Plant Assets and Intangible Assets

Chapter 10

 Questions

1. Depreciation: Buildings, Machinery and Equipment, Furniture and Fixtures Depletion: Natural Resources (Minerals) Amortization: Intangibles

2. The cost of all assets, including plant assets, is the sum of all the costs incurred to bring the asset to its intended purpose, net of all discounts. The cost of repairing the asset after it is placed in service is debited to expense, not to the asset account.

3. Under the relative-sales-value method, the cost of an individual asset acquired in a group (or basket) purchase is based on the ratio of that asset’s market value to the total market value of the combined assets. The ratio for each asset is multiplied by the total purchase price to compute the cost of each asset.

4. A capital expenditure is an expenditure that increases the capacity or efficiency or the useful life of a plant asset or an intangible asset. Accordingly, it is debited to the asset account. An expense merely repairs the asset or maintains it in good working order.

Chapter 10 Plant Assets and Intangible Assets 203 5. Depreciation is a process of allocating the cost of a plant asset to expense as the asset is used. Depreciation is not a process of valuation based on the asset’s market value. Depreciation is not a fund of cash set aside to replace a used-up asset. Establishing a cash fund is entirely separate from depreciation.

6. Accelerated depreciation is a pattern of depreciation that writes off more of the asset’s cost nearer the start of its useful life than the straight-line method does.

Double-declining-balance depreciation results in the most depreciation in the first year of an asset’s life.

7. The units-of-production method is most appropriate for depreciating the minivans. Under this method, depreciation arises only when the assets are used. When business is slow, Harwood records less depreciation. This pattern is consistent with the matching principle.

8. The accelerated double-declining-balance method is best from an income-tax point of view. It results in the most depreciation and the lowest taxable income in the early years of the asset’s life. Taxpayers benefit by paying less taxes early in the asset’s life, thus conserving cash that they can invest to earn net income.

9. Depreciation for less than a full year may be computed by multiplying an annual amount by the appropriate fraction of the year. Depreciation for less than a full month may be accounted for as follows. Record a full month’s depreciation if the asset is purchased on or before the 15th day of the month, and no depreciation for the month if purchased after the 15th.

10. Gain = Sale Proceeds > Book value of the asset sold. Loss = Sale Proceeds < Book value of the asset sold.

11. Depletion expense applies to natural resources. Depletion is computed by the units-of-production method.

204 Accounting 5/e Solutions Manual 12. Intangible assets differ from most other assets in that intangibles have no physical form. They carry special rights for the owner. Amortization expense applies to intangibles.

13. The excess of acquisition cost over the market value of the other company’s net assets is called goodwill. Goodwill is an intangible asset, and its cost, like that of other intangibles, is amortized over a period not to exceed 40 years.

14. Oracle does not report on its balance sheet any goodwill that Oracle has created by being successful. No company does. This goodwill would be recorded only by another company that purchased Oracle.

Chapter 10 Plant Assets and Intangible Assets 205  Daily Exercises

(5 min.) DE 10-1

1. The Home Depot’s fiscal year ends on January 30 because this date marks the low point in the company’s operations each year.

2. Property and equipment Millions 3. Property and equipment, at cost...... $11,890 Less Accumulated depreciation...... (1,663) Property and equipment, book value...... $10,227

(5 min.) DE 10-2

The related costs (back property tax, transfer taxes, removal of a building, and survey fee) are included as part of the cost of the land because the buyer of the land must incur these costs to get the land ready for its intended use.

After the land is ready for use, the related costs (listed above) would be expensed.

206 Accounting 5/e Solutions Manual (5 min.) DE 10-3

A capital lease is fundamentally like an asset to the lessee because the lessee is making lease payments that are similar to installment payments to purchase the asset. For example, The Home Depot has long-term capital leases on some of its store buildings. The Home Depot accounts for its capital leases as assets that appear on the company’s balance sheet.

Chapter 10 Plant Assets and Intangible Assets 207 (10 min.) DE 10-4

Req. 1

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT 20X3 Dec. 31 Equipment ($800,000  .09) 72,000 Cash 72,000

Req. 2

Equipment Construction costs 800,000 Interest cost 72,000 Dec. 31, 20X3 Bal. 872,000

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Land ($100,000  .50) 50,000 Building ($100,000  .375) 37,500 Equipment ($100,000  .125) 12,500 Note Payable 100,000

Estimated Market Value Percent of Total Land...... $ 80,000 $80,000 / $160,000 = 50.0% Building...... 60,000 $60,000 / $160,000 = 37.5 Equipment...... 20,000 $20,000 / $160,000 = 12.5 Total...... $160,000 100.0%

Chapter 10 Plant Assets and Intangible Assets 209 (10-15 min.) DE 10-6

Req. 1

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Incorrect entry: Airplane (or Equipment) 750,000 Cash 750,000

Correct entry: Repair Expense 750,000 Cash 750,000

Req. 2

Income Statement Revenues CORRECT Expenses UNDERSTATED Net income OVERSTATED

Balance Sheet Current assets CORRECT Total liabilities CORRECT Plant assets OVERSTATED Owner’s equity OVERSTATED ______Total liabilities ______Total assets OVERSTATED and owner’s equity OVERSTATED

Req. 1

First-year depreciation: a. Straight-line ($36,000,000  $6,000,000) / 5 years...... $ 6,000,000 b. Units-of-production [($36,000,000  $6,000,000) / 5,000,000 miles]  750,000 miles...... $ 4,500,000 c. Double-declining-balance ($36,000,000 / 5 years  2).... $14,400,000

Req. 2

Book value: Double- Straight- Units-of- Declining- Line Production Balance

Cost...... $36,000,000 $36,000,000 $36,000,000

Less Accumulated depreciation...... (6,000,000) (4,500,000) (14,400,000)

Book value...... $30,000,000 $31,500,000 $21,600,000

Fifth-year depreciation: a. Straight-line ($36,000,000  $6,000,000) / 5 years...... $6,000,000 b. Units-of-production [($36,000,000  $6,000,000) / 5,000,000 miles]  1,250,000 miles...... $7,500,000

c. Double-declining-balance

Year 1 ($36,000,000 / 5 years)  2 = $14,400,000

Year 2 [($36,000,000  $14,400,000) / 5]  2 = $8,640,000

Year 3 $36,000,000  $14,400,000  $8,640,000 = $12,960,000; ($12,960,000 / 5)  2 = $5,184,000

Year 4 $12,960,000  $5,184,000  $6,000,000 = $1,776,000

Year 5 No depreciation: asset is fully depreciated = $-0-

Req. 1

The double-declining-balance (DDB) method offers the tax advantage for the first year of an asset’s use. The advantage results from the greater amount of DDB depreciation (versus the amount of depreciation under the other methods) during the first year. This saves cash that the taxpayer can invest to earn a return.

Req. 2

DDB depreciation...... $14,400,000

Straight-line depreciation...... (6,000,000)

Excess depreciation tax deduction...... $ 8,400,000

Income tax rate......  .40

Income tax savings for first year...... $ 3,360,000

(5-10 min.) DE 10-10

First-year depreciation (for a partial year): a. Straight-line ($36,000,000  $6,000,000) / 5 years  9/12.. $ 4,500,000 b. Units-of-production ($36,000,000  $6,000,000) / 5,000,000 miles  800,000 miles...... … $ 4,800,000 c. Double-declining-balance ($36,000,000 / 5)  2  9/12...... $10,800,000

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Depreciation Expense—Hot Dog Stand 10,000 Accumulated Depreciation—Hot Dog Stand 10,000

Depreciation for years 1-4:

$40,000 / 8 years = $ 5,000 per year

$ 5,000  4 years = $20,000 for years 1-4

Asset’s remaining depreciable  (New) Estimated = (New) Annual book value useful life remaining depreciation

$40,000  $20,000  2 years = $10,000 per year

$20,000

214 Accounting 5/e Solutions Manual (10 min.) DE 10-12 Req. 1

(a) Straight-line depreciation method:

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT 20X2 Dec. 31 Cash 23,000 Accumulated Depreciation 16,000 Loss on Sale of Delivery Truck 2,000 Delivery Truck 41,000

(b) Double-declining-balance depreciation method:

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT 20X2 Dec. 31 Cash 23,000 Accumulated Depreciation 26,240 Delivery Truck 41,000 Gain on Sale of Delivery Truck 8,240 Req. 2

The difference between the loss under the straight-line depreciation method and the gain under the double-declining-balance method results from the difference in depreciation amounts under the two depreciation methods.

Depreciation is higher under DDB, so the asset’s book value is lower. As a result, there will be a larger gain under DDB.

Req. 1

Units-of-production depreciation method is used to compute depletion expense.

Req. 2

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Billions Depletion Expense [($18 / 2.4)  0.6] 4.5 Accumulated Depletion 4.5

Req. 3

At December 31, 20X1: Billions Cost of mineral assets...... $18.0 Less Accumulated depletion ($11.5 + $4.5)...... (16.0) Book value of mineral assets...... $ 2.0

Req. 1 (Flannahan’s cost of the goodwill)

Purchase price paid for The Thrifty Nickel...... $700,000 Market value of The Thrifty Nickel’s assets...... $990,000 Less: The Thrifty Nickel’s liabilities...... (600,000) Market value of The Thrifty Nickel’s net assets...... 390,000 Goodwill purchased by Flannahan Newsprint...... $310,000

Req. 2 (Flannahan’s entry to record the purchase of goodwill)

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Assets 990,000 Goodwill 310,000 Liabilities 600,000 Cash 700,000

Req. 3

Maximum useful life for goodwill...... 40 years Using a 40-year life, amortization expense per year is ($310,000 / 40 years)...... $7,750

Req. 1

Cost in excess of the fair value of net assets acquired.

Req. 2

Millions Cost of goodwill...... $344 Less Accumulated amortization...... (33) Book value of goodwill...... …. $311

Req. 3

Millions Cost of goodwill, January 30, 2000...... $344 Cost of goodwill, January 30, 1999...... (329) Goodwill purchased during the year ended January 30, 2000...... …. $ 15

218 Accounting 5/e Solutions Manual (10-15 min.) DE 10-16

Req. 1

Questor Applications Income Statement Year Ended December 31, 20X3 Revenues: Sales revenue $1,500,000 Expenses: Cost of goods sold $200,000 Research and development expense 875,000 Amortization of patent ($300,000 / 3) 100,000 Selling expenses 400,000 Total expenses 1,575,000 Net income (net loss) $ (75,000)

Req. 2

Questor’s outlook for future profits should be favorable. The major expense is research and development, which is all expensed in the first year. After the first year, the company should be able to earn a profit on the new software program.

Chapter 10 Plant Assets and Intangible Assets 219  Exercises

(5-10 min.) E 10-1

Land: $77,000 + $120,000 + $2,000 + $2,500 + $5,400 = $206,900 Land improvements: $51,000 + $10,400 + $6,000 = $67,400 Building: $799,000

Delmar will depreciate the land improvements and the building.

(15-20 min.) E 10-2 Req. 1

Cost of factory building in 20X3: Construction cost………………………... $600,000 Capitalized interest ($600,000  .09)…… 54,000 Total……………………………………... $654,000

(continued) E 10-2 Req. 2

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Cash 600,000 Note Payable 600,000 Borrowed money for construction of building.

Factory Building 600,000 Cash 600,000 Incurred construction cost.

Factory Building 54,000 Cash ($600,000  .09) 54,000 Recorded interest on note payable.

220 Accounting 5/e Solutions Manual (10-15 min.) E 10-3

Allocation of cost to individual saddles:

Appraised Saddle Value Proportion Allocated Cost 1 $ 3,350 $3,350 / $13,000 = .258  $10,000 = $2,580 2 5,400 5,400 / 13,000 = .415 10,000 = 4,150 3 4,250 4,250 / 13,000 = .327 10,000 = 3,270 Totals $13,000 1.000 $10,000

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Saddle 1 2,580 Saddle 2 4,150 Saddle 3 3,270 Cash 5,000 Note Payable 5,000

(5-10 min.) E 10-4

Capital expenditures: (a) major overhaul, (c) lubrication before machine is placed in service, (e) purchase price, (f) sales tax, (g) transportation and insurance, (h) installation, (i) training of personnel, (j) reinforcement to platform

Expenses: (b) ordinary recurring repairs, (d) periodic lubrication, (k) income tax

Chapter 10 Plant Assets and Intangible Assets 221 (10-15 min.) E 10-5

Depreciation is the process of allocating a plant asset’s cost to expense over the period the asset is used. It is designed to match depreciation expense against revenue over the asset’s life. The primary purpose of depreciation accounting is to match the period’s expenses against its revenues in order to measure income. Of less importance is the need to account for the asset’s decline in usefulness.

Lake is correct that depreciation can relate to the wear and tear of an asset. However, the depreciation of some assets is more affected by obsolescence than by physical wear and tear.

McPherson is wrong. Depreciation has nothing to do with a cash fund to replace an asset.

Depreciation Expense Per Year Double-Declining- Year Straight-Line Units-of-Production Balance 20X1 $ 3,000 $ 4,080 $ 7,500 20X2 3,000 3,360 3,750 20X3 3,000 2,160 375 20X4 3,000 2,400 375 $12,000 $12,000 $12,000 ______Computations:

Straight-line: ($15,000  $3,000)  4 = $3,000 per year.

Units-of-production: ($15,000  $3,000)  100,000 miles = $.12 per mile; 34,000  $.12 = $4,080; 28,000  $.12 = $3,360; 18,000  $.12 = $2,160; 20,000  $.12 = $2,400.

Double-declining-balance: $15,000  (1/4  2) = $7,500; ($15,000  $7,500)  2/4 = $3,750; ($15,000  $7,500  $3,750) = $3,750  $3,000 residual value = $750  2 = $375.

The units-of-production method tracks the wear and tear on the truck most closely.

For income-tax purposes, the double-declining-balance method is best because it provides the most depreciation and thus the largest tax deductions in the early life of the asset. The company can invest the tax savings to earn a return on the investment.

MACRS depreciation method for income tax: Double-declining-balance

Double- Declining- Straight- Balance Line Year 1: $165,000  2/7...... $47,143 ($165,000  $16,500)  7...... $21,214 Year 2: ($165,000  $47,143)  2/7...... 33,673 ($165,000  $16,500)  7...... ______21,214 Total...... $80,816 $42,428 Extra cash to invest with DDB ($80,816  $42,428)...... $38,388 ______Note: This solution ignores the half-year convention of MACRS depreciation.

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Year 15 Depreciation Expense [($775,000  $100,000)  40] 16,875 Accumulated Depreciation—Building 16,875

Year 16 Depreciation Expense 21,458* Accumulated Depreciation—Building 21,458 ______*Computation:

Depreciable cost: $775,000  $100,000 = $675,000 Depreciation through year 15: $675,000  40 = $16,875  15 = $253,125 Asset’s remaining depreciable book value: $775,000  $253,125  $200,000 = $321,875 New estimated useful life remaining: 15 years New annual depreciation: $321,875  15 = $21,458

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT 20X4 Depreciation for 9 months: Sept. 30 Depreciation Expense 1,710a Accumulated Depreciation— Fixtures 1,710

Sale of fixtures: 30 Cash 4,950 Accumulated Depreciation— Fixtures ($3,800 + $1,710) 5,510 Store Fixtures 9,500 Gain on Sale of Fixtures 960b ______a20X3 depreciation: $9,500  2/5 = $3,800 20X4 depreciation: ($9,500  $3,800)  2/5  9/12 = $1,710 bGain is computed as follows: Sale price of old store fixtures...... $4,950 Book value of old fixtures: Cost...... $9,500 Less Accumulated depreciation...... (5,510) 3,990 Gain on sale...... $ 960

Cost of new truck = Book value of old truck + Cash paid

$338,175 = $258,175a + $80,000

______aCost of old truck...... $385,000 Accumulated depreciation:

75 + 120 + 210 + 40 ($385,000  $100,000)  ...... (126,825) 1,000 ______Book value of old truck...... $258,175

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT (a) Purchase of minerals: Mineral Asset 298,500 Cash 298,500

(b) Payment of fees and other costs: Mineral Asset ($500 + $1,000) 1,500 Cash 1,500

Mineral Asset 60,000 Cash 60,000

(c) Depletion Expense 75,600* Accumulated Depletion— Mineral Asset 75,600 ______*$298,500 + $500 + $1,000 + $60,000 = $360,000; $360,000  200,000 tons = $1.80 per ton; 42,000 tons  $1.80 = $75,600

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Part 1(a) Purchase of patent: Patents 1,370,000 Cash 1,370,000

(b) Amortization for one year: Amortization Expense—Patents ($1,370,000  8) 171,250 Patents 171,250

Part 2 Amortization for year 5: Amortization Expense—Patents 342,500* Patents 342,500 ______*Asset remaining book value: $1,370,000  ($171,250  4) = $685,000 New estimated useful life remaining: 2 years New annual amortization: $685,000  2 = $342,500

Req. 1

Campbell’s title for goodwill: Purchase Price in Excess of Net Assets of Businesses Acquired

This title fits the definition of goodwill almost word for word.

Req. 2

Millions Payments to acquire other businesses...... $105 Less: Payments for goodwill, included in the above purchase price ($1,697  $1,655)...... (42) Payment for other assets, such as receivables, inventory, property, and equipment...... $ 63

Req. 1

Cost of goodwill purchased:

Purchase price paid for Adelaide Bakeries...... $12,000,000 Market value of Adelaide’s net assets: Market value of Adelaide’s assets………... $15,000,000 Less: Adelaide’s liabilities...... ………. (10,000,000) Market value of Adelaide’s net assets...... ……….. 5,000,000 Cost of goodwill purchased...... $ 7,000,000

Reqs. 2 and 3

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Assets (Cash, Receivables, Inventories, Plant Assets) 15,000,000 Goodwill 7,000,000 Liabilities 10,000,000 Cash 12,000,000 Purchased Adelaide Bakeries.

Amortization Expense— Goodwill ($7,000,000  10) 700,000 Goodwill 700,000 Recorded amortization of goodwill.

Year 1 2 3 4 5 Millions of Francs (F) 1. Total current assets No effects 2. Equipment, net F3.6u* F2.7u** F1.8u F0.9u Correct 3. Net income 3.6u* 0.9o 0.9o 0.9o 0.9o

______u = Understated o = Overstated

*Cost (F4.5 million)  Depreciation expense (F.9 million) = F3.6 million **Cost (F4.5 million)  Two years’ depreciation (F1.8 million) = F2.7 million

(All amounts in millions of dollars)

Req. 1

Unamortized Special Tools Dec. 31, 19X8 Balance 7,298 19X9 Acquisitions 2,559 19X9 Amortization 2,492

Dec. 31, 19X9 Balance 7,365

Req. 2

Sale proceeds ...... $215 Less gain...... (15) Book value of assets sold ...... $200

Chapter 10 Plant Assets and Intangible Assets 233  Problems

Group A (20-25 min.) P 10-1A Req. 1

LAND OFFICE ITEM LAND IMPROVEMENTS BUILDING GARAGE FURNITURE (a) $560,000 $ 80,000 (b) 3,700 (c) 5,175 (d) 1,000 (e) $ 44,100 (f) $ 200 (g) 32,000 (h) 20,950 (i) 27,500 (j) 814,000 (k) 734,000 (l) 3,400 (m) 17,450 (n) 8,900 (o) 3,300 49,500 2,200 (p) $123,500 (q) 1,100 (r) 9,100* Totals $569,875 $103,800 $1,633,100 $109,700 $124,600 ______Computations: (a) Land: $700,000 / $800,000  $640,000 = $560,000 Garage: $100,000 / $800,000  $640,000 = $ 80,000

(o) Land improvements: $ 55,000  .06 = $ 3,300 Office building: $ 55,000  .90 = $49,500 Garage: $ 55,000  .04 = $ 2,200 ______*Some accountants would debit this cost to the Land account. (continued) P 10-1A 234 Accounting 5/e Solutions Manual Req. 2

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Dec. 31 Depreciation Expense—Land Improvements ($103,800 / 20  9/12) 3,893* Accumulated Depreciation— Land Improvements 3,893

31 Depreciation Expense—Office Building ($1,633,100 / 40  9/12) 30,621 Accumulated Depreciation— Office Building 30,621

31 Depreciation Expense—Garage ($109,700 / 40  9/12) 2,057 Accumulated Depreciation— Garage 2,057

31 Depreciation Expense— Furniture ($124,600 / 8  9/12) 11,681 Accumulated Depreciation— Furniture 11,681 ______*$3,551 ($94,700 / 20  9/12) if $9,100 (r in Req. 1) is debited to the Land account.

Chapter 10 Plant Assets and Intangible Assets 235 (25-35 min.) P 10-2A Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT May 3 Communication Equipment ($90,000 / $100,000  $80,000) 72,000 Televideo Equipment ($10,000 / $100,000  $80,000) 8,000 Cash 80,000

July 30 Office Equipment (new) 79,000 Accumulated Depreciation— Office Equipment (old) ($96,000  $11,000) 85,000 Office Equipment (old) 96,000 Cash ($88,000  $20,000) 68,000

Sept. 1 Depreciation Expense—Building [($475,000  $47,500) / 30  8/12] 9,500 Accumulated Depreciation— Building 9,500

1 Cash 150,000 Note Receivable 450,000 Accumulated Depreciation— Building ($353,500 + $9,500) 363,000 Building 475,000 Gain on Sale of Building 488,000

Dec. 31 Depreciation Expense— Communication Equipment ($72,000  2/5  8/12) 19,200 Accumulated Depreciation— Communication Equipment 19,200

31 Depreciation Expense— Televideo Equipment ($8,000  2/5  8/12) 2,133 Accumulated Depreciation— Televideo Equipment 2,133

236 Accounting 5/e Solutions Manual (continued) P 10-2A

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Dec. 31 Depreciation Expense— Office Equipment [($79,000  $9,000) / 7] 10,000 Accumulated Depreciation— Office Equipment 10,000

Chapter 10 Plant Assets and Intangible Assets 237 (10-15 min.) P 10-3A

TO: Clay Fitzhugh

FROM: Student Name

SUBJECT: Depreciation

Depreciation is the process of allocating a plant asset’s cost to expense over the period the asset is used. Depreciation procedures are designed to match this expense against revenue over the asset’s life. The primary purpose of depreciation accounting is to measure income. Of less importance is the need to account for the decline in the asset’s usefulness.

Depreciation does not mean that the business sets aside cash to replace assets as they wear out. Accounting for depreciation has nothing to do with setting aside such a fund. The period over which an asset’s cost is depreciated depends on a number of factors, including physical deterioration of the asset and obsolescence. For computers, obsolescence may be the more important factor as the company replaces used machines with new models. In this case the company should depreciate computers over a shorter life than the period of their physical usefulness.

238 Accounting 5/e Solutions Manual (30-40 min.) P 10-4A

Req. 1

Straight-Line Depreciation Schedule Depreciation for the Year ASSET DEPRECIATION DEPRECIABLE DEPRECIATION ACCUMULATED ASSET BOOK DATE COST RATE  COST = AMOUNT DEPRECIATION VALUE 1-02-20X1 $70,000 $70,000 12-31-20X1 1/6 $55,800 $ 9,300 $ 9,300 60,700 12-31-20X2 1/6 55,800 9,300 18,600 51,400 12-31-20X3 1/6 55,800 9,300 27,900 42,100 12-31-20X4 1/6 55,800 9,300 37,200 32,800 12-31-20X5 1/6 55,800 9,300 46,500 23,500 12-31-20X6 1/6 55,800 9,300 55,800 14,200 $55,800 ______Asset cost: $63,000 + $2,200 + $800 + $4,000 = $70,000 Depreciation for the year: ($70,000  $14,200) / 6 years = $9,300

Chapter 10 Plant Assets and Intangible Assets 239 (continued) P 10-4A

Req. 1

Units-of-Production Depreciation Schedule Depreciation for the Year ASSET DEPRECIATION NUMBER DEPRECIATION ACCUMULATED ASSET BOOK DATE COST PER MILE  OF MILES = AMOUNT DEPRECIATION VALUE 1-02-20X1 $70,000 $70,000 12-31-20X1 $.558 18,000 $10,044 $10,044 59,956 12-31-20X2 .558 18,000 10,044 20,088 49,912 12-31-20X3 .558 18,000 10,044 30,132 39,868

12-31-20X4 .558 18,000 10,044 40,176 29,824 12-31-20X5 .558 14,000 7,812 47,988 22,012 12-31-20X6 .558 14,000 7,812 55,800 14,200 Total miles 100,000 $55,800 ______Depreciation per mile: ($70,000  $14,200) / 100,000 miles = $.558

Req. 1

Double-Declining-Balance Depreciation Schedule Depreciation for the Year ASSET DEPRECIABLE DEPRECIATION ACCUMULATED ASSET BOOK DATE COST DDB RATE  COST = AMOUNT DEPRECIATION VALUE 1-02-20X1 $70,000 $70,000 12-31-20X1 1/3* $70,000 $23,333 $23,333 46,667 12-31-20X2 1/3 46,667 15,556 38,889 31,111 12-31-20X3 1/3 31,111 10,370 49,259 20,741 12-31-20X4 6,541** 55,800 14,200 12-31-20X5 55,800 14,200 12-31-20X6 55,800 14,200 $55,800 ______* DDB rate = (1/6 years  2) = 2/6 = 1/3 ** Depreciation for 20X4: $20,741  $14,200 = $6,541

Req. 2 (depreciation for financial statements vs. depreciation for income tax purposes)

The depreciation method that maximizes reported income in the first year of the trailer’s life is the straight-line method, which produces the lowest depreciation for that year ($9,300).

The method that maximizes cash flow by minimizing income tax payments in the first year is the double-declining-balance method, which produces the highest depreciation amount for that year ($23,333).

Req. 3 (comparison of net income and cash provided by operations)

DEPRECIATION METHOD THAT IN THE EARLY YEARS A B MAXIMIZES MINIMIZES REPORTED INCOME TAX INCOME PAYMENTS Net income for first year: SL DDB Cash provided by operations before income tax. $150,000 $150,000 Depreciation expense...... 9,300 23,333 Income before income tax...... 140,700 126,667 Income tax expense (40%)...... 56,280 50,667 Net income...... $ 84,420 $ 76,000 Net-income advantage of SL over DDB...... $8,420

Cash flow analysis for first year: Cash provided by operations before income tax...... $150,000 $150,000 Income tax expense...... 56,280 50,667 Cash provided by operations (called cash flow)...... $ 93,720 $ 99,333 Cash-flow advantage of DDB over SL...... $5,613

Req. 1

Cost of plant assets…………………... $242,000,000 Accumulated depreciation…………… (147,422,000) Book value…………………………… $ 94,578,000

Book value does not measure how much the company could sell its assets for. There are at least two reasons: The cost of the assets occurred in the past, and the current value of assets changes over time. Also, accumulated depreciation is not based on the assets’ current value. Instead, accumulated depreciation is the sum of all the assets’ depreciation amounts based on their cost.

Req. 2

Depreciation expense………………… $ 12,864,000 Accumulated depreciation…………… $147,422,000

Depreciation expense is for one year only. Accumulated depreciation is for all the years that the assets have been used.

Req. 3

During 19X9, Curtiss-Wright paid $19,883,000 to purchase plant assets.

Property, Plant, and Equipment, at Cost Balance, 19X8 237,215,000 Cost of assets sold Additions during 19X9 19,883,000 during 19X9 15,098,000 Balance, 19X9 242,000,000

During 19X9, Curtiss-Wright bought more plant assets than it sold.

Chapter 10 Plant Assets and Intangible Assets 243 (30-40 min.) P 10-6A Part 1

Req. 1

Another title of Cost of Acquisitions in Excess of the Fair Market Value of the Net Assets of Subsidiaries is Goodwill.

Req. 2

The entry to record the acquisition of the other company is:

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Assets (Cash, Receivables, Inventory, Plant Assets, etc.) 906,000 Goodwill 1,149,000* Liabilities 405,000 Cash 1,650,000 ______*Cost, $1,650,000  Net assets acquired ($906,000  $405,000) = Goodwill, $1,149,000

Req. 3

The entry to record amortization of goodwill for one year is:

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Amortization Expense— Goodwill ($1,149,000 / 20) 57,450 Goodwill 57,450

Part 2 (oil properties and depletion)

Req. 1

Journal DATE ACCOUNTS AND EXPLANATION DEBIT CREDIT Oil and Gas Properties 7,000,000 Cash 7,000,000

Oil and Gas Properties 350,000 Cash 350,000

Oil and Gas Properties 110,000 Cash 110,000

Oil and Gas Properties 65,000 Note Payable 65,000

Depletion Expense 1,158,850 Accumulated Depletion—Oil and Gas Properties [($7,000,000 + $350,000 + $110,000 + $65,000) / 500,000]  77,000 1,158,850

Accounts Receivable (77,000  $19) 1,463,000 Sales Revenue 1,463,000

Operating Expenses 185,000 Cash 185,000

Part 2 (continued)

Req. 2

Continental Pipeline Company Income Statement – Oil and Gas Project Year 1 Sales revenue $1,463,000 Depletion expense $1,158,850 Operating expenses 185,000 1,343,850 Net income $ 119,150

The oil and gas project was rather profitable. Net income was 8.1% of sales, which is good.

Req. 1

(All amounts in billions) Balance sheet at December 31, 1999: Property, plant, and equipment ($32.1 + $6.1  $1.1)...... $37.1 Less accumulated depreciation ($13.1 + $3.7  $1.1)...... (15.7) Property, plant, and equipment, net (book value)...... $21.4 Req. 2

The plant assets sold during 1999 were fully depreciated (cost = $1.1 billion; accumulated depreciation = $1.1 billion; book value = $0) Billions Cash received from the sale of plant assets...... $0.2 Book value of asset sold: Cost...... $ 1.1 Less: Accumulated depreciation...... (1.1) 0.0 Gain on sale...... ……… $0.2

Req. 3

Billions Total assets at Dec. 31, 1998………………… $33.3 Total liabilities at Dec. 31, 1998…………….. 20 .9 Owners’ equity at Dec. 31, 1998…………….. $12 .4 Req. 4

Billions Total revenues for 1999……………………… $19.9 Total expenses for 1999……………………… 20 .8 Net income (net loss) for 1999………………. $(0 .9)

Chapter 10 Plant Assets and Intangible Assets 247  Problems

Group B (20-30 min.) P 10-1B Req. 1

LAND SALES GARAGE ITEM LAND IMPROVEMENTS BUILDING BUILDING FURNITURE (a) $262,500 $37,500 (b) 8,100 (c) $17,650 (d) 770 (e) 5,900 (f) 4,475 (g) $ 350 (h) 22,500 (i) 709,000 (j) 214,000 (k) 36,900 (l) 9,000 (m) 6,400* (n) 29,750 (o) 7,300 (p) 3,600 34,000 2,400 (q) $107,100 (r) 2,270 Totals $277,270 $69,175 $988,850 $76,800 $109,370 ______Computations: (a) Land: $280,000 / $320,000  $300,000 = $262,500 Garage building: $ 40,000 / $320,000  $300,000 = $ 37,500

(p) Land improvements: $ 40,000  .09 = $ 3,600 Sales building: $ 40,000  .85 = $34,000 Garage building: $ 40,000  .06 = $ 2,400 ______*Some accountants would debit this cost to the Land account.

248 Accounting 5/e Solutions Manual (continued) P 10-1B

Req. 2

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Dec. 31 Depreciation Expense—Land Improvements ($69,175 / 20  8/12) 2,306* Accumulated Depreciation— Land Improvements 2,306

31 Depreciation Expense— Sales Building ($988,850 / 40  8/12) 16,481 Accumulated Depreciation— Sales Building 16,481

31 Depreciation Expense— Garage Building ($76,800 / 40  8/12) 1,280 Accumulated Depreciation— Garage Building 1,280

31 Depreciation Expense— Furniture ($109,370 / 8  8/12) 9,114 Accumulated Depreciation— Furniture 9,114 ______*$2,093 ($62,775 / 20  8/12) if $6,400 (m in Req. 1) is debited to Land.

Chapter 10 Plant Assets and Intangible Assets 249 (25-35 min.) P 10-2B

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Jan. 2 Motor-Carrier Equipment (new) 153,000 Accumulated Depreciation— Motor-Carrier Equipment ($130,000  $47,000) 83,000 Motor-Carrier Equipment (old) 130,000 Cash ($176,000  $70,000) 106,000

July 1 Depreciation Expense—Building [($550,000  $55,000) / 30  6/12] 8,250 Accumulated Depreciation— Building 8,250

1 Cash 100,000 Note Receivable 600,000 Accumulated Depreciation— Building ($247,500 + $8,250) 255,750 Building 550,000 Gain on Sale of Building 405,750

Oct. 26 Land [$115,000 / ($115,000 + $230,000)  $300,000] 100,000 Building [$230,000 / ($115,000 + $230,000)  $300,000] 200,000 Cash 300,000

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Dec. 31 Depreciation Expense— Motor-Carrier Equipment ($153,000  1/6  2) 51,000 Accumulated Depreciation— Motor-Carrier Equipment 51,000

31 Depreciation Expense— Buildings [$200,000  (12%  $200,000)] / 40  2/12 733 Accumulated Depreciation— Buildings 733

Chapter 10 Plant Assets and Intangible Assets 251 (10-15 min.) P 10-3B

Depreciation is the process of allocating a plant asset’s cost to expense over the period the asset is used. Depreciation procedures are designed to match this expense against revenue over the asset’s life. The primary purpose of depreciation accounting is to measure income. Of less importance is the need to account for the decline in the asset’s usefulness.

The decreasing annual amounts indicate that the company is using an accelerated depreciation method, which allocates more asset cost to expense during the early years of asset use than during the later years. This pattern is not related to changes in the value of the asset, because depreciation is not a process of asset valuation. Even though the property values may be increasing, it is still necessary to record depreciation.

252 Accounting 5/e Solutions Manual (30-40 min.) P 10-4B

Req. 1

Straight-Line Depreciation Schedule Depreciation for the Year ASSET DEPRECIATION DEPRECIABLE DEPRECIATION ACCUMULATED ASSET BOOK DATE COST RATE  COST = AMOUNT DEPRECIATION VALUE 1-03-20X1 $240,000 $240,000 12-31-20X1 1/5 $223,000 $ 44,600 $ 44,600 195,400 12-31-20X2 1/5 223,000 44,600 89,200 150,800 12-31-20X3 1/5 223,000 44,600 133,800 106,200 12-31-20X4 1/5 223,000 44,600 178,400 61,600 12-31-20X5 1/5 223,000 44,600 223,000 17,000 $223,000 ______Asset cost: $224,000 + $700 + $100 + $12,100 + $3,100 = $240,000 Depreciation for the year: ($240,000  $17,000) / 5 years = $44,600

Chapter 10 Plant Assets and Intangible Assets 253 (continued) P 10-4B

Req. 1

Units-of-Production Depreciation Schedule Depreciation for the Year ASSET DEPRECIATION NUMBER DEPRECIATION ACCUMULATED ASSET BOOK DATE COST PER UNIT  OF UNITS = AMOUNT DEPRECIATION VALUE 1-03-20X1 $240,000 $240,000 12-31-20X1 $1.115 50,000 $ 55,750 $ 55,750 184,250 12-31-20X2 1.115 45,000 50,175 105,925 134,075 12-31-20X3 1.115 40,000 44,600 150,525 89,475 12-31-20X4 1.115 35,000 39,025 189,550 50,450 12-31-20X5 1.115 30,000 33,450 223,000 17,000 Total units 200,000 $223,000 ______Depreciation per unit: ($240,000  $17,000) / 200,000 units = $1.115

Req. 1

Double-Declining-Balance Depreciation Schedule Depreciation for the Year ASSET ASSET BOOK DEPRECIATION ACCUMULATED ASSET BOOK DATE COST DDB RATE  VALUE = AMOUNT DEPRECIATION VALUE 1-03-20X1 $240,000 $240,000 12-31-20X1 .40 $240,000 $ 96,000 $ 96,000 144,000 12-31-20X2 .40 144,000 57,600 153,600 86,400 12-31-20X3 .40 86,400 34,560 188,160 51,840 12-31-20X4 .40 51,840 20,736 208,896 31,104 12-31-20X5 14,104 223,000 17,000 $223,000 ______DDB rate: (1/5 years  2) = 2/5 = .40

Req. 2

The depreciation method that maximizes reported income in the first year of the equipment’s life is the straight-line method, which produces the lowest depreciation for that year ($44,600). The method that maximizes cash flow by minimizing income tax payments in the first year is the double-declining-balance method, which produces the highest depreciation amount for that year ($96,000).

Req. 3 (comparison of net income and cash provided by operations)

DEPRECIATION METHOD THAT IN THE EARLY YEARS A B MAXIMIZES MINIMIZES REPORTED INCOME TAX INCOME PAYMENTS Net income for first year: SL DDB Cash provided by operations before income tax...... $180,000 $180,000 Depreciation expense...... 44,600 96,000 Income before income tax...... 135,400 84,000 Income tax expense (40%)...... 54,160 33,600 Net income...... $ 81,240 $ 50,400 Net-income advantage of SL over DDB.. $30,840

Cash flow analysis for first year: Cash provided by operations before income tax...... $180,000 $180,000 Income tax expense...... 54,160 33,600 Cash provided by operations (called cash flow)...... $125,840 $146,400 Cash-flow advantage of DDB over SL.... $20,560

Req. 1 Millions Cost of plant assets...... … $39,616 Accumulated depreciation...... … 22,026 Percent used up: $22,026 = 55.6% $39,616

Req. 2 Millions Depreciation expense...... $ 6,159 Accumulated depreciation...... 22,026

Depreciation expense is for one year only. Accumulated depreciation is for all the years that the assets have been used.

Req. 3

During 19X9, IBM paid $5,959 million for plant assets.

Plant Assets, at Cost (Amounts in Millions) Balance, 19X8 44,870 Cost of plant assets Purchased during 19X9 5,959 sold during 19X9 11,213 Balance, 19X9 39,616

During 19X9, IBM sold more plant assets than it bought.

Req. 4

Software is an intangible asset.

Chapter 10 Plant Assets and Intangible Assets 257 (30-40 min.) P 10-6B Part 1

Req. 1

Another title of Cost in Excess of Net Assets of Purchased Businesses is Goodwill.

Req. 2

The entry to record the acquisition of the other company is:

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Assets (Cash, Receivables, Inventory, Plant Assets, etc.) 2,800,000 Goodwill 2,100,000* Liabilities 2,200,000 Cash 2,700,000 ______*Cost, $2,700,000  Net assets acquired ($2,800,000  $2,200,000) = Goodwill, $2,100,000

Req. 3

The entry to record amortization of goodwill for one year is:

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Amortization Expense— Goodwill ($2,100,000 / 20) 105,000 Goodwill 105,000

Part 2

Req. 1

Journal POST. DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT Coal 2,800,000 Cash 2,800,000

Coal 60,000 Cash 60,000

Coal 45,000 Cash 45,000

Coal 30,000 Note Payable 30,000

Depletion Expense 1,027,250 Accumulated Depletion—Coal [($2,800,000 + $60,000 + $45,000 + $30,000) / 100,000]  35,000 1,027,250

Accounts Receivable (35,000  $37) 1,295,000 Sales Revenue 1,295,000

Operating Expenses 252,000 Cash 252,000

Part 2 (continued)

Req. 2

Georgia-Pacific Corporation Income Statement – Coal Operations Year 1 Sales revenue $1,295,000 Depletion expense $1,027,250 Operating expenses 252,000 1,279,250 Net income $ 15,750

The coal operations were barely profitable. Net income of $15,750 on sales of $1,295,000 is quite low.

Req. 1 (All amounts in billions) Balance sheet at December 31, 19X9: Property, plant, and equipment ($5.7 + $1.1  $0.1)...... $ 6.7 Less accumulated depreciation ($2.0 + $0.8  $0.1)...... (2.7) Property, plant, and equipment, net (book value)...... $ 4.0

Req. 2

The plant assets sold during 19X9 were fully depreciated (cost = $0.1 billion; accumulated depreciation = $0.1 billion; book value = $0). Billions Cash received from the sale of plant assets...... $0.2 Book value of asset sold: Cost...... $0.1 Less: Accumulated depreciation...... (0.1) 0.0 Gain on sale...... ………………. $0.2

Req. 3

Billions Total assets at Dec. 31, 19X8…………………. $19.1 Total liabilities at Dec. 31, 19X8……………... 10.7 Owners’ equity at Dec. 31, 19X8……………... $ 8.4

Req. 4

Total revenues for 19X9………………………. $19.8 Total expenses for 19X9……………………… 17.3 Net income for 19X9………………………….. $ 2.5  Decision Case

Chapter 10 Plant Assets and Intangible Assets 261 (30-45 min.) Decision Case 1

Req. 1

Astoria Enterprises and Hilton Systems Income Statements For the Year Ended December 31, 20XX ACCOUNT TITLE ASTORIA (FIFO and SL) HILTON (LIFO and DDB) Sales revenue $370,000 $370,000

Cost of goods sold 128,000* 149,000* Gross profit 242,000 221,000

Operating expenses $80,000 $80,000 Depreciation expense Astoria (SL): ($143,000  $20,000 / 10) 12,300 Hilton (DDB): ($143,000  1/10  2) 28,600 Total expenses 92,300 108,600 Net income $149,700 $112,400 ______*Cost of goods sold: Units COGS Astoria 10,000  $4 = $ 40,000 (FIFO): 5,000  5 = 25,000 7,000  6 = 42,000 3,000  7 = 21,000 25,000 $128,000

Hilton 10,000  $7 = $ 70,000 (LIFO): 7,000  6 = 42,000 5,000  5 = 25,000 3,000  4 = 12,000 25,000 $149,000

262 Accounting 5/e Solutions Manual (continued) Decision Case 1

Req. 2

INVESTMENT NEWSLETTER

TO: Our clients

FROM: Student Name

RE: Selecting Astoria Enterprises or Hilton Systems for a long- term investment

In picking an investment we suggest you consider the following factors: Astoria and Hilton are basically identical companies. The two companies started operations at the same time and engaged in essentially the same transactions. Their main difference lies in the accounting methods that they use.

1. Astoria’s income statement reports net income of $149,700 compared to $112,400 for Hilton Systems. On the surface Astoria appears to be more profitable. This difference is illusory, however, because Astoria uses the FIFO method to account for inventories and the straight-line method to account for depreciation of its plant assets. These methods result in the highest possible reported income.

2. Hilton Systems reports lower net income than Astoria because Hilton uses the LIFO method for inventories and the double-declining-balance method for depreciation. These methods result in lower reported net income.

Over the long run Hilton may outperform Astoria because Hilton will pay lower income taxes and thus have more cash to invest. That should result in higher real profits for Hilton even if the profits do not show up on this year’s income statement.

Chapter 10 Plant Assets and Intangible Assets 263 (20-30 min.) Decision Case 2 a. A dishonest manager might debit the cost of an expense to a plant asset account in order to overstate reported income and asset amounts. b. We support the recording and reporting of intangible assets at cost, less accumulated amortization, in accordance with GAAP because the business paid a price for intangibles like any other asset. The argument for recording intangibles at $1 or $0 is consistent with a lender’s perspective, who might reason that, in the liquidation of a business, most of its intangibles are worthless. However, accounting serves other users besides lenders. Also, someone who evaluates a company and believes its intangibles are worthless can simply subtract the intangibles’ cost from total assets and from total owner equity to compute revised totals. But the reverse is not true. If intangibles were not reported on the balance sheet, a user of the statements could not add the unknown amount to compute revised total assets and total owner equity. c. A dishonest manager might debit an expense account for the cost of a plant asset for two reasons: (1) To obtain a quicker tax deduction for the expense than for depreciation expense, which will be recorded over the life of the asset, and (2) To understate reported income and asset amounts.

Note: Student responses will probably not be this complete.

264 Accounting 5/e Solutions Manual  Ethical Issue

Req. 1

The taxpayer wants to allocate as much of the purchase price as possible to the building because tax law allows a deduction from taxable income for depreciation expense on plant assets other than land. The greater the allocation to the building, the greater the depreciation deduction, and the lower the tax payments because there is no tax deduction on the land. The cost of the land is not depreciated.

Req. 2

Reflection Cove’s allocation was unethical. Allocating 90% to the building (versus the more realistic figure of 70%) overstates tax deductions for depreciation and saves taxes unlawfully. The nation’s taxpayers—you and I—are robbed by this dishonest accounting.

Chapter 10 Plant Assets and Intangible Assets 265  Financial Statement Case

(30-40 min.) Financial Statement Case

Req. 1

Depreciation method used for the financial statements (Note 1—Summary of accounting policies for property and long-lived assets...... ……………. Straight-line Type of depreciation method probably used for income tax purposes...... Accelerated

Accelerated depreciation is preferable for income tax purposes because it provides the most depreciation expense as quickly as possible, thus decreasing immediate tax payments.

Req. 2

Millions Depreciation and Amortization……………………. $854

Depreciation and Amortization Expense...... ……….. 854 Accumulated Depreciation and Amortization....….. 854

Req. 3

Millions Purchases of plant assets...... …... $1,918

Property and Equipment...... ………….. 1,918 Cash...... …... 1,918

266 Accounting 5/e Solutions Manual (continued) Financial Statement Case

Req. 4

Millions Cash receipts from disposal of plant assets...... $126

Cash...... 126 Accumulated Depreciation...... 697 Loss on Sale of Plant Assets...... 165 Property and Equipment...... ………. 988

Chapter 10 Plant Assets and Intangible Assets 267  Team Project

Student reports will vary, depending on the nature of the business they interview.

268 Accounting 5/e Solutions Manual Solution to Internet Exercise

FedEx Corporation

The financial information reported is for 1998 and 1999. Go to the http://www.prenhall.com/horngren Web site for updated solutions.

1a. The four types of property and equipment reported are  flight equipment  package handling and ground support equipment and vehicles  computer and electronic equipment  other On December 31, 1999 FedEx reported Total cost……………………………………... $13,719,907,000 Book value…………………………………… $ 6,559,217,000 Cost already expensed— accumulated depreciation…………………. $ 7,160,690,000

1b. Depreciation expense is reported on the income statement. In 1999, $1,035,118,000 was reported for depreciation and amortization expense.

2a. FedEx uses straight-line depreciation for financial reporting purposes. An accelerated depreciation method is generally used for tax reporting purposes.

Accelerated depreciation is used for tax reporting because it expenses depreciation as quickly as possible and decreases the tax payment in the early part of the asset’s life. Straight-line is used for financial reporting purposes to smooth the net income reported to shareholders. Using one depreciation method for the financial statements and another for tax reporting is both ethical and legal because GAAP and tax law permit it. The Consistency Principle refers to consistency from one year to the next, not consistency between financial and tax reporting. Therefore, Fed Ex Corporation is complying with the Consistency Principle.

Chapter 10 Plant Assets and Intangible Assets 269 2b. The range of useful lives for flight equipment is 5 to 20 years and for computer and electronic equipment is 3 to 10 years. These useful lives make sense because computers become obsolete more quickly than flight equipment.

2c. Aircraft airframes and engines are assigned residual values ranging from 10% to 20% of asset cost, and all other property and equipment have no material (that is, zero) residual values.

270 Accounting 5/e Solutions Manual