PROBLEM 9.

2A
SWANSON & HILLER, INC.
a. (1) Straight-Line Schedule:
Depreciation Accumulated Book
Year Computation Expense Depreciation Value
2006 $100,000  15  12 $10,000 $10,000 $98,000
2007 100,000  15 20,000 30,000 78,000
2008 100,000  15 20,000 50,000 58,000
2009 100,000  15 20,000 70,000 38,000
2010 100,000  15 20,000 90,000 18,000
2011 100,000  15  12 10,000 100,000 8,000

(2) 200% Declining-Balance Schedule:

Depreciation Accumulated Book
Year Computation Expense Depreciation Value
2006 $108,000  40% x 12 $21,600 $21,600 $86,400
2007 86,400  40% 34,560 56,160 51,840
2008 51,840  40% 20,736 76,896 31,104
2009 31,104  40% 12,442 89,338 18,662
2010 18,662  40% 7,465 96,803 11,197
2011 100,000 – 96,803 3,197 100,000 8,000

(3) 150% Declining-Balance Schedule:

Depreciation Accumulated Book
Year Computation Expense Depreciation Value
2006 $108,000  30% x 12 $16,200 $16,200 $91,800
2007 91,800  30% 27,540 43,740 64,260
2008 64,260  30% 19,278 63,018 44,982
2009 44,982  30% 13,495 76,513 31,487
2010* ($31,487 – $8,000)  2 11,744 88,257 19,743
yrs.
2011* ($31,487 – $8,000)  2 11,743 100,000 8,000
yrs.
* Switch to straight-line
 PROBLEM 9.2A
SWANSON & HILLER, INC. (concluded)

b. Swanson & Hiller will probably use the straight-line method for financial reporting
purposes, as this method results in the least amount of depreciation expense in the
early years of the asset’s useful life.

c. Computation of gains or losses upon disposal:

1. Straight-Line

Cash proceeds $ 28,000

Book value on 12/31/09
(38,000)
$
Loss on disposal
(10,000)

2. 200% Declining-Balance:

Cash proceeds $ 28,000

Book value on 12/31/09
(18,662)
Gain on disposal $ 9,338

3. 150% Declining-Balance:

Cash proceeds $ 28,000

Book value on 12/31/09
(31,487)
$
Loss on disposal
(3,487)

The reported gain or loss on the sale of an asset has no direct cash effects. The only direct cash
effect associated with the sale of this machine is the $28,000 received by Swanson & Hiller, Inc.
from the sale of the machine.
 PROBLEM 9.3A
SMART HARDWARE

a. Costs to be depreciated include:

Cost of shelving $12,000
Freight charges 520
Sales taxes 780
Installation 2,700
Total cost to be depreciated $16,000

(1) Straight-Line Schedule (nearest whole month):

Depreciation Accumulated Book
Year Computation Expense Depreciation Value
2007 $16,000  120  912 $600 $600 $15,400
2008 16,000  120 800 1,400 14,600
2009 16,000  120 800 2,200 13,800
2010 16,000  120 800 3,000 13,000

(2) 200% Declining-Balance (half-year convention):

Depreciation Accumulated Book
Year Computation Expense Depreciation Value
2007 $16,000  10%  12 $800 $800 $15,200
2008 15,200  10% 1,520 2,320 13,680
2009 13,680  10% 1,368 3,688 12,312
2010 $12,312  10% 1,231 4,919 11,081

(3) 150% Declining-Balance (half-year convention):

Depreciation Accumulated Book
Year Computation Expense Depreciation Value
2007 $16,000  7.5%  12 $600 $600 $15,400
2008 15,400  7.5% 1,155 1,755 14,245
2009 14,245  7.5% 1,068 2,823 13,177
2010 13,177  7.5% 988 3,811 12,189
 PROBLEM 9.3A
SMART HARDWARE (concluded)

b. Smart may use the straight-line method in its financial statements to achieve the
least amount of depreciation expense in the early years of the shelving’s useful
life. In its federal income tax return, Smart may use an accelerated method
(called MACRS). The use of MACRS will reduce Smart’s income as much as
possible in the early year’s of the shelving’s useful life. Thus, management’s
goals are really not in conflict.

c. The 200% declining-balance method results in the lowest reported book value at
the end of 2010 ($11,081). Depreciation, however, is not a process of valuation.
Thus, the $11,081 book value is not an estimate of the shelving’s fair value at the
end of 2010.

d. A book value of $400 means that accumulated depreciation at the time of the
disposal was $8,600.

1. Journal entry assuming that the shelving was sold for $1,200:
Cash 1,200
Accumulated Depreciation: Shelving 8,600
Shelving 9,000
Gain on Disposal of Assets 800

To record sale of shelving for $1,200 cash.

2. Journal entry assuming that the shelving was sold for $200:
Cash 200
Accumulated Depreciation: Shelving 8,600
Loss on Sale of Asset 200
Shelving 9,000

To record sale of shelving for $200 cash.

 PROBLEM 9.4A
RAMIREZ DEVELOPERS
a.
General Journal

Loss on Disposal of Plant

Feb
10 Assets 200
Accumulated Depreciation: Office Equipment
25,800
Office Equipment
26,000
Scrapped office equipment; received no salvage value.

Apr
1 Cash 100,000
Notes Receivable
800,000
Accumulated Depreciation: Building
250,000
Land
50,000
Building
550,000
Gain on Sale of Plant Assets
550,000
Sold land and building for a $100,000 cash down-
payment and a 5-year, 9% note for the balance.

Aug Vehicles (new truck)

15 39,000
Accumulated Depreciation: Vehicles (old truck)
18,000
Vehicles (old truck)
26,000
Gain on Disposal of Plant Assets
2,000
Cash
29,000
To record trade-in of old truck on new; trade-in
allowance exceeded book value by $2,000.
Oct Office Equipment (new computer)
1 8,000
Loss on Trade-in of Plant
Assets 3,500
Accumulated Depreciation: Office Equip. (old
computer) 11,000
Office Equipment (old computer)
15,000
Cash
1,500
Notes Payable
6,000
Acquired new computer system by trading in old
computer, paying part cash, and issuing a 1-year,
8% note payable. Recognized loss equal to book value
of
old computer ($4,000) minus trade-in allowance ($500).

b. Gains and losses on asset disposals do not affect gross profit because they are not part of
the cost of goods sold. Such gains and losses do, however, affect net income reported in a
firm’s income statement.

c. Unlike realized gains and losses on asset disposals, unrealized gains and losses on
marketable securities are not generally reported in a firm’s income statement. Instead,
they are reported in the balance sheet as a component of stockholders’ equity.
 PROBLEM 9.2B
R & R, INC.
a. (1) Straight-Line Schedule:
Depreciation Accumulated Book
Year Computation Expense Depreciation Value
2007 $170,000  15  12 $17,000 $17,000 $163,000
2008 170,000  15 34,000 51,000 129,000
2009 170,000  15 34,000 85,000 95,000
2010 170,000  15 34,000 119,000 61,000
2011 170,000  15 34,000 153,000 27,000
2012 170,000  15  12 17,000 170,000 10,000

(2) 200% Declining-Balance Schedule:

Depreciation Accumulated Book
Year Computation Expense Depreciation Value
2007 $180,000  40% × 12 $36,000 $36,000 $144,000
2008 144,000  40% 57,600 93,600 86,400
2009 86,400  40% 34,560 128,160 51,840
2010 51,840  40% 20,736 148,896 31,104
2011 31,104  40% 12,442 161,338 18,662
2012 18,662 – 10,000 8,662 170,000 10,000

(3) 150% Declining-Balance Schedule:

Depreciation Accumulated Book
Year Computation Expense Depreciation Value
2007 $180,000  30% × 12 $27,000 $27,000 $153,000
2008 153,000  30% 45,900 72,900 107,100
2009 107,100  30% 32,130 105,030 74,970
2010 74,970  30% 22,491 127,521 52,479
2011 52,479 × 30% 15,744 143,265 36,735
2012 36,735 – 10,000 26,735 170,000 10,000
 PROBLEM 9.2B
R & R, INC. (concluded)

b. R & R, Inc. will probably use the straight-line method for financial reporting
purposes, as this method results in the least amount of depreciation expense in
the early years of the asset’s useful life.

c. Computation of gains or losses upon disposal:

1. Straight-Line

Cash proceeds $
55,000
Book value on 12/31/10
61,000
Loss on disposal $
(6,000)

2. 200% Declining-Balance:

Cash proceeds $
55,000
Book value on 12/31/10
31,104
Gain on disposal $
23,896

3. 150% Declining-Balance:

Cash proceeds $
55,000
Book value on 12/31/10
52,479
Gain on disposal $
2,521

The reported gain or loss on the sale of an asset has no direct cash effects. The only direct cash
effect associated with the sale of this machine is the $55,000 received by R & R, Inc. from the
buyer.
 PROBLEM 9.3B
DAVIDSON, DDS

a. Costs to be depreciated include:

Cost of furniture $11,000
Freight charges 375
Sales taxes 550
Installation 75
Total cost to be depreciated $12,000

(1) Straight-Line (nearest whole month):

Depreciation Accumulated Book
Year Computation Expense Depreciation Value
2007 $12,000    8/12 $800 $800 $11,200
2008 $12,000   1,200 2,000 10,000
2009 $12,000   1,200 3,200 8,800
2010 $12,000   1,200 4,400 7,600

(2) 200% Declining-Balance (half-year convention):

Depreciation Accumulate Book
Expense d
Year Computation Depreciation Value
2007 $12,000  20%  12 $1,200 $1,200 $10,800
2008 10,800  20% 2,160 3,360 8,640
2009 8,640  20% 1,728 5,088 6,912
2010 $6,912  20% 1,382 6,470 5,530

(3) 150% Declining-Balance (half-year convention):

Depreciation Accumulate Book
Expense d
Year Computation Depreciation Value
2007 $12,000  15%  12 $900 $900 $11,100
2008 11,100  15% 1,665 2,565 9,435
2009 9,435  15% 1,415 3,980 8,020
2010 8,020  15% 1,203 5,183 6,817
 PROBLEM 9.3B
DAVIDSON, DDS (concluded)

b. Davidson's may use the straight-line method in its financial statements to achieve
the least amount of depreciation expense in the early years of the furniture’s
useful life. In its federal income tax return, Davidson may use an accelerated
method (called MACRS). The use of MACRS will reduce Davidson's taxable
income as much as possible in the early year's of the furniture's useful life. Thus
management's goals are really not in conflict.

c. The 200% declining-balance method results in the lowest reported book value at
the end of 2010 ($5,530). Depreciation, however, is not a process of valuation.
Thus, the $5,530 book value is not an estimate of the furniture’s fair value at the
end of 2010.

d. A book value of $400 means that accumulated depreciation at the time of the
disposal was $2,600.

1. Journal entry assuming that the furniture was sold for $600:
Cash 600
Accumulated Depreciation: Furniture 2,600
Furniture 3,000
Gain on Disposal of Assets 200

To record sale of furniture for $600 cash.

2. Journal entry assuming that the furniture was sold for $300:
Cash 300
Accumulated Depreciation: Furniture 2,600
Loss on Sale of Asset 100
Furniture 3,000

To record sale of furniture for $300 cash.

 PROBLEM 9.4B
BLAKE CONSTRUCTION
a.
General Journal

Jan 6 Loss on Disposal of Plant Assets 1,200

Accumulated Depreciation: Office Equipment 16,800

Office Equipment 18,000

Scrapped equipment; received no salvage value.

Mar 3 Cash 100,000

Notes Receivable
700,000
Accumulated Depreciation: Building
250,000
Land
50,000
Building
680,000
Gain on Sale of Plant Assets
320,000
Sold land and building for a $100,000 cash down-
payment and a 5-year, 12% note for the balance.

Vehicles (new truck)

Jul 10 37,000
Accumulated Depreciation: Vehicles (old truck)
22,000
Vehicles (old truck)
26,000
Gain on Disposal of Plant Assets
8,000
Cash
25,000
To record trade-in of old truck on new; trade-in
allowance exceeded book value by $8,000.
 Office Equipment (new computer)
Sep 3 10,000
Loss on Trade-in of Plant Assets
2,600
Accumulated Depreciation: Office Equip. (old computer)
9,000
Office Equipment (old computer)
12,000
Cash
1,000
Notes Payable
8,600
Acquired new computer system by trading in old
computer, paying part cash, and issuing a 1-year,
10% note payable. Recognized loss equal to book value
of
old computer ($3,000) minus trade-in allowance ($400).

b. Gains and losses on asset disposals do not affect gross profit because they are not part of
the cost of goods sold. Such gains and losses do, however, affect net income reported in a
firm’s income statement.

c. Unlike realized gains and losses on asset disposals, unrealized gains and losses on
marketable securities are not generally reported in a firm’s income statement. Instead,
they are reported in the balance sheet as a component of stockholders’ equity.