Paid $7,000 of accrued taxes at the time the plant site was acquired.

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Exercise 9-1

The following expenditures relating to plant assets were made by Watkens Company during the first 2 months of 2014. (a) Indicate the account title to which each expenditure should be debited.
1. Paid $7,000 of accrued taxes at the time the plant site was acquired.

2. Paid $200 insurance to cover a possible accident loss on new factory machinery while the machinery was in transit.

3. Paid $850 sales taxes on a new delivery truck.

4. Paid $21,000 for parking lots and driveways on the new plant site.

5. Paid $250 to have the company name and slogan painted on the new delivery truck.

6. Paid $8,000 for installation of new factory machinery.

7. Paid $900 for a 1-year accident insurance policy on the new delivery truck.

8. Paid $75 motor vehicle license fee on the new truck.
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Exercise 9-4

Melissa Adduci has prepared the following list of statements about depreciation. Identify each statement as true or false.
1. Depreciation is a process of asset valuation, not cost allocation.

2. Depreciation provides for the proper matching of expenses with revenues.

3. The book value of a plant asset should approximate its fair value.

4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.

5. Depreciation does not apply to a building because its usefulness and revenue-producing ability generally remain intact over time.

6. The revenue-producing ability of a depreciable asset will decline due to wear and tear and to obsolescence.

7. Recognizing depreciation on an asset results in an accumulation of cash for replacement of the asset.

8. The balance in accumulated depreciation represents the total cost that has been charged to expense since placing the asset in service.

9. Depreciation expense and accumulated depreciation are reported on the income statement.

10. Four factors affect the computation of depreciation: cost, useful life, salvage value, and residual value.
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Exercise 9-11 (Essay)

Shonrock International is considering a significant expansion to its product line. The sales force is excited about the opportunities that the new products will bring. The new products are a significant step up in quality above the company’s current offerings, but offer a complementary fit to its existing product line. Richard Farley, senior production department manager, is very excited about the high-tech new equipment that will have to be acquired to produce the new products. Donna Beson, the company’s CFO, has provided the following projections based on results with and without the new products.
Without New Products With New Products
Sales $10,000,000 $16,000,000
Net income $500,000 $960,000
Average total assets $5,000,000 $12,000,000
(b) Compute the company’s return on assets, profit margin, and asset turnover, both with and without the new product line and discuss the implications it would have for the company’s decision.

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Exercise 9-11

Shonrock International is considering a significant expansion to its product line. The sales force is excited about the opportunities that the new products will bring. The new products are a significant step up in quality above the company’s current offerings, but offer a complementary fit to its existing product line. Richard Farley, senior production department manager, is very excited about the high-tech new equipment that will have to be acquired to produce the new products. Donna Beson, the company’s CFO, has provided the following projections based on results with and without the new products.
Without New Products With New Products
Sales revenue $11,855,400 $16,352,800
Net income $489,040 $928,200
Average total assets $5,951,000 $13,781,000
(a) Compute the company’s return on assets, profit margin, and asset turnover, both with and without the new product line. (Round answers to 0 decimal place, e.g. 2% and asset turnover to 1 decimal places e.g. 6.2)
Without new products With new products
The company’s return on assets % %
The company’s profit margin % %
The company’s asset turnover
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