Sandblasting equipment acquired at a cost of $36,000 has an estimated residual value of $6,000 and an estimated useful life of 10 years. It was placed into service on April 1 of the current fiscal year, which ends on December 31. Determine the depreciation for the current fiscal year and for the following fiscal year by (a) the straight-line method and (b) the double-declining-balance method.
Answer: a. Year 1: 9/12 × [($36,000 – $6,000) ÷ 10] = $2,250 Year 2: ($36,000 – $6,000) ÷ 10 = $3,000
b. Year 1: 9/12 × 20% of $36,000 = $5,400 Year 2: 20% of ($36,000 – $5,400) = $6,120 A building with a cost of $780,000 has an estimated residual value of $90,000, has an estimated useful life of 40 years, and is depreciated by the straight-line method. (a) What is the amount of the annual depreciation? (b) What is the book value at the end of the twenty-fourth year of use? (c) If at the start of the twenty-fifth year it is estimated that the remaining life is 10 years and that the residual value is $70,000, what is the depreciation expense for each of the remaining 10 years?
Answer: a. $17,250 [($780,000 – $90,000) ÷ 40] b. $366,000 [$780,000 – ($17,250 × 24 yrs.)] c. $29,600 [($366,000 – $70,000) ÷ 10 yrs.] Willow Creek Company purchased and installed carpet in its new general offices on April 30 for a total cost of $18,000. The carpet is estimated to have a 15-year useful life and no residual value.
a. Prepare the journal entry necessary for recording the purchase of the new carpet. b. Record the December 31 adjusting entry for the partial-year depreciation expense for the carpet, assuming that Willow Creek Company uses the straight-line method.
Equipment acquired on January 6, 2011, at a cost of $714,000, has an estimated useful life of 12 years and an estimated residual value of $44,400.
a. What was the annual amount of depreciation for the years 2011, 2012, and 2013, using the straight-line method of depreciation? b. What was the book value of the equipment on January 1, 2014? c. Assuming that the equipment was sold on January 3, 2014, for $525,000, journalize the entry to record the sale. d. Assuming that the equipment had been sold on January 3, 2014, for $560,000 instead of $525,000, journalize the entry to record the sale.
Answer:
a. 2011 depreciation expense: $55,800 [($714,000 – $44,400) ÷ 12] 2012 depreciation expense: $55,800 2013 depreciation expense: $55,800 b. $546,600 [$714,000 – ($55,800 × 3)] c. Cash 525,000 Accumulated Depreciation—Equipment 167,400 Loss on Sale of Equipment 21,600 Equipment 714,000 d. Cash 560,000 Accumulated Depreciation—Equipment 167,400 Equipment 714,000 Gain on Sale of Equipment 13,400
Equipment acquired on January 8, 2011, at a cost of $420,000, has an estimated useful life of 15 years, has an estimated residual value of $30,000, and is depreciated by the straight-line method.
a. What was the book value of the equipment at December 31, 2014, the end of the year? b. Assuming that the equipment was sold on October 1, 2015, for $275,000, journalize the entries to record (1) depreciation for the nine months until the sale date, and (2) the sale of the equipment.
Answer:
a. Cost of equipment……………………………………………………………………………… $420,000 Accumulated depreciation at December 31, 2014 (4 years at $26,000* per year)……………………………………………………………… 104,000 Book value at December 31, 2014…………………………………………………………… $316,000 * ($420,000 – $30,000) ÷ 15 = $26,000 b. (1) Depreciation Expense—Equipment 19,500 Accumulated Depreciation—Equipment 19,500 Equipment depreciation ($26,000 × 9/12 = $19,500). (2) Cash 275,000 Accumulated Depreciation—Equipment* 123,500 Loss on Sale of Equipment 21,500 Equipment 420,000 * $104,000 + $19,500 = $123,500
Crazy Jim’s Mining Co. acquired mineral rights for $21,750,000. The mineral deposit is estimated at 15,000,000 tons. During the current year, 3,600,000 tons were mined and sold.
a. Determine the amount of depletion expense for the current year. b. Journalize the adjusting entry to recognize the depletion expense.
Answer:
a. $21,750,000 ÷ 15,000,000 tons = $1.45 depletion per ton 3,600,000 tons × $1.45 = $5,220,000 depletion expense b. Depletion Expense 5,220,000 Accumulated Depletion 5,220,000 Depletion of mineral deposit. Voss Company acquired patent rights on January 6, 2011, for $480,000. The patent has a useful life equal to its legal life of eight years. On January 3, 2014, Voss successfully defended the patent in a lawsuit at a cost of $80,000.
a. Determine the patent amortization expense for the current year ended December 31, 2014. b. Journalize the adjusting entry to recognize the amortization.
Answer:
a. ($480,000 ÷ 8) + ($80,000 ÷ 5) = $76,000 total patent expense b. Amortization Expense—Patents 76,000 Patents 76,000 Amortized patent rights ($60,000 + $16,000).
Apple Inc. designs, manufactures, and markets personal computers and related software. Apple also manufactures and distributes music players (iPod) and mobile phones (iPhone) along with related accessories and services, including online distribution of third-party music, videos, and applications. The following information was taken from a recent annual report of Apple:
Property, Plant, and Equipment (in millions): Current Year Preceding Year Land and buildings $1,471 $ 955 Machinery, equipment, and internal-use software 3,589 1,932 Office furniture and equipment 144 115 Other fixed assets related to leases 2,030 1,665 Accumulated depreciation and amortization 2,466 1,713
a. Compute the book value of the fixed assets for the current year and the preceding year and explain the differences, if any.
b. Would you normally expect Apple’s book value of fixed assets to increase or decrease during the year?
Answer:
a. Property, Plant, and Equipment (in millions): Current Preceding Year Year Land and buildings…………………………………………………… $1,471 $ 955 Machinery, equipment, and internal-use software…………… 3,589 1,932 Office furniture and equipment…………………………………… 144 115 Other fixed assets related to leases……………………………… 2,030 1,665 $7,234 $4,667 Less accumulated depreciation and amortization……………… 2,466 1,713 Book value…………………………………………………………… $4,768 $2,954 A comparison of the book values of the current and preceding years indicates that they increased. A comparison of the total cost and accumulated depreciation reveals that Apple purchased $2,567 million ($7,234 – $4,667) of additional fixed assets, which was offset by the additional depreciation expense of $753 million ($2,466 – $1,713) taken during the current year.
b. We would expect Apple’s book value of fixed assets to increase during the year as its sales increase. Although additional depreciation expense will reduce the book value, most companies, such as Apple, invest in new assets in an amount that is at least equal to the depreciation expense. However, during periods of economic downturn, companies purchase fewer fixed assets, and the book value of their fixed assets may decline.
Answer: 1. Fixed assets should be reported at cost and not replacement cost. 2. Land does not depreciate. 3. Patents and goodwill are intangible assets that should be listed in a separate section following the Fixed Assets section. Patents should be reported at their net book values (cost less amortization to date). Goodwill should not be amortized, but should be only written down upon impairment.
Verizon Communications is a major telecommunications company in the United States. Two recent balance sheets for Verizon disclosed the following information regarding fixed assets:
Year 2 (in millions) Year 1 (in millions) Plant, property, and equipment $211,655 $229,743 Less accumulated depreciation 123,944 137,758 $ 87,711 $ 91,985
Verizon’s revenue for Year 2 was $106,565 million. Assume the fixed asset turnover for the telecommunications industry averages approximately 1.10.
a. Determine Verizon’s fixed asset turnover ratio for Year 2. Round to two decimal places. b. Interpret Verizon’s fixed asset turnover ratio.
Answer:
a. Fixed Asset Turnover Ratio = Revenue Average Book Value of Fixed Assets Fixed Asset Turnover Ratio = $106,565 ($87,711 + $91,985) ÷ 2 Fixed Asset Turnover Ratio = 1.19
b. Verizon earns $1.19 revenue for every dollar of fixed assets. This is a low fixed asset turnover ratio, reflecting the high fixed asset intensity in a telecommunications company. The industry average fixed asset turnover ratio is slightly lower at 1.10. Thus, Verizon is using its fixed assets more efficiently than the industry as a whole.
A printing press priced at a fair market value of $275,000 is acquired in a transaction that has commercial substance by trading in a similar press and paying cash for the difference between the trade-in allowance and the price of the new press.
a. Assuming that the trade-in allowance is $90,000, what is the amount of cash given? b. Assuming that the book value of the press traded in is $68,000, what is the gain or loss on the exchange?
Answer:
a. Price (fair market value) of new equipment………………………… $275,000 Trade-in allowance of old equipment………………………………… 90,000 Cash paid on the date of exchange………………………………… $185,000 b. Fair market value (trade-in allowance) of old equipment………… $ 90,000 Less book value of old equipment…………………………………… 68,000 Gain on exchange of equipment……………………………………… $ 22,000 or Price (fair market value) of new equipment………………………… $275,000 Less assets given up in exchange: Book value of old equipment……………………………………… $ 68,000 Cash paid on the exchange………………………………………… 185,000 253,000
The following table shows the revenue and average net fixed assets (in millions) for a recent fiscal year for Best Buy and RadioShack:
Revenue Average Net Fixed Assets Best Buy $50,272 $3,947 RadioShack 4,473 278
a. Compute the fixed asset turnover for each company. Round to two decimal places. b. Which company uses its fixed assets more efficiently? Explain.
Answer: a. Best Buy: 12.74 ($50,272 ÷ $3,947) RadioShack: 16.09 ($4,473 ÷ $278)
b. RadioShack’s fixed asset turnover ratio of 16.09 is higher than Best Buy’s fixed asset turnover ratio of 12.74. Thus, RadioShack is generating $3.35 ($16.09 – $12.74) more revenue for each dollar of fixed assets than is Best Buy. On this basis, RadioShack is managing its fixed assets more efficiently than is Best Buy.
