On October 1, Bentley Delivery Services acquired a new truck with a list price (fair market value) of $75,000

On October 1, Bentley Delivery Services acquired a new truck with a list price (fair market value) of $75,000. Bentley Delivery received a trade-in allowance (fair market value) of $24,000 on an old truck of similar type and paid cash of $51,000. The following information about the old truck is obtained from the account in the equipment ledger: cost, $56,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $35,000; annual depreciation, $7,000. Assuming that the exchange has commercial substance, journalize the entries to record (a) the current depreciation of the old truck to the date of trade-in and (b) the transaction on October 1.

Answer:

a.  Oct. 1 Depreciation Expense—Trucks 5,250

Accumulated Depreciation—Trucks5,250

Truck depreciation ($7,000 × 9 ÷ 12).

b.  Oct. 1 Accumulated Depreciation—Trucks 40,250

Trucks75,000

Trucks56,000

Cash51,000

Gain on Exchange of Trucks8,250

Assume the same facts as in Exercise 9-27, except that the book value of the press traded in is $108,500

Assume the same facts as in Exercise 9-27, except that the book value of the press traded in is $108,500. (a) What is the amount of cash given? (b) What is the gain or loss on the exchange?

Answer:

a. Price (fair market value) of new equipment........................  $275,000

Less trade-in allowance of old equipment........................... 90,000

Cash paid on the date of exchange.................................... $185,000

b. Fair market value (trade-in allowance) of old equipment...... $ 90,000

Less book value of old equipment....................................  108,500

Loss on exchange of equipment....................................... $ (18,500)

or

Price (fair market value) of new equipment........................  $275,000

Assets given up in exchange:

Book value of old equipment....................................... $108,500

Cash paid on the exchange.......................................... 185,000 293,500

Loss on exchange of equipment....................................... $ (18,500)

On July 1, Twin Pines Co., a water distiller, acquired new bottling equipment with a list price (fair market value) of $220,000.

On July 1, Twin Pines Co., a water distiller, acquired new bottling equipment with a list price (fair market value) of $220,000. Twin Pines received a trade-in allowance (fair market value) of $45,000 on the old equipment of a similar type and paid cash of $175,000. The following information about the old equipment is obtained from the account in the equipment ledger: cost, $180,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $120,000; annual depreciation, $12,000. Assuming that the exchange has commercial substance, journalize the entries to record (a)  the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on July 1.

Answer:

a.  July 1 Depreciation Expense—Equipment 6,000

Accumulated Depreciation—Equipment 6,000

Equipment depreciation ($12,000 × 6 ÷ 12).

b.  July 1 Accumulated Depreciation—Equipment 126,000

Equipment220,000

Loss on Exchange of Equipment 9,000

Equipment180,000

Cash175,000

A printing press priced at a fair market value of $275,000 is acquired in a transaction that has commercial substance by trading

A printing press priced at a fair market value of $275,000 is acquired in a transaction that has commercial substance by trading in a similar press and paying cash for the difference between the trade-in allowance and the price of the new press.

a Assuming that the trade-in allowance is $90,000, what is the amount of cash given?

b. Assuming that the book value of the press traded in is $68,000, what is the gain or loss on the exchange?

Answer:

a. Price (fair market value) of new equipment........................  $275,000

Less trade-in allowance of old equipment........................... 90,000

Cash paid on the date of exchange.................................... $185,000

b. Fair market value (trade-in allowance) of old equipment...... $ 90,000

Less book value of old equipment....................................  68,000

Gain on exchange of equipment....................................... $ 22,000

or

Price (fair market value) of new equipment........................  $275,000

Assets given up in exchange:

Book value of old equipment....................................... $ 68,000

Cash paid on the exchange.......................................... 185,000 253,000

Gain on exchange of equipment....................................... $ 22,000

The following table shows the sales and average book value of fixed assets for three different companies from three different industries for a recent year: Company (Industry)

The following table shows the sales and average book value of fixed assets for three different companies from three different industries for a recent year: 

Company (Industry) Sales (in millions) Average Book Value of Fixed Assets (in millions) Alphabet (Google) Inc. (Internet) $ 74,989 $ 26,450 Comcast Corporation (communications) 74,510 32,309 Wal-Mart Stores, Inc. (retail) 485,651 117,281

a. For each company, determine the fixed asset turnover ratio. Round to one decimal place.

b.  Explain Comcast’s fixed asset turnover ratio relative to the other two companies. 

Answer:

a.

Fixed Asset Turnover Ratio = 

Comcast:

=Wal-Mart:

Alphabet (Google) Inc.:

$74,989

$26,450

$74,510

$32,309

$485,651

$117,281

2.8 2.3 4.1

Sales

Average Book Value of Fixed Assets

b. Comcast’s fixed asset turnover is less than the other two companies. This means

Comcast is less efficient at generating sales from fixed assets than the other two

companies. This can be explained by the nature of Comcast’s business. Comcast

must build a complete cable network in order to earn revenues. This includes

underground cable through cities, neighborhoods, and individual residences. In

addition, Comcast must provide the additional technology to carry broadband over 

this network. As a result, Comcast has a significant investment in fixed assets in 

order to earn revenues. Alphabet (Google) has a significant investment in servers; 

however, these servers are able to generate advertising revenue more efficiently than 

Comcast is able to earn subscription revenues over its cable network. Wal-Mart’s 

major fixed assets are its stores. However, Wal-Mart’s other major asset is 

merchandise inventory, which is not included in the fixed asset turnover ratio. 

Thus, Wal-Mart’s higher asset efficiency is only partially explained by the fixed asset 

turnover ratio. The inventory turnover ratio would also need to be analyzed to fully 

appreciate Wal-Mart’s efficiency in using its total assets. The other two companies do 

not have merchandise inventory, so the fixed asset turnover ratio is a more complete 

measure of their total asset efficiency relative to Wal-Mart’s.

FedEx Corporation and United Parcel Service, Inc. compete in the package delivery business. The major fixed assets for each business include aircraft

FedEx Corporation and United Parcel Service, Inc. compete in the package delivery business. The major fixed assets for each business include aircraft, sorting and handling facilities, delivery vehicles, and information technology. The sales and average book value of fixed assets reported on recent financial statements for each company were as follows:

                                                                                 FedEx | UPS

Sales (in millions).                                                 $47,453 | $58,363

Average book value of fixed assets (in millions)     20,213 | 18,317

a. Compute the fixed asset turnover ratio for each company. Round to one decimal place.

b. Which company appears more efficient in using fixed assets?

c.  Interpret the meaning of the ratio for the more efficient company.

Answer:

a. Fixed Asset Turnover Ratio = =

 2.3

UPS: = 3.2

FedEx: $

47,453

$20,213

$58,363

$18,317

Sales

Average Book Value of Fixed Assets

b. The ratios show that UPS is 39% more efficient at using its fixed assets than 

FedEx [(3.2 – 2.3) ÷ 2.3].   

c. The fixed asset turnover is a measure of how efficiently revenue is generated from

underlying fixed assets. In the case of UPS, the fixed assets represent all fixed assets

necessary to deliver packages from one location to another. These include aircraft,

trucks, sorting and handling facilities, and information technology. For every dollar of 

these fixed assets, UPS is able to generate $3.20 in sales. The fixed asset turnover

ratio will be influenced by the degree these assets are utilized to their optimal 

capacity. So, for example, optimally filled planes, trucks, and sorting centers will 

cause the fixed asset turnover ratio to improve.

Verizon Communications Inc. is a major telecommunications company in the United States. Two recent balance sheets for Verizon disclosed

Verizon Communications Inc. is a major telecommunications company in the United States. Two recent balance sheets for Verizon disclosed the following information regarding fixed assets:

End of Year (in millions) Beginning of Year (in millions) Property, plant, and equipment $220,163 $230,508 Less accumulated depreciation 136,622 140,561 Property, plant, and equipment (net) $ 83,541 $ 89,947

Verizon’s revenue for the year was $131,620 million. Assume that the fixed asset turnover ratio for the telecommunications industry averages approximately 1.1. 

a. Determine Verizon’s fixed asset turnover ratio. Round to one decimal place.

b.  Interpret this ratio with respect to the industry average.

Answer:

Verizon: $

131,620 = 1.5 ($89,947 + $83,541) / 2

Verizon earns $1.50 revenue for every dollar of fixed assets. Telecommunications 

requires a significant investment in the network in order to generate revenues.

The industry average fixed asset turnover ratio is 1.1. Thus, Verizon is using its

fixed assets more efficiently in generating revenues than the industry as a whole. 

The reason would require further analysis into the nature of Verizon’s fixed assets

and revenues, but is likely related to having high data volume on its network.

Amazon.com, Inc. is the world’s leading Internet retailer of merchandise and media. Amazon also designs and sells electronic products

Amazon.com, Inc. is the world’s leading Internet retailer of merchandise and media. Amazon also designs and sells electronic products, such as e-readers. Netflix, Inc.isthe world’sleading Internet television network. Both companies competeinthe digital media and streaming space. However, Netflix is more narrowly focused in the digital streaming business than is Amazon. Sales and average book value of fixed assets information (in millions) are provided for Amazon and Netflix for a recent year as follows:

                                                      Amazon | Netflix

Sales                                           $107,006 | $6,780

Average book value of fixed assets 19,403 |    162

a. Compute the fixed asset turnover ratio for each company. Round to one decimal place.

b. Which company is more efficient in generating sales from fixed assets?

c.  Interpret your results.

Answer:

a.

$107,006

$19,403

$6,780

$162

5.5

41.9

b. Netflix is more efficient than Amazon in generating revenue from fixed assets.

Netflix’s fixed asset turnover ratio is 41.9, which means it is able to generate $41.90 

of revenue for every dollar of fixed assets. Amazon’s fixed asset turnover ratio is 5.5, 

which is only $5.50 of revenue for every dollar of fixed assets. Netflix’s fixed asset 

turnover ratio is more than 7 times larger than Amazon’s (41.9 ÷ 5.5).

c. The difference in their fixed asset turnover ratios reflects the difference in their

core businesses. Netflix is mostly an Internet streaming and DVD rental company.

These services do not require significant fixed assets. The most significant fixed

assets of Netflix are its information technology assets, followed by its headquarters 

and DVD mailing operations. Amazon also provides streaming services, media 

downloads, and other electronic products. In addition, Amazon sells a wide 

assortment of merchandise and markets Kindle

®

 products. This broader

assortment of activities requires more extensive use of fixed assets beyond

information technology, including warehouses and equipment. These additional

fixed assets are the cause of Amazon’s lower fixed asset turnover ratio.  

List the errors you find in the following partial balance sheet:Burnt Red Company Balance Sheet December 31,

List the errors you find in the following partial balance sheet:

Burnt Red Company Balance Sheet December 31, 20Y2 Assets Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $350,000 Replacement Cost Accumulated Depreciation Book   Value Property, plant, and equipment:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,000 $  50,000 $200,000 Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000 160,000 290,000 Factory equipment . . . . . . . . . . . . . . . . . . . . . . . . . 375,000 140,000 235,000 Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000 60,000 65,000 Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 — 90,000 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 10,000 50,000

Total property, plant, and equipment . . . . .$1,350,000 $420,000 $930,000

Answer:

1. Fixed assets should be reported at cost and not replacement cost.

2. Land does not depreciate.

3. Patents and goodwill are intangible assets that should be listed in a separate section following the Fixed assets section. Patents should be reported at their net book values (cost less amortization to date). Goodwill should not be amortized but should be written down only upon impairment.

Apple Inc. designs, manufactures, and markets personal computers and related software.

Apple Inc. designs, manufactures, and markets personal computers and related software. Apple also manufactures and distributes music players (iPod) and mobile phones (iPhone) along with related accessories and services, including online distribution of third-party music, videos, and applications. The following information was taken from a recent annual report of Apple:

Property, Plant, and Equipment (in millions): 

Current Year Preceding Year Land and buildings$  6,956 $  4,863 Machinery, equipment, and internal-use software 37,038 29,639 Other fixed assets5,263 4,513 Accumulated depreciation and amortization (26,786) (18,391)

a. Compute the book value of the fixed assets for the current year and the preceding year and explain the differences, if any.

b.  Would you normally expect Apple’s book value of fixed assets to increase or decrease during the year? Why?

Answer:

a. Property, Plant, and Equipment (in millions): Current Preceding Land and buildings......................................................... $ 6,956 $ 4,863 Machinery, equipment, and internal-use software............... 37,038 29,639 Other fixed assets ......................................................... 5,263 4,513 Total fixed assets............................................................ $49,257 $39,015 Less accumulated depreciation and amortization............... 26,786 18,391 Book value..................................................................... $22,471 $20,624 A comparison of the book values of the current and preceding years indicates that they increased. A comparison of the total cost and accumulated depreciation reveals that Apple purchased $10,242 million ($49,257 – $39,015) of additional fixed assets, which was offset by the additional depreciation expense of $8,395 million ($26,786 – $18,391) taken during the current year.

b. We would expect Apple’s book value of fixed assets to increase during the year as its sales increase. Although additional depreciation expense will reduce the book value, most companies, such as Apple, invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets may decline. 

Kleen Company acquired patent rights on January 10 of Year 1 for $2,800,000. The patent has a useful life equal to its legal life

Kleen Company acquired patent rights on January 10 of Year 1 for $2,800,000. The patent has a useful life equal to its legal life of eight years. On January 7 of Year 4, Kleen successfully defended the patent in a lawsuit at a cost of $38,000.

a. Determine the patent amortization expense for Year 4 ended December 31.

b. Journalize the adjusting entry on December 31 of Year 4 to recognize the amortization. 

Answer:

a. ($2,800,000 ÷ 8) + ($38,000 ÷ 5) = $357,600 total patent amortization expense

b.  Dec. 31 Amortization Expense—Patents 357,600

Patents357,600

Amortized patent rights

($350,000 + $7,600).

Alaska Mining Co. acquired mineral rights for $67,500,000. The mineral deposit is estimated at 30,000,000 tons

Alaska Mining Co. acquired mineral rights for $67,500,000. The mineral deposit is estimated at 30,000,000 tons. During the current year, 4,000,000 tons were mined and sold.

a. Determine the amount of depletion expense for the current year.

b. Journalize the adjusting entry on December 31 to recognize the depletion expense.

Answer:

a. $67,500,000 ÷ 30,000,000 tons = $2.25 depletion per ton

4,000,000 tons × $2.25 = $9,000,000 depletion expense

b.  Dec. 31 Depletion Expense9,000,000

Accumulated Depletion9,000,000

Depletion of mineral deposit.

Equipment acquired on January 6 at a cost of $375,000 has an estimated useful life of 20 years and an estimated residual value of $25,000.

Equipment acquired on January 6 at a cost of $375,000 has an estimated useful life of 20 years and an estimated residual value of $25,000.

a. What was the annual amount of depreciation for the Years 1–3 using the straight-line method of depreciation?

b. What was the book value of the equipment on January 1 of Year 4?

c. Assuming that the equipment was sold on January 3 of Year 4 for $300,000, journalize the entry to record the sale.

d. Assuming that the equipment had been sold on January 3 of Year 4 for $325,000 instead of $300,000, journalize the entry to record the sale.

Answer:

a. Year 1 depreciation expense:  $17,500  [($375,000 – $25,000) ÷ 20]

Year 2 depreciation expense:  $17,500

Year 3 depreciation expense:  $17,500

b. $322,500  [$375,000 – ($17,500 × 3)]

c.  Year 4

 Jan. 3 Cash300,000

Accumulated Depreciation—Equipment 52,500

Loss on Sale of Equipment 22,500

Equipment375,000

d.  Year 4

 Jan. 3 Cash325,000

Accumulated Depreciation—Equipment 52,500

Equipment375,000

Gain on Sale of Equipment2,500

Equipment acquired on January 8 at a cost of $168,000 has an estimated useful life of 18 years,

Equipment acquired on January 8 at a cost of $168,000 has an estimated useful life of 18 years, has an estimated residual value of $15,000, and is depreciated by the straight-line method.

a. What was the book value of the equipment at December 31 the end of the fourth year?

b. Assuming that the equipment was sold on April 1 of the fifth year for $125,000, journalize the entries to record (1) depreciation for the three months until the sale date and (2) the sale of the equipment.

Answer:

a. Cost of equipment.............................................................................. $168,000

Less accumulated depreciation at end of fourth year, December 31

(4 years at $8,500 per year)............................................................... 34,000

Book value at end of fourth year, December 31....................................... $134,000

Yearly depreciation = ($168,000 – $15,000) ÷ 18 = $8,500

b. Apr.  1 Depreciation Expense—Equipment 2,125

Accumulated Depreciation—Equipment 2,125

Equipment depreciation

($8,500 × 3 ÷ 12).

1 Cash125,000

Accumulated Depreciation—Equipment 36,125

Loss on Sale of Equipment 6,875

Equipment168,000

*Accumulated Depreciation—Equipment = $34,000 + $2,125 = $36,125

Willow Creek Company purchased and installed carpet in its new general offices on April 30 for a total cost of $18,000.

Willow Creek Company purchased and installed carpet in its new general offices on April 30 for a total cost of $18,000. The carpet is estimated to have a 15-year useful life and no residual value.

a. Prepare the journal entry necessary for recording the purchase of the new carpet.

b. Record the December 31 adjusting entry for the partial-year depreciation expense for the carpet, assuming that Willow Creek uses the straight-line method.

Answer:

a. Apr. 30 Carpet 18,000

Cash18,000

b.  Dec. 31 Depreciation Expense—Carpet 800

Accumulated Depreciation—Carpet800

Carpet depreciation

[($18,000 ÷ 15 years) × (8 ÷ 12)].

Quality Move Company made the following expenditures on one of its delivery trucks: Mar. 20. Replaced the transmission at a cost of $1,890.

Quality Move Company made the following expenditures on one of its delivery trucks:

Mar. 20. Replaced the transmission at a cost of $1,890.

June 11. Paid $1,350 for installation of a hydraulic lift.

Nov. 30. Paid $55 to change the oil and air filter.

Prepare journal entries for each expenditure.

Answer:

Mar. 20 Accumulated Depreciation—Delivery Truck 1,890

Cash1,890

 June 11 Delivery Truck1,350

Cash1,350

 Nov. 30 Repairs and Maintenance Expense 55

Cash55

Jackie Fox owns and operates Platinum Transport Co. During the past year, Jackie incurred the following costs related to an 18-wheel truck:

Jackie Fox owns and operates Platinum Transport Co. During the past year, Jackie incurred the following costs related to an 18-wheel truck:

1. Changed engine oil.

2. Installed a television in the sleeping compartment of the truck.

3. Installed a wind deflector on top of the cab to increase fuel mileage.

4.  Modified the factory-installed turbo charger with a special-order kit designed to add 50 more horsepower to the engine performance.

5. Replaced a headlight that had burned out.

6. Replaced a shock absorber that had worn out.

7. Replaced fog and cab light bulbs.

8. Replaced the hydraulic brake system that had begun to fail during his latest trip through the Rocky Mountains.

9. Removed the old radio and replaced it with a new communications module. 

10. Replaced the old radar detector with a newer model that is fastened to the truck with a locking device that prevents its removal.

Classify each of the costs as a capital expenditure or a revenue expenditure.

Answer:

Capital expenditures: 2, 3, 4, 8, 9, 10

Revenue expenditures: 1, 5, 6, 7

A building with a cost of $1,200,000 has an estimated residual value of $250,000, has an estimated useful life of 40 years

A building with a cost of $1,200,000 has an estimated residual value of $250,000, has an estimated useful life of 40 years, and is depreciated by the straight-line method. (a) What is the amount of the annual depreciation? (b) What is the book value at the end of the twenty-eighth year of use? (c) If at the start of the twenty-ninth year it is estimated that the remaining life is 10 years and that the residual value is $180,000, what is the depreciation expense for each of the remaining 10 years?

Answer:

a. $23,750  [($1,200,000 – $250,000) ÷ 40] or [($1,200,000 – $250,000) × 2.5%]

b. $535,000  [$1,200,000 – ($23,750 × 28 yrs.)]

c. $35,500  [($535,000 – $180,000) ÷ 10 yrs.]

US Freight Lines Co. incurred the following costs related to trucks and vans used in operating its delivery service:

US Freight Lines Co. incurred the following costs related to trucks and vans used in operating its delivery service:

1. Installed GPS systems on the trucks.

2. Replaced the transmission fluid on a truck that had been in service for the past four years.

3.  Overhauled the engine on one of the trucks purchased three years ago.

4. Performed annual service of installing new spark plugs, changing the oil, and greasing the joints of all trucks and vans.

5. Rebuilt the engine on one of the vans that had been driven 80,000 miles. 

6. Repaired a flat tire on one of the vans.

7. Installed a hydraulic lift to a truck.

8. Tinted the back and side windows of the vans and installed a security system to discourage theft of contents.

9. Replaced a truck’s suspension system with a new suspension system, allowing for heavier loads.  

10. Installed an optional third-row seat on one of the vans. 

Classify each of the costs as a capital expenditure or a revenue expenditure.

Answer:

Capital expenditures: 1, 3, 5, 7, 8, 9, 10

Revenue expenditures: 2, 4, 6

A storage tank acquired at the beginning of the fiscal year at a cost of $75,000 has an estimated residual value of $10,000

A storage tank acquired at the beginning of the fiscal year at a cost of $75,000 has an estimated residual value of $10,000 and an estimated useful life of 20 years. Determine the following: (a) the amount of annual depreciation by the straight-line method and (b) the amount of depreciation for the first and second years computed by the double-declining-balance method.

Answer:

a. 

5% of ($75,000 – $10,000) = $3,250 or [($75,000 – $10,000) ÷ 20]

b. 

Year 1: 10% of $75,000 = $7,500

Year 2: 10% of ($75,000 – $7,500) = $6,750

Equipment acquired at a cost of $105,000 has an estimated residual value of $12,000 and an estimated useful life of 10 years

Equipment acquired at a cost of $105,000 has an estimated residual value of $12,000 and an estimated useful life of 10 years. It was placed into service on May 1 of the current fiscal year, which ends on December 31. Determine the depreciation for the current fiscal year and for the following fiscal year by (a) the straight-line method and (b) the double-declining-balance method.

Answer:

a. 

Year 1:  ($105,000 – $12,000) ÷ 10 = $9,300; $9,300 × (8 ÷ 12) = $6,200

Year 2:  ($105,000 – $12,000) ÷ 10 = $9,300

b. 

Year 1:  8 ÷ 12 × 20% of $105,000 = $14,000

Year 2:  20% of ($105,000 – $14,000) = $18,200

A Kubota tractor acquired on January 8 at a cost of $85,000 has an estimated useful life of 10 years.

A Kubota tractor acquired on January 8 at a cost of $85,000 has an estimated useful life of 10 years. Assuming that it will have no residual value, determine the depreciation for each of the first two years (a) by the straight-line method and (b) by the double-declining-balance method.

Answer:

First Year Second Year

a. 10% of $85,000 = $8,500 or $85,000/10 = $8,500

b. 20% of $85,000 = $17,000

20% of ($85,000 – $17,000) = $13,600