Universidad Ana G Méndez

School of Business & Entrepreneurship

Acco 112 – Introduction to Accounting II
Chapter 10- Plant Assets, Natural Resources and Intangibles Assets
Assignment #3 RPPE Chapters Questions and Problems
Due Date: Tuesday, November 9, 2021; 10:00am

I. Chapters Questions

Chapter 10- Plant Assets, Natural Resources and Intangibles Assets

1. Sid Watney is uncertain about the applicability of the historical cost principle to plant assets.
Explain the principle to Sid.
For plant assets, the historical cost principle means that cost consists of all expenditures
necessary to acquire the asset and make it ready for its intended use.

2. What are some examples of land improvements?

Examples of land improvements include driveways, parking lots, fences, and underground
sprinklers

3. Lynn Company acquires the land and building owned by Noble Company. What types of costs
may be incurred to make the asset ready for its intended use if Lynn Company wants to use (a)
only the land, and (b) both the land and the building?
(a) When only the land is to be used, all demolition and removal costs of the building less any
proceeds from salvaged materials are necessary expenditures to make the land ready for its
intended use.
(b) When both the land and building are to be used, necessary costs of the building include
remodeling expenditures and the cost of replacing or repairing the roofs, floors, wiring, and
plumbing.

4. Andrew is studying for the next accounting examination. He asks your help on two questions:
(a) What is salvage value? (b) Is salvage value used in determining periodic depreciation under
each depreciation method? Answer Andrew's questions.
(a) Salvage value, also called residual value, is the expected value of the asset at the end of its
useful life.
(b) Salvage value is used in determining depreciation in each of the methods except the
declining-balance method.

5. Contrast the straight-line method and the units-of-activity method as to (a) useful life, and
(b) the pattern of periodic depreciation over useful life.
(a) Useful life is expressed in years under the straight-line method and in units of activity under
the units-of-activity method.
(b) The pattern of periodic depreciation expense over useful life is constant under the straight-
line method and variable under the units-of-activity method.

6. Distinguish between revenue expenditures and capital expenditures during useful life.
Revenue expenditures are ordinary repairs made to maintain the operating efficiency and
productive life of the asset. Capital expenditures are additions and improvements made to
increase operating efficiency, productive capacity, or useful life of the asset. Revenue
expenditures are recognized as expenses when incurred; capital expenditures are generally
debited to the plant asset affected.

7. How is a gain or loss on the sale of a plant asset computed?

In a sale of plant assets, the book value of the asset is compared to the proceeds received from
the sale. If the proceeds of the sale exceed the book value of the plant asset, a gain on disposal
occurs. If the proceeds of the sale are less than the book value of the plant asset sold, a loss on
disposal occurs

8. Romero Corporation owns a machine that is fully depreciated but is still being used. How
should Romero account for this asset and report it in the financial statements?
The plant asset and its accumulated depreciation should continue to be reported on the
balance sheet without further depreciation adjustment until the asset is retired. Reporting the
asset and related accumulated depreciation on the balance sheet informs the reader of the
financial statements that the asset is still in use. However, once an asset is fully depreciated,
even if it is still being used, no additional depreciation should be taken. In no situation can the
accumulated depreciation on the plant asset exceed its cost.

9. What are natural resources, and what are their distinguishing characteristics?
Natural resources consist of underground deposits of oil, gas, and minerals, and standing
timber. These long-lived productive assets have two distinguishing characteristics: they are
physically extracted in operations, and they are replaceable only by an act of nature.

10. Explain the concept of depletion and how it is computed.

Depletion is the allocation of the cost of natural resources to expense in a rational and
systematic manner over the resource’s useful life. It is computed by multiplying the depletion
cost per unit by the number of units extracted and sold
II. Problems

A. At December 31, 2020, Grand Company reported the following as plant assets.

Land $ 4,000,000
Buildings $28,500,000
Less: Accumulated depreciation—buildings 12,100,000 16,400,000
Equipment 48,000,000
Less: Accumulated depreciation—equipment 5,000,000 43,000,000
Total plant assets $63,400,000
During 2021, the following selected cash transactions occurred.
April Purchased land for $2,130,000.
1
May Sold equipment that cost $750,000 when purchased on January 1, 2017. The
1 equipment was sold for $450,000.
June Sold land purchased on June 1, 2011 for $1,500,000. The land cost $400,000.
1
July Purchased equipment for $2,500, 000.
1
Dec. Retired equipment that cost $500,000 when purchased on December 31, 2011. The
31 company received no proceeds related to salvage.
Instructions

a. Journalize the above transactions. The company uses straight-line depreciation for buildings
and equipment. The buildings are estimated to have a 50-year life and no salvage value. The
equipment is estimated to have a 10-year useful life and no salvage value. Update depreciation
on assets disposed of at the time of sale or retirement.
b. Record adjusting entries for depreciation for 2021.
c. Prepare the plant assets section of Grand's balance sheet at December 31, 2021.

B. Ceda Co. has equipment that cost $80,000 and that has been depreciated $50,000.
Instructions

Record the disposal under the following assumptions.

a. It was scrapped as having no value.
b. It was sold for $21,000.
c. It was sold for $31,000.
C. The Hartley Clinic purchased a new surgical laser for $90,000. The estimated salvage value is
$5,000. The laser has a useful life of five years and the clinic expects to use it 10,000 hours. It
was used 1,600 hours in year 1; 2,200 hours in year 2; 2,400 hours in year 3; 1,800 hours in year
4; 2,000 hours in year 5.
Instructions
(a) Compute the annual depreciation for each of the five years under each of the following
methods:
(1) straight-line.
(2) units-of-activity.
(b) If you were the administrator of the clinic, which method would you deem as most
appropriate? Justify your answer.
(c) Which method would result in the lowest reported income in the first year? Which
method would result in the lowest total reported income over the five-year period?