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.

Answer

Check Figure: First year, $6,200

EX 10-12

Revision of depreciation
1. Obj. 2

A building with a cost of $1,200,000 has an estimated residual value of $250,000, has an estimated useful life of 40 years, and is depreciated by the straight-line method. (a) What is the amount of the annual depreciation? (b) What is the book value at the end of the twenty-eighth year of use? (c) If at the start of the twenty-ninth year it is estimated that the remaining life is 10 years and that the residual value is $180,000, what is the depreciation expense for each of the remaining 10 years?

Answer

Check Figure: $23,750

EX 10-13

Capital and revenue expenditures
1. Obj. 2

US Freight Lines Co. incurred the following costs related to trucks and vans used in operating its delivery service:

1. Installed GPS systems on the trucks.

2. Replaced the transmission fluid on a truck that had been in service for the past four years.

3. Overhauled the engine on one of the trucks purchased three years ago.

4. Performed annual service of installing new spark plugs, changing the oil, and greasing the joints of all trucks and vans.

5. Rebuilt the engine on one of the vans that had been driven 80,000 miles.

6. Repaired a flat tire on one of the vans.

7. Installed a hydraulic lift to a truck.

8. Tinted the back and side windows of the vans and installed a security system to discourage theft of contents.

9. Replaced a truck's suspension system with a new suspension system, allowing for heavier loads.

10. Installed an optional third-row seat on one of the vans.

Classify each of the costs as a capital expenditure or a revenue expenditure.

EX 10-14

Capital and revenue expenditures
1. Obj. 2

Jackie Fox owns and operates Platinum Transport Co. During the past year, Jackie incurred the following costs related to an 18-wheel truck:

1. Changed engine oil.

2. Installed a television in the sleeping compartment of the truck.

3. Installed a wind deflector on top of the cab to increase fuel mileage.

4. Modified the factory-installed turbo charger with a special-order kit designed to add 50 more horsepower to the engine performance.

5. Replaced a headlight that had burned out.

6. Replaced a shock absorber that had worn out.

7. Replaced fog and cab light bulbs.

8. Replaced the hydraulic brake system that had begun to fail during his latest trip through the Rocky Mountains.

9. Removed the old radio and replaced it with a new communications module.

10. Replaced the old radar detector with a newer model that is fastened to the truck with a locking device that prevents its removal.

Classify each of the costs as a capital expenditure or a revenue expenditure.

EX 10-15

Capital and revenue expenditures
1. Obj. 1, 2

Quality Move Company made the following expenditures on one of its delivery trucks:

Mar. 20.

Replaced the transmission at a cost of $1,890.

June 11.

Paid $1,350 for installation of a hydraulic lift.

Nov. 30.

Paid $55 to change the oil and air filter.

Prepare journal entries for each expenditure.

EX 10-16

Capital expenditure and depreciation; parital-year depreciation
1. Obj. 1, 2

Willow Creek Company purchased and installed carpet in its new general offices on April 30 for a total cost of $18,000. The carpet is estimated to have a 15-year useful life and no residual value.

1. Prepare the journal entry necessary for recording the purchase of the new carpet.

2. Record the December 31 adjusting entry for the partial-year depreciation expense for the carpet, assuming that Willow Creek uses the straight-line method.

Answer

Check Figure: Depreciation Expense, $800

EX 10-17

Entries for sale of fixed asset
1. Obj. 3

Equipment acquired on January 8 at a cost of $168,000 has an estimated useful life of 18 years, has an estimated residual value of $15,000, and is depreciated by the straight-line method.

1. What was the book value of the equipment at December 31 the end of the fourth year?

Answer

Check Figure: $134,000

2. Assuming that the equipment was sold on April 1 of the fifth year for $125,000, journalize the entries to record (1) depreciation for the three months until the sale date and (2) the sale of the equipment.

EX 10-18

Disposal of fixed asset
1. Obj. 3

Equipment acquired on January 6 at a cost of $375,000 has an estimated useful life of 20 years and an estimated residual value of $25,000.

1. What was the annual amount of depreciation for the Years 1–3 using the straight-line method of depreciation?

2. What was the book value of the equipment on January 1 of Year 4?

Answer

Check Figure: $322,500

3. Assuming that the equipment was sold on January 3 of Year 4 for $300,000, journalize the entry to record the sale.

4. Assuming that the equipment had been sold on January 3 of Year 4 for $325,000 instead of $300,000, journalize the entry to record the sale.

EX 10-19

Depletion entries
1. Obj. 4

Alaska Mining Co. acquired mineral rights for $67,500,000. The mineral deposit is estimated at 30,000,000 tons. During the current year, 4,000,000 tons were mined and sold.

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

Answer

Check Figure: $9,000,000

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

EX 10-20

Amortization entries
1. Obj. 5

Kleen Company acquired patent rights on January 10 of Year 1 for $2,800,000. The patent has a useful life equal to its legal life of eight years. On January 7 of Year 4, Kleen successfully defended the patent in a lawsuit at a cost of $38,000.

1. Determine the patent amortization expense for Year 4 ended December 31.

Answer

Check Figure: $357,600

2. Journalize the adjusting entry on December 31 of Year 4 to recognize the amortization.

EX 10-21

Book value of fixed assets
1. Obj. 6

Apple Inc. designs, manufactures, and markets personal computers and related software. Apple also manufactures and distributes music players (iPod) and mobile phones (iPhone) along with related accessories and services, including online distribution of third-party music, videos, and applications. The following information was taken from a recent annual report of Apple:

Property, Plant, and Equipment (in millions):

1. Compute the book value of the fixed assets for the current year and the preceding year and explain the differences, if any.

2. Would you normally expect Apple's book value of fixed assets to increase or decrease during the year? Why?

EX 10-22

Balance sheet presentation
1. Obj. 6

List the errors you find in the following partial balance sheet:

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EX 10-23

Fixed asset turnover ratio
1. Obj. 7

Amazon.com, Inc. is the world's leading Internet retailer of merchandise and media. Amazon also designs and sells electronic products, such as e-readers. Netflix, Inc. is the world's leading Internet television network. Both companies compete in the digital media and streaming space. However, Netflix is more narrowly focused in the digital streaming business than is Amazon.

Sales and average book value of fixed assets information (in millions) are provided for Amazon and Netflix for a recent year as follows:

1. Compute the fixed asset turnover ratio for each company. Round to one decimal place.

2. Which company is more efficient in generating sales from fixed assets?

3. Interpret your results.

EX 10-24

Fixed asset turnover ratio
1. Obj. 7

Verizon Communications Inc. is a major telecommunications company in the United States. Two recent balance sheets for Verizon disclosed the following information regarding fixed assets:

Verizon's revenue for the year was $131,620 million. Assume that the fixed asset turnover ratio for the telecommunications industry averages approximately 1.1.

1. Determine Verizon's fixed asset turnover ratio. Round to one decimal place.

2. Interpret this ratio with respect to the industry average.

EX 10-25

Fixed asset turnover ratio
1. Obj. 7

FedEx Corporation and United Parcel Service, Inc. compete in the package delivery business. The major fixed assets for each business include aircraft, sorting and handling facilities, delivery vehicles, and information technology. The sales and average book value of fixed assets reported on recent financial statements for each company were as follows:

1. Compute the fixed asset turnover ratio for each company. Round to one decimal place.

2. Which company appears more efficient in using fixed assets?

3. Interpret the meaning of the ratio for the more efficient company.

EX 10-26

Fixed asset turnover ratio
1. Obj. 7

The following table shows the sales and average book value of fixed assets for three different companies from three different industries for a recent year:

1. For each company, determine the fixed asset turnover ratio. Round to one decimal place.

2. Explain Comcast's fixed asset turnover ratio relative to the other two companies.

Appendix EX 10-27

Asset traded for similar asset
1. A printing press priced at a fair market value of $275,000 is acquired in a transaction that has commercial substance by trading in a similar press and paying cash for the difference between the trade-in allowance and the price of the new press.

1. Assuming that the trade-in allowance is $90,000, what is the amount of cash given?

Answer

Check Figure: $185,000

2. Assuming that the book value of the press traded in is $68,000, what is the gain or loss on the exchange?

Appendix EX 10-28

Asset traded for similar asset
1. Assume the same facts as in Exercise 9-27, except that the book value of the press traded in is $108,500. (a) What is the amount of cash given? (b) What is the gain or loss on the exchange?

Answer

Check Figure: $(18,500) loss

Appendix EX 10-29

Entries for trade of fixed asset
1. On July 1, Twin Pines Co., a water distiller, acquired new bottling equipment with a list price (fair market value) of $220,000. Twin Pines received a trade-in allowance (fair market value) of $45,000 on the old equipment of a similar type and paid cash of $175,000. The following information about the old equipment is obtained from the account in the equipment ledger: cost, $180,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $120,000; annual depreciation, $12,000. Assuming that the exchange has commercial substance, journalize the entries to record (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on July 1.

Appendix EX 10-30

Entries for trade of fixed asset
1. On October 1, Bentley Delivery Services acquired a new truck with a list price (fair market value) of $75,000. Bentley Delivery received a trade-in allowance (fair market value) of $24,000 on an old truck of similar type and paid cash of $51,000. The following information about the old truck is obtained from the account in the equipment ledger: cost, $56,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $35,000; annual depreciation, $7,000. Assuming that the exchange has commercial substance, journalize the entries to record (a) the current depreciation of the old truck to the date of trade-in and (b) the transaction on October 1.

10-8gProblems: Series A
PR 10-1A

Allocating payments and receipts to fixed asset accounts
Obj. 1

The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale ceramic business. The receipts are identified by an asterisk.

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Instructions

1. Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts. Indicate receipts by an asterisk. Identify each item by letter and list the amounts in columnar form, as follows:

2. Determine the amount debited to Land, Land Improvements, and Building.

3. The costs assigned to the land, which is used as a plant site, will not be depreciated, while the costs assigned to land improvements will be depreciated. Explain this seemingly contradictory application of the concept of depreciation.

4. What would be the effect on the current year's income statement and balance sheet if the cost of filling and grading land of $12,000 [payment (i)] was incorrectly classified as Land Improvements rather than Land? Assume that Land Improvements are depreciated over a 20-year life using the double-declining-balance method.

Answer

Check Figure: Land, $400,000

PR 10-2A

Comparing three depreciation methods
Obj. 2

Dexter Industries purchased packaging equipment on January 8 for $72,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $4,500. The equipment was used for 7,600 hours during Year 1, 6,000 hours in Year 2, and 4,400 hours in Year 3.

Instructions

1. Determine the amount of depreciation expense for the three years ending December 31 by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. The following columnar headings are suggested for recording the depreciation expense amounts:

Answer

Check Figure: Year 1: straight-line depreciation, $22,500

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the three-year life of the equipment?

PR 10-3A

Depreciation by three methods; partial years
Obj. 2

Perdue Company purchased equipment on April 1 for $270,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $9,000. The equipment was used for 7,500 hours during Year 1, 5,500 hours in Year 2, 4,000 hours in Year 3, and 1,000 hours in Year 4.

Instructions

1. Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method.

Answer

Check Figure: Year 1: $65,250

PR 10-4A

Depreciation by two methods; sale of fixed asset
Obj. 2, 3

New lithographic equipment, acquired at a cost of $800,000 on March 1 of Year 1 (beginning of the fiscal year), has an estimated useful life of five years and an estimated residual value of $90,000. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year.

On March 4 of Year 5, the equipment was sold for $135,000.

Instructions

1. Determine the annual depreciation expense for each of the estimated five years of use, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by (a) the straight-line method and (b) the double-declining-balance method. The following columnar headings are suggested for each schedule:

Answer

Check Figure: Year 1: $320,000 depreciation expense

2. Journalize the entry to record the sale assuming that the manager chose the double-declining-balance method.

3. Journalize the entry to record the sale in (2) assuming that the equipment was sold for $88,750 instead of $135,000.

PR 10-5A

Transactions for fixed assets, including sale
Obj. 1, 2, 3

The following transactions and adjusting entries were completed by Legacy Furniture Co. during a three-year period. All are related to the use of delivery equipment. The double-declining-balance method of depreciation is used.

Year 1

Jan. 4.

Purchased a used delivery truck for $28,000, paying cash.

Nov. 2.

Paid garage $675 for miscellaneous repairs to the truck.

Dec. 31.

Recorded depreciation on the truck for the year. The estimated useful life of the truck is four years, with a residual value of $5,000 for the truck.

Year 2

Jan. 6.

Purchased a new truck for $48,000, paying cash.

Apr. 1.

Sold the used truck purchased on Jan. 4 of Year 1 for $15,000. (Record depreciation to date in Year 2 for the truck.)

June 11.

Paid garage $450 for miscellaneous repairs to the truck.

Dec. 31.

Record depreciation for the new truck. It has an estimated residual value of $9,000 and an estimated life of five years.

Year 3

July 1.

Purchased a new truck for $54,000, paying cash.

Oct. 2.

Sold the truck purchased January 6, Year 2, for $16,750. (Record depreciation to date for Year 3 for the truck.)

Dec. 31.

Recorded depreciation on the remaining truck purchased on July 1. It has an estimated residual value of $12,000 and an estimated useful life of eight years.

Instructions

1. Journalize the transactions and the adjusting entries.

PR 10-6A

Amortization and depletion entries
Obj. 4, 5

Data related to the acquisition of timber rights and intangible assets during the current year ended December 31 are as follows:

1. Timber rights on a tract of land were purchased for $1,600,000 on February 22. The stand of timber is estimated at 5,000,000 board feet. During the current year, 1,100,000 board feet of timber were cut and sold.

2. On December 31, the company determined that $3,750,000 of goodwill was impaired.

3. Governmental and legal costs of $6,600,000 were incurred on April 3 in obtaining a patent with an estimated economic life of 12 years. Amortization is to be for three-fourths of a year.

Instructions

2. Determine the amount of the amortization, depletion, or impairment for the current year for each of the foregoing items.

Answer

Check Figure: $352,000

3. Journalize the adjusting entries required to record the amortization, depletion, or impairment for each item.

10-8hProblems: Series B
PR 10-1B

Allocating payments and receipts to fixed asset accounts
Obj. 1

The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale apparel business. The receipts are identified by an asterisk.

Enlarge Image

Instructions

1. Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts. Indicate receipts by an asterisk. Identify each item by letter and list the amounts in columnar form, as follows:

2. Determine the amount debited to Land, Land Improvements, and Building.

3. The costs assigned to the land, which is used as a plant site, will not be depreciated, while the costs assigned to land improvements will be depreciated. Explain this seemingly contradictory application of the concept of depreciation.

4. What would be the effect on the current year's income statement and balance sheet if the cost of paving the parking lot of $21,600 [payment (o)] was incorrectly classified as Land rather than Land Improvements? Assume that Land Improvements are depreciated over a 10-year life using the double-declining-balance method.

Answer

Check Figure: Land, $860,000

PR 10-2B

Comparing three depreciation methods
Obj. 2

Waylander Coatings Company purchased waterproofing equipment on January 6 for $320,000. The equipment was expected to have a useful life of four years, or 20,000 operating hours, and a residual value of $35,000. The equipment was used for 7,200 hours during Year 1, 6,400 hours in Year 2, 4,400 hours in Year 3, and 2,000 hours in Year 4.

Instructions

1. Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the four years by each method. The following columnar headings are suggested for recording the depreciation expense amounts:

Answer

Check Figure: Year 1: straight-line depreciation, $71,250

2. What method yields the highest depreciation expense for Year 1?

3. What method yields the most depreciation over the four-year life of the equipment?

PR 10-3B

Depreciation by three methods; partial years
Obj. 2

Layton Company purchased tool sharpening equipment on October 1 for $108,000. The equipment was expected to have a useful life of three years, or 12,000 operating hours, and a residual value of $7,200. The equipment was used for 1,350 hours during Year 1, 4,200 hours in Year 2, 3,650 hours in Year 3, and 2,800 hours in Year 4.

Instructions

1. Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method.

Answer

Check Figure: Year 1, $8,400

PR 10-4B

Depreciation by two methods; sale of fixed asset
Obj. 2, 3

New tire retreading equipment, acquired at a cost of $110,000 on September 1 of Year 1 (beginning of the fiscal year), has an estimated useful life of four years and an estimated residual value of $7,500. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. On the basis of the data presented to the manager, the double-declining-balance method was selected.

On September 6 of Year 4, the equipment was sold for $18,000.

Instructions

1. Determine the annual depreciation expense for each of the estimated four years of use, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by (a) the straight-line method and (b) the double-declining-balance method. The following columnar headings are suggested for each schedule:

Answer

Check Figure: Year 1, $55,000 depreciation expense

2. Journalize the entry to record the sale.

3. Journalize the entry to record the sale, assuming that the equipment sold for $10,500 instead of $18,000.

PR 10-5B

Transactions for fixed assets, including sale
Obj. 1, 2, 3

The following transactions and adjusting entries were completed by Robinson Furniture Co. during a three-year period. All are related to the use of delivery equipment. The double-declining-balance method of depreciation is used.

Year 1

Jan. 8.

Purchased a used delivery truck for $24,000, paying cash.

Mar. 7.

Paid garage $900 for changing the oil, replacing the oil filter, and tuning the engine on the delivery truck.

Dec. 31.

Recorded depreciation on the truck for the fiscal year. The estimated useful life of the truck is four years, with a residual value of $4,000 for the truck.

Year 2

Jan. 9.

Purchased a new truck for $50,000, paying cash.

Feb. 28.

Paid garage $250 to tune the engine and make other minor repairs on the used truck.

Apr. 30.

Sold the used truck for $9,500. (Record depreciation to date in Year 2 for the truck.)

Dec. 31.

Record depreciation for the new truck. It has an estimated residual value of $12,000 and an estimated life of eight years.

Year 3

Sept. 1.

Purchased a new truck for $58,500, paying cash.

4.

Sold the truck purchased January 9, Year 2, for $36,000. (Record depreciation to date for Year 3 for the truck.)

Dec. 31.

Recorded depreciation on the remaining truck. It has an estimated residual value of $16,000 and an estimated useful life of 10 years.

Instructions

1. Journalize the transactions and the adjusting entries.

PR 10-6B

Amortization and depletion entries
Obj. 4, 5

Data related to the acquisition of timber rights and intangible assets during the current year ended December 31 are as follows:

1. On December 31, the company determined that $3,400,000 of goodwill was impaired.

2. Governmental and legal costs of $4,800,000 were incurred on September 30 in obtaining a patent with an estimated economic life of eight years. Amortization is to be for one-fourth of a year.

3. Timber rights on a tract of land were purchased for $2,975,000 on February 4. The stand of timber is estimated at 12,500,000 board feet. During the current year, 4,150,000 board feet of timber were cut and sold.

Instructions

2. Determine the amount of the amortization, depletion, or impairment for the current year for each of the foregoing items.

Answer

Check Figure: $150,000

3. Journalize the adjusting entries to record the amortization, depletion, or impairment for each item.

10-8iCases & Projects
CP 10-1

Ethics in Action
Hard Bodies Co. is a fitness chain that has just completed its second year of operations. At the beginning of its first fiscal year, the company purchased fitness equipment at a cost of $600,000 and estimated that the equipment would have a useful life of five years and no residual value. The company uses the straight-line depreciation method. The company reported net income for the first two years of operations as follows:

Mike Gambit, the company's chief financial officer (CFO), has recently run financial models to predict future net income, and he expects net losses to continue at $(2,000) per year for the next three years. James Steed, the president of Hard Bodies, is concerned about these predictions, as he is under pressure from the company's owner to return the company to Year 1 net income levels. If the company does not meet these goals, both he and Mike will likely be fired. Mike suggests that the company change the estimated useful life of the fitness equipment to 10 years and increase the equipment's estimated residual value to $50,000. This will reduce depreciation expense and increase net income.

1. Evaluate the decision to change the equipment's estimated useful life and estimated residual value to improve earnings. How does this change impact the usefulness of the company's net income for external decision makers?

2. If Mike and James make the change, are they acting in an ethical manner? Explain.

CP 10-2

Ethics in Action
Dave Elliott, CPA, is an assistant to the controller of Lyric Consulting Co. In his spare time, Dave also prepares tax returns and performs general accounting services for clients. Frequently, Dave performs these services after his normal working hours, using Lyric Consulting Co.’s computers and laser printers. Occasionally, Dave's clients will call him at the office during regular working hours.

1. Discuss whether Dave is performing in a professional manner.

CP 10-3

Team Activity
In teams, select a public company that interests you. Obtain the company's most recent annual report on Form 10-K. The Form 10-K is a company's annually required filing with the Securities and Exchange Commission (SEC). It includes the company's financial statements and accompanying notes. The Form 10-K can be obtained either (a) by referring to the investor relations section of the company's website or (b) by using the company search feature of the SEC's EDGAR database service found at www.sec.gov/edgar/searchedgar/companysearch.html.

1. Based on the information in the company's most recent annual report, answer the following questions:

1. What depreciation methods does the company use to compute depreciation expense?

2. How much depreciation expense does the company report on its income statement?

3. What is the initial cost of the company's fixed assets?

4. What is the book value of the company's fixed assets?

5. What types of intangible assets, if any, does the company report on its balance sheet?

2. Does the book value of the company's fixed assets reflect its current market value? Explain your answer.

CP 10-4

Team Activity
1. Go to the Internet and review the procedures for applying for a patent, a copyright, and a trademark. You may find information available on Wikipedia (Wikipedia.org) useful for this purpose. Prepare a brief written summary of these procedures.

CP 10-5

Communication
Godwin Co. owns three delivery trucks. Details for each truck at the end of the most recent year follow:

· At the beginning of the year, a hydraulic lift is added to Truck 1 at a cost of $4,500. The addition of the hydraulic lift will allow the company to deliver much larger objects than could previously be delivered.

· At the beginning of the year, the engine of Truck 2 is overhauled at a cost of $5,000. The engine overhaul will extend the truck's useful life by three years.

2. Write a short memo to Godwin's chief financial officer explaining the financial statement effects of the expenditures associated with Trucks 1 and 2.

CP 10-6

Financial versus tax depreciation
The following is an excerpt from a conversation between two employees of WXT Technologies, Nolan Sears and Stacy Mays. Nolan is the accounts payable clerk, and Stacy is the cashier.

Nolan:

Stacy, could I get your opinion on something?

Stacy:

Sure, Nolan.

Nolan:

Do you know Rita, the fixed assets clerk?

Stacy:

I know who she is, but I don't know her real well. Why?

Nolan:

Well, I was talking to her at lunch last Monday about how she liked her job. You know, the usual; and she mentioned something about having to keep two sets of books—one for taxes and one for the financial statements. That can't be good accounting, can it? What do you think?

Stacy:

Two sets of books? It doesn't sound right.

Nolan:

It doesn't seem right to me either. I was always taught that you had to use generally accepted accounting principles. How can there be two sets of books? What can be the difference between the two?

1. How would you respond to Nolan and Stacy if you were Rita?