Problem 1:
(1) Most companies use straight-line depreciation for their books but an accelerated method for the tax return. Explain why companies use these two different methods that result in the need for two sets of records.
(2) Private Industries paid $450,000 to purchase equipment at the beginning of 2006. Private Industries estimated the useful life of the equipment to be 4 years or 200,000 units. The equipment will be considered fully depreciated when the balance in the Accumulated Depreciation account reaches $420,000. The equipment produced 55,000 units in 2007.
a. Determine the estimated residual value of the equipment.
b. What is the depreciable cost of the equipment?
c. Calculate depreciation expense for 2007 under each of the following methods:
i. Straight-line
ii. Units-of-production
iii. Double-declining-balance
Problem 2:
(1). Monteverde Company purchased timber rights for $850,000 in April of the current year. The tract of land is expected to produce 2,500,000 board feet of lumber. Because Monteverde purchased only the timber rights, there will be no residual value after depletion.
During the current year, 575,000 board feet were cut.
a. Prepare the journal entries to purchase the rights and to recognize depletion for the current year.
b. Compute the book value of the timber right at the end of the current year.
(2). Wide View Window Company purchased equipment costing $200,000 on October 1, by paying 10% down and signing an 8%, 9-month note payable for the balance. Wide View Window Company’s year end is December 31.
a. Prepare journal entries to record the purchase of the equipment, the accrual of interest on December 31, and the payment of the note at maturity.
b. Determine the balance of any current liabilities associated with the note as of December 2008.
Problem 3:
Craig Company signed a ten-year lease for a store in the best mall in the area. At the beginning of the seventh year of the lease, the company decided to refurbish the store. The following expenditures were made:
Item Cost Useful Life
Carpeting $6,000 3 years
Painting $3,500 5 years
Lighting Fixtures $4,500 6 years
Wall Construction $10,000 8 years
All items were paid in cash. There is no residual value for any of the items noted above.
a. Prepare the journal entry to record the expenditures of the above items.
b. Prepare the year-end adjustment to record the expense associated with the above items.
Problem 4:
Centex Company surveys American television-viewing trends. The company’s balance sheet reports the following assets under Property and Equipment: Land, Buildings, Office Furniture, Communication Equipment, and Televideo Equipment. The company has a separate accumulated depreciation account for each of these assets except land. Assume that Centex Company completed the following transactions:
Jan. 2 Traded in communication equipment with book value of $11,000 (cost of $96,000) for similar new equipment with a cash cost of $88,000. The seller gave Centex a trade-in allowance of $15,000 on the old equipment, and Centex paid the remainder in cash.
Aug. 31 Sold a building that had cost of $475,000 and had accumulated depreciation of $353,500 through December 31 of the preceding year. Depreciation is computed on a straight-line basis. The building has a 30-year useful life and a residual value of $47,500. Centex received $150,000 cash and a $450,000 note receivable.
Nov. 4 Purchased used communication and televideo equipment from Diebold polling organization. Total cost was $80,000 paid in cash. An independent appraisal valued the communication equipment at $75,000 and the televideo equipment at $25,000.
Dec. 31 Recorded depreciation as follows:
Equipment is depreciated by the double-declining-balance method over a 5-year live with zero residual value. Record depreciation separately on the equipment purchased on January 2 and on November 4.
Record the transactions in the journal of Centex Company.