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196. Record the following events and transactions for Axle Company for the current year.
1. On January 2, Axle purchased a patent for $35,000 with a useful life of 10 years. Prepare
the journal entry to amortize the patent at the end of the first year.
2. On January 3, Axle purchased a leasehold for $8,400,000. 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, Axle purchased a music distributor’s collection of lyrics and songs for
$1,425,000. The copyrights are expected to last another 30 years. Prepare the journal entry to
amortize the copyright at the end of the first year.
Answer:
197. A company traded an old forklift for a new forklift, receiving a $10,500 trade-in
allowance and paying the remaining $37,200 in cash. The old forklift had cost $39,000, and
straight-line accumulated depreciation of $27,200 had been recorded as of the exchange date
under the assumption it would last five years and have a $5,000 salvage value.
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?
Answer:
198. The original cost of a machine was $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.
199. A company exchanged its used machine for a new machine in a transaction that had
commercial substance. The old machine cost $70,000, and the new one had a cash price of
$95,000. The company had taken $60,000 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?
200. A company exchanged an old truck for a newer model. The old truck account had a cost
of $76,000 and accumulated depreciation of $65,000 as of the exchange date. The new truck
had a cash price of $84,000, but the company was given a $15,000 trade-in allowance and the
balance of $69,000 was paid in cash. Prepare the journal entry to record the exchange, if the
transaction lacks commercial substance.
201. 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.
202. During the current year, a company 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.
203. A company purchased office 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.
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204. 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.
205. Identify each of the following assets by balance sheet classification by placing an X in
the correct classification: Plant Assets, Natural Resources, or Intangibles.
Natural Intangible
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Plant assets Resources Assets
a. Trademark
b. Oil field
c. Gold mine
d. Building
e. Franchise
f. Timberland
g. Patent
h. Land
i. Copyright
j. Leasehold
206. A machine costing $450,000 with a four-year life and an estimated $30,000 salvage
value is installed by Lux Company on January 1. The factory 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
207. On July 1 of the current year, Botox 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 entries to
record (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.
208. On July 1 of the current year, Suffox Company signed a contract to sublease space in a
building for 7 years. Suffox Company paid Alec Company $56,000 for the right to sublease
this space. After taking possession of the leased space, Suffox 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 Suffox to record (a) its payment to Alec 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.
209. Rockport Company reports the following in millions: net sales of $25,355 for 2014 and
$22,340 for 2014; end-of-year total assets of $15,875 for 2014 and $13,860 for 2013.
Compute its total asset turnover for 2011 and assess its level if competitors average a total
asset turnover of 2.0 times.
Fill in the Blank Questions
210. __________________ is an estimate of an asset’s value at the end of its benefit period
(or useful life).
211. _____________________ refers to the insufficient capacity of a company’s plant asset to
meet the company’s productive demands.
212. _________________ 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.
213. Revising estimates of the useful life or salvage value of a plant asset is referred to as a
____________________________.
214. _____________ are the federal income tax rules for depreciating assets.
215. _______________________ depreciation recognizes equal amounts of annual
depreciation over the life of an asset.
216. ______________________ depreciation charges a varying amount to expense for each
period of an asset’s useful life depending on its usage.
217. _____________________ depreciation 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.
218. _______________________ are expenditures that extend an asset’s useful life beyond its
original estimate.
219. ___________________ are additional costs of plant assets that do not materially increase
the asset’s life or productive capabilities.
220. _____________________ are 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.
221. _____________________ are 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.
222. _________________________ are capital expenditures that make a plant asset more
productive; they often involve adding a component to an asset or replacing one of its old
components with a better one, and do not always increase an asset’s life.