Chapter 8: Operating Assets: Property, Plant and Equipment, and Intangibles
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
149. Land is not a depreciable asset, but the amount allocated to the building is subject to ______________.
ANSWER:
depreciation
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.08-03 – LO: 08-03
KEYWORDS:
Bloom’s: Remembering
150. Interest included as part of the acquisition cost of the asset is referred to as___________ of interest.
ANSWER:
capitalization
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.08-04 – LO: 08-04
KEYWORDS:
Bloom’s: Remembering
151. The three reasons why a company might choose an accelerated depreciation method are
__________________________________________________,
__________________________________________________, and
__________________________________________________.
ANSWER:
1. To minimize income and taxes.
2. To more accurately match expenses with revenues.
3. As a result of rapid technology changes.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
KEYWORDS:
Bloom’s: Remembering
Please answer the following questions regarding depreciation:
152. _________________________ depreciation is the GAAP depreciation method used most frequently.
ANSWER:
Straight-line
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
KEYWORDS:
Bloom’s: Remembering
153. ______________________________ depreciation is the GAAP depreciation method considered to be “accelerated”
in nature.
ANSWER:
Double declining-balance
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
KEYWORDS:
Bloom’s: Remembering
154. The two items that must be estimated with respect to a plant asset in order to properly allocate cost to the affected
accounting periods are ______________________________ and ______________________________.
ANSWER:
Salvage value, Useful life
Useful life, salvage value
Residual value, Useful life
Useful life, residual value
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
KEYWORDS:
Bloom’s: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
155. A change in estimate should be recorded_________________.
ANSWER:
prospectively
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.08-06 – LO: 08-06
KEYWORDS:
Bloom’s: Remembering
Goodwill
Revenue expenditure
Natural resources
Research and development costs
Trademark
Capital expenditure
ANSWER:
Research and development costs
DIFFICULTY:
FACC.PONO.13.08-09 – LO: 08-09
KEYWORDS:
Bloom’s: Remembering
ANSWER:
Capital expenditure
DIFFICULTY:
KEYWORDS:
Bloom’s: Remembering
ANSWER:
DIFFICULTY:
Easy
FACC.PONO.13.08-09 – LO: 08-09
KEYWORDS:
Bloom’s: Remembering
ANSWER:
Goodwill
DIFFICULTY:
FACC.PONO.13.08-09 – LO: 08-09
KEYWORDS:
Bloom’s: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
160. With respect to operating assets, the two different transactions that would appear in the investing activities category
of the statement of cash flows are __________________________________ and
__________________________________.
ANSWER:
Purchase of plant asset, Sale of plant asset
Purchase of intangible asset, Sale of intangible asset
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-11 – LO: 08-11
KEYWORDS:
Bloom’s: Remembering
Matching
For each of the following items, indicate whether each would be treated as a
a.
capital expenditure
b.
revenue expenditure
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-02 – LO: 08-02
FACC.PONO.13.08-07 – LO: 08-07
KEYWORDS:
Bloom’s: Applying
161. Costs related to acquiring an asset, such as sales or excise taxes, transportation, insurance during shipment
ANSWER:
a
162. Costs incurred prior to using the asset, such as costs to prepare the asset for use, installation costs
ANSWER:
a
163. Costs incurred after putting the asset into service which keep the asset in normal operating condition
ANSWER:
b
164. Costs incurred after putting the asset into service which would extend the asset’s useful life
ANSWER:
a
Select the account that would be increased to show each of the following costs.
a.
Land
b.
Land Improvements
c.
Buildings
d.
Machinery and Equipment
e.
An Expense Account
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-02 – LO: 08-02
FACC.PONO.13.08-04 – LO: 08-04
FACC.PONO.13.08-07 – LO: 08-07
KEYWORDS:
Bloom’s: Applying
165. The transportation charges related to the acquisition costs of a new piece of machinery
ANSWER:
d
166. The interest costs incurred during the construction period of a new building built by a company for its own use
ANSWER:
c
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
167. The costs paid to clear land
ANSWER:
a
168. The annual painting costs of an office building
ANSWER:
e
169. The sales taxes paid related to a machine purchased
ANSWER:
d
170. The costs to pave a parking lot
ANSWER:
b
Exeter Corporation purchased a piece of equipment with a price of $80,000 on March 1, 2018. The amounts below are
related to the equipment purchase. Match the items below and explain why each revenue expenditure is not capitalized.
a.
This item should be included as part of the cost of the equipment.
b.
This item should be considered a revenue expenditure.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-02 – LO: 08-02
FACC.PONO.13.08-07 – LO: 08-07
KEYWORDS:
Bloom’s: Applying
171. Terms of the purchase were 2/10, net 30. Edison paid for the purchase on March 8.
ANSWER:
a
172. $3,000 freight costs were paid to ship the equipment from the manufacturer.
ANSWER:
a
173. A state agency required that a pollution-control device be installed on the equipment at a cost of $5,000.
ANSWER:
a
174. During the installation, the equipment was damaged and repair costs of $2,000 were incurred.
ANSWER:
b
175. It was necessary for an architect to redesign the work space to accommodate the new equipment. A fee of $6,000 was
paid.
ANSWER:
a
176. The company purchased a three-year liability insurance policy to cover possible damage caused by the new
equipment at a cost of $6,000.
ANSWER:
b
177. The company financed the equipment purchase with a bank loan. Interest of $3,000 was paid on the loan during
2018.
ANSWER:
b
Chapter 8: Operating Assets: Property, Plant and Equipment, and Intangibles
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Identify where each of the following accounts would be reported on Coca-Cola’s financial statements.
a.
Balance Sheet—Property, Plant, and Equipment
b.
Balance Sheet—Intangible Assets
c.
Balance Sheet—Current Assets
d.
Balance Sheet—Other Assets
e.
Income Statement—Operating Section
f.
Income Statement—Other Revenue and Expense Section
g.
Statement of Cash Flows
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-071 – LO: 08-07
FACC.PONO.13.08-09 – LO: 08-09
FACC.PONO.13.08-10 – LO: 08-10
KEYWORDS:
Bloom’s: Applying
178. Building
ANSWER:
a
179. Total amortization since inception
ANSWER:
b
180. Copyright
ANSWER:
b
181. Land improvements
ANSWER:
a
182. Research and development costs
ANSWER:
e
183. Accumulated depreciation
ANSWER:
a
184. Amortization expense
ANSWER:
e
185. Patents
ANSWER:
b
186. Goodwill
ANSWER:
b
187. Accumulated amortization
ANSWER:
b
Chapter 8: Operating Assets: Property, Plant and Equipment, and Intangibles
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Given the following list of methods of depreciation, select the method that is best for the situation or purpose given. Some
answers may be used more than once, while others may not be used at all.
a.
Straight-line
b.
Units-of-production
c.
Double-declining-balance
d.
MACRS
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
KEYWORDS:
Bloom’s: Applying
188. Early in the life of the asset, this method maximizes net income.
ANSWER:
a
189. This method is the easiest to use.
ANSWER:
a
190. This method is the best for management bonus plans.
ANSWER:
a
191. This method minimizes taxable income (early in the asset’s life).
ANSWER:
d
Given below is a list of items that may be reported on a statement of cash flows. Identify each as one of the following
using the indirect method:
a.
Operating
b.
Investing
c.
Financing
d.
Not separately reported on a statement of cash flows
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-11 – LO: 08-11
KEYWORDS:
Bloom’s: Applying
192. Proceeds from the sale of a building
ANSWER:
b
193. Depreciation expense
ANSWER:
a
194. Cost incurred to acquire a patent
ANSWER:
b
195. Payment of research and development costs
ANSWER:
a
196. Loss of the sale of equipment
ANSWER:
a
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
197. Amortization of a copyright
ANSWER:
a
198. Purchase of equipment for cash
ANSWER:
b
Select the financial statement on which the user would most likely find the answer to the question given.
a.
Income statement
b.
Balance sheet
c.
Statement of cash flows
d.
Statement of retained earnings
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-02 – LO: 08-02
FACC.PONO.13.08-11 – LO: 08-11
KEYWORDS:
Bloom’s: Applying
199. What amount of cash was used for to purchase property, plant, and equipment during the year?
ANSWER:
c
Chapter 8: Operating Assets: Property, Plant and Equipment, and Intangibles
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Subjective Short Answer
200. Aliquippa Co. purchased equipment at the beginning of 2016 for $60,000. In addition, Aliquippa paid $2,000 for
delivery of the equipment to its plant and $1,000 for installation of the equipment. The equipment has an estimated
residual value of $7,000 and an estimated life of 7 years or 70,000 hours of operation. Aliquippa is looking at alternative
depreciation methods for the equipment. Calculate the following:
A.
The depreciation expense for the year 2016 using the straight-line depreciation method.
B.
The total accumulated depreciation at December 31, 2017, using the units-of-production
depreciation method. Assume that the equipment is operated for 15,000 hours in 2016 and
12,000 hours in 2017.
C.
The book value of the equipment at December 31, 2016, using the double-declining-balance
depreciation method.
D.
Which of the above methods is considered accelerated?
E.
What are the advantages of using an accelerated depreciation method as compared to the
straight-line method for lowering taxes early in the life of the equipment?
ANSWER:
A.
($63,000 – $7,000)/7 = $8,
B.
($63,000 – $7,000)/70,000 = $.80 per hour
Depreciation for 2016: 15,000 × $.80 = $12,000
Depreciation for 2017: 12,000 × $.80 = $9,600
Accumulated depreciation: $12,000 + $9,600 = $21,6
C.
Depreciation for 2016: $63,000 × (1/7 × 2) = $18,000
Book value: $63,000 – $18,000 = $45,
D.
Double-declining balance is an accelerated method.
E.
Accelerated depreciation allocates more expense to the earlier accounting periods
during the life of the equipment than straight-line depreciation. Accelerated depreciation
causes net income to be lower, so less taxes are paid and cash flow is increased early in
the equipment’s life than if the straight-line method was used.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
FACC.PONO.13.08-071 – LO: 08-07
KEYWORDS:
Bloom’s: Analyzing
201. Imperial Corp. purchased land and a building for $425,000. The appraised values of the land and the building were
$150,000 and $450,000, respectively. In addition, the attorney was paid $10,000 for handling the closing on the property.
A.
What amounts will be recorded as the costs of the land and building?
B.
What is the accounting justification against increasing the land and building accounts for their
appraised values?
ANSWER:
A.
Land: ($150,000/$600,000) × $435,000 = $108,750
Building: ($450,000/$600,000) × $435,000 = $326,250
B.
The appraised values do not represent the actual amount paid for the land and building.
The appraised amounts are not verifiable. Conservatism requires that plant assets be
recorded at the original cost to avoid overstatement.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-02 – LO: 08-02
FACC.PONO.13.08-071 – LO: 08-07
KEYWORDS:
Bloom’s: Analyzing
202. Florence, Inc. purchased equipment at the beginning of 2016 for $140,000. The company decided to depreciate the
equipment over a 10-year period using the double-declining-balance method. The company estimated the equipment’s
salvage value at $12,000. Show how the costs should be presented on Florence’s financial statements at December 31,
2017. Label the statements properly.
ANSWER:
2016 Depreciation: $140,000 × .20 =
$28,000
2017 Depreciation: $112,000 × .20 =
22,400
Accumulated depreciation
$50,400
BALANCE SHEET
Property, plant, and equipment:
Equipment
$140,000
Less: Accumulated depreciation
(50,400)
Net property, plant, and equipment
$ 89,600
INCOME STATEMENT
Operating expenses:
Depreciation expense
$ 22,400
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
FACC.PONO.13.08-071 – LO: 08-07
KEYWORDS:
Bloom’s: Analyzing
KEYWORDS:
Bloom’s: Analyzing
203. Tasty Catering purchased a van on January 1, 2014 for $48,000. The company decided to depreciate the van over a 5-
year period using the straight-line method. The company estimated its residual value at $3,000. Show how the costs
should be presented on Tasty’s balance sheet and income statement for the full year ended June 30, 2016. Label the
statements properly.
ANSWER:
BALANCE SHEET
Property, plant, and equipment:
Van
$48,000
Less: Accumulated depreciation*
(22,500)
Net property, plant, and equipment
$25,500
* [($48,000 – $3,000) / 5] × 2.5 years
INCOME STATEMENT
Operating expenses:
Depreciation expense*
$ 9,000
* ($48,000 – $3,000) / 5
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
FACC.PONO.13.08-071 – LO: 08-07
KEYWORDS:
Bloom’s: Analyzing
204. Fulsom Co. began construction of a new factory at the beginning of 2016. At the end of the year, construction was
completed, and construction costs totaled $200,000. Fulsom borrowed $180,000 at the beginning of 2016 to finance the
construction and repaid the loan at the end of 2016. The interest rate on the loan was 9%. Determine the following
amounts.
A.
The actual interest incurred on the construction loan during 2016.
B.
The interest to be capitalized for 2016.
C.
The total cost of the factory reported on the balance sheet.
D.
What impact does capitalizing interest have on net income for 2016? Explain.
ANSWER:
A.
$180,000 (Amount of the loan) × 9% (Interest rate on the loan) = $16,200
B.
$180,000 (Amount of the loan) × 9% (Interest rate on the loan) = $16,200
C.
$200,000 (Construction costs) + $16,200 (Interest incurred on the loan) =
$216,200 (Total Costs)
Capitalizing the interest causes the carrying value of the plant asset to be larger
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
205. Given below are several accounts and balances from Carrier Corporation’s 2016 financial statements. Prepare the
Property, Plant, and Equipment section of the balance sheet and a partial income statement in the space provided below
using the accounts provided.
Depreciation expense
$ 59,800
Accumulated depreciation
257,400
Gain on sale of plant asset
19,500
Building
585,000
Land
120,000
Cash received from sale of plant asset
52,000
BALANCE SHEET
INCOME STATEMENT
ANSWER:
BALANCE SHEET
Property, plant, and equipment
Land
$120,000
Building
585,000
$705,000
Less: Accumulated depreciation
(257,400)
Net property, plant, and equipment
$447,600
INCOME STATEMENT
Operating expenses:
Depreciation expense
$59,800
Other income and expenses:
Gain on sale of plant asset
19,500
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-071 – LO: 08-07
FACC.PONO.13.08-08 – LO: 08-08
KEYWORDS:
Bloom’s: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
206. On January 1, 2016, Humansville Company purchased a piece of equipment with a list price of $80,000. The
following amounts were related to the equipment purchase:
• Terms of the purchase were 2/10, net 30. Humansville paid for the purchase on January 8.
• Freight costs of $1,250 were incurred.
• A state agency required that a pollution control device be installed on the equipment at a cost of $3,300.
• During installation, the equipment was damaged and repair costs of $4,200 were incurred.
• Architect’s fees of $6,100 were paid to redesign the work space to accommodate the new equipment.
• Humansville purchased liability insurance to cover possible damage to the asset. The three-year policy cost $8,700.
• Humansville financed the purchase with a bank loan. Interest of $4,600 was paid on the loan during 2016.
Required:
Determine the acquisition cost of the equipment.
ANSWER:
The acquisition cost of the asset should be computed as follows:
List price
$80,000
Less: Discount of 2%
(1,600)
Freight
1,250
Pollution control device
3,300
Architect’s fee
6,100
Total acquisition cost
$89,050
Note: Repair costs of $4,200 are not included because they are not normal or necessary to the
acquisition. Insurance cost of $8,700 should be treated as prepaid insurance.
Interest cost of $4,600 is not included unless an asset is constructed over time.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-02 – LO: 08-02
KEYWORDS:
Bloom’s: Analyzing
Total
Land
Building
Equipment
Land
Building
Equipment
207. On January 1, 2016, Aaron Simpson bought a farm store of a small competitor for $620,000. An appraiser, hired to
assess the acquired assets’ value, determined that the land, building, and equipment had market values of $300,000,
$215,000, and $270,000, respectively.
Required:
1. What is the acquisition cost of each asset? Prepare a journal entry to record the acquisition (rounded to the nearest
dollar).
2. Simpson plans to depreciate the building on a straight-line basis for 30 years and the equipment over 16 years.
Determine the amount of depreciation expense for 2016 on these newly acquired assets (rounded to the nearest dollar).
You can assume zero residual value for all assets.
3. How would the assets appear on the balance sheet as of December 31, 2016?
ANSWER:
1. The total market value is calculated as follows:
Land
$300,000
Building
215,000
Equipment
270,000
3. The assets would appear on the balance sheet as follows:
Long-term assets:
Land
$236,943
Building
$169,809
Less: Accumulated Depreciation
(5,660)
164,149
Equipment
$213,248
Less: Accumulated Depreciation
(13,328)
199,920
Total long-term assets
$601,012
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-03 – LO: 08-03
KEYWORDS:
Bloom’s: Analyzing
208. A company begins construction of an asset on January 1, 2016, and completes construction on December 1, 2016.
The company pays the following amounts related to construction:
January 1: $1,000,000
July 1: $2,000,000
October 1: $1,000,000
Calculate the average accumulated expenditures for the purpose of capitalizing interest.
ANSWER:
$1,000,000 × 12/12
$1,000,000
$2,000,000 × 6/12
1,000,000
$1,000,000 × 3/12
250,000
Average accumulated expenditures
$2,250,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-04 – LO: 08-04
KEYWORDS:
Bloom’s: Analyzing
209. Boston Corp. purchased equipment with a cost of $70,000 at the beginning of 2016. The equipment has an estimated
life of 25 years or 25,000 units of product. The estimated residual value is $7,500. During 2016, 1,100 units of product
were produced with this machinery. Determine the following:
A.
Amount of total accumulated depreciation at December 31, 2016, using units-of-production depreciation
B.
Book value at the end of 2016 using straight-line depreciation
C.
Why would the company choose units-of-production depreciation instead of straight-line?
ANSWER:
A.
($70,000 – $7,500)/25,000 × 1,100 = $2,750
B.
($70,000 – $7,500)/25 = $2,500
$70,000 – $2,500 = $67,500
C.
A company may use units-of-production when the usage of the plant asset is a better
indicator of the cost used up as compared to a time allocation. This situation exists
primarily when production is erratic or seasonal.
DIFFICULTY:
Moderate
KEYWORDS:
Bloom’s: Analyzing
210. Why do many companies use MACRS (Modified Accelerated Cost Recovery System) depreciation for tax purposes?
If a company uses MACRS for depreciation for tax purposes, can it use a different method for financial reporting?
Explain why or why not.
ANSWER:
Many companies use MACRS because it is an approved accelerated tax method of
depreciation that allocates more cost in the earlier years of useful life than other methods.
This results in lower taxes earlier in the life of the asset. Yes, a company can use one method
for accounting purposes and another method for tax purposes. For accounting purposes, the
goal of depreciation is to properly allocate the cost of the plant asset to the accounting
periods benefited. A company should select a tax depreciation method that allows it to pay
the least possible taxes in the early years, thus increasing available cash flow.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
KEYWORDS:
Bloom’s: Understanding
211. Daytona Beach Company purchased a car for a salesman for $23,500 at the beginning of 2016. The car had an
estimated life of 5 years, and an estimated residual value of $3,500. Daytona Beach used the straight-line depreciation
method. At the beginning of 2017, Daytona Beach incurred $2,500 to replace the car’s transmission. This resulted in a 2-
year extension of the car’s useful life, but no change in the residual value.
A.
What type of cost is the $2,500? Explain.
B.
Calculate the book value of the car at the end of 2016.
C.
Find the depreciation expense on the car for 2017.
ANSWER:
A.
The $2,500 cost is a capital expenditure. It increases the
plant asset’s useful life so it must be capitalized.
B.
Depreciation: ($23,500 – $3,500)/5 = $4,000 per year
Book value: $23,500 – $4,000 = $19,500
C.
($19,500 + $2,500 – $3,500)/6 years = $3,083
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
FACC.PONO.13.08-06 – LO: 08-06
KEYWORDS:
Bloom’s: Analyzing
FACC.PONO.13.08-05 – LO: 08-05
FACC.PONO.13.08-08 – LO: 08-08
KEYWORDS:
Bloom’s: Analyzing
212. Moore, Inc. purchased slot machines at the beginning of 2016 for $20,000. The machines have an estimated residual
value of $2,000 and an estimated life of 5 years or 20,000 hours of operation. Moore is looking at alternative depreciation
methods for the equipment. Calculate the following:
A.
Accumulated depreciation at December 31, 2017, using the straight-line depreciation method.
B.
Depreciation expense for 2016 using the units-of-production depreciation method. Assume that the
machines are operated for 5,000 hours in 2016 and 2,000 hours in 2017.
C.
Book value of the equipment at December 31, 2017, using the double-declining-balance depreciation
method.
D.
What are the advantages of using straight-line depreciation for financial reporting purposes?
ANSWER:
A.
Depreciation per year: ($20,000 – $2,000)/5 = $3,600
Total at 12/31/17: $3,600 × 2 years* = $7,200
*2017 and 2018
B.
Expense per hour: ($20,000 – $2,000)/20,000 = $.90 per hour
$.90 × 5,000 = $4,500
C.
2016: $20,000 × (1/5 × 2) = $8,000
2017: $12,000 × .40 = $4,800
Total accumulated depreciation = $8,000 + $4,800 = $12,800
Book value = $20,000 – $12,800 = $7,200
D.
Straight-line is an easy, simple method. Because of this, it is also the most popular.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
KEYWORDS:
Bloom’s: Analyzing
213. Dayton Ridge Co. purchased new trucks at the beginning of 2016 for $600,000. The trucks had an estimated life of 4
years and an estimated residual value of $50,000. Dayton Ridge uses straight-line depreciation. At the beginning of 2017,
Dayton Ridge sold the trucks for $480,000 and purchased new trucks for $700,000. Determine the following amounts:
A.
Book value of the trucks at the end of 2016.
B.
Gain (loss) on the sale of the trucks at the beginning of 2017 (Indicate the amount and
whether a gain or loss).
ANSWER:
A.
Depreciation expense: ($600,000 – $50,000)/ 4 years = $137,500
Book value: $600,000 – $137,500 = $462,500
B.
$480,000 – $462,500 = $17,500 gain
DIFFICULTY:
Moderate
KEYWORDS:
Bloom’s: Analyzing
214. Foxrun, Inc. purchased a truck at the beginning of 2016 for $32,500. Foxrun decided to depreciate the truck over an
8-year period using the straight-line method, and estimated its residual value to be $4,500. At the beginning of 2017,
Foxrun determined that a 5-year life should have been used to depreciate the truck. The estimated residual value was not
affected by the revision in the asset’s life.
A.
Determine the amounts to be recorded as depreciation expense for 2016 and 2017.
B.
What factors may have influenced Foxrun to change the useful life?
ANSWER:
A.
2016: ($32,500 – $4,500)/8 = $3,500
2017: [($32,500 – $3,500) – $4,500]/4 = $6,125
B.
The factors that may influence the change in useful life are the same factors that
influence the initial selection of a useful life. These factors are: anticipated decline in
usefulness due to physical deterioration such as wear and tear; obsolescence due to new
technology; and the company’s repair and maintenance policy.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.08-05 – LO: 08-05
FACC.PONO.13.08-06 – LO: 08-06
KEYWORDS:
Bloom’s: Analyzing
215. Craig Inc. purchased a truck on January 1, 2016 for $40,000. The truck had an estimated life of six years and an
estimated salvage value of $4,000. Craig uses the straight-line method to depreciate the asset. On July 1, 2018, the truck
was sold for $14,000 cash.
A.
Determine the effect on the accounting equation upon recording the depreciation for 2016.
B.
Show how the gain or loss on the sale of the asset would be reported on Craig Inc.’s income
statement.
ANSWER:
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Accum.
Deprec.
(6,000)
(6,000)
Depreciation
Expense 6,000
(6,000)
($40,000 – $4,000)/6 = $6,000
B.
Other income and
expenses:
asset
Book value
($40,000 – [$6,000 Depreciation × 2 1/2 Years])
$40,000 – 15,000 or $25,000 basis
$14,000 selling price less $25,000 basis
= $11,000 loss on sale
DIFFICULTY:
Moderate
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216. Assume that Alabama Company purchased factory equipment on January 1, 2016, for $75,000. The equipment has
an estimated life of five years and an estimated residual value of $6,000. Alabama’s accountant is considering whether to
use the straight-line or the units-of-production method to depreciate the asset. Because the company is beginning a new
production process, the equipment will be used to produce 5,000 units in 2016, but production subsequent to 2016 will
increase by 5,000 units each year.
Required:
Calculate the depreciation expense, accumulated depreciation, and book value of the equipment under both methods for
each of the five years of its life. Would the units-of production method yield reasonable results in this situation? Explain.
ANSWER:
Depreciation, accumulated depreciation, and book value for the straight-line method should
be as follows:
Year
Annual
Depreciation
Accumulated
Depreciation
Book
Value
2016
$13,800*
$13,800
$61,200
2017
13,800
27,600
47,400
2018
13,800
41,400
33,600
2019
13,800
55,200
19,800
2020
13,800
69,000
6,000
*($75,000 – $6,000)/5 years = $13,800 per year
The estimated total number of units to be produced is
5,000 + 10,000 + 15,000 + 20,000 + 25,000 = 75,000 units.
Depreciation Expense
Year
2016
2017
2018
2019
18,400
2020
= (Acquisition Cost – Residual Value)/Life in Units
Dec. 31
Depreciation Expense
Moderate
FACC.PONO.13.08-05 – LO: 08-05
217. Surplus Warehouse purchased a forklift on January 1, 2016, for $12,000. The forklift is expected to last for five years
and have a residual value of $1,200. Surplus Warehouse uses the double-declining-balance method for depreciation.
Required:
1. Calculate the depreciation expense, accumulated depreciation, and book value for each year of the forklift’s life.
2. Prepare the journal entry to record depreciation expense for 2016.
3. What factors may have influenced Surplus Warehouse to use the double-declining-balance method?
ANSWER:
1.
Year
Annual
Depreciation
Accumulated
Depreciation
Book
Value
2016
40%* × $12,000=
$4,800
$4,800
$7,200
2017
40% × 7,200 =
2,880
7,680
4,320
2018
40% × 4,320 =
1,728
9,408
2,592
2019
40% × 2,592 =
1,037
10,445
1,555
2020
355**
10,800
1,200
*Straight-line rate: 100%/5 years = 20%; double the straight-line rate = 40%. This 40% rate
will be applied in all years to the asset’s book value at the beginning of each year. As
depreciation is recorded, the book value declines. Thus, a constant rate is applied to a
Remaining depreciable amount
$72,000
= $72,000/4 years
= $18,000
FACC.PONO.13.08-06 – LO: 08-06
Bloom’s: Analyzing
218. Assume that Banker Company purchased a new machine on January 1, 2016, for $96,000. The machine has an
estimated useful life of nine years and a residual value of $6,000. Banker has chosen to use the straight-line method of
depreciation. On January 1, 2018, Banker discovered that the machine would not be useful beyond December 31, 2021,
and estimated its value at that time to be $4,000.
Required:
1. Calculate the depreciation expense, accumulated depreciation, and book value of the asset for each year 2016 to 2021.
2. Was the depreciation recorded in 2016 and 2017 wrong? If so, why was it not corrected?
ANSWER:
1. Depreciation, accumulated depreciation, and book value for the straight-line method
should be as follows:
Year
Depreciation
Accumulated
Depreciation
Book Value
2016
$ 10,000*
$ 10,000
$ 86,000
2017
10,000
20,000
76,000
2018
18,000**
38,000
58,000
2019
18,000
56,000
40,000
2020
18,000
74,000
22,000
2021
18,000
92,000
4,000
*($96,000 – $6,000)/9 years = $10,000
**$76,000 – $4,000 = $72,000
$72,000/4 years = $18,000
Acquisition cost, January 1, 2016
$96,000
Less: Accumulated depreciation
(2 years at $10,000 per year)
(20,000)
Book value, January 1, 2018
$76,000
Less: Residual value
(4,000)