18 Chap 010 A

Chapter 10
Plant Assets, Natural Resources,

and Intangibles
QUESTIONS
1.
A plant asset is tangible; it is used in the production or sale of other assets or services; and
it has a useful life longer than one accounting period.
2.
The cost of a plant asset includes all normal and reasonable expenditures necessary to get
the asset in place and ready for its intended use.
3.
Land is an asset with an unlimited life and, therefore, is not subject to depreciation. Land
improvements have limited lives and are subject to depreciation.
4.
Often the lump-sum or basket purchase includes assets with different lives that must be
depreciated separately. Sometimes the purchase may include land, which is never
depreciated.
5.
The Accumulated DepreciationMachinery account is a contra asset account with a credit

balance that cannot be used to buy anything. The balance of the Accumulated Depreciation
Machinery account reflects that portion of the machinery's original cost that has been
charged to depreciation expense. It also gives some indication of the assets age and how
soon it will need to be replaced. Any funds available for buying machinery are shown on the
balance sheet as liquid assets with debit balances.
6.
The Modified Accelerated Cost Recovery System is not generally acceptable for financial
accounting purposes because it allocates depreciation over an arbitrary period that is
usually much shorter than the predicted useful life of the asset.
7.
The materiality principle justifies charging low-cost plant asset purchases to expense
because such amounts are unlikely to impact the decisions of financial statement users.
8.
Ordinary repairs are made to keep a plant asset in normal, good operating condition, and
should be charged to expense of the current period. Extraordinary repairs are made to
extend the life of a plant asset beyond the original estimated life; they are recorded as capital
expenditures (and added to the asset account).
9.
A company might sell or exchange an asset when it reaches the end of its useful life, or if it
becomes inadequate or obsolete, or if the company has changed its business plans. An
asset also can be damaged or destroyed by fire or some other accident that would require its
disposal.
10. The process of allocating the cost of natural resources to expense over the periods when
they are consumed is called depletion. The method to compute depletion is similar to unitsof-production depreciation.
McGraw-Hill Companies, 2007

Solutions Manual, Chapter 10
45
11.
No, depletion expense should be calculated on the units that are extracted (similar to the
units-of-production basis) and sold.
12. An intangible asset: (1) has no physical existence; (2) derives value from the unique legal
and contractual rights held by its owner; and (3) is used in the companys operations.
13. Intangible assets are generally recorded at their cost and amortized over their predicted
useful life. (However, some costs are not included, such as the research and development
costs leading up to a patent.) The costs of intangible assets are generally allocated to
amortization expense using the straight-line method over their useful lives. If the useful life
of an intangible asset is indefinite, then it is not amortizedinstead, it is annually tested for
impairment.
14. A company has goodwill when its value exceeds the value of its individual assets and
liabilities. Goodwill appears in the balance sheet when one company acquires another
company or separate segment and pays a price that exceeds the combined values of all its
net assets (assets less liabilities) excluding goodwill.
15.
No; this type of goodwill would not be amortized. Instead, the FASB (SFAS 142) requires that
goodwill be annually tested for impairment. If the book value of goodwill does not exceed its
fair (market) value, goodwill is not impaired. However, if the book value of goodwill exceeds
its fair value, an impairment loss is recorded equal to that excess. (Details of this two-step
test are in advanced courses.)
16. Total asset turnover is calculated by dividing net sales by average total assets. Financial
statement users can use total asset turnover to evaluate the efficiency of a company in using
its assets to generate sales.
17. Best Buy lists Land and buildings; Leasehold improvements; Fixtures and equipment;
Property under master and capital lease. The book value of these assets is $2,464,000,000.
18. Circuit City calls its plant assets Property and equipment, net. The book value of the
property and equipment is $738,802,000
19. Apples Long term assets discussed in this chapter are: Property, plant, and equipment, net;
Goodwill; Acquired intangible assets.

46
Fundamental Accounting Principles, 18th Edition
QUICK STUDIES
Quick Study 10-1 (10 minutes)
Recorded cost = $190,000 + $20,000 + $4,000 + $13,700 = $227,700
Note: The $1,850 repair charge is an expense because it is not a normal and reasonable
expenditure necessary to get the asset in place and ready for its intended use.

1. The main difference between plant assets and current assets is that
current assets are consumed or converted into cash within a short
period of time, while plant assets have a useful life of more than one
accounting period.
2. The main difference between plant assets and inventory is that
inventory is held for resale and plant assets are not.
3. The main difference between plant assets and long-term investments is
that plant assets are used in the primary operation of the business and
investments are not.
1. Straight-line
($65,800 - $2,000) / 4 years = $15,950 depreciation per year
2. Units-of-production
($65,800 - $2,000) / 200 concerts =
319 depreciation per concert

x 45 concerts in 2008
$14,355 depreciation in 2008

$65,800 Cost
- 15,950 Accumulated depreciation (first year)
49,850 Book value at point of revision
- 2,000 Salvage value
47,850 Remaining depreciable cost
47
2 Years of life remaining

$23,925 Depreciation per year for years 2 and 3

48

Note: Double-declining-balance rate = (100% / 8 years) x 2 = 25%
First year:
$830,000 x 25%
= $207,500
Second year:
($830,000 - $207,500) x 25%
= $155,625
Third year:
($830,000 - $207,500 - $155,625) x 25%
= $116,719* (rounded)
* Total accumulated depreciation of $479,844 ($207,500 + $155,625 + $116,719)

does not exceed the depreciable cost of $755,000 ($830,000 - $75,000).

1. (a) Capital expenditure
(b) Revenue expenditure
(c) Revenue expenditure
(d) Capital expenditure
2. (a)
Equipment................................................................ 40,000
Cash...................................................................
40,000
To record addition of a new wing.
(d) Building.................................................................... 225,000

Cash...................................................................
225,000
To record an extraordinary repair.

49

Book value of old machine = $76,800 - $40,800 = $36,000
1.
Cash................................................................................. 47,000
...................................................................................
Accumulated depreciation............................................ 40,800
Equipment........................................................................
Gain on sale of equipment*............................................
To record the sale of equipment.
*(Gain = $47,000 - $36,000)
2.
Cash................................................................................. 36,000
...................................................................................
Equipment........................................................................
3.
76,800
11,000
76,800
Cash................................................................................. 31,000
...................................................................................
Loss on sale of equipment
5,000
Equipment........................................................................
*(Loss = $31,000 - $36,000)
76,800

1.
Ore Mine..........................................................................1,800,000
Cash..........................................................................
1,800,000
To record cost of ore mine.
2.
Depletion per unit =
$1,800,000 - $200,000
1,000,000 tons
= $1.60 per ton
Depletion ExpenseOre Mine....................................... 288,000

Accumulated DepletionOre Mine........................
288,000
To record depletion of ore mine (180,000 x $1.60).

Intangible Assets:
b) Trademark c) Leasehold f) Copyright g) Franchise

50
Natural Resources: a) Oil well

Note:
d) Gold mine h) Timberland
Building is reported under plant assets.

51

1.
Jan. 4 Leasehold Improvements...............................................
105,000
Cash..........................................................................
105,000
To record leasehold improvements.
2.
Dec. 31 Amortization ExpenseLeasehold Improvements.............
13,125
Accumulated AmortizationLeasehold
Improvements.........................................................
13,125
To record amortization of leasehold over

the remaining life of the lease.*
*
Amortization = $105,000 / 8-year-lease-term = $13,125 per year.

Total asset turnover =
($ millions)
$14,880
($15,869 + $17,819) / 2
= 0.88 times
Interpretation: The companys turnover of 0.88 times is markedly lower than

its competitors turnover of 2.0. This company must perform better if it is to
be successful in the long run.
Quick Study 10-12A (10 minutes)

Book value of old machine = $42,400 - $18,400 = $24,000
1.
Machinery (new)........................................................
Accumulated DepreciationMachinery (old)..........
Loss on Exchange of Assets*..................................
Machinery (old).................................................
Cash...................................................................
52,000
18,400
2,000
42,400
30,000
To record asset exchange assuming commercial

substance. *$52,000 ($24,000 + $30,000) = $(2,000)
2.
Machinery (new)*.......................................................
Accumulated DepreciationMachinery (old)..........
Machinery (old).................................................
Cash...................................................................
46,000
18,400
42,400
22,000
To record asset exchange assuming lack of

52
commercial substance.
*Book value of old asset + cash given = $24,000 + $22,000

53
EXERCISES
Exercise 10-1 (15 minutes)
Invoice price of machine.........................................................
$ 12,500
Less discount (.02 x $12,500).................................................(250)
Net purchase price...................................................................
12,250
Freight charges (transportation-in)........................................ 360
Mounting and power connections..........................................895
Assembly.................................................................................. 475
Materials used in adjusting..................................................... 40
Total cost to be recorded........................................................
$ 14,020

Cost of land
Purchase price for land...........................................................
$ 280,000
Purchase price for old building..............................................
110,000
Demolition costs for old building...........................................
33,500
Costs to fill and level lot..........................................................
47,000
Total cost of land......................................................................
$ 470,500
Cost of new building and land improvements
Cost of new building................................................................
$1,452,200
Cost of land improvements.....................................................
87,800
Total construction costs..........................................................
$1,540,000
Journal entry
Land................................................................................. 470,500
Land Improvements.......................................................
87,800
Building........................................................................... 1,452,200
Cash..........................................................................
2,010,500
To record costs of plant assets.

54

Purchase price............................................................
Closing costs...............................................................
Total cost of acquisition.............................................
$375,280
20,100
$395,380
Allocation of total cost

Appraised
Value
Land............................... $157,040
Land improvements.......
58,890
Building......................... 176,670
Totals............................. $392,600
Percent
of Total
Applying %
to Cost
Apportioned
Cost
40%
15
45
100%
$395,380 x .40
$395,380 x .15
$395,380 x .45
$158,152
59,307
177,921
$395,380
Journal entry
Land.......................................................................... 158,152
Land Improvements................................................. 59,307
Building.................................................................... 177,921
Cash...................................................................
395,380
To record costs of lump-sum purchase.

1. Straight-line depreciation: ($154,000 - $25,000) / 4 years = $32,250 per year
Year
Annual Depreciation Year-End Book Value
2007........
$ 32,250
$121,750
2008........
32,250
89,500
2009........
32,250
57,250
2010........
32,250
25,000
Total.......
$129,000
2. Double-declining-balance depreciation
Depreciation rate: 100% / 4 years = 25% x 2 = 50%
Beginning-Year Depreciation
Annual
Year
Book Value
Rate
Depreciation
2007.......
$154,000
50%
$ 77,000
2008.......
77,000
50
38,500
2009.......
38,500
50
13,500*
2010.......
25,000
--Total.......
$129,000
Year-End
Book Value
$77,000
38,500
25,000
25,000

55
* Do not depreciate more than $13,500 in the third year since the
salvage value is not subject to depreciation.

56

1. Straight-line
($43,500 - $5,000) / 10 years = $3,850
2. Units-of-production
Depreciation per unit = ($43,500 - $5,000) / 385,000 units = $0.10 per unit
For 32,500 units in second year: Depreciation = 32,500 x $0.10 = $3,250
3. Double-declining-balance
Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year
First years depreciation = $43,500 x 20% = $8,700
Book value at beginning of second year = $43,500 - $8,700 = $34,800
Second years depreciation = $34,800 x 20% = $6,960
1. Straight-line depreciation for 2008
($280,000 - $40,000) / 5 years = $48,000
2. Double-declining-balance depreciation for 2008
Rate = (100% / 5 years) x 2 = 40%
2008 depreciation ($280,000 x 40% x 9/12)............................ $ 84,000
Book value at January 1, 2008 ($280,000 - $84,000)............. $196,000
Depreciation for 2008 ($196,000 x 40%)................................. $ 78,400
Alternate calculation
2007 depreciation ($280,000 x 40% x 9/12)......................................... $
2008 depreciation
$280,000 x 40% x 3/12...................................................................... $
($280,000 - $84,000 - $28,000) x 40% x 9/12...................................
Total 2008 depreciation........................................................................ $
84,000
28,000
50,400
78,400

1. Original cost of machine.............................................................$ 23,860
Less two years' accumulated depreciation
[($23,860 - $2,400) / 4 years] x 2 years.................................... (10,730)
Book value at end of second year..............................................$ 13,130
2. Book value at end of second year..............................................$ 13,130
57
Less revised salvage value......................................................... (2,000)

Remaining depreciable cost.......................................................$ 11,130
Revised annual depreciation = $11,130 / 3 years = $3,710

58

1. Straight-line depreciation
Income
before
Depreciation
Year 1.........
Year 2.........
Year 3.........
Year 4.........
Year 5.........
Totals.........
$ 88,500
88,500
88,500
88,500
88,500
$442,500
Depreciation
Expense*
$ 38,960
38,960
38,960
38,960
38,960
$194,800
Net
Income
$ 49,540
49,540
49,540
49,540
49,540
$247,700
*($238,400 - $43,600) / 5 years = $38,960
2. Double-declining-balance depreciation
Income
before
Depreciation
Depreciation
Expense*
Net
Income
$ 88,500
88,500
88,500
88,500
88,500
$442,500
$ 95,360
57,216
34,330
7,894
0
$194,800
$ (6,860)
31,284
54,170
80,606
88,500
$247,700
Year 1........
Year 2.........
Year 3.........
Year 4.........
Year 5.........
Totals.........
Supporting calculations for depreciation expense

*Note: (100% / 5 years) x 2 = 40% depreciation rate
Annual
Accumulated
Beginning
Depreciation
Depreciation at
Book
(40% of
the End of the
Value
Book Value)
Year
Year 1................ $238,400
$ 95,360
$ 95,360
Year 2................ 143,040
57,216
152,576
Year 3................
85,824
34,330**
186,906
Year 4................
51,494
7,894***
194,800
Year 5................
43,600
0
194,800
Total..................
$194,800
Ending Book Value

($238,400 Cost Less
Accumulated
Depreciation)
$143,040
85,824
51,494
43,600
43,600
** rounded
***Must not use $20,598; instead take only enough depreciation in Year 4 to
reduce book value to the $43,600 salvage value.

59

1. Annual depreciation = $572,000 / 20 years = $28,600 per year
Age of the building = Accumulated depreciation / Annual depreciation
= $429,000 / $28,600 = 15 years
2. Entry to record the extraordinary repairs
Building........................................................................... 68,350
Cash.........................................................................
68,350
To record extraordinary repairs.
3.
4.
Cost of building
Before repairs..................................................................
$572,000
Add cost of repairs.........................................................
68,350
Less accumulated depreciation.......................................
Revised book value of building........................................
$640,350
429,000
$211,350
Revised book value of building (part 3)...........................

New estimate of useful life (20 - 15 + 7)...........................
Revised annual depreciation............................................
$211,350
12 years
$17,612.5
Journal entry
Depreciation Expense*..................................................17,612.5
Accumulated DepreciationBuilding........................
17,612.5
To record depreciation. *Students may round this

amount to 17,613, which is fine.

1.
Equipment...................................................................... 22,000
Cash.........................................................................
22,000
To record betterment.
2.
Repairs Expense...........................................................
Cash.........................................................................
6,250
6,250
To record ordinary repairs.
3.
Equipment..................................................................... 14,870
Cash.........................................................................
14,870
To record extraordinary repairs.

60

Note: Book value of milling machine = $250,000 - $182,000 = $68,000
1. Disposed at no value
Jan. 3
Loss on Sale of Milling Machine.................................

68,000
Accumulated DepreciationMilling Machine............
182,000
Milling Machine........................................................
250,000
To record disposal of milling machine.
2. Sold for $35,000 cash

Jan. 3
Cash...............................................................................
35,000
Loss on Sale of Milling Machine.................................
33,000
182,000
Milling Machine........................................................
250,000
To record cash sale of milling machine.

Jan. 2
Cash...............................................................................
68,000
182,000
Milling Machine........................................................
250,000

Jan. 2
Cash...............................................................................
80,000
182,000
Gain on Sale of Milling Machine.............................
12,000
Milling Machine........................................................
250,000

61

2011
July 1
Depreciation Expense.............................................
Accumulated Depreciation--Machinery............
7,500
7,500
To record one-half year depreciation.*

*Annual depreciation = $105,000 / 7 years = $15,000
Depreciation for 6 months in 2011 = $15,000 x 6/12 = $7,500

July 1
Cash...............................................................................45,500
Accumulated DepreciationMachinery.....................67,500
Gain on Sale of Machinery.......................................
Machinery..................................................................
8,000
105,000
To record sale of machinery.*
*Total accumulated depreciation at date of disposal:

Four years 2007-2010 (4 x $15,000)......... $60,000
Partial year 2011 (6/12 x $15,000).............
7,500
Total accumulated depreciation............... $67,500
Book value of machinery = $105,000 - $67,500 = $37,500
2. Destroyed by fire with $25,000 cash insurance settlement

July 1
Cash...............................................................................25,000
Loss from Fire...............................................................12,500
Accumulated DepreciationMachinery.....................67,500
Machinery..................................................................
105,000
To record disposal of machinery from fire.

Dec. 31
Depletion ExpenseMineral Deposit.........................

405,528
Accumulated DepletionMineral Deposit............
405,528
To record depletion [$3,721,000/1,525,000 tons =

$2.44 per ton; 166,200 tons x $2.44 = $405,528].
Dec. 31
Depreciation ExpenseMachinery ............................

23,268
Accumulated DepreciationMachinery................
23,268
To record depreciation [$213,500/1,525,000 tons=

$0.14 per ton; 166,200 tons x $0.14 = $23,268].
62

Jan.
1 Copyright.......................................................................
418,000
Cash..........................................................................
To record purchase of copyright.
418,000
00
Dec. 31 Amortization ExpenseCopyright.............................

41,800
Accumulated AmortizationCopyright.................
41,800
To record amortization of copyright

[$418,000 / 10 years].

1. Goodwill = $2,500,000 - $1,800,000 = $700,000
2. Goodwill is not amortized. Instead, Robinson must test the value of the
Goodwill each year, and if the value is impaired, it must be written down.
3. Goodwill is only recorded when it is purchased. Goodwill is not
recorded by the company that has created it.

1. $269,166,000 for property and equipment
2. $154,788,000 for depreciation and amortization
3. $81,039,000 used in investing activities
Total asset turnover for 2007 =
$5,865,000
($1,686,000 + $1,800,000)/2
= 3.36
Total asset turnover for 2008 =
$8,689,000
($1,800,000 + $1,982,000)/2
= 4.59
Analysis comments. Based on these calculations, Lok turned its assets over 1.23
(4.59 3.36) more times in 2008 than in 2007. This increase indicates that Lok
became more efficient in using its assets. Moreover, Lok has improved its
efficiency in using assets relative to its competitors who average 3.0. Together,
these results based on total asset turnover indicate that Lok has markedly
improved its performance and is currently superior to its competitors.

63
Exercise 10-18A (15 minutes)

1. Book value of the old tractor ($96,000 - $52,500)..........................$ 43,500
2. Loss on the exchange
Book value - Trade-in allowance ($43,500 - $29,000)..............$ 14,500
3. Debit to new Tractor account
Cash paid + Trade-in allowance ($83,000 + $29,000)...............$112,000
Alternatively, answers can be taken from the following journal entry:
Tractor (new)*...............................................................................
112,000
Loss on Exchange of Assets......................................................
14,500
Accumulated DepreciationTractor............................................
52,500
Tractor (old)..........................................................................
Cash......................................................................................
96,000
83,000
To record asset exchange. *($29,000 + $83,000)
Exercise 10-19A (25 minutes)

Note: Book value of Machine equals $44,000 - $24,625 = $19,375

Jan. 2
Cash...............................................................................
18,250
Loss on Sale of Machinery..........................................
1,125
Accumulated DepreciationMachinery (old).............
24,625
Machinery (old)........................................................
44,000
To record cash sale of machine.

2. $25,000 trade-in allowance exceeds book value; but no gain is
recognized on an asset exchange that lacks commercial substance

($5,625 gain is buried in the cost of the new machinery)
Jan. 2
Machinery (new)*..........................................................
54,575
24,625
Machinery (old)........................................................
Cash**.......................................................................
44,000
35,200
To record asset exchange.

*[$60,200 - ($25,000 - $19,375)] **($60,200 - $25,000)
3. $15,000 trade-in allowance is less than book value (yielding a loss)

Jan. 2
Machinery (new)...........................................................
60,200
Loss on Exchange of Machinery.................................
4,375
24,625
Machinery (old)........................................................
Cash*.........................................................................
44,000
45,200

64
To record asset exchange. *($60,200 - $15,000)

65
PROBLEM SET A
Problem 10-1A (50 minutes)
Part 1
Building..........................
Land................................
Land improvements......
Vehicles..........................
Total................................
2008
Jan. 1
Estimated
Market Value
$508,800
297,600
28,800
124,800
$960,000
Percent
of Total
53%
31
3
13
100%
Apportioned
Cost
$477,000
279,000
27,000
117,000
$900,000
Building...........................................................................
477,000
Land.................................................................................
279,000
Land Improvements.......................................................
27,000
Vehicles...........................................................................
117,000
Cash...........................................................................
900,000
To record asset purchases.
Part 2
Year 2008 straight-line depreciation on building
[($477,000 - $27,000) / 15 years] = $30,000
Part 3
Year 2008 double-declining-balance depreciation on land improvements
(100% / 5 years) x 2 = 40% rate
$27,000 x 40% = $10,800
Part 4
Accelerated depreciation does not lower the total amount of taxes paid over
the asset's life. Instead, it defers or postpones taxes to the later years of an
assets useful life. This is because accelerated methods charge a higher
portion of asset costs against revenue in earlier years and a lower portion in
later years. The result is to reduce taxable income more in earlier years but
less in later years. [Note: From a present value perspective, there is a tax

66
savings from use of accelerated depreciation. The company gets to use the
tax deferred amounts for investment purposes until they are due.]

67

Part 1
Land
Building
2
$598,000
Building
3
Land
Improvements 1
$390,000
Land
Improvements
2
Purchase price*...................
$1,612,000
Demolition............................
328,400
Land grading.......................
175,400
New building........................
New improvements.............
_________
Totals..................................
$2,115,800
_______
$598,000
$2,202,000
_________
$2,202,000
*Allocation of purchase price
Appraised
Value
Percent
of Total
Apportioned
Cost**
62%
23
15
100%
$1,612,000
598,000
390,000
$2,600,000
Land.......................................... $1,736,000
Building 2.................................
644,000
Land Improvements 1..............
420,000
Totals........................................ $2,800,000
_______
$390,000
$164,000
$164,000
**Multiply the percentages in column 3 by the $2,600,000 purchase price.
Part 2
2008
Jan. 1
Land....................................................................... 2,115,800
Building 2.............................................................. 598,000
Building 3.............................................................. 2,202,000
Land Improvements 1.......................................... 390,000
Land Improvements 2.......................................... 164,000
Cash................................................................
5,469,800
To record costs of plant assets.
Part 3
2008
Dec. 31 Depreciation ExpenseBuilding 2...............................

26,900
Accumulated DepreciationBuilding 2.................
26,900
To record depreciation [($598,000 - $60,000)/20].
31 Depreciation ExpenseBuilding 3...............................

72,400
Accumulated DepreciationBuilding 3.................
72,400
To record depreciation [($2,202,000 - $392,000)/25].
31 Depreciation ExpenseLand Improv. 1.......................

32,500
Accum. DepreciationLand Improv. 1...................
32,500
To record depreciation [$390,000/12].
31 Depreciation ExpenseLand Improv. 2.......................

8,200
Accum. DepreciationLand Improv. 2...................
8,200

68
To record depreciation [$164,000/20].

69

2007
Jan.
1 Equipment .................................................................300,600
Cash.....................................................................
300,600
To record loader costs ($287,600 +$11,500 +$1,500).
Jan.
3 Equipment.....................................................................4,800
Cash.........................................................................
4,800
To record betterment of loader.
Dec. 31 Depreciation ExpenseEquipment...........................

70,850*
Accumulated DepreciationEquipment..............
70,850
To record depreciation.
*
2007 depreciation after January 3rd betterment

Total original cost.................................................................... $300,600
Plus cost of betterment...........................................................
4,800
Revised cost of equipment...................................................... 305,400
Less revised salvage ($20,600 + $1,400)...............................
22,000
Cost to be depreciated............................................................ 283,400
Annual depreciation ($283,400 / 4 years)............................... $ 70,850
2008
Jan.
1 Equipment.....................................................................5,400
Cash.........................................................................
5,400
To record extraordinary repair on loader.
Feb. 17 Repairs ExpenseEquipment.................................... 820

Cash.........................................................................
820
To record ordinary repair on loader.
Dec. 31 Depreciation ExpenseEquipment...........................

43,590*
Accumulated DepreciationEquipment..............
43,590
*2008 depreciation after January 1st extraordinary repair
Total cost ($305,400 + $5,400)...........................................................................
$310,800
Less accumulated depreciation ......................................................................
70,850
Book value.........................................................................................................
239,950
Less salvage......................................................................................................
22,000
Remaining cost to be depreciated...................................................................
$217,950
Revised remaining useful life (Original 4 years - 1yr. + 2yrs.)..............................
5 yrs.
$ 43,590
Revised annual depreciation ($217,950 / 5 yrs)...............................................

70

2007
Jan.
1 Trucks............................................................................22,000
Cash.........................................................................
22,000
To record cost of truck ($20,515 + $1,485).
Dec. 31 Depreciation ExpenseTrucks................................... 4,000

Accumulated DepreciationTrucks.....................
4,000

2008
Dec. 31 Depreciation ExpenseTrucks...................................5,200*

5,200
*
2008 depreciation
Total cost............................................................................................................
$ 22,000
Less accumulated depreciation (from 2007)...................................................
4,000
Book value.........................................................................................................
18,000
Less revised salvage value...............................................................................
2,400
Remaining cost to be depreciated...................................................................
$ 15,600
Revised useful life.............................................................................................
4 yrs.
Less one year used in 2007..............................................................................
1 yrs.
Revised remaining useful life...........................................................................
3 yrs.
Total depreciation for 2008 ($15,600/3)............................................................
$ 5,200
2009
Dec. 31 Depreciation ExpenseTrucks................................... 5,200

5,200
To record annual depreciation.
Dec. 31 Cash............................................................................... 5,300

Accumulated DepreciationTrucks...........................14,400**
Loss on Disposal of Trucks......................................... 2,300***
Trucks......................................................................
22,000
To record sale of truck.
**
Accumulated depreciation on truck at 12/31/2009

2007.................................................................................. $ 4,000
2008.................................................................................. 5,200
2009.................................................................................. 5,200
Total................................................................................. $14,400
***
Book value of truck at 12/31/2009
Total cost......................................................................... $22,000
Less accumulated depreciation..................................... (14,400)
Book value ...................................................................... $ 7,600
Loss ($5,300 cash received - $7,600 book value)......... $ 2,300
71

Cost of machine................................................................
$257,500
Less estimated salvage value.........................................
20,000
Total depreciable cost......................................................
$237,500
Year
Straight-Line
1...................... $ 59,375
2...................... 59,375
3...................... 59,375
4...................... 59,375
Totals.............. $237,500
Units-of-Production
$110,000
62,300
60,900
4,300
$237,500
Double-DecliningBalancec
$128,750
64,375
32,188
12,187
$237,500
Straight- line:
Cost per year = $237,500/4 years = $59,375 per year
Units-of-production:
Cost per unit = $237,500/475,000 units = $0.50 per unit
Year
1................
2................
3................
4................
Total..........
*
Units
220,000
124,600
121,800
15,200
Unit Cost
$0.50
0.50
0.50
0.50
Depreciation
$ 110,000
62,300
60,900
4,300*
$237,500
Take only enough depreciation in Year 4 to reduce book

value to the assets $20,000 salvage value.
Double-declining-balance:
(100%/4) x 2 = 50% depreciation rate
Year
1.........
2.........
3.........
4.........
Total...
Beginning
Book
Value
$257,500
128,750
64,375
32,187
Annual
Depreciation
(50% of
Book Value)
$128,750
64,375
32,188*
12,187**
$237,500
Accumulated
Depreciation
at the End of
the Year
$128,750
193,125
225,313
237,500
Ending Book Value

($257,500 Cost Less
Accumulated
Depreciation)
$128,750
64,375
32,187
20,000
* rounded
**Take only enough depreciation in Year 4 to reduce book value to
the assets $20,000 salvage value.

72

1.
Jan. 2 Machinery................................................................. 178,000
Cash....................................................................
178,000
To record machinery purchase.
Jan. 3 Machinery.................................................................
Cash....................................................................
2,840
2,840
To record machinery costs.
Jan. 3 Machinery.................................................................
Cash....................................................................
1,160
1,160
To record machinery costs.
2. a. First year
Dec. 31 Depreciation ExpenseMachinery............................
28,000
Accumulated DepreciationMachinery..............
28,000
b. Fifth year
28,000
Accumulated DepreciationMachinery..............
28,000
To record years depreciation.
3. Accumulated depreciation at the date of disposal

Five years' depreciation (5 x $28,000)..........................$140,000
Book value at the date of disposal
Original total cost...........................................................$182,000
Accumulated depreciation............................................ (140,000)
Book value......................................................................$ 42,000
a. Sold for $15,000 cash
Dec. 31 Cash...............................................................................
15,000
Loss on Sale of Machinery..........................................
27,000
Accumulated DepreciationMachinery....................
140,000
Machinery.................................................................
182,000
b. Sold for $50,000 cash
Dec. 31 Cash...............................................................................
50,000
140,000
Machinery.................................................................
Gain on Sale of Machinery.....................................
182,000
8,000
c. Destroyed in fire and collected $30,000 cash from insurance co.
Dec. 31 Cash...............................................................................
30,000
73
140,000
Loss from Fire..............................................................
12,000
Machinery.................................................................
182,000

74

a.
July 23 Mineral Deposit.............................................................
4,715,000
Cash.........................................................................
4,715,000
To record purchase of mineral deposit.
b.
July 25 Machinery......................................................................
410,000
Cash.........................................................................
410,000
To record costs of machinery.
c.
Dec. 31 Depletion ExpenseMineral Deposit.........................
441,600
Accum. DepletionMineral Deposit....................
441,600
To record depletion [$4,715,000/

5,125,000 tons = $0.92 per ton.
480,000 tons x $0.92 = $441,600].
d.
38,400
Accum. DepreciationMachinery........................
38,400
To record depreciation [$410,000/

5,125,000 tons = $0.08 per ton.
480,000 tons x $0.08 = $38,400].
Analysis Component
SimilaritiesAmortization, depletion, and depreciation are similar in that
they are all methods of allocating costs of long-term assets to the periods
that benefit from their use. DifferencesThey are different in that they
apply to different types of long-term assets: amortization applies to
intangible assets with (definite) useful lives; depletion applies to natural
resources; and depreciation applies to plant assets. Also, amortization is
typically computed using the straight-line method, whereas the units-ofproduction method is routinely used in depletion.

75

1.
2008
(a)
June 25 Leasehold......................................................................
200,000
Cash.........................................................................
200,000
To record payment for sublease.
(b)
July 1 Prepaid Rent.................................................................
80,000
Cash.........................................................................
80,000
To record prepaid annual lease rental.
(c)
July 5 Leasehold Improvements............................................
130,000
Cash.........................................................................
130,000
To record costs of leasehold improvements.
2.
2008
(a)
Dec. 31 Rent Expense................................................................
10,000
Accumulated AmortizationLeasehold..............
10,000
To record leasehold amortization ($200,000/10 x

6/12).
(b)
Dec. 31 Amortization ExpenseLeasehold Improvements............6,500
Accumulated AmortizationLeasehold
Improvements..............................................................
6,500
To record leasehold improvement amortization

($130,000/10 years remaining on lease x 6/12).
(c)
Dec. 31 Rent Expense................................................................
40,000
Prepaid Rent...........................................................
40,000
To record one-half year lease rental ($80,000 x 6/12).

76

18 Chap 010 A

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

18 Chap 010 A

Uploaded by

Copyright:

Available Formats

Chapter 10

Plant Assets, Natural Resources,

The Accumulated DepreciationMachinery account is a contra asset account with a credit

McGraw-Hill Companies, 2007

McGraw-Hill Companies, 2007

Fundamental Accounting Principles, 18th Edition

Quick Study 10-2 (10 minutes)

319 depreciation per concert

Quick Study 10-4 (10 minutes)

2 Years of life remaining

McGraw-Hill Companies, 2007

Fundamental Accounting Principles, 18th Edition

Quick Study 10-5 (10 minutes)

* Total accumulated depreciation of $479,844 ($207,500 + $155,625 + $116,719)

Quick Study 10-6 (10 minutes)

To record addition of a new wing.

(d) Building.................................................................... 225,000

To record an extraordinary repair.

McGraw-Hill Companies, 2007

Quick Study 10-7 (15 minutes)

Quick Study 10-8 (10 minutes)

= $1.60 per ton

Depletion ExpenseOre Mine....................................... 288,000

To record depletion of ore mine (180,000 x $1.60).

Quick Study 10-9 (10 minutes)

b) Trademark c) Leasehold f) Copyright g) Franchise

McGraw-Hill Companies, 2007

Fundamental Accounting Principles, 18th Edition

Natural Resources: a) Oil well

d) Gold mine h) Timberland

Building is reported under plant assets.

McGraw-Hill Companies, 2007

Quick Study 10-10 (10 minutes)

To record amortization of leasehold over

Amortization = $105,000 / 8-year-lease-term = $13,125 per year.

Quick Study 10-11 (10 minutes)

Interpretation: The companys turnover of 0.88 times is markedly lower than

Quick Study 10-12A (10 minutes)

To record asset exchange assuming commercial

To record asset exchange assuming lack of

Fundamental Accounting Principles, 18th Edition

McGraw-Hill Companies, 2007

Exercise 10-2 (15 minutes)

To record costs of plant assets.

McGraw-Hill Companies, 2007

Fundamental Accounting Principles, 18th Edition

Exercise 10-3 (20 minutes)

Allocation of total cost

To record costs of lump-sum purchase.

Exercise 10-4 (20 minutes)

McGraw-Hill Companies, 2007

McGraw-Hill Companies, 2007

Fundamental Accounting Principles, 18th Edition

Exercise 10-5 (15 minutes)

Exercise 10-7 (15 minutes)

Less revised salvage value......................................................... (2,000)

McGraw-Hill Companies, 2007

Fundamental Accounting Principles, 18th Edition

Exercise 10-8 (30 minutes)

*($238,400 - $43,600) / 5 years = $38,960

Supporting calculations for depreciation expense

Ending Book Value

McGraw-Hill Companies, 2007