CHAPTER 9

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Walker Company's average total assets are $200,000, net sales total to $100,000, and net income is $40,000. How much net income did Walker Company generate for each dollar of assets invested?

$0.20 Solution: $40,000/$200,000 = $0.20. Chapter 9, Learning objective 6: Describe methods for evaluating the use of plant assets.

Walker Company's average total assets are $240,000, net sales total to $140,000, and net income is $90,000. How much net income did Walker Company generate for each dollar of assets invested?

$0.375 Solution: $90,000/$240,000 = $0.375.

On January 1, Jamaica Company purchased equipment for $18,000. The estimated salvage value is $4,000 and the estimated useful life is 5 years. On December 31 of the fourth year, and before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment by two years giving it a total life of 7 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for the fourth year?

$1,400

Ralph's Wrecker Service bought equipment for $70,000 on January 1 of its first year. The equipment's original estimated useful life is 8 years and its estimated salvage value is $14,000. The company uses the straight-line method of depreciation. On December 31 of its third year, before year-end adjusting entries have been recorded, Ralph's decides to shorten the estimated useful life by 2 years giving it a total life of 6 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the third year?

$10,500 Solution: Original depreciation per year = [(70,000 - 14,000)/8] x 2 = 7,000 Revised depreciation per year = [(70,000 - 2 x 7,000 - 14,000]/ (6-2)= 10,500

A company purchased land for $80,000. The company also assumes $16,000 of accrued taxes on the property, incurred $9,000 to remove an old building, and received $4,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records?

$101,000 Solution: All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. The company should include the purchase price of $80,000, the assumption of accrued taxes of $16,000 (i.e., the buyer agrees to pay the property taxes that the previous owner owed), the cost of razing the old building of $9,000 less the payment received for the salvaged materials in the amount of $4,000. This results in an acquisition cost of $101,000.

A company purchases land for $90,000 cash. The company assumes $2,500 in property taxes due on the land owed by the previous owner. The title and attorney fees totaled $1,000. The company pays to have the land graded for $2,200. They paid $10,000 for paving of a parking lot. The company spent $12,000 demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $1,500. What amount does the company record as the cost for the land?

$106,200 Solution: Total cost = $90,000 + $2,500 + $1,000 + $2,200 + ($12,000 - 1,500) = $106,200

Able Towing Company purchased a tow truck for $50,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 8 years with an estimated salvage value of $10,000. At the end of the fourth year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 6 years and to change its estimated salvage value to $2,000. How much depreciation expense should be recorded for the fourth year?

$11,000 Solution: For the first three years, the annual depreciation expense is ($50,000 - $10,000)/8 years = $5,000 per year. In the fourth year, before depreciation is recorded, the asset's book value is ($50,000 - 3 x 5,000 = $35,000), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($35,000 - $2,000)/(6-3) = $11,000. Note: There are three years of useful life including the fourth, fifth, and sixth years.

Rhonda's Rose Shop bought equipment for $80,000 on January 1 of its first year. The equipment's original estimated useful life is 5 years and its estimated salvage value is $10,000. The company uses the straight-line method of depreciation. On December 31 of its second year, before year-end adjusting entries have been recorded, Rhonda's decides to extend the estimated useful life 1 year giving it a total life of 6 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the second year?

$11,200 Solution: Original depreciation per year: ($80,000 - 10,000)/5 years = $14,000 per year. Revised depreciation per year: ($80,000 - 1 x 14,000 - 10,000)/(6-1) = $11,200 per year

On May 1 of the current year, 2021, Hall Company paid $90,000 for a copyright issued 65 years earlier. The amount of amortization expense recognized by the company for the current year would be

$12,000 Solution: Copyrights are intangible assets with useful lives of 70 years after which they expire. A copyright issued 65 years earlier has five years of remaining useful life. Intangibles that can be amortized (e.g., copyrights) are amortized using a straight-line method with no salvage value. The current year is a partial year (i.e., May 1 through December 31). Amortization expense = $90,000/5 years x 8/12 = $12,000

On April 1 of the current year, Moreno Company purchased a patent from another company for $80,000. The estimated useful life of the patent is 10 years, and its remaining legal life is 5 years. How much is Moreno's amortization expense for the current year?

$12,000 Solution: Amortization is calculated using the straight-line method over the shorter of the useful life or the remaining legal life. In this case, the shorter is 5 years. Amortization expense for the current year = $80,000/5 years x 9/12 = $12,000.

Able Towing Company purchased a tow truck for $60,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 10 years with an estimated salvage value of $12,000. At the end of the third year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 6 years and to change its estimated salvage value to $2,000. How much depreciation expense should be recorded for the third year?

$12,100 Solution: For the first three years, the annual depreciation expense is ($60,000 - $12,000)/10 years = $4,800 per year. In the third year, before depreciation is recorded, the asset's book value is ($60,000 - 2 x 4,800 = $50,400), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($50,400 - $2,000)/(6-2) = $12,100. Note: There are four years of useful life including the third, fourth, fifth, and sixth years.

Paul Company purchased a dump truck for $27,000. In addition, Paul Company paid freight charges of $500, and $700 to paint the company's logo on the truck. The estimated salvage value and useful life are $3,200 and 4 years, respectively. How much is the accumulated depreciation under the straight-line method after two years?

$12,500 Solution: The purchase price includes all costs necessary to get the truck ready to use: $27,000 + $500 + $700 = $28,200. The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($28,200 - $3,200)/4 years = $6,250. Accumulated depreciation after three years = $6,250 x 2 = $12,500.

At the start of the current year, a company paid for the following in cash: Copyrights, $200,000 Equipment, $25,000,000 Goodwill, $3,500,000 Inventory, $1,500,000 Land, $15,000,000 Patents, $1,000,000 Research and development, $1,500,000 Supplies, $1,500,000 Trademarks, $1,200,000 It amortizes its intangibles over 10 years. Determine its current year amortization expense.

$120,000

Santiago Corporation bought equipment on January 1. The equipment cost $320,000 and had an expected salvage value of $40,000. The life of the equipment was estimated to be 7 years and straight-line depreciation is used. The book value of the equipment at the end of the fifth year would be

$120,000 Solution: Depreciation per year = ($320,000 - 40,000)/7 years = $40,000 per year Accumulated depreciation after 5 years = $40,000 x 5 = $200,000 Book value = Cost minus accumulated depreciation Book value = $320,000 - 200,000 = $120,000

A company purchased machinery for $850,000 on July 1, 2021. The company also paid freight charges of $5,000 and installation costs of $20,000. It is estimated that the machinery will have a $75,000 salvage value at the end of its 10-year useful life. What is the amount of accumulated depreciation at December 31, 2022 if the straight-line method of depreciation is used?

$120,000 Solution: Depreciation per year = ($850,000 + 5,000 + 20,000 - 75,000)/10 years = $80,000 per year Accumulated depreciation after 1.5 years = $80,000 x 1.5 = $120,000

Able Towing Company purchased a tow truck for $60,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 9 years with an estimated salvage value of $6,000. At the end of the sixth year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 7 years and to change its estimated salvage value to $4,000. How much depreciation expense should be recorded for the sixth year?

$13,000 Solution: For the first five years, the annual depreciation expense is ($60,000 - $6,000)/9 years = $6,000 per year. In the sixth year, before depreciation is recorded, the asset's book value is ($60,000 - 5 x 6,000 = $30,000), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($30,000 - $4,000)/(7 - 5) = $13,000. Note: There are two years of useful life including the sixth and seventh years.

A company has the following asset account balances: Buildings and equipment, $8,900,000; Accumulated depreciation, $1,800,000; Patents, $850,000; Land Improvements, $1,200,000; and Land, $5,000,000. How much will be reported on the balance sheet under property, plant, & equipment?

$13,300,000 Solution: Buildings and equipment, land improvements, and land, less accumulated depreciation are included for a total of $13,300,000. (i.e., 8,900,000+1,200,000+5,000,000-1,800,000=13,300,000).

A company has the following asset account balances: Buildings and equipment, $9,200,000; Accumulated depreciation, $1,200,000; Patents, $750,000; Land Improvements, $1,000,000; and Land, $5,000,000. How much will be reported on the balance sheet under property, plant, & equipment?

$14,000,000 Solution: Buildings and equipment, land improvements, and land, less accumulated depreciation are included for a total of $14,000,000. (i.e., 9,200,000+1,000,000+5,000,000-1,200,000=14,000,000).

A company acquires land for $140,000 cash. Additional costs are as follows: Removal of shed, $1,000 Filling and grading, $2,500 Salvage value of lumber of shed, $200 Broker commission, $4,000 Paving of parking lot, $13,000 Closing costs, $1,700 The company should record the acquisition cost of the land as

$149,000 Solution: Purchase price, 140,000 Add: Removal of shed less salvages (i.e., 1,000 - 200), 800 Add: Filling and grading, 2,500 Add: Broker's commission, 4,000 Add: Closing costs, 1,700 Acquisition costs of land, 149,000 Note: Paving of the parking lot is recorded as a land improvement rather than as part of the cost of the land.

$149,000* Purchase price, 140,000Add: Removal of shed less salvages (i.e., 1,000 - 200), 800Add: Filling and grading, 2,500Add: Broker's commission, 4,000Add: Closing costs, 1,700Acquisition costs of land, 149,000*

Santiago Corporation bought equipment on January 1. The equipment cost $350,000 and had an expected salvage value of $50,000. The life of the equipment was estimated to be 6 years and straight-line depreciation is used. The book value of the equipment at the end of the fourth year would be

$150,000 Solution: Depreciation per year = ($350,000 - 50,000)/6 years = $50,000 per year Accumulated depreciation after 4 years = $50,000 x 4 = $200,000 Book value = Cost minus accumulated depreciation Book value = $350,000 - 200,000 = $150,000

On September 1 of the current year, a company purchased an asset for $9,000. It has a $1,500 salvage value and a 4-year useful life. How much is the current year depreciation expense using the straight-line method?

625

A company acquires land for $150,000 cash. Additional costs are as follows: Removal of shed, $200 Filling and grading, $2,000 Salvage value of lumber of shed, $80 Broker commission, $5,000 Paving of parking lot, $15,500 Closing costs, $1,200. The company should record the acquisition cost of the land as

$158,320 Solution: Purchase price, 150,000 Add: Removal of shed less salvages (i.e., 200 - 80), 120 Add: Filling and grading, 2,000 Add: Broker's commission, 5,000 Add: Closing costs, 1,200 Acquisition costs of land, 158,320 Note: Paving of the parking lot is recorded as a land improvement rather than as part of the cost of the land.

A plant asset with a cost of $240,000 and accumulated depreciation of $228,000 is sold for $28,000. What is the amount of the gain or loss on disposal of the plant asset?

$16,000 gain Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. Book value = Cost - Accumulated depreciation =$240,000 - 228,000 = $12,000 Since the sales price is is larger than the book value the company recognizes a gain. It is computed as follows: Gain = Sales proceeds from selling the asset - Book value of the asset sold Gain = $28,000 - 12,000 = $16,000

In the current year, Brogan Company sold equipment for $20,000. The original cost was $70,000, the estimated salvage value was $4,000, and the expected useful life was 6 years. The equipment was fully depreciated. How much is the gain or loss on the sale?

$16,000 gain Solution: The book value at the date of sale is the salvage value since the asset is fully depreciated. The gain or loss is the selling price less the book value: $20,000 - $4,000 = $16,000 gain.

Paul Company purchased a dump truck for $27,000. In addition, Paul Company paid freight charges of $500, and $700 to paint the company's logo on the truck. The estimated salvage value and useful life are $1,200 and 5 years, respectively. How much is the accumulated depreciation under the straight-line method after three years?

$16,200 Solution: The purchase price includes all costs necessary to get the truck ready to use: $27,000 + $500 + $700 = $28,200. The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($28,200 - $1,200)/5 years = $5,400. Accumulated depreciation after three years = $5,400 x 3 = $16,200.

On March 1 of the current year, a company purchases and places into service new equipment. The cost of the equipment is $125,000. The equipment has an estimated 5-year life and $25,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$16,667

Santiago Corporation bought equipment on January 1, Year 1. The equipment cost $360,000 and had an expected salvage value of $40,000. The life of the equipment was estimated to be 5 years and straight line depreciation is used. The book value of the equipment at the end of the third year would be

$168,000 Solution: Depreciation per year = ($360,000 - 40,000)/5 years = $64,000 per year Accumulated depreciation after 3 years = $64,000 x 3 = $192,000 Book value = Cost minus accumulated depreciation Book value = $360,000 - 192,000 = $168,000.

Equipment was purchased for $90,000. Freight charges paid to acquire the equipment amounted to $4,200. There was a cost of $12,000 for building a foundation for the equipment and installing the equipment. It is estimated that the equipment will have a $18,000 salvage value at the end of its 5-year useful life. Depreciation expense each full year using the straight-line method will be

$17,640 Solution: The cost of an asset includes its purchase price plus other costs to acquire the asset and prepare it for use. Add the freight charges and the foundation costs to the purchase price. Cost of the equipment = $90,000 + 4,200 + 12,000 = $106,200 Depreciation per year = (Cost - salvage value)/Life in year Depreciation per year = ($106,200 - 18,000)/5 years $17,640 per year

Rawlings Company purchased a machine for $80,000 on January 1 of the current year and depreciates it on a straight-line basis over a 10-year life assuming no salvage value. If the company sells the machine for $26,000 on June 30 of the fifth year, what would be the company's gain or loss from the sale?

$18,000 loss Solution: The selling price less the book value of the machine equals the gain or loss on the sale. The Book value of the machine when sold: $80,000 - [($80,000/10 years) x 4.5 years] = $44,000. The gain (loss) on the sale = sales price minus book vale = $26,000 - $44,000 = ($18,000).

On January 1, Jamaica Company purchased equipment for $15,000. The estimated salvage value is $3,000 and the estimated useful life is 4 years. On December 31, 2017 of the third year, and before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment by one year giving it a total life of 5 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for the third year?

$2,000

On April 1 of the current year, La Presa Company sells some equipment for $18,000. The original cost was $50,000, the estimated salvage value was $8,000, and the expected useful life was 6 years. Straight-line depreciation is used. On January 1 of the current year, the Accumulated Depreciation account had a balance of $28,000. How much is the gain or loss on the sale?

$2,250 loss First, the accumulated depreciation must be brought up to date to the date of sale. Since the equipment has a $42,000 depreciable cost (i.e., Depreciable cost = Cost - salvage value = $50,000 - 8,000) and a life of 6 years, the depreciation is $7,000 per year. In the current year, depreciation expense is $1,750 (i.e., $7,000 per year x 3/12) which increases accumulated depreciation. The Accumulated Depreciation balance at the date of sale is $29,750 (i.e., $28,000 + $1,750). Book value equals cost minus accumulated depreciation. Book value is $20,250 (i.e., $50,000 - $29,750). A gain occurs if the selling price exceeds the book value, and a loss occurs if the selling price is less than the book value. Sales price - book value = $18,000 - 20,250 = ($2,250) (i.e., loss).

A company sold a plant asset for $3,000. It had cost $12,000 and its accumulated depreciation is $8,500. What gain or loss did the company experience?

Loss of $500 Solution: Book value is $3,500 ($12,000 - $8,500). Since the book value ($3,500) exceed the proceeds ($3,000) by $500, there is a loss.

On January 1, Jamaica Company purchased equipment for $18,000. The estimated salvage value is $2,000 and the estimated useful life is 5 years. On December 31 of the third year, before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment by one year giving it a total life of 6 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for the third year?

$2,400 Solution: The annual depreciation for the first two years of life is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($18,000 - $2,000)/5 years = $3,200 per year. The depreciable cost that remains is $18,000 - $2,000 - (2 years x $3,200) = $9,600. This amount is allocated over the remaining useful life, and the remaining useful life is 4 years (i.e., 6 total years - 2 expired years). Depreciation in the third year is $2,400 (i.e., $9,600/4 years).

On March 1 of the current year, Franz Company purchases and places into service new equipment. The cost of the equipment is $40,000. The equipment has an estimated 10-year life and $5,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$2,917 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($40,000 - 5,000)/10 years = $3,500 per year Depreciation expense for March 1 through December 31 = $3,500 x 10/12 = $2,917

On February 1 of the current year, Fritz Company purchases and places into service new equipment. The cost of the equipment is $135,000. The equipment has an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$21,083 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($135,000 - 20,000)/5 years = $23,000 per year Depreciation expense for February 1 through December 31 = $23,000 x 11/12 = $21,083

Equipment was purchased for $72,000 on January 1. Freight charges paid to acquire the equipment amounted to $2,000. There was also a cost of $3,000 for building a foundation for the equipment and installing the equipment. It is estimated that the equipment will have a $10,000 salvage value at the end of its 6-year useful life. The straight-line method of depreciation is used. What is the amount of accumulated depreciation at the end of the second year of using the asset and after adjusting entries have been recorded?

$22,333. Solution: The cost of an asset includes its purchase price plus other costs to acquire the asset and prepare it for use. Add the freight charges and the foundation costs to the purchase price. Cost of the equipment = $72,000 + 2,000 + 3,000 = $77,000 Depreciation per year = (Cost - salvage value)/Life in year Depreciation per year = ($77,000 - 10,000)/6 years = $11,167 per year Accumulated depreciation after two years = 2 x $11,667 = $22,333

Based on the following year-end account balances, what amount would the company report on its balance sheet as intangible assets? Trademarks $14,000,000 Research and development 8,000,000 Copyrights 1,500,000 Patents 2,000,000 Goodwill 5,000,000

$22,500,000 Solution: For this company, intangibles include trademarks, copyrights, patents, and goodwill. Intangibles = $14,000,000 + 1,500,000 + 2,000,000 = $5,000,000 = $22,500,000

Jack's Copy Shop bought equipment for $180,000 on January 1 of its first year. The equipment's original estimated useful life is 3 years and its estimated salvage value is $30,000. The company uses the straight-line method of depreciation. On December 31 of its third year, before year-end adjusting entries have been recorded, Jack's decides to extend the estimated useful life 1 year giving it a total life of 4 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the third year?

$25,000 Solution: Original depreciation per year: ($180,000 - 30,000)/3 years = $50,000 per year. Revised depreciation per year: ($180,000 - 2 x 50,000 - 30,000)/(4-2) = $25,000 per year

A company's average total assets is $250,000, average total equity is $150,000, and net sales is $80,000. Its return on assets is 10%. What was the company's net income?

$25,000 Solution: Return on assets is net income divided by average total assets. Alternatively, net income equals average total assets times the return on assets. Net income = $250,000 x 10% = $25,000.

A company purchased equipment and incurred these costs: Cash price, $24,000; Sales taxes, $1,200; Insurance during transit, $200; Annual maintenance costs, $400. What amount should be recorded as the cost of the equipment?

$25,400 Solution: All costs necessary to get the asset ready to use should be included as part of the cost of the equipment because these are the costs that are necessary to acquire, safely transport, and prepare it for its intended use ($24,000 + $1,200 + $200 = $25,400). The $400 annual maintenance costs are expensed as operating expenses as incurred; they are not capitalized or added to the asset's cost or depreciated.

Given the following account balances at year end, how much is amortization expense on Analog Enterprises' income statement for the current year if the company amortizes intangibles over ten years? Sales revenue, $45,000,000; Patents, $2,500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,000,000; and Goodwill, $4,500,000. The company also paid $2,000,000 for research & development at the start of the current year. Assume that all of the company's intangible assets were acquired at the start of the current year.

$250,000 Solution: The intangibles are trademarks patents and goodwill. Only patents are amortized. Amortization expense for the year equals $2,500,000/10 = $250,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights. Goodwill is not amortized because it is considered to have an indefinite life. Trademarks are registered with the U.S. patent office and have lives of 20 years but they may be renewed indefinitely; because trademarks (and trade names) have indefinite lives, they are not amortized.

On March 1 of the current year, Franklin Company purchases and places into service new equipment. The cost of the equipment is $25,000. The equipment has an estimated 5-year life and $5,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$3,333 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = (25,000 - 5,000)/5 years = $4,000 per year Depreciation expense for March 1 through December 31 = $4,000 x 10/12 = $3,333

$250000 Solution: The intangibles are trademarks patents and goodwill. Only patents are amortized. Amortization expense for the year equals $2,500,000/10 = $250,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights. Goodwill is not amortized because it is considered to have an indefinite life. Trademarks are registered with the U.S. patent office and have lives of 20 years but they may be renewed indefinitely; because trademarks (and trade names) have indefinite lives, they are not amortized.

Jim's Coffee Shop bought equipment for $300,000 on January 1 of its first year. The equipment's original estimated useful life is 10 years and its estimated salvage value is $60,000. The company uses the straight-line method of depreciation. On December 31 of its sixth year, before year-end adjusting entries have been recorded, Jim's decides to revise the estimated salvage value to $48,000 but the estimated useful life is unchanged. How much depreciation expense should be recorded for the sixth year?

$26,400 Solution: Original depreciation per year: ($300,000 - 60,000)/10 years = $24,000 per year. Revised depreciation per year: ($300,000 - 5 x 24,000 - 48,000)/(10-5) = $26,400 per year

A company purchased equipment and incurred these costs: Cash price, $25,000; Sales taxes, $1,400; Insurance during transit, $300; Annual maintenance costs, $300. What amount should be recorded as the cost of the equipment?

$26,700 Solution: All costs necessary to get the asset ready to use should be included as part of the cost of the equipment because these are the costs that are necessary to acquire, safely transport, and prepare it for its intended use ($25,000 + $1,400 + $300 = $26,700). The $300 annual maintenance costs are expensed as operating expenses as incurred; they are not capitalized or added to the asset's cost or depreciated.

Equipment was purchased for $68,000 on January 1. Freight charges paid to acquire the equipment amounted to $2,800. There was also a cost of $8,000 for building a foundation for the equipment and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life. The straight-line method of depreciation is used. What is the amount of accumulated depreciation at the end of the second year of using the asset and after adjusting entries have been recorded?

$26,720 Solution: The cost of an asset includes its purchase price plus other costs to acquire the asset and prepare it for use. Add the freight charges and the foundation costs to the purchase price. Cost of the equipment = $68,000 + 2,800 + 8,000 = $78,800 Depreciation per year = (Cost - salvage value)/Life in year Depreciation per year = ($78,800 - 12,000)/5 years = $13,360 per year Accumulated depreciation after two years = 2 x $13,660 = $26,720

A company purchases land for $250,000. The company also assumes $3,000 in property taxes due on the land owed by the previous owner. The title and attorney fees totaled $2,000. The company spent $10,000 demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $2,500. What amount does the company record as the cost for the land?

$262,500 Solution: Total cost = $250,000 + $3,000 + $2,000 + ($10,000 - 2,500) = $262,500

A company purchased equipment and incurred these costs: Cash price, $26,000; Sales taxes, $1,200; Insurance during transit, $400; Annual maintenance costs, $500. What amount should be recorded as the cost of the equipment?

$27,600

On March 1 of the current year, Freddy Company purchases and places into service new equipment. The cost of the equipment is $200,000. The equipment has an estimated 5-year life and $30,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$28,333 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($200,000 - 30,000)/5 years = $34,000 per year Depreciation expense for March 1 through December 31 = $34,000 x 10/12 = $28,333

A company's average total assets is $240,000, average total equity is $150,000, and net sales is $60,000. Its return on assets is 12%. What was the company's net income?

$28,800 Solution: Return on assets is net income divided by average total assets. Alternatively, net income equals average total assets times the return on assets. Net income = $240,000 x 12% = $28,800.

Bazydlo Corporation bought equipment for $320,000 and it had an expected salvage value of $40,000. The life of the equipment was estimated to be 7 years. The depreciable cost of the equipment is

$280,000 Solution: Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $320,000 - 40,000 = $280,000.

Bazydlo Corporation bought equipment for $350,000 and it had an expected salvage value of $40,000. The life of the equipment was estimated to be 7 years. The depreciable cost of the equipment is

$280,000 Solution: Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $320,000 - 40,000 = $280,000.

On October 1 of the current year, Mann Company purchased and places a new asset into service. The cost of the asset is $80,000 with an estimated 5-year life and $20,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$3,000 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($80,000 - 20,000)/5 years = $12,000 per year Depreciation expense for October 1 through December 31 = $12,000 x 3/12 = $3,000

Based on the following year-end account balances, what amount would the company report on its balance sheet as intangible assets? Buildings and Equipment $18,000,000 Accumulated depreciation 4,000,000 Research and development 1,500,000 Patents 3,000,000 Accounts receivable 5,000,000 The total amount reported on the balance sheet as intangible assets would be

$3,000,000

On March 1 of the current year, a company sells some equipment for $30,000. The original cost was $60,000, the estimated salvage value was $12,000, and the expected useful life was 6 years. Straight-line depreciation is used. On January 1 of the currentyear, the Accumulated Depreciation account had a balance of $32,000. How much is the gain or loss on the sale?

$3,333 gain

A purchase of equipment includes a purchase price of $18,000, freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $3,000 and five years, respectively. Under the straight-line method, how much is annual depreciation expense?

$3,600 Solution: The cost of the equipment is $18,000 plus the freight costs of $500 and the installation costs of $2,500 for a total of $21,000. Depreciation expense = ($21,000 - $3,000)/5 = $3,600 per year.

On July 1 of the current year, Fred Company purchases and places into service new equipment. The cost of the equipment is $90,000. The equipment has an estimated 10-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$3,750 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($90,000 - 15,000)/10 years = $7,500 per year Depreciation expense for July 1 through December 31 = $7,500 x 6/12 = $3,750

Jeremy's Photo Store bought equipment for $60,000 on January 1 of its first year. The equipment's original estimated useful life is 8 years and its estimated salvage value is $12,000. The company uses the straight-line method of depreciation. On December 31 of its fourth year, before year-end adjusting entries have been recorded, Jeremy's decides to extend the estimated useful life 3 years giving it a total life of 11 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the fourth year?

$3,750 Solution: Original depreciation per year: (60,000 - 12,000)/8 years = 6,000 per year. Revised depreciation per year: (60,000 - 3 x 6,000 - 12,000)/(11-3) = 3,750 per year

A company's average total assets is $200,000, average total equity is $120,000, and net sales is $100,000. Its return on assets is 15%. What was the company's net income?

$30,000

Bazydlo Corporation bought equipment for $350,000 and it had an expected salvage value of $50,000. The life of the equipment was estimated to be 5 years. The depreciable cost of the equipment is

$300,000 Solution: Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $350,000 - 50,000 = $300,000.

A company's average total assets is $200,000, average total equity is $120,000, and net sales is $100,000. Its return on assets is 15%. What was the company's net income?

$30000

Bazydlo Corporation bought equipment for $360,000 and it had an expected salvage value of $40,000. The life of the equipment was estimated to be 5 years. The depreciable cost of the equipment is

$320,000 Solution: Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $360,000 - 40,000 = $320,000.

In the current year, Pierce Company incurred $150,000 of research and development costs in its laboratory to develop a new product. It also spent $20,000 in legal fees for a patent on that new product. Later in the current year, Pierce paid $15,000 for legal fees in a successful defense of that patent. What is the total amount that should be debited to the company's Patents account in the current year?

$35,000 Solution: Only the $20,000 in legal fees and the $15,000 of successful defense costs should be debited to the Patents account. The research and development costs spent to develop the new product must be expensed in the year they were incurred because there is no certainty of future benefits.

Given the following account balances at year end, how much is amortization expense on Analog Enterprises income statement for the current year if the company amortizes intangibles over ten years? Sales revenue, $45,000,000; Patents, $1,500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,000,000; Goodwill, $4,500,000; and Copyrights of $2,000,000. The company also paid $500,000 for research & development at the start of the current year. Assume that all of the company's intangible assets were acquired at the start of the current year.

$350,000 Solution: The intangibles are trademarks patents and goodwill. Only patents and copyrights are amortized. ($1,500,000 + 2,000,000)/10 = $350,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights. Goodwill is not amortized because it is considered to have an indefinite life. Trademarks are registered with the U.S. patent office and have lives of 20 years but they may be renewed indefinitely; because trademarks (and trade names) have indefinite lives, they are not amortized.

$3750 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($90,000 - 15,000)/10 years = $7,500 per year Depreciation expense for July 1 through December 31 = $7,500 x 6/12 = $3,750

Solution: For the first three years, the annual depreciation expense is ($60,000 - $12,000)/10 years = $4,800 per year. In the third year, before depreciation is recorded, the asset's book value is ($60,000 - 2 x 4,800 = $50,400), and this remaining book value should be depreciated to the asset's revised salvage value over the asset's remaining estimated useful life: ($50,400 - $2,000)/(6-2) = $12,100. Note: There are four years of useful life including the third, fourth, fifth, and sixth years.

$3750 Solution: Original depreciation per year: (60,000 - 12,000)/8 years = 6,000 per year. Revised depreciation per year: (60,000 - 3 x 6,000 - 12,000)/(11-3) = 3,750 per year

On May 1 of the current year, La Presa Company sells some equipment for $25,000. The original cost was $50,000, the estimated salvage value was $5,000, and the expected useful life was 5 years. Straight-line depreciation is used. On January 1 of the current year, the Accumulated Depreciation account had a balance of $18,000. How much is the gain or loss on the sale?

$4,000 loss First, the accumulated depreciation must be brought up to date to the date of sale. Since the equipment has a $45,000 depreciable cost (i.e., Depreciable cost = Cost - salvage value = $50,000 - 5,000) and a life of 5 years, the depreciation is $9,000 per year. In the current year, depreciation expense is $3,000 (i.e., $9,000 per year x 4/12) which increases accumulated depreciation. The Accumulated Depreciation balance at the date of sale is $21,000 (i.e., $18,000 + 3,000). Book value equals cost minus accumulated depreciation. Book value is $29,000 (i.e., $50,000 - $21,000). A gain occurs if the selling price exceeds the book value, and a loss occurs if the selling price is less than the book value. Sales price - book value = $25,000 - 29,000 = ($4,000) (i.e., loss).

Southern Company purchased machinery with a list price of $64,000. The seller granted Southern Company a 10 percent discount so Southern paid $57,600 for the machinery. Southern Company also paid $400 for shipping and paid sales tax of $3,000 to purchase the machinery. Southern Company estimates that the machinery will have a useful life of 10 years and a salvage value of $20,000. If Southern Company uses straight-line depreciation, annual depreciation will be

$4,100 Solution: The cost of an asset includes its purchase price plus other costs to acquire the asset and prepare it for use. Add the freight charges and the foundation costs to the purchase price. Cost of the equipment = $57,600 + 400 + 3,000 = $61,000 Depreciation per year = (Cost - salvage value)/Life in year Depreciation per year = ($61,000 - 20,000)/10 years $4,100 per year

A company has the following asset account balances: Buildings and equipment, $5,800,000; Accumulated depreciation, $1,600,000; Patents, $1,050,000; Inventory, $1,000,000; and Goodwill, $4,000,000. How much will be reported on the balance sheet under property, plant & equipment?

$4,200,000 Solution: Buildings and equipment less accumulated depreciation are the only amounts included under Plant & Equipment: $5,800,000 - $1,600,000 = $4,200,000.

A company has the following asset account balances: Buildings and equipment, $6,200,000; Accumulated depreciation, $1,800,000; Patents, $950,000; Inventory, $1,000,000; and Goodwill, $4,000,000. How much will be reported on the balance sheet under property, plant & equipment?

$4,400,000

Based on the following year-end account balances, what amount would the company report on its balance sheet as intangible assets? Trademarks $250,000 Accounts Receivable 3,000,000 Research and development 2,500,000 Goodwill 1,500,000 Retained earnings 1,200,000 Copyrights 2,700,000

$4,450,000

A purchase of equipment includes a purchase price of $18,000, freight charges of $500 and installation costs of $3,500. The estimated salvage value and useful life are $4,000 and four years, respectively. Under the straight-line method, how much is annual depreciation expense?

$4,500 Solution: The cost of the equipment is $18,000 plus the freight costs of $500 and the installation costs of $3,500 for a total of $22,000. Depreciation expense = ($22,000 - $4,000)/4 = $4,500 per year.

In the current year, Pierce Company incurred $160,000 of research and development costs in its laboratory to develop a new product. It also spent $25,000 in legal fees for a patent on that new product. Later in the current year, Pierce paid $15,000 for legal fees in a successful defense of that patent. What is the total amount that should be debited to the company's Patents account in the current year?

$40,000 Solution: Only the $25,000 in legal fees and the $15,000 of successful defense costs should be debited to the Patents account. The research and development costs spent to develop the new product must be expensed in the year they were incurred because there is no certainty of future benefits.

A company sells a plant asset that originally cost $240,000 for $80,000 on December 31 of the current year. The accumulated depreciation account had a balance of $120,000 after the current year's depreciation of $20,000 had been recorded. The company should recognize a

$40,000 loss on disposal. Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. Book value = Cost - Accumulated depreciation =$240,000 - $120,000 = $120,000 Since the sales price is less than the book value the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $120,000 - 80,000 = $40,000

On October 1, Year 1, Best Buy purchased an asset for $10,000, with a $2,000 estimated salvage value, and a 5-year useful life. How much is the year 1 depreciation expense using the straight-line method?

$400 Solution: The purchase price less salvage value is divided by the useful life times the portion of a year that will be expensed: ($10,000 - $2,000)/5 x 3/12 = $400. Chapter 9, Learning objective 3: Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.

A company purchased factory equipment on April 1 of the current year, for $96,000. It is estimated that the equipment will have a $12,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31 of the current year is

$6,300 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($96,000 - 12,000)/10 years = $8,400 per year Depreciation expense for April 1 through December 31 = $8,400 x 9/12 = 6,300

Given the following account balances at year end, how much is amortization expense on Analog Enterprises' income statement for the current year if the company amortizes intangibles over ten years? Sales revenue, $45,000,000; Patents, $2,500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,200,000; Goodwill, $4,500,000; and Copyrights, $1,500,000. The company also paid $2,000,000 for research & development at the start of the current year. Assume that all of the company's intangible assets were acquired at the start of the current year.

$400,000 Solution: The intangibles are trademarks patents, goodwill, and copyrights. Only patents and copyrights are amortized. Amortization expense for the year equals ($2,500,000 + $1,500,000)/10 = $400,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights. Goodwill is not amortized because it is considered to have an indefinite life. Trademarks are registered with the U.S. patent office and have lives of 20 years but they may be renewed indefinitely; because trademarks (and trade names) have indefinite lives, they are not amortized.

A company purchased land for $420,000. It also paid a real estate brokers' commission of $22,000 and spent $33,000 demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $2,500. The company also assumed $4,000 in property taxes due on the land owed by the previous owner. Under the historical cost principle, the cost of land would be recorded at

$476,500. Solution: Total cost = $420,000 + $22,000 + ($33,000 - 2,500) + 4,000 = $476,500

At the beginning of the current year, a company purchased machinery for $50,000. It has a salvage value of $5,000 and an estimated useful life of 9 years. How much is depreciation expense for the first year under the straight-line method?

$5,000 Solution: The annual depreciation is calculated as the sum of the purchase price ($50,000) less the salvage value ($5,000) divided by the useful life (9 years) resulting in an annual depreciation value of $5,000. Depreciation expense per year = (50,000 - 5,000)/9 = 5,000 per year.

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Cash, $1,500,000; Accounts receivable, $3,000,000; Land, $15,000,000; Equipment, $25,000,000; Franchises, $500,000; Trademarks, $1,700,000; and Goodwill, $2,800,000. The company also paid $1,500,000 for research & development during the current year.

$5,000,000 Solution: The intangibles are trademarks of $1,700,000, franchises of $500,000, and goodwill of $2,800,000 totaling $5,000,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights.

At the beginning of the current year, a company purchased machinery for $50,000. It has a salvage value of $6,000 and an estimated useful life of 8 years. How much is depreciation expense for the first year under the straight-line method?

$5,500 Solution: The annual depreciation is calculated as the sum of the purchase price ($50,000) less the salvage value ($6,000) divided by the useful life (8 years) resulting in an annual depreciation value of $5,500. Depreciation expense per year = (50,000 - 6,000)/8 = 5,500 per year.

Based on the following year-end account balances, what amount would the company report on its balance sheet as intangible assets? Research and development $1,500,000 Accounts Receivable 4,000,000 Trademarks 1,000,000 Goodwill 2,500,000 Equipment 1,500,000 Patents 2,000,000

$5,500,000

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Copyrights, $200,000; Cash, $1,500,000; Accounts receivable, $3,000,000; Patents, $1,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,200,000; and Goodwill, $3,500,000. The company also paid $1,500,000 for research & development during the current year.

$5,900,000

At the beginning of the current year, a company purchased machinery for $60,000. It has a salvage value of $6,000 and an estimated useful life of 9 years. How much is depreciation expense for the first year under the straight-line method?

$6,000 Solution: The annual depreciation is calculated as the sum of the purchase price ($60,000) less the salvage value ($6,000) divided by the useful life (9 years) resulting in an annual depreciation value of $6,000. Depreciation expense per year = (60,000 - 6,000)/9 = 6,000 per year.

Given the following account balances at year end, how much are total intangible assets on the balance sheet of Alisha Enterprises? Sales revenue, $45,000,000; Cash, $1,500,000; Copyrights, $500,000; Accounts receivable, $4,000,000; Land, $15,000,000; Equipment, $25,000,000; Trademarks, $1,000,000; and Goodwill, $4,500,000. The company also paid $2,000,000 for research & development during the current year.

$6,000,000 Solution: The intangibles are copyrights of $500,000, trademarks of $1,000,000, and goodwill of $4,500,000 totaling $6,000,000. Notice that research & development is not an intangible asset even though research & development may lead to new intangibles, such as patents or copyrights.

Southern Company purchased machinery with a list price of $96,000. The seller granted Southern Company a 10 percent discount so Southern paid $86,400 for the machinery. Southern Company also paid $600 for shipping and paid sales tax of $4,500 to purchase the machinery. Southern Company estimates that the machinery will have a useful life of 10 years and a salvage value of $30,000. If Southern Company uses straight-line depreciation, annual depreciation will be

$6,150

On May 1 of the current year, Fredericks Company purchases and places into service new equipment. The cost of the equipment is $115,000. The equipment has an estimated 10-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$6,667 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($115,000 - 15,000)/10 years = $10,000 per year Depreciation expense for May 1 through December 31 = $10,000 x 8/12 = $6,667

A company purchased machinery for $410,000 on July 1, 2021. The company also paid freight charges of $7,000 and installation costs of $8,000. It is estimated that the machinery will have a $25,000 salvage value at the end of its 10-year useful life. What is the amount of accumulated depreciation at December 31, 2022 if the straight-line method of depreciation is used?

$60,000

A company purchased land for $560,000. The company also paid a real estate brokers' commission of $24,000 and spent $20,000 demolishing an old building on the land before construction of a new building could start. Proceeds from salvage of the demolished building was $2,000. The company additionally assumed $5,000 in property taxes due on the land owed by the previous owner. Under the historical cost principle, the cost of land would be recorded at

$607,000. Solution: Total cost = $560,000 + $24,000 + ($20,000 - 2,000) + 5,000 = $607,000

On September 1, Year 1, Best Buy purchased an asset for $9,000, with a $1,500 estimated salvage value, and a 4-year useful life. How much is the Year 1 depreciation expense using the straight-line method?

$625 Solution: The purchase price less salvage value is divided by the useful life times the portion of a year that will be expensed: ($9,000 - $1,500)/4 x 4/12 = $625.

A corporation purchased a piece of land for $50,000. The corporation paid attorney's fees of $5,000 and brokers' commissions of $3,000 in connection with the purchase. An old building on the land was torn down at a cost of $1,500, and proceeds from the scrap were $500. The corporation also assumes $6,000 of property taxes on the land owed by the previous owner. How much is the total cost of the land?

$65,000

On April 1 of the current year, 2021, Hall Company paid $90,000 for a patent issued 10 years earlier. The amount of amortization expense recognized by the company for the current year would be

$6750 Solution: Patents are intangible assets with useful lives of 20 years after which they expire. A copyright issued 10 years earlier has 10 years of remaining useful life. Intangibles that can be amortized (e.g., patents) are amortized using a straight-line method with no salvage value. The current year is a partial year (i.e., April 1 through December 31). Amortization expense = $90,000/10 years x 9/12 = $6,750

A corporation purchased a piece of land for $60,000. The corporation paid attorney's fees of $5,000 and brokers' commissions of $4,000 in connection with the purchase. An old building on the land was torn down at a cost of $3,000, and proceeds from the scrap were $700. The corporation also assumes $5,000 of property taxes on the land owed by the previous owner. How much is the total cost of the land?

$73,600

A company purchased machinery for $210,000 on January 1, 2021. The company also paid freight charges of $4,000 and installation costs of $6,000. It is estimated that the machinery will have a $35,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2023 if the straight-line method of depreciation is used?

$74,000 Solution: Depreciation per year = ($210,000 + 4,000 + 6,000 - 35,000)/5 years = $37,000 per year Accumulated depreciation after 2 years = $37,000 x 2 = $74,000

On May 1 of the current year, Moreno Company purchased a patent from another company for $96,000. The estimated useful life of the patent is 8 years, and its remaining legal life is 12 years. How much is Moreno's amortization expense for the current year?

$8,000 Solution: Amortization is calculated using the straight-line method over the shorter of the useful life or the remaining legal life. In this case, the shorter is 8 years. Amortization expense for the current year = $96,000/8 years x 8/12 = $8,000.

On August 1 of the current year, Johnson Company purchases and places into service new equipment. The cost of the equipment is $75,000. It has an estimated 3-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

$8,333 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = (75,000 - 15,000)/3 years = $20,000 per year Depreciation expense for August 1 through December 31 = $20,000 x 5/12 = $8,333

Joan's Jewelry Shop bought equipment for $100,000 on January 1 of its first year. The equipment's original estimated useful life is 10 years and its estimated salvage value is $25,000. The company uses the straight-line method of depreciation. On December 31 of its sixth year, before year-end adjusting entries have been recorded, Joan's decides to revise the estimated salvage value to $20,000 but the estimated useful life is unchanged. How much depreciation expense should be recorded for the sixth year?

$8,500. Solution: Original depreciation per year: ($100,000 - 25,000)/20 years = $7,500 per year. Revised depreciation per year: ($100,000 - 5 x 7,500 - 20,000)/(10-5) = $8,500 per year

Rick's Printing Shop bought equipment for $50,000 on January 1 of its first year. The equipment's original estimated useful life is 8 years and its estimated salvage value is $10,000. The company uses the straight-line method of depreciation. On December 31 of its second year, before year-end adjusting entries have been recorded, Rick's decides to shorten the estimated useful life by 3 years giving it a total life of 5 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the second year?

$8,750 Solution: Original depreciation per year = [($50,000 - $10,000)/8] x 1 = $5,000 Revised depreciation per year = [($50,000 - 5,000) - $10,000]/(5-1) = $8,750

An asset purchased on January 1 for $40,000 has an estimated salvage value of $4,000. The current useful life is 8 years. How much is total accumulated depreciation using the straight-line method at the end of the second year of life?

$9,000 Solution: The annual depreciation is calculated as the sum of the purchase price less the salvage value divided by the useful life: ($40,000 - $4,000)/8 years = $4,500 At the end of the second year, there will be two years of accumulated depreciation for a total of $9,000.

A company purchased land for $80,000. The company also assumes $12,000 of accrued taxes on the property, incurred $5,000 to remove an old building, and received $2,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records?

$95,000 Solution: All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. The company should include the purchase price of $80,000, the assumption of accrued taxes of $12,000 (i.e., the buyer agrees to pay the property taxes that the previous owner owed), the cost of razing the old building of $5,000 less the payment received for the salvaged materials in the amount of $2,000. This results in an acquisition cost of $95,000.

A company purchased land for $80,000. The company also assumes $15,000 of accrued taxes on the property, incurred $8,000 to remove an old building, and received $4,000 from the salvage of the old building. At what amount will the land be recorded in the accounting records?

$99,000 Solution: All costs necessary to get the land ready to use should be capitalized as part of the cost of the land. The company should include the purchase price of $80,000, the assumption of accrued taxes of $15,000 (i.e., the buyer agrees to pay the property taxes that the previous owner owed), the cost of razing the old building of $8,000 less the payment received for the salvaged materials in the amount of $4,000. This results in an acquisition cost of $99,000.

When equipment is sold for cash in an amount that is less than its book value, the company debits the following

(i) Accumulated Depreciation, (ii) Cash, and (iii) Loss on Disposal of Plant Assets

The following information is provided for Northwest Corporation (in $ millions): Net income for the current year is $390; net income for the prior year was $350. Net sales for the current year is $4,100; net sales for the prior year were $3,800. Total assets as of the end of the current year was $4,000; total assets as of the end of the prior year was $3,000. What is the company's asset turnover ratio for the current year?

1.17 times Solution: Assets turnover ratio = Net sales/Average total assets Return on assets = $4,100/[($3,000 + 4,000)/2] = 1.17 or 1.17 times per year

A company's average total assets are $275,000, depreciation expense is $20,000, and accumulated depreciation is $80,000. Net income is $1,500,000. Net sales total $325,000. What is the asset turnover?

1.18 Solution: The asset turnover is net sales divided by the average total assets: $325,000/$275,000 = 1.18 times.

A company's average total assets are $250,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net income is $1,200,000. Net sales total $300,000. What is the asset turnover?

1.2 Solution: The asset turnover is net sales divided by the average total assets: $300,000/$250,000 = 1.2 times.

During the current year, Ronald Corporation reported net sales of $1,500,000, net income of $900,000, and depreciation expense of $100,000. Ronald also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Ronald's asset turnover ratio is

1.2 times Solution: Assets turnover ratio = Net sales/Average total assets Return on assets = $1,500,000/[($1,000,000 + 1,500,000)/2] = 1.2 or 1.2 times per year

A company's average total assets are $200,000, depreciation expense is $10,000, and accumulated depreciation is $60,000. Net income is $1,000,000. Net sales total $250,000. What is the asset turnover?

1.25 Solution: The asset turnover is net sales divided by the average total assets: $250,000/$200,000 = 1.25 times.

The following information is provided for Nguyen Company (in $ millions): Net income for the current year is $275; net income in the prior year was $250. Net sales for the current year is $1,500; net sales in the prior year were $1,400. Total assets as of the end of the current year is $1,150; total assets as of the end of the prior year is $1,050. What is the company's asset turnover ratio for the current year?

1.36 times Solution: Assets turnover ratio = Net sales/Average total assets Return on assets = $1,500/[($1,050,000 + 1,150)/2] = 1.36 or 1.36 times per year

The following information is provided for a certain company (in $ millions): Net income for the current year is $390 Net income for the prior year was $350 Net sales for the current year is $4,100 Net sales for the prior year were $3,800 Total assets as of the end of the current year was $4,000 Total assets as of the end of the prior year was $3,000 What is the company's return on assets for the current year?

11.1%

On May 1, Year 1, Best Buy purchased an asset for $12,000, with a $1,500 estimated salvage value, and a 6-year useful life. How much is the Year 1 depreciation expense using the straight-line method?

1167 Solution: The purchase price less salvage value is divided by the useful life times the portion of a year that will be expensed: ($12,000 - $1,500)/6 x 8/12 = $1,167.

Oahu Industries' average total assets for the year are $5,000,000, its average total stockholders' equity for the year are $2,500,000, its net income is $700,000, its gross margin is $2,500,000, and its net sales are $10,000,000. What is Oahu's return on assets?

14% Solution: Return on assets is calculated by dividing net income by the average total assets. Oahu's return on assets is $700,000 divided by $5,000,000 = 14%.

Rawlings Company purchased a machine for $70,000 on January 1 of the current year and depreciated it on a straight-line basis over a 10-year life assuming no salvage value. If the company sells the machine for $29,000 on June 30 of the fourth year, what would be the company's gain or loss from the sale?

16,500 loss Solution: The selling price less the book value of the machine equals the gain or loss on the sale. The Book value of the machine when sold: $70,000 - [($70,000/10 years) x 3.5 years] = $45,500. The gain (loss) on the sale = sales price minus book vale = $29,000 - $45,500 = ($16,500). Chapter 9, Learning objective 5: Explain how to account for the disposal of plant assets.

A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end of its useful life. The current year's depreciation expense is $4,000. It is calculated on the straight-line basis. The balance of the company's Accumulated Depreciation account at the end of the year after adjusting entries is $24,000. The remaining useful life of the plant asset is

2 years Solution: Depreciation per year = (Cost - salvage value)/Useful life Solving for useful life: Useful life = ($40,000 - 8,000)/$4,000 = 8 years Years expired = Accumulated depreciation/Depreciation per year = $24,000/$4,000 = 6 years Remaining life = Useful life - Years expired = (8 - 6) = 2 years.

Oahu Industries' average total assets for the year are $4,000,000, its average total stockholders' equity for the year are $3,000,000, its net income is $800,000, its gross margin is $2,000,000, and its net sales are $10,000,000. What is Oahu's return on assets?

20% Solution: Return on assets is calculated by dividing net income by the average total assets. Oahu's return on assets is $800,000 divided by $4,000,000 = 20%.

A company uses straight-line depreciation. It purchased a truck for $40,000. The truck's salvage value is $10,000. The truck's annual depreciation expense is $6,000. What is the truck's useful life?

5 years Solution:The depreciable cost equals the cost minus the salvage value; it is the $40,000 purchase price less $10,000 salvage value, which is $30,000. The annual depreciation cost is $6,000. Since $30,000 will be depreciated by $6,000 per year, the useful life is 5 years (i.e., $30,000/$6,000 per year = 5 years).

A company uses straight-line depreciation. It purchased a truck for $42,000. The truck's salvage value is $6,000. The truck's annual depreciation expense is $6,000. What is the truck's useful life?

6 years Solution: The depreciable cost equals the cost minus the salvage value; it is the $42,000 purchase price less $6,000 salvage value, which is $36,000. The annual depreciation cost is $6,000. Since $36,000 will be depreciated by $6,000 per year, the useful life is 6 years (i.e., $36,000/$6,000 per year = 6 years).

Oahu Industries' average total assets for the year are $4,000,000, its average total stockholders' equity for the year are $3,000,000, its net income is $900,000, its gross margin is $5,000,000, and its net sales are $12,000,000. What is Oahu's return on assets?

22.5% Solution: Return on assets is calculated by dividing net income by the average total assets. Oahu's return on assets is $900,000 divided by $4,000,000 = 22.5%.

The following information is provided for a certain company (in $ millions): Net income for the current year is $275 Net income in the prior year was $250 Net sales for the current year is $1,500 Net sales in the prior year were $1,400 Total assets as of the end of the current year is $1,150 Total assets as of the end of the prior year is $1,050 What is the company's return on assets for the current year?

25% Solution: Return on assets = Net income/Average total assets Return on assets = $275/[($1,050 + 1,150)/2] = 0.25 or 25%

A company purchased a plant asset for $45,000. It has a salvage value of $5,000 and a useful life of 8 years. It calculates depreciation using the straight-line method. The balance of the company's Accumulated Depreciation account at the end of the current year after-adjusting entries is $25,000. What is the asset's remaining useful life?

3 years

An asset was purchased on January 1 for $74,000 has an estimated salvage value of $10,000. The depreciation expense in the second year is $12,800 and the balance of the Accumulated Depreciation account after the adjusting entries are recorded in the second year is $25,600. If the company uses the straight-line method, what is the asset's remaining useful life?

3 years Solution: Since the depreciable cost is $64,000 (i.e., $74,000 purchase price less the salvage value of $10,000) and the annual depreciation is $12,800, it has a 5-year life. The balance in Accumulated Depreciation indicates that 2 years of life have been consumed ($25,600/$12,800 per year = 2 years). Of the total 5 years of life, 3 years remain.

Bazydlo Corporation bought equipment for $350,000 and it had an expected salvage value of $50,000. The life of the equipment was estimated to be 5 years. The depreciable cost of the equipment is

300,000 Solution: Depreciable cost is the amount of an asset's cost that is subject to depreciation; it is cost minus salvage value Depreciable cost = $350,000 - 50,000 = $300,000.

A plant asset was purchased on January 1 for $48,000 with an estimated salvage value of $3,000 at the end of its useful life. The current year's depreciation expense is $5,000. It is calculated on the straight-line basis. The balance of the company's Accumulated Depreciation account at the end of the year after adjusting-entries is $25,000. The remaining useful life of the plant asset is

4 years

On April 1 of the current year, Frey Company purchases and places into service new equipment. The cost of the equipment is $75,000. The equipment has an estimated 10-year life and $15,000 salvage value at the end of its useful life. What is the depreciation expense for the current year ending December 31 if the company uses the straight-line method of depreciation?

4,500 Solution: Depreciation expense per year = (Cost - salvage value)/Life Depreciation expense per year = ($75,000 - 15,000)/10 years = $6,000 per year Depreciation expense for April 1 through December 31 = $6,000 x 9/12 = $4,500

A purchase of equipment includes a purchase price of $18,000, freight charges of $500, and installation costs of $2,500. The estimated salvage value and useful life are $2,000 and four years, respectively. Under the straight-line method, how much is annual depreciation expense?

4,750 Solution: The cost of the equipment is $18,000 plus the freight costs of $500 and the installation costs of $2,500 for a total of $21,000. Depreciation expense = ($21,000 - $2,000)/4 = $4,750 per year.

A corporation recorded a loss of $6,000 when it sold equipment that originally cost $56,000 for $10,000. Accumulated depreciation on the equipment must have been

40,000

An asset was purchased on January 1 for $48,000. It has an estimated salvage value of $3,000. The depreciation expense in the fourth year is $5,000 and the balance of the Accumulated Depreciation account after the adjusting entries are recorded in the fourth year is $20,000. If the company uses the straight-line method, what is the asset's remaining useful life?

5 years Solution: Since the depreciable cost is $45,000 (i.e., $48,000 purchase price less the salvage value of $3,000) and the annual depreciation is $5,000, it must have a 9-year life. The balance in Accumulated Depreciation indicates that 4 years of life have been consumed (i.e., $20,000/$5,000 per year = 4 years). Of the total 9 years of life, 5 years remain.

An asset was purchased on January 1 for $53,000 has an estimated salvage value of $3,000. The depreciation expense for the third year is $5,000 and the balance of the Accumulated Depreciation account after the third year's adjusting entries are recorded is $15,000. If the company uses the straight-line method, what is the asset's remaining useful life?

7 years Solution: Since the depreciable cost is $50,000 (i.e., $53,000 purchase price less the salvage value of $3,000) and the annual depreciation is $5,000, it has a 10-year life. The balance in Accumulated Depreciation indicates that 3 years of life have been consumed (i.e., $15,000/$5,000 per year = 3 years). Of the total 10 years of life, 7 years remain. Chapter 9, Learning objective 3: Compute periodic depreciation using the straight-line method, and contrast its expense pattern with those of other methods.

Karen's Craft shop bought equipment for $40,000 on January 1 of its first year. The equipment's original estimated useful life is 8 years and its estimated salvage value is $8,000. The company uses the straight-line method of depreciation. On December 31 of its third year, before year-end adjusting entries have been recorded, Karen's decides to shorten the estimated useful life by 3 years giving it a total life of 5 years. The company did not change the salvage value and continues to use the straight-line method. How much depreciation expense should be recorded for the third year?

8,000 Solution: Original depreciation per year: ($40,000 - 8,000)/8 years = $4,000 per year. Revised depreciation per year: ($40,000 - 2 x 4,000 - 8,000)/(5-2) = $8,000 per year

Which one of the following will maximize a company's reported net income in the first year of owning an asset?

A long estimated life, a high salvage value, and straight-line depreciation

Which one of the following will minimize depreciation expense in the first year of owning an asset?

A long estimated life, a high salvage value, and straight-line depreciation

Which of the following is an acceptable way to express the useful life of a depreciable asset?

All of these

Conrad Inc. made an ordinary repair to a piece of equipment. What account should the company debit as a result of this transaction?

Maintenance and Repairs Expense

When using the straight-line depreciation method, which of the following is not a factor that affects the computation of depreciation?

Book Value of the asset

A corporation has equipment that originally cost $90,000. Its accumulated depreciation is $36,000 after the current year's adjusting entries have been recorded. A new processing technique has rendered the equipment obsolete, so it is retired. How should the company record the retirement of the equipment?

Debit the Accumulated Depreciation account for $36,000 Debit the Loss on Disposal of Plant Assets account for $54,000 Credit the Equipment account for $90,000 Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. In this case, the company retires the asset without receiving any payment. Book value = Cost - Accumulated depreciation =$90,000 - 36,000 = $54,000 Since the sales price is zero and the book value is more than zero the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $54,000 - 0 = $54,000 The company will debit the loss, and it will credit the plant asset for its cost, debit the accumulated depreciation for its balance

A corporation has equipment that originally cost $70,000. Its accumulated depreciation is $52,000 after the current year's adjusting entries have been recorded. A new processing technique has rendered the equipment obsolete, so it is retired. How should the company record the retirement of the equipment?

Debit the Accumulated Depreciation account for $52,000 Debit the Loss on Disposal of Plant Assets account for $18,000 Credit the Equipment account for $70,000

A corporation has equipment that originally cost $80,000. Its accumulated depreciation is $68,000 after the current year's adjusting entries have been recorded. A new processing technique has rendered the equipment obsolete, so it is retired. How should the company record the retirement of the equipment?

Debit the Accumulated Depreciation account for $68,000 Debit the Loss on Disposal of Plant Assets account for $12,000 Credit the Equipment for $80,000

A company sold a plant asset for $3,000. It had a cost $10,000 and its accumulated depreciation is $7,500. What gain or loss did the company experience?

Gain of $500 Solution: Book value is $2,500 ($10,000 - $7,500). Since the proceeds ($3,000) exceed the book value ($2,500) by $500, there is a gain.

Which of the following is an intangible asset that cannot be sold individually in the market place?

Goodwill

Which of the following is not amortized?

Goodwill

Which of the following best describes depreciation?

It is a cost allocation method.

Which of the following is not a depreciable asset?

Land

Which of the following statements is true?

The amortization period of a patent is the lesser of its useful life or 20 years, whichever is shorter

Which of the following costs should not be included in the cost of a building?

Parking lot repaving

Which of the following gives the recipient the right to manufacture, sell, or otherwise control an invention for a period of 20 years?

Patent

Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets?

Price of replacing the plant asset. Solution: Depreciable assets are depreciated over their useful lives using a depreciation method (such as straight-line depreciation). To compute depreciation, one must know the asset's cost, salvage value, estimated useful life, and which depreciation method is being used.

Which one of these statements is true?

Research and development costs are expensed in the year incurred.

Which of the following statements is false?

Research and development costs are not expensed when they result to a successful patent.

If a company properly reports goodwill as an intangible asset on its books, which of the following must be true?

The company purchased another company.

In the current year, Jefferson Company paid $250,000 to improvement to one of its buildings. If the company's accountant expensed this amount in the current year, which of the following statements is true?

The entry will improperly understate net income for the year.

Which of the following two ratios multiplied together yields the return on assets ratio?

The profit margin ratio and the asset turnover ratio

A company owns one depreciable asset. The balance in the company's Accumulated Depreciation account represents the

amount charged to depreciation expense since the acquisition of the depreciable asset.

In computing depreciation, salvage value is

an estimate of a plant asset's value at the end of its useful life.

A permanent decline in the market value of an asset is called

an impairment

Which of the following measures provides an indication of how efficient a company is in employing its assets?

asset turnover ratio

The book value of an asset is equal to the

asset's cost less accumulated depreciation

Plant assets are ordinarily presented in the balance sheet

cost less accumulated depreciation

A company paid $300,000 for a machine a few years ago. This year, the machine was completely destroyed in a fire. At the date of the fire, the accumulated depreciation on the machine was $120,000. An insurance check for $100,000 was received as a result of the fire. No journal entry for the casualty was recorded until the company received the check from the insurance company. The company's entry to record the insurance proceeds will include a

credit to the Equipment account for $300,000.

A truck that cost $45,000 is discarded as worthless. The truck had already been depreciated by $39,000. The entry to record this event would include a

debit to Loss on Disposal of Plant Assets for $6,000. Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. In this case, the company retires the asset without receiving any payment. Book value = Cost - Accumulated depreciation =$45,000 - 39,000 = $6,000 Since the sales price is zero and the book value is more than zero the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $6,000 - 0 = $6,000 This loss reduces the company's income before taxes by $6,000. The company will debit the loss.

The term applied to the periodic expiration of a plant asset's cost is

depreciation

Recording depreciation each period is necessary in accordance with the

expense recognition principle

Equipment that cost $72,000 and on which $60,000 of accumulated depreciation has been recorded was disposed of for $18,000 cash. The entry to record this event would include a

gain of 6,000 Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. In this case, the company retires the asset without receiving any payment. Book value = Cost - Accumulated depreciation =$72,000 - 60,000 = $12,000 Since the sales price is more than the book value the company recognizes a gain, computed as follows: Gain = Sales proceeds from selling the asset - Book value of the asset sold Gain = $18,000 - 12,000 = $6,000 The company will debit the loss, and it will credit the plant asset for its cost, debit the accumulated depreciation for its balance, and debit cash for the amount of cash collected from the purchaser.

A corporation paid $210,000 for a machine four years ago. This year, the machine was completely destroyed in a fire. The accumulated depreciation on the equipment is $84,000; that amount includes depreciation for the current year. An insurance check for $240,000 was received based on the replacement cost of the equipment. No journal entry for the casualty was recorded until the company received the check from the insurance company. The company's journal-entry to record the insurance proceeds will include a

gain on disposal of $114,000. Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. Book value = Cost - Accumulated depreciation =$210,000 - 84,000 = $126,000 Since the sales price is less than the book value the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $240,000 - 126,000 = $114,000

A company paid $132,000 for a machine a few years ago. This year, the machine was completely destroyed in a fire. At the date of the fire, the accumulated depreciation on the machine was $60,000. An insurance check for $100,000 was received as a result of the fire. No journal entry for the casualty was recorded until the company received the check from the insurance company. The company's entry to record the insurance proceeds will include a

gain on disposal of plant assets of $28,000. Solution: Remove the asset and its accumulated depreciation from the company's books while recording the cash received from the insurance company. Record a gain or loss so that debits being recorded equal the credits being recorded. Gains are recorded with credits, and losses are recorded with debits. Debit cash for $100,000 Debit accumulated depreciation for $60,000 Credit the equipment account for $132,000 Credit a gain on the disposal of plant assets for $28,000

A company paid $200,000 for a machine a few years ago. This year, the machine was completely destroyed in a fire. At the date of the fire, the accumulated depreciation on the machine was $80,000. An insurance check for $100,000 was received as a result of the fire. No journal entry for the casualty was recorded until the company received the check from the insurance company. The company's entry to record the insurance proceeds will include a

loss on disposal of plant assets of $20,000 Solution: Remove the asset and its accumulated depreciation from the company's books while recording the cash received from the insurance company. Record a gain or loss so that debits being recorded equal the credits being recorded. Gains are recorded with credits, and losses are recorded with debits. Debit cash for $100,000 Debit accumulated depreciation for $80,000 Debit loss on the disposal of plant assets for $20,000 Credit the equipment account for $200,000

Which one of the following costs will not be included in the cost of equipment?

maintenance costs

Harrison Corporation sold equipment for $20,000. The equipment had an original cost of $60,000 and accumulated depreciation of $30,000. Ignoring the tax effect, as a result of the sale

net income will decrease $10,000. Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. Book value = Cost - Accumulated depreciation =$60,000 - 30,000 = $30,000 Since the sales price is less than the book value the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $30,000 - 20,000 = $10,000 This loss reduces the company's income before taxes by $10,000. Ignoring taxes, it also reduces net income by $10,000.

Higgins Corporation sold its equipment for $32,000. The equipment had an original cost of $96,000 and accumulated depreciation of $48,000. Ignoring the tax effect, as a result of the sale

net income will decrease $16,000 Solution: A gain or loss on disposal of a plant asset is determined by comparing the book value of the asset with the proceeds received from its sale. If it sells a plant asset for more than its book value the company recognizes a gain. If it sells it for less than the book value the company recognizes a loss. Book value = Cost - Accumulated depreciation =$96,000 - 48,000 = $48,000 Since the sales price is less than the book value the company recognizes a loss, computed as follows: Loss = Book value of the asset sold - Sales proceeds from selling the asset Loss = $48,000 - 32,000 = $16,000 This loss reduces the company's income before taxes by $16,000. Ignoring taxes, it also reduces net income by $16,000.

If a plant asset is retired and its accumulated depreciation equals its cost

no gain or loss will be recorded

When there is a change in a depreciable asset's useful life or salvage value

only that asset's current and future years' depreciation will be affected.

Goodwill can be recorded

only when there is an exchange transaction involving the purchase of an entire business.

The cost of a plant asset, such as equipment, machinery, and buildings used in the operation of a company, is expensed

over its useful life

At the start of the current year, a company paid for the following in cash: Copyrights, $1,500,000 Equipment, $25,000,000 Goodwill, $4,500,000 Inventory, $1,500,000 Land, $15,000,000 Patents, $2,500,000 Research and development, $1,500,000 Supplies, $4,000,000 Trademarks, $1,200,000 It amortizes its intangibles over 10 years. Determine its current year amortization expense.

patents + copyrights / years answer= 400,000

Which ratio is computed by dividing net income by net sales?

profit margin ratio

When a plant asset is retired, the difference between the plant asset's cost and the accumulated depreciation of the same plant asset is

recognized on the income statement as a loss on disposal of plant asset Solution: When plant assets are retired, the company retiring the asset (i) credits the plant asset's account in the amount of its cost, (ii) debits the Accumulated Depreciation account for the entire amount of the plant asset's depreciation, and (iii) recognizes a loss for the difference. Note that when a company retires a plant asset there is no cash or other consideration received because the plant asset is not sold or exchanged. Also, accumulated depreciation never exceeds an asset's cost, so the retirement of a plant asset never produces a gain. Rather, they produce losses (unless the cost equals the accumulated depreciation and neither gain nor loss is produced).

When an asset is sold, a gain occurs when the

sale price exceeds the book value of the asset sold.

A change in the estimated useful life of equipment requires

that the amount of periodic depreciation be changed in the current year and in future years.

CHAPTER 9

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