150,000 Fixed Assets and Intangible Assets

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Chapter 9 Fixed Assets and Intangible Assets

CP 9-3 Effect of depreciation on net income Tuttle Construction Co. specializes in building replicas of historic houses. Tim Newman, president of Tuttle Construction, is considering the purchase of various items of equip- ment on July 1, 2012, for 400,000. The equipment would have a useful life of five years and no residual value. In the past, all equipment has been leased. For tax purposes, Tim is considering depreciating the equipment by the straight-line method. He discussed the matter with his CPA and learned that, although the straight-line method could be elected, it was to his advantage to use the Modified Accelerated Cost Recovery System MACRS for tax purposes. He asked for your advice as to which method to use for tax purposes. 1. Compute depreciation for each of the years 2012, 2013, 2014, 2015, 2016, and 2017 of useful life by a the straight-line method and b MACRS. In using the straight-line method, one-half year’s depreciation should be computed for 2012 and 2017. Use the MACRS rates presented on page 417. 2. Assuming that income before depreciation and income tax is estimated to be 750,000 uniformly per year and that the income tax rate is 40, compute the net income for each of the years 2012, 2013, 2014, 2015, 2016, and 2017 if a the straight-line method is used and b MACRS is used. 3. What factors would you present for Tim’s consideration in the selection of a depreciation method? CP 9-4 Applying for patents, copyrights, and trademarks group Project Go to the Internet and review the procedures for applying for a patent, a copyright, and a trademark. You may find information available on Wikipedia Wikipedia.org useful for this purpose. Prepare a brief written summary of these procedures. CP 9-5 Fixed asset turnover: three industries The following table shows the revenues and average net fixed assets for a recent fiscal year for three different companies from three different industries: retailing, manufactur- ing, and communications. Revenues in millions Average net Fixed Assets in millions Walmart 421,849 105,093 Occidental Petroleum Corporation 19,045 33,837 Comcast Corporation 37,937 23,685 a. For each company, determine the fixed asset turnover ratio. Round to two decimal places. b. Explain Walmart’s ratio relative to the other two companies. Internet Project Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook andor eChapters. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. C H A P T E R 10 B uying goods on credit is probably as old as business itself. In fact, the ancient Babylonians were lending money to support trade as early as 1300 B . C . The use of credit makes transactions more convenient and improves buying power. For individuals, the most common form of short-term credit is a credit card. Credit cards allow individuals to purchase items before they are paid for, while removing the need for individuals to carry large amounts of cash. They also provide documentation of purchases through a monthly credit card statement. Short-term credit is also used by busi- nesses to make purchasing items for manufac- ture or resale more convenient, and gives the business control over the payment for goods and services. For example, Panera Bread , a chain of bakery-cafés located throughout the United States, uses short-term trade credit, or accounts payable, to purchase ingredients for making bread products in its bakeries. Short-term trade credit gives Panera control over cash payments by separating the purchase function from the payment function. Thus, the employee responsible for purchasing the bakery ingredi- ents is separated from the employee responsible for paying for the purchase. This separation of duties can help prevent unauthorized purchases or payments. In addition to accounts payable, a busi- ness like Panera Bread can also have cur- rent liabilities related to payroll, payroll taxes, employee benefits, short-term notes, un- earned revenue, and contingencies. This chap- ter discusses each of these types of current liabilities. Panera Bread Current Liabilities and Payroll AP PHO T OT OM G ANNAM Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook andor eChapters. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.