ACCT 100 – Principles of Financial Accounting

Fall 2020, Section 6

Week 10
Chapter 9 – Plant assets and intangible assets

Computing the cost of assets

Macbeth College purchased new computing equipment for its library on July 1. The following
information refers to the purchase and installation of this equipment:

1. The list price of the equipment was $285,000; however, Macbeth College qualified for
an“education discount” of $25,000. It paid$50,000 cash for the equipment, and issued a
three month, 9 percent note payable for the remaining balance. The note, plus accrued
interest charges of $4,500, was paid promptly at the note’s maturity date.
2. In addition to the amounts described in 1, Macbeth paid sales taxes of $15,000 at the date
of purchase.
3. Freight charges for delivery of the equipment totaled $1,000.
4. Installation costs related to the equipment amounted to $5,000.
5. During installation, one of the computer terminals was accidentally damaged by a library
employee. It cost the college $500 to repair this damage.
6. As soon as the computers were installed, the college paid $4,000 to print admissions
brochures featuring the library’s new, state-of-the-art computing facilities.
7.
Instructions
(a) Compute the total cost added to the college’s computing equipment account.
(b) Prepare a journal entry at the end of the current year (ending December 31) to record
depreciation on the computing equipment. Macbeth College intends to depreciate this equipment
by the straight-line method over an estimated useful life of five years. Assume a zero residual
value.

(a) Expenditures that should be debited to the computing equipment account:

$
Purchase price 260,000
Sales tax 15,000
Freight charges 1,000
Installation charges 5,000
TOTAL COST 281,000

(b) Dec 31 Depreciation Expense: Computing Equipment 28,100

Accumulated Dep: Computing Eqt 28,100
(281,000 / 5 x 6/12)
Depreciation methods

Swanson & Hiller, Inc., purchased a new machine on September 1, 2015, at a cost of $108,000.
The machine’s estimated useful life at the date of purchase was 5 years, and its residual value
was $8,000. Prepare a complete depreciation schedule under:
(i) Straight-line
(ii) Double-declining balance

Assume that Swanson & Hiller sells the machine on December 31, 2018, for $30,000 cash.
Compute the resulting gain or loss from this sale under each of the depreciation methods used in
part a. (Use rounded book values for calculations. Round your final answers to the nearest whole
dollar.)

Straight-Line Schedule:
Year Computation Depreciation Accumulated Book Value
Expense Depreciation
2015 $100,000 x 1/5 x 4/2 $6,667 $6,667 $101,333
2006 100,000 x 1/5 20,000 26,667 81,333
2017 100,000 x 1/5 20,000 46,667 61,333
2018 100,000 x 1/5 20,000 66,667 41,333
2019 100,000 x 1/5 20,000 86,667 21,333
2020 100,000 x 1/5 x 8/12 13,333 100,000 8,000

Declining Balance Schedule

Year Computation Depreciation Accumulated Book Value
Expense Depreciation
2015 $108,000 x 40% x $14,400 $14,400 $93,600
4/12
2016 93,600 x 40% 37,440 51,840 56,160
2017 56,160 x 40% 22,464 74,304 33,696
2018 33,696 x 40% 13,478 87,782 20,218
2019 20,218 x 40% 8,087 95,869 12,131
2020 100,000 – 95,869 4,131 100,000 8,000

Straight Line Declining Method

Cash Proceeds 30,000 30,000
Book Value at Dec 31, 2018 (41,333) (20,218)
(Loss)/Gain on disposal (11,333) 9,782

Journal Entries to record the disposal:

Straight Line Method:
Dec 31, 2018 Cash 30,000
Accumulated Dep 66,667
Loss on disposal 11,333
Machine 108,000
Declining Balance Method:
Dec 31, 2018 Cash 30,000
Accumulated Dep 87,782
Machine 108,000
Gain on disposal 9,782

Research and Development Expenditure

Maxwell Industries spent $300,000 on research and $600,000 on development of a new product.
Of the $600,000 in development costs, $400,000 was incurred prior to technological feasibility
and $200,000 after technological feasibility had been demonstrated. Prepare the journal entry to
record research and development costs.

Dr. Research Expense 300,000 

Dr. Development Expense 400,000 
Dr. Development Costs 200,000 
Cr. Cash 900,000

Disposal of fixed assets

Amina Company sells equipment on September 30, 2014, for $20,000 cash. The equipment
originally cost $72,000 and as of January 1, 2014, had accumulated depreciation of $42,000.
Depreciation for the first 9 months of 2014 is $4,800.

Prepare the journal entries to

(a) update depreciation to September 30, 2014, and
(b) record the sale of the equipment. 

(a) Depreciation Expense 4,800 

Accumulated Depreciation—Equipment 4,800 

(b) Cash 20,000 

Accumulated Depreciation—Equipment 46,800 
Loss on Disposal of Plant Assets 5,200 
Equipment 72,000 
Changes in Estimate:
Analysis: