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Plant Asset Disposals, Natural Resources, and Intangible Assets Practice Problems

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
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