Chapter 9: 8RQ (page 488)
Which depreciation method ignores residual value until the last year of depreciation? Why?
The method of depreciation which ignores residual value is the double-declining method.
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Whitney Plumb Associates surveys American eating habits. The company’s accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:
Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financed the remainder with a note payable.
Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(350,000 paid in cash. An independent appraisal valued the land at \)275,625 and the communication equipment at \(91,875.
Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Whitney Plumb received \)390,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.
Dec. 31 Recorded depreciation as follows:
Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value. Office equipment is depreciated using the double-declining-balance method over five years with a \)2,000 residual value.
Record the transactions in the journal of Whitney Plumb Associates.
Determining asset cost and recording partial-year depreciation, straight-line Discount Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:
a. Purchase price of three acres of land $ 80,000
b. Delinquent real estate taxes on the land to be paid by Discount Parking 6,300
c. Additional dirt and earthmoving 9,000
d. Title insurance on the land acquisition 3,200
e. Fence around the boundary of the property 9,600
f. Building permits for the building 1,000
g. Architect’s fee for the design of the building 20,700
h. Signs near the front of the property 9,300
i. Materials used to construct the building 215,000
j. Labor to construct the building 175,000
k. Interest cost on the construction loan for the building 9,400
l. Parking lots on the property 28,500
m. Lights for the parking lots 11,200
n. Salary of construction supervisor (80% to building; 20% to parking lot and concrete walks) 50,000
o. Furniture 11,200
p. Transportation of furniture from seller to the building 2,200
q. Additional fencing 6,600
Discount Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value’s
Requirements
1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on October 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar
This problem continues the Canyon Canoe Company situation from Chapter 8. Amber and Zack Wilson are continuing to review business practices. Currently, they are reviewing the company’s property, plant, and equipment and have gathered the following information:
Asset | Acquisition Date | Cost | Estimated Life | Estimated Residual value | Depreciation Method | Monthly Depreciation Expense |
Canoes | Nov. 3, 2018 | \(4,800 | 4 Years | \) 0 | SL | $100 |
Land | Dec 1, 2018 | 85,000 | n/a | |||
Building | Dec 1, 2018 | 35,000 | 5 Years | 5,000 | SL | 500 |
Canoes | Dec 2, 2018 | 7,200 | 4 Years | 0 | SL | 150 |
Computer | Mar. 2, 2019 | 3,600 | 3 Years | 300 | DDB | |
Office Furniture | MAR. 3, 2019 | 3,000 | 5 Years | 600 | SL |
*SL = Straight@line; DDB = Double@declining@balance
Requirements
1. Calculate the amount of monthly depreciation expense for the computer and office furniture for 2019.
2. For each asset, determine the book value as of December 31, 2018. Then, calculate the depreciation expense for the first six months of 2019 and the book value as of June 30, 2019.
3. Prepare a partial balance sheet showing Property, Plant, and Equipment as of June 30, 2019.
What is the process by which businesses spread the allocation of an intangible asset’s cost over its useful life?
Making a lump-sum purchase of assets Maplewood Properties bought three lots in a subdivision for a lump-sum price. An independent appraiser valued the lots as follows:
Lot | Appraised Value |
1 | \(144,000 |
2 | 96,000 |
3 | 240,000 |
Maplewood paid \)355,000 in cash. Record the purchase in the journal, identifying each lot’s cost in a separate Land account. Round decimals to two places, and use the computed percentages throughout.
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