Question Details

CHAPTER 10 PART 13 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS

Ex. 231
Southeast Airlines purchased a 747 aircraft on January 1, 2007, at a cost of $35,000,000. The
estimated useful life of the aircraft is 20 years, with an estimated salvage value of $5,000,000. On
January 1, 2010 the airline revises the total estimated useful life to 15 years with a revised
salvage value of $3,500,000.
Instructions
(a) Compute the depreciation and book value at December 31, 2009 using the straight-line
method and the double-declining-balance method.
(b) Assuming the straight-line method is used, compute the depreciation expense for the year
ended December 31, 2010.

Ex. 232
Seymor Company purchased a machine on January 1, 2008, at a cost of $80,000. It is expected
to have an estimated salvage value of $5,000 at the end of its 5-year life. The company
capitalized the machine and depreciated it in 2008 using the double-declining-balance method of
depreciation. The company has a policy of using the straight-line method to depreciate equipment
but the company accountant neglected to follow company policy when he used the doubledeclining-
balance method. Net income for the year ended December 31, 2008 was $55,000 as
the result of depreciating the machine incorrectly.
Instructions
Using the method of depreciation which the company normally follows, prepare the correcting
entry and determine the corrected net income. (Show computations.)

Ex. 233
Equipment was acquired on January 1, 2005, at a cost of $80,000. The equipment was originally
estimated to have a salvage value of $5,000 and an estimated life of 10 years. Depreciation has
been recorded through December 31, 2008, using the straight-line method. On January 1, 2009,
the estimated salvage value was revised to $6,000 and the useful life was revised to a total of 8
years.
Instructions
Determine the Depreciation Expense for 2009.
10 - 44 Test Bank for Accounting Principles, Eighth Edition

Ex. 234
Gantner Company purchased a machine on January 1, 2008. In addition to the purchase price
paid, the following additional costs were incurred: (a) sales tax paid on the purchase price, (b)
transportation and insurance costs while the machinery was in transit from the seller, (c)
personnel training costs for initial operation of the machinery, (d) annual city operating license, (e)
major overhaul to extend the life of the machinery, (f) lubrication of the machinery gearing before
the machinery was placed into service, (g) lubrication of the machinery gearing after the
machinery was placed into service, and (h) installation costs necessary to secure the machinery
to the building flooring.
Instructions
Indicate whether the items (a) through (h) are capital or revenue expenditures in the spaces
provided: C = Capital, R = Revenue.
(a)_____________ (b)______________ (c)______________ (d)______________
(e)_____________ (f)______________ (g)______________ (h)______________

Ex. 235
Carey Word Processing Service uses the straight-line method of depreciation. The company's
fiscal year end is December 31. The following transactions and events occurred during the first
three years.
2007 July 1 Purchased a computer from the Computer Center for $2,300 cash plus sales
tax of $150, and shipping costs of $50.
Nov. 3 Incurred ordinary repairs on computer of $140.
Dec. 31 Recorded 2007 depreciation on the basis of a four year life and estimated
salvage value of $500.
2008 Dec. 31 Recorded 2008 depreciation.
2009 Jan. 1 Paid $400 for an upgrade of the computer. This expenditure is expected to
increase the operating efficiency and capacity of the computer.
Instructions
Prepare the necessary entries. (Show computations.)

10 - 46 Test Bank for Accounting Principles, Eighth Edition
Ex. 236
Identify the following expenditures as capital expenditures or revenue expenditures.
(a) Replacement of worn out gears on factory machinery.
(b) Construction of a new wing on an office building.
(c) Painting the exterior of a building.
(d) Oil change on a company truck.
(e) Replacing a Pentium II computer chip with a Pentium IV chip, which increases productive
capacity. No extension of useful life expected.
(f) Overhaul of a truck motor. One year extension in useful life is expected.
(g) Purchased a wastebasket at a cost of $10.
(h) Painting and lettering of a used truck upon acquisition of the truck.

Ex. 237
On January 1, 2006 Rosen Company purchased and installed a telephone system at a cost of
$20,000. The equipment was expected to last five years with a salvage value of $3,000. On
January 1, 2007 more telephone equipment was purchased to tie-in with the current system for
$10,000. The new equipment is expected to have a useful life of four years. Through an error, the
new equipment was debited to Telephone Expense. Rosen Company uses the straight-line
method of depreciation.
Instructions
Prepare a schedule showing the effects of the error on Telephone Expense, Depreciation
Expense, and Net Income for each year and in total beginning in 2007 through the useful life of
the new equipment.
Telephone Expense Depreciation Expense Net Income
Overstated Overstated Overstated
Year (Understated) (Understated) (Understated)
___________________________________________________________________________
2007
2008
2009
2010
Plant Assets, Natural Resources, and Intangible Assets 10 - 47


Ex. 238
Berman Company sold equipment on July 31, 2008 for $50,000. The equipment had cost
$140,000 and had $80,000 of accumulated depreciation as of January 1, 2008. Depreciation for
the first 6 months of 2008 was $8,000.
Instructions
Prepare the journal entry to record the sale of the equipment.


Ex. 239
(a) Watts Company purchased equipment in 2001 for $90,000 and estimated a $6,000 salvage
value at the end of the equipment's 10-year useful life. At December 31, 2007, there was
$58,800 in the Accumulated Depreciation account for this equipment using the straight-line
method of depreciation. On March 31, 2008, the equipment was sold for $24,000.
Prepare the appropriate journal entries to remove the equipment from the books of Watts
Company on March 31, 2008.
(b) Gorman Company sold a machine for $15,000. The machine originally cost $35,000 in 2005
and $8,000 was spent on a major overhaul in 2008 (charged to Machine account).
Accumulated Depreciation on the machine to the date of disposal was $28,000.
Prepare the appropriate journal entry to record the disposition of the machine.
(c) Klinger Company sold office equipment that had a book value of $6,000 for $8,000. The
office equipment originally cost $20,000 and it is estimated that it would cost $25,000 to
replace the office equipment.
Prepare the appropriate journal entry to record the disposition of the office equipment.
10 - 48 Test Bank for Accounting Principles, Eighth Edition

Ex. 240
Fleming's Lumber Mill sold two machines in 2009. The following information pertains to the two
machines:
Purchase Useful Salvage Depreciation Sales
Machine Cost Date Life Value Method Date Sold Price
#1 $66,000 7/1/05 5 yrs. $6,000 Straight-line 7/1/09 $15,000
#2 $40,000 7/1/08 5 yrs. $5,000 Double-declining- 12/31/09 $24,000
balance
Instructions
(a) Compute the depreciation on each machine to the date of disposal.
(b) Prepare the journal entries in 2009 to record 2009 depreciation and the sale of each
machine.
Ex. 241
Presented below are selected transactions for Milton Company for 2008.
Jan. 1 Received $9,000 scrap value on retirement of machinery that was purchased on
January 1, 1998. The machine cost $90,000 on that date, and had a useful life of 10
years with no salvage value.
April 30 Sold a machine for $28,000 that was purchased on January 1, 2005. The machine
cost $75,000, and had a useful life of 5 years with no salvage value.
Dec. 31 Discarded a business automobile that was purchased on October 1, 2003. The car
cost $32,000 and was depreciated on a 5-year useful life with a salvage value of
$2,000.
Instructions
Journalize all entries required as a result of the above transactions. Milton Company uses the
straight-line method of depreciation and has recorded depreciation through December 31, 2007.
Ex. 242
Watson Company sold the following two machines in 2008:
Machine A Machine B
Cost $68,000 $80,000
Purchase date 7/1/04 1/1/05
Useful life 8 years 5 years
Salvage value $4,000 $4,000
Depreciation method Straight-line Double-declining-balance
Date sold 7/1/08 8/1/08
Sales Price $30,000 $16,000
Instructions
Journalize all entries required to update depreciation and record the sales of the two assets in
2008. The company has recorded depreciation on the machine through December 31, 2007.
Ex. 243
Girard Mining invested $960,000 in a mine estimated to have 1,200,000 tons of ore with no
salvage value. During the first year, 200,000 tons of ore were mined and sold.
Instructions
Prepare the journal entry to record depletion expense.
Ex. 244
Eddy Mining Company purchased a mine for $70 million which is estimated to have 250,000 tons
of ore and a salvage value of $10 million.
(a) In the first year, 50,000 tons of ore are extracted and sold. Prepare the journal entry to
record depletion expense for the first year.
(b) In the second year, 150,000 tons of ore are extracted but only 125,000 tons are sold.
Prepare the journal entry to record depletion expense for the second year.
(c) What amount and in what account are the tons of ore not sold reported?
10 - 52 Test Bank for Accounting Principles, Eighth Edition
Ex. 245
Harper Mining Company purchased land containing an estimated 15 million tons of ore at a cost
of $4,500,000. The land without the ore is estimated to be worth $600,000. The company expects
to operate the mine for 10 years. Buildings costing $600,000 are erected on the site and are
expected to last for 25 years. Equipment costing $300,000 with an estimated life of 12 years is
installed. The buildings and the equipment possess no salvage value after the mine is closed.
During the first year of operations, the mining company mined and sold 2 million tons of ore.
Instructions
(a) Compute the depletion charge per ton.
(b) Compute the depletion expense for the first year.
(c) Compute the appropriate first year's depreciation expense for the buildings.
(d) Compute the appropriate first year's depreciation expense for the equipment.
(e) Prepare journal entries to record depletion and depreciation expenses for the year.
Ex. 246
(a) A company purchased a patent on January 1, 2008, for $2,000,000. The patent's legal life is
20 years but the company estimates that the patent's useful life will only be 5 years from the
date of acquisition. On June 30, 2008, the company paid legal costs of $135,000 in
successfully defending the patent in an infringement suit. Prepare the journal entry to
amortize the patent at year end on December 31, 2008.
(b) Foley Company purchased a franchise from Yummie Food Company for $400,000 on
January 1, 2008. The franchise is for an indefinite time period and gives Foley Company the
exclusive rights to sell Yummie Wings in a particular territory. Prepare the journal entry to
record the acquisition of the franchise and any necessary adjusting entry at year end on
December 31, 2008.
(c) Dryer Company incurred research and development costs of $500,000 in 2008 in
developing a new product. Prepare the necessary journal entries during 2008 to record
these events and any adjustments at year end on December 31, 2008.
Ex. 247
On January 2, 2008, Holmes Company purchased a patent for $200,000. The patent has an 8-
year estimated useful life and a legal life of 20 years.
Instructions
Prepare the journal entry to record patent amortization.
10 - 54 Test Bank for Accounting Principles, Eighth Edition
Ex. 248
For each item listed below, enter a code letter in the blank space to indicate the allocation
terminology for the item. Use the following codes for your answer:
A—Amortization P—Depletion
D—Depreciation N—None of these
____ 1. Goodwill ____ 7. Timberlands
____ 2. Land ____ 8. Franchises (indefinite life)
____ 3. Buildings ____ 9. Licenses (limited life)
____ 4. Patents ____ 10. Land Improvements
____ 5. Copyrights ____ 11. Oil Deposits
____ 6. Research and development costs ____ 12. Equipment
Ex. 249
For each of the following unrelated transactions, (a) determine the amount of the amortization or
depletion expense for the current year, and (b) present the adjusting entries required to record
each expense at year end.
(1) Timber rights were purchased on a tract of land for $360,000. The timber is estimated at
1,200,000 board feet. During the current year, 75,000 board feet of timber were cut and
sold.
(2) Costs of $8,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $22,000
was spent in legal costs to successfully defend the patent against competitors. The patent
has an estimated legal life of 12 years.
Plant Assets, Natural Resources, and Intangible Assets 10 - 55
Ex. 250
During the current year, Lymon Company incurred several expenditures. Briefly explain whether
the expenditures listed below should be recorded as an operating expense or as an intangible
asset. If you view the expenditure as an intangible asset, indicate the number of years over which
the asset should be amortized. Explain your answer.
(a) Spent $30,000 in legal costs in a patent defense suit. The patent was unsuccessfully
defended.
(b) Purchased a trademark from another company. The trademark can be renewed indefinitely.
Lymon Company expects the trademark to contribute to revenue indefinitely.
(c) Lymon Company acquires a patent for $2,000,000. The company selling the patent has
spent $1,000,000 on the research and development of it. The patent has a remaining life of
15 years.
(d) Lymon Company is spending considerable time and money in developing a different patent
for another product. So far $3,000,000 has been spent this year on research and
development. Lymon Company is very confident they will obtain this patent in the next few
years.