PR 10-6B Amortization and depletion entries

Data related to the acquisition of timber rights and intangible assets during the current year ended December 31 are as follows:

a. On December 31, the company determined that $3,400,000 of goodwill was impaired.

b.  Governmental and legal costs of $4,800,000 were incurred on September 30 in obtaining a patent with an estimated economic life of eight years. Amortization is to be for one-fourth of a year.

c. Timber rights on a tract of land were purchased for $2,975,000 on February 4. The stand of timber is estimated at 12,500,000 board feet. During the current year, 4,150,000 board feet of timber were cut and sold.

Instructions
1. Determine the amount of the amortization, depletion, or impairment for the current year for each of the foregoing items.
2. Journalize the adjusting entries to record the amortization, depletion, or impairment for each item.


Answer:
1 a. Loss from impaired goodwill, $3,400,000
b. $4,800,000 ÷ 8 years = $600,000;
1/4 of $600,000 = $150,000
c. $2,975,000 ÷ 12,500,000 board feet = $0.238 per board foot;
4,150,000 board feet × $0.238 per board foot = $987,700
2 a.  Dec. 31 Loss from Impaired Goodwill 3,400,000
Goodwill3,400,000
Impaired goodwill.
b.  Dec. 31 Amortization Expense—Patents 150,000
Patents150,000
Patent amortization.
c.  Dec. 31 Depletion Expense987,700. 
Accumulated Depletion987,700

Depletion of timber rights.

PR 10-5B Transactions for fixed assets, including sale

The following transactions and adjusting entries were completed by Robinson Furniture Co. during a three-year period. All are related to the use of delivery equipment. The double-declining-balance method of depreciation is used.

Year 1
Jan.
  8. Purchased a used delivery truck for $24,000, paying cash.
Mar.
  7. Paid garage $900 for changing the oil, replacing the oil filter, and tuning the engine on the delivery truck.
Dec.
 31. Recorded depreciation on the truck for the fiscal year. The estimated useful life of the truck is four years, with a residual value of $4,000 for the truck.

Year 2
Jan.
  9. Purchased a new truck for $50,000, paying cash.
Feb.
 28. Paid garage $250 to tune the engine and make other minor repairs on the used truck.
Apr.
 30. Sold the used truck for $9,500. (Record depreciation to date in Year 2 for the truck.) 
Dec.
 31. Record depreciation for the new truck. It has an estimated residual value of $12,000 and an estimated life of eight years.

Year 3
Sept.
  1. Purchased a new truck for $58,500, paying cash.
  4. Sold the truck purchased January 9, Year 2, for $36,000. (Record depreciation to date for Year 3 for the truck.)
Dec.
 31. Recorded depreciation on the remaining truck. It has an estimated residual value of $16,000 and an estimated useful life of 10 years.

Instructions
Journalize the transactions and the adjusting entries.


Answer:


 Year 1
 Jan. 8 Delivery Truck24,000
Cash24,000
 Mar. 7 Truck Repair Expense900
Cash900
 Dec. 31 Depreciation Expense—Delivery Truck 12,000
Accum. Depreciation—Delivery Truck 12,000
Delivery truck depreciation
[$24,000 × (100% ÷ 4) × 2].
 Year 2
 Jan. 9 Delivery Truck50,000
Cash50,000
 Feb. 28 Truck Repair Expense250
Cash250
 Apr. 30 Depreciation Expense—Delivery Truck 2,000
Accum. Depreciation—Delivery Truck 2,000
Delivery truck depreciation
[($24,000 – $12,000) × 
(100% ÷ 4) × 2 × (4 ÷ 12)].
30 Accum. Depreciation—Delivery Truck 14,000
Cash9,500
Loss on Sale of Delivery Truck 500
Delivery Truck24,000
 Dec. 31 Depreciation Expense—Delivery Truck 12,500
Accum. Depreciation—Delivery Truck 12,500
Delivery truck depreciation
[$50,000 × (100% ÷ 8) × 2].
1 Delivery Truck58,500
Cash58,500
4 Depreciation Expense—Delivery Truck 6,250
Accum. Depreciation—Delivery Truck 6,250
Delivery truck depreciation
[($50,000 – $12,500) × 
(100% ÷ 8) × 2 × (8 ÷ 12)].
4 Cash36,000
Accum. Depreciation—Delivery Truck 18,750
Delivery Truck50,000
Gain on Sale of Delivery Truck4,750
31 Depreciation Expense—Delivery Truck 3,900
Accum. Depreciation—Delivery Truck 3,900
Delivery truck depreciation

[$58,500 × (100% ÷ 10) × 2 × (4 ÷ 12)].

PR 10-4B Depreciation by two methods; sale of fixed asset

New tire retreading equipment, acquired at a cost of $110,000 on September 1 of Year 1 (beginning of the fiscal year), has an estimated useful life of four years and an estimated residual value of $7,500. The manager requested information regarding the effect of alternative methods on the amount of depreciation expense each year. On the basis of the data presented to the manager, the double-declining-balance method was selected. On September 6 of Year 4, the equipment was sold for $18,000.

Instructions
1. Determine the annual depreciation expense for each of the estimated four years of use, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by (a) the straight-line method and (b) the double-declining-balance method. The following columnar headings are suggested for each schedule:

Year Depreciation Expense Accumulated Depreciation,  End of Year Book Value, End of Year


2. Journalize the entry to record the sale.
3. Journalize the entry to record the sale, assuming that the equipment sold for $10,500 instead of $18,000.


Answer:
1.
Depreciation Book Value,
Expense End of Year
a. 1......................................................... $25,625 $84,375
2......................................................... 25,625 58,750
3......................................................... 25,625 33,125
4......................................................... 25,625 7,500
Yearly depreciation = [($110,000 – $7,500) ÷ 4] = $25,625
b. 1 [$110,000 × (100% ÷ 4) × 2]............ $55,000 $55,000
2 [$55,000 × (100% ÷ 4) × 2]............... 27,500 27,500
3 [$27,500 × (100% ÷ 4) × 2]............... 13,750 13,750
4 ($110,000 – $96,250 – $7,500)......... 6,250 7,500
Note: Book value should not be reduced below $7,500, the residual value.
2.  Sept. 6 Cash
Accumulated Depreciation—Equipment
Equipment
Gain on Sale of Equipment
Gain on sale of equipment = $18,000 – ($110,000 – $96,250) = $4,250
3.  Sept. 6 Cash
Accumulated Depreciation—Equipment
Loss on Sale of Equipment
Equipment
Loss on sale of equipment = $10,500 – ($110,000 – $96,250) = –$3,250

PR 10-3B Depreciation by three methods; partial years

Layton Company purchased tool sharpening equipment on October 1 for $108,000.The equipment was expected to havea useful life ofthree years, or 12,000 operating hours, and a residual value of $7,200. The equipment was used for 1,350 hours during Year 1, 4,200 hours in Year 2, 3,650 hours in Year 3, and 2,800 hours in Year 4.

Instructions
Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method.


Answer:
a. Straight-line method:
Year 1: [($108,000 – $7,200) ÷ 3] × 3 ÷ 12....................................... $ 8,400
Year 2: [($108,000 – $7,200) ÷ 3]................................................... 33,600
Year 3: [($108,000 – $7,200) ÷ 3]................................................... 33,600
Year 4: [($108,000 – $7,200) ÷ 3] × 9 ÷ 12....................................... 25,200
b. Units-of-activity method:
Activity rate = ($108,000 – $7,200) ÷ 12,000 hours = $8.40 per hour
Year 1: 1,350 hours × $8.40......................................................... $11,340
Year 2: 4,200 hours × $8.40......................................................... 35,280
Year 3: 3,650 hours × $8.40......................................................... 30,660
Year 4: 2,800 hours × $8.40......................................................... 23,520
c. Double-declining-balance method:
Year 1: $108,000 × 2 ÷ 3 × 3 ÷ 12................................................... $18,000
Year 2: ($108,000 – $18,000) × 2 ÷ 3............................................. 60,000
Year 3: ($108,000 – $18,000 – $60,000) × 2 ÷ 3................................. 20,000
Year 4: ($108,000 – $18,000 – $60,000 – $20,000 – $7,200)............... 2,800

Note:  Book value should not be reduced below $7,200, the residual value.

PR 10-2B Comparing three depreciation methods

Waylander Coatings Company purchased waterproofing equipment on January 6 for $320,000. The equipment was expected to have a useful life of four years, or 20,000 operating hours, and a residual value of $35,000. The equipment was used for 7,200 hours during Year 1, 6,400 hours in Year 2, 4,400 hours in Year 3, and 2,000 hours in Year 4.

Instructions
1. Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, by (a) the straight-line method, (b) the units-of-activity method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the four years by each method. The following columnar headings are suggested for recording the depreciation expense amounts:

Depreciation Expense Year Straight-Line Method Units-of-Activity Method Double-Declining-Balance Method



2. What method yields the highest depreciation expense for Year 1?
3. What method yields the most depreciation over the four-year life of the equipment?


Answer:
1.
a. Straight- b. Units-of- c. Double-
Line Activity Declining-Balance
Year Method Method Method
Year 1 $ 71,250 $102,600 $160,000
Year 2 71,250 91,200 80,000
Year 3 71,250 62,700 40,000
Year 4 71,250 28,500 5,000
Total $285,000 $285,000 $285,000
Calculations:
Straight-line method:
($320,000 – $35,000) ÷ 4 = $71,250 each year
Units-of-activity method:
($320,000 – $35,000) ÷ 20,000 hours = $14.25 per hour
Year 1: 7,200 hours × $14.25 = $102,600
Year 2: 6,400 hours × $14.25 = $91,200
Year 3: 4,400 hours × $14.25 = $62,700
Year 4: 2,000 hours × $14.25 = $28,500
Double-declining-balance method:
Year 1: $320,000 × [(1 ÷ 4) × 2] = $160,000
Year 2: ($320,000 – $160,000) × [(1 ÷ 4) × 2] = $80,000
Year 3: ($320,000 – $160,000 – $80,000) × [(1 ÷ 4) × 2] = $40,000
Year 4: ($320,000 – $160,000 – $80,000 – $40,000 – $35,000) = $5,000
Note:  Book value should not be reduced below the residual value of $35,000.
2. The double-declining-balance method yields the most depreciation expense in 
Year 1 of $160,000.
3. Over the four-year life of the equipment, all three depreciation methods yield 
the same total depreciation, $285,000, which is the cost of the equipment of 

$320,000 less the residual value of $35,000.

PR 10-1B Allocating payments and receipts to fixed asset accounts

The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale apparel business. The receipts are identified by an asterisk.

a. Fee paid to attorney for title search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $  3,600 b. Cost of real estate acquired as a plant site:  Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720,000 Building (to be demolished). . . . . . . . . . . 60,000 c. Finder’s fee paid to real estate agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,400 d. Delinquent real estate taxes on property, assumed by purchaser . . . . . . . . . . . . . . . . . 15,000 e. Architect’s and engineer’s fees for plans for new building  . . . . . . . . . . . . . . . . . . . . . . . 75,000 f. Cost of removing building purchased with land in (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 g. Proceeds from sale of salvage materials from old building . . . . . . . . . . . . . . . . . . . . . . . 3,400* h. Cost of filling and grading land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 i. Premium on one-year insurance policy during construction. . . . . . . . . . . . . . . . . . . . . . 8,400 j. Money borrowed to pay building contractor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000* k. Special assessment paid to city for extension of water main to the property. . . . . . . 13,400 l. Cost of repairing windstorm damage during construction . . . . . . . . . . . . . . . . . . . . . . . 3,000 m. Cost of repairing vandalism damage during construction . . . . . . . . . . . . . . . . . . . . . . . . 2,000 n. Cost of trees and shrubbery planted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 o. Cost of paving parking lot to be used by customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,600 p. Interest incurred on building loan during construction . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 q. Proceeds from insurance company for windstorm and vandalism damage . . . . . . . . 4,500* r. Payment to building contractor for new building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000 s. Refund of premium on insurance policy (i) canceled after 10 months . . . . . . . . . . . . . 1,400*



Instructions
1. Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts. Indicate receipts by an asterisk. Identify each item by letter and list the amounts in columnar form, as follows:

Item Land Land Improvements Building Other Accounts


2. Determine the amount debited to Land, Land Improvements, and Building.

3. The costs assigned to the land, which is used as a plant site, will not be depreciated, while the costs assigned to land improvements will be depreciated. Explain this seemingly contradictory application of the concept of depreciation.
4. What would be the effect on the current year’s income statement and balance sheet if the cost of paving the parking lot of $21,600 [payment (o)] was incorrectly classified as Land rather than Land Improvements? Assume that Land Improvements are depreciated over a 10-year life using the double-declining-balance method.


Answer:

1.Land Other
Item Land Improvements Building Accounts
a. $ 3,600
b. 780,000
c. 23,400
d. 15,000
e.$ 75,000
f. 10,000
g. (3,400)
h. 18,000
i.8,400
j.$(800,000)
k. 13,400
l.3,000
m.2,000
n.$14,000
o.21,600
p.40,000
q.(4,500)
r.800,000
s.(1,400)
2. $860,000 $35,600 $922,000
* Received cash.
3. Land used as a plant site does not lose its ability to provide services; thus, it is
not depreciated. However, land improvements do lose their ability to provide
services as time passes and are, therefore, depreciated.
4. Because land improvements are depreciated, depreciation expense of $4,320 
[$21,600 × (100% ÷ 10) × 2] would be understated and net income would be
overstated by $4,320 on the income statement. On the balance sheet, Land would 
be overstated by $21,600, Land Improvements would be understated by $17,280 

($21,600 – $4,320), and Retained Earnings would be overstated by $4,320. 

PR 9-6B Sales and notes receivable transactions

The following were selected from among the transactions completed during the current year by Danix Co., an appliance wholesale company:

Jan.
 21. Sold merchandise on account to Black Tie Co., $28,000. The cost of merchandise sold was $16,800.
Mar.
 18. Accepted a 60-day, 6% note for $28,000 from Black Tie Co. on account.
May
 17. Received from Black Tie Co. the amount due on the note of March 18.
June
 15. Sold merchandise on account to Pioneer Co. for $17,700. The cost of merchandise sold was $10,600.
 21. Loaned $18,000 cash to JR Stutts, receiving a 30-day, 8% note.
 25. Received from Pioneer Co. the amount due on the invoice of June 15.
July
 21. Received the interest due from JR Stutts and a new 60-day, 9% note as a renewal of the loan of June 21. (Record both the debit and the credit to the notes receivable account.)
Sept.
 19. Received from JR Stutts the amount due on her note of July 21.
 22. Sold merchandise on account to Wycoff Co., $20,000. The cost of merchandise sold was $12,000.
Oct.
 14. Accepted a 30-day, 6% note for $20,000 from Wycoff Co. on account.
Nov. 
 13. Wycoff Co. dishonored the note dated October 14.
Dec.
 28. Received from Wycoff Co. the amount owed on the dishonored note, plus interest for 45 days at 8% computed on the maturity value of the note.

Instructions
Journalize the entries to record the transactions.


Answer:

 Jan. 21 Accounts Receivable—Black Tie Co. 28,000
Sales28,000
21 Cost of Merchandise Sold 16,800
Merchandise Inventory16,800
 Mar. 18 Notes Receivable28,000
Accounts Receivable—Black Tie Co. 28,000
 May 17 Cash28,280
Notes Receivable28,000
Interest Revenue280
($28,000 × 6% × 60 ÷ 360).
 June 15 Accounts Receivable—Pioneer Co. 17,700
Sales17,700
15 Cost of Merchandise Sold 10,600
Merchandise Inventory10,600
21 Notes Receivable18,000
Cash18,000
25 Cash17,700
Accounts Receivable—Pioneer Co. 17,700
 July 21 Notes Receivable18,000
Cash120
Notes Receivable18,000
Interest Revenue120
($18,000 × 8% × 30 ÷ 360).
 Sept. 19 Cash18,270
Notes Receivable18,000
Interest Revenue270
($18,000 × 9% × 60 ÷ 360).
22 Accounts Receivable—Wycoff Co. 20,000
Sales20,000
 Sept. 22 Cost of Merchandise Sold 12,000
Merchandise Inventory12,000
 Oct. 14 Notes Receivable20,000
Accounts Receivable—Wycoff Co. 20,000
 Nov. 13 Accounts Receivable—Wycoff Co. 20,100
Notes Receivable20,000
Interest Revenue100
($20,000 × 6% × 30 ÷ 360).
 Dec. 28 Cash20,301
Accounts Receivable—Wycoff Co. 20,100
Interest Revenue201

($20,100 × 8% × 45 ÷ 360).

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