Test Bank – Chapter 9 –Long-Lived Assets 9-21
7. For each transaction numbered 1 through 6 below, identify which accounting
treatment—capitalized or expensed—should be used to properly account for the
transactions. You may use each letter more than once or not at all.
Accounting Treatments
E. Expensed immediately
C. Capitalized as part of the cost of the new asset
______1. Freight costs on production equipment in transit
______2. Sales tax on equipment purchase
______3. Damage during installation and repair costs
______4. Interest paid on construction loan during the building period
______5. Survey costs by contractor
______6. Construction insurance to cover theft or vandalism during building
construction
9-22 Test Bank – Chapter 9 – Long-Lived Assets
SHORT PROBLEMS
1. Lincoln Co. purchased a piece of property (land and building) at a tax sale for $110,000.
A reliable estimate of the fair market value of the land and building is $114,000. What is
the gain that Lincoln Co. should record from this advantageous purchase?
2. On December 1, Dominican Corp. purchased a tract of land for $325,000 to be used as
a factory site. An old unusable building on the land was razed (torn down), and the
salvaged materials from the demolition were sold. These cash expenditures and receipts
and other costs incurred during December are as follows:
Demolition of old building
$11,000
Proceeds from sale of salvaged materials
5,000
Legal fees to transfer land title
3,000
Title guarantee insurance
1,000
Calculate the balance in Dominican’s Land account on its December 31 balance sheet.
3. Apple Inc. purchased a used pickup truck with an advertised price of $18,900 for
$17,000 cash. While Jeff, the CEO, was driving the truck to get supplies, he was
stopped by a highway patrol woman and received a $50 speeding ticket and a warning
for a nonfunctioning brake light. Jeff had failed to notice when this problem when he
purchased the truck. If Jeff knew about the brake light condition, he would have paid
only $16,500 for the car. The cost, not under warranty, of replacing the brake light was
$50. Calculate the cost to be capitalized to the truck account.
4. Arnez Company purchased a building and equipment for $110,000. Although a reliable
market value of the building could not be determined, the equipment’s market value is
$70,000. What are the separate costs assigned to the building and equipment?
Test Bank – Chapter 9 –Long-Lived Assets 9-23
5. On January 1, Hampton Company paid $48,000 for a new delivery truck. It was
estimated that the truck would be driven 100,000 miles during the next 5 years, at which
time it would have a salvage value of $3,000. During the first and second years, the
truck was driven 22,000 and 18,000 miles, respectively. How much is accumulated
depreciation using the activity (miles driven) method at the end of year 2?
6. On January 1, 2017, Blackwell Company paid $90,000 for a new delivery truck. It was
estimated that the truck would be driven 300,000 miles during the next 6 years, at which
time it would have a salvage value of $9,000. At the end of the second year, the
odometer registered 88,000 miles. Show how the plant asset would appear in Blackwell
Company’s balance sheet at December 31, 2018 assuming the company uses the
activity method depreciation.
7. Harvey Ltd. purchased land in exchange for 50,000 shares of its stock that is trading on
the New York Stock Exchange at $20 a share. Although the market value of the land is
unknown, the current assessed value is $900,000. What is the cost of the land?
9-24 Test Bank – Chapter 9 – Long-Lived Assets
8. On January 1, Bisbee Co. paid $80,000 for a new truck. It was estimated that the truck
would be driven 400,000 miles during the next 8 years, at which time it would have a
salvage value of $8,000. At the end of the first and second years, the odometer
registered 45,000 and 97,000 miles, respectively. Calculate the book value of the truck
using straight-line depreciation at the end of the second year.
9. On January 1, Marriott Company paid $80,000 for a copy machine. It was estimated that
the machine would produce 200,000 copies over the next 8 years, at which time it would
have a salvage value of $8,000. During the first and second years, the copies totaled
24,000 and 51,000, respectively. Calculate accumulated depreciation using the double-
declining-balance method at the end of year two.
10. On January 1, Weston Company paid $88,000 for a copy machine. It was estimated that
the machine would produce 1,000,000 copies over the next 8 years, at which time it
would have a salvage value of $8,000. During the first and second years, the copies
totaled 180,000 and 300,000, respectively. Calculate depreciation expense using the
activity method for each of the first two years.
Test Bank – Chapter 9 –Long-Lived Assets 9-25
11. On January 1, equipment is purchased for $55,000 with an 8-year life expectancy and
salvage value of $5,000. If the double-declining-balance method is used, calculate the
book value of the equipment at the end of year 2.
12. On January 1, equipment is purchased for $40,000 with a 20-year life expectancy and
salvage value of $4,000. If the double-declining-balance method is used, how much
depreciation expense is recorded for the first year?
13. On September 30, 2017, equipment is purchased for $50,000 with a 4-year life
expectancy and salvage value of $2,000. If the double-declining-balance method is
used, calculate depreciation expense for the year ending December 31, 2017.
14. Zack Co. incurred the following costs related to equipment during November 2017.
1. Purchased equipment with a list price of $90,000 for $87,300.
2. Had the equipment installed and paid the installer $2,000.
3. Paid the freight bill for delivery of the equipment, $1,000.
4. Advertised a product that will be produced by the new equipment, $3,400.
5. Paid sales taxes of $3,800 on the purchase of the new equipment.
Calculate the cost of the equipment.
9-26 Test Bank – Chapter 9 – Long-Lived Assets
15. Carson Co. purchased a printer for $10,000, for which it paid $1,000 a month for 10
months. Carson had the option of paying $9,500 cash for the printer but chose the
delayed payment plan. It cost Carson $80 to transport the printer to its place of business
and $200 for installing and initial timing adjustments to the printer. Calculate the cost of
the printer.
16. On January 1, Summers Co. purchased equipment with a 10-year life and zero salvage
value for $900,000. Summers uses the straight-line method on its financial statements
and double-declining-balance method on its income tax returns. By what amount does
the tax deduction for depreciation exceed depreciation expense on Summers’ income
statements for each of the first two years?
17. Farmdale Company’s President purchased an extremely used automobile on November
1 by paying $2,000. He immediately had it towed to his mechanic who overhauled the
auto in order to get the car ready to be safely driven. The cost of the tow was $40 and
the initial overhaul was $1,500. While driving from his mechanic’s garage, he ran over a
nail that punctured a tire and cost $35 to repair. Calculate the cost of the auto.
18. On April 1, Tarpon Co. made the following expenditures on its printing press:
Purchase of stapling attachment
$8,000
Installation of attachment
2,000
Cleaning and oiling press costs prior to renovation
1,000
Replacement parts for renovation of printing press
1,000
Labor used in press renovation
3,000
The renovation increased the expected life and the attachment increased the
productivity of the press. What are the total expenditures capitalized to the printing
press?
Test Bank – Chapter 9 –Long-Lived Assets 9-27
19. On April 1, 2013, Cardot Co., which uses straight-line depreciation, purchased
equipment for $60,000 with a useful life of 7 years and $4,000 salvage value. On April 1,
2017, the equipment was sold for $30,000. What gain should Cardot recognize as a
result of this disposition?
20. Harrahs Corporation purchased a dump truck at the beginning of 2015 at a cost of
$60,000. The truck had an estimated life of 5 years and an estimated salvage value of
$5,000. On January 1, 2017, the company made major repairs of $3,000 to the truck that
extended its life 2 more years. Starting with 2017, the truck has a remaining life of 5
years. The company uses the straight-line depreciation method.
How much is the book value of the truck to be reported on the balance sheet at the end
of 2016?
21. Harrahs Corporation purchased a dump truck at the beginning of 2015 at a cost of
$60,000. The truck had an estimated life of 5 years and an estimated salvage value of
$5,000. On January 1, 2017, the company made major repairs of $3,000 to the truck that
extended its life 2 more years. Starting with 2017, the truck has a remaining life of 5
years. The company uses the straight-line depreciation method.
What amount should be recorded as depreciation expense each year starting in 2017?
22. Harrahs Corporation purchased a dump truck at the beginning of 2015 at a cost of
$60,000. The truck had an estimated life of 5 years and an estimated salvage value of
$5,000. On January 1, 2017, the company made major repairs of $3,000 to the truck that
extended its life 2 more years. Starting with 2017, the truck has a remaining life of 5
years. The company uses the straight-line depreciation method.
If Harrahs sells the truck at the end of 2017 for $20,000 cash, how much gain or loss
would be recognized?
9-28 Test Bank – Chapter 9 – Long-Lived Assets
23. Calculate depreciation expense for each of the first two full years of life for an airplane
with a cost of $600,000, salvage value of $40,000, and an estimated life of 4 years under
the double-declining-balance depreciation method.
24. Courtney Corp. has significant stock that can be issued by the company. The managers
are planning to sell the stock for a large profit by fraudulently inflating reported earnings.
They plan to sell the stock after current earnings are reported, then leave for the carnival
in Brazil. To accomplish their devious plans, they purchased inventory for $800,000 and
charged the inventory purchase to equipment that is being depreciated using the
straight-line method with a life of 8 years and no salvage value. If beginning and ending
inventories were correctly stated and a full year’s depreciation is recognized on the
equipment, what is the amount of Courtney’s current net income overstatement?
25. Raymond Corporation is a new business that recycles consumption leftovers. The
investors in Raymond’s stock, expecting losses in the early stages of business, are
impressed with its early net incomes resulting in the ballooning of its stock price to $32 a
share. During the second year of operations, Raymond’s reported net income of
$1,300,000. However, a few months later, independent auditors reported existence of
accounting irregularities concerned with the capitalization of $3 million dollars of
expenditures to Raymond’s land account that should have been expensed. What is the
appropriately adjusted net income for the second year of operations?
Test Bank – Chapter 9 –Long-Lived Assets 9-29
26. The balance in accumulated depreciation on January 1 and December 31 is $60,000
and $70,000, respectively, during a year in which an asset with a cost of $20,000 and
net book value of $5,000 was sold for $3,000. Calculate the amount of depreciation
expense for the current year.
27. Laney Inc. and Monroe Company each ordered a new computer on January 1, 2017.
The cost of each computer was $3,500. The economic life expectancy of each computer
is three years with a $500 expected salvage value. During the current year Laney and
Monroe experienced identical operating events with the only difference being that Laney
used the straight-line depreciation method, while Monroe used the double-declining-
balance depreciation method. Both became disenchanted with their computers during
the year due to the introduction of a new generation of computers, and on December 31,
2017, each sold the computer for $800.
Calculate Laney’s depreciation expense and loss (gain) from the disposal of the
computer.
28. Laney Inc. and Monroe Company each ordered a new computer on January 1, 2017.
The cost of each computer was $3,500. The economic life expectancy of each computer
is three years with a $500 expected salvage value. During the current year Laney and
Monroe experienced identical operating events with the only difference being that Laney
used the straight-line depreciation method, while Monroe used the double-declining-
balance depreciation method. Both became disenchanted with their computers during
the year due to the introduction of a new generation of computers, and on December 31,
2017, each sold the computer for $800.
Calculate Monroe’s depreciation expense and loss (gain) from the disposal of the
computer.
29. Laney Inc. and Monroe Company each ordered a new computer on January 1, 2017.
The cost of each computer was $3,500. The economic life expectancy of each computer
is three years with a $500 expected salvage value. During the current year Laney and
Monroe experienced identical operating events with the only difference being that Laney
used the straight-line depreciation method, while Monroe used the double-declining-
9-30 Test Bank – Chapter 9 – Long-Lived Assets
balance depreciation method. Both became disenchanted with their computers during
the year due to the introduction of a new generation of computers, and on December 31,
2017, each sold the computer for $800.
Indicate how the current year’s net income statements for Laney and Monroe would
differ.
Test Bank – Chapter 9 –Long-Lived Assets 9-31
30. Mondova Corporation began operations on January 1. Below is Mondova’s current net
income statement and December 31 balance sheet calculated using straight-line
depreciation.
Income Statement
Sales revenue
$20,000
Cost of goods sold
9,000
Gross profit
$ 11,000
Depreciation (Note 1)
3,000
Net income
$ 8,000
Balance Sheet
Current assets
$44,000
Equipment
$20,000
Accumulated depreciation
3,000
17,000
Total assets
$61,000
Liabilities (all current)
$45,000
Shareholders’ equity
16,000
Total liabilities & shareholders’ equity
$61,000
Note 1: Equipment was purchased on January 1. Straight-line depreciation method was used with
an estimated economic life of 5 years.
A. Determine the estimated salvage value of the equipment being depreciated using the
straight-line method.
B. Prepare an income statement and balance sheet in the same format as presented
above assuming that Mondova Corporation uses the double-declining-balance
depreciation method. The equipment has an estimated economic life of 5 years.
C. Calculate and compare Mondova’s December 31 current ratio, debt/equity ratio, and
debt to assets ratio using the financial statements constructed using the straight-line
and double-declining-balance methods of depreciation.
Income Statement
Sales revenue
$20,000
Cost of goods sold
9,000
Gross profit
Depreciation (Note 1)
8,000
Net income
Balance Sheet
Current assets
$44,000
Equipment
$20,000
Accumulated depreciation
12,000
9-32 Test Bank – Chapter 9 – Long-Lived Assets
31. Several years ago, Welch Company purchased a copyright, which they amortize on a
straight-line basis over its estimated useful life. The company’s balance sheets follow at
December 31, 2017, and 2016:
(In thousands)
December 31,
2017
December 31,
2016
Copyright, less accumulated amortization of $15,000 (2016)
and $18,000 (2017)
$132,000
$135,000
A. How much amortization expense did Welch record during 2017?
B. Calculate the original cost of the patent.
C. As of December 31, 2017, over how many years has Welch amortized the copyright?
32. On January 1, the balance in accumulated depreciation is $28,000. During the current
year, depreciation expense is $10,000 and equipment with a cost of $9,000 was sold for
$3,000 at a loss of $1,000. Calculate the December 31 balance in accumulated
depreciation.
Test Bank – Chapter 9 –Long-Lived Assets 9-33
33. The balance of accumulated depreciation on January 1 and December 31, 2017 is
$54,000 and $58,000, respectively. During 2017, depreciation expense is $18,000, and
equipment with a cost of $20,000 is sold for $4,000. Calculate the loss or gain from the
sale of equipment.
9-34 Test Bank – Chapter 9 – Long-Lived Assets
SHORT ESSAY QUESTIONS
1. Dorman Company purchased a new web server on January 1. The following information
and expenditures related to this acquisition were made:
List price
$5,000
Cash price paid
4,200
Transportation-in
300
Insurance during transport
100
Interest paid for the current year related to financing the web server
240
Installation cost
200
One-year maintenance contract
400
Disk drive installed into the web server
1,000
Specify and justify which of the preceding expenditures should be added to the cost of
the web server and disclose that cost. Indicate how the expenditures excluded from the
cost of the web server would be classified.
2. Many years ago, a well-known American company publicly advertised with the slogan
“Our most important asset is our employees”. More recently, other companies have
realized that quality employees working in an excellent work environment that respects
those employees produce quality products at a reasonable cost. Although this may be
the foundation for American companies to become more internationally competitive,
there is no recognition of an employee asset on the balance sheet. Why is there not an
asset on the balance sheet that recognizes the contribution of employees to the future
profit-making ability of a firm?
Test Bank – Chapter 9 –Long-Lived Assets 9-35
3. On January 1, Tavis Corp. sold a piece of equipment for $10,000 that it had used for
several years. The equipment had cost $50,000, and the accumulated depreciation
account had a balance of $34,000 at the time of the sale. Describe the effects on the
accounting equation of selling the equipment.
4. Identify the role of the matching principle in accounting for long-lived assets.
5. What primary objective should management attempt to accomplish when selecting the
depreciation method for tax purposes?
6. What problems are inherent in recording trade-ins of plant assets?
9-36 Test Bank – Chapter 9 – Long-Lived Assets
7. How do intangible assets differ from long-lived plant assets?
8. During a meeting of top executives of the Alcorn Corporation, a discussion of the current
downturn of sales and profits was taking place. Expecting vigorous competition to extend
this difficult situation well into the next decade, the executives searched for ways to
soften its impact on the financial statements. Attention was focused upon the company
controller who was answering inquiries concerning the possibility of changing accounting
procedures in order to give shareholders’ the “best view from a bad situation”.
Responding to the inquiries, the controller authoritatively observed: “Alcorn uses a 10-
year expected life on its long-term assets and a salvage value equal to 5% of cost in
calculating depreciation expense using the straight-line method. This policy was quite
conservative in light of the industry average of a 15-year life expectancy and a 10% of
cost salvage value. In light of the 3 billion dollars of depreciable assets (net book value),
switching to the industry average would certainly improve the measured results of
operations.” Everyone was thrilled about the possibility of improving measured profits
except for one middle-top executive. She questioned whether the switch would be
acceptable to the auditor. The controller responded that switching to industry average
expectations would not violate GAAP and would be acceptable to the auditor (whose
firms depends greatly on Alcorn’s account). Alcorn would disclose the change in the
footnotes and the effect of this change on accounting estimates in the current year’s net
income. The questioning executive would not object to the plan to liberalize income
measurement, but stated that Alcorn has always been known as a most conservative
firm. And if things ultimately go from bad to worse, Alcorn may get some negative press
concerning the change because of the appearance of delaying disclosure on the income
statement of the financial trouble Alcorn is facing. It was decided to change the
depreciation policy using the industry average expected life and salvage value.
Comment on this change of depreciation measurement in light of generally accepted
accounting principles and the problem of appearance. Include the amount of increase in
net income caused by this change in depreciation parameters.
Test Bank – Chapter 9 –Long-Lived Assets 9-37
9. What are post-acquisition expenditures? How are they accounted for?
10. How should management choose an acceptable cost allocation method for accounting
purposes?
11. Identify the steps necessary in recording the retirement of the long-lived asset.
9-38 Test Bank – Chapter 9 – Long-Lived Assets
12. Intangible assets can be divided into two broad categories; those with definite lives, and
those with indefinite lives. Assets with indefinite lives are not subject to amortization
while those with definite lives are. Explain why this is the case and give at least one
example of an intangible asset with a definite life and one example of an intangible asset
with an indefinite live.
13. How do long-lived assets differ from inventory?
14. The Dayton Symphony recently acquired cellist Carlos Romono from the Cincinnati
Symphony in exchange for violinist Elton Daal. These artists’ contracts are capitalized
and reported as assets by the symphonies. What complications arise in determining the
cost of each artist’s contract for accounting purposes?
Test Bank – Chapter 9 –Long-Lived Assets 9-39
IFRS QUESTIONS
1. Under IFRS a special land account is often found on the balance sheet. This account is
called:
a. Land Improvements
b. Depreciable Land
c. Investment Property
d. Accumulated Depreciation – Land
2. A significant difference in long-lived accounting between US GAAP and IFRS accounting
is that in IFRS:
a. Management has the option of periodically revaluing property, plant and
equipment to market value
b. Management is mandated to revaluing property, plant and equipment to market
value
c. Management may use hypothetical future value in depreciating assets
d. There are no differences in long-lived asset accounting between US GAAP and IFRS
3. In respect to accounting for long-lived assets, IFRS appears to be:
a. Moving away from market-value accounting and toward historical cost accounting
b. Moving toward market-value accounting and away from historical cost accounting
c. Moving toward hypothetical future value accounting
d. There is no discernable trend