Chapter 7
Long-Term Assets
EXERCISES
Exercise 7-1
Purchase price of land (and building to be removed)
$400,000
Title insurance
3,000
Back property taxes
4,000
Cost of removing the building
Less: Salvaged materials
Level the land
Exercise 7-2
Purchase price
$45,000
Sales tax
3,000
Shipping
Installation
Debit
Credit
Equipment
49,700
Exercise 7-3
Estimated
Fair Value
Allocation
Percentage
Amount of
Basket Purchase
Recorded
Amount
Land
$ 150,000
$150,000/$1,000,000 = 15%
X $900,000
$135,000
Exercise 7-4 (LO 7-1, 7-4)
1. Land is not depreciated. However, depreciation on the building is tax-
2. If the true allocation should have been 40% to land and 60% to building, then
the allocation of 20% to land and 80% to building, for the express purpose of
Exercise 7-5
Debit
Credit
Legal Fees Expense
7,000
Patents
Salaries Expense
Exercise 7-6
(amounts in millions)
Purchase price
$30
Less:
(16)
Goodwill
Exercise 7-7
1. Patent costs capitalized
Legal fees for patent application
$ 50,000
Legal fees for successful defense
Total costs capitalized
2. Expense items on income statement
Basic research to develop the technology
$2,000,000
Engineering design work
Development of prototype device
Testing and modification of the prototype
Exercise 7-8
List A
List B
____f___ 1. Intangible assets
a. Oil and gas deposits, timber
tracts, and mineral deposits.
____e___ 2. Amortization
b. Purchase price less fair market
value of net identifiable assets.
____g___ 3. Depreciation
c. Exclusive right to display a
____b___ 4. Goodwill
d. Exclusive right to benefit from
a creative work.
____a___ 5. Natural resources
intangible assets
contractual rights.
____d___ 7. Copyright
g. The allocation of cost for plant
and equipment.
Exercise 7-9
1.
Equipment
$40,000
3.
Repairs and Maintenance Expense
4.
Prepaid Insurance
5.
Equipment
6.
Land Improvements
$90,000
Chapter 07 – Long-Term Assets
Exercise 7-10
1. Straight-line
2. Double-declining-balance
3. Activity-based
Exercise 7-11
Requirement 1
Straight-line
Requirement 2
Double-declining Balance
Calculation
End of Year Amounts
Year
Beginning
Book Value
X
Depreciation
Rate*
=
Depreciation
Expense
Accumulated
Depreciation
Book
Value**
1
40,000
0.40
16,000
16,000
24,000
2
24,000
0.40
14,400
3
14,400
0.40
30,000
10,000
4
10,000
Total
Requirement 3
Activity Based
Calculation
End of Year Amounts
Year
Miles
Used
X
Depreciation
Rate*
=
Depreciation
Expense
Accumulated
Depreciation
Book
Value**
1
23,000
$0.30
6,900
6,900
33,100
2
17,000
$0.30
5,100
28,000
3
19,000
$0.30
5,700
22,300
4
22,000
$0.30
6,600
15,700
Total
30,000
Exercise 7-12
Year
2018
($12,000 – $2,000)
=
$2,500 x 3/12
=
2019
($12,000 – $2,000)
Exercise 7-13
Year
2018
($22,000 – $2,000)
=
$4,000 x 4/12
=
$1,333
5 years
2019
Exercise 7-14
Cost of the equipment
$20,000
Less: Accumulated Depreciation (Years 1 and 2)
(8,000)*
Book value, end of year 2
12,000
Less: New residual value
New depreciable cost
11,000
Depreciation in years 3 to 6
$2,750
Exercise 7-15
($22,000 – $2,000)
=
.20/mile
100,000
Year
2018
x
$1,200
2019
x
$4,400
Exercise 7-16
Requirement 1
January 1, 2018
Debit
Credit
Patents
180,000
Cash
180,000
December 31, 2018
Amortization Expense
45,000
Patents
Amortization Expense
45,000
Patents
January, 2020
Patents
Cash
December 31, 2020
Amortization Expense*
55,000
Patents
Requirement 2
Balance in patent account
Patents
180,000
45,000
55,000
Exercise 7-17
Requirement 1
The entry to record the sale is as follows:
Debit
Credit
Cash
15,000
Accumulated Depreciation
15,000*
Equipment
Requirement 2
The entry to record the sale is as follows:
Debit
Credit
Cash
11,000
Accumulated Depreciation
15,000
Loss
Equipment
Exercise 7-18
Requirement 1
Find the fair value of the new land
Fair value of the old land
$100,000
Cash paid to complete the purchase
Fair value of the new land
$115,000
Requirement 2
Journal entry to record exchange
Debit
Credit
Land, new
115,000
Cash
Gain
Exercise 7-19
Net
Income
÷
Average
Total Assets
=
Return
on Assets
$68,477
÷
($545,588 + $675,378)/2
=
11.2%
÷
=
Exercise 7-20
Requirement 1
Step 1: Test for Impairment
The long-term asset is impaired since future cash flows ($3.0 million) are less than
book value ($3.5 million).
Requirement 2
Step 1: Test for Impairment
The long-term asset is not impaired since future cash flows ($4.0 million) exceed book
Chapter 8
Current Liabilities
EXERCISES
Exercise 8-1
Reporting Method
C. Current liability
Item
__C__ 1. Accounts payable.
__C__ 2. Customer advances.
__C__ 3. Commercial paper.
__D__ 4. Unused line of credit.
__C__ 7. Notes payable due next year.
__C__ 8. Current portion of long-term debt.
Exercise 8-2
1. December 1, 2018
Debit
Credit
Cash
60,000
Notes Payable
60,000
2. December 31, 2018
Interest Expense ($60,000 x 10% x 1/12)
500
3. February 28, 2019
Notes Payable
60,000
Interest Expense ($60,000 x 10% x 2/12)
1,000
Interest Payable ($60,000 x 10% x 1/12)
Cash
Exercise 8-3
1. September 1, 2018
Debit
Credit
10,000,000
2. December 31, 2018
3. February 28, 2019
Notes Payable
10,000,000
Interest Expense ($10 million x 6% x 2/12)
Interest Payable ($10 million x 6% x 4/12)
Exercise 8-4
1. September 1, 2018
Debit
Credit
10,000,000
2. December 31, 2018
3. February 28, 2019
Cash
10,300,000
Exercise 8-5
1.
Exercise 8-6
January 13
No Journal Entry
February 1
Cash
2,000,000
Notes Payable
Notes Payable
2,000,000
Cash
Exercise 8-7
Requirement 1
Total Salary Expense
(10 x 40 hours x $20)
$8,000
Less: Withholdings
Federal Income Taxes
(8,000 x .15)
State Income Taxes
(8,000 x .06)
FICA Taxes
(8,000 x .0765)
Total Withholdings
Actual Direct Deposit
$5,708
Requirement 2
FICA Taxes
(8,000 x .0765)
$612
Unemployment Taxes
(8,000 x .062)
$1,108
Requirement 3
The company does not make an accounting entry to record the free skiing given to
Exercise 8-8
Requirement 1
January 31
Salaries Expense
1,000,000
Income Tax Payable
210,000
FICA Tax Payable
76,500
703,500
Requirement 2
January 31
Salaries Expense (fringe benefits)
30,000
Requirement 3
January 31
Payroll Tax Expense (total)
138,500
FICA Tax Payable
Unemployment Tax Payable
Exercise 8-9
January 31
Salaries Expense
250,000
January 31
Payroll Tax Expense (total)
34,625