Chapter Nine Questions
1. Define the term property, plant, and equipment.
Property, plant, and equipment are resources with
lives longer than one year, used in normal business operations, and that
provide benefits through their physical form.
2. Identify three examples of property, plant, and equipment.
Buildings, computers, trucks.
3. What is the major difference between tangible and intangible assets?
Tangible assets provide benefits through their
physical form, while intangible assets provide benefits in non-physical form,
usually legal rights.
4. Identify two examples of intangible assets.
Patents and copyrights.
5. How is the "using up" of property, plant, and equipment similar to the "using up" of supplies and insurance?
The using up of property, plant, and equipment,
supplies, and insurance all require the expense of such use to be recorded.
6. How is the "using up" of property, plant, and equipment different from the "using up" of supplies and insurance?
Using up property, plant, and equipment differs from
using up supplies and insurance because it is much more difficult to measure
the amount of property, plant, and equipment used up.
7. Identify two major sources of property, plant, and equipment.
Company’s obtain property, plant, and equipment by converting other
resources, such as cash, and by borrowing.
8. What is the name of the expense account in which the use of property, plant, and equipment is recorded?
Depreciation expense.
9. What is the name of the asset account in which the amount of property, plant, and equipment that has been used up is recorded?
Accumulated depreciation.
10. What are the two basic requirements for determining whether a dollar amount should be reported as part of property, plant, and equipment?
The dollar amount must benefit more than one
accounting period and must be necessary to get the asset ready for use.
11. The total dollar amount of property, plant, and equipment’s depreciation expense is the difference between what two items?
Cost - residual value = total depreciation expense.
12. Define the term residual value or salvage value.
Residual value is the dollar amount a company
expects to receive when it disposes of an asset.
13. Identify one important way in which the accounting for land differs from the accounting for buildings or equipment.
Because land values have not decreased significantly
over time, land is not depreciated, while buildings and equipment are
depreciated.
14. Define the term useful life.
Useful life is the number of years an asset is
expected to be used.
15. What is the purpose all depreciation methods are attempting to accomplish?
Depreciation methods attempt to determine the dollar
amount of depreciation expense to record in each year of an asset’s life.
16. What assumption does the straight-line depreciation method make concerning an asset’s benefits?
Straight-line depreciation is based on the idea that
some assets provide relatively constant benefits each year of their lives.
17. What assumption do accelerated depreciation methods often make concerning an asset’s benefits?
Accelerated depreciation methods are based on the
idea that some assets provide more benefits in the early years of their lives
or some other costs of owning the assets (such as maintenance) increase as the
assets get older.
18. What does the word "double" stand for in double-declining-balance depreciation?
Double refers to twice the straight-line rate, where
the straight-line rate = 1 / asset’s useful life.
19. What do the words "declining-balance" stand for in double-declining-balance depreciation?
Declining-balance refers to the dollar amounts in
the asset accounts at the beginning of the period for which depreciation
expense is being calculated. Asset balance = asset
cost - accumulated depreciation.
20. Why does accelerated depreciation result in companies having more resources than does straight-line depreciation?
Accelerated depreciation results in the postponement
of income taxes. The cash made available by postponing
taxes can be invested and, thus, resources can increase as the investment
generates a return.
21. What is the Modified Accelerated Cost Recovery System?
MACRS is the government’s accelerated
depreciation method which may be used for income tax purposes.
22. If as a result of disposing of some of its property, plant, and equipment a company’s resources decrease, in what"stockholders’ equity" account is the decrease recorded?
Loss on disposal of property,
plant, and equipment.
23. On which financial statement and in which section of the statement is a gain on disposal of property, plant, and equipment reported?
A gain (or loss) on disposal of property, plant, and
equipment is reported in the other revenues and expenses section of the income
statement.
Chapter Nine Exercises
Exercise 9.1: Buying Property, Plant, and Equipment
The Vigneau Corporation has been operating for approximately 15 years. During March, the company engaged in many transactions, some of which are presented below. Prepare the journal entries necessary to record the transactions. Before you prepare each journal entry, determine the transaction's effects on the company's resources and sources of resources. The first transaction has been completed for you.
March 3 Paid cash for $765 of office supplies. The
office supplies will be used during the next several months.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $765 |
|
|
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
March 3 |
Office Supplies |
|
765 |
|
|
|
Cash |
|
|
765 |
|
|
Office supplies cash purchase |
|
|
|
March 9 Paid $1,264 cash for office equipment. The
office equipment will be used during the next three years.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $1,264 |
|
|
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
March 9 |
Office Equipment |
|
1,264 |
|
|
|
Cash |
|
|
1,264 |
|
|
Office equipment cash purchase |
|
|
|
March 13 Purchased $479 of office supplies on account. The
office supplies will be paid for in April and used during the next several
months.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $479 |
= |
+ $479 |
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
Mar. 13 |
Office Supplies |
|
479 |
|
|
|
Accounts Payable |
|
|
479 |
|
|
Office supplies purchase on account |
|
|
|
March 19 In order to acquire additional office equipment, the company issued
bonds and received $80,000 cash.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $80,000 |
= |
+ $80,000 |
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
Mar. 19 |
Cash |
|
80,000 |
|
|
|
Bonds Payable |
|
|
80,000 |
|
|
Bond issue |
|
|
|
March 24 Paid $78,643 cash for office equipment. The
office equipment will be used during the next five years.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $78,643 |
|
|
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
Mar. 24 |
Office Equipment |
|
78,643 |
|
|
|
Cash |
|
|
78,643 |
|
|
Office equipment cash purchase |
|
|
|
March 28 Purchased $1,909 of office equipment on account. The
office equipment will be paid for in April and used during the next four years.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $1,909 |
= |
+ $1,909 |
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
Mar. 28 |
Office Equipment |
|
1,909 |
|
|
|
Accounts Payable |
|
|
1,909 |
|
|
Office equipment purchase on account |
|
|
|
Exercise 9.2: Using Property, Plant, and Equipment
Prepare journal entries to record the following transactions of the Chopra Corporation for the month of April. Before you prepare each journal entry, determine the transaction's effects on the company's resources and sources of resources.
April 30 The company’s trial balance shows office supplies of $1,875
and office supplies expense of $0. During April, $550
of office supplies had been used up.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $550 |
= |
|
|
|
|
- $550 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
April 30 |
Office Supplies Expense |
|
550 |
|
|
|
Office Supplies |
|
|
550 |
|
|
Office supplies used in April |
|
|
|
April 30 Buildings are being depreciated at a rate of $4,000 per month.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $4,000 |
= |
|
|
|
|
- $4,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
April 30 |
Depreciation Expense, Buildings |
|
4,000 |
|
|
|
Accumulated Depreciation, Buildings |
|
|
4,000 |
|
|
April depreciation |
|
|
|
April 30 The company’s trial balance shows prepaid insurance of $2,400
and insurance expense of $0. During April, $400 of
insurance protection had been used up.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $400 |
= |
|
|
|
|
- $400 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
April 30 |
Insurance Expense |
|
400 |
|
|
|
Prepaid Insurance |
|
|
400 |
|
|
Insurance used in April |
|
|
|
April 30 Office equipment is being depreciated at a rate of $2,500 per month.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $2,500 |
= |
|
|
|
|
- $2,500 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
April 30 |
Depreciation Expense, Office Equipment |
|
2,500 |
|
|
|
Accumulated Depreciation, Office Equipment |
|
|
2,500 |
|
|
April depreciation |
|
|
|
April 30 The company’s trial balance shows prepaid rent of $0 and rent
expense of $900. The company’s rental lease
states that it costs the company $300 per month to use the space it rents.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $600 |
= |
|
|
|
|
+ $600 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
April 30 |
Prepaid Rent |
|
600 |
|
|
|
Rent Expense |
|
|
600 |
|
|
Rent available on April 30 |
|
|
|
April 30 Autos and trucks are being depreciated at a rate of $1,000 per month.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $1,000 |
= |
|
|
|
|
- $1,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
April 30 |
Depreciation Expense, Autos & Trucks |
|
1,000 |
|
|
|
Accumulated Depreciation, Autos & Trucks |
|
|
1,000 |
|
|
April depreciation |
|
|
|
Exercise 9.3: Property, Plant, and Equipment Cost
The Antonelli Corporation is in the process of acquiring additional land and a building. After lengthy negotiations, the company agreed to pay $75,000 for the land and $2,500,000 for the building. In addition, the company must pay legal fees of $500 for a title search to guarantee that the seller owns the land. Another $3,000 must be paid to complete landscaping the land and $21,000 must be paid to finish construction on the building. The Antonelli Corporation must pay $12,000 per year to insure the building and approximately $24,000 per year to heat and cool it.
1. Calculate the cost the Antonelli Corporation
would record in its land account for the purchase of the additional land.
|
Purchase price |
$75,000 |
|
Legal fees |
$500 |
|
Landscaping |
$3,000 |
|
Total land cost |
$78,500 |
2. Calculate the cost the Antonelli Corporation would
record in its buildings account for the purchase of the building.
|
Purchase price |
$2,500,000 |
|
Finish construction |
$21,000 |
|
Total building cost |
$2,521,000 |
Exercise 9.4: Property, Plant, and Equipment Expense
The Chinokoyev Corporation was founded in August. During its first few months the company spent the following amounts to acquire property, plant, and equipment: $95,000 for land, $5,000,000 for buildings, $3,000,000 for equipment, and $72,000 for delivery trucks. The land was expected to have an unlimited life and a residual value of at least $95,000. The buildings were expected to have a 40-year life and a residual value of $1,000,000. The equipment was expected to have a 10-year life and a residual value of $400,000. The delivery trucks were expected to have a 5-year life and a residual value of $7,000.
1. Calculate the total buildings depreciation expense the Chinokoyev Corporation will record over the 40-year life of
the buildings.
|
Buildings cost |
$5,000,000 |
|
Residual value |
$1,000,000 |
|
Total building depreciation expense |
$4,000,000 |
2. Calculate the total equipment depreciation expense the Chinokoyev
Corporation will record over the 10-year life of the equipment.
|
Equipment cost |
$3,000,000 |
|
Residual value |
$400,000 |
|
Total equipment depreciation expense |
$2,600,000 |
3. Calculate the total delivery trucks depreciation expense the Chinokoyev Corporation will record over the 5-year life of
the delivery trucks.
|
Delivery trucks cost |
$72,000 |
|
Residual value |
$7,000 |
|
Total delivery trucks depreciation expense |
$65,000 |
4. Calculate the total land depreciation expense the Chinokoyev
Corporation will record over the life of the land.
$0. The land would not be
depreciated because it is not expected to decrease in value. Note
that its disposal value is expected to be at least as much as its original cost.
Exercise 9.5: Straight-line Depreciation
The Bloomfield Corporation’s fiscal year ends June 30. On July 1, the company paid $40,000 for new office equipment. The equipment had an estimated useful life of ten years and a residual value of $6,000. The company uses the straight-line depreciation method for all office equipment.
1. Calculate the total depreciation expense the Bloomfield Corporation will
record over the 10-year life of the office equipment.
|
Office equipment cost |
$40,000 |
|
Residual value |
$6,000 |
|
Total office equipment depreciation expense |
$34,000 |
2. Calculate the depreciation expense for each of the ten years of the office equipment’s
useful life.
$34,000 / 10 years = $3,400 per year
straight-line depreciation expense.
3. Calculate the balance in the accumulated depreciation account on each June
30 over the office equipment’s 10-year useful life.
|
Date |
Depreciation Expense |
Accumulated Depreciation |
|
June 30, Year 1 |
$3,400 |
$3,400 |
|
June 30, Year 2 |
$3,400 |
$6,800 |
|
June 30, Year 3 |
$3,400 |
$10,200 |
|
June 30, Year 4 |
$3,400 |
$13,600 |
|
June 30, Year 5 |
$3,400 |
$17,000 |
|
June 30, Year 6 |
$3,400 |
$20,400 |
|
June 30, Year 7 |
$3,400 |
$23,800 |
|
June 30, Year 8 |
$3,400 |
$27,200 |
|
June 30, Year 9 |
$3,400 |
$30,600 |
|
June 30, Year 10 |
$3,400 |
$34,000 |
4. Prepare the journal entry necessary to record the office equipment’s
depreciation expense for the first year ended June 30. Before
you prepare the journal entry, determine the transaction's effects on the
company's resources and sources of resources.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $3,400 |
= |
|
|
|
|
- $3,400 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
June 30 |
Depreciation Expense, Office Equipment |
|
3,400 |
|
|
|
Accumulated Depreciation, Office Equipment |
|
|
3,400 |
|
|
Office equipment depreciation |
|
|
|
5. Assume the Bloomfield Corporation’s fiscal year ends on December 31
instead of June 30. Prepare the journal entry
necessary to record the office equipment’s depreciation expense for the
first six months ended December 31. Before you prepare
the journal entry, determine the transaction's effects on the company's
resources and sources of resources.
By December 31, the office equipment would have been
used for six months, July through December. Since the
yearly depreciation is $3,400, the depreciation for six months would be $1,700.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $1,700 |
= |
|
|
|
|
- $1,700 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
Dec. 31 |
Depreciation Expense, Office Equipment |
|
1,700 |
|
|
|
Accumulated Depreciation, Office Equipment |
|
|
1,700 |
|
|
Office equipment depreciation |
|
|
|
Exercise 9.6: Double-declining-balance Depreciation
The Rambarran Corporation’s fiscal year ends September 30. On October 1, the company paid $50,000 for new office equipment. The equipment had an estimated useful life of eight years and a residual value of $7,000. The company uses the double-declining-balance depreciation method for all office equipment.
1. Calculate the total depreciation expense the Rambarran
Corporation will record over the 8-year life of the office equipment.
|
Office equipment cost |
$50,000 |
|
Residual value |
$7,000 |
|
Total office equipment depreciation expense |
$43,000 |
2. Calculate the depreciation expense for each of the eight years of the office
equipment’s useful life.
The double-declining-balance depreciation rate = 2 x
(1/8) = 2/8 = 1/4 = 25%.
|
Year |
Depreciation Expense |
|
1 |
$50,000 x .25 = $12,500.00 |
|
2 |
($50,000 - $12,500 = $37,500) x .25 = $9,375.00 |
|
3 |
($50,000 - $21,875 = $28,125) x .25 = $7,031.25 |
|
4 |
($50,000 - $28,906.25 = $21,093.75) x .25 = $5,273.44 |
|
5 |
($50,000 - $34,179.69 = $15,820.31) x .25 = $3,955.08 |
|
6 |
($50,000 - $38,134.77 = $11,865.23) x .25 = $2,966.31 |
|
7 |
$50,000 - $41,101.08 = $1,898.92 |
|
8 |
$0 |
|
Total |
$43,000 |
Note: Year 7 depreciation expense is limited to
$1,898.92 because total depreciation expense cannot exceed $43,000. On a pure math basis, the expense would have been: ($50,000
- $41,101.08 = $8,898.92) x .25 = $2,224.73.
3. Calculate the balance in the accumulated depreciation account on each
September 30 over the office equipment’s 8-year useful life.
|
Date |
Depreciation Expense |
Accumulated Depreciation |
|
Sept. 30, Year 1 |
$12,500.00 |
$12,500.00 |
|
Sept. 30, Year 2 |
$9,375.00 |
$21,875.00 |
|
Sept. 30, Year 3 |
$7,031.25 |
$28,906.25 |
|
Sept. 30, Year 4 |
$5,273.44 |
$34,179.69 |
|
Sept. 30, Year 5 |
$3,955.08 |
$38,134.77 |
|
Sept. 30, Year 6 |
$2,966.31 |
$41,101.08 |
|
Sept. 30, Year 7 |
$1,898.92 |
$43,000 |
|
Sept. 30, Year 8 |
$0.00 |
$43,000 |
4. Prepare the journal entry necessary to record the office equipment’s
depreciation expense for the first year ended September 30. Before
you prepare the journal entry, determine the transaction's effects on the
company's resources and sources of resources.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $12,500 |
= |
|
|
|
|
- $12,500 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
Sept. 30 |
Depreciation Expense, Office Equipment |
|
12,500 |
|
|
|
Accumulated Depreciation, Office Equipment |
|
|
12,500 |
|
|
Office equipment depreciation |
|
|
|
5. Assume the Rambarran Corporation’s fiscal
year ends on December 31 instead of September 30. Prepare
the journal entry necessary to record the office equipment’s depreciation
expense for the first three months ended December 31. Before
you prepare the journal entry, determine the transaction's effects on the
company's resources and sources of resources.
By December 31, the office equipment would have been
used for three months, October through December. Since
the depreciation for the first twelve months is $12,500, the depreciation for
three months would be $3,125.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $3,125 |
= |
|
|
|
|
- $3,125 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
Dec. 31 |
Depreciation Expense, Office Equipment |
|
3,125 |
|
|
|
Accumulated Depreciation, Office Equipment |
|
|
3,125 |
|
|
Office equipment depreciation |
|
|
|
Exercise 9.7: Income Effects of Depreciation Methods
The Wightman Corporation is planning to open a new store, which will require
$80,000 of new equipment. Based on its estimates, the
equipment will have a 4-year life and a residual value of $12,000. The company estimates that the new store will generate
average annual sales of $400,000, with an annual cost of goods sold of
$150,000, and annual operating expenses (other than depreciation) of $200,000. The company’s expected income tax rate is 35%. The company has calculated depreciation of the new
equipment as follows.
|
Year |
Straight-line |
Double-Declining- |
|
1 |
$17,000 |
$40,000 |
|
2 |
$17,000 |
$20,000 |
|
3 |
$17,000 |
$8,000 |
|
4 |
$17,000 |
$0 |
|
Totals |
$68,000 |
$68,000 |
1. Calculate the Wightman Corporation’s expected net income for each of
the four years if the company uses the straight-line depreciation method.
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
|
Sales |
$400,000 |
$400,000 |
$400,000 |
$400,000 |
|
Cost of Goods Sold |
$150,000 |
$150,000 |
$150,000 |
$150,000 |
|
Gross Profit |
$250,000 |
$250,000 |
$250,000 |
$250,000 |
|
Operating Expenses |
$217,000 |
$217,000 |
$217,000 |
$217,000 |
|
Income Before Taxes |
$33,000 |
$33,000 |
$33,000 |
$33,000 |
|
Income Taxes Expense |
$11,550 |
$11,550 |
$11,550 |
$11,550 |
|
Net Income |
$21,450 |
$21,450 |
$21,450 |
$21,450 |
2. Calculate the Wightman Corporation’s expected net income for the total
4-year period if the company uses the straight-line depreciation method.
|
|
Years 1 - 4 |
|
Sales |
$1,600,000 |
|
Cost of Goods Sold |
$600,000 |
|
Gross Profit |
$1,000,000 |
|
Operating Expenses |
$868,000 |
|
Income Before Taxes |
$132,000 |
|
Income Taxes Expense |
$46,200 |
|
Net Income |
$85,800 |
3. Calculate the Wightman Corporation’s expected net income for each of
the four years if the company uses the double-declining-balance depreciation
method.
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
|
Sales |
$400,000 |
$400,000 |
$400,000 |
$400,000 |
|
Cost of Goods Sold |
$150,000 |
$150,000 |
$150,000 |
$150,000 |
|
Gross Profit |
$250,000 |
$250,000 |
$250,000 |
$250,000 |
|
Operating Expenses |
$240,000 |
$220,000 |
$208,000 |
$200,000 |
|
Income Before Taxes |
$10,000 |
$30,000 |
$42,000 |
$50,000 |
|
Income Taxes Expense |
$3,500 |
$10,500 |
$14,700 |
$17,500 |
|
Net Income |
$6,500 |
$19,500 |
$27,300 |
$32,500 |
4. Calculate the Wightman Corporation’s expected net income for the total
4-year period if the company uses the double-declining-balance depreciation
method.
|
|
Years 1 - 4 |
|
Sales |
$1,600,000 |
|
Cost of Goods Sold |
$600,000 |
|
Gross Profit |
$1,000,000 |
|
Operating Expenses |
$868,000 |
|
Income Before Taxes |
$132,000 |
|
Income Taxes Expense |
$46,200 |
|
Net Income |
$85,800 |
Exercise 9.8: Income Taxes Effects of Depreciation Methods
The Archambault Corporation purchased $100,000 of new
equipment and expanded its operations. Based on its
estimates, the equipment will have a 5-year life and a residual value of
$20,000. The company estimates that the new operations
will generate average annual sales of $500,000, with an annual cost of goods
sold of $200,000, and annual operating expenses (other than depreciation) of
$240,000. The company’s expected income tax rate
is 35%. The company has calculated depreciation of the
new equipment as follows.
|
Year |
Straight-line |
Double-Declining- |
|
1 |
$16,000 |
$40,000 |
|
2 |
$16,000 |
$24,000 |
|
3 |
$16,000 |
$14,400 |
|
4 |
$16,000 |
$1,600 |
|
5 |
$16,000 |
$0 |
|
Totals |
$80,000 |
$80,000 |
1. Calculate the Archambault Corporation’s expected
income taxes expense for each of the five years if the company uses the
straight-line depreciation method.
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
Sales |
$500,000 |
$500,000 |
$500,000 |
$500,000 |
$500,000 |
|
Cost of Goods Sold |
$200,000 |
$200,000 |
$200,000 |
$200,000 |
$200,000 |
|
Gross Profit |
$300,000 |
$300,000 |
$300,000 |
$300,000 |
$300,000 |
|
Operating Expenses |
$256,000 |
$256,000 |
$256,000 |
$256,000 |
$256,000 |
|
Income Before Taxes |
$44,000 |
$44,000 |
$44,000 |
$44,000 |
$44,000 |
|
Income Taxes Expense |
$15,400 |
$15,400 |
$15,400 |
$15,400 |
$15,400 |
2. Calculate the Archambault Corporation’s
expected income taxes expense for the total 5-year period if the company uses the
straight-line depreciation method.
|
|
Years 1 - 5 |
|
Sales |
$2,500,000 |
|
Cost of Goods Sold |
$1,000,000 |
|
Gross Profit |
$1,500,000 |
|
Operating Expenses |
$1,280,000 |
|
Income Before Taxes |
$220,000 |
|
Income Taxes Expense |
$77,000 |
3. Calculate the Archambault Corporation’s
expected income taxes expense for each of the five years if the company uses
the double-declining-balance depreciation method.
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
Sales |
$500,000 |
$500,000 |
$500,000 |
$500,000 |
$500,000 |
|
Cost of Goods Sold |
$200,000 |
$200,000 |
$200,000 |
$200,000 |
$200,000 |
|
Gross Profit |
$300,000 |
$300,000 |
$300,000 |
$300,000 |
$300,000 |
|
Operating Expenses |
$280,000 |
$264,000 |
$254,400 |
$241,600 |
$240,000 |
|
Income Before Taxes |
$20,000 |
$36,000 |
$45,600 |
$58,400 |
$60,000 |
|
Income Taxes Expense |
$7,000 |
$12,600 |
$15,960 |
$20,440 |
$21,000 |
4. Calculate the Archambault Corporation’s expected
income taxes expense for the total 5-year period if the company uses the
double-declining-balance depreciation method.
|
|
Years 1 - 5 |
|
Sales |
$2,500,000 |
|
Cost of Goods Sold |
$1,000,000 |
|
Gross Profit |
$1,500,000 |
|
Operating Expenses |
$1,280,000 |
|
Income Before Taxes |
$220,000 |
|
Income Taxes Expense |
$77,000 |
Exercise 9.9: Income Taxes Advantage of Depreciation Methods
The McNamara Corporation is trying to decide whether it should depreciate
its new equipment using the straight-line or double-declining-balance method. The company has calculated its income taxes expense
resulting from the revenues and expenses related to the new equipment as
follows.
|
Year |
Straight-line
Method |
Double-Declining-Balance
|
|
1 |
$14,000 |
$5,600 |
|
2 |
$14,000 |
$11,360 |
|
3 |
$14,000 |
$14,816 |
|
4 |
$14,000 |
$18,224 |
|
5 |
$14,000 |
$20,000 |
|
Totals |
$70,000 |
$70,000 |
Assume (1) the McNamara Corporation’s effective income tax rate is 35% (2) the company pays its taxes at the end of the year, and (3) the company expects to earn 10% before taxes on all cash not paid for income taxes.
Calculate the increase in resources the McNamara Corporation would have at
the end of five years if the company uses the double-declining-balance
depreciation method instead of the straight-line method.
|
Year |
Income Taxes Expense |
Cash Available |
10% Investment Earnings |
35% Taxes |
Investment Earnings After |
|
1 |
+ $8,400 |
|
|
|
|
|
2 |
+ $2,640 |
$8,400.00 |
$840.00 |
$294.00 |
$546.00 |
|
3 |
- $816 |
$11,586.00 |
$1,158.60 |
$405.51 |
$753.09 |
|
4 |
- $4,224 |
$11,523.09 |
$1,152.31 |
$403.31 |
$749.00 |
|
5 |
- $6,000 |
$8,048.09 |
$804.81 |
$281.68 |
$523.13 |
|
1 thru 5 |
$0 |
$2,571.22 |
$3,955.72 |
$1,384.50 |
$2,571.22 |
Year 2 cash available to invest = $8,400 taxes
postponed at the end of year 1.
Year 3 cash available to invest = $8,400 taxes
postponed at the end of year 1 + $546 earned on $8,400 cash available to invest
during year 2 + $2,640 additional taxes postponed at the end of year 2 =
$11,586.00..
Year 4 cash available to invest = $8,400 taxes
postponed at the end of year 1 + $546 earned on $8,400 cash available to invest
during year 2 + $2,640 additional taxes postponed at the end of year 2 +
$753.09 earned on cash available to invest during year 3 - $816 additional
taxes paid at the end of year 3 = $11,523.09.
Year 5 cash available to invest = $8,400 taxes
postponed at the end of year 1 + $546 earned on $8,400 cash available to invest
during year 2 + $2,640 additional taxes postponed at the end of year 2 +
$753.09 earned on cash available to invest during year 3 - $816 additional
taxes paid at the end of year 3 + $749.00 earned on cash available to invest
during year 4 - $4,224 additional taxes paid at the end of year 4 = $8,048.09.
Exercise 9.10: Property, Plant, and Equipment Disposal
On July 3, the Plisinski Corporation disposed of equipment that it no longer used. The equipment originally cost the company $76,000. On July 3, the equipment’s accumulated depreciation account had a balance of $68,000.
1. Calculate the company’s gain or loss if the company received
$10,000 cash on disposal of the equipment.
|
Equipment cost |
$76,000 |
|
Accumulated depreciation |
$68,000 |
|
Resource dollar amount |
$8,000 |
|
|
|
|
Cash received |
$10,000 |
|
Gain on disposal |
$2,000 |
2. Prepare the journal entry necessary to record the disposal of the equipment. Before you prepare the journal entry, determine the transaction's
effects on the company's resources and sources of resources.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $2,000 |
= |
|
|
|
|
+ $2,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 3 |
Cash |
|
10,000 |
|
|
|
Accumulated Depreciation, Equipment |
|
68,000 |
|
|
|
Equipment |
|
|
76,000 |
|
|
Gain on Disposal of Equipment |
|
|
2,000 |
|
|
Equipment disposal |
|
|
|
3. Calculate the company’s gain or loss if the company received $5,000
cash on disposal of the equipment.
|
Equipment cost |
$76,000 |
|
Accumulated depreciation |
$68,000 |
|
Resource dollar amount |
$8,000 |
|
|
|
|
Cash received |
$5,000 |
|
Loss on disposal |
$3,000 |
4. Prepare the journal entry necessary to record the disposal of the equipment. Before you prepare the journal entry, determine the
transaction's effects on the company's resources and sources of resources.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $3,000 |
= |
|
|
|
|
- $3,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 3 |
Cash |
|
5,000 |
|
|
|
Accumulated Depreciation, Equipment |
|
68,000 |
|
|
|
Loss on Disposal of Equipment |
|
3,000 |
|
|
|
Equipment |
|
|
76,000 |
|
|
Equipment disposal |
|
|
|
5. On which financial statement and in which section of the statement would the
Plisinski Corporation report the gain or loss on
disposal of the equipment?
A gain or loss on disposal of property, plant, and
equipment would appear in the other revenues and expenses section of the income
statement.