Problem #1

On 1/1/2021, your company purchases some new equipment. The total

price on the invoice received from the supplier is $630,000 and it
includes both the purchase price ($610,000) and the cost of delivery
($20,000). In addition, you pay $20,000 to an external installation
service provider to have the equipment correctly set up before you can
use it.
You estimate the total useful life of the equipment to be 4 years, and
the salvage value to be $50,000.
Calculate the depreciation expense for the years 2021, 22, 23 and 24
using the double-declining balance method.

1
 Problem #1
On 1/1/2021, your company purchases some new equipment. The total
price on the invoice received from the supplier is $630,000 and it
includes both the purchase price ($610,000) and the cost of delivery
($20,000). In addition, you pay $20,000 to an external installation
service provider to have the equipment correctly set up before you can
use it.
You estimate the total useful life of the equipment to be 4 years, and
the salvage value to be $50,000.
Calculate the depreciation expense for the years 2021, 22, 23 and 24
using the double-declining balance method.
Book value Depr. Acc. Book value
YEARS Deprectiation rate
(BEG) expense Depr. (END)

1 $650,000 2 / 4 = 50.00% $325,000 $325,000 $325,000

2 $325,000 2 / 4 = 50.00% $162,500 $487,500 $162,500
3 $162,500 2 / 4 = 50.00% $81,250 $568,750 $81,250
4 $81,250 2 / 4 = 50.00% $31,250 $600,000 $50,000
2
 Question 1
If a company uses the double-declining-balance method, when is the
depreciation expense going to be twice as large as the straight-line
depreciation expense?

a) In all cases, in all years

b) In all cases, but only in the first year

c) In some cases, and only in the first year

d) Never

Chapter #11 3
 Question 1
If a company uses the double-declining-balance method, when is the
depreciation expense going to be twice as large as the straight-line
depreciation expense?

a) In all cases, in all years

b) In all cases, but only in the first year

c) In some cases, and only in the first year

d) Never

Chapter #11 4
 Question 1
Only in the first year, and only as long as there is no residual value.

STRAIGHT LINE DEPRECIATION

COST - RESIDUAL ( COST - RES VAL. ) x 1

= DEPRECIATION EXP
TOTAL ESTIMATED YEARS

( $500,000 - $50,000 ) x 1
= $ 90,000
5
DOUBLE-DECLINING DEPRECIATION METHOD
DOUBLE
Book value Depreciation Accumulated Book value
YEARS Depreciation rate
(BEG) expense depreciation (END)

1 $500,000 2 / 5 = 40.00% $200,000 $200,000 $300,000

DOUBLE RATE 500k x 40% = HIGHER EXPENSE

COST
Chapter #11 5
 Problem #2
You are given the following information about the notes payable of a company on
12/31/2020, end of the 2020 fiscal year (ignore interest for simplicity):
• NOTE 1: 12/31 balance = $100,000, signed on November 1st 2019 and payable
in full at the maturity date December 1st 2021.
• NOTE 2: 12/31 balance = $44,000, signed on November 1st 2019 and payable in
full at the maturity date December 1st 2022.
• NOTE 3: 12/31 balance = $500,000, signed on August 1st 2020. The note’s
principal is payable in 10 annual installments of equal amount (i.e. 50k every
year on August 1st)
• NOTE 4: 12/31 balance = $70,000, signed on September 1st 2018 and payable in
full at the maturity date September 1st 2021. However, the lender has formally
agreed to refinance the note for additional 12 months at maturity.
• NOTE 5: 12/31 balance = $40,000, signed on September 1st 2018 and payable in
full at the maturity date September 1st 2021. The company has asked the lender
for a refinancing agreement, but the lender has not agreed yet.

What is the total balance of LONG TERM LIABILITIES in the 2020 balance sheet?

6
 Problem #2
You are given the following information about the notes payable of a company on
12/31/2020, end of the 2020 fiscal year:
• NOTE 1: 12/31 balance = $100,000, signed on November 1st 2019 and payable
in full at the maturity date December 1st 2021.
• NOTE 2: 12/31 balance = $44,000, signed on November 1st 2019 and payable in
full at the maturity date December 1st 2022.
• NOTE 3: 12/31 balance = $500,000, signed on August 1st 2020. The note’s
principal is payable in 10 annual installments of equal amount (i.e. 50k every
year on August 1st)
• NOTE 4: 12/31 balance = $70,000, signed on September 1st 2018 and payable in
full at the maturity date September 1st 2021. However, the lender has formally
agreed to refinance the note for additional 12 months at maturity.
• NOTE 5: 12/31 balance = $40,000, signed on September 1st 2018 and payable in
full at the maturity date September 1st 2021. The company has asked the lender
for a refinancing agreement, but the lender has not agreed yet.

What is the total balance of LONG TERM LIABILITIES in the 2020 balance sheet?
44 + (500 – 50) + 70 = 564
7
 Problem #3
On 1/1/18 a company purchased a patent for $100,000. The useful life of the
patent was estimated to be 10 years. On 12/31/2019, an impairment test reveals
that the total expected future cash flows from the patent are equal to $70,000. The
fair value of the patent is $63,000. Record the journal entry for the impairment loss
(if any) on 12/31/2019. Also, calculate the amortization expense to be recorded on
12/31/20.

8
 Problem #3
On 1/1/18 a company purchased a patent for $100,000. The useful life of the
patent was estimated to be 10 years. On 12/31/2019, an impairment test reveals
that the total expected future cash flows from the patent are equal to $70,000. The
fair value of the patent is $63,000. Record the journal entry for the impairment loss
(if any) on 12/31/2019. Also, calculate the amortization expense to be recorded on
12/31/20.
STRAIGHT LINE AMORTIZATION UNTIL IMPAIRMENT TEST

( COST - RES. VAL ) x YEARS ACCUMULATED AMORT.

=
ON TEST DAY
TOTAL ESTIMATED YEARS

( $100,000 - $0 )x 2 = $20,000
10

9
 Problem #3
On 1/1/18 a company purchased a patent for $100,000. The useful life of the
patent was estimated to be 10 years. On 12/31/2019, an impairment test reveals
that the total expected future cash flows from the patent are equal to $70,000. The
fair value of the patent is $63,000. Record the journal entry for the impairment loss
(if any) on 12/31/2019. Also, calculate the amortization expense to be recorded on
12/31/20.
IMPAIRMENT LOSS CALCULATION

COST - ACC.AMORT = NET BOOK VALUE

$100,000 - $20,000 = $80,000

NET BV - EXP. CF = TEST

$80,000 - $70,000 = $10,000
If the difference is positive, an impairment
loss must be calculated

NET BV - FAIR VALUE = IMP. LOSS

$80,000 - $63,000 = $17,000 10
 Problem #3
On 1/1/18 a company purchased a patent for $100,000. The useful life of the
patent was estimated to be 10 years. On 12/31/2019, an impairment test reveals
that the total expected future cash flows from the patent are equal to $70,000. The
fair value of the patent is $63,000. Record the journal entry for the impairment loss
(if any) on 12/31/2019. Also, calculate the amortization expense to be recorded on
12/31/20.

DATE ACCOUNT NAME Dr. Cr.

12/31/19 Impairment loss $17,000
Patents $17,000

11
 Problem #3
On 1/1/18 a company purchased a patent for $100,000. The useful life of the
patent was estimated to be 10 years. On 12/31/2019, an impairment test reveals
that the total expected future cash flows from the patent are equal to $70,000. The
fair value of the patent is $63,000. Record the journal entry for the impairment loss
(if any) on 12/31/2019. Also, calculate the amortization expense to be recorded on
12/31/20.

ANNUAL AMORTIZATION AFTER IMPAIRMENT TEST

NEW VALUE
= ANNUAL AMORTIZATION
TOTAL REMAINING YEARS

$63,000
= $7,875
8

12
 Problem #4

On 1/1/X1, Johnson Shoes Inc. purchases a large order of shoes

from Redson Wholeshoe Company. Terms of the sale require
Johnson to sign a non interest bearing note of $60,500 due on
12/31/X2. To calculate the present value, apply a 10% rate.
Record journal entries on 1/1/X1, 12/31/X1 and 12/31/X2.
 Problem #4

On 1/1/X1, Johnson Shoes Inc. purchases a large order of shoes

from Redson Wholeshoe Company. Terms of the sale require
Johnson to sign a non interest bearing note of $60,500 due on
12/31/X2. To calculate the present value, apply a 10% rate.
Record journal entries on 1/1/X1, 12/31/X1 and 12/31/X2.
.

PV = 60,500 / (1 + 10%)2 = 50,000

 Problem #4

On 1/1/X1, Johnson Shoes Inc. purchases a large order of shoes

from Redson Wholeshoe Company. Terms of the sale require
Johnson to sign a non interest bearing note of $60,500 due on
12/31/X2. To calculate the present value, apply a 10% rate.
Record journal entries on 1/1/X1, 12/31/X1 and 12/31/X2.
Date Account Titles Type Debit Credit
1/1/X1 Inventory A 50,000
Notes payable L 50,000
 Problem #4

On 1/1/X1, Johnson Shoes Inc. purchases a large order of shoes

from Redson Wholeshoe Company. Terms of the sale require
Johnson to sign a non interest bearing note of $60,500 due on
12/31/X2. To calculate the present value, apply a 10% rate.
Record journal entries on 1/1/X1, 12/31/X1 and 12/31/X2.
Date Account Titles Type Debit Credit

12/31/X1 Interest expense (50,000 x 10%) EXP 5,000

Notes payable L 5,000
 Problem #4

On 1/1/X1, Johnson Shoes Inc. purchases a large order of shoes

from Redson Wholeshoe Company. Terms of the sale require
Johnson to sign a non interest bearing note of $60,500 due on
12/31/X2. To calculate the present value, apply a 10% rate.
Record journal entries on 1/1/X1, 12/31/X1 and 12/31/X2.
Date Account Titles Type Debit Credit

12/31/X2 Interest expense (55,000 x 10%) EXP 5,500

Notes payable L 5,500

Notes payable L 60,500

Cash A 60,500
 Problem #5
The following data is available for the year X1:
• Net receivables (in the balance sheet): 260,000
• Allowance for doubtful accounts (in the post-closing trial balance): 40,000

In addition, you know the following about the year X2:

• Sales on account were 400,000
• Collections of receivables were 350,000
• During the year, 5,000 receivables were written off
• Net receivables (in the balance sheet) was 301,000

How much bad debt expense was reported in the X2 income statement?
 Problem #5
The following data is available for the year X1:
• Net receivables (in the balance sheet): 260,000
• Allowance for doubtful accounts (in the post-closing trial balance): 40,000

In addition, you know the following about the year X2:

• Sales on account were 400,000
• Collections of receivables were 350,000
• During the year, 5,000 receivables were written off
• Net receivables (in the balance sheet) was 301,000

How much bad debt expense was reported in the X2 income statement?
Solution: Bad debt exp. = 9,000
 Problem #5

Acc. Rec. Allowance Net receivable

Dr. Cr. Dr. Cr. change running total
BEG BALANCE 300 40 260
SALES 400 400 660
COLLECTIONS 350 -350 310
WRITE-OFF 5 5 0 310
PRE-ADJ BALANCE 345 35 310
BAD DEBT ADJ. 9 -9
END BALANCE 345 DATA 44 301

Solution: Bad debt exp. = 9,000

Two ways to calculate the bad debt expense in this case:
#1: Reconstruct what happened in the T-Accounts
 Problem #5

Acc. Rec. Allowance Net receivable

Dr. Cr. Dr. Cr. change running total
BEG BALANCE 300 40 260
SALES 400 400 660
COLLECTIONS 350 -350 310
WRITE-OFF 5 5 0 310
PRE-ADJ BALANCE 345 35 310
BAD DEBT ADJ. 9 -9
END BALANCE 345 44 301
CALCULATIONS

Solution: Bad debt exp. = 9,000

Two ways to calculate the bad debt expense in this case:
#1: Reconstruct what happened in the T-Accounts
 Problem #5

Acc. Rec. Allowance Net receivable

Dr. Cr. Dr. Cr. change running total
BEG BALANCE 300 40 260
SALES 400 400 660
COLLECTIONS 350 -350 310
WRITE-OFF 5 5 0 310
PRE-ADJ BALANCE 345 35 310
BAD DEBT ADJ. 9 -9
END BALANCE 345 44 301
ANSWER

Solution: Bad debt exp. = 9,000

Two ways to calculate the bad debt expense in this case:
#1: Reconstruct what happened in the T-Accounts
 Problem #5

Acc. Rec. Allowance Net receivable

Dr. Cr. Dr. Cr. change running total
BEG BALANCE 300 40 260
SALES 400 400 660
COLLECTIONS 350 -350 310
WRITE-OFF 5 5 0 310
PRE-ADJ BALANCE 345 35 310
BAD DEBT ADJ. 9 -9
END BALANCE 345 44 301

Solution: Bad debt exp. = 9,000

Two ways to calculate the bad debt expense in this case:
#1: Reconstruct what happened in the T-Accounts
#2: Infer the bad debt expense from the change in net receivables:
• net receivable (pre-adj): 260 +400 – 350 = 310
• net receivable (post-adj): 301
• Difference: 310 – 301 = 9
 Problem #6
A company’s accountants provide you with the following data about
inventory and purchases during the year X2:
• In total, suppliers billed the company for $1,000 for purchases made
during the year. In addition, the company paid $50 for transportation
services necessary to bring the purchased goods to the company’s
warehouse.
• During the year, the company returned damaged goods for $150 to
suppliers for a complete refund of the purchase price.
• One supplier billed the company for $100, included in the $1,000 above,
with terms “2/10, n/30”. The company paid 6 days after the purchase.
• The value of the goods present in the warehouse on 12/31/X2 is 400. In
addition, on 12/27 the company purchased goods for $40 FOB-Shipping
Point (shipped on the same date), to be delivered 15 days after the
purchase.
If the balance sheet of the year X1 reported inventory for $300, how much is
COGS in the income statement of the year X2?
 Problem #6
A company’s accountants provide you with the following data about
inventory and purchases during the year X2:
• In total, suppliers billed the company for $1,000 for purchases made
during the year. In addition, the company paid $50 for transportation
services necessary to bring the purchased goods to the company’s
warehouse.
• During the year, the company returned damaged goods for $150 to
suppliers for a complete refund of the purchase price.
• One supplier billed the company for $100, included in the $1,000 above,
with terms “2/10, n/30”. The company paid 6 days after the purchase.
• The value of the goods present in the warehouse on 12/31/X2 is 400. In
addition, on 12/27 the company purchased goods for $40 FOB-Shipping
Point (shipped on the same date), to be delivered 15 days after the
purchase.
If the balance sheet of the year X1 reported inventory for $300, how much is
COGS in the income statement of the year X2?
inventory on 1/1/X2 (i.e. beginning balance) = 300
 Problem #6
A company’s accountants provide you with the following data about
inventory and purchases during the year X2:
• In total, suppliers billed the company for $1,000 for purchases made
during the year. In addition, the company paid $50 for transportation
services necessary to bring the purchased goods to the company’s
warehouse.
• During the year, the company returned damaged goods for $150 to
suppliers for a complete refund of the purchase price.
• One supplier billed the company for $100, included in the $1,000 above,
with terms “2/10, n/30”. The company paid 6 days after the purchase.
• The value of the goods present in the warehouse on 12/31/X2 is 400. In
addition, on 12/27 the company purchased goods for $40 FOB-Shipping
Point (shipped on the same date), to be delivered 15 days after the
purchase.
If the balance sheet of the year X1 reported inventory for $300, how much is
COGS in the income statement of the year X2?
inventory on 1/1/X2 (i.e. beginning balance) = 300
Net cost of new inventory (i.e. net purchases): 1,000 + 50 – 150 – 2 = 898
 Problem #6
A company’s accountants provide you with the following data about
inventory and purchases during the year X2:
• In total, suppliers billed the company for $1,000 for purchases made
during the year. In addition, the company paid $50 for transportation
services necessary to bring the purchased goods to the company’s
warehouse.
• During the year, the company returned damaged goods for $150 to
suppliers for a complete refund of the purchase price.
• One supplier billed the company for $100, included in the $1,000 above,
with terms “2/10, n/30”. The company paid 6 days after the purchase.
• The value of the goods present in the warehouse on 12/31/X2 is 400. In
addition, on 12/27 the company purchased goods for $40 FOB-Shipping
Point (shipped on the same date), to be delivered 15 days after the
purchase.
If the balance sheet of the year X1 reported inventory for $300, how much is
COGS in the income statement of the year X2?
inventory on 1/1/X2 (i.e. beginning balance) = 300
Net cost of new inventory (i.e. net purchases): 1,000 + 50 – 150 – 2 = 898
Cost of inventory available for sale (i.e. COGAS): 300 + 898 = 1,198
 Problem #6
A company’s accountants provide you with the following data about
inventory and purchases during the year X2:
• In total, suppliers billed the company for $1,000 for purchases made
during the year. In addition, the company paid $50 for transportation
services necessary to bring the purchased goods to the company’s
warehouse.
• During the year, the company returned damaged goods for $150 to
suppliers for a complete refund of the purchase price.
• One supplier billed the company for $100, included in the $1,000 above,
with terms “2/10, n/30”. The company paid 6 days after the purchase.
• The value of the goods present in the warehouse on 12/31/X2 is 400. In
addition, on 12/27 the company purchased goods for $40 FOB-Shipping
Point (shipped on the same date), to be delivered 15 days after the
purchase.
If the balance sheet of the year X1 reported inventory for $300, how much is
COGS in the income statement of the year X2?
inventory on 1/1/X2 (i.e. beginning balance) = 300
Net cost of new inventory (i.e. net purchases): 1,000 + 50 – 150 – 2 = 898
Cost of inventory available for sale (i.e. COGAS): 300 + 898 = 1,198
inventory on 12/31/X2: 400 + 40 = 440
 Problem #6
A company’s accountants provide you with the following data about
inventory and purchases during the year X2:
• In total, suppliers billed the company for $1,000 for purchases made
during the year. In addition, the company paid $50 for transportation
services necessary to bring the purchased goods to the company’s
warehouse.
• During the year, the company returned damaged goods for $150 to
suppliers for a complete refund of the purchase price.
• One supplier billed the company for $100, included in the $1,000 above,
with terms “2/10, n/30”. The company paid 6 days after the purchase.
• The value of the goods present in the warehouse on 12/31/X2 is 400. In
addition, on 12/27 the company purchased goods for $40 FOB-Shipping
Point (shipped on the same date), to be delivered 15 days after the
purchase.
If the balance sheet of the year X1 reported inventory for $300, how much is
COGS in the income statement of the year X2?
inventory on 1/1/X2 (i.e. beginning balance) = 300
Net cost of new inventory (i.e. net purchases): 1,000 + 50 – 150 – 2 = 898
Cost of inventory available for sale (i.e. COGAS): 300 + 898 = 1,198
inventory on 12/31/X2: 400 + 40 = 440
Cost of inventory sold (i.e. COGS): 1,198 – 440 = 758