Question

ABC Company had the following inventory data in year 2005:

January 1 (beginning inventory)	15 units @ $20 per unit
January 7 purchase	30 units @ $23 per unit
January 12 sale	22 units
January 19 purchase	50 units @ $25 per unit
January 29 sale	47 units

From February ABC Company started selling digital cameras. Per-unit cost information pertaining to ABC's inventory of digital cameras as of April was as follows:

Original cost in February	$120
Estimated selling price	$125
Estimated selling costs	$12
Net realizable value (NRV)	$103
Replacement cost	$97
Normal profit margin	$12

In 5 years, ABC Company increases its business to several branches and enters into several business acquisitions. In 2010, ABC Company purchases chemical processing machinery for $45,000. The equipment has an estimated useful life of three years and an estimated salvage value of $15,000. The company expects to produce 10,000 units of output using this machinery, with 5,000 units in each of the first year, 3,000 units in the second years, and 2,000 units in the third year. The company's effective tax rate is 30%. Revenues are $100,000 per year, and expenses other than depreciation are $40,000 in each year.

At the beginning of 2010, ABC Company entered into a business acquisition. As a result of the acquisition, ABC reported the following intangible assets:

Patent	$400,000
Franchise agreement	$320,000
Copyright	$120,000
Goodwill	$550,000

The patent expires in 10 years. The franchise agreement expires in 7 years but can be renewed indefinitely at a minimal cost. The copyright is expected to be sold at the end of 5 years for $20,000.

On December 31, 2010, ABC Company issued a 5-year, 8% annual coupon bond with a face value of $10,000.

a)Prepare the income statement (year 2010) for the first year of depreciation (chemical processing machinery) using 3 depreciation methods: (a) the straight-line method, (b) the double declining balance method, and (c) the units of production method.

b)Use the straight-line amortization method to calculate the total carrying value of ABC's intangible assets at the end of the year 2010. Please explain your calculations.

c)Calculate the year-end book value of the bond issued in 2010 and the interest expense for each year of bond’s life, assuming that the bond was issued at a market rate of interest of 8%. Please interpret your answer.

Answer 1

33 1. Straight-line 35 36 37 Cost Price of Machinery Less Salvage Value Depreciable Value (A Number of Years of Life (B) Depreciation Amount (A/B) 39 10000 Year Beginning Value Depreciation Expense Accumulated Depreciation Book Value (A -B) 41 43 2010 45,000 10,000 10,000 35,000 45 2. Double-declining-balance 46 47 Rate 100 % *2 Rate 66.67% 51 52 53 54 Book Value (A-C) Rate Depreciation Expense (A"B ) =(C) Year Beginning value Accumulated Depreciation 2010 45,000 66 67% 30,000 30,000 15,000 56