QUESTIONS
1. A. What is meant by an "accelerated" depreciation method? What is the tax advantage of an accelerated depreciation method?
B. Distinguish between revenue expenditures and capital expenditures during the useful life of plant assets.
2. When an exchange of similar plant assets is said to have "commercial substance", what does that mean?
3. Is there any circumstance in which a gain on similar asset exchange should not be recorded?
4. On which financial statement are gains and losses on disposals of plant assets reported?
5. What are intangible assets? Give an example of an intangible asset. What is meant by amortization of intangible assets? Where are intangible assets reported on the classified balance sheet?
6. What are natural resources? Give an example of natural resources. What is meant by the depletion of natural resources? Where are natural resources reported on the classified balance sheet?
7. Under what conditions is goodwill recorded?
EXERCISES
1. On January 1, 2017, Evers Company purchased the following two machines for use in its production process.
Machine A:
The cash price of this machine was $48,000. Related expenditures included: sales tax $1,700, shipping costs $150, insurance during shipping $80, installation and testing costs $70, and $100 of oil and lubricants to be used with the machinery during its first year of operations. Evers estimates that the useful life of the machine is 5 years with a $5,000 salvage value remaining at the end of that time period. Assume that the straight-line method of depreciation is used.
Machine B:
The recorded cost of this machine was $180,000. Evers estimates that the useful life of the machine is 4 years with a $10,000 salvage value remaining at the end of that time period.
Instructions
(a) Prepare the following for Machine A.
1. The journal entry to record its purchase on January 1, 2017.
2. The journal entry to record annual depreciation at December 31, 2017.
(b) Prepare a depreciation schedule for Machine B using the straight-line depreciation method.
2. Presented below are selected transactions at Ridge Company for 2017.
Jan. 1 Retired a piece of machinery that was purchased on January 1, 2007. The machine cost $62,000 on that date. It had a useful life of 10 years with no salvage value.
June 30 Sold a computer that was purchased on January 1, 2014. The computer cost $45,000. It had a useful life of 5 years with no salvage value. The computer was sold for $14,000 cash.
Dec. 31 Discarded a delivery truck that was purchased on January 1, 2013.
The truck cost $33,000. It was depreciated based on a 6-year useful life with a $3,000 salvage value.
Instructions
Journalize all entries required on the above dates. Ridge Company uses straightline depreciation. (Assume depreciation is up to date as of December 31, 2016.)
3. Presented below are two independent transactions. Both transactions have commercial substance.
1. Mercy Co. exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for new trucks. The old trucks had a fair market value of $38,000.
2. Pence Inc. trades its used machine (cost $12,000 less $4,000 accumulated depreciation) for a new machine. In addition to exchanging the old machine (which had a fair market value of $11,000), Pence also paid cash of $3,000.
Instructions
(a) Prepare the entry to record the exchange of assets by Mercy Co.
(b) Prepare the entry to record the exchange of assets by Pence Inc.
4. Ceda Co. has equiPment that cost $80,000 and that has been depreciated $50,000.
Instructions
Record the disposal under the following assumptions.
(a) It was scrapped as having no value.
(b) It was sold for $21,000 cash.
(c) It was sold for $31,000 cash.
(d) It was exchanged for new equipment. The old equipment had a fair market value of $23,000 and Ceda Co. paid $77,000 cash. The exchange is presumed to have commercial substance.
(e) It was exchanged for new equipment. The old equipment had a fair market value of $33,000 and Ceda Co. paid $67,000 cash. The exchange is presumed to have commercial substance.