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8.11: Exercises

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    98087

    • Henry Dauderis and David Annand
    • Athabasca University via Lyryx Learning
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    EXERCISE 8–1 (LO1)

    For all expenditures, accountants identify them as either capital or revenue expenditures. The entries for such transactions can be made to any one of the following accounts:

    Capital expenditures are recorded in an asset account on the balance sheet such as:

    1. Land
    2. Buildings
    3. Equipment
    4. Trucks
    5. Automobiles

    Revenue expenditures are recorded in an income statement account:

    1. An expense account

    Required: For each transaction below, indicate the account to be adjusted. Assume all expenditures are material in amount. Explain your answers.

    Example:  
    ___b___ Architect fees to design building.
    _______ Battery purchased for truck.
    _______ Commission paid to real estate agent to purchase land.
    _______ Cost of equipment test runs.
    _______ Cost to remodel building.
    _______ Cost to replace manual elevator with automatic elevator.
    _______ Cost of sewage system.
    _______ Equipment assembly expenditure.
    _______ Expenditures for debugging new equipment and getting it ready for use.
    _______ Installation of air-conditioner in automobile.
    _______ Insurance paid during construction of building.
    _______ Legal fees associated with purchase of land.
    _______ Oil change for truck.
    _______ Payment for landscaping.
    _______ Expenditures for removal of derelict structures.
    _______ Repair made to building after moving in.
    _______ Repair of collision damage to truck.
    _______ Repair of torn seats in automobile.
    _______ Replacement of engine in automobile.
    _______ Special floor foundations for installation of new equipment.
    _______ Tires purchased for truck.
    _______ Transportation expenditures to bring newly purchased equipment to plant.
     

    EXERCISE 8–2 (LO1)

    Glasgo Holdings Inc. purchased a property including land and a building for $300,000. The market values of the land and building were $100,000 and $300,000, respectively.

    Required: Using these market values, prepare a journal entry to record the lump sum purchase.

    EXERCISE 8–3 (LO1,2)

    Ekman Corporation purchased a new laser printer to be used in its business. The printer had a list price of $4,000, but Ekman was able to purchase it for $3,575. The company expects it to have a useful life of five years, with an estimated residual value of $250. Ekman is paying the delivery costs of $100 along with the set-up and debugging costs of $350.

    Required:

    1. Calculate the total cost of the laser printer.
    2. Ekman management asks you whether the straight-line or double-declining balance method of depreciation would be most appropriate for the printer. Provide calculations to support your answer.

    EXERCISE 8–4 (LO2)

    Willow Inc. began a business on January 1, 2023. It purchased equipment for its factory on this date for $240,000. The equipment is expected to have an estimated useful life of five years with a residual value of $40,000. Willow's year-end is December 31.

    Required: Compute the depreciation for 2023, 2024, 2025, 2026 and 2027 using

    1. The straight-line method
    2. The double-declining balance method.

    EXERCISE 8–5 (LO2)

    Mayr Inc. began a business on January 1, 2023. It purchased a machine for its factory on this date for $110,000. The machine is expected to have an estimated useful life of four years with a residual value of $40,000.

    Required: Compute the depreciation for 2023, 2024, 2025, and 2026 using

    1. The straight-line method
    2. The double-declining balance method.

    EXERCISE 8–6 (LO2,3)

    Penny Corp. purchased a new car on March 1, 2023 for $25,000. The estimated useful life of the car was five years or 500,000 kms. Estimated residual value was $5,000. The car was driven 120,000 kms. in 2023 and 150,000 kms. in 2024. Penny Corp.'s year end is December 31.

    Required:

    1. Applying the half-year rule, calculate depreciation for 2023 and 2024 using
      1. The straight-line method
      2. Units-of-production method
      3. Double-declining-balance method
    2. Assuming Penny Corp. calculates depreciation to the nearest whole month, determine depreciation for 2023 and 2024 using
      1. The straight-line method
      2. Units-of-production method
      3. Double-declining-balance method

    EXERCISE 8–7 (LO4)

    Global Flow Inc. purchased machinery on January 1, 2023 for $60,000 cash. It had an estimated useful life of three years, with no residual value, and depreciation is calculated using the straight-line method. During 2025, Global Flow determined that the estimated useful life should be revised to a total of five years and the residual value changed to $10,000.

    Required: Prepare the entry to record revised depreciation for the year ended December 31, 2025.

    EXERCISE 8–8 (LO4)

    Denton Inc. purchased machinery on January 1, 2023 for $140,000 cash. It had an estimated useful life of five years and no residual value. On January 1, 2024, Denton purchased a specialized component for $50,000 that was attached to the machinery to significantly increase its productivity. The estimated useful life of the component was four years with no residual value. The life and residual value of the original machinery was not affected by the new component.

    Required:

    1. Prepare the entry to record depreciation for the year ended December 31, 2023.
    2. Prepare the entry to record revised depreciation for the year ended December 31, 2024.

    EXERCISE 8–9 (LO5)

    As part of its December 31, 2023 year end procedures, Beltore Inc. is evaluating its assets for impairment. It has recorded no impairment losses for previous years. Following is the Property, Plant and Equipment schedule showing adjusted balances as at December 31, 2023:

    Asset Date of Purchase Depreciation Method Cost Estimated Residual Estimated Useful life Accumulated Depreciation Recoverable Amount
    Land Sept. 1/2022 N/A $100,000 N/A N/A N/A $115,000
    Building Dec. 1/2022 SL 890,000 $250,000 20 $34,667 870,000
    Machinery Dec. 1/2022 SL 400,000 150,000 10 27,083 350,000

    DDB = Double-declining-balance; SL = Straight-line; U = Units-of-production; N/A = Not applicable

    Required:

    1. Record any impairment losses at December 31, 2023.
    2. Record depreciation expense for the year ended December 31, 2024 assuming no changes in the estimated residual values or estimated useful lives of the assets.

    EXERCISE 8–10 (LO6)

    Freeman Inc. purchased a piece of agricultural land several years ago for $125,000. The land has a fair value of $200,000 now. The company plans to exchange this land for equipment owned by a land developer that has a fair value of $240,000. The equipment was originally purchased for $325,000, and $80,000 of depreciation has been recorded to the date of the exchange.

    Required:

    1. Prepare the journal entry on the books of
      1. Freeman
      2. the developer.
    2. Why would the developer give up an asset with a fair value of $240,000 in exchange for an asset with a fair value of only $200,000?

    EXERCISE 8–11 (LO6)

    Mayr Inc. showed the following selected adjusted trial balance information at June 30, 2023:

      Debits Credits
    Equipment $60,000  
    Accumulated Depreciation – Equipment   $40,000

    Required: Mayr Inc. is planning on selling the equipment. Using the information provided above, prepare the journal entry to record the sale assuming

    1. The equipment was sold for $20,000.
    2. The equipment was sold for $30,000.
    3. The equipment was sold for $5,000.

    EXERCISE 8–12 (LO7)

    On March 1, 2023, Willis Publishing purchased the copyright from the author of a new book for cash of $50,000. It is expected that the book will have a shelf life of about 5 years with no expected residual value. On October 1, 2025, Willis sold the copyright to a movie producer for $100,000. Willis Publishing uses the straight-line method to amortize copyrights.

    Required: Prepare Willis Publishing's journal entries at

    1. March 1, 2023 to record the purchase of the copyright.
    2. December 31, 2023, Willis's year-end, to record amortization of the copyright.
    3. October 1, 2025.

    Problems

    PROBLEM 8–1 (LO1)

    Arrow Construction Company Ltd. purchased a farm from K. Jones. Arrow and Jones completed the transaction under the following terms: a cheque from Arrow to Jones for $140,000; bank loan assumed by Arrow, $100,000. Legal, accounting, and brokerage fees amounted to $20,000.

    It was Arrow's intention to build homes on the property after sub-dividing. Crops on the farm were sold for $6,000; a house, to be moved by the buyer, was sold for $1,600; barns were razed at a cost of $6,000, while salvaged lumber was sold for $4,400. The property was cleared and levelled at a cost of $10,000.

    The necessary property was turned over to the township for roads, schools, churches, and playgrounds. Riverside still expected to secure a total of 500 identical lots from the remaining land.

    Required: Prepare a schedule showing the cost to Arrow of the 500 lots.

    PROBLEM 8–2 (LO2)

    On January 1, 2021, Beyond Adventures Ltd. purchased a safari jeep for use in their wilderness weekends. The following information is available.

    Cost $30,000
    Estimated useful life 6 years or 80,000 kms
    Residual value $8,000
    Mileage in 2021 15,000 kms

    Required:

    1. Assuming that the company depreciates on the basis of 50% each in the years of acquisition and disposal, calculate the depreciation for 2022 under each of the methods below. Round your final answer to nearest whole dollar.
      1. Usage based (Units of Production)
      2. Straight-line
      3. Double-declining balance – round percentage to two decimal places.
    2. Compare the carrying amount for 2021 under each of these methods.
    3. Which of the three methods results in the lowest net income for 2021?
    4. Which of the three methods results in the lowest net income for 2022 if 25,000 kms were driven?

    PROBLEM 8–3 (LO2,6)

    Janz Corporation purchased a piece of machinery on January 1, 2023. The company's year-end is December 31. The following information is available regarding the machinery:

      Estimated Estimated Depreciation
    Cost Useful Life Residual Value Method
    $95,000 9,000 units $5,000 Units-of-Production

    Assume actual output was:

    Year Actual Units Produced
    2023 2,000
    2024 3,000
    2025 2,800
    2026 2,900

    The machinery was sold on January 15, 2027 for $12,000.

    Required:

    1. Calculate the depreciation expense for each of 2023 through to 2026 inclusive.
    2. What is the balance of accumulated depreciation at the end of 2026?
    3. What is the carrying amount of the machinery shown on the balance sheet at the end of 2026?
    4. Prepare the entry on January 15, 2027 to record the sale of the machinery.

    PROBLEM 8–4 (LO1,2,4)

    The following are details about an equipment purchase on January 1, 2021:

    Purchase price $35,000
    Transportation charges 1.200
    Installation costs 5,700
    Minor repair cost 100
    Useful life four years
    Residual value $8,000

    Required:

    1. Calculate the total cost of the equipment asset.
    2. Record the depreciation for each year of the expected useful life of the machine under straight-line method and double-declining balance method. Year-end is Dec 31.
    3. Assume now that on January 1, 2024, management changed the estimated useful life on the machine to a total of five years from the date of purchase. Residual value was also changed to $2,000. Calculate the depreciation that should be recorded in 2024 and each year thereafter assuming the company used the straight-line method.

    Round all final answers to the nearest whole dollar.

    PROBLEM 8–5 (LO4,6)

    On January 1, 2015, Inceptor Ltd. purchased equipment for $115,000. The estimated useful life was thirty years. The residual value was estimated to be 15 per cent of the original cost. On January 1, 2022, experts were hired to review the expected useful life and residual value of the machine. They determined that the estimated useful life remaining was fifteen years and the new residual value was $18,000.

    Depreciation has not yet been recorded in 2022. The company uses straight-line method of depreciation and the policy is to depreciate 50% each in the years of acquisition and disposal.

    Required:

    1. Calculate the carrying amount of the machine at December 31, 2021.
    2. Calculate and record the depreciation expense at December 31, 2022.
    3. Record the journal entries if the machine is sold on July 31, 2023 for $80,000.

    PROBLEM 8–6 (LO4,6)

    On August 1, 2015 Mayfere Co. commenced business and purchased production equipment for $250,000 cash. The equipment had an estimated useful life of eight years, an estimated total production output of 200,000 units, and a residual value of $40,000. The equipment was depreciated using the units-of-production method. Actual units of output over three years were: 2022: 11,000; 2023: 25,000; and 2024: 35,000.

    On January 1, 2021, the company traded in the original equipment for new production equipment. The company paid and additional $30,000 cash for the new equipment. The fair value of the original equipment was $140,000 at the date of the trade.

    Required: Prepare journal entries to record the transactions for:

    1. The equipment purchase
    2. Depreciation for 2022, 2023 and 2024
    3. The sale of the equipment

    PROBLEM 8–7 (LO7,8,9)

    Teldor Ltd. paid $1M cash to purchase the following tangible and intangible assets of Zak Company on January 1, 2022. The fair values of the assets purchased were:

    Land $150,000
    Building 400,000
    Patents 200,000
    Machinery 150,000

    The patents have an estimated useful life of twenty years and are amortized on a straight-line basis. They have no residual value. On January 3, 2024, the value of the patents was estimated to be $165,000.

    Required: Record the entries for the following transactions for Teldor:

    1. The $900,000 purchase.
    2. The decline in value of the patents at January 3, 2024.
    3. The amortization of the patents at December 31, 2024.
    4. Prepare a partial balance sheet for the intangible assets section at December 31, 2024 in good form, with proper disclosures.

    PROBLEM 8–8 (LO1,2)

    Global Flow Inc. purchased a computer on January 1, 2022 for $3,000 cash. It had an estimated useful life of three years and no residual value. Global Flow made the following changes to the computer:

    Mar 1, 2022 Added storage capacity at a cost of $1,000. This had no effect on residual value or estimated useful life.
    Apr 1, 2023 Added a new processing board for $2,000, which extended the estimated useful life of the computer another three years but did not affect residual value.

    Required:

    1. Prepare a journal entry to record each of the above expenditures. Assume all amounts are material. Descriptions are not necessary.
    2. Calculate and prepare journal entries to record depreciation expense for 2022 and 2023 using the double-declining balance method. Assume a December 31 fiscal year-end and that the company depreciates 50% each in the acquisition and disposal years.

    This page titled 8.11: Exercises is shared under a CC BY-NC-SA 3.0 license and was authored, remixed, and/or curated by Henry Dauderis and David Annand (Lyryx Learning) .