Chapter 6, Problem 29P

a

To determine

Prepare the horizontal statement model to show the effects of given transactions on the elements of the financial statements.

Explanation of Solution

Horizontal analysis model: In this model the analysts will analyse the effect of the transactions on balance sheet, income statement, and statement of cash flows.

Prepare the horizontal statement model to show the effects of given transactions on the elements of the financial statements:

Horizontal Statements Model
Date		Assets	=	Liabilities	+	Equity		Net Income		Cash Flows
1/1/14		+−		NA		NA		NA		− IA
12/31/14		−		NA		−		−		NA
5/5/15		−		NA		−		−		− OA
12/31/15		−		NA		−		−		NA
1/1/16		+−		NA		NA		NA		− IA
12/31/16		−		NA		−		−		NA
3/1/17		−		NA		−		−		− OA
12/31/17		−		NA		−		−		NA
1/1/18		+−		NA		NA		NA		− IA
12/31/18		−		NA		−		−		NA
7/1/19		−		NA		−		−		NA
7/1/19		+		NA		+		+		+ IA

Table (1)

b

To determine

Compute the amount of depreciation expense Incorporation S will report on the income statements for the years 2014 and 2018.

Explanation of Solution

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset.

Compute the amount of depreciation expense Incorporation S will report on the income statements for the years 2014 and 2018:

Year	Computation	Depreciation Expense
2014	$(\$38,000-\$3,000)/5$	$7,000
2015	$(\$38,000-\$3,000)/5$	7,000
2016	$(\$38,000+\$4,000-\$14,000-\$3,000)/3$	8,333
2017	$(\$38,000+\$4,000-\$14,000-\$3,000)/3$	8,333
2018	$(\$42,000-\$2,500-\$21,666(1)\text{)}\text{/}3$	5,945

Table (2)

Working note 1: Compute the accumulated depreciation:

$\begin{array}{c}\text{Accumulated Depreciation in 2017 = Depreciation expense in 2014 to 2017}-\text{overhaul costs }\\ \text{=}\text{\$7,000 + \$7,000 + \$8,333 + \$8,333}-\$9,000\\ =\$30,666-\$9,000\\ =\$21,666\end{array}$

c

To determine

Compute the book value that Incorporation S will report on the balance sheet for the years 2014 and 2018.

Explanation of Solution

Compute the book value that Incorporation S will report on the balance sheet for the years 2014 and 2018:

Computation of Book Value
Year	Cost	−	Accumulated  Depreciation	=	Book Value
2014	$38,000	−	$7,000	=	$31,000
2015	38,000	−	14,000	=	24,000
2016	42,000	−	22,333	=	19,667
2017	42,000	−	30,666	=	11,334
2018	42,000	−	27,611	=	14,389

Table (3)

Working note 2: Compute the accumulated depreciation for the year 2018:

$\begin{array}{c}\text{Accumulated Depreciation in 2018 = Accumulated Depreciation in 2017}\text{+}\text{Depreciation expense in 2018}\\ \text{=}\text{\$21,666}\text{+}\text{\$5,945}\\ =\$27,611\end{array}$

d

To determine

Compute the gain or loss that would be reported on the disposal of equipment on July 1, 2019.

Explanation of Solution

Compute the gain or loss that would be reported on the disposal of equipment on July 1, 2019:

Selling price		$8,500
Less: Book value
Beginning book value	$14,389
Less: Depreciation in 2019     $\left(\$5,945\times \frac{6\text{months}}{12}\right)$	($2,973)
Book value on July 1, 2019		($11,416)
Loss on sale of equipment		$2,916

Table (4)