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Property, Plant, and Equipment Practice Problems

Site: Saylor Academy
Course: BUS103: Introduction to Financial Accounting
Book: Property, Plant, and Equipment Practice Problems
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Date: Friday, April 26, 2024, 5:57 PM

Description

Complete the practice problems. Check your answers after you finish.

Table of contents

Demonstration Problem

Demonstration problem A 

Cleveland Company purchased a 2-square-mile farm under the following terms: cash paid, USD 486,000; mortgage note assumed, USD 240,000; and accrued interest on mortgage note assumed, USD 6,000. The company paid USD 55,200 for brokerage and legal services to acquire the property and secure clear title. Cleveland planned to subdivide the property into residential lots and to construct homes on these lots. Clearing and leveling costs of USD 21,600 were paid. Crops on the land were sold for USD 14,400. A house on the land, to be moved by the buyer of the house, was sold for USD 5,040. The other buildings were torn down at a cost of USD 9,600, and salvaged material was sold for USD 10,080.

Approximately 6 acres of the land were deeded to the township for roads, and another 10 acres was deeded to the local school district as the site for a future school. After the subdivision was completed, this land would have an approximate value of USD 7,680 per acre. The company secured a total of 1,200 salable lots from the remaining land.

Present a schedule showing in detail the composition of the cost of the 1,200 salable lots.


Demonstration problem B 

Calvin Company acquired and put into use a machine on 2010 January 1, at a total cost of USD 45,000. The machine was estimated to have a useful life of 10 years and a salvage value of USD 5,000. It was also estimated that the machine would produce one million units of product during its life. The machine produced 90,000 units in 2010 and 125,000 units in 2011.

Compute the amounts of depreciation to be recorded in 2010 and 2011 under each of the following:

a. Straight-line method.

b. Units-of-production method.

c. Double-declining-balance method.

d. Assume 30,000 units were produced in the first quarter of 2010. Compute depreciation for this quarter under each of the three methods.


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Solution to demonstration problems

Solution to demonstration problem A

CLEVELAND COMPANY

Schedule of Cost of 1,200 Residential Lots

Costs incurred:

Cash paid

$486,000

Mortgage note assumed

240,000

Interest accrued on mortgage note assumed

6,000

Broker and legal services

55,200

Clearing and leveling costs incurred

21,600

Tearing down costs

9,600

$818,400

Less proceeds from sale of:

Crops

$ 14,400

House

5,040

Salvaged materials

10,080

29,520

Net cost of land to be subdivided into1,200 lots

$788,880

 

Solution to demonstration problem B

a. Straight-line method:
\mathrm{2010: }\dfrac{(\text { USD } 45,000-\text { USD } 5,000)}{10}=\text{USD 4,000}

\mathrm{2011:} \dfrac{(\text { USD } 45,000-\text { USD5 }, 000)}{10}=\text{USD 4,000}
b. Units-of-production method:

\text{2010: } \dfrac{(\text {USD 45,000 - USD 5,000)}}{1,000,000}\times 90,000=\text{USD 3,600}

\text{2011: } \dfrac{\text{(U SD 45,000 - USD 5,000)}}{1,000,000} \times 125,000=\text{USD 5,000}

c. Double-declining-balance method:
\text { 2010: USD } 45,000 \times 20 \text { per cent }=\text { USD } 9,000
\text { 2011: }(\text { USD } 45,000-\text { USD } 9,000) \times 20 \text { per cent }=U S D 7,200

d. Straight-line:   \dfrac{(\mathrm{USD} \, 45,000-\mathrm{USD} \, 5,000)}{10} \times \dfrac{1}{4}=\mathrm{USD} \, 1,000

Units-of-production: (\mathrm{USD}\, 45,000-\mathrm{USD} \, 9,000-\mathrm{USD} \, 7,000) \times 0.2 \times \dfrac{1}{4}=\mathrm{USD} \, 1,440

Double-declining-balance: (\mathrm{USD} \, 45,000-\mathrm{USD} \, 9,000-\mathrm{USD} \, 7,000) \times 0.2 \times \dfrac{1}{4}=\mathrm{USD} \, 1,440

Self-test

True-false

Indicate whether each of the following statements is true or false.

1. The cost of land includes its purchase price and other related costs, including the cost of removing an old unusable building that is on the land.

2. Depreciation is the process of valuation of an asset to arrive at its market value.

3. The purpose of depreciation accounting is to provide the cash required to replace plant assets.

4. Expenditures made on plant assets that increase the quality of services are debited to the accumulated depreciation account.

5. Plant asset subsidiary ledgers are used to increase control over plant assets.


Multiple choice

Select the best answer for each of the following questions.

1. On 2010 January 1, Jackson Company purchased equipment for USD 400,000, and installation and testing costs totaled USD 40,000. The equipment has an estimated useful life of 10 years and an estimated salvage value of USD 40,000. If Jackson uses the straight-line depreciation method, the depreciation expense for 2010 is:

a. USD 36,000.

b. USD 40,000.

c. USD 44,000.

d.  USD 80,000.

e. USD 88,000.

2. In Question 1, if the equipment were purchased on 2010 July 1, and Jackson used the double-declining-balance method, the depreciation expense for 2010 would be:

a. USD 88,000.

b. USD 72,000.

c. USD 36,000.

d.  USD 44,000.

e.  USD 40,000.

3. Hatfield Company purchased a computer on 2008 January 2, for USD 10,000. The computer had an estimated salvage value of USD 3,000 and an estimated useful life of five years. At the beginning of 2010, the estimated salvage value changed to USD 1,000, and the computer is expected to have a remaining useful life of two years. Using the straight-line method, the depreciation expense for 2010 is:

a. USD 1,400.

b. USD 1,750.

c. USD 2,250.

d.  USD 1,800.

e.  USD 3,100.

4. The result of recording a capital expenditure as a revenue expenditure is an:

a. Overstatement of current year's expense.

b.  Understatement of current year's expense.

c.  Understatement of subsequent year's net income.

d. Overstatement of current year's net income.

e.  None of the above.

Self-test - Answers

True-false

1. True. The cost of land includes all normal, reasonable, and necessary expenditures to obtain the land and get it ready for use.

2. False. Depreciation is a process of allocation, not valuation, and the book value of an asset has little to do with its market value.

3. False. Depreciation accounting does not provide funds required to replace plant assets. Instead, accumulated depreciation simply shows how much of an asset's cost has been charged to expense since the asset was acquired.

4. False. Expenditures that improve the quality of services are charged to the asset account.

5. True. Plant asset subsidiary ledgers provide detailed information that the general ledger account cannot provide and thus give better control over plant assets.


Multiple choice

1. b. The depreciation expense for 2010 using the straight-line method is computed as follows:

2. d. Double-declining balance rate per cent

Depreciation expense for per cent

3. e. At the beginning of 2010 , the balance of accumulated depreciation is USD 2,800 (annual depreciation of USD 1,400 X 2) and book value is USD 7,200 , or (USD 10,000 - USD 2,800). The revised annual depreciation expense is USD 3,100 , or [.

4. a. The error in recording a capital expenditure as a revenue expenditure results in an overstatement of current year's expense, as well as an understatement of current year's net income.