Chapter 11: Q11-24Q (page 583)
In what way may the use of percentage depletion violate sound accounting theory?
Answer
In financial statements, the wrong amount of expense will be reported.
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On January 1, 2016, Locke Company, a small machine-tool manufacturer, acquired for
The following depreciation methods may be used:
Use the MACRS tables for computing depreciation.
Instructions
Describe cost depletion and percentage depletion. Why is the percentage depletion method permitted?
(Depletion, Timber, and Unusual Loss) Conan O’Brien Logging and Lumber Company owns 3,000 acres of timberland on the north side of Mount Leno, which was purchased in 2005 at a cost of
At the time of the eruption, O’Brien had logged 20% of the estimated 500,000 board feet of timber. Prior to the eruption, O’Brien estimated the land to have a value of \)200 per acre after the timber was harvested. O’Brien includes the logging roads in the depletion base.
O’Brien estimates it will take 3 years to salvage the downed timber at a cost of
Instructions
(Ratio Analysis) The 2014 annual report of Tootsie Roll Industries contains the following information.
(in millions) | December 31, 2014 | December 31, 2013 |
Total assets | \(910.4 | \)888.4 |
Total liabilities | 219.3 | 208.1 |
Net sales | 539.9 | 539.6 |
Net income | 63.2 | 60.8 |
Instructions
Compute the following ratios for Tootsie Roll for 2014.
(Comprehensive Fixed-Asset Problem) Darby Sporting Goods Inc. has been experiencing growth in the demand for its products over the last several years. The last two Olympic Games greatly increased the popularity of basketball around the world. As a result, a European sports retailing consortium entered into an agreement with Darby’s Roundball Division to purchase basketballs and other accessories on an increasing basis over the next 5 years.
To be able to meet the quantity commitments of this agreement, Darby had to obtain additional manufacturing capacity. A real estate firm located an available factory in close proximity to Darby’s Roundball manufacturing facility, and Darby agreed to purchase the factory and used machinery from Encino Athletic Equipment Company on October 1, 2016. Renovations were necessary to convert the factory for Darby’s manufacturing use.
The terms of the agreement required Darby to pay Encino
1/1 | 4/1 | 10/1 | 12/31 | |
Encino | \)50,000 | \(90,000 | \)110,000 | \(150,000 |
Malone | 30,000 | 30,000 | 40,000 |
On January 1, 2017, Darby secured a \)500,000 line-of-credit with a 12% interest rate to finance the purchase cost of the factory and machinery, and the renovation costs. Darby drew down on the line-of-credit to meet the payment schedule shown above; this was Darby’s only outstanding loan during 2017.
Bob Sprague, Darby’s controller, will capitalize the maximum allowable interest costs for this project. Darby’s policy regarding purchases of this nature is to use the appraisal value of the land for book purposes and prorate the balance of the purchase price over the remaining items. The building had originally cost Encino
Angie Justice, chief engineer, estimated that the renovated plant would be used for 15 years, with an estimated salvage value of
plant. One-half year’s depreciation is taken in the year the plant is placed in service, and one-half year is allowed when the property is disposed of or retired. Darby uses a 360-day year for calculating interest costs.
Instructions
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