SOLUTION
Date
Accounts and Explanation
Debit
Credit
Jan. 1
Office Equipment
112,000
Cash
78,000
Note Payable
34,000
To record purchase of office equipment.
Land
307,500
Communication Equipment
102,500
Cash
410,000
To record purchase of land and comm. equipment.
Depreciation Expense—Building
Accumulated Depreciation—Building
To record depreciation on building.
Cash
360,000
Accumulated Depreciation—Building
248,000
Building
540,000
Gain on Disposal
68,000
To record sale of building.
Depreciation Expense—Communication Equipment
Accumulated Depreciation—Comm. Equipment
15,375
To record depreciation on communication equipment.
Depreciation Expense—Office Equipment
Accumulated Depreciation—Office Equipment
44,800
To record depreciation on office equipment.
Calculations:
Apr. 1 – Acquisition of land and communication equipment:
Asset
Market
Value
Percentage of Total Value
= Assigned
Cost of
Each Asset
P9-38B, 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)
Market value of assets received
Less: Book value of asset disposed of
Cost
$ 540,000
Less: Accumulated Depreciation ($240,000 + $8,000)
Gain or (Loss)
$ 68,000
Straight-line depreciation
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
=
=
$15,375 per partial year (2016)
Double-declining-balance depreciation
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
$44,800 in 2016
P9-39B Accounting for natural resources
Learning Objective 4
Dep. Exp. $2,261,000
Gandy Oil Incorporated has an account titled Oil and Gas Properties. Gandy paid $6,100,000 for oil
reserves holding an estimated 300,000 barrels of oil. Assume the company paid $560,000 for additional
geological tests of the property and $480,000 to prepare for drilling. During the first year, Gandy
removed and sold 95,000 barrels of oil. Record all of Gandy’s transactions, including depletion for the
first year.
SOLUTION
Purchase price of oil reserves
$ 6,100,000
Add related costs:
Geological tests
Drilling preparation
Total cost of oil reserves
$ 7,140,000
Depletion per unit
(Cost – Residual value) / Estimated total units
$23.80 per barrel
Depletion expense
Depletion per unit × Number of units extracted
$23.80 per barrel × 95,000 barrels
$2,261,000
Date
Accounts and Explanation
Debit
Credit
Oil and Gas Properties
6,100,000
Cash
6,100,000
To record purchase of oil reserves.
Oil and Gas Properties
1,040,000
Cash
1,040,000
of oil reserves.
Depletion Expense—Oil and Gas Properties
2,261,000
Accumulated Depletion—Oil and Gas Properties
2,261,000
To record depletion.
P9-40B Accounting for intangibles
Learning Objective 5
1. Goodwill $460,000
Central States Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana.
Central States purchased goodwill as part of the acquisition of Shurburn Wireless Company, which had
the following figures:
Requirements
1. Journalize the entry to record Central States’s purchase of Shurburn Wireless for $360,000 cash plus
a $540,000 note payable.
2. What special asset does Central States’s acquisition of Shurburn Wireless identify? How should
Central States Telecom account for this asset after acquiring Shurburn Wireless? Explain in detail.
SOLUTION
Requirement 1
Purchase price to acquire Shurburn Wireless ($360,000 + $540,000)
$ 900,000
Goodwill
Requirement 2
The acquisition identifies the asset goodwill.
P9A-41B Journalizing partial-year depreciation and asset disposals and exchanges
Learning Objectives 2, 3, 7
Appendix 9A
Jan. 1 Gain $8,000
During 2016, Dora Company completed the following transactions:
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Jan. 1
Office Equipment (new)
163,000
Accumulated Depreciation—Office Equipment
69,000
Office Equipment (old)
124,000
Cash
100,000
Gain on Disposal
8,000
To record exchange of office equipment.
Depreciation Expense—Equipment
2,700
1
Cash
Accumulated Depreciation—Equipment
44,700
Loss on Disposal
Equipment
To record sale of equipment.
Dec. 31
Depreciation Expense—Office Equipment
81,500
Accumulated Depreciation—Office Equipment
To record depreciation on office equipment.
Calculations:
Jan. 1 – Exchange of office equipment
Market value of assets received
$ 163,000
Less:
Book value of asset exchanged
Cost
$ 124,000
Less: Accumulated depreciation
(69,000)
$ 55,000
Cash paid
100,000
155,000
Gain or (Loss)
$ 8,000
P9-41B, cont.
Apr. 1 – Sale of equipment
Straight-line depreciation
=
(Cost − Residual value) / Useful life × (Number of Months / 12)
=
($54,000 ̶ $0) / 5 years × 3/12
=
$2,700 per partial year (2016)
Market value of assets received
Less: Book value of asset disposed of
Cost
$ 54,000
Less: Accumulated Depreciation ($42,000 + $2,700)
Gain or (Loss)
Double-declining-balance depreciation
=
(Cost – Accumulated depreciation) × 2 × (1 / Useful life)
=
($163,000 – $0) × 2 × (1/4 years)
=
$81,500
Continuing Problem
P9-42 Calculating and journalizing partial-year depreciation
This problem continues the Daniels Consulting situation from Problem P8-41 of Chapter 8. Assume
Daniels Consulting had purchased a computer, $3,600, and office furniture, $3,000, on December 3 and
4, 2016, respectively, and that they were expected to last five years. Assume that both assets have a
residual value of $0.
Requirements
1. Calculate the amount of depreciation expense for each asset for the year ended December 31, 2016,
assuming the computer is depreciated using the straight-line method and the office furniture is
depreciated using the double-declining-balance method.
2. Record the entry for the one month’s depreciation.
SOLUTION
Requirement 1
Depreciation on computer
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Depreciation Expense—Computer
60
Depreciation Expense—Office Furniture
Critical Thinking
Ethical Issue 9-1
Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the
maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to
the land. A more realistic allocation would have been 70% to the building and 30% to the land.
Requirements
1. Explain the tax advantage of allocating too much to the building and too little to the land.
2. Was Western’s allocation ethical? If so, state why. If not, why not? Identify who was harmed.
SOLUTION
Requirement 1
The taxpayer wants to allocate as much of the purchase price as possible to the building because tax law
Requirement 2
Whether the taxpayer’s choice was ethical or unethical is a difficult call. If the taxpayer is deliberately
Fraud Case 9-1
Jim Reed manages a fleet of utility trucks for a rural county government. He’s been in his job for 30
years, and he knows where the angles are. He makes sure that when new trucks are purchased, the
residual value is set as low as possible. Then, when they become fully depreciated, they are sold off by
the county at residual value. Jim makes sure his buddies in the construction business are first in line for
the bargain sales, and they make sure he gets a little something back. Recently, a new county
commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this
man has a business degree, and he is coming to visit Jim tomorrow.
Requirements
1. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?
2. How do businesses determine what residual values to use for their various assets? Are there “hard
and fast” rules for residual values?
3. How would an organization prevent the kind of fraud depicted here?
SOLUTION
Requirement 1
Requirement 2
Requirement 3
An organization could arrange for public auction of surplus vehicles, which would allow the public to
Financial Statement Case 9-1
Requirements
1. Which depreciation method does Starbucks Corporation use for reporting in the financial
statements? What type of depreciation method does the company probably use for income tax
purposes?
2. What was the amount of depreciation and amortization expense for the year ending September 29,
2013? (Hint: Review the Statement of Cash Flows.)
3. The statement of cash flows reports the cash purchases of property, plant, and equipment. How much
were Starbucks’s additions to property, plant, and equipment during the year ending 2013? Did
Starbucks record any proceeds from the sale of property, plant, and equipment?
4. What was the amount of accumulated depreciation at September 29, 2013? What was the net book
value of property, plant, and equipment for Starbucks as of September 29, 2013?
5. Compute Starbucks’s asset turnover ratio for year ending September 29, 2013. How does
Starbucks’s ratio compare with that of Green Mountain Coffee Roasters, Inc.?
SOLUTION
Requirement 1
Depreciation of property, plant, and equipment, which includes assets under capital leases, is provided
Requirement 2
Requirement 3
Starbucks’ statement of cash flows for the year ended September 29, 2013 reports a cash outflow of
Requirement 4
Requirement 5
(Amounts in millions)
Communication Activity 9-1
In 150 words or fewer, explain the different methods that can be used to calculate depreciation. Your
explanation should include how to calculate depreciation expense using each method.
SOLUTION
Student answers will vary, but should include the following points: