13) On January 1 2010, Max, Inc. paid $80,000 for a truck with an estimated useful life of 10
years and a $20,000 salvage value. During 2013, Max, Inc.’s truck was not running very well.
Part A: Put an X in the appropriate box to show whether each item is an expense, a capital
expenditure, or neither.
During 2013, Max, Inc.:
Expense
Capital
expenditure
Neither
1
paid $150 to have the oil changed in the truck.
2
paid $500 to overhaul the transmission.
3.
paid $20,000 for a rebuilt engine for the truck,
which extends its useful life to the end of 2017,
with no change in salvage value.
Part B:
1. Straight-line depreciation expense for 2012 is $_____________________.
2. The book value of the machine at December 31, 2012 is $___________________.
3. Straight-line depreciation expense for 2013, after the major overhaul, is $__________.
Expense
Capital
expenditure
Neither
1
paid $150 to have the oil changed in the
truck.
2
paid $500 to overhaul the transmission.
3.
truck, which extends its useful life to the
end of 2017, with no change in salvage
value.
14) Identify the appropriate accounting treatment for each of the payments listed below using the
following code:
C = Capitalize
E = Expense
N = Neither of the above
______ 1. A payment for service that maintains the working condition of a truck
______ 2. A payment for service that adds 3 years of useful life to a machine
______ 3. A payment that reduces a liability
______ 4. A payment of cash to the owners of the business
______ 5. A payment to buy an asset with a 5-year estimated useful life
______ 6. A payment to install the asset with a 5-year estimated useful life
______ 7. A payment to increase the speed of a cutting machine used in production
______ 8. A payment to decrease the cost of operating a metal molding machine
______ 9. A monthly payment to tune-up and lubricate factory equipment
______ 10. A payment to change the rubber belts on the factory conveyor system
15) Identify the appropriate accounting treatment for each of the payments listed below using the
following code:
C = Capitalize
E = Expense
N = Neither of the above
______ 1. $5,000 spent to improve the working condition of a truck
______ 2. $10,000 spent to pay a liability
______ 3. Bought a machine that cost $40,000
______ 4. Distributed $3,000 cash to the owners
______ 5. Spent $78 tuning up a truck
______ 6. Spent $234 to have a piece of equipment shipped to the warehouse where it will be
used
______ 7. $17,000 spent to make a crushing machine work faster
______ 8. $16,000 spent to make a trash compactor work more efficiently
______ 9. Paid the monthly fee to have the factory equipment oiled
______ 10. Paid an architect $5,600 to design an office building
16) Identify the appropriate accounting treatment for each of the payments listed below using the
following code:
C = Capitalize
E = Expense
N = Neither of the above
______ 1. Paid one-month’s rent on an office
______ 2. Bought a new truck
______ 3. Bought new hand-held computers for the sales staff
______ 4. Paid for insurance coverage for one year
______ 5. Paid to tune up the truck
______ 6. Paid the employees their weekly wages
______ 7. Paid cash to the owners as a dividend
______ 8. Paid for construction of a building
______ 9. Paid to paint a machine
______ 10. Incurred a cost designed to make a machine work two additional years
17) Identify each of the events listed below as an expense, capital expenditure, or neither one.
Use the following code:
E = expense
C = capital expenditure
N = neither
_______ 1. Purchased a patent from a start-up company for $9,000 cash
_______ 2. Paid $10,400 cash for routine repairs designed to maintain the operating efficiency of
a drilling machine
_______ 3. Paid $13,600 to a creditor to satisfy a debt
_______ 4. Paid $39,000 to put a new roof on a warehouse
_______ 5. Purchased rights to a competitor’s trademark for $6,200 cash
_______ 6. Paid $2,000,000 for research and development costs
_______ 7. Paid $8,800 to completely overhaul a factory machine’s engine, which extended its
useful life by 6 years
_______ 8. Purchased a new conveyor belt system for the factory at a cost of $2,300,000
_______ 9. Paid $219 to add memory to the home-office computers
_______ 10. Incurred a cost of $2,330,000 to add a new wing to an existing structure
_______ 11. Paid $39,000 to change the gears on factory equipment as part of normal monthly
maintenance
_______ 12. Distributed cash to the owners as a dividend
Learning Objective 6-5
1) A gain on the sale of a long-term asset is recorded when cash proceeds are ________.
A) less than the book value of the assets sold
B) less than the historical cost of the asset sold
C) less than the accumulated depreciation
D) greater than the book value of the asset sold
2) A loss on the sale of a long-term asset is recorded when cash proceeds are ________.
A) less than the book value of the assets sold
B) less than the historical cost of the asset sold
C) less than the accumulated depreciation
D) greater than the book value of the asset sold
3) DFS Company sold an asset for $8,500 in cash. The asset had an historical cost of $30,000
and accumulated depreciation of $20,000 on the day it was sold. How much is the gain or loss on
the sale?
A) $21,500 loss
B) $10,000 loss
C) $1,500 loss
D) $1,500 gain
4) BFS Company sold an asset for $7,500 in cash. The asset had an historical cost of $30,000
and accumulated depreciation of $20,000 on the day it was sold. How much is the gain or loss on
the sale?
A) $22,500 gain
B) $10,000 loss
C) $2,500 loss
D) $2,500 gain
5) A loss is a ________.
A) reduction in liabilities
B) reduction in an asset’s selling price
C) reduction in income that is incurred outside the normal course of business
D) decrease in cash related to operating a business
6) When a long-term asset is sold, both its cost and the related accumulated depreciation must be
removed from the accounting records.
7) A loss results when a long-term asset is sold for less than book value.
8) A gain results when a long-term asset is sold for more than book value.
9) Describe how to account for a piece of factory equipment from the date of purchase to the end
of its useful life.
10) Explain what gains and losses are, how they are calculated, and how they are reported on the
financial statements.
11) A machine was purchased for $100,000 in 2011 and used for four years, during which
$40,000 of depreciation accumulated. The machine was then sold for $50,000 cash. What is the
gain or loss on this transaction? Assume depreciation is up to date at the time of the sale.
12) A machine was purchased for $100,000 in 2011 and used for four years, during which
$40,000 of depreciation accumulated. The machine was then sold for $60,000 cash. What is the
gain or loss on this transaction? Assume depreciation is up to date at the time of the sale.
13) A machine was purchased for $100,000 in 2011 and used for four years, during which
$50,000 of depreciation accumulated. The machine was then sold for $60,000 cash. What is the
gain or loss on this transaction? Assume depreciation is up to date at the time of the sale.
14) A machine was purchased for $100,000 in 2011 and used for four years, during which
$60,000 of depreciation accumulated. The machine was then sold for $60,000 cash. What is the
gain or loss on this transaction? Assume depreciation is up to date at the time of the sale.
15) A machine was purchased for $100,000 in 2011 and used for four years, during which
$60,000 of depreciation accumulated. The machine was then sold for $50,000 cash. What is the
gain or loss on this transaction? Assume depreciation is up to date at the time of the sale.
16) The management of Omega Co. has decided to sell some of its long-term assets in order to
generate cash. The following events occurred during the current year.
a. Sold a truck with an historical cost of $20,000 and accumulated depreciation of $14,000 for
$4,000 in cash
b. Sold land with an historical cost of $100,000 for $120,000 in cash
c. Purchased a new truck for $33,000 cash
d. Sold factory equipment with an historical cost of $90,000 and accumulated depreciation of
$60,000 for $23,000
e. Sold an old office building with an historical cost of $500,000 and accumulated depreciation
of $300,000 for $190,000 cash
Required:
1. Determine the net amount of cash generated by all of the transactions combined.
2. Determine the net gain or loss from each of the transactions. What is the total net gain or loss
from all of the transactions combined?
17) The management of Zeta Co. has decided to sell some of its long-term assets in order to
generate cash. The following events occurred during the current year:
a. Sold machinery with an historical cost of $100,000 and accumulated depreciation of $66,000
for $24,000 cash.
b. Sold land with an historical cost of $40,000 for $88,000 cash.
c. Purchased new equipment for $55,000 cash.
d. Sold factory equipment with an historical cost of $120,000 and accumulated depreciation of
$80,000 for $53,000 cash.
e. Sold an old office building with an historical cost of $400,000 and accumulated depreciation
of $380,000 for $390,000 cash.
Required:
1. Determine the net amount of cash generated by all of the transactions combined.
2. Determine the net gain or loss from each of the transactions. What is the total net gain or loss
from all of the transactions combined?
18) Eta Co. experienced the following events during the current year:
a. Purchased land at a cost of $134,000 cash.
b. Invested in stock as a long-term, strategic position for $289,000 cash.
c. Sold an old warehouse with an historical cost of $350,000 and accumulated depreciation of
$200,000 for $77,000.
d. Sold an old piece of factory equipment for $20,000 cash to a scrap metal dealer. The
equipment cost $560,000 ten years ago, and $430,000 of depreciation had been recorded.
e. Sold old office furniture for $13,000. The furniture had cost $30,000 to buy seven years ago
and $15,000 of depreciation has accumulated.
f. Sold land for $220,000 cash. The land was acquired at a cost of $170,000 five years ago.
Required:
1. Determine the net amount of cash generated by all of the transactions combined.
2. Determine the net gain or loss from each of the transactions. What is the total net gain or loss
from all of the transactions combined?
19) On January 1, 2011, Muddy Acres, Inc. purchased a $44,000 mulching machine with a useful
life of 5 years and a $4,000 salvage value. The company uses straight-line depreciation. On
December 31, 2014, after 4 full years of use, Muddy Acres sold the machine for $6,000.
Part A: Show the effect of the sale in 2014 on the accounting equation. Write in both the correct
dollar amounts and the account titles affected. Use a + for increases and parentheses () for
decreases. Assume that depreciation expense for 2014 has already been recorded.
Assets
Liabilities
Shareholders’ equity
CC
Retained earnings
Part B: For each item below, WRITE IN THE AMOUNT as of or for the period ended
December 31, 2014, in the column of the one financial statement where the amount is found.
Income
Statement
Statement of
Cash Flows
Balance Sheet
1.Proceeds from sale of
equipment
2. Gain (loss) from sale of
equipment
3. Depreciation expense
CC
Retained earnings
depreciation
Income
Statement
equipment
2. Gain (loss) from sale of
equipment
3. Depreciation expense
20) Part A: Record the effect of each of the following sales of long-term assets on the
accounting equation. Write in BOTH the correct dollar amounts and the titles of the accounts
involved.
Assets
Liabilities
Shareholders’ equity
CC
Retained earnings
1. A $44,000 van was depreciated using
straight-line and assuming a 10-year life
and $5,000 salvage value. After 3 years,
it was sold for $30,000 cash.
2. A $44,000 van was depreciated
using double-declining balance and
assuming a 10-year life and $5,000
salvage value. After 3 years it was sold
for $30,000 cash.
Part B: Use your answer from PART A, SALE 2. to answer the following three questions:
_____ 1. The gain or loss from the sale of the van will appear on the ________.
a. Income Statement b. Statement of cash flows c. Balance sheet
_____ 2. A gain from the sale of the van would ________.
a. increase Sales d. increase Net income
b. increase Gross profit e. All of these
c. increase Operating income
_____ 3. The sale of the van appears on the Statement of cash flows as ________.
a. $7,472 cash from operating activities
b. $30,000 cash from operating activities
c. $7,472 cash from investing activities.
d. $30,000 cash from investing activities
e. $7,472 cash from financing activities
f. $30,000 cash from financing activities
21) Indicate whether each of the following transactions would result in a gain, a loss, or neither a
gain nor a loss.
A= Gain
B= Loss
C= Neither a gain nor a loss
______ 1. Sold an asset for $4,000. The asset had an original cost of $10,000 and accumulated
depreciation of $8,000 had been recorded up to the date of the sale.
______ 2. Sold stock for $12,000. The stock was purchased four years ago for $16,000.
______ 3. Bought a machine 9 years ago for $100,000 and over the years recorded accumulated
depreciation of $75,000. Sold the machine for $25,000.
______ 4. Seven years ago the company purchased a patent with a 10-year useful life for
$30,000. Sold rights to the patent for $11,000.
______ 5. Recorded $80,000 of depreciation on an asset that originally cost $100,000 and then
sold it for a $10,000 note receivable.
______ 6. Bought a machine 5 years ago for $50,000 and over the years recorded accumulated
depreciation of $45,000. Sold the machine for $7,000.
22) Indicate whether each of the following transactions would result in a gain, a loss, or neither
one.
A = Gain
B = Loss
C = Neither a gain nor a loss
______ 1. Sold an asset for $8,000. The asset had an original cost of $40,000. Accumulated
depreciation of $32,000 had been recorded up to the date of the sale.
______ 2. Bought a machine 9 years ago for $200,000 and over the years recorded $175,000 of
depreciation. Sold the machine for $35,000.
______ 3. Four years ago purchased a patent with a 10-year useful life for $2,000,000. Sold
rights to the patent for $1,000,000.
______ 4. Recorded $70,000 of depreciation on an asset that originally cost $100,000 and then
sold it for a $40,000 note receivable.
______ 5. Bought a machine 5 years ago for $200,000 and over the years recorded $180,000 of
depreciation. Sold the machine for $17,000.
Learning Objective 6-6
1) On January 1, 2011, Fred McGriff Company bought office computers that cost $43,000, with
an estimated useful life of 10 years and an estimated salvage value of $3,000. The company uses
the straight-line method of depreciation and has a calendar yearend. For the year ended
December 31, 2011, McGriff Company will report depreciation expense of ________ on the
________.
A) $4,300; statement of cash flows
B) $4,300; income statement
C) $4,000; income statement
D) $4,000; statement of cash flows
2) On January 1, 2011, Fred McGriff Company bought office computers that cost $43,000, with
an estimated useful life of 10 years and an estimated salvage value of $3,000. The company uses
the straight-line method of depreciation and has a calendar year end. For the year ended
December 31, 2012, McGriff Company will report depreciation expense of ________ on the
________.
A) $4,300; statement of cash flows
B) $4,300; income statement
C) $4,000; income statement
D) $4,000; statement of cash flows
3) If an adjusting entry for depreciation is NOT made at the end of the accounting period, what
is the effect on net income?
A) Net income will be too high.
B) Net income will be too low.
C) There will be no effect on net income.
D) Net income will not be affected in the current period, but will be overstated in the next period.
4) What is book value and on which financial statement is it reported?
A) Book value is the difference between accumulated depreciation and market value, and it is
reported on the income statement.
B) Book value is the difference between historical cost and accumulated depreciation, and it is
reported on the balance sheet.
C) Book value is the difference between depreciation expense and accumulated depreciation, and
it is reported on the balance sheet.
D) Book value is the difference between historical cost and market value, and it is reported on
the balance sheet.
5) What effect does depreciating a long-term asset have on the financial statements?
A) Depreciation causes a decrease in net income on the income statement and a decrease in total
assets on the balance sheet.
B) Depreciation is reported as an operating activity cash outflow.
C) Depreciation is reported as an investing activity cash outflow.
D) Depreciation is reported on the statement of changes in shareholders’ equity.
6) WDS Company owns a patent with an estimated useful life of 15 years, a zero salvage value,
and a historical cost of $42,000. Net income is $200,000 BEFORE the year-end adjustment
related to the patent. What will net income be AFTER the proper year-end adjustment has been
made?
A) $202,800
B) $200,000
C) $197,200
D) $194,000
7) KUI Company owns a copyright with an estimated 10-year useful life, a zero salvage value,
and an historical cost of $20,000. What is the effect on net income of making the proper
adjusting entry at year-end?
A) The adjustment will decrease net income by $20,000.
B) The adjustment will increase net income by $2,000.
C) The adjustment will decrease net income by $2,000.
D) The adjustment will have no affect on net income, but it will reduce net operating cash flows
by $2,000.
8) Which depreciation method will maximize net income reported to the shareholders in the early
years of an asset’s life?
A) the straight-line method
B) the double-declining balance method
C) the capitalization method
D) the revenue matching method
9) Which depreciation method will result in the most total depreciation expense being recognized
over a depreciable asset’s entire life?
A) the straight-line method
B) the double-declining balance method
C) the activity (units-of-production) method
D) All three of these methods report the same total depreciation expense over the asset’s life.
10) On January 1, 2011, Albatross Shipping Company bought equipment that cost $55,000, with
an estimated useful life of 10 years and an estimated salvage value of $5,000. The company uses
the straight-line method of depreciation. What is the BOOK VALUE of the equipment on
December 31, 2014?
A) $55,000
B) $50,000
C) $35,000
D) $30,000
11) On January 1, 2011, Petrel Shipping Company bought equipment that cost $65,000 with an
estimated useful life of 10 years and an estimated salvage value of $5,000. The company uses the
double-declining balance method of depreciation. What will be the BOOK VALUE of the asset
on December 31, 2012?
A) $35,600
B) $38,900
C) $40,460
D) $41,600
12) According to GAAP, which of the following items about long term-assets must be disclosed,
either in the financial statements or in the related footnotes?
A) the historical cost of the long-term assets owned
B) the accumulated depreciation taken over the life of the long-term assets
C) the method(s) used to depreciate long-term assets
D) all of these
13) On January 1, 2011, Handy Manufacturing Company paid $50,000 for equipment with an
estimated useful life of 5 years and $3,000 expected salvage value. The company uses straight-
line depreciation. If the adjustment for depreciation is NOT made, net income for the year ended
December 31, 2011 will be ________.
A) understated by $19,400
B) overstated by $9,400
C) overstated by $19,400
D) understated by $9,400
14) Which financial statement reports long-term assets?
A) the balance sheet
B) the income statement
C) the statement of changes in shareholders’ equity
D) the statement of long-term assets
15) U.S. GAAP value plant and equipment at historical cost minus accumulated depreciation.
16) International Financial Reporting Standards (IFRS) allow revaluation of assets to their fair
value if fair value can be measured reliably.
17) International Financial Reporting Standards (IFRS) require revaluation of assets to their fair
value if fair value can be measured reliably.
18) Under U.S. GAAP, when assets are written down because of impairment, the impairment
losses cannot be reversed even if conditions change.
19) Under International Financial Reporting Standards (IFRS), when assets are written down
because of impairment, the impairment losses can be reversed if circumstances change.
20) What basic information must be disclosed about long-term assets in the financial statements
and accompanying footnotes?
21) Tennyson LTP purchased computers on January 1, 2011, at a cost of $120,000. The
estimated useful life of the computers is 4 years and there is no estimated salvage value.
Required:
1. Complete the depreciation schedule below assuming Tennyson uses the straight-line method.
Year
Depreciation
expense
Accumulated
depreciation
Book value at the end
of the year
2011
$
$
$
2012
$
$
$
2013
$
$
$
2014
$
$
$
2. Complete the depreciation schedule below assuming Tenison uses the double-declining
balance method.
Year
Depreciation
rate
Book value before
depreciating the asset
for the year
Depreciation
expense for the
year
Accumulated
depreciation at
the end of the
year
2011
%
$
$
$
2012
%
$
$
$
2013
%
$
$
$
2014
$
$
$
3. Which method would report the greater net income to the shareholders for 2011?
4. Which method results in the higher amount of total depreciation expense over the four-year
life of the asset?
2011
2012
2013
2014
2. Double-declining balance method
Year
Depreciation
rate
Book value before
depreciating the
asset for the year
Depreciation
expense for the
year
Accumulated
depreciation at the
end of the year
2011
50%
$120,000
$60,000
$(60,000)
2012
50%
$60,000
$30,000
$(90,000)
2013
50%
$30,000
$15,000
$(105,000)
2014
Remaining
depreciable
amount
$15,000
$15,000
$(120,000)
3. The straight-line method results in the higher net income because it has the smaller
depreciation expense.
4. They are equal. The only difference is the amount of expense recognized each year.
XOAXOA: 3
XOAXOA: Analytic skills, Communication abilities
XOAXOA: LO 6-2 & LO 6-6
22) A factory machine was purchased on January 1, 2011 for $30,000. The machine has an
expected 9-year useful life and a $3,000 estimated salvage value. On January 1, 2017, the asset is
sold for $3,500 cash.
Required:
1. Determine the total amount of depreciation expense taken over the life of the asset up to the
day it is sold. Assume the company uses the straight-line method and has a calendar year.
2. Determine the asset’s book value on the day it is sold.
3. Determine if the asset is sold at a gain or a loss, and show the amount.
4 .Explain how the sale will be reported on the statement of cash flows.