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87. Denver Co. acquired a large rotary forge to be used in its manufacturing process from a
competitor that was going out of business. The following costs were incurred by Denver in
connection with the acquisition:
List price
$375,000
Finder’s fee
1,500
Transportation to Denver’s plant
13,000
Cleaning and repainting the forge
1,800
Installation costs
21,000
Costs to repair a control panel damaged during installation
900
Required:
How much should Denver Co. capitalize to the machinery account?
88. Bonzo Co. owns a building in Pennsylvania. The historical cost of the building is
$1,050,000 and $540,000 of accumulated depreciation has been recorded to date. During 2018,
Bonzo incurred the following expenses related to the building:
Repaired a broken water main
$81,500
Major improvement to the HVAC system
75,000
Added a 6,000 square foot employees’ lounge
197,500
Replaced the carpet in the purchasing department offices
21,300
Repainted the building
25,000
Required:
a. Which of the building related costs incurred by Bonzo Co. should be capitalized in 2018?
b. What is the subsequent carrying amount of the building?
89. Delilah Manufacturing Company, a calendar year reporting company, purchased a machine
for $80,000 on January 1, 2018. At the date of purchase, Delilah incurred the following
additional costs:
Loss on sale of old machinery
$1,500
Freight-in
800
Installation cost
2,300
Sales tax paid on new machine
500
Testing costs prior to regular operation
300
The estimated salvage value of the machine was $5,000, and Delilah estimated the machine
would have a useful life of 15 years, with depreciation being computed using the straight-line
method. In January 2020, accessories costing $5,200 were added to the machine in order to
reduce operating costs and improve the machine’s output. These accessories neither prolonged
the machine’s life nor provided any additional salvage value.
Required:
What should Delilah record as depreciation expense for 2020?
90. Brick Company started construction on a new office building on January 1, 2018, and
moved into the finished building on July 1, 2019. Of the building’s $3,000,000 total cost,
$2,000,000 was incurred in 2018 evenly throughout the year. The remaining $1,000,000 was
paid in installments of $500,000 each on February 1, 2019 and June 30, 2019. Brick’s
incremental borrowing rate was 12% throughout the construction period and the total amount of
interest incurred by Brick during 2018 and 2019 was $200,000 and $210,000 respectively.
Required:
a. What amount of capitalized interest should Brick report as part of its building account at
December 31, 2018?
b. What amount of capitalized interest should Brick report as part of its building account at
December 31, 2019?
91. King Company began constructing a building for its own use in January 2018. During 2018
King incurred interest of $60,000 on specific construction debt and $12,000 on other borrowings.
Interest computed on the weighted-average amount of accumulated expenditures for the building
during 2018 as $50,000.
Required:
a. What amount of interest should King capitalize?
b. Prepare the journal entry to record payment of the interest.
92. Jade, Inc. develops and markets computer software. During 2018, one of Jade’s engineers
began developing a new and very innovative software product. On April 1, 2019, a team of
Jade’s engineers determined that the software product was technologically feasible. Jade
engineers continued to ready the software for general release and in January 2020 the first
product sales were made. Total costs incurred were as follows:
2018
$4,750,000 (evenly throughout the year)
2019
$2,800,000 (evenly throughout the year)
Required:
a. How should Jade account for the costs incurred during 2018 and what is the rationale for your
answer?
b. How should Jade account for the costs incurred during 2019? If your answer differs from
your answer in requirement a, explain why.
93. On January 2, 2018 Lamp, Inc. purchased a patent for a new consumer product for
$120,000. At the time of purchase, the patent was valid for 14 years; however, the patent’s
useful life was estimated to be only 10 years due to the competitive nature of the product. On
December 31, 2021 the product was permanently withdrawn from sale under governmental order
because of a potential health hazard in the product.
Required:
a. Record any loss on impairment that Lamp should record in 2021 related to this patent.
b. What should the total charge against income be in 2021 on this patent?
94. Four years ago Alpha Products, Inc. acquired a computer-controlled milling machine to use
in its medical device manufacturing operations at a cost of $5,000,000. The firm expected the
machine to have an eight-year useful life and zero salvage value. The company has been using
straight-line depreciation for the asset. Due to the rapid rate of technological change in the
industry, at the end of Year 5, Alpha estimates that the machine is capable of generating
(undiscounted) future cash flows of $1,500,000. Based on the quoted market prices of similar
assets, Alpha estimates the machine to have a fair value of $1,200,000.
Required:
a. What is the book value of the machine at the end of Year 5?
b. Should Alpha recognize an impairment of this asset? Why or why not? If yes, what is the
amount of the impairment loss that should be recognized?
c. At the end of Year 5, at what amount should the machine appear in Alpha’s balance sheet?
d. What would your answer to requirement (b.) have been if Alpha’s estimate of the machine’s
(undiscounted) future cash flows was $2,000,000?
95. Rick Company uses straight-line depreciation for its property, plant, and equipment which—
stated at cost—consisted of the following:
2019
2018
Land
$25,000
$25,000
Buildings
195,000
195,000
Machinery and equipment
795,000
750,000
1,015,000
970,000
− Accumulated depreciation
(420,000)
(400,000)
Net book value
$595,000
$570,000
Rick’s depreciation expense for 2019 and 2018 was $115,000 and $110,000 respectively.
Required:
What amount was debited to accumulated depreciation during 2019 because of property, plant,
and equipment retirements?
96. In January 2018, Rock Company purchased a copper mine for $8,500,000, with removable
ore estimated at 2,400,000 tons. After it has extracted all the ore, Rock will be required by law
to restore the land to its original condition at an estimated cost of $500,000. Rock believes it will
be able to then sell the property for $200,000. During 2018, Rock incurred $750,000 of
development costs to prepare the mine for production, and it removed and sold 80,000 tons of
ore.
Required:
a. What amount should Rock capitalize as the cost of the mine?
b. What amount should Rock report as depletion expense in its 2018 income statement?
97. Mackerel Company purchased equipment on January 2, 2018 for $100,000. The equipment
had an estimated eight-year service life and $5,000 salvage value. Mackerel’s policy for “eight-
year assets” is to use double-declining balance depreciation for the first five years of the asset’s
life and then switch to the straight-line depreciation method.
Required:
In its December 31, 2020 balance sheet, what amount should Mackerel report as net book value
for this equipment?
98. Nadir Company purchased a milling machine on January 3, Year 1 for $55,000. The
machine was being depreciated on the straight-line method over an estimated useful life of 10
years, with $5,000 salvage value. At the beginning of Year 9, the company paid $15,000 to
overhaul the machine. As a result of this expenditure, the company estimated that the remaining
useful life of the machine was now 8 years with no salvage value.
Required:
What should be the depreciation expense recorded for this machine in Year 9 and what is the
asset’s December 31, Year 9 book value?
99. Roadrunner Co. is building a waste landfill in the desert near Phoenix, AZ. Roadrunner
estimates that this landfill will be in operation for 4 years, will cost $175,000,000 to build, and
will generate $600 million in revenues during its useful life. Federal law requires that
Roadrunner decommission and decontaminate the site at the end of its useful life. A team of
engineers has studied the decontamination procedure and has estimated that Roadrunner will
have to spend $20,000,000 on the decommissioning process when the landfill is shut down four
years from now. Roadrunner’s credit-adjusted risk-free rate of interest is 10%; the PV factor for
4 periods at 10% equals 0.683013.
Required:
a. In accordance with U.S. GAAP, how should Roadrunner Co. account for the costs associated
with the decommissioning process? Prepare the journal entry required and prepare an
amortization table for the asset retirement obligation.
b. How are the costs associated with the decommissioning process reflected on the income
statement? Explain how this accounting treatment improves the matching process.
Ans:
100. Harrison Company owns a manufacturing plant with a fair value of $3,500,000, a recorded
cost of $6,200,000, and accumulated depreciation of $2,400,000. Pablo Company owns a
depreciation of $2,800,000. Harrison and Pablo exchange assets with Harrison also receiving
cash of $500,000 from Pablo. The exchange is considered to have commercial substance.
Required:
Record the exchange on the books of:
1. Harrison.
2. Pablo.
