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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-76
*Ex. 262
Railsback Company purchased a machine on January 1, 2017, 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 2017 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, 2017,
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 2017. (Show computations.)
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
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*Ex. 263
Stan's Lumber Mill sold two pieces of equipment in 2017. The following information pertains to
the two pieces of equipment:
Purchase Useful Salvage Depreciation Sales
Machine Cost Date Life Value Method Date Sold Price
#1 $86,000 7/1/13 5 yrs. $6,000 Straight-line 7/1/17 $20,000
#2 $95,000 1/1/16 5 yrs. $5,000 Double-declining- 12/31/17 $37,000
balance
Instructions
(a) Compute the depreciation on each piece of equipment to the date of disposal.
(b) Prepare the journal entries in 2017 to record 2017 depreciation and the sale of each piece of
equipment.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-78
COMPLETION STATEMENTS
264. The _______________ price is equal to the fair market value of the asset given up or the
fair value of the asset received.
265. With the exception of land, plant assets experience a ______________ in service
potential over their useful lives.
266. When vacant land is acquired, expenditures for clearing, draining, filling, and grading
should be charged to the ______________ account.
267. The cost of demolishing an old building on land that has been acquired so that a new
building can be constructed should be charged to the ______________ account.
268. The cost of paving, fencing, and lighting a new company parking lot is charged to a
______________ account.
269 Equipment with an invoice price of $20,000 was purchased and freight costs were $900.
The cost of the equipment would be $______________.
270. ______________ is the process of allocating the cost of a plant asset to expense over its
service life in a rational and systematic manner.
271. The book value of a plant asset is obtained by subtracting ______________ from the
______________ of the plant asset.
272. Three factors that affect the computation of periodic depreciation expense are (1)
_______________, (2) _______________, and (3) _________________.
273. The ________________ method of computing depreciation expense results in an equal
amount of periodic depreciation throughout the useful life of the plant asset.
274. The declining-balance method of computing depreciation is known as an _____________
depreciation method.
Reporting and Analyzing Long-Lived Assets
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275. Ordinary repairs that maintain operating efficiency and expected productive life are called
_______________.
276. Additions and improvements are costs incurred to increase the operating efficiency,
productive capacity, or expected useful life and are referred to as _________________.
277. A _____________ decline in the market value of an asset is referred to as an impairment.
278. If disposal of a plant asset occurs at any time during the year, ___________________ for
the fraction of the year to the date of disposal must be recorded.
279. If the proceeds from the sale of a plant asset exceed its ______________, a gain on
disposal will occur.
280. A plant asset originally cost $64,000 and was estimated to have a $4,000 salvage value at
the end of its 5-year useful life. If at the end of three years, the asset was sold for
$12,000, and had accumulated depreciation recorded of $36,000, the company should
recognize a ______________ on disposal in the amount of $____________.
281. The cost of a patent should be amortized over its __________________ life or its
_______________ life, whichever is shorter.
282. In recording the purchase of a business, goodwill should be recorded for the excess of
________________ over the _________________ of the net assets acquired.
283. The process of allocating to expense the cost of an asset over its useful life is called
__________________ for tangible plant assets and __________________ for intangible
assets.
284. An overall measure of profitability is the ______________________ ratio.
285. The _______________ ratio is calculated by dividing net sales by average total assets.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
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*286. The declining-balance method of computing depreciation expense involves multiplying a
_______________ book value by a _______________ percentage.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
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MATCHING
Set 1
287. Match the items below by entering the appropriate code letter in the space provided.
A. Plant assets F. Units-of-activity method
B. Depreciation G. Double-declining-balance method
C. Book value H. MACRS
D. Salvage value I. Revenue expenditures
E. Straight-line method J. Capital expenditures
____ 1. Small expenditures which primarily benefit the current period.
____ 2. Cost less accumulated depreciation.
____ 3. An accelerated depreciation method used for financial statement purposes.
____ 4. Tangible resources that are used in operations and are not intended for resale.
____ 5. Equal amount of depreciation each period.
____ 6. Expected cash value of the asset at the end of its useful life.
____ 7. Process of allocating the cost of equipment over its service life.
____ 8. Material expenditures that increase an asset's operating efficiency, productive
capacity, or useful life.
____ 9. An accelerated depreciation method used for tax purposes.
____ 10. Useful life is expressed in terms of units of production or expected use.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
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Set 2
288. Match the items below by entering the appropriate code letter in the space provided.
A. Gain on disposal F. Return on assets
B. Loss on disposal G. Goodwill
C. Trademark H. Amortization
D. Capital lease I. Intangible asset
E. Asset turnover J. Research and development costs
____ 1. Process of allocating the cost of an intangible asset to expense over its useful life.
____ 2. Is recorded if the proceeds from the sale exceed the book value of the plant asset.
____ 3. Examples are franchises and licenses.
____ 4. A long-term agreement allowing the lessee to use the lessor’s asset where the
arrangement is accounted for as a purchase.
____ 5. Can be identified only with a business as a whole.
____ 6. A symbol that identifies a particular enterprise or product.
____ 7. When book value of asset is greater than the proceeds received from its sale.
____ 8. Must be expensed when incurred.
____ 9. Computed by dividing net income by average assets.
____ 10. Indicates how efficiently a company is able to generate sales with a given amount of
assets.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 289
In general, how does one determine whether or not an expenditure should be included in the
acquisition cost of property, plant, and equipment?
S-A E 290
How is the cost for a plant asset measured in a cash transaction? In a noncash transaction?
S-A E 291
Comment on the validity of the following statements: “As an asset loses its ability to provide
S-A E 292
The declining-balance method is an accelerated method of depreciation. Briefly explain what is
meant by an accelerated method of depreciation and justify the choosing of an accelerated
method.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
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S-A E 293
Identify the factors that are considered in classifying an expenditure as a capital or a revenue
expenditure. Are there instances where it may be difficult to classify an expenditure as one or the
other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What
basis would be used in a decision?
S-A E 294
How is a gain or a loss on the sale of a plant asset computed?
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
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S-A E 295
You are comparing two companies in the same industry. You have determined that Nenn Corp.
depreciates its plant assets over a 40-year life, whereas Henderson Corp. depreciates its plant
assets over a 20-year life. Discuss the implications this has for comparing the results of the two
companies.
S-A E 296
Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a
whole. If goodwill is an intangible asset, why can't it be sold like other intangible assets such as
copyrights and patents? Briefly explain what makes goodwill different.
S-A E 297 (Ethics)
Physician Reference Service (PRS) provides services to physicians including research
assistance, diagnosis coding, and medical practice software including an advanced medical
record cross-referencing system. PRS is aggressive in monitoring other firms' offerings and
ensuring that its services are comparable to all others.
Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending
professionals to trade shows. In addition, PRS has agreements with several clients whereby the
client requests a presentation of a competitor's services. A PRS employee poses as an employee
of the client's office and attends the presentation, obtaining as much data and sample information
as possible. The cost of the travel and attending presentations is charged to Product
Development and expensed during the current year.
In April of this year, PRS began selling a software product substitute before the competitor's
software was released. The competitor, Compu-Med, sued for copyright infringement and won.
PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS
immediately negotiated an agreement with Compu-Med to sell Compu-Med's product (since it
was prohibited from offering its own version for five years). This agreement cost an additional
$1.3 million, but it allowed PRS to continue to offer a full line of services.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
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S-A E 297 (Cont.)
PRS' accountant, Kelly Hall, initially recorded the cash payments as "Loss from Lawsuit" and
"Product Development," respectively. However, Gilbert Brown, the controller, instructed Kelly to
create an intangible asset, named "Goodwill," and charge both costs to this account. "We're
protected from another lawsuit as long as this agreement is in effect," he says. "It's about as
close to goodwill as we'll ever get from our competitors. We might as well amortize the cost rather
than take the full hit to income, anyway."
Required:
1. What are the ethical issues?
2. What should Kelly do?
S-A E 298 (Communication)
The Old Fix-It is a company specializing in the restoration of old homes. To showcase its work,
the company purchased an old Victorian home in downtown Pittsburg, Kansas on January 2,
2013. The original home was purchased for $125,000. A new heating and air-conditioning system
was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000.
Custom cabinets were added, and the floors and trim were refurbished to their original condition,
at a cost of $75,000.
The project was such a success, that Old Fix-It decided on January 2, 2017, to purchase another
very large home, this time in nearby Joplin, Missouri. On January 3, 2017, a realtor offered to
purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments
for visiting dignitaries. Mark Gibson, the president of Old Fix-It, decided that the $50,000 gain
over purchase price was appropriate, and so he agreed to sell the showcase house. Only
afterward did he learn that Old Fix-It had a loss of almost $30,000 on the sale. Mark does not
believe that a loss is possible. "We sold that house for more than we paid for it," he said. "I know
we put some money in it, but we had depreciated it for four years. How in the world can we have
a loss?"
Due to the commercial aspects of the property and its expected traffic flow, the life of the
showcase house was established as 15 years. Old Fix-It utilized straight-line depreciation with no
salvage or residual value. Old Fix-It took full years’ of depreciation in 2013 through 2016 and
none in 2017 due to the sale date of January 3, 2017.
Reporting and Analyzing Long-Lived Assets
FOR INSTRUCTOR USE ONLY
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S-A E 298 (Cont.)
Required:
Write a short memo to Mr. Gibson explaining how it would be possible to have a loss. Address
cost and depreciation as general numbers rather than specific values.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
9-88
IFRS QUESTIONS
1. As a recent graduate of State University you're aware that IFRS requires component
depreciation for plant assets. A friend has asked you to succinctly explain what
component depreciation means. Which of the following correctly describes component
depreciation?
a. The method used to ensure that the depreciation rate remains constant from year to
year.
b. The method that requires that significant parts of a plant asset with different useful
lives be depreciated separately.
c. The method used to prorate annual depreciation on a time basis.
d. The method of depreciation recommended for an asset that is expected to be
significantly more productive in the first half of its useful life.
2. Salem Company hired Kirk Construction to construct an office building for ₤8,000,000 on
land costing ₤2,000,000, which Salem Company owned. The building was complete and
ready to be used on January 1, 2017 and it has a useful life of 40 years. The price of the
building included land improvements costing ₤600,000 and equipment costing ₤750,000.
The useful lives of the land improvements and the equipment are 10 years and 5 years,
respectively. Salem Company uses component depreciation, and the company uses
straight-line depreciation for other similar assets. What total amount of depreciation
expense would Salem Company report on its income statement for the year ended
December 31, 2017?
a. ₤335,000
b. ₤200,000
c. ₤426,250
d. ₤376,250
3. Salem Company hired Kirk Construction to construct an office building for ₤8,000,000 on
land costing ₤2,000,000, which Salem Company owned. The building was complete and
ready to be used on January 1, 2017 and it has a useful life of 40 years. The price of the
building included land improvements costing ₤600,000 and equipment costing ₤750,000.
The useful lives of the land improvements and the equipment are 10 years and 5 years,
respectively. Salem Company uses component depreciation, and the company uses
straight-line depreciation for other similar assets. What is the net amount reported for the
building on Salem Company's December 31, 2017 statement of financial position?
a. ₤7,665,000
b. ₤7,573,750
c. ₤6,483,750
d. ₤7,800,000
Reporting and Analyzing Long-Lived Assets
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4. Nicholson Company purchased equipment on January 1, 2015, for €28,000 with an
estimated residual value of €7,000 and estimated useful life of 8 years. On January 1,
2017, Nicholson decided the equipment will last 12 years from the date of purchase. The
residual value is still estimated at €7,000. Using the straight-line method the new annual
depreciation will be:
a. €1,575.
b. €1,750.
c. €2,100.
d. €2,333.
5. An asset was purchased for ¥200,000. It had an estimated residual value of ¥40,000 and
an estimated useful life of 10 years. After 5 years of use, the estimated residual value is
revised to ¥32,000 but the estimated useful life is unchanged. Assuming straight-line
depreciation, depreciation expense in year 6 would be
a. ¥24,000.
b. ¥17,600.
c. ¥12,000.
d. ¥16,800.
6. Under U.S. GAAP
a. property, plant, and equipment may not be revalued.
b. component depreciation is not required.
c. research and development costs are expensed as incurred.
d. All of these answer choices are correct.
7. Which of the following statements concerning IFRS and U.S. GAAP is correct?
a. IFRS permits revaluation of all intangible assets, whereas U.S. GAAP prohibits
revaluation of intangible assets.
b. Gains on exchange of assets when the exchange has commercial substance are
recognized under both IFRS and U.S. GAAP.
c. Changes in depreciation method under IFRS are reported in current and future
periods, under U.S. GAAP such changes are treated as prior period adjustments.
d. All of these answer choices are correct.
