Balance at Retirements Balance at Beginning Additions and End of ($ in thousands) of Year 3 at Cost Transfers Year 3

Transcription

1 CHAPTER 10 Long-Lived Assets and Depreciation 10-1 ShopKo Stores, Inc. (ShopKo) is a leading regional discount store chain operating 109 discount retail stores in 13 states. ShopKo stores carry a wide selection of branded and private label nondurable hardline goods such as housewares, music videos, health and beauty aids, toys, and sporting goods and softline goods such as home textiles, apparel (men s, women s, and children s), shoes, jewelry, cosmetics, and accessories. In addition, 106 of the company s stores include pharmacy departments and 99 include optical departments. Information taken from a recent copy of ShopKo s annual report to shareholders and the firm s 10-K reports that were filed with the SEC appears next. C10 7 ShopKo (CW): Long-lived assets reporting Property and Equipment Property and equipment are carried at cost. The cost of buildings and equipment is depreciated over the estimated useful lives of the assets. Buildings and certain equipment (principally computer and retail store equipment) are depreciated using the straight-line method. Remaining properties are depreciated on an accelerated basis. Useful lives generally assigned are: buildings 25 to 40 years; retail store equipment 8 years; warehouse, transportation, and other equipment 3 to 10 years. Costs of leasehold improvements are amortized over the period of the lease or the estimated useful life of the asset, whichever is shorter, using the straight-line method. Property under capital leases is amortized over the related lease term using the straight-line method. Interest on property under construction of $1.1, $1.1, and $1.0 million was capitalized in fiscal years 3, 2, and 1, respectively. The components of property and equipment are as follows: February 27 February 29 ($ in thousands) Year 3 Year 2 Property and equipment at cost: Land $102,394 $ 89,196 Buildings 352, ,382 Property under construction 8,664 18,648 Leasehold improvements 40,914 40,903 Equipment 221, ,907 Property under capital leases 14,216 14, , ,011 Less accumulated depreciation and amortization: Property and equipment (239,344) (212,242) Property under capital leases (7,656) (7,546) Net property and equipment $493,068 $445,223 Shopko Stores, Inc. and Subsidiaries Property and Equipment Balance at Retirements Balance at Beginning Additions and End of ($ in thousands) of Year 3 at Cost Transfers Year 3 Land $ 89,196 $13,328 $ 130 $102,394 Buildings: Owned 309,382 35,687 (7,357) 352,426 Leased 14, ,216 Property under construction 18,648 9,984 8,664 Leasehold improvements 40,903 1,603 1,592 40,914 Equipment 191,907 40,442 10, ,454 $665,011 $91,060 $16,003 $740,068

2 10-2 CHAPTER 10 Long-Lived Assets and Depreciation Shopko Stores, Inc. and Subsidiaries Reserve for Depreciation and Amortization Property and Equipment Balance at Retirements Balance at Beginning Additions and End of ($ in thousands) of Year 3 at Cost Transfers Year 3 Buildings: Owned $ 80,286 $15,663 $ 2,509 $ 93,440 Leased 7, ,656 Leasehold improvements 11,654 2,625 1,592 12,687 Equipment 120,302 23,889 10, ,217 $219,788 $43,046 $15,834 $247,000 Shopko Stores, Inc. and Subsidiaries Consolidated Statement of Cash Flows Fiscal Years Ended February 27 February 29 February 23 Year 3 Year 2 Year 1 ($ in thousands) (52 weeks) (53 weeks) (52 weeks) Cash Flows from Operating Activities Net earnings $ 50,059 $ 49,589 $ 45,080 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 43,275 40,372 39,134 Provision for losses on receivables Gain on the sale of property and equipment (240) (120) (783) Deferred income taxes (68) (3,899) 829 Change in assets and liabilities: Receivables (3,926) (430) (2,461) Merchandise inventories (30,122) 2,016 (19,600) Other current assets (1,213) (1,031) (1,894) Other assets (558) Accounts payable 9,258 (13,859) 13,530 Accrued liabilities 8,649 3,675 5,581 Net cash provided by operating activities 75,257 76,452 79,631 Cash Flows from Investing Activities Payments for property and equipment $(91,060) $(53,391) $(59,100) Proceeds from the sale of property and equipment 408 1,327 1,341 Net cash (used in) investing activities (90,652) (52,064) (57,759) Cash Flows from Financing Activities Payments to related party (181,167) (22,867) (19,417) Net proceeds from long-term debt 197,112 Proceeds from short-term debt 15,025 Net proceeds from sale of common stock 240,830 Dividends paid (14,080) (240,830) Reduction in capital lease obligations (784) (1,446) (2,263) Net cash provided by (used in) financing activities 16,106 (24,313) (21,680) Net increase in cash Cash at beginning of year 2,081 2,006 1,814 Cash at end of year $ 2,792 $ 2,081 $ 2,006 (continued on next page)

3 CHAPTER 10 Long-Lived Assets and Depreciation 10-3 Shopko Stores, Inc. and Subsidiaries (continued ) Consolidated Statement of Cash Flows Fiscal Years Ended February 27 February 29 February 23 Year 3 Year 2 Year 1 ($ in thousands) (52 weeks) (53 weeks) (52 weeks) Supplemental Cash Flow Information Noncash investing and financial activities Capital lease obligations incurred $ 0 $ 1,871 $ 333 Cash paid during the period for: Interest 15,642 18,339 22,331 Income taxes 31,879 42,430 27,237 Required: 1. How much cash was expended on new property and equipment during fiscal Year 3? Make the journal entry. 2. How much depreciation and amortization did ShopKo record on its property and equipment in fiscal Year 3? Make the journal entry. 3. Assume that retirements of property and equipment consist exclusively of sales for cash. What was the original cost of the property and equipment sold in fiscal Year 3? What was the book value of the property and equipment sold in fiscal Year 3? What was the gain or loss recognized on the sale of the property and equipment sold in fiscal Year 3? Make the journal entry to record the sale of property and equipment during fiscal Year 3. Tuesday Morning Corporation operates a chain of 246 deep discount retail stores in 32 states. As a deep discount retailer, the company purchases close-out merchandise at prices generally ranging from 10% to 50% of normal wholesale prices and sells the merchandise at prices that are 50% to 80% lower than retail prices generally charged by department and specialty stores. Merchandise offered by Tuesday Morning stores primarily consists of dinnerware, silver serving pieces, gourmet housewares, bathroom, bedroom, and kitchen accessories, linens and domestics, Christmas trim, luggage, toys, stationery, and silk plants. Appearing next is information taken from Tuesday Morning s annual report to shareholders for a past year. C10 8 Tuesday Morning Corporation (CW): Long-lived assets reporting Tuesday Morning Corporation and Subsidiaries Consolidated Balance Sheets December 31 ($ in thousands, except share amount) Assets Current assets: Cash and cash equivalents $ 4,535 $ 1,728 Income taxes receivable 2,133 Inventories 46,815 53,551 Prepaid expenses 1, Other current assets 649 1,246 Total current assets 53,673 59,649 Property, plant and equipment: Land 8,356 8,356 Buildings 12,852 12,748 Furniture and fixtures 15,017 15,120 Equipment 12,578 5,287 Leasehold improvements 1,713 1,491 50,516 43,002 (continued on next page)

4 10-4 CHAPTER 10 Long-Lived Assets and Depreciation Tuesday Morning Corporation and Subsidiaries (continued ) Consolidated Balance Sheets December 31 ($ in thousands, except share amount) Less accumulated depreciation and amortization (17,563) (14,411) Net property, plant, and equipment 32,953 28,591 Due from officer 1,799 Other assets Total assets $89,403 $88,967 Liabilities and Shareholders Equity Current liabilities: Current installments on mortgages $ 2,747 $ 1,402 Current installments on capital lease obligation 607 Accounts payable 12,916 15,859 Accrued expenses: Sales tax 1,574 1,760 Other 1,945 3,118 Deferred income taxes Due to officer 599 Income taxes payable 988 Total current liabilities 21,080 22,884 Mortgages on property, plant, and equipment, excluding current installments 4,952 7,595 Capital lease obligations, excluding current installments 1,821 Deferred income taxes 2,920 2,764 9,693 10,359 Shareholders equity: Preferred stock of $1 par value per share Authorized 2,000,000 shares, none issued Common stock of $0.01 par value per share Authorized 20,000,000 shares; issued 8,099,586 shares in 1994 and 8,059,586 in Additional paid-in capital 18,171 18,091 Retained earnings 42,545 39,894 Less: Treasury stock (299,500 shares in 1994 and 329,500 shares in 1993) (2,167) (2,342) Total shareholders equity 58,630 55,724 Total liabilities and shareholders equity $89,403 $88,967 Note 9: Supplemental cash flow information Net earnings (loss) $ 2,651 $ (1,052) $ 8,171 Adjustments to reconcile net earnings to cash provided by operations: Depreciation and amortization 3,862 2,805 2,071 Deferred income taxes Loss on sale of fixed assets Changes in operating assets and liabilities (net) 5,218 12,008 (29,104) Net cash provided by (used in) operations $12,056 $14,630 $(18,407) During 1994 Tuesday Morning entered into a new lease to obtain additional store locations. As a result of the lease, the firm made an entry to increase the Property, plant, and equipment account by $2,642,000.

5 CHAPTER 10 Long-Lived Assets and Depreciation 10-5 Tuesday Morning Corporation and Subsidiaries Consolidated Statements of Operations Years Ended December 31 ($ in thousands) Net sales $190,081 $175,790 $160,075 Cost of sales 126, , ,581 Gross profit 63,150 52,642 55,494 Selling, general, and administrative expenses 57,523 54,895 45,315 Operating income (loss) 5,627 (2,253) 10,179 Other income (expenses) Interest income Interest expense (2,458) (1,689) (771) Other, net 649 1, (1,611) (319) 36 Earnings (loss) before income taxes and cumulative effect of changes in accounting principles 4,016 (2,572) 10,215 Income tax benefit (expense) (1,365) 956 (3,643) Earnings (loss) before cumulative effect of changes in accounting principles 2,651 (1,616) 6,572 Cumulative effect to December 31, 1992 of change in accounting for income taxes 564 Cumulative effect to December 31, 1991 of change in accounting for inventories (net of tax) 1,599 Net earnings (loss) $2,651 $(1,052) $8,171 Consolidated Statements of Cash Flows Years Ended December 31 ($ in thousands) Cash flows from operating activities: Cash received from customers $190,081 $175,790 $160,075 Cash paid to suppliers and employees (177,676) (157,295) (175,732) Interest received Interest paid (2,458) (1,689) (771) Income taxes (paid) refunded 1,911 (2,487) (2,345) Net cash provided by (used in) operating activities 12,056 14,630 (18,407) Cash flows from investing activities: Sale of marketable equity securities (1,791) Capital expenditures (5,693) (4,850) (5,087) Advances/loans to officer (2,398) (2,067) (1,884) Proceeds from sale of property, plant and equipment Net cash used in investing activities (7,992) (6,497) (5,166) Cash flows from financing activities: Net increase (decrease) in notes payable (3,500) 3,500 Principal payments on mortgages (1,298) (1,194) (1,453) Principal payments under capital lease obligation (214) Proceeds from common stock offering (2,419) Proceeds from exercise of common stock options/stock purchase plan Repurchase of common stock (3,383) (1,390) Net cash provided by (used in) financing activities (1,257) (7,932) 3,395 Net increase (decrease) in cash and cash equivalents 2, (20,178) Cash and cash equivalents at beginning of year 1,728 1,527 21,705 Cash and cash equivalents at end of year $4,535 $1,728 $1,527

6 10-6 CHAPTER 10 Long-Lived Assets and Depreciation Required: 1. How much cash was expended on new property, plant, and equipment during fiscal 1994? 2. Make the journal entry for requirement What is the total amount of depreciation and amortization reported by Tuesday Morning in fiscal 1994? 4. Where do you think the depreciation and amortization is accounted for on Tuesday Morning s 1994 Consolidated Statement of Operations? 5. Make the journal entry for requirement What was the gain/loss recognized by Tuesday Morning on the sale of property, plant, and equipment in fiscal 1994? 7. What was the original cost of property, plant, and equipment sold in fiscal 1994? 8. Make the journal entry to record the sale of property, plant, and equipment during fiscal Where do you think the gain/loss from requirement 8 is reported on Tuesday Morning s 1994 Consolidated Statement of Operations? 10. What impact, if any, did the gain/loss on the sale of property, plant, and equipment in 1994 have on the firm s 1994 Consolidated Statement of Cash Flows? 11. Assume that on January 1, 1995 Tuesday Morning acquired some new property, plant, and equipment at a total cost of $100,000. Of the total, $50,000 was for buildings, $30,000 was for furniture and fixtures, and $20,000 was for equipment. Assume that all the assets are expected to have a zero salvage value and that the buildings have a useful life of 30 years, the furniture and fixtures seven years, and the equipment three years. Tuesday Morning has decided to use the straight-line method to depreciate the buildings, the sum-of-the-years digits method to depreciate the furniture and fixtures, and the double-declining balance method to depreciate the equipment. Calculate the depreciation expense to be recorded on the buildings, furniture and fixtures, and equipment in 1995.