Ch 9 - Long-lived assets

Question 1

Assume that factory equipment is purchased on Nov 6 for $10,000 cash and a $40,000 note payable. Related cash expenditures include insurance during shipping, $500; the annual insurance policy $750; and installation and testing $1000.
A)What is the cost of the equipment?
B) Record these expenditures

Answer 1

A) $50,000 + 500 + 1000 = $51,500.

Equipment 51,500
Prepaid insurance 750
Cash (10,000 + 500 + 750 + 1000) 12,250
Notes payable 40,000

Question 2

What is straight line depreciation?

B) How to calculate annual depreciation expense?

C) When is it most appropriate?

Answer 2

Depreciation expense will be the same for each year of the asset’s useful life.

Cost - residual value = deprecation amount

B) Depreciation amount / estimated useful life = Annual deprecation expense

C) When asset is used quite uniformly throughout its useful life. ie office furniture, fixtures, buildings

Question 3

Diminishing Balance?

Double Diminishing Balance?

Answer 3

Decreasing annual depreciation expense over the assets useful life. Carrying amount diminishes.
Depreciation rate remains constant from year to year, but the rate is applied to a carrying amount that declines each year.

Straight line rate is determined by dividing 100% by the estimated useful life.

100% / useful life in years = deprecation rate
100% / 5 years = 20%

Question 4

Double Diminishing Balance?

Answer 4

Doubles the straight line diminishing balance. The total amount of depreciation over the life of the asset will be the same regardless if straight line or double. For double, it will just be accelerated in the beg.

200% / useful life in years = depreciation rate.
200% / 5 years = 40%

$25,000 carrying amount at beg. of year x 40% = annual depreciation expense of $10,000.

Question 5

How does residual value calculate into the diminishing or double diminishing balance formula?

Answer 5

residual value is not included in the calculation of either the depreciation rate or depreciation expense.

Question 6

JE for recording a vehicle depreciation of $10,000 for the year?

Answer 6

Deprecation expense 10,000

Accumulated depreciation - vehicles 10,000

Question 7

Units of production method would be used when?

Answer 7

Measuring something other than time - units of production. Ie for truck with estimated life of 200,000 km.

Question 8

How to calculate depreciation expense for Units of Production? JJ’s truck has a total estimated life of 200,000km and in the first year truck was driven 30,000. What is the calculated depreciation in the first year? Truck was purchased for $25,000 and expected to have residual value of $2000.

Answer 8

$25,000 - 2000 = 23,000 (total depreciation amount)

$23,000 / 200,000km = $0.115 (depreciation amount per unit)
0.115 x 30,000km = $3,450 (annual depreciation)

Question 9

On Oct 1, 2017 Iron Ski comp. purchases a new snow grooming machine for $52,000. Machine is estimated to have a 5 year useful life and a $4000 residual value. Also estimated to have a total useful life of 6000 hours. It is used 1000 hours in the year ended Dec 31, 2017 and 1,300 hours in the year ended Dec 31, 2018. How much depreciation should Iron ski record in 2017 and 2018 under each deprecation method?
A) straight line
B) double diminishing balance
C) units of production?

Answer 9

2017 2018
Straight line $2,400 9600
Double 5,200 18,720
Units of pro 8,000 10,400

A) 52,000 - 4000 = 48,000/5 = 9600 per year x 3/12 = 2400
B) 200%/5 = 40%. 52,000 x 40% = $20,800 x 3/12 = 5200
2018: 52000 - 5200 = 46,800 x 40% = 18,720
C) 52,000 - 4000 = 48,000 / 6000 hours = $8/unit.
2017: 8 x 1000 = 8000; 2018: 8 x 1,300 = 10,400

Question 10

If an asset requires repairs to maintain the operating efficiency, how are these accounted for?

Answer 10

Debited to repairs expense.

Question 11

What about for additions and improvements that will increase the assets value?

Answer 11

Debit to the appropriate plant, property, or equipment account. The capital expenditure will be depreciated over the remaining life of the original structure and revisions need to occur.

Question 12

If an asset became impaired or was unable to function sooner than expected because say replacement parts were not longer able to be purchased, how would you account for this?

Dec 31, Piniwa reviews its equip. Equip cost 800,000 and accumulated deprecation of $200,000. The recoverable amount is currently $500,000.

Answer 12

Impairment loss 100,000
Accumulated depreciation - equip 100,000

Carrying amount: 800,000-200,000 = 600,000
Recoverable amount: -500,000
= Impairment loss $100,000

Question 13

On Aug 1, 2002 Fine furniture purchased a building for $500,000. Straight line depreciation to allocate the cost of the building, estimating a residual value of $50,000 and a useful life of 30 years. After 15 years of use, on Aug 1, 2017, the company was forced to replace the entire roof at a cost of $25,000 cash. The residual value was expected to remain at $50,000 but the total useful life was expected to increase to 40 years.
A) record depreciation for year ended July 31, 2017
B) the cost of the addition on Aug 1, 2017
C) the depreciation for year ended July 31, 2018

Answer 13

$500,000 - 50,000 / 30 years = $15,000 per year.

A) Depreciation expense 15,000
Accumulated dep - building 15,000

B) Building 25,000
Cash 25,000

C) 15,000 x 15 years = 225,000 acc. dep.
Cost: 500,000
Less: accumulated depreciation 225,000
= 275,000.
Add: capital expenditure + 25,000
=300,000
Less Residual value - 50,000
= 250,000 / 25 (40-15) years = 10,000

Depreciation expense 10,000
Accumulated depreciation-build 10,000

Question 14

Recording disposals of assets steps

Answer 14

1. update depreciation
2. calculate carrying amount (Cost-acc dep)
3. calculate gain or loss (proceeds - carrying amount)
4. record the disposal

Question 15

Andre’s - date of retirement dec 31, 2017. Equipment cost $31,200 and was acquired Jan 2, 2014. Estimated useful life of 4 years with no residual value. Straight line depreciation with annual deprecation expense of $7800.

Say Andre’s retired the equipment on Jan 2, 2017 (after 3rd year) instead of anticipated Dec 31, 2017 and received no proceeds. JE transaction

Answer 15

Carrying Amount: 31,200 - 23,400 acc. depreciation = 7,800

$0 proceeds - carrying amount 7800 = (7,800) loss

Accumulated depreciation - equipment 23,400
Loss on disposal 7,800
Equipment 31,200

Question 16

Assume on Apr 1, 2017 Andres sells office furniture for $15,000 cash. Originally purchased Jan 2, 2013 for $60,200 and it was estimated to last 5 years with residual value of $5000. JE sale

What if it were sold for $9000 instead?

Answer 16

60,200 - 5000 / 5 = $11, 040 per year.
Depreciation expense ($11,040 x 3/12) 2760
Accumulated depreciation- furniture 2760

Cost - acc depreciation = carrying amount
Acc dep = 11,040 x 4 years = 44160+2760 = 46920

60,200 - 46920 = $ 13,280 carrying amount
15,000 - 13,280 = Gain of 1720

Cash 15,000
Accumulated deprecation - furniture 46,920
Gain on disposal 1,720
Furniture 60,200

Cash 9000
Accumulated depreciation - furn 46,920
Loss on disposal 4,280
Furniture 60,200

Question 17

Tangible assets vs intangible assets

Answer 17

Tangible - physical substance like property, plant, equipment, natural resources
Intangible - rights, privileges, competitive advantages. No physical substance

Question 18

Intangible asset criteria

Answer 18

1. It can be separated from the company and sold or
2. It is based on contractual or legal rights

Recorded at cost.

Question 19

Amortization

Answer 19

Depreciation for tangible assets.

Cost less residual value = amortizable amount

Question 20

Goodwill

Answer 20

Represents the value of favorable attributes related to a business that cannot be separated from the company. Like exceptional management, good location, good customer relations, skilled employees, etc.

Cannot be amortized so measured using the companies fair value.

Question 21

John’s company purchased a copyright to a new book series for $15,000 cash on Aug 1, 2016. Books are expected to have a saleable life of 3 years. One year later, the company spends an additional $6000 cash to successfully defend this copyright in court. The year end is July 31.
A) Record the purchase of the copyright Aug 1, 2016
B) Year end amortization July 31, 2017
C) Legal costs incurred Aug 1, 2017
D) Year end Amortization at July 31, 2018

Answer 21

A) Copyrights 15,000
Cash 15000

B) Amortization Expense 5000
Accumulated amortization - copyrights 5000

C) Copyrights 6000
Cash 6000

D) 15,000 - 5000 + 6000 = $16,000 / 2 years = 8,000

Amortization expense 8,000
Accumulated amortization - copyrights 8,000

Question 22

Asura purchased land, building, equipment for $190,000. Lands fair value was 75,000; building 80,000; equipment 50,000. What costs should be debited to the Land account?
A) 74,146 B) 69,512 C) 46,341 D) 75,000

Answer 22

75 + 80 + 50 = 205,000. 75,000 / 205000 = 36.59%
190,000 x 36.58 = 69, 512

B

Question 23

When depreciation is revised:
A) Previous depreciation should be corrected
B) Current and future years depreciation should be revised
C) Only future years depreciation should be revised
D) None of the above

Answer 23

B - current and future years.

Question 24

Oviatt sold equip for $10,000. At that time, equipment had a cost of $45,000 and accumulated depreciation of $30,000. Oviatt should record:
A) $5000 loss on disposal
B) $5000 gain on disposal
C) $15,000 loss on disposal
D) $ 15,000 gain on disposal

Answer 24

A Loss of $5000