A kubota tractor acquired on january 8

Chapter Review

10-8dDiscussion Questions

1. O'Neil Office Supplies has a fleet of automobiles and trucks for use by salespersons and for delivery of office supplies and equipment. Collins Auto Sales Co. has automobiles and trucks for sale. Under what caption would the automobiles and trucks be reported in the balance sheet of (a) O'Neil Office Supplies and (b) Collins Auto Sales Co.?

2. Bullwinkle Co. acquired an adjacent vacant lot with the hope of selling it in the future at a gain. The lot is not intended to be used in Bullwinkle business operations. Where should such real estate be listed on the balance sheet?

3. Alpine Company solicited bids from several contractors to construct an addition to its office building. The lowest bid received was for $1,200,000. Alpine decided to construct the addition itself at a cost of $1,100,000. What amount should be recorded in the building account?

4. Keyser Company purchased a machine that has a manufacturer's suggested life of 20 years. The company plans to use the machine on a special project that will last 12 years. At the completion of the project, the machine will be sold. Over how many years should the machine be depreciated?

5. Is it necessary for a business to use the same method of computing depreciation for all classes of its depreciable assets?

6.

1. Under what conditions is the use of the straight-line depreciation method most appropriate?

2. Under what conditions is the use of the units-of-activity depreciation method most appropriate?

3. Under what conditions is the use of the double-declining-balance depreciation method most appropriate?

7. Distinguish between the accounting for capital expenditures and revenue expenditures.

8. Immediately after a used truck is acquired, a new motor is installed at a total cost of $3,850. Is this a capital expenditure or a revenue expenditure?

9. For some of the fixed assets of a business, the balance in Accumulated Depreciation is equal to the cost of the asset. (a) Is it permissible to record additional depreciation on the assets if they are still useful to the business? Explain. (b) When should an entry be made to remove the cost and the accumulated depreciation from the accounts?

10.

1. Over what period of time should the cost of a patent acquired by purchase be amortized?

2. In general, what is the required accounting treatment for research and development costs?

3. How shoul

10-8ePractice Exercises

PE 10-1A

Straight-line depreciation

1. Obj. 2

Example Exercise 10-1

A building acquired at the beginning of the year at a cost of $1,450,000 has an estimated residual value of $300,000 and an estimated useful life of 10 years. Determine (a) the depreciable cost, (b) the straight-line rate, and (c) the annual straight-line depreciation.

PE 10-1B

Straight-line depreciation

1. Obj. 2

Example Exercise 10-1

Equipment acquired at the beginning of the year at a cost of $340,000 has an estimated residual value of $45,000 and an estimated useful life of 10 years. Determine (a) the depreciable cost, (b) the straight-line rate, and (c) the annual straight-line depreciation.

PE 10-2A

Units-of-activity depreciation

1. Obj. 2

Example Exercise 10-2

A truck acquired at a cost of $69,000 has an estimated residual value of $12,000, has an estimated useful life of 300,000 miles, and was driven 77,000 miles during the year. Determine (a) the depreciable cost, (b) the depreciation rate, and (c) the units-of-activity depreciation for the year.

PE 10-2B

Units-of-activity depreciation

1. Obj. 2

Example Exercise 10-2

A tractor acquired at a cost of $420,000 has an estimated residual value of $30,000, has an estimated useful life of 25,000 hours, and was operated 1,850 hours during the year. Determine (a) the depreciable cost, (b) the depreciation rate, and (c) the units-of-activity depreciation for the year.

PE 10-3A

Double-declining-balance depreciation

1. Obj. 2

Example Exercise 10-3

A building acquired at the beginning of the year at a cost of $1,375,000 has an estimated residual value of $250,000 and an estimated useful life of 40 years. Determine (a) the double-declining-balance rate and (b) the double-declining-balance depreciation for the first year.

PE 10-3B

Double-declining-balance depreciation

1. Obj. 2

Example Exercise 10-3

Equipment acquired at the beginning of the year at a cost of $175,000 has an estimated residual value of $12,000 and an estimated useful life of 10 years. Determine (a) the double-declining-balance rate and (b) the double-declining-balance depreciation for the first year.

PE 10-4A

Revision of depreciation

1. Obj. 2

Example Exercise 10-4

Equipment with a cost of $180,000 has an estimated residual value of $14,400, has an estimated useful life of 16 years, and is depreciated by the straight-line method. (a) Determine the amount of the annual depreciation. (b) Determine the book value at the end of the tenth year of use. (c) Assuming that at the start of the eleventh year the remaining life is estimated to be eight years and the residual value is estimated to be $10,500, determine the depreciation expense for each of the remaining eight years.

PE 10-4B

Revision of depreciation

1. Obj. 2

Example Exercise 10-4

A truck with a cost of $82,000 has an estimated residual value of $16,000, has an estimated useful life of 12 years, and is depreciated by the straight-line method. (a) Determine the amount of the annual depreciation. (b) Determine the book value at the end of the seventh year of use. (c) Assuming that at the start of the eighth year the remaining life is estimated to be six years and the residual value is estimated to be $12,000, determine the depreciation expense for each of the remaining six years.

PE 10-5A

Capital and revenue expenditures

1. Obj. 2

Example Exercise 10-5

On February 14, Garcia Associates Co. paid $2,300 to repair the transmission on one of its delivery vans. In addition, Garcia paid $450 to install a GPS system in its van. Journalize the entries for the transmission and GPS system expenditures.

PE 10-5B

Capital and revenue expenditures

1. Obj. 2

Example Exercise 10-5

On August 7, Green River Inflatables Co. paid $1,675 to install a hydraulic lift and $40 for an air filter for one of its delivery trucks. Journalize the entries for the new lift and air filter expenditures.

PE 10-6A

Sale of equipment

1. Obj. 3

Example Exercise 10-6

Equipment was acquired at the beginning of the year at a cost of $600,000. The equipment was depreciated using the double-declining-balance method based on an estimated useful life of 16 years and an estimated residual value of $60,000.

1. What was the depreciation for the first year?

2. Assuming that the equipment was sold at the end of the second year for $480,000, determine the gain or loss on the sale of the equipment.

3. Journalize the entry to record the sale.

PE 10-6B

Sale of equipment

1. Obj. 3

Example Exercise 10-6

Equipment was acquired at the beginning of the year at a cost of $465,000. The equipment was depreciated using the straight-line method based on an estimated useful life of 15 years and an estimated residual value of $45,000.

1. What was the depreciation for the first year?

2. Assuming the equipment was sold at the end of the eighth year for $235,000, determine the gain or loss on the sale of the equipment.

3. Journalize the entry to record the sale.

PE 10-7A

Depletion

1. Obj. 4

Example Exercise 10-7

Glacier Mining Co. acquired mineral rights for $494,000,000. The mineral deposit is estimated at 475,000,000 tons. During the current year, 31,500,000 tons were mined and sold.

1. Determine the depletion rate.

2. Determine the amount of depletion expense for the current year.

3. Journalize the adjusting entry on December 31 to recognize the depletion expense.

PE 10-7B

Depletion

1. Obj. 4

Example Exercise 10-7

Caldwell Mining Co. acquired mineral rights for $127,500,000. The mineral deposit is estimated at 425,000,000 tons. During the current year, 42,000,000 tons were mined and sold.

1. Determine the depletion rate.

2. Determine the amount of depletion expense for the current year.

3. Journalize the adjusting entry on December 31 to recognize the depletion expense.

PE 10-8A

Impaired goodwill and amortization of patent

1. Obj. 5

Example Exercise 10-8

On December 31, it was estimated that goodwill of $6,000,000 was impaired. In addition, a patent with an estimated useful economic life of 12 years was acquired for $1,500,000 on April 1.

1. Journalize the adjusting entry on December 31 for the impaired goodwill.

2. Journalize the adjusting entry on December 31 for the amortization of the patent rights.

PE 10-8B

Impaired goodwill and amortization of patent

1. Obj. 5

Example Exercise 10-8

On December 31, it was estimated that goodwill of $4,000,000 was impaired. In addition, a patent with an estimated useful economic life of 15 years was acquired for $900,000 on August 1.

1. Journalize the adjusting entry on December 31 for the impaired goodwill.

2. Journalize the adjusting entry on December 31 for the amortization of the patent rights.

PE 10-9A

Fixed asset turnover ratio

1. Obj. 7

Example Exercise 10-9

Financial statement data for years ending December 31 for DePuy Company follow:

1. Determine the fixed asset turnover ratio for Year 1 and Year 2.

2. Does the change in the fixed asset turnover ratio from Year 1 to Year 2 indicate a favorable or an unfavorable change?

PE 10-9B

Fixed asset turnover ratio

1. Obj. 7

Example Exercise 10-9

Financial statement data for years ending December 31 for Davenport Company follow:

1. Determine the fixed asset turnover ratio for Year 1 and Year 2.

2. Does the change in the fixed asset turnover ratio from Year 1 to Year 2 indicate a favorable or an unfavorable change?

10-8fExercises

EX 10-1

Costs of acquiring fixed assets

1. Obj. 1

Melinda Stoffers owns and operates ABC Print Co. During February, ABC incurred the following costs in acquiring two printing presses. One printing press was new, and the other was purchased from a business that recently filed for bankruptcy.

Costs related to new printing press:

1. Fee paid to factory representative for installation

2. Freight

3. Insurance while in transit

4. New parts to replace those damaged in unloading

5. Sales tax on purchase price

6. Special foundation

Costs related to used printing press:

. 7.

Fees paid to attorney to review purchase agreement

. 8.

Freight

. 9.

Installation

. 10.

Repair of damage incurred in reconditioning the press

. 11.

Replacement of worn-out parts

. 12.

Vandalism repairs during installation

1. Indicate which costs incurred in acquiring the new printing press should be debited to the asset account.

1. Indicate which costs incurred in acquiring the used printing press should be debited to the asset account.

EX 10-2

Determining cost of land

1. Obj. 1, 2

Bridger Ski Co. has developed a tract of land into a ski resort. The company has cut the trees, cleared and graded the land and hills, and constructed ski lifts.

 (a) Should the tree cutting, land clearing, and grading costs of constructing the ski slopes be debited to the land account? (b) If such costs are debited to Land, should they be depreciated? Explain.

EX 10-3

Determining cost of land

1. Obj. 1

On-Time Delivery Company acquired an adjacent lot to construct a new warehouse, paying $90,000 and giving a short-term note for $50,000. Legal fees paid were $1,750, delinquent taxes assumed were $25,000, and fees paid to remove an old building from the land were $9,000. Materials salvaged from the demolition of the building were sold for $1,000. A contractor was paid $415,000 to construct a new warehouse. Determine the cost of the land to be reported on the balance sheet.

EX 10-4

Nature of depreciation

1. Obj. 2

Tri-City Ironworks Co. reported $44,500,000 for equipment and $29,800,000 for accumulated depreciation—equipment on its balance sheet.

 Does this mean (a) that the replacement cost of the equipment is $44,500,000 and (b) that $29,800,000 is set aside in a special fund for the replacement of the equipment? Explain.

EX 10-5

Straight-line depreciation rates

1. Obj. 2

Convert each of the following estimates of useful life to a straight-line depreciation rate, stated as a percentage: (a) 10 years, (b) 8 years, (c) 25 years, (d) 40 years, (e) 5 years, (f) 4 years, (g) 20 years.

Answer

Check Figure: 4%

EX 10-6

Straight-line depreciation

1. Obj. 2

A refrigerator used by a wholesale warehouse has a cost of $64,000, an estimated residual value of $5,200, and an estimated useful life of 12 years. What is the amount of the annual depreciation computed by the straight-line method?

EX 10-7

Depreciation by units-of-activity method

1. Obj. 2

A diesel-powered tractor with a cost of $90,000 and estimated residual value of $15,000 is expected to have a useful operating life of 30,000 hours. During April, the tractor was operated 120 hours. Determine the depreciation for the month.

EX 10-8

Depreciation by units-of-activity method

1. Obj. 2

Prior to adjustment at the end of the year, the balance in Trucks is $296,900 and the balance in Accumulated Depreciation—Trucks is $99,740. Details of the subsidiary ledger are as follows:

Enlarge Image

1. Determine for each truck the depreciation rate per mile and the amount to be credited to the accumulated depreciation section of each subsidiary account for the miles operated during the current year.

Answer

Check Figure: Truck #1, credit to Accumulated Depreciation, $5,460

2. Journalize the entry on December 31 to record depreciation for the year.

EX 10-9

Depreciation by two methods

1. Obj. 2

A Kubota tractor acquired on January 8 at a cost of $85,000 has an estimated useful life of 10 years. Assuming that it will have no residual value, determine the depreciation for each of the first two years (a) by the straight-line method and (b) by the double-declining-balance method.

Answer

Check Figure: $8,500

EX 10-10

Depreciation by two methods

1. Obj. 2

A storage tank acquired at the beginning of the fiscal year at a cost of $75,000 has an estimated residual value of $10,000 and an estimated useful life of 20 years. Determine the following: (a) the amount of annual depreciation by the straight-line method and (b) the amount of depreciation for the first and second years computed by the double-declining-balance method.

Answer

Check Figure: $3,250

EX 10-11

Partial-year depreciation

1. Obj. 2

Equipment acquired at a cost of $105,000 has an estimated residual value of $12,000 and an estimated useful life of 10 years. It was placed into service on May 1 of the current fiscal year, which ends on December 31. Determine the depreciation for the current fiscal year and for the following fiscal year by (a) the straight-line method and (b) the double-declining-balance method.