ExErcisEs: sEt BRecognition and Classification of Capital ExpendituresE1B. concEpt ▶ Tell whether each of the following transactions related to an office building is a revenue expenditure (RE) or a capital expenditure (CE). In addition, indicate whether each transaction is an ordinary repair (OR), an extraordinary repair (ER), an addition (A), a betterment (B), or none of these (N): 1. The hallways and ceilings in the building are repainted at a cost of $6,250. 2. The hallways, which have tile floors, are carpeted at a cost of $28,000. 3. A new wing is added to the building at a cost of $105,470. 4. Furniture is purchased for the entrance to the building at a cost of $13,250. 5. The air-conditioning system is overhauled at a cost of $21,153. The overhaul

extends the useful life of the air-conditioning system by 10 years. 6. A cleaning firm is paid $150 per week to clean the newly installed carpets.

Recognizing and Classifying the Cost of Long-Term AssetsE2B. concEpt ▶ Golan Manufacturing purchased land next to its factory to be used as a parking lot. The expenditures incurred by the company were as follows: purchase price, $600,000; broker’s fees, $48,000; title search and other fees, $4,400; demoli-tion of a cottage on the property, $16,000; general grading of property, $8,400; paving parking lots, $80,000; lighting for parking lots, $64,000; and signs for parking lots, $12,800. Determine the amounts that should be debited to the Land account and the Land Improvements account.

Group PurchaseE3B. Shaun Pollok purchased a car wash for $480,000. If purchased separately, the land would have cost $120,000, the building $270,000, and the equipment $210,000. Determine the amount that should be recorded in the new business’s records for land, building, and equipment.

Cost of Long-Term Asset and DepreciationE4B. Herschel Gibbs purchased a used tractor for $35,000. Before the tractor could be used, it required new tires, which cost $2,200, and an overhaul, which cost $2,800. Its first tank of fuel cost $150. The tractor is expected to last six years and have a residual value of $4,000. Determine the cost and depreciable cost of the tractor and calculate the first year’s depreciation under the straight-line method.

Depreciation MethodsE5B. On January 13, 2013, Dillo Company purchased a drilling truck for $45,000. Dillo expects the truck to last five years or 200,000 miles, with an estimated residual value of $7,500 at the end of that time. During 2014, the truck is driven 48,000 miles. Dillo’s year end is December 31. Compute the depreciation for 2014 under each of the follow-ing methods: (1) straight-line, (2) production, and (3) double-declining-balance. Using the amount computed in (3), prepare the journal entry to record depreciation expense for the second year, and show how the Drilling Truck account would appear on the bal-ance sheet.

Double-Declining-Balance MethodE6B. Excel Security Company purchased a computer for $2,240. It has an estimated use-ful life of four years and an estimated residual value of $240. Compute the depreciation charge for each of the four years using the double-declining-balance method.

Revision of Depreciation RatesE7B. Green Hospital purchased a special X-ray machine. The machine, which cost $311,560, was expected to last ten years, with an estimated residual value of $31,560.

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2 Chapter 10: Long-Term Assets

After two years of operation (and depreciation charges using the straight-line method), it became evident that the X-ray machine would last a total of only seven years. The esti-mated residual value, however, would remain the same. Given this information, deter-mine the new depreciation charge for the third year on the basis of the revised estimated useful life.

Disposal of Plant AssetsE8B. A piece of equipment that cost $32,400 and on which $18,000 of accumulated depreciation had been recorded was disposed of on January 2, the first day of business of the current year. For each of the following assumptions, compute the gain or loss on the disposal:1. The equipment was discarded as having no value.2. The equipment was sold for $6,000 cash.3. The equipment was sold for $18,000 cash.

Disposal of Plant AssetsE9B. TCS Company purchased a computer on January 2, 2012, at a cost of $1,250. The computer is expected to have a useful life of five years and a residual value of $125. Assume that the computer is disposed of on July 1, 2015. Record the depreciation expense for half a year and the disposal under each of the following assumptions: 1. The computer is discarded. 2. The computer is sold for $200. 3. The computer is sold for $550.

Natural Resource Depletion and Depreciation of Related Plant AssetsE10B. Castle Company purchased land containing an estimated 2.5 million tons of ore for a cost of $4,400,000. The land without the ore is estimated to be worth $250,000. During its first year of operation, the company mined and sold 375,000 tons of ore. Compute the depletion charge per ton. Compute the depletion expense that Castle should record for the year.

Amortization of Copyrights and TrademarksE11B. Complete the following requirements regarding amortizing copyrights and trademarks: 1. Belmont Publishing Company purchased the copyright to a basic computer textbook

for $80,000. The usual life of a textbook is about four years. However, the copy-right will remain in effect for another 50 years. Calculate the annual amortization of the copyright.

2. Accounting connEction ▶ Bulls Company purchased a trademark from a well-known supermarket for $640,000. The company’s management argued that the trademark’s useful life was indefinite. Explain how the cost should be accounted for.

Accounting for a PatentE12B. At the beginning of the fiscal year, Anthony Company purchased for $2,060,000 a patent that applies to the manufacture of a unique tamper-proof lid for medicine bottles. Anthony incurred legal costs of $900,000 in successfully defending use of the lid by a competitor. Anthony estimated that the patent would be valuable for at least ten years.

During the first two years of operations, Anthony successfully marketed the lid. At the beginning of the third year, a study appeared in a consumer magazine showing that children could in fact remove the lid. As a result, all orders for the lids were canceled, and the patent was rendered worthless.

Prepare journal entries to record the following: (a) purchase of the patent, (b) successful defense of the patent, (c) amortization expense for the first year, and (d) write-off of the patent as worthless.

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Management IssuesE13B. BusinEss ApplicAtion ▶ Indicate whether each of the following actions is primarily related to (a) acquisition of long-term assets, (b) evaluating the financing of long-term assets, or (c) applying accrual accounting to long-term assets: 1. Deciding to use the production method of depreciation. 2. Allocating costs on a group purchase. 3. Determining the total units a machine will produce. 4. Deciding to borrow funds to purchase equipment. 5. Estimating the savings a new machine will produce and comparing that amount to

cost. 6. Examining the trend of free cash flow over several years. 7. Deciding whether to rent or buy a piece of equipment.

Free Cash FlowE14B. BusinEss ApplicAtion ▶ Zenith Corporation had net cash flows from operat-ing activities during the past year of $216,000. During the year, the company expended $462,000 for property, plant, and equipment; sold property, plant, and equipment for $54,000; and paid dividends of $50,000. Calculate the company’s free cash flow. What does the result tell you about the company?

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