P9-32A Recording lump-sum asset purchases, depreciation, and disposals
Learning Objectives 1, 2, 3
Sep. 1 Gain $193,250
Ellie Johnson Associates surveys American eating habits. The company’s accounts include Land,
Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated
Depreciation account for each depreciable asset. During 2018, Ellie Johnson Associates
completed the following transactions:
Jan. 1 Purchased office equipment, $113,000. Paid $80,000 cash and
financed the remainder with a note payable.
Apr. 1 Acquired land and communication equipment in a lump-sum purchase.
Total cost was $310,000 paid in cash. An independent appraisal valued
the land at $244,125 and the communication equipment at $81,375.
Sep. 1 Sold a building that cost $520,000 (accumulated depreciation of
$285,000 through December 31 of the preceding year). Ellie Johnson
Associates received $420,000 cash from the sale of the building.
Depreciation is computed on a straight-line basis. The building has a
40-year useful life and a residual value of $25,000.
Dec.
31
Recorded depreciation as follows:
Communication equipment is depreciated by the straight-line method
over a five-year life with zero residual value.
Office equipment is depreciated using the double-declining-balance
method over five years with a $1,000 residual value.
Record the transactions in the journal of Ellie Johnson Associates.
P9-32A, cont.
SOLUTION
P9-33A Accounting for natural resources
Learning Objective 4
Depl. Exp. $548,640
Conseco Oil, Inc. has an account titled Oil and Gas Properties. Conseco paid $6,600,000 for oil
reserves holding an estimated 1,000,000 barrels of oil. Assume the company paid $570,000 for
additional geological tests of the property and $450,000 to prepare for drilling. During the first
year, Conseco removed and sold 72,000 barrels of oil. Record all of Conseco’s transactions,
including depletion for the first year.
SOLUTION
P9-34A Accounting for intangibles
Learning Objective 5
1. Goodwill $230,000
Midland States Telecom provides communication services in Iowa, Nebraska, the Dakotas, and
Montana. Midland States Telecom purchased goodwill as part of the acquisition of Sheldon
Wireless Enterprises, which had the following figures:
Book value of assets $ 900,000
Market value of assets 1,400,000
Market value of
liabilities
530,000
Requirements
1. Journalize the entry to record Midland States Telecom’s purchase of Sheldon Wireless for
$440,000 cash plus a $660,000 note payable.
2. What special asset does Midland States Telecom’s acquisition of Sheldon Wireless identify?
How should Midland States Telecom account for this asset after acquiring Sheldon
Wireless? Explain in detail.
SOLUTION
Requirement 1
P9A-35A Journalizing partial-year depreciation and asset disposals and exchanges
Learning Objectives 2, 3, 7 Appendix 9A
Jan. 1 Gain $8,000
During 2018, Mora Corporation completed the following transactions:
Jan. 1 Traded in old office equipment with book value of $55,000 (cost of
$127,000 and accumulated depreciation of $72,000) for new equipment.
Mora also paid $70,000 in cash. Fair value of new equipment is $133,000.
Assume the exchange had commercial substance.
Apr. 1 Sold equipment that cost $18,000 (accumulated depreciation of $8,000
through December 31 of the preceding year). Mora received $6,100 cash
from the sale of the equipment. Depreciation is computed on a straight-line
basis. The equipment has a five-year useful life and a residual value of $0.
Dec.
31
Recorded depreciation as follows:
Office equipment is depreciated using the double-declining-balance method
over four years with a $9,000 residual value.
Record the transactions in the journal of Mora Corporation.
SOLUTION
P9A-35A. cont.
Calculations:
Jan. 1 – Exchange of office equipment
Market value of assets received $ 133,000
Less:
Book value of asset exchanged
Cost $ 127,000
Less: Accumulated depreciation (72,000) $ 55,000
Cash paid 70,000 125,000
Gain or (Loss) $ 8,000
Apr. 1 – Sale of equipment
Straight-line depreciation = (Cost − Residual value) / Useful life × (Number of Months / 12)
= ($18,000 ̶ $0) / 5 years × 3/12
= $900 per partial year (2018)
Market value of assets received $ 6,100
Less: Book value of asset disposed of
Cost $ 18,000
Less: Accumulated Depreciation ($8,000 + $900) (8,900) 9,100
Gain or (Loss) $ (3,000)
Dec. 31 – Depreciation on office equipment
Double-declining-balance depreciation = (Cost – Accumulated depreciation) × 2 × (1 / Useful life)
= ($133,000 – $0) × 2 × (1/4 years)
= $66,500
Problems (Group B)
P9-36B Determining asset cost and recording partial-year depreciation
Learning Objectives 1, 2
1. Bldg. $483,500
Safe Parking, near an airport, incurred the following costs to acquire land, make land
improvements, and construct and furnish a small building:
a. Purchase price of three acres of land $ 86,00
0
b. Delinquent real estate taxes on the land to be paid by Safe Parking 6,300
c. Additional dirt and earthmoving 8,400
d. Title insurance on the land acquisition 3,400
e. Fence around the boundary of the property 9,600
f. Building permit for the building 900
g. Architect’s fee for the design of the building 20,100
h. Signs near the front of the property 9,000
i. Materials used to construct the building 217,000
j. Labor to construct the building 172,000
k. Interest cost on construction loan for the building 9,500
l. Parking lots on the property 29,400
m. Lights for the parking lots 11,600
n. Salary of construction supervisor (80% to building; 20% to parking lot and
concrete walks) 80,000
o. Furniture 11,700
p. Transportation of furniture from seller to the building 1,900
q. Additional fencing 6,900
Safe Parking depreciates land improvements over 15 years, buildings over 40 years, and
furniture over 10 years, all on a straight-line basis with zero residual value.
Requirements
1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to
account for each cost by listing the cost under the correct account. Determine the total cost
of each asset.
2. All construction was complete and the assets were placed in service on September 1.
Record partial-year depreciation expense for the year ended December 31. Round to the
nearest dollar.
P9-36B, cont.
SOLUTION
Requirement 1
P9-36B, cont.
Requirement 2, cont.
P9-37B Determining asset cost, preparing depreciation schedules (3 methods), and identifying
depreciation results that meet management objectives
Learning Objectives 1, 2
1. Units-of-production, 12/31/18, Dep. Exp. $15,000
On January 3, 2018, Speedy Delivery Service purchased a truck at a cost of $67,000. Before
placing the truck in service, Speedy spent $3,000 painting it, $1,200 replacing tires, and $3,500
overhauling the engine. The truck should remain in service for five years and have a residual
value of $5,100. The truck’s annual mileage is expected to be 20,000 miles in each of the first
four years and 12,800 miles in the fifth year—92,800 miles in total. In deciding which
depreciation method to use, Alec Rivera, the general manager, requests a depreciation schedule
for each of the depreciation methods (straight-line, units-of-production, and
double-declining-balance).
Requirements
1. Prepare a depreciation schedule for each depreciation method, showing asset cost,
depreciation expense, accumulated depreciation, and asset book value.
2. Speedy prepares financial statements using the depreciation method that reports the highest
net income in the early years of asset use. Consider the first year that Speedy uses the truck.
Identify the depreciation method that meets the company’s objectives.
P9-37B, cont.
SOLUTION
Requirement 1
