126.
Benson Mining Company purchased a site containing a mineral deposit during 2016. 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.
Required:
A. Explain the objective of recording depletion of natural resources.
B. Determine Benson’s depletion rate per ton of ore.
C. Prepare the journal entry to record depletion for the year 2016, when Benson mined and
sold 150,000 tons of ore.
D. Prepare the journal entry to record depreciation on the building for 2016. Benson
calculates depreciation on the building using the units-of-production method based on the
amount of ore extracted (150,000 tons in 2016).
127.
On January 1, 2016, 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.
Required:
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, 2016.
C. At the end of 2019, after amortization had been recorded through December 31, 2019,
Gordon concluded that the estimated future cash flows from the patent to be $250,000. The
patent’s estimated fair value on December 31, 2019 was $200,000. Prepare the journal entry
to record the patent impairment, if necessary.
129.
Landmark Restaurants reported net income of $45.9 million during Year 6. Landmark 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 Year 6.
Required:
Explain where each of these items would be reported and their impact on cash flows on the
statement of cash flows.
130.
Frankel Feed purchased a new machine on January 1, 2016. Relevant information is as
follows:
Cost when acquired
$26,000
Estimated residual value
2,000
Estimated useful life
10
years
Accumulated depreciation at the end of
year 5
(assume straight-line depreciation)
12,000
It is now the beginning of year 6 and the management reevaluated the estimates related to
the machine.
The estimated total useful life is changed to
15 years, residual value is unchanged.
The residual value is changed to $1,000;
useful life unchanged.
131.
Sadler Corporation purchased equipment to be used in manufacturing. The purchase was
made at the beginning of 2015 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 2017,
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.
Required:
A. Prepare the journal entry to record depreciation on the equipment for 2016.
B. Prepare the journal entry to record depreciation on the equipment for 2017, including the
effect of the changes in estimates.
C. Describe how and when a business should account for a change in the estimated useful
life and/or residual value of a depreciable asset.
132.
Determine the effect of the following transactions on the financial statement components
identified. Code each item listed under the transaction with the letter A, B, or C, 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 prepared.
Net income _____
Total assets _____
Stockholders’ equity _____
Transaction 2: The adjusting journal entry to record patent amortization expense was
prepared.
Net income _____
Total assets _____
Stockholders’ equity _____
Transaction 3: A depreciable asset was sold for a gain.
Net income _____
Total assets _____
Stockholders’ equity _____
Transaction 4: The adjusting journal entry to record an impairment loss was prepared.
Net income _____
Total assets _____
Stockholders’ equity _____
