A. From the following list, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N).

Purchase of land

Proceeds from sale of land

Gain on sale of land

Purchase of equipment

Depreciation expense

Proceeds from sale of equipment

Loss on sale of equipment

B. From the following list, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N).

Cost incurred to acquire copyright

Proceeds from sale of patent

Gain on sale of patent

Research and development costs

Amortization of patent

C. On January 1, 2010, Jose Company purchased a building for $200,000 and a delivery truck for $20,000. The following expenditures have been incurred during 2012.

• The building was painted at a cost of $5,000.

• To prevent leaking, new windows were installed in the building at a cost of $10,000.

• To improve production, a new conveyor system was installed at a cost of $40,000.

• The delivery truck was repainted with a new company logo at a cost of $1,000.

• To allow better handling of large loads, a hydraulic lift system was installed on the truck at a cost of $5,000.

• The truck’s engine was overhauled at a cost of $4,000.

Required

1. Determine which of those costs should be capitalized. Also identify and analyze the effect of the capitalized costs. Assume that all costs were incurred on January 1, 2010.

2. Determine the amount of depreciation for the year 2010. The company uses the straight-line method and depreciates the building over 25 years and the truck over 6 years. Assume zero residual value for all assets.

3. How would the assets appear on the balance sheet of December 31, 2010?

D. Griffith Delivery Service purchased a delivery truck for $33,600. The truck has an estimated useful life of six years and no salvage value. For purposes of preparing financial statements, Griffith is planning to use straight-line depreciation. For tax purposes, Griffith follows MACRS. Depreciation expense using MACRS is $6,720 in Year 1, $10,750 in Year 2, $6,450 in Year 3, $3,870 in each of Years 4 and 5, and $1,940 in Year 6.

1. What is the difference between straight-line and MACRS depreciation expense each of the sic years?

2. Griffith’s president has asked why you use one method for the books and another for tax calculations. “Can you do this? Is it legal? Don’t we take the same total depreciation either way? He asked. Write a brief memo answering his questions and explaining the benefits of using two methods for depreciation.

E. O’hare Company’s only asset as of January 1, 2012, was a limousine. During 2012, only the following three transactions occurred:

Services of $100,000 were provided on account.

All accounts receivable were collected.

Depreciation on the limousine was $15,000.