Chapter 8
Exercise 8-1
Invoice price of machine ........................... $
Less discount (.02 x $11,500) ...................
Net purchase price.....................................
Freight charges (transportation-in) ..........
Mounting and power connections ...........
Assembly ....................................................
Materials used in adjusting .......................
Total cost to be recorded .......................... $
11,500
(230)
11,270
260
795
375
30
12,730
Exercise 8-2
Cost of land
Purchase price for land ............................. $ 225,000
Purchase price for old building ................
120,000
Demolition costs for old building .............
34,500
Landscaping ...............................................
51,000
Total cost of land ....................................... $ 430,500
Cost of new building and land improvements
Cost of new building ................................. $1,354,500
Cost of land improvements ......................
85,500
Total construction costs ........................... $1,440,000
Journal entry
Land ................................................................................ 430,500
Land Improvements .......................................................
85,500
Building .......................................................................... 1,354,500
Cash ..........................................................................
To record costs of plant assets.
1,870,500
Exercise 8-3
Purchase price .................................................
Closing costs ...................................................
Total cost of acquisition .................................
$368,250
19,600
$387,850
Allocation of total cost
Appraised
Value
Land ............................... $166,320
55,440
Land improvements
Building ......................... 174,240
Totals ............................. $396,000
Percent
of Total
Applying %
to Cost
Apportioned
Cost
42%
14
44
100%
$387,850 x .42
$387,850 x .14
$162,897
54,299
170,654
$387,850
$387,850 x .44
Journal entry
Land .......................................................................... 162,897
Land Improvements ................................................ 54,299
Building .................................................................... 170,654
Cash ..................................................................
387,850
To record costs of lump-sum purchase.
Exercise 8-4
1. Straight-line depreciation: ($147,000 - $30,000) / 4 years = $29,250 per year
Year
Annual Depreciation Year-End Book Value
2004 ........
$ 29,250
$117,750
2005 ........
29,250
88,500
2006 ........
29,250
59,250
2007 ........
29,250
30,000
Total .......
$117,000
2. Double-declining-balance depreciation
Depreciation rate: 100% / 4 years = 25% x 2 = 50%
Beginning-Year Depreciation
Annual
Year
Book Value
Rate
Depreciation
2004.......
$147,000
50%
$ 73,500
2005.......
73,500
50
36,750
2006.......
36,750
50
6,750*
2007.......
30,000
--Total .......
$117,000
* Do not depreciate more than $6,750 in the third year since the salvage
value is not subject to depreciation.
Year-End
Book Value
$73,500
36,750
30,000
30,000
Exercise 8-5
1. Straight-line
($42,300 - $6,000) / 10 years = $3,630
2. Units-of-production
Depreciation per unit = ($42,300 - $6,000) / 363,000 units = $0.10 per unit
For 35,000 units in second year: Depreciation = 35,000 x $0.10 = $3,500
3. Double-declining-balance
Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year
First year’s depreciation = $42,300 x 20% = $8,460
Book value at beginning of second year = $42,300 - $8,460 = $33,840
Second year’s depreciation = $33,840 x 20% = $6,768
Exercise 8-6
1. Straight-line depreciation for 2005
($250,000 - $25,000) / 5 years = $45,000
2. Double-declining-balance depreciation for 2004
Rate = (100% / 5 years) x 2 = 40%
2004 depreciation ($250,000 x 40% x 9/12) .....................
$ 75,000
Book value at January 1, 2005 ($250,000 - $75,000) ......
$175,000
Depreciation for 2005 ($175,000 x 40%) ..........................
$ 70,000
Alternate calculation
2004 depreciation ($250,000 x 40% x 9/12) .................................
2005 depreciation
$250,000 x 40% x 3/12 .............................................................
($250,000 - $75,000 - $25,000) x 40% x 9/12 ...........................
Total 2005 depreciation ...............................................................
$ 75,000
$ 25,000
45,000
$ 70,000
Exercise 8-7
1. Original cost of machine ........................................
Less two years' accumulated depreciation
[($21,750 - $2,250) / 4 years] x 2 years ...............
Book value at end of second year .........................
$21,750
2. Book value at end of second year .........................
Less revised salvage value ....................................
Remaining depreciable cost ..................................
$12,000
(1,800)
$10,200
Revised annual depreciation = $10,200 / 3 years = $3,400
(9,750)
$12,000
Exercise 8-8
1. Straight-line depreciation
Income
before
Depreciation
Year 1 ........
Year 2 ........
Year 3 ........
Year 4 ........
Year 5 ........
Totals ........
$ 85,500
85,500
85,500
85,500
85,500
$427,500
Depreciation
Expense*
$ 36,540
36,540
36,540
36,540
36,540
$182,700
Net
Income
$ 48,960
48,960
48,960
48,960
48,960
$244,800
*($235,200 - $52,500) / 5 years = $36,540
2. Double-declining-balance depreciation
Year 1 ........
Year 2 ........
Year 3 ........
Year 4 ........
Year 5 ........
Totals ........
Income
before
Depreciation
Depreciation
Expense*
Net
Income
$ 85,500
85,500
85,500
85,500
85,500
$427,500
$ 94,080
56,448
32,172
0
0
$182,700
$ (8,580)
29,052
53,328
85,500
85,500
$244,800
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 ............... $235,200
$ 94,080
$ 94,080
Year 2 ............... 141,120
56,448
150,528
Year 3 ...............
84,672
32,172**
182,700
Year 4 ...............
52,500
0
182,700
Year 5 ...............
52,500
0
182,700
Total..................
$182,700
Ending Book Value
($235,200 Cost Less
Accumulated
Depreciation)
$141,120
84,672
52,500
52,500
52,500
**Must not use $33,869; instead take only enough depreciation in Year 3 to reduce
book value to the $52,500 salvage value.
Exercise 8-9
1. Annual depreciation = $561,000 / 20 years = $28,050 per year
Age of the building = Accumulated depreciation / Annual depreciation
= $420,750 / $28,050 = 15 years
2. Entry to record the extraordinary repairs
Building .........................................................................
Cash ........................................................................
67,200
67,200
To record extraordinary repairs.
3.
4.
Cost of building
Before repairs...................................................... $561,000
Add cost of repairs .............................................
67,200
Less accumulated depreciation ...........................
Revised book value of building ............................
$628,200
420,750
$207,450
Revised book value of building (part 3) ...............
New estimate of useful life (20 - 15 + 7) ...............
Revised annual depreciation ................................
$207,450
12 years
$17,287.5
Journal entry
Depreciation Expense.................................................... 17,287.5
Accumulated Depreciation–Building ........................
17,287.5
To record depreciation.
Exercise 8-10
1.
Equipment .....................................................................
Cash ........................................................................
21,000
21,000
To record betterment.
2.
Repairs Expense ...........................................................
Cash ........................................................................
5,250
5,250
To record ordinary repairs.
3.
Equipment .....................................................................
Cash ........................................................................
To record extraordinary repairs.
13,950
13,950
Exercise 8-11
1. Book value of the old tractor ($95,000 - $52,500) .......................... $ 42,500
2. Loss on the exchange
Book value - Trade-in allowance ($42,500 - $28,000).............. $ 14,500
3. Debit to new Tractor account
Cash paid + Trade-in allowance ($82,000 + $28,000) .............. $110,000
Alternatively, answers can be taken from the following journal entry:
Tractor (new)* ..............................................................................
110,000
Loss on Exchange of Assets ......................................................
14,500
Accumulated Depreciation–Tractor ...........................................
52,500
Tractor (old) .........................................................................
Cash .....................................................................................
95,000
82,000
To record asset exchange. *($28,000+$82,000)
Exercise 8-12
Note: Book value of Machine equals $42,000 - $22,625 = $19,375
1. Sold for $16,250 cash
Jan. 2
Cash ..............................................................................
16,250
Loss on Sale of Machinery ..........................................
3,125
Accumulated Depreciation--Machinery .....................
22,625
Machinery .................................................................
42,000
To record cash sale of machine.
2. $20,000 trade-in allowance exceeds book value; but no gain is recognized
on similar asset exchange ($625 gain is ‘buried’
in the cost of the new machinery)
Jan. 2
Machinery* ....................................................................
57,875
Accumulated Depreciation--Machinery .....................
22,625
Machinery .................................................................
Cash** .......................................................................
42,000
38,500
To record similar asset exchange.
*[$58,500 - ($20,000-$19,375)] **($58,500- $20,000)
3. $15,000 trade-in allowance is less than book value (yielding a loss)
Jan. 2
Machinery .....................................................................
58,500
Loss on Exchange of Machinery ................................
4,375
Accumulated Depreciation--Machinery .....................
22,625
Machinery .................................................................
42,000
Cash* ........................................................................
43,500
To record similar asset exchange. *($58,500-$15,000)
Exercise 8-13
2008
July 1 Depreciation Expense .............................................
Accumulated Depreciation--Machinery ...........
To record one-half year depreciation.*
6,625
6,625
*Annual depreciation = $92,750 / 7 years = $13,250
Depreciation for 6 months in 2008 = $13,250 x 6/12 = $6,625
1. Sold for $35,000 cash
July 1
Cash ..............................................................................35,000
Accumulated Depreciation—Machinery ....................59,625
Gain on Sale of Machinery .....................................
Machinery .................................................................
1,875
92,750
To record disposal of machinery.*
*Total accumulated depreciation at date of disposal:
Four years 2004-2007 (4 x $13,250) ........ $53,000
Partial year 2008 (6/12 x $13,250)............
6,625
Total accumulated depreciation ............. $59,625
2. Destroyed by fire with $30,000 cash insurance settlement
July 1
Cash ..............................................................................30,000
Loss from Fire .............................................................. 3,125
Accumulated Depreciation—Machinery ....................59,625
Machinery .................................................................
92,750
To record disposal of machinery from fire.
Exercise 8-14
Dec. 31
Depletion Expense—Mineral Deposit ........................
398,310
Accumulated Depletion—Mineral Deposit ............
398,310
To record depletion [$3,633,750/1,425,000 tons=
$2.55 per ton; 156,200 tons x $2.55 = $398,310].
Dec. 31
Depreciation Expense—Machinery ...........................18,744
Accumulated Depreciation—Machinery ...............
To record depreciation [$171,000/1,425,000 tons
= $0.12 per ton; 156,200 tons x $0.12 = $18,744].
18,744
Exercise 8-15
Jan.
1 Copyright ......................................................................
236,700
Cash..........................................................................
236,700
To record purchase of copyright.
Dec. 31 Amortization Expense—Copyright ............................19,725
Accumulated Amortization—Copyright ................
19,725
To record amortization of copyright
[$236,700 / 12 years].
Exercise 8-16A
Net assets (excluding goodwill) .............................................
Normal rate of return in this industry ....................................
Normal net income on net assets ..........................................
Expected (typical) future net income .....................................
Expected net income above-normal ......................................
$437,000
x 10%
43,700
85,000
$ 41,300
1. Value of goodwill = $41,300 x 10 = $413,000
2. Value of goodwill = $41,300 / 8% = $516,250
Note: These estimates of goodwill assume that Corey Alt’s departure does not impact the
business’s goodwill.