Question Details

CHAPTER 10 PART 14 PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS

Ex. 251
Presented below is information related to plant assets, natural resources, and intangibles at year
end on December 31, 2008, for Norten Company:
Buildings $1,080,000
Goodwill 350,000
Patents 480,000
Coal Mine 440,000
Accumulated Depreciation 670,000
Accumulated Depletion 275,000
Instructions
Prepare a partial balance sheet for Norten Company that shows how the above listed items would
be presented.
Ex. 252
Compute the asset turnover ratio based on the following:
Beginning total assets $ 800,000
Ending total assets 1,200,000
Net income 300,000
Net sales 2,200,000
Ex. 253
Indicate in the blank spaces below, the section of the balance sheet where the following items are
reported. Use the following code to identify your answer:
PPE Property, Plant, and Equipment
I Intangibles
O Other
N/A Not on the balance sheet
____ 1. Goodwill ____ 7. Timberlands
____ 2. Land Improvements ____ 8. Franchises
____ 3. Buildings ____ 9. Licenses
____ 4. Accumulated Depreciation ____ 10. Equipment
____ 5. Trademarks ____ 11. Oil Deposits
____ 6. Research and development costs ____ 12. Land
*Ex. 254
Presented below are two independent situations:
(a) Riley Company exchanged an old machine (cost $100,000 less $60,000 accumulated
depreciation) plus $7,000 cash for a new machine. The old machine had a fair market value
of $36,000. Prepare the entry to record the exchange of assets by Riley Company.
(b) Carlin Company trades old equipment (cost $90,000 less $54,000 accumulated depreciation)
for new equipment. Carlin paid $36,000 cash in the trade. The old equipment that was
traded had a fair market value of $54,000. Prepare the entry to record the exchange of
assets by Carlin Company.
10 - 58 Test Bank for Accounting Principles, Eighth Edition
*Ex. 255
Agler Company exchanges equipment with Eaton Company and Peters Company exchanges
equipment with Fiero Company. The following information pertains to the exchanges:
Agler Company Peters Company
Equipment (cost) $114,000 $96,000
Accumulated depreciation 50,000 45,000
Fair market value of the equipment 75,000 42,000
Cash paid 45,000 -0-
Instructions
Prepare the journal entries to record the exchanges on the books of Agler Company and Peters
Company.
Ex. 256
Farr Delivery Company and Bell Delivery Company exchanged delivery trucks on January 1,
2008. Farr's truck cost $84,000, had accumulated depreciation of $69,000, and has a fair market
value of $9,000. Bell's truck cost $63,000, had accumulated depreciation of $54,000, and has a
fair market value of $9,000.
Instructions
(a) Journalize the exchange for Farr Delivery Company.
(b) Journalize the exchange for Bell Delivery Company.
10 - 60 Test Bank for Accounting Principles, Eighth Edition
aEx. 257
Prepare the journal entries to record the following transactions for Bryant Company which has a
calendar year end and uses the straight-line method of depreciation.
a) On September 30, 2008, the company exchanged old delivery equipment and $24,000 for
new delivery equipment. The old delivery equipment was purchased on January 1, 2006, for
$84,000 and was estimated to have a $12,000 salvage value at the end of its 5-year life.
Depreciation on the delivery equipment has been recorded through December 31, 2007. It is
estimated that the fair market value of the old delivery equipment is $36,000 on September
30, 2008.
(b) On June 30, 2008, the company exchanged old office equipment and $40,000 for new office
equipment. The old office equipment originally cost $80,000 and had accumulated
depreciation to the date of disposal of $35,000. It is estimated that the fair market value of
the old office equipment on June 30 was $60,000.
COMPLETION STATEMENTS
258. With the exception of land, plant assets experience a ______________ in service
potential over their useful lives.
259. When vacant land is acquired, expenditures for clearing, draining, filling, and grading
should be charged to the ______________ account.
260. The cost of demolishing an old building on land that has been acquired so that a new
building can be constructed should be charged to the ______________ account.
261. The cost of paving, fencing, and lighting a new company parking lot is charged to a
______________ account.
262. Equipment with an invoice price of $20,000 was purchased and freight costs were $900.
The cost of the equipment would be $______________.
263. ______________ is the process of allocating the cost of a plant asset to expense over its
service life in a rational and systematic manner.
264. The book value of a plant asset is obtained by subtracting ______________ from the
______________ of the plant asset.
265. Three factors that affect the computation of periodic depreciation expense are (1)
_______________, (2) _______________, and (3) _________________.
266. The ________________ method of computing depreciation expense results in an equal
amount of periodic depreciation throughout the service life of the plant asset.
267. The declining-balance method of computing depreciation expense involves multiplying a
_______________ book value by a _______________ percentage.
268. The declining-balance method of computing depreciation is known as an _____________
depreciation method.
269. Ordinary repairs which maintain operating efficiency and expected productive life are
called _______________.
270. Additions and improvements are costs incurred to increase the operating efficiency,
productive capacity, or expected useful life and are referred to as __________________.
271. If disposal of a plant asset occurs at any time during the year, ___________________ for
the fraction of the year to the date of disposal must be recorded.
272. If fully depreciated equipment that cost $10,000 with no salvage value is retired, the entry
to record the retirement requires a debit to the ___________________________ account
and a credit to the _____________________ account.
273. If the proceeds from the sale of a plant asset exceed its ______________, a gain on
disposal will occur.
274. A plant asset originally cost $48,000 and was estimated to have a $3,000 salvage value at
the end of its 5-year useful life. If at the end of three years, the asset was sold for $9,000,
and had accumulated depreciation recorded of $27,000, the company should recognize a
______________ on disposal in the amount of $____________.
10 - 62 Test Bank for Accounting Principles, Eighth Edition
275. Natural resources have two distinguishing characteristics (1) they are physically
_______________ in operations, and (2) they are _________________ only by an act of
nature.
276. In recording the purchase of a business, goodwill should be recorded for the excess of
______________ over the _______________ of the net assets acquired.
277. The allocation of the cost of an asset to expense over its useful life is called
_________________ for tangible plant assets, ________________ for natural resources,
and _________________ for intangible assets.
278. The cost of a patent should be amortized over its ____________ life or its ____________
life, whichever is shorter.
279. The ___________________ ratio is calculated by dividing net sales by average total
assets.
a280. In the case of an exchange of plant assets resulting in a loss on disposal, the cost of the
new asset acquired is equal to the ______________ of the asset given up plus any cash
paid by the purchaser.
a281. A company exchanged an old machine, which originally cost $22,000 and has
accumulated depreciation to date of $12,000, for a new machine. The old machine had a
fair market value of $14,000. The cost of the new machine should be recorded at
$_____________.
272. Accumulated Depreciation—Equipment, Equipment
Plant Assets, Natural Resources, and Intangible Assets 10 - 63
MATCHING
Set 1
282. Match the items below by entering the appropriate code letter in the space provided.
A. Plant assets F. Units-of-activity method
B. Depreciation G. Double-declining-balance method
C. Book value H. MACRS
D. Salvage value I. Revenue expenditure
E. Straight-line method J. Capital expenditure
____ 1. Small expenditures which primarily benefit the current period.
____ 2. Cost less accumulated depreciation.
____ 3. An accelerated depreciation method used for financial statement purposes.
____ 4. Tangible resources that are used in operations and are not intended for resale.
____ 5. Equal amount of depreciation each period.
____ 6. Expected cash value of the asset at the end of its useful life.
____ 7. Allocation of the cost of a plant asset to expense over its useful life.
____ 8. Material expenditures which increase an asset's operating efficiency, productive
capacity, or useful life.
____ 9. An accelerated depreciation method used for tax purposes.
____ 10. Useful life is expressed in terms of units of production or expected use.
10 - 64 Test Bank for Accounting Principles, Eighth Edition
Set 2
283. Match the items below by entering the appropriate code letter in the space provided.
A. Gain on disposal F. Asset turnover ratio
B. Loss on disposal G. Goodwill
C. Trademark H. Amortization
D. Depletion I. Intangible asset
E. Useful life J. Research and development costs
_____ 1. Process of allocating the cost of an intangible asset to expense over its useful life.
_____ 2. Is only recorded when an exchange has commercial substance.
_____ 3. Examples are franchises and licenses.
_____ 4. The allocation of the cost of a natural resource to expense over its useful life.
_____ 5. Can be identified only with a business as a whole.
_____ 6. A symbol that identifies a particular enterprise or product.
_____ 7. When book value of asset is greater than the proceeds received from its sale.
_____ 8. Must be expensed when incurred.
_____ 9. Indicates how efficiently a company is able to generate sales with its assets.
_____ 10. An estimate of the expected productive life of an asset.
SHORT-ANSWER ESSAY QUESTIONS
S-A E 284
The declining-balance method is an accelerated method of depreciation. Briefly explain what is
meant by an accelerated method of depreciation and justify the choosing of an accelerated
method.
S-A E 285
Identify the factors that are considered in classifying an expenditure as a capital or a revenue
expenditure. Are there instances where it may be difficult to classify an expenditure as one or the
other (e.g., the purchase of a wastebasket that has a useful life of 5 years and cost $10)? What
basis would be used in a decision?
S-A E 286
In general, how does one determine whether or not an expenditure should be included in the
acquisition cost of property, plant, and equipment?
10 - 66 Test Bank for Accounting Principles, Eighth Edition
S-A E 287
Comment on the validity of the following statements: “As an asset loses its ability to provide
services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.”
S-A E 288
Goodwill is an unusual asset in that it cannot be sold individually apart from a business as a
whole. If goodwill is an intangible asset, why can't it be sold like other intangible assets such as
copyrights and patents? Briefly explain what makes goodwill different.
S-A E 289 (Ethics)
Physician Reference Service (PRS) provides services to physicians including research
assistance, diagnosis coding and medical practice software including an advanced medical
record cross-referencing system. PRS is aggressive in monitoring other firms' offerings and
ensuring that its services are comparable to all others.
Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending
professionals to trade shows. In addition, PRS has agreements with several clients whereby the
client requests a presentation of a competitor's services. A PRS employee poses as an employee
of the client's office and attends the presentation, obtaining as much data and sample information
as possible. The cost of the travel and attending presentations is charged to Product
Development and expensed during the current year.
Plant Assets, Natural Resources, and Intangible Assets 10 - 67
S-A E 289 (cont.)
In April of this year, PRS began selling a software product substitute before the competitor's
software was released. The competitor, Compu-Med, sued for copyright infringement and won.
PRS had to withdraw its product from the market and pay $1.5 million in damages. PRS
immediately negotiated an agreement with Compu-Med to sell Compu-Med's product (since it
was prohibited from offering its own version for five years.) This agreement cost an additional
$1.3 million, but it allowed PRS to continue to offer a full line of services.
PRS's accountant, June Bianco, initially recorded the cash payments as "Loss from Lawsuit" and
"Product Development," respectively. However, Fred Nance, the controller, instructed June to
create an intangible asset, named "Goodwill" and charge both costs to this account. "We're
protected from another lawsuit as long as this agreement is in effect," he says. "It's about as
close to goodwill as we'll ever get from our competitors. We might as well amortize the cost rather
than take the full hit to income, anyway."
Required:
1. What are the ethical issues?
2. What should June do?
S-A E 290 (Communication)
The Restor-It is a company specializing in the restoration of old homes. To showcase its work,
the company purchased an old Victorian home in downtown Pittsburg, Kansas. The original home
was purchased for $125,000. A new heating and air-conditioning system was added for $30,000.
The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were
added, and the floors and trim were refurbished to their original condition, at a cost of $75,000.
The project was such a success, that Restor-It decided to purchase another very large home, this
time in nearby Joplin, Missouri. A realtor offered to purchase the home in Pittsburg for $175,000.
He plans to lease it as luxury short-term apartments for visiting dignitaries. Restor-It decided that
a modest return was all that was required, and so they agreed to sell. Only afterward did they
learn that they had a $10,000 loss on the sale. The president of the company, Jim Herman, does
not believe that a loss is possible. "We sold that house for more than we paid for it," he said. "I
know we put some money in it, but we had depreciated it for three years. How in the world can
we have a loss?"
10 - 68 Test Bank for Accounting Principles, Eighth Edition
S-A E 290 (cont.)
Required:
Write a short memo to Mr. Herman explaining how it would be possible to have a loss. Do not try
to use specific numbers for cost or depreciation.