Tutorial 6 Questions

S10-1 Determining the cost of an asset

Learning Objective 1

Alton Clothing purchased land, paying $88,000 cash plus a $250,000 note payable. In addition,
Alton paid delinquent property tax of $1,900, title insurance costing $500, and $4,200 to level
the land and remove an unwanted building. Record the journal entry for purchase of the land.

S10-2 Making a lump-sum asset purchase

Learning Objective 1

Foley Distribution Service paid $130,000 for a group purchase of land, building, and equipment.
At the time of the acquisition, the land had a market value of $70,000, the building $42,000, and
the equipment $28,000. Journalize the lump-sum purchase of the three assets for a total cost of
$130,000, the amount for which the business signed a note payable.

S10-3 Computing first-year depreciation and book value

Learning Objective 2

At the beginning of the year, Austin Airlines purchased a used airplane for $33,500,000. Austin
Airlines expects the plane to remain useful for five years (4,000,000 miles) and to have a residual
value of $5,500,000. The company expects the plane to be flown 1,100,000 miles during the first
year.

Requirements
1. Compute Austin Airlines’s first-year depreciation expense on the plane using the following
methods:
a. Straight-line
b. Units-of-production
c. Double-declining-balance
2. Show the airplane’s book value at the end of the first year for all three methods.

S10-4 Computing second-year depreciation and accumulated depreciation

Learning Objective 2

At the beginning of 2016, Air Asia purchased a used airplane at a cost of $40,000,000. Air Asia
expects the plane to remain useful for eight years (5,000,000 miles) and to have a residual value
of $5,000,000. Air Asia expects the plane to be flown 1,200,000 miles the first year and
1,400,000 miles the second year.

Requirements
1. Compute second-year (2017) depreciation expense on the plane using the following methods:
a. Straight-line
 b. Units-of-production
c. Double-declining-balance
2. Calculate the balance in Accumulated Depreciation at the end of the second year for all three
methods.

S10-5 Calculating partial-year depreciation

Learning Objective 2

On September 30, 2015, Meggie Services purchased a copy machine for $38,000. Meggie
Services expects the machine to last for four years and have a residual value of $2,000. Compute
depreciation expense on the machine for the year ended December 31, 2015, using the straight-
line method.

S10-6 Changing the estimated life of an asset

Learning Objective 2

Assume that ABC Catering Services paid $20,000 for equipment with a 10-year life and zero
expected residual value. After using the equipment for four years, the company determines that
the asset will remain useful for only three more years.

Requirements
1. Record depreciation expense on the equipment for year 5 by the straight-line method.
2. What is accumulated depreciation at the end of year 5?

S10-7 Discarding of a fully depreciated asset

Learning Objective 3

On June 15, 2015, Perfect Furniture discarded equipment that had a cost of $12,000, a residual
value of $0, and was fully depreciated. Journalize the disposal of the equipment.

S10-8 Discarding an asset

Learning Objective 3

On May 31, 2016, Choice Landscapes discarded equipment that had a cost of $29,400.
Accumulated Depreciation as of December 31, 2015, was $27,000. Assume annual depreciation
on the equipment is $2,400. Journalize the partial-year depreciation expense and disposal of the
equipment.

S10-9 Selling an asset at gain or loss

Learning Objective 3

Mill Creek Golf Club purchased equipment on January 1, 2016, for $31,500. Suppose Mill Creek
Golf Club sold the equipment for $22,000 on December 31, 2018. Accumulated Depreciation as
of December 31, 2018, was $21,000. Journalize the sale of the equipment, assuming straight-line
depreciation was used.
E10-17 Determining the cost of assets
Learning Objective 1
1. Land $365,000

Lavallee Furniture purchased land, paying $95,000 cash plus a $260,000 note payable. In
addition, Lavallee paid delinquent property tax of $3,000, title insurance costing $2,000, and
$5,000 to level the land and remove an unwanted building. The company then constructed an
office building at a cost of $450,000. It also paid $55,000 for a fence around the property,
$16,000 for a sign near the entrance, and $7,000 for special lighting of the grounds.

Requirements
1. Determine the cost of the land, land improvements, and building.
2. Which of these assets will Lavallee depreciate?

E10-18 Making a lump-sum purchase of assets

Learning Objective 1
Lot 3 $108,750

Dearwood Properties bought three lots in a subdivision for a lump-sum price. An independent
appraiser valued the lots as follows:

Dearwood paid $435,000 in cash. Record the purchase in the journal, identifying each lot’s cost
in a separate Land account. Round decimals to two places, and use the computed percentages
throughout.

E10-19 Distinguishing capital expenditures from revenue expenditures

Learning Objective 1

Consider the following expenditures:

Classify each of the expenditures as a capital expenditure or a revenue expenditure related to
machinery.

E10-20 Computing depreciation—three methods

Learning Objective 2
1. Double-declining-balance, 12/31/17, Exp. $5,250
(Requirement 1 only)

Crackling Fried Chicken bought equipment on January 2, 2016, for $21,000. The equipment was
expected to remain in service for four years and to perform 3,600 fry jobs. At the end of the
equipment’s useful life, Crackling’s estimates that its residual value will be $3,000. The
equipment performed 360 jobs the first year, 1,080 the second year, 1,440 the third, and 720 the
fourth year.

Requirements
1. Prepare a schedule of depreciation expense, accumulated depreciation, and book value per
year for the equipment under the three depreciation methods. Show your computations. Note:
Three depreciation schedules must be prepared.
2. Which method tracks the wear and tear on the equipment most closely?

E10-22 Recording partial-year depreciation and sale of an asset

Learning Objectives 2, 3
Depr. Exp. $2,400

On January 2, 2015, Ditto Clothing Consignments purchased showroom fixtures for $12,000
cash, expecting the fixtures to remain in service for five years. Ditto has depreciated the fixtures
on a double-declining-balance basis, with zero residual value. On October 31, 2016, Ditto sold
the fixtures for $5,900 cash. Record both depreciation expense for 2016 and sale of the fixtures
on October 31, 2016.

E10-23 Recording partial-year depreciation and sale of an asset

Learning Objectives 2, 3
Loss $(6,000)

On January 2, 2014, Pet Salon purchased fixtures for $48,200 cash, expecting the fixtures to
remain in service for nine years. Pet Salon has depreciated the fixtures on a straight-line basis,
with $5,000 residual value. On May 31, 2016, Pet Salon sold the fixtures for $30,600 cash.
Record both depreciation expense for 2016 and sale of the fixtures on May 31, 2016.

P10-31A Determining asset cost, recording first-year depreciation, and identifying

depreciation results that meet management objectives
Learning Objectives 1, 2
1. Units-of-production, 12/31/16, Dep. Exp. $14,000

On January 3, 2016, Fast Delivery Service purchased a truck at a cost of $62,000. Before placing
the truck in service, Fast spent $3,000 painting it, $1,500 replacing tires, and $3,500 overhauling
the engine. The truck should remain in service for five years and have a residual value of $5,000.
The truck’s annual mileage is expected to be 28,000 miles in each of the first four years and
18,000 miles in the fifth year—130,000 miles in total. In deciding which depreciation method to
use, Steven Kittridge, the general manager, requests a depreciation schedule for each of the
depreciation methods (straight-line, units-of-production, and double- declining-balance).

Requirements
1. Prepare a depreciation schedule for each depreciation method, showing asset cost,
depreciation expense, accumulated depreciation, and asset book value.
2. Fast prepares financial statements using the depreciation method that reports the highest net
income in the early years of asset use. Consider the first year that Fast uses the truck. Identify
the depreciation method that meets the company’s objectives.

P10-37B Determining asset cost, recording first-year depreciation, and identifying

depreciation results that meet management objectives
Learning Objectives 1, 2
1. Units-of-production, 12/31/16, Dep. Exp. $18,900

On January 3, 2016, Quick Delivery Service purchased a truck at a cost of $90,000. Before
placing the truck in service, Quick spent $2,500 painting it, $1,800 replacing tires, and $4,700
overhauling the engine. The truck should remain in service for five years and have a residual
value of $9,000. The truck’s annual mileage is expected to be 21,000 miles in each of the first
four years and 16,000 miles in the fifth year—100,000 miles in total. In deciding which
depreciation method to use, Harvey Warner, the general manager, requests a depreciation
schedule for each of the depreciation methods (straight-line, units-of-production, and double-
declining-balance).

Requirements
1. Prepare a depreciation schedule for each depreciation method, showing asset cost,
depreciation expense, accumulated depreciation, and asset book value.
2. Quick prepares financial statements using the depreciation method that reports the highest net
income in the early years of asset use. Consider the first year that Quick uses the truck.
Identify the depreciation method that meets the company’s objectives.