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S9-8 Discarding an asset
Learning Objective 3
On October 31, 2018, Alternative Landscapes discarded equipment that had a cost of
$26,920. Accumulated Depreciation as of December 31, 2017, was $25,000. Assume annual
depreciation on the equipment is $1,920. Journalize the partial-year depreciation expense
and disposal of the equipment.
SOLUTION
S9-9 Selling an asset at gain or loss
Learning Objective 3
Alpha Communication purchased equipment on January 1, 2018, for $27,500. Suppose Alpha
Communication sold the equipment for $20,000 on December 31, 2020. Accumulated
Depreciation as of December 31, 2020, was $10,000. Journalize the sale of the equipment,
assuming straight-line depreciation was used.
SOLUTION
S9-10 Selling an asset at gain or loss
Learning Objective 3
Peter Company purchased equipment on January 1, 2018, for $28,000. Suppose Peter Company
sold the equipment for $4,000 on December 31, 2019. Accumulated Depreciation as of
December 31, 2019, was $11,000. Journalize the sale of the equipment, assuming straight-line
depreciation was used.
SOLUTION
Equipment 28,000
Sold equipment for cash.
S9-11 Accounting for depletion of natural resources
Learning Objective 4
Ajax Petroleum holds huge reserves of oil assets. Assume that at the end of 2018, Ajax
Petroleum’s cost of oil reserves totaled $27,000,000, representing 3,000,000 barrels of oil.
Requirements
1. Which method does Ajax Petroleum use to compute depletion?
2. Suppose Ajax Petroleum removed and sold 500,000 barrels of oil during 2019. Journalize
depletion expense for 2019.
SOLUTION
Requirement 1
S9-12 Accounting for an intangible asset
Learning Objective 5
On October 1, 2018, Modern Company purchased a patent for $153,600 cash. Although the
patent gives legal protection for 20 years, the patent is expected to be used for only eight years.
Requirements
1. Journalize the purchase of the patent.
2. Journalize the amortization expense for the year ended December 31, 2018. Assume
straight-line amortization.
SOLUTION
Requirement 1
S9-13 Accounting for goodwill
Learning Objective 5
Decca Publishing paid $230,000 to acquire Thrifty Nickel, a weekly advertising paper. At the
time of the acquisition, Thrifty Nickel’s balance sheet reported total assets of $130,000 and
liabilities of $70,000. The fair market value of Thrifty Nickel’s assets was $100,000. The fair
market value of Thrifty Nickel’s liabilities was $70,000.
Requirements
1. How much goodwill did Decca Publishing purchase as part of the acquisition of Thrifty
Nickel?
2. Journalize Decca Publishing’s acquisition of Thrifty Nickel.
SOLUTION
Requirement 1
S9-14 Computing the asset turnover ratio
Learning Objective 6
Biagas, Inc. had net sales of $55,600,000 for the year ended May 31, 2018. Its beginning and
ending total assets were $52,800,000 and $98,500,000, respectively. Determine Biagas’s asset
turnover ratio for year ended May 31, 2018.
SOLUTION:
S9A-15 Exchanging plant assets
Learning Objective 7 Appendix 9A
Micron Precision, Inc. purchased a computer for $2,500, debiting Computer Equipment. During
2016 and 2017, Micron Precision, Inc. recorded total depreciation of $1,600 on the computer. On
January 1, 2018, Micron Precision, Inc. traded in the computer for a new one, paying $2,100
cash. The fair market value of the new computer is $3,900. Journalize Micron Precision, Inc.’s
exchange of computers. Assume the exchange had commercial substance.
SOLUTION
S9A-16 Exchanging plant assets
Learning Objective 7 Appendix 9A
White Corporation purchased equipment for $22,000. White recorded total depreciation of
$19,000 on the equipment. On January 1, 2018, White traded in the equipment for new
equipment, paying $23,200 cash. The fair market value of the new equipment is $25,100.
Journalize White Corporation’s exchange of equipment. Assume the exchange had commercial
substance.
SOLUTION
Exercises
E9-17 Determining the cost of assets
Learning Objective 1
1. Land $333,000
Lawson Furniture purchased land, paying $65,000 cash and signing a $250,000 note payable. In
addition, Lawson paid delinquent property tax of $5,000, title insurance costing $4,000, and
$9,000 to level the land and remove an unwanted building. The company then constructed an
office building at a cost of $400,000. It also paid $54,000 for a fence around the property,
$12,000 for a sign near the entrance, and $8,000 for special lighting of the grounds.
Requirements
1. Determine the cost of the land, land improvements, and building.
2. Which of these assets will Lawson depreciate?
SOLUTION
Requirement 1
E9-18 Making a lump-sum purchase of assets
Learning Objective 1
Lot 3 $177,500
Maplewood Properties bought three lots in a subdivision for a lump-sum price. An independent
appraiser valued the lots as follows:
Lot Appraised Value
1 $ 144,000
2 96,000
3 240,000
Maplewood paid $355,000 in cash. Record the purchase in the journal, identifying each lot’s cost
in a separate Land account. Round decimals to two places, and use the computed percentages
throughout.
SOLUTION
E9-19 Distinguishing capital expenditures from revenue expenditures
Learning Objective 1
Consider the following expenditures:
a. Purchase price.
b. Ordinary recurring repairs to keep the machinery in good
working order.
c. Lubrication before machinery is placed in service.
d. Periodic lubrication after machinery is placed in service.
e. Major overhaul to extend useful life by three years.
f. Sales tax paid on the purchase price.
g. Transportation and insurance while machinery is in transit from
seller to buyer.
h. Installation.
i. Training of personnel for initial operation of the machinery.
Classify each of the expenditures as a capital expenditure or a revenue expenditure related to
machinery.
SOLUTION
