Reporting and Analyzing Long-Lived Assets
9-61
Ex. 243 (Cont.)
Instructions
Journalize all entries required as a result of the above transactions. Tinker Company uses the
straight-line method of depreciation and has recorded depreciation through December 31, 2014.
Ex. 244
Vineyard Company sold the following two pieces of equipment in 2014:
Equipment A Equipment B
Cost $116,000 $63,000
Purchase date 7/1/10 1/1/11
Useful life 8 years 5 years
Salvage value $4,000 $3,000
Depreciation method Straight-line Straight-line
Date sold 7/1/14 9/1/14
Sales price $49,000 $20,000
Instructions
Journalize all entries required to update depreciation and record the sales of the two assets in
2014. The company has recorded depreciation on the equipment through December 31, 2013.
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Ex. 245
Phill Co. has equipment that cost $50,000 and has been depreciated $30,000.
Instructions
Record entries for the disposal under the following assumptions.
(a) It was scrapped as having no value.
(b) It was sold for $23,000.
(c) It was sold for $18,000.
Reporting and Analyzing Long-Lived Assets
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Ex. 246
Here are selected 2014 transactions of Howe Corporation.
Jan. 1 Retired a piece of equipment that was purchased on January 1, 2004. The equipment
cost $55,000 and had a useful life of 10 years with no salvage value.
June 30 Sold equipment that was purchased on January 1, 2012. The equipment cost
$78,000 and had a useful life of 3 years with no salvage value. The equipment was
sold for $9,000 cash.
Dec. 31 Sold equipment for $12,500 cash. The equipment cost $43,000 when it was
purchased on January 1, 2011, and was depreciated based on a 5-year useful life
with a $3,000 salvage value.
Instructions
Journalize all entries required on the above dates, including entries to update depreciation on
assets disposed of, where applicable. Howe Corporation uses straight-line depreciation.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
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Ex. 247
Forcum Company reports the following information (in millions) during a recent year: net sales,
$12,408.5; net earnings, $344.9; total assets, ending, $4,312.6; and total assets, beginning,
$4,254.3.
Instructions
(a) Calculate the (1) return on assets, (2) asset turnover, and (3) profit margin ratios.
(b) Prove mathematically how the profit margin and asset turnover ratios work together to
explain return on assets, by showing the appropriate calculations.
Ex. 248
The following information is available from the annual reports of Reser Company and Trent
Company
(Amounts in millions)
Reser Trent
Net Income $ 965 $ 1,271
Sales 22,653 33,812
Total Assets (average) 21,188 36,167
Instructions
(a) Based on the preceding information, compute the following values for each company:
1. Asset turnover ratio
2. Return on assets
Reporting and Analyzing Long-Lived Assets
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Ex. 248 (Cont.)
(b) What conclusion concerning the management of plant assets can be drawn from these data?
Ex. 249
(a) A company purchased a patent on January 1, 2014, for $2,500,000. The patent’s legal life is
20 years but the company estimates that the patent’s useful life will only be 5 years from the
date of acquisition. On June 30, 2014, the company paid legal costs of $162,000 in
successfully defending the patent in an infringement suit. Prepare the journal entry to
amortize the patent at year end on December 31, 2014.
(b) Milner Company purchased a franchise from the Tasty Food Company for $450,000 on
January 1, 2014. The franchise is for an indefinite time period and gives Milner Company
the exclusive rights to sell Tasty Wings in a particular territory. Prepare the journal entry to
record the acquisition of the franchise and any necessary adjusting entry at year end on
December 31, 2014.
(c) Huerter Company incurred research and development costs of $500,000 in 2014 in
developing a new product. Prepare the necessary journal entries during 2014 to record
these events and any adjustments at year end on December 31, 2014.
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Ex. 250
a. A patent that was acquired for $800,000 at the beginning of the current year expires in 20
years and is expected to have value for 5 years. Present the adjusting entry to amortize the
patent for the current year.
b. Research and development costs of $300,000 were incurred during the current fiscal year.
Determine the minimum amount to be expensed for the current fiscal year.
Ex. 251
For each of the following unrelated transactions, (a) determine the amount of the amortization for
the current year, and (b) present the adjusting entries required to record amortization at year end.
(1) Costs (it was not acquired) of $39,000 were incurred on January 1 to obtain a patent. On
January 31, $38,610 was spent in legal costs to successfully defend the patent against
competitors. The patent has an estimated legal life of 12 years.
(2) A company acquired a copyright for $160,000. The copyright has a useful life of 50 years.
Reporting and Analyzing Long-Lived Assets
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Solution 251 (Cont.)
Ex. 252
During the current year Knight Company incurred several expenditures. Briefly explain whether
the expenditures listed below should be recorded as an operating expense or as an intangible
asset. If you view the expenditure as an intangible asset, indicate the number of years over which
the asset should be amortized. Explain your answer.
(a) Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully
defended.
(b) Purchased a trademark from another company. The trademark can be renewed indefinitely.
Knight Company expected the trademark to contribute to revenue indefinitely.
(c) Knight Company acquires a patent for $2,000,000. The company selling the patent has
spent $1,000,000 on the research and development of it. The patent has a remaining life of
15 years.
(d) Knight Company is spending considerable time and money in developing a different patent
for another product. So far $3,000,000 has been spent this year on research and
development. Knight Company is very confident they will obtain this patent in the next few
years.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
None, IMA: Reporting
Solution 252 (10 min.)
Ex. 253
Nelson Company, organized in 2014, has these transactions related to intangible assets in that
year:
Jan. 2 Purchased a patent (5-year life) $325,000.
Apr. 1 Goodwill purchased (indefinite life) $360,000.
July 1 Acquired a 9-year franchise; expiration date July 1, 2023, $720,000.
Sept. 1 Research and development costs $185,000.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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9-68
Ex. 253 (Cont.)
Instructions
(a) Prepare the necessary entries to record these intangibles. All costs incurred were for cash.
(b) Make the entries as of December 31, 2014, recording any necessary amortization.
(c) Indicate what the balance should be on December 31, 2014.
Ans: N/A, LO: 7, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Solution 253 (12 min.)
Ex. 254
Presented below is information related to plant assets and intangible assets at year end on
December 31, 2014, for Looper Company:
Buildings $1,180,000
Goodwill 370,000
Patents 480,000
Land 390,000
Accumulated Depreciation 650,000
Instructions
Prepare a partial balance sheet for Looper Company that shows how the above listed items
would be presented.
Ans: N/A, LO: 8, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Reporting and Analyzing Long-Lived Assets
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Solution 254 (10 min.)
Ex. 255
Jensen Company purchased a new machine on October 1, 2014, at a cost of $104,000. The
company estimated that the machine has a salvage value of $8,000. The machine is expected to
be used for 80,000 working hours during its 8-year life.
Instructions
Compute depreciation using the following methods in the year indicated.
(a) Straight-line for 2014 and 2015, assuming a December 31 year–end.
(b) Declining-balance using double the straight-line rate for 2014 and 2015.
(c) Units-of-activity for 2014, assuming machine usage was 2,900 hours. (Round depreciation
per unit to the nearest cent.)
Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Solution 255 (12 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
9-70
*Ex. 256
Nichols Company purchased a new machine for $250,000. It is estimated that the machine will
have a $25,000 salvage value at the end of its 5-year useful service life. The double-declining-
balance method of depreciation will be used.
Instructions
Prepare a depreciation schedule that shows the annual depreciation expense on the machine for
its 5-year life.
Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 256 (10 min.)
*Ex. 257
Redeker Company purchased equipment on January 1, 2013, for $90,000. It is estimated that the
equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated
that the equipment will produce 100,000 units over its 5-year life.
Instructions
Answer the following independent questions.
1. Compute the amount of depreciation expense for the year ended December 31, 2013, using
the straight-line method of depreciation.
2. If 16,000 units of product are produced in 2013 and 24,000 units are produced in 2014, what
is the book value of the equipment at December 31, 2014? The company uses the units–of–
activity depreciation method.
3. If the company uses the double-declining-balance method of depreciation, what is the
balance of the Accumulated Depreciation—Equipment account at December 31, 2015?
Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 257 (15 min.)
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
9-71
*Solution 257 (Cont.)
*Ex. 258
A plant asset acquired on October 1, 2014, at a cost of $800,000 has an estimated useful life of
10 years. The salvage value is estimated to be $50,000 at the end of the asset’s useful life.
Instructions
Determine the depreciation expense for the first two years using the:
(a) straight-line method.
(b) double-declining-balance method.
Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 258 (10 min.)
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*Ex. 259
Tony’s, a popular pizza hang–out, has a thriving delivery business. Tony’s has a fleet of three
delivery automobiles. Prior to making the entry for this year’s depreciation expense, the
subsidiary ledger for the fleet is as follows:
Accumulated
Estimated Depr.—Beg. Miles Operated
Car Cost Salvage Value Life in Miles of the Year During Year
1 $35,000 $5,000 75,000 $2,100 20,000
2 25,000 4,000 60,000 1,890 22,000
3 23,500 2,500 70,000 2,000 19,000
Instructions
(a) Determine the depreciation rates per mile for each car.
(b) Determine the Depreciation Expense for each car for the current year.
(c) Make one compound journal entry to record the annual Depreciation Expense for the fleet.
Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 259 (10 min.)
*Ex. 260
The Rowland Clinic purchased a new surgical laser for $84,000. The estimated salvage value is
$4,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It
was used 1,600 hours in year 1; 2,100 hours in year 2; 2,400 hours in year 3; 1,900 hours in year
4; 2,000 hours in year 5.
Instructions
(a) Compute the annual depreciation for each of the five years under each of the following
methods:
(1) straight-line.
(2) units–of-activity.
Reporting and Analyzing Long-Lived Assets
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*Ex. 260 (Cont.)
(b) If you were the administrator of the clinic, which method would you deem as most
appropriate? Justify your answer.
(c) Which method would result in the lower reported income in the first year? Which method
would result in the lower total reported income over the five-year period?
Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 260 (10 min.)
*Ex. 261
Mideast Airlines purchased a 777 aircraft on January 1, 2012 at a cost of $40,000,000. The
estimated useful life of the aircraft is 20 years, with an estimated salvage value of $6,000,000.
Instructions
Compute the accumulated depreciation and book value at December 31, 2014 using the straight–
line method and the double-declining-balance method.
Ans: N/A, LO: 3,9, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
9-74
*Solution 261 (20 min.)
*Ex. 262
Railsback Company purchased a machine on January 1, 2014, at a cost of $72,000. The
machine is expected to have an estimated salvage value of $4,000 at the end of its 5-year life.
The company capitalized the machine and depreciated it in 2014 using the double-declining-
balance method of depreciation. The company has a policy of using the straight-line method to
depreciate equipment but the company accountant neglected to follow company policy when he
used the double-declining-balance method. Net income for the year ended December 31, 2014,
was $45,000 before taxes as the result of depreciating the machine incorrectly.
Instructions
Using the method of depreciation that the company normally follows, prepare the correcting entry
and determine the corrected net income for 2014. (Show computations.)
Ans: N/A, LO: 3,9, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
*Solution 262 (10 min.)