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Chapter 9: Q12RQ (page 525)
What financial statements are property, plant, and equipment reported on, and how?
Thenon-current asset section of the balance sheet reports the property, plant, and equipment.
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Determining asset cost and recording partial-year depreciation, straight-line Discount Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:
a. Purchase price of three acres of land $ 80,000
b. Delinquent real estate taxes on the land to be paid by Discount Parking 6,300
c. Additional dirt and earthmoving 9,000
d. Title insurance on the land acquisition 3,200
e. Fence around the boundary of the property 9,600
f. Building permits for the building 1,000
g. Architect’s fee for the design of the building 20,700
h. Signs near the front of the property 9,300
i. Materials used to construct the building 215,000
j. Labor to construct the building 175,000
k. Interest cost on the construction loan for the building 9,400
l. Parking lots on the property 28,500
m. Lights for the parking lots 11,200
n. Salary of construction supervisor (80% to building; 20% to parking lot and concrete walks) 50,000
o. Furniture 11,200
p. Transportation of furniture from seller to the building 2,200
q. Additional fencing 6,600
Discount Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value’s
Requirements
1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on October 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar
Question: Determining asset cost, preparing depreciation schedules (3 methods), and identifying depreciation results that meet management objectives
On January 3, 2018, Speedy Delivery Service purchased a truck at a cost of \(67,000. Before placing the truck in service, Speedy spent \)3,000 painting it, \(1,200 replacing tires, and \)3,500 overhauling the engine. The truck should remain in service for five years and have a residual value of $5,100. The truck’s annual mileage is expected to be 20,000 miles in each of the first four years and 12,800 miles in the fifth year—92,800 miles in total. In deciding which depreciation method to use, Alec Rivera, the general manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance).
Requirements
1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value.
2. Speedy prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. Consider the first year that Speedy uses the truck. Identify the depreciation method that meets the company’s objectives.
Making a lump-sum asset purchase
Concord Pet Care Clinic paid \(210,000 for a group purchase of land, building, and equipment. At the time of the acquisition, the land had a market value of \)110,000, the building \(88,000, and the equipment \)22,000. Journalize the lump-sum purchase of the three assets for a total cost of $210,000, the amount for which the business signed a note payable.
Core Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Core purchased goodwill as part of the acquisition of Surety Wireless Company, which had the following figures:
Book value of assets \( 700,000
Market value of assets 1,000,000
Market value of liabilities 510,000
Requirements
1. Journalize the entry to record Core’s purchase of Surety Wireless for \)280,000 cash plus a $420,000 note payable.
2. What special asset does Core’s acquisition of Surety Wireless identify? How should Core Telecom account for this asset after acquiring Surety Wireless? Explain in detail.
: Distinguishing capital expenditures from revenue expenditures consider the following expenditures:
a. Purchase price.
b. Ordinary recurring repairs to keep the machinery in good working order.
c. Lubrication before machinery is placed in service.
d. Periodic lubrication after machinery is placed in service.
e. Major overhaul to extend useful life by three years.
f. Sales tax paid on the purchase price.
g. Transportation and insurance while machinery is in transit from seller to buyer.
h. Installation.
i. Training of personnel for initial operation of the machinery. Classify each of the expenditures as a capital expenditure or revenue expenditure
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