ACC 206 Week 2 Quiz 1 Chapter 10 – Strayer

ACC 206 Accounting Principles II Week 2 Quiz – Strayer (All Possible Questions With Answers)

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CHAPTER 10

PLANTASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS

CHAPTERSTUDY OBJECTIVES

1. Describe how the cost principle applies to plant assets.

2. Explain the concept of depreciation..

3. Compute periodic depreciation using different methods.

4. Describe the procedure for revising periodic depreciation.

5. Distinguish between revenue and capital expenditures, and explain the entries for each.

6. Explain how to account for the disposal of a plant asset.

7. Compute periodic depletion of natural resources.

8. Explain the basic issues related to accounting for intangible assets.

9. Indicate how plant assets, natural resources, and intangible assets are reported.

10. Explain how to account for the exchange of plant assets.

TRUE-FALSESTATEMENTS

1. All plant assets (fixed assets) must be depreciated for accounting purposes.

2. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

3. When purchasing delivery equipment, sales taxes and motor vehicle licenses should be charged to Delivery Equipment.

4. Land improvementsare generally charged to the Land account.

5. Once cost is established for a plant asset, it becomes the basis of accounting for the asset unless the asset appreciates in value, in which case, market value becomes the basis for accountability.

6. The book value of a plant asset is always equal to its fair market value.

7. Recording depreciation on plant assets affects the balance sheet and the income statement.

8. The depreciable cost of a plant asset is its original cost minus obsolescence.

9. Recording depreciationeach period is an application of the matching principle.

10. The Accumulated Depreciation account represents a cash fund available to replace plant assets.

11. In calculating depreciation, both plant asset cost and useful life are based on estimates.

12. Using the units-of-activity method of depreciating factory equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.

13. Salvage value is not subtracted from plant asset cost in determining depreciation expense under the declining-balance method of depreciation.

14. The declining-balance method of depreciation is called an accelerated depreciation method because it depreciates an asset in a shorter period of time than the asset’s useful life.

15. Under the double-declining-balance method, the depreciation rate used each year remains constant.

16. The IRS does not require the taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.

17. A change in the estimated useful life of a plant asset may cause a change in the amount of depreciation recognized in the current and future periods, but not to prior periods.

18. A change in the estimated salvage value of a plant asset requires a restatement of prior years’ depreciation.

19. To determine a new depreciation amount after a change in estimate of a plant asset’s useful life, the asset’s remaining depreciable cost is divided by its remaining useful life.

20. Additions and improvements to a plant asset that increase the asset’s operating efficiency, productive capacity, or expected useful life are generally expensed in the period incurred.

21. Capital expenditures are expenditures that increase the company’s investment in productive facilities.

22. Ordinary repairs should be recognized when incurred as revenue expenditures.

23. A characteristic of capital expenditures is that the expenditures occur frequently during the period of ownership.

24. Once an asset is fully depreciated, no additional depreciation can be taken even though the asset is still being used by the business.

25. The fair market value of a plant asset is always the same as its book value.

26. If the proceeds from the sale of a plant asset exceed its book value, a gain on disposal occurs.

27. A loss on disposal of a plant asset can only occur if the cash proceeds received from the asset sale is less than the asset’s book value.

28. The book value of a plant asset is the amount originally paid for the asset less anticipated salvage value.

29. A loss on disposal of a plant asset as a result of a sale or a retirement is calculated in the same way.

30. A plant asset must be fully depreciated before it can be removed from the books.

31. If a plant asset is sold at a gain, the gain on disposal should reduce the cost of goods sold section of the income statement.

32. Depletion cost per unit is computed by dividing the total cost of a natural resource by the estimated number of units in the resource.

33. The Accumulated Depletion account is deducted from the cost of the natural resource in the balance sheet.

34. Depletion expense for a period is only recognized on natural resources that have been extracted and sold during the period.

35. Natural resources are long-lived productive assets that are extracted in operations and are replaceable only by an act of nature.

36. The cost of natural resources is not allocated to expense because the natural resources are replaceable only by an act of nature.

37. Conceptually, the cost allocation procedures for natural resources parallels that of plant assets.

38. Natural resources include standing timber and underground deposits of oil, gas, and minerals.

39. If an acquired franchise or license has an indefinite life, the cost of the asset is not amortized.

40. When an entire business is purchased, goodwill is the excess of cost over the book value of the net assets acquired.

41. Research and development costs which result in a successful product which is patentable are charged to the Patent account.

42. The cost of a patent must be amortized over a 20-year period.

43. The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.

44. The balances of the major classes of plant assets and accumulated depreciation by major classes should be disclosed in the balance sheet or notes.

45. The asset turnover ratio is calculated as total sales divided by ending total assets.

46. Research and development costs can be classified as a property, plant, and equipment item or as an intangible asset.

a47. An exchange of plant assets has commercial substance if the future cash flows change as a result of the exchange.

a48. Companies record a gain or loss on the exchange of plant assets because most exchanges have commercial substance.

a49. When plant assets are exchanged, the cost of the new asset is the book value of the old asset plus any cash paid.

Additional True-False Questions

50. When constructing a building, a company is permitted to include the acquisition cost and certain interest costs incurred in financing the project.

51. Recognition of depreciation permits the accumulation of cash for the replacement of the asset.

52. When an asset is purchased during the year, it is not necessary to record depreciation expense in the first year under the declining-balance depreciation method.

53. Depletion expense is reported in the income statement as an operating expense.

54. Goodwill is not recognized in accounting unless it is acquired from another business enterprise.

55. Research and development costs should be charged to expense when incurred.

56. A loss on the exchange of plant assets occurs when the fair market value of the old asset is less than its book value.

MULTIPLECHOICE QUESTIONS

57. The cost of a purchasedbuilding includes all of the following except a. closing costs.
b. real estate broker’s commission. c. remodeling costs.
d. All of these are included.

58. A company purchased land for $90,000 cash. Real estate brokers’ commission was $5,000 and $7,000 was spent for demolishing an old building on the land before construction of a new building could start. Under the cost principle, the cost of land would be recorded at
a. $97,000. b. $90,000. c. $95,000. d. $102,000.

59. Which one of the following items is not considered a part of the cost of a truck purchased for business use?
a. Sales tax
b. Truck license c. Freight charges
d. Cost of lettering on side of truck

60. Which of the following assets does not decline in service potential over the course of its useful life?
a. Equipment b. Furnishings c. Land
d. Fixtures

61. The four subdivisions for plant assets are
a. land, land improvements, buildings, and equipment. b. intangibles, land, buildings, and equipment.
c. furnishings and fixtures, land, buildings, and equipment. d. property, plant, equipment, and land.

62. The cost of land does not include
a. real estate brokers’ commission. b. annual property taxes.
c. accrued property taxes assumed by the purchaser. d. title fees.

63. Feeney Clinic purchases land for $130,000 cash. The clinic assumes $1,500 in property taxes due on the land. The title and attorney fees totaled $1,000. The clinic has the land graded for $2,200. What amount does Feeney Clinic record as the cost for the land?
a. $132,200 b. $130,000 c. $134,700 d. $132,500

64. Belle Company buys land for $50,000 on 12/31/07. As of 3/31/08, the land has appreciated in value to $50,700. On 12/31/08, the land has an appraised value of $51,800.By what amount should the Land account be increased in 2008?
a. $0 b. $700
c. $1,100 d. $1,800

65. Pine Company acquires land for $86,000 cash. Additional costs are as follows:

Removal of shed $ 300 Filling and grading 1,500 Salvage value of lumber of shed 120 Broker commission 1,130 Paving of parking lot 10,000 Closing costs 560

Pine will record the acquisition cost of the land as a. $86,000.
b. $87,690. c. $89,610. d. $89,370.

66. Shawnee Hospital installs a new parking lot. The paving cost $30,000 and the lights to illuminate the new parking area cost $15,000. Which of the following statements is true with respect to these additions?
a. $30,000 should be debited to the Land account.
b. $15,000 should be debited to Land Improvements. c. $45,000 should be debited to the Land account. d. $45,000 should be debited to Land Improvements.
10 – 10

67. Land improvementsshould be depreciated over the useful life of the a. land.
b. buildings on the land.
c. land or land improvements, whichever is longer. d. land improvements.

68. General Molding is building a new plant that will take three years to construct. The construction will be financed in part by funds borrowed during the construction period. There are significant architect fees, excavation fees, and building permit fees. Which of the following statements is true?
a. Excavation fees are capitalized but building permit fees are not. b. Architect fees are capitalized but building permit fees are not.
c. Interest is capitalized during the construction as part of the cost of the building.
d. The capitalized cost is equal to the contract price to build the plant less any interest on borrowed funds.

69. A company purchases a remote site building for computer operations. The building will be suitable for operations after some expenditures. The wiring must be replaced to computer specifications. The roof is leaky and must be replaced. All rooms must be repainted and recarpeted and there will also be some plumbing work done. Which of the following statements is true?
a. The cost of the building will not include the repainting and recarpeting costs. b. The cost of the building will include the cost of replacing the roof.
c. The cost of the building is the purchase price of the building, while the additional expenditures are all capitalized as Building Improvements.
d. The wiring is part of the computer costs, not the building cost.

70. Carley Company purchases a new delivery truck for $45,000. The sales taxes are $3,000. The logo of the company is painted on the side of the truck for $1,200. The truck license is $120. The truck undergoes safety testing for $220. What does Carley record as the cost of the new truck?
a. $49,540 b. $49,420 c. $48,000 d. $47,420

71. All of the following factors in computing depreciation are estimates except a. cost.
b. residual value. c. salvage value. d. useful life.

72. Stories Company purchased equipment and these costs were incurred:

Cash price Sales taxes
Insuranceduring transit Installationand testing Total costs
$22,500 1,800 320
430 $25,050
Plant Assets, Natural Resources, and Intangible Assets 10 – 11

Stories will record the acquisition cost of the equipment as a. $22,500.
b. $24,300. c. $24,620. d. $25,050.

73. Becky’s Blooms purchased a delivery van for $20,000. The company was given a $2,000 cash discount by the dealer, and paid $1,000 sales tax. Annual insurance on the van is $500. As a result of the purchase, by how much will Becky’s Blooms increase its van account?
a. $20,000 b. $18,000 c. $19,500 d. $19,000

74. Upton Company purchased equipment on January 1 at a list price of $50,000, with credit terms 2/10, n/30. Payment was made within the discount period and Upton was given a $1,000 cash discount. Upton paid $2,500 sales tax on the equipment, and paid installation charges of $880. Prior to installation, Upton paid $2,000 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment?
a. $52,380 b. $54,380 c. $55,380 d. $50,500

75. Interest may be included in the acquisition cost of a plant asset a. during the construction period of a self-constructed asset. b. if the asset is purchased on credit.
c. if the asset acquisition is financed by a long-term note payable. d. if it is a part of a lump-sum purchase.

76. The balance in the Accumulated Depreciationaccount represents the a. cash fund to be used to replace plant assets.
b. amount to be deducted from the cost of the plant asset to arrive at its fair market value.
c. amount charged to expense in the current period.
d. amount charged to expense since the acquisition of the plant asset.

77. Which one of the following items is not a consideration when recording periodic depreciation expense on plant assets?
a. Salvage value
b. Estimated useful life
c. Cash needed to replace the plant asset d. Cost

78. Depreciation is the process of allocating the cost of a plant asset over its service life in a. an equal and equitable manner.
b. an accelerated and accurate manner. c. a systematic and rational manner.
d. a conservative market-based manner.
10 – 12

79. The book value of an asset is equal to the
a. asset’s market value less its historical cost.
b. blue book value relied on by secondarymarkets. c. replacement cost of the asset.
d. asset’s cost less accumulated depreciation.

80. Accountants do not attempt to measure the change in a plant asset’s market value during ownership because
a. the assets are not held for resale. b. plant assets cannot be sold.
c. losses would have to be recognized.
d. it is management’s responsibilityto determine fair values.

81. Depreciation is a process of a. asset devaluation.
b. cost accumulation. c. cost allocation.
d. asset valuation.

82. Recording depreciationeach period is necessary in accordance with the a. going concern principle.
b. cost principle.
c. matching principle.
d. asset valuation principle.

83. In computing depreciation, salvage value is
a. the fair market value of a plant asset on the date of acquisition.
b. subtracted from accumulated depreciation to determine the plant asset’s depreciable cost.
c. an estimate of a plant asset’s value at the end of its useful life. d. ignored in all the depreciation methods.

84. When estimating the useful life of an asset, accountants do not consider a. the cost to replace the asset at the end of its useful life.
b. obsolescence factors.
c. expected repairs and maintenance. d. the intended use of the asset.

85. Useful life is expressed in terms of use expected from the asset under the a. declining-balance method.
b. straight-line method.
c. units-of-activitymethod. d. none of these.

86. Equipment was purchased for $75,000. Freight charges amounted to $3,500 and there was a cost of $10,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $15,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
a. $17,700. b. $14,700. c. $12,300. d. $12,000.
Plant Assets, Natural Resources, and Intangible Assets 10 – 13

87. A truck was purchased for $120,000 and it was estimated to have a $24,000 salvage value at the end of its useful life. Monthly depreciation expense of $2,000 was recorded using the straight-line method. The annual depreciation rate is
a. 20%. b. 2%. c. 8%. d. 25%.

88. A company purchased factory equipment on April 1, 2008 for $64,000. It is estimated that the equipment will have an $8,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2008 is
a. $6,400. b. $5,600. c. $4,200. d. $4,800.

89. A company purchased office equipment for $40,000 and estimated a salvage value of $8,000 at the end of its 5-year useful life. The constant percentage to be applied against book value each year if the double-declining-balance method is used is
a. 20%. b. 25%. c. 40%. d. 4%.

90. The declining-balance method of depreciation produces a. a decreasing depreciation expense each period.
b. an increasing depreciation expense each period. c. a declining percentage rate each period.
d. a constant amount of depreciation expense each period.

91. A company purchased factory equipment for $250,000. It is estimated that the equipment will have a $25,000 salvage value at the end of its estimated 5-year useful life. If the company uses the double-declining-balance method of depreciation, the amount of annual depreciation recorded for the second year after purchase would be
a. $100,000. b. $60,000. c. $90,000. d. $43,200.

92. The units-of-activity method is generally not suitable for a. airplanes.
b. buildings.
c. delivery equipment. d. factory machinery.

93. A plant asset cost $144,000 and is estimated to have an $18,000 salvage value at the end of its 8-year useful life. The annual depreciation expense recorded for the third year using the double-declining-balance method would be
a. $12,060. b. $20,250. c. $17,718. d. $13,785.
10 – 14

94. A factory machine was purchased for $75,000 on January 1, 2008. It was estimated that it would have a $15,000 salvage value at the end of its 5-year useful life. It was also estimated that the machine would be run 40,000 hours in the 5 years. The company ran the machine for 4,000 actual hours in 2008. If the company uses the units-of-activity method of depreciation, the amount of depreciation expense for 2008 would be
a. $7,500. b. $12,000. c. $15,000. d. $6,000.

95. The Modified Accelerated Cost Recovery System (MACRS) is a depreciation method which
a. is used for tax purposes.
b. must be used for financial statement purposes. c. is required by the SEC.
d. expenses an asset over a single year because capital acquisitions must be expensed in the year purchased.

96. Which of the following methods of computing depreciation is production based? a. Straight-line
b. Declining-balance c. Units-of-activity d. None of these

97. Management should select the depreciation method that a. is easiest to apply.
b. best measures the plant asset’s market value over its useful life.
c. best measures the plant asset’s contribution to revenue over its useful life. d. has been used most often in the past by the company.

98. The depreciation method that applies a constant percentage to depreciable cost in calculating depreciation is
a. straight-line.
b. units-of-activity.
c. declining-balance. d. none of these.

Use the following information for questions 99–100.

On October 1, 2008, Dole Company places a new asset into service. The cost of the asset is $60,000with an estimated 5-year life and $15,000 salvage value at the end of its useful life.

99. What is the depreciation expense for 2008 if Dole Company uses the straight-line method of depreciation?
a. $2,250 b. $12,000 c. $3,000 d. $6,000
Plant Assets, Natural Resources, and Intangible Assets 10 – 15

100. What is the book value of the plant asset on the December 31, 2008, balance sheet assuming that Dole Company uses the double-declining-balance method of depreciation? a. $39,000
b. $45,000 c. $54,000 d. $57,000

101. Which depreciation method is most frequently used in businesses today? a. Straight-line
b. Declining-balance c. Units-of-activity
d. Double-declining-balance

102. Wine Company uses the units-of-activity method in computing depreciation. A new plant asset is purchased for $24,000 that will produce an estimated 100,000 units over its useful life. Estimated salvage value at the end of its useful life is $2,000. What is the depreciation cost per unit?
a. $2.20 b. $2.40 c. $.22 d. $.24

103. Units-of-activityis an appropriate depreciation method to use when a. it is impossible to determine the productivity of the asset.
b. the asset’s use will be constant over its useful life.
c. the productivity of the asset varies significantly from one period to another. d. the company is a manufacturingcompany.

104. The calculation of depreciation using the declining balance method,
a. ignores salvage value in determining the amount to which a constant rate is applied. b. multiplies a constant percentage times the previous year’s depreciationexpense.
c. yields an increasing depreciation expense each period.
d. multiplies a declining percentage times a constant book value.

Use the following information for questions 105–106.

Grey Company purchased a new van for floral deliveries on January 1, 2008. The van cost $36,000 with an estimated life of 5 years and $9,000 salvage value at the end of its useful life. The double-declining-balance method of depreciation will be used.

105. What is the depreciationexpense for 2008? a. $7,200
b. $5,400 c. $10,800 d. $14,400

106. What is the balance of the AccumulatedDepreciation account at the end of 2009? a. $5,760
b. $17,280 c. $23,040 d. $8,640
10 – 16

107. Porter Company purchased equipment for $450,000 on January 1, 2007, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 3-year life and a $20,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2009 will be
a. $50,000. b. $30,000. c. $54,440. d. $34,440.

108. A plant asset was purchased on January 1 for $50,000 with an estimated salvage value of $10,000 at the end of its useful life. The current year’s Depreciation Expense is $5,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $25,000. The remaining useful life of the plant asset is
a. 10 years. b. 8 years. c. 5 years. d. 3 years.

109. Equipment was purchased for $60,000. Freight charges amounted to $2,800 and there was a cost of $8,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $12,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be
a. $14,160. b. $11,760. c. $9,840. d. $9,600.

110. Equipment was purchased for $17,000 on January 1, 2008. Freight charges amounted to $700 and there was a cost of $2,000 for building a foundation and installing the equipment. It is estimated that the equipment will have a $3,000 salvage value at the end of its 5-year useful life. What is the amount of accumulated depreciation at December 31, 2009, if the straight-line method of depreciation is used?
a. $6,680 b. $3,340 c. $2,860 d. $5,720

111. A company purchased factory equipment on June 1, 2008, for $48,000. It is estimated that the equipment will have a $3,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2008, is
a. $4,500. b. $2,625. c. $2,250. d. $1,875.

112. A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end of its useful life. The current year’s Depreciation Expense is $4,000 calculated on the straight-line basis and the balance of the Accumulated Depreciation account at the end of the year is $20,000. The remaining useful life of the plant asset is
Plant Assets, Natural Resources, and Intangible Assets 10 – 17

a. 10 years. b. 8 years. c. 5 years. d. 3 years.

Use the following information for questions 113–115.

Brinkman Corporation bought equipment on January 1, 2008. The equipment cost $90,000 and had an expected salvage value of $15,000. The life of the equipment was estimated to be 6 years.

113. The depreciable cost of the equipment is a. $90,000.
b. $75,000. c. $50,000. d. $12,500.

114. The depreciation expense using the straight-line method of depreciation is a. $17,500.
b. $18,000. c. $12,500.
d. none of the above.

115. The book value of the equipment at the beginning of the third year would be a. $90,000.
b. $75,000. c. $65,000. d. $25,000.

116. Baden Company purchased machinery with a list price of $32,000. They were given a 10% discount by the manufacturer. They paid $200 for shipping and sales tax of $1,500. Baden estimates that the machinery will have a useful life of 10 years and a residual value of $10,000. If Baden uses straight-line depreciation, annual depreciationwill be
a. $2,050. b. $2,036. d. $3,050. d. $1,880.

117. Bates Company purchased equipment on January 1, 2008, at a total invoice cost of $600,000. The equipment has an estimated salvage value of $15,000 and an estimated useful life of 5 years. What is the amount of accumulated depreciation at December 31, 2009, if the straight-line method of depreciation is used?
a. $120,000 b. $240,000 c. $117,000 d. $234,000
10 – 18

118. On January 1, a machine with a useful life of five years and a residual value of $15,000 was purchased for $45,000. What is the depreciation expense for year 2 under the double-declining-balance method of depreciation?
a. $10,800 b. $18,000 c. $14,400 d. $8,640

119. A machine with a cost of $160,000 has an estimated salvage value of $10,000 and an estimated useful life of 5 years or 15,000 hours. It is to be depreciated using the units-of-activity method of depreciation. What is the amount of depreciation for the second full year, during which the machine was used 5,000 hours?
a. $50,000 b. $30,000 c. $43,333 d. $53,333

120. Equipment with a cost of $240,000 has an estimated salvage value of $15,000 and an estimated life of 4 years or 15,000 hours. It is to be depreciated using the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 3,300 hours?
a. $60,000 b. $67,800 c. $49,500 d. $56,250

121. Larime Company purchased equipment for $40,000 on January 1, 2007, and will use the double-declining-balance method of depreciation. It is estimated that the equipment will have a 5-year life and a $2,000 salvage value at the end of its useful life. The amount of depreciation expense recognized in the year 2009 will be
a. $5,760. b. $9,120. c. $9,600. d. $5,472.

122. Interline Trucking purchased a tractor trailer for $98,000. Interline uses the units-of-activity method for depreciating its trucks and expects to drive the truck 1,000,000 miles over its 12-year useful life. Salvage value is estimated to be $14,000. If the truck is driven 90,000 miles in its first year, how much depreciation expense should Interline record?
a. $7,000 b. $8,820 c. $7,560 d. $8,167

123. An asset was purchased for $150,000. It had an estimated salvage value of $30,000 and an estimated useful life of 10 years. After 5 years of use, the estimated salvage value is revised to $24,000 but the estimated useful life is unchanged. Assuming straight-line depreciation, depreciation expense in year 6 would be
a. $18,000. b. $13,200. c. $9,000. d. $12,600.
Plant Assets, Natural Resources, and Intangible Assets 10 – 19

124. Equipment costing $30,000 with a salvage value of $6,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 5 years and no change in the salvage value, the depreciation expense for year 3 would be
a. $3,600. b. $8,000. c. $6,000. d. $4,800.

125. Joe’s Quik Shop bought machinery for $25,000 on January 1, 2008. Joe estimated the useful life to be 5 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2009, Joe decides that the business will use the machinery for a total of 6 years. What is the revised depreciation expense for 2009?
a. $4,000 b. $2,000 c. $3,333 d $5,000

126. Each of the following is used in computing revised annual depreciation for a change in estimate except
a. book value. b. cost.
c. depreciable cost.
d. remaining useful life.

127. A change in the estimated useful life of equipment requires
a. a retroactive change in the amount of periodic depreciation recognized in previous years.
b. that no change be made in the periodic depreciation so that depreciation amounts are comparable over the life of the asset.
c. that the amount of periodic depreciation be changed in the current year and in future years.
d. that income for the current year be increased.

128. Hunt Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate?
a. Revisions in useful life are permitted if approved by the IRS.
b. Retroactive changes must be made to correct previously recorded depreciation. c. Only future years will be affected by the revision.
d. Both current and future years will be affected by the revision.

129. Jim’s Copy Shop bought equipment for $90,000 on January 1, 2007. Jim estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2008, Jim decides that the business will use the equipment for 5 years. What is the revised depreciation expense for 2008?
a. $30,000 b. $12,000 c. $15,000 d. $22,500
10 – 20

130. Costs incurred to increase the operating efficiency or useful life of a plant asset are referred to as
a. capital expenditures. b. expense expenditures. c. ordinary repairs.
d. revenue expenditures.

131. Expenditures that maintain the operating efficiency and expected productive life of a plant asset are generally
a. expensed when incurred.
b. capitalized as a part of the cost of the asset.
c. debited to the Accumulated Depreciation account. d. not recorded until they become material in amount.

132. Which of the following is not true of ordinary repairs?
a. They primarily benefit the current accounting period. b. They can be referred to as revenue expenditures.
c. They maintain the expected productive life of the asset. d. They increase the productive capacity of the asset.

133. The paneling of the body of an open pickup truck would be classified as a(n) a. revenue expenditure.
b. addition.
c. improvement. d. ordinary repair.

134. Additions and improvements
a. occur frequently during the ownership of a plant asset. b. normally involve immaterial expenditures.
c. increase the book value of plant assets when incurred. d. typically only benefit the current accounting period.

135. If a plant asset is retired before it is fully depreciated and no salvage value is received, a. a gain on disposal occurs.
b. a loss on disposal occurs.
c. either a gain or a loss can occur. d. neither a gain nor a loss occurs.

136. A gain or loss on disposal of a plant asset is determined by comparing the a. replacement cost of the asset with the asset’s original cost.
b. book value of the asset with the asset’s original cost.
c. original cost of the asset with the proceeds received from its sale. d. book value of the asset with the proceeds received from its sale.

137. The book value of a plant asset is the difference between the a. replacement cost of the asset and its historical cost.
b. cost of the asset and the amount of depreciation expense for the year. c. cost of the asset and the accumulated depreciation to date.
d. proceeds received from the sale of the asset and its original cost.
Plant Assets, Natural Resources, and Intangible Assets 10 – 21

138. If a plant asset is sold before it is fully depreciated, a. only a gain on disposal can occur.
b. only a loss on disposal can occur. c. either a gain or a loss can occur. d. neither a gain nor a loss can occur.

139. If a plant asset is retired before it is fully depreciated, and the salvage value received is less than the asset’s book value,
a. a gain on disposal occurs. b. a loss on disposal occurs.
c. there is no gain or loss on disposal.
d. additional depreciation expense must be recorded.

140 A company sells a plant asset which originally cost $180,000 for $60,000 on December 31, 2008. The Accumulated Depreciation account had a balance of $72,000 after the current year’s depreciation of $18,000 had been recorded. The company should recognize a
a. $120,000 loss on disposal. b. $48,000 gain on disposal. c. $48,000 loss on disposal. d. $30,000 loss on disposal.

141. If disposal of a plant asset occurs during the year, depreciation is a. not recorded for the year.
b. recorded for the whole year.
c. recorded for the fraction of the year to the date of the disposal. d. not recorded if the asset is scrapped.

142. If a fully depreciated plant asset is still used by a company, the
a. estimated remaining useful life must be revised to calculate the correct revised depreciation.
b. asset is removed from the books.
c. accumulated depreciation account is removed from the books but the asset account remains.
d. asset and the accumulated depreciation continue to be reported on the balance sheet without adjustment until the asset is retired.

143. Which of the following statements is not true when a fully depreciated plant asset is retired?
a. The plant asset’s book value is equal to its estimated salvage value. b. The accumulated depreciation account is debited.
c. The asset account is credited.
d. The plant asset’s original cost equals its book value.

144. If a plant asset is retired before it is fully depreciated, and no salvage or scrap value is received,
a. a gain on disposal will be recorded.
b. phantom depreciation must be taken as though the asset were still on the books. c. a loss on disposal will be recorded.
d. no gain or loss on disposal will be recorded.
10 – 22

145. The book value of an asset will equal its fair market value at the date of sale if a. a gain on disposal is recorded.
b. no gain or loss on disposal is recorded. c. the plant asset is fully depreciated.
d. a loss on disposal is recorded.

146. A truck costing $110,000 was destroyed when its engine caught fire. At the date of the fire, the accumulated depreciation on the truck was $50,000. An insurance check for $125,000 was received based on the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck will include a
a. Gain on Disposal of $15,000.
b. credit to the Truck account of $60,000.
c. credit to the Accumulated Depreciation account for $50,000. d. Gain on Disposal of $65,000.

147. On July 1, 2008, Meed Kennels sells equipment for $66,000. The equipment originally cost $180,000, had an estimated 5-year life and an expected salvage value of $30,000. The accumulated depreciation account had a balance of $105,000 on January 1, 2008, using the straight-line method. The gain or loss on disposal is
a. $9,000 gain. b. $6,000 loss. c. $9,000 loss. d. $6,000 gain.

148. A loss on disposal of a plant asset is reported in the financial statements a. in the Other Revenues and Gains section of the income statement. b. in the Other Expenses and Losses section of the income statement. c. as a direct increase to the capital account on the balance sheet.
d. as a direct decrease to the capital account on the balance sheet.

149. Wells Company’s delivery truck, which originally cost $70,000, was destroyed by fire. At the time of the fire, the balance of the Accumulated Depreciation account amounted to $47,500.The company received $40,000 reimbursementfrom its insurance company. The gain or loss as a result of the fire was
a. $30,000 loss. b. $17,500 loss. c. $30,000 gain. d. $17,500 gain.

150. A truck that cost $21,000 and on which $10,000 of accumulated depreciation has been recorded was disposed of for $9,000 cash. The entry to record this event would include a a. gain of $2,000.
b. loss of $2,000.
c. credit to the Truck account for $11,000.
d. credit to AccumulatedDepreciationfor $10,000.

151. A truck that cost $36,000 and on which $30,000 of accumulated depreciation has been recorded was disposed of for $9,000 cash. The entry to record this event would include a a. gain of $3,000.
b. loss of $3,000.
c. credit to the Truck account for $6,000.
d. credit to AccumulatedDepreciationfor $30,000.
Plant Assets, Natural Resources, and Intangible Assets 10 – 23

152. Ace Corporation sold equipment for $12,000. The equipment had an original cost of $36,000and accumulated depreciation of $18,000. As a result of the sale,
a. net income will increase $12,000. b. net income will increase $6,000. c. net income will decrease $6,000. d. net income will decrease $12,000.

153. Jarman’s Courier Service recorded a loss of $3,000 when it sold a van that originally cost $28,000for $5,000. Accumulated depreciation on the van must have been
a. $26,000. b. $8,000. c. $25,000. d. $20,000.

154. On a balance sheet, natural resources may be described more specifically as all of the following except
a. land improvements. b. mineral deposits.
c. oil reserves. d. timberlands.

155. Natural resources are
a. depreciated using the units-of-activity method.
b. physically extracted in operations and are replaceable only by an act of nature. c. reported at their market value.
d. amortized over a period no longer than 40 years.

156. Depletion is
a. a decrease in market value of natural resources.
b. the amount of spoilage that occurs when natural resources are extracted. c. the allocation of the cost of natural resources to expense.
d. the method used to record unsuccessful patents.

157. To qualify as natural resources in the accounting sense, assets must be a. underground.
b. replaceable.
c. of a mineral nature.
d. physically extracted in operations.

158. The method most commonly used to compute depletion is the a. straight-linemethod.
b. double-declining-balancemethod. c. units-of-activity method.
d. effective interest method.

159. In computing depletion, salvage value is a. always immaterial.
b. ignored.
c. impossible to estimate.
d. included in the calculation.
10 – 24

160. If a mining company extracts 1,500,000 tons in a period but only sells 1,200,000 tons, a. total depletion on the mine is based on the 1,200,000 tons.
b. depletion expense is recognized on the 1,500,000 tons extracted.
c. depletion expense is recognized on the 1,200,000 tons extracted and sold.
d. a separate accumulated depletion account is set up to record depletion on the 300,000tons extracted but not sold.

161. A coal company invests $16 million in a mine estimated to have 20 million tons of coal and no salvage value. It is expected that the mine will be in operation for 5 years. In the first year, 1,000,000 tons of coal are extracted and sold. What is the depletion expense for the first year?
a. $800,000 b. $320,000 c. $80,000
d. Cannot be determined from the information provided.

162. AccumulatedDepletion
a. is used by all companies with natural resources. b. has a normal debit balance.
c. is a contra-asset account.
d. is never shown on the balance sheet.

163. On July 4, 2008, Montana Mining Company purchased the mineral rights to a granite deposit for $800,000. It is estimated that the recoverable granite will be 400,000 tons. During 2008, 100,000 tons of granite was extracted and 60,000 tons were sold. The amount of the Depletion Expense recognized for 2008 would be
a. $100,000. b. $60,000. c. $120,000. d. $200,000.

164. Depletion expense is computed by multiplying the depletion cost per unit by the a. total estimated units.
b. total actual units.
c. number of units extracted. d. number of units sold.

165. Intangible assets are the rights and privileges that result from ownership of long-lived assets that
a. must be generated internally.
b. are depletable natural resources. c. have been exchanged at a gain. d. do not have physical substance.

166. Identify the item below where the terms are not related. a. Equipment—depreciation
b. Franchise—depreciation c. Copyright—amortization d. Oil well—depletion
Plant Assets, Natural Resources, and Intangible Assets 10 – 25

167. A patent should
a. be amortized over a period of 20 years. b. not be amortized if it has an indefinite life.
c. be amortized over its useful life or 20 years, whichever is longer. d. be amortized over its useful life or 20 years, whichever is shorter.

168. The entry to record patent amortization usually includes a credit to a. Amortization Expense.
b. Accumulated Amortization. c. Accumulated Depreciation. d. Patents.

169. The cost of successfully defending a patent in an infringement suit should be a. charged to Legal Expenses.
b. deducted from the book value of the patent. c. added to the cost of the patent.
d. recognized as a loss in the current period.

170. An asset that cannot be sold individually in the market place is a. a patent.
b. goodwill.
c. a copyright. d. a trade name.

171. Goodwill can be recorded
a. when customers keep returning because they are satisfied with the company’s products.
b. when the company acquires a good location for its business. c. when the company has exceptional management.
d. only when there is an exchange transaction involving the purchase of an entire business.

172. On July 1, 2008, Marsh Company purchased the copyright to Parsons Computer tutorials for $162,000. It is estimated that the copyright will have a useful life of 5 years with an estimated salvage value of $12,000. The amount of Amortization Expense recognized for the year 2008 would be
a. $32,400. b. $15,000. c. $30,000. d. $16,200.

173. All of the following intangible assets are amortized except a. copyrights.
b. limited-life franchises. c. patents.
d. trademarks.

174. Which of the following is not an intangible asset arising from a government grant? a. Goodwill
b. Patent
c. Trademark d. Trade name
10 – 26

175. The amortization period for a patent cannot exceed a. 50 years.
b. 40 years. c. 20 years. d. 10 years.

176. Cost allocation of an intangible asset is referred to as a. amortization.
b. depletion. c. accretion.
d. capitalization.

177. A patent
a. has a legal life of 40 years. b. is nonrenewable.
c. can be renewed indefinitely.
d. is rarely subject to litigation because it is an exclusive right.

178. If a company incurs legal costs in successfully defending its patent, these costs are recorded by debiting
a. Legal Expense.
b. an Intangible Loss account. c. the Patent account.
d. a revenue expenditure account.

179. Copyrights are granted by the federal government
a. for the life of the creator or 70 years, whichever is longer. b. for the life of the creator plus 70 years.
c. for the life of the creator or 70 years, whichever is shorter. d. and therefore cannot be amortized.

180. Goodwill
a. is only recorded when generated internally. b. can be subdivided and sold in parts.
c. can only be identified with the business as a whole.
d. can be defined as normal earnings less accumulated amortization.

181. In recording the acquisition cost of an entire business,
a. goodwill is recorded as the excess of cost over the fair value of identifiable net assets. b. assets are recorded at the seller’s book values.
c. goodwill, if it exists, is never recorded.
d. goodwill is recorded as the excess of cost over the book value of identifiable net assets.

182. Research and development costs
a. are classified as intangible assets.
b. must be expensed when incurred under generally accepted accounting principles. c. should be included in the cost of the patent they relate to.
d. are capitalized and then amortized over a period not to exceed 40 years.
Plant Assets, Natural Resources, and Intangible Assets 10 – 27

183. A computer company has $2,000,000 in research and development costs. Before accounting for these costs, the net income of the company is $1,600,000. What is the amount of net income or loss after these R & D costs are accounted for?
a. $400,000 loss
b. $1,600,000 net income c. $0
d. Cannot be determined from the information provided.

184. Denton Company incurred $300,000 of research and development costs in its laboratory to develop a new product. It spent $40,000 in legal fees for a patent granted on January 2, 2008. On July 31, 2008, Denton paid $30,000 for legal fees in a successful defense of the patent. What is the total amount that should be debited to Patents through July 31, 2008? a. $300,000
b. $70,000 c. $370,000
d. Some other amount

185. Given the following account balances at year end, compute the total intangible assets on the balance sheet of Anisha Enterprises.

Cash AccountsReceivable Trademarks Goodwill
Research& Development Costs

a. $11,500,000 b. $7,500,000 c. $5,500,000 d. $9,500,000
$1,500,000 4,000,000 1,000,000 4,500,000 2,000,000

186. During 2008, Sitter Corporation reported net sales of $2,000,000, net income of $1,200,000, and depreciation expense of $100,000. Sitter also reported beginning total assets of $1,000,000, ending total assets of $1,500,000, plant assets of $800,000, and accumulated depreciation of $500,000. Sitter’s asset turnover ratio is
a. 2 times. b. 1.6 times. c. 1.3 times. d. .96 times.

187. During 2008, Tyler Corporation reported net sales of $3,000,000 and net income of $1,800,000. Tyler also reported beginning total assets of $1,000,000 and ending total assets of $1,500,000. Tyler’s asset turnover ratio is
a. 3.0 times. b. 2.4 times. c. 2.0 times. d. 1.4 times.

188. Natural resources are generally shown on the balance sheet under a. Intangibles.
b. Investments.
c. Property, Plant, and Equipment. d. Owner’s Equity.
10 – 28

189. Which of the following statements concerning financial statement presentation is not a true statement?
a. Intangibles are reported separately under Intangible Assets.
b. The balances of major classes of assets may be disclosed in the footnotes.
c. The balances of the accumulated depreciation of major classes of assets may be disclosed in the footnotes.
d. The balances of all individual assets, as they appear in the subsidiary plant ledger, should be disclosed in the footnotes.

190. Intangible assets
a. should be reported under the heading Property, Plant, and Equipment.
b. are not reported on the balance sheet because they lack physical substance. c. should be reported as Current Assets on the balance sheet.
d. should be reported as a separate classification on the balance sheet.

191. A company has the following assets:

Buildingsand Equipment, less accumulated depreciation of $2,000,000 Copyrights
Patents
Timberlands,less accumulated depletion of $2,800,000

The total amount reported under Property, Plant, and Equipment would be a. $19,360,000.
b. $14,400,000. c. $18,400,000. d. $15,360,000.
$9,600,000 960,000 4,000,000 4,800,000

a192. A company decides to exchange its old machine and $77,000 cash for a new machine. The old machine has a book value of $63,000 and a fair market value of $70,000 on the date of the exchange. The cost of the new machine would be recorded at
a. $140,000. b. $147,000. c. $133,000.
d. cannot be determined.

a193. A company exchanges its old office equipment and $40,000 for new office equipment. The old office equipment has a book value of $28,000 and a fair market value of $20,000 on the date of the exchange. The cost of the new office equipment would be recorded at
a. $68,000. b. $60,000. c. $48,000.
d. cannot be determined.

a194. In an exchange of plant assets that has commercial substance, any difference between the fair market value and the book value of the old plant asset is
a. recorded as a gain or loss.
b. recorded if a gain but is deferred if a loss. c. recorded if a loss but is deferred if a gain. d. deferred if either a gain or loss.
Plant Assets, Natural Resources, and Intangible Assets 10 – 29

a195. Gains on an exchange of plant assets that has commercial substance are a. deducted from the cost of the new asset acquired.
b. deferred.
c. not possible.
d. recognized immediately.

a196. Losses on an exchange of plant assets that has commercial substance are a. not possible.
b. deferred.
c. recognized immediately.
d. deducted from the cost of the new asset acquired.

a197. The cost of a new asset acquired in an exchange that has commercial substance is the cash paid plus the
a. book value of the old asset.
b. fair market value of the old asset. c. book value of the asset acquired. d. fair market value of the new asset.

Additional Multiple Choice Questions

198. The cost of land includes all of the following except a. real estate brokers’ commissions.
b. closing costs.
c. accrued property taxes. d. parking lots.

199. A term that is not synonymous with property, plant, and equipment is a. plant assets.
b. fixed assets.
c. intangible assets.
d. long-lived tangible assets.

200. The factor that is not relevant in computing depreciation is a. replacement value.
b. cost.
c. salvage value. d. useful life.

201. Depreciable cost is the
a. book value of an asset less its salvage value. b. cost of an asset less its salvage value.
c. cost of an asset less accumulated depreciation. d. book value of an asset.

202. Santayana Company purchased a machine on January 1, 2006, for $12,000 with an estimated salvage value of $3,000 and an estimated useful life of 8 years. On January 1, 2008, Santayana decides the machine will last 12 years from the date of purchase. The salvage value is still estimated at $3,000. Using the straight-line method, the new annual depreciation will be
10 – 30

a. $675. b. $750. c. $900. d. $1,000.

203. Ordinary repairs are expendituresto maintain the operating efficiency of a plant asset and are referred to as
a. capital expenditures. b. expense expenditures. c. improvements.
d. revenue expenditures.

204. Improvements are
a. revenue expenditures.
b. debited to an appropriate asset account when they increase useful life.
c. debited to accumulated depreciation when they do not increase useful life.
d. debited to an appropriate asset account when they do not increase useful life.

205. A gain on sale of a plant asset occurs when the proceeds of the sale are greater than the a. salvage value of the asset sold.
b. market value of the asset sold. c. book value of the asset sold.
d. accumulated depreciation on the asset sold.

206. The entry to record depletion expense
a. decreases owner’s equity and assets.
b. decreases net income and increases liabilities. c. decreases assets and liabilities.
d. decreases assets and increases liabilities.

207. All of the following are intangible assets except a. copyrights.
b. goodwill. c. patents.
d. research and development costs.

208. A purchased patent has a legal life of 20 years. It should be a. expensed in the year of acquisition.
b. amortized over 20 years regardless of its useful life. c. amortized over its useful life if less than 20 years. d. not amortized.

209. The asset turnover ratio is computed by dividing a. net income by average total assets.
b. net sales by average total assets. c. net income by ending total assets. d. net sales by ending total assets.
Plant Assets, Natural Resources, and Intangible Assets 10 – 31

a210. In an exchange of plant assets that has commercial substance a. neither gains nor losses are recognized immediately.
b. gains, but not losses, are recognized immediately. c. losses, but not gains, are recognized immediately. d. both gains and losses are recognized immediately.

BRIEFEXERCISES
BE 211
Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E), or none of these (X).

1. Parking lots

2. Electricity used by a machine

3. Excavation costs

4. Interest on building construction loan

5. Cost of trial runs for machinery

6. Drainage costs

7. Cost to install a machine

8. Fences

9. Unpaid (past) property taxes assumed

10. Cost of tearing down a building when land and a building on it are purchased

BE 212

Seller Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures incurred in purchasing the land were as follows: purchase price, $50,000; broker’s fees, $6,000; title search and other fees, $5,000; demolition of an old building on the property, $5,700; grading, $1,200; digging foundation for the road, $3,000; laying and paving driveway, $25,000; lighting $7,500; signs, $1,500. List the items and amounts that should be included in the Land account.

BE 213

Eastman Company purchased a delivery truck for $35,000 on January 1, 2008. The truck was assigned an estimated useful life of 5 years and has a residual value of $10,000. Compute depreciation expense using the double-declining-balance method for the years 2008 and 2009.

BE 214

Eastman Company purchased a delivery truck for $35,000 on January 1, 2008. The truck was assigned an estimated useful life of 100,000 miles and has a residual value of $10,000. The truck was driven 18,000 miles in 2008 and 22,000 miles in 2009. Compute depreciation expense using the units-of-activity method for the years 2008 and 2009.

BE 215

Porika Company purchased a truck for $57,000. The company expected the truck to last four years or 100,000 miles, with an estimated residual value of $6,000 at the end of that time. During the second year the truck was driven 27,000 miles. Compute the depreciation for the second year under each of the methods below and place your answers in the blanks provided.

Units-of-activity $

Double-declining-balance $

BE 216

On January 1, 2006, Ecker Company purchased a computer system for $20,500. The system had an estimated useful life of 5 years and no salvage value. At January 1, 2008, the company revised the remaining useful life to two years. What amount of depreciation will be recorded for 2008 and 2009?

BE 217

Robot Enterprises sold equipment on January 1, 2008 for $5,000. The equipment had cost $24,000. The balance in Accumulated Depreciation at January 1 is $20,000. What entry would Robot make to record the sale of the equipment?

BE 218

On January 1, 2008, Freeport Enterprises purchased natural resources for $1,200,000. The company expects the resources to produce 12,000,000 units of product. (1) What is the depletion cost per unit? (2) If the company mined and sold 20,000 units in January, what is depletion expense for the month?

BE 219

On January 2, 2008, Elneer Company purchased a patent for $38,000. The patent has an estimated useful life of 25 years and a 20-year legal life. What entry would the company make at December 31, 2008 to record amortization expense on the patent?

BE 220

Using the following data for Rocky, Inc., compute its asset turnover ratio.

Rocky, Inc. Net Income 2008
Total Assets 12/31/08 Total Assets 12/31/07 Net Sales 2008

$ 123,000 2,443,000 1,880,000 2,135,000

$2,135,000

EXERCISES
Ex. 221
Hunt Company purchased factory equipment with an invoice price of $80,000. Other costs incurred were freight costs, $1,100; installation wiring and foundation, $2,200; material and labor costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire insurance policy covering equipment, $1,400. The equipment is estimated to have a $5,000 salvage value at the end of its 5-year useful service life.

Instructions

(a) Compute the acquisitioncost of the equipment. Clearly identify each element of cost.

(b) If the double-declining-balance method of depreciation was used, the constant percentage applied to a declining book value would be .

Ex. 222

For each entry below make a correcting entry if necessary. If the entry given is correct, then state “No entry required.”

(a) The $60 cost of repairing a printer was charged to Computer Equipment.

(b) The $5,000 cost of a major engine overhaul was debited to Repair Expense. The overhaul is expected to increase the operating efficiency of the truck.

(c) The $6,000 closing costs associated with the acquisition of land were debited to Legal Expense.

(d) A $500 charge for transportation expenses on new equipment purchased was debited to Freight-In.

Ex. 223

Benedict Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order in the account, Land.

Debits
1. Cost of real estate purchased as a plant site (land and building).
2. Accruedreal estate taxes paid at the time of the purchase of the real estate. 3. Cost of demolishing building to make land suitable for construction of a new
building.
4. Architect’sfees on building plans. 5. Excavationcosts for new building. 6. Cost of filling and grading the land.
7. Insuranceand taxes during construction of building.
8. Cost of repairs to building under construction caused by a small fire.
9. Interest paid during the year, of which $54,000 pertains to the construction period.
10. Full payment to building contractor. 11. Cost of parking lots and driveways.
12. Real estate taxes paid for the current year on the land. Total Debits

Credits 13. Insuranceproceeds for fire damage.
14. Proceedsfrom salvage of demolished building Total Credits

$ 220,000 4,000

15,000 14,000 24,000 5,000 6,000 7,000

64,000 760,000 36,000
4,000 $1,159,000

$3,000
3,500 $6,500

Instructions

Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns.

Item Land Building Other Account Title

Ex. 224

Duncan Company purchased a machine at a cost of $90,000. The machine is expected to have a $5,000 salvage value at the end of its 5-year useful life.

Instructions
Computeannual depreciationfor the first and second years using the (a) straight-line method.
(b) double-declining-balancemethod.

Ex. 225

Reynolds Company purchased a new machine for $300,000. It is estimated that the machine will have a $30,000 salvage value at the end of its 5-year useful service life. The double-declining-balance method of depreciation will be used.

Instructions
Preparea depreciation schedule which shows the annual depreciation expense on the machine for its 5-year life.

Ex. 226

Tanner Company purchased equipment on January 1, 2007 for $70,000. It is estimated that the equipment will have a $5,000 salvage value at the end of its 5-year useful life. It is also estimated that the equipment will produce 100,000 units over its 5-year life.

Instructions

Answer the following independent questions.

1. Compute the amount of depreciation expense for the year ended December 31, 2007, using the straight-line method of depreciation.

2. If 16,000 units of product are produced in 2007 and 24,000 units are produced in 2008, what is the book value of the equipment at December 31, 2008? The company uses the units-of-activity depreciation method.

3. If the company uses the double-declining-balance method of depreciation, what is the balance of the Accumulated Depreciation—Equipment account at December 31, 2009?

Ex. 227

A plant asset acquired on October 1, 2008, at a cost of $300,000 has an estimated useful life of 10 years. The salvage value is estimated to be $30,000 at the end of the asset’s useful life.

Instructions
Determinethe depreciation expense for the first two years using: (a) the straight-line method.
(b) the double-declining-balance method.
50,000 miles
60,000 miles
70,000 miles

Ex. 228

Tony’s, a popular pizza hang-out, has a thriving delivery business. Tony’s has a fleet of three delivery automobiles. Prior to making the entry for this year’s depreciation expense, the subsidiary ledger for the fleet is as follows:
Accumulated
Estimated Depr.—Beg. Miles Operated Car Cost Salvage Value Life in Miles of the Year During Year
1 $21,000 $3,000 50,000 $2,520 20,000 2 18,000 2,400 60,000 2,340 22,000 3 20,000 2,500 70,000 2,000 19,000

Instructions
(a) Determine the depreciation rates per mile for each car.
(b) Determine the Depreciation Expense for each car for the current year.
(c) Make one compound journal entry to record the annual Depreciation Expense for the fleet.

$21,000– $3,000

Ex. 229

The Barnett Clinic purchased a new surgical laser for $80,000. The estimated salvage value is $5,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It was used 1,600 hours in year 1; 2,200 hours in year 2; 2,400 hours in year 3; 1,800 hours in year 4; 2,000 hours in year 5.

Instructions
(a) Compute the annual depreciation for each of the five years under each of the following methods:
(1) straight-line. (2) units-of-activity.

(b) If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer.

(c) Which method would result in the lowest reported income in the first year? Which method would result in the lowest total reported income over the five-year period?

Ex. 230

The December 31, 2007 balance sheet of Ritter Company showed Equipment of $64,000 and Accumulated Depreciation of $18,000. On January 1, 2008, the company decided that the equipment has a remaining useful life of 6 years with a $4,000 salvage value.

Instructions
Computethe (a) depreciable cost of the equipment and (b) revised annual depreciation.

Ex. 231

Southeast Airlines purchased a 747 aircraft on January 1, 2007, at a cost of $35,000,000. The estimated useful life of the aircraft is 20 years, with an estimated salvage value of $5,000,000. On January 1, 2010 the airline revises the total estimated useful life to 15 years with a revised salvage value of $3,500,000.

Instructions

(a) Compute the depreciation and book value at December 31, 2009 using the straight-line method and the double-declining-balance method.

(b) Assuming the straight-line method is used, compute the depreciation expense for the year ended December 31, 2010.

Ex. 232

Seymor Company purchased a machine on January 1, 2008, at a cost of $80,000. It is expected to have an estimated salvage value of $5,000 at the end of its 5-year life. The company capitalized the machine and depreciated it in 2008 using the double-declining-balance method of depreciation. The company has a policy of using the straight-line method to depreciate equipment but the company accountant neglected to follow company policy when he used the double-declining-balance method. Net income for the year ended December 31, 2008 was $55,000 as the result of depreciatingthe machine incorrectly.

Instructions

Using the method of depreciation which the company normally follows, prepare the correcting entry and determine the corrected net income. (Show computations.)

Ex. 233

Equipment was acquired on January 1, 2005, at a cost of $80,000. The equipment was originally estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2008, using the straight-line method. On January 1, 2009, the estimated salvage value was revised to $6,000 and the useful life was revised to a total of 8 years.

Instructions
Determinethe Depreciation Expense for 2009.

Ex. 234

Gantner Company purchased a machine on January 1, 2008. In addition to the purchase price paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b) transportation and insurance costs while the machinery was in transit from the seller, (c) personnel training costs for initial operation of the machinery, (d) annual city operating license, (e) major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before the machinery was placed into service, (g) lubrication of the machinery gearing after the machinery was placed into service, and (h) installation costs necessary to secure the machinery to the building flooring.

Instructions
Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces provided: C = Capital, R = Revenue.

(a) (b) (c) (d)

(e) (f) (g) (h)

Ex. 235

Carey Word Processing Service uses the straight-line method of depreciation. The company’s fiscal year end is December 31. The following transactions and events occurred during the first three years.

2007 July 1

Nov. 3 Dec. 31

2008 Dec. 31
Purchased a computer from the Computer Center for $2,300 cash plus sales tax of $150, and shipping costs of $50.
Incurredordinary repairs on computer of $140.
Recorded 2007 depreciation on the basis of a four year life and estimated salvage value of $500.

Recorded2008 depreciation.

2009 Jan. 1 Paid $400 for an upgrade of the computer. This expenditure is expected to increase the operating efficiency and capacity of the computer.

Instructions
Preparethe necessary entries. (Show computations.)

Ex. 236

Identifythe following expenditures as capital expenditures or revenue expenditures. (a) Replacement of worn out gears on factory machinery.
(b) Construction of a new wing on an office building. (c) Painting the exterior of a building.
(d) Oil change on a company truck.

(e) Replacing a Pentium II computer chip with a Pentium IV chip, which increases productive capacity. No extension of useful life expected.

(f) Overhaul of a truck motor. One year extension in useful life is expected. (g) Purchased a wastebasket at a cost of $10.
(h) Painting and lettering of a used truck upon acquisition of the truck.

Ex. 237

On January 1, 2006 Rosen Company purchased and installed a telephone system at a cost of $20,000. The equipment was expected to last five years with a salvage value of $3,000. On January 1, 2007 more telephone equipment was purchased to tie-in with the current system for $10,000. The new equipment is expected to have a useful life of four years. Through an error, the new equipment was debited to Telephone Expense. Rosen Company uses the straight-line method of depreciation.

Instructions
Prepare a schedule showing the effects of the error on Telephone Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2007 through the useful life of the new equipment.

Telephone Expense Overstated
Year (Understated)
Depreciation Expense Overstated
(Understated)
Net Income Overstated
(Understated)

2007

2008

2009

2010

Ex. 238

Berman Company sold equipment on July 31, 2008 for $50,000. The equipment had cost $140,000 and had $80,000 of accumulated depreciation as of January 1, 2008. Depreciation for the first 6 months of 2008 was $8,000.

Instructions
Preparethe journal entry to record the sale of the equipment.

Ex. 239

(a) Watts Company purchased equipment in 2001 for $90,000 and estimated a $6,000 salvage value at the end of the equipment’s 10-year useful life. At December 31, 2007, there was $58,800 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2008, the equipment was sold for $24,000.

Prepare the appropriate journal entries to remove the equipment from the books of Watts Company on March 31, 2008.

(b) Gorman Company sold a machine for $15,000. The machine originally cost $35,000 in 2005 and $8,000 was spent on a major overhaul in 2008 (charged to Machine account). Accumulated Depreciation on the machine to the date of disposal was $28,000.

Preparethe appropriate journal entry to record the disposition of the machine.

(c) Klinger Company sold office equipment that had a book value of $6,000 for $8,000. The office equipment originally cost $20,000 and it is estimated that it would cost $25,000 to replace the office equipment.

Preparethe appropriate journal entry to record the disposition of the office equipment.

Ex. 240

Fleming’s Lumber Mill sold two machines in 2009. The following information pertains to the two machines:
Purchase Useful Salvage Depreciation Sales
Machine Cost Date Life Value Method Date Sold Price
#1 $66,000 7/1/05 5 yrs. $6,000 Straight-line 7/1/09 $15,000 #2 $40,000 7/1/08 5 yrs. $5,000 Double-declining- 12/31/09 $24,000
balance

Instructions
(a) Compute the depreciation on each machine to the date of disposal.

(b) Prepare the journal entries in 2009 to record 2009 depreciation and the sale of each machine.

Ex. 241

Presentedbelow are selected transactions for Milton Companyfor 2008.

Jan. 1 Received $9,000 scrap value on retirement of machinery that was purchased on January 1, 1998. The machine cost $90,000 on that date, and had a useful life of 10 years with no salvage value.

April 30

Dec. 31
Sold a machine for $28,000 that was purchased on January 1, 2005. The machine cost $75,000, and had a useful life of 5 years with no salvage value.

Discarded a business automobile that was purchased on October 1, 2003. The car cost $32,000 and was depreciated on a 5-year useful life with a salvage value of $2,000.

Instructions
Journalize all entries required as a result of the above transactions. Milton Company uses the straight-line method of depreciation and has recorded depreciationthrough December 31, 2007.

Ex. 242

WatsonCompany sold the following two machines in 2008:

Cost Purchasedate Useful life Salvage value
Depreciation method Date sold
Sales Price
Machine A
$68,000 7/1/04 8 years $4,000
Straight-line 7/1/08 $30,000
Machine B $80,000 1/1/05 5 years $4,000
Double-declining-balance 8/1/08 $16,000

Instructions
Journalize all entries required to update depreciation and record the sales of the two assets in 2008. The company has recorded depreciation on the machine through December 31, 2007.

Ex. 243

Girard Mining invested $960,000 in a mine estimated to have 1,200,000 tons of ore with no salvage value. During the first year, 200,000 tons of ore were mined and sold.

Instructions

Preparethe journal entry to record depletion expense.

Ex. 244

Eddy Mining Company purchased a mine for $70 million which is estimated to have 250,000 tons of ore and a salvage value of $10 million.

(a) In the first year, 50,000 tons of ore are extracted and sold. Prepare the journal entry to record depletion expense for the first year.

(b) In the second year, 150,000 tons of ore are extracted but only 125,000 tons are sold. Preparethe journal entry to record depletion expense for the second year.

(c) What amount and in what account are the tons of ore not sold reported?

Ex. 245

Harper Mining Company purchased land containing an estimated 15 million tons of ore at a cost of $4,500,000. The land without the ore is estimated to be worth $600,000. The company expects to operate the mine for 10 years. Buildings costing $600,000 are erected on the site and are expected to last for 25 years. Equipment costing $300,000 with an estimated life of 12 years is installed. The buildings and the equipment possess no salvage value after the mine is closed. During the first year of operations, the mining company mined and sold 2 million tons of ore.

Instructions
(a) Compute the depletion charge per ton.
(b) Compute the depletion expense for the first year.
(c) Compute the appropriate first year’s depreciation expense for the buildings. (d) Compute the appropriate first year’s depreciation expense for the equipment.
(e) Prepare journal entries to record depletion and depreciation expenses for the year.

Ex. 246

(a) A company purchased a patent on January 1, 2008, for $2,000,000. The patent’s legal life is 20 years but the company estimates that the patent’s useful life will only be 5 years from the date of acquisition. On June 30, 2008, the company paid legal costs of $135,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2008.

(b) Foley Company purchased a franchise from Yummie Food Company for $400,000 on January 1, 2008. The franchise is for an indefinite time period and gives Foley Company the exclusive rights to sell Yummie Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2008.

(c) Dryer Company incurred research and development costs of $500,000 in 2008 in developing a new product. Prepare the necessary journal entries during 2008 to record these events and any adjustmentsat year end on December 31, 2008.

Ex. 247

On January 2, 2008, Holmes Company purchased a patent for $200,000. The patent has an 8-year estimated useful life and a legal life of 20 years.

Instructions
Preparethe journal entry to record patent amortization.

Ex. 248

For each item listed below, enter a code letter in the blank space to indicate the allocation terminology for the item. Use the following codes for your answer:

A—Amortization

D—Depreciation
P—Depletion

N—None of these

1. Goodwill

2. Land

3. Buildings

4. Patents

5. Copyrights

6. Researchand development costs
7. Timberlands

8. Franchises(indefinite life)

9. Licenses(limited life)

10. Land Improvements

11. Oil Deposits

12. Equipment

Ex. 249

For each of the following unrelated transactions, (a) determine the amount of the amortization or depletion expense for the current year, and (b) present the adjusting entries required to record each expense at year end.

(1) Timber rights were purchased on a tract of land for $360,000. The timber is estimated at 1,200,000 board feet. During the current year, 75,000 board feet of timber were cut and sold.

(2) Costs of $8,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $22,000 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years.

Ex. 250

During the current year, Lymon Company incurred several expenditures. Briefly explain whether the expenditures listed below should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate the number of years over which the asset should be amortized. Explain your answer.

(a) Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully defended.

(b) Purchased a trademark from another company. The trademark can be renewed indefinitely. Lymon Company expects the trademark to contribute to revenue indefinitely.

(c) Lymon Company acquires a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining life of 15 years.

(d) Lymon Company is spending considerable time and money in developing a different patent for another product. So far $3,000,000 has been spent this year on research and development. Lymon Company is very confident they will obtain this patent in the next few years.

Ex. 251

Presented below is information related to plant assets, natural resources, and intangibles at year end on December 31, 2008, for Norten Company:

Buildings Goodwill Patents Coal Mine
AccumulatedDepreciation AccumulatedDepletion
$1,080,000 350,000 480,000 440,000 670,000 275,000

Instructions

Preparea partial balance sheet for Norten Company that shows how the above listed items would be presented.

Ex. 252

Computethe asset turnover ratio based on the following:

Beginningtotal assets Ending total assets Net income
Net sales
$ 800,000 1,200,000 300,000 2,200,000

Ex. 253

Indicatein the blank spaces below, the section of the balance sheet where the following items are reported. Use the following code to identify your answer:

PPE Property, Plant, and Equipment I Intangibles
O Other
N/A Not on the balance sheet

1. Goodwill

2. Land Improvements 3. Buildings
4. AccumulatedDepreciation 5. Trademarks
6. Researchand development costs
7. Timberlands 8. Franchises 9. Licenses
10. Equipment 11. Oil Deposits
12. Land

*Ex. 254

Presentedbelow are two independent situations:

(a) Riley Company exchanged an old machine (cost $100,000 less $60,000 accumulated depreciation) plus $7,000 cash for a new machine. The old machine had a fair market value of $36,000. Prepare the entry to record the exchange of assets by Riley Company.

(b) Carlin Company trades old equipment (cost $90,000 less $54,000 accumulated deprecia-tion) for new equipment. Carlin paid $36,000 cash in the trade. The old equipment that was traded had a fair market value of $54,000. Prepare the entry to record the exchange of assets by Carlin Company.

*Ex. 255

Agler Company exchanges equipment with Eaton Company and Peters Company exchanges equipment with Fiero Company. The following information pertains to the exchanges:

Equipment(cost) Accumulateddepreciation
Fair market value of the equipment Cash paid
Agler Company $114,000
50,000 75,000 45,000
Peters Company $96,000
45,000 42,000
-0-

Instructions
Prepare the journal entries to record the exchanges on the books of Agler Company and Peters Company.

Ex. 256

Farr Delivery Company and Bell Delivery Company exchanged delivery trucks on January 1, 2008. Farr’s truck cost $84,000, had accumulated depreciation of $69,000, and has a fair market value of $9,000. Bell’s truck cost $63,000, had accumulated depreciation of $54,000, and has a fair market value of $9,000.

Instructions
(a) Journalize the exchange for Farr Delivery Company. (b) Journalize the exchange for Bell Delivery Company.

Ex. 257

Prepare the journal entries to record the following transactions for Bryant Company which has a calendar year end and uses the straight-line method of depreciation.

a) On September 30, 2008, the company exchanged old delivery equipment and $24,000 for new delivery equipment. The old delivery equipment was purchased on January 1, 2006, for $84,000 and was estimated to have a $12,000 salvage value at the end of its 5-year life. Depreciation on the delivery equipment has been recorded through December 31, 2007. It is estimated that the fair market value of the old delivery equipment is $36,000 on September 30, 2008.

(b) On June 30, 2008, the company exchanged old office equipment and $40,000 for new office equipment. The old office equipment originally cost $80,000 and had accumulated depreciation to the date of disposal of $35,000. It is estimated that the fair market value of the old office equipment on June 30 was $60,000.

COMPLETIONSTATEMENTS

258. With the exception of land, plant assets experience a in service potentialover their useful lives.

259. When vacant land is acquired, expenditures for clearing, draining, filling, and grading should be charged to the account.

260. The cost of demolishing an old building on land that has been acquired so that a new building can be constructed should be charged to the account.

261. The cost of paving, fencing, and lighting a new company parking lot is charged to a

account.

262. Equipment with an invoice price of $20,000 was purchased and freight costs were $900. The cost of the equipment would be $ .

263. is the process of allocating the cost of a plant asset to expense over its service life in a rational and systematic manner.

264. The book value of a plant asset is obtained by subtracting from the

of the plant asset.

265. Three factors that affect the computation of periodic depreciation expense are (1)

, (2) , and (3) .

266. The method of computing depreciation expense results in an equal amount of periodic depreciation throughout the service life of the plant asset.

267. The declining-balance method of computing depreciation expense involves multiplying a

book value by a percentage.

268. The declining-balance method of computing depreciation is known as an

depreciationmethod.

269. Ordinary repairs which maintain operating efficiency and expected productive life are called .

270. Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life and are referred to as .

271. If disposal of a plant asset occurs at any time during the year, for the fraction of the year to the date of disposal must be recorded.

272. If fully depreciated equipment that cost $10,000 with no salvage value is retired, the entry to record the retirement requires a debit to the account and a credit to the account.

273. If the proceeds from the sale of a plant asset exceed its , a gain on disposal will occur.

274. A plant asset originally cost $48,000 and was estimated to have a $3,000 salvage value at the end of its 5-year useful life. If at the end of three years, the asset was sold for $9,000, and had accumulated depreciation recorded of $27,000, the company should recognize a
on disposal in the amount of $ .

275. Natural resources have two distinguishing characteristics (1) they are physically

in operations, and (2) they are only by an act of nature.

276. In recording the purchase of a business, goodwill should be recorded for the excess of

over the of the net assets acquired.

277. The allocation of the cost of an asset to expense over its useful life is called

for tangible plant assets, for natural resources, and for intangible assets.

278. The cost of a patent should be amortized over its life or its

life, whichever is shorter.

279. The ratio is calculated by dividing net sales by average total assets.

a280. In the case of an exchange of plant assets resulting in a loss on disposal, the cost of the new asset acquired is equal to the of the asset given up plus any cash paid by the purchaser.

a281. A company exchanged an old machine, which originally cost $22,000 and has accumulated depreciation to date of $12,000, for a new machine. The old machine had a fair market value of $14,000. The cost of the new machine should be recorded at $ .

10 – 63

MATCHING

Set 1

282. Match the items below by entering the appropriate code letter in the space provided.

A. Plant assets B. Depreciation C. Book value
D. Salvage value
E. Straight-linemethod
F. Units-of-activitymethod
G. Double-declining-balance method H. MACRS
I. Revenueexpenditure J. Capital expenditure

1. Small expenditures which primarily benefit the current period.

2. Cost less accumulated depreciation.

3. An accelerated depreciation method used for financial statement purposes.

4. Tangibleresources that are used in operations and are not intended for resale.

5. Equal amount of depreciation each period.

6. Expectedcash value of the asset at the end of its useful life.

7. Allocationof the cost of a plant asset to expense over its useful life.

8. Material expenditures which increase an asset’s operating efficiency, productive capacity, or useful life.

9. An accelerated depreciation method used for tax purposes.

10. Useful life is expressed in terms of units of production or expected use.

Set 2

283. Match the items below by entering the appropriate code letter in the space provided.

A. Gain on disposal B. Loss on disposal C. Trademark
D. Depletion E. Useful life
F. Asset turnover ratio G. Goodwill
H. Amortization
I. Intangibleasset
J. Researchand development costs

1. Processof allocating the cost of an intangible asset to expense over its useful life.

2. Is only recorded when an exchange has commercial substance.

3. Examples are franchises and licenses.

4. The allocation of the cost of a natural resource to expense over its useful life.

5. Can be identified only with a business as a whole.

6. A symbol that identifies a particular enterprise or product.

7. When book value of asset is greater than the proceeds received from its sale.

8. Must be expensed when incurred.

9. Indicateshow efficiently a company is able to generate sales with its assets.

10. An estimate of the expected productive life of an asset.

SHORT-ANSWERESSAY QUESTIONS

S-AE 284

The declining-balance method is an accelerated method of depreciation. Briefly explain what is meant by an accelerated method of depreciation and justify the choosing of an accelerated method.

S-AE 285

Identify the factors that are considered in classifying an expenditure as a capital or a revenue expenditure. Are there instances where it may be difficult to classify an expenditure as one or the other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What basis would be used in a decision?

S-AE 286

In general, how does one determine whether or not an expenditure should be included in the acquisition cost of property, plant, and equipment?

S-AE 287

Comment on the validity of the following statements: ―As an asset loses its ability to provide services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.‖

S-AE 288

Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a whole. If goodwill is an intangible asset, why can’t it be sold like other intangible assets such as copyrights and patents? Briefly explain what makes goodwill different.

S-AE 289 (Ethics)

Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis coding and medical practice software including an advanced medical record cross-referencing system. PRS is aggressive in monitoring other firms’ offerings and ensuring that its services are comparable to all others.

Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests a presentation of a competitor’s services. A PRS employee poses as an employee of the client’s office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year.

S-AE 289 (cont.)

In April of this year, PRS began selling a software product substitute before the competitor’s software was released. The competitor, Compu-Med, sued for copyright infringement and won. PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med’s product (since it was prohibited from offering its own version for five years.) This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line of services.

PRS’s accountant, June Bianco, initially recorded the cash payments as “Loss from Lawsuit” and “Product Development,” respectively. However, Fred Nance, the controller, instructed June to create an intangible asset, named “Goodwill” and charge both costs to this account. “We’re protected from another lawsuit as long as this agreement is in effect,” he says. “It’s about as close to goodwill as we’ll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway.”

Required:

1. What are the ethical issues? 2. What should June do?

S-AE 290 (Communication)

The Restor-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbishedto their original condition, at a cost of $75,000.

The project was such a success, that Restor-It decided to purchase another very large home, this time in nearby Joplin, Missouri. A realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Restor-It decided that a modest return was all that was required, and so they agreed to sell. Only afterward did they learn that they had a $10,000 loss on the sale. The president of the company, Jim Herman, does not believe that a loss is possible. “We sold that house for more than we paid for it,” he said. “I know we put some money in it, but we had depreciated it for three years. How in the world can we have a loss?”

S-AE 290 (cont.)

Required:

Write a short memo to Mr. Herman explaining how it would be possible to have a loss. Do not try to use specific numbers for cost or depreciation.