Chapter 9
November 3, 2008
1. Diversified Industries started as a house constructions company. In recent years, it has expanded into heavy construction, ready-mix concrete, sand and gravel, construction supplies, and earth-moving services. The company completed the following transactions during 2008. Amounts have been simplified.
Prepare Journal entries from the following transactions and adjusting entries.
a. Jan. 1, the management decided to buy a 10-year building for $175,000 and the land on which it was situated for $130,000. DI paid $100,000 in cash and signed a note payable for the rest.
b. Jan. 3, DI paid $38,000 in cash for renovations to the building prior to use.
c. July 10, DI paid $1200 cash for ordinary repairs on the building.
Adjusting Entries
d. The building will be depreciated on a straight-line basis over an estimated useful life of 30 years. The estimated residual value is $33,000.
e. DI purchased another company two years ago at $100,000 more than fair values of the net assets acquired. The goodwill has an unlimited life.
f. At the beginning of the year, DI owned equipment with a cost of $650,000 and accumulated deprecation of $150,000. The equipment is being depreciated using the double-declining balance method, with a useful life of 20 years and no residual value.
g. At year-end, DI tested its long-lived assets for possible impairment of their value. Included in its equipment was a piece of old excavation equipment with a cost of $156,000 and book value of $120,000, after making the adjustment for (c). Due to its smaller size and lack of safety features, the old equipment has limited use. The future cash flows and fair value are expected to be $35,000. Goodwill was found to be not impaired.
2. Torge Company bought a machine for $65,000 cash. The estimated useful life was five years, and the estimated residual value was $5,000. Assume that the estimated useful life in productive units is 150,000. Units actually produced were 40,000 in year 1, and 45,000 in year 2.
a. Determine the appropriate amounts to complete the following schedule. Show computations.
Depreciation Expense for / Book Value at End of *Method of Depreciation / Year 1 / Year 2 / Year 1 / Year 2
Straight-line
Units-of-production
Double-declining-balance
b. Which method would result in the lowest net income for year1? For year 2?
c. Which method would result in the lowest fixed asset turnover ratio for year 1? Why?
3. During 2007, Rayon Corporation disposed of two different assets. On January 1, 2007, prior to their disposal, the accounts reflected the following:
Asset / Original Cost / Residual Value / Estimated Life / Accumulated Depr (S-L)Machine A / $60,000 / $11,000 / 7 years / 28,000 (4 yrs)
Machine B / $14,200 / $1925 / 5 years / 7,365 (3 yrs)
Give the journal entries related to the disposal of each machine at the beginning of 2007.
The machines were disposed of the following ways:
a. Machine A: Sold on January 2, 2007, for $33,500.
b. Machine B: On January 2, 2007, this machine suffered irreparable damage from an accident and was removed immediately by a salvage company at no cost.