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Chapter 9: Q2RQ (page 525)
Plant assets are recorded at historical cost. What does the historical cost of a plant asset include?
Yes, Plant assets are recorded at historical cost.
Historical costs include the entire amount paid to acquire the assets and make them ready for use.
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Making a lump-sum purchase of assets Maplewood Properties bought three lots in a subdivision for a lump-sum price. An independent appraiser valued the lots as follows:
Lot | Appraised Value |
1 | \(144,000 |
2 | 96,000 |
3 | 240,000 |
Maplewood paid \)355,000 in cash. Record the purchase in the journal, identifying each lot’s cost in a separate Land account. Round decimals to two places, and use the computed percentages throughout.
Question:Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land.
Requirements
1. Explain the tax advantage of allocating too much to the building and too little to the land.
2. Was Western’s allocation ethical? If so, state why. If not, why not? Identify who was harmed.
What is an intangible asset? Provide some examples
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.
2. On January 1, Alamo Cranes purchased a crane for \(140,000. Alamo expects the crane to remain useful for six years (1,000,000 lifts) and to have a residual value of \)2,000. The company expects the crane to be used for 80,000 lifts the first year. Compute the first-year depreciation expense on the crane using the following methods: a. Straight-line b. Units-of-production (Round depreciation per unit to two decimals. Round depreciation expense to the nearest whole dollar.) Compute the first-year and second-year depreciation expense on the crane using the following method: c. Double-declining-balance (Round depreciation expense to the nearest whole dollar.)
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