...Burke Ellzey Case 2 The primary problem faced by this staff auditor is whether King Realty properly calculated the depreciation on the houses. The controller did not calculate depreciation for the first five years of the useful life of the rental houses. Also, the controller did not calculate depreciation when nobody was living in the house. The alternative would have been to calculate depreciation over the entire useful life not excluding the first five years, and including the time when nobody is living in the houses. The controller argues that since the purpose of depreciation is to measure the “using up” of an asset, no depreciation should be recorded because the usefulness of the asset actually increase during the first five years. Also, the controller argues that since no revenue is being generated when the house is vacant, no depreciation expense should be recognized. Accounting Standards Codification (ASC) No. 360-10-35-4 states that “the cost of a productive facility is one of the costs of the services it renders during its useful economic life. Generally accepted accounting principles (GAAP) require that this cost be spread over the expected useful life of the facility in such a way as to allocate it as equitably as possible to the periods during which services are obtained from the use of the facility. This procedure is known as depreciation accounting, a system of accounting which aims to distribute the cost or other basic value of tangible capital assets...
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...Case 7 1: Stern Corporation (B)* Note: This case is updated from the Twelfth Edition. Approach This is a straightforward problem, designed for use in connection with study of the text. I find it useful to put T-accounts on the board or on a Vugraph and post entries to them as they are given. The account titles given in the balance sheet should be used. The case assumes individual unit depreciation. It may be desirable to ask at some point what the entries would be if composite or group depreciation were used. Comments on Questions Question 1 1. Cash 3,866 Accumulated Depreciation, Factory Machinery 27,367 Factory Machinery 31,233 2. Tools Used (Expense) 7,850 Tools 7,850 (Note the contrast between depreciation and a direct write-off.) 3. (a) Depreciation Expense 278 Accumulated Depreciation, Automotive Equipment 278 (The additional depreciation is 1/6 x .20 x $8,354. Note that the half-year convention is not used. Note that if the depreciation incurred in 2006 is disregarded, the loss will be overstated.) (b) Cash 2,336 Accumulated Depreciation, Automotive Equipment 5,458 Loss on Sale of Other Assets 560 Automotive Equipment 8,354 (There can be a discussion of the proper showing of the loss on the income statement.) 4. Patent Amortization Expense 11,250 Patent 11,250 5. Cash 75 Accumulated Depreciation, Office Machines 1,027 Gain on Sale of Other Assets 75 Office Machines 1,027 ...
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...that will last for more than one year, but will not last indefinitely. Over time, these assets depreciate. Depreciation is defined as a non-cash expense that reduces the value of an asset as a result of physical or functional factors over time. Therefore, the costs of the fixed assets should be recorded as an expense over their useful lives, since they depreciate and must be replaced once the end of their useful life is reached. Physical depreciation factors include wear and tear during use or from being exposed to such things as weather. Functional depreciation factors include obsolescence or changes in customer needs that cause the asset to no longer provide services for which it was intended or needed. When it comes to computing depreciation, there are three factors that determine the depreciation expense for a fixed asset: the asset’s initial cost, expected useful life, and estimated residual value. And there are also three different ways to calculate depreciation: the straight –line method, the units-of-production method, and the double-declining-balance method. The straight-line method of depreciation provides the same amount of depreciation expense for each year of the asset’s useful life, and is known to be the most commonly used method of calculating depreciation. The unit’s-of-production method of depreciation provides the same amount of depreciation expense for each unit of production. Based on what the asset is, the unit’s-of-production method can be expressed...
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...assets are recorded at their acquisition prices and reported at historical costs (less accumulated depreciation, if applicable). Cost included in Asset Cost: The cost of a long-lived asset consists of all expenditures that are reasonable and necessary to acquire the asset, bring it to its desired location (in case of machines, equipment, and furniture), and make it ready for its intended use * Purchase Price * Sales Tax * Installation Costs * Freight/Shipping cost & Insurance while it is being acquired * Legal Fee * Repairs/Reconditioning * Not the repair cost that result as damage while installing * Testing * Modifying the asset * Legal prints Capital Cost is debited to an asset account instead of expense account Intangible assets are recorded at their acquisition costs, as well. Internally developed intangibles are not recorded in the books; only purchased intangible assets are recorded. That said, however, the costs of registering and successfully defending an intangible asset are recorded in the books. The cost of unsuccessful legal defense of an intangible asset is expensed when incurred. What is depreciation: Transferring of an assets cost to expense over its useful life. Depreciation Journal entry: * Dr. – Depreciation Expense account * Cr. – Accumulated Depreciation (This is a contra asset account) Depreciation Methods: 1. Straight Line 2. Units of Production (or Units of...
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...• • • Operates a fleet of over 100 airplanes 22,000+ employees Fly the most modern fleet and are the world’s largest operator of Boeing 747s Company has been profitable every year since 1948 Current share price $10.86 with a market cap of 12.98B Case Overview • • Delta and Singapore Airlines use base their depreciation methods on very different assumptions Entire airline industry struggling in the 1990s • • • • Competition from low cost carriers such as Southwest Iraq’s invasion of Kuwait and the corresponding oil crisis American recession From 1990-1993 the airline industry loses 12.8B and Delta is particularly hard hit. Singapore takes a hit as well but still manages to make 1.6B during the downturn Case Overview • • • • The average age of Delta’s aircraft was 8.8yrs at this time (low compared to its US competitors) while Sing air was operating the youngest fleet in the world 5.1yrs In 1993 Delta has approx. 412m more in total assets than Sing Air Delta is the 3rd largest carrier in the world and Singapore is the 7th * In 1993 Delta significantly changes its assumptions underlying its depreciation method. Sing Air does not modify their depreciation method Delta Specific Info Owns 296 planes and leases 268 for a total of 564 Years till Delta plane is fully Depreciated= (1986) 10yr useful life + 10% residual value (1987-1992) 15yr useful life +10% residual value...
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...1.0 INTRODUCTION Akademi Teknikal Laut Malaysia (ATLAM) was established on 15 August 1981, which wholly owned and organization by MICT Berhad located in Melaka and Terengganu. ATLAM was focused on training and preparing Malaysia for the maritime industry. On 1 January 1997 ATLAM went privatized and became one of the subsidiaries of the PETRA group-wide SAP. ATLAM vision and mission was to be a leader in maritime education and training and to facilitate value added learning via a conductive environment and provide excellent services to its clients. According to the conductive study by World Maritime University in 1997 ATLAM IT infrastructure was poor if compared to other countries in Europe and/or Japan. Because ATLAM used the single-user system, which allows users to produce only accounting entries, the system could not function for financial report. The access for better IT facilities was provided by PETRA after ATLAM was privatized. In 2001, ATLAM IT solution was to follow the PETRA IT infrastructure standards. ATLAM management had been asked to upgrade its accounting system with the PETRA group-wide SAP system in December 2001. SAP system, application and product in data processing are integrated business applications package that covered most functions of an organization. Those core functions of SAP are Financial Accounting, Controlling, Human Resources, Plant Maintenance, Project Systems and Basis System. In particularly, SAP system is feasible for ATLAM to run its financial...
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...Case 7-1 Journal Entries: # | Transaction | DR | CR | 1 | Cash | 3,866.00 | | | Accumulated Depreciation, Factory Machine | 27,367.00 | | | Factory Machine | | 31,233.00 | 2 | Depreciation Expense | 7,850.00 | | | Tools | | 7,850.00 | 3 | Depreciation Expense, Automotive (a) | 278.00 | | | Accumulated Depreciation, Automotive (a) | | 278.00 | | Cash | 2,336.00 | | | Accumulated Depreciation, Automotive (b) | 5,458.00 | | | Loss on Sale of Asset (c) | 560.00 | | | Automotive Equipment | | 8,354.00 | 4 | Patent Amortization Expense (d) | 11,250.00 | | | Patent | | 11,250.00 | 5 | Cash | 75.00 | | | Accumulated Depreciation, Office Typewriter | 1,027.00 | | | Gain from Sales of Office Typewriter | | 75.00 | | Office Typewriter | | 1,027.00 | 6 | Cash | 80.00 | | | Depreciation Expense, Furniture and Fixtures (e) | 36.75 | | | Accumulated Depreciation, Furniture and Fixtures | 431.75 | | | Accumulated Depreciation, Furniture and Fixtures | | 36.75 | | Furniture and Fixtures | | 490.00 | | Gain from Sales of Furniture and Fixtures (f) | | 21.75 | 7 | Depreciation Expense | 407,279.28 | | | Accumulated Depreciation, Building | | 48,105.18 | | Accumulated Depreciation, Factory machine | | 339,435.20 | | Accumulated Depreciation, Furniture and Fixtures | | 5,599.40 | | Accumulated Depreciation, Automotive | | 9,988.80...
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...26, No. 1 2011 pp. 155–162 American Accounting Association DOI: 10.2308/iace.2011.26.1.155 Bioscience Company: Accounting for Idle Plant Assets Victoria Dickinson, Paul Kimmel, and Terry Warfield ABSTRACT: Bioscience Company and its auditors have been in discussions with the SEC concerning the accounting for its long-lived assets. Among the issues being discussed is the company’s discontinuation of depreciation on productive assets that it had used previously, but it was not currently using. The case permits a technical examination of depreciation and impairment accounting issues with consideration of the FASB’s asset/liability measurement approach, fair value accounting, use of the FASB Codification, and comparisons to International Financial Reporting Standards. The case requirements are divided into basic requirements, which would be appropriate for intermediate level students; and advanced requirements, which would be more appropriate for accounting seniors, as well as M.B.A. and fifth-year accounting students. Keywords: accounting for long-lived assets; depreciation; impairment. INTRODUCTION ristin Murphy recently joined the audit team of one of the more interesting clients in her accounting firm’s practice. An important issue has arisen for this client on a topic that she has not encountered in her four years with the firm. Following is some background on the client and the accounting issue under consideration. K BIOSCIENCE COMPANY Bioscience Company, founded...
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...|PPE Case Study | | | | | |D Hazelwood | |Due 25JUN12 | Abstract This case study focuses on the treatment of property, plant, and equipment and how they are viewed by both GAAP and IFRS. We are provided with a situation in which we are required to apply both standards and determine the value of fixed assets IAW IFRS and GAAP in order to determined which accounting standard would be more beneficial in this situation; specifically, if it allows Old Line to be able to borrow more funds. The case study will also conclude with an opinion on whether the student’s preference is GAAP or IFRS in regards to acquisition contingencies. Background of the Situation: Old Line Manufacturing Company is having liquidity problems whereby the borrowing base is limited to 60% of net fixed assets. Given the different types of PPE, the...
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...matter of fact, we sometimes say that the proper recognition of revenue and expense is the only important accounting problem. Although this is an exaggeration, it is not far from the truth. The text and cases in this chapter constitute only a beginning in understanding and it is to be expected that students will understand the matter thoroughly only after they have attacked it from several different angles. Sometimes we ask the class “Suppose a company received a lawyer’s bill for $1,000. Explain all the different ways in which this bill could be recorded in the accounts.” The answer is that if the bill relates to services rendered in a prior year (or accounting period) but not recorded in that time, it is nevertheless an expense of the current year; if it represents a charge for a previous year that was recorded in that year, the payment of the bill merely represents a decrease in a liability; if it represents a charge in the current year, it is recorded as an expense; and if it represents a retainer for services to be rendered in the following year it is recorded as an asset, prepaid expense. It may be desirable to introduce a number of short questions of this type in order to hammer home the accrual concept. It is suggested, however, that problems relating to depreciation be deferred, as this is an intricate matter which is perhaps best left until Chapter 7. Students should always be required to use the word “revenue” rather than the word “income.” They may find it...
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... Some differences such as loans received which do not impact the profit and loss statement are pretty obvious. Others may not be as obvious but you can break them down into three main areas: - Revenue is booked at sale. In many cases a sale is recorded for accounting purposes in the profit and loss statement when a company delivers a product or service. In many cases, no cash has been exchanged at the time of sale since customers typically have a stated number of days to pay. So, since profit is partially determined by revenue, a component of that profit reflects a customer’s promise to pay. Cash flow reflects only cash actually received. - Expenses are matched to revenue. An overriding accounting principle is to match the costs and expenses associated with the revenues generated during a given time period. The expenses charged to the income statement may not be those that were actually paid during that period. Many will be paid later when they are invoiced by a vendor. Cash flow reflects the cash that actually went out the door during a period. - Capital expenditures do not count against profit directly. A capital expenditure does not appear on the income statement when it occurs. It is only the depreciation that is charged against revenue over time which is based on the useful life of the item that was purchased. The cash flow reflects a different story as most items are paid for long before they may be fully depreciated on the profit and...
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...Florence Man A424 Case 1 Summer 2013 Substantive procedures are designed to detect material misstatements in a transaction classes, account balance, and disclosure component of financial statements. Little Drummer Boy Inc. In the case of Little Drummer Boy Inc. management provided assertions in the following transaction classes: acquisition of long-term asset, depreciation of long-term asset, and allocation of cost in lump-sum purchase. The long-term asset account, depreciation and accumulated depreciation of long-term asset accounts should be detected for material misstatements. Finally, auditor should detect material misstatements in disclosure of depreciation and method of cost allocation for Little Drummer Boy Inc. In performing substantive procedures, auditor should test errors or fraud in (1) individual transactions (2) the ending financial statement account balances and disclosures. For Little Drummer Boy Inc. the engagement team didn’t test the long-term asset account and corresponding payable account to determine whether the fair value of property, plant, and equipment is properly recorded. Moreover, auditors didn’t performed tests in determine whether depreciation of plant and equipment is properly recorded in depreciation expense and accumulated depreciation accounts in accordance to estimations on useful life of the plant and equipment. The ending balance in plant and equipment should also be tested. The same procedures should be applied to test whether...
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...Case No. 7 – 3 Stafford Press 1. Analyze the effect of each of these transactions on the items in the balance sheet and income statement. For transactions that affect owner’s equity, distinguish between those that affect the net income of the current year and those that do not. In most cases, the results of your analysis can be set forth most clearly in the form of journal entries. 1.) Amount in dollars ($) Land | | 34,004 | Building | 350,064 | | Accumulated Depreciation | 199,056 | | Book Value | | 151,008 | | | | Total | | 185,042 | | | | | | | Cash received | 149,860 | | Total value of land and buildings | 185,042 | | | (35,182) | | | | | Cash | 149,860 | | | | Accumulated Depreciation - Buildings | 199,056 | | | | Loss of Sale on Land and Building | 35,182 | | | | Land | | | 34,034 | | Building | | | 350,064 | | 2.) Equipment | 73,645 | | Accumulated Depreciation | 40,890 | | Book Value | 32,755 | | | | | Cash received | 35,200 | | Total value of equipment | 32,755 | | Gain on the sale | 2,445 | | Cash | 35,200 | | | | Accumulated Depreciation - Equipment | 40,890 | | | | Equipment | | | 73,645 | | Gain on Sale of Equipment | | | 2,445 | | 3.) Payment | 109,868 | | Freight | 450 | | Installation | 900 | | | | | Total | 111,218 | | Equipment | 111,218 | | | | Cash | | | 111,218 | | 4.) Payment for the land...
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...round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.) Equivalent Annual Cost Quick & Dirty $3.668 million Do-It-Right $3.553 million b. Which system should Blooper install? Do-It-Right Explanation: a. Find the equivalent annual cost of each alternative: Quick and Dirty Do-It-Right Operating costs $3 million $3 million Investment $16 million $18 million Project life 4 years 5 years Annual depreciation $4 million $3.6 million Depreciation tax shield $1.6 million $1.44 million PV(depreciation tax shield)* $4.86 million $5.191 million Net capital cost† $11.14 million $12.809 million EAC of net capital cost* $3.668 million $3.553 million *Annuity discounted at 12%; number of years = project life. †Investment − PV(depreciation tax shield). The present value of the depreciation tax shield for each alternative is computed as follows: PV= $1.600 MILLION {1/0.12 -1/0.12 (1.12)4 }= $4.860 MILLION PV= $1.440 MILLION {1/0.12 -1/0.12 (1.12)5}= $5.191 MILLION The equivalent annual cost (EAC) for each alternative is computed as follows: C X {1/0.12-1/0.12 X (1.12)4}=$11.140 million>...
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...Assumptions: Based on the Common Size Income Statement and observation of cost behaviors I: Considered COGS as variable as it directly correlates to the amount of products that we sell. We can also see that COGS to Revenue percentage is almost the same meaning the relationship between is constant, thus the cost is variable. I used the average relationship between the COGS and Revenue for the previous years to project the increase and decrease in revenue. Selling expenses area variable and based of sales, we can deduct if following the logical connection to “sales” and visual connection through the Common Size Income Statement. To calculate it I used the average relationship between the Selling expenses and Revenues. General and Administrative are fixed, and even though in real world environment the company that loses money would probably try to lower the fixed costs by shrinking it’s personnel. Also generally the more the business grows the more general and administrative expenses there would be, because the company would most likely to hire new people in order to accommodate the growth and increase capacity, but I treated it as a fixed cost as I could also observe it’s behavior from the income statement. To calculate it I used an average annual cost. Interest Expense I classified as variable as I observed it’s behavior I also noticed that that rate the interest is growing is 0.02% each successful year, thus I used that rate to calculate the increase in interest during...
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