Case 7-1

STERN CORPORATION
Jovan Capco
Ethel Sombrero
Maricor Gonzalez
 Synthesis
The controller of Stern Corporation is tasked
to prepare the yearly financial reports of the
company. Referring to the balance sheet as
of December 31, 2001, the controller has to
review and analyze the property, plant,
equipment and accumulated depreciation
transactions that took place in 2002 and
make the proper entry for these accounts
on the company’s balance sheet.
 Point of View

 The case takes the point of view of the

controller of Stern Corp who was assigned
to prepare the financial reports of the
company.
 Problem Statement

 How should the controller analyze and

record the transactions on the non-
monetary assets and other accounts of
the company in 2002?
 Objectives
 To discuss the characteristics and
accounting principles involved in non-
monetary assets.
a. How they are acquired?
b. How their acquisition cost is converted to
expenses?
c. How they are disposed when they no
longer provide service?
 Objectives
 To analyze the effect of depreciation on
non-monetary assets and prepare
journal entries for these transactions
 To give the correct totals for property,
plant and equipment, and the amount
of accumulated depreciation as of
December 31, 2002.
 Areas of Consideration

 Group’s assumptions
1. Based on the case, it is assumed that all
these transactions are limited to the
accounting period as of Dec. 31, 2002
2. It is also assumed that there were no
other transactions other than those
provided for in the case.
 Areas of Consideration

 Stern Corporation’s Balance Sheet as of

December 31, 2001
 Definition of Terms
Amortization: a process of systematically allocating the
cost of an intangible asset to expense over its estimated
useful life.

Accumulated depreciation: the total depreciation of an

asset since its acquisition; a contra asset account
deducted from the original cost of an asset on the
balance sheet.

Book value: the original cost of a plant asset less its

accumulated depreciation.
 Definition of Terms
Depreciation: the process of allocating the cost of a
plant asset to expense in the periods benefiting from its
use.

Intangible assets: rights, privileges and competitive

advantages to the owner of long-term assets that have
no physical substance and are used in operations;
examples include patents, copyrights, leaseholds,
leasehold improvements, goodwill and trademarks.

Patent: an exclusive right granted to its owner to

manufacture and sell a machine or device, or to use a
process, for 17 years.
 Definition of Terms

Plant assets: tangible assets that are used in the

operations of a company and have a useful life of more
than one accounting period.

Useful life: the length of time a plant asset will be

productively used in the operations of a business.
 Task #1:

Analyze the effect of each of these transactions

on the property, plant, and equipment accounts,
accumulated depreciation, and any other
accounts that may be involved; prepare journal
entries for these transactions.
 Transactions Entered Into
By Stern Corporation
Given that depreciation was calculated at the following
rates:
Buildings 2%
Factory machinery 10%
Furniture and fixtures 10%
Automotive equipment 20%
Office machines 10%
* Included in the factory machinery cost of $3,425,585
was a machine costing $85,000 that had had been
fully depreciated on Dec. 31, 2001 and that was still in
use.
 Transactions Entered Into
By Stern Corporation
1. On January 2, 2002, one of the factory machines was sold for its
book value, $ 3, 866. This machine was recorded on the books
at $ 31, 233, with accumulated depreciation of $ 27, 367.

Journal Entry

January 2, 2002

Cash 3, 866
Accu. depreciation 27, 367

Factory machinery 31, 233

 Transactions Entered Into
By Stern Corporation
2. Tools were carried on the books at cost, and at the end of each yr a
physical inventory was taken to determine what tools still remained.
The account was written down to the extent of the decrease in tools
as ascertained by the year-end inventory. At the end of 2002, it was
determined that there had been a decrease in the tools inventory
amounting to $7,850.

Journal Entry

December 31, 2002

Tools expense 7, 850

Tools Inventory 7, 850
 Transactions Entered Into
By Stern Corporation
3. On March 1, 2002, the company sold for $2,336 cash an automobile that
was recorded on the books at a cost of $8,354 and had an accumulated
depreciation of $5,180, giving a net book value of $3,174 as of January
1, 2002. In this and other cases of the sale of long lived assets during the
year, the accumulated depreciation and depreciation items were both
increased by an amount that reflected the depreciation chargeable for the
months in 2002 in which the asset was held in sale, at the rates listed
above.

Annual depreciation = Cost X Depreciation rate

*$1,671 = $8,354 X 20% * = rounded off numbers

Monthly depreciation = Annual depreciation / 12months

*$139 = $1671 / 12 * = rounded off numbers

Accu. depreciation (Jan to Feb) = 2 X monthly depreciation

$278 = 2 X 139
 Computations
Total Accumulated depreciation (as of Feb 28, 2002) =
Accu. depreciation (2001) + Accu. depreciation (Jan-Feb, 2002)

$5,458 = $5,180 + 278

Loss on Sale of Automobile Equipment =

selling price - Net book value (as of Feb 28, 2002)

- $560 = $2,336 - $2,896

( $3,174 - $278 )
 Transactions Entered Into
By Stern Corporation
Journal Entry

March 1, 2002

Depreciation expense 278

Accumulated depreciation 278

Cash 2, 336
Accumulated Depreciation 5, 458
Loss on Sale of Automotive
Equipment 560
Automotive equipment 8, 354
 Transactions Entered Into By Stern
Corporation
4. The patent listed on the balance sheet had been purchased by
the Stern Corporation on December 31, 1991, for $168, 750.
This patent had been granted on December 31, 1989. The
cost of the patent was to be written off as an expense over
the remainder of its legal life. (The legal life of a patent is 17
years from the date granted.)

Journal Entry Computation:

December 31, 2002 Patent Amor. Exp. = Cost of Patent /

(17yrs – 2yrs)
Patent Amort. Exp 11, 250
$11,250 = $168,750 / (17 - 2)
Patent 11, 250
 Transactions Entered Into By Stern
Corporation

5. On July 1, 2002, a typewriter had cost $1,027 and had been

fully depreciated on December 31, 2001, was sold for $75.

Journal Entry

July 1, 2002

Cash 75
Accumulated Dep. 1,027

Gain on sale of office machine 75

Office machines 1,027
 Transactions Entered Into By Stern
Corporation
6. On October 1, 2002, the company sold a desk for $80. This piece
of furniture was recorded on the books at a cost of $490 with an
accumulated depreciation of $395 as of January 1, 2002.

Computation:
Annual depreciation = Cost X Depreciation rate
$49 = $490 X 10%

Monthly depreciation = Annual depreciation / 12months

$4.083 = $49 / 12

Accumulated depreciatoin (Jan to Sept-2002) = 9 X monthly dep.

*$37 = 9 X 4.083
 Computations
Total Accumulated depreciation (as of Sept 30, 2002) =
Accumulated depreciation (2001) + Accumulated
depreciation (Jan to Feb, 2002)

$432 = $395 + $37

Gain on Sale of Furniture = selling price – net book

value (As of Sept 30, 2002)

$22 = $80 - $58

($490 - $432)
* = rounded off numbers
Transactions Entered Into By Stern
Corporation

Journal Entry

October 1, 2002

Depreciation expense 37
Accumulated depreciation 37

Cash 80
Accumulated depreciation 432
Gain on sale of Furniture & Fixture 22
Furniture and Fixtures 490
 Task 2:

Give the correct totals for the property, plant,

and equipment, and the amount of accumulated
depreciation as of December 31, 2002, after the
transactions affecting them had been recorded.
 Factory Machinery
Factory Machinery
(Accumulated Depreciation Totals)

Factory Machinery Accumulated

Depreciation

3, 425, 585 31, 233 27, 367 1, 642, 358

3, 394, 352 330, 935
1, 945, 926

3,394,352 – 85,000* = 3,309,352

Depreciation Exp 2002: 3,309,352 x 10%^ = 330,935 (rounded off)

*Given - cost of machine that had been fully depreciated on December

31, 2001 and that was still in use.
^Factory Machinery depreciation rate
 Factory Machinery
Factory Machinery
(Book Value)

Factory machinery $3,394,352

Less: Accum. Depreciation 1,945,926
Book Value, Dec. 31, 2002 $1,448,426
Tools

Tools Totals

Tools

61,294 7,850
$53,444
Automotive Equipment
Automotive Equipment
(Accumulated Depreciation Totals)

Automotive Equipment Accum. Dep

58, 298 8, 354 5,458 37, 156

$49,944 278
9, 989
$41, 965

Dep Exp 2002: 49,944 x 20%* = 9,989

*Automotive equipment depreciation rate

Automotive Equipment
(Book Value)

Automotive Equipment $ 49, 944

Less: Accum. Depreciation 41, 965
Book Value, Dec. 31, 2002 $7, 979
Patent Totals

Patent Totals

Patent
56,250 11,250
$45,000
Office Machines
Office Machines
(Accumulated Depreciation Totals)

Office Machines Accum. Depreciation

42, 534 1,027 1,027 28, 005

$41, 507 4, 151
$31, 129

Dep Exp 2002: 41,507 x 10%*= 4,151

*Office machine depreciation rate

Office Machines
(Book Value)

Office machine $41, 507

Less: Accum. Depreciation 31, 129
Book Value, Dec. 31, 2002 $10, 378
Furniture and Fixtures
Furniture and Fixtures
(Accumulated Depreciation Totals)

Furniture & Fixtures Accum. Depreciation

56,484 490 432 40, 400

$55,994 37
5, 599
$45, 604

Dep Exp 2002: 55,994 x 10%* = 5,599

*Furniture and Fixtures depreciation rate

Furniture and Fixtures

(Book Value)

Furniture & Fixture $55, 994

Less: Accum. Depreciation 45, 604
Book Value, Dec. 31, 2002 $10, 390
 Building
Building
(Accumulated Depreciation Totals)

Building Accum. Depreciation

2,405,259 663, 379

$2,405,259 48, 105
$711, 484

Dep Exp 2002: 2,405,259 x 2%* = 48,105

*Building depreciation rate

Building
Book Value

Building $ 2, 405, 259

Less: Accum. depreciation 711,484
Book Value, Dec. 31, 2002 $1, 693, 775
Non-monetary Assets (Depreciation & Amortization)
Summary

Accumulated Depreciation-Building 711, 484

Accumulated Depreciation-Factory Machinery 1, 945, 926
Accumulated Depreciation-Furniture & Fixtures 45,604
Accumulated Depreciation-Automotive equipment 41,965
Accumulated Depreciation- Office machine 31,129
-------------------
TOTAL DEPRECIATION $ 2,776,108
Non-monetary Assets (Depreciation & Amortization)
Summary

Land 186,563
Building $ 2, 405, 259
Less: Accumulated Depreciation 711, 484 1, 693, 775
Factory machinery $ 3, 394, 352
Less: Accumulated Depreciation 1, 945, 926 1, 448, 426
Furniture & Fixtures $ 55,994
Less: Accumulated Depreciation 45,604 10,390
Automotive equipment $ 49,944
Less: Accumulated Depreciation 41,965 7,979
Office machine $ 41,507
Less: Accumulated Depreciation 31,129 10,378

TOTAL PROPERTY, PLANT

AND EQUIPMENT, DECEMBER 31, 2002 $ 3,357,511

Tools 53,444
Patent 45,000
 Conclusions & Learning Points

 There are 2 types of non-monetary assets; they are tangible and intangible
assets.

a. Tangible assets has physical substance, such as buildings or machines.

b. Intangible assets are patent rights or copyrights and has no physical
substance.

 A. Tangible assets such as property, plant and equipment are capitalized at

their acquisition cost which includes cost involved in making them ready to
provide service. A portion of this cost is charged as depreciation expense
to each of the accounting periods in which the asset provides service. The
accounting process of converting the original cost of plant and equipment
assets to expense is known as depreciation.

 Land on the other hand is not amortized because its useful life is assumed
to be indefinite.
 Conclusions & Learning Points

 B. Intangible long-lived assets fall into three categories: intangible assets with
limited useful lives, intangible assets with indefinite useful lives and goodwill.

 Patents are an example of intangible assets with limited useful life and are usually
converted to expenses over a number of accounting periods. The accounting
process of allocating the costs of these assets to the periods in which they provide
benefits is called amortization and is credited directly to the asset account rather
than being accumulated in a separate contra asset account.

 Intangible long-lived assets with indefinite useful lives such as broadcasting license
are not amortized but are subjected to periodic impairment tests. An intangible
asset’s useful life is considered to be indefinite if there are no legal, regulatory,
contractual, competitive, economic or other factors that limit its useful life.

 Goodwill arises when a company buys another company and pays more than the
acquired fair value of its net assets. Additional payment is given because the
acquired company has strong management team, a favorable reputation or
superior production methods. Goodwill cannot be amortized under any
circumstances.
 Case 7-1
STERN CORPORATION
Jovan Capco
Ethel Sombrero
Maricor Gonzalez