Chapter 8

Exercise 8-3 Straight-Line and Units-of-Production Methods

Depreciation, accumulated depreciation, and book value for the straight-line method should be as
follows:
Annual Accumulated Book
Year Depreciation Depreciation Value
2014 $10,800* $10,800 $49,200
2015 10,800 21,600 38,400
2016 10,800 32,400 27,600
2017 10,800 43,200 16,800
2018 10,800 54,000 6,000
*($60,000 $6,000)/5 years = $10,800 per year
The estimated total number of units to be produced is
10,000 + 20,000 + 30,000 + 40,000 + 50,000 = 150,000 units.
Depreciation Expense per Unit = (Acquisition Cost Residual Value)/Life in Units
= ($60,000 $6,000)/150,000 units
= $0.36 per unit
Depreciation, accumulated depreciation, and book value for the units-of- production method
should be as follows:

Annual Accumulated Book

Year Depreciation Depreciation Value
2014 10,000 $0.36 = $ 3,600 $ 3,600 $56,400
2015 20,000 $0.36 = 7,200 10,800 49,200
2016 30,000 $0.36 = 10,800 21,600 38,400
2017 40,000 $0.36 = 14,400 36,000 24,000
2018 50,000 $0.36 = 18,000 54,000 6,000

Exercise 8-7 Asset Disposal

1.July 1 Depreciation Expense 4,500

Accumulated DepreciationAsset 4,500
To record depreciation to July 1.
($60,000 $6,000)/6 years = $9,000
per year. $9,000 6/12 = $4,500.

July 1 Cash 15,000

Note Receivable 15,000
Accumulated DepreciationAsset 22,500
Loss on Sale of Asset 7,500*
Asset 60,000
To record sale of the asset.
 *The loss on sale is calculated as follows:
Asset cost $60,000
Less: Accumulated depreciation 22,500
Book value $37,500
Sale price 30,000
Loss on sale $ 7,500

2. The gain or loss should appear in the Other Expense category of the income statement to
indicate it is not part of the normal operating activity of the company.

Exercise 8-11 Capital versus Revenue Expenditures

1. The following entries should be made to capitalize costs:

Jan. 1 Building 40,000
Cash 40,000
To record cost of new conveyor system.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Building 40,000
Cash (40,000)

Delivery Truck 5,000

Cash 5,000
To record cost of hydraulic lift installed in truck.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Delivery Truck5,000
Cash (5,000)
Note: Some may choose to capitalize the engine overhaul costs of $4,000 and the window
repair costs of $10,000. However, both costs appear to keep the asset in its normal operating
condition and are more properly treated as expenses.
2. The entry to record depreciation should be as follows:
Dec. 31 Depreciation Expense 14,322
Accumulated DepreciationBuilding 9,739
Accumulated DepreciationTruck 4,583
To record 2008 depreciation.
 BALANCE SHEET INCOME STATEMENT
Assets = Liabilities +Stockholders Equity+ Revenues Expenses
Accumulated Depreciation
Depreciation Expense (14,322)
Building (9,739)
Accumulated
Depreciation
Truck (4,583)

The depreciation for 2014 should be calculated as follows:

Building Truck
Original cost $200,000 $20,000
Less: Depreciation for 2012 and 2013 16,000 6,667
Book value $184,000 $13,333
Plus: Capitalized costs 40,000 5,000
Depreciable amount $224,000 $18,333
Depreciation per year on building =
$224,000/23 years = $ 9,739
Depreciation per year on truck =
$18,333/4 years = $ 4,583

3. The assets should appear on the 2014 balance sheet as follows:

Building $240,000
Less: Accumulated depreciation 25,739 $214,261
Truck $ 25,000
Less: Accumulated depreciation 11,250 13,750
Total property, plant, and equipment $228,011
Chapter 9
Exercise 9-4 Transaction Analysis

1. a. Purchases 8,000
Accounts Payable 8,000
To record purchase of inventory on account.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Accounts Payable8,000 Purchases (8,000)

b. Land 44,500
Cash (20% $44,500) 8,900
Notes Payable 35,600
To record purchase of land.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Land 44,500 Notes Payable 35,600
Cash (8,900)*

*$44,500 20% = $8,900

c. Accounts Payable 450

Purchase Returns and Allowances 450
To record purchase return.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Accounts Payable(450) Purchase Returns
and Allowances 450

d. Accounts Payable 7,550

Cash 7,550
To record payment of account payable.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Cash (7,550) Accounts Payable(7,550)

e. Cash 13,800
Discount on Notes Payable 1,200
Notes Payable 15,000
 To record loan less interest in advance.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Cash 13,800 Notes Payable 15,000
Discount on
Notes Payable(1,200)

f. Cash (200 $25) 5,000

Unearned Revenue 5,000
To record gift certificates.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Cash 5,000* Unearned
Revenue 5,000

*200 $25 = $5,000

g. Cash ($127,200 90%) 114,480

Accounts Receivable 12,720
Sales 120,000
Sales Tax Payable 7,200
To record sales and related sales tax.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Cash 114,480* Sales Tax Sales 120,000
Accounts Payable 7,200
Receivable12,720

*$127,200 90% = $114,480

2. b. Interest Expense ($35,600 8% 8/12) 1,898.67

Interest payable 1,898.67
To record accrued interest on note payable.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Interest Payable 1,898.67* Interest Expense(1,898.67)

*$35,600 8% 8/12 = $1,898.67

 e. Interest Expense 700
Discount on Notes Payable ($1,200 7/12) 700
To record interest in advance as interest expense.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Discount on Interest Expense (700)
Notes Payable 700*

*$1,200 7/12 = $700

f. Unearned Sales Revenue 1,750

Sales (35% $5,000) 1,750
To record gift certificates redeemed.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses
Unearned Sales 1,750
Revenue (1,750)*

*$5,000 35% = $1,750

3. Sales tax payable $7,200.00

Notes payable, due November 1 35,600.00
Notes payable, due June 1 $15,000.00
Less: Discount on notes payable* 500.00 14,500.00
Unearned sales revenue** 3,250.00
Interest payable 1,898.67
Total current liabilities $62,448.67
*$1,200 $700 = $500.
**$5,000 $1,750 = $3,250.
Exercise 9-5 Current Liabilities and Ratios

1. KRUSE COMPANY
BALANCE SHEET
DECEMBER 31, 2014
Current liabilities:
Accounts payable $ 55,000
Notes payable, 12%, due in 60 days 20,000
Taxes payable 15,000
Salaries payable 10,000
Total current liabilities $100,000

2. Working capital = Current assets Current liabilities

= $300,000* $100,000
= $200,000
*Current assets = Cash $ 15,000
Accounts receivable 180,000
Less: Allowance (20,000)
Marketable securities 40,000
Inventory 85,000
$300,000

3. Current ratio = Current assets/Current liabilities

= $300,000/$100,000
= 3:1
Kruse has sufficient current assets to meet its short-term obligations (pay its current
liabilities).

Exercise 9-12 Simple versus Compound Interest

Part 1.
1. $20,000 4% 6 years = $4,800
2. $20,000 6% 4 years = $4,800
3. $20,000 8% 3 years = $4,800
Part 2.
1. Table 9-1 n = 6, i = 4%
Future value = $20,000 1.265 = $25,300
Interest = future value beginning amount
= $25,300 $20,000
= $5,300
2. Table 9-1 n = 4, i = 6%
 Future value = $20,000 1.262 = $25,240
Interest = future value beginning amount
= $25,240 $20,000
= $5,240
3. Table 9-1 n = 3, i = 8%
Future value = $20,000 1.260 = $25,200
Interest = future value beginning amount
= $25,200 $20,000
= $5,200
Part 3.
1. Table 9-1 n = 12, i = 2%
Future value = $20,000 1.268 = $25,360
Interest = future value beginning amount
= $25,360 $20,000
= $5,360

2. Table 9-1 n = 8, i = 3%
Future value = $20,000 1.267 = $25,340
Interest = $25,340 $20,000 = $5,340

3. Table 9-1 n = 6, i = 4%
Future value = $20,000 1.265 = $25,300
Interest = $25,300 $20,000 = $5,300
You would want to choose an investment that yields the highest future value. All other
factors being equal, higher interest rates, more frequent compounding, and a longer term will
increase the future value of your investment.

Exercise 9-17 Annuity

$2,000 20.024 = $40,048 n = 15, i = 4%

Chapter 10

Exercise 10-2 Issue Price

1. a. $500,000
b. $500,000
c. $500,000

2. a. $500,000 8% 1/2 year = $20,000

b. $500,000 8% 1/2 year = $20,000
c. $500,000 8% 1/2 year = $20,000

3. a. $ 20,000 13.590 (n = 20, i = 4%) = $271,800

$500,000 0.456 (n = 20, i = 4%) = 228,000
Issue price $499,800*
*Should equal $500,000; the difference is due to rounding in present value
factors.
b. $ 20,000 14.877 (n = 20, i = 3%) = $297,540
$500,000 0.554 (n = 20, i = 3%) = 277,000
Issue price $574,540
c. $ 20,000 12.462 (n = 20, i = 5%) = $249,240
$500,000 0.377 (n = 20, i = 5%) = 188,500
Issue price $437,740

Exercise 10-5 Redemption of Bonds

1. Redemption Price: $75,000 1.03 = $77,250

Carrying Value: $75,000 $1,750 = 73,250
$ (4,000) Loss

2. The gain or loss on bond redemption should be presented on the income statement. In most
cases, the gain or loss on bond redemption should not be considered unusual or infrequent
and therefore should not be presented in the section of the statement where extraordinary
items are presented.
Exercise 10-9 Leased Assets

1. a. The value of the forklift will not appear on the balance sheet.
b. The lease payments will appear on the income statement as lease expense.
2. a. 2014
Jan. 1 Leased Asset 5,001
Lease Liability 5,001
To record signing of lease.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses

Leased Asset 5,001* Lease Liability 5,001

*$1,510 3.312 (n = 4, i = 8%) = $5,001

The leased asset should be reported at the present value of the payments which is $5,001, not
at $6,040.

b. Dec. 31 Lease Liability 1,110

Interest Expense 400*
Cash 1,510

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses

Cash (1,510) Lease Liability (1,110) Interest Expense (400)*

*$5,001 8% = $400

c. Depreciation expense = $5,001/4 years = $1,250.

d. Current Liabilities:
Lease Liability (current portion) $1,199*
*($5,001 $1,110) 8% = $311.
$1,510 $311 = $1,199.
Long-Term Liabilities:
Lease Liability $2,692**
**$5,001 $1,110 $1,199 = $2,692
Problem 10-8 Bond Transaction

1. 2014
April 1 Cash 1,000,000
Bonds Payable 1,000,000
To record the issuance of bonds.

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses

Cash 1,000,000 Bonds

Payable 1,000,000

2. Oct. 1 Interest Expense 60,000

Cash 60,000
To record interest payment:

BALANCE SHEET INCOME STATEMENT

Assets = Liabilities + Stockholders Equity + Revenues Expenses

Cash (60,000) Interest

Expense (60,000)*

*$1,000,000 0.12 6/12 = $60,000

3. Additional interest must be recorded on December 31 to accrue interest for the time period of
October 1December 31. The interest should be recorded as an expense when it is incurred
under the accrual accounting process. The accrual does not affect the amount of interest paid
on April 1, 2009. A full semiannual payment of $60,000 should occur on that date.

4. Total cash inflow to Brand $1,000,000

Total cash outflow:
Interest $60,000 16 payments $ 960,000
Principal 1,000,000
Total outflow 1,960,000
Difference $ 960,000