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Chapter 10

Plant Assets, Natural Resources,


and Intangibles
QUESTIONS
1.

A plant asset is tangible; it is used in the production or sale of other assets or services;
and it has a useful life longer than one accounting period.

2.

The cost of a plant asset includes all normal and reasonable expenditures necessary to
get the asset in place and ready for its intended use.

3.

Land is an asset with an unlimited life and, therefore, is not subject to depreciation.
Land improvements have limited lives and are subject to depreciation.

4.

Often the lump-sum or basket purchase includes assets with different lives that must be
depreciated separately. Sometimes the purchase may include land, which is never
depreciated.

5.

The Accumulated DepreciationMachinery account is a contra asset account with a


credit balance that cannot be used to buy anything. The balance of the Accumulated
DepreciationMachinery account reflects that portion of the machinery's original cost
that has been charged to depreciation expense. It also gives some indication of the
assets age and how soon it will need to be replaced. Any funds available for buying
machinery are shown on the balance sheet as liquid assets with debit balances.

6.

The Modified Accelerated Cost Recovery System is not generally acceptable for financial
accounting purposes because it allocates depreciation over an arbitrary period that is
usually much shorter than the predicted useful life of the asset.

7.

The materiality constraint justifies charging low-cost plant asset purchases to expense
because such amounts are unlikely to impact the decisions of financial statement users.

8.

Ordinary repairs are made to keep a plant asset in normal, good operating condition, and
should be charged to expense of the current period. Extraordinary repairs are made to
extend the life of a plant asset beyond the original estimated life; they are recorded as
capital expenditures (and added to the asset account).

9.

A company might sell or exchange an asset when it reaches the end of its useful life, or
if it becomes inadequate or obsolete, or if the company has changed its business plans.
An asset also can be damaged or destroyed by fire or some other accident that would
require its disposal.

10. The process of allocating the cost of natural resources to expense over the periods
when they are consumed is called depletion. The method to compute depletion is similar
to units-of-production depreciation.

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11. No, depletion expense should be calculated on the units that are extracted (similar to the
units-of-production basis) and sold.
12. An intangible asset: (1) has no physical existence; (2) derives value from the unique
legal and contractual rights held by its owner; and (3) is used in the companys
operations.
13. Intangible assets are generally recorded at their cost and amortized over their predicted
useful life. (However, some costs are not included, such as the research and
development costs leading up to a patent.) The costs of intangible assets are generally
allocated to amortization expense using the straight-line method over their useful lives.
If the useful life of an intangible asset is indefinite, then it is not amortizedinstead, it is
annually tested for impairment.
14. A company has goodwill when its value exceeds the value of its individual assets and
liabilities. Goodwill appears in the balance sheet when one company acquires another
company or separate segment and pays a price that exceeds the combined values of all
its net assets (assets less liabilities) excluding goodwill.
15.

No; this type of goodwill would not be amortized. Instead, the FASB (SFAS 142) requires
that goodwill be annually tested for impairment. If the book value of goodwill does not
exceed its fair (market) value, goodwill is not impaired. However, if the book value of
goodwill exceeds its fair value, an impairment loss is recorded equal to that excess.
(Details of this two-step test are in advanced courses.)

16. Total asset turnover is calculated by dividing net sales by average total assets.
Financial statement users can use total asset turnover to evaluate the efficiency of a
company in using its assets to generate sales.
17. Best Buy lists Land and buildings; Leasehold improvements; Fixtures and equipment;
Property under capital lease. The book value of these assets is $2,938,000,000.
18. Circuit City calls its plant assets Property and equipment, net of accumulated
depreciation. The book value of the property and equipment is $921,027,000.
19. The word net means that RadioShack is presenting its property, plant, and equipment
after deducting accumulated depreciation to date.
20. Apples long-term assets discussed in this chapter are: Property, plant, and equipment,
net; Goodwill; Acquired intangible assets, net.

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QUICK STUDIES
Quick Study 10-1 (10 minutes)
Recorded cost = $350,000 + $10,000 + $4,000 + $21,000 = $385,000
Note: The $4,200 repair charge is an expense because it is not a normal and reasonable
expenditure necessary to get the asset in place and ready for its intended use.

Quick Study 10-2 (10 minutes)


1. The main difference between plant assets and current assets is that
current assets are consumed or converted into cash within a short
period of time, while plant assets have a useful life of more than one
accounting period.
2. The main difference between plant assets and inventory is that
inventory is held for resale and plant assets are not.
3. The main difference between plant assets and long-term investments is
that plant assets are used in the primary operation of the business and
investments are not.
Quick Study 10-3 (10 minutes)
Straight-line depreciation
($32,500 - $2,500) / 4 years = $7,500 depreciation per year
Quick Study 10-4 (10 minutes)
Units-of-production depreciation
($32,500 - $2,500) / 200 concerts =

$ 150 depreciation per concert


x 47 concerts in 2009
$7,050 depreciation in 2009

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Quick Study 10-5 (10 minutes)


$32,500 Cost
- 7,500 Accumulated depreciation (first year)
25,000 Book value at point of revision
- 2,500 Salvage value
22,500 Remaining depreciable cost
2 Years of life remaining
$11,250 Depreciation per year for years 2 and 3
Quick Study 10-6 (10 minutes)
Note: Double-declining-balance rate = (100% / 8 years) x 2 = 25%

First year:
$1,200,000 x 25%

= $300,000

Second year:
($1,200,000 - $300,000) x 25%

= $225,000

Third year:
($1,200,000 - $300,000 - $225,000) x 25%

= $168,750*

* Total accumulated depreciation of $693,750 ($300,000 + $225,000 + $168,750)


does not exceed the depreciable cost of $1,100,000 ($1,200,000 - $100,000).

Quick Study 10-7 (10 minutes)


1. (a) Capital expenditure
(b) Revenue expenditure
(c) Revenue expenditure
(d) Capital expenditure
2. (a)

Equipment............................................................
Cash..............................................................

40,000
40,000

To record replacement of compressor.

(d) Building................................................................
Cash..............................................................

225,000
225,000

To record addition to building.


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Quick Study 10-8 (15 minutes)


Book value of old machine = $92,500 - $54,000 = $38,500
1.

Cash...............................................................................
.................................................................................
Accumulated depreciation...........................................
Equipment..............................................................
Gain on sale of equipment*...................................

42,000
54,000
92,500
3,500

To record the sale of equipment.


*(Gain = $42,000 - $38,500)

2.

Cash...............................................................................
.................................................................................
Accumulated depreciation...........................................
Equipment..............................................................

38,500
54,000
92,500

To record the sale of equipment.

3.

Cash...............................................................................
.................................................................................
Accumulated depreciation...........................................
Loss on sale of equipment..........................................
Equipment..............................................................

31,000
54,000
7,500
92,500

To record the sale of equipment.


*(Loss = $31,000 - $38,500)

Quick Study 10-9 (10 minutes)


1.

Ore Mine...................................................................... 6,800,000


Cash......................................................................
6,800,000
To record cost of ore mine. ($6,300,000 + $500,000)

2.
Depletion per unit =

$6,800,000 - $900,000
1,000,000 tons

= $5.90 per ton

Depletion ExpenseOre Mine...................................


Accumulated DepletionOre Mine....................

737,500
737,500

To record depletion of ore mine (125,000 x $5.90).

Quick Study 10-10 (10 minutes)


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Intangible Assets:

b) Trademark c) Leasehold f) Copyright g) Franchise

Natural Resources: a) Oil well


Note:

d) Gold mine h) Timberland

Building is reported under plant assets.

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Quick Study 10-11 (10 minutes)


1.
Jan. 4 Leasehold Improvements....................................... 275,000
Cash..................................................................
275,000
To record leasehold improvements.

2.
Dec. 31 Amortization ExpenseLeasehold Improvements.....
Accumulated AmortizationLeasehold
Improvements.................................................

34,375
34,375

To record amortization of leasehold over


the remaining life of the lease.*
*

Amortization = $275,000 / 8-year-lease-term = $34,375 per year.

Quick Study 10-12 (10 minutes)


Total asset turnover =
($ 000s)

$14,880
($15,869 + $17,819) / 2

= 0.88 times

Interpretation: The companys turnover of 0.88 times is markedly lower than


its competitors turnover of 2.0. This company must perform better if it is to
be successful in the long run.

Quick Study 10-13A (10 minutes)


Book value of old machine = $84,800 - $36,800 = $48,000
1.

Machinery (new).......................................................
Accumulated DepreciationMachinery (old).........
Loss on Exchange of Assets*................................
Machinery (old)...............................................
Cash.................................................................

104,000
36,800
4,000
84,800
60,000

To record asset exchange assuming commercial


substance. *$104,000 ($48,000 + $60,000) = $(4,000)

2.

Machinery (new)*.....................................................
Accumulated DepreciationMachinery (old).........
Machinery (old)...............................................
Cash.................................................................

92,000
36,800
84,800
44,000

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To record asset exchange assuming lack of


commercial substance.
*Book value of old asset + Cash given = $48,000 + $44,000

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EXERCISES
Exercise 10-1 (15 minutes)
Invoice price of machine.........................................
Less discount (.01 x $10,400).................................
Net purchase price..................................................

$ 10,400
(104)
10,296

Freight charges (transportation-in).......................


Mounting and power connections.........................
Assembly..................................................................
Materials used in adjusting....................................
Total cost to be recorded........................................

235
719
339
40
$ 11,629

Note: The $250 repair charge is an expense because it is not a normal and reasonable
expenditure necessary to get the asset in place and ready for its intended use.

Exercise 10-2 (15 minutes)


Cost of land
Purchase price for land...........................................
Purchase price for old building..............................
Demolition costs for old building..........................
Costs to fill and level lot.........................................
Total cost of land.....................................................

$ 209,000
104,000
40,400
59,722
$ 413,122

Cost of new building and land improvements


Cost of new building...............................................

$1,564,400

Cost of land improvements....................................


Total construction costs.........................................

98,750
$1,663,150

Journal entry
Land..........................................................................
Land Improvements................................................
Building....................................................................
Cash....................................................................

413,122
98,750
1,564,400
2,076,272
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To record costs of plant assets.

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Exercise 10-3 (20 minutes)


Purchase price.........................................................
Closing costs............................................................
Total cost of acquisition..........................................

$404,000
21,500
$425,500

Allocation of total cost


Appraised
Value

Percent
of Total

Applying %
to Cost

Apportioned
Cost

47%

$425,500 x .47

$199,985

Land..........................

$217,140

Land improvements.

83,160

18

$425,500 x .18

76,590

Building....................

161,700

35

$425,500 x .35

148,925

Totals........................

$462,000

100%

$425,500

Journal entry
Land.....................................................................
Land Improvements...........................................
Building...............................................................
Cash.............................................................

199,985
76,590
148,925
425,500

To record costs of lump-sum purchase.

Exercise 10-4 (15 minutes)


Straight-line depreciation: ($102,000 - $21,000) / 5 years = $16,200 per year
Year

Annual Depreciation

Year-End Book Value

2009....................

$ 16,200

$ 85,800

2010....................

16,200

69,600

2011....................

16,200

53,400

2012....................

16,200

37,200

2013....................

16,200

21,000

Total...................

$ 81,000
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Exercise 10-5 (20 minutes)


Double-declining-balance depreciation
Depreciation rate: (100% / 5 years) x 2 = 20% x 2 = 40%
Year

Beginning-Year
Book Value

2009.......

$102,000

2010.......

61,200

2011.......

Depreciation
Rate

Year-End
Book Value

$40,800

$61,200

40

24,480

36,720

36,720

40

14,688

22,032

2012.......

22,032

40

2013.......

21,000

--

Total.......

40%

Annual
Depreciation

1,032*
--

21,000
21,000

$81,000

* Do not depreciate more than $1,032 in the fourth year because the
$21,000 salvage value is not subject to depreciation.

Exercise 10-6 (10 minutes)


Straight-line: ($67,000 - $4,000) / 10 years = $6,300
Exercise 10-7 (10 minutes)
Units-of-production:
Depreciation per unit = ($67,000 - $4,000) / 420,000 units = $0.15 per unit
For 29,900 units in second year: Depreciation = 29,900 x $0.15 = $4,485

Exercise 10-8 (15 minutes)


Double-declining-balance:
Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year
First years depreciation = $67,000 x 20% = $13,400
Book value at beginning of second year = $67,000 - $13,400 = $53,600
Second years depreciation = $53,600 x 20% = $10,720
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Exercise 10-9 (10 minutes)


Straight-line depreciation for 2009
($253,000 - $25,300) / 5 years = $45,540

Exercise 10-10 (15 minutes)


Double-declining-balance depreciation for 2009
Rate = (100% / 5 years) x 2 = 40%
2008 depreciation ($253,000 x 40% x 9/12)........................

$ 75,900

Book value at January 1, 2009 ($253,000 - $75,900).........

$177,100

Depreciation for 2009 ($177,100 x 40%).............................

$ 70,840

Alternate calculation
2008 depreciation ($253,000 x 40% x 9/12)....................................
2009 depreciation
$253,000 x 40% x 3/12.................................................................
($253,000 - $75,900 - $25,300) x 40% x 9/12..............................
Total 2009 depreciation...................................................................

75,900

25,300
45,540
70,840

Exercise 10-11 (15 minutes)


1. Original cost of machine................................................
Less two years' accumulated depreciation
[($26,400 - $2,900) / 4 years] x 2 years.......................

$ 26,400

Book value at end of second year.................................

$ 14,650

2. Book value at end of second year.................................

$ 14,650

Less revised salvage value............................................

(2,050)

Remaining depreciable cost...........................................

$ 12,600

(11,750)

Revised annual depreciation = $12,600 / 3 years = $4,200

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Exercise 10-12 (30 minutes)


Straight-line depreciation
Income
before
Depreciation

Year 1..............
Year 2..............
Year 3..............
Year 4..............
Year 5..............
Totals............

$ 86,800
86,800
86,800
86,800
86,800
$434,000

Depreciation
Expense*

$ 46,780
46,780
46,780
46,780
46,780
$233,900

Net
Income

$ 40,020
40,020
40,020
40,020
40,020
$200,100

*($274,900 - $41,000) / 5 years = $46,780

Exercise 10-13 (30 minutes)


Double-declining-balance depreciation

Year 1..............
Year 2..............
Year 3..............
Year 4..............
Year 5..............
Totals...........

Income
before
Depreciation

Depreciation
Expense*

Net
Income

$ 86,800
86,800
86,800
86,800
86,800
$434,000

$109,960
65,976
39,586
18,378
0
$233,900

$ (23,160)
20,824
47,214
68,422
86,800
$200,100

Supporting calculations for depreciation expense


*Note: (100% / 5 years) x 2 = 40% depreciation rate
Annual
Accumulated
Beginning
Depreciation
Depreciation at
Book
(40% of
the End of the
Value
Book Value)
Year
Year 1..........
$274,900
$109,960
$109,960
Year 2..........
164,940
65,976
175,936
Year 3..........
98,964
39,586**
215,522
Year 4..........
59,378
18,378***
233,900
Year 5..........
41,000
0
233,900
Total............
$233,900

Ending Book Value


($274,900 Cost Less
Accumulated
Depreciation)
$164,940
98,964
59,378
41,000
41,000

** rounded
***Must not use $23,751; instead take only enough depreciation in Year 4 to
reduce book value to the $41,000 salvage value.
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Exercise 10-14 (25 minutes)


1. Annual depreciation = $620,000 / 20 years = $31,000 per year
Age of the building = Accumulated depreciation / Annual depreciation
= $496,000 / $31,000 = 16 years
2. Entry to record the extraordinary repairs

Building.....................................................................
Cash..................................................................

74,000
74,000

To record extraordinary repairs.

3.

4.

Cost of building
Before repairs......................................................
Add cost of repairs..............................................
Less accumulated depreciation............................
Revised book value of building.............................

$620,000
74,000

Revised book value of building (part 3)...............


New estimate of useful life (20 - 16 + 7)................
Revised annual depreciation.................................
Journal entry
Depreciation Expense.............................................
Accumulated DepreciationBuilding.............

$694,000
496,000
$198,000
$198,000
11 years
$ 18,000

18,000
18,000

To record depreciation

Exercise 10-15 (15 minutes)


1.

Equipment...............................................................
Cash..................................................................

29,500
29,500

To record betterment.

2.

Repairs Expense....................................................
Cash..................................................................

7,375
7,375

To record ordinary repairs.

3.

Equipment...............................................................
Cash..................................................................

22,450
22,450

To record extraordinary repairs.

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Exercise 10-16 (20 minutes)


Note: Book value of milling machine = $250,000 - $182,000 = $68,000
1. Disposed at no value
Jan. 3

Loss on Sale of Milling Machine.......................


Accumulated DepreciationMilling Machine. .
Milling Machine..............................................

68,000
182,000
250,000

To record disposal of milling machine.

2. Sold for $35,000 cash


Jan. 3

Cash.....................................................................
Loss on Sale of Milling Machine.......................
Accumulated DepreciationMilling Machine. .
Milling Machine..............................................

35,000
33,000
182,000
250,000

To record cash sale of milling machine.

3. Sold for $68,000 cash


Jan. 3

Cash.....................................................................
Accumulated DepreciationMilling Machine. .
Milling Machine..............................................

68,000
182,000
250,000

To record cash sale of milling machine.

4. Sold for $80,000 cash


Jan. 3

Cash.....................................................................
Accumulated DepreciationMilling Machine. .
Gain on Sale of Milling Machine....................
Milling Machine..............................................

80,000
182,000
12,000
250,000

To record cash sale of milling machine.

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Exercise 10-17 (25 minutes)


2013

July 1

Depreciation Expense...........................................
Accumulated Depreciation--Machinery..........

5,875
5,875

To record one-half year depreciation.*


*Annual depreciation = $94,000 / 8 years = $11,750
Depreciation for 6 months in 2013 = $11,750 x 6/12 = $5,875

1. Sold for $43,593 cash


July 1

Cash......................................................................
Accumulated DepreciationMachinery............
Gain on Sale of Machinery..............................
Machinery..........................................................

43,593
52,875
2,468
94,000

To record sale of machinery.*

*Total accumulated depreciation at date of disposal:


Four years 2009-2012 (4 x $11,750)......... $47,000
Partial year 2013 (6/12 x $11,750).............
5,875
Total accumulated depreciation.............. $52,875
Book value of machinery = $94,000 - $52,875 = $41,125
Gain on sale = $43,593 - $41,125 = $2,468

2. Destroyed by fire with $39,480 cash insurance settlement


July 1

Cash......................................................................
Loss from Fire......................................................
Accumulated DepreciationMachinery............
Machinery..........................................................

39,480
1,645
52,875
94,000

To record disposal of machinery from fire.

Loss on sale = $39,480 - $41,125 = $(1,645)

Exercise 10-18 (10 minutes)


Dec. 31

Depletion ExpenseMineral Deposit...............


Accumulated DepletionMineral Deposit...

498,960
498,960

To record depletion [$3,920,000/1,400,000 tons =


$2.80 per ton; 178,200 tons x $2.80 = $498,960].

Dec. 31

Depreciation ExpenseMachinery ..................


Accumulated DepreciationMachinery......

26,730
26,730

To record depreciation [$210,000/1,400,000 tons=


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$0.15 per ton; 178,200 tons x $0.15 = $26,730].

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Exercise 10-19 (10 minutes)


Jan.

1 Copyright.............................................................
Cash.................................................................

432,000
432,000
00

To record purchase of copyright.

Dec. 31 Amortization ExpenseCopyright...................


Accumulated AmortizationCopyright.......

28,800
28,800

To record amortization of copyright


[$432,000 / 15 years].

Exercise 10-20 (10 minutes)


1. Goodwill = $2,500,000 - $1,800,000 = $700,000
2. Goodwill is not amortized. Instead, Jeffrey must test the value of the
goodwill each year, and if the value is impaired, it must be written down.
3. Goodwill is only recorded when it is purchased. Goodwill is not
recorded by the company that has created it.

Exercise 10-21 (15 minutes)


1. $285,725,000 for property and equipment
2. $177,828,000 and $3,645,000 for depreciation and amortization, respectively
3. $334,709,000 used in investing activities

Exercise 10-22 (15 minutes)


Total asset turnover for 2008 =

$4,796,000
($1,578,000 + $1,824,000)/2

= 2.82

Total asset turnover for 2009 =

$8,758,000
($1,824,000 + $1,946,000)/2

= 4.65

Analysis comments. Based on these calculations, Teridan turned its assets


over 1.83 (4.65 2.82) more times in 2009 than in 2008. This increase
indicates that Teridan became more efficient in using its assets. Moreover,
Teridan has improved its efficiency in using assets relative to its competitors
who average 3.0. Together, these results based on total asset turnover

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indicate that Teridan has markedly improved its performance and is currently
superior to its competitors.

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Exercise 10-23A (15 minutes)


1. Book value of the old tractor ($83,000 - $45,000)..........................$ 38,000
2. Loss on the exchange
Book value - Trade-in allowance ($38,000 - $24,500)..............$ 13,500
3. Debit to new Tractor account
Cash paid + Trade-in allowance ($71,750 + $24,500)..............$ 96,250
Alternatively, answers can be taken from the following journal entry:
Tractor (new).............................................................................
96,250
Loss on Exchange of Assets...................................................
13,500
Accumulated DepreciationTractor........................................
45,000
Tractor (old).......................................................................
Cash...................................................................................

83,000
71,750

To record asset exchange.

Exercise 10-24A (25 minutes)


Note: Book value of Machine equals $52,400 - $28,227 = $24,173

1. Sold for $20,274 cash


Jan. 2

Cash...................................................................
Loss on Sale of Machinery..............................
Accumulated DepreciationMachinery (old)
Machinery (old)............................................

20,274
3,899
28,227
52,400

To record cash sale of machine.

2. $24,953 trade-in allowance exceeds book value; but no gain is


recognized on an asset exchange that lacks commercial substance ($780 gain is buried in the cost of the new machinery)
Jan. 2

Machinery (new)*..............................................
Accumulated DepreciationMachinery (old)
Machinery (old)............................................
Cash**...........................................................

68,120
28,227
52,400
43,947

To record asset exchange.


*[$68,900 - ($24,953 - $24,173)] **($68,900 - $24,953)

3. $18,714 trade-in allowance is less than book value (yielding a loss)


Jan. 2

Machinery (new)...............................................
Loss on Exchange of Machinery....................
Accumulated DepreciationMachinery (old)
Machinery (old)............................................

68,900
5,459
28,227
52,400
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Cash*.............................................................

50,186

To record asset exchange. *($68,900 - $18,714)

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PROBLEM SET A
Problem 10-1A (50 minutes)
Part 1
Estimated
Market Value
$514,250
271,150
65,450
84,150
$935,000

Percent
of Total
55%
29
7
9
100%

Building........................
Land..............................
Land improvements....
Vehicles........................
Total..............................
......................................
2009
Jan. 1
Building..........................................................
Land................................................................
Land Improvements......................................
Vehicles..........................................................
Cash..........................................................

Apportioned
Cost
$495,000
261,000
63,000
81,000
$900,000

495,000
261,000
63,000
81,000
900,000

To record asset purchases.

Part 2
Year 2009 straight-line depreciation on building
[($495,000 - $30,000) / 15 years] = $31,000
Part 3
Year 2009 double-declining-balance depreciation on land improvements
(100% / 5 years) x 2 = 40% rate
$63,000 x 40% = $25,200
Part 4
Accelerated depreciation does not lower the total amount of taxes paid over
the asset's life. Instead, it defers or postpones taxes to the later years of an
assets useful life. This is because accelerated methods charge a higher
portion of asset costs against revenue in earlier years and a lower portion in
later years. The result is to reduce taxable income more in earlier years but
less in later years. [Note: From a present value perspective, there is a tax

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savings from use of accelerated depreciation. The company gets to use the
tax deferred amounts for investment purposes until they are due.]

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Problem 10-2A (45 minutes)


Part 1
Land

Building
2
$609,500

Building
3

Land
Improvements 1
$397,500

Land
Improvements
2

Purchase price*......... $1,643,000


Demolition.................
342,400
....................................
Land grading.............
193,400
New building..............
New improvements. . . _________
Totals........................ $2,178,800

_______
$609,500

$2,282,000
_________
$2,282,000

*Allocation of purchase price

Appraised
Value

Percent
of Total

Apportioned
Cost**

Land.....................................
Building 2............................
Land Improvements 1.........
Totals...................................

$1,866,820
692,530
451,650
$3,011,000

62%
23
15
100%

$1,643,000
609,500
397,500
$2,650,000

_______
$397,500

$168,000
$168,000

**Multiply the percentages in column 3 by the $2,650,000 purchase price.

Part 2
2009

Jan. 1

Land..................................................................... 2,178,800
Building 2............................................................
609,500
Building 3............................................................ 2,282,000
Land Improvements 1........................................
397,500
Land Improvements 2........................................
168,000
Cash...............................................................
5,635,800
To record costs of plant assets.

Part 3
2009

Dec. 31 Depreciation ExpenseBuilding 2.......................


Accumulated DepreciationBuilding 2.........

26,225
26,225

To record depreciation [($609,500 - $85,000)/20].

31 Depreciation ExpenseBuilding 3.......................


Accumulated DepreciationBuilding 3.........

75,280
75,280

To record depreciation [($2,282,000 - $400,000)/25].

31 Depreciation ExpenseLand Improv. 1..............


Accum. DepreciationLand Improv. 1..........

33,125
33,125

To record depreciation [$397,500/12].

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31 Depreciation ExpenseLand Improv. 2..............


Accum. DepreciationLand Improv. 2..........

8,400
8,400

To record depreciation [$168,000/20].

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Fundamental Accounting Principles, 19th Edition

Problem 10-3A (50 minutes)


2008

Jan.

1 Equipment ............................................................. 306,900


Cash.................................................................
306,900
To record loader costs ($293,660 +$11,740 +$1,500).

Jan.

3 Equipment..............................................................
Cash.................................................................

5,100
5,100

To record betterment of loader.

Dec. 31 Depreciation ExpenseEquipment....................


Accumulated DepreciationEquipment......

68,750*
68,750

To record depreciation.
*

2008 depreciation after January 3rd betterment


Total original cost..................................................................

$306,900

Plus cost of betterment.........................................................

5,100

Revised cost of equipment...................................................

312,000

Less revised salvage ($36,000 + $1,000).............................

37,000

Cost to be depreciated..........................................................

275,000

Annual depreciation ($275,000 / 4 years).............................

$ 68,750

2009

Jan.

1 Equipment..............................................................
Cash.................................................................

4,500
4,500

To record extraordinary repair on loader.

Feb. 17 Repairs ExpenseEquipment.............................


Cash.................................................................

1,125
1,125

To record ordinary repair on loader.

Dec. 31 Depreciation ExpenseEquipment....................


Accumulated DepreciationEquipment......

42,150*
42,150

To record depreciation.
*2009 depreciation after January 1st extraordinary repair
Total cost ($312,000 + $4,500)..............................................

$316,500

Less accumulated depreciation ..........................................

68,750

Book value.............................................................................

247,750

Less salvage..........................................................................

37,000

Remaining cost to be depreciated.......................................

$210,750

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Revised remaining useful life (Original 4 years - 1yr. + 2yrs.)

5 yrs.

Revised annual depreciation ($210,750 / 5 yrs)...................

$ 42,150

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Fundamental Accounting Principles, 19th Edition

Problem 10-4A (40 minutes)


2008

Jan.

1 Trucks.......................................................................
Cash....................................................................

26,500
26,500

To record cost of truck ($25,015 + $1,485).

Dec. 31 Depreciation ExpenseTrucks..............................


Accumulated DepreciationTrucks................

4,900
4,900

To record depreciation [($26,500 - $2,000)/5].


2009

Dec. 31 Depreciation ExpenseTrucks..............................


Accumulated DepreciationTrucks................

6,300*
6,300

To record depreciation.
*

2009 depreciation
Total cost....................................................................
Less accumulated depreciation (from 2008)............
Book value..................................................................
Less revised salvage value.......................................
Remaining cost to be depreciated............................
Revised useful life.....................................................
Less one year used in 2008.......................................
Revised remaining useful life...................................
Total depreciation for 2009 ($18,900/3)....................

$ 26,500
4,900
21,600
2,700
$ 18,900
4 yrs.
1 yrs.
3 yrs.
$ 6,300

2010

Dec. 31 Depreciation ExpenseTrucks..............................


Accumulated DepreciationTrucks................

6,300
6,300

To record annual depreciation.

Dec. 31 Cash..........................................................................
Accumulated DepreciationTrucks......................
Loss on Disposal of Trucks....................................
Trucks.................................................................

5,600
17,500**
3,400***
26,500

To record sale of truck.


**

Accumulated depreciation on truck at 12/31/2010


2008.............................................................................
2009.............................................................................
2010.............................................................................
Total............................................................................
***
Book value of truck at 12/31/2010
Total cost....................................................................
Less accumulated depreciation................................
Book value .................................................................
Loss ($5,600 cash received - $9,000 book value)....

$ 4,900
6,300
6,300
$17,500
$26,500
(17,500)
$ 9,000
$ 3,400

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Problem 10-5A (25 minutes)


Cost of machine....................................
Less estimated salvage value..............
Total depreciable cost..........................

Year

Straight-Line

$320,000
33,000
$287,000

Units-of-Production

Double-DecliningBalancec

1..................

$ 71,750

$ 71,400

$160,000

2..................

71,750

72,240

80,000

3..................

71,750

71,960

40,000

4..................

71,750

71,400

7,000

Totals.........

$287,000

$287,000

$287,000

Straight- line:
Cost per year = $287,000/4 years = $71,750 per year

Units-of-production:
Cost per unit = $287,000/512,500 units = $0.56 per unit
Year
1.............
2.............
3.............
4.............
Total.......
*

Units
127,500
129,000
128,500
127,500

Unit Cost
$0.56
0.56
0.56
0.56

Depreciation
$ 71,400
72,240
71,960
71,400*
$287,000

Take only enough depreciation in Year 4 to reduce book


value to the assets $33,000 salvage value.

Double-declining-balance:
(100%/4) x 2 = 50% depreciation rate

Year
1.........
2.........
3.........
4.........
Total...

Beginning
Book
Value
$320,000
160,000
80,000
40,000

Annual
Depreciation
(50% of
Book Value)
$160,000
80,000
40,000
7,000*
$287,000

Accumulated
Depreciation
at the End of
the Year

Ending Book Value


($320,000 Cost Less
Accumulated
Depreciation)

$160,000
240,000
280,000
287,000

$160,000
80,000
40,000
33,000

*Take only enough depreciation in Year 4 to reduce book value to


the assets $33,000 salvage value.
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Problem 10-6A (20 minutes)


1.
Jan. 2 Machinery.............................................................
Cash................................................................

198,750
198,750

To record machinery purchase.

Jan. 3 Machinery.............................................................
Cash................................................................

11,000
11,000

To record machinery costs.

Jan. 3 Machinery.............................................................
Cash................................................................

3,410
3,410

To record machinery costs.

2. a. First year
Dec. 31 Depreciation ExpenseMachinery....................
Accumulated DepreciationMachinery......

32,700
32,700

To record depreciation [($213,160* - $16,960)/6].


*($198,750 + $11,000 + $3,410)

b. Fifth year
Dec. 31 Depreciation ExpenseMachinery....................
Accumulated DepreciationMachinery......

32,700
32,700

To record years depreciation.

3.

Accumulated depreciation at the date of disposal


Five years' depreciation (5 x $32,700).....................
Book value at the date of disposal
Original total cost......................................................
Accumulated depreciation........................................
Book value..................................................................

$163,500
$213,160
(163,500)
$ 49,660

a. Sold for $21,000 cash

Dec. 31 Cash.....................................................................
Loss on Sale of Machinery................................
Accumulated DepreciationMachinery...........
Machinery.......................................................

21,000
28,660
163,500
213,160

b. Sold for $73,500 cash

Dec. 31 Cash.....................................................................
Accumulated DepreciationMachinery...........
Machinery.......................................................
Gain on Sale of Machinery............................

73,500
163,500
213,160
23,840

c. Destroyed in fire and collected $31,500 cash from insurance co.


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Dec. 31 Cash.....................................................................
Accumulated DepreciationMachinery...........
Loss from Fire.....................................................
Machinery.......................................................

31,500
163,500
18,160
213,160

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Fundamental Accounting Principles, 19th Edition

Problem 10-7A (20 minutes)


a.
July 23 Mineral Deposit..............................................
Cash..........................................................

4,612,500
4,612,500

To record purchase of mineral deposit.

b.
July 25 Machinery.......................................................
Cash..........................................................

512,500
512,500

To record costs of machinery.

c.
Dec. 31 Depletion ExpenseMineral Deposit..........
Accum. DepletionMineral Deposit......

441,000
441,000

To record depletion [$4,612,500/


5,125,000 tons = $0.90 per ton.
490,000 tons x $0.90 = $441,000].

d.
Dec. 31 Depreciation ExpenseMachinery..............
Accum. DepreciationMachinery.........

49,000
49,000

To record depreciation [$512,500 /


5,125,000 tons = $0.10 per ton. Then,
490,000 tons x $0.10 = $49,000].

Analysis Component
SimilaritiesAmortization, depletion, and depreciation are similar in that
they are all methods of allocating costs of long-term assets to the periods
that benefit from their use.
DifferencesThey are different in that they apply to different types of longterm assets: amortization applies to intangible assets with (definite) useful
lives; depletion applies to natural resources; and depreciation applies to
plant assets. Also, amortization is typically computed using the straightline method, whereas the units-of-production method is routinely used in
depletion.

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Problem 10-8A (20 minutes)


1.
2009
(a)
June 25 Leasehold............................................................
Cash...............................................................

260,000
260,000

To record payment for sublease.

(b)
July 1 Prepaid Rent.......................................................
Cash...............................................................

80,000
80,000

To record prepaid annual lease rental.

(c)
July 5 Leasehold Improvements..................................
Cash...............................................................

160,000
160,000

To record costs of leasehold improvements.

2.
2009
(a)
Dec. 31 Rent Expense......................................................
Accumulated AmortizationLeasehold.....

13,000
13,000

To record leasehold amortization ($260,000/10 x


6/12).

(b)
Dec. 31 Amortization ExpenseLeasehold Improvements. .

8,000

Accumulated AmortizationLeasehold
Improvements...................................................

8,000

To record leasehold improvement amortization


($160,000/10 years remaining on lease x 6/12).

(c)
Dec. 31 Rent Expense......................................................
Prepaid Rent.................................................

40,000
40,000

To record one-half year lease rental ($80,000 x 6/12).

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