Chapter 9

docx

School

University of the Pacific, Stockton *

*We aren’t endorsed by this school

Course

031

Subject

Accounting

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by AmbassadorChimpanzee945

CHAPTER 9 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS Cost of Plant Assets Example 1: On March 1, 2021, Westmorlan Company acquired real estate on which it planned to construct a small office building. The company paid $75,000 in cash. An old warehouse on the property was razed at a cost of $8,600; the salvaged materials were sold for $1,700. Additional expenditures before construction began included $1,100 attorney's fee for work concerning the land purchase, $5,000 real estate broker's fee, $7,800 architect's fee, and $14,000 to put in driveways and a parking lot. What is the cost of the land? Example 2: Lofton Company purchased a delivery truck. The total cash payment was $27,900, including the following items. Negotiated purchase price $24,000 Installation of special shelving 1,100 Painting and lettering 900 Motor vehicle license 100 Annual insurance policy 500 Sales tax 1,300 Total paid $27,900 What is the cost of truck? Prepare the journal entry to record the purchase. 1

Depreciation Three methods of recognizing depreciation are (a) straight-line, (b) units-of-activity, and (c) declining-balance. Straight-Line Method The formula for computing annual depreciation expense is: (Cost-Salvage Value) ÷ Useful Life (in years) = Depreciation Expense Example 3: Benson Company purchased a delivery truck for $11,000 on January 1 with an estimated salvage value of $1,000 at the end of its four-year service life. Calculate the annual depreciation. Annual depreciation is $2,500 [($11,000 – $1,000 ÷ 4)]. Units-of-Activity Method The formulas for computing depreciation expense are: Depreciable Cost ÷ Total Units of Activity = Depreciable Cost per Unit Depreciable Cost per Unit X Units of Activity during the Year = Depreciation Expense Example 4: Yello Bus Lines uses the units-of-activity method in depreciating its buses. One bus was purchased on January 1, 2022, at a cost of $148,000. Over its 4-year useful life, the bus is expected to be driven 100,000 miles. Salvage value is expected to be $8,000. Prepare a depreciation schedule assuming actual mileage was: 2022, 26,000; 2023, 32,000; 2024, 25,000; and 2025, 17,000. Declining-Balance Method The formula for computing depreciation expense is: Book Value at Beginning of Year X Declining-Balance Rate = Depreciation Expense Book Value at Beginning of Year × ( 2/useful life in years) = Depreciation Expense Book Value at Beginning of Year – Salvage Value =Last Year Depreciation Expense Example 5: Corales Company acquires a delivery truck at a cost of $38,000. The truck is expected to have a salvage value of $2,000 at the end of its 4-year useful life. Assuming the declining-balance depreciation rate is double the straight-line rate, compute annual depreciation for the first and second years under the declining- balance method. 2

Example 6: Rottino Company purchased a new machine on October 1, 2021, at a cost of $150,000. The company estimated that the machine will have a salvage value of $12,000. The machine is expected to be used for 10,000 working hours during its 5-year life. Compute the depreciation expense under the following methods for the year indicated. (a) Straight-line for 2021. (b) Units-of-activity for 2021, assuming machine usage was 1,700 hours. (c) Declining-balance using double the straight-line rate for 2021 and 2022. Example 7: Linton Company purchased a delivery truck for $34,000 on January 1, 2021. The truck has an expected salvage value of $2,000, and is expected to be driven 100,000 miles over its estimated useful life of 8 years. Actual miles driven were 15,000 in 2021 and 12,000 in 2022. Instructions: (a) Compute depreciation expense for 2021 and 2022 using (1) the straight-line method, (2) the units-of- activity method, and (3) the double-declining-balance method. (b) Assume that Linton uses the straight-line method. 1. Prepare the journal entry to record 2021 depreciation. 2. Show how the truck would be reported in the December 31, 2021, balance sheet. A) 2021 2022 Stream line 34k-2k/8=4k 4k UOA Depreciable cost per unit: 34k-2k/100k=.32 .32*15k=4800 .32*12k=3840 Double Declining B 2/8x(34k-0)=8500 2/8x(34k-8500)=6375 B) 12/31/2021 Depreciation Exp 4k Accumulated Dep 4k Equipment 34k Less accumulated Dep 4k Book value 30k 3

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Example 8: On January 1, 2021, Evers Company purchased a machine for use in its production process. The recorded cost of this machine was $180,000. Evers estimates that the useful life of the machine is 4 years with a $10,000 salvage value remaining at the end of that time period. Calculate the amount of depreciation expense that Evers should record for the machine each year of its useful life under the following assumptions. 1) Evers uses the straight-line method of depreciation. 2) Evers uses the declining-balance method. The rate used is twice the straight-line rate. 3) Evers uses the units-of-activity method and estimates that the useful life of the machine is 125,000 units. Actual usage is as follows: 2021, 45,000 units; 2022, 35,000 units; 2023, 25,000 units; 2024, 20,000 units. 1) SL 180k- 1000/4=42500(2021) 2022(42500) 2023(42500) 2024(42500) 3) UOA 2021(61200) 2022(47600) 2023(34000) 2024(27200) 2) DEP Accum. Dep book value 2021 2/4x(180k-0)=90k 90k 180-90k=90k 2022 2/4x(180-90k)=45k 135k 90k-45k=45k 2023 2/4x(180-45k)=22500 157500 22500 2024 22500-10k=12500 170k 10k Revising Periodic Depreciation Example 9: On January 1, 2021, the Morgantown Company ledger shows Equipment $32,000 and Accumulated Depreciation—Equipment $9,000. The depreciation resulted from using the straight-line method with a useful life of 10 years and a salvage value of $2,000. On this date, the company concludes that the equipment has a remaining useful life of only 4 years with the same salvage value. Compute the revised annual depreciation. 4

Expenditures during Useful Life  Ordinary repairs are debited to Maintenance and Repairs Expense as incurred  Additions and improvements are debited to the specific plant assets Example 10: Flaherty Company had the following two transactions related to its delivery truck. 1. Paid $45 for an oil change. 2. Paid $400 to install a special gear unit, which increases the operating efficiency of the truck. Prepare Flaherty's journal entries to record these two transactions. Plant Asset Disposals Example 11: Gunkelson Company sells equipment on September 30, 2021, for $18,000 cash. The equipment originally cost $72,000 and as of January 1, 2021, had accumulated depreciation of $42,000. Depreciation for the first 9 months of 2021 is $5,250. Prepare the journal entries to (a) update depreciation to September 30, 2021, and (b) record the sale of the equipment. Equipment AD 72 42k 1/1 72k 5250 9/30 47250 9/30/2021 DEP Exp 5250 Accum. Dep 5250 Accum. Dep 47250 Cash 18k Loss on disposed of plant 6750 Assets Equipment 72k 5

Example 12: Presented below are selected transactions at Ridge Company for 2021. Jan. 1 Retired a piece of machinery that was purchased on January 1, 2011. The machine cost $62,000 on that date. It had a useful life of 10 years with no salvage value. June 30 Sold a computer that was purchased on January 1, 2018. The computer cost $45,000. It had a useful life of 5 years with no salvage value. The computer was sold for $14,000. Dec. 31 Discarded a delivery truck that was purchased on January 1, 2017. The truck cost $33,000. It was depreciated based on a 6-year useful life with a $3,000 salvage value. Journalize all entries required on the above dates, including entries to update depreciation, where applicable, on assets deisposed of. Ridge Company uses straight-line depreciation. (Assume depreciation is up to date as of December 31, 2020.) Part A Jan1 Equipment AD 62k (62-0/10)*10=62k 62k Jan 1. Dep Exp 62k Accum Dep 62k Accum dep 6200 Equipment 62k Part BJune 30 Equipment AD 45k (45k-0/5)*3=27000 45k 4500 31500 Dep Exp (45k/5*6/12)=4500 Dep Exp 4500 Accum dep 4500 Accum dep 31500 Cash 14k Equipment 45k Gain disposal of plant 500 Part c DEC 31 Equipment AD 33k (33-3000/6)*4=20000 Dep Exp (33000-3k/6*1)=5000 Dep exp 5000 Accum Dep 5000 6 45500

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Accum Dep 25000 Equipment 33000 Loss of disposal of plant assets 8k Natural Resources Depletion is the systematic write-off of the cost of natural resources. The units-of-activity method is generally used to compute depletion. The formulas for computing depletion expense are: Total Cost minus Salvage Value ÷ Total Estimated Units = Depletion Cost per Unit. Depletion Cost per Unit X Number of Units Extracted and Sold = Depletion Expense. Example 13: Franceour Mining Co. purchased for $7 million a mine that is estimated to have 35 million tons of ore and no salvage value. In the first year, 5 million tons of ore are extracted and sold. (a) Prepare the journal entry to record depletion expense for the first year. (b) Show how this mine is reported on the balance sheet at the end of the first year. Deplection cost per unit= 7M/35= 0.2 Depletion =5*.2= 1M Inventory 1M Accum dep 1M Ore Mine 7M Less Accum Dep 1m Total: 6M Intangible Assets  Intangible assets: Patents Copyrights Trademark or Trade name Franchise Goodwill  The systematic write-off of an intangible asset is referred to as amortization. To record amortization, Amortization Expense is debited and the specific intangible asset is credited. Amortization is typically computed on a straight-line basis. Example 14: Gill Company, organized in 2021, has the following transactions related to intangible assets. 1/2/21 Purchased patent (7-year life) $595,000 4/1/21 Goodwill purchased (indefinite life) 360,000 7/1/21 10-year franchise; expiration date 7/1/2031 480,000 7

9/1/21 Research and development costs 185,000 Prepare the necessary entries to record these intangibles. All costs incurred were for cash. Make the adjusting entries as of December 31, 2021, recording any necessary amortization and reflecting all balances accurately as of that date. 1/2/21 purchased patent ................................................. 595k Cash .................................................................. 595k Goodwill .................................................................. 360k Cash .............................................. 360k Franchise .................................................................. 480k Cash ................................................................. 480k R&D Exp .................................................................. 185k Cash ................................................................. 185k Authorization exp Patent (595/7) ......................................................................... 85k Franchise(480/10*6/12) .......................................................... 24k Total .......................................................................... 109k Return on Assets= net income/average assets= net income/net sales* net sales/average assets ............................. Profit margin*asset turnover Statement Presentations and Analysis Asset Turnover=Net Sales ÷ Average Total Assets Example 15: In a recent annual report, Target reported beginning total assets of $44.1 billion; ending total assets of $44.5 billion; and net sales of $63.4 billion. Compute Target's asset turnover. 8