CHAPTER 10 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS: Test Bank for Accounting Principles, Eleventh Edition: This document/TEST BANK Contains 313 Questions With Answers, Worked Solutions and Essay Explanations.

CHAPTER 10 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY sg This question also appears in the Study Guide. st This question also appears i ...

CHAPTER 10 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY sg This question also appears in the Study Guide. st This question also appears in a self-test at the student companion website. a This question covers a topic in an appendix to the chapter. SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE CHAPTER LEARNING OBJECTIVES 1. Describe how the historical cost principle applies to plant assets. 2. Explain the concept of depreciation and how to compute it. 3. Distinguish between revenue and capital expenditures, and explain the entries for each. 4. Explain how to account for the disposal of a plant asset. 5. Compute periodic depletion of natural resources. 6. Explain the basic issues related to accounting for intangible assets. 7. Indicate how plant assets, natural resources, and intangible assets are reported. a8. Explain how to account for the exchange of plant assets. TRUE-FALSE STATEMENTS 1. All plant assets (fixed assets) must be depreciated for accounting purposes. , 2. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account. , 3. When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Delivery Equipment. , 4. Land improvements are generally charged to the Land account. , 5. Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability. , 6. The book value of a plant asset is always equal to its fair market value. , 7. Recording depreciation on plant assets affects the balance sheet and the income statement. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 8. The depreciable cost of a plant asset is its original cost minus obsolescence. , 9. Recording depreciation each period is an application of the expense recognition principle. 10. The Accumulated Depreciation account represents a cash fund available to replace plant assets. , 11. In calculating depreciation, both plant asset cost and useful life are based on estimates. , 12. Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used. 13. Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation. , 14. The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset's useful life. , 15. Under the double-declining-balance method, the depreciation rate used each year remains constant. , 16. The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements. , 17. A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not to prior periods. , 18. A change in the estimated salvage value of a plant asset requires a restatement of prior years' depreciation. , 19. To determine a new depreciation amount after a change in estimate of a plant asset's useful life, the asset's remaining depreciable cost is divided by its remaining useful life. , 20. Additions and improvements to a plant asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred. 21. Capital expenditures are expenditures that increase the company's investment in productive facilities. 22. Ordinary repairs should be recognized when incurred as revenue expenditures. , 23. A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership. , 24. Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business. 25. The fair value of a plant asset is always the same as its book value. , 26. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs. , 27. A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale are less than the asset's book value. , 28. The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value. 29. A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way. , LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 30. A plant asset must be fully depreciated before it can be removed from the books. , 31. If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement. , 32. Depletion cost per unit is computed by dividing the total cost of a natural resource by the estimated number of units in the resource. , 33. The Accumulated Depletion account is deducted from the cost of the natural resource in the balance sheet. , 34. Depletion expense for a period is only recognized on natural resources that have been extracted and sold during the period. , 35. Natural resources are long-lived productive assets that are extracted in operations and are replaceable only by an act of nature. , 36. The cost of natural resources is not allocated to expense because the natural resources are replaceable only by an act of nature. , 37. Conceptually, the cost allocation procedures for natural resources parallels that of plant assets. , LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 38. Natural resources include standing timber and underground deposits of oil, gas, and minerals. , 39. If an acquired franchise or license has an indefinite life, the cost of the asset is not amortized. , 40. When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired. , 41. Research and development costs which result in a successful product which is patentable are charged to the Patent account. , 42. The cost of a patent must be amortized over a 20-year period. , 43. The cost of a patent should be amortized over its legal life or useful life, whichever is shorter. , 44. The balances of the major classes of plant assets and accumulated depreciation by major classes should be disclosed in the balance sheet or notes. , 45. The asset turnover is calculated as total sales divided by ending total assets. , 46. Research and development costs can be classified as a property, plant, and equipment item or as an intangible asset. , a47. An exchange of plant assets has commercial substance if the future cash flows change as a result of the exchange. , a48. Companies record a gain or loss on the exchange of plant assets because most exchanges have commercial substance. , a49. When plant assets are exchanged, the cost of the new asset is the book value of the old asset plus any cash paid. , 50. When constructing a building, a company is permitted to include the acquisition cost and certain interest costs incurred in financing the project. , 51. Recognition of depreciation permits the accumulation of cash for the replacement of the asset. , 52. When an asset is purchased during the year, it is not necessary to record depreciation expense in the first year under the declining-balance depreciation method. , 53. Depletion expense is reported in the income statement as an operating expense. , 54. Goodwill is not recognized in accounting unless it is acquired from another business enterprise. , 55. Research and development costs should be charged to expense when incurred. , a56. A loss on the exchange of plant assets occurs when the fair market value of the old asset is less than its book value. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA Answers to True-False Statements MULTIPLE CHOICE QUESTIONS 57. The cost of a purchased building includes all of the following except a. closing costs. b. real estate broker's commission. c. remodeling costs. d. All of these are included. , 58. A company purchased land for $90,000 cash. Real estate brokers' commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the historical cost principle, the cost of land would be recorded at a. $107,000. b. $90,000. c. $90,000. d. $102,000. , : Problem Solving, IMA: FSA Solution: $90,000 + $5,000 + $7,000  $102,000 59. Which one of the following items is not considered a part of the cost of a truck purchased for business use? a. Sales tax b. Truck license c. Freight charges d. Cost of lettering on side of truck , LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 60. Which of the following assets does not decline in service potential over the course of its useful life? a. Equipment b. Furnishings c. Land d. Fixtures , 61. The four subdivisions for plant assets are a. land, land improvements, buildings, and equipment. b. intangibles, land, buildings, and equipment. c. furnishings and fixtures, land, buildings, and equipment. d. property, plant, equipment, and land. , 62. The cost of land does not include a. real estate brokers' commission. b. annual property taxes. c. accrued property taxes assumed by the purchaser. d. title fees. , 63. Gagner Clinic purchases land for $175,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Gagner Clinic record as the cost for the land? a. $157,200 b. $175,000 c. $179,700 d. $157,500 , : Problem Solving, IMA: FSA Solution: $175,000 + $1,500 + $1,000 + $2,200  $179,700 64. Carey Company buys land for $50,000 on 12/31/13. As of 3/31/14, the land has appreciated in value to $50,700. On 12/31/14, the land has an appraised value of $51,800. By what amount should the Land account be increased in 2014? a. $0 b. $700 c. $1,100 d. $1,800 , LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 65. Hull Company acquires land for $86,000 cash. Additional costs are as follows: Removal of shed $ 300 Filling and grading 1,500 Salvage value of lumber of shed 120 Broker commission 1,130 Paving of parking lot 10,000 Closing costs 560 Hull will record the acquisition cost of the land as a. $96,000. b. $87,690. c. $89,610. d. $89,370. , : Problem Solving, IMA: FSA Solution: $86,000 + $300 + $1,500  $120 + $1,130 + $560  $89,370 66. Wesley Hospital installs a new parking lot. The paving cost $40,000 and the lights to illuminate the new parking area cost $25,000. Which of the following statements is true with respect to these additions? a. $40,000 should be debited to the Land account. b. $25,000 should be debited to Land Improvements. c. $65,000 should be debited to the Land account. d. $65,000 should be debited to Land Improvements. , LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: $40,000 + $25,000  $65,000 67. Land improvements should be depreciated over the useful life of the a. land. b. buildings on the land. c. land or land improvements, whichever is longer. d. land improvements. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 68. Mattox Company is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true? a. Excavation fees are capitalized but building permit fees are not. b. Architect fees are capitalized but building permit fees are not. c. Interest is capitalized during the construction as part of the cost of the building. d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds. , LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 69. A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true? a. The cost of the building will not include the repainting and recarpeting costs. b. The cost of the building will include the cost of replacing the roof. c. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements. d. The wiring is part of the computer costs, not the building cost. , LO: 1, Bloom: C, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 70. Engler Company purchases a new delivery truck for $55,000. The sales taxes are $4,000. The logo of the company is painted on the side of the truck for $1,600. The truck license is $160. The truck undergoes safety testing for $290. What does Engler record as the cost of the new truck? a. $61,050 b. $60,890 c. $59,000 d. $60,600 , : Problem Solving, IMA: FSA Solution: $55,000 + $4,000 + $1,600 + $290  $60,890 71. All of the following factors in computing depreciation are estimates except a. cost. b. residual value. c. salvage value. d. useful life. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 72. Presto Company purchased equipment and these costs were incurred: Cash price $65,000 Sales taxes 3,600 Insurance during transit 640 Installation and testing 860 Total costs $70,100 Presto will record the acquisition cost of the equipment as a. $65,000. b. $68,600. c. $69,240. d. $70,100. , LO: 1, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: $65,000 + $3,600 + $640 + $860  $70,100 73. Angie’s Blooms purchased a delivery van for $40,000. The company was given a $4,000 cash discount by the dealer, and paid $2,000 sales tax. Annual insurance on the van is $1,000. As a result of the purchase, by how much will Angie’s Blooms increase its van account? a. $40,000 b. $36,000 c. $39,000 d. $38,000 , LO: 1, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: $40,000  $4,000 + $2,000  $38,000 74. Yocum Company purchased equipment on January 1 at a list price of $120,000, with credit terms 2/10, n/30. Payment was made within the discount period and Yocum was given a $2,400 cash discount. Yocum paid $6,000 sales tax on the equipment, and paid installation charges of $1,760. Prior to installation, Yocum paid $4,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment? a. $125,360 b. $129,360 c. $131,760 d. $123,600 , : Problem Solving, IMA: FSA Solution: $120,000  $2,400 + $6,000 + $1,760 + $4,000  $129,360 75. Interest may be included in the acquisition cost of a plant asset a. during the construction period of a self-constructed asset. b. if the asset is purchased on credit. c. if the asset acquisition is financed by a long-term note payable. d. if it is a part of a lump-sum purchase. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 76. The balance in the Accumulated Depreciation account represents the a. cash fund to be used to replace plant assets. b. amount to be deducted from the cost of the plant asset to arrive at its fair market value. c. amount charged to expense in the current period. d. amount charged to expense since the acquisition of the plant asset. , 77. Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets? a. Salvage value b. Estimated useful life c. Cash needed to replace the plant asset d. Cost , 78. Depreciation is the process of allocating the cost of a plant asset over its service life in a. an equal and equitable manner. b. an accelerated and accurate manner. c. a systematic and rational manner. d. a conservative market-based manner. , , IMA: Business Economics 79. The book value of an asset is equal to the a. asset's fair value less its historical cost. b. blue book value relied on by secondary markets. c. replacement cost of the asset. d. asset's cost less accumulated depreciation. , 80. Accountants do not attempt to measure the change in a plant asset's fair value during ownership because a. the assets are not held for resale. b. plant assets cannot be sold. c. losses would have to be recognized. d. it is management's responsibility to determine fair values. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 81. Depreciation is a process of a. asset devaluation. b. cost accumulation. c. cost allocation. d. asset valuation. , , IMA: Business Economics 82. Recording depreciation each period is necessary in accordance with the a. going concern principle. b. historical cost principle. c. expense recognition principle. d. asset valuation principle. 83. In computing depreciation, salvage value is a. the fair value of a plant asset on the date of acquisition. b. subtracted from accumulated depreciation to determine the plant asset's depreciable cost. c. an estimate of a plant asset's value at the end of its useful life. d. ignored in all the depreciation methods. , 84. When estimating the useful life of an asset, accountants do not consider a. the cost to replace the asset at the end of its useful life. b. obsolescence factors. c. expected repairs and maintenance. d. the intended use of the asset. , , IMA: Business Economics 85. Useful life is expressed in terms of use expected from the asset under the a. declining-balance method. b. straight-line method. c. units-of-activity method. d. none of these answer choices are correct. , 86. Equipment was purchased for $300,000. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $60,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $70,800. b. $58,800. c. $49,200. d. $48,000. , : Problem Solving, IMA: Reporting Solution: ($300,000 + $14,000 + $40,000  $60,000)  5  $58,800 87. A truck was purchased for $180,000 and it was estimated to have a $36,000 salvage value at the end of its useful life. Monthly depreciation expense of $3,000 was recorded using the straight-line method. The annual depreciation rate is a. 20%. b. 2%. c. 8%. d. 25%. , : Problem Solving, IMA: Reporting Solution: ($3,000 × 12)  ($180,000  $36,000)  .25 88. A company purchased factory equipment on April 1, 2014 for $160,000. It is estimated that the equipment will have a $20,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2014 is a. $16,000. b. $14,000. c. $10,500. d. $12,000. , Solution: [($160,000  $20,000)  10] × 9/12  $10,500 89. A company purchased office equipment for $40,000 and estimated a salvage value of $8,000 at the end of its 5-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is a. 20%. b. 25%. c. 40%. d. 5%. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: (1  5) × 2  .40 90. The declining-balance method of depreciation produces a. a decreasing depreciation expense each period. b. an increasing depreciation expense each period. c. a declining percentage rate each period. d. a constant amount of depreciation expense each period. , , IMA: Business Economics 91. A company purchased factory equipment for $700,000. It is estimated that the equipment will have a $70,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be a. $280,000. b. $168,000. c. $252,000. d. $120,960. , Solution: ($700,000  0) × .40 = $280,000; ($700,000  $280,000) × .40  $168,000 92. The units-of-activity method is generally not suitable for a. airplanes. b. buildings. c. delivery equipment. d. factory machinery. , , IMA: Business Economics 93. A plant asset cost $288,000 and is estimated to have a $36,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be a. $24,120. b. $40,500. c. $35,436. d. $27,570. , Solution: ($288,000  0) × .25 = $72,000; ($288,000  $72,000) × .25  $54,000; ($288,000  $126,000) × .25 = $40,500 94. A factory machine was purchased for $375,000 on January 1, 2014. It was estimated that it would have a $75,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2014. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2014 would be a. $37,500. b. $60,000. c. $75,000. d. $30,000. , : Problem Solving, IMA: Reporting Solution: [($375,000  $75,000)  40,000] × 4,000  $30,000 95. The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method which a. is used for tax purposes. b. must be used for financial statement purposes. c. is required by the SEC. d. expenses an asset over a single year because capital acquisitions must be expensed in the year purchased. , , IMA: Business Economics 96. Which of the following methods of computing depreciation is production based? a. Straight-line b. Declining-balance c. Units-of-activity d. None of these answer choices are correct. , , IMA: Business Economics 97. Management should select the depreciation method that a. is easiest to apply. b. best measures the plant asset's market value over its useful life. c. best measures the plant asset's contribution to revenue over its useful life. d. has been used most often in the past by the company. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics 98. The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is a. straight-line. b. units-of-activity. c. declining-balance. d. none of these. , , IMA: Business Economics 99. On October 1, 2014, Holt Company places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the depreciation expense for 2014 if Holt Company uses the straight-line method of depreciation? a. $4,500 b. $24,000 c. $6,000 d. $12,000 , : Problem Solving, IMA: Reporting Solution: [($120,000  $30,000)  5] × 3/12  $4,500 100. On October 1, 2014, Holt Company places a new asset into service. The cost of the asset is $120,000 with an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the book value of the plant asset on the December 31, 2014, balance sheet assuming that Holt Company uses the double-declining-balance method of depreciation? a. $78,000 b. $90,000 c. $108,000 d. $114,000 , : Problem Solving, IMA: Reporting Solution: [($120,000  0) × .40] × 3/12  $12,000; $120,000  $12,000 = $108,000 101. Which depreciation method is most frequently used in businesses today? a. Straight-line b. Declining-balance c. Units-of-activity d. Double-declining-balance , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 102. Mott Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $48,000 that will produce an estimated 100,000 units over its useful life. Estimated salvage value at the end of its useful life is $4,000. What is the depreciation cost per unit? a. $4.40 b. $4.80 c. $.44 d. $.48 , PC: Problem Solving, IMA: Business Economics Solution: ($48,000  4,000)  100,000 = $.44 103. Units-of-activity is an appropriate depreciation method to use when a. it is impossible to determine the productivity of the asset. b. the asset's use will be constant over its useful life. c. the productivity of the asset varies significantly from one period to another. d. the company is a manufacturing company. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 104. The calculation of depreciation using the declining balance method, a. ignores salvage value in determining the amount to which a constant rate is applied. b. multiplies a constant percentage times the previous year's depreciation expense. c. yields an increasing depreciation expense each period. d. multiplies a declining percentage times a constant book value. , , IMA: Business Economics 105. Farr Company purchased a new van for floral deliveries on January 1, 2014. The van cost $56,000 with an estimated life of 5 years and $14,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the depreciation expense for 2014? a. $11,200 b. $8,400 c. $16,800 d. $22,400 , : Problem Solving, IMA: Reporting Solution: ($5,600  0) × .40  $22,400 106. Farr Company purchased a new van for floral deliveries on January 1, 2014. The van cost $56,000 with an estimated life of 5 years and $14,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used. What is the balance of the Accumulated Depreciation account at the end of 2015? a. $8,960 b. $26,880 c. $35,840 d. $13,440 , : Problem Solving, IMA: Reporting Solution: ($56,000  0) × .40  $22,400; [($56,000  $22,400) × .40] + $22,400 = $35,840 107. Moreno Company purchased equipment for $900,000 on January 1, 2013, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 3-year life and a $40,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2015 will be a. $100,000. b. $60,000. c. $108,880. d. $68,880. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($900,000  0) × .662/3  $600,000; ($900,000  $600,000) × .662/3 = $200,000; $900,000  $40,000  (600,000 + 200,000) = $60,000 108. A plant asset was purchased on January 1 for $100,000 with an estimated salvage value of $20,000 at the end of its useful life. The current year's Depreciation Expense is $10,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $50,000. The remaining useful life of the plant asset is a. 10 years. b. 8 years. c. 5 years. d. 3 years. , LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: ($100,000  $20,000)  $10,000 = 8; 8  ($50,000  $10,000) = 3 109. Equipment was purchased for $150,000. Freight charges amounted to $7,000 and there was a cost of $20,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $30,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be a. $35,400. b. $29,400. c. $24,600. d. $24,000. , : Problem Solving, IMA: Reporting Solution: $150,000 + $7,000 + $20,000 = $177,000; ($177,000 - $30,000)  5 = $29,400 110. Equipment was purchased for $85,000 on January 1, 2014. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $15,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2015, if the straight-line method of depreciation is used? a. $33,400 b. $16,700 c. $14,300 d. $28,600 , : Problem Solving, IMA: Reporting Solution: $85,000 + $3,500 + $10,000 = $98,500; [($98,500  $15,000)  5] × 2 = $33,400 111. A company purchased factory equipment on June 1, 2014, for $160,000. It is estimated that the equipment will have a $10,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2014, is a. $15,000. b. $8,750. c. $7,500. d. $6,250. , : Problem Solving, IMA: Reporting Solution: [($160,000  $10,000)  10] × 7/12 = $8,750 112. A plant asset was purchased on January 1 for $60,000 with an estimated salvage value of $12,000 at the end of its useful life. The current year's Depreciation Expense is $6,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $30,000. The remaining useful life of the plant asset is a. 10 years. b. 8 years. c. 5 years. d. 3 years. , : Problem Solving, IMA: Business Economics Solution: ($60,000  $12,000)  6,000 = 8; 8  ($30,000  $6,000) = 3 113. Sargent Corporation bought equipment on January 1, 2014. The equipment cost $360,000 and had an expected salvage value of $60,000. The life of the equipment was estimated to be 6 years. The depreciable cost of the equipment is a. $360,000. b. $300,000. c. $200,000. d. $50,000. , LO: 2, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $360,000  $60,000 = $300,000 114. Sargent Corporation bought equipment on January 1, 2014. The equipment cost $360,000 and had an expected salvage value of $60,000. The life of the equipment was estimated to be 6 years. The depreciation expense using the straight-line method of depreciation is a. $70,000. b. $72,000. c. $50,000. d. None of these answer choices are correct. , : Problem Solving, IMA: Reporting Solution: ($360,000  $60,000)  6 = $50,000 115. Sargent Corporation bought equipment on January 1, 2014. The equipment cost $360,000 and had an expected salvage value of $60,000. The life of the equipment was estimated to be 6 years. Assuming straight-line deprecation, the book value of the equipment at the beginning of the third year would be a. $360,000. b. $150,000. c. $260,000. d. $100,000. , : Problem Solving, IMA: Reporting Solution: ($360,000  $60,000)  6 = $50,000; $360,000  ($50,000 × 2) = $260,000 116. Tomko Company purchased machinery with a list price of $96,000. They were given a 10% discount by the manufacturer. They paid $600 for shipping and sales tax of $4,500. Tomko estimates that the machinery will have a useful life of 10 years and a residual value of $30,000. If Tomko uses straight-line depreciation, annual depreciation will be a. $6,150. b. $6,108. c. $9,150. d. $5,640. , LO: 3, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: ($96,000 × .90) + $600 + $4,500  $30,000]  10 = $6,150 117. Drago Company purchased equipment on January 1, 2014, at a total invoice cost of $1,200,000. The equipment has an estimated salvage value of $30,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2015, if the straight-line method of depreciation is used? a. $240,000 b. $480,000 c. $234,000 d. $468,000 , : Problem Solving, IMA: Reporting Solution: [($1,200,000  $30,000)  5] × 2 = $468,000 118. On January 1, a machine with a useful life of five years and a residual value of $30,000 was purchased for $90,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation? a. $21,600 b. $36,000 c. $28,800 d. $17,280 , : Problem Solving, IMA: Reporting Solution: ($90,000  $0) × .40 = $36,000; ($90,000  $36,000) × .40 = $21,600 119. A machine with a cost of $480,000 has an estimated salvage value of $30,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-of-activity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours? a. $150,000 b. $90,000 c. $130,000 d. $160,000 , Solution: ($480,000  $30,000)  15,000 = $30; $30 × 5,000 = $150,000 120. Equipment with a cost of $400,000 has an estimated salvage value of $25,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours? a. $100,000 b. $113,800 c. $82,500 d. $93,750 , LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: ($400,000  $25,000)  15,000 = $25; $3,300 × $25 = $82,500 121. Eckman Company purchased equipment for $120,000 on January 1, 2013, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $6,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2015 will be a. $17,280. b. $27,360. c. $28,800. d. $16,416. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($120,000  $0) × .40 = $48,000; ($120,000  $48,000) × .40 = $28,800; ($120,000  $76,800) × .40 = $17,280 122. Grimwood Trucking purchased a tractor trailer for $171,500. Interline uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $24,500. If the truck is driven 90,000 miles in its first year, how much depreciation expense should Grimwood record? a. $12,250 b. $15,435 c. $13,230 d. $14,292 , LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($171,500  $24,500)  $1,000,000 = $.147; $90,000 × $.147 = $13,230 123. On May 1, 2014, Pinkley Company sells office furniture for $300,000 cash. The office furniture originally cost $750,000 when purchased on January 1, 2007. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $75,000. What depreciation expense should be recorded on this asset in 2014? a. $22,500. b. $25,000. c. $33,750. d. $67,500. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($750,000  $75,000)  10] × 4/12 = $22,500 124. On May 1, 2014, Pinkley Company sells office furniture for $300,000 cash. The office furniture originally cost $750,000 when purchased on January 1, 2007. Depreciation is recorded by the straight-line method over 10 years with a salvage value of $75,000. What gain should be recognized on the sale? a. $22,500. b. $45,000. c. $47,500. d. $90,000. , LO: 4, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: [($750,000  $75,000)  10] × 7⅓ = $495,000; ($750,000  $495,000)  $300,000 = $45,000 125. Mather Company purchased equipment on January 1, 2014 at a total invoice cost of $336,000; additional costs of $6,000 for freight and $30,000 for installation were incurred. The equipment has an estimated salvage value of $12,000 and an estimated useful life of five years. The amount of accumulated depreciation at December 31, 2015 if the straight-line method of depreciation is used is: a. $129,600. b. $132,000. c. $144,000. d. $148,800. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($336,000 + $6,000 + $30,000  $12,000)  5] = $72,000; $72,000 × 2 = $144,000 126. Kingston Company purchased a piece of equipment on January 1, 2014. The equipment cost $200,000 and had an estimated life of 8 years and a salvage value of $25,000. What was the depreciation expense for the asset for 2015 under the double-declining-balance method? a. $21,667. b. $37,500. c. $50,000. d. $39,063. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($200,000  $0) ×.25 = $50,000; ($200,000  $50,000) × .25 = $37,500 127. Able Towing Company purchased a tow truck for $180,000 on January 1, 2014. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $36,000. On December 31, 2016, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2016) and the salvage value to $5,000. What was the depreciation expense for 2016? a. $18,000. b. $14,400. c. $45,000. d. $36,550 , LO: 2, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: ($180,000  $36,000) × 2/10 = $28,800; ($180,000  $28,800  $5,000)  4 = $36,550 128. Nicholson Company purchased equipment on January 1, 2012, for $80,000 with an estimated salvage value of $20,000 and estimated useful life of 8 years. On January 1, 2014, Nicholson decided the equipment will last 12 years from the date of purchase. The salvage value is still estimated at $20,000. Using the straight-line method the new annual depreciation will be: a. $4,500. b. $5,000. c. $6,000. d. $6,667. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($80,000  $20,000) × 2/8 = $15,000; ($80,000  $15,000  $20,000)/(12  2) = $4,500 129. An asset was purchased for $250,000. It had an estimated salvage value of $50,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $40,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be a. $30,000. b. $22,000. c. $15,000. d. $21,000. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($250,000  $50,000) × 5/10 = $100,000; ($250,000  $100,000  $40,000)  5 = $22,000 130. Equipment costing $70,000 with a salvage value of $14,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for year 3 would be a. $ 8,400. b. $18,667. c. $14,000. d. $11,200. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($70,000  $14,000)  8] × 2 = $14,000; ($70,000  $14,000  $14,000)  3 = $14,000 131. Ron's Quik Shop bought machinery for $75,000 on January 1, 2014. Ron estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2015, Ron decides that the business will use the machinery for a total of 6 years. What is the revised depreciation expense for 2015? a. $12,000 b. $ 6,000 c. $10,000 d $15,000 , LO: 2, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($75,000  0)  5 = $15,000; ($75,000  $15,000)  (6  1) = $12,000 132. Each of the following is used in computing revised annual depreciation for a change in estimate except a. book value. b. cost. c. depreciable cost. d. remaining useful life. , 133. A change in the estimated useful life of equipment requires a. a retroactive change in the amount of periodic depreciation recognized in previous years. b. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset. c. that the amount of periodic depreciation be changed in the current year and in future years. d. that income for the current year be increased. , , IMA: Business Economics 134. Enos Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate? a. Revisions in useful life are permitted if approved by the IRS. b. Retroactive changes must be made to correct previously recorded depreciation. c. Only future years will be affected by the revision. d. Both current and future years will be affected by the revision. , , IMA: Business Economics 135. Don's Copy Shop bought equipment for $450,000 on January 1, 2013. Don estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2014, Don decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2014? a. $150,000 b. $ 60,000 c. $ 75,000 d. $112,500 , LO: 2, Bloom: AN, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($450,000  0)  3 = $150,000; ($450,000  $150,000)  (5  1) = $75,000 136. Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as a. capital expenditures. b. expense expenditures. c. ordinary repairs. d. revenue expenditures. , 137. Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally a. expensed when incurred. b. capitalized as a part of the cost of the asset. c. debited to the Accumulated Depreciation account. d. not recorded until they become material in amount. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 138. Which of the following is not true of ordinary repairs? a. They primarily benefit the current accounting period. b. They can be referred to as revenue expenditures. c. They maintain the expected productive life of the asset. d. They increase the productive capacity of the asset. , 139. The paneling of the body of an open pickup truck would be classified as a(n) a. revenue expenditure. b. addition. c. improvement. d. ordinary repair. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 140. Additions and improvements a. occur frequently during the ownership of a plant asset. b. normally involve immaterial expenditures. c. increase the book value of plant assets when incurred. d. typically only benefit the current accounting period. , LO: 3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 141. If a plant asset is retired before it is fully depreciated and no salvage value is received, a. a gain on disposal occurs. b. a loss on disposal occurs. c. either a gain or a loss can occur. d. neither a gain nor a loss occurs. , 142. A gain or loss on disposal of a plant asset is determined by comparing the a. replacement cost of the asset with the asset's original cost. b. book value of the asset with the asset's original cost. c. original cost of the asset with the proceeds received from its sale. d. book value of the asset with the proceeds received from its sale. 143. The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost. b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date. d. proceeds received from the sale of the asset and its original cost. 144. If a plant asset is sold before it is fully depreciated, a. only a gain on disposal can occur. b. only a loss on disposal can occur. c. either a gain or a loss can occur. d. neither a gain nor a loss can occur. , 145. If a plant asset is retired before it is fully depreciated, and the salvage value received is less than the asset's book value, a. a gain on disposal occurs. b. a loss on disposal occurs. c. there is no gain or loss on disposal. d. additional depreciation expense must be recorded. , 146. A company sells a plant asset which originally cost $360,000 for $120,000 on December 31, 2014. The Accumulated Depreciation account had a balance of $144,000 after the current year's depreciation of $36,000 had been recorded. The company should recognize a a. $240,000 loss on disposal. b. $96,000 gain on disposal. c. $96,000 loss on disposal. d. $60,000 loss on disposal. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $120,000  ($360,000  $144,000) = ($96,000) 147. If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year. b. recorded for the whole year. c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped. , 148. If a fully depreciated plant asset is still used by a company, the a. estimated remaining useful life must be revised to calculate the correct revised depreciation. b. asset is removed from the books. c. accumulated depreciation account is removed from the books but the asset account remains. d. asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment until the asset is retired. 149. Which of the following statements is not true when a fully depreciated plant asset is retired? a. The plant asset's book value is equal to its estimated salvage value. b. The accumulated depreciation account is debited. c. The asset account is credited. d. The plant asset's original cost equals its book value. , 150. If a plant asset is retired before it is fully depreciated, and no salvage or scrap value is received, a. a gain on disposal will be recorded. b. phantom depreciation must be taken as though the asset were still on the books. c. a loss on disposal will be recorded. d. no gain or loss on disposal will be recorded. , 151. The book value of an asset will equal its fair market value at the date of sale if a. a gain on disposal is recorded. b. no gain or loss on disposal is recorded. c. the plant asset is fully depreciated. d. a loss on disposal is recorded. , 152. A truck costing $110,000 was destroyed when its engine caught fire. At the date of the fire, the accumulated depreciation on the truck was $50,000. An insurance check for $125,000 was received based on the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck will include a a. Gain on Disposal of $15,000. b. credit to the Truck account of $60,000. c. credit to the Accumulated Depreciation account for $50,000. d. Gain on Disposal of $65,000. , LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: $125,000  ($110,000  $50,000) = $65,000 153. On July 1, 2014, Hale Kennels sells equipment for $220,000. The equipment originally cost $600,000, had an estimated 5-year life and an expected salvage value of $100,000. The accumulated depreciation account had a balance of $350,000 on January 1, 2014, using the straight-line method. The gain or loss on disposal is a. $30,000 gain. b. $20,000 loss. c. $30,000 loss. d. $20,000 gain. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($600,000  $100,000)  5] × 6/12 = $50,000; $220,000  [600,000  ($350,000 + $50,000)] = $20,000 154. A loss on disposal of a plant asset is reported in the financial statements a. in the Other Revenues and Gains section of the income statement. b. in the Other Expenses and Losses section of the income statement. c. as a direct increase to the capital account on the balance sheet. d. as a direct decrease to the capital account on the balance sheet. 155. Yanik Company's delivery truck, which originally cost $84,000, was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to $57,000. The company received $48,000 reimbursement from its insurance company. The gain or loss as a result of the fire was a. $36,000 loss. b. $21,000 loss. c. $36,000 gain. d. $21,000 gain. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $48,000  ($84,000  57,000) = $21,000 156. Equipment that cost $420,000 and on which $200,000 of accumulated depreciation has been recorded was disposed of for $180,000 cash. The entry to record this event would include a a. gain of $40,000. b. loss of $40,000. c. credit to the Equipment account for $220,000. d. credit to Accumulated Depreciation for $200,000. , LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: $180,000  ($420,000  200,000) = ($40,000) 157. A truck that cost $72,000 and on which $60,000 of accumulated depreciation has been recorded was disposed of for $18,000 cash. The entry to record this event would include a a. gain of $6,000. b. loss of $6,000. c. credit to the Equipment account for $12,000. d. credit to Accumulated Depreciation for $60,000. , LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: $18,000  ($72,000  $60,000) = $6,000 158. Orr Corporation sold equipment for $30,000. The equipment had an original cost of $90,000 and accumulated depreciation of $45,000. As a result of the sale, a. net income will increase $30,000. b. net income will increase $15,000. c. net income will decrease $15,000. d. net income will decrease $30,000. , LO: 4, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $30,000  ($90,000  $45,000) = ($15,000) 159. Powell’s Courier Service recorded a loss of $9,000 when it sold a van that originally cost $84,000 for $15,000. Accumulated depreciation on the van must have been a. $78,000. b. $24,000. c. $75,000. d. $60,000. , LO: 4, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution: $15,000 – ($84,000 – x) = ($9,000); x = $60,000 160. A plant asset cost $90,000 when it was purchased on January 1, 2007. It was depreciated by the straight-line method based on a 9-year life with no salvage value. On June 30, 2014, the asset was discarded with no cash proceeds. What gain or loss should be recognized on the retirement? a. No gain or loss. b. $20,000 loss. c. $15,000 loss. d. $10,000 gain. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $90,000  [($90,000  0)  9] x 7.5 = $15,000 161. Nicklaus Company has decided to sell one of its old machines on June 30, 2014. The machine was purchased for $200,000 on January 1, 2010, and was depreciated on a straight-line basis for 10 years with no salvage value. If the machine was sold for $65,000, what was the amount of the gain or loss recorded at the time of the sale? a. $45,000. b. $135,000. c. $55,000. d. $115,000. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($200,000  0)/10] x 4.5 = $90,000; $65,000  ($200,000  $90,000) = ($45,000) 162. On a balance sheet, natural resources may be described more specifically as all of the following except a. land improvements. b. mineral deposits. c. oil reserves. d. timberlands. , 163. Natural resources are a. depreciated using the units-of-activity method. b. physically extracted in operations and are replaceable only by an act of nature. c. reported at their market value. d. amortized over a period no longer than 40 years. , 164. Depletion is a. a decrease in market value of natural resources. b. the amount of spoilage that occurs when natural resources are extracted. c. the allocation of the cost of natural resources to expense. d. the method used to record unsuccessful patents. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 165. To qualify as natural resources in the accounting sense, assets must be a. underground. b. replaceable. c. of a mineral nature. d. physically extracted in operations. , 166. The method most commonly used to compute depletion is the a. straight-line method. b. double-declining-balance method. c. units-of-activity method. d. effective interest method. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 167. In computing depletion, salvage value is a. always immaterial. b. ignored. c. impossible to estimate. d. included in the calculation. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 168. If a mining company extracts 1,500,000 tons in a period but only sells 1,200,000 tons, a. total depletion on the mine is based on the 1,200,000 tons. b. depletion expense is recognized on the 1,500,000 tons extracted. c. depletion expense is recognized on the 1,200,000 tons extracted and sold. d. a separate accumulated depletion account is set up to record depletion on the 300,000 tons extracted but not sold. , LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 169. A coal company invests $15 million in a mine estimated to have 20 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the first year? a. $750,000 b. $300,000 c. $75,000 d. Cannot be determined from the information provided. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($15  20) × 1,000,000 = $750,000 170. Accumulated Depletion a. is used by all companies with natural resources. b. has a normal debit balance. c. is a contra-asset account. d. is never shown on the balance sheet. , 171. On July 4, 2014, Wyoming Mining Company purchased the mineral rights to a granite deposit for $1,600,000. It is estimated that the recoverable granite will be 400,000 tons. During 2014, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount of the Depletion Expense recognized for 2014 would be a. $200,000. b. $120,000. c. $240,000. d. $400,000. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: ($1,600,000  400,000) × 60,000 = $240,000 172. Depletion expense is computed by multiplying the depletion cost per unit by the a. total estimated units. b. total actual units. c. number of units extracted. d. number of units sold. , 173. Intangible assets are the rights and privileges that result from ownership of long-lived assets that a. must be generated internally. b. are depletable natural resources. c. have been exchanged at a gain. d. do not have physical substance. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 174. Identify the item below where the terms are not related. a. Equipment—depreciation b. Franchise—depreciation c. Copyright—amortization d. Oil well—depletion , LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 175. A patent should a. be amortized over a period of 20 years. b. not be amortized if it has an indefinite life. c. be amortized over its useful life or 20 years, whichever is longer. d. be amortized over its useful life or 20 years, whichever is shorter. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 176. The entry to record patent amortization usually includes a credit to a. Amortization Expense. b. Accumulated Amortization. c. Accumulated Depreciation. d. Patents. , LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 177. The cost of successfully defending a patent in an infringement suit should be a. charged to Legal Expenses. b. deducted from the book value of the patent. c. added to the cost of the patent. d. recognized as a loss in the current period. , 178. An asset that cannot be sold individually in the market place is a. a patent. b. goodwill. c. a copyright. d. a trade name. , LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 179. Goodwill can be recorded a. when customers keep returning because they are satisfied with the company's products. b. when the company acquires a good location for its business. c. when the company has exceptional management. d. only when there is an exchange transaction involving the purchase of an entire business. , 180. On July 1, 2014, Jenks Company purchased the copyright to Jackson Computer tutorials for $324,000. It is estimated that the copyright will have a useful life of 5 years with an estimated salvage value of $24,000. The amount of Amortization Expense recognized for the year 2014 would be a. $64,800. b. $30,000. c. $60,000. d. $32,400. , LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: [($324,000  $24,000)  5] × 6/12 = $30,000 181. All of the following intangible assets are amortized except a. copyrights. b. limited-life franchises. c. patents. d. trademarks. , 182. Which of the following is not an intangible asset arising from a government grant? a. Goodwill b. Patent c. Trademark d. Trade name , LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 183. The amortization period for a patent cannot exceed a. 50 years. b. 40 years. c. 20 years. d. 10 years. , 184. Cost allocation of an intangible asset is referred to as a. amortization. b. depletion. c. accretion. d. capitalization. , 185. A patent a. has a legal life of 40 years. b. is nonrenewable. c. can be renewed indefinitely. d. is rarely subject to litigation because it is an exclusive right. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 186. If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting a. Legal Expense. b. an Intangible Loss account. c. the Patent account. d. a revenue expenditure account. , 187. Copyrights are granted by the federal government a. for the life of the creator or 70 years, whichever is longer. b. for the life of the creator plus 70 years. c. for the life of the creator or 70 years, whichever is shorter. d. and therefore cannot be amortized. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 188. Goodwill a. is only recorded when generated internally. b. can be subdivided and sold in parts. c. can only be identified with the business as a whole. d. can be defined as normal earnings less accumulated amortization. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 189. In recording the acquisition cost of an entire business, a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets. b. assets are recorded at the seller's book values. c. goodwill, if it exists, is never recorded. d. goodwill is recorded as the excess of cost over the book value of identifiable net assets. , 190. Research and development costs a. are classified as intangible assets. b. must be expensed when incurred under generally accepted accounting principles. c. should be included in the cost of the patent they relate to. d. are capitalized and then amortized over a period not to exceed 40 years. , LO:6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 191. A computer company has $2,800,000 in research and development costs. Before accounting for these costs, the net income of the company is $2,000,000. What is the amount of net income or loss after these R & D costs are accounted for? a. $800,000 loss b. $2,000,000 net income c. $0 d. Cannot be determined from the information provided. , LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $2,000,000  $2,800,000 = -$800,000 192. Henson Company incurred $600,000 of research and development costs in its laboratory to develop a new product. It spent $90,000 in legal fees for a patent granted on January 2, 2014. On July 31, 2014, Henson paid $60,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2014? a. $600,000 b. $150,000 c. $750,000 d. Some other amount , LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: $90,000 + $60,000 = $150,000 193. Given the following account balances at year end, compute the total intangible assets on the balance sheet of Kepler Enterprises. Cash $1,500,000 Accounts Receivable 4,000,000 Trademarks 1,000,000 Goodwill 3,000,000 Research & Development Costs 2,000,000 a. $10,000,000 b. $6,000,000 c. $4,000,000 d. $8,000,000 , LO: 6, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $1,000,000 + $3,000,000 = $4,000,000 194. Rooney Company incurred $560,000 of research and development cost in its laboratory to develop a patent granted on January 1, 2014. On July 31, 2014, Rooney paid $84,000 for legal fees in a successful defense of the patent. The total amount debited to Patents through July 31, 2014, should be: a. $560,000. b. $84,000. c. $644,000. d. $476,000. , LO: 6, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA 195. Mehring Company reported net sales of $540,000, net income of $72,000, beginning total assets of $240,000, and ending total assets of $360,000. What was the company's asset turnover? a. 2.3 times b. 0.6 times c. 1.8 times d. 1.5 times , LO: 7, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $540,000  [($240,000 + $360,000)  2] = 1.8 196. During 2014, Rathke Corporation reported net sales of $3,000,000, net income of $1,200,000, and depreciation expense of $100,000. Rathke also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Rathke’s asset turnover is a. 3 times. b. 2.4 times. c. 2.0 times. d. .96 times. , LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $3,000,000  [($1,000,000 + $1,500,000)  2] = 2.4 197. During 2014, Stein Corporation reported net sales of $5,000,000 and net income of $2,100,000. Stein also reported beginning total assets of $1,000,000 and ending total assets of $1,500,000. Stein’s asset turnover is a. 5.0 times. b. 4.0 times. c. 3.3 times. d. 1.7 times. , LO: 7, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business Economics Solution: $5,000,000  [($1,000,000 + $1,500,000)  2] = 4 198. Natural resources are generally shown on the balance sheet under a. Intangibles. b. Investments. c. Property, Plant, and Equipment. d. Owner's Equity. , 199. Which of the following statements concerning financial statement presentation is not a true statement? a. Intangibles are reported separately under Intangible Assets. b. The balances of major classes of assets may be disclosed in the footnotes. c. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes. d. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes. , LO: 7, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 200. Intangible assets a. should be reported under the heading Property, Plant, and Equipment. b. are not reported on the balance sheet because they lack physical substance. c. should be reported as Current Assets on the balance sheet. d. should be reported as a separate classification on the balance sheet. , 201. A company has the following assets: Buildings and Equipment, less accumulated depreciation of $2,000,000 $9,600,000 Copyrights 960,000 Patents 4,000,000 Timberlands, less accumulated depletion of $2,800,000 4,800,000 The total amount reported under Property, Plant, and Equipment would be a. $19,360,000. b. $14,400,000. c. $18,400,000. d. $15,360,000. , LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution: $9,600,000 + $4,800,000 = $14,400,000 a202. A company decides to exchange its old machine and $231,000 cash for a new machine. The old machine has a book value of $189,000 and a fair value of $210,000 on the date of the exchange. The cost of the new machine would be recorded at a. $420,000. b. $441,000. c. $399,000. d. cannot be determined. , LO: 8, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: $231,000 + $210,000 = $441,000 a203. A company exchanges its old office equipment and $80,000 for new office equipment. The old office equipment has a book value of $56,000 and a fair value of $40,000 on the date of the exchange. The cost of the new office equipment would be recorded at a. $136,000. b. $120,000. c. $96,000. d. cannot be determined. , LO: 8, Bloom: K, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution: $80,000 + $40,000 = $120,000 a 204. In an exchange of plant assets that has commercial substance, any difference between the fair value and the book value of the old plant asset is a. recorded as a gain or loss. b. recorded if a gain but is deferred if a loss. c. recorded if a loss but is deferred if a gain. d. deferred if either a gain or loss. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a205. Gains on an exchange of plant assets that has commercial substance are a. deducted from the cost of the new asset acquired. b. deferred. c. not possible. d. recognized immediately. , LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a206. Losses on an exchange of plant assets that has commercial substance are a. not possible. b. deferred. c. recognized immediately. d. deducted from the cost of the new asset acquired. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics a207. The cost of a new asset acquired in an exchange that has commercial substance is the cash paid plus the a. book value of the old asset. b. fair value of the old asset. c. book value of the asset acquired. d. fair value of the new asset. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 208. The cost of land includes all of the following except a. real estate brokers’ commissions. b. closing costs. c. accrued property taxes. d. parking lots. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 209. A term that is not synonymous with property, plant, and equipment is a. plant assets. b. fixed assets. c. intangible assets. d. long-lived tangible assets. , 210. The factor that is not relevant in computing depreciation is a. replacement value. b. cost. c. salvage value. d. useful life. , , IMA: Business Economics 211. Depreciable cost is the a. book value of an asset less its salvage value. b. cost of an asset less its salvage value. c. cost of an asset less accumulated depreciation. d. book value of an asset. , , IMA: Business Economics 212. Santayana Company purchased a machine on January 1, 2012, for $60,000 with an estimated salvage value of $15,000 and an estimated useful life of 8 years. On January 1, 2014, Santayana decides the machine will last 12 years from the date of purchase. The salvage value is still estimated at $15,000. Using the straight-line method, the new annual depreciation will be a. $3,375. b. $3,750. c. $4,500. d. $5,000. , Solution: [($60,000  $15,000)  8] × 2 = $11,250; ($60,000  $11,250  $15,000)  (12  2) = $3,375 213. Ordinary repairs are expenditures to maintain the operating efficiency of a plant asset and are referred to as a. capital expenditures. b. expense expenditures. c. improvements. d. revenue expenditures. , 214. Improvements are a. revenue expenditures. b. debited to an appropriate asset account when they increase useful life. c. debited to accumulated depreciation when they do not increase useful life. d. debited to an appropriate asset account when they do not increase useful life. , 215. A gain on sale of a plant asset occurs when the proceeds of the sale are greater than the a. salvage value of the asset sold. b. market value of the asset sold. c. book value of the asset sold. d. accumulated depreciation on the asset sold. , 216. The entry to record depletion expense a. decreases owner's equity and assets. b. decreases net income and increases liabilities. c. decreases assets and liabilities. d. decreases assets and increases liabilities. , LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 217. All of the following are intangible assets except a. copyrights. b. goodwill. c. patents. d. research and development costs. , 218. A purchased patent has a legal life of 20 years. It should be a. expensed in the year of acquisition. b. amortized over 20 years regardless of its useful life. c. amortized over its useful life if less than 20 years. d. not amortized. , LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 219. The asset turnover is computed by dividing a. net income by average total assets. b. net sales by average total assets. c. net income by ending total assets. d. net sales by ending total assets. , a220. In an exchange of plant assets that has commercial substance a. neither gains nor losses are recognized immediately. b. gains, but not losses, are recognized immediately. c. losses, but not gains, are recognized immediately. d. both gains and losses are recognized immediately. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 221. As a recent graduate of State University you’re aware that IFRS requires component depreciation for plant assets. A friend has asked you to succinctly explain what component depreciation means. Which of the following correctly describes component depreciation? a. The method used to ensure that the depreciation rate remains constant from year to year. b. The method that requires that significant parts of a plant asset with different useful lives be depreciated separately. c. The method used to prorate annual depreciation on a time basis. d. The method of depreciation recommended for an asset that is expected to be significantly more productive in the first half of its useful life. IFRS: , LO: 9, Bloom: K, Difficulty: Hard, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 222. Salem Company hired Kirk Construction to construct an office building for £6,400,000 on land costing £1,600,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2014 and it has a useful life of 40 years. The price of the building included land improvements costing £480,000 and personal property costing £600,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What total amount of depreciation expense would Salem Company report on its income statement for the year ended December 31, 2014? a. £268,000 b. £160,000 c. £341,000 d. £301,000 IFRS: , LO: 9, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting ($6,400,000 - $480,000 - $600,000)/40 = $133,000; $480,000/10 = $48,000; $600,000/10 = $60,000; $133,000 + $48,000 + $60,000 = $301,000 223. Salem Company hired Kirk Construction to construct an office building for £6,400,000 on land costing £1,600,000, which Salem Company owned. The building was complete and ready to be used on January 1, 2014 and it has a useful life of 40 years. The price of the building included land improvements costing £480,000 and personal property costing £600,000. The useful lives of the land improvements and the personal property are 10 years and 5 years, respectively. Salem Company uses component depreciation, and the company uses straight-line depreciation for other similar assets. What is the net amount reported for the building on Salem Company’s December 31, 2014 statement of financial position? a. £6,132,000 b. £6,059,000 c. £5,187,000 d. £6,240,000 IFRS: , LO: 9, Bloom: AP, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting ($6,400,000 - $480,000 - $600,000)/40 = $133,000; $6,400,000 - $480,000 - $600,000 - $133,000 = $5,187,000 224. IFRS allows companies to revalue plant assets to fair value. Which of the following statements is true regarding revaluation? a. At the time a company purchases an asset it must decide whether to follow revaluation procedures for the asset; once the election is made, it must be followed for the remainder of the asset’s useful life. b. Assets that are experiencing rapid price changes must be revalued quarterly, other assets can be revalued on an annual basis. c. The journal entry to record a revaluation when the asset’s price has increased includes a credit to the account revaluation surplus. d. All of the choices are correct regarding revaluation of plant assets. IFRS: , LO: 9, Bloom: K, Difficulty: Hard, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 225. IFRS allows companies to revalue plant assets to fair value. When an asset has increased in value, where is the account “Revaluation Surplus” reported? a. On the income statement as part of income from continuing operations (other revenues and gains). b. On the income statement as part of discontinued operations (discontinuing historical cost). c. On the statement of financial position as part of accumulated comprehensive income (equity). d. All of the choices are acceptable methods for the reporting of “Revaluation Surplus”. IFRS: , LO: 9, Bloom: K, Difficulty: Hard, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting 226. Which of the following statements concerning IFRS and U.S. GAAP is true? a. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits revaluation of intangible assets. b. Gains on exchange of assets when the exchange has commercial substance are recognized under both IFRS and U.S. GAAP. c. Changes in depreciation method under IFRS are reported in current and future periods, under U.S. GAAP such changes are treated as prior period adjustments. d. All of the choices are true regarding IFRS and U.S. GAAP. IFRS: , LO: 9, Bloom: K, Difficulty: Medium, Min: 1, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Answers to Multiple Choice Questions Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 57. d 82. c 107. b 132. b 157. a 182. a a207. b 58. d 83. c 108. d 133. c 158. c 183. c a208. d 59. b 84. a 109. b 134. d 159. d 184. a 209. c 60. c 85. c 110. a 135. c 160. c 185. b 210. a 61. a 86. b 111. b 136. a 161. a 186. c 211. b 62. b 87. d 112. d 137. a 162. a 187. b 212. a 63. c 88. c 113. b 138. d 163. b 188. c 213. d 64. a 89. c 114. c 139. b 164. c 189. a 214. d 65. d 90. a 115. c 140. c 165. d 190. b 215. c 66. d 91. b 116. a 141. b 166. c 191. a 216. a 67. d 92. b 117. d 142. d 167. d 192. b 217. d 68. c 93. b 118. a 143. c 168. c 193. c 218. c 69. b 94. d 119. a 144. c 169. a 194. b 219. b 70. b 95. a 120. c 145. b 170. c 195. c a220. d 71. a 96. c 121. a 146. c 171. c 196. b 221. b 72. d 97. c 122. c 147. c 172. d 197. b 222. d 73. d 98. a 123. a 148. d 173. d 198. c 223. c 74. b 99. a 124. b 149. d 174. b 199. d 224. c 75. a 100. c 125. c 150. c 175. d 200. d 225. c 76. d 101. a 126. b 151. b 176. d 201. b 226. b 77. c 102. c 127. d 152. d 177. c a202. b 78. c 103. c 128. a 153. d 178. b a203. b 79. d 104. a 129. b 154. b 179. d a204. a 80. a 105. d 130. c 155. d 180. b a205. d 81. c 106. c 131. a 156. b 181. d a206. c BRIEF EXERCISES BE 227 Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X). _____ 1. Parking lots _____ 2. Electricity used by a machine _____ 3. Excavation costs _____ 4. Interest on building construction loan _____ 5. Cost of trial runs for machinery _____ 6. Drainage costs _____ 7. Cost to install a machine _____ 8. Fences _____ 9. Unpaid (past) property taxes assumed _____10. Cost of tearing down a building when land and a building on it are purchased , LO: 1, Bloom: K, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Solution 227 (5 min.) 1. LI 6. L 2. X 7. E 3. B 8. LI 4. B 9. L 5. E 10. L BE 228 Farley Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures incurred in purchasing the land were as follows: purchase price, $70,000; broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building on the property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and paving driveway, $25,000; lighting $7,500; signs, $1,500. List the items and amounts that should be included in the Land account. , LO: 1, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 228 (3 min.) Purchase price $70,000 Broker’s fees 6,000 Title search and other fees 5,000 Demolition of old building 5,700 Grading 1,200 Land acquisition cost $87,900 BE 229 Iverson Company purchased a delivery truck for $45,000 on January 1, 2014. The truck was assigned an estimated useful life of 5 years and has a residual value of $10,000. Compute depreciation expense using the double-declining-balance method for the years 2014 and 2015. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 229 (4 min.) Double the straight-line rate: 1 ÷ 5 = 20%; 20% × 2 = 40% 2014: Book value ($45,000 – 0) × 40% = $18,000 depreciation expense 2015: Book value ($45,000 – $18,000) × 40% = $10,800 depreciation expense , LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting BE 230 Iverson Company purchased a delivery truck for $45,000 on January 1, 2014. The truck was assigned an estimated useful life of 100,000 miles and has a residual value of $10,000. The truck was driven 18,000 miles in 2014 and 22,000 miles in 2015. Compute depreciation expense using the units-of-activity method for the years 2014 and 2015. , SO: 3, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 230 (4 min.) Depreciation expense per mile: ($45,000 – $10,000) ÷ 100,000 miles = $.35 per mile Depreciation expense for 2014: 18,000 miles ($.35 per mile) = $6,300 Depreciation expense for 2015: 22,000 miles ($.35 per mile) = $7,700 BE 231 Weller Company purchased a truck for $66,000. The company expected the truck to last four years or 100,000 miles, with an estimated residual value of $6,000 at the end of that time. During the second year the truck was driven 27,000 miles. Compute the depreciation for the second year under each of the methods below and place your answers in the blanks provided. Units-of-activity $ Double-declining-balance $ , LO: 2, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 231 (6 min.) Units-of-activity $_ 16,200 [($66,000 – $6,000) ÷ 100,000] × 27,000 = $16,200 Double-declining-balance $_ 16,500 year 1— [$66,000 × (1 ÷ 4 × 2)] = $33,000 year 2— [($66,000 – $33,000) × (1 ÷ 4 × 2)] = $16,500 BE 232 On January 1, 2012, Santo Company purchased a computer system for $30,500. The system had an estimated useful life of 5 years and no salvage value. At January 1, 2014, the company revised the remaining useful life to two years. What amount of depreciation will be recorded for 2014 and 2015? , LO: 2, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 232 (4 min.) Original depreciation: $30,500 ÷ 5 = $6,100 per year Book value at January 1, 2014: $30,500 – ($6,100 + $6,100) = $18,300 Depreciation for 2014 and 2015: $18,300 ÷ 2 = $9,150 per year BE 233 Carey Enterprises sold equipment on January 1, 2014 for $10,000. The equipment had cost $48,000. The balance in Accumulated Depreciation at January 1 is $40,000. What entry would Carey make to record the sale of the equipment? , LO: 4, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 233 (4 min.) Calculate gain or loss on sale: Proceeds $10,000 Book value 8,000 ($48,000 – $40,000) Gain on Disposal of plant Assets $2,000 Entry to record sale: Cash 10,000 Accumulated Depreciation—Equipment 40,000 Gain on Disposal of plant Assets 2,000 Equipment 48,000 BE 234 On January 1, 2014, Petersen Enterprises purchased natural resources for $1,800,000. The company expects the resources to produce 12,000,000 units of product. (1) What is the depletion cost per unit? (2) If the company mined and sold 20,000 units in January, what is depletion expense for the month? , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 234 (3 min.) (1) Depletion cost per unit: $1,800,000 ÷ 12,000,000 units = $.15 per unit (2) Depletion expense for January: $.15 × 20,000 = $3,000 BE 235 On January 2, 2014, Kerwin Company purchased a patent for $48,000. The patent has an estimated useful life of 25 years and a 20-year legal life. What entry would the company make at December 31, 2014 to record amortization expense on the patent? , LO: 6, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 235 (3 min.) Amortization Expense ($48,000 ÷ 20) 2,400 Patents 2,400 BE 236 Using the following data for Renfro, Inc., compute its asset turnover. Notson, Inc. Net Income 2014 $ 123,000 Total Assets 12/31/14 2,443,000 Total Assets 12/31/13 1,880,000 Net Sales 2014 2,135,000 , LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 236 (3 min.) Asset Turnover: = Net Sales = $2,135,000 = .99 times Avg. Total Assets ($2,443,000 + $1,880,000) ÷ 2 EXERCISES Ex. 237 Hunt Company purchased factory equipment with an invoice price of $90,000. Other costs incurred were freight costs, $1,100; installation wiring and foundation, $2,200; material and labor costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire insurance policy covering equipment, $1,400. The equipment is estimated to have a $5,000 salvage value at the end of its 8-year useful service life. Instructions (a) Compute the acquisition cost of the equipment. Clearly identify each element of cost. (b) If the double-declining-balance method of depreciation was used, the constant percentage applied to a declining book value would be __________. , LO: 1,2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 237 (10 min.) (a) Invoice cost $90,000 Freight costs 1,100 Installation wiring and foundation 2,200 Material and labor costs in testing 700 Acquisition cost $94,000 (b) If the double-declining-balance method of depreciation was used, the constant percentage applied to a declining book value would be 25% (8 years = 12.5%  2). Ex. 238 For each entry below make a correcting entry if necessary. If the entry given is correct, then state "No entry required." (a) The $60 cost of repairing a printer was charged to Equipment. (b) The $5,000 cost of a major engine overhaul was debited to Maintenance and Repairs Expense. The overhaul is expected to increase the operating efficiency of the truck. (c) The $6,000 closing costs associated with the acquisition of land were debited to Miscellaneous Expense. (d) A $500 charge for transportation expenses on new equipment purchased was debited to Freight-In. , LO: 1,3, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 238 (10 min.) (a) Maintenance and Repairs Expense 60 Equipment 60 (b) Equipment 5,000 Maintenance and Repairs Expense 5,000 (c) Land 6,000 Miscellaneous Expense 6,000 (d) Equipment 500 Freight-In 500 Ex. 239 Garrison Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order in the account, Land. Debits 1. Cost of real estate purchased as a plant site (land and building). $ 250,000 2. Accrued real estate taxes paid at the time of the purchase of the real estate. 4,000 3. Cost of demolishing building to make land suitable for construction of a new building. 15,000 4. Architect's fees on building plans. 14,000 5. Excavation costs for new building. 24,000 6. Cost of filling and grading the land. 5,000 7. Insurance and taxes during construction of building. 6,000 8. Cost of repairs to building under construction caused by a small fire. 7,000 9. Interest paid during the year, of which $54,000 pertains to the construction period. 64,000 10. Full payment to building contractor. 780,000 11. Cost of parking lots and driveways. 46,000 12. Real estate taxes paid for the current year on the land. 4,000 Total Debits $1,219,000 Ex. 239 (Cont.) Credits 13. Insurance proceeds for fire damage. $3,000 14. Proceeds from salvage of demolished building 3,500 Total Credits $6,500 Instructions Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns. Item Land Buildings Other Account Title , LO: 1, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA Solution 239 (15 min.) Item Land Buildings Other Account Title 1 $250,000 2 4,000 3 15,000 4 $ 14,000 5 24,000 6 5,000 7 6,000 8 $ 7,000 Fire Loss 9 54,000 10,000 Interest Expense 10 780,000 11 46,000 Land Improvements 12 4,000 Taxes Expense 13 (3,000) Fire Loss 14 (3,500) Totals $270,500 $878,000 $64,000 Ex. 240 On March 1, 2014, Landon Company acquired real estate on which it planned to construct a small office building. The company paid $90,000 in cash. An old warehouse on the property was razed at a cost of $7,600; the salvaged materials were sold for $1,700. Additional expenditures before construction began included $1,100 attorney's fee for work concerning the land purchase, $4,000 real estate broker's fee, $7,800 architect's fee, and $14,000 to put in driveways and a parking lot. Instructions Determine the amount to be reported as the cost of the land. , LO: 1, Bloom: AP, Difficulty: Medium, Min: 4, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 240 (4 min.) Cost of land Cash paid $90,000 Net cost of removing warehouse ($7,600 – $1,700) 5,900 Attorney's fee 1,100 Real estate broker's fee 4,000 Total $101,000 Ex. 241 Ermler Company purchased a machine at a cost of $80,000. The machine is expected to have a $5,000 salvage value at the end of its 5-year useful life. Instructions Compute annual depreciation for the first and second years using the (a) straight-line method. (b) double-declining-balance method. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution 241 (8 min.) (a) Straight-line method: Years 1 and 2 depreciation = $15,000/yr. ($80,000 – $5,000)  5 (b) Double-declining-balance method: Year 1 depreciation = $32,000 ($80,000 – 0) × *40% Year 2 depreciation = $19,200 ($80,000 – $32,000) × 40% *(1/5 × 2) Ex. 242 Alvarado Company purchased a new machine for $400,000. It is estimated that the machine will have a $40,000 salvage value at the end of its 5-year useful service life. The double-declining-balance method of depreciation will be used. Instructions Prepare a depreciation schedule which shows the annual depreciation expense on the machine for its 5-year life. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution 242 (10 min.) Declining-balance rate = 2 ÷ 5 = 40% Book Value Annual End of Year Beginning Depreciation Depreciation Accumulated Book Value Year of Year × Rate = Expense Depreciation End of Year 1 $400,000 × 40% $160,000 $160,000 $240,000 2 240,000 × 40% 96,000 256,000 144,000 3 144,000 × 40% 57,600 313,600 86,400 4 86,400 × 40% 34,560 348,160 51,840 5 51,840 × 40% 11,840* 360,000 40,000 *Adjusted to $11,840 because ending book value should not be less than expected salvage value. Ex. 243 Dougan Company purchased equipment on January 1, 2013 for $90,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated that the equipment will produce 100,000 units over its 5-year life. Instructions Answer the following independent questions. 1. Compute the amount of depreciation expense for the year ended December 31, 2013, using the straight-line method of depreciation. 2. If 16,000 units of product are produced in 2013 and 24,000 units are produced in 2014, what is the book value of the equipment at December 31, 2014? The company uses the units-of-activity depreciation method. 3. If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2015? , LO: 2, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Solution 243 (15 min.) 1. Straight-line method: = C – S = ($90,000 – $5,000) = $17,000 per year Years 5 2. Units-of-activity method: = C – S = ($90,000 – $5,000) = $0.85 per unit Units 100,000 units 2013 16,000 units × $.85 = $13,600 2014 24,000 units × $.85 = 20,400 Accumulated depreciation = $34,000 Cost of asset $90,000 Less: Accumulated depreciation 34,000 Book value $56,000 3. Double-declining-balance method: Book Value Beginning Declining Depreciation Accumulated of Year × Balance Rate = Expense Depreciation 2013 $90,000 40% $36,000 $36,000 2014 54,000 40% 21,600 57,600 2015 32,400 40% 12,960 70,560 Ex. 244 A plant asset acquired on October 1, 2014, at a cost of $400,000 has an estimated useful life of 10 years. The salvage value is estimated to be $40,000 at the end of the asset's useful life. Instructions Determine the depreciation expense for the first two years using: (a) the straight-line method. (b) the double-declining-balance method. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 244 (10 min.) (a) Straight-line method Year 1 = ($400,000 – $40,000) = $36,000 × 3 ÷ 12 = $9,000 10 years Year 2 $36,000 (b) Double-declining-balance method Constant rate — 2 ÷ 10 = 20% Year 1 $400,000 × 20% × 3 ÷ 12 = $20,000 Year 2 $380,000 × 20% = $76,000 Ex. 245 Jack’s, a popular pizza hang-out, has a thriving delivery business. Jack’s has a fleet of three delivery automobiles. Prior to making the entry for this year's depreciation expense, the subsidiary ledger for the fleet is as follows: Accumulated Estimated Depr.—Beg. Miles Operated Car Cost Salvage Value Life in Miles of the Year During Year 1 $21,000 $3,000 75,000 $2,520 20,000 2 18,000 2,400 60,000 2,340 22,000 3 23,500 2,500 70,000 2,000 19,000 Instructions (a) Determine the depreciation rates per mile for each car. (b) Determine the depreciation expense for each car for the current year. (c) Make one compound journal entry to record the annual depreciation expense for the fleet. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 245 (10 min.) (a) Car 1 = ($21,000 – $3,000) = $0.24 per mile 75,000 miles Car 2 = ($18,000 – $2,400) = $0.26 per mile 60,000 miles Car 3 = ($23,500 – $2,500) = $0.30 per mile 70,000 miles (b) Car 1 — 20,000 miles × $0.24 = $4,800 Car 2 — 22,000 miles × $0.26 = $5,720 Car 3 — 19,000 miles × $0.30 = $5,700 (c) Depreciation Expense 16,220 Accumulated Depreciation—Car 1 4,800 Accumulated Depreciation—Car 2 5,720 Accumulated Depreciation—Car 3 5,700 Ex. 246 The Hartley Clinic purchased a new surgical laser for $90,000. The estimated salvage value is $5,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It was used 1,600 hours in year 1; 2,200 hours in year 2; 2,400 hours in year 3; 1,800 hours in year 4; 2,000 hours in year 5. Instructions (a) Compute the annual depreciation for each of the five years under each of the following methods: (1) straight-line. (2) units-of-activity. (b) If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer. (c) Which method would result in the lowest reported income in the first year? Which method would result in the lowest total reported income over the five-year period? , LO: 2, Bloom: E, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 246 (10 min.) (a) (1) Straight-line method: = ($90,000 – $5,000) = $17,000 per year 5 years (2) Units-of-activity method: = ($90,000 – $5,000) = $8.50/hour 10,000 hours Solution 246 (Cont.) Year 1 1,600 × $8.50 = $13,600 2 2,200 × 8.50 = 18,700 3 2,400 × 8.50 = 20,400 4 1,800 × 8.50 = 15,300 5 2,000 × 8.50 = 17,000 Straight-line Units-of-Activity Year 1 $17,000 $13,600 Year 2 17,000 18,700 Year 3 17,000 20,400 Year 4 17,000 15,300 Year 5 17,000 7,000 Total $85,000 $85,000 (b) The units-of-activity method can be justified based on the variable usage the laser will receive during its useful life. (c) The straight-line method provides the highest depreciation expense for the first year, and therefore the lowest first year income. Over the five-year period, both methods result in the same total depreciation expense ($85,000) and, therefore, the same total income. Ex. 247 The December 31, 2013 balance sheet of Jensen Company showed Equipment of $76,000 and Accumulated Depreciation of $18,000. On January 1, 2014, the company decided that the equipment has a remaining useful life of 6 years with a $4,000 salvage value. Instructions Compute the (a) depreciable cost of the equipment and (b) revised annual depreciation. , LO: 2, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 247 (5 min.) (a) Book value, 1/1/14 ($76,000 – $18,000) $58,000 Less salvage value 4,000 Depreciable cost $54,000 (b) Revised annual depreciation = $9,000 ($54,000  6) Ex. 248 South Airlines purchased a 747 aircraft on January 1, 2013, at a cost of $35,000,000. The estimated useful life of the aircraft is 20 years, with an estimated salvage value of $5,000,000. On January 1, 2016 the airline revises the total estimated useful life to 15 years with a revised salvage value of $3,500,000. Instructions (a) Compute the depreciation and book value at December 31, 2015 using the straight-line method and the double-declining-balance method. (b) Assuming the straight-line method is used, compute the depreciation expense for the year ended December 31, 2016. , LO: 2, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 248 (20 min.) (a) Straight-line Depreciable Depreciation Annual Accumulated Year Cost × Rate = Depreciation Depreciation Book Value 2013 $30,000,000 5% $1,500,000 $1,500,000 $33,500,000 2014    3,000,000 32,000,000 2015    4,500,000 30,500,000 Double-declining-balance Book Value Depreciation Annual Accumulated Year Beginning Year × Rate = Depreciation Depreciation Book Value 2013 $35,000,000 10% $3,500,000 $ 3,500,000 $31,500,000 2014 31,500,000  3,150,000 6,650,000 28,350,000 2015 28,500,000  2,835,000 9,485,000 25,515,000 (b) Book value, January 1, 2016 $30,500,000 Less: Revised salvage value 3,500,000 Depreciable cost $27,000,000 Remaining useful life 12 yrs. Revised annual depreciation $2,250,000 Ex. 249 Hayden Company purchased a machine on January 1, 2014, at a cost of $90,000. It is expected to have an estimated salvage value of $5,000 at the end of its 5-year life. The company capitalized the machine and depreciated it in 2014 using the double-declining-balance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment but the company accountant neglected to follow company policy when he used the double-declining-balance method. Net income for the year ended December 31, 2014 was $55,000 as the result of depreciating the machine incorrectly. Instructions Using the method of depreciation which the company normally follows, prepare the correcting entry and determine the corrected net income. (Show computations.) , LO: 2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 249 (10 min.) Depreciation taken: ($90,000 – 0) × .40 = $36,000 Correct depreciation: ($90,000 – $5,000) ÷ 5 yrs. = 17,000 Overstatement of depreciation = $19,000 Accumulated Depreciation 19,000 Depreciation Expense 19,000 Correct net income: Net income as reported $55,000 Add: Overstatement of depreciation expense 19,000 Correct net income $74,000 Ex. 250 Equipment was acquired on January 1, 2011, at a cost of $90,000. The equipment was originally estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2014, using the straight-line method. On January 1, 2015, the estimated salvage value was revised to $6,000 and the useful life was revised to a total of 8 years. Instructions Determine the depreciation expense for 2015. , LO: 2, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Solution 250 (5 min.) Calculate the book value at the time of the revision: $90,000 – $5,000 = $8,500 annual depreciation expense 10 years 4 years have been depreciated: $8,500 × 4 = $34,000 Book value at the time of the revision: $90,000 – $34,000 = $56,000 Calculate the revised annual depreciation: $56,000 – $6,000 = $12,500 revised annual depreciation 4 years remaining The depreciation expense for 2015 is $12,500. Ex. 251 Frank White the new controller of Youngman Company, has reviewed the expected useful lives and salvage values of selected depreciable assets at the beginning of 2014. His findings are as follows. Type of Asset Date Acquired Cost Accumulated Depreciation 1/1/14 Useful Life in Years Salvage Value Old Proposed Old Proposed Buildings 1/1/08 $1,600,000 $228,000 40 50 $80,000 $52,000 Warehouse 1/1/09 207,000 40,000 25 20 7,000 5,000 All assets are depreciated by the straight-line method. Youngman Company uses a calendar year in preparing annual financial statements. After discussion, management has agreed to accept Frank’s proposed changes. Instructions (a) Compute the revised annual depreciation on each asset in 2014. (Show computations.) (b) Prepare the entry (or entries) to record depreciation on the building in 2014. , LO: 2, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 252 Fleming Company purchased a machine on January 1, 2014. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) annual city operating license, (e) major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before the machinery was placed into service, (g) lubrication of the machinery gearing after the machinery was placed into service, and (h) installation costs necessary to secure the machinery to the building flooring. Instructions Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces provided: C = Capital, R = Revenue. (a)_____________ (b)______________ (c)______________ (d)______________ (e)_____________ (f)______________ (g)______________ (h)______________ , LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Ex. 253 Foley Word Processing Service uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions and events occurred during the first three years. 2013 July 1 Purchased a computer from the Computer Center for $1,900 cash plus sales tax of $150, and shipping costs of $50. Nov. 3 Incurred ordinary repairs on computer of $140. Dec. 31 Recorded 2013 depreciation on the basis of a four year life and estimated salvage value of $500. Ex. 253 (Cont.) 2014 Dec. 31 Recorded 2013 depreciation. 2015 Jan. 1 Paid $300 for an upgrade of the computer. This expenditure is expected to increase the operating efficiency and capacity of the computer. Instructions Prepare the necessary entries. (Show computations.) , LO: 2,3, Bloom: AN, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 254 Identify the following expenditures as capital expenditures or revenue expenditures. (a) Replacement of worn out gears on factory machinery. (b) Construction of a new wing on an office building. (c) Painting the exterior of a building. (d) Oil change on a company truck. (e) Painting and lettering of a used truck upon acquisition of the truck. (f) Overhaul of a truck motor. One year extension in useful life is expected. (g) Purchased a wastebasket at a cost of $10. , LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Ex. 255 On January 1, 2012 Grier Company purchased and installed a telephone system at a cost of $20,000. The equipment was expected to last five years with a salvage value of $3,000. On January 1, 2013 more telephone equipment was purchased to tie-in with the current system for $10,000. The new equipment is expected to have a useful life of four years. Through an error, the new equipment was debited to Telephone Expense. Grier Company uses the straight-line method of depreciation. Instructions Prepare a schedule showing the effects of the error on Telephone Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2013 through the useful life of the new equipment. Telephone Expense Depreciation Expense Net Income Overstated Overstated Overstated Year (Understated) (Understated) (Understated) 2013 2014 2015 2016 , LO: 3, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 256 Karley Company sold equipment on July 1, 2014 for $75,000. The equipment had cost $210,000 and had $120,000 of accumulated depreciation as of January 1, 2014. Depreciation for the first 6 months of 2014 was $12,000. Instructions Prepare the journal entry to record the sale of the equipment. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 257 (a) Brown Company purchased equipment in 2007 for $150,000 and estimated a $10,000 salvage value at the end of the equipment's 10-year useful life. At December 31, 2013, there was $98,000 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2014, the equipment was sold for $40,000. Prepare the appropriate journal entries to remove the equipment from the books of Brown Company on March 31, 2014. (b) Finney Company sold a machine for $15,000. The machine originally cost $35,000 in 2011 and $8,000 was spent on a major overhaul in 2014 (charged to the Equipment account). Accumulated Depreciation on the machine to the date of disposal was $28,000. Prepare the appropriate journal entry to record the disposition of the machine. (c) Stanley Company sold office equipment that had a book value of $12,000 for $16,000. The office equipment originally cost $40,000 and it is estimated that it would cost $50,000 to replace the office equipment. Prepare the appropriate journal entry to record the disposition of the office equipment. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 258 Grayson's Lumber Mill sold two machines in 2015. The following information pertains to the two machines: Purchase Useful Salvage Depreciation Sales Machine Cost Date Life Value Method Date Sold Price #1 $66,000 7/1/11 5 yrs. $6,000 Straight-line 7/1/15 $15,000 #2 $50,000 7/1/14 5 yrs. $5,000 Double-declining- 12/31/15 $30,000 balance Instructions (a) Compute the depreciation on each machine to the date of disposal. (b) Prepare the journal entries in 2015 to record 2015 depreciation and the sale of each machine. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 259 Presented below are selected transactions for Werley Company for 2014. Jan. 1 Received $9,000 scrap value on retirement of machinery that was purchased on January 1, 2004. The machine cost $90,000 on that date, and had a useful life of 10 years with no salvage value. April 30 Sold a equipment for $34,000 that was purchased on January 1, 2011. The equipment cost $90,000, and had a useful life of 5 years with no salvage value. Dec. 31 Discarded a business automobile that was purchased on April 1, 2010. The car cost $27,000 and was depreciated on a 5-year useful life with a salvage value of $2,000. Instructions Journalize all entries required as a result of the above transactions. Werley Company uses the straight-line method of depreciation and has recorded depreciation through December 31, 2013. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 260 Zimmer Company sold the following two machines in 2014: Machine A Machine B Cost $76,000 $80,000 Purchase date 7/1/10 1/1/11 Useful life 8 years 5 years Salvage value $4,000 $4,000 Depreciation method Straight-line Double-declining-balance Date sold 7/1/14 8/1/14 Sales price $35,000 $16,000 Instructions Journalize all entries required to update depreciation and record the sales of the two assets in 2014. The company has recorded depreciation on the machines through December 31, 2013. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 261 Lynn Company owns equipment that cost $120,000 when purchased on January 1, 2011. It has been depreciated using the straight-line method based on estimated salvage value of $15,000 and an estimated useful life of 5 years. Instructions Prepare Lynn Company's journal entries to record the sale of the equipment in these four independent situations. (a) Sold for $58,000 on January 1, 2014. (b) Sold for $58,000 on May 1, 2014. (c) Sold for $32,000 on January 1, 2014. (d) Sold for $32,000 on October 1, 2014. , LO: 4, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 262 On July 1, 2014, Melton Inc. invested $560,000 in a mine estimated to have 800,000 tons of ore of uniform grade. During the last 6 months of 2014, 100,000 tons of or were mined and sold. Instructions (a) Prepare the journal entry to record depletion expense. (b) Assume that the 100,000 tons of ore were mined, but only 85,000 units were sold. How are the costs applicable to the 15,000 unsold units reported? , LO: 5, Bloom: AP, Difficulty: Medium, Min: 6, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 263 Gorman Mining invested $960,000 in a mine estimated to have 1,200,000 tons of ore with no salvage value. During the first year, 200,000 tons of ore were mined and sold. Instructions Prepare the journal entry to record depletion expense. , LO:5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 264 Kahn Mining Company purchased a mine for $60 million which is estimated to have 250,000 tons of ore and a salvage value of $10 million. (a) In the first year, 50,000 tons of ore are extracted and sold. Prepare the journal entry to record depletion expense for the first year. (b) In the second year, 150,000 tons of ore are extracted but only 125,000 tons are sold. Prepare the journal entry to record depletion expense for the second year. (c) What amount and in what account are the tons of ore not sold reported? Ex. 265 Quayle Mining Company purchased land containing an estimated 15 million tons of ore at a cost of $4,200,000. The land without the ore is estimated to be worth $600,000. The company expects to operate the mine for 12 years. Buildings costing $600,000 are erected on the site and are expected to last for 25 years. Equipment costing $300,000 with an estimated life of 15 years is installed. The buildings and the equipment possess no salvage value after the mine is closed. During the first year of operations, the mining company mined and sold 2 million tons of ore. Instructions (a) Compute the depletion charge per ton. (b) Compute the depletion expense for the first year. (c) Compute the appropriate first year's depreciation expense for the buildings. (d) Compute the appropriate first year's depreciation expense for the equipment. (e) Prepare journal entries to record depletion and depreciation expenses for the year. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 266 (a) A company purchased a patent on January 1, 2014, for $2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2014, the company paid legal costs of $135,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2014. (b) Trent Company purchased a franchise from Tastee Food Company for $400,000 on January 1, 2014. The franchise is for an indefinite time period and gives Trent Company the exclusive rights to sell Tastee Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2014. (c) Kline Company incurred research and development costs of $500,000 in 2014 in developing a new product. Prepare the necessary journal entries during 2014 to record these events and any adjustments at year end on December 31, 2014. , LO: 6, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 267 On January 2, 2014, Olathe Company purchased a patent for $240,000. The patent has an 8-year estimated useful life and a legal life of 20 years. Instructions Prepare the journal entry to record patent amortization. , LO: 6, Bloom: AP, Difficulty: Easy, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Solution 267 (3 min.) Amortization Expense 30,000 Patents ($240,000  8) 30,000 Ex. 268 For each item listed below, enter a code letter in the blank space to indicate the allocation terminology for the item. Use the following codes for your answer: A—Amortization P—Depletion D—Depreciation N—None of these 1. Goodwill 7. Timberlands 2. Land 8. Franchises (indefinite life) 3. Buildings 9. Licenses (limited life) 4. Patents 10. Land Improvements 5. Copyrights 11. Oil Deposits 6. Research and development costs 12. Equipment , LO: 6, Bloom: AP, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Ex. 269 For each of the following unrelated transactions, (a) determine the amount of the amortization or depletion expense for the current year, and (b) present the adjusting entries required to record each expense at year end. (1) Timber rights were purchased on a tract of land for $480,000. The timber is estimated at 1,200,000 board feet. During the current year, 75,000 board feet of timber were cut and sold. Ex. 269 (Cont.) (2) Costs of $8,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $22,000 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years. , LO: 6, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA Ex. 270 During the current year, Marin Company incurred several expenditures. Briefly explain whether the expenditures listed below should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate the number of years over which the asset should be amortized. Explain your answer. (a) Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully defended. (b) Purchased a trademark from another company. The trademark can be renewed indefinitely. Marin Company expects the trademark to contribute to revenue indefinitely. (c) Marin Company acquires a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining life of 15 years. (d) Marin Company is spending considerable time and money in developing a different patent for another product. So far $3,000,000 has been spent this year on research and development. Marin Company is very confident they will obtain this patent in the next few years. , LO: 6, Bloom: C, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting Ex. 271 Presented below is information related to plant assets, natural resources, and intangibles at year end on December 31, 2014, for Hanley Company: Buildings $1,280,000 Goodwill 650,000 Patents 480,000 Coal Mine 440,000 Accumulated Depreciation—Bldg. 670,000 Accumulated Depletion 275,000 Instructions Prepare a partial balance sheet for Hanley Company that shows how the above listed items would be presented. , LO: 7, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 272 Compute the asset turnover based on the following: Beginning total assets $ 800,000 Ending total assets 1,200,000 Net income 300,000 Net sales 2,500,000 , LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 273 During 2014 Lopez Corporation reported net sales of $3,200,000 and net income of $1,200,000. Its balance sheet reported average total assets of $1,600,000. Instructions Calculate the asset turnover. , LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting Ex. 274 Indicate in the blank spaces below, the section of the balance sheet where the following items are reported. Use the following code to identify your answer: PPE Property, Plant, and Equipment I Intangibles O Other N/A Not on the balance sheet 1. Goodwill 7. Timberlands 2. Land Improvements 8. Franchises 3. Buildings 9. Licenses 4. Accumulated Depreciation 10. Equipment 5. Trademarks 11. Oil Deposits 6. Research and development costs 12. Land , LO: 7, Bloom: C, Difficulty: Medium, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting *Ex. 275 Presented below are two independent situations: (a) Yount Company exchanged an old machine (cost $150,000 less $90,000 accumulated depreciation) plus $10,000 cash for a new machine. The old machine had a fair value of $54,000. Prepare the entry to record the exchange of assets by Yount Company. *Ex. 275 (Cont.) (b) Lawson Company trades old equipment (cost $90,000 less $54,000 accumulated deprecia-tion) for new equipment. Lawson paid $36,000 cash in the trade. The old equipment that was traded had a fair value of $54,000. Prepare the entry to record the exchange of assets by Lawson Company. The transaction has commercial substance. , LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA *Ex. 276 Dolan Company exchanges equipment with Eaton Company and Pawnee Company exchanges equipment with Fiero Company. The following information pertains to the exchanges: Dolan Company Pawnee Company Equipment (cost) $228,000 $192,000 Accumulated depreciation 100,000 90,000 Fair value of the equipment 150,000 84,000 Cash paid 90,000 -0- Instructions Prepare the journal entries to record the exchanges on the books of Dolan Company and Pawnee Company. The transaction has commercial substance. Ex. 277 Bell Company and Kene Company exchanged trucks on January 1, 2012. Bell's truck cost $140,000, had accumulated depreciation of $115,000, and has a fair value of $15,000. Kene's truck cost $105,000, had accumulated depreciation of $90,000, and has a fair value of $15,000. Instructions (a) Journalize the exchange for Bell Company. (b) Journalize the exchange for Kene Company. , LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA aEx. 278 Prepare the journal entries to record the following transactions for Ogleby Company which has a calendar year end and uses the straight-line method of depreciation. a) On September 30, 2014, the company exchanged old delivery equipment and $36,000 for new delivery equipment. The old delivery equipment was purchased on January 1, 2012, for $126,000 and was estimated to have a $18,000 salvage value at the end of its 5-year life. Depreciation on the delivery equipment has been recorded through December 31, 2013. It is estimated that the fair value of the old delivery equipment is $54,000 on September 30, 2014. (b) On June 30, 2014, the company exchanged old office equipment and $40,000 for new office equipment. The old office equipment originally cost $80,000 and had accumulated depreciation to the date of disposal of $35,000. It is estimated that the fair market value of the old office equipment on June 30 was $60,000. The transaction has commercial substance. , LO: 8, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA COMPLETION STATEMENTS 279. With the exception of land, plant assets experience a ______________ in service potential over their useful lives. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 280. When vacant land is acquired, expenditures for clearing, draining, filling, and grading should be charged to the ______________ account. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 281. The cost of demolishing an old building on land that has been acquired so that a new building can be constructed should be charged to the ______________ account. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 282. The cost of paving, fencing, and lighting a new company parking lot is charged to a ______________ account. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 283. Equipment with an invoice price of $20,000 was purchased and freight costs were $900. The cost of the equipment would be $______________. , LO: 1, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 284. ______________ is the process of allocating the cost of a plant asset to expense over its service life in a rational and systematic manner. , , IMA: Business Economics 285. The book value of a plant asset is obtained by subtracting ______________ from the ______________ of the plant asset. , 286. Three factors that affect the computation of periodic depreciation expense are (1) _______________, (2) _______________, and (3) _________________. , 287. The ________________ method of computing depreciation expense results in an equal amount of periodic depreciation throughout the service life of the plant asset. , 288. The declining-balance method of computing depreciation expense involves multiplying a _______________ book value by a _______________ percentage. , , IMA: Business Economics 289. The declining-balance method of computing depreciation is known as an _____________ depreciation method. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 290. Ordinary repairs which maintain operating efficiency and expected productive life are called _______________. , 291. Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life and are referred to as __________________. , 292. If disposal of a plant asset occurs at any time during the year, ___________________ for the fraction of the year to the date of disposal must be recorded. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 293. If fully depreciated equipment that cost $10,000 with no salvage value is retired, the entry to record the retirement requires a debit to the ___________________________ account and a credit to the _____________________ account. , 294. If the proceeds from the sale of a plant asset exceed its ______________, a gain on disposal will occur. 295. A plant asset originally cost $64,000 and was estimated to have a $4,000 salvage value at the end of its 5-year useful life. If at the end of three years, the asset was sold for $12,000, and had accumulated depreciation recorded of $36,000, the company should recognize a ______________ on disposal in the amount of $____________. , LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 296. Natural resources have two distinguishing characteristics (1) they are physically _______________ in operations, and (2) they are _________________ only by an act of nature. , 297. In recording the purchase of a business, goodwill should be recorded for the excess of ______________ over the _______________ of the net assets acquired. , 298. The allocation of the cost of an asset to expense over its useful life is called _________________ for tangible plant assets, ________________ for natural resources, and _________________ for intangible assets. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 299. The cost of a patent should be amortized over its ____________ life or its ____________ life, whichever is shorter. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 300. The ___________________ is calculated by dividing net sales by average total assets. , a301. In the case of an exchange of plant assets resulting in a loss on disposal, the cost of the new asset acquired is equal to the ______________ of the asset given up plus any cash paid by the purchaser. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA a302. A company exchanged an old machine, which originally cost $22,000 and has accumulated depreciation to date of $12,000, for a new machine. The old machine had a fair value of $14,000. The cost of the new machine should be recorded at $_____________. , LO: 8, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA MATCHING 303. Match the items below by entering the appropriate code letter in the space provided. A. Plant assets F. Units-of-activity method B. Depreciation G. Double-declining-balance method C. Book value H. MACRS D. Salvage value I. Revenue expenditure E. Straight-line method J. Capital expenditure 1. Small expenditures which primarily benefit the current period. 2. Cost less accumulated depreciation. 3. An accelerated depreciation method used for financial statement purposes. 4. Tangible resources that are used in operations and are not intended for resale. 5. Equal amount of depreciation each period. 6. Expected cash value of the asset at the end of its useful life. 7. Allocation of the cost of a plant asset to expense over its useful life. 8. Material expenditures which increase an asset's operating efficiency, productive capacity, or useful life. 9. An accelerated depreciation method used for tax purposes. 10. Useful life is expressed in terms of units of production or expected use. , LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 304. Match the items below by entering the appropriate code letter in the space provided. A. Gain on disposal F. Asset turnover B. Loss on disposal G. Goodwill C. Trademark H. Amortization D. Depletion I. Intangible asset E. Useful life J. Research and development costs 1. Process of allocating the cost of an intangible asset to expense over its useful life. 2. Is only recorded when an exchange has commercial substance. 3. Examples are franchises and licenses. 4. The allocation of the cost of a natural resource to expense over its useful life. 5. Can be identified only with a business as a whole. 6. A symbol that identifies a particular enterprise or product. 7. When book value of asset is greater than the proceeds received from its sale. 8. Must be expensed when incurred. 9. Indicates how efficiently a company is able to generate sales with its assets. 10. An estimate of the expected productive life of an asset. , LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA SHORT-ANSWER ESSAY QUESTIONS S-A E 305 The declining-balance method is an accelerated method of depreciation. Briefly explain what is meant by an accelerated method of depreciation and justify the choosing of an accelerated method. , LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics S-A E 306 Identify the factors that are considered in classifying an expenditure as a capital or a revenue expenditure. Are there instances where it may be difficult to classify an expenditure as one or the other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What basis would be used in a decision? , LO: 3, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting S-A E 307 What are the similarities and differences between the terms depreciation, depletion, and amortization? , LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Reporting S-A E 308 In general, how does one determine whether or not an expenditure should be included in the acquisition cost of property, plant, and equipment? , LO: 8, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics S-A E 309 Comment on the validity of the following statements: “As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.” , LO: 2, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics S-A E 310 Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a whole. If goodwill is an intangible asset, why can't it be sold like other intangible assets such as copyrights and patents? Briefly explain what makes goodwill different. , LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics S-A E 311 How is a gain or loss on the sale of a plant asset computed? , LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics S-A E 312 (Ethics) Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis coding and medical practice software including an advanced medical record cross-referencing system. PRS is aggressive in monitoring other firms' offerings and ensuring that its services are comparable to all others. Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests a presentation of a competitor's services. A PRS employee poses as an employee of the client's office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year. In April of this year, PRS began selling a software product substitute before the competitor's software was released. The competitor, Compu-Med, sued for copyright infringement and won. PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med's product (since it was prohibited from offering its own version for five years.) This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line of services. PRS's accountant, Jill Linsey, initially recorded the cash payments as "Loss from Lawsuit" and "Product Development," respectively. However, Jack Meyer, the controller, instructed Jill to create an intangible asset, named "Goodwill" and charge both costs to this account. "We're protected from another lawsuit as long as this agreement is in effect," he says. "It's about as close to goodwill as we'll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway." Required: 1. What are the ethical issues? 2. What should Jill do? , LO: 6, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: Communications, IMA: Business Economics S-A E 313 (Communication) The Restor-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbished to their original condition, at a cost of $75,000. The project was such a success, that Restor-It decided to purchase another very large home, this time in nearby Joplin, Missouri. A realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Restor-It decided that a modest return was all that was required, and so they agreed to sell. Only afterward did they learn that they had a $10,000 loss on the sale. The president of the company, Dan Easler, does not believe that a loss is possible. "We sold that house for more than we paid for it," he said. "I know we put some money in it, but we had depreciated it for three years. How in the world can we have a loss?" Required: Write a short memo to Mr. Easler explaining how it would be possible to have a loss. Do not try to use specific numbers for cost or depreciation. , LO: 4, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics