Chapter 10

Kelly Melnik owns and operates Aaladin Print Co. During July, Aaladin Print Co. incurred the following costs in acquiring two printing presses. One printing press was new, and the other was used by a business that recently filed for bankruptcy. Costs related to new printing press: 1\. Sales tax on purchase price 2\. Insurance while in transit 3\. Freight 4\. Special foundation 5\. Fee paid to factory representative for installation 6\. New parts to replace those damaged in unloading Costs related to used printing press: 7\. Fees paid to attorney to review purchase agreement 8\. Installation 9\. Repair of vandalism during installation 10\. Replacement of worn-out parts 11\. Freight 12\. Repair of damage incurred in reconditioning the press a. Indicate which costs incurred in acquiring the new printing press should be debited to the asset account. b. Indicate which costs incurred in acquiring the used printing press should be debited to the asset account.

Serenity Ski Co. has developed a tract of land into a ski resort. The company has cut the trees, cleared and graded the land and hills, and constructed ski lifts. (a) Should the tree cutting, land clearing, and grading costs of constructing the ski slopes be debited to the land account? (b) If such costs are debited to Land, should they be depreciated?

Next Day Delivery Company acquired an adjacent lot to construct a new warehouse, paying \( 25,000\) and giving a short-term note for \( 175,000\). Legal fees paid were \( 1,200\), delinquent taxes assumed were \( 10,850\), and fees paid to remove an old building from the land were \( 15,000\). Materials salvaged from the demolition of the building were sold for \( 2,400\). A contractor was paid \(\$ 760,000\) to construct a new warehouse. Determine the cost of the land to be reported on the balance sheet.

Thare Co. incurred the following costs related to trucks and vans used in operating its delivery service: 1\. Changed the oil and greased the joints of all the trucks and vans. 2\. Installed security systems on four of the newer trucks. 3\. Changed the radiator fluid on a truck that had been in service for the past four years. 4\. Installed a hydraulic lift to a van. 5\. Removed a two-way radio from one of the trucks and installed a new radio with a greater range of communication. 6\. Overhauled the engine on one of the trucks that had been purchased three years ago. 7\. Tinted the back and side windows of one of the vans to discourage theft of contents. 8\. Repaired a flat tire on one of the vans. 9\. Rebuilt the transmission on one of the vans that had been driven 40,000 miles. The van was no longer under warranty. 10\. Replaced the trucks' suspension system with a new suspension system that allows for the delivery of heavier loads. Classify each of the costs as a capital expenditure or a revenue expenditure.

Felix Little owns and operates Big Sky Transport Co. During the past year, Felix incurred the following costs related to his 18 -wheel truck: 1\. Replaced a headlight that had burned out. 2\. Replaced fog and cab light bulbs. 3\. Installed a television in the sleeping compartment of the truck. 4\. Removed the old CB radio and replaced it with a newer model with a greater range. 5\. Replaced a shock absorber that had worn out. 6\. Installed a wind deflector on top of the cab to increase fuel mileage. 7\. Replaced the old radar detector with a newer model that detects the KA frequencies now used by many of the state patrol radar guns. The detector is wired directly into the cab, so that it is partially hidden. In addition, Felix fastened the detector to the truck with a locking device that prevents its removal. 8\. Changed engine oil. 9\. Replaced the hydraulic brake system that had begun to fail during his latest trip through the Rocky Mountains. 10\. Modified the factory-installed turbo charger with a special-order kit designed to add 50 more horsepower to the engine performance. Classify each of the costs as a capital expenditure or a revenue expenditure.

Load All Company made the following expenditures on one of its delivery trucks: Feb. 22. Replaced transmission at a cost of \( 2,300\). Mar. 20. Paid \( 900\) for installation of a hydraulic lift. Nov. 2. Paid \( 67\) to change the oil and air filter. Prepare journal entries for each expenditure.

Armored Metal Co. reported \( 975,600\) for equipment and \( 600,000\) for accumulated depreciation-equipment on its balance sheet. Does this mean (a) that the replacement cost of the equipment is \(\$ 975,600\) and (b) that \( 600,000\) is set aside in a special fund for the replacement of the equipment? Explain.

Convert each of the following estimates of useful life to a straight-line depreciation rate, stated as a percentage, assuming that the residual value of the fixed asset is to be ignored: (a) 2 years, (b) 8 years, (c) 10 years, (d) 20 years, (e) 25 years, (f) 40 years, (g) 50 years.

A refrigerator used by a meat processor has a cost of \( 198,500\), an estimated residual value of \( 30,500\), and an estimated useful life of 15 years. What is the amount of the annual depreciation computed by the straight-line method?

A diesel-powered tractor with a cost of \( 215,000\) and estimated residual value of \( 27,000\) is expected to have a useful operating life of 80,000 hours. During October, the generator was operated 380 hours. Determine the depreciation for the month.

A John Deere tractor acquired on January 5 at a cost of \( 44,800\) has an estimated useful life of 16 years. Assuming that it will have no residual value, determine the depreciation for each of the first two years (a) by the straight-line method and (b) by the double-decliningbalance method. Round to the nearest dollar.

A storage tank acquired at the beginning of the fiscal year at a cost of \( 86,000\) has an estimated residual value of \( 10,000\) and an estimated useful life of eight years. Determine the following: (a) the amount of annual depreciation by the straight-line method and (b) the amount of depreciation for the first and second year computed by the double-decliningbalance method.

Sandblasting equipment acquired at a cost of \( 68,000\) has an estimated residual value of \( 18,000\) and an estimated useful life of 10 years. It was placed in service on October 1 of the current fiscal year, which ends on December 31 . Determine the depreciation for the current fiscal year and for the following fiscal year by (a) the straight-line method and (b) the double- declining-balance method.

A building with a cost of \( 750,000\) has an estimated residual value of \( 300,000\), has an estimated useful life of 36 years, and is depreciated by the straight-line method. (a) What is the amount of the annual depreciation? (b) What is the book value at the end of the twentieth year of use? (c) If at the start of the twenty-first year it is estimated that the remaining life is 20 years and that the residual value is \(\$ 200,000\), what is the depreciation expense for each of the remaining 20 years?

Sime Company purchased and installed carpet in its new general offices on March 29 for a total cost of \( 48,000\). The carpet is estimated to have a 15 -year useful life and no residual value. a. Prepare the journal entries necessary for recording the purchase of the new carpet. b. Record the December 31 adjusting entry for the partial-year depreciation expense for the carpet, assuming that Sime Company uses the straight-line method.

Equipment acquired on January 3,2005 , at a cost of \( 360,000\), has an estimated useful life of 12 years, has an estimated residual value of \( 30,000\), and is depreciated by the straightline method. a. What was the book value of the equipment at December 31,2008 , the end of the year? b. Assuming that the equipment was sold on April 1, 2009, for \( 220,000\), journalize the entries to record (1) depreciation for the three months until the sale date, and (2) the sale of the equipment.

Equipment acquired on January 3,2005 , at a cost of \( 147,500\), has an estimated useful life of eight years and an estimated residual value of \( 17,500\). a. What was the annual amount of depreciation for the years 2005,2006 , and 2007, using the straight-line method of depreciation? b. What was the book value of the equipment on January 1,2008 ? c. Assuming that the equipment was sold on January 2, 2008, for \( 95,000\), journalize the entry to record the sale. d. Assuming that the equipment had been sold on January 2, 2008, for \( 100,000\) instead of \( 95,000\), journalize the entry to record the sale.

A printing press priced at \( 280,000\) is acquired by trading in a similar press and paying cash for the difference between the trade-in allowance and the price of the new press. a. Assuming that the trade-in allowance is \( 80,000\), what is the amount of cash given? b. Assuming that the book value of the press traded in is \( 78,750\), what is the cost of the new press for financial reporting purposes?

On October 1, Clear Spring Co., a water distiller, acquired new bottling equipment with a list price of \( 288,750\). Clear Springs received a trade-in allowance of \( 60,000\) on the old equipment of a similar type, paid cash of \( 28,750\), and gave a series of five notes payable for the remainder. The following information about the old equipment is obtained from the account in the equipment ledger: cost, \( 210,000\); accumulated depreciation on December 31 , the end of the preceding fiscal year, \( 137,500\); annual depreciation, \( 12,500\). Journalize the entries to record (a) the current depreciation of the old equipment to the date of trade-in and (b) the exchange transaction on October 1 for financial reporting purposes.

On April 1, Senorita's Delivery Services acquired a new truck with a list price of \( 75,000\). Senorita's received a trade-in allowance of \( 15,000\) on an old truck of similar type, paid cash of \( 10,000\), and gave a series of five notes payable for the remainder. The following information about the old truck is obtained from the account in the equipment ledger: cost, \( 48,000\); accumulated depreciation on December 31 , the end of the preceding fiscal year, \( 32,000\); annual depreciation, \( 8,000\). Journalize the entries to record (a) the current depreciation of the old truck to the date of trade-in and (b) the transaction on April 1 for financial reporting purposes.

On the first day of the fiscal year, a delivery truck with a list price of \( 86,500\) was acquired in exchange for an old delivery truck and \( 75,000\) cash. The old truck had a book value of \( 15,675\) at the date of the exchange. a. Determine the depreciable cost for financial reporting purposes. b. Assuming that the book value of the old delivery truck was \( 6,000\), determine the depreciable cost for financial reporting purposes.

Rainbow Mining Co. acquired mineral rights for \( 30,000,000\). The mineral deposit is estimated at \(75,000,000\) tons. During the current year, \(11,250,000\) tons were mined and sold. a. Determine the amount of depletion expense for the current year. b. Journalize the adjusting entry to recognize the depletion expense.

Venture Company acquired patent rights on January 3,2005 , for \( 661,500\). The patent has a useful life equal to its legal life of 15 years. On January 5,2008 , Venture successfully defended the patent in a lawsuit at a cost of \( 105,000\). a. Determine the patent amortization expense for the current year ended December 31,2008 . b. Journalize the adjusting entry to recognize the amortization.