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Chapter 9: Q19RQ (page 526)
What does the asset turnover ratio measure, and how is it calculated?
The ratio that determines how efficiently the company can generate sales using its assets is the assets turnover ratio. It is determined using the net assets and average of the total assets.
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Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land.
Requirements
1. Explain the tax advantage of allocating too much to the building and too little to the land.
2. Was Western鈥檚 allocation ethical? If so, state why. If not, why not? Identify who was harmed.
Question: Accounting for natural resources Conseco Oil, Inc. has an account titled Oil and Gas Properties. Conseco paid \(6,600,000 for oil reserves holding an estimated 1,000,000 barrels of oil. Assume the company paid \)570,000 for additional geological tests of the property and $450,000 to prepare for drilling. During the first year, Conseco removed and sold 72,000 barrels of oil. Record all of Conseco鈥檚 transactions, including depletion for the first year.
Dylan worked for a propane gas distributor as an accounting clerk in a small Midwestern
town. Last winter, his brother Mike lost his job at the machine plant. By January,
temperatures were sub-zero, and Mike had run out of money. Dylan saw that Mike鈥檚
account was overdue, and he knew Mike needed another delivery to heat his home. He
decided to credit Mike鈥檚 account and debit the balance to the parts inventory because he
knew the parts manager, the owner鈥檚 son, was incompetent and would never notice the
extra entry. Months went by, and Dylan repeated the process until an auditor ran across
the charges by chance. When the owner fired Dylan, he said, 鈥淚f you had only come to
me and told me about Mike鈥檚 situation, we could have worked something out.鈥�
Requirements
1. What can a business like this do to prevent team member fraud of this kind?
2. What effect would Dylan鈥檚 actions have on the balance sheet? The income statement?
3. How much discretion does a business have about accommodating
hardship situations?
This problem continues the Canyon Canoe Company situation from Chapter 8. Amber and Zack Wilson are continuing to review business practices. Currently, theyare reviewing the company鈥檚 property, plant, and equipment and have gathered thefollowing information:
Asset | Acquisition Date | Cost | Estimated Life | Estimated Residual value | Depreciation Method | Monthly Depreciation Expense |
Canoes | Nov. 3, 2018 | \(4,800 | 4 Years | \) 0 | SL | $100 |
Land | Dec 1, 2018 | 85,000 | n/a | |||
Building | Dec 1, 2018 | 35,000 | 5 Years | 5,000 | SL | 500 |
Canoes | Dec 2, 2018 | 7,200 | 4 Years | 0 | SL | 150 |
Computer | Mar. 2, 2019 | 3,600 | 3 Years | 300 | DDB | |
Office Furniture | MAR. 3, 2019 | 3,000 | 5 Years | 600 | SL |
*SL = Straight@line; DDB = Double@declining@balance
Requirements
1. Calculate the amount of monthly depreciation expense for the computer andoffice furniture for 2019.
2. For each asset, determine the book value as of December 31, 2018. Then, calculatethe depreciation expense for the first six months of 2019 and the book valueas of June 30, 2019.
3. Prepare a partial balance sheet showing Property, Plant, and Equipment as ofJune 30, 2019.
During 2018, Lora Company completed the following transactions:
Jan. 1 Traded in old office equipment with book value of \(55,000 (cost of\)129,000 and accumulated depreciation of \(74,000) for new equipment.Lora also paid \)55,000 in cash. Fair value of new equipment is \(116,000.Assume the exchange had commercial substance.
Apr. 1 Sold equipment that cost \)12,000 (accumulated depreciation of \(1,000through December 31 of the preceding year). Lora received \)7,100 cashfrom the sale of the equipment. Depreciation is computed on a straightlinebasis. The equipment has a five-year useful life and a residual valueof \(0.
Dec. 31 Recorded depreciation as follows:
Office equipment is depreciated using the double-declining-balancemethod over four years with a \)7,000 residual value.
Record the transactions in the journal of Lora Company.
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