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Question 5 Not checked Marked out of 48.00 Flag question Question text Take me to the text Equipment was purchased on December 31, 2012 for $60,000. The asset is expected to last for four years, at which time the estimated residual value will be $10,000. Required a) Prepare a table showing the amount of depreciation expense each year, accumulated depreciation to date and net book value. The company uses straightline depreciation. Do not enter dollar signs or commas in the input boxes. Round all dollar figure answers to the nearest whole number. Yea r Cost of Long-Term Asset 201 3 $60,000 201 4 $60,000 201 5 $60,000 201 6 $60,000 Depreciation Expense $Answer Accumulated Depreciation $Answer $Answer 12,500 $Answer 12,500 $Answer 25,000 $Answer 37,500 22,500 $Answer $Answer 12,500 35,000 $Answer $Answer 12,500 47,500 $Answer $Answer 12,500 Net Book Value 50,000 10,000 b) The asset was sold for $13,000 on the first day of 2017. Prepare the journal entry to record the sale. Enter all debit accounts in alphabetical order. Enter all credit accounts in alphabetical order. Dat e Jan 1 Account Title and Explanation Debit Credit Answer Answer Cash 13,000 Accumulated Depreciation 50,000 Answer Answer Answer Answer Equipment 60,000 Answer Answer Gain on Disposal of Asset 3,000 Sale of equipment for cash c) Using the same purchase information at the beginning of the question, prepare the table assuming that the company used doubledecliningbalance depreciation and the asset had no residual value. Yea r Net Book Value at the Beginning of the Year 201 3 $Answer 201 4 $Answer 201 5 $Answer 201 6 $Answer Depreciation Expense $Answer 60,000 Accumulated Depreciation $Answer $Answer $Answer $Answer $Answer $Answer 15,000 $Answer 52,500 7,500 $Answer 7,500 30,000 45,000 15,000 15,000 $Answer 30,000 30,000 30,000 Net Book Value at the End of the Year $Answer 7,500 $Answer 56,250 3,750 3,750 d) Using the same purchase information and residual value at the beginning of the question, assume that the company uses the unitsofproduction method. The asset can produce one million units. Prepare the depreciation table. This part is still all wrong! Yea r 201 3 Cost of LongTerm Asset $60,000 Units Produced 180,000 Depreciation Expense $Answer Accumulated Depreciation $Answer Net Book Value $Answer 201 4 $60,000 190,000 201 5 $60,000 170,000 201 6 $60,000 260,000 $Answer $Answer $Answer $Answer $Answer $Answer $Answer $Answer $Answer Check Skip to main content Question 9 Not checked Mark 7.00 out of 9.00 Flag question Question text Take me to the text Velma Corporation purchased a large forest for $14 million on January 1, 2016. The company estimates that 9 million board feet of lumber can be harvested. After 10 years, the company will sell the land and expects it to be worth $3 million. Required a) Prepare the journal entry to record the purchase of the forest. Do not enter dollar signs or commas in the input boxes. Dat Account Title and Explanation e Jan 1 Credit Answer Answer Forest Answer Debit 14000000 Answer Cash 14000000 Record the purchase of the forest b) Calculate the unit for each BF to be extracted. Round your answers to 2 decimal places. Unit Cost = $Answer 1.2 per board foot c) During the current year, the company harvested 200,000 board feet. Prepare the journal entry to record the harvesting on December 31, 2016. This is still wrong as well! Sorry Round your answers to the nearest whole number. Date Account Title and Explanation Dec 31 Debit Credit Answer Answer Inventory Answer Answer Accumulated Depletion Record depletion for the year Check Next Chapter 3 Long-Term Assets learning outcomes Identify the characteristics of long-term assets Record the acquisition and changes in the value of property, plant and equipment Apply the three methods of depreciation of property, plant and equipment Account for the gain or loss on disposal of asset and changes in depreciation estimates Account for natural resources Define and account for intangible assets and describe the different types of intangible assets Calculate and interpret asset turnover and return on asset ratios Describe controls related to long-term assets Describe ethical approach related to longterm assets Access ameengage.com for integrated resources including tutorials, practice exercises, the digital textbook and more. Assessment Questions AS-1 ( 1 ) Where are long-term assets listed on the balance sheet? Long-term assets are listed after current assets. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ AS-2 ( 1 ) Define long-term assets. Give an example of a long-term asset. Long-term assets are the assets owned and used by a company as part of normal operations ______________________________________________________________________________ on an ongoing basis. Examples of long-term assets include tangible assets such as machines ______________________________________________________________________________ and vehicles, and intangible assets such as patents and copyrights. ______________________________________________________________________________ ______________________________________________________________________________ 85 Chapter 3 Long-Term Assets AS-3 ( 1 ) What are the three characteristics of long-term assets? Long-term assets must possess all of the following three characteristics. ______________________________________________________________________________ 1. They provide the infrastructure necessary for operating the business. ______________________________________________________________________________ 2. They are expected to be used on an ongoing basis. Typically, an \"ongoing basis\" ______________________________________________________________________________ means longer than one accounting period or one year. ______________________________________________________________________________ 3. They are not intended to be sold to customers. ______________________________________________________________________________ ______________________________________________________________________________ AS-4 ( 2 ) What is meant by a lump sum purchase of assets? How are costs allocated when the purchase of assets is a lump sum purchase? A lump sum purchase occurs when one price is paid for a group of assets. Costs are allocated ______________________________________________________________________________ based on each asset's relative appraised value. The cost of each asset is determined by ______________________________________________________________________________ calculating the appraised value of each asset as a percentage of the total appraised value of ______________________________________________________________________________ all the assets purchased, then applying the percentage to the amount actually paid. ______________________________________________________________________________ ______________________________________________________________________________ AS-5 ( 2 ) After the initial purchase of a long-term asset, additional costs may be incurred. What criteria are used to assess whether these costs are regarded as an expense or an addition to assets? These additional costs must be classified as either betterment or repair. Betterment is added ______________________________________________________________________________ to the value of the asset, while repair is regarded as an expense. ______________________________________________________________________________ To determine whether the additional costs should be classified as betterment or repair, one ______________________________________________________________________________ needs to ask some additional questions. ______________________________________________________________________________ Does the expenditure extend the life of the asset? ______________________________________________________________________________ Does the expenditure improve the productivity of the asset or improve the quality of the ______________________________________________________________________________ asset's output? ______________________________________________________________________________ Does the expenditure reduce operating costs? ______________________________________________________________________________ Is the expenditure a material amount? ______________________________________________________________________________ ______________________________________________________________________________ 86 Long-Term Assets Chapter 3 AS-6 ( 3 ) What is the residual value of a long-term asset? The residual value is the value that management estimates the asset would be worth at the ______________________________________________________________________________ end of its useful life. ______________________________________________________________________________ ______________________________________________________________________________ AS-7 ( 3 ) Name three different methods of calculating depreciation. 1. straight-line ______________________________________________________________________________ 2. declining or double-declining-balance ______________________________________________________________________________ 3. units of production ______________________________________________________________________________ ______________________________________________________________________________ AS-8 ( 4 ) Does a company always receive the estimated salvage value of an asset on disposal? Assuming the asset is fully depreciated, how is the difference between the estimated residual value and the actual salvage value treated? The estimated residual value and actual salvage value received are seldom the same. The ______________________________________________________________________________ difference between the two numbers is recorded as a loss (if estimate is greater than actual), ______________________________________________________________________________ or as a gain (if estimate is less than actual) on disposal. ______________________________________________________________________________ ______________________________________________________________________________ AS-9 ( 4 ) What does the net book value of a long-term asset represent? Does the net book value represent the actual value of the asset? The remaining value (net book value) represents the amount of cost that is yet to be ______________________________________________________________________________ depreciated (expensed). It does not represent the actual value (or market value) of the ______________________________________________________________________________ long-term asset. ______________________________________________________________________________ ______________________________________________________________________________ 87 Chapter 3 Long-Term Assets AS-10 ( 6 ) In which section of the balance sheet are intangible assets found? Intangible assets are found below tangible assets in the long-term assets section of the ______________________________________________________________________________ balance sheet. ______________________________________________________________________________ ______________________________________________________________________________ AS-11 ( 6 ) What is the primary difference between intangible assets and tangible assets? Tangible long-term assets (e.g. PPE) have a physical form while intangible assets do not have a ______________________________________________________________________________ physical form. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ AS-12 ( 6 ) Define intangible assets and describe the costs that are included in calculating their value. Intangible assets are identifiable assets that have no physical form. Their role is often to ______________________________________________________________________________ protect intellectual property from imitation and theft. Much of the cost involved with such ______________________________________________________________________________ assets include either legal fees paid in obtaining necessary documentation, or a purchase ______________________________________________________________________________ price to obtain certain rights from someone else. ______________________________________________________________________________ AS-13 ( 6 ) Define goodwill. Goodwill represents the portion of a company's worth that cannot be determined by book ______________________________________________________________________________ value alone. Goodwill can consist of a recognizable brand name, experienced management, a ______________________________________________________________________________ skilled workforce or a unique product. ______________________________________________________________________________ ______________________________________________________________________________ 88 Long-Term Assets Chapter 3 AS-14 ( 6 ) How is the value of goodwill calculated? Goodwill is calculated by deducting the value of net assets purchased from the cash price ______________________________________________________________________________ paid. ______________________________________________________________________________ ______________________________________________________________________________ AS-15 ( 6 ) What is the major difference between goodwill and other intangible assets? Unlike other intangible assets, goodwill is not identifiable. In other words, goodwill is neither ______________________________________________________________________________ separable from the company nor based on contractual or legal rights. ______________________________________________________________________________ ______________________________________________________________________________ AS-16 ( 5 ) What method is usually used to record the depletion of natural resources? The normal method of depletion used for natural resources is the units-of-production ______________________________________________________________________________ method. ______________________________________________________________________________ ______________________________________________________________________________ AS-17 ( 3 ) How is the per unit amount for units-of-production depreciation calculated? The Per Unit Amount = Total Cost Residual Value Total Units AS-18 ( 6 ) List three examples of intangible assets. Patents, trademarks and copyrights. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 89 Chapter 3 Long-Term Assets AS-19 ( 8 ) How can a company protect the value of its intangible assets? A company should be on the lookout for entities that are using its intangible assets without ______________________________________________________________________________ permission because any such use will diminish the value of the intangible assets. All proper ______________________________________________________________________________ legal avenues should be pursued to defend the assets. ______________________________________________________________________________ AS-20 ( 9 ) True or False: In the year that a company has high taxable income, its accountant should help to minimize the company's tax obligations by classifying long-term asset items as expense items. False. Recording items in a way that does not reflect their true nature is an ethical breach and ______________________________________________________________________________ should always be avoided. Tax evasion is also illegal. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ AS-21 ( 4 ) What is impairment? Impairment occurs when an asset's recoverable amount drops to a point that is below its net ______________________________________________________________________________ book value. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ AS-22 ( 4 ) What is the recoverable amount when it comes to asset impairment? An asset's recoverable amount is equal to the asset's market price less costs of disposal, or its ______________________________________________________________________________ future value for the company, whichever is higher. ______________________________________________________________________________ ______________________________________________________________________________ 90 Long-Term Assets Chapter 3 AS-23 ( 5 ) In a natural resource company, what do assets under construction mainly represent? The processes involved with developing and getting the resource (i.e. the mine) ready for ______________________________________________________________________________ use may take more than one year. All costs involved in preparing resources for extraction are ______________________________________________________________________________ capitalized; for instance, costs such as expenses in constructing equipment used in mining ______________________________________________________________________________ natural resources. The costs associated with constructing assets that have not been finished ______________________________________________________________________________ are capitalized as assets under construction. ______________________________________________________________________________ AS-24 ( 5 ) True or False: Depletion of assets should start as soon the asset is under construction. False. Depletion or depreciation does not start until the asset under construction is complete ______________________________________________________________________________ and the asset is ready for its intended use. ______________________________________________________________________________ ______________________________________________________________________________ AS-25 ( 4 ) Where does an impairment loss appear on the income statement? An impairment loss should be recorded as part of the operating expenses on the income ______________________________________________________________________________ statement. ______________________________________________________________________________ ______________________________________________________________________________ AS-26 ( 7 ) What does the asset turnover ratio measure? This ratio measures how quickly a company converts its total assets into revenue. ______________________________________________________________________________ ______________________________________________________________________________ AS-27 ( 7 ) What does the return on assets ratio measure? This ratio measures whether the company is making enough profit from investment in its total ______________________________________________________________________________ assets. ______________________________________________________________________________ 91 Chapter 3 Long-Term Assets Application Questions Group A AP-1A ( 2 ) Prepare the journal entry for the purchase of machinery worth $200,000 (on credit) on March 6, 2016. Date Mar 6 Account Title and Explanation Debit Machinery Credit 200,000 Accounts Payable 200,000 Record the purchase of machinery AP-2A ( 3 ) Prepare the journal entry to record depreciation of $2,000 for a long-term asset on February 29, 2016. Date Feb 29 Account Title and Explanation Debit Depreciation Expense Credit 2,000 Accumulated Depreciation 2,000 Record the depreciation of long-term assets AP-3A ( 2 ) Land, building and equipment were purchased for a total amount of $800,000 on May 25, 2016. The assessed values of these purchases were, Land$600,000; Building$300,000; Equipment$100,000. Calculate the cost of each asset by filling in the following table, and write the journal entry that records the purchase. Item Land Building Equipment Total 92 Assessment Percent Applied to Cost $600,000 60% $480,000 300,000 30% 240,000 100,000 10% 80,000 $1,000,000 100% $800,000 Long-Term Assets Chapter 3 Date May 25 Account Title and Explanation Debit Land 480,000 Building 240,000 Equipment Credit 80,000 Cash 800,000 Record the purchase of land, building and equipment AP-4A ( 3 4 ) On July 1, 2008, Bob's Juice Factory purchased a bottle-sealing machine for $102,000. The machine had an estimated useful life of 10 years and is expected to have no residual value. Assume that the company has adopted a partial-year depreciation policy, where depreciation is taken on a monthly basis. Required a) Fill in the table below using the following facts: The company uses straight-line depreciation. The company's fiscal year-end is December 31. The company stopped using this machine on November 1, 2016, when it was traded for a new machine. Depreciation Expense Accumulated Depreciation To Date Year Cost of Long-Term Asset 2008 $102,000 $5,100 $5,100 $96,900 2009 102,000 10,200 15,300 86,700 2010 102,000 10,200 25,500 76,500 2011 102,000 10,200 35,700 66,300 2012 102,000 10,200 45,900 56,100 2013 102,000 10,200 56,100 45,900 2014 102,000 10,200 66,300 35,700 2015 102,000 10,200 76,500 25,500 2016 102,000 8,500 85,000 17,000 Net Book Value 93 Chapter 3 Long-Term Assets b) On November 1, 2016, Bob's Juice Factory traded the old bottle-sealing machine for a new machine. The price tag on the new machine is $130,000. In return for the old machine that Bob's Juice Factory is giving up, the supplier of the new machine agrees to take $30,000 off the price of the new machine even though the fair value of the old machine on the day of the trade is only $20,000. Record the journal entry for the machine exchange. Date Nov 1 Account Title and Explanation Machine (new) Accumulated DepreciationMachine Debit Credit 120,000 85,000 Bottle-Sealing Machine 102,000 Cash 100,000 Gain on Disposal of Asset 3,000 Record exchange of bottle-sealing machine Analysis What is a drawback of using the straight-line depreciation method? The straight-line depreciation method allocates equal amounts of depreciation every period. The net book value of a long-term asset does not always decrease by the same amount each year. For many long-term assets, the largest decrease in net book value occurs in the first few years. 94 Long-Term Assets Chapter 3 AP-5A ( 3 4 ) Equipment was purchased on December 31, 2012 for $50,000. The asset is expected to last for four years, at which time the estimated residual value will be $10,000. Required a) Prepare a table showing the year, the cost of the asset, the amount of depreciation expense each year, accumulated depreciation to date and net book value. The company uses straight-line depreciation. Depreciation Expense Accumulated Depreciation To Date Year Cost of Long-Term Asset 2013 $50,000 $10,000 $10,000 $40,000 2014 50,000 10,000 20,000 30,000 2015 50,000 10,000 30,000 20,000 2016 50,000 10,000 40,000 10,000 Net Book Value b) The asset was sold for $12,000 cash on the first day of 2017. Prepare the journal entry to record the sale. Date Jan 1 Account Title and Explanation Debit Cash 12,000 Accumulated DepreciationEquipment 40,000 Equipment Credit 50,000 Gain on Disposal of Asset 2,000 Sale of equipment for cash c) Using the same purchase information at the beginning of the question, prepare the table assuming that the company used double-declining-balance depreciation and the asset had no residual value. Year Net Book Value at the Beginning of the Year Depreciation Expense Accumulated Depreciation To Date Net Book Value at the End of the Year 2013 $50,000 $25,000 $25,000 $25,000 2014 25,000 12,500 37,500 12,500 2015 12,500 6,250 43,750 6,250 2016 6,250 3,125 46,875 3,125 95 Chapter 3 Long-Term Assets d) Using the same purchase information and residual value at the beginning of the question, assume that the company uses the units-of-production method. The asset can produce one million units. Record of production: year 2013300,000 units; year 2014250,000; year 2015300,000 units; year 2016100,000 units. Prepare a table showing the year, the cost of the asset, the amount of depreciation expense each year, accumulated depreciation to date and net book value. (Hint: Depreciate the cost of the asset minus its residual value.) Depreciation Expense Accumulated Depreciation To Date Year Cost of Long-Term Asset 2013 $50,000 $12,000 $12,000 $38,000 2014 50,000 10,000 22,000 28,000 2015 50,000 12,000 34,000 16,000 2016 50,000 4,000 38,000 12,000 Net Book Value Analysis Since the double-declining balance method for depreciation allows charging higher depreciation in the first few years, some business owners may want to use this method for all assets. Is it appropriate to use this method for all assets? It is not always appropriate to use the double-declining balance method for depreciation. The business should choose a depreciation method that best reflects the nature of the asset involved. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 96 Long-Term Assets Chapter 3 AP-6A ( 3 ) On January 1, 2013 a long-term asset was purchased for $50,000. The asset was expected to last for four years (with an estimated residual value of $10,000). For the first two years, the company used the double-declining-balance. Suppose the company decides to switch to the straight-line method after recording the depreciation expense for 2014. Calculate the depreciation expense for the years 2015 and 2016. Amounts at the End of 2014 Cost 50,000 Accumulated Depreciation 37,500 Net Book Value 12,500 Less : Residual Value 10,000 Remaining to be Written off 2,500 Depreciation2015 1,250 Depreciation2016 1,250 2,500 AP-7A ( 3 4 ) On December 31, 2010, Tiesto Company purchased equipment worth $150,000. The equipment has a useful life of six years and no residual value. Depreciation is recorded beginning a month after acquisition and will be recorded up until the month of disposal. The company uses the straight-line method of depreciation. Required a) Given that the company's year-end is December 31, complete the following table. Depreciation Expense Accumulated Depreciation To Date Year Cost of Long-Term Asset Net Book Value 2011 $150,000 $25,000 $25,000 $125,000 2012 150,000 25,000 50,000 100,000 2013 150,000 25,000 75,000 75,000 2014 150,000 25,000 100,000 50,000 2015 150,000 25,000 125,000 25,000 2016 150,000 25,000 150,000 0 97 Chapter 3 Long-Term Assets b) On June 30, 2016, Tiesto Company sold the equipment for $3,000. Prepare a journal entry to record the depreciation on the disposal and the sale. You will need to recalculate the depreciation expense for 2016 from part a) to account for the sale part-way during the year. Date Jun 30 Account Title and Explanation Cash Debit Credit 3,000 Depreciation Expense 12,500 Accumulated DepreciationEquipment Loss on Disposal of Asset 125,000 9,500 Equipment 150,000 To record the sale of equipment at $3,000 Analysis The owner of Tiesto Company believes that the loss on sale of equipment indicates that the company has made a mistake while calculating depreciation. Do you agree or disagree? Explain. Since estimates are used to calculate depreciation, a gain or loss on the disposal of a longterm asset is not necessarily due to a mistake. As long as the estimates were made with the best information available at the time, no mistake was made. AP-8A ( 3 4 ) At the beginning of 2015, an entrepreneur purchased a group of assets as a \"bulk purchase\" at an auction sale. The entrepreneur paid $250,000 \"as is\" for two automobiles, a widget machine, a forklift truck and a trailer. The items were valued by a professional appraiser as follows. Item 98 Estimated Value Percentage Estimated Remaining Life Auto 1 $10,000 3.22% 3 Years Auto 2 15,000 4.84% 5 Years Widget Machine 258,000 83.23% 15 Years Forklift 15,000 4.84% 5 Years Trailer 12,000 3.87% 10 Years Total 310,000 100% Long-Term Assets Chapter 3 After the auction, the entrepreneur had the machine moved to the factory. Moving the widget machine cost $2,000. After the machine was placed in the factory, an electrician was contracted to install additional power lines and hook up the machine at a cost of $1,000. A plumber was also needed to connect the machine to the water mains. This cost $500. A gas fitter was required to connect the widget machine to the gas line at a cost of $200. Before placing Auto 1 and 2 into use, the entrepreneur took both autos to the local repair shop. The mechanic said that Auto 1 needed a new engine that would cost $2,000 and Auto 2 needed a major tune-up at a cost of $500 (the tune-up is required to get the car going). The entrepreneur paid cash for the repairs. Early in 2016, the entrepreneur advertised and sold Auto 1 for $8,000 and replaced the front brakes on Auto 2 for $300. The entrepreneur's company uses a half-year method for depreciation (i.e. year's depreciation in the year of purchase, and year's depreciation in the year of sale). The company uses straight-line depreciation, with an estimated residual value of 10% of cost for all assets. Required Write the journal entries to record the following. a) Using straight-line depreciation method, record all journal entries related to the above transactions. When allocating a bulk purchase, round up to the nearest dollar. If necessary, adjust the largest number up or down to avoid journal entry imbalance due to rounding. Note: The exact journal entry dates can be omitted for the purpose of this exercise. Simply indicate if each transaction belongs to 2015 or 2016. Show your calculations in the space provided on the following page. Date 2015 Account Title and Explanation Debit Auto 1 (3.22% 250,000) 8,050 Auto 2 (4.84% 250,000) 12,100 Widget Machine (83.23% 250,000) Credit 208,075 Forklift (4.84% 250,000) 12,100 Trailer (3.87% 250,000) 9,675 Cash 250,000 Record assets purchased at auction Widget Machine Cash 3,700 3,700 Paid for moving, electrical, plumbing and gas hook up 99 Chapter 3 Long-Term Assets Date Account Title and Explanation Auto 1 Debit Credit 2,000 Cash 2,000 Paid for new engine before placing into use Auto 2 500 Cash 500 Paid for tune up before placing into use Depreciation ExpenseAuto 1 1,508 Accumulated DepreciationAuto 1 1,508 Record depreciation on Auto 1 for 2015 (8,050 + 2,000 1,005) 3 12 Depreciation ExpenseAuto 2 1,134 Accumulated DepreciationAuto 2 1,134 Record depreciation on Auto 2 for 2015 (12,100 + 500 1,260) 5 12 Depreciation Expense - Widget Machine 6,353 Accumulated DepreciationWidget Machine 6,353 Record depreciation of Widget Machine [(208,075 + 3,700) (20,807 + 370)] 15 1/2 Depreciation Expense - Forklift 1,089 Accumulated DepreciationForklift 1,089 Record depreciation of Forklift for 2015 (12,100 1,210) 5 1/2 Depreciation Expense - Trailer Accumulated DepreciationTrailer Record depreciation of Trailer for 2015 (9,675 968) 10 1/2 100 435 435 Long-Term Assets Chapter 3 Date 2016 Account Title and Explanation Depreciation ExpenseAuto 1 Debit Credit 1,508 Accumulated DepreciationAuto 1 1,508 Depreciation of Auto 1 for 2016 (8,050 + 2,000 1,005) 3 x = 1,508 Cash 8,000 Accumulated DepreciationAuto 1 3,016 Gain on Disposal of Asset 966 Auto 1 10,050 Record the sale of Auto 1 Auto Repairs Expense 300 Cash 300 Record the repairs for Auto 2 b) Using the double-declining-balance depreciation method, redo the journal entries for the depreciation of the Trailer for 2015 and 2016. Note: the exact journal entry dates can be omitted for the purpose of this exercise. Simply indicate if each transaction belongs to 2015 or 2016. Show your calculations in the space provided on the following page. Date 2015 Account Title and Explanation Depreciation ExpenseTrailer Debit Credit 968 Accumulated DepreciationTrailer 968 Record the depreciation expense for the year (100% 10 = 10% 2 = 20%; 9,675 20% ) 2016 Depreciation ExpenseTrailer Accumulated DepreciationTrailer 1,741 1,741 Record the depreciation expense for the year [(9,675 968) 20%] 101 Chapter 3 Long-Term Assets Calculations Bulk Purchase Auto 1 2015 8,050.00 Tune Up 2,000.00 Book Value 10,050.00 Residual 10% 1,005.00 Less Residual Less Residual Div by Yrs Yrs 9,045.00 3 Auto 1 2016 3,015.00 Half Yr Method Round 1,507.50 1,508 3,015.00 3,015 Auto 2* 12,100.00 500.00 12,600 1,260.00 11,340.00 5 2,268.00 1,134.00 1,134 Widget 208,075.00 3,700.00 211,775.00 21,177.50 190,597.50 15 12,706.50 6,353.25 6,353 Fork Lift 12,100.00 0.00 12,100.00 1,210.00 10,890.00 5 2,178.00 1,089.00 1,089 9,675 0.00 9,675.00 967.50 8,707.50 10 870.75 435.38 435 Trailer *Note $300 for brakes classed as maintenance, not capital Note $500 for tune up needed to get the car going is capital Note that the percentages shown with the problem were used for calculations. These are rounded values. If students do not round the percentages, the values will be slightly different. AP-9A ( 6 ) Feggins Company purchased a patent from Marquette Limited for $200,000 on January 1, 2016. The patent has a remaining life of six years. Required a) Prepare the journal entry to record the purchase. Date Jan 1 Account Title and Explanation Patents Debit Credit 200,000 Cash 200,000 Record the purchase of patents for cash b) Prepare the journal entry to record amortization for one year on December 31, 2016. The company does not use the half-year rule. Assume the straight-line method of depreciation is used. Date Dec 31 Account Title and Explanation Amortization ExpensePatents Accumulated AmortizationPatents Record the amortization for the year (200,000 6) 102 Debit Credit 33,333 33,333 Long-Term Assets Chapter 3 AP-10A ( 6 ) Mirabella Manufacturing spent several years developing a process for producing widgets. Its lawyer suggested patenting the process. The company obtained the patent on January 1, 2016. The company paid $100,000 to the lawyer, $25,000 to the government for the patent and $10,000 in additional fees. Required a) Prepare the journal entries to record the cost of the patent. Date Jan 1 Account Title and Explanation Patents Debit Credit 100,000 Cash 100,000 Paid to lawyer Jan 1 Patents 25,000 Cash 25,000 Paid to Government Jan 1 Patents 10,000 Cash 10,000 Record other fees paid b) The patent has a life of 20 years. Prepare the journal entry to amortize the patent for one year on December 31, 2016. Date Dec 31 Account Title and Explanation Amortization ExpensePatents Accumulated AmortizationPatents Debit Credit 6,750 6,750 Amortization for the year (100,000 + 25,000 + 10,000) 20 Some students may choose to credit the patent account directly, which is also correct. 103 Chapter 3 Long-Term Assets AP-11A ( 5 ) Turpen Corporation purchased a large forest for $12 million on January 1, 2016. Turpen estimates that 10 million board feet (BF) of lumber can be harvested. After 10 years, Turpen will sell the land and expects it to be worth $2 million. Required a) Record the journal entry for the purchase of the forest. Date Jan 1 Account Title and Explanation Forest Debit Credit 12,000,000 Cash 12,000,000 Record the purchase of forest b) Calculate the unit cost for each BF to be extracted. Unit cost\t= Total cost residual value total units ______________________________________________________________________________ = ($12,000,000 $2,000,000) 10,000,000 ______________________________________________________________________________ = $1 per board foot. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ c) During the current year, the company harvested 500,000 board feet. Record the journal entry to record the harvesting on December 31, 2016. Date Dec 31 Account Title and Explanation Inventory Accumulated DepletionForest Record depletion for the year 104 Debit Credit 500,000 500,000 Long-Term Assets Chapter 3 AP-12A ( 6 ) John Partington purchased assets ($500,000) and liabilities ($400,000) of a company, for which he paid $150,000 on August 6, 2016. The company owns the rights to a unique product. Required a) Record the purchase transaction. Date Aug 6 Account Title and Explanation Goodwill Assets Debit Credit 50,000 500,000 Liabilities 400,000 Cash 150,000 Record the purchase of assets and liabilities for $150,000 cash b) Subsequent to the purchase of the company, a competitor appeared. On December 31, 2016, John assessed that the value of the goodwill that his company owned was now worth $20,000. Record the appropriate journal entry to reflect the reduction in the value of goodwill. Date Dec 31 Account Title and Explanation Loss on Impairment of Goodwill Goodwill Debit Credit 30,000 30,000 Record the impairment of Goodwill 105 Chapter 3 Long-Term Assets AP-13A ( 3 ) On July 1, 2015, Earth Corporation purchased factory equipment for $150,000. The equipment is to be depreciated over eight years using the double-declining-balance method. Earth Corporation's year-end is on September 30. Calculate the depreciation expense to be recorded for the year 2016. Earth Corporation depreciates its assets based on the number of months it owned the asset during the year. 2015 Depreciation (150,000 x 25% x 3/12) 2016 Depreciation ((150,000 9,375) x 25%) $9,375 $35,156 AP-14A ( 6 ) On February 1, 2016, Eastern Company acquired the assets ($800,000) and liabilities ($500,000) of Newton Corporation. The agreed purchase price is $500,000 in cash. Prepare a journal entry to record the purchase. Date Feb 1 Account Title and Explanation Debit Assets 800,000 Goodwill 200,000 Credit Liabilities 500,000 Cash 500,000 Purchase of net assets and recognition of goodwill AP-15A ( 6 ) On January 1, 2016, Lava Company purchased a $90,000 patent for a new consumer product. However, the patent's useful life is estimated to be only 10 years due to the competitive nature of the product. Required a) Prepare a journal entry to record the purchase. Date Jan 1 Account Title and Explanation Patent Cash To record the purchase of patent 106 Debit Credit 90,000 90,000 Long-Term Assets Chapter 3 b) Prepare a journal entry to record the amortization on December 31, 2016. Date Dec 31 Account Title and Explanation Debit Amortization ExpensePatent Credit 9,000 Accumulated AmortizationPatent 9,000 To record amortization for patent AP-16A ( 7 ) The following data pertains to Krips Company for the year ended December 31, 2016. Net Sales Net Income Total Assets (January 1, 2016) Total Assets (December 31, 2016) $60,000 15,000 200,000 300,000 Calculate Krips Company's return on assets for 2016. Explain what the ratio means. Return on Assets = Net Income Average Total Assets = $15,000 $250,000 = 6% Return on assets ratio is used to evaluate if the company is making enough money from investment in its assets. A higher ratio indicates better performance. For Krips Company, return on assets of 6% suggests the company is earning $0.06 of net income for every $1 of investment in the total assets. 107 Chapter 3 Long-Term Assets AP-17A ( 3 4 ) Details of some of Stark Corporation's long-term assets are listed below. Date of Purchase Feb 1, 2013 Sep 1, 2013 Asset Building Truck Residual Value $25,000 $4,600 Cost $370,600 $51,400 Estimated Useful Life 8 years 6 years On August 1, 2016, Stark Corporation decides to dispose of both of these assets. The total proceeds received for the assets were $246,000. Both assets use the straight-line depreciation method based on the number of months owned in the year. Stark Corporation has a December 31 year-end. Round all answers to the nearest whole number. Required a) Prepare the depreciation table. Year Cost of Long-Term Asset Building Depreciation Expense Accumulated Depreciation Net Book Value 2013 $370,600 $39,600 $39,600 $331,000 2014 370,600 43,200 82,800 287,800 2015 370,600 43,200 126,000 244,600 2016 370,600 25,200 151,200 219,400 Truck 2013 51,400 2,600 2,600 48,800 2014 51,400 7,800 10,400 41,000 2015 51,400 7,800 18,200 33,200 2016 51,400 4,550 22,750 28,650 b) Prepare the journal entry to record the disposal of the assets. Date Credit Aug 1 Cash 246,000 Accumulated DepreciationBuilding 151,200 Accumulated DepreciationTruck 22,750 Loss on Disposal of Asset 2,050 Building 370,600 Truck 51,400 108 Debit Account Title and Explanation To record the disposal of building and truck Long-Term Assets Chapter 3 AP-18A ( 2 ) On September 8, 2016, Swanson Corporation purchased the following assets: land, machinery and a building. The appraised values of the assets were $1,000,000 for land, $200,000 for machinery and $800,000 for the building. The total purchase price of all three assets was $1,700,000. Swanson paid cash of $365,400 and signed a note payable for the remaining balance. Required a) Complete the table to determine the cost of the assets. Item Appraised Land Percent Applied to Cost $1,000,000 50% $850,000 Machinery 200,000 10% 170,000 Building 800,000 40% 680,000 $2,000,000 100% $1,700,000 Total b) Prepare the journal entry to record the purchase. Date Sep 8 Debit Account Title and Explanation Credit Land 850,000 Machinery 170,000 Building 680,000 Cash 365,400 Notes Payable 1,334,600 To record the purchase of assets 109 Chapter 3 Long-Term Assets AP-19A ( 3 ) A new machine for a bottle factory was purchased in February 2013 for $900,000. The machine has an estimated production capacity of 1,500,000 bottles and no residual value. The machine produced the following number of bottles over the past four years: 2013 - 420,000 bottles, 2014 - 405,000 bottles, 2015 - 390,000 bottles, 2016 - 315,000 bottles. Assuming the company uses the units-of-production method, complete the following table. Depreciation Expense Accumulated Depreciation To Date Year Cost of Long-Term Asset 2013 $900,000 $252,000 $252,000 $648,000 2014 900,000 243,000 495,000 405,000 2015 900,000 234,000 729,000 171,000 2016 900,000 171,000 900,000 0 Net Book Value Note: The depreciation expense for 2016 is limited to $171,000 to prevent the machine's value dropping below $0. AP-20A ( 3 4 ) On December 31, 2016, a company had the following information reported in their balance sheet. Equipment $400,000 Accumulated DepreciationEquipment (320,000) The equipment was donated to a charity. The equipment was valued at its current net book value. Prepare the journal entry to record the donation. Date Dec 31 Account Title and Explanation Accumulated DepreciationEquipment Donation Expense Equipment Disposal of equipment by donation 110 Debit Credit 320,000 80,000 400,000 Long-Term Assets Chapter 3 AP-21A ( 5 ) Metallic Inc. is an international producer of aluminum through bauxite mining. It recently spent $5,000,000 cash to purchase a mine with an estimated residual value of zero. The company also incurred additional expenditures of $700,000 in preparing the mine for the extraction of bauxite. Metallic Inc. expects to use this mine for eight years with an expected capacity of 200,000 tons of bauxite over that time. Required a) Prepare the journal entry to record the purchase of the bauxite mine. Date Jan 1 Account Title and Explanation Bauxite Mine Debit Credit 5,700,000 5,700,000 Cash Record the purchase of the bauxite mine b) Calculate the unit cost for each ton of bauxite to be extracted. Estimated cost per ton = (Total cost residual value) total units ______________________________________________________________________________ = $5,700,000 200,000 ______________________________________________________________________________ = $28.50 per ton of bauxite. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ c)\t\u0007Metallic Inc. extracted 15,000 tons of bauxite in the first year. Prepare the journal entries to record the depletion for this year. Date Dec 31 Account Title and Explanation Inventory Accumulated Depletion - Bauxite Mine Debit Credit 427,500 427,500 Record depletion for the year 111 Chapter 3 Long-Term Assets AP-22A ( 3 4 ) ReHear Company is in the business of producing and selling hearing aid technology. As a result of recent advances in this type of technology, the company decided to test its factory equipment for impairment. Four years ago, the equipment was purchased for $520,000 with an estimated residual value of $40,000. The equipment is expected to have a useful life of 15 years and four years of depreciation have been recorded up to the impairment test. The company uses straightline depreciation. Required a) What is the net book value of the equipment at the end of this year? Net Book Value = Original Cost Accumulated Depreciation = $520,000 $128,000 = $392,000 ______________________________________________________________________________ Accumulated Depreciation = 4 years $32,000 = $128,000 ______________________________________________________________________________ Yearly Depreciation Expense = ($520,000 $40,000) 15 = $32,000 ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ b) Was it required for ReHear to implement an impairment test for its equipment? Why? Yes. Based on either IFRS or ASPE, whenever a company becomes aware of an impairment ______________________________________________________________________________ indication for its property, plant and equipment (i.e. changes in technology that have ______________________________________________________________________________ negative impacts on the older-technology asset's market price), an impairment test must be ______________________________________________________________________________ implemented. ______________________________________________________________________________ ______________________________________________________________________________ c)\t\u0007Assume ReHear company finds out that the equipment's recoverable amount is $390,000. Is the equipment impaired? If yes, how much is the impairment loss? Impairment Loss = *Net Book Value Recoverable Amount = $392,000 $390,000 = $2,000 ______________________________________________________________________________ *Net book value is calculated in part a) for $392,000 ______________________________________________________________________________ Yes, the equipment is impaired. The net book value is larger than the recoverable amount by ______________________________________________________________________________ $2,000. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 112 Long-Term Assets Chapter 3 d) Record the journal entry for the impairment loss, if any. Date Dec 31 Account Title and Explanation Loss on Impairment of Equipment Accumulated DepreciationEquipment Record the impairment loss Debit 2,000 Credit 2,000 AP-23A ( 7 ) The following financial data is given for two companies, TIX and SUBA. They are both in the business of selling fresh produce to large supermarkets across North America. Both companies have a year-end of December 31. TIX Company Net Sales Total Assets Net Income Gross Profit December 31, 2015 $2,500,000 $4,700,000 $310,000 $1,000,000 December 31, 2014 $2,250,000 $4,200,000 $300,000 $900,000 SUBA Company Net Sales Total Assets Net Income Gross Profit December 31, 2015 $1,900,000 $1,500,000 $400,000 $855,000 December 31, 2014 $2,200,000 $1,800,000 $421,000 $990,000 Required Based on the information provided, answer the following questions. Round your answers to two decimal places. a) Calculate the asset turnover of each company for 2015. Asset Turnover = Net Sales Average Total Assets Asset turnover of TIX Company for 2015 Average Total Assets = ($4,700,000 + $4,200,000) = $4,450,000 2 Asset Turnover = $2,500,000 $4,450,000 = 0.56 113 Chapter 3 Long-Term Assets Asset turnover of SUBA Company for 2015 Average Total Assets = ($1,500,000 + $1,800,000) = $1,650,000 2 Asset Turnover = $1,900,000 $1,650,000 = 1.15 b) In 2015, which company performed better when it comes to managing assets? Explain. SUBA Company performed better in managing long-term assets in 2015 than TIX Company. ______________________________________________________________________________ SUBA generated more revenue dollars per investment in assets than TIX Company as it had ______________________________________________________________________________ a higher asset turnover ratio. In 2015, SUBA earned $1.15 of revenue for every dollar of total ______________________________________________________________________________ assets as opposed to TIX, which earned only $0.56 for every dollar of assets invested. ______________________________________________________________________________ ______________________________________________________________________________ Analysis TIX uses the straight-line method of depreciation and SUBA uses the double-decliningbalance method of depreciation. Does this affect your ability to compare these two companies? Depreciation method does affect comparison between companies. In this example TIX will have lower depreciation expenses in the early years compared to SUBA. As a result, TIX's net income and carrying value of assets will be higher in the early years compared to SUBA. 114 Long-Term Assets Chapter 3 AP-24A ( 6 ) On February 1, 2016 CN Corporation bought assets and liabilities of Lincoln Inc. for $300,000. CN paid a premium for the purchase because Lincoln Inc. is a recognizable brand in the market. Lincoln had assets of $600,000 and liabilities of $400,000. Required a) Prepare the journal entry for CN Corporation to record the purchase of Lincoln Inc. Date Feb 1 Account Title and Explanation Debit Assets 600,000 Goodwill 100,000 Credit Cash 300,000 Liabilities 400,000 To record the purchase of a company b) Due to an increase in the number of competitors in the market, on December 31, 2016 CN Corporation reviewed all assets for any impairment. It was discovered that the goodwill has a fair market value of only $85,000. Prepare the journal entry to record this impairment to goodwill. Date Dec 31 Account Title and Explanation Loss on Impairment of Goodwill Goodwill Debit Credit 15,000 15,000 To record impairment to goodwill 115 Chapter 3 Long-Term Assets Application Questions Group B AP-1B ( 2 ) On March 1, 2016, Lindt Corp. bought machinery for $250,000 on credit from Super Machines Inc. Prepare the journal entry to record the transaction. Date March 1 Account Title and Explanation Machinery Debit Credit 250,000 Account PayableSuper Machines Inc. 250,000 Record the purchase of machinery AP-2B ( 3 ) On June 1, 2013, new equipment was purchased for use in the factory. The equipment cost $1,200,000 and has a salvage value of $180,000. The equipment has an estimated production capacity of 800,000 units. The equipment produced the following number of units over the past four years: 2013224,000 units, 2014216,000 units, 2015208,000 units, and 2016168,000 units. Assuming the company uses the units-of-production method, complete the following table. Do not round the per unit cost of depreciation in your calculations. Depreciation Expense Accumulated Depreciation To Date Year Cost of Long-Term Asset 2013 $1,200,000 $285,600 $285,600 $914,400 2014 1,200,000 275,400 561,000 639,000 2015 1,200,000 265,200 826,200 373,800 2016 1,200,000 193,800 1,020,000 180,000 Net Book Value Note: the depreciation expense for 2013 is limited to $193,800 to avoid the equipment's value dropping below $180,000. 116 Long-Term Assets Chapter 3 AP-3B ( 2 ) On September 5, 2016, land, building and equipment were purchased for a total amount of $1,300,000. The assessed value of each asset at the time of acquisition is as follows: Land $845,000; Building$325,000; Equipment$455,000. Write the journal entry that records the purchase. Date Sep 5 Account Title and Explanation Debit Building 260,000 Equipment 364,000 Land 676,000 Cash Credit 1,300,000 Purchased long-term assets AP-4B ( 3 4 ) On April 1, 2008, Bob's Juice Factory purchased a new bottle sealing machine for $99,000. The machine had an estimated useful life of 10 years and is expected to have no residual value. Assume that the company has adopted a partialyear depreciation policy, where depreciation is taken on a monthly basis. Required a) Prepare the table using the following facts. The company uses straight-line depreciation. The asset is sold on April 30, 2016 for $31,000. The company's fiscal year-end is December 31. Year Cost of Long-Term Asset Depreciation Expense Accumulated Depreciation To Date Net Book Value 2008 $99,000 $7,425 $7,425 $91,575 2009 99,000 9,900 17,325 81,675 2010 99,000 9,900 27,225 71,775 2011 99,000 9,900 37,125 61,875 2012 99,000 9,900 47,025 51,975 2013 99,000 9,900 56,925 42,075 2014 99,000 9,900 66,825 32,175 2015 99,000 9,900 76,725 22,275 2016 99,000 3,300 80,025 18,975 117 Chapter 3 Long-Term Assets b) Record the journal entry for the sale, assuming that the depreciation for 2016 has already been recorded. Date Apr 30 Account Title and Explanation Debit Accumulated DepreciationMachine 80,025 Cash 31,000 Credit Gain on Disposal of Asset 12,025 Machine 99,000 Sold asset for gain AP-5B ( 3 4 ) Equipment was purchased on January 1, 2016 for $86,000. The asset is expected to last for four years, at which time the estimated residual value will be $7,000. Required a) Fill in the following table, assuming the company uses straightline depreciation. Year Cost of Long-Term Asset Depreciation Expense Accumulated Depreciation To Date Net Book Value 2016 $86,000 $19,750 $19,750 $66,250 2017 86,000 19,750 39,500 46,500 2018 86,000 19,750 59,250 26,750 2019 86,000 19,750 79,000 7,000 b) Fill in the following table, assuming that the company uses the unitsof-production method and that the estimated residual value will be $7,000. The asset is expected to produce a total of 1,010,000 units over four years. The number of units that the asset is expected to produce for each year is: year 2016202,000 units; year 2017252,500 units; year 2018303,000 units; year 2019252,500 units. Year 118 Cost of Long-Term Asset Depreciation Expense Accumulated Depreciation To Date Net Book Value 2016 $86,000 $15,800 $15,800 $70,200 2017 86,000 19,750 35,550 50,450 2018 86,000 23,700 59,250 26,750 2019 86,000 19,750 79,000 7,000 Long-Term Assets Chapter 3 c) Continuing from part b), the business sold the equipment on December 31, 2019 for $9,000 cash. The sale happened after the journal entry to record the year's depreciation. Prepare the journal entry to record the sale of the equipment. Date Dec 31 Account Title and Explanation Cash Debit Credit 9,000 Accumulated DepreciationEquipment 79,000 Gain on Disposal of Asset 2,000 Equipment 86,000 To record sale of equipment for cash AP-6B ( 3 4 ) On January 1, 2014, South Company purchased a machine for $40,000. The residual value was estimated to be $5,000. The machine will be depreciated over five years using the straight-line method. The company's year-end is December 31. Required a) Prepare a depreciation schedule for the machine's useful life using the following table. Depreciation Expense Accumulated Depreciation To Date Year Cost of Long-Term Asset Net Book Value 2014 $40,000 $7,000 $7,000 $33,000 2015 40,000 7,000 14,000 26,000 2016 40,000 7,000 21,000 19,000 2017 40,000 7,000 28,000 12,000 2018 40,000 7,000 35,000 5,000 119 Chapter 3 Long-Term Assets b) At the end of 2018, the company stopped using this machine. Since no one was interested in buying it, the machine was simply discarded. Prepare a journal entry to record the machine's retirement. Date Dec 31 Account Title and Explanation Debit Loss on Disposal of Asset Credit 5,000 Accumulated DepreciationMachine 35,000 Machine 40,000 To record the gain on sale of machine retirement c) Assume that South Company uses the double-declining-balance depreciation method and the machine has no residual value. At the end of 2018, new technology emerged, making the product manufactured by this machine obsolete. After testing for impairment, South Company determines that the fair value of the machine has permanently declined to $50. Prepare a depreciation schedule for the machine's useful life using the following table. Determine whether impairment has incurred, and if so, calculate the amount of impairment loss. Year Net Book Value at the beginning of the year Accumulated Depreciation To Date Net Book Value at the end of the year 2014 $40,000 $16,000 $16,000 $24,000 2015 24,000 9,600 25,600 14,400 2016 14,400 5,760 31,360 8,640 2017 8,640 3,456 34,816 5,184 2018 5,184 2,074 36,890 3,110 Depreciation Expense Impairment has occurred because the machine's fair value falls below its net book value, and ______________________________________________________________________________ the fair value is not expected to recover. Impairment loss is equal to $3,060 (net book value of ______________________________________________________________________________ $3,110 less fair value of $50). ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 120 Long-Term Assets Chapter 3 d) Assume that the company uses the units-of-production method, and the machine can produce 350,000 units. Record of production: 201420,000 units; 201560,000 units; 201670,000 units; 2017100,000 units; 2018100,000 units. Prepare a depreciation schedule for the machine's useful life using the following table. Compare the pattern of depreciation expense resulting from three different depreciation methods in parts a), c) and d). Depreciation Expense Accumulated Depreciation To Date Year Cost of Long-Term Asset Net Book Value 2014 $40,000 $2,000 $2,000 $38,000 2015 40,000 6,000 8,000 32,000 2016 40,000 7,000 15,000 25,000 2017 40,000 10,000 25,000 15,000 2018 40,000 10,000 35,000 5,000 The straight-line method in part a) results in a depreciation expense that is constant every ______________________________________________________________________________ year. The double-declining-balance method in part c) results in a depreciation expense that ______________________________________________________________________________ decreases every year. The units-of-production method in part d) results in a depreciation ______________________________________________________________________________ expense that is variable based on the number of units produced each year. ______________________________________________________________________________ AP-7B ( 3 4 ) MNO Company purchased equipment worth $35,000 on January 1, 2016. The equipment has an estimated five-year service life with no residual value. The company's policy for five-year assets is to use the double-declining-balance method for the first two years of the asset's life and then switch to the straight-line depreciation method. The company's yearend is December 31. Required a) Calculate the depreciation expense on December 31, 2018. 2016 Depreciation (35,000 x 40%) 2017 Depreciation (21,000 x 40%) Accumulated DepreciationDecember 31, 2017 $14,000 8,400 22,400 2018 DepreciationStraight Line Net Book Value/Number of Years = ($35,000 $22,400) 3 = $4,200 121 Chapter 3 Long-Term Assets b) Assume that MNO Company's depreciation policy recognizes only half a year's depreciation in the year of purchase and half a year's depreciation in the year of disposal. The company uses the straight-line method. The asset was sold for $15,000 on May 15, 2018. Prepare a depreciation schedule using the following table. Depreciation Expense Accumulated Depreciation To Date Year Cost of Long-Term Asset Net Book Value 2016 $35,000 $3,500 $3,500 $31,500 2017 35,000 7,000 10,500 24,500 2018 35,000 3,500 14,000 21,000 c) Prepare the journal entry to record the depreciation on the disposal and sale. Date May 15 Account Title and Explanation Cash Depreciation Expense Accumulated DepreciationEquipment Loss on Disposal of Asset Equipment To record the sale of asset for a loss 122 Debit Credit 15,000 3,500 10,500 6,000 35,000 Long-Term Assets Chapter 3 AP-8B ( 3 ) Leonard Corporation acquired a machine in the first week of October 2015 and paid the following bills. Invoice Price Freight In Installation Cost $40,000 5,000 7,000 The estimated useful life of the machine is eight years with no residual value. The company has December 31 as its year-end and uses a straight-line depreciation method to depreciate long-term assets. Leonard Corporation depreciates their assets based on the number of months they owned the asset during the year. Required a) Calculate the book value of the machine on December 31, 2016. Cost (40,000 + 5,000 + 7,000) $52,000 Accumulated Depreciation: 2015 1,625 2016 6,500 Book Value (December 31, 2016) 8,125 $43,875 b) On December 31 2016, the business sold the machine for $40,000. The sale happened after the journal entry to record the year's depreciation. Prepare the journal entry to record the sale of the machine. Date Dec 31 Account Title and Explanation Cash Debit 40,000 Accumulated DepreciationEquipment 8,125 Loss Disposal of Asset 3,875 Equipment Credit 52,000 To record sale of equipment for cash 123 Chapter 3 Long-Term Assets AP-9B ( 6 ) On September 1, 2015, Pat Jarvis purchased assets ($492,000) and liabilities ($422,000) of a company, for which he paid $200,000. The extra amount was paid because the company sells a superior product. Required a) Record the purchase transaction. Date Sep 1 Account Title and Explanation Debit Assets 492,000 Goodwill 130,000 Credit Cash 200,000 Liabilities 422,000 Purchased a company and paid goodwill b) Subsequent to the purchase of the company, a competitor appeared. On August 31, 2016, Pat assessed the value of the goodwill that his company owned was now worth $113,000. Record the appropriate journal entry to reflect the reduction in the value of goodwill. Date Aug 31 Account Title and Explanation Loss on Impairment of Goodwill Goodwill To record impairment of goodwill 124 Debit Credit 17,000 17,000 Long-Term Assets Chapter 3 AP-10B ( 6 ) Higgins Company purchased a patent from Marquette Limited for $283,000 on August 1, 2015. The patent has a remaining life of six years. Required a) Prepare the journal entry to record the purchase. Date Aug 1 Account Title and Explanation Patents Debit Credit 283,000 Cash 283,000 Purchased patent for cash b) Prepare the journal entry to record amortization for one year on July 31, 2016. The company does not use the halfyear rule. Date Jul 31 Account Title and Explanation Amortization Expense Debit Credit 47,167 Accumulated Amortization 47,167 To record amortization on patent AP-11B ( 5 ) On March 1, 2016, Bowser Mining purchased an ore mine for $3,000,000. The company expects to use the mine for five years and expects to extract 100,000 tons of ore over that time. At the end of five years, the residual value is estimated to be $500,000. For the year ended December 31, 2016, the company extracted 16,000 tons of ore. Prepare the journal entry to reco