Plant Assets, Natural Resources, and intangibles

Dylan worked for a propane gas distributor as an accounting clerk in a small Midwestern

town. Last winter, his brother Mike lost his job at the machine plant. By January,

temperatures were sub-zero, and Mike had run out of money. Dylan saw that Mike’s

account was overdue, and he knew Mike needed another delivery to heat his home. He

decided to credit Mike’s account and debit the balance to the parts inventory because he

knew the parts manager, the owner’s son, was incompetent and would never notice the

extra entry. Months went by, and Dylan repeated the process until an auditor ran across

the charges by chance. When the owner fired Dylan, he said, “If you had only come to

me and told me about Mike’s situation, we could have worked something out.”

Requirements

1. What can a business like this do to prevent team member fraud of this kind?

2. What effect would Dylan’s actions have on the balance sheet? The income statement?

3. How much discretion does a business have about accommodating

hardship situations?

What is the difference between capital expenditure and a revenue expenditure? Give an example of each.

What is depreciation? Define useful life, residual value, and depreciable cost.

Which depreciation method ignores residual value until the last year of depreciation? Why?

On October 31, 2018, Alternative Landscapes discarded equipment that had a cost of \(26,920. Accumulated Depreciation as of December 31, 2017, was \)25,000. Assume annual depreciation on the equipment is $1,920. Journalize the partial-year depreciation expense and disposal of the equipment.

How does a business decide which depreciation method is best to use?

Alpha Communication purchased equipment on January 1, 2018, for \(27,500. Suppose Alpha Communication sold the equipment for \)20,000 on December 31, 2020. Accumulated Depreciation as of December 31, 2020, was $10,000. Journalize the sale of the equipment, assuming straight-line depreciation was used.

What is the depreciation method that is used for tax accounting purposes? How is it different than the methods that are required by GAAP to be used for financial accounting purposes?

If a business changes the estimated useful life or estimated residual value of a plant asset, what must the business do in regard to depreciation expense?

How is discarding of a plant asset different from selling a plant asset?

How is gain or loss determined when disposing of plant assets? What situation constitutes a gain? What situation constitutes a loss?

What is a natural resource? What is the process by which businesses spread the allocation of a natural resource’s cost over its usage?

What is an intangible asset? Provide some examples

What is the process by which businesses spread the allocation of an intangible asset’s cost over its useful life?

: 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

Computing depreciation—three methods Crispy Fried Chicken bought equipment on January 2, 2018, for \(33,000. The equipment was expected to remain in service for four years and to operate for 6,750 hours. At the end of the equipment’s useful life, Crispy’s estimates that its residual value will be \)6,000. The equipment operated for 675 hours the first year, 2,025 hours the second year, 2,700 hours the third year, and 1,350 hours the fourth year.

 Requirements 

1. Prepare a schedule of depreciation expense, accumulated depreciation, and book value per year for the equipment under the three depreciation methods: straight-line, unit’s of-production, and double-declining-balance. Show your computations. Note: Three depreciation schedules must be prepared.

 2. Which method tracks the wear and tear on the equipment most closely?

Changing an asset’s useful life and residual value Salem Hardware Consultants purchased a building for \(540,000 and depreciated it on a straight-line basis over a 40-year period. The estimated residual value is \)100,000.

 After using the building for 15 years, Salem realized that wear and tear on the building would wear it out before 40 years and that the estimated residual value should be $88,000. 

Starting with the 16th year, Salem began depreciating the building over a revised total life of 35 years using the new residual value. Journalize depreciation expense on the building for years 15 and 16.

Recording partial-year depreciation and sale of an asset On January 2, 2017, Comfy Clothing Consignments purchased showroom fixtures for \(17,000 cash, expecting the fixtures to remain in service for five years. Comfy has depreciated the fixtures on a double-declining-balance basis, with zero residual value. On October 31, 2018, Comfy sold the fixtures for \)7,600 cash. Record both depreciation expense for 2018 and sale of the fixtures on October 31, 2018.

Recording partial-year depreciation and sale of an asset On January 2, 2016, Pet Spa purchased fixtures for \(37,800 cash, expecting the fixtures to remain in service for six years. Pet Spa has depreciated the fixtures on a straight-line basis, with \)9,000 residual value. On May 31, 2018, Pet Spa sold the fixtures for $24,200 cash. Record both depreciation expense for 2018 and sale of the fixtures on May 31, 2018

Journalizing natural resource depletion 

Cannon Mountain Mining paid \(462,300 for the right to extract mineral assets from a 400,000-ton deposit. In addition to the purchase price, Cannon also paid a \)900 filing fee, a \(1,800 license fee to the state of Nevada, and \)55,000 for a geological survey of the property. Because Cannon purchased the rights to the minerals only and did not purchase the land, it expects the asset to have zero residual value. During the first year, Cannon removed and sold 50,000 tons of the minerals. Make journal entries to record (a) purchase of the minerals (debit Minerals), (b) payment of fees and other costs, and (c) depletion for the first year.

Budget Banners pays \(200,000 cash for a group purchase of land, building, and equipment. At the time of acquisition, the land has a market value of \)22,000, the building \(187,000, and the equipment \)11,000. Journalize the lump-sum purchase.

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.)

Counselors of Atlanta purchased equipment on January 1, 2017, for \(20,000. Counselors of Atlanta expected the equipment to last for four years and have a residual value of \)2,000. Suppose Counselors of Atlanta sold the equipment for $8,000 on December 31, 2019, after using the equipment for three full years. Assume depreciation for 2019 has been recorded. Journalize the sale of the equipment, assuming straight-line depreciation was used.

Amplify Petroleum holds huge reserves of oil. Assume that at the end of 2017, Amplify Petroleum’s cost of oil reserves totaled $80,000,000, representing 100,000,000 barrels of oil. Suppose Amplify Petroleum removed and sold 20,000,000 barrels of oil during 2018. Journalize depletion expense for 2018.

^{Question:  On January 1, Orange Manufacturing paid $40,000 for a patent. Although it gives legal protection for 20 years, the patent is expected to provide a competitive advantage for only eight years. Assuming the straight-line method of amortization, record the journal entry for amortization for Year 1.}

 Maxim Company reported beginning and ending total assets of \(140,000 and \)160,000, respectively. Its net sales revenue for the year was $240,000. What was Maxim’s asset turnover ratio?

Arca Salvage, Inc. purchased equipment for \(10,000. Arca recorded total depreciation of \)8,000 on the equipment. Assume that Arca exchanged the old equipment for new equipment, paying \(4,000 cash. The fair market value of the new equipment is \)5,000. Journalize Arca’s exchange of equipment. Assume this exchange has commercial substance.

Define property, plant, and equipment. Provide some examples.

Plant assets are recorded at historical cost. What does the historical cost of a plant asset include?

How do land improvements differ from land?

What does the word capitalize mean?

What is a lump-sum purchase, and how is it accounted for?

Question: What is a lump-sum purchase, and how is it accounted for?

What is a lump-sum purchase, and how is it accounted for?

What financial statements are property, plant, and equipment reported on, and how?

Determining the cost of an asset

Highland Clothing purchased land, paying \(96,000 cash and signing a \)300,000 note payable. In addition, Highland paid delinquent property tax of \(1,100, title insurance costing \)600, and $4,600 to level the land and remove an unwanted building. Record the journal entry for purchase of the land.

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.

Computing first-year depreciation and book value 

On January 1, 2018, Air Canadians purchased a used airplane for \(37,000,000. Air Canadians expects the plane to remain useful for five years (4,000,000 miles) and to have a residual value of \)5,000,000. The company expects the plane to be flown 1,400,000 miles during the first year.

Requirements 

1. Compute Air Canadians’s first-year depreciation expense on the plane using the following methods: 

a. Straight-line 

b. Units-of-production 

c. Double-declining-balance 

2. Show the airplane’s book value at the end of the first year for all three methods.

What is goodwill? Is goodwill amortized? What happens if the value of goodwill has decreased at the end of the year?

What does the asset turnover ratio measure, and how is it calculated?

What does it mean if an exchange of plant assets has commercial substance? Are gains and losses recorded on the books because of the exchange?

Calculating partial-year depreciation 

On February 28, 2017, Rural Tech Support purchased a copy machine for \(53,400. Rural Tech Support expects the machine to last for six years and have a residual value of \)3,000. Compute depreciation expense on the machine for the year ended December 31, 2017, using the straight-line method.

Changing the estimated life of an asset 

Assume that Smith’s Auto Sales paid $45,000 for equipment with a 15-year life and zero expected residual value. After using the equipment for six years, the company determines that the asset will remain useful for only five more years. 

Requirements 

1. Record depreciation expense on the equipment for Year 7 by the straight-line method. 

2. What is accumulated depreciation at the end of Year 7?

Discarding of a fully depreciated asset On June 15, 2017, Family Furniture discarded equipment that cost \(27,000, a residual value of \)0, and was fully depreciated. Journalize the disposal of the equipment.

Discarding of a fully depreciated asset On June 15, 2017, Family Furniture discarded equipment that cost \(27,000, a residual value of \)0, and was fully depreciated. Journalize the disposal of the equipment

Selling an asset at gain or loss Peter Company purchased equipment on January 1, 2018, for \(28,000. Suppose Peter Company sold the equipment for \)4,000 on December 31, 2019. Accumulated Depreciation as of December 31, 2019, was $11,000. Journalize the sale of the equipment, assuming straight-line depreciation was used.

Accounting for depletion of natural resources Ajax Petroleum holds huge reserves of oil assets. Assume that at the end of 2018, Ajax Petroleum’s cost of oil reserves totaled $27,000,000, representing 3,000,000 barrels of oil.

 Requirements

1. Which method does Ajax Petroleum use to compute depletion?
2. Suppose Ajax Petroleum removed and sold 500,000 barrels of oil during 2019. Journalize depletion expense for 2019.

Accounting for an intangible asset On October 1, 2018, Modern Company purchased a patent for $153,600 cash. Although the patent gives legal protection for 20 years, the patent is expected to be used for only eight years.

 Requirements 

1. Journalize the purchase of the patent. 

2. Journalize the amortization expense for the year ended December 31, 2018. Assume straight-line amortization.

Accounting for goodwill 

Decca Publishing paid \(230,000 to acquire Thrifty Nickel, a weekly advertising paper. At the time of the acquisition, Thrifty Nickel’s balance sheet reported total assets of \)130,000 and liabilities of \(70,000. The fair market value of Thrifty Nickel’s assets was \)100,000. The fair market value of Thrifty Nickel’s liabilities was $70,000.

 Requirements 

1. How much goodwill did Decca Publishing purchase as part of the acquisition of Thrifty Nickel? 
2. Journalize Decca Publishing’s acquisition of Thrifty Nickel

Computing the asset turnover ratio Biagas, Inc. had net sales of \(55,600,000 for the year ended May 31, 2018. Its beginning and ending total assets were \)52,800,000 and $98,500,000, respectively. Determine Biagas’s asset turnover ratio for year ended May 31, 2018.