Intermediate accounting kieso 13th edition solutions manual free download

Proponents of this approach argue that oil and gas should be valued at the date of discovery. The oil companies are concerned because the valuation issue is extremely tenuous.

For example, to properly value the reserves, the following must be estimated: 1 amount of the reserves, 2 future production costs, 3 periods of expected disposal, 4 discount rate, and 5 the selling price. Using full-cost accounting, the cost of unsuccessful ventures as well as those that are successful is capitalized, because a cost of drilling a dry hole is a cost that is needed to find the commercially profitable wells.

Successful efforts accounting capitalizes only those costs related to successful projects. They contend that to measure cost and effort accurately for a single property unit, the only measure is in terms of the cost directly related to that unit. In addition, it is argued that full-cost is misleading because capitalizing all costs will make an unsuccessful company over a short period of time show no less income than does one that is successful.

It applies to depreciable assets acquired in and later. The taxpayer determines the recovery deduction for an asset by applying a statutory percentage to the historical cost of the property. MACRS was adopted to permit a faster write-off of tangible assets so as to provide additional tax incentives and to simplify the depreciation process.

The simplification should end disputes related to estimated useful life, salvage value, and so on. Journalentry: Loss on Impairment Computations: St. Another alternative would be to debit Accumulated Depreciation— Buildings on the theory that the replacementextends the usefullife of the building. The entry in this case would be as follows: Accumulated Depreciation—Buildings Reasonable accuracy is normally given by 2, 3, or 4.

The simplestof the applications are 6,2, 3, 4, 5, and 1, in about that order. Methods 2, 3, and 4 combine reasonable accuracy with simplicity of application. Restorationofany impairmentlossis notpermitted. Depreciation is nottaken on assets intendedto be sold.

It is not reported as an extraordinary item. To evaluate this step, management does a recoverability test. The recoverability test estimates the future cash flows expected from use of that asset and its eventual disposition. If the sum of the expected future net cash flows undiscounted is less than the carrying amount of the asset, an impairment results.

If the recoverability test indicates that an impairment has occurred, a loss is computed. The impairment loss is the amountby which the carrying amountof the asset exceeds its fair value. X , bd. The problem is complicated because the proper cost of the machine to be depreciated must be determined.

For example, purchase discounts and freight charges must be considered. The problem is straightforward and provides an excellent review of the basic computational issues involving depreciation methods.

Problem Time 40—50 minutes Purpose—to provide the student with an opportunity to compute depreciation expense using a number of different depreciation methods.

Before the proper depreciation expense can be computed, the accounts must be corrected for a number of errors made by the company in its accounting for the assets. An excellent problem for reviewing the proper accounting for plant assets and related deprecia-tion expense. Problem Time 45—60 minutes Purpose—to provide the student with an opportunity to correct the improper accounting for Semitrucks and determine the proper depreciation expense.

The student is required to compute separately the errors arising in determining or entering depreciation or in recording transactions affecting Semitrucks. Problem Time 25—30 minutes Purpose—to provide the student with a problem involving the computation of estimated depletion and depreciation costs associated with a tract of mineral land.

The student must compute depletion and de- preciation on a units-of-production basis tons mined. A portion of the cost of machinery associated with the product must be allocated over different periods. The student may experience some difficulty with this problem.

Problem Time 25—30 minutes Purpose—to provide the student with a problem involving the proper accounting for depletion cost. This problem involves timberland for which a depletion charge must be computed. In addition, a computation of a loss that occurs because of volcanic activity must be determined. Problem Time 25—35 minutes Purpose—to provide the student with a problem involving depletion and depreciation computations. Problem Time 25—35 minutes Purpose—to provide the student with a comprehensive problem related to property, plant, and equipment.

The student must determine depreciable bases for assets, including capitalized interest, and prepare depreciation entries using various methods of depreciation. Problem Time 15—25 minutes Purpose—to provide the student with an opportunity to analyze impairments for assets to be used and assets to be disposed of. Problem Time 45—60 minutes Purpose—to provide the student with an opportunity to solve a complex problem involving a number of plant assets. In addition, the cost of assets acquired is difficult to determine.

The purpose of computing the depreciation expense is to determine which method will result in the maximization of net income and which will result in the minimization of net income over a three-year period. An excellent problem for reviewing the fundamentals of depreciation accounting. DepreciationBase Computation: Purchase price Each of Yrs. Total purchase price Land: No depreciation. Diversity of practices among companies and industries called for standardization in practices.

Total interest costs should be allocated to enterprise assets and operations, just as material, labor, and overhead costs are allo- cated. That is, under the concept of historical costs, all costs incurred to bring an asset to the condition and location necessary for its intended use should be reflected as a cost of that asset.

Arguments againstthe capitalization of interestinclude the following: 1. Interest capitalized in a period would tend to be offset by amorti- zation of interest capitalized in prior periods.

Interest cost is a cost of financing, not of construction. Recovery of impairment losses are recorded. This can be found in an annuity due table sincethe paymentsare at the beginning of each year. Alternatively, to convert from an ordinary annuity to an annuity due factor, proceed as follows: For eleven payments use the present value of an ordinary annuity for 11 years 7. Multiplythis factor 7. These computations are provided below.

Finally, the classic issue of whether depreciation provides funds must be considered. The tax effects of depreciation must be considered when this part of the case is examined. An excellent case for covering the traditional issues involving depreciation accounting. CA Time 20—25 minutes Purpose—to provide the student with a basic understanding of the difference between the unit and group or composite depreciation methods. The student is required to indicate the arguments for and against these methods and to indicate how retirements are handled.

CA Time 25—35 minutes Purpose—to provide the student with an understanding of a number of unstructured situations involving depreciation accounting. The first situation considers whether depreciation should be recorded during a strike. The second situation involves the propriety of employing the units-of-production method in certain situations.

The third situation involves the step-up of depreciation charges because properties are to be replaced due to obsolescence. The case is somewhat ambiguous, so cut-and-dried approaches should be discouraged. CA Time 25—35 minutes Purpose—to provide the student with an understanding of the objectives of depreciation and the theoretical basis for accelerated depreciation methods. CA Time 20—25 minutes Purpose—to provide the student with the opportunity to examine the ethical dimensions of the depre- ciation method choice.

Under generally accepted accounting principles, depreciation accounting is a process of allocation, not of valuation, through which the productive effort cost is to be matched with productive accomplishment revenue for the period. Depreciation accounting, therefore, is concerned with the timing of the expiration of the cost of tangible plant assets. Whether it is rational in terms of cost allocation depends on the facts of the case. It produces an increasing depreciation charge, which is usually not justifiable in terms of the benefit from the use of the asset because manufacturers typically prefer to use their new equipment as much as possible and their old equipment only as needed to meet production quotas during periods of peak demand.

As a general rule, then, the benefit declines with age. Assuming that the actual operations including equipment usage of each year are identical, maintenance and repair costs are likely to be higher in the later years of usage than in the earlier years. Hence the proposed method would couple light depreciation and repair charges in the early years. Reported net income in the early years would be much higher than reported net incomein the later years of assetlife, an unreasonable and undesirable variation during periods of identical operation.

On the other hand, if the expected level of operations including equipment usage in the early years of asset life is expected to be low as compared to that of later years because of slack demand or production policies, the pattern of the depreciation charges of the proposed method approximately parallels expected benefits and revenues and hence is reasonable. Although the units-of-production depreciation method is the usual selection to fit this case, the proposed method also conforms to generally accepted accounting principles in this case provided that proper justification is given.

Revenue-producing activities are the sources of funds from operations: if revenues exceed out-of-pocket costs during a fiscal period, funds are available to cover other than out-of-pocket costs; if revenues do not exceed out-of- pocket costs, no funds are made available no matter howmuch, or little, depreciation is charged. First, depreciation charges affect reported income and hence may affect managerial decisions such as those regarding pricing, product selection, and dividends.

For example, the proposed method would result initially in higher reported income than would the straight-line method, consequently stockholders might demand higher dividends in the earlier years than they would otherwise expect. The straight-line method, by causing a lower reported income during the early years of asset life and thereby reducing the amount of possible dividends in early years as compared with the proposed method, could encourage earlier reinvestments in other profit-earning assets in order to meet increasing demand.

Second, depreciation charges affect reported taxable income and hence affect directly the amount of income taxes payable in the year of deduction. Using the proposed method for tax purposes would reduce the total tax bill over the life of the assets 1 if the tax rates were increased in future years or 2 if the business were doing poorly now but were to do significantly better in the future.

The first condition is political and speculative but the second condition may be applicable to Burnitz Manufacturing Company in view of its recent origin and its rapid expansion program.

Consequently, more funds might be available for reinvestment in plant assets in years of large deductions if one of the above assumptions were true. If Burnitz is quite profitable now, the president should reconsider his proposal because it will delay the availability of the tax shield provided by depreciation. CA a 1 The unit method of recording depreciation involves the treatment of plant assets or substantial additions thereto as individual items. The method entails maintaining detailed records of the costs of specific assets and related accumulated depreciation.

Computation of depreciation is based on the estimated useful life of the individual asset. The method is distinguished from group and composite-life methods under which the cost and estimated life of the assets are commingled. Depreciation may be recordedby straight-line, accelerated, orother accepted computation methods. Such grouping might be horizontal, vertical, or geographical. Horizontal grouping assembles together all assets of similar physical characteristics,suchas trucks, presses,returnable containers, etc.

A vertical or functional grouping comprises all assets contributing to a common economic function, such as a sugar refinery, a service station, etc. The geographical grouping includes all assets in a district or region, such as telephone poles.

Separate accounts are established for the total cost of each asset grouping and its related accumulated depreciation. The asset grouping should be composed of a large number of units to obtain a reliable average life.

Arguments for the use of the unit method are: i. The method is simple in that it does not require involved mathematical computations. The gain or loss on the retirement of a particular asset can be computed. For cost purposes, depreciation on idle equipment can be isolated. The method results in a more accurately computed depreciation provision in any given year, as the total depreciation charge represents the best estimate of the depreciation of each asset and is not the result of averaging the cost over a longer period of time.

Arguments against the unit method are: i. Considerable additional bookkeeping is necessaryto account for each assetand its related depreciation. Computers reduce the work burden, however. There is a point of diminishing returns in the accumulation of accounting data under this method, that is, additional accuracy may not justify the additional cost of record-keeping. Arguments for the use of the group and composite-life methods are: i.

The methods require less detailed bookkeeping. The application of depreciation to the whole group tends to average out or offset errors, economic or operating, caused by under-depreciation or over-depreciation. Periodic income is not distorted by gains or losses on disposal of assets. Total views 21, On Slideshare 0. From embeds 0. Number of embeds Downloads Hogg, allen t. Larsen Morris L.

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LIFO retail. Dollar-value LIFO retail. Special LIFO problems. Describe and apply the lower- of-cost-or-market rule. Explain when companies value inventories at net realizable value.

Explain when companies use the relative sales value method to value inventories. Discuss accounting issues related to purchase commitments. Determine ending inventory by applying the gross profit method. Determine ending inventory by applying the retail inventory method.

Explain how to report and analyze inventory. Determine ending inventory by applying the LIFO retail methods. Simple 15—20 E Lower-of-cost-or-market. Simple 10—15 E Lower-of-cost-or-market. Simple 15—20 E Lower-of-cost-or-market—journal entries. Simple 10—15 E Lower-of-cost-or-market—valuation account. Moderate 20—25 E Lower-of-cost-or-market—error effect. Simple 10—15 E Relative sales value method.

Simple 15—20 E Relative sales value method. Simple 12—17 E Purchase commitments. Simple 05—10 E Purchase commitments. Simple 15—20 E Gross profit method. Simple 8—13 E Gross profit method. Simple 10—15 E Gross profit method. Moderate 15—20 E Gross profit method. Moderate 20—25 E Retail inventory method.

Simple 12—17 E Retail inventory method. Simple 20—25 E Analysis of inventories. Simple 10—15 P Lower-of-cost-or-market. Moderate 25—30 P Entries for lower-of-cost-or-market—cost-of-good- sold and loss. Moderate 30—35 P Gross profit method. Moderate 20—30 P Gross profit method. Complex 40—45 P Retail inventory method. Moderate 20—30 P Retail inventory method. Moderate 20—30 4. Moderate 30—40 P Lower-of-cost-or-market.

Complex 40—50 CA Lower-of-cost-or-market. Moderate 15—25 CA Lower-of-cost-or-market. Moderate 20—30 CA Lower-of-cost-or-market. Moderate 15—20 CA Retail inventory method. Moderate 15—25 CA Purchase commitments. Moderate 10—15 5. Held for sale in the ordinary course of business 2. In process of production for such sale 3.

To be currently consumed in the production of goods or services to be available for sale. The term inventory embraces goods awaiting sale the merchandise of a trading concern and the finished goods of a manufacturer , goods in the course of production work in process , and goods to be consumed directly or indirectly in production raw materials and supplies.

This definition of inventories excludes long-term assets subject to depreciation accounting, or goods which, when put into use, will be so classified. The fact that a depreciable asset is retired from regular use and held for sale does not indicate that the item should be classified as part of the inventory. Raw materials and supplies purchased for production may be used or consumed for the construction of long-term assets or other purposes not related to production, but the fact that inventory items representing a small portion of the total may not be absorbed ultimately in the production process does not require separate classification.

By trade practice, operating materials and supplies of certain types of entities such as oil producers are usually treated as inventory. Market shall not exceed the net realizable value 2. Market shall not be less than net realizable value reduced by an allowance for an approximately normal profit margin. Estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.

Valuation of inventories at estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The second definition provides a link to guidance for lower-of-cost-or-market in the agricultural industry FASB ASC Growing Crops Costs of growing crops shall be accumulated until the time of harvest.

Growing crops shall be reported at the lower-of-cost-or-market. The product has a reliable, readily determinable, and realizable market price. The product has relatively insignificant and predictable costs of disposal. The product is available for immediate delivery. Inventories of harvested crops and livestock held for sale and commonly referred to as valued at market are actually valued at net realizable value.

Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes,the difference shall be recognized as a loss of the currentperiod.

This is generally accomplished by stating such goods at a lower level commonly designated as market.