Plant Asset Disposals, Natural Resources, and Intangible Assets Practice Problems
| Site: | Saylor Academy |
| Course: | BUS103: Introduction to Financial Accounting |
| Book: | Plant Asset Disposals, Natural Resources, and Intangible Assets Practice Problems |
| Printed by: | Guest user |
| Date: | Thursday, 3 April 2025, 1:48 AM |
Description
Complete the practice problems. Check your answers after you finish.
Demonstration problem
Demonstration problem A
On 2007 January 2, Darton Company purchased a machine for USD 36,000 cash. The machine has an estimated useful life of six years and an estimated salvage value of USD 1,800. Darton uses the straight-line method of depreciation.
a. Compute the book value of the machine as of 2010 July 1.
b. Assume the machine was disposed of on 2010 July 1. Prepare the journal entries to record the disposal of the machine under each of the following unrelated assumptions:
- The machine was sold for USD 12,000 cash.
- The machine was sold for USD 18,000 cash.
- The machine and USD 24,000 cash were exchanged for a new machine that had a cash price of USD 39,000. The exchange has commercial substance.
- The machine was completely destroyed by fire. Darton expects to recover cash of USD 10,800 from the insurance company.
Demonstration problem B
Howard Company acquired on 2010 January 1, a tract of property containing timber at a cost of USD 8,000,000. After the timber is removed, the land will be worth about USD 3,200,000 and will be sold to another party. Costs of developing the site were USD 800,000. A building was erected at a cost of USD 160,000. The building had an estimated physical life of 20 years and will have an estimated salvage value of USD 80,000 when the timber is gone. It was expected that 50,000,000 board feet of timber can be economically cut. During the first year, 16,000,000 board feet were cut. Howard uses the units-of-production basis to depreciate the building. Prepare the entries to record:
a. The acquisition of the property.
b. The development costs.
c. Depletion cost for the first year.
d. Depreciation on the building for the first year.
Demonstration problem C
On 2010 January 2, Bedford Company purchased a 10-year sublease on a warehouse for USD 30,000. Bedford will also pay annual rent of USD 6,000. Bedford immediately incurred costs of USD 20,000 for improvements to the warehouse, such as lighting fixtures, replacement of a ceiling, heating system, and loading dock. The improvements have an estimated life of 12 years and no residual value.
Prepare the entries to record:
a. The payment for the sublease on a warehouse.
b. The rent payment for the first year.
c. The payment for the improvements.
d. Amortization of the leasehold for the first year.
e. Amortization of the leasehold improvements for the first year.
Source: Textbook Equity, https://learn.saylor.org/pluginfile.php/41442/mod_resource/content/16/AccountingPrinciples2.pdf
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License.
Solution to Demonstration problems
Solution to demonstration problem a
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DARTON COMPANY |
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a. |
Schedule to Compute Book Value |
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2010 July 1 |
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Cost |
$ 36,000 |
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Less accumulated depreciation: |
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($35,000 - $1,800)/6 years= $5,700 per year 19,950 |
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$5,700 X 31 1/2 years = $19,950 |
$ 16,050 |
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Book value |
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b. |
(1.) |
Cash (+A) |
12,000 |
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Accumulated Depreciation - Machinery |
19,950 |
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(+A) |
4,050 |
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Loss from Disposal of Plant Assets (-SE) |
36,000 |
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Machinery (-A) |
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To record the sale of machinery at loss. |
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(2) |
Cash (+A) |
18,000 |
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Accumulated Depreciation - Machinery |
19,950 |
36,000 |
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(+A) |
1,950 |
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Machinery (-A) |
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Gain on Disposal of Plant Assets (+SE) To record sale of machinery at a gain. |
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Machinery (new) (+A) |
39,000 |
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Accumulated Depreciation - Machinery (+A) |
19,950 |
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Loss from Disposal of Plant Asset (-SE) |
1,050 |
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Machinery (old) (-A) |
36,000 |
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Cash (-A) |
24,000 |
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To record exchange of machines. |
The exchange has commercial substance.
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Receivable from Insurance Company (+A) |
10,800 |
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Accumulated Depreciation - Machinery (+A) |
19,950 |
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Fire Loss (-SE) |
5,250 |
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Machinery (-A) |
36,000 |
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To record loss of machinery. |
Solution to demonstration problem B
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a. |
Land (+A) |
3,200,000 |
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Timber Stands (+A) |
4,800,000 |
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Cash (-A) |
8,000,000 |
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To record purchase of land and timber. |
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b. |
Timber Stands (+A) |
800,000 |
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Cash (-A) |
800,000 |
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To record costs of development of the site. |
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c. |
Depletion (-SE) |
1,792,000 |
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Accumulated Depletion-Timber Stands (-A) To record depletion for 2007. |
1,792,000 |
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$4,800,000} + $800,000 / 50,000,000 = $0.112 per board foot. |
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$0.112 X 16,000,000 = $ 1,792,000.) |
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d. |
Depreciation Expense-Buildings (-SE) |
25,600 |
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Accumulated Depreciation-Buildings (-A) |
25,600 |
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To record depreciation expense: |
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($ 160,000 - $ 80,000) / 50,000,000 board feet = $0.0016 per board foot. |
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$ 0.0016 X 16,000,000 = $ 25,600. |
Demonstration problem C
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a. |
Leasehold (+A) |
30,000 |
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Cash (-A) |
30,000 |
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To record purchase of sublease on warehouse. |
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b. |
Rent Expense (-SE) |
6,000 |
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Cash (-A) |
6,000 |
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To record annual rent payment. |
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c. |
Leasehold Improvements (+A) |
20,000 |
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Cash (-A) |
20,000 |
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To record payment for leasehold improvements. |
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d. |
Rent Expense(-SE) |
3,000 |
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Leasehold (-A) |
3,000 |
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To record leasehold amortization for 2007: |
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Annual amortization = $30,000/10 years = $3,000 |
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e. |
Rent Expense (-SE) |
2,000 |
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Leasehold Improvements (+A) |
2,000 |
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To amortize leasehold improvements: |
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Annual amortization = $20,000/10years = $2,000 |
Self-test
True-false
1. Indicate whether each of the following statements is true or false.
2. When a plant asset is still being used after it has been fully depreciated, depreciation can be taken in excess of its cost.
3. In an exchange of nonmonetary assets having commercial substance, the new asset is recorded at the fair market value of the asset received or the fair market value of the asset given up plus cash paid, whichever is more clearly evident.
4. In calculating depletion, the residual value of acquired land containing an ore deposit is included in total costs subject to depletion.
5. All recorded intangible assets are subject to amortization.
Multiple-choice
Select the best answer for each of the following questions.
1. When a fully depreciated asset is still in use:
a. Prior years' depreciation should be adjusted.
b. The cost should be adjusted to market value.
c. Part of the depreciation should be reversed.
d. The cost and accumulated depreciation should remain in the ledger and no more depreciation should be taken.
e. It should be written off the books.
2. A truck costing USD 45,000 and having an estimated salvage value of USD 4,500 and an original life of five years is exchanged for a new truck. The cash price of the new truck is USD 57,000, and a trade-in allowance of USD 22,500 is received. The old truck has been depreciated for three years using the straight-line method. The new truck would be recorded at:
a. USD 55,200
b. USD 57,000
c. USD 34,500
d. USD 43,200
e. None of the above
3. Land containing a mine having an estimated 1,000,000 tons of economically extractable ore is purchased for USD 375,000. After the ore deposit is removed, the land will be worth USD 75,000. If 100,000 tons of ore are mined and sold during the first year, the depletion cost charged to expense for the year is:
a. USD 300,000
b. USD 37,500
c. USD 30,000
d. USD 375,000
e. None of the above
4. Bren Company purchased a patent for USD 36,000. The patent is expected to have a finite life of 10 years even though its legal life is 17 years. The amortization for the first year is:
a. USD 36,000
b. USD 3,600
c. USD 2,118
d. USD 3,240
e. None of the above
Check your answers on the next page.
Self-test Answers
True-false
1. False. No more depreciation can be taken on a fully depreciated plant asset.
2. True. The new asset is recorded at the fair market value of the asset received or given up, whichever is more clearly evident.
3. False. The residual value of land should be deducted from total costs subject to depletion.
4. False. Only intangible assets with finite useful lives should be amortized.
Multiple choice
1. d. The cost and accumulated depreciation should not be removed from the accounts until the disposal of the asset.
2. a. On the date of exchange, the book value of the old truck is USD 20,700 (USD 45,000 minus accumulated depreciation of USD 24,300). The trade-in allowance of USD 22,500 indicates a gain on exchange of USD 1,800. In an exchange of nonmonetary assets not having commercial substance, a gain is not recognized, but reduces the cost of a new asset. Therefore, the cost of the new truck is USD 55,200 (USD 57,000 minus USD 1,800), and no gain is recognized.
3. c. The depletion charge for the first year is:
Since all of the ore that was extracted was sold, all of the USD 30,000 is expensed as cost of ore sold.
4. b. The patent is amortized over 10 years:
