
Concept explainers
1.
Ascertain the appropriate amounts to complete the following schedule by showing computations.
1.

Explanation of Solution
Depreciation refers to allocation, of the cost of asset to expense over the useful life of the asset. Depreciation expense relating to the current accounting period should be accounted for, by an
Following are the appropriate amounts determined to complete the following schedule.
Method of depreciation | Depreciation expense | Book value at the end of | ||
Year 1 |
Year 2 | Year 1 |
Year 2 | |
Straight-line | (2)$22,500 | (3)$22,500 | $73,500 (10) | $51,000 (11) |
Units-of-production | (5)$32,250 | (6)$33,750 | $63,750 (12) | $30,000 (13) |
Double-declining-balance | (8)$48,000 | (9)$24,000 | $48,000 (14) | $24,000 (15) |
Table (1)
Working notes:
Calculate the cost of asset:
Depreciation expense under straight-line method:
Calculate the amount to be depreciated under straight-line method for year 1:
Calculate the amount to be depreciated under straight-line method for year 2:
Depreciation expense under Units-of-production method:
Calculate the units-of-production:
Calculate the amount of depreciation for year 1 (Units-of-production method):
Calculate the amount of depreciation for year 2 (Units-of-production method):
Depreciation expense under Double-declining-balance method:
Calculate the rate of Double-declining-balance:
Note: Straight line depreciation rate =
Calculate the amount of depreciation for year 1 (Double-declining-balance method):
Calculate the amount of depreciation for year 2 (Double-declining-balance method):
Calculate the book value of asset under straight-line method for year 1:
Calculate the book value of asset under straight-line method for year 2:
Calculate the book value of asset under units-of-production method for year 1:
Calculate the book value of asset under units-of-production method for year 2:
Calculate the book value of asset under double-declining-balance method for year 1:
Calculate the book value of asset under double-declining-balance method for year 2:
2.
Ascertain the method that would result in the lowest earnings per share for year 1 and year 2
2.

Explanation of Solution
Earnings per Share:
Earnings per share help to measure the profitability of a company. Earnings per share are the amount of profit that is allocated to each share of outstanding stock.
- The method that would result in the lowest earnings per share during the year 1 is the double-declining-balance method. Thus, the highest depreciation expense was produced in this method which resulted in the lowest income (from requirement 1).
- During the year 2 the units-of-production method results in the lowest earnings per share. Thus, the highest depreciation expense was produced in this method which resulted in the lowest income.
3.
Ascertain the method that would result in the highest amount of
3.

Explanation of Solution
Statement of
This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.
- While recognising the depreciation there is no payment of cash involved therefore, it is a noncash expense. All methods have the same impact on cash flows during the year 1 since it ignored implications of income tax. The straight-line method results in the highest net income, lowest expense and highest tax liability, when a method is assumed to be applied for tax determination.
- Thus the highest amount of cash outflows is resulted from the straight-line depreciation method. The Methods are selected by the companies for tax purposes in order to reduce the tax obligations.
4.
Indicate the effects of (a) acquiring the machine and (b) recording annual depreciation on the operating and investing activities sections of the statement of cash flows (indirect method) for Year 1(Assume the straight-line method).
4.

Explanation of Solution
Statement of cash flows:
It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.
Operating activities:
Operating activities refer to the normal activities of a company to carry out the business. The examples for operating activities are purchase of inventory, payment of salary, sales, and others.
Investing activities:
Investing activities refer to the activities carried out by a company for acquisition of long term assets. The examples for investing activities are purchase of equipment, long term investment, sale of land, and others.
Following are the effects of (a) acquiring the machine and (b) recording annual depreciation on the operating and investing activities sections of the statement of cash flows (indirect method) for Year 1(Assume the straight-line method).
(a) Acquiring the machine:
The acquisition of machine decrease the cash provided by investing activities due to the purchase cost of $96,000.
(b) Recording annual depreciation on the operating and investing activities sections of the statement of cash flows (indirect method) for Year 1(Assume the straight-line method):
There is no effect on the cash provided by operating activities since depreciation is a noncash expense. The depreciation expense of $22,500 is added back to net income in the operating activities of cash flow statement because the depreciation must be originally subtracted in order to get the net income, and adjustments have to be made for reversing this cash flow effect.
Want to see more full solutions like this?
Chapter 8 Solutions
Financial Accounting
- Innovative Consulting Co. has the following accounts in its ledger: Cash, Accounts Receivable, Supplies, Office Equipment, Accounts Payable, Common Stock, Retained Earnings, Dividends, Fees Earned, Rent Expense, Advertising Expense, Utilities Expense, Miscellaneous Expense. Journalize the following selected transactions for October 2012 in a two-column journal. Journal entry explanations may be omitted. If an amount box does not require an entry, leave it blank. Oct. 1. Paid rent for the month, $2,500. 4. Paid advertising expense, $1,000. 5. Paid cash for supplies, $1,800. 6. Purchased office equipment on account, $11,500. 12. Received cash from customers on account, $7,500. 20. Paid creditor on account, $2,700. 27. Paid cash for miscellaneous expenses, $700. 30. Paid telephone bill for the month, $475. 31. Fees earned and billed to customers for the month, $42,400. 31. Paid electricity bill for the month, $900. 31. Paid dividends, $1,500.arrow_forwardCash Accounts Receivable Supplies Prepaid Insurance Equipment Notes Payable Accounts Payable Debit Balances Credit Balances 20,350 37,000 1,100 200 171,175 36,000 26,000 Common Stock 50,000 Retained Earnings 94,150 Dividends 15,000 Fees Earned 429,850 Wages Expense 270,000 Rent Expense 63,000 Advertising Expense 25,200 Miscellaneous Expense 5,100 608,125 636,000arrow_forwardOn October 1, 20Y6, Jay Crowley established Affordable Realty, which completed the following transactions during the month: Oct. 1 Jay Crowley transferred cash from a personal bank account to an account to be used for the business in exchange for common stock, $40,000. 2 Paid rent on office and equipment for the month, $4,800. 3 Purchased supplies on account, $2,150. 4 Paid creditor on account, $1,100. 10 5 Earned sales commissions, receiving cash, $18,750. 6 Paid automobile expenses (including rental charge) for month, $1,580, and miscellaneous expenses, $800. 7 Paid office salaries, $3,500. 8 Determined that the cost of supplies used was $1,300. 9 Paid dividends, $1,500.arrow_forward
- Reese, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December, she received a $20,000 bill from her accountant for consulting services related to her small business. Reese can pay the $20,000 bill anytime before January 30 of next year without penalty. Assume Reese’s marginal tax rate is 32 percent this year and will be 37 percent next year, and that she can earn an after-tax rate of return of 12 percent on her investments. a. What is the after-tax cost if she pays the $20,000 bill in December? b. What is the after-tax cost if she pays the $20,000 bill in January 30? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.) Exhibit 3.1 below 4% 5% 6% 7% 8% 9% 10% 11% 12% Year 1 .962 .952 .943 .935 .926 .917 .909 .901 .893 Year 2 .925 .907 .890 .873 .857 .842 .826 .812 .797 Year 3 .889 .864 .840 .816 .794 .772 .751 .731 .712 Year 4 .855 .823 .792 .763 .735 .708 .683 .659 .636 Year 5…arrow_forwardManny, a calendar-year taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 of legal services for a client. Manny typically requires his clients to pay his bills immediately upon receipt. Assume Manny’s marginal tax rate is 37 percent this year and next year, and that he can earn an after-tax rate of return of 12 percent on his investments. a. What is the after-tax income if Manny sends his client the bill in December? b. What is the after-tax income if Manny sends his client the bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.) Exhibit 3.1 below 4% 5% 6% 7% 8% 9% 10% 11% 12% Year 1 .962 .952 .943 .935 .926 .917 .909 .901 .893 Year 2 .925 .907 .890 .873 .857 .842 .826 .812 .797 Year 3 .889 .864 .840 .816 .794 .772 .751 .731 .712 Year 4 .855 .823 .792 .763 .735 .708 .683 .659 .636 Year 5 .822 .784 .747 .713 .681 .650 .621 .593 .567 Year 6 .790 .746…arrow_forwardRocky Mountain Tours Co. is a travel agency. The nine transactions recorded by Rocky Mountain Tours during June 20Y2, its first month of operations, are indicated in the following T accounts: Cash (1) 40,000 (2) 4,000 (7) 13,100 (3) 5,000 (4) 6,175 (6) 6,000 (9) 1,500 Equipment (3) 15,000 Dividends (9) 1,500 Accounts Receivable Accounts Payable Service Revenue (5) 20,500 (7) 13,100 (6) 6,000 (3) 10,000 (5) 20,500 Supplies (2) 4,000 (8) 2,200 Common Stock (1) 40,000 Operating Expenses (4) 6,175 (8) 2,200 a. Prepare an unadjusted trial balance. List all the accounts in the order of Assets, Liabilities, Stockholders' equity, Revenues, and Expenses. Place the amounts in the proper columns. If an entry is not required in an amount box, leave it blank.arrow_forward
- Transactions and T Accounts The following selected transactions were completed during July of the current year: 1. Billed customers for fees earned, $112,700. 2. Purchased supplies on account, $4,500. 3. Received cash from customers on account, $88,220. 4. Paid creditors on account, $3,100. a. Journalize these transactions in a two-column journal, using the appropriate number to identify the transactions. Journal entry explanations may be omitted. If an amount box does not require an entry, leave it blank. (1) Accounts Receivable Fees Earned (2) Supplies Accounts Payable (3) Cash Accounts Receivable (4) Accounts Payable Casharrow_forwardIsabel, a calendar-year taxpayer, uses the cash method of accounting for her sole proprietorship. In late December she received a $20,000 bill from her accountant for consulting services related to her small business. Isabel can pay the $20,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 37 percent this year and next year, and that she can earn an after-tax rate of return of 12 percent on her investments. a. What is the after-tax cost if Isabel pays the $20,000 bill in December? b. What is the after-tax cost if Isabel pays the $20,000 bill in January? Use Exhibit 3.1. (Round your answer to the nearest whole dollar amount.) c. Based on requirements a and b, should Isabel pay the $20,000 bill in December or January? multiple choice December Januaryarrow_forwardAnswer correctly plz otherwise unhearrow_forward
- Financial accountingarrow_forwardWhen privately-held Toys "R" Us filed for bankruptcy in fall 2017, it disclosed that it had $5 billion in debt and was spending about $400 million per year for interest on that debt. Toys "R" Us net debt was $109.0 million in 2005, just before being taken over by private equity buyers in 2005. In that takeover, the company incurred $5.3 billion in debt. Sales revenue in the twelve months before the buyout in 2005 were $11.2 billion. Sales in the twelve months ending October 2017 were $11.1 billion. During the bankruptcy and store closing announcement in March 2018, the Toys "R" Us CEO stated that the company had fallen behind on the general upkeep and condition of its stores, which contributed to the decline in sales. It has also faced intense competition from other retailers, such as Amazon.com and Walmart. Toys "R" Us had had plans during 2017 to invest in technology, upgrade its stores to have toy testing areas, and create other features that would draw customers into the stores,…arrow_forwardAnswer? financial accountingarrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education





