Tangible Assets – Practice Problems

Problem #1

The Reid Co. acquired a piece of land to construct a new factory paying $100,000. Reid
demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the
old building for $5,000. The architect's fees for the factory were $25,000 and the contractor
received $300,000 for construction of the factory building.
What is the recorded cost of the land?

What is the recorded cost of the building?

If the land has a useful life of 50 years and no salvage value, what amount is recorded as
depreciation expense for the first year? (Assume straight-line method.)

Problem #2

Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight to deliver the
machine. Staley used $4,600 of staff mechanics' time to install the machine and employee
training cost on the new machine totaled $7,000. Staley also paid $2,000 for the annual insurance
premium relating to operating the machine. The state charged a 5% sales tax on the invoice price.
What is the capitalized cost of the machine? 

  
Problem #3

Eagle Corporation acquires a new machine on January 2, 2021 at a cost of $126,000. The
machine has an expected 4-year life and a salvage value of $6,000.

Using the straight-line depreciation method, calculate depreciation expense for Eagle in
2022.

Using the double-declining balance depreciation method, calculate depreciation expense for
Eagle in 2022.

Using the double-declining balance depreciation method, calculate depreciation expense for
Eagle in 2024.

Problem #4
In 2020, Bake-n-Take purchased a freezer for $25,000. The freezer has a useful life of 3 years
and a residual value of $4,000. It is expected to freeze 75,000 units. During 2020 the freezer
froze 22,000 units.
Calculate depreciation expense in 2020 using the units of production method of
depreciation.

  

Problem #5

Devine Company has a machine that originally cost $34,000. Accumulated depreciation
recorded to date totals $27,000.

If Devine sold the asset for 6,000 in cash, how would the transaction impact the Balance
Sheet?

How would the transaction impact the income statement?

Now assume that Devine simply discards the machine, how would the Income Statement be
impacted?
Problem #6

The following information is provided for a tangible asset:

 Total Original Cost = $45,000
 Straight-line depreciation, 15 year life
 Purchased Jan 1, 2019
 Residual value = $0
On Jan 1, 2025 the following estimates were generated as part of an impairment analysis:
 Remaining useful life 8 years
 Cash inflow per year will be $2,500
 Fair Value = $22,000
Is the asset impaired?

If the asset is impaired, what is the amount of impairment loss?

If the asset is impaired, what is the new balance sheet value?

Problem #7

True / False - An impairment loss is the difference between the book value of the asset and
the undiscounted future value of the asset. 
Problem #8

On January 1, 2020, Buckeye Inc. purchased a truck for $30,000 with a useful life of 10 years
and salvage value of $5,000. They use the straight-line method to depreciate the truck. On
January 1, 2025, Buckeye Inc. estimates that the truck’s useful life is actually 15 years, but has
no salvage value.
What amount will Buckeye Inc. record as depreciation expense on December 31, 2020?

What amount will Buckeye Inc. record as depreciation expense on December 31, 2025?

How does this change in estimate impact the 2029 year-end balance sheet and income
statement? Compare this to the year-end balance sheet and income statement if the change
in estimate had not been made.

2029 with change in 2029 without change Impact of the

estimate in estimate change in estimate.
Balance sheet value

Income statement
expense

Cash flow impact

 ANSWERS

Problem #1

The Reid Co. acquired a piece of land to construct a new factory paying $100,000. Reid
demolished the old building at a cost of $20,000, and sold scrapped material salvaged from the
old building for $5,000. The architect's fees for the factory were $25,000 and the contractor
received $300,000 for construction of the factory building.
What is the recorded cost of the land?

100,000 (cost) + 20,000 (demolition) – 5,000 (salvage) = 115,000

What is the recorded cost of the building?

25,000 (architect) + 300,000 (contractor) = $325,000

If the land has a useful life of 50 years and no salvage value, what amount is recorded as
depreciation expense for the first year? (Assume straight-line method.)
None, land is never depreciated.

Problem #2

Staley Enterprises purchased a machine for $260,000. The seller paid $900 freight to deliver the
machine. Staley used $4,600 of staff mechanics' time to install the machine and employee
training cost on the new machine totaled $7,000. Staley also paid $2,000 for the annual insurance
premium relating to operating the machine. The state charged a 5% sales tax on the invoice price.
What is the capitalized cost of the machine? 
$284,600

  

Insurance premium would be capitalized then partially expensed every month.

Problem #3

Eagle Corporation acquires a new machine on January 2, 2021 at a cost of $126,000. The
machine has an expected 4-year life and a salvage value of $6,000.

Using the straight-line depreciation method, calculate depreciation expense for Eagle in
2022.

(126,000 – 6,000) / 4 = 30,000

Using the double-declining balance depreciation method, calculate depreciation expense for
Eagle in 2022.
SL rate = ¼ = 25%
DD rate = 25% x 2 = 50%

BV DDB rate Depreciation New BV

2011 126,000 50% 63,000 63,000

2012 63,000 50% 31,500 31,500

Depreciation in 2022 = $31,500

Using the double-declining balance depreciation method, calculate depreciation expense for
Eagle in 2024.

BV DDB rate Depreciation New BV

2011 126,000 50% 63,000 63,000

2012 63,000 50% 31,500 31,500

2013 31,500 50% 15,750 15,750

2014 15,750 Plug = 9,750 6,000

Depreciation in 2024 = 9,750

Problem #4

In 2020, Bake-n-Take purchased a freezer for $25,000. The freezer has a useful life of 3 years
and a residual value of $4,000. It is expected to freeze 75,000 units. During 2020 the freezer
froze 22,000 units.
Calculate depreciation expense in 2020 using the units of production method of
depreciation.
(25,000 – 4,000) * (22,000/75,000) = 6,160

  

Problem #5
Devine Company has a machine that originally cost $34,000. Accumulated depreciation
recorded to date totals $27,000.

If Devine sold the asset for 6,000 in cash, how would the transaction impact the Balance
Sheet?

Sales price 6,000 = 6,000 increase in Cash

Book value (34,000-27,000) = 7,000 decrease in Net PP&E
Sales price 6,000 - book value (7,000) = 1,000 pre-tax reduction in RE

How would the transaction impact the income statement?

Loss of sale of PPE = 1,000

Now assume that Devine simply discards the machine, how would the Income Statement be
impacted?

Book value ($34,000 - $27,000) = $7,000 Loss on disposal

  

Problem #6

The following information is provided for a tangible asset:

 Total Original Cost = $45,000
 Straight-line depreciation, 15 year life
 Purchased Jan 1, 2019
 Residual value = $0
On Jan 1, 2025 the following estimates were generated as part of an impairment analysis:
 Remaining useful life 8 years
 Cash inflow per year will be $2,500
 Fair Value = $22,000
Is the asset impaired?
Accumulated depreciation at Jan 1, 2025 = (45,000) / 15 = $3,000 x 6 years = 18,000
BV = 45,000 – 18,000 = $27,000
Sum of undiscounted cash flows = 2,500 * 8 = $20,000
Sum of future cash flows ($20,000) is LESS than Book Value ($27,000) = Yes asset is
Impaired

If the asset is impaired, what is the amount of impairment loss?

Asset written down to FV = 27,000 – 22,000 = $5,000 Impairment Loss

If the asset is impaired, what is the new balance sheet value?

22,000

Problem #7

True / False - An impairment loss is the difference between the book value of the asset and
the undiscounted future value of the asset. 

FALSE – Impairment loss in the difference between the book value and the fair market
value of the asset

Problem #8

On January 1, 2020, Buckeye Inc. purchased a truck for $30,000 with a useful life of 10 years
and salvage value of $5,000. They use the straight-line method to depreciate the truck. On
January 1, 2025, Buckeye Inc. estimates that the truck’s useful life is actually 15 years, but has
no salvage value.
What amount will Buckeye Inc. record as depreciation expense on December 31, 2020?
(30,000 – 5,000) / 10 = 2,500

What amount will Buckeye Inc. record as depreciation expense on December 31, 2025?
(17,500 – 0) / 10 (5 years in, only 10 remain) = $1,750 Depreciation expense for 2025

(BV – Salvage) / UL = Depr Exp

BV = 30,000 – (2,500 * 5) = 17,500
Salvage = 0 (provided, as opposed to 5,000 under initial estimate)
Remaining UL = 15 (new estimate) – 5 (years already in service) = 10 years remaining (as
opposed to 5 years remaining under initial estimate)

How does this change in estimate impact the 2029 year-end balance sheet and income
statement? Compare this to the year-end balance sheet and income statement if the change
in estimate had not been made.

2029 with change in 2029 without change Impact of the

estimate in estimate change in estimate.
Balance sheet value PP&E, net = 8,750 PP&E, net = 5,000 Extension of the
(5 years remain to (asset would have useful life causes
record depreciation been depreciated to PP&E, net to be
expense) salvage value at this higher by 3,750
point)
Income statement Depreciation Depreciation Net income is higher
expense expense = 1,750 expense = 2,500 by 750 (pre-tax)
Cash flow impact No effect No effect No effect

BV was $17,500 and new depreciation expense with change in estimate is 1,750/year. By
end of 2029, 5 more years of expense have been recorded (1,750 x 5 = 8,750) and balance
sheet value at end of 2029 = 8,750.