Chapter 8

Exercise 8-1

Invoice price of machine...... / $ 11,500
Less discount (.02 x $11,500)...... / (230)
Net purchase price...... / 11,270
Freight charges (transportation-in).... / 260
Mounting and power connections..... / 795
Assembly...... / 375
Materials used in adjusting...... / 30
Total cost to be recorded...... / $ 12,730

Exercise 8-2

Cost of land

Purchase price for land...... / $ 225,000
Purchase price for old building...... / 120,000
Demolition costs for old building...... / 34,500
Landscaping...... / 51,000
Total cost of land...... / $ 430,500

Cost of new building and land improvements

Cost of new building...... / $1,354,500
Cost of land improvements...... / 85,500
Total construction costs...... / $1,440,000

Journal entry

Land......

/ 430,500
Land Improvements...... / 85,500
Building...... / 1,354,500
Cash...... / 1,870,500
To record costs of plant assets.

Exercise 8-3

Purchase price...... / $368,250
Closing costs...... / 19,600
Total cost of acquisition...... / $387,850

Allocation of total cost

Appraised
Value / Percent
of Total / Applying %
to Cost / Apportioned
Cost
Land...... / $166,320 / 42% / $387,850 x .42 / $162,897
Land improvements / 55,440 / 14 / $387,850 x .14 / 54,299
Building...... / 174,240 / 44 / $387,850 x .44 / 170,654
Totals...... / $396,000 / 100% / $387,850

Journal entry

Land...... / 162,897
Land Improvements...... / 54,299
Building...... / 170,654
Cash...... / 387,850
To record costs of lump-sum purchase.

Exercise 8-4

1. Straight-line depreciation: ($147,000 - $30,000) / 4 years = $29,250 per year

Year / Annual Depreciation / Year-End Book Value
2004... / $ 29,250 / $117,750
2005... / 29,250 / 88,500
2006... / 29,250 / 59,250
2007... / 29,250 / 30,000
Total... / $117,000

2. Double-declining-balance depreciation

Depreciation rate: 100% / 4 years = 25% x 2 = 50%

Year / Beginning-Year
Book Value / Depreciation
Rate / Annual
Depreciation / Year-End
Book Value
2004... / $147,000 / 50% / $ 73,500 / $73,500
2005... / 73,500 / 50 / 36,750 / 36,750
2006... / 36,750 / 50 / 6,750* / 30,000
2007... / 30,000 / -- / -- / 30,000
Total... / $117,000

* Do not depreciate more than $6,750 in the third year since the salvage
value is not subject to depreciation.

Exercise 8-5

1. Straight-line

($42,300 - $6,000) / 10 years = $3,630

2.Units-of-production

Depreciation per unit = ($42,300 - $6,000) / 363,000 units = $0.10 per unit

For 35,000 units in second year: Depreciation = 35,000 x $0.10 = $3,500

3. Double-declining-balance

Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year

First year’s depreciation = $42,300 x 20% = $8,460

Book value at beginning of second year = $42,300 - $8,460 = $33,840

Second year’s depreciation = $33,840 x 20% = $6,768

Exercise 8-6

1. Straight-line depreciation for 2005

($250,000 - $25,000) / 5 years = $45,000

2. Double-declining-balance depreciation for 2004

Rate = (100% / 5 years) x 2 = 40%

2004 depreciation ($250,000 x 40% x 9/12)...... / $ 75,000
Book value at January 1, 2005 ($250,000 - $75,000)... / $175,000
Depreciation for 2005 ($175,000 x 40%)...... / $ 70,000
Alternate calculation
2004 depreciation ($250,000 x 40% x 9/12)...... / $ 75,000
2005 depreciation
$250,000 x 40% x 3/12...... / $ 25,000
($250,000 - $75,000 - $25,000) x 40% x 9/12...... / 45,000
Total 2005 depreciation...... / $ 70,000

Exercise 8-7

1. / Original cost of machine...... / $21,750
Less two years' accumulated depreciation
[($21,750 - $2,250) / 4 years] x 2 years...... / (9,750)
Book value at end of second year...... / $12,000
2. / Book value at end of second year...... / $12,000
Less revised salvage value...... / (1,800)
Remaining depreciable cost...... / $10,200

Revised annual depreciation = $10,200 / 3 years = $3,400

Exercise 8-8

1. Straight-line depreciation

Income
before
Depreciation /
Depreciation
Expense* /
Net
Income
Year 1.... / $ 85,500 / $ 36,540 / $ 48,960
Year 2.... / 85,500 / 36,540 / 48,960
Year 3.... / 85,500 / 36,540 / 48,960
Year 4.... / 85,500 / 36,540 / 48,960
Year 5.... / 85,500 / 36,540 / 48,960
Totals.... / $427,500 / $182,700 / $244,800

*($235,200 - $52,500) / 5 years = $36,540

2. Double-declining-balance depreciation

Income
before
Depreciation /
Depreciation
Expense* /
Net
Income
Year 1... / $ 85,500 / $ 94,080 / $ (8,580)
Year 2.... / 85,500 / 56,448 / 29,052
Year 3.... / 85,500 / 32,172 / 53,328
Year 4.... / 85,500 / 0 / 85,500
Year 5.... / 85,500 / 0 / 85,500
Totals.... / $427,500 / $182,700 / $244,800
Supporting calculations for depreciation expense
*Note: (100% / 5 years) x 2 = 40% depreciation rate
/
Beginning
Book
Value / Annual
Depreciation
(40% of
Book Value) / Accumulated
Depreciation at the End of the Year / Ending Book Value ($235,200 Cost Less Accumulated Depreciation)
Year 1...... / $235,200 / $ 94,080 / $ 94,080 / $141,120
Year 2...... / 141,120 / 56,448 / 150,528 / 84,672
Year 3...... / 84,672 / 32,172** / 182,700 / 52,500
Year 4...... / 52,500 / 0 / 182,700 / 52,500
Year 5...... / 52,500 / 0 / 182,700 / 52,500
Total...... / $182,700
**Must not use $33,869; instead take only enough depreciation in Year 3 to reduce
book value to the $52,500 salvage value.

Exercise 8-9

1. Annual depreciation = $561,000 / 20 years = $28,050 per year

Age of the building = Accumulated depreciation / Annual depreciation

= $420,750 / $28,050 = 15 years

2. Entry to record the extraordinary repairs

Building......

/ 67,200
Cash...... / 67,200
To record extraordinary repairs.
3. / Cost of building
Before repairs...... / $561,000
Add cost of repairs...... / 67,200 / $628,200
Less accumulated depreciation...... / 420,750
Revised book value of building...... / $207,450
4. / Revised book value of building (part 3)...... / $207,450
New estimate of useful life (20 - 15 + 7)...... / 12 years
Revised annual depreciation...... / $17,287.5

Journal entry

Depreciation Expense...... / 17,287.5
Accumulated Depreciation–Building...... / 17,287.5
To record depreciation.

Exercise 8-10

1. / Equipment...... / 21,000
Cash...... / 21,000
To record betterment.
2. / Repairs Expense...... / 5,250
Cash...... / 5,250
To record ordinary repairs.
3. /
Equipment......
/ 13,950
Cash...... / 13,950
To record extraordinary repairs.

Exercise 8-11

1. Book value of the old tractor ($95,000 - $52,500)...... $ 42,500

2. Loss on the exchange

Book value - Trade-in allowance ($42,500 - $28,000)...... $ 14,500

3. Debit to new Tractor account

Cash paid + Trade-in allowance ($82,000 + $28,000)...... $110,000

Alternatively, answers can be taken from the following journal entry:

Tractor (new)*...... / 110,000
Loss on Exchange of Assets...... / 14,500
Accumulated Depreciation–Tractor...... / 52,500
Tractor (old)...... / 95,000
Cash...... / 82,000
To record asset exchange. *($28,000+$82,000)

Exercise 8-12

Note: Book value of Machine equals $42,000 - $22,625 = $19,375

1. Sold for $16,250 cash

Jan. 2 / Cash...... / 16,250
Loss on Sale of Machinery...... / 3,125
Accumulated Depreciation--Machinery...... / 22,625
Machinery...... / 42,000
To record cash sale of machine.
  1. $20,000 trade-in allowance exceeds book value; but no gain is recognized on similar asset exchange ($625 gain is ‘buried’

in the cost of the new machinery)

Jan. 2 / Machinery*...... / 57,875
Accumulated Depreciation--Machinery...... / 22,625
Machinery...... / 42,000
Cash**...... / 38,500
To record similar asset exchange.
*[$58,500 - ($20,000-$19,375)] **($58,500- $20,000)

3.$15,000 trade-in allowance is less than book value (yielding a loss)

Jan. 2 / Machinery...... / 58,500
Loss on Exchange of Machinery...... / 4,375
Accumulated Depreciation--Machinery...... / 22,625
Machinery...... / 42,000
Cash*...... / 43,500
To record similar asset exchange. *($58,500-$15,000)

Exercise 8-13

2008
July 1 / Depreciation Expense...... / 6,625
Accumulated Depreciation--Machinery..... / 6,625
To record one-half year depreciation.*

*Annual depreciation = $92,750 / 7 years = $13,250

Depreciation for 6 months in 2008 = $13,250 x 6/12 = $6,625

1. Sold for $35,000 cash

July 1 / Cash...... / 35,000
Accumulated Depreciation—Machinery...... / 59,625
Gain on Sale of Machinery...... / 1,875
Machinery...... / 92,750
To record disposal of machinery.*

*Total accumulated depreciation at date of disposal:

Four years 2004-2007 (4 x $13,250).... $53,000

Partial year 2008 (6/12 x $13,250)..... 6,625

Total accumulated depreciation...... $59,625

2. Destroyed by fire with $30,000 cash insurance settlement

July 1 / Cash...... / 30,000
Loss from Fire...... / 3,125
Accumulated Depreciation—Machinery...... / 59,625
Machinery...... / 92,750
To record disposal of machinery from fire.

Exercise 8-14

Dec. 31 / Depletion Expense—Mineral Deposit...... / 398,310
Accumulated Depletion—Mineral Deposit..... / 398,310
To record depletion [$3,633,750/1,425,000 tons=
$2.55 per ton; 156,200 tons x $2.55 = $398,310].
Dec. 31 / Depreciation Expense—Machinery ...... / 18,744
Accumulated Depreciation—Machinery...... / 18,744
To record depreciation [$171,000/1,425,000 tons
= $0.12 per ton; 156,200 tons x $0.12 = $18,744].

Exercise 8-15

Jan. 1 / Copyright...... / 236,700
Cash...... / 236,700
To record purchase of copyright.
Dec. 31 / Amortization Expense—Copyright...... / 19,725
Accumulated Amortization—Copyright...... / 19,725
To record amortization of copyright
[$236,700 / 12 years].

Exercise 8-16A

Net assets (excluding goodwill)...... / $ 437,000
Normal rate of return in this industry...... / x 10%
Normal net income on net assets...... / 43,700
Expected (typical) future net income...... / 85,000
Expected net income above-normal...... / $ 41,300

1. Value of goodwill = $41,300 x 10= $413,000

2. Value of goodwill = $41,300 / 8%= $516,250

Note: These estimates of goodwill assume that Corey Alt’s departure does not impact the business’s goodwill.