Chapter 7Plant Assets, Natural Resources, and IntangiblesCheck Points(5 min.) CP 7-11.Property, Plant and Equipment Millions2.Property, plant and equipment, at cost$26,915Less: Accumulated depreciation(13,007)Property, Plant and equipment, book value$13,908Book value is less than cost because accumulated depreciation is subtracted from cost to compute book value.(5 min) CP 7-2The related costs (real estate commission, back property tax, removal of a building, and survey fee) are included as part of the cost of the land because the buyer of the land must incur these costs to get the land ready for its intended use.After the land is ready for use, the related costs (listed above) would be expensed.(10 min.) CP 7-3Land ($150,000 .50).75,000Building ($150,000 .375).56,250Equipment ($150,000 .125)18,750Note Payable150,000EstimatedMarketValuePercent of TotalLand.$ 80,000$80,000 / $160,000= 50.0%Building. 60,000$60,000 / $160,000= 37.5Equipment. 20,000$20,000 / $160,000= 12.5Total.$160,000100.0%(10-15 min.) CP 7-4Income StatementRevenuesCORRECTExpensesUNDERSTATEDNet income OVERSTATEDBalance SheetCurrent assetsCORRECTTotal liabilitiesCORRECTPlant assetsOVERSTATEDOwners equityOVERSTATED Total liabilitiesTotal assetsOVERSTATEDand owners equityOVERSTATED(10 min.) CP 7-51.First-year depreciation:Straight-line ($20,000,000 $6,000,000) / 5 years.$2,800,000Units-of-production ($20,000,000 $6,000,000) /5,000,000 miles 750,000 miles.$2,100,000Double-declining-balance ($20,000,000 / 5 years 2).$8,000,0002.Book value:Straight-LineUnits-of-ProductionDouble-Declining-BalanceCost.$20,000,000$20,000,000$20,000,000Less AccumulatedDepreciation. (2,800,000) (2,100,000) (8,000,000)Book value.$17,200,000$17,900,000$12,000,000(10 min.) CP 7-6Third-year depreciation:a.Straight-line ($20,000,000 $6,000,000) / 5 years.$2,800,000b.Units-of-production ($20,000,000 $6,000,000) /5,000,000 miles 1,250,000 miles$3,500,000c.Double-declining-balance:Year 1($20,000,000 2/5) = $8,000,000Year 2($20,000,000 $8,000,000) 2/5 = $4,800,000Year 3($20,000,000 $8,000,000 $4,800,000 = $7,200,000; $7,200,000 $6,000,000 residual value)$1,200,000(10 min.) CP 7-71.The double-declining-balance (DDB) method offers the tax advantage for the first year of an assets use. The advantage results from the greater amount of DDB depreciation (versus the amount of depreciation under the other methods) during the first year. This saves cash that the taxpayer can invest to earn a return.2.DDB depreciation.$8,000,000Straight-line depreciation. (2,800,000)Excess depreciation tax deduction.$5,200,000Income tax rate .40Income tax savings for first year$2,080,000(5-10 min.) CP 7-8First-year depreciation (for a partial year):a.Straight-line (40,000,000 5,000,000) / 5 years 9/12 5,250,000b.Units-of-production (40,000,000 5,000,000)/ 5,000,000 miles 500,000 miles. 3,500,000c.Double-declining-balance (40,000,000 2/5 9/12).12,000,000UOP depreciation produces the highest net income (lowest depreciation). DDB depreciation produces the lowest net income (highest depreciation).(10 min.) CP 7-9Depreciation Expense Hot Dog Stand.15,000Accumulated Depreciation Hot Dog Stand.15,000Depreciation for years 1-4:$50,000 / 10 years=$ 5,000 per year$ 5,000 4 years=$20,000 for years 1-4Assets remainingdepreciable)(New) Estimated=(New) Annualbook valueuseful life remainingdepreciation$50,000 $20,000)2 years=$15,000 per year$30,000(10 min.) CP 7-10Req. 1(a)Straight-line depreciation method:20X5Jan. 1Cash10,000Acumulated Depreciation.16,000Loss on Sale of Delivery Truck.15,000Delivery Truck.41,000(b)Double-declining-balance depreciation method:20X5Jan. 1Cash10,000Acumulated Depreciation.26,240Loss on Sale of Delivery Truck.4,760Delivery Trucks.41,000Req. 2The difference between the amounts of the loss on disposal under the straight-line d