LUELLA ORCHARDS FIXED ASSETS

Luann and Ella Fredricks are sisters who inherited 20 acres on Feb 22, 20x1 of land. The land had been purchased by their great uncle for $200,000, and their neighbor offered to purchase it from them for $400,000. They declined to sell, deciding to turn it into an orchard, called Luella Orchards.

On May 1, 20x1, Luella purchased and planted rootstock (grafted seedlings) for 5 edible apple varietals. These varietals produce edible fruit after 3 full years of planting the seedlings. Because apple trees are not self-pollinating, Luella also planted ornamental crab apple trees as neighboring trees. They planted a total of 100 trees per acre, half to produce apples and half for pollination purposes. The cost of the trees was $20/tree for the first 100 trees and $15/tree for each additional tree, with a flat fee of $20,000 in transportation costs. The trees are required to sit in their pots to acclimate to their new climate for one month. On June 1, 20x1, Luella paid $50,000 in labor and machine rental costs for the initial planting.

Newly planted trees require weekly watering from June to September. The cost of watering is $10,000 for the entire orchard in years 1-3 and drops to $5,000 per year once the trees are well established.

In the first 5 years of production (years 4-8), the trees are expected to produce 400 fruits per tree; after 5 years, production is expected to increase to 800 fruits per tree. Apple trees may live for a total of 80 years, but rarely produce consumable fruit after their 50^th year.

[1] How should Luella record the inheritance of land?

1. Land at $0
2. Land at original historical cost of $200,000
3. Land at $400,000
4. No recording of Land since it was inherited

[2] When should Luella record the purchase of the rootstock?

1. When contract is signed.
2. When trees are delivered.
3. When invoice is received.
4. When invoice is paid.
5. When the trees are planted.

[3] How much should Luella record for the purchase of the rootstock on May 1?

1. $15,250
2. $30,500
3. $25,250
4. $50,500

[4] On June 1, 20x1, planting costs should be:

1. Capitalized (added to rootstock) and depreciated, starting in year 1.
2. Capitalized (added to rootstock) and depreciated, starting in year 4.
3. Capitalized as an indefinite lived asset.
4. Expensed immediately.

[5] The cost of watering the trees in years 1-3 should be:

1. Capitalized (added to rootstock) and depreciated over 3 years.
2. Capitalized (added to rootstock) and depreciated over 47 years.
3. Capitalized (added to rootstock) and depreciated over 50 years.
4. Expensed immediately

[6] The cost of watering the trees in years 4-50 should be:

1. Capitalized (added to rootstock) and depreciated over 3 years.
2. Capitalized (added to rootstock) and depreciated over 47 years.
3. Capitalized (added to rootstock) and depreciated over 50 years.
4. Expensed immediately.

[7] At the end of year 1, the value in the rootstock account, net of accumulated depreciation is:

1. 108,290
2. 110,500
3. 130,500
4. 127,890

[8] At the end of year 3, the value in the rootstock account, net of accumulated depreciation is:

1. 103,870
2. 110,500
3. 130,500
4. 122,670

[9] Would it be acceptable to record higher depreciation expense in later years than in earlier ones?

1. No, depreciation should always be higher in the beginning than at the end.
2. No, depreciation should be straight line.
3. Yes, depreciation can reflect the units of production.
4. Yes, depreciation can be any method that fits the change in the market value of the asset.