On July 1, Twin Pines Co., a water distiller, acquired new bottling equipment with a list price (fair market value) of $220,000. Twin Pines received a trade-in allowance (fair market value) of $45,000 on the old equipment of a similar type and paid cash of $175,000. The following information about the old equipment is obtained from the account in the equipment ledger: cost, $180,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $120,000; annual depreciation, $12,000. Assuming the exchange has commercial substance, journalize the entries to record (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on July 1.Answer:
a. Depreciation Expense—Equipment 6,000Accumulated Depreciation—Equipment 6,000Equipment depreciation ($12,000 × 6/12).b. Accumulated Depreciation—Equipment 126,000Equipment 220,000Loss on Exchange of Equipment 9,000Equipment 180,000Cash 175,000
Assume the same facts as in Exercise 10-25, except that the book value of the press traded in is $108,500. (a) What is the amount of cash given? (b) What is the gain or loss on the exchange?Answer:
a. Price (fair market value) of new equipment………………………… $275,000Trade-in allowance of old equipment………………………………… 90,000Cash paid on the date of exchange………………………………… $185,000b. Fair market value (trade-in allowance) of old equipment………… $ 90,000Less book value of old equipment…………………………………… 108,500Gain on exchange of equipment……………………………………… $ (18,500)orPrice (fair market value) of new equipment………………………… $275,000Less assets given up in exchange:Book value of old equipment……………………………………… $108,500Cash paid on the exchange………………………………………… 185,000 293,500Loss on exchange of equipment……………………………………… $ (18,500)
On October 1, Bentley Delivery Services acquired a new truck with a list price (fair market value) of $75,000. Bentley Delivery received a trade-in allowance (fair market value) of $24,000 on an old truck of similar type and paid cash of $51,000. The following information about the old truck is obtained from the account in the equipment ledger: cost, $56,000; accumulated depreciation on December 31, the end of the preceding fiscal year, $35,000; annual depreciation, $7,000. Assuming the exchange has commercial substance, journalize the entries to record (a) the current depreciation of the old truck to the date of trade-in and (b) the transaction on October 1.Answer:
a.
Depreciation Expense—Trucks 5,250Accumulated Depreciation—Trucks 5,250Truck depreciation ($7,000 × 9/12).
b.
Accumulated Depreciation—Trucks 40,250Trucks 75,000Trucks 56,000Cash 51,000Gain on Exchange of Trucks 8,250
The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale ceramic business. The receipts are identified by an asterisk.
a. Fee paid to attorney for title search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,500b. Cost of real estate acquired as a plant site: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285,000Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000c. Delinquent real estate taxes on property, assumed by purchaser . . . . . . . . . . . . . . . . 15,500d. Cost of razing and removing building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000e. Proceeds from sale of salvage materials from old building . . . . . . . . . . . . . . . . . . . . . . . 4,000*f. Special assessment paid to city for extension of water main to the property . . . . . . 29,000g. Architect’s and engineer’s fees for plans and supervision . . . . . . . . . . . . . . . . . . . . . . . . 60,000h. Premium on one-year insurance policy during construction . . . . . . . . . . . . . . . . . . . . . 6,000i. Cost of filling and grading land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000j. Money borrowed to pay building contractor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900,000*k. Cost of repairing windstorm damage during construction . . . . . . . . . . . . . . . . . . . . . . . 5,500l. Cost of paving parking lot to be used by customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000m. Cost of trees and shrubbery planted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000n. Cost of floodlights installed on parking lot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000o. Cost of repairing vandalism damage during construction . . . . . . . . . . . . . . . . . . . . . . . 2,500p. Proceeds from insurance company for windstorm and vandalism damage . . . . . . . . 7,500*q. Payment to building contractor for new building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000r. Interest incurred on building loan during construction . . . . . . . . . . . . . . . . . . . . . . . . . . 34,500s. Refund of premium on insurance policy (h) canceled after 11 months . . . . . . . . . . . . 500*Instructions1. 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 LandLandImprovements BuildingOtherAccounts2. 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 income statement and balance sheet if the cost of filling and grading land of $12,000 [payment (i)] was incorrectly classified as Land Improvements rather than Land? Assume Land Improvements are depreciated over a 20-year life using the double-declining-balance method.Answer:
1. Land OtherItem Land Improvements Building Accountsa. $ 2,500b. 340,000c. 15,500d. 5,000e.* (4,000)f. 29,000g. $ 60,000h. 6,000i. 12,000j.* $(900,000)k. 5,500l. $32,000m. 11,000n. 2,000o. 2,500p.* (7,500)q. 800,000r. 34,500s.* (500)2. $400,000 $45,000 $900,000* Receipt.3. Since land used as a plant site does not lose its ability to provide services, it isnot depreciated. However, land improvements do lose their ability to provideservices as time passes and are therefore depreciated.4. Since Land Improvements are depreciated, depreciation expense of $1,200($12,000 × 1/20 × 2) would be overstated and net income would be understatedby $1,200 on the income statement. On the balance sheet, Land would beunderstated by $12,000, Land Improvements would be overstated by $10,800($12,000 – $1,200), and Owner’s Capital would be understated by $1,200.
Waldum Company purchased packaging equipment on January 5, 2012, for $135,000. The equipment was expected to have a useful life of three years, or 18,000 operating hours, and a residual value of $13,500. The equipment was used for 8,600 hours during 2012, 5,300 hours in 2013, and 4,100 hours in 2014.Instructions1. Determine the amount of depreciation expense for the years ended December 31, 2012, 2013, and 2014, by (a) the straight-line method, (b) the units-of-output method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the three years by each method. The following columnar headings are suggested for recording the depreciation expense amounts:
Depreciation ExpenseYearStraightLineMethodUnits-ofOutputMethodDouble-DecliningBalanceMethod2. What method yields the highest depreciation expense for 2012?3. What method yields the most depreciation over the three-year life of the equipment?Answer:
1. Depreciation Expensea. Straight- b. Units-of- c. DoubleLineOutput Declining-BalanceYear Method Method Method2012 $ 40,500 $ 58,050 $ 90,0002013 40,500 35,775 30,0002014 40,500 27,675 1,500Total $121,500 $121,500 $121,500Calculations:Straight-line method:($135,000 – $13,500) ÷ 3 = $40,500 each yearUnits-of-output method:($135,000 – $13,500) ÷ 18,000 hours = $6.75 per hour2012: 8,600 hours × $6.75 = $58,0502013: 5,300 hours × $6.75 = $35,7752014: 4,100 hours × $6.75 = $27,675Double-declining-balance method:2012: $135,000 × 2/3 = $90,0002013: ($135,000 – $90,000) × 2/3 = $30,0002014: ($135,000 – $90,000 – $30,000 – $13,500*) = $1,500* Book value should not be reduced below the residual value of $13,500.2. The double-declining-balance method yields the most depreciation expense in2012 of $90,000.3. Over the three-year life of the equipment, all three depreciation methods yieldthe same total depreciation, $121,500, which is the cost of the equipment of$135,000 less the residual value of $13,500.
The following transactions, adjusting entries, and closing entries were completed by Legacy 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.2012Jan. 4. Purchased a used delivery truck for $28,000, paying cash.Nov. 2. Paid garage $675 for miscellaneous repairs to the truck.Dec. 31. Recorded depreciation on the truck for the year. The estimated useful life of the truck is four years, with a residual value of $5,000 for the truck.2013Jan. 6. Purchased a new truck for $48,000, paying cash.Apr. 1. Sold the used truck for $15,000. (Record depreciation to date in 2013 for the truck.)June 11. Paid garage $450 for miscellaneous repairs to the truck.Dec. 31. Record depreciation for the new truck. It has an estimated residual value of $9,000 and an estimated life of five years.2014July 1. Purchased a new truck for $54,000, paying cash.Oct. 2. Sold the truck purchased January 6, 2013, for $16,750. (Record depreciation to date for 2014 for the truck.)Dec. 31. Recorded depreciation on the remaining truck. It has an estimated residual value of $12,000 and an estimated useful life of eight years.InstructionsJournalize the transactions and the adjusting entries.Answer:
2012Jan. 4 Delivery Truck 28,000Cash 28,000Nov. 2 Truck Repair Expense 675Cash 675Dec. 31 Depreciation Expense—Delivery Truck 14,000Accum. Depreciation—Delivery Truck 14,000Delivery truck depreciation.[$28,000 × (1/4 × 2)]2013Jan. 6 Delivery Truck 48,000Cash 48,000Apr. 1 Depreciation Expense—Delivery Truck 1,750Accum. Depreciation—Delivery Truck 1,750Delivery truck depreciation.[($28,000 – $14,000) × (1/4 × 2) × 3/12]1 Accum. Depreciation—Delivery Truck 15,750Cash 15,000Delivery Truck 28,000Gain on Sale of Delivery Truck 2,750June 11 Truck Repair Expense 450Cash 450Dec. 31 Depreciation Expense—Delivery Truck 19,200Accum. Depreciation—Delivery Truck 19,200Delivery truck depreciation.[$48,000 × (1/5 × 2)]2014July 1 Delivery Truck 54,000Cash 54,000Oct. 2 Depreciation Expense—Delivery Truck 8,640Accum. Depreciation—Delivery Truck 8,640Delivery truck depreciation.[($48,000 – $19,200) × (1/5 × 2) × 9/12]2 Cash 16,750Accum. Depreciation—Delivery Truck 27,840Loss on Sale of Delivery Truck 3,410Delivery Truck 48,000Dec. 31 Depreciation Expense—Delivery Truck 6,750Accum. Depreciation—Delivery Truck 6,750Delivery truck depreciation.[$54,000 × (1/8 × 2) × 1/2]
