Chapter 8: 9DQ (page 386)
Question: Identify events that might lead to the disposal of a plant asset.
Disposal of a plant asset occurs in three ways which are Discard, sale, or exchange.
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On January 1, 2010, Mason Co. entered into a 12-year lease on a building. The lease contract requires (1) annual (prepaid) rental payments of \(36,000 each January 1 throughout the life of the lease and (2) for the lessee to pay for all additions and improvements to the leased property. On January 1, 2017, Mason decides to sublease the space to Stewart Co. for the remaining five years of the lease—Stewart pays \)40,000 to Mason for the right to sublease and agrees to assume the obligation to pay the \(36,000 annual rent to the building owner beginning January 1, 2017. After taking possession of the leased space, Stewart pays for improving the office portion of the leased space at a \)20,000 cost. The improvements are paid for by Stewart on January 3, 2017, and are estimated to have a useful life equal to the 13 years remaining in the life of the building.
Required
Question: What is the difference between land and land improvements?
Identify the main difference between (a) plant assets and current assets, (b) plant assets and inventory, and (c) plant assets and long-term investments.
Question: What characteristics of a plant asset make it different from other assets?
On February 19 of the current year, Quartzite Co. pays \(5,400,000 for land estimated to contain 4 million tons of recoverable ore. It installs machinery costing \)400,000 that has a 16-year life and no salvage value and is capable of mining the ore deposit in 12 years. The machinery is paid for on March 21, eleven days before mining operations begin. The company removes and sells 254,000 tons of ore during its first nine months of operations ending on December 31. Depreciation of the machinery is in proportion to the mine’s depletion as the machinery will be abandoned after the ore is mined.
Required
Prepare entries to record (a) the purchase of the land, (b) the cost and installation of the machinery, (c) the first nine months’ depletion assuming the land has a net salvage value of zero after the ore is mined, and (d) the first nine months’ depreciation on the machinery.
Analysis Component
Describe both the similarities and differences in amortization, depletion, and depreciation.
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