Chapter 8: Accounting for Long-Term Assests

On January 1, Truesdale, Inc., purchased a piece of machinery for use in operations. The total acquisition cost was $33,000. The machine has an estimated useful life of 3 years and a salvage value of $3,000. Using the straight-line method, the amount of depreciation that should be recorded during year 1, is approximately

$10,000 (33000-3000)/3 = annual depreciation

Worthington, Inc., paid $90,000 to acquire land, land improvements, and a building. The company obtained two appraisals: The land was appraised at $30,000, the land improvements were appraised at $10,000, and the building was appraised at $60,000. The allocation of the cost of the purchase result in cost figures of

$27,000 for the land, $9,000 for the land improvements, and $54,000 for the building

On January 1, 2015, Coopers Industries bought a parcel of land for use in its operations by paying the seller $100,000 in cash and signing a 5-year, 12 percent note payable in the amount of $400,000. In connection with the purchase of the land, Coopers incurred legal fees of $19,000, a real estate agent sales commission of $25,000, surveying fees of $1,000, and an appraisal fee of $5,000. The acquisition cost of the land is

$550,000

On October 1, 2019, Illini Company purchased a truck for $42,000. The truck is expected to have a salvage value of $3,000 at the end of its 3-year useful life. If the company uses the straight-line method, the depreciation expense recorded during the year ending December 31, 2019, will be:

(42000-3000) / 3 = 13000 13000*3 months / 12 months in a year

straight line method

(cost - salvage value) / useful life in periods

Straight line rate

100% divided by useful life

On January 1, 2019, Truesdale, Inc., purchased a piece of machinery for use in operations. The total acquisition cost was $33,000. The machine has an estimated useful life of 3 years and a salvage value of $3,000. Using the straight-line method, the book value of the machinery at December 31, 2020, is approximately

2 years have passed, 2019 & 2020 annual depreciation is $10,000 leaves a $13000 book value

Depletion method

Depletion per unit =(cost - salvage value) / total units of capacity Depletion expense = Depletion per unit x units extracted

On December 29, 2020, Patel Products, Inc., sells a delivery van that cost $20,000. The equipment had accumulated depreciation of $16,000 at December 31, 2019. Annual depreciation on this equipment is $2,000 computed using straight-line depreciation.Complete the necessary journal entry to bring the accumulated depreciation up-to-date by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Depreciation expense - $2,000 (debit) Accumulated depreciation - $2,000 (credit)

Patent

Exclusive right granted to its owner to manufacture and sell an item

Depreciation computations for tax return purposes are performed using the _____.

Modified Accelerated Cost Recovery System

Units of production method

Step 1: Depreciation per unit = cost - salvage value / total units of production Step 2: Depreciation Expense = Depreciation per unit x units produced in period

On January 1, 2015, Truesdale, Inc., purchased a piece of machinery for use in operations. The total acquisition cost was $33,000. The machine has an estimated useful life of 3 years and a salvage value of $3,000. At December 31, 2016, using the double-declining-balance method, the book value of the machine is approximately _____.

Straight-line rate = 100%÷ useful life of 3 years = 1/3 Double-declining rate = Straight-line rate of 1/3 x 2 = 2/3 2015 Depreciation = Starting book value of $33,000 (or cost of $33,000) x rate of 2/3 = $22,000 Book value at 12/31/16 = Cost of $33,000 - Accumulated depreciation of $22,000 = $11,000 2016 Depreciation = Book value at 12/31/15 of $11,000 x rate of 2/3 = $7,333 Book value at 12/31/17 = (Cost of $33,000 - Accumulated depreciation of $29,733 (or $22,000 + $7,333) = $3,667

On December 29, 2019, Patel Products, Inc., sells a delivery van that cost $20,000. After recording the entry to bring the accumulated depreciation up-to-date, the delivery van had accumulated depreciation of $18,000. Patel received $2,000 cash from the purchaser of the delivery van. Complete the necessary journal entry to record the sale

The book value of the equipment at the time of the sale was $2,000 (or cost of $20,000 − updated accumulated depreciation of $18,000). Because Patel received $2,500 cash from the purchaser of the delivery van, which is more than the equipment's book value ($2,000) at the time of the sale, there is a gain on the disposal. The entry to record this sale at more than book value includes a debit to Cash for $2,000, a debit to Accumulated Depreciation — Delivery Van for $18,000, a credit , and a credit to Delivery Van for $20,000.

On January 2, 2015, Dixie, Inc., pays a salvage company $1,000 to haul away a machine costing $28,000 with accumulated depreciation of $28,000. Complete the necessary journal entry by selecting the account names and dollar amounts from the drop-down menus.

The entry to record the disposal includes a debit to Accumulated Depreciation — Machinery for $28,000, a debit to Loss on Disposal of Machinery for $1,000, a credit to Cash for $1,000, and a credit to Machinery for $28,000. Although the book value of the machine is zero (or cost of $28,000 − accumulated depreciation of $28,000), the cash payment to haul away the equipment caused the loss.

Capital expenditures

benefit future periods and are debited to asset accounts Examples are extraordinary repairs and betterments.

4 main issues in accounting for plant assets

computing the costs of plant assets, allocating the costs of most plant assets, account for subsequent expenditures, record disposal

How to record straight line depreciation for machinery in the general journal

depreciation expense debit, accumulated depreciation - machinery credit

Revenue expenditures

expire in the current period and are debited to expense accounts and matched with current revenues. Ordinary repairs are an example

Copyright

gives its owner the exclusive right to publish and sell musical, literary, or artistic work over a defined period of time

Cost of factory machine includes

invoice cost less any cash discount for early payment + any necessary freight, unpacking, assembling, installing and testing costs

accelerated depreciation method

method that produces larger depreciation charges in the early years of an asset's life and smaller charges in its later years

the useful life of a new plant asset

might be estimated based on the experience of others or on engineering studies and judgement if the company does not have past experience with a similar asset

land improvements include

parking lot surfaces, walkways, fences, landscaping and sprinkling/lighting systems

land includes

payments for surveying, clearing, grading, and draining, government assessments,

Plant assets are also called:

plant and equipment; property, plant and equipment; or fixed assets

The double-declining-balance and straight-line depreciation methods _____.

produce the same amount of total depreciation over an asset's useful life

Building's cost includes

purchase price, brokerage fees, taxes, titles fee and attorney fees

Cost of machinery and equipment consist of

purchase price, taxes, transportation charges, insurance while in transit, and the installing, assembling and testing

double declining-balance method

straight line rate = 100% / useful life ddb rate = straight line rate x 2 depreciation expense = ddb rate x beginning period book value.

plant assets (equipment)

tangible assets used in a company's operations that have a useful life of more than one accounting period. recorded at cost when purchased Cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. The cost of a lump-sum purchase is allocated among its individual assets.

Goodwill

the amount by which a company's value exceeds the value of its individual assets and liabilities

Zimmerman Auto sells new and used cars. Among its assets are the following: (1) the showroom building, a separate building used to service customer cars, and various parking lots, (2) a nearby acre of land not currently used by the auto dealership, (3) new and used cars and trucks for sale to customers, and (4) a car that is used to provide rides to customers who prefer to wait at home while their cars are serviced. The assets that are classified as plant assets on the company's balance sheet include

1 & 4

The general steps in accounting for disposal of a plant asset are

1 Record depreciation up to the date of disposal 2 Record the removal of the disposed asset's account balances 3 Record any cash (or other assets) assets (received or paid) in the disposal 4 record any gain or loss

Last year, Mountain Top, Inc., purchased a coal mine at a cost of $900,000. The salvage value has been estimated at $100,000. The coal mine has an estimated 200,000 tons of available coal. A total of 70,000 tons were mined and sold during the current year.Complete the necessary adjusting journal entry to record depletion expense for the current year by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Depletion expense - $280,000 (debit)Accumulated depletion - $280,000 (credit)

On January 1, 2015, Truesdale, Inc., purchased a piece of machinery for use in operations. The total acquisition cost was $33,000. The machine was expected to produce a total of 60,000 units in during its life. The machine actually produced 16,000 units during 2015, 23,000 units during 2016, and 21,000 units during 2017. The machinery has a salvage value of $3,000. Using the units-of-production method, the amount of depreciation that should be recorded during 2015 is approximately

Depreciation per unit = (Cost of $33,000 - Salvage value of $3,000) ÷ Total number of units expected to be produced of 60,000 = $0.50 per unit Depreciation for 2013 = Units produced in the period of 16,000 x Depreciation per unit of $0.50 = $8,000

On January 1, 2015, Truesdale, Inc., purchased a piece of machinery for use in operations. The total acquisition cost was $33,000. The machine was expected to produce a total of 60,000 units in during its life. The machine actually produced 16,000 units during 2015, 23,000 units during 2016, and 21,000 units during 2017. The machinery has a salvage value of $3,000. Using the units-of-production method, the book value of the machinery at December 31, 2016 is approximately

Depreciation per unit = (Cost of $33,000 - Salvage value of $3,000) ÷ Total number of units expected to be produced of 60,000 = $0.50 per unit Depreciation for 2015 = Units produced in the period of 16,000 x Depreciation per unit of $0.50 = $8,000 Depreciation for 2016 = Units produced in the period of 23,000 x Depreciation per unit of $0.50 = $11,500 Book value at December 31, 2016 = Cost of $33,000 - Accumulated depreciation of $19,500 (or $8,000 for 2015 + $11,500 for 2016) = $13,500

The acquisition cost of a plant asset does not include

repair costs resulting from damage to the plant asset while it was being unpacked

Depreciation

the process of allocating to expense the cost of a plant asset over the accounting periods that benefit from its use. Three factors determine depreciation: cost, salvage value, and useful life.