Chapter 8: Reporting and Analyzing Long-Term Operating Assets Class Homework Solutions

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1 M8-11. a. Expense b. Capitalize c. Capitalize (the new equipment enhances the assembly line) d. Expense this is routine maintenance of the building, unless it extends the building s useful life e. Capitalize the useful life is extended f. Capitalize this is a purchased intangible asset M8-12. a. Straight-line: ($18,000 - $1,500)/ 5 years = $3,300 for both 2016 and b. Double-declining-balance: Twice straight-line rate = 2 x 1/5 = 40% 2016: $18,000 x 0.40 = $7, : ($18,000 - $7,200) x 0.40 = $4,320 Notice that, over the first two years, the company reports $6,600 of depreciation expense under the straight-line method and $11,520 of depreciation expense under the double-declining-balance method. M8-13. a. Straight-line: ($130,000 - $10,000)/ 6 years = $20,000 for both 2016 and b. Double-declining-balance: Twice straight-line rate = 2 x 1/6 = 1/3 2016: $130,000 x 1/3 = $43, : ($130,000 - $43,333) x 1/3 = $28,889 c. Units of production: ($130,000 - $10,000) / 1,000,000 = $0.12 per unit 2016: 180,000 units x $0.12 = $21, : 140,000 units x $0.12 = $16,800 Solutions Manual, Chapter 8 8-1

2 M8-19. a. b. Year Barrels Extracted Depletion per Barrel Depletion ,000 $32,000,000 / 4,000,000 = $8 $2,400, ,000 $32,000,000 / 4,000,000 = $8 $4,000, ,000 $32,000,000 / 4,000,000 = $8 $4,800,000 i. Oil reserve (+A)... 32,000,000 Cash (-A)... 32,000,000 ii. Oil inventory (+A)... 2,400,000 Oil reserve (-A)... 2,400,000 c. + Oil Reserve (A) - + Oil Inventory (A) - i. 32,000,000 ii. 2,400,000 2,400,000 ii. Balance 29,600,000 Balance 2,400,000 + Cash (A) - 32,000,000 i. Balance 32,000, Financial Accounting, 5 th Edition

3 M8-20. Chapter 8: Reporting and Analyzing a. PPE Turnover Rates for 2014 Texas Instruments $13,045 / [($2,840 + $3,399) / 2] = 4.18 Intel Corp. $55,870 / [($33,238 + $31,428) / 2] = 1.73 Texas Instruments turns its PPE more quickly than does Intel. b. PPE turnover rates increase with increases in sales volume relative to the dollar amount of PPE on the balance sheet. The PPE turnover rate is often a very difficult turnover rate to change, and typically requires creative thinking. Many companies are outsourcing the manufacturing process in whole or in part to others in the supply chain. This is beneficial so long as the savings realized by the reduction of manufacturing assets more than offset the higher cost of the goods as these are now purchased rather than manufactured. Another approach is to utilize long-term operating assets in partnership with another firm, say in a joint venture. Solutions Manual, Chapter 8 8-3

4 E8-24. a. 1. Accumulated depreciation on the date of sale: [($800,000-$80,000)/10 years] x 6 years = $432,000 b Net book value of the plane at date of sale: $800,000 - $432,000 = $368,000 Cash (+A) ,000 Plane (-A) , Loss on sale of: $195,000 - $368,000 = $173,000 Cash (+A) ,000 Loss on sale of plane (+E, -SE) ,000 Plane (-A) , Gain on sale of: $600,000 - $368,000 = $232,000 Cash (+A) ,000 Gain on sale of plane (+R, +SE) ,000 Plane (-A) ,000 E8-26. a. Depreciation expense to date of sale is [($27,200 - $2,000)/6] x 3 = $12,600. The net book value of the van is, therefore, $27,200 - $12,600 = $14,600. b. 1. $0 2. $400 gain ($15,000 - $14,600) 3. $2,600 loss ($12,000 - $14,600) 8-4 Financial Accounting, 5 th Edition

5 E8-30. Chapter 8: Reporting and Analyzing a. Receivable Turnover Rate Inventory Turnover Rate PPE Turnover Rate $30,871 $16,106 $30, = 7.43 = 4.18 = 3.63 $4,253+$4,061 $3,864+$3,837 $8,652+$8, $31,821 $16,447 $31,821 =7.50 = 4.35 $4,238+$4,253 $3,706+$3,864 $8,489+$8, = 3.71 b. 3M s Receivable, PPE, and Inventory turnover ratios have improved from 2013 to M s revenues increased in 2014, and that increase is likely to account for the increase in the PPET. PPE turns can also be improved by off-loading manufacturing to other companies in the supply chain and acquiring long-term operating assets in partnership with other companies, for example, in a joint venture. Receivable turnover improvement could be due to monitoring more closely the quality of customers to which credit is granted, implementing better collection procedures, and offering discounts as an incentive for early payment. Inventory turnover rates can be improved by weeding out slowly moving product lines, by reducing the depth and breadth of products carried, and by implementing just-in-time deliveries. Solutions Manual, Chapter 8 8-5