454 9 Plant Assets, Natural Resources, and Intangible Assets

Capital expenditures Expenditures that increase the Licenses Operating rights to use public property, granted
company’s investment in productive facilities. (p. 441). to a business by a governmental agency. (p. 447).
Component depreciation Depreciation method in Materiality concept If an item would not make a differ-
which any significant parts of a plant asset that have ence in decision-making, a company does not have to
significantly different useful lives are separately depre- follow IFRS in reporting it. (p. 441).
ciated. (p. 437). Natural resources Assets that consist of standing timber
Copyrights Exclusive grant from the government that and underground deposits of oil, gas, or minerals. (p. 444).
allows the owner to reproduce and sell an artistic or Ordinary repairs Expenditures to maintain the operat-
published work. (p. 447). ing efficiency and productive life of the plant asset.
Declining-balance method Depreciation method that (p. 441).
applies a constant rate to the declining book value of Patent An exclusive right issued by a patent office that
the asset and produces a decreasing annual deprecia- enables the recipient to manufacture, sell, or otherwise
tion expense over the useful life of the asset. (p. 436). control an invention for a specified number of years
Depletion The allocation of the cost of an extractable from the date of the grant. (p. 446).
natural resource to expense in a rational and system- Plant assets Tangible resources that are used in the op-
atic manner over the resource’s useful life. (p. 444). erations of the business and are not intended for sale to
Depreciable cost The cost of a plant asset less its resid- customers. (p. 428).
ual value. (p. 433). Research and development (R&D) costs Expenditures
Depreciation The process of allocating to expense the that may lead to patents, copyrights, new processes, or
cost of a plant asset over its useful (service) life in a new products. (p. 449).
rational and systematic manner. (p. 431). Residual value An estimate of an asset’s value at the end
Franchise (license) A contractual arrangement under of its useful life. (p. 433).
which the franchisor grants the franchisee the right to Revenue expenditures Expenditures that are immedi-
sell certain products, perform specific services, or use ately charged against revenues as an expense. (p. 441).
certain trademarks or trade names, usually within a Straight-line method Depreciation method in which
designated geographic area. (p. 447). periodic depreciation is the same for each year of the
Going concern assumption States that the company asset’s useful life. (p. 433).
will continue in operation for the foreseeable future. Trademark (trade name) A word, phrase, jingle, or sym-
(p. 432). bol that identifies a particular enterprise or product.
Goodwill The value of all favorable attributes that relate (p. 447).
to a company that is not attributable to any other spe- Units-of-activity method Depreciation method in which
cific asset. (p. 448). useful life is expressed in terms of the total units of
Intangible assets Rights, privileges, and competitive production or use expected from an asset. (p. 435).
advantages that result from the ownership of long-lived Useful life An estimate of the expected productive life,
assets that do not possess physical substance. (p. 446). also called service life, of an asset. (p. 432).

PRACTICE MULTIPLE-CHOICE QUESTIONS

(LO 1) 1. Erin Danielle Company purchased equipment and estimated useful life of 5 years. The amount of ac-
incurred the following costs. cumulated depreciation at December 31, 2017, if the
straight-line method of depreciation is used, is:
Cash price €24,000 (a) £80,000. (c) £78,000.
Sales taxes 1,200 (b) £160,000. (d) £156,000.
Insurance during transit 200 4. Ann Torbert purchased a truck for €11,000 on January 1, (LO 2)
Installation and testing 400 2016. The truck will have an estimated residual value of
Total costs €25,800 €1,000 at the end of 5 years. Using the units-of-activity
method, the balance in accumulated depreciation at
What amount should be recorded as the cost of the December 31, 2017, can be computed by the following
equipment? formula:
(a) €24,000. (c) €25,400. (a) (€11,000 ÷ Total estimated activity) × Units of
(b) €25,200. (d) €25,800. activity for 2017.
(LO 2) 2. Depreciation is a process of: (b) (€10,000 ÷ Total estimated activity) × Units of
(a) valuation. (c) cash accumulation. activity for 2017.
(b) cost allocation. (d) appraisal. (c) (€11,000 ÷ Total estimated activity) × Units of
(LO 2) 3. Micah Bartlett Ltd. purchased equipment on January 1, activity for 2016 and 2017.
2016, at a total invoice cost of £400,000. The equipment (d) (€10,000 ÷ Total estimated activity) × Units of
has an estimated residual value of £10,000 and an activity for 2016 and 2017.
 Review and Practice 455

(LO 2) 5. Chang Company purchased a piece of equipment on residual value is expected and 2 million tons are
January 1, 2017. The equipment cost HK$600,000 and mined in the first year, the entry to record depletion
has an estimated life of 8 years and a residual value will include a:
of HK$80,000. What was the depreciation expense (a) debit to Accumulated Depletion of NT$2,000,000.
for the asset for 2018 under the double-declining- (b) credit to Depletion Expense of NT$1,200,000.
balance method? (c) debit to Inventory of NT$1,200,000.
(a) HK$65,000. (c) HK$150,000. (d) credit to Accumulated Depletion of NT$2,000,000.
(b) HK$112,500. (d) HK$65,620. 12. Which of the following statements is false? (LO 6)
(LO 2) 6. When there is a change in estimated depreciation: (a) If an intangible asset has a finite life, it should be
(a) previous depreciation should be corrected. amortized.
(b) current and future years’ depreciation should be (b) The amortization period of an intangible asset
revised. can exceed 20 years.
(c) only future years’ depreciation should be revised. (c) Goodwill is recorded only when a business is
(d) None of the above. purchased.
(LO 2) 7. Able Towing plc purchased a tow truck for £60,000 (d) Development costs are always expensed when
on January 1, 2015. It was originally depreciated on incurred.
a straight-line basis over 10 years with an assumed 13. Indicate which of the following statements is true. (LO 7)
residual value of £12,000. On December 31, 2017, (a) Since intangible assets lack physical substance,
before adjusting entries had been made, the com- they need be disclosed only in the notes to the
pany decided to change the remaining estimated life financial statements.
to 4 years (including 2017) and the residual value to (b) Goodwill should be reported as a contra account
£2,000. What was the depreciation expense for 2017? in the equity section.
(a) £6,000. (c) £15,000. (c) Totals of major classes of assets can be shown
(b) £4,800. (d) £12,100. in the statement of financial position, with asset
(LO 2) 8. Wales plc applies revaluation accounting to equip- details disclosed in the notes to the financial
ment that is recorded on its books at €800,000, with statements.
€100,000 of accumulated depreciation after deprecia- (d) Intangible assets are typically combined with
tion for the year recorded. It has determined that the plant assets and extractable natural resources
asset is now worth €775,000. The entry to record the and shown in the property, plant, and equipment
revaluation would include a: section.
(a) credit to Equipment of €25,000. 14. Tianzi Coffee Ltd. reported net sales of HK$1,800,000, (LO 7)
(b) debit to Equipment of €75,000. net income of HK$540,000, beginning total as-
(c) credit to Accumulated Depreciation of €100,000. sets of HK$2,000,000, and ending total assets of
(d) debit to Revaluation Surplus of €75,000. HK$3,000,000. What was the company’s asset
(LO 3) 9. Additions to plant assets are: turnover?
(a) revenue expenditures. (a) 0.90. (c) 0.72.
(b) debited to the Maintenance and Repairs Expense (b) 0.20. (d) 1.39.
account. *15. Schopenhauer NV exchanged an old machine, with (LO 8)
(c) debited to the Purchases account. a book value of €39,000 and a fair value of €35,000,
(d) capital expenditures. and paid €10,000 cash for a similar new machine.
(LO 4) 10. Bennie Razor Company has decided to sell one of its The transaction has commercial substance. At what
old manufacturing machines on June 30, 2017. The amount should the machine acquired in the exchange
machine was purchased for €80,000 on January 1, be recorded on Schopenhauer’s books?
2013, and was depreciated on a straight-line basis for (a) €45,000. (c) €49,000.
10 years assuming no residual value. If the machine (b) €46,000. (d) €50,000.
was sold for €26,000, what was the amount of the *16. In exchanges of assets in which the exchange has (LO 8)
gain or loss recorded at the time of the sale? commercial substance:
(a) €18,000. (c) €22,000. (a) neither gains nor losses are recognized immediately.
(b) €54,000. (d) €46,000. (b) gains, but not losses, are recognized immediately.
(LO 5) 11. Maggie Sharrer Ltd. expects to extract 20 million tons (c) losses, but not gains, are recognized immediately.
of coal from a mine that cost NT$12 million. If no (d) both gains and losses are recognized immediately.

Solutions
1. (d) All of the costs (€1,200 + €200 + €400) in addition to the cash price (€24,000) should be included in the cost of the equip-
ment because they were necessary expenditures to acquire the asset and make it ready for its intended use. The other choices are
therefore incorrect.
2. (b) Depreciation is a process of allocating the cost of an asset over its useful life, not a process of (a) valuation, (c) cash accumu-
lation, or (d) appraisal.
456 9 Plant Assets, Natural Resources, and Intangible Assets

3. (d) Accumulated depreciation will be the sum of 2 years of depreciation expense. Annual depreciation for this asset is (£400,000 −
£10,000)/5 = £78,000. The sum of 2 years’ depreciation is therefore £156,000 (£78,000 + £78,000), not (a) £80,000, (b) £160,000, or
(c) £78,000.
4. (d) The units-of-activity method takes residual value into consideration; therefore, the depreciable cost is €10,000. This
amount is divided by total estimated activity. The resulting number is multiplied by the units of activity used in 2016 and 2017
to compute the accumulated depreciation at the end of 2017, the second year of the asset’s use. The other choices are therefore
incorrect.
5. (b) For the double-declining method, the depreciation rate would be 25% or (1/8 × 2). For 2017, annual depreciation expense is
HK$150,000 (HK$600,000 book value × 25%); for 2018, annual depreciation expense is HK$112,500 [(HK$600,000 − HK$150,000) ×
25%], not (a) HK$65,000, (c) HK$150,000, or (d) HK$65,620.
6. (b) When there is a change in estimated depreciation, the current and future years’ depreciation computation should reflect the
new estimates. The other choices are incorrect because (a) previous years’ depreciation should not be adjusted when new estimates
are made for depreciation, and (c) when there is a change in estimated depreciation, the current and future years’ depreciation
computation should reflect the new estimates. Choice (d) is wrong because there is a correct answer.
7. (d) First, calculate accumulated depreciation from January 1, 2015, through December 31, 2016, which is £9,600 {[(£60,000 −
£12,000)/10 years] × 2 years}. Next, calculate the revised depreciable cost, which is £48,400 (£60,000 − £9,600 − £2,000). Thus, the
depreciation expense for 2017 is £12,100 (£48,400/4), not (a) £6,000, (b) £4,800, or (c) £15,000.
8. (a) The entry to record the revaluation would include a credit to Equipment of €25,000, as well as a debit (not credit) to Accu-
mulated Depreciation of €100,000 and a credit (not debit) to Revaluation Surplus of €75,000.
9. (d) When an addition is made to plant assets, it is intended to increase productive capacity, increase the assets’ useful life, or
increase the efficiency of the assets. This is called a capital expenditure. The other choices are incorrect because (a) additions to
plant assets are not revenue expenditures because the additions will have a long-term useful life whereas revenue expenditures are
minor repairs and maintenance that do not prolong the life of the assets; (b) additions to plant assets are debited to Plant Assets,
not Maintenance and Repairs Expense, because the Maintenance and Repairs Expense account is used to record expenditures not
intended to increase the life of the assets; and (c) additions to plant assets are debited to Plant Assets, not Purchases, because the
Purchases account is used to record assets intended for resale (inventory).
10. (a) First, the book value needs to be determined. The accumulated depreciation as of June 30, 2017, is €36,000 [(€80,000/10) ×
4.5 years]. Thus, the cost of the machine less accumulated depreciation equals €44,000 (€80,000 − €36,000). The loss recorded at
the time of sale is €18,000 (€26,000 − €44,000), not (b) €54,000, (c) €22,000, or (d) €46,000.
11. (c) The amount of depletion is determined by computing the depletion per unit (NT$12 million/20 million tons = NT$0.60 per ton)
and then multiplying that amount times the number of units extracted during the year (2 million tons × NT$0.60 = NT$1,200,000). This
amount is debited to Inventory and credited to Accumulated Depletion. The other choices are therefore incorrect.
12. (d) Development costs are expensed when incurred until technological feasibility is achieved. After that point, development
costs are capitalized. The other choices are true statements.
13. (c) Reporting only totals of major classes of assets in the statement of financial position is appropriate. Additional details can
be shown in the notes to the financial statements. The other choices are false statements.
14. (c) Asset turnover = Net sales (HK$1,800,000)/Average total assets [(HK$2,000,000 + HK$3,000,000)/2] = 0.72 times, not (a) 0.90,
(b) 0.20, or (d) 1.39 times.
*15. (a) When an exchange has commercial substance, the debit to the new asset is equal to the fair value of the old asset plus the
cash paid (€35,000 + €10,000 = €45,000), not (b) €46,000, (c) €49,000, or (d) €50,000.
*16. (d) Both gains and losses are recognized immediately when an exchange of assets has commercial substance. The other
choices are therefore incorrect.

PRACTICE EXERCISES

Determine depreciation for 1. Winston plc purchased a new machine on October 1, 2017, at a cost of £120,000. The
partial periods. company estimated that the machine will have a residual value of £12,000. The machine
(LO 2) is expected to be used for 12,000 working hours during its 4-year life.

Instructions
Compute the depreciation expense under the following methods for the year indicated.
(a) Straight-line for 2017.
(b) Units-of-activity for 2017, assuming machine usage was 1,700 hours.
(c) Declining-balance using double the straight-line rate for 2017 and 2018.
 Review and Practice 457

Solution
1. (a) Straight-line method:
£120,000 – £12,000 = £27,000 per year
4
2017 depreciation = £27,000 × 3/12 = £6,750
(b) Units-of-activity method:
£120,000 – £12,000 = £9 per hour
12,000
2017 depreciation = 1,700 hours × £9 = £15,300
(c) Declining-balance method:
2017 depreciation = £120,000 × 50% × 3/12 = £15,000
Book value January 1, 2018 = £120,000 – £15,000 = £105,000
2018 depreciation = £105,000 × 50% = £52,500

2. Sun Moon Lake Ltd., organized in 2017, has the following transactions related to intangible Prepare entries to set up
assets. appropriate accounts for
1/2/17 Purchased patent (8-year life) NT$560,000 different intangibles; amortize
4/1/17 Goodwill purchased (indefinite life) 360,000 intangible assets.
7/1/17 10-year franchise; expiration date 7/1/2027 440,000 (LO 6)
9/1/17 Research and development costs 185,000

Instructions
Prepare the necessary entries to record these intangibles. All costs incurred were for cash.
Make the adjusting entries as of December 31, 2017, recording any necessary amortization
and reflecting all balances accurately as of that date. Assume all development costs were
incurred prior to technological feasibility.

Solution
2. 1/2/17 Patents 560,000
Cash 560,000
4/1/17 Goodwill 360,000
Cash 360,000
(Part of the entry to record purchase
of another company)
7/1/17 Franchises 440,000
Cash 440,000
9/1/17 Research and Development Expense 185,000
Cash 185,000
12/31/17 Amortization Expense
(NT$560,000 ÷ 8) + [(NT$440,000 ÷ 10) × 1/2] 92,000
Patents 70,000
Franchises 22,000

Ending balances, 12/31/17:

Patents = NT$490,000 (NT$560,000 − NT$70,000)
Goodwill = NT$360,000
Franchises = NT$418,000 (NT$440,000 − NT$22,000)
Research and development expense = NT$185,000

PRACTICE PROBLEMS

1. DuPage SA purchases a factory machine at a cost of €18,000 on January 1, 2017. Compute depreciation under
DuPage expects the machine to have a residual value of €2,000 at the end of its 4-year use- different methods.
ful life. (LO 2)
During its useful life, the machine is expected to be used 160,000 hours. Actual annual
hourly use was 2017, 40,000; 2018, 60,000; 2019, 35,000; and 2020, 25,000.
458 9 Plant Assets, Natural Resources, and Intangible Assets

Instructions
Prepare depreciation schedules for the following methods: (a) straight-line, (b) units-
of-activity, and (c) declining-balance using double the straight-line rate.

Solution
1. (a)
Straight-Line Method
Computation Annual End of Year
Depreciable Depreciation Depreciation Accumulated Book
Year Cost* × Rate = Expense Depreciation Value
2017 €16,000 25% €4,000 € 4,000 €14,000**
2018 16,000 25% 4,000 8,000 10,000
2019 16,000 25% 4,000 12,000 6,000
2020 16,000 25% 4,000 16,000 2,000
*€18,000 − €2,000.
**€18,000 − €4,000.

(b)
Units-of-Activity Method
Computation End of Year
Annual
Units of Depreciable Depreciation Accumulated Book
Year Activity × Cost/Unit = Expense Depreciation Value
2017 40,000 €0.10* €4,000 € 4,000 €14,000
2018 60,000 0.10 6,000 10,000 8,000
2019 35,000 0.10 3,500 13,500 4,500
2020 25,000 0.10 2,500 16,000 2,000
*(€18,000 − €2,000) ÷ 160,000.

(c)
Declining-Balance Method
Computation
End of Year
Book Value Annual
Beginning of Depreciation Depreciation Accumulated Book
Year Year × Rate* = Expense Depreciation Value
2017 €18,000 50% €9,000 € 9,000 €9,000
2018 9,000 50% 4,500 13,500 4,500
2019 4,500 50% 2,250 15,750 2,250
2020 2,250 50% 250** 16,000 2,000

*¼ × 2.
**Adjusted to €250 because ending book value should not be less than expected residual value.

Record disposal of plant 2. On January 1, 2017, Hong Kong International Airport Limousine Co. purchased a limo
asset. at an acquisition cost of HK$280,000. The vehicle has been depreciated by the straight-line
(LO 4) method using a 4-year service life and a HK$40,000 residual value. The company’s fiscal
year ends on December 31.

Instructions
Prepare the journal entry or entries to record the disposal of the limousine assuming that
it was:
(a) Retired and scrapped with no residual value on January 1, 2021.
(b) Sold for HK$50,000 on July 1, 2020.

Solution
2. (a) 1/1/21 Accumulated Depreciation—Equipment 240,000
Loss on Disposal of Plant Assets 40,000
Equipment 280,000
(To record retirement of limousine)
 Questions 459

(b) 7/1/20 Depreciation Expense* 30,000

Accumulated Depreciation—Equipment 30,000
(To record depreciation to date of disposal)
Cash 50,000
Accumulated Depreciation—Equipment** 210,000
Loss on Disposal of Plant Assets 20,000
Equipment 280,000
(To record sale of limousine)

*[(HK$280,000 − HK$40,000) ÷ 4] × ½.
**[(HK$280,000 − HK$40,000) ÷ 4] × 3 = HK$180,000; HK$180,000 + HK$30,000.

Brief Exercises, DO IT! Review, Exercises, and Problems, and many additional resources are
available for practice in WileyPLUS.
NOTE: Asterisked Questions, Exercises, and Problems relate to material in the appendix to the chapter.

QUESTIONS

1. Rick Baden is uncertain about the applicability of the 16. What are the similarities and differences between the
historical cost principle to plant assets. Explain the terms depreciation, depletion, and amortization?
principle to Rick. 17. Spectrum Company hires an accounting intern
2. What are some examples of land improvements? who says that intangible assets should always be
3. Lexa Company acquires the land and building owned amortized over their legal lives. Is the intern correct?
by Malta Company. What types of costs may be Explain.
incurred to make the asset ready for its intended use 18. Goodwill has been defined as the value of all favor-
if Lexa Company wants to use (a) only the land, and able attributes that relate to a business. What types of
(b) both the land and the building? attributes could result in goodwill?
4. In a recent newspaper release, the president of Wanzo 19. Mark Gannon, a business major, is working on a case
OAO asserted that something has to be done about problem for one of his classes. In the case problem, the
depreciation. The president said, “Depreciation does company needs to raise cash to market a new product
not come close to accumulating the cash needed to it developed. Sara Bates, an engineering major, takes
replace the asset at the end of its useful life.” What is one look at the company’s statement of financial posi-
your response to the president? tion and says, “This company has an awful lot of good-
5. Jeremy is studying for the next accounting examina- will. Why don’t you recommend that it sell some of it
tion. He asks your help on two questions: (a) What is to raise cash?” How should Mark respond to Sara?
residual value? (b) Is residual value used in determin- 20. Under what conditions is goodwill recorded?
ing periodic depreciation under each depreciation 21. Often, research and development costs provide com-
method? Answer Jeremy’s questions. panies with benefits that last a number of years. (For
6. Contrast the straight-line method and the units-of- example, these costs can lead to the development of
activity method as to (a) useful life, and (b) the pattern a patent that will increase the company’s income for
of periodic depreciation over useful life. many years.) However, IFRS requires that many such
7. Contrast the effects of the three depreciation methods costs be recorded as an expense when incurred. Why?
on annual depreciation expense. 22. Some product development expenditures are recorded
8. What is component depreciation, and when must it as research and development expenses, and others as
be used? development costs. Explain the difference between
9. In the fourth year of an asset’s 5-year useful life, the these accounts, and how a company decides which
company decides that the asset will have a 6-year classification is appropriate.
service life. How should the revision of depreciation 23. McDonald’s Corporation (USA) reports total average
be recorded? Why? assets of $28.9 billion and net sales of $20.5 billion.
10. What is revaluation of plant assets? When should What is the company’s asset turnover?
revaluation be applied? 24. Alpha SE and Zito SE operate in the same industry.
11. Distinguish between revenue expenditures and capital Alpha uses the straight-line method to account for de-
expenditures during an asset’s useful life. preciation; Zito uses an accelerated method. Explain
12. How is a gain or loss on the sale of a plant asset computed? what complications might arise in trying to compare
13. Luis SA owns a machine that is fully depreciated but the results of these two companies.
is still being used. How should Luis account for this 25. Wanzo ASA uses straight-line depreciation for finan-
asset and report it in the financial statements? cial reporting purposes but an accelerated method for
14. What are extractable natural resources, and what are tax purposes. Is it acceptable to use different methods
their distinguishing characteristics? for the two purposes? What is Wanzo’s motivation for
15. Explain the concept of depletion and how it is computed. doing this?
460 9 Plant Assets, Natural Resources, and Intangible Assets

26. You are comparing two companies in the same indus- *28. When assets are exchanged in a transaction involv-
try. You have determined that Lam Ltd. depreciates ing commercial substance, how is the gain or loss on
its plant assets over a 40-year life, whereas Shuey Ltd. disposal of plant assets computed?
depreciates its plant assets over a 20-year life. Discuss *29. Morris Refrigeration Company trades in an old
the implications this has for comparing the results of machine on a new model when the fair value of
the two companies. the old machine is greater than its book value. The
27. Zelm Company is doing significant work to revitalize transaction has commercial substance. Should Morris
its warehouses. It is not sure whether it should capi- recognize a gain on disposal of plant assets? If the fair
talize these costs or expense them. What are the im- value of the old machine is less than its book value,
plications for current-year net income and future net should Morris recognize a loss on disposal of plant
income of expensing versus capitalizing these costs? assets?

BRIEF EXERCISES

Determine the cost of land. BE9-1 The following expenditures were incurred by Rosenberg AG in purchasing land:
(LO 1) cash price €64,000, accrued taxes €3,000, attorneys’ fees €2,500, real estate broker’s com-
mission €2,000, and clearing and grading €4,400. What is the cost of the land?
Determine the cost of a truck. BE9-2 Jawson plc incurs the following expenditures in purchasing a truck: cash price
(LO 1) £30,000, accident insurance £2,000, sales taxes £1,800, motor vehicle license £160, and
painting and lettering £400. What is the cost of the truck?
Compute straight-line BE9-3 Weller Company acquires a delivery truck at a cost of €42,000. The truck is expected
depreciation. to have a residual value of €9,000 at the end of its 5-year useful life. Compute annual
(LO 2) depreciation expense for the first and second years using the straight-line method.
Compute depreciation and BE9-4 Kowloon Ltd. purchased land and a building on January 1, 2017. Management’s
evaluate treatment. best estimate of the value of the land was HK$1,000,000 and of the building HK$2,000,000.
(LO 2) However, management told the accounting department to record the land at HK$2,250,000
and the building at HK$750,000. The building is being depreciated on a straight-line basis
over 20 years with no residual value. Why do you suppose management requested this
accounting treatment? Is it ethical?
Compute declining-balance BE9-5 Depreciation information for Weller Company is given in BE9-3. Assuming the
depreciation. declining-balance depreciation rate is double the straight-line rate, compute annual depre-
(LO 2) ciation for the first and second years under the declining-balance method.
Compute depreciation using BE9-6 Freemont Taxi Service uses the units-of-activity method in computing depreciation
the units-of-activity method. on its taxicabs. Each cab is expected to be driven 150,000 miles. Taxi no. 10 cost €33,500
(LO 2) and is expected to have a residual value of €500. Taxi no. 10 is driven 36,000 miles in year
1 and 22,000 miles in year 2. Compute the depreciation for each year.
Compute depreciation using BE9-7 Mandall Ltd. constructed a warehouse for £280,000. Mandall estimates that the
component method. warehouse has a useful life of 20 years and no residual value. Construction records indi-
(LO 2) cate that £40,000 of the cost of the warehouse relates to its heating, ventilation, and air
conditioning (HVAC) system, which has an estimated useful life of only 8 years. Compute
the first year of depreciation expense using straight-line component depreciation.
Compute revised BE9-8 On January 1, 2017, the Vasquez SA ledger shows Equipment €32,000 and Accu-
depreciation. mulated Depreciation—Equipment €9,000. The depreciation resulted from using the
(LO 2) straight-line method with a useful life of 10 years and residual value of €2,000. On this
date, the company concludes that the equipment has a remaining useful life of only 4
years with the same residual value. Compute the revised annual depreciation.
Prepare entries for BE9-9 At the end of its first year of operations, Brianna Company chose to use the reval-
revaluation of plant assets. uation framework allowed under IFRS. Brianna’s ledger shows Equipment £480,000 and
(LO 2) Accumulated Depreciation—Equipment £60,000. Prepare journal entries to record the
following.
(a) Independent appraisers determine that the plant assets have a fair value of £468,000.
(b) Independent appraisers determine that the plant assets have a fair value of £400,000.
Prepare entries for delivery BE9-10 Tong Company had the following two transactions related to its delivery truck.
truck costs.
1. Paid €45 for an oil change.
(LO 3)
2. Paid €580 to install special gear unit, which increases the operating efficiency of the
truck.
Prepare Tong’s journal entries to record these two transactions.
 DO IT! Review 461

BE9-11 Prepare journal entries to record the following. Prepare entries for disposal by
(a) Matterhorn AG retires its delivery equipment, which cost CHF44,000. Accumulated retirement.
depreciation is also CHF44,000 on this delivery equipment. No residual value is received. (LO 4)
(b) Assume the same information as (a), except that accumulated depreciation is
CHF37,000, instead of CHF44,000, on the delivery equipment.
BE9-12 Arma Ltd. sells equipment on September 30, 2017, for £20,000 cash. The equip- Prepare entries for disposal
ment originally cost £72,000 and as of January 1, 2017, had accumulated depreciation of by sale.
£42,000. Depreciation for the first 9 months of 2017 is £4,800. Prepare the journal entries (LO 4)
to (a) update depreciation to September 30, 2017, and (b) record the sale of the equipment.
BE9-13 Jackie Chan Mining Co. purchased for ¥7 million a mine that is estimated to have 28 Prepare depletion entry and
million tons of ore and no residual value. In the first year, 4.7 million tons of ore are extracted. statement of financial posi-
(a) Prepare the journal entry to record depletion for the first year. tion presentation for natural
(b) Show how this mine is reported on the statement of financial position at the end of the resources.
first year. (LO 5)
BE9-14 Felipe SA purchases a patent for R$120,000 on January 2, 2017. Its estimated Prepare amortization expense
useful life is 8 years. entry and statement of finan-
(a) Prepare the journal entry to record amortization expense for the first year. cial position presentation for
(b) Show how this patent is reported on the statement of financial position at the end of intangibles.
the first year. (LO 6)
BE9-15 Newell Industries spent €260,000 on research and €600,000 on development of a Prepare entry for research and
new product. Of the €600,000 in development costs, €400,000 was incurred prior to tech- development costs.
nological feasibility and €200,000 after technological feasibility had been demonstrated. (LO 6)
Prepare the journal entry to record research and development costs.
BE9-16 Information related to plant assets, extractable natural resources, and intangibles Classify long-lived assets on
at the end of 2017 for Loomis Company is as follows: buildings £1,300,000, accumulated statement of financial
depreciation—buildings £650,000, goodwill £410,000, coal mine £500,000, and accumu- position.
lated depletion—coal mine £122,000. Prepare a partial statement of financial position of (LO 7)
Loomis Company, Ltd. for these items.
BE9-17 In its 2013 annual report, Target (USA) reported beginning total assets of $48.2 Analyze long-lived assets.
billion; ending total assets of $44.6 billion; and net sales of $72.6 billion. Compute Target’s (LO 7)
asset turnover.
*BE9-18 Cordero Company SLU exchanges old delivery equipment for new delivery equip- Prepare entry for disposal by
ment. The book value of the old delivery equipment is €33,000 (cost €61,000 less accumu- exchange.
lated depreciation €28,000). Its fair value is €19,000, and cash of €5,000 is paid. Prepare (LO 8)
the entry to record the exchange, assuming the transaction has commercial substance.
*BE9-19 Assume the same information as BE9-18, except that the fair value of the old Prepare entry for disposal by
delivery equipment is €37,200. Prepare the entry to record the exchange. exchange.
(LO 8)

> DO IT! REVIEW

DO IT! 9-1 Yockey Company Ltd. purchased a delivery truck. The total cash payment was Explain accounting for cost
£28,220 including the following items. of plant assets.

Negotiated purchase price £24,000 (LO 1)

Installation of special shelving 1,200
Painting and lettering 780
Motor vehicle license 140
Annual insurance policy 800
Sales tax 1,300
Total paid £28,220

Explain how each of these costs would be accounted for.

DO IT! 9-2 On January 1, 2017, Rolling Hills Country Club purchased a new riding Calculate depreciation
mower for £18,000. The mower is expected to have an 8-year life with a £2,000 residual expense and make journal
value. What journal entry would Rolling Hills make at December 31, 2017, if it uses entry.
straight-line depreciation? (LO 2)
462 9 Plant Assets, Natural Resources, and Intangible Assets

Calculate revised DO IT! 9-3 Savin NV purchased a piece of equipment for €50,000. It estimated a 5-year life
depreciation. and €2,000 residual value. At the end of year four (before the depreciation adjustment), it
(LO 2) estimated the new total life to be 8 years and the new residual value to be €4,000. Compute
the revised depreciation.
Make journal entries to DO IT! 9-4 Forgetta Manufacturing has old equipment that cost €48,000. The equipment
record plant asset disposal. has accumulated depreciation of €28,000. Forgetta has decided to sell the equipment.
(LO 4) (a) What entry would Forgetta make to record the sale of the equipment for €26,000 cash?
(b) What entry would Forgetta make to record the sale of the equipment for €15,000 cash?
Match intangibles DO IT! 9-5 Match the statement with the term most directly associated with it.
classifications concepts.
(a) Goodwill (d) Amortization
(LO 6)
(b) Intangible assets (e) Franchises
(c) Development expenses (f) Development costs
1. ______ Rights, privileges, and competitive advantages that result from the ownership of
long-lived assets that do not possess physical substance.
2. ______ The allocation of the cost of an intangible asset to expense in a rational and
systematic manner.
3. ______ A right to sell certain products or services, or use certain trademarks or trade
names within a designated geographic area.
4. ______ Costs incurred after technological feasibility to complete the development of a
new product.
5. ______ The excess of the cost of a company over the fair value of the net assets acquired.
6. ______ Costs incurred after research to bring a new product to a state of technological
feasibility.
Calculate asset turnover. DO IT! 9-6 For 2017, Sale Company reported beginning total assets of $300,000 and end-
(LO 7) ing total assets of $340,000. Its net income for this period was $50,000, and its net sales
were $400,000. Compute the company’s asset turnover for 2017.

EXERCISES

Determine cost of plant E9-1 The following expenditures (in thousands) relating to plant assets were made by Lee
acquisitions. Jung Ltd. during the first 2 months of 2017.
(LO 1) 1. Paid W5,000 of accrued taxes at time plant site was acquired.
2. Paid W400 insurance to cover possible accident loss on new factory machinery while
the machinery was in transit.
3. Paid W850 sales taxes on new delivery truck.
4. Paid W17,500 for parking lots and driveways on new plant site.
5. Paid W310 to have company name and advertising slogan painted on new delivery
truck.
6. Paid W8,000 for installation of new factory machinery.
7. Paid W900 for one-year accident insurance policy on new delivery truck.
8. Paid W90 motor vehicle license fee on the new truck.
Instructions
(a) Explain the application of the historical cost principle in determining the
acquisition cost of plant assets.
(b) List the numbers of the foregoing transactions, and opposite each indicate the account
title to which each expenditure should be debited.

Determine property, plant, E9-2 Bliesmer SE incurred the following costs.

and equipment costs. 1. Sales tax on factory machinery purchased € 5,000
(LO 1) 2. Painting of and lettering on truck immediately upon purchase 700
3. Installation and testing of factory machinery 2,000
4. Real estate broker’s commission on land purchased 3,500
5. Insurance premium paid for first year’s insurance on new truck 1,100
 Exercises 463

6. Cost of landscaping on property purchased 7,200

7. Cost of paving parking lot for new building constructed 17,900
8. Cost of clearing, draining, and filling land 12,600
9. Architect’s fees on self-constructed building 10,000
Instructions
Indicate to which account Bliesmer would debit each of the costs.

E9-3 On March 1, 2017, Rollinger Company acquired real estate on which it planned to Determine acquisition costs
construct a small office building. The company paid €86,000 in cash. An old warehouse on of land.
the property was razed at a cost of €9,400; the salvaged materials were sold for €1,700. (LO 1)
Additional expenditures before construction began included €1,100 attorney’s fee for work
concerning the land purchase, €5,100 real estate broker’s fee, €7,800 architect’s fee, and
€12,700 to put in driveways and a parking lot.

Instructions
(a) Determine the amount to be reported as the cost of the land.
(b) For each cost not used in part (a), indicate the account to be debited.

E9-4 Ann Tremel has prepared the following list of statements about depreciation. Understand depreciation
1. Depreciation is a process of asset valuation, not cost allocation. concepts.
2. Depreciation provides for the proper matching of expenses with revenues. (LO 2)
3. The book value of a plant asset should approximate its fair value.
4. Depreciation applies to three classes of plant assets: land, buildings, and equipment.
5. Depreciation does not apply to a building because its usefulness and revenue-
producing ability generally remain intact over time.
6. The revenue-producing ability of a depreciable asset will decline due to wear and tear
and to obsolescence.
7. Recognizing depreciation on an asset results in an accumulation of cash for replace-
ment of the asset.
8. The balance in accumulated depreciation represents the total cost that has been
charged to expense.
9. Depreciation expense and accumulated depreciation are reported on the income statement.
10. Three factors affect the computation of depreciation: cost, useful life, and residual value.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.

E9-5 Copacabana Bus Lines uses the units-of-activity method in depreciating its buses. Compute depreciation under
One bus was purchased on January 1, 2017, at a cost of R$145,000. Over its 4-year useful units-of-activity method.
life, the bus is expected to be driven 100,000 miles. Residual value is expected to be (LO 2)
R$15,000.

Instructions
(a) Compute the depreciable cost per unit.
(b) Prepare a depreciation schedule assuming actual mileage was 2017, 27,000; 2018,
32,000; 2019, 24,000; and 2020, 17,000.

E9-6 Xanadu A/S purchased a new machine on October 1, 2017, at a cost of €96,000. The Determine depreciation for
company estimated that the machine will have a residual value of €12,000. The machine partial periods.
is expected to be used for 10,000 working hours during its 5-year life. (LO 2)
Instructions
Compute the depreciation expense under the following methods for the year indicated.
(a) Straight-line for 2017.
(b) Units-of-activity for 2017, assuming machine usage was 1,700 hours.
(c) Declining-balance using double the straight-line rate for 2017 and 2018.

E9-7 Tanger Company purchased a delivery truck for R$38,000 on January 1, 2017. The Compute depreciation using
truck has an expected residual value of R$6,000, and is expected to be driven 100,000 miles different methods.
over its estimated useful life of 8 years. Actual miles driven were 15,000 in 2017 and 12,000 (LO 2)
in 2018.
464 9 Plant Assets, Natural Resources, and Intangible Assets

Instructions
(a) Compute depreciation expense for 2017 and 2018 using (1) the straight-line method,
(2) the units-of-activity method, and (3) the double-declining-balance method.
(b) Assume that Tanger uses the straight-line method.
(1) Prepare the journal entry to record 2017 depreciation.
(2) Show how the truck would be reported in the December 31, 2017, statement of
financial position.

Compute depreciation under E9-8 Mooney Ltd. completed construction of an office building for £2,400,000 on Decem-
component method. ber 31, 2016. The company estimated that the building would have a residual value of £0
(LO 2) and a useful life of 40 years. A more detailed review of the expenditures related to the
building indicates that £300,000 of the total cost was used for personal property and
£180,000 for land improvements. The personal property has a depreciable life of 5 years
and land improvements have a depreciable life of 10 years.

Instructions
Compute depreciation expense for 2017 using component depreciation and the straight-
line method.

Compute revised annual E9-9 Steve Grant, the new controller of Greenbriar Ltd., has reviewed the expected useful
depreciation. lives and residual values of selected depreciable assets at the beginning of 2017. His find-
(LO 2) ings are as follows.

Accumulated Total Useful

Type of Date Depreciation Life in Years Residual Value
Asset Acquired Cost 1/1/17 Old Proposed Old Proposed
Building 1/1/07 £800,000 £190,000 40 50 £40,000 £18,000
Warehouse 1/1/12 100,000 18,000 25 20 10,000 3,700

All assets are depreciated by the straight-line method. Greenbriar uses a calendar year in
preparing annual financial statements. After discussion, management has agreed to accept
Grant’s proposed changes.

Instructions
(a) Compute the revised annual depreciation on each asset in 2017. (Show computations.)
(b) Prepare the entry (or entries) to record depreciation on the building in 2017.

Journalize entries for E9-10 Barton Enterprises purchased equipment on January 1, 2017, at a cost of €350,000.
straight-line depreciation Barton uses the straight-line depreciation method, a 5-year estimated useful life, and no
and revaluation. residual value. At the end of 2017, independent appraisers determined that the assets have
(LO 2) a fair value of €320,000.

Instructions
(a) Prepare the journal entry to record 2017 depreciation using the straight-line method.
(b) Prepare the journal entry to record the revaluation of the equipment.
(c) Prepare the journal entry to record 2018 depreciation, assuming no additional
revaluation.

Journalize entries for E9-11 At December 31, 2017, the end of its first year of operations, Franklin SA chose to
straight-line depreciation use the revaluation framework allowed under IFRS. Franklin’s ledger shows Equipment
and revaluation. €750,000 and Accumulated Depreciation—Equipment €150,000.
(LO 2)
Instructions
(a) Independent appraisers determine that the plant assets have a fair value of €660,000.
Record the revaluation.
(b) Using your answer from part (a), what would be the amount of Franklin’s 2018 depre-
ciation? Assume no change in the value of Franklin’s equipment in 2018, a 4-year
remaining life, and no residual value.
(c) Independent appraisers determine that the plant assets have a fair value of €520,000.
Record the revaluation. (Ignore your answers to parts (a) and (b).)
(d) Using your answer from part (c), what would be the amount of Franklin’s 2018 depre-
ciation? Assume no change in the value of Franklin’s equipment in 2018, a 4-year
remaining life, and no residual value.
 Exercises 465

E9-12 Presented below are selected transactions at Ingles Company for 2017. Journalize entries for disposal
Jan. 1 Retired a piece of machinery that was purchased on January 1, 2007. The machine of plant assets.
cost £58,000 on that date. It had a useful life of 10 years with no residual value. (LO 4)
June 30 Sold a computer that was purchased on January 1, 2014. The computer cost
£40,000. It had a useful life of 5 years with no residual value. The computer
was sold for £14,600.
Dec. 31 Discarded a delivery truck that was purchased on January 1, 2013. The truck
cost £34,000. It was depreciated based on a 6-year useful life with a £4,000
residual value.
Instructions
Journalize all entries required on the above dates, including entries to update deprecia-
tion, where applicable, on assets disposed of. Ingles Company uses straight-line deprecia-
tion. (Assume depreciation is up to date as of December 31, 2016.)
E9-13 Francis Company owns equipment that cost €50,000 when purchased on January 1, Journalize entries for disposal
2014. It has been depreciated using the straight-line method based on an estimated resid- of equipment.
ual value of €8,000 and an estimated useful life of 5 years. (LO 4)
Instructions
Prepare Francis Company’s journal entries to record the sale of the equipment in these
four independent situations.
(a) Sold for €28,000 on January 1, 2017.
(b) Sold for €28,000 on May 1, 2017.
(c) Sold for €11,000 on January 1, 2017.
(d) Sold for €11,000 on October 1, 2017.

E9-14 On July 1, 2017, Ticino AG invested CHF736,000 in a mine estimated to have Journalize entries for
800,000 tons of ore of uniform grade. During the last 6 months of 2017, 124,000 tons of extractable natural resources
ore were mined. depletion.
(LO 5)
Instructions
(a) Prepare the journal entry to record depletion.
(b) Assume that the 124,000 tons of ore were mined, but only 90,000 units were sold. How
are the costs applicable to the 34,000 unsold units reported?
E9-15 The following are selected 2017 transactions of Yosuke Ltd. Prepare adjusting entries for
amortization.
Jan. 1 Purchased a small company and recorded goodwill of €150,000. Its useful life is
indefinite. (LO 6)
May 1 Purchased for €84,000 a patent with an estimated useful life of 5 years and a
legal life of 20 years.

Instructions
Prepare necessary adjusting entries at December 31 to record amortization required by
the events above.

E9-16 Nelson Company, organized in 2017, has the following transactions related to Prepare entries to set up
intangible assets. appropriate accounts for
different intangibles; amortize
1/2/17 Purchased patent (7-year life) $560,000 intangible assets.
4/1/17 Goodwill purchased (indefinite life) 360,000 (LO 6)
7/1/17 8-year franchise; expiration date 7/1/2025 440,000
11/1/17 Research and development costs incurred
prior to technological feasibility 448,000

Instructions
Prepare the necessary entries to record these intangibles. All costs incurred were for cash.
Make the adjusting entries as of December 31, 2017, recording any necessary amortization
and reflecting all balances accurately as of that date.

E9-17 During 2017, Otaki Ltd. reported net sales of €5,200,000 and net income of Calculate asset turnover.
€1,500,000. Its statement of financial position reported average total assets of €1,600,000. (LO 7)
Instructions
Calculate the asset turnover.
466 9 Plant Assets, Natural Resources, and Intangible Assets

Journalize entries for *E9-18 Presented below are two independent transactions. Both transactions have com-
exchanges. mercial substance.
(LO 8) 1. Global Co. exchanged old trucks (cost £64,000 less £22,000 accumulated depreciation)
plus cash of £17,000 for new trucks. The old trucks had a fair value of £37,400.
2. Rijo Ltd. trades its used machine (cost £12,000 less £4,000 accumulated depreciation)
for a new machine. In addition to exchanging the old machine (which had a fair value
of £9,000), Rijo also paid cash of £3,200.
Instructions
(a) Prepare the entry to record the exchange of assets by Global Co.
(b) Prepare the entry to record the exchange of assets by Rijo Ltd.
Journalize entries for the *E9-19 Jay’s Delivery Company and Astro’s Express Delivery exchanged delivery trucks on
exchange of plant assets. January 1, 2017. Jay’s truck cost €22,000. It has accumulated depreciation of €16,000 and
(LO 8) a fair value of €4,000. Astro’s truck cost €10,000. It has accumulated depreciation of €7,000
and a fair value of €4,000. The transaction has commercial substance.
Instructions
(a) Journalize the exchange for Jay’s Delivery Company.
(b) Journalize the exchange for Astro’s Express Delivery.

PROBLEMS: SET A

Determine acquisition costs P9-1A Diaz SLU was organized on January 1. During the first year of operations, the fol-
of land and building. lowing plant asset expenditures and receipts were recorded in random order.
(LO 1)
Debit
1. Cost of filling and grading the land € 6,600
2. Full payment to building contractor 780,000
3. Real estate taxes on land paid for the current year 5,000
4. Cost of real estate purchased as a plant site (land €100,000 and
building €45,000) 145,000
5. Excavation costs for new building 35,000
6. Architect’s fees on building plans 10,500
7. Accrued real estate taxes paid at time of purchase of real estate 2,800
8. Cost of parking lots and driveways 14,000
9. Cost of demolishing building to make land suitable for
construction of new building 15,000
€1,013,900

Credit
10. Proceeds from salvage of demolished building € 3,600

Instructions
Totals Analyze the foregoing transactions using the following column headings. Insert the number
Land €165,800 of each transaction in the Item column, and then insert the amounts in the other appropri-
Buildings €825,500 ate columns. For amounts entered in the Other Accounts column, also indicate the account
titles.

Item Land Buildings Other Accounts

Compute depreciation under P9-2A In recent years, Freeman Transportation purchased three used buses. Because of
different methods. frequent turnover in the accounting department, a different accountant selected the depre-
(LO 2) ciation method for each bus, and various methods were selected. Information concerning
the buses is summarized below.
Residual Useful Life
Bus Acquired Cost Value in Years Depreciation Method
1 1/1/15 £ 96,000 £ 6,000 5 Straight-line
2 1/1/15 140,000 10,000 4 Declining-balance
3 1/1/16 92,000 8,000 5 Units-of-activity
 Problems: Set A 467

For the declining-balance method, the company uses the double-declining rate. For the
units-of-activity method, total miles are expected to be 120,000. Actual miles of use in the
first 3 years were 2016, 24,000; 2017, 36,000; and 2018, 31,000.

Instructions
(a) Compute the amount of accumulated depreciation on each bus at December 31, 2017. (a) Bus 2, 2016, £105,000
(b) If Bus 2 was purchased on April 1 instead of January 1, what is the depreciation
expense for this bus in (1) 2015 and (2) 2016?
P9-3A On January 1, 2017, Pele SA purchased the following two machines for use in its Compute depreciation under
production process. different methods.
(LO 2)
Machine A: The cash price of this machine was R$35,000. Related expenditures
included: sales tax R$2,200, shipping costs R$150, insurance during ship-
ping R$80, installation and testing costs R$70, and R$100 of oil and lubri-
cants to be used with the machinery during its first year of operations.
Pele estimates that the useful life of the machine is 5 years with a R$5,000
residual value remaining at the end of that time period. Assume that the
straight-line method of depreciation is used.
Machine B: The recorded cost of this machine was R$80,000. Pele estimates that the
useful life of the machine is 4 years with a R$5,000 residual value remain-
ing at the end of that time period.

Instructions
(a) Prepare the following for Machine A.
(1) The journal entry to record its purchase on January 1, 2017.
(2) The journal entry to record annual depreciation at December 31, 2017.
(b) Calculate the amount of depreciation expense that Pele should record for Machine B
each year of its useful life under the following assumptions.
(1) Pele uses the straight-line method of depreciation.
(2) Pele uses the declining-balance method. The rate used is twice the straight-line (b) (2) 2017 DDB
rate. depreciation
(3) Pele uses the units-of-activity method and estimates that the useful life of the R$40,000
machine is 125,000 units. Actual usage is as follows: 2017, 42,000 units; 2018,
37,000 units; 2019, 28,000 units; and 2020, 18,000 units.
(c) Which method used to calculate depreciation on Machine B reports the highest
amount of depreciation expense in year 1 (2017)? The highest amount in year 4 (2020)?
The highest total amount over the 4-year period?
P9-4A At the beginning of 2015, Mansen plc acquired equipment costing £80,000. It was Calculate revisions to
estimated that this equipment would have a useful life of 6 years and a residual value of depreciation expense.
£8,000 at that time. The straight-line method of depreciation was considered the most (LO 2)
appropriate to use with this type of equipment. Depreciation is to be recorded at the end
of each year.
During 2017 (the third year of the equipment’s life), the company’s engineers
reconsidered their expectations, and estimated that the equipment’s useful life would
probably be 7 years (in total) instead of 6 years. The estimated residual value was not
changed at that time. However, during 2020 the estimated residual value was reduced
to £4,400.

Instructions
Indicate how much depreciation expense should be recorded each year for this equip-
ment, by completing the following table.

Year Depreciation Expense Accumulated Depreciation

2015
2016
2017 2021 depreciation
2018 expense, £11,400
2019
2020
2021
468 9 Plant Assets, Natural Resources, and Intangible Assets

Journalize a series of P9-5A At December 31, 2016, Jimenez SA reported the following as plant assets.
equipment transactions
related to purchase, sale, Land € 3,000,000
retirement, and depreciation. Buildings €26,500,000
(LO 2, 4, 7) Less: Accumulated depreciation—buildings 12,100,000 14,400,000
Equipment 40,000,000
Less: Accumulated depreciation—equipment 5,000,000 35,000,000
Total plant assets €52,400,000

During 2017, the following selected cash transactions occurred.

April 1 Purchased land for €2,200,000.
May 1 Sold equipment that cost €750,000 when purchased on January 1, 2013. The
equipment was sold for €466,000.
June 1 Sold land purchased on June 1, 2007 for €1,800,000. The land cost €300,000.
July 1 Purchased equipment for €2,450,000.
Dec. 31 Retired equipment that cost €500,000 when purchased on December 31, 2007.
No residual value was received.
Instructions
(a) Journalize the above transactions. The company uses straight-line depreciation for
buildings and equipment. The buildings are estimated to have a 50-year life and no
(b) Depreciation Expense— residual value. The equipment is estimated to have a 10-year useful life and no residual
Buildings €530,000; value. Update depreciation on assets disposed of at the time of sale or retirement.
Equipment €3,997,500 (b) Record adjusting entries for depreciation for 2017.
(c) Total plant assets (c) Prepare the plant assets section of Jimenez’s statement of financial position at Decem-
€51,772,500 ber 31, 2017.
Record disposals P9-6A Yount Co. has equipment that cost €50,000 and that has been depreciated €22,000.
(LO 4) Instructions
Record the disposal under the following assumptions.
(a) It was scrapped as having no value.
(b) It was sold for €25,000.
(c) It was sold for €31,000.
Prepare entries to record P9-7A The intangible assets section of Glover Ltd. at December 31, 2016, is presented
transactions related to below.
acquisition and amortization
Patents (£60,000 cost less £6,000 amortization) £54,000
of intangibles; prepare the
intangible assets section. Franchises (£48,000 cost less £19,200 amortization) 28,800
(LO 6, 7) Total £82,800

The patent was acquired in January 2016 and has a useful life of 10 years. The franchise
was acquired in January 2013 and also has a useful life of 10 years. The following cash
transactions may have affected intangible assets during 2017.
Jan. 2 Paid £45,000 legal costs to successfully defend the patent against infringe-
ment by another company.
Jan.–June Developed a new product, incurring £100,000 in research costs and £68,000 in
development costs prior to technological feasibility. A patent was granted for
the product on July 1. Its useful life is equal to its 20-year legal life.
Sept. 1 Paid £58,000 to an extremely large defensive lineman to appear in commer-
cials advertising the company’s products. The commercials will air in September
and October.
Oct. 1 Acquired a franchise for £100,000. The franchise has a useful life of 40 years.
(b) Amortization Expense
(patents) £11,000 Instructions
Amortization Expense (a) Prepare journal entries to record the transactions above.
(franchises) £5,425 (b) Prepare journal entries to record the 2017 amortization expense.
(c) Total intangible assets (c) Prepare the intangible assets section of the statement of financial position at December
£211,375 31, 2017.
Prepare entries to correct P9-8A Due to rapid turnover in the accounting department, a number of transactions
errors made in recording and involving intangible assets were improperly recorded by the Buek Company in 2017.
amortizing intangible assets.
1. Buek developed a new manufacturing process, incurring research costs of €97,000
(LO 6) and development costs prior to technological feasibility of €50,000. The company
 Problems: Set B 469

also purchased a patent for €60,000. In early January, Buek capitalized €207,000 as
the cost of the patents. Patent amortization expense of €10,350 was recorded based
on a 20-year useful life.
2. On July 1, 2017, Buek purchased a small company and as a result acquired goodwill of
€80,000. Buek recorded a half-year’s amortization in 2017, based on a 50-year life (€800
amortization). The goodwill has an indefinite life.
Instructions
Prepare all journal entries necessary to correct any errors made during 2017. Assume the Research and Develop.
books have not yet been closed for 2017. Exp. €147,000
P9-9A Luó Ltd. and Zhào Ltd., two corporations of roughly the same size, are both Calculate and comment on
involved in the manufacture of in-line skates. Each company depreciates its plant assets asset turnover.
using the straight-line approach. An investigation of their financial statements reveals the (LO 7)
following information.

Luó Ltd. Zhào Ltd.

Net income HK$ 400,000 HK$ 450,000
Sales revenue 1,240,000 1,110,000
Average total assets 2,000,000 1,500,000
Average plant assets 1,500,000 800,000
Instructions
(a) For each company, calculate the asset turnover.
(b) Based on your calculations in part (a), comment on the relative effectiveness
of the two companies in using their assets to generate sales and produce net income.

PROBLEMS: SET B

P9-1B Foxx Ltd. was organized on January 1. During the first year of operations, the Determine acquisition costs
following plant asset expenditures and receipts were recorded in random order. of land and building.
(LO 1)
Debit
1. Accrued real estate taxes paid at time of purchase of real estate £ 9,000
2. Real estate taxes on land paid for the current year 6,100
3. Full payment to building contractor 520,000
4. Excavation costs for new building 19,000
5. Cost of real estate purchased as a plant site (land £75,000 and
building £25,000) 100,000
6. Cost of parking lots and driveways 18,000
7. Architect’s fees on building plans 9,000
8. Installation cost of fences around property 6,000
9. Cost of demolishing building to make land suitable for construction
of new building 19,000
£706,100

Credit
10. Proceeds from salvage of demolished building £ 4,200
Instructions
Analyze the foregoing transactions using the following column headings. Insert the num-
ber of each transaction in the Item column, and then insert the amounts in the other
appropriate columns. For amounts entered in the Other Accounts column, also indicate Totals
the account title. Land £123,800
Item Land Buildings Other Accounts Buildings £548,000

P9-2B In recent years, Wáng Company purchased three machines. Because of heavy turn- Compute depreciation under
over in the accounting department, a different accountant was in charge of selecting the different methods.
(LO 2)
470 9 Plant Assets, Natural Resources, and Intangible Assets

depreciation method for each machine, and each selected a different method. Information
concerning the machines is summarized below.

Residual Useful Life Depreciation

Machine Acquired Cost Value in Years Method
1 1/1/14 ¥105,000 ¥ 5,000 8 Straight-line
2 1/1/15 150,000 10,000 10 Declining-balance
3 11/1/17 100,000 15,000 6 Units-of-activity

For the declining-balance method, the company uses the double-declining rate. For the
units-of-activity method, total machine hours are expected to be 25,000. Actual hours of
use in the first 3 years were 2017, 1,300; 2018, 4,100; and 2019, 5,500.

Instructions
(a) Machine 2, 2016, (a) Compute the amount of accumulated depreciation on each machine at December 31,
¥54,000 2017.
(b) If Machine 2 had been purchased on May 1 instead of January 1, what would be the
depreciation expense for this machine in (1) 2015 and (2) 2016?
Compute depreciation under P9-3B On January 1, 2017, Abraham SA purchased the following two machines for use in
different methods. its production process.
(LO 2)
Machine A: The cash price of this machine was €55,000. Related expenditures
included: sales tax €3,300, shipping costs €325, insurance during ship-
ping €75, installation and testing costs €1,300, and €90 of oil and lubri-
cants to be used with the machinery during its first year of operation.
Abraham estimates that the useful life of the machine is 4 years with a
€6,000 residual value remaining at the end of that time period.
Machine B: The recorded cost of this machine was €130,000. Abraham estimates that
the useful life of the machine is 5 years with a €10,000 residual value
remaining at the end of that time period.

Instructions
(a) Prepare the following for Machine A.
(1) The journal entry to record its purchase on January 1, 2017.
(a) (2) €13,500 (2) The journal entry to record annual depreciation at December 31, 2017, assuming
the straight-line method of depreciation is used.
(b) Calculate the amount of depreciation expense that Abraham should record for Machine
B each year of its useful life under the following assumption.
(1) Abraham uses the straight-line method of depreciation.
(2) Abraham uses the declining-balance method. The rate used is twice the straight-
line rate.
(3) Abraham uses the units-of-activity method and estimates the useful life of the
machine is 24,000 units. Actual usage is as follows: 2017, 4,700 units; 2018, 8,200
units; 2019, 6,800 units; 2020, 2,500 units; and 2021, 1,800 units.
(c) Which method used to calculate depreciation on Machine B reports the lowest amount
of depreciation expense in year 1 (2017)? The lowest amount in year 5 (2021)? The
lowest total amount over the 5-year period?
Calculate revisions to P9-4B At the beginning of 2015, Bellamy Company acquired equipment costing £60,000.
depreciation expense. It was estimated that this equipment would have a useful life of 6 years and a residual
(LO 2) value of £6,000 at that time. The straight-line method of depreciation was considered the
most appropriate to use with this type of equipment. Depreciation is to be recorded at the
end of each year.
During 2017 (the third year of the equipment’s life), the company’s engineers
reconsidered their expectations, and estimated that the equipment’s useful life would
probably be 7 years (in total) instead of 6 years. The estimated residual value was not
changed at that time. However, during 2020 the estimated residual value was reduced
to £3,000.

Instructions
Indicate how much depreciation expense should be recorded for this equipment each year
by completing the following table.
 Problems: Set B 471

Year Depreciation Expense Accumulated Depreciation

2015
2016
2017
2018
2019
2020 2021 depreciation
2021 expense, £8,700
P9-5B At December 31, 2016, Durango Ltd. reported the following as plant assets. Journalize a series of
equipment transactions
Land £ 2,000,000 related to purchase, sale,
Buildings £28,500,000 retirement, and depreciation.
Less: Accumulated depreciation—buildings 12,100,000 16,400,000
(LO 2, 4, 7)
Equipment 30,000,000
Less: Accumulated depreciation—equipment 4,000,000 26,000,000
Total plant assets £44,400,000
During 2017, the following selected cash transactions occurred.
Mar. 1 Purchased land for £1,350,000.
April 1 Sold equipment that cost £420,000 when purchased on January 1, 2013. The
equipment was sold for £248,000.
June 1 Sold land purchased on June 1, 2007, for £1,000,000. The land cost £310,000.
Oct. 1 Purchased equipment for £1,260,000.
Dec. 31 Retired equipment that cost £300,000 when purchased on December 31, 2007.
No residual value was received.
Instructions
(a) Journalize the above transactions. Durango uses straight-line depreciation for build-
ings and equipment. The buildings are estimated to have a 50-year useful life and no (b) Depreciation
residual value. The equipment is estimated to have a 10-year useful life and no resid- Expense—Buildings
ual value. Update depreciation on assets disposed of at the time of sale or retirement. £570,000; Equipment
(b) Record adjusting entries for depreciation for 2017. £2,959,500
(c) Prepare the plant assets section of Durango’s statement of financial position at December (c) Total plant assets
31, 2017. £42,888,500
P9-6B Vermeer NV has equipment that cost €40,000 and that has been depreciated Record disposals.
€29,000. (LO 4)
Instructions
Record the disposal under the following assumptions.
(a) It was scrapped as having no value.
(b) It was sold for €24,000.
(c) It was sold for €10,000.
P9-7B The intangible assets section of Whitley Company at December 31, 2016, is pre- Prepare entries to record
sented below. transactions related to
acquisition and amortization
Patents (£100,000 cost less £10,000 amortization) £ 90,000 of intangibles; prepare the
Copyrights (£80,000 cost less £32,000 amortization) 48,000 intangible assets section.
Total £138,000 (LO 6, 7)

The patent was acquired in January 2016 and has a useful life of 10 years. The copyright
was acquired in January 2013 and also has a useful life of 10 years. The following cash
transactions may have affected intangible assets during 2017.
Jan. 2 Paid £48,600 legal costs to successfully defend the patent against infringe-
ment by another company.
Jan.–June Developed a new product, incurring £110,000 in research costs and
£120,000 in development costs prior to technological feasibility. A patent
was granted for the product on July 1. Its useful life is equal to its legal life.
Sept. 1 Paid £125,000 to an X-Games star to appear in commercials advertising the
company’s products. The commercials will air in September and October.
Oct. 1 Acquired a copyright for £192,000. The copyright has a useful life of 40 years.
472 9 Plant Assets, Natural Resources, and Intangible Assets

Instructions
(b) Amortization Expense (a) Prepare journal entries to record the transactions above.
(patents) £15,400; (b) Prepare journal entries to record the 2017 amortization expense for intangible assets.
Amortization Expense (c) Prepare the intangible assets section of the statement of financial position at Decem-
(copyrights) £9,200 ber 31, 2017.
(c) Total intangible (d) Prepare the note to the financials on Whitley’s intangibles as of December 31,
assets, £354,000 2017.
Prepare entries to correct P9-8B Due to rapid turnover in the accounting department, a number of transactions
errors made in recording and involving intangible assets were improperly recorded by Kaya A.Ş. in 2017.
amortizing intangible assets.
1. Kaya developed a new manufacturing process, incurring research and development
(LO 6) costs of 110,000 before reaching technological feasibility. The company also purchased
a patent for 70,000. In early January, Kaya capitalized 180,000 as the cost of the pat-
ents. Patent amortization expense of 9,000 was recorded based on a 20-year useful life.
2. On July 1, 2017, Kaya purchased a small company and as a result acquired goodwill of
200,000. Kaya recorded a half-year’s amortization in 2017, based on a 40-year life
( 2,500 amortization). The goodwill has an indefinite life.
Instructions
Research and Develop. Prepare all journal entries necessary to correct any errors made during 2017. Assume the
Exp. 110,000 books have not yet been closed for 2017.
Calculate and comment on P9-9B Ling Ltd. and Tseng Ltd., two corporations of roughly the same size, are both
asset turnover. involved in the manufacture of canoes and sea kayaks. Each company depreciates its plant
(LO 7) assets using the straight-line approach. An investigation of their financial statements
reveals the following information.

Ling Ltd. Tseng Ltd.

Net income NT$ 9,000,000 NT$ 9,750,000
Sales revenue 36,000,000 27,900,000
Average total assets 30,000,000 30,600,000
Average plant assets 22,500,000 23,100,000
Instructions
(a) For each company, calculate the asset turnover.
(b) Based on your calculations in part (a), comment on the relative effective-
ness of the two companies in using their assets to generate sales and produce net
income.

COMPREHENSIVE PROBLEM: CHAPTERS 3 TO 9

CP9 Raymond Company’s trial balance at December 31, 2017, is presented below. All
2017 transactions have been recorded except for the items described below and on
page 473.

Debit Credit
Cash £ 28,000
Accounts Receivable 36,800
Notes Receivable 10,000
Interest Receivable −0−
Inventory 36,200
Prepaid Insurance 4,400
Land 20,000
Buildings 160,000
Equipment 60,000
Patents 8,000
Allowance for Doubtful Accounts £ 300
Accumulated Depreciation—Buildings 49,000
Accumulated Depreciation—Equipment 24,000
 Comprehensive Problem: Chapters 3 to 9 473

Debit Credit
Accounts Payable 28,300
Income Taxes Payable –0–
Salaries and Wages Payable –0–
Unearned Rent Revenue 6,000
Notes Payable (due in 2018) 11,000
Interest Payable –0–
Notes Payable (due after 2018) 35,000
Share Capital—Ordinary 50,000
Retained Earnings 63,600
Dividends 12,000
Sales Revenue 910,000
Interest Revenue −0−
Rent Revenue −0−
Gain on Disposal of Plant Assets −0−
Bad Debt Expense −0−
Cost of Goods Sold 630,000
Depreciation Expense −0−
Income Tax Expense −0−
Insurance Expense −0−
Interest Expense −0−
Other Operating Expenses 61,800
Amortization Expense −0−
Salaries and Wages Expense 110,000
Total £1,177,200 £1,177,200

Unrecorded transactions:
1. On May 1, 2017, Raymond purchased equipment for £13,000 plus sales taxes of £780
(all paid in cash).
2. On July 1, 2017, Raymond sold for £3,500 equipment which originally cost £5,000.
Accumulated depreciation on this equipment at January 1, 2017, was £1,800; 2017
depreciation prior to the sale of the equipment was £450.
3. On December 31, 2017, Raymond sold on account £9,400 of inventory that cost
£6,600.
4. Raymond estimates that uncollectible accounts receivable at year-end is £4,000.
5. The note receivable is a one-year, 8% note dated April 1, 2017. No interest has been
recorded.
6. The balance in prepaid insurance represents payment of a £4,400 6-month premium
on October 1, 2017.
7. The building is being depreciated using the straight-line method over 40 years. The
residual value is £20,000.
8. The equipment owned prior to this year is being depreciated using the straight-line
method over 5 years. The residual value is 10% of cost.
9. The equipment purchased on May 1, 2017, is being depreciated using the straight-line
method over 5 years, with a residual value of £1,000.
10. The patent was acquired on January 1, 2017, and has a useful life of 10 years from that
date.
11. Unpaid salaries and wages at December 31, 2017, total £2,200.
12. The unearned rent revenue of £6,000 was received on December 1, 2017, for 4 months
rent.
13. Both the short-term and long-term notes payable are dated January 1, 2017, and carry
a 9% interest rate. All interest is payable in the next 12 months.
14. Income tax expense was £17,000. It was unpaid at December 31.

Instructions
(a) Prepare journal entries for the transactions listed above.
(b) Prepare a December 31, 2017, adjusted (entries 4–14 are adjustments) trial balance. (b) Totals £1,228,294
(c) Prepare a 2017 income statement and a 2017 retained earnings statement. (c) Net income £68,256
(d) Prepare a December 31, 2017, classified statement of financial position. (d) Total assets £271,996