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SOLUTION
Date
Accounts and Explanation
Debit
Credit
Jan. 1
Office Equipment
112,000
Cash
74,000
Note Payable
38,000
To record purchase of office equipment.
Cash
380,000
Accumulated Depreciation—Building
248,000
Building
540,000
Gain on Disposal
88,000
To record sale of building.
Calculations:
Apr. 1 – Acquisition of land and communication equipment:
Asset
Market
Value
Percentage of Total Value
× Total
Purchase
Price
= Assigned
Cost of
Each Asset
P9-32A, cont.
Sep. 1 – Sale of building
Straight-line depreciation
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
=
($540,000 ̶ $60,000) / 40 years × 8/12
=
$8,000 per partial year (2016)
P9-33A Accounting for natural resources
Learning Objective 4
Dep. Exp. $1,186,250
Chapman Oil, Inc. has an account titled Oil and Gas Properties. Chapman paid $6,300,000 for oil
reserves holding an estimated 400,000 barrels of oil. Assume the company paid $560,000 for additional
geological tests of the property and $440,000 to prepare for drilling. During the first year, Chapman
removed and sold 65,000 barrels of oil. Record all of Chapman’s transactions, including depletion for
the first year.
SOLUTION
Purchase price of oil reserves
$ 6,300,000
Add related costs:
Date
Accounts and Explanation
Debit
Credit
Oil and Gas Properties
6,300,000
Cash
6,300,000
To record purchase of oil reserves.
P9-34A Accounting for intangibles
Learning Objective 5
1. Goodwill $650,000
Middle Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana.
Middle purchased goodwill as part of the acquisition of Shipley Wireless Enterprises, which had the
following figures:
Requirements
1. Journalize the entry to record Middle’s purchase of Shipley Wireless for $400,000 cash plus a
$600,000 note payable.
2. What special asset does Middle’s acquisition of Shipley Wireless identify? How should Middle
Telecom account for this asset after acquiring Shipley Wireless? Explain in detail.
SOLUTION
Requirement 1
Purchase price to acquire Shipley Wireless ($400,000 + $600,000)
$1,000,000
Date
Accounts and Explanation
Debit
Credit
Assets
900,000
Goodwill
650,000
Requirement 2
P9A-35A Journalizing partial-year depreciation and asset disposals and exchanges
Learning Objectives 2, 3, 7
Appendix 9A
Jan. 1 Gain $7,000
During 2016, Zora Corporation completed the following transactions:
Record the transactions in the journal of Zora Corporation.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Jan. 1
Office Equipment (new)
142,000
Accumulated Depreciation—Office Equipment
69,000
Office Equipment (old)
129,000
Cash
75,000
Gain on Disposal
7,000
To record exchange of office equipment.
Calculations:
Jan. 1 – Exchange of office equipment
Market value of assets received
$ 142,000
Less:
P9-35A, cont.
Apr. 1 – Sale of equipment
Straight-line depreciation
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
=
($48,000 ̶ $0) / 5 years × 3/12
=
$2,400 per partial year (2016)
Problems (Group B)
P9-36B Determining asset cost and recording partial-year depreciation
Learning Objectives 1, 2
1. Bldg. $471,000
Park and Go, near an airport, incurred the following costs to acquire land, make land improvements, and
construct and furnish a small building:
Park and Go depreciates land improvements over 20 years, buildings over 50 years, and furniture over
eight 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 July 1. Record partial-year
depreciation expense for the year ended December 31.
SOLUTION
Requirement 1
Land
Land
Improvements
Building
Furniture
Purchase price
$ 88,000
Requirement 2
Straight-line
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
P9-36B, cont.
Requirement 2, cont.
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Depreciation Expense—Land Improvements
1,848
Accumulated Depreciation—Land Improvements
1,848
To record depreciation on land improvements.
P9-37B Determining asset cost, recording first-year depreciation, and identifying depreciation
results that meet management objectives
Learning Objectives 1, 2
1. Units-of-production, 12/31/16, Dep. Exp. $18,900
On January 3, 2016, Quick Delivery Service purchased a truck at a cost of $90,000. Before placing the
truck in service, Quick spent $2,500 painting it, $1,800 replacing tires, and $4,700 overhauling the
engine. The truck should remain in service for five years and have a residual value of $9,000. The
truck’s annual mileage is expected to be 21,000 miles in each of the first four years and 16,000 miles in
the fifth year—100,000 miles in total. In deciding which depreciation method to use, Harvey Warner,
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. Quick 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 Quick uses the truck. Identify the
depreciation method that meets the company’s objectives.
SOLUTION
Requirement 1
Purchase price of truck
$ 90,000
Straight-Line Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Depreciable
Cost
Depreciation
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/03/16
$ 99,000
$ 99,000
P9-37B, cont.
Requirement 1, cont.
Depreciation per unit
=
(Cost – Residual value) / Useful life in units
=
($99,000 ̶ $9,000) / 100,000 miles
=
$0.90 per mile
Units-of-Production Depreciation Schedule
Depreciation for the Year
Asset
Depreciation
Number
Depreciation
Accumulated
Book
Double-Declining-Balance Depreciation Schedule
Depreciation for the Year
Date
Asset
Cost
Book
Value
DDB
Rate
Depreciation
Expense
Accumulated
Depreciation
Book
Value
1/03/16
$ 99,000
$ 99,000
Requirement 2
The depreciation method that reports the highest net income in the first year is the straight-line method.
It produces the lowest depreciation expense ($18,000) and therefore the highest net income.
P9-38B Recording lump-sum asset purchases, depreciation, and disposals
Learning Objectives 1, 2, 3
Sep. 1 Gain $68,000
Granny Carney 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 asset. During 2016, Granny Carney completed the following transactions:
Record the transactions in the journal of Granny Carney Associates.
