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Chapter 8
ACCOUNTING FOR LONG-TERM ASSETS
True / False Questions
1. Plant assets refer to nonphysical assets that are used in the operations of a business.
2. Plant assets are used in operations and have useful lives that extend over more than one
accounting period.
3. If land is purchased as a building site, the cost of removing existing structures is not
charged to the Land account.
4. The process of allocating the cost of a plant asset to expense in the accounting periods
benefiting from its use is called depletion.
5. Salvage value is an estimate of an asset’s value at the end of its benefit period.
6. Obsolescence refers to the insufficient capacity of a company’s plant assets to meet the
company’s growing productive demands.
7. Depreciation does not measure the decline in market value of an asset each period.
8. A plant asset’s useful life is the length of time it is productively used in a company’s
operations.
9. It is necessary to report both the cost and the accumulated depreciation of plant assets in the
financial statements.
10. Depreciation expense is calculated using its cost, estimates of an asset’s salvage value, and
an estimated useful life.
11. When an asset is purchased (or disposed of) at a time other than the beginning or the end
of an accounting period, depreciation is recorded for part of a year so that the year of purchase
or the year of disposal is charged with its share of the asset’s depreciation.
12. Revising an estimate of the useful life or salvage value of a plant asset is referred to as a
change in accounting estimate and is reflected in the current, and future financial statements.
13. The going concern assumption supports the reporting of plant assets at undepreciated cost
(book value) rather than market value.
14. Total depreciation expense over an asset’s useful life will be identical under all methods of
depreciation.
15. Financial accounting and tax accounting require the same recordkeeping and there should
be no difference in results between the two accounting systems.
16. Depreciation is higher in earlier years and income is lower in the later years when using
straight-line versus accelerated methods.
17. The book value of an asset when using double-declining-balance depreciation is always
greater than the book value from using straight-line depreciation, except at the beginning and
the end of the asset’s useful life, when it is the same.
18. The Modified Accelerated Cost Recovery System (MACRS) is part of the U.S. federal
income tax laws and may be used for financial reporting.
19. Decision makers and other users of financial statements are especially interested in
evaluating a company’s ability to use its assets in generating sales.
20. Asset turnover is computed by dividing net sales by average total assets.
21. Companies that have a relatively large amount invested in assets to generate a given level
of sales are considered capital-intensive.
22. Duncan reported net sales of $2,523 million and average total assets of $1,476 million. Its
total asset turnover equals 1.71.
23. Edmond reported average total assets of $9,965 million and net sales of $10,430 million.
Its total asset turnover equals .96.
24. An asset’s cost includes all normal and reasonable expenditures necessary to get the asset
in place and ready for its intended use.
25. If a machine is damaged during unpacking, the repairs are added to its cost.
26. The purchase of a property that included land, building, and related improvements is
called a lump-sum or basket purchase.
27. When a company constructs a building, the cost of the building includes materials and
labor but not design fees, building permits, or insurance during construction.
28. Additions to land that increase the usefulness of the land such as parking lots, fences, and
lighting are not depreciated.
29. The cost of fees for insuring the title and any accrued property taxes are included in the
cost of land.
30. Total asset cost plus depreciation expense equals book value.
31. The units-of-production method of depreciation charges a varying amount of expense for
each period of an asset’s useful life depending on its usage.
32. An accelerated depreciation method yields larger depreciation expense in the early years
of an asset’s life and less depreciation expense in later years.
33. The double-declining balance method is applied by (1) computing the asset’s straight-line
depreciation rate, (2) doubling it, (3) subtracting salvage value from cost, and (4) multiplying
the rate times the net value.
34. A company purchased a plant asset for $60,000. The asset has an estimated salvage value
of $4,000, and an estimated useful life of 7 years. The annual depreciation expense using the
straight-line method is $4,000 per year.
35. Revenue expenditures are additional costs of plant assets that do not materially increase
the assets’ life or productive capabilities.
36. Capital expenditures are expenditures that keep assets in normal, good operating
condition.
37. Extraordinary repairs are expenditures extending the asset’s useful life beyond its original
estimate, and are capital expenditures because they benefit future periods.
38. Revenue expenditures are also called balance sheet expenditures.
39. Betterments are a type of capital expenditure.
40. Plant assets can be disposed of by discarding, selling, or exchanging them.
41. The first step in accounting for an asset disposal is to calculate the gain or loss on
disposal.
42. Accounting for the exchange of assets depends on whether the transaction has commercial
substance; commercial substance implies that it alters the company’s future cash flows.
43. If an asset is sold above its book value, the selling company records a loss.
44. Gain or loss on the disposal of assets is determined by comparing the disposed asset’s
book value to the value of any assets received.
45. A loss on disposal of a plant asset occurs if the cash proceeds received from the asset sale
is less than the asset’s book value.
46. Natural resources are assets that include standing timber, mineral deposits, and oil and gas
fields.
47. Amortization is the process of allocating the cost of natural resources to periods when
they are consumed.
48. Natural resources may be reported under either plant assets or their own separate category
on the balance sheet.
49. When the usefulness of plant assets used to extract natural resources is directly related to
the depletion of a natural resource, their costs are depreciated using the units-of-production
method of depreciation, as long as the assets will not be moved to and used at another site
when extraction of the natural resources is complete.
50. The cost of an intangible asset is systematically allocated to depreciation expense over its
estimated useful life.
51. A leasehold refers to the rights the lessor grants to the lessee under the terms of the lease.
52. Intangible assets are nonphysical assets used in operations that confer on their owners’
long-term rights, privileges, or competitive advantages.
53. Since goodwill is an intangible, it is amortized each year using the straight-line method,
the same as other intangibles are amortized.
54. A patent is an exclusive right granted to its owner to manufacture and sell a patented
device or to use a process for 20 years.
55. A copyright gives its owner the exclusive right to publish and sell a musical, literary, or
artistic work during the life of the creator plus 17 years.
56. A trademark is an exclusive right granted to its owner to publish and sell a musical,
literary, or artistic work during the life of the creator plus 70 years.
57. Plant assets are defined as:
A. Tangible assets that have a useful life of more than one accounting period and are used in
the operation of a business.
B. Current assets.
C. Held for sale.
D. Intangible assets used in the operations of a business that have a useful life of more than
one accounting period.
E. Tangible assets used in the operation of business that have a useful life of less than one
accounting period.
58. One characteristic of plant assets is that they are:
A. Current assets.
B. Used in operations.
C. Natural resources.
D. Long-term investments.
E. Intangible.
59. The relevant factors in computing depreciation do not include:
A. Cost.
B. Salvage value.
C. Useful life.
D. Depreciation method.
E. Market value.
60. Salvage value is:
A. Not a factor relevant to determining depletion.
B. A factor relevant to amortizing an intangible asset with an indefinite life.
C. An estimate of the asset’s value at the end of its benefit period.
D. A factor relevant to determining depreciation under MACRS.
E. A factor relevant to determining depreciation that cannot be revised during an asset’s useful
life.
61. Depreciation:
A. Measures the decline in market value of an asset.
B. Measures physical deterioration of an asset.
C. Is the process of allocating the cost of a plant asset to expense.
D. Is an outflow of cash from the use of a plant asset.
E. Is applied to land.
62. The useful life of a plant asset is:
A. The length of time it is productively used in a company’s operations.
B. Never related to its physical life.
C. Its productive life, but not to exceed one year.
D. Determined by the FASB.
E. Determined by law.
63. The term inadequacy, as it relates to the useful life of an asset, refers to:
A. The insufficient capacity of a company’s plant assets to meet the company’s growing
production demands.
B. An asset that is worn out.
C. An asset that is no longer useful in producing goods and services.
D. The condition where the salvage value is too small to replace the asset.
E. The condition where the asset’s salvage value is less than its cost.
64. The term, obsolescence, as it relates to the useful life of an asset, refers to:
A. The end of an asset’s useful life.
B. A plant asset that is no longer useful in producing goods and services with a competitive
advantage.
C. The insufficient capacity of a company’s plant assets to meet the company’s productive
demands.
D. An asset’s salvage value becoming less than its replacement cost.
E. Intangible assets that have been fully amortized.
65. Once the estimated depreciation expense for an asset is calculated:
A. It cannot be changed, based on the historical cost principle.
B. It may be revised based on new information.
C. Any changes are accumulated and recognized when the asset is sold.
D. The estimate itself cannot be changed; however, new information should be disclosed in
financial statement footnotes.
E. It cannot be changed, based on the consistency principle.
66. A machine originally had an estimated useful life of 6 years, but after 4 complete years, it
was decided that the original estimate of useful life should have been 10 years. At that point
the remaining cost to be depreciated should be allocated over the remaining:
A. 2 years.
B. 4 years.
C. 6 years.
D. 16 years.
E. 10 years.
67. A change in an accounting estimate is:
A. Reflected in past financial statements.
B. Reflected in future financial statements and also requires modification of past statements.
C. Reflected in current and future years’ financial statements, not in prior statements.
D. Not allowed under current accounting rules.
E. Considered an error in the financial statements.
68. When originally purchased, a vehicle costing $23,000 had an estimated useful life of 8
and an estimated salvage value of $1,500. After 4 years of straight-line depreciation, the
asset’s total estimated useful life was revised from 8 years to 6 years and there was no change
in the estimated salvage value. The depreciation expense in year 5: equals:
A. $ 5,375.00.
B. $ 2,687.50.
C. $ 5,543.75.
D. $10,750.00.
E. $ 2,856.25.
69. A company used straight-line depreciation for an item of equipment that cost $12,000, had
a salvage value of $2,000 and a five-year useful life. After depreciating the asset for three
complete years, the salvage value was reduced to $1,200 but its total useful life remained the
same. Determine the amount of depreciation to be charged against the equipment during each
of the remaining years of its useful life:
A. $1,000.
B. $1,800.
C. $5,400.
D. $2,400.
E. $2,000.
70. Beckman Enterprises purchased a depreciable asset on October 1, Year 1 at a cost of
$100,000. The asset is expected to have a salvage value of $20,000 at the end of its five-year
useful life. If the asset is depreciated on the double-declining-balance method, the asset’s
book value on December 31, Year 2 will be:
A. $36,000
B. $42,000
C. $54,000
D. $16,000
E. $90,000
71. Peavey Enterprises purchased a depreciable asset for $22,000 on April 1, Year 1. The asset
will be depreciated using the straight-line method over its four-year useful life. Assuming the
asset’s salvage value is $2,000, what will be the amount of accumulated depreciation on this
asset on December 31, Year 3?
A. $5,000
B. $15,000
C. $15,125
D. $20,000
E. $13,750
72. Peavey Enterprises purchased a depreciable asset for $22,000 on April 1, Year 1. The asset
will be depreciated using the straight-line method over its four-year useful life. Assuming the
asset’s salvage value is $2,000, Peavey Enterprises should recognize depreciation expense in
Year 2 in the amount of:
A. $10,000
B. $ 5,000
C. $ 5,500
D. $20,000
E. $ 9,250
73. The following information is available on a depreciable asset owned by Mutual Savings
Bank:
Purchase date June 1, Year 1
Purchase price $85,000
Salvage value $10,000
Useful life 10 years
Depreciation method straight-line
The asset’s book value is $70,000 on June 1, Year 3. On that date, management determines
that the asset’s salvage value should be $5,000 rather than the original estimate of $10,000.
Based on this information, the amount of depreciation expense the company should recognize
during the last six months of Year 3 would be:
A. $8,125.00
B. $7,375.00
C. $4,062.50
D. $3,750.00
E. $7,812.50
74. A benefit of using an accelerated depreciation method is that:
A. It is preferred by the tax code.
B. It is the simplest method to calculate.
C. It yields larger depreciation expense in the early years of an asset’s life.
D. It yields a higher income in the early years of the asset’s useful life.
E. The results are identical to straight-line depreciation.
75. The modified accelerated cost recovery system (MACRS):
A. Is included in the U.S. federal income tax rules for depreciating assets.
B. Is an outdated system that is no longer used by companies.
C. Is required for financial reporting.
D. Is identical to units of production depreciation.
E. Does not allow partial year depreciation.
76. The straight-line depreciation method and the double-declining-balance depreciation
method:
A. Produce the same total depreciation over an asset’s useful life.
B. Produce the same depreciation expense each year.
C. Produce the same book value each year.
D. Are acceptable for tax purposes only.
E. Are the only acceptable methods of depreciation for financial reporting.
77. Total asset turnover is used to evaluate:
A. The efficient use of assets to generate sales.
B. The necessity for asset replacement.
C. The number of times operating assets were sold during the year.
D. The cash flows used to acquire assets.
E. The relation between asset cost and book value.
78. A total asset turnover ratio of 3.5 indicates that:
A. For every $1 in sales, the firm acquired $3.50 in assets during the period.
B. For every $1 in assets, the firm produced $3.50 in net sales during the period.
C. For every $1 in assets, the firm earned gross profit of $3.50 during the period.
D. For every $1 in assets, the firm earned $3.50 in net income.
E. For every $1 in assets, the firm paid $3.50 in expenses during the period.
79. The calculation of total asset turnover is:
A. Gross profit divided by average total assets.
B. Average total assets divided by gross profit.
C. Net sales divided by average total assets.
D. Average total assets multiplied by net sales.
E. Net assets multiplied by total assets.
80. A company had average total assets of $887,000. Its gross sales were $1,090,000 and its
net sales were $1,000,000. The company’s total asset turnover equals:
A. 0.81.
B. 0.89.
C. 1.09.
D. 1.13.
E. 1.23.
81. Spears Co. had net sales of $35,400 million. Its average total assets for the period were
$14,700 million. Spears’ total asset turnover equals:
A. 0.42.
B. 0.35.
C. 1.48.
D. 2.41.
E. 3.54.
82. Land improvements are:
A. Assets that increase the usefulness of land, and like land, are not depreciated.
B. Assets that increase the usefulness of land, but that have a limited useful life and are
subject to depreciation.
C. Included in the cost of the land account.
D. Expensed in the period incurred.
E. Also called basket purchases.
83. Which of the following are not classified as plant assets?
A. Land.
B. Land improvements.
C. Buildings.
D. Machinery and equipment.
E. Patent.
84. The cost of land would not include:
A. Purchase price.
B. Cost of parking lot lighting.
C. Costs of removing existing structures.
D. Fees for insuring the title.
E. Government assessments.
85. A company paid $150,000, plus a 7% commission and $5,000 in closing costs for a
property. The property included land appraised at $87,500, land improvements appraised at
$35,000, and a building appraised at $52,500. What should be the allocation of this property’s
costs in the company’s accounting records?
A. Land $75,000; Land Improvements, $30,000; Building, $45,000.
B. Land $75,000; Land Improvements, $30,800; Building, $46,200.
C. Land $82,750; Land Improvements, $33,100; Building, $49,650.
D. Land $80,250; Land Improvements, $32,100; Building, $48,150.
E. Land $77,500; Land Improvements; $31,000; Building; $46,500.
86. Merchant Company purchased property for a building site. The costs associated with the
property were:
Real estate commissions .................................................. 15,000
Legal fees 700
Expenses of clearing the land........................................... 2,000
Expenses to remove old building..................................... 4,000
What portion of these costs should be allocated to the cost of the land and what portion should
be allocated to the cost of the new building?
A. $187,700 to Land; $19,000 to Building.
B. $200,700 to Land; $6,000 to Building.
C. $200,000 to Land; $6,700 to Building.
D. $185,000 to Land; $21,700 to Building.
E. $206,700 to Land; $0 to Building.
87. A company purchased property for $100,000. The property included a building, a parking
lot, and land. The building was appraised at $62,000; the land at $35,000, and the parking lot
at $18,000. Land should be recorded in the accounting records with an allocated cost of:
A. $ 0.
B. $ 30,435.
C. $ 35,000.
D. $ 46,087.
E. $100,000.
89. The total cost of an asset less its accumulated depreciation is called:
A. Historical cost.
B. Book value.
C. Present value.
D. Current (market) value.
E. Replacement cost.
90. The depreciation method that charges the same amount of expense to each period of the
asset’s useful life is called:
A. Accelerated depreciation.
B. Declining-balance depreciation.
C. Straight-line depreciation.
D. Units-of-production depreciation.
E. Modified accelerated cost recovery system (MACRS) depreciation.
91. The depreciation method that allocates an equal portion of the total depreciable cost for a
plant asset to each unit produced is called:
A. Accelerated depreciation.
B. Declining-balance depreciation.
C. Straight-line depreciation.
D. Units-of-production depreciation.
E. Modified accelerated cost recovery system (MACRS) depreciation.
92. The depreciation method in which a plant asset’s depreciation expense for a period is
determined by applying a constant depreciation rate to the asset’s beginning-of-period book
value is called:
A. Book value depreciation.
B. Declining-balance depreciation.
C. Straight-line depreciation.
D. Units-of-production depreciation.
E. Modified accelerated cost recovery system (MACRS) depreciation.
93. The depreciation method that produces larger depreciation expense during the early years
of an asset’s life and smaller expense in the later years is a (an):
A. Accelerated depreciation method.
B. Book value depreciation method.
C. Straight-line depreciation method.
D. Units-of-production depreciation method.
E. Unrealized depreciation method.
94. A company purchased a delivery van for $28,000 with a salvage value of $3,000 on
September 1, Year 1. It has an estimated useful life of 5 years. Using the straight-line method,
how much depreciation expense should the company recognize on December 31, Year 1?
A. $5,000.
B. $1,667.
C. $1,400.
D. $1,250.
E. $2,067.
95. Marlow Company purchased a point of sale system on January 1 for $3,400. This system
has a useful life of 10 years and a salvage value of $400. What would be the depreciation
expense for the second year of its useful life using the double-declining-balance method?
A. $ 680.
B. $ 480.
C. $ 544.
D. $600.
E. $300.
96. Marlow Company purchased a point of sale system on January 1 for $3,400. This system
has a useful life of 10 years and a salvage value of $400. What would be the depreciation
expense for the first year of its useful life using the double-declining-balance method?
A. $ 680.
B. $2,320.
C. $2,720.
D. $600.
E. $300.
97. Marlow Company purchased a point of sale system on January 1 for $3,400. This system
has a useful life of 10 years and a salvage value of $400. What would be the accumulated
depreciation at the end of the second year of its useful life using the double-declining-balance
method?
A. $2,176.
B. $ 544.
C. $1,200.
D. $ 600.
E. $1,224.
98. Marlow Company purchased a point of sale system on January 1 for $3,400. This system
has a useful life of 10 years and a salvage value of $400. What would be the book value of the
asset at the end of the first year of its useful life using the double-declining-balance method?
A. $ 680.
B. $2,320.
C. $2,720.
D. $600.
E. $300.
99. A company purchased a weaving machine for $190,000. The machine has a useful life of
8 years and a residual value of $10,000. It is estimated that the machine could produce 75,000
bolts of woven fabric over its useful life. In the first year, 15,000 bolts were produced. In the
second year, production increased to 19,000 units. Using the units-of-production method,
what is the amount of depreciation expense that should be recorded for the second year?
A. $48,133.
B. $45,600.
C. $22,500.
D. $23,750.
E. $81,600.
100. A company purchased a weaving machine for $190,000. The machine has a useful life of
8 years and a residual value of $10,000. It is estimated that the machine could produce 75,000
bolts of woven fabric over its useful life. In the first year, 15,000 bolts were produced. In the
second year, production increased to 19,000 units. Using the units-of-production method,
what is the amount of accumulated depreciation at the end of the second year?
A. $48,133.
B. $45,600.
C. $86,133.
D. $23,750.
E. $81,600.
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McGraw-Hill Education.
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101. A company purchased a weaving machine for $190,000. The machine has a useful life of
8 years and a residual value of $10,000. It is estimated that the machine could produce 75,000
bolts of woven fabric over its useful life. In the first year, 15,000 bolts were produced. In the
second year, production increased to 19,000 units. Using the units-of-production method,
what is the book value of the machine at the end of the second year?
A. $108,400.
B. $144,400.
C. $81,600.
D. $190,000.
E. $180,000.
102. Revenue expenditures:
A. Are additional costs of plant assets that do not materially increase the asset’s life or its
productive capabilities.
B. Are known as balance sheet expenditures because they relate to plant assets.
C. Extend the asset’s useful life.
D. Substantially benefit future periods.
E. Are debited to asset accounts when incurred.
103. Another name for a capital expenditure is:
A. Revenue expenditure.
B. Asset expenditure.
C. Long-term expenditure.
D. Contributed capital expenditure.
E. Balance sheet expenditure.
104. Extraordinary repairs:
A. Are revenue expenditures.
B. Extend the useful life of an asset beyond its original estimate.
C. Are credited to accumulated depreciation.
D. Are additional costs of plants assets that do not materially increase the asset’s life.
E. Are expensed when incurred.
105. Which of the following is an example of an extraordinary repair?
A. New tires for a truck.
B. Replacement of all florescent light tubes in an office.
C. Carpet cleaning and repair.
D. Replacing the roof on a manufacturing warehouse.
E. Routine machine maintenance.
106. Ordinary repairs meet all of the following criteria except:
A. Are expenditures to keep an asset in normal operating condition.
B. Are necessary if an asset is to perform to expectations over its useful life.
C. Extend the useful life of an asset beyond its original estimate
D. Include cleaning, lubricating, and normal adjusting.
E. Are treated as expenses.
107. Betterments are:
A. Expenditures making a plant asset more efficient or productive.
B. Also called ordinary repairs.
C. Always increase an asset’s life.
D. Revenue expenditures.
E. Credited against the asset account when incurred.
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McGraw-Hill Education.
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108. An asset’s book value is $18,000 on December 31, Year 5. The asset has been
depreciated at an annual rate of $3,000 on the straight-line method. Assuming the asset is sold
on December 31, Year 5 for $15,000, the company should record:
A. A loss on sale of $12,000.
B. A gain on sale of $12,000.
C. Neither a gain nor a loss is recognized on this transaction.
D. A gain on sale of $3,000.
E. A loss on sale of $3,000.
109. Martinez owns an asset that cost $87,000 with accumulated depreciation of $40,000. The
company sells the equipment for cash of $42,000. At the time of sale, the company should
record:
A. A gain on sale of $2,000.
B. A loss on sale of $2,000.
C. A loss on sale of $5,000.
D. A gain on sale of $5,000.
E. A loss on sale of $45,000.
110. Martinez owns machinery that cost $87,000 with accumulated depreciation of $40,000.
The company sells the machinery for cash of $42,000. The journal entry to record the sale
would include:
A. A credit to Accumulated Depreciation of $40,000
B. A credit to Gain on Sale of $2,000.
C. A credit to Machinery of $47,000.
D. A debit to Cash of $42,000.
E. A debit to Accumulated Depreciation of $47,000.
111. An asset’s book value is $36,000 on January 1, Year 6. The asset is being depreciated
$500 per month using the straight-line method. Assuming the asset is sold on July 1, Year 7
for $25,000, the company should record:
A. Neither a gain or loss is recognized on this type of transaction.
B. A gain on sale of $2,000.
C. A loss on sale of $1,000.
D. A gain on sale of $1,000.
E. A loss on sale of $2,000.
7. Thus, the asset’s book value on that date would be $27,000. If the asset is sold for $25,000, a loss
on sale of $2,000 should be recognized.
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McGraw-Hill Education.
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112. Marks Consulting purchased equipment costing $45,000 on January 1, Year 1. The
equipment is estimated to have a salvage value of $5,000 and an estimated useful life of 8
years. Straight-line depreciation is used. If the equipment is sold on July 1, Year 5 for
$20,000, the journal entry to record the sale will include a:
A. Credit to cash for $20,000.
B. Debit to accumulated depreciation for $22,500.
C. Debit to loss on sale for $10,000.
D. Credit to loss on sale for $10,000.
E. Debit to gain on sale for $2,500.
113. A machine costing $75,000 is purchased on September 1, Year 1. The machine is
estimated to have a salvage value of $10,000 and an estimated useful life of 4 years. Double-
declining-balance depreciation is used. If the machine is sold on December 31, Year 3 for
$13,000, the journal entry to record the sale will include:
A. A credit to gain on sale for $8,000.
B. A debit to loss on sale for $2,625.
C. A credit to accumulated depreciation for $59,375.
D. A debit to loss on sale for $3,042.
E. A credit to gain on sale for $4,979.
114. An asset can be disposed of by all of the following except:
A. Discarding it.
B. Selling it.
C. Exchanging it for another asset.
D. Donating it to charity.
E. Continuing to use it after it is fully depreciated.
115. A company sold equipment that originally cost $100,000 for $60,000 cash. The
accumulated depreciation on the equipment was $40,000. The company should recognize a:
A. $0 gain or loss.
B. $20,000 gain.
C. $20,000 loss.
D. $40,000 loss.
E. $60,000 gain.
116. A company discarded a computer system originally purchased for $18,000. The
accumulated depreciation was $17,200. The company should recognize a (an):
A. $0 gain or loss.
B. $800 loss.
C. $800 gain.
D. $8,000 loss.
E. $7,200 loss.
117. A company had a tractor destroyed by fire. The tractor originally cost $85,000 with
accumulated depreciation of $60,000. The proceeds from the insurance company were
$20,000. The company should recognize:
A. A loss of $5,000.
B. A gain of $5,000.
C. A loss of $20,000.
D. A gain of $65,000.
E. A gain of $20,000.
118. Natural resources are:
A. Consumable assets such standing timber, mineral deposits, and oil and gas fields.
B. Tangible assets used in the operations of the business.
C. Current assets because they are depleted.
D. Not subject to allocation to expense over their useful lives.
E. Depleted using a straight-line method.
119. Which of the following would be classified as a natural resource?
A. Patent on an oil extraction process.
B. Land held as an investment.
C. Timber purchased by a lumber yard.
D. Diamond mine.
E. Goodwill.
120. Depletion is:
A. The process of allocating the cost of natural resources to the period when it is consumed.
B. Calculated using the double-declining balance method.
C. Also called amortization.
D. An increase in the value of a natural resource when incurred.
E. The process of allocating the cost of intangibles to periods when they are used.
121. A company purchased a tract of land for its natural resources at a cost of $1,500,000. It
expects to mine 2,000,000 tons of ore from this land. The salvage value of the land is
expected to be $250,000. The depletion expense per ton of ore is:
A. $0.75.
B. $0.625.
C. $0.875.
D. $6.00.
E. $8.00.
122. A company purchased a tract of land for its natural resources at a cost of $1,500,000. It
expects to mine 2,000,000 tons of ore from this land. The salvage value of the land is
expected to be $250,000. If 150,000 tons of ore are mined during the first year, the journal
entry to record the depletion is:
A. Debit Depletion Expense $93,750; credit Natural Resources $93,750.
B. Debit Cash $112,500; credit Natural Resources $112,500.
C. Debit Depletion Expense $93,750; credit Accumulated Depletion $93,750.
D. Debit Cash $93,750; credit Accumulated Depletion $93,750.
E. Debit Depletion Expense $112,500; credit Accumulated Depletion $112,500.
123. A company purchased a tract of land for its natural resources at a cost of $1,000,000. It
expects to harvest 5,000,000 board feet of timber from this land. The salvage value of the land
is expected to be $200,000. The depletion expense per board foot of timber is:
A. $0.75.
B. $0.24.
C. $0.20.
D. $0.16.
E. $0.04.
124. A company purchased a mineral deposit for $800,000. It expects this property to produce
120,000 tons of minerals and to have a salvage value of $50,000. In the current year, the
company mined and sold 9,000 tons of minerals. Its depletion expense for the current period
equals:
A. $ 15,000.
B. $ 60,000.
C. $150,000.
D. $ 56,250.
E. $139,500.
125. Intangible assets do not include:
A. Patents.
B. Copyrights.
C. Trademarks.
D. Goodwill.
E. Land held as an investment.
126. Amortization is:
A. The systematic allocation of the cost of an intangible asset to expense over its estimated
useful life.
B. The process of allocating to expense the cost of a plant asset to the accounting periods
benefiting from its use.
C. The process of allocating the cost of natural resources to periods when they are consumed.
D. An accelerated form of expensing an asset’s cost.
E. Also called depletion.
127. Owning a patent:
A. Gives the owner the exclusive right to publish and sell a musical or literary work during
the life of the creator plus 70 years.
B. Gives the owner exclusive rights to manufacture and sell a patented item or to use a
process for 20 years.
C. Gives its owner an exclusive right to manufacture and sell a device or to use a process for
50 years.
D. Indicates that the value of a company exceeds the fair market value of a company’s net
assets if purchased separately.
E. Gives its owner the exclusive right to publish and sell a musical or literary work during the
life of the creator plus 17 years.
128. Holding a copyright:
A. Gives its owner the exclusive right to publish and sell a musical or literary work during the
life of the creator plus 70 years.
B. Gives its owner an exclusive right to manufacture and sell a patented item or to use a
process for 20 years.
C. Gives its owner an exclusive right to manufacture and sell a device or to use a process for
50 years.
D. Indicates that the value of a company exceeds the fair market value of a company’s net
assets if purchased separately.
E. Gives its owner the exclusive right to publish and sell a musical or literary work during the
life of the creator plus 20 years.
129. A leasehold is:
A. A short-term rental agreement.
B. The same as a patent.
C. The rights granted to the lessee by the lessor of a lease.
D. Recorded as revenue expenditure when paid.
E. An asset held as an investment.
130. The specific meaning of goodwill in accounting is:
A. The amount by which a company’s value exceeds the value of its individual assets and
liabilities.
B. Long term assets held as investment.
C. The support of the board of directors for the operating decisions of management.
D. The cost of developing, maintaining, or enhancing the value of a trademark.
E. Rights granted an entity to deliver a product or service under specified conditions.
131. A company’s old machine that cost $40,000 and had accumulated depreciation of
$22,000 was traded in on a new machine having an estimated 20-year life with an invoice
price of $45,000. The company also paid $33,000 cash, along with its old machine to acquire
the new machine. If this transaction has commercial substance, the new machine should be
recorded at:
A. $40,000.
B. $33,000.
C. $45,000.
D. $18,000.
E. $51,000.
132. Hunter Sailing Company exchanged an old sailboat for a new one. The old sailboat had a
cost of $160,000 and accumulated depreciation of $100,000. The new sailboat had an invoice
price of $270,000. Hunter received a trade in allowance of $70,000 on the old sailboat, which
meant the company paid $200,000 in addition to the old sailboat to acquire the new sailboat.
If this transaction lacks commercial substance, what amount of gain or loss should be
recorded on this exchange?
A. $0 gain or loss.
B. $10,000 gain.
C. $10,000 loss.
D. $60,000 loss
E. $70,000 loss.
133. Cliff Company traded in an old truck for a new one. The old truck had a cost of $75,000
and accumulated depreciation of $60,000. The new truck had an invoice price of $125,000.
Huffington was given a $12,000 trade-in allowance on the old truck, which meant they paid
$113,000 in addition to the old truck to acquire the new truck. If this transaction has
commercial substance, what is the recorded value of the new truck?
A. $15,000
B. $75,000
C. $113,000
D. $125,000
E. $128,000
134. A company bought new heating system for $42,000 and was given a trade-in of $2,000
on an old heating system, so the company paid $40,000 cash with the trade-in. The old system
had an original cost of $37,000 and accumulated depreciation of $34,000. If the transaction
has commercial substance, the company should record the new heating system at:
A. $ 2,000.
B. $ 3,000.
C. $40,000.
D. $42,000.
E. $43,000.
135. A company purchased equipment valued at $66,000. It traded in old equipment for a
$9,000 trade-in allowance and the company paid $57,000 cash with the trade-in. The old
equipment cost $44,000 and had accumulated depreciation of $36,000. This transaction has
commercial substance. What is the recorded value of the new equipment?
A. $ 8,000.
B. $ 9,000.
C. $57,000.
D. $65,000.
E. $66,000.
136. Which of the following statements regarding increases in the value of plant assets under
U.S. GAAP and IFRS is true?
A. U.S. GAAP allows companies to record increases in the value of plant assets.
B. IFRS prohibits upward asset revaluations.
C. Under GAAP, a company can reverse an impairment and record that increase in income.
D. U.S. GAAP prohibits companies from recording increases in the value of plant assets.
E. Under IFRS, an impairment increase beyond as asset’s original cost is not recorded.
137. Granite Company purchased a machine costing $120,000, terms 1/10, n/30. The machine
was shipped FOB shipping point and freight charges were $2,000. The machine requires
special mounting and wiring connections costing $10,000. When installing the machine,
$1,300 in damages occurred. Compute the cost recorded for this machine assuming Granite
paid within the discount period.
A. $129,800.
B. $132,100.
C. $130,800.
D. $118,800.
E. $120,100.
138. Wickland Company installs a manufacturing machine in its production facility at the
beginning of the year at a cost of $87,000. The machine’s useful life is estimated to be 5
years, or 400,000 units of product, with a $7,000 salvage value. During its second year, the
machine produces 84,500 units of product. Determine the machines’ second year depreciation
under the straight-line method.
A. $16,900.
B. $16,000.
C. $17,400.
D. $18,379.
E. $20,880.
139. Wickland Company installs a manufacturing machine in its production facility at the
beginning of the year at a cost of $87,000. The machine’s useful life is estimated to be 5
years, or 400,000 units of product, with a $7,000 salvage value. During its second year, the
machine produces 84,500 units of product. Determine the machines’ second year depreciation
under the double-declining-balance method.
A. $16,900.
B. $16,000.
C. $17,400.
D. $18,379.
E. $20,880.
140. Wickland Company installs a manufacturing machine in its production facility at the
beginning of the year at a cost of $87,000. The machine’s useful life is estimated to be 5
years, or 400,000 units of product, with a $7,000 salvage value. During its second year, the
machine produces 84,500 units of product. Determine the machines’ second year depreciation
under the units-of-production method.
A. $16,900.
B. $16,000.
C. $17,400.
D. $18,379.
E. $20,880.
141. Wickland Company installs a manufacturing machine in its production facility at the
beginning of the year at a cost of $87,000. The machine’s useful life is estimated to be 5
years, or 400,000 units of product, with a $7,000 salvage value. During its second year, the
machine produces 84,500 units of product. What journal entry would be needed to record the
machines’ second year depreciation under the units-of-production method?
A. Debit Depletion Expense $16,900; credit Accumulated Depletion $16,900.
B. Debit Depletion Expense $16,000; credit Accumulated Depletion $16,000.
C. Debit Depreciation Expense $16,900; credit Accumulated Depreciation $16,900.
D. Debit Depreciation Expense $16,000; credit Accumulated Depreciation $16,000.
E. Debit Amortization Expense $16,900; credit Accumulated Amortization $16,900.
142. Minor Company installs a machine in its factory at the beginning of the year at a cost of
$135,000. The machine’s useful life is estimated to be 5 years, or 300,000 units of product,
with a $15,000 salvage value. During its first year, the machine produces 64,500 units of
product. Determine the machines’ first year depreciation under the straight-line method.
A. $27,000.
B. $29,025.
C. $25,800.
D. $23,779.
E. $24,000.
143. Minor Company installs a machine in its factory at the beginning of the year at a cost of
$135,000. The machine’s useful life is estimated to be 5 years, or 300,000 units of product,
with a $15,000 salvage value. During its first year, the machine produces 64,500 units of
product. Determine the machines’ first year depreciation under the double-declining-balance
method.
A. $66,000.
B. $54,000.
C. $24,000.
D. $25,800.
E. $48,000.
144. Minor Company installs a machine in its factory at the beginning of the year at a cost of
$135,000. The machine’s useful life is estimated to be 5 years, or 300,000 units of product,
with a $15,000 salvage value. During its first year, the machine produces 64,500 units of
product. Determine the machines’ first year depreciation under the units-of-production
method.
A. $27,000.
B. $54,000.
C. $24,000.
D. $25,800.
E. $48,000.
145. Minor Company installs a machine in its factory at the beginning of the year at a cost of
$135,000. The machine’s useful life is estimated to be 5 years, or 300,000 units of product,
with a $15,000 salvage value. During its first year, the machine produces 64,500 units of
product. What journal entry would be needed to record the machines’ first year depreciation
under the units-of-production method?
A. Debit Depletion Expense $25,800; credit Accumulated Depletion $25,800.
B. Debit Depletion Expense $29,025; credit Accumulated Depletion $29,025.
C. Debit Depreciation Expense $29,025; credit Accumulated Depreciation $29,025.
D. Debit Depreciation Expense $25,800; credit Accumulated Depreciation $25,800.
E. Debit Amortization Expense $24,000; credit Accumulated Amortization $24,000.
146. Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs
additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000
tons and is expected to take 5 years to extract. Compute the depletion expense for the first
year assuming 418,000 tons were mined.
A. $1,233,100.
B. $1,358,500.
C. $1,300,000.
D. $1,180,000.
E. $1,280,000.
147. Fortune Drilling Company acquires a mineral deposit at a cost of $5,900,000. It incurs
additional costs of $600,000 to access the deposit, which is estimated to contain 2,000,000
tons and is expected to take 5 years to extract. What journal entry would be needed to record
the expense for the first year assuming 418,000 tons were mined?
A. Debit Depletion Expense $1,233,100; credit Accumulated Depletion $1,233,100.
B. Debit Amortization Expense $1,358,500; credit Accumulated Amortization $1,358,500.
C. Debit Depreciation Expense $1,358,500; credit Accumulated Depreciation $1,358,500.
D. Debit Depletion Expense $1,358,500; credit Accumulated Depletion $1,358,500.
E. Debit Depreciation Expense $1,233,100; credit Accumulated Depreciation $1,233,100.
148. Bering Rock acquires a granite quarry at a cost of $590,000, which is estimated to
contain 200,000 tons of granite and is expected to take 6 years to remove. Compute the
depletion expense for the first year assuming 38,000 tons were removed.
A. $98,333.
B. $93,158.
C. $38,000.
D. $12,881.
E. $112,100.
149. Bering Rock acquires a granite quarry at a cost of $590,000, which is estimated to
contain 200,000 tons of granite and is expected to take 6 years to remove. What journal entry
would be needed to record the expense for the first year assuming 38,000 tons were removed?
A. Debit Depletion Expense $112,100; credit Accumulated Depletion $112,100.
B. Debit Amortization Expense $112,100; credit Natural Resources $112,100.
C. Debit Depreciation Expense $93,158; credit Accumulated Depreciation $93,158.
D. Debit Depletion Expense $93,158; credit Accumulated Depletion $93,158.
E. Debit Depreciation Expense $98,333; credit Accumulated Depreciation $98,333.
150. Phoenix Agency leases office space for $7,000 per month. On January 3, Phoenix incurs
$65,000 to improve the leased office space. These improvements are expected to yield
benefits for 8 years. Phoenix has 5 years remaining on its lease. Compute the amount of
expense that should be recorded the first year related to the improvements.
A. $20,000.
B. $6,000.
C. $13,000.
D. $65,000.
E. $8,125.
151. Crestfield leases office space for $7,000 per month. On January 3, the company incurs
$12,000 to improve the leased office space. These improvements are expected to yield
benefits for 10 years. Crestfield has 4 years remaining on its lease. What journal entry would
be needed to record the expense for the first year related to the improvements?
A. Debit Amortization Expense $1,200; credit Accumulated Amortization $1,200.
B. Debit Depletion Expense $3,000; credit Accumulated Depletion $3,000.
C. Debit Depreciation Expense $1,200; credit Accumulated Depreciation $1,200.
D. Debit Depletion Expense $12,000; credit Accumulated Depletion $12,000.
E. Debit Amortization Expense $3,000; credit Accumulated Amortization $3,000.
152. Ngu owns equipment that cost $93,500 with accumulated depreciation of $64,000. Ngu
asks $35,000 for the equipment but sells the equipment for $33,000. Compute the amount of
gain or loss on the sale.
A. $3,500 loss.
B. $5,500 gain.
C. $5,500 loss.
D. $3,000 gain.
E. $3,500 gain.
153. Gaston owns equipment that cost $90,500 with accumulated depreciation of $61,000.
Gaston asks $30,000 for the equipment but sells the equipment for $26,000. Which of the
following would not be part of the journal entry to record the disposal of the equipment?
A. Debit Accumulated Depreciation $61,000.
B. Credit Equipment $90,500.
C. Debit Loss on Disposal of Equipment $3,500.
D. Credit Gain on Disposal of Equipment $3,500.
E. Debit Cash $6,000.
154. Flask Company reports net sales of $4,315 million; cost of goods sold of $2,808 million;
net income of $283 million; and average total assets of $2,136. Compute its total asset
turnover.
A. 1.31.
B. 2.02.
C. .13.
D. .76.
E. .50.
155. Riverboat Adventures pays $310,000 plus $15,000 in closing costs to buy out a
competitor. The real estate consists of land appraised at $35,000, a building appraised at
$105,000, and paddleboats appraised at $210,000. Compute the cost that should be allocated
to the building.
A. $97,500.
B. $105,000.
C. $89,178.
D. $140,000.
E. $93,000.
156. Riverboat Adventures pays $310,000 plus $15,000 in closing costs to buy out a
competitor. The real estate consists of land appraised at $35,000, a building appraised at
$105,000, and paddleboats appraised at $210,000. Compute the cost that should be allocated
to the land.
A. $93,000.
B. $140,000.
C. $32,500.
D. $31,000.
E. $97,500.
157. Victory Company purchases office equipment at the beginning of the year at a cost of
$15,000. The machine’s useful life is estimated to be 7 years with a $1,000 salvage value. The
journal entry to record the first year depreciation is:
A. Debit Depreciation Expense $2,143, credit Accumulated Depreciation $2,143.
B. Debit Depreciation Expense $2,000, credit Office Equipment $2,000.
C. Debit Office Equipment $2,000, credit Accumulated Depreciation $2,000.
D. Debit Accumulated Depreciation $2,143; credit Office Equipment $2,143.
E. Debit Depreciation Expense $2,000, credit Accumulated Depreciation $2,000.
158. Victory Company purchases office equipment at the beginning of the year at a cost of
$15,000. The machine’s useful life is estimated to be 7 years with a $1,000 salvage value. The
book value at the end of 7 years is:
A. $2,143.
B. $1,000.
C. $2,000.
D. $14,000.
E. $0.
159. Match each of the following terms with the appropriate definitions.
a. Depletion
b. Betterment
c. Ordinary repairs
d. Units-of production method
e. Intangible assets
f. Accelerated depreciation
g. Amortization
h. Goodwill
i. Total asset turnover
j. Revenue expenditure
____ 1. The amount by which the company’s value exceeds the value of its
individual assets and liabilities.
____ 2. A cost reported as an expense on the current income statement because it
does not provide a material benefit in future periods.
____ 3. An expenditure that makes a plant asset more efficient or productive.
____ 4. A method of depreciation that yields larger expense during the early years of
an asset’s life and smaller expense in the later years.
____ 5. Expenditures to keep a plant asset in normal, good operating condition.
____ 6. The process of allocating the cost of a natural resource to the period when it
are consumed.
____ 7. A measure of a company’s effectiveness in using its assets to generate sales.
____ 8. The process of systematically allocating the cost of an intangible asset to
expense over its estimated useful life.
____ 9. A depreciation method that charges a varying amount to expense for each
period of an asset’s useful life depending on its usage.
____10. Certain nonphysical assets used in operations that confer long-term rights,
privileges, or competitive advantages on their owners.
1. H; 2. J; 3. B; 4. F; 5. C; 6. A; 7. I; 8. G; 9. D; 10. E
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 08-C3
Learning Objective: 08-A1
Learning Objective: 08-P1
Learning Objective: 08-P3
Learning Objective: 08-P4
Topic: Additional Expenditures
Topic: Total Asset Turnover
Topic: Depreciation Methods
Topic: Natural Resources
Topic: Intangible Assets
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10-76
160. Match each of the following terms with the appropriate definitions.
a. Extraordinary repairs
b. Obsolescence
c. Leasehold improvements
d. Depletion
e. Salvage value
f. Book value
g. Land improvements
h. Copyright
i. Inadequacy
j. Patent
____ 1. An estimate of an asset’s value at the end its benefit period.
____ 2. Major repairs that extend the useful life of a plant asset beyond its original
estimate.
____ 3. Alternations or improvements to leased property made by the lessee.
____ 4. A right granted that gives its owner the exclusive privilege to publish and
sell musical, literary, or artistic work during the life of the creator plus 70
years.
____ 5. A condition where a plant asset is no longer useful in producing goods or
services with a competitive advantage.
____ 6. The total cost of a plant asset less its accumulated depreciation.
____ 7. The process of allocating the cost of natural resources to the periods when
they are consumed.
____ 8. An exclusive right granted to its owner to manufacture and sell an item, or
to use a process, for 20 years.
____ 9. The insufficient capacity of plant assets to meet the company’s productive
demands.
____ 10. Assets that increase the benefits of land, have a limited useful life, and are
subject to depreciation.
1. E; 2. A; 3. C; 4. H; 5. B; 6. F; 7. D; 8. J; 9. I; 10. G
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10-77
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 08-C1
Learning Objective: 08-C3
Learning Objective: 08-P1
Learning Objective: 08-P3
Learning Objective: 08-P4
Topic: Cost Determination
Topic: Additional Expenditures
Topic: Depreciation Methods
Topic: Natural Resources
Topic: Intangible Assets
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10-74
Short Answer Questions
161. Define plant assets and identify the four primary issues in accounting for them.
162. What is depreciation of plant assets? What are the factors necessary in computing
depreciation?
163. What are some of the variables that make a plant asset’s useful life difficult to predict?
164. Explain the purpose of and method of depreciation for partial years.
165. Explain the impact, if any, on depreciation when estimates that determine depreciation
change.
166. Compare the different depreciation methods (straight-line, units-of-production, and
double-declining-balance) with respect to the amounts of depreciation expense per period and
the total depreciation over the life of the asset.
167. Explain how to calculate total asset turnover. Describe what it reveals about a company’s
financial condition, whether a higher or lower ratio is desirable, and how it is best applied for
comparative purposes.
168. How is the cost principle applied to plant asset acquisitions, including lump-sum
purchases?
169. Explain in detail how to compute each of the following depreciation methods: straight-
line, units-of-production, and double-declining-balance.
170. Explain the difference between revenue expenditures and capital expenditures and how
they are recorded in the accounting system.
171. What are the general accounting procedures for recording asset disposals?
172. Describe the accounting for natural resources, including their acquisition, cost allocation,
and account titles.
173. Describe the accounting for intangible assets, including their acquisition, cost allocation,
and accounts involved.
174. A company’s property records revealed the following information about its plant assets:
Machin
e No. Cost
Salvage
Value
Purchas
e Date
Estimate
d Life Depreciation Method
1 $42,000 $3,000 10/1 3 years Straight-line
2 86,000 8,600 7/01 5 years Double-declining balance
Calculate the depreciation expense for each machine in Year 1 and Year 2 for the year ended
December 31.
Machine 1:
Year 1______________________ Year 2 _______________________
Machine 2:
Year 1 ______________________ Year 2 _______________________
175. A company’s property records revealed the following information about its plant assets:
Machin
e No. Cost
Salvage
Value
Purchas
e Date
Estimate
d Life Depreciation Method
1 $82,000 $8,000 1/01 4 years Straight-line
2 46,000 3,600 7/01 5 years Double-declining balance
Calculate the depreciation expense for each machine in Year 1 and Year 2 for the year ended
December 31.
Machine 1:
Year 1______________________ Year 2 _______________________
Machine 2:
Year 1 ______________________ Year 2 _______________________
176. A company’s property records revealed the following information about one of its plant
assets:
Cost
Salvage
Value
Purchas
e Date
Estimate
d Life Depreciation Method
$450,00
0
$30,000 10/01 7 years Straight-line
Calculate the depreciation expense for the asset in Year 1 and Year 2 for the year ended
December 31.
Year 1______________________ Year 2 _______________________
177. A company’s property records revealed the following information about one of its plant
assets:
Cost
Salvage
Value
Purchas
e Date
Estimate
d Life Depreciation Method
154,000 15,000 01/01 10 years Double-declining balance
Calculate the depreciation expense in Year 1 and Year 2 for the year ended December 31.
Year 1 ______________________ Year 2 _______________________
178. A company purchased a delivery van on October 1 of the current year at a cost of
$40,000. The van is expected to last six years and has a salvage value of $2,200. The
company’s annual accounting period ends on December 31.
1. What is the depreciation expense for the current year, assuming the straight-line method is
used?
2. What is the book value of the van at the end of the first year?
1. [($40,000 – $2,200)/6] * 3/12 = $1,575
2. Cost – Accumulated Depreciation = Book Value; $40,000 – $1,575 = $38,425
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 08-C2
Learning Objective: 08-P1
Topic: Depreciation Methods
Topic: Partial-Year Depreciation
179. A building was purchased for $370,000 and depreciated for ten years on a straight-line
basis under the assumption it would have a twenty-year life and a $10,000 salvage value. At
the beginning of the building’s eleventh year it was recognized the building had eight years of
remaining life instead of ten and that at the end of the remaining eight years its salvage value
would be $16,000. What amount of depreciation should be recorded in each of the building’s
remaining eight years?
180. Greene Company purchased a machine for $75,000 that was expected to last 6 years and
to have a salvage value of $6,000. At the beginning of the machine’s fourth year the company
decided that the estimated useful life should be revised to a total of 10 years instead of 6
years. Also, the salvage value was re-estimated to be $5,500. Straight-line depreciation was
used throughout the machine’s life. Calculate the depreciation expense for the fourth year of
the machine’s useful life.
181. On April 1 of the current year, a company purchased and placed in service a machine
with a cost of $240,000. The company estimated the machine’s useful life to be four years or
60,000 units of output with an estimated salvage value of $60,000. During the current year,
12,000 units were produced.
Prepare the necessary December 31 adjusting journal entry to record depreciation for the
current year assuming the company uses:
a. The straight-line method of depreciation
b. The units-of-production method of depreciation
c. The double-declining balance method of depreciation
182. On September 30 of the current year, a company acquired and placed in service a
machine at a cost of $700,000. It has been estimated that the machine has a service life of five
years and a salvage value of $40,000. Using the double-declining-balance method of
depreciation, complete the schedule below showing depreciation amounts for all six years
(round answers to the nearest dollar). The company closes its books on December 31 of each
year.
Year
Depreciation for the Period End of Period
Beginning of
Period Book
Value
Depreciation
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1
2
3
4
5
6
183. On April 1, Year 1, Astor Corp. purchased and placed a plant asset in service. The
following information is available regarding the plant asset:
Acquisition cost ...................................................... $130,000
Estimated salvage value.......................................... $15,000
Estimated useful life ............................................... 5 years
Make the necessary adjusting journal entries at December 31, Year 1, and December 31, Year
2 to record depreciation for each year under the straight-line depreciation method.
184. On April 1, Year 1, Raines Co. purchased and placed a plant asset in service. The
following information is available regarding the plant asset:
Acquisition cost ...................................................... $130,000
Estimated salvage value.......................................... $15,000
Estimated useful life ............................................... 5 years
Make the necessary adjusting journal entries at December 31, Year 1, and December 31, Year
2 to record depreciation for each year under the double-declining balance depreciation
method:
185. On January 1, Year 1, Naples purchased a computer system that cost $1,480,000. The
estimated useful life of the computer is 3 years and salvage value is $40,000. Straight-line
depreciation is to be used. On January 1, Year 2, Naples determined that the estimated useful
life of the computer would be 4 years instead of 3 years. The estimated salvage value will
only be $10,000.
Prepare the journal entry to record depreciation expense for Year 1.
Prepare the journal entry to record depreciation expense for Year 2.
186. The Oberon Company purchased a delivery truck for $95,000 on January 2. The truck
was estimated to have a $3,000 salvage value and a 4 year life. The truck was depreciated
using the straight-line method. At the beginning of the third year, it was obvious that the
truck’s total useful life would be 6 years rather than 4, and the salvage at the end of the 6th
year would be $1,500. Determine the depreciation expense for the truck for the 6 years of its
life.
Year Depreciation expense
1
2
3
4
5
6
187. McClintock Co. had the following transactions involving plant assets during Year 1.
Unless otherwise indicated, all transactions were for cash.
Jan. 2 Purchased a truck for $70,000 plus sales taxes of $3,000. The truck is expected to
have a $14,000 salvage value and a 4 year life.
Jan. 3 Paid $2,500 to have the company’s logo painted on the truck. This did not change
the truck’s salvage value.
Dec. 31 Recorded straight-line depreciation on the truck.
Prepare the general journal entries to record these transactions.
188. In year one, McClintock Co. acquired a truck that cost $75,500 with an estimated
$14,000 salvage value and 4 year estimated useful life. Depreciation in the first year was
$15,375. McClintock had the following transactions involving plant assets during Year 2.
Unless otherwise indicated, all transactions were for cash.
Jan. 5 Paid $5,000 to put a new engine in the truck that is expected to make the truck run
more efficiently and increase the truck’s useful life by one year. The salvage value
did not change.
Mar. 1 Paid $2,000 to replace a broken tailgate that was damaged when a heavy carton was
inadvertently dropped on it.
Dec. 31 Recorded straight-line depreciation on the truck.
Prepare the general journal entries to record these transactions.
189. A company purchased a cooling system on January 2 for $225,000. The system had an
estimated useful life of 15 years. On January 3 of the thirteenth year, the company completed
a renovation of the system at a cost of $33,000 and now expects the system to be more
efficient and last 8 years beyond the original estimate. The company uses the straight-line
method of depreciation.
(a) Prepare the journal entry at January 3, to record the renovation of the cooling system.
(b) Prepare the journal entry at December 31, to record the revised depreciation for the
thirteenth year.
190. A company purchased and installed equipment on January 1 at a total cost of $72,000.
Straight-line depreciation was calculated based on the assumption of a five-year life and no
salvage value. The equipment was disposed of on July 1 of the fourth year. The company uses
the calendar year.
1. Prepare the general journal entry to update depreciation to July 1 in the fourth year.
2. Prepare the general journal entry to record the disposal of the equipment under each of
these three independent situations:
a. The equipment was sold for $22,000 cash.
b. The equipment was sold for $15,000 cash.
c. The equipment was totally destroyed in a fire and the insurance company settled the claim
for $18,000 cash.
1. July 1 Depreciation Expense, Equipment.................................. 7,200
Accumulated Depreciation, Equipment...................... 7,200
$72,000/5 x 6/12 = $7,200
2a. July 1 Cash................................................................................ 22,000
Accumulated Depreciation, Equipment*......................... 50,400
Gain on Disposal of Asset.......................................... 400
Equipment.................................................................. 72,000
*($72,000/5) x 3 ½ years = $50,400
2b. July 1 Cash................................................................................ 15,000
Accumulated Depreciation, Equipment........................... 50,400
Loss on Disposal of Asset............................................... 6,600
Equipment.................................................................. 72,000
2c. July 1 Cash................................................................................ 18,000
Accumulated Depreciation, Equipment........................... 50,400
Loss from Fire................................................................. 3,600
Equipment.................................................................. 72,000
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 08-C2
Learning Objective: 08-P2
Topic: Partial-Year Depreciation
Topic: Disposals of Plant Assets
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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191. A company purchased and installed machinery on January 1 at a total cost of $93,000.
Straight-line depreciation was calculated based on the assumption of a five-year life and no
salvage value. The machinery was disposed of on July 1 of year four. The company uses the
calendar year.
1. Prepare the general journal entry to update depreciation to July 1 in year four.
2. Prepare the general journal entry to record the sale of the machine for $27,000 cash.
1. July 1 Depreciation Expense, Machinery................................... 9,300
Accumulated Depreciation, Machinery...................... 9,300
$93,000/5 x 6/12 = $9,300
2a. July 1 Cash................................................................................ 27,000
Accumulated Depreciation, Machinery*......................... 65,100
Loss on Disposal of Asset............................................... 900
Machinery.................................................................. 93,000
* ($93,000/5) x 3 ½ years = $65,100
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 08-C2
Learning Objective: 08-P2
Topic: Partial-Year Depreciation
Topic: Disposals of Plant Assets
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McGraw-Hill Education.
10-97
192. On April 1, Year 5 a company discarded a machine that had cost $10,000 and had
accumulated depreciation of $8,000 as of December 31, Year 4. The asset had a 5-year life
and no salvage value. Prepare the journal entries to record the updating of the depreciation
expense and discarding of this asset in Year 5.
193. On January 1, 2016, a company disposed of equipment for $16,200 cash that had cost
$35,000, a salvage value of $5,000, and a useful life 10 years. The double-declining-balance
depreciation method was used. On December 31, 2015, accumulated depreciation was
$20,664. Prepare a journal entry to record the disposal of the equipment.
Jan. 1 Cash…………………………………………………… 16,200
Accumulated Depreciation—Equipment …………… 20,664
Equipment…………………………………….. .....35,000
Gain on Disposal of Equipment……………… .......1,864
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 08-P2
Topic: Disposals of Plant Assets
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10-98
194. On January 2, 2010, a company purchased a delivery truck for $45,000 cash. The truck
had an estimated useful life of seven years and an estimated salvage value of $3,000. The
straight-line method of depreciation was used. Prepare the journal entries to record
depreciation expense and the disposition of the truck on September 1, 2014, under each of the
following assumptions:
a. The truck and $45,000 cash were given in exchange for a new delivery truck that had a cash
price of $60,000. This transaction has commercial substance.
b. The truck and $40,000 cash were exchanged for a new delivery truck that had a cash price
of $60,000. This transaction lacks commercial substance.
195. A company had net sales of $230,000 for 2015 and $288,000 for 2016. The company’s
average total assets for 2015 were $150,000 and $180,000 for 2016. Calculate the total asset
turnover for each year and comment on the company’s efficiency in the use of its assets.
197. Schwartz Co. paid $780,000 cash to buy the plant assets of Kimberly Co. that went out
of business. An independent appraiser assigned the following values to the assets acquired:
Land…………………………………….. $522,000
Building…………………………………. 243,000
Equipment………………………………. 135,000
Total…………………………………….. $900,000
Prepare Schwartz’ journal entry to record the acquisition of these assets.
198. A company purchased a special purpose machine on September 15 of the past year, and it
was installed and ready to run on January 1 of this year. The following costs were incurred in
the purchase and installation of the machine. Determine the total cost of the machine.
Invoice price plus sales tax................................................. $1,270,500
Freight costs.........................................................................
9,000
Setup costs........................................................................... 51,000
Costs to adjust machine to appropriate specifications........ 36,000
Electrical connections ........................................................ 32,000
Maintenance supplies for future use................................... 108,000
Traffic fine incurred during transport of machine.............. 300
Cost of special foundation for machine 18,500
199. A company paid $595,000 for property that included land appraised at $384,000; land
improvements appraised at $128,000; and a building appraised at $288,000. The plan is to use
the building as a manufacturing plant. Determine the amounts that should be recorded as:
(a) Land…………………. $ ______________________________________
(b) Land Improvements.... $ ______________________________________
(c) Building……………… $_______________________________________
200. Prepare journal entries to record the following transactions of a company during the
current year:
Mar 1 Purchased a truck for $40,000 with a 5-year useful life and a $5,000
salvage value. Also paid 6% sales tax, $350 for the annual truck license,
$300 to paint the truck with the company’s colors and name, and $1,500 for
maintenance supplies for the future. All payments were in cash.
Mar 10 Purchased a garage from a neighboring business with a 7%, 4-year,
$67,000 note. The seller’s book value for the garage was $42,750. The
estimated remaining useful life of the garage is 10 years.
July 5 Paid $800 cash to replace (uninsured) garage windows broken during a
storm.
Aug 25 Purchased used shop equipment for $10,700 cash. Sales tax was $825,
freight costs $250, $3,200 for a special base to house the equipment, and
reconditioning costs $900, all of which were paid in cash. The estimated
useful life of the equipment is 3 years and salvage value is $500.
Oct 5 Purchased office equipment for $11,500 cash. Paid $1,290 in sales tax,
$550 for repairs incurred from damage during installation, and $2,200 for
supplies to be used for periodic preventive maintenance. The estimated
useful life of the equipment is 8 years and salvage value is $1,200.
201. A company purchased equipment on June 28 of the current year and placed it in service
on August 1. The following costs were incurred in acquiring the equipment:
Purchase (invoice) price...................................................... $215,600
Transportation...................................................................... 1,400
Insurance during shipping................................................... 200
One-year fire insurance beginning August 1 of the current year 1,200
Installation cost.................................................................... 4,500
Raw materials and direct labor used to test the equipment. 1,500
Determine the amount to be recorded as cost for the equipment.
202. A company purchased land with a building for a lump-sum cost of $2,570,000 ($500,000
paid in cash and the balance on a long-term note). It was estimated that the land and building
had market values of $600,000 and $2,400,000, respectively.
Determine the cost to be apportioned to the land and to the building and prepare the journal
entry to record the acquisition.
203. A company needed a new building. It found a suitable location with an existing old
building on the land. The company reached an agreement to buy the land and the building for
$960,000 cash. The old building was demolished to make way for the needed new building.
Following is information regarding the demolition of the old building and construction of the
new one:
Construction cost of new building $8,900,000
Cost for parking lot………………………………………. ..................................$260,000
Demolition of old building…………………………………. 200,000
Proceeds from sale of salvaged materials from old building 70,000
Prepare a single journal entry to record the above costs assuming all transactions are paid in
cash.
204. A company purchased land on which to construct a new building for a cost of $350,000.
Additional costs incurred were:
Real estate broker’s commissions…………………………. ..............................$24,500
Legal fees incurred in purchase of the real estate………… ..................................1,500
Landscaping……………………………………………….. ..................................8,000
Cost to remove old house located on land…………… .........................................3,000
Proceeds from selling materials salvaged from old house 1,000
What total dollar amount should be charged to Land and what amount should be charged to
Building or other accounts?
205. A company made the following expenditures in connection with the construction of a
new building:
Architect’s fees..................................................................... $ 12,000
Cash paid for land and unusable building on the land......... 300,000
Removal of old building...................................................... 18,000
Salvage from sale of old building materials ....................... (4,000)
Construction survey............................................................. 1,500
Legal fees for title search..................................................... 3,000
Excavation for basement construction................................ 25,000
Machinery purchased for operations................................... 100,000
Storage and delivery charges on machinery because building
was not ready when machinery was delivered 900
Freight on machinery purchased......................................... 1,600
Construction costs of new building..................................... 1,000,000
Installation of machinery..................................................... 2,500
Prepare a schedule showing the amounts to be recorded as Land, Buildings, and Machinery.
206. A new machine costing $1,800,000 cash and estimated to have a $60,000 salvage value
was purchased on January 1. The machine is expected to produce 600,000 units of product
during its 8-year useful life. Calculate the depreciation expense in the first year under the
following independent situations:
1. The company uses the units-of-production method and the machine produces 70,000 units
of product during its first year.
2. The company uses the double-declining-balance method.
3. The company uses the straight-line method.
1. ($1,800,000 – $60,000)/600,000 units = $2.90/unit; 70,000 units * $2.90/unit = $203,000
2. $1,800,000 * 25% = $450,000
3. ($1,800,000 – $60,000)/8 years = $217,500
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 08-P1
Topic: Depreciation Methods
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McGraw-Hill Education.
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207. A company purchased a machine on January 1 of the current year for $750,000.
Calculate the annual depreciation expense for each year of the machine’s life (estimated at 5
years or 20,000 hours, with a salvage value of $75,000) using each of the below-mentioned
methods. During the machine’s 5-year life its hourly usage was: 3,000; 4,000; 5,000; 5,000;
and 3,000 hours.
Straight-line Units-of-production
Double-declining-
balance
Year 1
Year 2
Year 3
Year 4
Year 5
Totals
208. A company purchased an equipment system for $325,000 on January 2. The company
expects the equipment to last for eight years or 81,250 hours of operation, with no estimated
salvage value. During the first year, the equipment was in operation for 8,000 hours, while in
the second year, the equipment was in operation for 8,700 hours. Compute the depreciation
expense relating to the equipment for Year 1 and Year 2 using the following depreciation
methods:
a. Straight-line.
b. Double-declining-balance.
c. Units-of-production.
209. On January 1, a machine costing $260,000 with a 6-year life and an estimated $5,000
salvage value was purchased. It was also estimated that the machine would produce 500,000
units during its life. The actual units produced during its first year of operation were 110,000.
Determine the amount of depreciation expense for the first year under each of the following
assumptions:
1. The company uses the straight-line method of depreciation.
2. The company uses the units-of-production method of depreciation.
3. The company uses the double-declining-balance method of depreciation.
1. ($260,000 – $5,000)/6 = $42,500
2. ($260,000 – $5,000)/500,000 = $0.51/unit; 110,000 * $0.51 = $56,100
3. $260,000 * (1/6 * 2) = $86,667
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 08-P1
Topic: Depreciation Methods
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McGraw-Hill Education.
10-113
210. Suarez Company uses the straight-line method of depreciation. The company purchased
a computer system on January 1, Year 1, for $1,600,000 with an expected life of six years and
a salvage value of $130,000. Assuming the computer is sold on July 1, Year 3 for $1,000,000
cash, prepare the journal entries to record depreciation for the first 6 months of Year 3 and the
sale of the computer.
211. A company paid $320,000 for equipment that was expected to last five years and to have
a salvage value of $40,000. During the third year of the equipment’s life, $39,000 cash was
paid for replacement parts that were expected to increase productivity by 10% each year.
Prepare the journal entry to record the $39,000 cost incurred in the third year.
212. On January 1, a company purchased machinery for $75,000 that had a 6-year useful life
and a salvage value of $6,000. After three years of straight-line depreciation, the company
paid $8,500 cash at the beginning of the year to improve the efficiency of the machinery. The
productivity of the machinery was improved without increasing its remaining useful life or
changing its salvage value. Straight-line depreciation is used throughout the machinery’s life.
1. Prepare the journal entry to record the $8,500 expenditure.
2. Prepare the journal entry to record depreciation expense for the fourth year.
1. Machinery..................................................................................... 8,500
Cash……………………………………………………………... 8,500
2. Depreciation expense................................................................... 14,333
Accumulated Depr.—Machinery…………………………….. 14,333
($75,000 – $6,000)/6 x 3 = $34,500 Accumulated depreciation after 3 years
$75,000 – $34,500 = $40,500 Book value after 3 years
($40,500 + $8,500 – 6,000)/3 = $14,333 Depreciation for the fourth year
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Hard
Learning Objective: 08-C2
Learning Objective: 08-C3
Learning Objective: 08-P1
Topic: Change in Estimates
Topic: Revenue and Capital Expenditure
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
10-115
Topic: Depreciation Methods
213. A company sold a machine that originally cost $90,000 for $28,000 cash. The
accumulated depreciation on this machine was $47,000 at the time of the sale. What was the
company’s gain or loss on this sale?
214. Wallace Company had a building that was destroyed by fire. The building originally cost
$650,000, and its accumulated depreciation as of the date of the fire was $300,000. The
company received $320,000 cash from an insurance policy that covered the building and will
use that money to help rebuild. Prepare the single journal entry to record the disposal of the
building and the receipt of cash from the insurance company.
215. On April 1, 2015, due to obsolescence resulting from a new technology, a company
discarded a computer that cost $5,000, had a useful life of 4 years, and a salvage value of
$400. Based on straight-line depreciation, the accumulated depreciation as of December 31,
2014 was $3,450.
a. Prepare the journal entry to record depreciation up to the date of disposal of the computer.
b. Prepare the journal entry to record the disposal of the computer.
216. On April 1 of the current year, a company disposed of a truck that had cost $20,000. The
truck had a salvage value of $2,000, and a useful life of 5 years. The accounting records
showed accumulated depreciation for this truck of $8,100 as of April 1 of the current year.
The asset was discarded after an accident, and $10,500 cash was received from an insurance
claim. Prepare the journal entry to record the disposal of the truck.
217. Anderson Company sold a piece of equipment for $28,000 cash on December 31 after
recording the annual depreciation on the asset. The equipment had an original cost of $97,500
and accumulated depreciation of $63,000. Prepare the general journal entry to record the sale
of this asset.
218. A company purchased mining property for $1,560,000. The property was estimated to
contain 13,000,000 tons of ore. In the current year, the company removed and sold 263,000
tons of ore. Calculate the depletion expense for the current year.
219. A company purchased mining property for $4,875,000 containing an estimated
15,000,000 tons of ore. In Year 1, it mined 689,000 tons of ore and in Year 2, it mined
935,000 tons. Calculate the depletion expense for Year 1 and Year 2 and determine the book
value of the property at the end of Year 2.
$4,875,000/15,000,000 tons = $0.325 per ton
Year 1: 689,000 tons * $0.325 per ton = $223,925
Year 2: 935,000 tons * $0.325 per ton = $303,875
Mining property $4,875,000
Accumulated depletion ($223,925 + $303,875) 527 ,800
Book value at end of Year 2 $4 ,347,200
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 08-P3
Topic: Natural Resources
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McGraw-Hill Education.
10-119
220. A company purchased mining property for $1,837,500 containing an estimated 7,350,000
tons of ore. In Year 1, it mined and sold 857,000 tons of ore. Calculate the depletion expense
for Year 1 and prepare the journal entry to record the depletion.
221. Record the following events and transactions for Leonard Company for the current year.
1. On January 2, Leonard purchased a patent for $35,000 with a remaining useful life of 10
years. Prepare the journal entry to amortize the patent at the end of the first year.
2. On January 3, Leonard made an advance payment on a leasehold of $840,000. The
leasehold expires in 15 years. Prepare the journal entry to amortize the leasehold at the end of
the first year.
3. On January 4, Leonard purchased a music distributor’s collection of lyrics and songs for
$1,425,000. The copyrights have a remaining life of another 30 years. Prepare the journal
entry to amortize the copyright at the end of the first year.
1. Amortization Expense—Patent…………... 3,500
Accumulated Amortization-Patent……… 3,500
($35,000/10 years= $3,500)
2. Amortization Expense—Leasehold………… 56,000
Accumulated Amortization-Leasehold……… 56,000
($840,000/15 years = $56,000)
3. Amortization Expense—Copyrights…………47,500
Accumulated Amortization-Copyrights…… 47,500
($1,425,000/30 years = $47,500)
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 08-P4
Topic: Intangible Assets
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McGraw-Hill Education.
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222. A company traded an old forklift for a new forklift, receiving a $13,500 trade-in
allowance and paying the remaining $47,200 in cash. The old forklift had cost $43,000, a 5-
year useful life and a $5,000 salvage value. Straight-line accumulated depreciation of $27,200
had been recorded as of the exchange date.
1. What was the book value of the old forklift on the date of the exchange?
2. What amount of gain or loss (indicate which) should be recognized in recording the
exchange, assuming the transaction has commercial substance?
3. What amount should be recorded as the cost of the new forklift?
1. Asset cost $43,000
Accumulated depreciation 27,200
Book value $15,800
1. Market value of new forklift ($13,500 + $47,200) $60,700
Book value of old forklift $15,800
Cash paid in the exchange 47,200 63,000
Loss $ 2,300
3. In this case, the new forklift should be recorded at its market value of $60,700.
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 08-P1
Learning Objective: 08-P5
Topic: Depreciation Methods
Topic: Exchanging Plant Assets
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McGraw-Hill Education.
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223. A machine had an original cost of $60,000. After $45,000 of depreciation was recorded,
the machine was traded in on a new machine priced at $75,000. A $10,500 trade-in allowance
was received on the old machine and the balance of $64,500 was paid in cash. This
transaction has commercial substance. Prepare the general journal entry to record this trade-
in.
224. A company exchanged its used machine for a new machine in a transaction that had
commercial substance. The old machine cost $68,000, and the new one had a cash price of
$95,000. The company had taken $59,000 depreciation on the old machine and was allowed a
$2,500 trade-in allowance and the balance of $92,500 was paid in cash. What gain or loss
should be recorded on the exchange?
225. A company exchanged an old automobile for a newer model. The old automobile
account had a cost of $36,000 and accumulated depreciation of $25,000 as of the exchange
date. The new automobile had a cash price of $34,000, but the company was given a $15,000
trade-in allowance and the balance of $19,000 was paid in cash. Prepare the journal entry to
record the exchange, if the transaction lacks commercial substance.
226. During the current year, a company exchanged an old truck costing $58,000 with
accumulated depreciation of $52,000 for a new truck. The new truck had a cash price of
$80,000 and the company received a $16,000 trade-in allowance on the old truck with the
balance of $64,000 paid in cash. Prepare the journal entry to record the exchange, assuming
the transaction lacked commercial substance.
227. During the current year, Beldon Co. acquired a new computer with a cash price of
$12,800 by exchanging an old one on which the company received a $1,500 trade-in
allowance (with the balance of $11,300 paid in cash). The old computer cost $9,000 and its
accumulated depreciation was $5,500 as of the exchange date. Assuming the exchange
transaction had commercial substance, prepare the journal entry to record the exchange.
228. A company purchased store equipment for $4,300 by trading in old equipment with a
cost of $2,000 and that had accumulated depreciation of $1,900 as of the exchange date. The
company received a $75 trade-in allowance for the old equipment with the balance of $4,225
paid in cash. Prepare the journal entry to record the exchange, assuming the transaction had
commercial substance.
229. On April 1 of the current year, a company traded an old machine that originally cost
$32,000 and that had accumulated depreciation of $24,000 for a similar new machine that had
a cash price of $40,000.
1. Prepare the entry to record the exchange under the assumption that a $5,000 trade-in
allowance was received and the balance of $35,000 was paid in cash. Assume the exchange
transaction had commercial substance.
2. Prepare the entry to record the exchange under the assumption that instead of a $5,000
trade-in allowance, a $12,500 trade-in allowance was received and the balance of $27,500
was paid in cash. Assume the exchange transaction lacked commercial substance.
230. Identify the balance sheet classification of each of the following assets by placing an X
in the correct classification: Plant Assets, Natural Resources, or Intangibles.
Plant
assets
Natural
Resources
Intangible
Assets
a.Trademark
b.Oil field
c.Gold mine
d.Building
e.Franchise
f. Timberland
g.Patent
h.Land
i. Copyright
j. Leasehold
231. A machine costing $450,000 with a 4-year life and an estimated salvage value of $30,000
is installed by Peters Company on January 1. The company estimates the machine will
produce 1,050,000 units of product during its life. It actually produces the following units for
the first 2 years: Year 1, 260,000; Year 2, 275,000. Enter the depreciation amounts for years 1
and 2 in the table below for each depreciation method. Show calculation of amounts below
the table.
Double-
Units-of- Declining-
Year
Straight-Line
Production
Balance
Year 1
Year 2
232. On July 1 of the current year, Glover Mining Co. pays $5,400,000 for land estimated to
contain 7,200,000 tons of recoverable ore. It installs machinery on July 3 costing $864,000
that has an 8 year life and no salvage value and is capable of mining the ore deposit in six
years. The company removes and sells 745,000 tons of ore during its first six months of
operations ending on December 31. Depreciation of the machinery is in proportion to the
mine’s depletion as the machinery will be abandoned after the ore is mined. Prepare the
entries Glover must record for (a) the purchase of the ore deposit, (b) the costs and installation
of the machinery, (c) the depletion assuming the land has a zero salvage value, and (d) the
depreciation on the machinery.
233. On July 1 of the current year, Timberlake Company signed a contract to sublease space
in a building for 7 years. Timberlake Company paid $56,000 for the right to sublease this
space. After taking possession of the leased space, Timberlake pays $140,000 for improving
the office portion of the lease space. The improvements are paid on July 6 of the current year,
and are estimated to have a useful life equal to the 14 years remaining in the life of the
building. Prepare entries for Timberlake to record (a) its payment for the right to sublease the
building space, (b) its payment for the office improvements, (c) the December 31 year-end
entry to amortize the cost of the sublease, (d) the December 31 year-end entry to amortize the
office improvements.
234. Westport Company reports the following in millions: net sales of $25,300 for 2016 and
$22,640 for 2015; end-of-year total assets of $14,875 for 2016 and $13,680 for 2015.
Compute its total asset turnover for 2016 and assess its level if competitors average a total
asset turnover of 2.0 times.
235. __________________ is an estimate of an asset’s value at the end of its benefit period
(or useful life).
236. The insufficient capacity of a company’s plant asset to meet the company’s productive
demands is called ______________________.
237. _________________ refers to a plant asset that is no longer useful in producing goods or
services with a competitive advantage because of new inventions and improvements.
Topic: Obsolescence
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 1 Easy
Learning Objective: 08-C1
Topic: Cost Determination
238. A ____________________________ results from revising estimates of the useful life or
salvage value of a plant asset.
239. The federal income tax rules for depreciating assets are known as
___________________________.
240. The depreciation method that recognizes equal amounts of annual depreciation over the
life of an asset is _______________________________.
241. The depreciation method that charges a varying amount to expense for each period of an
asset’s useful life depending on its usage is ________________________________.
242. The depreciation method that uses a depreciation rate that is a multiple of the straight-
line rate and applies it to an asset’s beginning-of-period book value is
____________________.
243. Capital expenditures that extend an asset’s useful life beyond its original estimate are
called _______________________.
244. Additional costs of plant assets that do not materially increase the asset’s life or
productive capabilities are recorded as ______________________________.
245. Additional costs of plant assets that provide benefits extending beyond the current
period; they increase or improve the type or amount of service an asset provides are treated as
_________________________________.
246. Revenue expenditures to keep an asset in normal, good operating condition; they are
necessary if an asset is to perform to expectations over its useful life are called
_____________________.
247. _________________________ are capital expenditures that make a plant asset more
productive but do not always increase an asset’s life; they often involve adding a component
to an asset or replacing one of its old components with a better one.
