Question

The 2014 and 2013 income statements and balance sheets (asset section only) for Target Corporation follow, along with its footnote describing Target’s accounting for property and equip-ment. Target’s cash flow statement for fiscal 2014 reported capital expenditures of $1,786 million and disposal proceeds for property and equipment of $95 million. No gain or loss was reported on property and equipment disposals. In addition, Target acquired property and equipment through non-cash acquisitions not reported on the statement of cash flows.

Consolidated Statements of Operations

($ millions)                                                                  2014                2013                2012

Sales....................................................                          $72,618           $71,279                       $71,960

Credit card revenues.....................................                     —              —                      1,341

Total revenues ...........................................             $72,618           $71,279             $73,301

Cost of sales.............................................                 $51,278            $50,039            $50,568

Selling, general and administrative expenses ........$14,676            $14,465            $14,643

Credit card expenses.....................................             —                    —                         467

Depreciation and amortization............................      $2,129                $1,996             $2,044

Gain on receivables transaction...........................        —                        (391)                (161)

Earnings from continuing operations before interest   

expense and income taxes ............................ $4,535              $5 ,170              $5,740

Net interest expense .....................................                  $882               $1,049                 $684

Earnings from continuing operations before   

income taxes .......................................... $3,653                $4,121           $45,056

Provision for income taxes................................            $1,204                $1,427            $1,741

Net earnings from continuing operations .................. $2,449               $2 ,694             $3,315

Discontinued operations, net of tax........................      (4,085)                 (723)              (316)

Net (loss)/earnings.......................................                $(1,636)               $1,971           $2,999

Consolidated Statements of Financial Position (Asset Section Only)

($ millions)                                                                January 31, 2015        February 1, 2014

AssetsCash and cash equivalents, including

short-term investments of $1,520 and $3 . . . . . . . . . . . . . . . . $2,210                              $ 670

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,790                             8,278

Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . 1,333                                793

Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,754                               1,832

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,087                           11,573

Property and equipment

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,127                             6,143

Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,614                            25,984

Fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,346                            5,199

Computer hardware and software. . . . . . . . . . . . . . . . . . . . . . 2,553                                2,395

Construction-in-progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .424 757

Accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . (15,106)                       (14,066)

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . .25,958                              26,412

Noncurrent assets of discontinued operations . . . . . . . . . . . . . .442                                5,461

Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 917                                1,107

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    $41,404                           $44,553

12. Property and Equipment

Property and equipment is depreciated using the straight-line method over estimated useful lives or lease terms if shorter. We amortize leasehold improvements purchased after the beginning of the initial lease term over the shorter of the assets’ useful lives or a term that includes the original lease term, plus any renewals that are reasonably assured at the date the leasehold improvements are acquired. Depreciation expense for 2014, 2013 and 2012 was $2,108 million, $1,975 million and $2,027 million, respectively. For income tax pur-poses, accelerated depreciation methods are generally used. Repair and maintenance costs are expensed as incurred and were $715 million in 2014, $643 million in 2013, and $650 in 2012. Facility pre-opening costs, including supplies and payroll, are expensed as incurred.

Estimated Useful Lives Life (in years)

Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-39

Fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-15

Computer hardware and software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-7

Long-lived assets are reviewed for impairment when events or changes in circumstances, such as a decision to relocate or close a store or make significant software changes, indicate that the asset’s carrying value may not be recoverable. For asset groups classified as held for sale, the carrying value is compared to the fair value less cost to sell. We estimate fair value by obtaining market appraisals, valuations from third party brokers or other valuation techniques.

Impairments ($ millions)                                                       2014               2013                2012

Impairments included in segment SG&A ..........................    $108                  $58                  $37

Unallocated impairments .........................................                 16                     19                     —

Total impairments ................................................                 $124                  $77                 $37

a. Prepare journal entries to record the following for 2014:

i. Depreciation expense

ii. Capital expenditures

iii. Disposal of property, plant, and equipment

iv. Repair and maintenance costs v. Impairments and write-downs (Assume that impairments and write-downs reduce the property and equipment account, rather than increasing accumulated depreciation.)

b. Estimate the amount of property and equipment that was acquired through non-cash transactions.

Answer 1

a) Following are the required journal entries:

i. Depreciation expense

Depreciation Account Dr. 2108

To Accumulated Depreciation Account Cr. 2108

Since the amount of depreciation given in footnote is 2108 which is routed through accumulated depreciation account as shown in above financial position.

ii.Capital expenditures:

Bank/Cash Account Dr. 1786

*Suspense Account Dr. 284

To Plant & Equipment Account Cr. 2070

(*Suspense account is created since exact source of non cash transaction can not be traced from the above date. Also for details regarding calculation of capital expenditure including non cash expenditure refer question no. (b) below)

iii.Disposal of property, plant and equipment:

Bank/Cash Account Dr. 95

To Plant & Equipment Account Cr. 95

Since as per the information no profit or loss has been reported on disposal of plant & equipment and also exact amount of depreciation for the disposal portion has not been providded so direct entry as above can be passed assuming no portion of depreciation relating to disposed asset is present in accumulated depreciation account. In case if information was provided regarding depreciation of disposed plant & equipment then depreciation portion from accumulated depreciation should have been taken out and amount of proceeds should been splitted between Accumulated Depreciation & Plant & Equipment Account.

iv.Repair and maintenace costs v. Impairments & write-downs

Repair and maintenance costs Account Dr. 715

To Bank/Cash Account Cr. 715

Assuming expenses to have been incurred on cash on unavailability of creditors details.

Impairment Account Dr.124

To Plant & Equipment Account Cr.124

Entry being passed for total impairment which reduces total cost of plant & equipment

Statement of Operations Account Dr. 124

To Impairment Account Cr. 124

Ultimately amount of reduction in cost of plant & equipment should be transferred to statement of operations.

.

b) Calculation of amount of property & equipment acquired through non-cash transaction:

As per the information provided,

Accumulated Depreciation for 2014 (A)= 14066

Depreciation for 2013 (B) = 1975

Accumulated Depreciation for 2013 (A)-(B)= 12091

Total Plant & Equipment as on 2014 (C)= 39721

(adding all the plant & equipment given in consolidated financial position above)

Net Plant & Equipment as on 2014 (C)-(A)=25655

Net Plant & Equipment as on 2013 (C)-(B)=27630

Total capital Expenditure on 2014 = 1975+95=2070

Cash capital Expenditure=1786

Non cash capital expenditure=2070-1786=284