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    1. Property and equipment are initially reported at their historical cost on the balance sheet. Their costs are then allocated over their useful lives through depreciation expense. 2. This results in the assets being reported at their net book value, which is their original cost minus accumulated depreciation. This provides information on the invested capital in long-term operating assets. 3. Reporting property and equipment at net book value rather than fair value follows the historical cost principle and provides consistent and comparable information over time.

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    Saylor URL: 351

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    1. Property and equipment are initially reported at their historical cost on the balance sheet. Their costs are then allocated over their useful lives through depreciation expense. 2. This results in the assets being reported at their net book value, which is their original cost minus accumulated depreciation. This provides information on the invested capital in long-term operating assets. 3. Reporting property and equipment at net book value rather than fair value follows the historical cost principle and provides consistent and comparable information over time.

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    1. Property and equipment are initially reported at their historical cost on the balance sheet. Their costs are then allocated over their useful lives through depreciation expense. 2. This results in the assets being reported at their net book value, which is their original cost minus accumulated depreciation. This provides information on the invested capital in long-term operating assets. 3. Reporting property and equipment at net book value rather than fair value follows the historical cost principle and provides consistent and comparable information over time.

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    © All Rights Reserved
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    155 views10 pages

    Saylor URL: 351

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    suruth242
    1. Property and equipment are initially reported at their historical cost on the balance sheet. Their costs are then allocated over their useful lives through depreciation expense. 2. This results in the assets being reported at their net book value, which is their original cost minus accumulated depreciation. This provides information on the invested capital in long-term operating assets. 3. Reporting property and equipment at net book value rather than fair value follows the historical cost principle and provides consistent and comparable information over time.

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    1. Ulysses Company uses LIFO costing.

    It reported beginning inventory of


    $20,000,000 and ending inventory of $24,500,000. If current costs were used to
    value inventory, beginning inventory would have been $23,000,000 and ending
    inventory would have been $26,700,000. Cost of goods sold using LIFO was
    $34,900,000. Determine what cost of goods sold would be if Ulysses used FIFO.

    2. Paula’s Parkas sells NorthPlace jackets. At the beginning of the year, Paula’s
    had twenty jackets in stock, each costing $35 and selling for $60. The
    following table details the purchases and sales made during January:
    Figure 9.13

    Assume that Paula’s Parkas uses the perpetual FIFO method.


    a. Determine Paula’s Parkas cost of goods sold and ending inventory
    for January.
    b. Determine Parka’s gross profit for January.

    1. Assume the same facts as in problem 6 above, but that Paula’s Parkas uses
    the perpetual LIFO method.
    a. Determine Paula’s Parkas cost of goods sold and ending inventory
    for January.
    b. Determine Parka’s gross profit for January.

    Saylor URL: http://www.saylor.org/books Saylor.org


    351
    1. Assume the same facts as in problem 6 above, but that Paula’s Parkas uses
    the moving average method.
    a. Determine Paula’s Parkas cost of goods sold and ending inventory
    for January.
    b. Determine Parka’s gross profit for January.

    1. The Furn Store sells home furnishings, including bean bag chairs. Furn
    currently uses the periodic FIFO method of inventory costing, but is
    considering implementing a perpetual system. It will cost a good deal of
    money to start and maintain, so Furn would like to see the difference, if
    any, between the two and is using its bean bag chair inventory to do so.
    Here is the first quarter information for bean bag chairs:
    Figure 9.14

    Each bean bag chair sells for $40.


    a. Determine Furn’s cost of goods sold and ending inventory under
    periodic FIFO.
    b. Determine Furn’s cost of goods sold and ending inventory under
    perpetual FIFO.

    Saylor URL: http://www.saylor.org/books Saylor.org


    352
    1. Rollrbladz Inc. is trying to decide between a periodic or perpetual LIFO
    system. Management would like to see the effect of each on cost of goods
    sold and ending inventory for the year. Below is information concerning
    purchases and sales of its specialty line of rollerblades:
    Figure 9.15

    a. Determine Rollrbladz’s cost of goods sold and ending inventory


    under periodic LIFO.
    b. Determine Rollrbladz’s cost of goods sold and ending inventory
    under perpetual LIFO.

    1. Highlander Corporation sells swords for decorative purposes. It would like


    to know the difference in cost of goods sold and ending inventory if it uses
    the weighted average method or the moving average method. Please find
    below information to help determine these amounts for the second
    quarter.
    Figure 9.16

    Swords retail for $120 each.

    Saylor URL: http://www.saylor.org/books Saylor.org


    353
    a. Determine Highlander’s cost of goods sold and ending inventory
    under weighted average.
    b. Determine Highlander’s cost of goods sold and ending inventory
    under moving average.
    1. In Chapter 4 "How Does an Organization Accumulate and Organize the
    Information Necessary to Prepare Financial Statements? " and Chapter 7 "In
    a Set of Financial Statements, What Information Is Conveyed about
    Receivables?", we met Heather Miller, who started her own business, Sew
    Cool. The financial statements for the first year of business are shown
    below. To make calculations easier, assume that the business began on
    1/1/08 and that the balance in the inventory account on that date was -0-.
    Figure 9.17

    Figure 9.18

    Saylor URL: http://www.saylor.org/books Saylor.org


    354
    Figure 9.19

    Based on the financial statements determine the following:


    a. Gross profit percentage
    b. Number of days inventory is held
    c. Inventory turnover

    C OM PREH E NS IVE P RO BL E M

    This problem will carry through several chapters, building in difficulty. It allows
    students to continuously practice skills and knowledge learned in previous
    chapters.

    Saylor URL: http://www.saylor.org/books Saylor.org


    355
    In Chapter 8 "How Does a Company Gather Information about Its Inventory?", you
    prepared Webworks statements for August. They are included here as a starting
    point for September.

    Here are Webworks financial statements as of August 31.


    Figure 9.20

    Figure 9.21

    Saylor URL: http://www.saylor.org/books Saylor.org


    356
    The following events occur during September:

    a. Webworks purchases supplies worth $120 on account.

    b. At the beginning of September, Webworks had 19 keyboards costing $100 each


    and 110 flash drives costing $10 each. Webworks has decided to use periodic FIFO
    to cost its inventory.

    c. On account, Webworks purchases thirty keyboards for $105 each and fifty flash
    drives for $11 each.

    d. Webworks starts and completes five more Web sites and bills clients for $3,000.

    e. Webworks pays Nancy $500 for her work during the first three weeks of
    September.

    f. Webworks sells 40 keyboards for $6,000 and 120 flash drives for $2,400 cash.

    g. Webworks collects $2,500 in accounts receivable.

    h. Webworks pays off its salaries payable from August.

    i. Webworks pays off $5,500 of its accounts payable.

    j. Webworks pays off $5,000 of its outstanding note payable.

    k. Webworks pays Leon salary of $2,000.

    l. Webworks pays taxes of $795 in cash.

    Required:

    A. Prepare journal entries for the above events.

    B. Post the journal entries to T-accounts.

    C. Prepare an unadjusted trial balance for Webworks for September.

    D. Prepare adjusting entries for the following and post them to your T-accounts.

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    357
    m. Webworks owes Nancy $300 for her work during the last week of September.

    n. Leon’s parents let him know that Webworks owes $275 toward the electricity
    bill. Webworks will pay them in October.

    o. Webworks determines that it has $70 worth of supplies remaining at the end of
    September.

    p. Prepaid rent should be adjusted for September’s portion.

    q. Webworks is continuing to accrue bad debts so that the allowance for doubtful
    accounts is 10 percent of accounts receivable.

    r. Record cost of goods sold.

    E. Prepare an adjusted trial balance.

    F. Prepare financial statements for September.

    Saylor URL: http://www.saylor.org/books Saylor.org


    358
    Chapter 10
    In a Set of Financial Statements, What Information Is
    Conveyed about Property and Equipment?

    10.1 The Reporting of Property and Equipment

    L EA RNING O B JEC T IV ES

    At the end of this section, students should be able to meet the following
    objectives:
    1. Recognize that tangible operating assets with lives of over one year (such as
    property and equipment) are initially reported at historical cost.
    2. Understand the rationale for assigning the cost of these operating assets to
    expense over time if the item has a finite life.
    3. Recognize that these assets are reported on the balance sheet at book value,
    which is cost less accumulated depreciation.
    4. Explain the reason for not reporting property and equipment at fair value
    except in specified circumstances.

    Question: Wal-Mart Stores Inc. owns thousands of huge retail outlets and supercenters located

    throughout the United States and many foreign countries. These facilities contain a wide variety of

    machinery, fixtures and the like such as cash registers and shelving. On its January 31, 2009, balance

    sheet, Wal-Mart reports “property and equipment, net” of nearly $93 billion, a figure that made up

    almost 60 percent of the company’s total assets. This monetary amount was more than twice as large as

    any other asset reported by this company. Based on sheer size, the information conveyed about this

    group of accounts is extremely significant to any decision maker analyzing Wal-Mart or other similar

    companies. In creating financial statements, what is the underlying meaning of the figure reported for

    property, equipment, and the like? What information is conveyed by the nearly $93 billion balance

    disclosed by Wal-Mart?

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    359
    Answer: According to U.S. GAAP, the starting basis for the monetary figure to be reported by a company

    for property, equipment, and other tangible operating assets with a life of over one year (as with inventory

    and several other assets) is historical cost. The amount sacrificed to obtain land, machinery, buildings,

    furniture, and so forth can be objectively determined based on an arm’s length transaction. A willing

    buyer and a willing seller, both acting in their own self-interests, agreed on this exchange price as being

    satisfactory.

    Thus, the cost incurred to obtain property and equipment provides vital information about management

    policy and decision making. It also serves as the initial figure appearing on the balance sheet for any item

    classified in this manner. The buyer has voluntarily chosen to relinquish the specified amount of

    resources to gain the asset. After the date of acquisition, the reported balance will probably never again

    reflect fair value.

    Subsequently, for any of these operating assets that has a finite life (and most assets other than land do

    have finite lives), the matching principle necessitates that the historical cost be allocated to expense over

    the anticipated years of service. This expense is recognized systematically each period as the company

    utilizes the asset to generate revenue. Expenses are matched with revenues. For example, if equipment is

    used for ten years, all (or most) of its cost is assigned to expense over that period. This accounting is very

    similar to the handling of prepaid expenses such as rent as discussed in an earlier chapter. Cost is first

    recorded as an asset and then moved to expense over time in some logical fashion. At any point, the

    reported asset is the original cost less the portion of that amount that has been reclassified to expense.

    That is the most likely meaning of the $93 billion figure reported by Wal-Mart.

    Question: The basic accounting for property and equipment certainly resembles that utilized for prepaid

    expenses such as rent and insurance. Do any significant differences exist between the method of

    reporting prepaid expenses and the handling of operating assets like machinery?

    Saylor URL: http://www.saylor.org/books Saylor.org


    360

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