LongLived Tangible and Intangible Assets PowerPoint Authors Brandy Mackintosh Lindsay Heiser Learning Objective 91 Define classify and explain the nature of longlived assets Tangible ID: 388422
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Slide1
Chapter 9
Long-Lived Tangible and Intangible Assets
PowerPoint Authors:
Brandy Mackintosh
Lindsay
HeiserSlide2
Learning Objective 9-1
Define, classify, and explain the nature of long-lived assets.Slide3
Tangible
Physical
Substance
Intangible
No Physical
Substance
Will not be used up within the next year
Actively Used in Operations
Definition and Classification
Land
Assets subject to
depreciation
Buildings and equipment
Furniture and fixtures
Examples
Value represented by rights
that produce benefits.
Intangibles with a limited
life, such as patents and
copyrights, are subject to
amortization
.
Intangibles with an
unlimited (or indefinite)
life, such as goodwill and
trademarks, are
not
amortized.Slide4
Learning Objective 9-2
Apply the cost principle to
the acquisition of long-lived assets.Slide5
Acquisition of Tangible Assets
Recording costs as assets is called
capitalizing
the costs.
Acquisition cost includes:
purchase price, and
all expenditures needed to prepare the asset for its intended use.Slide6
Acquisition of Tangible Assets
Purchase cost
Legal fees
Surveying fees
Broker’s commissions
Land
Purchase/construction cost
Legal fees
Appraisal fees
Architectural fees
Buildings
Purchase/construction cost
Sales taxes
Transportation costs
Installation costs
EquipmentSlide7
The total cost of a combined purchase of land and building is allocated in proportion to their
relative market values
.
Acquisition of Tangible Assets
Basket Purchase
On January 1, Jones purchased land and building for $400,000 cash. The appraised values are building, $325,000, and land, $175,000.
How much of the $400,000 purchase price will be charged to the building and land accounts?Slide8
Acquisition of Tangible Assets
Component Allocation
IFRS takes the idea of a basket purchase one step further. The cost of an individual asset’s components is allocated among each significant component and then depreciated separately over that component’s useful life. Slide9
Cash Purchase
Cedar Fair purchased a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 for transportation and $625,000 for installation of the ride.
Prepare the journal entry for the acquisition assuming Cedar Fair
paid cash
for the new ride.
2
Record
1
AnalyzeSlide10
Credit Purchase
Instead of paying cash, assume that Cedar Fair
issued a note
for the new ride, but paid cash for the transportation and installation of the ride.
Prepare the journal entry for the acquisition.
1
Analyze
2
RecordSlide11
Maintenance Costs Incurred
during UseSlide12
Depreciation is a
cost allocation
process that matches costs of operational assets with periods benefited by their use.
Cost Allocaton
Balance Sheet
Income Statement
Expense
Acquisition
Cost
Depreciation Expense
Depreciation
Expense
Income
Statement
Depreciation for
the current year
Balance
Sheet
Accumulated
Depreciation
Total of depreciation
to date for an assetSlide13
Depreciation Expense
Depreciation calculations require three amounts for each asset:
Acquisition cost.
Estimated useful life.
Estimated residual value.
The effects of $130 of depreciation on the accounting
equation and the journal entry to record them follow:
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Accumulated
Depreciation (+xA) -130
Depreciation
Expense (+E) -130
2
Record
dr Depreciation Expense (+E, -SE)
cr Accumulated Depreciation (+xA, -A)
130
130Slide14
Depreciation Expense
2010 Depreciation
Includes $127 for 2010
Book value 2010Slide15
Learning Objective 9-3
Apply various depreciation methods as economic benefits are used up over time.Slide16
Straight-line
Units-of-production
Declining balance
Depreciation Methods
At the beginning of the year, Cedar Fair purchased a new go-kart Ride for $62,500 cash. The ride has an estimated useful life of 3 years or 100,000 miles and an estimated residual value of $2,500.
We will use the following information to illustrate
the three methods of depreciation:Slide17
Straight-Line Method
=
$20,000 per year
($62,500 - $2,500) ×
1
3Slide18
Units-of-Production Method
=
$18,000
($62,500 - $2,500) ×
30,000
100,000
The ride has a 100,000-mile estimated useful life. If the ride is used 30,000 miles in the first year,
what is the amount of depreciation expense?Slide19
Units-of-Production MethodSlide20
Declining-Balance Method
=
$41,667
($62,500 - $0) ×
2
3
First Year
Second Year
=
$13,889
($62,500 - $41,667) ×
2
3
What is the amount of
amount of depreciation
for each of the first two years?
Annual computation ignores residual value.
Cost – Accumulated DepreciationSlide21
Double-Declining-Balance Method
Third Year
=
$4,629
($62,500 - $55,556) ×
2
3
Depreciation expense is limited to the amount that
reduces book value to the estimated residual value.Slide22
Summary of Depreciation MethodsSlide23
When a plant asset is acquired during the year, depreciation is calculated for the fraction of the year the asset is owned.
June
30
Partial Year Depreciation CalculationsSlide24
Tax DepreciationSlide25
Learning Objective 9-4
Explain the effect of asset impairment on the financial statements.Slide26
Asset Impairment Losses
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Rides and
Equipment (-A) -63,000,000
Loss on
Impairment (+E) -63,000,000
2
Record
dr Loss on Impairment (+E, -SE)
cr Rides and Equipment (-A)
63,000,000
63,000,000Slide27
Learning Objective 9-5
Analyze the disposal of long-lived tangible assets.Slide28
Update depreciation to date of disposal.
Record the disposal.
dr
Cash (+A)
dr
Accumulated Depreciation (-xA)
cr
Equipment (-A)
Book value
Disposal of Tangible Assets
cr
Gain on Disposal (+R, +SE)
Gain
if cash received is greater than asset’s book valueSlide29
dr
Cash (+A)
dr
Accumulated Depreciation (-xA)
cr
Equipment (-A)
Book value
Disposal of Tangible Assets
Update depreciation to date of disposal.
Record the disposal.
dr
Loss on Disposal (+E, -SE)
Loss
if cash received is less than asset’s book valueSlide30
The amount of depreciation per year is:
a. $0.
b. $500,000.
c. $1,000,000.
d. $2,000,000.
Disposal of Tangible Assets
Cedar Fair sold a hotel for $3,000,000 cash at the end of its 16
th
year of use. The hotel originally cost $20,000,000, and was depreciated using the straight-line method with zero residual value and a useful life of 20 years.
The amount of depreciation per year is:
a. $0.
b. $500,000.
c. $1,000,000. d. $2,000,000.
Annual Depreciation:
($20,000,000 - $0) ÷ 20 Years
= $1,000,000 per yearSlide31
Cedar Fair sold a hotel for $3,000,000 cash at the end of its 16
th
year of use. The hotel originally cost $20,000,000, and was depreciated using the straight-line method with zero residual value and a useful life of 20 years.
The equipment’s book value at date of sale is:
a. $4,000,000.
b. $3,000,000.
c. $17,000,000.
d. $16,500,000.
Disposal of Tangible Assets
The equipment’s book value at date of sale is:
a. $4,000,000.
b. $3,000,000.
c. $17,000,000.
d. $16,500,000.
Accumulated Depreciation =
(16
yrs. × $1,000,000) = $16,000,000
BV = Cost - Accumulated Depreciation
BV = $20,000,000 - $16,000,000
= $4,000,000Slide32
Cedar Fair sold a hotel for $3,000,000 cash at the end of its 16
th
year of use. The hotel originally cost $20,000,000, and was depreciated using the straight-line method with zero residual value and a useful life of 20 years.
The equipment’s sale resulted in:
a. a loss of $1,000,000.
b. a gain of $3,000,000.
c. a gain of $1,000,000.
d. a loss of $5,000,000.
Disposal of Tangible Assets
The equipment’s sale resulted in:
a. a loss of $1,000,000.
b. a gain of $3,000,000.
c. a gain of $1,000,000.
d. a loss of $5,000,000.
Loss = Cash Received - Book Value
Loss = $3,000,000 - $4,000,000 = $1,000,000Slide33
Analyze and prepare the journal entry to record Cedar Fair’s sale of the hotel.
Disposal of Tangible Assets
2
Record
1
AnalyzeSlide34
Learning Objective 9-6
Analyze the acquisition, use, and disposal of long-lived intangible assets.Slide35
Noncurrent assets
without physical
substance.
Useful life is
often difficult
to determine.
Usually acquired
for operational
use.
Often provide
exclusive rights
or privileges.
Intangible Assets
Intangible
AssetsSlide36
Intangible Assets
Record at current cash equivalent cost, including purchase price, legal fees, and filing fees.
Amortize intangibles with limited lives over the shorter of their economic lives or legal lives using the straight-line method.Slide37
Trademarks and Copyrights
A trademark is a symbol, design,
or logo associated with a business.
Internally developed
trademarks have no
recorded asset cost.
Purchased trademarks
are recorded at cost.
Amortize cost
over the period
benefited.
Legal life is
life of creator
plus 70 years.
A copyright is an exclusive right granted by the federal
government to protect artistic or intellectual properties.Slide38
Cost is purchase
price plus legal
cost to defend.
Amortize cost
over the shorter of
useful life or 20 years.
Patents and Licensing Rights
A patent is an exclusive right granted by the federal
government to sell or manufacture an invention.
You may be using computer
software that is made
available to you through a
campus licensing agreement
.
Licensing rights grant limited permission to use a product
or service according to specific terms and conditions. Slide39
Technology Assets
Technology assets include software and Web development work.
Usually used up over a relatively short time (3 – 7 years)Slide40
Franchises
A franchise provides legally protected rights
to sell products or provide services purchased
by a franchisee from the franchisor.Slide41
Goodwill
Occurs when one
company buys
another company.
Purchase Price > Fair Market Value of Net Assets Acquired
Only purchased
goodwill is an
intangible asset.
Is not amortized.
Is impairment
tested and may be
written down.Slide42
Amortization of Limited Life Intangible Asset
Assume Cedar Fair purchased a patent for an uphill water-coaster
for $800,000 and intends to use it for 20 years. Each year, the company would record $40,000 in Amortization Expense ($800,000 ÷ 20 years).
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Patent (-A) -40,000
Amortization
Expense (+E) -40,000
2
Record
dr Amortization Expense (+E, -SE)
cr Patent (-A)
40,000
40,000Slide43
Summary of Accounting Rules
for Long-Lived AssetsSlide44
Learning Objective 9-7
Interpret the fixed asset turnover ratio.Slide45
This ratio measures the sales dollars generated by each dollar invested in fixed assets.
For the year 2010, Cedar Fair had $978 of
revenue. End-of-year fixed assets were $1,680
and beginning-of-year fixed assets were $1,780.
(All numbers in millions.)
Turnover Analysis
Fixed
Asset
Turnover
Net Sales Revenue
Average
Net Fixed Assets
=Slide46
Turnover AnalysisSlide47
Learning Objective 9-8
Describe the factors to consider when comparing companies’ long-lived assets.Slide48
Impact of Depreciation Differences
Accelerated depreciation, in the early years of an asset’s useful life, results in higher depreciation expense, lower net income, and
lower book value
than would result using straight-line depreciation.
Selling an asset with a
low book value
, resulting from accelerated depreciation, might result in a
gain
.
Selling the same asset with a
higher book value, resulting from straight-line depreciation, might result in a loss
. Slide49
Supplement 9A
Natural ResourcesSlide50
Total
depletion
cost
Inventory
for sale
Unsold
Inventory
Cost of
goods sold
Natural Resources
Depletion is the process of allocating a natural
resource’s cost over the period of its extraction.
Depletion is similar in concept to depreciation.
Depletion that is computed for a period is first added to
inventory and then expensed when the inventory is sold.Slide51
Supplement 9B
Changes in DepreciationSlide52
So depreciation
is an
estimate
.
Predicted
residual value
Predicted
useful life
Over the life of an asset, new information may come to light that indicates the
original estimates need to be revised.
Changes in Depreciation EstimatesSlide53
Cedar Fair purchased equipment that cost $60,000,000 with an estimated useful life of 20 years and
an
estimated salvage value of $3,000,000.
Shortly after the start of year
5, Cedar Fair changed the
initial estimated
useful life to 25 years and lowered the estimated salvage value to $2,400,000.
Calculate depreciation expense for year 5 and thereafter using the straight-line method.
Changes in Depreciation EstimatesSlide54
Book value at
date of change
Residual value at
date of change
Remaining useful life at date of change
–
Changes in Depreciation Estimates
When our estimates change, the new depreciation is:Slide55
Chapter 9
Solved Exercises
M9-4, M9-5, M9-6, E9-6, E9-7, E9-11Slide56
M9-4
Computing Book Value (Straight-Line Depreciation)
Calculate the book value of a three-year-old machine that cost $400,000, has an estimated residual value of $40,000, and has an estimated useful life of four years. The company uses straight-line depreciation.
Year
1
2
3
Depreciation
Expense
(debit)
$ 90,000
90,000
90,000Undepreciated
Balance(book value)
$ 400,000310,000220,000130,000
AccumulatedDepreciation
(credit balance) $ 90,000180,000270,000
=
$90,000 per year
($400,000 - $40,000) ×
1
4Slide57
M9-5
Computing Book Value (Units-of-Production Depreciation)
Calculate the book value of a three-year-old machine that cost $400,000, has an estimated residual value of $40,000, and has an estimated useful life of 20,000 machine hours. The company uses units-of-production depreciation and ran the machine 3,000 hours in year 1 and 8,000 hours in year 2, and 6,000 hours in year 3.
= $54,000
($400,000 - $40,000) ×
3,000
20,000
1
st
Year Depreciation
= $144,000
($400,000 - $40,000) ×
8,000
20,000
2
nd
Year Depreciation
= $108,000
($400,000 - $40,000) ×
6,000
20,000
3
rd
Year DepreciationSlide58
M9-5
Computing Book Value (Units-of-Production Depreciation)
Calculate the book value of a three-year-old machine that cost $400,000, has an estimated residual value of $40,000, and has an estimated useful life of 20,000 machine hours. The company uses units-of-production depreciation and ran the machine 3,000 hours in year 1 and 8,000 hours in year 2, and 6,000 hours in year 3.
Year
1
2
3
Hours
3,000
8,000
6,000
Depreciation
Expense
(debit)
$ 54,000
144,000108,000
UndepreciatedBalance(book value) $ 400,000
346,000202,000
94,000
AccumulatedDepreciation(credit balance) $ 54,000
198,000306,000Slide59
M9-6 Computing Book Value (Double-Declining-Balance Depreciation)
Calculate the book value of a three-year-old machine that cost $400,000, has an estimated residual value of $40,000, and has an estimated useful life of four years. The company uses double-declining-balance depreciation. Round to the nearest dollar.
=
$200,000
($400,000 - $0) ×
2
4
1
st
Year Depreciation
2
nd
Year Depreciation
=
$100,000
($400,000 - $200,000) ×
2
4
3
rd
Year Depreciation
=
$50,000
($400,000 – ($200,000 + $100,000) ×
2
4Slide60
M9-6 Computing Book Value (Double-Declining-Balance Depreciation)
Calculate the book value of a three-year-old machine that cost $400,000, has an estimated residual value of $40,000, and has an estimated useful life of four years. The company uses double-declining-balance depreciation. Round to the nearest dollar.
Year
1
2
3
Depreciation
Expense
(debit)
$ 200,000
100,000
50,000
Undepreciated
Balance
(book value)
$ 400,000200,000100,00050,000
Accumulated
Depreciation(credit balance) $ 200,000300,000350,000Slide61
E9-6 Computing Depreciation under Alternative Methods
Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $22,000. The estimated useful life was five years, and the residual value was $2,000. Assume that the estimated productive life of the machine is 10,000 units. Expected annual production was: year 1, 2,000 units; year 2, 3,000 units; year 3, 2,000 units; year 4, 2,000 units; and year 5, 1,000 units.
Required:
1. Complete a depreciation schedule for each of the alternative methods.
a. Straight-line.
b. Units-of-production.
c. Double-declining-balance.
1a. Straight-line
Year
0
1
2
34
5DepreciationExpense
(debit) ($22,000 - $2,000) x 1/5 = $4,000
($22,000 - $2,000) x 1/5 = $4,000($22,000 - $2,000) x 1/5 = $4,000($22,000 - $2,000) x 1/5 = $4,000($22,000 - $2,000) x 1/5 = $4,000
BookValue
$ 22,00018,00014,00010,0006,0002,000
Accumulated
Depreciation(credit balance)
$ 4,0008,00012,00016,00020,000Slide62
E9-6 Computing Depreciation under Alternative Methods
1b. Units-of-production
1c. Double-declining-balance
Year
0
1
2
3
4
5
Depreciation
Expense
(debit)
($22,000 - $2,000) x 2,000/10,000 = $4,000($22,000 - $2,000) x 3,000/10,000 = $6,000($22,000 - $2,000) x 2,000/10,000 = $4,000
($22,000 - $2,000) x 2,000/10,000 = $4,000($22,000 - $2,000) x 1,000/10,000 = $2,000
Book
Value $ 22,00018,00012,0008,0004,000
2,000Accumulated
Depreciation(credit balance)
$ 4,00010,00014,00018,00020,000
Year
0
1
2
345
DepreciationExpense(debit) ($22,000 - $0) x 2/5 = $8,800($22,000 - $8,800) x 2/5 = $5,280($22,000 - $14,080) x 2/5 = $3,168($22,000 - $17,248) x 2/5 = $1,901$2,851 - $2,000 = $851BookValue
$ 22,00013,2007,9204,7522,8512,000
Accumulated
Depreciation
(credit balance) $ 8,80014,08017,24819,14920,000Slide63
The method that will result in the highest net income is the
one that reports the lowest depreciation expense.
Straight-line depreciation method yields the lowest
depreciation expense in year 2 ($4,000), and therefore
results in the highest net income in year 2.
This higher net income does not mean the equipment was
used more efficiently. It only means a smaller amount of the
asset’s cost was allocated to depreciation expense in year 2
using straight-line depreciation.
E9-6 Computing Depreciation under Alternative Methods
Required:2. Which method will result in the highest net income in year 2? Does this higher
net income mean the machine was used more efficiently under this depreciation method?Slide64
E9-7 Computing Depreciation under Alternative Methods
Sonic Corporation purchased and installed electronic payment equipment at its drive-in restaurants in San Marcos, TX, at a cost of $27,000. The equipment has an estimated residual value of $1,500. The equipment is expected to process 255,000 payments over its three-year useful life. Per year, expected payment transactions are 61,200, year 1; 140,250, year 2; and 53,550, year 3.
Required:
Complete a depreciation schedule for each of the alternative methods.
1. Straight-line.
2. Units-of-production.
3. Double-declining-balance.
=
$8,500 per year
($27,000 - $1,500) ×
1
3
1. Straight-lineSlide65
E9-7 Computing Depreciation under Alternative Methods
1. Straight-line
Year
1
2
3
Depreciation
Expense
(debit)
$ 8,500
8,500
8,500
$ 25,500
UndepreciatedBalance
(book value) $ 27,000
18,50010,0001,500
AccumulatedDepreciation(credit balance)
$ 8,50017,00025,500Slide66
E9-7 Computing Depreciation under Alternative Methods
2. Units-of-production
= $14,025
($27,000 - $1,500) ×
140,250
255,000
2
nd
Year Depreciation
= $5,355
($27,000 - $1,500) ×
53,550
255,000
3
rd
Year Depreciation
= $6,120
($27,000 - $1,500) ×
61,200
255,000
1
st
Year DepreciationSlide67
E9-7 Computing Depreciation under Alternative Methods
2. Units-of-production
Year
1
2
3
Depreciation Expense
(Debit)
6,120
14,025
5,355
25,500
Undepreciated
Balance
(book value)
$ 27,00020,8806,8551,500
AccumulatedDepreciation(credit balance)
$ 6,12020,14525,500Slide68
E9-7 Computing Depreciation under Alternative Methods
3. Double-declining-balance
=
$18,000
($27,000 - $0) ×
2
3
1
st
Year Depreciation
2
nd
Year Depreciation
=
$6,000
($27,000 - $18,000) ×
2
3
3
rd
Year Depreciation
=
$2,000
[$27,000 – ($18,000 + $6,000)] ×
2
3Slide69
Year
1
2
3
Depreciation
Expense
(debit)
$ 18,000
6,000
1,500
$ 25,500
Undepreciated
Balance
(book value) $ 27,0009,0003,0001,500AccumulatedDepreciation
Balance
$ 18,00024,000 25,500
Year
1
2
3
Depreciation
Expense
(debit)
$ 18,000
6,000 2,000$ 26,000
UndepreciatedBalance(book value) $ 27,0009,0003,0001,000AccumulatedDepreciationBalance $ 18,00024,000 26,000
Below residual value
E9-7 Computing Depreciation under Alternative Methods
3. Double-declining-balance
Depreciation expense is limited to the amount that
reduces book value to the estimated residual value.Slide70
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset Disposal
FedEx Corporation is the world’s leading express-distribution company. In addition to the world’s largest fleet of all-cargo aircraft, the company has more than 56,700 ground vehicles that pick up and deliver packages. Assume that FedEx sold a delivery truck for $16,000. FedEx had originally purchased the truck for $28,000, and had recorded depreciation for three years.
Required:
1. Calculate the amount of gain or loss on disposal, assuming that
Accumulated Depreciation was: (a) $12,000, (b) $10,000, and (c) $15,000.
Sale price
Cost
Less: Accumulated Depreciation
Book Value
Gain (Loss)
c
$ 16,000
28,000 15,000 13,000$ 3,000
Caseb$ 16,00028,000 10,000 18,000$ (2,000)
a
$ 16,00028,000
12,000 16,000$ -Slide71
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset Disposal
Required:
2. Using the following structure, indicate the effects (accounts, amounts, and
+ or -) for the disposal of the truck in each of the three preceding situations.
Assets = Liabilities + Stockholders’ Equity
Case (a) Book Value = $16,000
Assets
Cash (+A)
Delivery Trucks (-A)
Accumulated
Depreciation (-xA)
+ 16,000
28,000
+ 12,000
Liabilities
Stockholders’ Equity
=
+Slide72
Case (b) Book Value = $18,000
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset Disposal
Case (c) Book Value = $13,000
Assets
Cash (+A)
Delivery Trucks (-A)
Accumulated
Depreciation (-xA)
+ 16,000
28,000
+ 10,000
Liabilities
Stockholders’ Equity
Loss of Disposal (+E)
- 2,000
=
+
Assets
Cash (+A)
Delivery Trucks (-A)
Accumulated
Depreciation (-xA)
+ 16,000
28,000
+ 15,000
Liabilities
Stockholders’ Equity
Gain on Disposal (+R)
+ 3,000
=
+Slide73
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset Disposal
Required:
3. Based on the three preceding situations, explain how the amount of
depreciation recorded up to the time of disposal affects the amount of gain or
loss on disposal.
The gain or loss reported on disposal is directly affected by the book value of the asset, which itself is affected by the amount of depreciation recorded before the disposal. With the same sale price of $16,000 in each case . . .
A larger amount of depreciation recorded before disposal
results in lower book value and a gain on disposal (case 1c).
A smaller amount depreciation recorded before disposal
results in higher book value and a loss on disposal (case
1b).Slide74
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset Disposal
Required:
4. Prepare the journal entry to record the disposal of the truck for each situation
in requirement 1.
Case (a) Book value = $16,000
Case (b) Book value = $18,000
dr Cash (+A)
dr Accumulated Depreciation (-xA, +A)
cr Delivery Trucks (-A)
28,000
16,000
12,000
dr Cash (+A)
dr Accumulated Depreciation (-xA, +A)
dr Loss on Disposal (-SE)
cr Delivery Trucks (-A)
28,000
16,000
10,000
2,000Slide75
Case (c) Book value = $13,000
E9-11 Demonstrating the Effect of Book Value on Reporting an Asset Disposal
Required:
4. Prepare the journal entry to record the disposal of the truck for each situation
in requirement 1.
dr Cash (+A)
dr Accumulated Depreciation (-xA, +A)
cr Gain on Disposal (+SE)
cr Delivery Trucks (-A)
3,000
28,000
16,000
15,000Slide76
End of Chapter 9