On January 1, 2012, Jose Company purchased a building for $200,000 and a delivery truck for

Exercise 8-11 Capital versus Revenue Expenditures

E8-11 Jose Company

E8-11 On January 1, 2012, Jose Company purchased a building for $200,000 and a delivery truck for $20,000. The following expenditures have been incurred during 2014:

·         The building was painted at a cost of $5,000.

·          To prevent leaking, new windows were installed in the building at a cost of $10,000.

·          To improve production, a new conveyor system was installed at a cost of $40,000.

·          The delivery truck was repainted with a new company logo at a cost of $1,000.

·          To allow better handling of large loads, a hydraulic lift system was installed on the truck at a cost of $5,000.

·          The truck’s engine was overhauled at a cost of $4,000.

Required

1. Determine which of those costs should be capitalized. Also, identify and analyze the effect of the capitalized costs. Assume that all costs were incurred on January 1, 2014.

2. Determine the amount of depreciation for the year 2014. The company uses the straight-line method and depreciates the building over 25 years and the truck over six years. Assume zero residual value for all assets.

3. How would the assets appear on the balance sheet of December 31, 2014?  

Hint: Read carefully the way a cost is determined to be either an asset or an expense. Also be sure to notice the dates since that could impact your answers.

TUTORIAL PREVIEW

EXERCISE 8-11 CAPITAL VERSUS REVENUE EXPENDITURES

1.   The following entries should be made to capitalize costs:

      Jan. 1         Building                                                                                   40,000

                              Cash                                                                                                           40,000

                        To record cost of new conveyor system.

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From the following list, identify each item as operating (O), investing (I), financing (F), or not

Exercise 8-9 Impact of Transactions Involving Operating Assets on Statement of Cash Flows

E8-9 From the following list, identify each item as operating (O), investing (I), financing (F), or not

separately reported on the statement of cash flows (N).

________ Purchase of land

________ Proceeds from sale of land
________ Gain on sale of land

________ Purchase of equipment

________ Depreciation expense

________ Proceeds from sale of equipment

________ Loss on sale of equipment

TUTORIAL PREVIEW 

Purchase of land:                                            I

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Ohare Company’s only asset as of January 1, 2014

Problem 8-4 Depreciation and Cash Flow

P8-4 Ohare Company’s only asset as of January 1, 2014, was a limousine. During 2014, only the following three transactions occurred:

Services of $100,000 were provided on account. All accounts receivable were collected.

Depreciation on the limousine was $15,000.

Required

1.        Develop an income statement for O’hare for 2014.

2.        Determine the amount of the net cash inflow for O’hare for 2014.

3.        Explain why O’hare’s net income does not equal net cash inflow.

4.        If O’hare developed a cash flow statement for 2014 using the indirect method, what amount would appear in the category titled Cash Flow from Operating Activities?

Hint: Although this is simplistic and brief information, be sure to use the proper format for the statements. It might be helpful to actually prepare a cash flow statement and show it next to the income statement for reference

TUTORIAL PREVIEW

1.                                                        O’HARE COMPANY

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2014

      Service Revenue                                                                                                            $100,000

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Griffith Delivery Service purchased a delivery truck for $33,600.

Problem 8-3 Book versus Tax Depreciation

P8-3 Griffith Delivery Service purchased a delivery truck for $33,600. The truck has an estimated useful life of six years and no salvage value. For purposes of preparing financial statements, Griffith is planning to use straight-line depreciation. For tax purposes, Griffith follows MACRS. Depreciation expense using MACRS is $6,720 in Year 1, $10,750 in Year 2, $6,450 in Year 3, $3,870 in each of Years 4 and 5, and $1,940 in Year 6.

Required
1. What is the difference between straight-line and MACRS depreciation expense for each of the six years?
2. Griffith’s president has asked why you use one method for the books and another for tax calculations. ?oCan you do this? Is it legal? Don’t we take the same total depreciation either way??? he asked. Write a brief memo answering his questions and explaining the benefits of using two methods for depreciation.

Hint: Set up a chart showing the different amounts of depreciation each year. Think about what the company will be doing each year if it is growing and profitable.

SOLUTION PREVIEW

PROBLEM 8-3 BOOK VERSUS TAX DEPREICATION

1.   Year                Straight-Line         –             MACRS             =           Difference

         1                       $    5,600*                          $    6,720                              $(1,120)

         2                            5,600                               10,750                                (5,150)

         3                            5,600                                 6,450                                   (850)

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Hopi Corporation expects the following operating results for next year

Hopi Corporation expects the following operating results for next year:

Sales $400,000

Margin of safety $100,000

Contribution margin ratio 75%

Degree of operating leverage 4

What is Hopi expecting total fixed expenses to be next year?

What is Hopi expecting total fixed expenses to be next year?

a. $75,000

b. $100,000

c. $200,000

d. $225,000

Attachments:SOLUTION PREVIEW

Margin of safety = Actual sales – break-even sales

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