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23) On January 1, 2011, Tiler Company purchased equipment that cost $30,000. The equipment
has an estimated useful life of 6 years and an estimated salvage value of $3,000.
Required:
1. Using the straight-line method, complete the chart below:
Year
Depreciation expense for the year
ended Dec. 31
Book value at Dec. 31
2011
$
$
2012
$
$
2013
$
$
2. Explain why long-term assets must be depreciated.
3. Explain why land is NOT depreciated while assets such as equipment are depreciated.
Answer:
24) Describe the impact on the financial statements of buying a piece of factory equipment for
cash, using it, and then selling it for cash.
On the balance sheet:
On the income statement:
On the statement of cash flows:
25) A client has asked you to review the following situations related to long-term assets:
a. Ana, an inexperienced accountant, has calculated depreciation expense of $14,000 for the year
ended December 31, 2009, on an asset that was acquired on March 1, 2009. The asset cost
$150,000, has an estimated salvage value of $10,000 and a 10-year estimated useful life. Ana
used the straight-line method to depreciate the asset.
b. Ana also calculated depreciation expense of $2,000 on a patent that has a historical cost of
$5,000 and a 5-year estimated useful life. The patent has been used all year.
c. A client asked Ana if he could use the double-declining balance method to depreciate assets
for the external financial statements. Ana said, “No,” because she is pretty sure that the double-
declining balance method applies only to tax reporting.
d. Ana determined that the cost of equipment purchased in January was $18,000. The equipment
had an invoice price of $11,000, $1,500 of shipping charges, $1,000 of installation costs, and
$1,500 of testing, moving, and handling costs. During the first month the equipment was owned,
it used $2,000 of power and required a $1,000 tune-up to keep it running. Ana entered $18,000
as the original cost of the equipment.
e. Ana calculated a $4,000 gain on an asset that was sold on the last day of the year. The asset
had an original cost of $120,000, an estimated useful life of 8 years and a $10,000 salvage value.
The asset was depreciated using the straight-line method and had been owned for 6 full years.
The asset was sold for $30,000 cash.
Required: For each of these items, decide if the accounting treatment described is correct or
not.
If the treatment is correct, write "Correct". If the current treatment is incorrect, provide the
correct answer.
26) On February 1, 2011, Delta Distribution Company purchased a delivery truck that cost
$30,000. The truck has an estimated useful life of 150,000 miles and an estimated salvage value
of $3,000. The truck is driven 10,000; 34,000; and 28,000 miles for the years 2011, 2012, and
2013, respectively.
Required:
1. Calculate the depreciation expense per mile using the activity (units-of-production) method.
2. Use the activity method to complete the chart below:
Year
Miles
driven
Depreciation expense
for the year ended Dec.
31
Book value at Dec. 31
2011
10,000
$
$
2012
34,000
$
$
2013
28,000
$
$
3. Explain why long-term assets must be depreciated, rather than recorded as expenses in the
period when the asset is purchased.
4. Explain why land is NOT depreciated when other assets, such as trucks, are depreciated.
27) On January 1, 2011, Gamma Company purchased equipment that cost $30,000. The
equipment has an estimated useful life of 10 years and an estimated salvage value of $5,000.
Required:
1. Use the double-declining balance method to complete the chart below:
Year
Depreciation expense for the year
ended Dec. 31
Book value at Dec. 31
2011
$
$
2012
$
$
2013
$
$
2. Explain why long-term assets must be depreciated.
3. Explain why land is NOT depreciated when assets like equipment are.
28) Indicate which financial statement would report the items listed in the table below.
Use the following code:
IS = Income statement
SE = Statement of changes in shareholders’ equity
BS = Balance sheet
CF = Statement of cash flows
NONE = The item does not appear on any financial statement.
Depreciation expense
Cash paid to purchase equipment
Accumulated depreciation
Cash received from selling land
Equipment book value
Cash paid to purchase a building
Cash paid to purchase new
computers
Cash received from selling 3-year
machinery
An asset's estimated useful life
An asset's estimated residual value
Cash paid to purchase land
Amortization expense
29) Indicate which financial statement would report the items listed in the table below.
Use the following code:
IS = Income statement
SE = Statement of changes in shareholders’ equity
BS = Balance sheet
CF = Statement of cash flows
NONE = The item does not appear on any financial statement.
Accumulated depreciation
Cash paid to purchase machinery
Cash received from selling an
old building
The current fair market value of land
owned
Cash received from selling
10-year old machinery
Cash paid to purchase a building
The historical cost of
equipment owned
Depreciation expense
The amount of revenue a
specific asset generates
Cash paid to purchase office
furniture
Cash paid to buy other
businesses
30) Robin Blind, Inc. recorded the following entries during the year. Put an X in the appropriate
box to indicate whether each entry caused net income and total assets to be overstated,
understated, or correctly stated.
1. Recorded depreciation for the year using $0 salvage value when the salvage value was
expected to be $5,000.
Overstated
Understated
Correctly stated
Net income
Total assets
2. Depreciated its airplanes over a life of 35 years, which is 10 years longer than the average life
of airplanes.
Overstated
Understated
Correctly stated
Net income
Total assets
3. Recorded ordinary repairs as capital expenditures.
Overstated
Understated
Correctly stated
Net income
Total assets
4. Recorded the purchase of patents as an expense. The purchase should have been capitalized.
Overstated
Understated
Correctly stated
Net income
Total assets
5. Recorded its research and development costs as expenses.
Overstated
Understated
Correctly stated
Net income
Total assets
31) KenCo bought a new packaging machine on September 15. By October 1, the machine had
been installed, all the employees had been trained to use it, and it was in full operational use. The
factory manager told the accountant: “I know the machine is running the way we hoped it would.
But I want you to capitalize all of the machine’s operating expenses through our December 31
yearend.”
Required:
1. What would be the effect on the company’s income statement and balance sheet for the
current year if three months of operating expenses are capitalized? Why would the company
manager want to do this?
2. Is it ethical to capitalize costs that should be expensed?
32) A client has asked you to review and correct the following income statement:
Ted Williams Construction
Income Statement
For the Year Ended October 31, 2011
Revenues $900,000
Expenses
Rent $120,000
Utilities 180,000
Equipment expense 120,000
Salaries 220,000
Depreciation 100,000
Total expenses 740,000
Net income $160,000
Additional information:
a. A $3,500 machine tune-up was recorded as an asset.
b. The costs of buying a $120,000 piece of equipment on the last day of the fiscal year were
treated as equipment expense.
c. An asset with a cost of $230,000, a 10-year useful life, and a zero salvage value was
depreciated $23,000 for the full year.
d. The power and electricity costs of running a machine were treated as an expense for the year.
The costs amounted to $56,000.
e. The costs of insuring a piece of equipment while it was in transit amounted to $5,000, and
those costs were capitalized.
Required:
1. List any errors that you find.
2. Correct the errors and prepare another income statement.
33) A client has asked you to review and correct the following income statement.
CD Manufacturing
Income Statement
For the Year Ended September 30, 2011
Revenues $800,000
Expenses
Rent $100,000
Utilities 50,000
Equipment expense 90,000
Salaries 200,000
Depreciation 100,000
Total expenses 540,000
Net income $260,000
Additional information:
a. A $5,500 machine tune-up was recorded as an asset.
b. The costs of buying a $90,000 piece of equipment on the last day of the fiscal year were
treated as equipment expense.
c. An asset with a cost of $230,000, an estimated useful life of ten years, and a $20,000 salvage
value was depreciated $23,000 for the full year.
d. The power and electricity costs of running a machine were treated as an asset for the year. The
costs amounted to $16,000.
e. The $10,000 costs of installing the factory equipment in part b were treated as part of Rent
expense.
Required:
1. List as many errors as you can find.
2. Prepare a correct income statement.
34) On January 1, 2011, Keep Trucking, Inc. purchased a truck for $80,000 that has an estimated
useful life of 10 years or 200,000 miles and a salvage value of $20,000. The truck was driven
24,000 miles in 2011 and 30,000 miles in 2012. Write in both the correct dollar amounts and the
account titles involved.
Part A: Show the effect of the adjusting entry for the FIRST YEAR of depreciation using the
straight-line depreciation method.
Part B: Show the effect of the adjusting entry for the FIRST YEAR of depreciation using the
activity method.
Part C: Show the effect of the adjusting entry for the FIRST YEAR of depreciation using the
double-declining balance method.
Part D: Show the amounts that would appear on the annual financial statements for December
31, 2012 (the SECOND YEAR) for each method. PUT AN ASTERISK(*) BY THE
METHOD THAT BEST REPRESENTS THE ACTUAL USE OF THE TRUCK.
Part E: For the first two years of the equipment's life determine which method gives the dollar
amount described AND indicate the financial statement where the information would be found.
35) During 2011, Rob M. Clean Company recorded the following business events. For each,
determine whether the accounting treatment was correct, and show the effect of any errors on the
accounting equation.
Rob M. Clean:
Assets
Liabilities
Shareholders’ equity
CC
Retained earnings
1. recorded $5,000
of advertisements
run in 2009 as
expenses
___ overstated
___understated
___correctly stated
___ overstated
___understated
___correctly stated
___ overstated
___understated
___correctly stated
2. recorded $4,000
of installation costs
for new equipment
as an expense
___ overstated
___understated
___correctly stated
___ overstated
___understated
___correctly stated
___ overstated
___understated
___correctly stated
3. depreciates its
building over 20
years rather than 5
years, which is the
building's estimated
useful life given the
company's growth
___ overstated
___understated
___correctly stated
___ overstated
___understated
___correctly stated
___ overstated
___understated
___correctly stated
36) On January 1, 2011. Hula Hoops, Inc. purchased a $40,000 machine for cash. The company
uses straight-line depreciation, an estimated useful life of 5 years, and a $2,000 salvage value.
Treat each of the following scenarios independently. For each, write in the amount in the column
that represents the one financial statement where the amount is found. Round your answers to the
nearest whole dollar. The company’s yearend is December 31.
Part A: On December 31, 2011, the company was told by an appraiser that the machine is in
such great condition it could be sold for $38,000.
As of or for the
year ended 2011:
Income
Statement
Statement of
Cash Flows
Balance
Sheet
1. Depreciation expense
2. Accumulated depreciation
3. Equipment (net)
4. Purchase of equipment
Part B: In December 2012, the company decided that the machine’s original estimated useful
life of 5 years should be revised to a total of 8 years since the machine is in such good condition.
Salvage value is still $2,000.
As of or for the
year ended 2012:
Income
Statement
Statement of
Cash Flows
Balance
Sheet
1. Depreciation expense
2. Accumulated depreciation
3. Equipment (net)
37) On January 1, 2011, Crunch Company paid $100,000 for equipment with an estimated useful
life of 5 years and no residual value.
Part A: Calculate the financial statement amounts using each of the depreciation methods
below:
2011 financial statement line items:
Straight-line
Double-declining balance
1. Depreciation expense
$
$
2. Accumulated depreciation
$
$
3. Equipment (net of accumulated
depreciation)
$
$
2012 financial statement line items:
Straight-line
Double-declining balance
4. Depreciation expense
$
$
5. Accumulated depreciation
$
$
6. Equipment (net of accumulated
depreciation)
$
$
Part B:
1. On January 1, 2013, Crunch Company sold the equipment for $62,000 cash. Assume straight-
line depreciation was used. For each financial statement line item, write in the correct amount in
the column that represents the financial statement where the information is found:
2013 financial statement line items:
Income
Statement
Statement of
Cash Flows
Balance Sheet
a. Proceeds from sale of equipment
b. Gain (loss) from sale of equipment
2. Show the effect if the truck had been sold for $45,000 cash.
2013 financial statement line item:
Straight-line
Double-declining balance
Gain (loss) from sale of equipment
$
$
