# Financial Accounting

Chapter 8

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25 Points

Problem 1: 2 pts

A company’s property records revealed the following information about its plant assets:

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Machine No.

Cost

Salvage Value

Purchase Date

Depreciation Method and Estimate Life

1

\$42,000

\$3,000

10/1/08

Straight-line (3 years)

2

86,000

8,600

7/1/08

Double-declining-balance (5 years)

Calculate the depreciation expense for each machine for the year ended December 31, 2010 and for the year ended December 31, 2009.

Answer:

Machine 1:
2009:

2010:

Machine 2:
2009:

2010:

Problem 2: 1 pt A company purchased equipment valued at \$825,000 on January 1. The equipment has an estimated useful life of seven years or six million units. The equipment is estimated to have a salvage value of \$35,000. Assuming the units of production method of depreciation, what is the annual depreciation for the second year if .5 million units were produced?

Answer:

Problem 3: 2 pts A company entered into the following transactions concerning its computer system:
On January 1, 2009 purchased a computer system that cost \$1,480,000. The estimated useful life of the computer is 3 years and salvage value is \$40,000. Straight-line depreciation is to be used. On January 1, 2010 the company determined that the estimated useful life of the computer would be 4 years instead of 3 years. The estimated salvage value will only be \$10,000.
a. Prepare the journal entry to record depreciation expense for 2010.
b. Prepare the journal entry to record depreciation expense for 2010.

Answer:

a.

2009

Dec. 31

b.

2010

Dec. 31

Problem 4: 6 pts Mahoney Company had the following transactions involving plant assets during 2010 and 2010. Unless otherwise indicated, all transactions were for cash.

2009

Jan. 2

Purchased a truck for \$50,000. Sales tax on the truck was \$3,000, and the license was \$250. The truck is expected to have a \$4,000 salvage value and a 4-year life.

Jan. 3

Paid \$1,500 to have the company’s logo painted on the truck. This did not change the truck’s salvage value.

Dec.31

Recorded straight-line depreciation on the truck.

2010

Jan. 5

Paid \$5,000 to put a bigger engine in the truck. This new engine is expected to make the truck run more efficiently, and will increase the truck’s useful life by one year. The salvage value remained at \$4,000.

Mar. 1

Paid \$2,000 to replace a broken tailgate. The tailgate was damaged when a heavy carton was inadvertently dropped on it.

Dec.31

Recorded straight-line depreciation on the truck.

Prepare the general journal entries to record these transactions.

Answer:

2009

2010

Problem 5: 2 pts A company purchased a heating system on January 2, 1997, for \$225,000. The system had an estimated useful life of 15 years. On January 3, 2010, the company completed a renovation of the system that cost of \$33,000 and now expects the system to be more efficient to last 8 years beyond the original estimate. The company uses the straight-line method of depreciation.
(a) Prepare the journal entry at January 3, 2010, to record the renovation of the heating system.
(b) Prepare the journal entry at December 31, 2010, to record the depreciation for 2010.
Answer:

(a)

Jan

3

(b)

Dec.

31

Problem 6: 4 pts A company purchased and installed a machine on January 1, 2006 at a total cost of \$72,000. Straight-line depreciation was calculated based on the assumption of a five-year life and no salvage value. The machine was disposed of on July 1, 2010.
1. Prepare the general journal entry to update depreciation to July 1, 2010.
2. Prepare the general journal entry to record the disposal of the machine under each of these three independent situations:
a. The machine was sold for \$22,000 cash
b. The machine was sold for \$15,000 cash
c. The machine was totally destroyed in a fire and the insurance company settled the claim for \$18,000 cash
Answer:

1.

July 1

2a.

July 1

2b.

July 1

2c.

July 1

Problem 7: 2 pts A company had net sales of \$230,000 for 2010 and \$288,000 for 2011. The company’s average total assets for 2010 were \$150,000 and \$180,000 for 2011. Calculate the total asset turnover for each year and comment on the company’s efficiency in the use of its assets.

Answer:
2010:

2011:

Comment:

Problem 8: 2 pts Heidel Co. paid \$750,000 cash to buy the plant assets of Rogers Co. that went out of business. An independent appraiser assigned the following values to the assets acquired:

Land

\$522,000

Building

243,000

Equipment

135,000

Total

\$900,000

Prepare Heidel’s journal entry to record the acquisition of these assets.
Answer:

Asset

Appraised Value

Percent of Total

Apportioned Cost

Land

Building

Equipment

Totals

Problem 9: 2 pts A company purchased a special purpose machine on August 1 of the past year and it was installed and ready to run on January 1 of this year. The following costs were incurred in the purchase and installation of the machine.
Determine the total cost of the machine.

Invoice price

\$1,200,000

Freight costs

6,000

Installation costs

64,000

Electrical and power connections

32,000

Repairs to correct damage incurred during uncrating

12,000

Costs to adjust machine to appropriate specifications

56,000

Spare parts for future use

108,000

Sales tax

70,500

Fines incurred during transport of machine

400

Cost of special foundation required for machine installation

28,500

Answer:

Total machine cost:

Problem 10: 2 pts  On January 2, 2006, a company purchased a delivery truck for \$45,000 cash. The truck had an estimated useful life of seven years and an estimated salvage value of \$3,000. The straight-line method of depreciation was used. Prepare the journal entries to record the updating of depreciation and the disposition of the truck on September 1, 2010, under each of the following assumptions:
a. The truck and \$45,000 cash were given in exchange for a new delivery truck that had a cash price of \$60,000

b. The truck and \$40,000 cash were exchanged for a new delivery truck that had a cash price of \$60,000
Answer:

a.

Sept. 1

b.

Sept. 1

Chapter 8 Worksheet

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Quick Study 8-13 (10 minutes) Don’t forget to use averaged accounts receivable.

Total asset turnover = = 0.80 times

(\$ 000s)

Interpretation:

Exercise 8-23 (15 minutes)

1.

Book value of the old tractor

2. Loss on the exchange

Book value – Trade-in allowance

3. Debit to new Tractor account

Cash paid + Trade-in allowance

Alternatively, answers can be taken from the following journal entry:

Tractor (new)

Loss on Exchange of Assets

Accumulated Depreciation–Tractor

Tractor (old)

Cash

To record asset exchange.

Problem 8-1A (50 minutes)

Part 1

Appraised
Value

Percent
of Total

Apportioned
Cost

Building

Land

Land improvements

Vehicles

Total

2011

Jan. 1

Building

Land

Land Improvements

Vehicles

Cash

To record asset purchases.

Part 2

Compute Year 2011 straight-line depreciation on building

Part 3

Computer Year 2011 double-declining-balance depreciation on land improvements

Part 4

Problem 8-6A (20 minutes) Don’t forget journal entry descriptions and include calculations where appropriate.

1.

Jan. 2

Machinery

Cash

Jan. 3

Machinery

Cash

Jan. 3

Machinery

Cash

2. a. First year

Dec. 31

Depreciation Expense—Machinery

Accumulated Depreciation—Machinery

b. Fifth year

Dec. 31

Depreciation Expense—Machinery

Accumulated Depreciation—Machinery

3. Accumulated depreciation at the date of disposal

Five years’ depreciation

Book value at the date of disposal

Original total cost

Accumulated depreciation

Book value

(a) Sold for \$13,500 cash

Dec. 31

Cash

Loss on Sale of Machinery

Accumulated Depreciation—Machinery

Machinery

(b) Sold for \$45,000 cash

Dec. 31

Cash

Accumulated Depreciation—Machinery

Machinery

Gain on Sale of Machinery

(c) Destroyed in fire and collected \$24,000 cash from insurance company

Dec. 31

Cash

Accumulated Depreciation—Machinery

Loss from Fire

Machinery

Problem 8-8A (20 minutes) Don’t forget to include descriptions and calculations where appropriate.

1.

2011

(a)

June 25

Leasehold

Cash

(b)

July 1

Prepaid Rent

Cash

.

(c)

July 5

Leasehold Improvements

Cash

2.

2011

(a)

Dec. 31

Rent Expense

Accumulated Amortization—Leasehold

(b)

Dec. 31

Amortization Expense—Leasehold Improvements

Accumulated Amortization—Leasehold

Improvements

(c)

Dec. 31

Rent Expense

Prepaid Rent

Ethics Challenge — BTN 8-3

1.

2.

3.

8-13

Eastman company reports the following( dollar amounts in the thousands): net sales of 13557 for 2011 and 12670 for 2010. End of years assets of 14968 for 2011 and 18810 for 2010. Compute its total assets turnover for 2011. And asses its levels if competitors average a total turnover of 2.0 times.

8-23

Raymond construction trades in an old tractor for a new tractor receiving a 31850 trade in allowances and paying the remaining 93275 in cash. The old tractor cost 107900 and straight line accumulated depreciation of 58500 had been recorded to date under the assumption that it would last eight years and have a 14300 salvage value. Answer th following questions assuming the exchange has commercial substance.

8-1a

Xavier construction negotiates a lump sum purchased several assets from a company going out of business. The purchase is completed on January 1, 2011 at the total cash price 787500 for a building , land, land improvements and four vehicles. The estimated market values of the assets are the building 408000, land 289000, land improvements 42500 and four vehicles 110500. The company fiscal year ends on December 31.

1. prepare a table to allocate the limp sum purchase price to the separate assets purchased. Round to the nearest 1%. Prepare the journal entry to record purchase.

2. Compute the depreciation expense for the year 2011 on the building using the straight line method, as summing 15 year life and a 25650 salvage value.

3. compute the depreciation expense for 2011 on the land improvements assuming a five year life and doublke declining balance depreciation.

4. defend or refute theis statement: Accelerated depreciation results in payment of less taxes over the assets life.

8-6a

Saturn co purchased a used machine for 167000 cash on January 2 and readies it for use the next day at 3420 cost. On January 3 it is installed on a required operating platform costing 1080 and it further readied for opertation. The company predicts the machine will be used for 6 years and have a 14600 salvage value. Depreciation is to be charged on a straight line basis. On December 31 at the end of its fifth year in operations. It is disposed of.

1. prepare the journal entries to record the machines purchase and the costs to ready and install it. Cash is paid in all cost incurred.

2. prepare journal entries to record the depreciation of the machine at December 31 of its first year in operations and the year of disposal.

3. prepare journal entries to record the machines disposal under each of the following assumptions: it is sold for 13500cash, it is sold for 45000 cash, it is destroyed in a fire and the insurance company pays 24000 cash to settle the claim.

8-8a

On july1 2006 sweetman company signed a contract to lease space in building for 15 years. The lease contract calls for annual prepaid rental payments of 70000 on each july 1 throughout the life of the lease and for the lessee to pay for all additions and improvements to the leased property. On june 25 2011 sweetman decides to sublease the space to kirk for the remaining 10 yearss of the lease, kirk pays 185000 to sweetman for the right to sublease and it agrees to assume the obligationto pay 70000 annual rent to the building owner beginning july 1 2011. After taking possession of the leased space, kirk pays improving the office portion od the leased space 129,840cost. The improvements are paid for by kirk on july 5 2011 and are estimated to have useful life equal to the 16 years remaining in the life of the building.

1. prepare the entries for kirk to record: payment to sweetman for the right to sublease the building, its payment for 2011 annual rent, and payment of office improvements

2. prepare kirks year end entries required December 31 2011: amortize the 185000 cost of sublease, amortize the office improvements, record rent expense

DO NOT DO BTN questions

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