Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Chapter 10
Plant Assets, Natural Resources, and
Intangibles
EXERCISES
Exercise 10-1 (15 minutes)
Invoice price of machine $ 12,500
Less discount (.02 x $12,500) (250)
Net purchase price 12,250
Freight charges (transportation-in) 360
Mounting and power connections 895
Assembly 475
Materials used in adjusting 40
Total cost to be recorded $ 14,020

Note: The $180 repair charge is an expense because it is not a normal and reasonable
expenditure necessary to get the asset in place and ready for its intended use.

Exercise 10-2 (15 minutes)

Cost of land

Purchase price for land $ 280,000

Purchase price for old building 110,000
Demolition costs for old building 33,500
Costs to fill and level lot 47,000
Total cost of land $ 470,500

Cost of new building and land improvements

Cost of new building $1,452,200

Cost of land improvements 87,800
Total construction costs $1,540,000

Journal entry

Land 470,500
Land Improvements 87,800
Building 1,452,200
Cash 2,010,500
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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

To record costs of plant assets.

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Exercise 10-3 (20 minutes)

Purchase price $375,280

Closing costs 20,100
Total cost of acquisition $395,380

Allocation of total cost

Appraised Percent Applying % Apportioned
Value of Total to Cost Cost
Land $157,040 40% $395,380 x .40 $158,152
Land improvements 58,890 15 $395,380 x .15 59,307
Building 176,670 45 $395,380 x .45 177,921
Totals $392,600 100% $395,380

Journal entry
Land 158,152
Land Improvements 59,307
Building 177,921
Cash 395,380
To record costs of lump-sum purchase.

Exercise 10-4 (10 minutes)

Straight-line
($43,500 - $5,000) / 10 years = $3,850

Exercise 10-5 (10 minutes)

Units-of-production
Depreciation per unit = ($43,500 - $5,000) / 385,000 units = $0.10 per unit
For 32,500 units in second year: Depreciation = 32,500 x $0.10 = $3,250

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Exercise 10-6 (15 minutes)

Double-declining-balance
Double-declining-balance rate = (100% / 10 years) x 2 = 20% per year
First year’s depreciation = $43,500 x 20% = $8,700
Book value at beginning of second year = $43,500 - $8,700 = $34,800

Second year’s depreciation = $34,800 x 20% = $6,960

Exercise 10-7 (15 minutes)

Straight-line depreciation: ($154,000 - $25,000) / 4 years = $32,250 per year

Year Annual Depreciation Year-End Book Value

2015 $ 32,250 $121,750

2016 32,250 89,500

2017 32,250 57,250

2018 32,250 25,000

Total $129,000

Exercise 10-8 (20 minutes)

Double-declining-balance depreciation
Depreciation rate: 100% / 4 years = 25% x 2 = 50%
Beginning-Year Depreciation Annual Year-End
Year Book Value Rate Depreciation Book Value
2015 $154,000 50% $ 77,000 $77,000
2016 77,000 50 38,500 38,500
2017 38,500 50 13,500* 25,000
2018 25,000 -- -- 25,000
Total $129,000

* Do not depreciate more than $13,500 in the third year since the
salvage value is not subject to depreciation.

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Exercise 10-9 (30 minutes)

Straight-line depreciation
Income
before Depreciation Net
Depreciation Expense* Income
Year 1 $ 88,500 $ 38,960 $ 49,540
Year 2 88,500 38,960 49,540
Year 3 88,500 38,960 49,540
Year 4 88,500 38,960 49,540
Year 5 88,500 38,960 49,540
Totals $442,500 $194,800 $247,700
*($238,400 - $43,600) / 5 years = $38,960

Exercise 10-10 (30 minutes)

Double-declining-balance depreciation
Income
before Depreciation Net
Depreciation Expense* Income
Year 1 $ 88,500 $ 95,360 $ (6,860)
Year 2 88,500 57,216 31,284
Year 3 88,500 34,330 54,170
Year 4 88,500 7,894 80,606
Year 5 88,500 0 88,500
Totals $442,500 $194,800 $247,700

Supporting calculations for depreciation expense

*Note: (100% / 5 years) x 2 = 40% depreciation rate
Annual Accumulated Ending Book Value
Beginning Depreciation Depreciation at ($238,400 Cost Less
Book (40% of the End of the Accumulated
Value Book Value) Year Depreciation)
Year 1 $238,400 $ 95,360 $ 95,360 $143,040
Year 2 143,040 57,216 152,576 85,824
Year 3 85,824 34,330** 186,906 51,494
Year 4 51,494 7,894*** 194,800 43,600
Year 5 43,600 0 194,800 43,600
Total $194,800

** rounded
***Must not use $20,598; instead take only enough depreciation in Year 4 to
reduce book value to the $43,600 salvage value.
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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Exercise 10-11 (10 minutes)

Straight-line depreciation for 2014

[($280,000 - $40,000) / 5 years] x 9/12 = $36,000

Straight-line depreciation for 2015

($280,000 - $40,000) / 5 years = $48,000

Exercise 10-12 (15 minutes)

Double-declining-balance depreciation for 2014 and 2015:

Rate = (100% / 5 years) x 2 = 40%
Depreciation for 2014 ($280,000 x 40% x 9/12) $ 84,000

Book value at January 1, 2015 ($280,000 - $84,000) $196,000

Depreciation for 2015 ($196,000 x 40%) $ 78,400

Alternate calculation
2014 depreciation ($280,000 x 40% x 9/12) $ 84,000
2015 depreciation
$280,000 x 40% x 3/12 $ 28,000
($280,000 - $84,000 - $28,000) x 40% x 9/12 50,400
Total 2015 depreciation $ 78,400

Exercise 10-13 (15 minutes)

1. Original cost of machine $ 23,860

Less two years' accumulated depreciation
[($23,860 - $2,400) / 4 years] x 2 years (10,730)
Book value at end of second year $ 13,130

2. Book value at end of second year $ 13,130

Less revised salvage value (2,000)
Remaining depreciable cost $ 11,130

Revised annual depreciation = $11,130 / 3 years = $3,710

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Exercise 10-14 (15 minutes)

1. Equipment 22,000
Cash 22,000
To record betterment.

2. Repairs Expense 6,250

Cash 6,250
To record ordinary repairs.

3. Equipment 14,870
Cash 14,870
To record extraordinary repairs.

Exercise 10-15 (25 minutes)

1. Annual depreciation = $572,000 / 20 years = $28,600 per year

Age of the building = Accumulated depreciation / Annual depreciation

= $429,000 / $28,600 = 15 years

2. Entry to record the extraordinary repairs

Building 68,350
Cash 68,350
To record extraordinary repairs.

3. Cost of building
Before repairs $572,000
Add cost of repairs 68,350 $640,350
Less accumulated depreciation 429,000
Revised book value of building $211,350

4. Revised book value of building (part 3) $211,350

New estimate of useful life (20 - 15 + 5) 10 years
Revised annual depreciation $ 21,135

Journal entry
Depreciation Expense 21,135
Accumulated Depreciation–Building 21,135
To record depreciation.

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Exercise 10-16 (20 minutes)

Note: Book value of milling machine = $250,000 - $182,000 = $68,000

1. Disposed at no value
Jan. 3 Loss on Disposal of Milling Machine 68,000
Accumulated Depreciation—Milling Machine 182,000
Milling Machine 250,000
To record disposal of milling machine.

2. Sold for $35,000 cash

Jan. 3 Cash 35,000
Loss on Sale of Milling Machine 33,000
Accumulated Depreciation—Milling Machine 182,000
Milling Machine 250,000
To record cash sale of milling machine.

3. Sold for $68,000 cash

Jan. 3 Cash 68,000
Accumulated Depreciation—Milling Machine 182,000
Milling Machine 250,000
To record cash sale of milling machine.

4. Sold for $80,000 cash

Jan. 3 Cash 80,000
Accumulated Depreciation—Milling Machine 182,000
Gain on Sale of Milling Machine 12,000
Milling Machine 250,000
To record cash sale of milling machine.

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Exercise 10-17 (25 minutes)

2019
July 1 Depreciation Expense 7,500
Accumulated Depreciation--Machinery 7,500
To record one-half year depreciation.*

*Annual depreciation = $105,000 / 7 years = $15,000

Depreciation for 6 months in 2019 = $15,000 x 6/12 = $7,500

1. Sold for $45,500 cash

July 1 Cash 45,500

Accumulated Depreciation—Machinery 67,500
Gain on Sale of Machinery 8,000
Machinery 105,000
To record sale of machinery.*

*Total accumulated depreciation at date of disposal:

Four years 2015-2018 (4 x $15,000)......... $60,000
Partial year 2019 (6/12 x $15,000)............ 7,500
Total accumulated depreciation.............. $67,500

Book value of machinery = $105,000 - $67,500 = $37,500

2. Destroyed by fire with $25,000 cash insurance settlement

July 1 Cash 25,000

Loss from Fire 12,500
Accumulated Depreciation—Machinery 67,500
Machinery 105,000
To record disposal of machinery from fire.

Exercise 10-18 (10 minutes)

Dec. 31 Depletion Expense—Mineral Deposit 405,528

Accumulated Depletion—Mineral Deposit 405,528
To record depletion [$3,721,000/1,525,000 tons =
$2.44 per ton; 166,200 tons x $2.44 = $405,528].

Dec. 31 Depreciation Expense—Machinery 23,268

Accumulated Depreciation—Machinery 23,268
To record depreciation [$213,500/1,525,000 tons=
$0.14 per ton; 166,200 tons x $0.14 = $23,268].

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

PROBLEM SET A
Problem 10-1A (50 minutes)
Part 1
Estimated Percent Apportioned
Market Value of Total Cost
Building $508,800 53% $477,000
Land 297,600 31 279,000
Land improvements 28,800 3 27,000
Vehicles 124,800 13 117,000
Total $960,000 100% $900,000

2015
Jan. 1 Building 477,000
Land 279,000
Land Improvements 27,000
Vehicles 117,000
Cash 900,000
To record asset purchases.

Part 2

Year 2015 straight-line depreciation on building

[($477,000 - $27,000) / 15 years] = $30,000

Part 3

Year 2015 double-declining-balance depreciation on land improvements

(100% / 5 years) x 2 = 40% rate
$27,000 x 40% = $10,800

Part 4

Accelerated depreciation does not lower the total amount of taxes paid over
the asset's life. Instead, it defers or postpones taxes to the later years of an
asset’s useful life. This is because accelerated methods charge a higher
portion of asset costs against revenue in earlier years and a lower portion in
later years. The result is to reduce taxable income more in earlier years but
less in later years. [Note: From a present value perspective, there is a tax
savings from use of accelerated depreciation. The company gets to use the
tax deferred amounts for investment purposes until they are due.]
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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Problem 10-2A (25 minutes)

Cost of machine $257,500

Less estimated salvage value 20,000
Total depreciable cost $237,500

Double-Declining-
a b
Year Straight-Line Units-of-Production Balancec
1 $ 59,375 $110,000 $128,750
2 59,375 62,300 64,375
3 59,375 60,900 32,188
4 59,375 4,300 12,187
Totals $237,500 $237,500 $237,500
aStraight- line:
Cost per year = $237,500/4 years = $59,375 per year
bUnits-of-production:
Cost per unit = $237,500/475,000 units = $0.50 per unit

Year Units Unit Cost Depreciation

1 220,000 $0.50 $110,000
2 124,600 0.50 62,300
3 121,800 0.50 60,900
4 15,200 0.50 4,300*
Total $237,500
*
Take only enough depreciation in Year 4 to reduce book
value to the asset’s $20,000 salvage value.

cDouble-declining-balance:
(100%/4) x 2 = 50% depreciation rate

Annual Accumulated Ending Book Value

Beginning Depreciation Depreciation ($257,500 Cost Less
Book (50% of at the End of Accumulated
Year Value Book Value) the Year Depreciation)
1 $257,500 $128,750 $128,750 $128,750
2 128,750 64,375 193,125 64,375
3 64,375 32,188* 225,313 32,187
4 32,187 12,187** 237,500 20,000
Total $237,500

* rounded
**Take only enough depreciation in Year 4 to reduce book value to
the asset’s $20,000 salvage value.

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Problem 10-3A (45 minutes)

Part 1
Land Land
Building Building Improve- Improvements
Land 2 3 ments 1 2
Purchase price* $1,612,000 $598,000 $390,000
Demolition 328,400
Land grading 175,400
New building $2,202,000
New improvements _________ _______ _________ _______ $164,000
Totals $2,115,800 $598,000 $2,202,000 $390,000 $164,000

Appraised Percent Apportioned

*Allocation of purchase price Value of Total Cost**
Land $1,736,000 62% $1,612,000
Building 2 644,000 23 598,000
Land Improvements 1 420,000 15 390,000
Totals $2,800,000 100% $2,600,000
**Multiply the percentages in column 3 by the $2,600,000 purchase price.

Part 2
2015
Jan. 1 Land 2,115,800
Building 2 598,000
Building 3 2,202,000
Land Improvements 1 390,000
Land Improvements 2 164,000
Cash 5,469,800
To record costs of plant assets.

Part 3
2015
Dec. 31 Depreciation Expense—Building 2 26,900
Accumulated Depreciation—Building 2 26,900
To record depreciation [($598,000 - $60,000)/20].

31 Depreciation Expense—Building 3 72,400

Accumulated Depreciation—Building 3 72,400
To record depreciation [($2,202,000 - $392,000)/25].

31 Depreciation Expense—Land Improv. 1 32,500

Accum. Depreciation—Land Improv. 1 32,500
To record depreciation [$390,000/12].

31 Depreciation Expense—Land Improv. 2 8,200

Accum. Depreciation—Land Improv. 2 8,200
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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

To record depreciation [$164,000/20].

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Problem 10-4A (50 minutes)

2014
Jan. 1 Equipment 300,600
Cash 300,600
To record loader costs ($287,600 +$11,500 +$1,500).

Jan. 3 Equipment 4,800

Cash 4,800
To record betterment of loader.

Dec. 31 Depreciation Expense—Equipment 70,850*

Accumulated Depreciation—Equipment 70,850
To record depreciation.
*
2014 depreciation after January 3rd betterment
Total original cost $300,600
Plus cost of betterment 4,800
Revised cost of equipment 305,400
Less revised salvage ($20,600 + $1,400) 22,000
Cost to be depreciated 283,400
Annual depreciation ($283,400 / 4 years) $ 70,850

2015
Jan. 1 Equipment 5,400
Cash 5,400
To record extraordinary repair on loader.

Feb. 17 Repairs Expense—Equipment 820

Cash 820
To record ordinary repair on loader.

Dec. 31 Depreciation Expense—Equipment 43,590*

Accumulated Depreciation—Equipment 43,590
To record depreciation.

*2015 depreciation after January 1st extraordinary repair

Total cost ($305,400 + $5,400) $310,800
Less accumulated depreciation 70,850
Book value 239,950
Less salvage 22,000
Remaining cost to be depreciated $217,950
Revised remaining useful life (Original 4 years - 1yr. + 2yrs.) 5 yrs.
Revised annual depreciation ($217,950 / 5 yrs) $ 43,590

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Problem 10-5A (40 minutes)

2014
Jan. 1 Trucks 22,000
Cash 22,000
To record cost of truck ($20,515 + $1,485).

Dec. 31 Depreciation Expense—Trucks 4,000

Accumulated Depreciation—Trucks 4,000
To record depreciation [($22,000 - $2,000)/5].
2015
Dec. 31 Depreciation Expense—Trucks 5,200*
Accumulated Depreciation—Trucks 5,200
To record depreciation.
*
2015 depreciation
Total cost $ 22,000
Less accumulated depreciation (from 2014) 4,000
Book value 18,000
Less revised salvage value 2,400
Remaining cost to be depreciated $ 15,600
Revised useful life 4 yrs.
Less one year used in 2014 1 yrs.
Revised remaining useful life 3 yrs.
Total depreciation for 2015 ($15,600/3) $ 5,200
2016
Dec. 31 Depreciation Expense—Trucks 5,200
Accumulated Depreciation—Trucks 5,200
To record annual depreciation.

Dec. 31 Cash 5,300

Accumulated Depreciation—Trucks 14,400**
Loss on Disposal of Trucks 2,300***
Trucks 22,000
To record sale of truck.
**
Accumulated depreciation on truck at 12/31/2016
2014 $ 4,000
2015 5,200
2016 5,200
Total $14,400
***
Book value of truck at 12/31/2016
Total cost $22,000
Less accumulated depreciation (14,400)
Book value $ 7,600
Loss ($5,300 cash received - $7,600 book value) $ 2,300

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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Problem 10-6A (20 minutes)

1.
Jan. 2 Machinery 178,000
Cash 178,000
To record machinery purchase.

Jan. 3 Machinery 2,840

Cash 2,840
To record machinery costs.

Jan. 3 Machinery 1,160

Cash 1,160
To record machinery costs.

2. a. First year
Dec. 31 Depreciation Expense—Machinery 28,000
Accumulated Depreciation—Machinery 28,000
To record depreciation [($182,000 - $14,000)/6].
b. Fifth year
Dec. 31 Depreciation Expense—Machinery 28,000
Accumulated Depreciation—Machinery 28,000
To record year’s depreciation.

3. Accumulated depreciation at the date of disposal

Five years' depreciation (5 x $28,000) $140,000
Book value at the date of disposal
Original total cost $182,000
Accumulated depreciation (140,000)
Book value $ 42,000

a. Sold for $15,000 cash

Dec. 31 Cash 15,000
Loss on Sale of Machinery 27,000
Accumulated Depreciation—Machinery 140,000
Machinery 182,000

b. Sold for $50,000 cash

Dec. 31 Cash 50,000
Accumulated Depreciation—Machinery 140,000
Machinery 182,000
Gain on Sale of Machinery 8,000

c. Destroyed in fire and collected $30,000 cash from insurance co.

Dec. 31 Cash 30,000
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Chapter 10 - Plant Assets, Natural Resources, and Intangibles

Accumulated Depreciation—Machinery 140,000

Loss from Fire 12,000
Machinery 182,000

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