Comprehensive Problem 3 Part 3: Spoiled Baby Corp Sel 464416

Comprehensive Problem 3 Part 3 50spoiled Baby Corp Sells Baby Bugg

Comprehensive Problem 3: Part 3 50% Spoiled Baby Corp sells baby buggies and has begun an equipment replacement project. You are required to determine the Book Value of each of its fixed assets and make decisions regarding the purchases, trades, and disposition of various assets. Indicate your recommendation and justify your position for each of the following events.

1. SPC purchased a tube extruder on April 3, 2007 for $27,000. It has a useful life of 10 years and a residual value of $4,000. SPC used double declining balance depreciation for this asset. On February 19, 2012 SPC has an offer to sell this unit for $8,000.

2. SPC purchased a winding machine on July 28, 2012 for $21,000. It has a useful life of 6 years or 12,000 hours. It has a residual value of $3,000. SPC is unsure whether to use straight line depreciation or units of production. It anticipates using the equipment approximately 3,000 hours each year.

3. SPC purchased a funneling machine on February 9, 2009 for $72,000. It has a useful life of 5 years and a residual value of $12,000. SPC has used straight line depreciation for this equipment. SPC has determined that this equipment no longer meets its needs and has decided to exchange this unit for a new model. The new model has a MSRP of $100,000. On December 28, 2012, SPC will exchange its equipment for the new model and pay $77,000.

4. SPC has a fully depreciated piece of equipment currently on its books. The equipment's original cost is $10,000. The company is no longer using it and has been offered $300 for its parts. What is the journal entry that would record this transaction?

Paper For Above instruction

Introduction

Financial decision-making regarding fixed assets involves evaluating the book value, appropriate depreciation methods, and potential disposal or replacement strategies. The case of Spoiled Baby Corp (SPC) offers an insightful perspective into asset management, highlighting the importance of accurate valuation, method selection, and strategic disposal to enhance financial performance. Analyzing each asset's scenario provides practical insights into these core principles of accounting and financial management.

Asset 1: Tube Extruder

The first asset, a tube extruder purchased on April 3, 2007, for $27,000, exemplifies the complexities involved in depreciation calculations and asset valuation. With a useful life of ten years and a residual value of $4,000, SPC initially used double declining balance (DDB) depreciation for this equipment. The DDB method accelerates depreciation in the early years, recognizing higher expenses immediately after purchase, aligning with the asset's higher utility during initial years.

Depreciation Calculation: Using DDB, the depreciation rate is 20% per year (100%/10 years times 2). The asset's book value progressively declines, and by February 19, 2012, when SPC received an offer to sell for $8,000, the accumulated depreciation and book value can be calculated.

As of February 19, 2012: The depreciation for each year from 2007 to 2012 is summed, considering that depreciation is proportional to the time used in 2012, since the purchase was in April 2007. The accumulated depreciation approximates to roughly $16,000, making the book value approximately $11,000 at that date. Given the offer price ($8,000), the decision hinges on whether to accept this bid or continue holding the asset, considering its residual value and remaining economic life.

Recommendation: If the market value ($8,000) is below the book value ($~11,000), and considering the offer is close to residual value, SPC might consider accepting the offer to avoid potential further depreciation losses and asset obsolescence.

Asset 2: Winding Machine

Purchased on July 28, 2012, for $21,000 with a 6-year or 12,000-hour lifespan, and a residual value of $3,000, the winding machine presents two depreciation options: straight-line or units of production. The choice impacts expense recognition and asset valuation, especially with usage uncertainty.

If SPC anticipates approximately 3,000 hours annually, the units of production method would allocate depreciation based on actual usage. Assuming the straight-line method, annual depreciation would be: ($21,000 - $3,000) / 6 = $3,000.

However, if actual hours significantly vary from forecasted, units of production could provide more accurate expense matching. For example, if in a given year the machine is used for 3,000 hours, depreciation expense would be proportional to that, i.e., ($21,000 - $3,000) / 12,000 hours * actual hours used.

Recommendation: Given the predictability of usage and simplicity, SPC might prefer straight-line depreciation unless usage data suggests substantial variation, in which case units of production could provide better insight into actual wear and tear.

Asset 3: Funneling Machine

Purchased on February 9, 2009, for $72,000, with a 5-year life and residual value of $12,000, this equipment was depreciated straight-line. By December 28, 2012, the asset has been used for nearly four years. As of that date, the remaining book value should reflect accumulated depreciation, which is: ($72,000 - $12,000) / 5 years = $12,000 per year.

Accumulated depreciation over 3.9 years is approximately $46,800, accounting for the partial year. The book value at the December 28, 2012, exchange date is roughly $25,200. The exchange involves trading this asset for a new model with a purchase price of $100,000, paying $77,000, and considering any book value differences.

Recommendation: Trading at a book value of ~$25,200 against a cash payment of $77,000 involves recognizing a loss or gain based on the fair value, which should be estimated based on market conditions. This strategic decision should consider whether the new equipment's expected benefits outweigh the book loss.

Asset 4: Fully Depreciated Equipment

The last asset, originally costing $10,000 and now fully depreciated, is no longer used, and SPC has received an offer of $300 for its parts. The journal entry must remove the asset and record the cash received.

Journal Entry:

Debit: Cash $300


Debit: Accumulated Depreciation $10,000


Credit: Equipment $10,000


Credit: Gain on Disposal $300

Alternatively, since the equipment is fully depreciated, the gain is minimal and can be recorded as a loss if the sale proceeds are less than net book value (zero). The entry simplifies to debiting cash and accumulated depreciation, crediting equipment, and recognizing any residual value as gain or loss based on actual proceeds.

Conclusion

Efficient management of fixed assets requires a balance between depreciation policies, market conditions, and operational needs. SPC's decisions regarding selling, trading, or disposing of equipment should align with accurate book values, useful life estimates, and strategic objectives to optimize financial outcomes and support long-term growth.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
  • Gibson, C. H. (2017). Financial Reporting & Analysis. Cengage Learning.
  • Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
  • Ross, S. A., Westerfield, R., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis. McGraw-Hill Education.
  • Simons, R. (2005). Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal. Harvard Business School Press.
  • Horngren, C. T., Sundem, G. L., & Elliott, J. (2014). Introduction to Financial Accounting. Pearson.
  • Raiborn, C., & Kinney, W. (2014). Cost Accounting. South-Western College Pub.
  • Kinney, W., & Raiborn, C. (2017). Cost Accounting: Foundations and Evolutions. Cengage Learning.
  • Hilton, R. W., & Platt, D. (2013). Managerial Accounting: Creating Value in a Dynamic Business Environment. McGraw-Hill Education.

Related Assignments