Handout 8: Accounting for Plant assets Exercise 1: On March 1, 2008, Penner Company acquired real estate on which it planned to construct a small office building. The company paid $80,000 in cash. An old warehouse on the property was razed at a cost of $8,600; the salvaged materials were sold for $1,700. Additional expenditures before construction began included $1,100 attorney's fee for work concerning the land purchase, $5,000 real estate broker's fee, $7,800 architect's fee. Land price 8,600 Instruction: Compute and journalize the acquisition cost for the land. Solution: Land cost $80,000 Old warehouse razing Salvage material sale -1.700 Expenditures before construction began: Attorney fees 1,100 Real estate broker's fees 5,000 Architect' fees (building cost) total 93,000 Cr Journal entry: Land Building Cash Dr 93,000 7,800 100,800 Exercise 2 : Assume that Lenard Company purchases a delivery truck at a cash price of $22000. Related expenditures consist of sales taxes $1320, painting and lettering $500, motor vehicle license $80, and a 3-year accident insurance policy $1600. Instruction: Compute and journalize the acquisition cost for the delivery truck. Chapter 10 Hand our 8 22,000 1,320 500 Solution: Purchase price Sales tax Painting and lettering Motor vehicle license (not included) Prepaid insurance (not included) total Journal entry: Dr Cr Vehicles 23,820 Prepaid insurance 1,600 Truck license expense Cash 25,500 23,820 80 Exercise : 3 The following data for a small delivery truck purchased by Barb's Florists on January 1, 2005. Cost $13,000 Expected salvage value $1000. Estimated useful life(years) Instructions: a) Prepare five years depreciation schedule, using straight line method. b) Journalize the adjusting entry for depreciation expense on Dec. 31, 20021. Solution: a Dep. Schedule: Depreciable Dep. Annual Accumulated *Book Year Cost Rate = Dep. Exp. Dep. Value 2005 2006 2007 2008 2009 * Book value = original cost. accumulated depreciation X X X X X Solution: b Dr Cr Hand out 8 Chapter 10 Exercise: 4 The following data for a small delivery truck purchased by Barb's Florists on January 1, 2005. Cost $13,000 Expected salvage value $1000. Estimated useful life years) Estimated useful life(miles) 100,000 Miles driven: Y1 15,000 miles, Y2 30,000 miles, Y3 20,000 miles, Y4 25,000, Y5 10,000 Instructions: Calculate depreciation expenses for first year, and prepare the depreciation schedule for the estimated useful life using units of activity method. Depreciation schedule: Year Units of activity X *Depreciation '1= Annual depreciation Accumulated **Book depreciation value rate 2005 2006 2007 2008 2009 *Depreciation rate = ($13,000 - 1,000) /100,000 miles = $ 0.12 * Book value - original cost accumulated depreciation Exercise 5: The following data for equipment purchased by Afrah Company on September 1, 2005. Cost $120,000. Expected salvage value $20000 Estimated useful life years) Estimated useful life(units) 1,000,000 Actual units produced 100,000 units during the first year. Instruction: Instructions: calculate depreciation expenses for first year, and prepare the depreciation schedule for the estimated useful life using a) straight line method b) units of activity method. Solution End of Year Annual Accumulated Book = Dep. Exp. Dep. Value x Depreciation. Schedule: Computation Units of Depreciable Year Activities Cost 2005 100000 2006 220000 2007 200000 2008 190000 2009 170000 2010 120000 x x x x x Hand our 8 Chapter 10
