Questions

➢  What is the main distinction between inventory and a plant asset?

➢  Which of the following items are properly classifiable as plant assets on the balance sheet?

➢  Advertising that will appear in the future to inform the public about new energy-saving programs at a manufacturing plant.

➢  A truck acquired by a manufacturing company to be used to deliver the company’s products to wholesalers.

➢  An automobile acquired by an insurance company to be used by one of its salespersons.

➢  Adding machines acquired by an office supply company to be sold to customers.

➢  The cost of constructing and paving a driveway that has an estimated useful life of 10 years.

➢  In general terms, what does the cost of a plant asset include?

➢  In what way does the purchase of a plant asset resemble the prepayment of an expense?

➢  Brown Company purchased an old farm with a vacant building as a factory site for $ 1,040,000. Brown decided to use the building in its operations. How should Brown allocate the purchase price between the land and the building? How should this purchase be handled if the building is to be torn down?

➢  Describe how a company may determine the cost of a self-constructed asset.

➢  In any exchange of noncash assets, the accountant’s task is to find the most appropriate valuation for the asset received. What is the general rule for determining the most appropriate valuation in such a situation?

➢  Why should periodic depreciation be recorded on all plant assets except land?

➢  Define the terms inadequacy and obsolescence as used in accounting for depreciable plant assets.

➢  What four factors must be known to compute depreciation on a plant asset? How objective is the calculation of depreciation?

➢  A friend, Mindy Jacobs, tells you her car depreciated $ 5,000 last year. Explain whether her concept of depreciation is the same as the accountant’s concept.

➢  What does the term accelerated depreciation mean? Give an example showing how depreciation is accelerated.

➢  Provide a theoretical reason to support using an accelerated depreciation method.

➢  Nancy Company purchased a machine that originally had an estimated eight years of useful life. At the end of the third year, Nancy determined that the machine would last only three more years. Does this revision affect past depreciation taken?

➢  What does the balance in the accumulated depreciation account represent? Does this balance represent cash that can be used to replace the related plant asset when it is completely depreciated?

➢  What is the justification for reporting plant assets on the balance sheet at undepreciated cost (book value) rather than market value?

➢  Distinguish between capital expenditures and revenue expenditures.

➢  For each of the following, state whether the expenditure made should be charged to an expense, an asset, or an accumulated depreciation account:

➢  Cost of installing air-conditioning equipment in a building that was not air-conditioned.

➢  Painting of an owned factory building every other year.

➢  Cost of replacing the roof on a 10-year-old building that was purchased new and has an estimated total life of 40 years. The expenditure did not extend the life of the asset beyond the original estimate.

➢  Cost of repairing an electric motor. The expenditure extended the estimated useful life beyond the original estimate.

➢  Indicate which type of account (asset, accumulated depreciation, or expense) would be debited for each of the following expenditures:

➢  Painting an office building at a cost of $ 1,000. The building is painted every year.

➢  Adding on a new plant wing at a cost of $ 24,000,000.

➢  Expanding a paved parking lot at a cost of $ 144,000.

➢  Replacing a stairway with an escalator at a cost of $ 20,000.

➢  Replacing the transmission in an automobile at a cost of $ 1,600, thus extending its useful life two years beyond the original estimate.

➢  Replacing a broken fan belt at a cost of $ 600.

➢  How do subsidiary records provide control over a company’s plant assets?

➢  What advantages can accrue to a company that maintains plant asset subsidiary records?

➢  Real world question Based on the financial statements and the notes to those statements of The Limited, Inc., contained in the Annual report appendix, what was the 2000 ending net property and equipment balance? Did the company acquire any of these assets in 2000? What depreciation method did the company use?

Exercises

Exercise A Stephon Company paid $ 640,000 cash for a tract of land on which it plans to erect a new warehouse, and paid $ 8,000 in legal fees related to the purchase. Stephon also agreed to assume responsibility for $ 25,600 of unpaid taxes on the property. The company incurred a cost of $ 28,800 to remove an old apartment building from the land. Prepare a schedule showing the cost of the land acquired.

Exercise B Laural Company paid $ 840,000 cash for real property consisting of a tract of land and a building. The company intended to remodel and use the old building. To allocate the cost of the property acquired, Laural had the property appraised. The appraised values were as follows: land, $ 576,000, and office building, $ 384,000. The cost of clearing the land was $ 18,000. The building was remodeled at a cost of $ 76,800. The cost of a new identical office building was estimated to be $ 432,000. Prepare a schedule showing the cost of the assets acquired.

Exercise C Fine Company purchased a heavy machine to be used in its factory for $ 720,000, less a 2 per cent cash discount. The company paid a fine of $ 3,600 because an employee hauled the machine over city streets without securing the required permits. The machine was installed at a cost of $ 21,600, and testing costs of $ 7,200 were incurred to place the machine in operation. Prepare a schedule showing the recorded cost of the machine.

Exercise D A machine is acquired in exchange for 50 shares of Marley Corporation capital stock. The stock recently traded at $ 400 per share. The machine cost $ 30,000 three years ago. At what amount should the machine be recorded?

Exercise E Keely Company purchased some office furniture for $ 29,760 cash on 2009 March 1. It also paid $ 480 cash for freight costs incurred. The furniture is being depreciated over four years under the straight-line method, assuming a salvage value of $ 1,440. The company employs a calendar-year accounting period. On 2010 July 1, it spent $ 192 to refinish the furniture. Prepare journal entries for the Keely Company to record all of the data, including the annual depreciation adjustments through 2010.

Exercise F On 2009 January 2, a new machine was acquired for $ 900,000. The machine has an estimated salvage value of $ 100,000 and an estimated useful life of 10 years. The machine is expected to produce a total of 500,000 units of product throughout its useful life. Compute depreciation for 2009 and 2010 using each of the following methods:

1. Straight line.
2. Units of production (assume 30,000 and 60,000 units were produced in 2009 and 2010, respectively).
3. Double-declining balance.

Exercise G Terrill Company finds its records are incomplete concerning a piece of machinery used in its plant. According to the company records, the machinery has an estimated useful life of 10 years and an estimated salvage value of $ 24,000. It has recorded $ 12,000 in depreciation each year using the straight-line method. If the accumulated depreciation account shows a balance of $ 72,000, what is the original cost of the machinery and how many years remain to be depreciated?

Exercise H Katherine Company purchased a machine on 2009 April 1, for $ 72,000. The machine has an estimated useful life of five years with no expected salvage value. The company’s accounting year ends on December 31.

Compute the depreciation expense for 2009 and 2010 under the double-declining-balance method.

Exercise I Australia Company purchased a machine for $ 3,200 and incurred installation costs of $ 800. The estimated salvage value of the machine is $ 200. The machine has an estimated useful life of four years. Compute the annual depreciation charges for this machine under the double-declining-balance method.

Exercise J Regal Company acquired a delivery truck on 2009 January 2, for $ 107,200. The truck had an estimated salvage value of $ 4,800 and an estimated useful life of eight years. At the beginning of 2009, a revised estimate shows that the truck has a remaining useful life of six years. The estimated salvage value changed to $ 1,600.

Compute the depreciation charge for 2009 and the revised depreciation charge for 2009 using the straight-line method.

Exercise K Assume that the truck described in the previous exercise was used 40 per cent of the time in 2010 to haul materials used in the construction of a building by Regal Company for its own use. (Remember that 2010 is before the revision was made on estimated life.) During the remaining time, Regal used the truck to deliver merchandise to its customers.

Prepare the journal entry to record straight-line depreciation on the truck for 2010.

Exercise L Vineland Company purchased a computer for $ 60,000 and placed it in operation on 2008 January 2. Depreciation was recorded for 2008 and 2009 using the straight-line method, a six-year life, and an expected salvage value of $ 2,400. The introduction of a new model of this computer in 2010 caused the company to revise its estimate of useful life to a total of four years and to reduce the estimated salvage value to zero.

Compute the depreciation expense on the computer for 2010.

Exercise M On 2009 January 2, a company purchased and placed in operation a new machine at a total cost of $ 60,000. Depreciation was recorded on the machine for 2009 and 2010 under the straight-line method using an estimated useful life of five years and no expected salvage value. Early in 2011, the machine was overhauled at a cost of $ 20,000. The estimated useful life of the machine was revised upward to a total of seven years.

Compute the depreciation expense on the machine for 2011.

Exercise N Lasky Company purchased a machine on 2009 January 3, at a cost of $ 50,000. It debited freight and installation charges of $ 10,000 to Repairs Expense. It recorded straight-line depreciation on the machine in 2009 and 2010 using an estimated life of 10 years and no expected salvage value.

Compute the amount of the error in net income for 2009 and 2010, and state whether net income is understated or overstated.

Exercise O Bragg Company owns a plant asset that originally cost $ 240,000 in 2006 The asset has been depreciated for three years assuming an eight-year useful life and no salvage value. During 2009, Bragg incorrectly capitalized $ 120,000 in repairs on the plant asset rather than expensing them. Describe the impact of this error on the asset’s cost and Bragg’s net income over the next five years.

Problems

Problem A Bolt Company purchased a machine for use in its operations that had an invoice price of $ 80,000 excluding sales tax. A 4 per cent sales tax was levied on the sale. Terms were net 30. The company estimated the total cost of hauling the machine from the dealer’s warehouse to the company’s plant at $ 5,600, which did not include a fine of $ 1,600 for failure to secure the necessary permits to use city streets in transporting the machine. In delivering the machine to its plant, a Bolt employee damaged the truck used; repairs cost $ 3,600. The machine was also slightly damaged with repair costs amounting to $ 1,600.

Bolt incurred installation costs of $ 32,000 that included the $ 4,000 cost of shoring up the floor under the machine. Testing costs amounted to $ 2,400. Safety guards were installed on the machine at a cost of $ 640, and the machine was placed in operation.

Prepare a schedule showing the amount at which the machine should be recorded in Bolt’s accounts.

Problem B Pressler Company planned to erect a new factory building and a new office building in Atlanta, Georgia, USA. A report on a suitable site showed an appraised value of $ 180,000 for land and orchard and $ 120,000 for a building.

After considerable negotiation, the company and the owner reached the following agreement: Pressler Company was to pay $ 216,000 in cash, assume a $ 90,000 mortgage note on the property, assume the interest of $ 1,920 accrued on the mortgage note, and assume unpaid property taxes of $ 13,200. Pressler Company paid $ 18,000 cash for brokerage and legal services in acquiring the property.

Shortly after acquisition of the property, Pressler Company sold the fruit on the trees for $ 2,640, remodeled the building into an office building at a cost of $ 38,400, and removed the trees from the land at a cost of $ 9,000. Construction of the factory building was to begin in a week.

Prepare schedules showing the proper valuation of the assets acquired by Pressler Company.

Problem C Timothy Company acquired and placed into use a heavy factory machine on 2009 October 1. The machine had an invoice price of $ 360,000, but the company received a 3 per cent cash discount by paying the bill on the date of acquisition. An employee of Timothy Company hauled the machine down a city street without a permit. As a result, the company had to pay a $ 1,500 fine. Installation and testing costs totaled $ 35,800. The machine is estimated to have a $ 35,000 salvage value and a seven-year useful life. (A fraction should be used for the DDB calculation rather than a percentage.)

1. Prepare the journal entry to record the acquisition of the machine.
2. Prepare the journal entry to record depreciation for 2009 under the double-declining balance method.
3. Assume Timothy Company used the straight-line depreciation method. At the beginning of 2009, it estimated the machine will last another six years. Prepare the journal entry to record depreciation for 2009. The estimated salvage value would not change.

Problem D Peach Company has the following entries in its Building account: