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On January 1, Year One, the Rhode Island Redbirds organization purchased new workout equipment for its athletes. The equipment had a cost of $15,600, transportation costs of $450, and set-up costs of $290. The Redbirds spent an additional $350 training their athletes on the proper use of this equipment. The expected useful life is five years. No residual value is anticipated. How much accumulated depreciation should the Redbirds report after two years if the straight-line method is used?
Refer to the information in number 1. Assume the Redbirds decide to use the double-declining balance depreciation method instead of the straight-line method. What amount of accumulated depreciation is reported on the balance sheet at the end of Year Two?
Ace Company buys a machine on April 1, Year One, for $50,000 in cash. It has a residual value of $10,000 and an expected useful life of ten years. The straight-line method and the half-year convention are applied. The asset is sold on September 1, Year Three, for $39,900. What loss should be reported on this sale?
The Timmons Company buys equipment on August 1, Year One, for a reported total amount of $60,000. It has a residual value of $10,000 and an expected useful life of five years. The straight-line method and the half-year convention are applied. The company reports net income in Year One of $70,000. However, an error was made. When this equipment was bought, a $5,000 cost was capitalized when it should have been expensed. What was the appropriate amount of net income that Timmons should have reported?
The Anna Corporation buys equipment on September 1, Year One, for $80,000 with a ten-year expected life and an estimated residual value of $10,000. The asset is depreciated using the double-declining balance method and the half-year convention. What is the net book value for this asset at the end of Year Three?
The Larisa Company buys machinery on April 1, Year One, for $50,000 with an expected life of ten years and residual value of $10,000. The double-declining balance method is applied along with the half-year convention. The machinery is sold on September 1, Year Three, for $32,400. What gain should be reported on this sale?
Which of the following is a characteristic of the MACRS system that is used in computing a company’s taxable income for federal income tax purposes?
The Greenville Company starts operations in Year One and buys several pieces of equipment. All of this equipment is expected to last for ten years and have a residual value equal to 25 percent of cost. MACRS is properly used for tax purposes while straight-line depreciation is applied for financial reporting purposes. Based solely on the expensing of this equipment in Year One, which of the following statements is true?
On January 3, Year One, Jewels Inc. purchases a South American mine (found to be rich in amethyst) for $560,000. After all of the amethyst has been removed, the land is estimated to be worth only $100,000. Experts predict that the mine contains 4,000 pounds of amethyst. Jewels plans on completing the extraction process in four years. In Year One, 400 pounds are dug from the mine. None of it has yet been sold. What should be reported as the net book value for the mine at the end of Year One?
Kite Corporation wishes to trade equipment it owns for a vehicle owned by the Runner Corporation. Kite’s equipment has a net book value of $4,000 and a fair value of $4,500. Runner’s vehicle has a net book value and fair value of $5,100. Kite agrees to pay Runner $600 in cash in addition to giving up the equipment. What is Kite’s reported gain or loss on this exchange?
A company has equipment with a cost of $50,000 and a net book value at present of $15,000. The equipment is actually worth $18,000. It is traded along with cash of $12,000 for a truck that has a value of $30,400. What is the company’s reported gain or loss on this exchange?
The Bristol Corporation buys equipment on January 1, Year One, for $50,000. It has a ten-year life and an expected residual value of $5,000. The double-declining balance method of determining depreciation is applied. The equipment actually loses exactly 10 percent of its initial value every year. On January 1, Year Three, this equipment is traded for some new machinery that has a fair value of $42,000. At what amount should this new machinery be recorded by Bristol?
At the beginning of Year Three, the Kelvin Company owned equipment that appeared on its balance sheet with a cost of $7 million and accumulated depreciation of $2 million. The equipment was purchased two years earlier and assigned a useful life of six years. The estimated residual value was $1 million. At the beginning of Year Three, Kelvin made several modifications to the equipment that increased its remaining useful life from four years to five years. No other changes occurred as a result of these modifications. Their cost was $50,000. What is the balance in the accumulated depreciation account on December 31, Year Three?
The Winslett Company buys a retail store on January 1, Year One, with a ten-year life and a cost of $800,000. No residual value is anticipated. Straight-line depreciation is used. The building was bought because the company believed that it could generate post-cash flows of $98,000 per year. On January 1, Year Four, a new road is opened in the area that takes much of the traffic away from the store. For the remainder of its life, the company only expects to generate a positive cash flow of $82,000 per year. An appraisal is made that indicates the building has a fair value of only $480,000. What recording should be made on that date for this building?
On January 1, Year One, the Capricorn Corporation borrows money on a loan paying 9 percent interest each year. The money is used to construct a new building, which takes exactly one year to complete. The building has a twenty-year expected life with no residual value. In determining net income for Year One, which of the following statements is true?
Professor Joe Hoyle discusses the answers to these two problems at the links that are indicated. After formulating your answers, watch each video to see how Professor Hoyle answers these questions.
Your roommate is an English major. The roommate’s parents own a chain of ice cream shops throughout Florida. One day, while packing to go home on spring break, your roommate poses this question: “My parents have always rented their store locations. However, last year, they built their first standalone shop in Orlando. It has been doing great business, but I know they spent a lot of money to build it. They have been talking recently about the depreciation making the first-year results look bad for that shop. I am not sure what they are talking about. The shop looks better than ever. It hasn’t depreciated at all. In fact, the value of that facility has probably gone up. What is this depreciation, and why has it hurt the reported results for the shop in Orlando?” How would you respond?
Your uncle and two friends started a small office supply store several years ago. The company has expanded and now has several large locations. Your uncle knows that you are taking a financial accounting class and asks you the following question: “We bought one of our facilities too far from our other stores. We thought it was a good idea at the time. The store does well, but we have trouble managing it and keeping it stocked with merchandise because of the distance. It is a valuable asset, but it does not fit in with our future plans. Another company has come up to us and offered to trade a large warehouse near our headquarters for that store. The warehouse is actually worth slightly more than the store, but the other company would really like to have a store at that location. And, we could use the warehouse space. We are inclined to make the exchange, but we want to have a careful understanding of how this transaction might impact our financial statements. We don’t want to do anything that would make us look bad. We don’t want to scare our creditors. How would we record such a swap?” How would you respond?
Equipment was bought by a company on January 1, Year One, for $40,000. It had an expected useful life of five years and a $5,000 residual value. Unfortunately, at the time of purchase, an error was made. The accountant debited supplies expense for $40,000 and credited cash. No adjusting entry was ever made. At the end of Year One, the company reported net income of $100,000 and total assets of $300,000. What should those reported figures have been under each of the following situations?
On January 1, Year One, the Sanborn Corporation buys a donut maker for $10,000 that has a ten-year estimated life and an estimated residual value of $1,000. The donut maker is expected to produce a total of 100,000 dozen donuts over its life. In Year One, 13,000 dozen are produced and, in Year Two, 11,000 dozen are produced.
On April 1, Year One, Chang and Chang Inc. invested in a new machine to manufacture soccer balls. The machine is expected to manufacture 1.4 million soccer balls over its life of three years and then be scrapped. The machine cost $50,000 including the normal and necessary costs of setting it up. The units-of-production method is used to depreciate the machine.
Springfield Corporation purchases a new machine on March 3, Year One, for $35,600 in cash. It pays an additional $3,400 to transport and set up the machine. Springfield’s accountant determines that the equipment has no residual value and that the useful life is five years. It is expected to generate 2.4 million units during its life. If applicable, assume that Springfield employs the half-year convention.
A company uses the half-year convention and buys equipment for $200,000 on December 1, Year One. The equipment has an expected life of ten years and a $40,000 anticipated residual value. The equipment is sold on March 1, Year Three, for $165,000 in cash.
The Huguenot Corporation buys equipment on October 1, Year One, for $120,000. It has an expected residual value of $30,000. The company expects to make use of it for ten years.The straight-line method of depreciation is applied but not the half-year convention. The equipment is sold on April 1, Year Three, for $107,000.
What would have been the difference in reported net income for Year Three if the double-declining balance method had been used along with the half-year convention?
On January 1, Year One, the Oklahoma Corporation buys an oil well for $2 million in cash. The company believes that this well holds 400,000 barrels in crude oil. However, the oil well will have no residual value after the oil has been removed. In Year One, the company pumps out 100,000 barrels and sells 70,000 barrels for $19 per barrel. In Year Two, the company pumps out another 50,000 barrels but sells a total of 60,000 barrels for $20 per barrel.
Make the necessary journal entries.
Markov Corporation owns forests that are harvested with the wood sold to papermaking companies. Markov purchases a new tract of forest on January 1, Year One, for $360,000. Company officials estimate that 4,000 tons of wood can be harvested from the forest and sold. After that, the land will be worth about $20,000.
Gameplay Company operates in mall locations and sells videogame equipment and games. The company purchased furniture and fixtures to use in one of its stores for $440,000 on January 1, Year One. The furniture and fixtures were being depreciated using the straight-line method over ten years with a residual value of $10,000. Near the end of December, Year Five, Gameplay decided to close this location and entered into an exchange agreement with Allero Corporation. Allero agreed to give Gameplay vehicles with a fair value of $200,000 and cash of $50,000 in exchange for the furniture and fixtures from this store. The furniture and fixtures have an estimated fair value of $250,000 on the date of exchange.
The Milan Corporation owns a building that it has used for a number of years. At the start of the current year, the building has a cost of $1.5 million and accumulated depreciation of $600,000. Straight line depreciation has been used with no expected residual value. The asset was originally assumed to have a thirty-year life, and twelve years have now passed.
Assume that each of the following situations is entirely independent. For each, prepare the appropriate journal entry and determine the amount of depreciation expense that should be reported for the current year.
The Monster Cookie Company buys a machine to make cookies on January 1, Year One. It costs $500,000 but has a $100,000 residual value and an expected life of ten years. Straight-line depreciation is to be applied. On January 1, Year Three, the company makes two changes to this machine. First, $30,000 is spent to add an attachment so that the company can make two types of cookies rather than just one. Second, the company spends $40,000 so that the machine will last five years longer than originally anticipated.
In connection with this machine, what figures are reported on the company’s financial statements for Year Three?
On June 30, Partyplace, a popular spot for receptions and other events, purchased a used limousine and a used Hummer from a car dealership. The company received a good deal because it was willing to buy both vehicles, paying a total of only $75,000. The market values were $45,000 for the limousine and $40,000 for the Hummer.
The Randolph Corporation owns a building in Waynesboro, Arkansas, that originally cost $2 million. At the current time, this building has a net book value of $900,000 and a remaining useful life of ten years with no expected residual value. However, the company no longer uses the building for manufacturing purposes, so its fair value has fallen to only $576,000. To generate some revenue from the building, several rooms are rented out to other businesses as warehouse space. In each of the following questions, should the company recognize an impairment loss? If so, how much loss should be recognized?
Fairfield Inc. invested in a plant to manufacture “Jphones,” thinking these devices would be the next “big thing.” Unfortunately, things did not work out so well for the Jphone.
Company A borrows $4 million on January 1, Year One, and uses the money to buy a retail store in Trenton, New Jersey. The store opens immediately and starts to make sales. The annual interest rate on the debt is 6 percent with payments made every December 31. The building has a twenty-year expected life and no residual value. Straight-line depreciation is used.
Company Z also borrows $4 million on January 1, Year One, but uses the money to construct a store in Reno, Nevada, that is exactly like the store owned by Company A. Construction takes one year, and the store is opened for business on January 1, Year Two. The annual interest rate is 6 percent, and the building is expected to last twenty years with no anticipated residual value. Straight-line depreciation is used.
On Year Two financial statements, how will the balances be different between the reporting by Company A and the reporting by Company Z?
This problem will carry through over several chapters to enable students to build their accounting skills using knowledge gained in previous chapters.
In Chapter 9 "Why Does a Company Need a Cost Flow Assumption in Reporting Inventory?", financial statements were prepared for Webworks for September 30, and the month then ended. Those financial statements are included here as a starting point for the financial reporting for October.
The following events occur during October:
Webworks pays taxes of $868 in cash.
Record cost of goods sold.
Assume that you take a job as a summer employee for an investment advisory service. One of the partners for that firm is currently looking at the possibility of investing in DuPont (official name is E. I. Du Pont de Nemours and Company). The partner knows that this manufacturing company has been in business for many years and wonders about the age of its property and equipment. The partner asks you to look at the 2011 financial statements for DuPont by following this path: