1.Lockard Company purchased machinery on January 1, 2012, for $167,280. The machinery is estimated to have a salvage value of $16,728
after a useful life of 8 years.
(a) Compute 2012 depreciation expense using the sum-of-the-years’-digits method. (b) Compute 2012 depreciation expense using the sumof-the-years’-digits method assuming the machinery was purchased on April 1, 2012. (Do not round intermediate calculations. Round
final answers to 0 decimal places, e.g. 2,520.)
(a)
Depreciation expense
(b)
Depreciation expense
(a)
(b)
($167,280 – $16,728 ) x 8/36*
=
[($167,280 – $16,728 ) x 8/36] x 9/12=
$
$
$33,456
$25,092
2.Dickinson Inc. owns the following assets.
Asset
Cost
Salvage
Estimated Useful Life
A
$71,600
$7,160
B
68,900
6,890
10 years
5 years
C
195,160
9,520
12 years
Compute the composite depreciation rate and the composite life of Dickinson’s assets. (Round answers to 1 decimal place, e.g. 4.8% or
4.8 years.)
Composite depreciation rate
%
Composite life
years
Asset
A
B
C
Depreciation Expense
($71,600 – $7,160)/10 =
$ 6,444
($68,900 – $6,890)/5 =
12,402
($195,160 – $9,520)/12=
15,470
$34,316
Composite rate = $34,316/$335,660 = 10.2 %
Composite life = $312,090*/$34,316 = 9.1 years
3.Jurassic Company owns equipment that cost $1,524,600 and has accumulated depreciation of $643,720. The expected future net cash flows
from the use of the asset are expected to be $847,000. The fair value of the equipment is $677,600.
Prepare the journal entry, if any, to record the impairment loss. (If no entry is required, select "No entry" for the account titles and
enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
4.Wenner Furnace Corp. purchased machinery for $315,270 on May 1, 2012. It is estimated that it will have a useful life of 10 years, salvage
value of $16,950, production of 271,200 units, and working hours of 25,000. During 2013, Wenner Corp. uses the machinery for 2,650 hours,
and the machinery produces 28,815 units.
From the information given, compute the depreciation charge for 2013 under each of the following methods. (Round answers to 0 decimal
places, e.g. $45,892.)
(a)
Straight-line
(b)
Units-of-output
(c)
Working hours
(d)
Sum-of-the-years’-digits
(e)
Double-declining-balance
$
$
$
$
$
(a)
(b)
(c)
(d)
$315,270 – $16,950
= $298,320; $298,320 ÷ 10 yrs.
=$29,832
$298,320 ÷ 271,200 units= $1.10; 28,815 units x $1.10
=$31,697
$298,320 ÷ 25,000 hours = $11.93 per hr.; 2,650 hrs. x $11.93=$31,615
n(n + 1) 10(11)
10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55 OR
=
=55
2
2
10
x $298,320 x1/3= $18,080
55
9
x $298,320 x2/3= 32,544
55
Total for 2013
$50,624
(e) $315,270 x 20% x 1/3
= $21,018
[$315,270 – ($315,270 x 20%)] x 20% x 2/3 = 33,629
Total for 2013
$54,647
5.In 1985, Abraham Company completed the construction of a building at a cost of $4,313,000 and first occupied it in January 1986. It was
estimated that the building will have a useful life of 40 years and a salvage value of $136,200 at the end of that time.
Early in 1996, an addition to the building was constructed at a cost of $1,066,900. At that time, it was estimated that the remaining life of the
building would be, as originally estimated, an additional 30 years, and that the addition would have a life of 30 years and a salvage value of
$45,400.
In 2014, it is determined that the probable life of the building and addition will extend to the end of 2045 or 20 years beyond the original
estimate.
(a) Using the straight-line method, compute the annual depreciation that would have been charged from 1986 through 1995. (Round
answer to 0 decimal places, e.g. $45,892.)
Annual depreciation from 1986 through 1995
$
(b) Compute the annual depreciation that would have been charged from 1996 through 2013. (Round answer to 0 decimal places, e.g.
$45,892.)
Annual depreciation from 1996 through 2013
$
(c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2014. (If no entry is
required, select "No entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented
when amount is entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
(d) Compute the annual depreciation to be charged beginning with 2014. (Round answer to 0 decimal places, e.g. $45,892.)
Annual depreciation expense—building
(b)
(d)
$
1996–2013—Building ($4,313,000 – $136,200) ÷40=
Addition ($ 1,066,900 – $45,400) ÷ 30
=
$104,420/yr
34,050/yr.
$138,470/yr.
Revised annual depreciation
Building
Book value: ($4,313,000 – $2,923,760*)
Salvage value
Remaining useful life
Annual depreciation
*
$104,420 x 28 years = $2,923,760
Addition
Book value: ($1,066,900 – $612,900**)
Salvage value
Remaining useful life
Annual depreciation
**
$34,050 x 18 years = $612,900
Annual depreciation expense—building ($39,158 + $12,769)
$ 1,389,240
136,200
1,253,040
÷ 32 years
$ 39,158
$454,000
45,400
408,600
÷ 32 years
$ 12,769
$51,927
6.Presented below is information related to equipment owned by Pujols Company at December 31, 2012.
Cost
$22,104,000
Accumulated depreciation to date
2,456,000
Expected future net cash flows
17,192,000
Fair value
10,806,400
Assume that Pujols will continue to use this asset in the future. As of December 31, 2012, the equipment has a remaining useful life of 5
years.
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2012. (If no entry is required, select "No
entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is
entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
(b) Prepare the journal entry to record depreciation expense for 2013 using straight-line method. (If no entry is required, select "No
entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is
entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
(c) The fair value of the equipment at December 31, 2013, is $12,525,600. Prepare the journal entry (if any) necessary to record this
increase in fair value. (If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Credit account
titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
Cost
$22,104,000
Accumulated depreciation
2,456,000
Carrying amount
19,648,000
Fair value
10,806,400
Loss on impairment
$8,841,600
New carrying amount $10,806,400
Useful life
5 years
Depreciation per year $2,161,280
7.Conan O’Brien Logging and Lumber Company owns 3,400 acres of timberland on the north side of Mount Leno, which was purchased in
2000 at a cost of $610 per acre. In 2012, O’Brien began selectively logging this timber tract. In May of 2012, Mount Leno erupted, burying
the timberland of O’Brien under a foot of ash. All of the timber on the O’Brien tract was downed. In addition, the logging roads, built at a cost
of $159,000, were destroyed, as well as the logging equipment, with a net book value of $346,500.
At the time of the eruption, O’Brien had logged 20% of the estimated 540,000 board feet of timber. Prior to the eruption, O’Brien estimated
the land to have a value of $230 per acre after the timber was harvested. O’Brien includes the logging roads in the depletion base.
O’Brien estimates it will take 3 years to salvage the downed timber at a cost of $700,500. The timber can be sold for pulp wood at an
estimated price of $2 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties.
(a) Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Leno. (Round per unit answer to 2
decimal places, e.g. 0.45.)
Depletion cost per board foot
$
(b) Prepare the journal entry to record the depletion prior to the eruption. (Round per unit answer to 2 decimal places, e.g. 0.45 for
computational purpose and final answer to 0 decimal places, e.g. $45,892. If no entry is required, select "No entry" for the
account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not
indent manually.)
Account Titles and Explanation
Debit
Credit
(c) If this tract represents approximately half of the timber holdings of O’Brien, determine the amount of the extraordinary loss due to the
eruption of Mount Leno for the year ended December 31, 2012.
Extraordinary loss due to the eruption of Mount Leno
Original cost
Deduct residual value of land
$
$610 x 3,400 =$2,074,000
$230 x 3,400 =
782,000
1,292,000
159,000
$1,451,000
Cost of logging road
Depletion base
$1,451,000
=$2.69 depletion per board foot
540,000 ft.
Depletion, 2012: 20% x 540,000 bd. ft. =108,000 bd. ft.;
108,000 bd. ft x $2.69
=$290,520
Loss of timber [$1,292,000 – ($1,292,000 x 20%)]
$1,033,600
Cost of salvaging timber
700,500
Less recovery ($2 x 432,000 bd. ft.)
(864,000)
Loss of land value
Loss of logging roads [($159,000 – (20% x $159,000)]
Logging equipment
Extraordinary loss due to the eruption of Mt. Leno
$870,100
782,000
127,200
346,500
$2,125,800
1.AMR Corporation (parent company of American Airlines) reported the following for 2009 (in millions).
Service cost
$333
Interest on P.B.O.
712
Return on plan assets
566
Amortization of prior service cost
13
Amortization of net loss
145
Compute AMR Corporation’s 2009 pension expense.
Pension expense
Service cost
Interest on P.B.O.
Return on plan assets
Amortization of prior service cost
Amortization of net loss
Pension expense
$
millions
$333,000,000
712,000,000
(566,000,000)
13,000,000
145,000,000
$ 637,000,000
2.Mancuso Corporation amended its pension plan on January 1, 2012, and granted $154,770 of prior service costs to its employees. The
employees are expected to provide 2,010 service years in the future, with 365 service years in 2012.
Compute prior service cost amortization for 2012.
Prior service cost amortization for 2012
Cost per service year:
$154,770/2,010
2012 amortization:
365 x $77
$
= $77
= $28,105
3.Lahey Corp. has three defined benefit pension plans as follows.
Pension Assets
Projected Benefit
(at Fair Value)
Obligation
Plan X
$615,200
$543,900
Plan Y
942,000
762,400
Plan Z
561,200
722,500
How will Lahey report these multiple plans in its financial statements?
Pension
Pension
Plan X
Plan Y
Plan Z
$
Pension Assets
(at Fair Value)
$615,200
942,000
561,200
Projected Benefit
Obligation
$543,900
762,400
722,500
$
Pension Asset/
Liability
$71,300 asset
$179,600 asset
$161,300 liability
4. The following facts apply to the pension plan of Boudreau Inc. for the year 2012.
Plan assets, January 1, 2012
$490,400
Projected benefit obligation, January 1, 2012
490,400
Settlement rate
8 %
Service cost
42,360
Contributions (funding)
25,320
Actual and expected return on plan assets
48,040
Benefits paid to retirees
33,690
Using the preceding data, compute pension expense for the year 2012. As part of your solution, prepare a pension worksheet that shows the
journal entry for pension expense for 2012 and the year-end balances in the related pension accounts.
Items
Balance,
January 1,
2012
Service
cost
Annual Pension
Expense
BOUDREAU INC.
Pension Worksheet—2012
General Journal Entries
Pension Asset/
Cash
Liability
Memo Record
Projected Benefit
Plan
Obligation
Assets
Interest
cost
Actual
return
Contributio
ns
Benefits
Journal
entry,
December
31
Balance,
December
31, 2012
5.Ferreri Company received the following selected information from its pension plan trustee concerning the operation of the company’s
defined benefit pension plan for the year ended December 31, 2012.
January 1, 2012
Projected benefit obligation
Market-related and fair value of plan assets
Accumulated benefit obligation
Accumulated OCI (G/L)—Net gain
December 31, 2012
$1,421,300
$1,451,200
885,100
1,280,410
1,673,800
1,794,160
0
(192,130 )
The service cost component of pension expense for employee services rendered in the current year amounted to $79,900 and the
amortization of prior service cost was $120,360. The company’s actual funding (contributions) of the plan in 2012 amounted to
$306,800. The expected return on plan assets and the actual rate were both 10%; the interest/discount (settlement) rate was 10%.
Accumulated other comprehensive income (PSC) had a balance of $1,203,600 on January 1, 2012. Assume no benefits paid in 2012.
(a)
Determine the amounts of the components of pension expense that should be recognized by the company in 2012. (Enter negative
amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Components of Pension Expense
$
Interest on projected benefit obligation = (10% x $1,421,300)
Expected return on plan assets
= (10% x $885,100)
= $142,130
= ($88,510)
6.The actuary for the pension plan of Gustafson Inc. calculated the following net gains and losses.
Incurred during the Year
2012
(Gain) or Loss
$308,400
2013
489,000
2014
(238,600 )
2015
(295,600 )
Other information about the company’s pension obligation and plan assets is as follows.
As of January 1,
Projected Benefit
Obligation
Plan Assets
(market-related asset value)
2012
$4,005,700
$2,404,800
2013
4,522,600
2,209,300
2014
5,001,800
2,605,600
2015
4,244,400
3,046,300
Gustafson Inc. has a stable labor force of 400 employees who are expected to receive benefits under the plan. The total service-years for all
participating employees is 5,600. The beginning balance of accumulated OCI (G/L) is zero on January 1, 2012. The market-related value and
the fair value of plan assets are the same for the 4-year period. Use the average remaining service life per employee as the basis for
amortization.
Compute the minimum amount of accumulated OCI (G/L) amortized as a component of net periodic pension expense for each of the years
2012, 2013, 2014, and 2015. Apply the “corridor” approach in determining the amount to be amortized each year. (Round answers to 0
decimal places, e.g. 2,500.)
Year
2012
2013
2014
2015
Minimum Amortization of (Gain) Loss
$
$
$
$
Expected future years of service
=Average remaining service life per employee
Number of employees
Average remaining service life per employee=
5,600
400
=14
Amortization of Net (Gain) or Loss
(Gain) or Loss For the Year
Amount
Ended December 31,
Year
2012
2013
2014
2015
(a)
(b)
(c)
(d)
(e)
2012
308,400
2013
489,000
2014
(238,600 )
2015
(295,600 )
Projected Benefit
Plan
Accumulated Minimum Amortization
Obligation (a)
Assets (a) Corridor (b) OCI (G/L) (a)
of (Gain) Loss
$4,005,700 $2,404,800
$400,570
$0
$0
4,522,600
2,209,300
452,260
308,400
0
5,001,800
2,605,600
500,180
797,400
21,230 (c)
4,244,400
3,046,300
424,440
537,570(d)
8,081 (e)
As of the beginning of the year.
The corridor is 10 percent of the greater of the projected benefit obligation or plan assets.
$797,400 – $500,180 = $297,220; $297,220/14 = $21,230
$797,400 – $21,230 – $238,600 = $537,570
$537,570 – $424,440 = $113,130; $113,130/14 = $8,081
7.Gordon Company sponsors a defined benefit pension plan. The following information related to the pension plan is available for 2012
and 2013.
2012
Plan assets (fair value), December 31
Projected benefit obligation, January 1
2013
$1,407,786
$1,709,886
1,409,800
1,611,200
Pension asset/liability, January 1
281,960 Cr.
Prior service cost, January 1
503,500
483,360
?
Service cost
120,840
181,260
Actual and expected return on plan assets
48,336
60,420
Amortization of prior service cost
20,140
24,168
231,610
241,680
1,007,000
1,107,700
Contributions (funding)
Accumulated benefit obligation, December 31
Interest/settlement rate
8 %
(a)
Compute pension expense for 2012 and 2013.
Pension expense for 2012
Pension expense for 2013
$
$
Service cost
Interest cost ($1,409,800 x8%) and ($1,611,200 x8%)
Expected return on plan assets
Amortization of prior service cost
Pension expense
2012
$120,840
112,784
(48,336)
20,140
$205,428
2013
$ 181,260
128,896
(60,420)
24,168
$273,904
8 %