Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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110. Covey Company purchased a machine on January 1, 2010, by paying cash of $250,000.
The machine has an estimated useful life of five years, is expected to produce 500,000 units,
and has an estimated residual value of $25,000.
Requirements:
A. Calculate determine depreciation expense (to the nearest dollar) for each year of the
machine’s useful life under (1.) straight-line depreciation; and (2.) the 200% declining balance
method.
B. What is the book value of the machine after three years using the 200% declining– balance
method?
C. What is the book value of the machinery after three years with straight-line depreciation?
D. If the machine was used to produce and sell 120,000 units in 2010, what would the
depreciation expense be under the units of production method?
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
111. Hubbard Company purchased a truck on January 1, 2009, at a cost of $34,000. The
company estimated that the truck would have a useful life of 4 years and a residual value of
$4,000.
Requirements:
A. Calculate depreciation expense under straight line and double declining balance for 2009-
2012.
B. Which of the two methods would result in lower net income in 2010 and 2012?
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
112. Allison Company purchased a machine for $1,200,000 at the beginning of 2009. Allison
was using the double-declining-balance (200%) method to depreciate the asset and its useful
life was estimated to be 5 years with a residual value of $200,000. At the end of 2010, Allison
Co. estimates the future cash flows from the asset to be equal to $500,000 and the fair value to
be $450,000. What is the amount of the impairment loss?
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
113. A company purchased equipment for $800,000 and has depreciated it using the straight-
line method for the past 5 years when its original life was estimated to be 10 years with a
$200,000 residual value. The equipment’s utility to the company has declined because they
expect it to generate net cash flows over the remaining years of $300,000. The asset’s fair
value at the end of the fifth year is $200,000. If the asset has been impaired, record the journal
entry to record the impairment.
114. Beckworth Company purchased a truck on January 1, 2009, at a cash cost of $10,600.
The estimated residual value was $400 and the estimated useful life 4 years. The company
uses straight-line depreciation computed monthly. On July 1, 2012, the company sold the
truck for $1,900 cash.
A. What was the depreciation expense amount per month?
B. What was the amount of accumulated depreciation at July 1, 2012?
C. Give the required journal entries on the date of disposal, July 1, 2012. (Assume no 2012
depreciation had yet been recorded)
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
115. Lue Company sold used equipment for $450,000 cash. The equipment was purchased 5
years ago for a cost of $800,000. It has been depreciated using the straight-line method over
an estimated useful life of 10 years with an estimated residual value of $50,000. Record the
journal entry at the end of year five for the asset’s disposal assuming the fifth year’s
depreciation had been recorded.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
116. Bennett Corporation sold a piece of equipment on June 30, 2012 for $50,000 cash. The
equipment had been purchased on January 1, 2008 for $150,000. It had an estimated useful
life of 6 years and a $30,000 residual value. Bennett Corp. has been using the straight-line
method of depreciation and has a year-end of December 31st. Prepare any necessary journal
entries on June 30, 2012 assuming that 2012 depreciation expense has not been recorded.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
117. Spa Sources Corporation purchased a machine that had an original cost of $60,000 and
an estimated residual value of $10,000. The useful life was expected to be 8 years and
straight-line depreciation is used. At the end of 2010, the book value of the machine was
$35,000. Spa Sources sold the machine for $32,000 cash on October 1, 2011.
Requirements:
A. Prepare the journal entry to record depreciation for 2011 up to the date of sale.
B. Prepare the journal entry to record the sale of the machine.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
118. Give the required adjusting journal entry at December 31, 2011, the end of the annual
accounting period for the three items below. Assume that no adjusting entries have been made
during the year. If no entry is required, explain why.
A. Polk Company acquired a patent that cost $6,000 on January 1, 2011. The patent was
registered on January 1, 2006. The useful life of a patent is 20 years from registration.
B. Polk Company acquired a gravel pit on January 1, 2011, that cost $24,000. The company
estimates that 30,000 tons of gravel can be extracted economically. During 2011 4,000 tons
were extracted and sold.
C. On January 1, 2011, Polk Company acquired a used dump truck that cost $6,000 to use
hauling gravel. The company estimated a residual value of 10% of cost and a useful life 4
years. The company uses straight-line depreciation.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
119. Benson Mining Company purchased a site containing a mineral deposit during 2010. The
purchase price was $820,000, and the site is estimated to contain 400,000 tons of extractable
ore. Benson constructed a building at the site, at a cost of $500,000, to be used while the ore is
being extracted. When the ore reserves are gone, the building will have no further value.
Requirements:
A. Explain the objective of recording depletion on natural resources.
B. Determine Benson’s depletion rate per ton of ore.
C. Prepare the journal entry to record depletion for the year 2010, when Benson mined and
sold 150,000 tons of ore.
D. Prepare the journal entry to record depreciation on the building for 2010. Benson
calculates depreciation on the building using the units-of-production method based on the
amount of ore extracted (150,000 tons in 2010).
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
120. On January 1, 2010 Gordon Company purchased a patent for $420,000 from an inventor
who had developed a new manufacturing process. At the time of the purchase, the patent had
a remaining useful life of 10 years.
Requirements:
A. Prepare the journal entry to record Gordon’s purchase of the patent.
B. Prepare the journal entry to record amortization of the patent on December 31, 2010.
C. At the end of 2013, after amortization had been recorded through December 31, 2013,
Gordon concluded that the estimated future cash flows from the patent to be $250,000. The
patent’s estimated fair value on December 31, 2011 was $200,000. Prepare the journal entry to
record the patent impairment, if necessary.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
121. Pier 5 has been in business 8 years with 4 stores in the San Francisco bay area. Their
local reputation for making savory pies such as curried potatoes is well recognized. A national
food distributor has offered to purchase the company. Pier 5 has $0.9 million of net assets at
book value, but those net assets have a fair market value of $1.2 million. If the distributor
offers to buy Pier 5 for $3.5 million, how much will be recorded as goodwill based on the
offered purchase price?
122. Landmark Restaurants reported net income of $45.9 million during 2010. They reported
depreciation and amortization of plant and equipment of $48.8 million and cash paid for
additions to property, plant and equipment of $162.9 million during 2010. Explain where each
of these items would be reported and their impact on cash flows on the statement of cash
flows.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
123. Frankel Feed purchased a new machine on January 1, 2010, relevant information is as
follows:
It is now the beginning of year 6 and the management reevaluated the estimates related to the
machine. Compute the depreciation expense for year 6 under each of the following
independent cases:
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
124. Sadler Corporation purchased equipment to be used in manufacturing. The purchase was
made at the beginning of 2009 by paying cash of $150,000. The equipment has an estimated
residual value of 10,000 and an expected useful life of 10 years. At the beginning of 2011,
Sadler concluded that the total useful life of the equipment will be 8 years rather than 10, and
that the residual value will be zero. Sadler uses the straight-line method for depreciation.
Requirements:
A. Make the journal entry to record depreciation on the equipment for 2010.
B. Make the journal entry to record depreciation on the equipment for 2011, including the
effect of the changes in estimates.
C. Describe how a business should account for a change in the estimated useful life and/or
residual value of a depreciable asset.
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles
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125. Determine the effect of the following transactions on the financial statement components
identified. Code your answers as follows:
A: If the transaction results in an increase in the financial statement component.
B: If the transaction results in a decrease in the financial statement component.
C. If the transaction does not affect the financial statement component.
Transaction 1: The adjusting journal entry to record depreciation expense was made.
Net income_____
Total assets_____
Stockholders’ equity_____
Transaction 2: The adjusting journal entry to record patent amortization expense was made.
Net income_____
Total assets_____
Stockholders’ equity_____
Transaction 3: A depreciable asset was sold for a gain.
Net income_____
Total assets_____
Stockholders’ equity_____
Chapter 08 – Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles