BRIEF EXERCISE 9-3
The depreciable cost is $27,000 ($31,000 – $4,000). With a 4-year useful life, annual depreciation is $6,750 ($27,000 ÷ 4). Under the straight-line method, depreciation is the same each year. Thus, depreciation is $6,750 for both the first and second years.
EXERCISE 9-2
1. Equipment
2. Equipment
3. Equipment
4. Land
5. Prepaid Insurance
6. Land Improvements
7. Land Improvements
8. Land
9. Building
EXERCISE 9-7
(a) Loss on Disposal of Plant Assets 26,000
Accumulated Depreciation—Equipment 24,000
Equipment 50,000
(b) Cash 37,000
Accumulated Depreciation—Equipment 24,000
Equipment 50,000
Gain on Disposal of Plant Assets 11,000
(c) Cash 20,000
Accumulated Depreciation—Equipment 24,000
Loss on Disposal of Plant Assets 6,000
Equipment 50,000
EXERCISE 9-14
(a) 1/2/12 Patent 280,000
Cash 280,000
4/1/12 Goodwill 360,000
Cash 360,000
(Part of the entry to record
purchase of another company)
7/1/12 Franchise 540,000
Cash 540,000
9/1/12 Research and Development Expense 185,000
Cash 185,000
(b) Amortization Expense 86,000
Acc. Amortization - Patent ($280,000 ÷ 5) 56,000
Acc. Amortization - Franchise [($540,000 ÷ 9) X 6/12] 30,000
(c) Balance Sheet Carrying Values @ 12/31/12:
Patent = $224,000 ($280,000 – $56,000)
Goodwill = $360,000
Franchise = $510,000 ($540,000 – $30,000)
EXERCISE 9-18
(a) Depreciation cost per unit is $.575 per mile [($100,000 – $8,000) ÷ 160,000].
(b) Computation End of Year
Annual
Units of Depreciation Depreciation Accumulated Book
Years Activity X Cost/Unit = Expense Depreciation Value
2012 40,000 $.575 $23,000 $23,000 $77,000
2013 52,000 .575 29,900 52,900 47,100
2014 41,000 .575 23,575 76,475 23,525
2015 27,000 .575 15,525 92,000 8,000
Item Land Building Other Accounts
1 $270,000
2 6,000
3 32,000
4 6,700
5 $ 21,900
6 44,000
7 629,500
8 $36,000 Land Improvements
9 7,300 Property Tax Exp.
10 (12,700)
$302,000 $695,400
(a) STRAIGHT-LINE DEPRECIATION
Computation End of Year
Annual
Depreciable Depreciation Depreciation Accumulated Book
Years Cost X Rate = Expense Depreciation Value
2012 $330,000a 20%b $66,000 $ 66,000 $284,000
2013 330,000 20% 66,000 132,000 218,000
2014 330,000 20% 66,000 198,000 152,000
2015 330,000 20% 66,000 264,000 86,000
2016 330,000 20% 66,000 330,000 20,000
a$350,000 – $20,000
b1/5 = 20%
DOUBLE-DECLINING-BALANCE DEPRECIATION
Computation End of Year
Book Value Annual
Beginning Depreciation Depreciation Accumulated Book
Years of Year X Rate = Expense Depreciation Value
2012 $350,000 40%c $140,000 $140,000 $210,000
2013 210,000 40% 84,000 224,000 126,000
2014 126,000 40% 50,400 274,400 75,600
2015 75,600 40% 30,240 304,640 45,360
2016 45,360 40% 25,360d 330,000 20,000
c(1/5) X 2 = 40%
dAdjusted so ending book value will equal salvage value.
(b) Straight-line depreciation provides the lower amount for 2012 depreciation expense and, therefore, the higher 2012 income. Over the five-year period, both methods result in the same total depreciation expense ($330,000) and, therefore, the same total income.
(c) Double-declining-balance depreciation provides the higher amount for 2012 depreciation expense and, therefore, the lower 2012 income. Both methods result in the same total income over the five-year period.
(a) Tootsie Roll Hershey Foods
1.
NI / Avg. Total Assets
2.
NI / Net Sales
3.
Net Sales / Avg. Total Assets
The asset turnover ratio measures how efficiently a company uses its assets to generate sales. It shows the dollars of sales generated by each dollar invested in assets. Hershey Foods’ asset turnover ratio (1.45) was 142% higher than Tootsie Roll’s (.60) in 2009. Therefore, it can be concluded that Hershey Foods was significantly more efficient than Tootsie Roll during 2009 in utilizing assets to generate sales. This efficiency was partially offset by a profit margin (8.2%) that was lower than Tootsie Roll’s (10.7%). Tootsie Roll is more effective in generating profit from its sales but its lower asset turnover resulted in only a 6.5% return on assets compared to Hershey’s 11.9% return. What this shows is that a company can generate a reasonable return on assets with a lower profit margin, if it has a high turnover ratio.