48) On January 1, 2011, the Peninsula Paper Company purchased manufacturing equipment for
$600,000. The equipment has a 4-year estimated useful life and a salvage value of $22,500. The
company expects to use the equipment for 275,000 hours. Actual hours the equipment was used
are provided in the table below:
Year
Hours
2011
40,000
2012
95,000
2013
80,000
2014
60,000
Required: Calculate the depreciation expense for each year of the asset’s life using:
1. the straight-line method,
2. the double-declining balance method, and
3. the activity (units-of-production) method.
Year
Depreciation expense
2011
2012
2013
2014
Year
Depreciation expense
2011
2012
2013
2014
Year
Depreciation expense
2011
2012
2013
2014
49) On January 1, 2011, the Pine River Paper Company purchased manufacturing equipment for
$80,000. The equipment has a 4-year estimated useful life and a salvage value of $5,000. The
company expects to use the equipment for 300,000 hours. Actual hours the equipment was used
are provided in the table below:
Year
2011
2012
2013
2014
Required:
Calculate the depreciation expense for each year of the asset’s life using:
1. the straight-line method,
2. the double-declining balance method, and
3. the activity (units of production) method.
Depreciation expense
2011
2012
2013
2014
Year
Depreciation expense
2011
2012
2013
2014
Year
Depreciation Expense
2011
2012
2013
2014
50) On January 1, 2011, Borba, Inc. purchased a $100,000 machine with an estimated useful life
of 10 years or 1,000,000 units and a $10,000 salvage value. The machine actually produced
120,000 units in 2011 and 110,000 units in 2012.
Part A: Calculate depreciation expense and accumulated depreciation using the following three
methods:
December 31, 2011:
Straight-line
Activity
Double-declining
balance
1 Depreciation expense
$
$
$
2 Accumulated depreciation
$
$
$
December 31, 2012:
Straight-
line
Activity
Double-declining
balance
3 Depreciation expense
$
$
$
4 Accumulated depreciation
$
$
$
Part B: In the first year of the machine’s life, which method would show the LOWER amount
for each of the following financial statement line items? Put an X in the appropriate box.
Financial statement item
Straight-line
Double-declining balance
1 Net income
2 Income tax expense
3 Retained earnings
4 Total assets
December 31, 2011:
1 Depreciation expense
2 Accumulated
depreciation
December 31, 2012:
Straight-line
3 Depreciation expense
4 Accumulated
depreciation
51) SML International owns an oil field that contains an estimated 10,000,000 barrels of oil. The
oil field was acquired at a cost of $35,000,000 and has no salvage value. In 2011, 1,000,000
barrels were produced and in 2012, 1,750,000 barrels were produced. How much depletion
expense should be recorded in 2011 and 2012?
52) Part A: Put an X in the appropriate box to show if these amounts related to the purchase of a
new computer system are expenses or capital expenditures.
During 2012, Webmasters, Inc.:
Expense
Capital
expenditure
1
paid $100,000 for a new computer system.
2
paid the vendor $5,000 to install the system.
3
paid $4,000 to the computer programmers to
transfer the data from the old system to the new
system.
4
paid $400 for the removal of the old computer
system.
5
paid $1,000 training the employees to use the new
computer system.
6
paid $1,000 for the annual off-site storage of its
backed-up data.
7
paid $10,000 for additional memory to be
installed in the computer system.
Part B: What other information is needed to calculate double-declining depreciation expense for
the year 2012?
During 2012, Webmasters, Inc.:
expenditure
1
paid $100,000 for a new computer system.
2
paid the vendor $5,000 to install the system.
3
paid $4,000 to the computer programmers to
transfer the data from the old system to the new
system.
4
paid $400 for the removal of the old computer
system.
5
paid $1,000 training the employees to use the new
computer system.
6
paid $1,000 for the annual off-site storage of its
backed-up data.
7
paid $10,000 for additional memory to be installed
in the computer system.
53) On January 1, 2012, Orbit, Inc. purchased land and a building for a total of $90,000 by
paying $20,000 cash and issuing a note for the rest. The market value of the building was
appraised at $80,000 and the land at $20,000. Write in both the correct dollar amounts and the
account titles involved. Use a plus for increases and parentheses () for decreases.
Part A: Show the effect of the purchase on the accounting equation.
Assets
Liabilities
Shareholders’ equity
CC
Retained earnings
Part B: Show the effect of the first year’s depreciation, assuming the straight-line method and an
estimated useful life of 20 years with a $32,000 salvage value.
Assets
Liabilities
Shareholders’ equity
CC
Retained earnings
Part C: Show the effect of the first year’s depreciation, assuming double-declining depreciation
and an estimated useful life of 20 years with a $32,000 salvage value.
Assets
Liabilities
Shareholders’ equity
CC
Retained earnings
Part D: Show the amounts that would appear on the annual financial statements at the end of the
THIRD YEAR for each method.
Straight-line
Double-declining
balance
1. Depreciation expense
$
$
2. Accumulated depreciation
$
$
3. Building (net of accumulated
depreciation)
$
$
4. Land
$
$
Learning Objective 6-3
1) Which of the following is NOT an intangible asset?
A) human resources
B) copyrights
C) patents
D) franchises
2) Which assets are depreciated?
A) intangible assets
B) natural resources
C) property, plant and equipment, except for land
D) long-term investments in marketable stocks and bonds
3) Which assets are depleted?
A) intangible assets
B) natural resources
C) property, plant and equipment, except for land
D) long-term investments in marketable stocks and bonds
4) Which assets are amortized?
A) intangible assets
B) natural resources
C) property, plant and equipment, except for land
D) long-term investments in marketable stocks and bonds
5) A business will have depletion expense only if it has ________.
A) current assets that are consumed during the period
B) property, plant, and equipment that are used in operating activities
C) natural resources like timber and oil
D) intangible assets like copyrights and trademarks
6) Amortization is the ________.
A) allocation of a natural resource’s cost to an expense account as the resource is consumed
B) allocation of an intangible asset’s cost to an expense account over the asset’s estimated useful
life
C) allocation of building and equipment cost to an expense account over the assets’ estimated
useful lives
D) capitalization of a long-term asset’s cost
7) Which depreciation method is most similar to the method that is used to calculate amortization
of intangible assets?
A) straight-line
B) double-declining balance
C) activity
D) capitalization
8) Which of the following assets should be amortized?
A) building
B) patent
C) oil reserves
D) timber
9) On January 1, 2011, Ace Electronics purchased a patent for $2,000,000 cash, which allows
Ace the exclusive legal right to manufacture a new microchip for the next 20 years. However,
Ace thinks that the useful life of the patent is only 5 years because rapid changes in technology
will make the microchip obsolete. For 2011, Ace should report ________.
A) depreciation expense of $100,000
B) amortization expense of $100,000
C) depreciation expense of $400,000
D) amortization expense of $400,000
10) Under U.S. GAAP, research and development costs (R&D) are ________.
A) capitalized and amortized
B) capitalized and depreciated
C) expensed when incurred
D) expensed when the related product is sold
11) All long-term assets are tangible.
12) Intangible assets provide specific legal rights to the owner.
13) Depreciation, depletion, and amortization all refer to capitalizing an asset at its cost.
14) Intangible assets are depleted over their useful lives.
15) Intangible assets are depreciated over their useful lives.
16) Intangible assets are amortized over their useful lives.
17) Under U.S. GAAP, research and development costs (R&D) are not capitalized as part of the
cost of an asset.
18) What are natural resources? Give some examples. How are they accounted for?
19) Explain why certain long-term assets are depreciated, amortized, or depleted instead of
remaining in the accounting records at cost until the time of disposal.
21) Use the following code to identify the expense associated with each of the assets listed
below:
A = Depreciation expense
B = Depletion expense
C = Amortization expense
D = None of the above
______ 1. Land
______ 2. Patent
______ 3. Oil reserves
______ 4. Lumber
______ 5. Franchise
______ 6. Equipment
______ 7. Inventory
______ 8. Computers
______ 9. Office supplies
______ 10. Office furniture
22) Use the following code to identify the expense associated with each of the assets listed
below:
A = Depreciation expense
B = Depletion expense
C = Amortization expense
D = None of the above
______ 1. Accounts payable
______ 2. Minerals
______ 3. Factory
______ 4. Trucks
______ 5. Factory supplies
______ 6. Trademark
______ 7. Natural gas reserves
______ 8. Factory machinery
______ 9. License rights
______ 10. Land
Learning Objective 6-4
1) Which of the following should be recorded as an expense in the period when the activity takes
place?
A) Nationwise, Inc. routinely replaces the wiper blades on its fleet of delivery trucks.
B) ResolCo paid $100,000 to buy a new piece of equipment.
C) Revel, Inc. paid $10,000 to overhaul and improve a machine to make it last longer.
D) Rondeaux Company paid $50,000 for the exclusive right to manufacture a product.
2) To be capitalized, an expenditure must ________.
A) extend the useful life of a long-term asset
B) enhance the operating efficiency of a long-term asset
C) be reasonable and necessary to put a long-term asset into a working condition
D) all of these
3) Which of the statements below is TRUE?
A) Ordinary repairs should not be capitalized.
B) Expenditures that increase the working life of an asset should not be capitalized.
C) Expenditures that increase the efficiency of an asset should not be capitalized.
D) Ordinary repairs reduce the carrying value of an asset.
4) Which of the statements below regarding capital expenditures is TRUE?
A) Capital expenditures include those that make an asset last longer.
B) Capital expenditures maintain the operating condition of an asset.
C) Capital expenditures include ordinary repairs.
D) Capital expenditures decrease the carrying value of an asset.
5) Able Company bought a machine on January 1, 2008 for $80,000. At the time the machine
was purchased it was estimated to have an 8-year useful life and a $4,000 salvage value. Able
uses straight-line depreciation. During 2014, before the adjusting entry for depreciation was
made, Able revised the estimated useful life of the machine to a total of ten years, with an
estimated salvage value of $0. How much depreciation expense should the company report for
the year ended December 31, 2014?
A) $5,000
B) $5,750
C) $4,400
D) $9,500
6) Explain when a cost should be recorded as a capital expenditure rather than an expense.
7) David Justice Company incurred the following expenditures related to the purchase and use of
a new building that will be used as the growing company’s corporate headquarters in Toronto,
Canada.
Required: Put an X in the appropriate box to indicate which expenditures should be capitalized
and which should be expensed:
Expenditure
Capitalize
Expense
$560,000 spent for building materials (wood & brick)
$256,000 spent for labor costs
$78,000 architect’s fee
$80,000 rent for equipment used in the construction
$52,000 annual utilities costs to operate the building
(in use on Feb 8)
$90 cost to fix a broken window (June 3)
$230 cost to clean a stained rug
$3,900 annual janitorial costs to keep the building clean
Capitalize
Expense
$560,000 spent for building materials (wood & brick)
$256,000 spent for labor costs
$78,000 architect’s fee
$80,000 rent for equipment used in the construction
$90 cost to fix a broken window (June 3)
$230 cost to clean a stained rug
$3,900 annual janitorial costs to keep the building clean
8) Queue, Incorporated incurred the following expenditures for the purchase and use of a
machine, which was placed into service on January 1, 2011:
Expenditure
Amount
invoice price of the machine
$144,000
transportation costs
23,000
inspection, moving and handling
6,500
installation and testing
12,300
power and other operating costs for using the
machine during the year
43,000
Required:
1. Determine the total costs that should be capitalized into the machine account. What is the
total? Explain how you decided which costs to capitalize.
2. Determine the total operating expenses associated with using the machine for the year ended
December 31, 2011. Assume the machine has an estimated 5-year useful life and an $8,000
salvage value. Explain how you decided which costs to expense.
9) Able Baker Company incurred the following expenditures for the purchase and use of a
machine for the company’s factory in Puerto Rico.
Required: Put an X in the appropriate box to indicate which expenditures should be capitalized
and which should be expensed:
Expenditure
Capitalize
Expense
$60,000 invoice price of the machine
$3,000 transportation costs for the machine
$1,400 for inspection of the machine
$1,000 for moving and handling the machine
$3,500 for installation of the machine
$2,200 for testing the machine
$12,000 in power costs for the year to operate the
machine
$2,000 for ordinary repairs and maintenance on the
machine for the year
$4,000 for an overhaul to make the machine run more
efficiently
Expense
$60,000 invoice price of the machine
$3,000 transportation costs for the machine
$1,400 for inspection of the machine
$1,000 for moving and handling the machine
$3,500 for installation of the machine
$2,200 for testing the machine
$12,000 in power costs for the year to operate the
machine
$2,000 for ordinary repairs and maintenance on the
machine for the year
$4,000 for an overhaul to make the machine run more
efficiently
10) Required: Put an X in the appropriate box to indicate the proper accounting treatment for
each of the following payments:
Payment
Expense
Capitalize
Neither
Paid $6,700 cash for routine repairs designed to
maintain the operating efficiency of an asset
Paid $23,000 to a creditor to satisfy a debt
Paid $9,000 to put a new roof on a warehouse
Purchased rights to a competitor’s trademark
Paid $4,500 to completely overhaul a factory
machine’s engine, extending its useful life by 3
years
Purchased a new automated computer control
system for the factory at a cost of $2,300,000
Paid $250 to tune up a home office air conditioner
Incurred a cost of $1,500,000 to build a new
addition to an existing building
Paid $3,000 to change the rubber belts on factory
equipment as part of normal monthly maintenance
Distributed cash to the owners as a dividend
Payment
Expense
Capitalize
Neither
Paid $23,000 to a creditor to satisfy a debt
X
Paid $9,000 to put a new roof on a warehouse
Purchased rights to a competitor’s trademark
Paid $4,500 to completely overhaul a factory
machine’s engine, extending its useful life by 3
years
Purchased a new automated computer control
system for the factory at a cost of $2,300,000
Paid $250 to tune up a home office air conditioner
Incurred a cost of $1,500,000 to build a new
addition to an existing building
Paid $3,000 to change the rubber belts on factory
equipment as part of normal monthly maintenance
Distributed cash to the owners as a dividend
X
11) Put an X in the appropriate box to identify each of these events as either a capital expenditure
or an expense (revenue expenditure).
Capital
Expenditure
Expense (Revenue
Expenditure)
The company changed all the light bulbs in the
home office.
The company cleaned the office carpets as part
of normal monthly maintenance.
The company made the air conditioning
system operate more efficiently by upgrading
the thermostat.
The company purchased a new computer to
replace an old computer.
The company replaced parts in machines and
equipment as needed.
The company reengineered a major piece of
equipment and made it last longer in the
process.
The company changed the oil in the factory
production equipment.
The company paved a parking lot outside the
warehouse.
The company changed all the light bulbs in the
home office.
The company cleaned the office carpets as part
of normal monthly maintenance.
The company made the air conditioning
system operate more efficiently by upgrading
the thermostat.
The company purchased a new computer to
replace an old computer.
The company replaced parts in machines and
equipment as needed.
The company reengineered a major piece of
equipment and made it last longer in the
process.
The company changed the oil in the factory
production equipment.
12) Put an X in the appropriate box to show whether each item is an expense, a capital
expenditure, or neither:
Riteoff, Inc.:
Expense
Capital
expenditure
Neither
1
paid $1,000 on its notes payable.
2
paid $12,000 for the painting of its building
3
paid $20,000 to an advertising agency for ads run
during the year.
4
paid $5,000 for a URL address for its Web site.
5
paid $20,000 for a truck by issuing a 6%, 4-year
note.
6
paid $200 for ordinary repairs to its equipment.
7
paid $1,000 for a rebuilt engine for its truck.
8
paid $60,000 to have an addition added to its
building.
9
paid $2,000 of insurance premiums to cover the
delivery of a new machine.
10
paid $1,000 for the electricity during the year to run
its machines.
Riteoff, Inc.:
Expense
Capital
expenditure
Neither
1
paid $1,000 on its notes payable.
2
paid $12,000 for the painting of its building
3
paid $20,000 to an advertising agency for ads run
during the year.
4
paid $5,000 for a URL address for its Web site.
5
paid $20,000 for a truck by issuing a 6%, 4-year
note.
6
paid $200 for ordinary repairs to its equipment.
7
paid $1,000 for a rebuilt engine for its truck.
8
paid $60,000 to have an addition added to its
building.
9
paid $2,000 of insurance premiums to cover the
delivery of a new machine.
10
paid $1,000 for the electricity during the year to run
its machines.