9-1 Chapter 9 Plant Assets, Natural Resources, and Intangibles Demonstration Problems © 2016...

9-1

Chapter 9

Plant Assets, Natural

Resources, and Intangibles

Demonstration Problems

© 2016 Pearson Education, Inc.

9-2

Demonstration of E9-21

Silver Tree Inc. purchased a building for $1,500,000 and depreciated it on a straight-line basis over a 30-year period. The estimated residual value is $250,000. After using the building for 10 years, Silver Tree realized that wear and tear on the building would wear it out before 30 years and that the estimated residual value should be $220,000. Starting with the 11th year, Silver Tree began depreciating the building over a revised total life of 20 years using the new residual value.

Requirement

Journalize depreciation expense on the building for years 10 and 11.


9-3

Straight-line depreciation ═Cost − Residual value

Useful life

═ $1,500,000 − $250,00030 years

═ $41,667

Cost $1,500,000Residual value 250,000Useful life 30 years



9-4

Straight-line depreciation ═Cost − Residual value

Useful life

═ $1,500,000 − $250,00030 years

═ $41,667

Cost $1,500,000Residual value 250,000Useful life 30 years

Accumulated depreciation after 10 years ═ $41,667 × 10 years

═$416,667



9-5

Depreciation expense on the building for year 10.

Date Accounts and Explanation Debit Credit

Year 10 Depreciation Expense—Building 41,667

Accumulated Depreciation—Building 41,667

To record depreciation on building.



9-6

Book value after 10 years ═ Cost − Accumulated depreciation

═ $1,500,000 − $416,667

═ $1,083,333

Cost $1,500,000Accumulated depreciation 416,667Revised residual value 220,000Revised useful life remaining 10 years



9-7


═ $1,500,000 − $416,667

═ $1,083,333

Cost $1,500,000Accumulated depreciation 416,667Revised residual value 220,000Revised useful life remaining 10 years

Revised depreciation ═Book value − Revised residual value

Revised useful life remaining

═$1,083,333 − $220,000

10 years

═$863,33310 years

═ $86,333 per year



9-8

Depreciation expense on the building for the year 11.


Year 11 Depreciation Expense—Building 86,333

Accumulated Depreciation—Building 86,333

To record depreciation on building.



9-9


Mountain View Mining paid $500,000 for the right to extract mineral assets from a 600,000-ton deposit. In addition to the purchase price, Mountain View also paid a $600 filing fee, a $1,200 license fee to the state of Arizona, and $70,000 for a geological survey of the property. Because Mountain View purchased the rights to the minerals only, it expects the asset to have zero residual value. During the first year, Mountain View removed and sold 75,000 tons of the minerals.

Requirement

Make journal entries to record:(a) purchase of the minerals (debit Minerals)(b) payment of fees and other costs(c) depletion for the first year


9-10

Purchase price of minerals $500,000 Add related costs:Filing fee $600 License 1,200

Geological survey 70,000

71,800 Total cost of minerals $571,800

Purchase price $500,000Filing fee 600License fee 1,200Geological survey of property 70,000



9-11

a. Purchase of the minerals.


a. Minerals 500,000

Cash 500,000

To record purchase of mineral rights.



9-12

b. Payment of fees and other costs.


b. Minerals 71,800

Cash 71,800

To record payment of costs associated with purchase of minerals.



9-13

Cost $571,800Residual value 0Estimated total units 600,000Units extracted 75,000

Depletion per unit ═Cost − Residual valueEstimated total units

═ $571,000 − $0600,000 tons

═ $0.953 per ton



9-14

Cost $571,800Residual value 0Estimated total units 600,000Units extracted 75,000

Depletion per unit ═Cost − Residual valueEstimated total units

═ $571,000 − $0600,000 tons

═ $0.953 per ton

Depletion expense ═ Depletion per unit × Number of units extracted

═ 0.953 × 75,000

═ $71,475



9-15

c. Depletion for the first year.


c. Depletion Expense—Minerals 71,475

Accumulated Depletion—Minerals 71,475

To record depletion.



9-16


Great Electric Industries Corp. manufactures air conditioners. Assume that Great Electric recently paid $500,000 for a patent on a AC induction motors. Although it gives legal protection for 20 years, the patent is expected to provide a competitive advantage for only ten years.

Requirements

1. Assuming the straight-line method of amortization, make journal entries to record (a) the purchase of the patent and (b) amortization for the first full year.

2. After using the patent for five years, Great Electric learns at an industry trade show that another company is designing a more efficient AC induction motors. On the basis of this new information, Great Electric decides, starting with year 6, to amortize the remaining cost of the patent over three remaining years, giving the patent a total useful life of eight years. Record amortization for year 6.


9-17

Cost $500,000Residual value 0Useful life 10 years

Amortization expense ═Cost − Residual value

Useful life

═ $500,000 − $010 years

═ $50,000



9-18

a. Purchase of the patent.


a. Patent 500,000

Cash 500,000

To record purchase of patent.



9-19

b. Amortization for the first full year.


b. Amortization Expense—Patent 50,000

Patent 50,000

To record amortization.



9-20

Cost $500,000Amortization expense $50,000Revised useful life remaining 3 years

Accumulated amortization after 5 years ═ $50,000 per year × 5 years

═ $250,000



9-21



═ $250,000


═ $500,000 − $250,000

═ $250,000



9-22


Revised amortization ═Book value − Revised residual value

Revised useful life remaining

═ $250,000 − $03 years

═ $83,333(Rounded)


═ $250,000


═ $500,000 − $250,000

═ $250,000



9-23

Amortization for year 6.


Amortization Expense—Patent 83,333

Patent 83,333

To record amortization.



9-1 Chapter 9 Plant Assets, Natural Resources, and Intangibles Demonstration Problems © 2016...

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