Chapter 8: Long-Lived Assets. Post-Class Homework1

1. Holey Foods has a piece of equipment that it bought on January 1, 2011 for $48,000, which it sells to an equipment supplier on 12/31/2013 to settle $16,000 of debt that Holey Foods had with the supplier. Holey Foods used the double declining balance method and assumed it would use the equipment for four years. The residual value is $10,000. Assume that, apart from the sale, all other entries have been properly recorded and write the journal entry related to the sale of this piece of equipment on
December 31, 2013. 4 points.
Journal Entry

Debit

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Credit

Consider Net Capital Expenditures as the total amount of cash spent on obtaining capitalizable, non-current assets minus the total cash received from the sale or disposal of these assets.
During 2013 Holey Foods spent $14,000 on supplies; spent $20,000 on brand new equipment, which depreciated $4,000 during the year; sold the item noted above in Question 1; incurred $3,500 of expenses related to repairing other equipment, $800 of which it did not yet pay; and spent $1,000 improving the useful life and efficiency of its building.
What is the amount of Net Capital Expenditures for Holey Foods in 2013? 2 points.

2.  If you are curious: we shared this problem as an example of the work required here for our 311 class (other schools are generally interested in what McCombs’ Accounting Program does). Here is how it was described: In the problem for Chapter 8 that follows, students are required to work with Asset Sales, Gains and Losses, Impairments and Depreciation methods. This requires them to include the prior coverage of Inventory and Gains and Losses with some new material from Chapter 8. This problem also sets the students up to begin understanding the implications of how depreciation methods affect Gains and Losses and how impairments change the financial statements and can have various implications. This document is created by and for use in the Spring 2014 311 classes of Charrier and Badolato only.

3. Now, assume it is the end of 2014 and at this exact date, Holey Foods learns that no one, literally no one, will ever want to buy any of its non-organic, non-local food. If Holey Foods has $4 Million of inventory on its balance sheet, what transaction should Holey Foods record? If no entry is needed, clearly write “No Entry Needed.” 2 points.

4.

Debit

Credit

In this exact same scenario, assume Holey Foods has equipment used exclusively for making its non-organic, non-local food. The equipment was bought for $7 Million on Jan 1, 2013 and uses Straight-Line depreciation. The equipment has an initial residual value of $2 Million and an expected useful life of five years. Another company, Groupoff, is willing and able to pay Holey Foods $1 Million for the
equipment and there are no other potential buyers. Prior to any sale, what transaction should Holey Foods record? If no entry is needed, clearly write “No Entry Needed.” 2 points.

Journal Entry

Debit

Credit

Now, assume Holey Foods actually sells the equipment to Groupoff for $ 1 Million  on January 1, 2015 and all entries were appropriately recorded in 2014. Focusing only on the actual sale of the equipment to Groupoff, answer the following:

Income before Taxes: CIRCLE: INCREASES / DECREASES / NO EFFECT
by Amount __________ 1 point.
Total Assets: CIRCLE: INCREASE / DECREASE / NO EFFECT
by Amount __________ 1 point.