Chapter 10

Catherine Simpkins owns and operates Speedy Print Co. During February, Speedy 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 Freight 3 Special foundation 4\. Insurance while in transit 5\. New parts to replace those damaged in unloading 6\. Fee paid to factory representative for installation Costs related to used printing press: 7\. Fees paid to attorney to review purchase agreement 8\. Freight 9\. Installation 10\. Repair of vandalism during installation 11\. Replacement of worn-out parts 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.

Bridger 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?

Fastball Delivery Company acquired an adjacent lot to construct a new warehouse, paying \(30,000 and giving a short-term note for \)270,000. Legal fees paid were \(1,425, delinquent taxes assumed were \)12,000, and fees paid to remove an old building from the land were \(18,500. Materials salvaged from the demolition of the building were sold for \)4,500. A contractor was paid $910,000 to construct a new warehouse. Determine the cost of the land to be reported on the balance sheet.

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

Jaime Baldwin owns and operates Love Transport Co. During the past year, Jaime incurred the following costs related to an 18-wheel truck: 1\. Changed engine oil. 2\. Installed a wind deflector on top of the cab to increase fuel mileage. 3\. Replaced fog and cab light bulbs. 4\. Modified the factory-installed turbo charger with a special-order kit designed to add 50 more horsepower to the engine performance. 5\. Replaced a headlight that had burned out. 6\. Removed the old CB radio and replaced it with a newer model with a greater range. 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, Jaime fastened the detector to the truck with a locking device that prevents its removal. 8\. Replaced the hydraulic brake system that had begun to fail during his latest trip through the Rocky Mountains. 9\. Installed a television in the sleeping compartment of the truck. 10\. Replaced a shock absorber that had worn out. Classify each of the costs as a capital expenditure or a revenue expenditure.

Easy Move Company made the following expenditures on one of its delivery trucks: Feb. 16. Replaced transmission at a cost of \(3,150. July 15. Paid \)1,100 for installation of a hydraulic lift. Oct. 3. Paid $72 to change the oil and air filter. Prepare journal entries for each expenditure.

Legacy Ironworks Co. reported \(3,175,000 for equipment and \)2,683,000 for accumulated depreciation—equipment on its balance sheet. Does this mean (a) that the replacement cost of the equipment is \(3,175,000 and (b) that \)2,683,000 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 \(93,750, an estimated residual value of \)10,000, and an estimated useful life of 25 years. What is the amount of the annual depreciation computed by the straight-line method?

A diesel-powered tractor with a cost of \(145,000 and estimated residual value of \)7,000 is expected to have a useful operating life of 75,000 hours. During July, the generator was operated 150 hours. Determine the depreciation for the month.

Prior to adjustment at the end of the year, the balance in Trucks is \(250,900 and the balance in Accumulated Depreciation—Trucks is \)88,200. Details of the subsidiary ledger are as follows: Accumulated Miles Estimated Estimated Depreciation Operated Truck Residual Useful at Beginning During No. Cost Value Life of Year Year 1 \(50,000 \) 6,500 150,000 miles — 23,000 miles 2 72,900 9,900 300,000 $60,000 25,000 3 38,000 3,000 200,000 8,050 36,000 4 90,000 13,000 200,000 20,150 40,000 a. Determine the depreciation rates per mile and the amount to be credited to the accumulated depreciation section of each of the subsidiary accounts for the miles operated during the current year. b. Journalize the entry to record depreciation for the year.

A Kubota tractor acquired on January 9 at a cost of $75,000 has an estimated useful life of 20 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 doubledeclining-balance method.

A storage tank acquired at the beginning of the fiscal year at a cost of \(172,000 has an estimated residual value of \)20,000 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 years computed by the double-declining-balance method.

Sandblasting equipment acquired at a cost of \(85,000 has an estimated residual value of \)5,000 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 \(1,050,000 has an estimated residual value of \)420,000, 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 $300,000, what is the depreciation expense for each of the remaining 20 years?

Crane Company purchased and installed carpet in its new general offices on March 30 for a total cost of $12,000. 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 Crane Company uses the straight-line method.

Equipment acquired on January 3, 2007, at a cost of \(504,000, has an estimated useful life of 12 years, has an estimated residual value of \)42,000, and is depreciated by the straight-line method. a. What was the book value of the equipment at December 31, 2010, the end of the year? b. Assuming that the equipment was sold on April 1, 2011, for $315,000, 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, 2007, at a cost of \(265,500, has an estimated useful life of eight years and an estimated residual value of \)31,500. a. What was the annual amount of depreciation for the years 2007, 2008, and 2009, using the straight-line method of depreciation? b. What was the book value of the equipment on January 1, 2010? c. Assuming that the equipment was sold on January 4, 2010, for \(168,500, journalize the entry to record the sale. d. Assuming that the equipment had been sold on January 4, 2010, for \)180,000 instead of $168,500, journalize the entry to record the sale.

Cikan Mining Co. acquired mineral rights for $16,200,000. The mineral deposit is estimated at 90,000,000 tons. During the current year, 13,750,000 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.

Isolution Company acquired patent rights on January 4, 2007, for \(750,000. The patent has a useful life equal to its legal life of 15 years. On January 7, 2010, Isolution successfully defended the patent in a lawsuit at a cost of \)90,000. a. Determine the patent amortization expense for the current year ended December 31, 2010. b. Journalize the adjusting entry to recognize the amortization.

A printing press priced at a fair market value of \(300,000 is acquired in a transaction that has commercial substance by trading in a similar press and paying cash for the difference between the trade-in allowance and the price of the new press. a. Assuming that the trade-in allowance is \)120,000, what is the amount of cash given? b. Assuming that the book value of the press traded in is $115,500, what is the gain or loss on the exchange?

On October 1, Hot Springs Co., a water distiller, acquired new bottling equipment with a list price (fair market value) of \(462,000. Hot Springs received a trade-in allowance of \)96,000 on the old equipment of a similar type and paid cash of \(366,000. The following information about the old equipment is obtained from the account in the equipment ledger: cost, \)336,000; accumulated depreciation on December 31, the end of the preceding fiscal year, \(220,000; annual depreciation, \)20,000. Assuming the exchange has commercial substance, 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.

On April 1, Gyminny Delivery Services acquired a new truck with a list price (fair market value) of \(150,000. Gyminny received a trade-in allowance of \)30,000 on an old truck of similar type and paid cash of \(120,000. The following information about the old truck is obtained from the account in the equipment ledger: cost, \)96,000; accumulated depreciation on December 31, the end of the preceding fiscal year, \(64,000; annual depreciation, \)16,000. Assuming the exchange has commercial substance, 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.

Verizon Communications is a major telecommunications company in the United States. Verizon’s balance sheet disclosed the following information regarding fixed assets: Dec. 31, 2007 Dec. 31, 2006 (in millions) (in millions) Plant, property, and equipment \( 213,994 \)204,109 Less accumulated depreciation 128,700 121,753 _________ _________ \( 85,294 \) 82,356 _________ __ _________ _________ _______ Verizon’s revenue for 2007 was $93,469 million. The fixed asset turnover for the telecommunications industry averages 1.10. a. Determine Verizon’s fixed asset turnover ratio. Round to two decimal places. b. Interpret Verizon’s fixed asset turnover ratio.

The following table shows the revenue and average net fixed assets (in millions) for a recent fiscal year for Best Buy and Circuit City Stores, Inc.: Average Net Revenue Fixed Assets Best Buy 35,934 2,825 Circuit City Stores, Inc. 12,430 880 a. Compute the fixed asset turnover for each company. Round to two decimal places. b. Which company uses its fixed assets more efficiently? Explain.