ACCT1101 – Introduction to Financial Accounting

Assignment and Discussion Questions – Suggested Solution to Chapter 8

Assignment and Discussion Questions - Suggested Solution

M5-7.

Return on assets (ROA) = Net income = $100 = $100 = 0.111 (11.1%)

Avg total assets ($1,000+$800)/2 $900

Return on assets (ROA) measures how much the firm earned for each dollar of
investment.

M8–2.
Young’s fixed asset turnover ratio is
= Net operating revenues (net sales)
[(Beginning net fixed asset balance + Ending net fixed asset balance)  2]
= $3,600,000 = 1.89
[($1,500,000 + $2,300,000)  2]

Young’s ratio is lower than FedEx’s 2020 ratio of 2.16, indicating that Young’s
management may be less efficient in using fixed assets to generate revenues.

M13–4.

2.10 x 12.00% = 25.20%

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ACCT1101 – Introduction to Financial Accounting
Assignment and Discussion Questions – Suggested Solution to Chapter 8

E8–7.

Req. 1
Adjusting entry at the end of last year:
Depreciation expense (+E, SE) ..................................... 7,200
Accumulated depreciation, equipment (+XA, A) ..... 7,200
(($120,000 – $12,000) x 1/15 = $7,200)

Req. 2 (beginning of the current year)

Estimated life 15 years
Less: Used life -
$57,600 accumulated depreciation  $7,200 annual expense = 8 years
Remaining life 7 years

Req. 3 (during the current year):

Equipment (+A) ................................................................ 13,000
Cash (A).................................................................. 13,000
(Improvements incurred and capitalized.)

Repairs expense (+E, SE) .............................................. 1,000

Cash (A).................................................................. 1,000
(Ordinary repairs incurred.)

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ACCT1101 – Introduction to Financial Accounting
Assignment and Discussion Questions – Suggested Solution to Chapter 8

E8–24.

Req. 1
Equipment (+A) ................................................................ 15,500
Cash (A)................................................................... 15,500

Req. 2
Age of Machine A at December 31 of the prior year:

($30,000 cost – $4,500 residual value) x 1/5 years = $5,100 depreciation per year.

$10,200 accumulated depreciation  $5,100 = 2 years old at December 31 of the

prior year.

Req. 3
Depreciation expense (for the current year) (+E, SE) .... 4,800
Accumulated depreciation, machinery (+XA, A) ...... 4,800

Computations for change in estimates:

Cost when acquired ........................................................ $30,000
Less: Accumulated depreciation (2 years) ..................... 10,200
Undepreciated balance ................................................... 19,800
Add: Major renovation cost ............................................. 15,500
Total ............................................................................ $35,300 Net book value

Annual depreciation:

($35,300 net book value - $6,500 new residual value) x 1/6 years of remaining useful
life (8 years total useful life – 2 years used) = $4,800

Req. 4

Requirement (1) assumed that the major renovation and improvement cost was a
capital expenditure rather than a repair expense. Because a capital expenditure benefits
future periods, the expenditure is added to the net book value of the asset and then is
depreciated over the remaining life of the asset.

Requirement (3) recognized an accounting change due to a change in estimate (both

estimated life and residual value). A change in estimate is not an error correction;
consequently, it is treated prospectively. That is, the effect is spread over the current
year and the future remaining life of the asset. This approach means that the
undepreciated balance at the date of the change in estimate is depreciated over the
remaining life using the revised estimates.

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ACCT1101 – Introduction to Financial Accounting
Assignment and Discussion Questions – Suggested Solution to Chapter 8

P8–2.

Req. 1

Accumulated Depreciation Repairs

Aircraft Depreciation Expense Expense Cash
Balance January 1 $45,000,000 $22,500,000
a. NE NE NE +$7,000,000 $7,000,000
b. +2,700,000 NE NE NE 2,700,000
c. NE 2,250,000 $2,250,000* NE NE

Balance December 31 $47,700,000 $24,750,000 $2,250,000 $7,000,000

* ($45,000,000 cost - $0 residual value) x 1/20 years = $2,250,000 depreciation

expense per year.

Req. 2

Net Book Value of airplane on December 31 of the current year:

Aircraft ($45,000,000 + $2,700,000) ...................................... $47,700,000
Less: Accumulated depreciation ($22,500,000 + $2,250,000) 24,750,000
Net book (or carrying) value ............................................. $22,950,000

Req. 3

Depreciation is a noncash expense. Unlike most expenses, no cash payment is made

when the expense is recognized. The cash outflow occurred when the related asset
was acquired.

Note: For companies selecting the indirect method of preparing a statement of cash
flows (reconciling net income on the accrual basis to cash from operations),
depreciation expense is added back to net income because the expense reduces net
income, yet it is not a cash outlay.

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ACCT1101 – Introduction to Financial Accounting
Assignment and Discussion Questions – Suggested Solution to Chapter 8

P8–3.

Req. 1

Cost of each machine:

Machine
A B C Total

Purchase price .................................... $11,000 $30,000 $8,000 $49,000

Installation costs .................................. 500 1,000 500 2,000
Renovation costs ................................. 2,500 1,000 1,500 5,000
Total cost ......................................... $14,000 $32,000 $10,000 $56,000

Req. 2

Computation of depreciation at the end of Year 1 for each machine:

Machine Method Computation

A Straight-line ($14,000  $1,000) x 1/5 = $2,600
B Units-of-production ($32,000  $2,000)  60,000 hours = $0.50
$0.50 x 4,800 hours = $2,400
C Double-declining-balance ($10,000 $0) x 2/4 = $5,000

Adjusting entry:

Depreciation expense ($2,600 + $2,400 + $5,000) (+E, SE)…. 10,000

Accumulated depreciation, Machine A (+XA, A)……… 2,600
Accumulated depreciation, Machine B (+XA, A)……… 2,400
Accumulated depreciation, Machine C (+XA, A)……… 5,000

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ACCT1101 – Introduction to Financial Accounting
Assignment and Discussion Questions – Suggested Solution to Chapter 8

P8–5.
Req. 1

a. Machine A - Sold on January 1 of the current year:

(1) Depreciation expense for the current year - none recorded
because disposal date was January 1.
(2) To record disposal:
Cash (+A) .......................................................................... 5,000
Accumulated depreciation (XA, +A)................................. 15,750
Loss on disposal of machine (+E, SE)............................. 250
Equipment (Machine A) (A)...................................... 21,000

b. Machine B – Sold on December 31 of the current year:

(1) To record depreciation expense for the current year:
Depreciation expense (+E, SE) ....................................... 10,600
Accumulated depreciation (+XA, A) .......................... 10,600
($120,000 – $14,000)  10 years = $10,600.
(2) To record disposal:
Cash (+A) .......................................................................... 22,500
Note receivable (+A) ......................................................... 8,000
Accumulated depreciation (XA, +A) ($84,800 + $10,600) 95,400
Gain on disposal of machine (+R, +SE) .................... 5,900
Equipment (Machine B) (A)..................................... 120,000

c. Machine C – Disposal on January 1 of the current year:

(1) Depreciation expense for the current year - none recorded
because disposal date was January 1.
(2) To record disposal:
Accumulated depreciation (XA, +A) ................................ 64,000
Loss on disposal of machine (+E, SE) ............................ 21,000
Equipment (Machine C) (A) ..................................... 85,000

Req. 2

Machine A: Disposal of a long-lived asset with the disposal price below net book value
results in a loss.

Machine B: Disposal of a long-lived asset with the disposal price above net book value
results in a gain.

Machine C: Disposal of a long-lived asset due to damage results in a loss equal to

remaining book value.

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ACCT1101 – Introduction to Financial Accounting
Assignment and Discussion Questions – Suggested Solution to Chapter 8

P8–8.

Req. 1

a. Patent amortization for one year, $55,900  13 years = $4,300.

b. Copyright amortization for one year, $22,500  10 years = $2,250.

c. Franchise amortization for one year, $14,400  10 years = $1,440.

d. License amortization for one year, $14,000  5 years = $2,800.

e. Goodwill has an indefinite life and is not amortized.

Req. 2

Net Book Value on December 31, 2024:

Book Value Book Value
Item Date Acquired Computations Dec. 31, 2024
a. Patent…………. Jan. 1, 2023 $55,900 – ($4,300 x 2) $ 47,300
b. Copyright……… Jan. 1, 2023 $22,500 – ($2,250 x 2) 18,000
c. Franchise……… Jan. 1, 2023 $14,400 – ($1,440 x 2) 11,520
d. License………… Jan. 1, 2022 $14,000 – ($2,800 x 3) 5,600
e. Goodwill……….. Jan. 1, 2020 $40,000 (not amortized) 40,000
Total book value $122,420