Solution manual accounting principles 9e by kieso kimmel chapter 10

Reporting the asset and related accumulated depreciation on the balance sheet informs the reader of the financial statements that the asset is still in use.. In no situation can the accu

CHAPTER 10

Plant Assets, Natural Resources,

and Intangible AssetsASSIGNMENT CLASSIFICATION TABLE

Brief

A Problems

B Problems

1 Describe how the cost principle

applies to plant assets.

2 Explain the concept of

depreciation.

3 Compute periodic depreciation

using different methods.

4 Describe the procedure for

revising periodic depreciation.

5 Distinguish between revenue

and capital expenditures, and

explain the entries for each.

6 Explain how to account for

the disposal of a plant asset.

7 Compute periodic depletion

of natural resources.

8 Explain the basic issues

related to accounting for

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Difficulty Level

Time Allotted (min.)

5A Journalize a series of equipment transactions related to

purchase, sale, retirement, and depreciation.

7A Prepare entries to record transactions related to acquisition

and amortization of intangibles; prepare the intangible

assets section.

8A Prepare entries to correct errors made in recording and

amortizing intangible assets.

5B Journalize a series of equipment transactions related to

purchase, sale, retirement, and depreciation.

7B Prepare entries to record transactions related to acquisition

and amortization of intangibles; prepare the intangible

assets section.

8B Prepare entries to correct errors made in recording and

amortizing intangible assets.

WEYGANDT ACCOUNTING PRINCIPLES 9E

CHAPTER 10 PLANT ASSETS, NATURAL RESOURCES,

AND INTANGIBLE ASSETS

PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE

BLOOM’S TAXONOMY TABLE

P10-4A P10-4B BE10-7 E10-8

Q10-20 BE10-13 BE10-14 E10-14 P10-5A P10-7A P10-5B P10-7B P10-9A P10-9B

BE10-15 BE10-16 E10-15 E10-16

Exploring the Web Communication

ANSWERS TO QUESTIONS

the asset and make it ready for its intended use.

proceeds from salvaged materials are necessary expenditures to make the land ready for its intended use.

remodeling expenditures and the cost of replacing or repairing the roofs, floors, wiring, and plumbing.

asset to expense over its service (useful) life in a rational and systematic manner Recognition of depreciation is not intended to result in the accumulation of cash for replacement of the asset.

useful life.

declining-balance method.

the units-of-activity method.

method and variable under the units-of-activity method.

amount; units of activity—varying amount; declining-balance—decreasing amounts.

is that continual restatement of prior periods would adversely affect confidence in the financial statements.

life of the asset Capital expenditures are additions and improvements made to increase operating efficiency, productive capacity, or useful life of the asset Revenue expenditures are recognized

as expenses when incurred; capital expenditures are generally debited to the plant asset affected.

sale If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal occurs If the proceeds of the sale are less than the book value of the plant asset sold, a loss on disposal occurs.

sheet without further depreciation adjustment until the asset is retired Reporting the asset and related accumulated depreciation on the balance sheet informs the reader of the financial statements that the asset is still in use However, once an asset is fully depreciated, even if it is still being used, no additional depreciation should be taken In no situation can the accumulated depreciation on the plant asset exceed its cost.

Questions Chapter 10 (Continued)

These long-lived productive assets have two distinguishing characteristics: they are physically extracted in operations, and they are replaceable only by an act of nature.

manner over the resource’s useful life It is computed by multiplying the depletion cost per unit by the number of units extracted and sold.

an asset to expense over the periods benefited Depreciation refers to allocating the cost of a plant asset to expense, depletion to recognizing the cost of a natural resource as expense, and amortization to allocating the cost of an intangible asset to expense.

useful life (the period of time when operations are benefited by use of the asset) In addition, some intangibles have indefinite lives and therefore are not amortized at all.

location, good customer relations, skilled employees, high-quality products, and harmonious relations with labor unions.

Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately Goodwill can only be sold if the entire business is sold And, if goodwill appears

on the balance sheet, it means the company has purchased another company for more than the fair market value of its net assets.

business Goodwill is the excess of cost over the fair market value of the net assets (assets less liabilities) acquired The recognition of goodwill without an exchange transaction would lead to subjective valuations which would reduce the reliability of financial statements.

to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefits As a result, the FASB requires that research and development costs be recorded as an expense when incurred.

sales Net

Questions Chapter 10 (Continued)

tax return than is used in preparing financial statements Lopez Corporation uses an accelerated depreciation method for tax purposes to minimize its income taxes and thereby the cash outflow for taxes.

longer period of time The depreciation expense reported in each period is lower and net income is higher Won’s choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower net income.

there will be no additional depreciation expense in future periods If the costs are ordinary repairs, they should be expensed.

and equipment (in millions):

$ 11,228

the book value and the fair market value of the asset given up at the time of exchange.

old machine and its book value If the fair market value of the old machine is less than its book value, Tatum should recognize a loss equal to the difference between the two amounts.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 10-1

All of the expenditures should be included in the cost of the land Therefore, the cost of the land is $81,000, or ($70,000 + $3,000 + $2,500 + $2,000 + $3,500) BRIEF EXERCISE 10-2

The cost of the truck is $31,900 (cash price $30,000 + sales tax $1,500 + painting and lettering $400) The expenditures for insurance and motor vehicle license should not be added to the cost of the truck.

BRIEF EXERCISE 10-3

Depreciable cost of $36,000, or ($42,000 – $6,000) With a four-year useful life, annual depreciation is $9,000, or ($36,000 ÷ 4) Under the straight-line method, depreciation is the same each year Thus, depreciation is $9,000 for both the first and second years.

 or the reduction in depreciation expense This practice is

not ethical because management is knowingly misstating asset values.

BRIEF EXERCISE 10-5

BRIEF EXERCISE 10-6

The depreciation cost per unit is 22 cents per mile computed as follows:

Depreciable cost ($33,500 – $500) ÷ 150,000 = $.22

Year 1 30,000 miles X $.22 = $6,600 Year 2 20,000 miles X $.22 = $4,400

BRIEF EXERCISE 10-7

Book value, 1/1/10 $20,000 Less: Salvage value 2,000 Depreciable cost $18,000 Remaining useful life 4 years Revised annual depreciation ($18,000 ÷ 4) $ 4,500

BRIEF EXERCISE 10-8

1 Repair Expense 45

Cash 45

2 Delivery Truck 400

Cash 400

BRIEF EXERCISE 10-9

(a) Accumulated Depreciation—Delivery

Equipment 41,000

Delivery Equipment 41,000

(b) Accumulated Depreciation—Delivery

Equipment 39,000

Loss on Disposal 2,000

Delivery Equipment 41,000

BRIEF EXERCISE 10-9 (Continued)

Cost of delivery equipment $41,000

Less accumulated depreciation 39,000

Book value at date of disposal 2,000

Proceeds from sale 0

Cost of office equipment $72,000

Less accumulated depreciation 47,250*

Book value at date of disposal 24,750

Proceeds from sale 20,000

Coal mine $ 500,000

Less: Accumulated depletion 108,000 $392,000

Buildings 1,100,000

Less: Accumulated depreciation 650,000 450,000

Total property, plant, and

equipment $842,000 Intangible assets

Delivery Equipment (new) 24,000

Accumulated Depreciation—Delivery Equipment 30,000

Loss on Disposal 12,000

Delivery Equipment (old) 61,000 Cash 5,000

*BRIEF EXERCISE 10-15 (Continued)

Fair market value of old delivery

Cost of delivery equipment $24,000

Fair market value of old delivery

Delivery Equipment (new) 43,000

Accumulated Depreciation—Delivery Equipment 30,000

Gain on Disposal 7,000 Delivery Equipment (old) 61,000 Cash 5,000

Fair market value of old delivery

Cost of new delivery equipment $43,000

Fair market value of old delivery

Book value of old delivery

equipment ($61,000 – $30,000) 31,000

Gain on disposal $ 7,000

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 10-1

The following four items are expenditures necessary to acquire the truck and get it ready for use:

Negotiated purchase price $24,000

Installation of special shelving 1,100

Painting and lettering 900

Sales tax 1,300

Total paid $27,300

Thus, the cost of the truck is $27,300 The payments for the motor vehicle license and for the insurance are operating costs and are expensed in the first year of the truck’s life.

DO IT! 10-2

Cost – Salvage $15,000 – $1,000 Depreciation expense =

Useful life = 8 years = $1,750 The entry to record the first year’s depreciation would be:

Depreciation Expense 1,750

Accumulated Depreciation 1,750 (To record annual depreciation on mower)

SOLUTIONS TO EXERCISES

EXERCISE 10-1

(a) Under the cost principle, the acquisition cost for a plant asset includes all expenditures necessary to acquire the asset and make it ready for its intended use For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs.

EXERCISE 10-3

(a) Cost of land

Cash paid $80,000 Net cost of removing warehouse

($8,600 – $1,700) 6,900 Attorney’s fee 1,100 Real estate broker’s fee 5,000 Total $93,000

(b) The architect’s fee ($7,800) should be debited to the Building account The cost of the driveways and parking lot ($14,000) should be debited

4 False Depreciation applies to three classes of plant assets: land

5 False Depreciation does not apply to land because its usefulness and revenue-producing ability generally remain intact over time.

6 True.

7 False Recognizing depreciation on an asset does not result in an mulation of cash for replacement of the asset.

accu-8 True.

9 False Depreciation expense is reported on the income statement, and

accumulated depreciation is reported as a deduction from plant assets on the balance sheet.

10 False Three factors affect the computation of depreciation: cost, useful life, and salvage value (also called residual value).

Depreciation Cost /Unit =

Annual Depreciation Expense

Accumulated Depreciation

Book Value 2010

2011

2012

2013

26,000 32,000 25,000 17,000

$1.60 1.60 1.60 1.60

$41,600 51,200 40,000 27,200

$ 41,600 92,800 132,800 160,000

$126,400 75,200 35,200 8,000

Remaining useful life in years

Revised annual depreciation

$686,000 37,000

$649,000 44 $ 14,750

$75,000 3,600

$71,400 15 $ 4,760

(b) Dec 31 Depreciation Expense—Building 14,750

Accumulated Depreciation—

Building 14,750

30 Cash 14,000

Accumulated Depreciation—Computer ($40,000 X 3/5 = $24,000; $24,000 + $4,000) 28,000 Gain on Disposal

[$14,000 – ($40,000 – $28,000)] 2,000 Computer 40,000

Dec 31 Depreciation Expense 6,000

Accumulated Depreciation—Truck [($39,000 – $3,000) X 1/6] 6,000

31 Loss on Disposal 9,000

Accumulated Depreciation—Truck [($39,000 – $3,000) X 5/6] 30,000 Delivery Truck 39,000 EXERCISE 10-10

(a) Cash 28,000

Accumulated Depreciation—Equipment

[($50,000 – $5,000) X 3/5] 27,000

Equipment 50,000 Gain on Disposal 5,000 (b) Depreciation Expense

[($50,000 – $5,000) X 1/5 X 4/12] 3,000

Accumulated Depreciation—Equipment 3,000 Cash 28,000

Accumulated Depreciation—Equipment

($27,000 + $3,000) 30,000

Equipment 50,000 Gain on Disposal 8,000

Units estimated (b) 800,000 tons

Depletion cost per unit [(a) ÷ (b)] $0.90

(b) The costs pertaining to the unsold units are reported in current assets as part of inventory (20,000 X $.90 = $18,000).

EXERCISE 10-12

Dec 31 Amortization Expense—Patent 12,000

purchase of another company)

[($440,000 ÷ 10) X 1/2] 22,000

Patents 80,000 Franchise 22,000

*EXERCISE 10-15

(a) Trucks (new) 53,000

Accumulated Depreciation—Trucks (old) 22,000

Loss on Disposal 6,000

Trucks (old) 64,000 Cash 17,000

Cost of old trucks $64,000

Less: Accumulated depreciation 22,000

Cost of old machine $12,000

Less: Accumulated depreciation 4,000

Delivery Truck (old) 22,000

Cost of old truck $22,000

Less: Accumulated depreciation 15,000

Cost of old truck $10,000

Less: Accumulated depreciation 8,000

Book value 2,000

Fair market value of old truck 4,000

Gain on Disposal $ 2,000

Cost of new delivery truck* $ 4,000

*Fair value of old truck

$745,000

$ 5,000 Property Taxes Expense

14,000 Land Improvements

PROBLEM 10-2A

(a)

Year Computation

Accumulated Depreciation 12/31 BUS 1

BUS 2 2008

BUS 3 2009

2010

24,000 miles X $.60* = $14,400 34,000 miles X $.60 * = $20,400

$ 14,400 34,800

*$72,000 ÷ 120,000 miles = $.60 per mile.

(b) Year Computation Expense

BUS 2 (1)

PROBLEM 10-3A

(a) (1) Purchase price $ 38,000

Sales tax 1,700 Shipping costs 150 Insurance during shipping 80 Installation and testing 70 Total cost of machine $ 40,000

Machine 40,000

Cash 40,000

(2) Recorded cost $ 40,000 Less: Salvage value 5,000 Depreciable cost $ 35,000 Years of useful life ÷ 5 Annual depreciation $ 7,000

(2) Book Value at

Beginning

of Year

DDB Rate

Annual Depreciation

Expense

Accumulated Depreciation

PROBLEM 10-3A (Continued)

(3) Depreciation cost per unit = ($160,000 – $10,000)/125,000 units =

These facts occur because the declining-balance method is an ated depreciation method in which the largest amount of depreciation

acceler-is recognized in the early years of the asset’s life If the straight-line method is used, the same amount of depreciation expense is recognized each year Therefore, in the early years less depreciation expense will be recognized under this method than under the declining-balance method while more will be recognized in the later years.

The amount of depreciation expense recognized using the units-of-activity method is dependent on production, so this method could recognize more

or less depreciation expense than the other two methods in any year depending on output.

No matter which of the three methods is used, the same total amount

of depreciation expense will be recognized over the four-year period.

PROBLEM 10-4A

Year

Depreciation Expense

Accumulated Depreciation 2008

(b) 10,800 (b) 10,800 10,800 12,800 (c) 12,800

$13,500 27,000 37,800 48,600 59,400 72,200 85,000

(a) $90,000 – $9,000

(b) Book value – Salvage value

Remaining useful llife =

$63,000 – $9,000

(c) $30,600 – $5,000

1 Cash 450,000 Accumulated Depreciation—

Equipment 338,000 Equipment 780,000 Gain on Disposal 8,000

Cost $780,000 Accum depreciation—

equipment 338,000 [($780,000 X 1/10 X 4) +

$26,000]

Book value 442,000 Cash proceeds 450,000 Gain on disposal $ 8,000

June 1 Cash 1,500,000

Land 400,000 Gain on Disposal 1,100,000

31 Accumulated Depreciation—

Equipment 500,000 Equipment 500,000

PROBLEM 10-5A (Continued)

Cost $500,000 Accum depreciation—

equipment 500,000 ($500,000 X 1/10 X 10)

Book value $ 0 (b) Dec 31 Depreciation Expense 570,000

Accumulated Depreciation—

Buildings 570,000 ($28,500,000 X 1/50)

Land $ 5,730,000 Buildings $28,500,000

Less: Accumulated depreciation—

buildings 12,670,000 15,830,000 Equipment 48,720,000

Less: Accumulated depreciation—

equipment 9,010,000 39,710,000