Chapter 8

Reporting and Analyzing

Long-Term Operating Assets

Learning Objectives – coverage by question

Mini- Cases
Exercises Problems
Exercises and Projects

LO1 – Describe and distinguish

between tangible and intangible 17 31
assets.

LO2 – Determine which costs to

capitalize and report as assets and 11,17 22
which costs to expense.

LO3 – Apply different depreciation

12, 13,
methods to allocate the cost of assets 22 - 28, 32
16, 18, 19
over time.

LO4 – Determine the effects of asset

22, 24,
sales and impairments on financial 14, 15 36, 38, 39 40, 42, 43
26, 35
statements.

LO5 – Describe the accounting and

17, 21 31, 34 37 42
reporting for intangible assets.

LO6 – Analyze the effects of tangible

and intangible assets on key 20, 21 29, 30, 33 40 – 42
performance measures.

©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 8 8-1
 QUESTIONS

Q8-1. Routine maintenance costs that are necessary to realize the full benefits of
ownership of the asset should be expensed. However, betterment or
improvement costs should be capitalized if the outlay enhances the usefulness
of the asset or extends the asset’s useful life beyond original expectations. As
would be the case with any cost, an immaterial amount should be expensed as
incurred.
Q8-2. Capitalizing interest costs as part of the cost of constructing an asset reduces
interest expense, and increases net income during the construction period. In
subsequent periods, the interest costs that were capitalized as part of the cost
of the asset will increase the periodic depreciation expense and reduce net
income.
Q8-3. As any asset is used up, its cost is removed from the balance sheet and
transferred into the income statement as an expense. Capitalization of costs
onto the balance sheet and subsequent removal as expense is the essence of
accrual accounting. If the cost of a depreciable asset is recognized in full upon
purchase, profit would be inaccurately measured: it would be too low in the year
of purchase when the asset is expensed and too high in later years as
revenues earned by the asset are not matched with a corresponding cost. In
other words, expenses would not be recognized as assets are used up or as a
result of earning revenue.
Q8-4. The primary benefit of accelerated depreciation for tax reporting is that the
higher depreciation deductions in early periods reduce taxable income and
income taxes. Cash flow is, therefore, increased, and this additional cash can
be invested to yield additional cash inflows (e.g., an "interest-free loan" that can
be used to generate additional income). We would generally prefer to receive
cash inflows sooner rather than later in order to maximize this investment
potential.
Q8-5. When a change occurs in the estimate of an asset's useful life or its salvage
value, the revision of depreciation expense is handled by depreciating the
current undepreciated cost of the asset (original cost – accumulated
depreciation) using the revised assumptions of remaining useful life and
salvage value.
Present and future periods are affected by such revisions. Depreciation
expense calculated and reported in past periods is not revised.

©Cambridge Business Publishers, 2020

8-2 Financial Accounting, 6th Edition
Q8-6. The gain or loss on the sale of a PPE asset is determined by the difference
between the asset's book value and the sale proceeds. Sales proceeds in
excess of book values create gains; sales proceeds less than book values
cause losses. The relevant factors, then, are the depreciation rate and salvage
values used to compute depreciation expense, accumulated depreciation and
the net book value of the asset, as well as the selling price of the asset.
Q8-7. A PPE asset is considered to be impaired when the sum of the undiscounted
expected cash flows to be derived from the asset is less than its current book
value.
An impairment loss is calculated as the difference between the asset's book
value and its current fair market value.
Q8-8. Research and development costs must be expensed under GAAP unless they
have alternative future uses. Equipment relating to a specific research project
with no alternative use would, therefore, be expensed rather than capitalized
and subsequently depreciated.
Accounting standard-setters have justified this ‘expense as incurred’ treatment
for R&D costs since the outputs from research and development activities are
uncertain and thus there is not a way to know when the asset is used up or
whether revenue will be earned from the R&D spending.
Q8-9. The difficulty with amortizing intangible assets is estimating the useful life. For
some intangibles, the useful life is limited and can be easily estimated.
However, some intangibles have an indefinite life. This means that the useful
life of the intangible is long and cannot be determined with any reasonable
degree of accuracy. Under these circumstances, it is not appropriate to
amortize the asset until the useful life can be determined.
Q8-10. Goodwill arises whenever a company acquires another company and the
purchase price is greater than the fair value of the identifiable assets acquired.
The amount of goodwill is the difference between the purchase price and the
value assigned to the net assets of the acquired company. It is recorded as a
long-term asset in the balance sheet.
Since goodwill is assumed to have an indefinite life, it is not amortized. The
only time that goodwill will affect the income statement is if it is determined that
its value is impaired. In that case, an impairment loss is recorded in the income
statement and the value of the goodwill asset on the balance sheet is reduced.

©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 8 8-3
 MINI EXERCISES

M8-11. (10 minutes)

LO 2

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. (15 minutes)

LO 3

a. Straight-line: ($18,000 - $1,500)/ 5 years = $3,300 for both 2019 and 2020.

b. Double-declining-balance: Twice straight-line rate = 2 x 1/5 = 40%

2018: $18,000 x 0.40 = $7,200
2019: ($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. (15 minutes)

LO 3

a. Straight-line: ($130,000 - $10,000)/ 6 years = $20,000 for both 2019 and 2020.

b. Double-declining-balance: Twice straight-line rate = 2 x 1/6 = 1/3

2018: $130,000 x 1/3 = $43,333
2019: ($130,000 - $43,333) x 1/3 = $28,889

c. Units of production: ($130,000 - $10,000) / 1,000,000 = $0.12 per unit

2018: 180,000 units x $0.12 = $21,600
2019: 140,000 units x $0.12 = $16,800

©Cambridge Business Publishers, 2020

8-4 Financial Accounting, 6th Edition
M8-14. (15 minutes)
LO 4

Straight-line depreciation: $40,000/10 = $4,000; 8 years x $4,000 = $32,000.

a. Cash (+A) ............................................................................................. 3,500

Accumulated depreciation (-XA, +A) .................................................. 32,000
..............................................................................................................
..............................................................................................................
Loss on sale of furniture and fixtures (+E, -SE) .................................. 4,500
Furniture and fixtures (-A) ..................................................................40,000

b.
Balance Sheet Income Statement
Cash Noncash Contra Liabi- Contrib. Earned Net
Transaction - = + + Revenues - Expenses =
Asset + Assets Assets lities Capital Capital Income

Sold furniture +3,500 -40,000 -32,000 -4,500 +4,500 -4,500

and fixtures Cash Furniture Accum. Retained Loss
for cash. and - Deprec. Earnings - on Sale =
Fixtures of Furniture
and
Fixtures

M8-15. (15 minutes)

LO 4

Twice the straight-line rate = 1/5 x 2 = 40%

Year 1: $75,000 x .4 = $30,000
Year 2: ($75,000 - $30,000) x .4 = 18,000
Year 3: ($75,000 - $30,000 - $18,000) x .4 = 10,800
Total accumulated depreciation $58,800

a. Cash (+A) .............................................................................................

25,000
Accumulated depreciation (-XA, +A) ................................................... 58,800
Machinery (-A) .................................................................................... 75,000
Gain on sale of machinery (+R, +SE) ................................................ 8,800

b.

Balance Sheet Income Statement

Cash Noncash Contra Liabi- Contrib. Earned Net
Transaction - = + + Revenues - Expenses =
Asset + Assets Assets lities Capital Capital Income

Sold +25,000 -75,000 -58,800 +8,800 +8,800 +8,800

machinery Cash Machinery - Accum. Retained Gain on - =
for cash. Deprec. Earnings Sale of
Machinery

©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 8 8-5
M8-16. (15 minutes)
LO 3

a. Straight-line depreciation
2018: ($145,800 - $5,400)/3 = $46,800; (8/12) x $46,800 = $31,200
(Note: 8/12 is the fraction of the year, May through December)
2019: $46,800

b. Double-declining-balance depreciation

Preliminary computation: Twice straight-line rate = 2 x 1/3 = 66⅔%

($145,800 x 66⅔%) = $97,200
2018: (8/12) x $97,200 = $64,800
2019: ($145,800 - $64,800) x 66⅔% = $54,000

M8-17. (20 minutes)

LO 1, 2, 5

a. Under U.S. GAAP, capitalization of development costs is not allowed and all R&D
costs must be expensed. Under IFRS, development costs are capitalized if there is the
intention, feasibility and resources to bring the asset to completion, there exists the
ability to use or sell the asset to generate an economic benefit. Otherwise the costs
must be expensed.

b. Yes, impairment should be tested for annually (or sooner if there is an indication that
goodwill is impaired).

©Cambridge Business Publishers, 2020

8-6 Financial Accounting, 6th Edition
M8-18. (20 minutes)
LO 3

a.
Year Book Value Depreciation Rate Depreciation Expense
1 $50,000 2 x ¼ = 0.5 $25,000
2 25,000 2 x ¼ = 0.5 12,500
3 12,500 4,500
4 8,000 0*
*No depreciation is recorded in Year 4 because the asset is depreciated to its residual value of $8,000.

b.
Year Book Value Depreciation Rate Depreciation Expense
1 $50,000 2 x 1/5 = 0.4 $20,000
2 30,000 2 x 1/5 = 0.4 12,000
3 18,000 2 x 1/5 = 0.4 7,200
4 10,800 2 x 1/5 = 0.4 4,320
5 6,480 3,480*
*$3,480 of depreciation is required in Year 5 to depreciate the asset to its residual value of $3,000.

Year Book Value Depreciation Rate Depreciation Expense

1 $50,000 2 x 1/10 = 0.2 $10,000
2 40,000 2 x 1/10 = 0.2 8,000
3 32,000 2 x 1/10 = 0.2 6,400
4 25,600 2 x 1/10 = 0.2 5,120
5 20,480 2 x 1/10 = 0.2 4,096
6 16,384 2 x 1/10 = 0.2 3,277
7 13,107 2 x 1/10 = 0.2 2,621
8 10,486 2 x 1/10 = 0.2 2,097
9 8,389 2 x 1/10 = 0.2 1,678
10 6,711 5,711*

* $5,711 of depreciation is required in Year 10 to depreciate the remaining value of the asset.
Alternatively, DeFond could switch to straight-line depreciation in Year 7, recording $3,027 of
depreciation in Years 7 through 10.

©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 8 8-7
M8-19. (15 minutes)
LO 3

a.
Year Barrels Extracted Depletion per Barrel Depletion
2019 300,000 $32,000,000 / 4,000,000 = $8 $2,400,000
2020 500,000 $32,000,000 / 4,000,000 = $8 $4,000,000
2021 600,000 $32,000,000 / 4,000,000 = $8 $4,800,000

b.
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 32,000,000

M8-20. (15 minutes)

LO 6

a.
PPE Turnover Rates for 2018
Texas Instruments $15,784 / [($3,183 + $2,664) / 2] = 5.40
Intel Corp. $70,848 / [($48,976 + $41,109) / 2] = 1.57

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.

©Cambridge Business Publishers, 2020

8-8 Financial Accounting, 6th Edition
M8-21. (15 minutes)
LO 5, 6

a. $2,300 / $30,578 = 7.52%.

Abbott’s R&D expenditure level could be compared to the R&D expenditure level for its
competitors to gain a sense of the appropriateness of its R&D expenditures. Roche
Holding AG has historically spent 20% of its revenues on R&D while Teva
Pharmaceutical Industries Limited has a research and development intensity ratio of
about 7% (note both of these companies are listed as primary competitors on Yahoo
Finance).

b. R&D costs must be expensed when incurred unless they are expenditures for
depreciable assets that have alternative future uses (in which case the depreciation is
expensed as recognized). As a result, the balance sheet does not reflect the costs
incurred for long-term R&D assets. In addition, operating expenses are increased, thus
reducing retained earnings.
($ millions) Balance Sheet Income Statement

Cash Noncash Liabi- Contrib. Earned Net

Transaction Asset + Assets = lities + Capital + Capital Revenues - Expenses = Income

R&D -2,300 -2,300 +2,300 -2,300

= - =
expenditures Cash Retained R&D
Earnings Expense

©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 8 8-9
 EXERCISES

E8-22. (15 minutes)

LO 2, 3, 4

a. Machine (+A) .......................................................................................

89,500
Cash (-A) ($85,000 + $2,000 + $2,500) ............................................. 89,500

b. ($89,500 - $7,000) / 5 = $16,500 per year.

Depreciation expense (+E, -SE) ..........................................................

16,500
Accumulated depreciation (+XA, -A) .................................................. 16,500

c. Cash (+A) ............................................................................................

12,000
Accumulated depreciation (-XA, +A) ($16,500 x 4) ............................. 66,000
Loss on sale of machine (+E, -SE) ...................................................... 11,500
Machine (-A) .................................................................................... 89,500

E8-23. (20 minutes)

LO 3

a. Straight line:
($80,000 - $5,000)/5 years = $15,000 per year

b. Double declining balance: Twice straight-line rate = 2 x 1/5 = 40%

Year Book Value x Rate Depreciation Expense
1 $80,000 x 0.40 = $32,000
2 ($80,000 - $32,000) x 0.40 = 19,200
3 ($80,000 - $51,200) x 0.40 = 11,520
4 ($80,000 - $62,720) x 0.40 = 6,912
5 5,368 (plug)
Total $75,000

©Cambridge Business Publishers, 2020

8-10 Financial Accounting, 6th Edition
E8-24. (25 minutes)
LO 3, 4

a. 1. Accumulated depreciation on the date of sale:

[($800,000-$80,000)/10 years] x 6 years = $432,000
2. Net book value of the plane at date of sale:
$800,000 - $432,000 = $368,000

b. 1.
Cash (+A) .........................................................................................
368,000
Accumulated depreciation (-XA, +A) ................................................ 432,000
Plane (-A) ...................................................................................... 800,000

2. Loss on sale of: $195,000 - $368,000 = $173,000

Cash (+A) .........................................................................................
195,000
Accumulated depreciation (-XA, +A) ................................................ 432,000
Loss on sale of plane (+E, -SE) ....................................................... 173,000
Plane (-A) ...................................................................................... 800,000

3. Gain on sale of: $600,000 - $368,000 = $232,000

Cash (+A) .........................................................................................

600,000
Accumulated depreciation (-XA, +A) ................................................ 432,000
Gain on sale of plane (+R, +SE) ................................................... 232,000
Plane (-A) ...................................................................................... 800,000

E8-25. (15 minutes)

LO 3

a. Straight-line: 2019 and 2020 ($218,700 - $23,400)/6 years = $32,550

b. Double-declining-balance: twice straight-line rate = 2 x 1/6 = 33⅓%

2019 $218,700 x 33⅓% = $72,900
2020 ($218,700 - $ 72,900) x 33⅓% = $48,600

©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 8 8-11
E8-26. (15 minutes)
LO 3, 4

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)

E8-27. (20 minutes)

LO 3

a. Straight line: ($110,000 - $15,000) / 6 = $15,833 each year.

b. Double-declining-balance: rate = 2 x 1/6 = 1/3

2019: $110,000 x 1/3 = $36,667

2020: ($110,000 – $36,667) x 1/3 = $24,444
2021: ($110,000 – $36,667 – $24,444) x 1/3 = $16,296

c. Straight line: [$110,000 – ($15,833 x 2) – $10,000] / 5 = $13,667 in 2021 and each

subsequent year.

Double-declining balance: rate = 2 x 1/5 = 40%.

($110,000 – $36,667 – $24,444) x 40% = $19,556 in 2021

E8-28. (20 minutes)

LO 3

a. Straight-line: $6,000,000 / 30 = $200,000 per year each year.

b. Double-declining balance: rate = 2 x 1/30 = 1/15.

2019: $6,000,000 x 1/15 = $400,000

2020: ($6,000,000 – $400,000) x 1/15 = $373,333

c. The revised depreciation rate = 2 x 1/23 = 8.7%

2021: ($6,000,000 – $400,000 – $373,333) x 8.7% = $454,720*

*$454,493 (using unrounded depreciation rate)

©Cambridge Business Publishers, 2020

8-12 Financial Accounting, 6th Edition
E8-29. (10 minutes)
LO 6

Percent depreciated = Accumulated depreciation / Asset cost

= $7,095 million / ($12,916 - $283 - $619) million = 59%

Note: We eliminate land and construction in progress from the computation because
these assets are not depreciated.

Assuming that assets are replaced evenly as they are used up, we would expect assets
to be 50% depreciated, on average. Deere’s 59% is slightly higher than this level. If the
percentage depreciation were high, one possible concern is that it often requires higher
capital expenditures in the near future to replace aging assets.

E8-30. (25 minute)

LO 6

a. Receivable Turnover Rate Inventory Turnover Rate PPE Turnover Rate

$31,657 $16,055 $31,657
2017 = 6.81 = 4.33 = 3.64
$4,911+$4,392 $4,034+$3,385 $8,866+$8,516
2 2 2

$32,765 $16,682 $32,765

2018 =6.60 = 3.97 = 3.72
$5,020+$4,911 $4,366+$4,034 $8,738+$8,866
2 2 2

b. 3M’s Receivable and Inventory turnover ratios have declined from 2017 to 2018,
while its PPET improved. 3M’s revenues increased in 2018, 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 decline indicates that receivables have increased
faster than sales. This could indicate a need to monitor more closely the quality of
customers to which credit is granted, implement better collection procedures, or
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.

©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 8 8-13
E8-31. (10 minutes)
LO 1, 5

a. b.
Fair Value Useful Amortization
(Capitalized) Life Expense for 2019
Patent $200,000 3 years $66,667
Trademark $500,000 Indefinite
Noncompetition agreement $300,000 5 years $60,000
$126,667

E8-32. (15 minutes)

LO 3

a. Cost of resource property: $7,200,000 + $420,000 + $50,000 + $800,000

= $8,470,000

Residual value: $1,200,000

Depletion base: $8,470,000 – $1,200,000 = $7,270,000
Depletion rate: $7,270,000 / 500,000 tons = $14.54 per ton

2019: 60,000 x $14.54 = $872,400

2020: 85,000 x $14.54 = $1,235,900

b. 2019 Inventory (+A) .....................................................................................

872,400
:
Resource property (-A) .......................................................................
872,400

2020: Inventory (+A) .....................................................................................

1,235,900
Resource property (-A) ....................................................................... 1,235,900

©Cambridge Business Publishers, 2020

8-14 Financial Accounting, 6th Edition
E8-33. (15 minutes)
LO 6

a. PPET: $21,461,268 / [($11,330,077 + $10,027,522)/2] = 2.0 times

b. Percent depreciated: $2,699,098 / ($14,029,175 - $807,297) = 20.4%

The cost of construction in progress is subtracted in the denominator because this
amount represents PPE assets that are not currently in the base of depreciable
assets. The cost of land should also be subtracted, but because Tesla lumps land
and buildings together, this is not possible. Therefore, the actual percent
depreciated ratio should be a little higher than the 20.4% we calculated.

c. Tesla’s assets are about one fifth depreciated at the end of 2018. This results in an
extremely low percent depreciated ratio and PPE turnover ratio (PPET).
Tesla’s useful life assumptions could affect these ratios. For example, Tesla uses a
units-of-production approach to depreciate tooling. In the auto industry, companies
retool each time they make major design changes to a model. Years ago, this would
happen annually, but in more recent years, automakers may retool only every three
to five years. Tesla’s depreciation for tooling costs depend on its assumptions about
sales of each model. So, it assumes 325,000 units for the expensive Models S and
X while the (relatively) less expensive Model 3 has a projected demand of 1,000,000
units. Ultimately, the accuracy of these sales estimates will have an effect on
depreciation expenses and, in turn, Tesla’s ratios.

E8-34. (15 minutes)

LO 5

a. The list illustrates the wide range in expenditures for R&D (as a percent of sales)
across firms. Note the large amount spent by Intel (19.11%) and pharmaceutical
companies Pfizer (14.92%) and Merck (23.06%), compared to the amount spent by
Apple (5.36%), Deere (4.97%) or Callaway Golf (3.28%). The companies in the list
are to some extent paired by industry. It is interesting to see how similar some firms
in the same industry are. For example, Apple and Samsung spend almost the same
percentage of sales on R&D.
b. Beside industry affiliation, the differences in R&D expenditures as a percent of sales
is due to differences in markets, product mix, and other strategic considerations. As
suppliers of technology (hardware and software), Intel and Microsoft depend very
heavily on their intellectual property. As a result, their expenditures on research and
development are among the highest of established firms. Apple has established
itself as an innovator in technology and design and has spent billions of dollars
developing unique products such as the iPad®. Apple’s research intensity looks
relatively low but the company has tremendous sales revenue (the denominator in
the R&D intensity ratio). In addition, the company has increased their spending on
R&D.

©Cambridge Business Publishers, 2020

Solutions Manual, Chapter 8 8-15
E8-35. (20 minutes)
LO 4

a. Yes, the equipment is impaired at July 1, 2020 because its book value is not
recoverable through future cash flows. Specifically, on July 1, 2020, its book value is
$145,000 ($225,000 initial cost less $80,000 accumulated depreciation*) and the
estimated future (undiscounted) cash flows are only $125,000.
*4 years of [($225,000-$25,000)/10 years].

b. The impairment loss in a is computed as the equipment's book value minus its current
fair value: $145,000  $90,000 = $55,000

Impairment loss (+E, -SE) ...................................................................

55,000
Equipment* (-A) .................................................................................. 55,000

*Accumulated depreciation is sometimes credited for the loss.

c. Assuming that the salvage value remains the same after the impairment (this is not
likely given the decline in market value of the asset), the annual depreciation expense
would be ($90,000 - $25,000) / 6 = $10,833 per year.

Depreciation expense (+E, -SE) .........................................................

10,833
Accumulated depreciation (+XA, -A) .................................................. 10,833

d.
($000) Balance Sheet Income Statement
Cash Noncash Contra Liabi- Contrib. Earned Net
Transaction Asset + Assets - Assets = lities + Capital + Capital Revenues - Expenses = Income

b.Impairment -55,000 -55,000 +55,000 -55,000

charge. Equip- - Retained - Impairment =
ment Earnings Loss

c. Depreciation +10,833 -10,833 +10,833 -10,833

expense. - Accum. Retained - Deprec. =
Deprec. Earnings Expense

©Cambridge Business Publishers, 2020

8-16 Financial Accounting, 6th Edition