= $15,400 per year.SOLUTIONS TO ASSIGNMENTS
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EXERCISE 10-1
(a) Under the cost principle, the acquisition cost for a plant asset includes all expenditures necessary to acquire the asset and make it ready for its intended use. For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs.
Cost is measured by the cash paid in
a transaction, or by the cash equiv-alent price paid when noncash assets
are used in payment. The cash equivalent price is equal to the fair market value
of the asset given up
or the fair market value of the asset received, whichever is more clearly
determinable.
(b) 1. Land
2. Factory Machinery
3. Delivery Equipment
4. Land Improvements
5. Delivery Equipment
6. Factory Machinery
7. Prepaid Insurance
8. License Expense
EXERCISE 10-3
(a) Depreciation cost per unit is $1.20 per mile
[($128,000 – $8,000) ÷ 100,000].
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(b) |
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Computation |
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End of Year |
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Year |
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Units of Activity |
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Depreciation Cost/Unit |
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Annual Depreciation Expense |
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Accumulated Depreciation |
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Book Value |
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2002 2003 2004 2005 |
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26,000 32,000 25,000 17,000 |
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$1.20 1.20 1.20 1.20 |
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$31,200 38,400 30,000 20,400 |
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$ 31,200 69,600 99,600 120,000 |
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$96,800 58,400 28,400 8,000 |
EXERCISE 10-4
(a) Straight-line method:
= $15,400 per year.
2002 depreciation = $15,400 X 3/12 = $3,850.
(b) Units-of-activity method:
= $1.10 per hour.
2002 depreciation = 1,700 hours X $1.10 = $1,870.
(c) Declining-balance method:
2002 depreciation = $89,000 X 40% X 3/12 = $8,900.
Book value January 1, 2003 = $89,000 – $8,900 = $80,100.
2003 depreciation = $80,100 X 40% = $32,040.
EXERCISE 10-5
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(a) |
Type of Asset |
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Building |
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Warehouse |
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Book value, 1/1/02 Less: Salvage value Depreciable cost Revised useful life in years Revised annual depreciation |
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$686,000 70,000 $616,000 44 $14,000 |
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$88,600 3,600 $85,000 17 $5,000 |
(b) Dec. 31 Depreciation Expense—Building................ 14,000
Accumulated Depreciation—
Building............................................................ 14,000
EXERCISE 10-6
Jan. 1 Accumulated Depreciation—Machinery.......... 62,000
Machinery................................................................... 62,000
June 30 Depreciation Expense.......................................... 2,500
Accumulated Depreciation—
Computer ($35,000 X 1/7 X 6/12)........................ 2,500
30 Cash......................................................................... 22,000
Accumulated Depreciation—Computer........... 17,500
($35,000 X 3/7 = $15,000; $15,000 + $2,500)
Gain on Disposal....................................................... 4,500
[$22,000 – ($35,000 – $17,500)]
Computer.................................................................... 35,000
Dec. 31 Depreciation Expense.......................................... 4,500
Accumulated Depreciation—Truck....................... 4,500
[($30,000 – $3,000) X 1/6]
31 Loss on Disposal.................................................. 7,500
Accumulated Depreciation—Truck................... 22,500
[($30,000 – $3,000) X 5/6]
Delivery Truck........................................................... 30,000
EXERCISE 10-7
(a) Trucks (new)...................................................................... 57,000
Accumulated Depreciation—Trucks (old)................... 22,000
Loss on Disposal.............................................................. 2,000
Trucks (old)............................................................................ 64,000
Cash......................................................................................... 17,000
Cost of old trucks $64,000
Less accumulated depreciation 22,000
Book value 42,000
Fair market value of old trucks 40,000
Loss on disposal $ 2,000
Fair market value of old trucks $40,000
Cash paid 17,000
Cost of new trucks $57,000
(b) Machine (new)................................................................... 7,000
Accumulated Depreciation—Machine (old)................. 5,000
Machine (old)......................................................................... 10,000
Cash......................................................................................... 2,000
Cost of old machine $10,000
Less accumulated depreciation 5,000
Book value 5,000
Fair market value of old
machine 9,000
Gain on disposal $ 4,000
Fair market value of old
machine $ 9,000
Cash paid 2,000
Cost of new machine
(before deferral of gain) 11,000
Less: Gain on disposal 4,000
Cost of new machine
(after deferral of gain) $ 7,000
EXERCISE 10-10
(a) Dec. 31 Depletion Expense......................................... 40,000
Accumulated Depletion..................................... 40,000
(100,000 X $.40)
Cost (a) $320,000
Units estimated (b) 800,000 tons
Depletion cost per unit [(a) ÷ (b)] $0.40
(b) The costs pertaining to the unsold units are reported in current assets as part of inventory (20,000 X $.40 = $8,000).
EXERCISE 10-11
Dec. 31 Amortization Expense—Goodwill................... 4,500
Goodwill ($180,000 X 1/40)...................................... 4,500
31 Amortization Expense—Patent........................ 6,000
Patents ($45,000 X 1/5 X 8/12)................................ 6,000
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PROBLEM 10-1A |
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Land |
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Building |
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Other Accounts |
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1 2 3 4 5 6 7 8 9 10 |
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($ 4,000) ( 145,000) ( 2,000) ( 15,000) ( (3,500) ($162,500) |
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$700,000 20,000 10,000 0000,000 $730,000 |
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$ 5,000 Taxes Expense 14,000 Land Improvements 000,000 $19,000 |
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PROBLEM 10-2A |
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(a) |
Year |
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Computation |
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Cumulative 12/31 |
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BUS 1 |
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2000 2001 2002 |
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$80,000 X 25% = $20,000 $80,000 X 25% = $20,000 $80,000 X 25% = $20,000 |
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$ 20,000 40,000 60,000 |
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BUS 2 |
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2000 2001 2002 |
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$140,000 X 40% = $56,000 $84,000 X 40% = $33,600 $50,400 X 40% = $20,160 |
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$ 56,000 89,600 109,760 |
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BUS 3 |
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2001 2002 |
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24,000 miles X $.60* = $14,400 34,000 miles X $.60* = $20,400 |
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$ 14,400 34,800 |
*$72,200 ÷ 120,000 miles = $.60 per mile.
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(b) |
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Year |
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Computation |
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Expense |
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BUS 2 |
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(1) (2) |
2000 2001 |
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$140,000 X 40% X 9/12 = $42,000 $98,000 X 40% = $39,200 |
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$42,000 $39,200 |
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PROBLEM 10-3A |
(a) (1) Purchase price......................................................................... $30,000
Sales tax..................................................................................... 1,500
Shipping costs.......................................................................... 150
Insurance during shipping.................................................... 80
Installation and testing............................................................ 70
Total cost of machinery.................................................. $31,800
Machinery................................................................... 31,800
Cash................................................................................. 31,800
(2) Recorded cost.......................................................................... $31,800
Less: Salvage value............................................................... 5,000
Depreciable cost...................................................................... $26,800
Years of useful life.................................................................... ÷ 5
Annual depreciation........................................................ $ 5,360
Depreciation Expense............................................. 5,360
Accumulated Depreciation......................................... 5,360
(b) (1) Recorded cost.......................................................................... $60,000
Less: Salvage value............................................................... 5,000
Depreciable cost...................................................................... $55,000
Years of useful life.................................................................... ÷ 4
Annual depreciation........................................................ $13,750
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(2) |
Book Value at Beginning of Year |
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DDB Rate |
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Annual Depreciation Expense |
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Accumulated Depreciation |
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$60,000 30,000 15,000 7,500 |
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*50%* *50%* *50%* *50%* |
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$30,000 15,000 7,500 ** 2,500** |
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$30,000 45,000 52,500 55,000 |
**100% ÷ 4-year useful life = 25% X 2 = 50%.
**$7,500 book value – $5,000 salvage value.
(3) Depreciation cost per unit = ($60,000 – $5,000)/125,000 units = $.44 per unit.
Annual Depreciation Expense
2002: $.44 X 45,000 = $19,800
2003: .44 X 35,000 = 15,400
2004: .44 X 25,000 = 11,000
2005: .44 X 20,000 = 8,800
(c) The declining-balance method reports the highest amount of depreciation expense the first year while the straight-line method reports the lowest. In the fourth year, the straight-line method reports the highest amount of depreciation expense while the declining-balance method reports the lowest.
These facts occur because the declining-balance method is an accelerated depreciation method in which the largest amount of depreciation is recognized in the early years of the asset’s life. If the straight-line method is used, the same amount of depreciation expense is recognized each year. Therefore, in the early years less depreciation expense will be recognized under this method than under the declining-balance method while more will be recognized in the later years.
The amount of depreciation expense recognized using the units-of-activity method is dependent on production, so this method could recognize more or less depreciation expense than the other two methods in any year depending on output.
No matter which of the three methods is used, the same total amount of depreciation expense will be recognized over the four-year period.
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PROBLEM 10-4A |
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Year |
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Depreciation |
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Accumulated Depreciation |
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2000 2001 2002 2003 2004 2005 2006 |
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(b)$9,000(a) 9,000 (b)7,200(b) 7,200 7,200 (b)8,000(c) 8,000 |
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$ 9,000 18,000 25,200 32,400 39,600 47,600 55,600 |
(a)
= $9,000
(b)
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= $7,200
(c)
= $8,000
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PROBLEM 10-5A |
(a) Apr. 1 Land........................................................ 2,630,000
Cash................................................................. 2,630,000
May 1 Depreciation Expense......................... 19,000
Accumulated Depreciation—
Equipment................................................... 19,000
($570,000 X 1/10 X 4/12)
1 Cash........................................................ 350,000
Accumulated Depreciation—
Equipment......................................... 247,000
Equipment....................................................... 570,000
Gain on Disposal........................................... 27,000
Cost $570,000
Accum. depreciation—
equipment 247,000
[($570,000 X 1/10 X 4) + $19,000] 0000,000
Book value 323,000
Cash proceeds 350,000
Gain on disposal $ 27,000
June 1 Cash........................................................ 1,800,000
Land.................................................................. 200,000
Gain on Disposal........................................... 1,600,000
July 1 Equipment.............................................. 2,000,000
Cash................................................................. 2,000,000
Dec. 31 Depreciation Expense......................... 50,000
Accumulated Depreciation—
Equipment................................................... 50,000
($500,000 X 1/10)
31 Accumulated Depreciation—
Equipment......................................... 500,000
Equipment....................................................... 500,000
Cost $500,000
Accum. depreciation—
equipment 500,000
($500,000
X 1/10 X 10)
0000,000
$ 0
(b) Dec. 31 Depreciation Expense......................... 570,000
Accumulated Depreciation—
Buildings..................................................... 570,000
($28,500,000 X 1/50)
31 Depreciation Expense......................... 4,793,000
Accumulated Depreciation—
Equipment................................................... 4,793,000
($46,930,000* X 1/10) $4,693,000
[($2,000,000 X 1/10) X 6/12] 100,000
$4,793,000
*($48,000,000 – $570,000 – $500,000)
(c) LOS ALAMOS COMPANY
Partial Balance Sheet
December 31, 2003
Plant Assets*
Land................................................................................. $ 6,430,000
Buildings................................................... $28,500,000
Less: Accumulated depreciation—
buildings................................... 12,670,000 15,830,000
Equipment................................................ 48,930,000
Less: Accumulated depreciation—
equipment................................ 9,115,000 39,815,000
Total plant assets................................................. $62,075,000
*See T-accounts which follow.
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Land |
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Bal. 4,000,000 Apr. 1 2,630,000 |
June 1 200,000 |
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Bal. 6,430,000 |
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Buildings |
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Bal. 28,500,000 |
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Bal. 28,500,000 |
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Equipment |
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Bal. 48,000,000 July 1 2,000,000 |
May 1 570,000 Dec. 31 500,000 |
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Bal. 48,930,000 |
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Accumulated Depreciation—Buildings |
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Bal. 12,100,000 Dec. 31 adj. 570,000 |
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Bal. 12,670,000 |
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Accumulated Depreciation—Equipment |
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May 1 247,000 Dec. 31 500,000 |
Bal. 5,000,000 May 1 19,000 Dec. 31 50,000 Dec. 31 adj. 4,793,000 |
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Bal. 9,115,000 |
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PROBLEM 10-2B |
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(a) |
Year |
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Computation |
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Cumulative 12/31 |
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MACHINE 1 |
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1999 2000 2001 2002 |
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$90,000 X 10% = $9,000 $90,000 X 10% = $9,000 $90,000 X 10% = $9,000 $90,000 X 10% = $9,000 |
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$ 9,000 18,000 27,000 36,000 |
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MACHINE 2 |
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2000 2001 2002 |
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$60,000 X 25% = $15,000 $45,000 X 25% = $11,250 $33,750 X 25% = $ 8,438 |
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$15,000 26,250 34,688 |
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MACHINE 3 |
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2002 |
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1,000 X ($60,000 ÷ 24,000) = $2,500 |
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$ 2,500 |
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(b) |
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Year |
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Depreciation Computation |
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Expense |
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MACHINE 2 |
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(1) (2) |
2000 2001 |
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$60,000 X 25% X 9/12 = $11,250 $48,750 X 25% = $12,188 |
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$11,250 $12,188 |
