Progressive FAR Flashcards
During 2004, Burr Co. had the following transactions pertaining to its new office building:
$60,000 Purchase price of land
2,000 Legal fees for contracts to purchase land
8,000 Architects’ fees
5,000 Demolition of old building on site
3,000 Sale of scrap from old building
350,000 Construction cost of building (at completion)
In Burr’s December 31, 2004 Balance Sheet, what amounts should be reported as the cost of land and cost of building?
Land Building A. $60,000 $360,000 B. $62,000 $360,000 C. $64,000 $358,000 D. $65,000 $362,000
C
$ 60,000 Purchase price of land
2,000 Legal fees for contracts to purchase land
5,000 Demolition of old building on site
(3,000)Sale of scrap from old building
$ 64,000 Total cost reported for land
8,000 Architects' fees 350,000 Construction cost of new building (at completion)
$358,000 Total cost reported for building
Newt Co. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an):
A. Reduction of the cost of the new warehouse.
B. Gain from discontinued operations, net of inc taxes.
C. Part of continuing operations.
D. Extraordinary gain, net of taxes.
C
The gain or loss on the sale of an asset is part of continuing operations as it is expected that a company will sell existing assets from time to time as the assets are replaced.
Derby Co. incurred costs to modify its building and to rearrange its production line. As a result, an overall reduction in production costs is expected. However, the modifications did not increase the building’s market value, and the rearrangement did not extend the production line’s life.
Should the building modification costs and the production line rearrangement costs be capitalized?
Building mod costs Prod line rearrangement costs
A. Yes No
B. Yes Yes
C. No No
D. No Yes
B
The criterion for capitalizing post-acquisition costs is not whether the market value of the overall asset is increased. Rather, the criteria are (1) increase in useful life or (2) increase in productivity or efficiency including cost reduction.
An overall reduction in production costs meets the second criterion. Therefore, both costs are capitalized rather than immediately expensed.
Land was purchased to be used as the site for the construction of a plant. A building on the property was sold and removed by the buyer so that construction on the plant could begin.
The proceeds from the sale of the building should be:
A. Classified as other income.
B. Deducted from the cost of the land.
C. Netted against the costs to clear the land and expensed as incurred.
D. Netted against the costs to clear the land and amortized over the life of the plant.
B
The proceeds from the building removed and sold reduce the cost of the land to the buyer. Had the building been razed, the net razing cost would be added to the land. Compared to the latter situation, the case in the problem results in a cost savings.
On December 1, 2005, East Co. purchased a tract of land as a factory site for $300,000. The old building on the property was razed and salvaged materials resulting from demolition were sold.
Additional costs incurred and salvage proceeds realized during December 2005 were as follows:
$25,000 Cost to raze old building
5,000 Legal fees 4 purchase contract & 2 record ownership
6,000 Title guarantee insurance
4,000 Proceeds from sale of salvaged materials
In East’s December 31, 2005 Balance Sheet, what amount should be reported as land?
A. $311,000
B. $321,000
C. $332,000
D. $336,000
C
$300,000 Land
$25,000 Cost to raze old building
$5,000 Legal Fees
$6,000 Title guarantee insurance
($4,000) Proceeds from sale of salvaged material
$332,000 Total Value of Land
Talton Co. installed new assembly line production equipment at a cost of $185,000. Talton had to rearrange the assembly line and remove a wall to install the equipment. The rearrangement cost was $12,000 and the wall removal cost was $3,000. The rearrangement did not increase the life of the assembly line but it did make it more efficient.
What amount of these costs should be capitalized by Talton?
A. $185,000
B. $188,000
C. $197,000
D. $200,000
D
This response includes all the costs to get the equipment ready for use. The rearrangement costs and the wall removal costs were needed to put the equipment into use. The rearrangement costs made the production more efficient.
Lano Corp.’s forestland was condemned for use as a national park. Compensation for the condemnation exceeded the forestland’s carrying amount. Lano purchased similar, but larger, replacement forestland for an amount greater than the condemnation award.
As a result of the condemnation and replacement, what is the net effect on the carrying amount of the forestland reported in Lano’s Balance Sheet?
A. The amount is increased by the excess of the replacement forestland's cost over the condemned forestland's carrying amount. B. The amount is increased by the excess of the replacement forestland's cost over the condemnation award. C. The amount is increased by the excess of the condemnation award over the condemned forestland's carrying amount. D. No effect, because the condemned forestland's carrying amount is used as the replacement forestland's carrying amount.
A
The two transactions are not related. The land account is decreased by the book value of the land condemned and increased by the cost of the land purchased. The relative magnitudes of the book values are shown below:
award > book value of condemned land
cost of new land > award
Therefore: cost of new land > book value of condemned land
Thus, the land is increased by the net amount: cost of new land-book value of old land
Theoretically, which of the following costs incurred in connection with a machine purchased for use in a company’s manufacturing operations would be capitalized?
Insurance on machine while in transit. Testing and preparation of machine for use.
A. Yes Yes
B. Yes No
C. No Yes
D. No No
A
Both costs should be capitalized because they are costs necessary to place the asset into its intended use and location. Neither should be expensed as incurred.
On October 1, 2004, Shaw Corp. purchased a machine for $126,000 that was placed in service on November 30, 2004. Shaw incurred additional costs for this machine, as follows:
Shipping $ 3,000
Installation 4,000
Testing 5,000
In Shaw’s December 31, 2004 Balance Sheet, the machine’s cost should be reported as:
A. $126,000 B. $129,000 C. $133,000 D. $138,000
D
Every cost listed is a cost necessary to place the asset into its intended condition and location. This is the general rule for capitalizing costs to plant assets.
Thus, all four costs are capitalized to the machine yielding a final capitalized value of $138,000 ($126,000 + $3,000 + $4,000 + $5,000)
Merry Co. purchased a machine costing $125,000 for its manufacturing operations and paid shipping costs of $20,000. Merry spent an additional $10,000 testing and preparing the machine for use.
What amount should Merry record as the cost of the machine?
A. $155,000 B. $145,000 C. $135,000 D. $125,000
A
All three costs are included for a total of $155,000. Both the shipping and testing costs are necessary to place the asset into its intended location and condition for use. This is the criterion for capitalizing costs on acquisition of plant assets.
On December 1, 2005, Boyd Co. purchased a $400,000 tract of land for a factory site. Boyd razed an old building on the property and sold the materials it salvaged from the demolition.
Boyd incurred additional costs and realized salvage proceeds during December 2005 as follows:
Demolition of old building $50,000
Legal fees: purchase contract & recording ownership 10,000
Title guarantee insurance 12,000
Proceeds from sale of salvaged materials 8,000
In its December 31, 2005, Balance Sheet, Boyd should report a balance in the land account of:
A. $464,000 B. $460,000 C. $442,000 D. $422,000
A
Land purchase price $400,000 Plus demolition of old building 50,000 Less salvage proceeds (8,000) Plus title insurance 12,000 Plus legal fees 10,000 Equals recorded land cost $464,000 The net demolition cost is included in land because it is a cost required to prepare the land for its eventual use.
Immediately after a note payable was signed, its present value was $30,000. This note and $20,000 cash were used to acquire a used plant asset at the beginning of the current year. The interest rate implied in the note is 6%. Total interest payments due on the note over its term amount to $4,000. The term exceeds one year. No payments on the note are due during the current year. What amount of interest expense is recognized for the first year (current year) on this note, and what amount is capitalized to the plant asset account?
Interest Expense Capitalized Amount
A. $1,800 $50,000
B. $3,000 $50,000
C. $4,000 $30,000
D. $0 $50,000
A
The interest expense recognized for the first year is .06($30,000) = $1,800. Although no interest is paid, interest is accrued, increasing the carrying value of the note. The asset is capitalized at $50,000, the sum of cash down payment and present value of the note. The interest over the note term is not capitalized because it does not assist in the process of placing the asset into its intended condition and location.
A plant asset under construction by a firm for its own use was completed at the end of the current year. The following costs were incurred:
Materials $60,000
Labor 30,000
Incremental overhead 10,000
Capitalized interest 20,000
The asset has a service life of 10 years, estimated residual value of $10,000, and will be depreciated under the double declining balance method. At completion, the asset was worth $105,000 at fair value. What amount of depreciation will be recognized on the asset in total over its service life?
A. $105,000 B. $120,000 C. $95,000 D. $90,00
C
The sum of the four listed costs is $120,000, which exceeds fair value of $105,000. Therefore, the asset is capitalized at $105,000, the lesser of the two amounts. Subtracting the $10,000 residual value yields $95,000 depreciable cost-the total depreciation over the life of the asset
Plant assets are occasionally acquired by means other than by paying cash. Choose the correct statement about such acquisitions.
A. If equipment is acquired with 100% debt financing, the equipment is capitalized at the sum of all interest and principal payments on the debt.
B. If a building is acquired by issuing an amount of stock that is significant in relation to the amount of stock outstanding before the exchange, the fair value of the building should be used to initially debit the building account.
C. If land is received by a firm as a donation, no amount should be recorded for the land because there is no cost to the firm.
D. If land is acquired as one component of a group of plant assets for a discounted aggregate price, the amount capitalized for the land is its market value.
B
The more objective or readily determinable value is used for recording the building. If the number of shares is significant in relation to the total shares outstanding, the stock price will be affected by the increase in the shares outstanding resulting from the purchase. The more objective value is the appraised value of the building.
Young Corp. purchased equipment by making a down payment of $4,000 and issuing a note payable for $18,000. A payment of $6,000 is to be made at the end of each year for three years. The applicable rate of interest is 8%. The present value of an ordinary annuity factor for three years at 8% is 2.58, and the present value for the future amount of a single sum of one dollar for three years at 8% is .735. Shipping charges for the equipment were $2,000, and installation charges were $3,500. What is the capitalized cost of the equipment?
A. $19,480 B. $21,480 C. $24,980 D. $27,500
C
The capitalized cost is the sum of the down payment, present value of the note payments, and the shipping and installation charges. $4,000 + $6,000(2.58) $2,000 $3,500 = $24,980. The present value of the three payments required on the note is capitalized, which excludes the interest included in those payments. The two charges are capitalized because they were incurred to place the asset into its intended condition and location.
Oak Co., a newly formed corporation, incurred the following expenditures related to land and building:
County assessment for sewer lines $ 2,500
Title search fees 625
Cash paid for land with a building to be demolished 135,000
Excavation for construction of basement 21,000
Removal of old building $21,000 less salvage of $5,000 16,000
At what amount should Oak record the land? A. $138,125 B. $153,500 C. $154,125 D. $175,625
C
The amounts necessary to get the land ready for its intended purpose attach themselves as a part of the total cost of the land. This would be the: $2,500+625+135,000+16,000=$154,125
During 2004, Bay Co. constructed machinery for its own use and for sale to customers. Bank loans financed these assets both during construction and after construction was complete.
How much of the interest incurred should be reported as interest expense in the 2004 Income Statement?
Interest incurred for machinery for own use Interest incurred for machinery held for sale
A. All interest incurred All interest incurred
B. All interest incurred Interest incurred after completion
C. Interest incurred after completion Interest incurred after completion
D. Interest incurred after completion All interest incurred
D
Interest during construction on assets constructed for a firm’s own use is capitalized until construction is complete. Thus, only the interest incurred after completion is expensed.
Interest is capitalized on the construction of assets for sale only if the assets are large, individual, discrete projects, such as ships or real estate developments. The equipment constructed for sale does not appear to be a discrete item in that sense and, thus, none of the interest is capitalized. It is all expensed.
Debt is frequently incurred when plant assets are acquired. For example, debt may be incurred on the purchase of plant assets. Debt may also be incurred during the construction of plant assets. How is the interest in these two cases treated for financial reporting?
Debt for purchase Debt during construction A. expense capitalize B. expense expense C. capitalize capitalize D. capitalize expense
A
Interest on debt incurred when purchasing a plant asset, is incurred after the asset has reached its intended condition and location. Therefore, it is expensed as incurred. Debt incurred during the construction of plant assets is considered avoidable and also incurred before the asset has reached its intended condition and location. Therefore, it is capitalized to the asset in the same way material, labor, and overhead are capitalized. The interest is expensed as part of depreciation during the service life of the asset.
A company obtained a $300,000 loan with a 10% interest rate on January 1, year 1, to finance the construction of an office building for its own use. Building construction began on January 1, year 1, and the project was not completed as of December 31, year 1. The following payments were made in year 1 related to the construction project:
January 1 Purchased land for $120,000
September 1 Progress payment to contractor for $150,000
What amount of interest should be capitalized for the year ended December 31, year 1?
A. $13,500 B. $15,000 C. $17,000 D. $30,000
C
Interest can be capitalized on the accumulated average expenditures during the year. During year 1 the weighted average expenditures were ($120,000 x 12/12) + ($150,000 x 4/12) = $170,000. Interest is capitalized based on the weighted average expenditures times the interest rate of 10% ($170,000 x .10 = $17,000).
A firm began the construction of its new manufacturing facility in January of 20x2. The following expenditures were made on construction in that year: Jan. 1 $40,000 Mar. 1 120,000 Oct. 31 96,000 Debt outstanding the entire year:
6%, $60,000 construction loan
4%, $90,000 note payable not related to construction
6%, $90,000 note payable not related to construction
Compute interest to be capitalized using the specific method (use the construction loan first).
A. $7,000 B. $12,600 C. $8,400 D. $8,190
C
Average accumulated expenditures is $156,000 = $40,000 + $120,000(10/12) + $96,000(2/12). This method uses the specific construction loan first, and then the remaining debt is applied. The nonspecific loans have the same principal balance. Therefore, the weighted average interest rate on those two loans is 5% (the midpoint between 4% and 6%). Capitalized interest = .06($60,000) + .05($156,000-$60,000) = $3,600 + $4,800 = $8,400. The weighted average rate on the two nonspecific loans can also be computed as: [.04($90,000) + .06($90,000)]/($90,000 + $90,000)] = 5%.
Two approaches are available for applying interest rates to average accumulated expenditures for the purpose of capitalizing interest. These approaches are called the specific method and the weighted average method. In some cases, these approaches yield the same results. Two situations may be encountered in practice for a specific period:
(1) average accumulated expenditures exceed total interest bearing debt (principal) and
(2) the interest rates on all interest bearing debt instruments are the same.
Which situation yields the same results for the two approaches?
A. only (1). B. only (2). C. both (1) and (2). D. neither (1) nor (2).
C
When average accumulated expenditures exceeds interest bearing debt, all interest for the period is capitalized because all debt could have been avoided if the construction had not taken place. Also, if the interest rates on all debt are the same, then the two approaches yield the same results because, ultimately, only one interest rate is applied to average accumulated expenditures for computing capitalized interest.
Sun Co. was constructing fixed assets that qualified for interest capitalization. Sun had the following outstanding debt issuances during the entire year of construction:
$6,000,000 face value, 8% interest.
$8,000,000 face value, 9% interest.
None of the borrowings were specified for the construction of the qualified fixed asset. Average expenditures for the year were $1,000,000. What interest rate should Sun use to calculate capitalized interest on the construction?
A. 8.00% B. 8.50% C. 8.57% D. 9.00%
C
Neither debt issuances were identified as the construction loan. Therefore, the interest rate must be determined based on the weighted average of the interest on all of the debt outstanding during the year. The calculation is as follows: $6,0000,000 x .08 = $480,000 $8,000,000 x .09 = $720,000 Totals $14,000,000 $1,200,000 $1,200,000 / $14,000,000 =
At the beginning of the year, Cann Co. started construction on a new $2 million addition to its plant. Total construction expenditures made during the year were $200,000 on January 2, $600,000 on May 1, and $300,000 on December 1. On January 2, the company borrowed $500,000 for the construction at 12%. The only other outstanding debt the company had was a 10% interest rate, long-term mortgage of $800,000, which had been outstanding the entire year. What amount of interest should Cann capitalize as part of the cost of the plant addition? A. $140,000 B. $132,000 C. $72,500 D. $60,000
C
First calculate the Average Accumulated Expenditures (AAE). This gives you the amount of borrowing from which to calculate avoidable interest ($625,000). Next calculate avoidable interest ($72,500) and actual interest (($500,000 x 12%) + ($800,000 x 10%) = $140,000). The amount that can be capitalized is the lesser of the avoidable interest or actual interest. The amount that can be capitalized is $72,500. AAE 200,000 12/12 200,000 600,000 8/12 400,000 300,000 1/12 25,000 625,000 Avoidable interest 500,000 12% 60,000 125,000 10% 12,500 72,500
A firm began the construction of its new manufacturing facility in January of 20x2. The following expenditures were made on construction in that year: Jan. 1 $40,000 Mar. 1 120,000 Oct. 31 96,000 Debt outstanding the entire year:
6%, $60,000 construction loan
4%, $90,000 note payable not related to construction
6%, $90,000 note payable not related to construction
Compute interest to be capitalized using the weighted average method.
A. $6,720 B. $12,600 C. $8,400 D. $8,190
D
Average accumulated expenditures is $156,000 = $40,000 + $120,000(10/12) + $96,000(2/12). This method uses the average interest rate on all interest bearing debt, weighted by principal. That rate is the quotient of the interest on all the debt divided by the principal on all the debt. The rate = ($3,600 + $3,600 + $5,400)/$240,000 = .0525. Interest capitalized = (.0525)$156,000 = $8,190.
A firm is constructing a warehouse for its own use and purchased the land for the site immediately before beginning construction. Interest is capitalized on which of the following:
Warehouse Land A. Yes Yes B. Yes No C. No Yes D. No No
B
The average accumulated expenditures for purposes of capitalizing interest during construction of the warehouse includes the land cost, but the interest is capitalized to the warehouse only. The land is not under construction.
A firm has spent the last two years constructing a building to be used as the firm's headquarters. At the end of the first year of construction, the balance of building under construction was $400,000, which includes capitalized interest. During year two, the firm paid $240,000 to the contractor on March 1, and $600,000 on October 1. The building was not finished by the end of the second year. The firm had one loan outstanding all year, an 8%, $3,000,000 construction loan. Compute capitalized interest for year two. A. $28,000 B. $240,000 C. $60,000 D. $65,600
C
Average accumulated expenditures for the second year = $400,000(12/12) + $240,000(10/12) + $600,000(3/12) = $750,000. Interest capitalized = .08($750,000) = $60,000. Note that the interest capitalized in year one is compounded in year two because year one capitalized interest is included in average accumulated expenditures for the second year.
Cole Co. began constructing a building for its own use in January 2004. During 2004, Cole incurred interest of $50,000 on specific construction debt and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during 2004 was $40,000.
What amount of interest cost should Cole capitalize?
A. $20,000 B. $40,000 C. $50,000 D. $70,000
B
This question requires no calculation. The answer is given in the question.
Capitalized interest is limited to the interest that would have been avoided had the construction not occurred. This is the amount of interest based on average accumulated expenditures.
Average accumulated expenditures for year five on a construction project amounted to $70,000. The total cash invested in the project by the end of year five, was $160,000. During year six, the firm spent another $240,000 (total) on the project, uniformly throughout the year. Compute average accumulated expenditures for year six.
A. $240,000 B. $400,000 C. $190,000 D. $280,000
D
Average accumulated expenditures is the amount of debt for the annual period that could have been avoided. In this case, the firm has $160,000 already invested in the project at the beginning of year six. That amount represents $160,000 in debt, that could have been avoided for year six if the firm had not been involved in the construction project. The expenditures during year six were incurred evenly. Average accumulated expenditures therefore = $160,000(12/12) + $240,000/2 = $280,000. Also, [$160,000 + ($160,000 + $240,000)]/2 = $280,000.
A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable. To account for these events, the owner should:
A. Reduce accumulated depreciation equal to the cost of refurbishing.
B. Record a loss in the current period equal to the sum of the cost of refurbishing and the carrying amount of the damaged portion of the building.
C. Capitalize the cost of refurbishing, and record a loss in the current period equal to the carrying amount of the damaged portion of the building.
D. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building.
C
When the cost and accumulated depreciation of a component or portion of a larger asset is identifiable, and that component or portion is replaced, the replacement is treated as two separate transactions:
(1) disposal of the old component (for zero proceeds in this case, due to the fire damage) and
(2) purchase of the new component.
Thus, a loss equal to the book value of the old component is recognized for (1) and the amount paid to purchase the new component is capitalized as a separate purchase for (2).
Many years after constructing a plant asset, management spent a significant sum on the asset. Which of the following types of expenditures should be capitalized in this instance:
(1) an expenditure for routine maintenance that increases the useful life compared with deferring the maintenance,
(2) an expenditure that increases the useful life of the asset compared with the original estimate assuming normal maintenance at the required intervals,
(3) an expenditure that increases the utility of the asset.
(1) (2) (3) A. Yes Yes Yes B. No Yes Yes C. No No Yes D. No Yes No
B
Post-acquisition expenditures, which increase the useful life (assuming normal maintenance) or the utility (usefulness or productivity) of the asset, are capitalized. Such expenditures provide value for more than one year. The original useful life of an asset assumes regular maintenance. Therefore, regular maintenance does not increase the intended useful life of the asset.
On June 18, 2005, Dell Printing Co. incurred the following costs for one of its printing presses:
Purchase of collating and stapling attachment $84,000
Installation of attachment 36,000
Replacement parts for overhaul of press 26,000
Labor and overhead in connection with overhaul 14,000
The overhaul resulted in a significant increase in production. Neither the attachment nor the overhaul increased the estimated useful life of the press. What amount of the above costs should be capitalized?
A. $0 B. $84,000 C. $120,000 D. $160,000
D
All four costs should be capitalized because they result in an increase in the productivity of the asset. Costs that increase EITHER the life OR productivity are capitalized. Either type of increase results in enhanced asset values. $160,000 is the sum of the four costs listed.
A building suffered uninsured water and related damage. The damaged portion of the building was refurbished with upgraded materials. The cost and related accumulated depreciation of the damaged portion are identifiable.
To account for these events, the owner should:
A. Capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building. B. Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building. C. Record a loss in the current period equal to the cost of refurbishing, and continue to depreciate the original cost of the building. D. Record a loss in the current period equal to the sum of the cost of refurbishing and the carrying amount of the damaged portion of the building.
A
When the portion of an asset that is removed from a larger asset has identifiable costs and accumulated depreciation amounts, those amounts are removed from the books. The difference between these two amounts is the carrying value of the damaged portion of the larger asset. There is no insurance. Therefore, the carrying value of the damaged portion is written off as a loss. The replacement assets are capitalized at cost. The entries are: Portion removed New materials Loss Asset Accumulated depreciation Cash Asset
On January 1, 2005, Dix Co. replaced its old boiler. The following information was available on that date:
Carrying amount of old boiler $ 8,000
Fair value of old boiler 2,000
Purchase and installation price of new boiler 100,000
The old boiler was sold for $2,000. What amount should Dix capitalize as the cost of the new boiler?
A. $92,000 B. $94,000 C. $98,000 D. $100,000
D
The disposal of the old boiler and purchase of the new boiler are separate transactions. The loss on disposal has no effect on the capitalized cost of the new boiler, which is recorded at its $100,000 purchase cost.
Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation computation when using the
Straight-line method Production or use method
A. Yes No
B. Yes Yes
C. No No
D. No Yes
B
When salvage value is excluded from the computation of depreciation, excessive depreciation is recognized each year under BOTH methods. Therefore, income is understated for both methods.
Annual depreciation under straight-line is:
(1/n)(cost-salvage)
where n is the number of years in the useful life.
Annual depreciation under the production method is:
(current year production/tot.est.production)(cost-salvage)
In both cases, if salvage value is excluded from the computation, depreciation is overstated because cost, rather than depreciable cost, is used as the basis for depreciation.
Ichor Co. reported equipment with an original cost of $379,000 and $344,000 and accumulated depreciation of $153,000 and $128,000, respectively, in its comparative financial statements for the years ended December 31, 2005 and 2004.
During 2005, Ichor purchased equipment costing $50,000 and sold equipment with a carrying value of $9,000.
What amount should Ichor report as depreciation expense for 2005?
A. $19,000 B. $25,000 C. $31,000 D. $34,000
C
Net equipment at end of 2004: $344,000-$128,000 = $216,000
Equipment purchase 50,000
Book value of equipment sold (9,000)
Depreciation in 2005 ?
Equals net equipment at end of 2005: $379,000-$153,000 = $226,000
Solving for depreciation yields $31,000 depreciation for 2005.
A manufacturing firm purchased used equipment for $135,000. The original owners estimated that the residual value of the equipment was $10,000. The carrying amount of the equipment was $120,000 when ownership transferred. The new owners estimate that the expected remaining useful life of the equipment was 10 years, with a salvage value of $15,000. What amount represents the depreciable base used by the new owners?
A. $105,000 B. $110,000 C. $120,000 D. $125,000
The purchase price of the asset acquired less its salvage value is the asset’s depreciable cost. In this case, total depreciation on the asset is limited to $120,000 ($135,000 purchase price-$15,000 salvage value). The cost to the seller and the previous salvage value are not relevant to the new owner.
Zahn Corp.’s comprehensive Balance Sheet at December 31, 2005 and 2004 reported accumulated depreciation balances of $800,000 and $600,000, respectively. Property with a cost of $50,000 and a carrying amount of $40,000 was the only property sold in 2005.
Depreciation charged to operations in 2005 was:
A. $190,000 B. $200,000 C. $210,000 D. $220,000
C
The accumulated depreciation on the property sold was $10,000 ($50,000 cost less $40,000 carrying value). The sale of property requires that the accumulated depreciation on the property be removed from the accounts.
Thus, the $10,000 amount is a decrease in accumulated depreciation. With an overall increase of $200,000 in accumulated depreciation during the period ($800,000-$600,000), depreciation must have been $210,000 ($200,000 + $10,000).
In 2002, Spirit, Inc. determined that the 12-year estimated useful life of a machine purchased for $48,000 in January 1997 should be extended by three years. The machine is being depreciated using the straight-line method and has no salvage value. What amount of depreciation expense should Spirit report in its financial statements for the year ending December 31, 2002? A. $2,800 B. $3,200 C. $43,200 D. $4,800
A
This is a change in estimate and is handled currently and prospectively by allocating the remaining book value at the beginning of 2002 over the revised estimate of remaining years at that point. Through the beginning of 2002, the asset has been used five years. Therefore, seven years remain in the original book value. The book value at the beginning of 2002 is 7/12 x $48,000 or $28,000. The remaining useful life of seven years is extended to 10. Therefore, depreciation expense for 2002 is $28,000 x 1/10 or $2,800.
