Problem Set – Long-Term Assets | Test Bank – 10th

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Student name:__________

FILL IN THE BLANK. Write the word or phrase that best completes each statement or answers the question.
1) __________________ is an estimate of an asset’s value at the end of its useful life.

2) The inability of a plant asset to meet a company’s productive demands is called ______________________.

3) _________________ is the process of becoming outdated and no longer used.

4) A ____________________________ results from revising estimates of the useful life or salvage value of a plant asset.

5) The federal income tax rules for depreciating assets are known as ___________________________.

6) The depreciation method that recognizes equal amounts of depreciation over each period of an asset’s useful life is _______________________________.

7) The depreciation method that charges a varying amount to expense for each period of an asset’s useful life depending on its usage is ________________________________.

8) The depreciation method that uses a depreciation rate that is a multiple of the straight-line rate and applies it to an asset’s beginning-of-period book value is ____________________.

9) Capital expenditures that extend an asset’s useful life beyond its original estimate are called _______________________.

10) Additional costs of plant assets that do not materially increase the asset’s life or productive capabilities are recorded as ______________________________.

11) Additional costs of plant assets that provide benefits extending beyond the current period are _________________________________.

12) Revenue expenditures to keep an asset in good operating condition are _____________________.

13) _________________________ are capital expenditures that make a plant asset more efficient or productive but do not always increase an asset’s useful life; they often involve adding a component to an asset or replacing one of its old components with a better one.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
14) Define plant assets and identify the four primary issues in accounting for them.

15) What is depreciation of plant assets? What are the factors necessary in computing depreciation?

16) What is the Modified Accelerated Cost Recovery System (MACRS)? Why is MACRS not allowed for financial reporting?

17) Explain the purpose of and method of depreciation for partial years.

18) Explain the impact, if any, on depreciation when estimates that determine depreciation change.

19) Compare the different depreciation methods (straight-line, units-of-production, and double-declining-balance) with respect to the amounts of depreciation expense per period and the total depreciation over the life of the asset.

20) Explain how to calculate total asset turnover. Describe what it reveals about a company’s financial condition, whether a higher or lower ratio is desirable, and how it is best applied for comparative purposes.

21) How is the cost computed for individual assets purchased as a lump-sum?

22) Explain in detail how to compute each of the following depreciation methods: straight-line, units-of-production, and double-declining-balance.

23) Explain the difference between revenue expenditures and capital expenditures and how they are recorded in the accounting system.

24) What are the general accounting procedures for recording asset disposals?

25) Describe the accounting for natural resources, including their acquisition, cost allocation, and account titles.

26) Describe the accounting for intangible assets, including their acquisition, cost allocation, and accounts involved.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
27) A company’s property records revealed the following information about its plant assets:

Calculate the depreciation expense for each machine in Year 1 and Year 2 for the year ended December 31.

28) A company’s property records revealed the following information about its plant assets:

Calculate the depreciation expense for each machine in Year 1 and Year 2 for the year ended December 31.

29) A company’s property records revealed the following information about one of its plant assets:

Calculate the depreciation expense for the asset in Year 1 and Year 2 for the year ended December 31.

30) A company’s property records revealed the following information about one of its plant assets:

Calculate the depreciation expense in Year 1 and Year 2 for the year ended December 31.

31) A company purchased a delivery van on October 1 of the current year at a cost of $40,000. The van is expected to last six years and has a salvage value of $2,200. The company’s annual accounting period ends on December 31.

1. What is the depreciation expense for the current year, assuming the straight-line method is used?
2. What is the book value of the van at the end of the first year?

32) A building was purchased for $370,000 and depreciated using the straight-line basis under the assumption it would have a twenty-year life and a $10,000 salvage value. At the beginning of the building’s eleventh year it was determined the building had only eight years of remaining life instead of ten, and that at the end of the remaining eight years its salvage value would be $16,000. What amount of depreciation should be recorded in each of the building’s remaining eight years?

33) Greene Company purchased a machine for $75,000 that was expected to last 6 years and to have a salvage value of $6,000. At the beginning of the machine’s fourth year the company decided that the estimated useful life should be revised to a total of 10 years instead of 6 years and the salvage value revised to be $5,500. Straight-line depreciation was used throughout the machine’s life. Calculate the depreciation expense for the fourth year of the machine’s useful life.

34) On April 1 of the current year, a company purchased and placed in service a machine with a cost of $240,000. The company estimated the machine’s useful life to be four years or 60,000 units of output with an estimated salvage value of $60,000. During the current year, 12,000 units were produced.

Prepare the necessary December 31 adjusting journal entry to record depreciation for the current year assuming the company uses:

a. The straight-line method of depreciation
b. The units-of-production method of depreciation
c. The double-declining balance method of depreciation

35) On January 1 of Year 1, a company acquired and placed in service a machine at a cost of $800,000. It has been estimated that the machine has a service life of five years and a salvage value of $100,000. Using the double-declining-balance method of depreciation, complete the schedule below showing depreciation amounts for all five years.

36) On April 1, Year 1, Ast,or Corporation purchased and placed a plant asset in service. The following information is available regarding the plant asset:

Make the necessary adjusting journal entries at December 31, Year 1, and December 31, Year 2 to record depreciation for each year under the straight-line depreciation method.

37) On April 1, Year 1, Raines Company purchased and placed a plant asset in service. The following information is available regarding the plant asset:

Make the necessary adjusting journal entries at December 31, Year 1, and December 31, Year 2 to record depreciation for each year under the double-declining balance depreciation method:

38) On January 1, Year 1, Naples purchased a computer system that cost $1,480,000. The estimated useful life of the computer is 3 years and the salvage value is $40,000. Straight-line depreciation is to be used. On January 1, Year 2, Naples determined that the estimated useful life of the computer would be 4 years instead of 3 years. The estimated salvage value will only be $10,000.

a. Prepare the journal entry to record depreciation expense for Year 1.
b. Prepare the journal entry to record depreciation expense for Year 2.

39) The Oberon Company purchased a delivery truck for $95,000 on January 2. The truck was estimated to have a $3,000 salvage value and a 4-year life. The truck was depreciated using the straight-line method. At the beginning of the third year, it was determined the truck’s total useful life would be 6 years rather than 4, and the salvage at the end of the 6th year would be $1,500. Determine the depreciation expense for the truck for the 6 years of its life.

40) McClintock Company had the following transactions involving plant assets during Year 1. Unless otherwise indicated, all transactions were for cash.

Prepare the general journal entries to record these transactions.

41) On January 1 of Year 1, McClintock Company acquired a truck that cost $75,500 with an estimated $14,000 salvage value and 4-year estimated useful life. Depreciation in the first year was $15,375. McClintock had the following transactions involving plant assets during Year 2. Unless otherwise indicated, all transactions were for cash.

Prepare the general journal entries to record these transactions.

42) A company purchased a cooling system on January 1 for $225,000. The system had an estimated useful life of 15 years. After using the system for 13 full years, the company completed a renovation of the system at a cost of $33,000 and now expects the system to be more efficient and last 8 years beyond the original estimate. The company uses the straight-line method of depreciation.

(a) Prepare the journal entry at January 3, to record the renovation of the cooling system.
(b) Prepare the journal entry at December 31, to record the revised depreciation for the fourteenth year.

43) A company purchased and installed equipment on January 1 at a total cost of $72,000. Straight-line depreciation was calculated based on the estimate of a five-year life and no salvage value. The equipment was disposed of on July 1 of the fourth year. The company uses the calendar year.

1. Prepare the general journal entry to update depreciation to July 1 in the fourth year.
2. Prepare the general journal entry to record the disposal of the equipment under each of these independent situations:
a. The equipment was sold for $22,000 cash.
b. The equipment was sold for $15,000 cash.

44) A company purchased and installed machinery on January 1 at a total cost of $93,000. Straight-line depreciation was calculated based on the assumption of a five-year life and no salvage value. The machinery was disposed of on July 1 of year four. The company uses the calendar year.

1. Prepare the general journal entry to update depreciation to July 1 in year four.
2. Prepare the general journal entry to record the sale of the machine for $27,000 cash.

45) On April 1, Year 5 a company discarded a machine that had cost $10,000 and had accumulated depreciation of $8,000 as of December 31, Year 4. The asset had a 5-year life and no salvage value. Prepare the journal entries to record the updating of the depreciation expense and discarding of this asset in Year 5.

46) On January 1, 2022, a company disposed of equipment for $16,200 cash that had cost $35,000, a salvage value of $5,000, and a useful life 10 years. The double-declining-balance depreciation method was used. On December 31, 2021, accumulated depreciation was $20,664. Prepare a journal entry to record the disposal of the equipment.

47) On January 2, 2020, a company purchased a delivery truck for $45,000 cash. The truck had an estimated useful life of seven years and an estimated salvage value of $3,000. The straight-line method of depreciation was used. Prepare the journal entries to record depreciation expense and the disposal of the truck on September 1, 2024, under each of the following assumptions:

a. The truck and $45,000 cash were given in exchange for a new delivery truck that had a cash price of $60,000. This transaction has commercial substance.
b. The truck and $40,000 cash were exchanged for a new delivery truck that had a cash price of $60,000. This transaction has commercial substance.

48) A company had net sales of $228,000 for Year 1 and $288,000 for Year 2. The company’s average total assets for Year 1 were $150,000 and $180,000 for Year 2. Calculate the total asset turnover for each year and comment on the company’s efficiency in the use of its assets.

49) A company had net sales of $1,539,000 in Year 1 and $1,496,000 in Year 2. Its average total assets were $810,000 for Year 1 and $800,000 for Year 2. (1) Calculate the total asset turnover for each year. (2) Interpret and comment on the company’s efficiency in the use of its assets.

50) Schwartz Company paid $780,000 cash to buy the a group of plant assets. An independent appraiser assigned the following values to the assets acquired:

Prepare Schwartz’ journal entry to record the acquisition of these assets.

51) A company purchased a machine. The following costs were incurred in the purchase and installation of the machine. Determine the total cost of the machine.

52) A company paid $595,000 for property that included land appraised at $384,000; land improvements appraised at $128,000; and a building appraised at $288,000. Determine the amounts that should be recorded as:

53) Prepare journal entries to record the following transactions of a company during the current year:

54) A company purchased equipment on June 28 of the current year and placed it in service on August 1. The following costs were incurred in acquiring the equipment:

Determine the amount to be recorded as cost for the equipment.

55) A company purchased land with a building for a lump-sum cost of $2,570,000 ($500,000 paid in cash and the balance on a note payable). It was estimated that the land and building had market values of $600,000 and $2,400,000, respectively.

Determine the cost to be apportioned to the land and to the building and prepare the journal entry to record the acquisition.

56) A company needed a new building. It found a suitable location with an existing old building on the land. The company reached an agreement to buy the land and the building for $960,000 cash. The old building was demolished to make way for the needed new building. Following is information regarding the demolition of the old building and construction of the new one:

Prepare a single journal entry to record the above costs assuming all transactions are paid in cash.

57) A company purchased land on which to construct a new building for a cost of $350,000. Additional costs incurred were:

What total dollar amount should be charged to the Land account?

58) A snow removal company purchased a truck on September 1 of the current year to be used during the coming winter for its snow removal service. The following costs were incurred in acquiring the truck and preparing it for use:

Determine the amount to be recorded as cost for the truck.

59) A new machine costing $1,800,000 cash and estimated to have a $60,000 salvage value was purchased on January 1. The machine is expected to produce 600,000 units of product during its 8-year useful life. Calculate the depreciation expense in the first year under the following independent situations:

1. The company uses the units-of-production method and the machine produces 70,000 units of product during its first year.
2. The company uses the double-declining-balance method.
3. The company uses the straight-line method.

60) A company purchased a machine on January 1 of the current year for $750,000. Calculate the annual depreciation expense for each year of the machine’s life (estimated at 5 years or 20,000 hours, with a salvage value of $75,000) using each of the below-mentioned methods. During the machine’s 5-year life its hourly usage was: 3,000; 4,000; 5,000; 5,000; and 3,000 hours.

61) A company purchased an equipment system for $325,000 on January 1. The company expects the equipment to last for eight years or 81,250 hours of operation, with no estimated salvage value. During the first year, the equipment was in operation for 8,000 hours, while in the second year, the equipment was in operation for 8,700 hours. Compute the depreciation expense related to the equipment for Year 1 and Year 2 using the following depreciation methods:

a. Straight-line.
b. Double-declining-balance.
c. Units-of-production.

62) On January 1, a machine costing $260,000 with an 8-year life and an estimated $5,000 salvage value was purchased. It was also estimated that the machine would produce 500,000 units during its life. The actual units produced during its first year of operation were 110,000. Determine the amount of depreciation expense for the first year under each of the following assumptions:

1. The company uses the straight-line method of depreciation.
2. The company uses the units-of-production method of depreciation.
3. The company uses the double-declining-balance method of depreciation.

63) Suarez Company uses the straight-line method of depreciation. The company purchased equipment on January 1, Year 1, for $1,600,000 with an expected life of six years and a salvage value of $130,000. Assuming the equipment is sold on July 1, Year 3 for $1,000,000 cash, prepare the journal entries to record depreciation for the first 6 months of Year 3 and the sale of the equipment.

64) A company paid $320,000 for equipment that was expected to last five years and to have a salvage value of $40,000. During the third year of the equipment’s life, $39,000 cash was paid for replacement parts that were expected to increase productivity by 20% each year. Prepare the journal entry to record the $39,000 cost incurred in the third year.

65) On January 1, a company purchased machinery for $75,000 that had a 6-year useful life and a salvage value of $6,000. After three years of straight-line depreciation, the company paid $10,500 cash at the beginning of the year to improve the efficiency of the machinery. The productivity of the machinery was improved without increasing its remaining useful life or changing its salvage value. Straight-line depreciation is used throughout the machinery’s life.

1. Prepare the journal entry to record the $10,500 expenditure.
2. Prepare the journal entry to record depreciation expense for the fourth year.

66) A company sold a machine that originally cost $90,000 for $28,000 cash. The accumulated depreciation on this machine was $47,000 at the time of the sale. What was the company’s gain or loss on this sale?

67) Wallace Company sold equipment that had originally cost $650,000 for $320,000 cash. The accumulated depreciation as of the date of the sale was $300,000. Prepare a single journal entry to record the sale of the equipment.

68) On April 1, 2021, due to obsolescence resulting from a new technology, a company discarded a computer that cost $5,000, had a useful life of 4 years, and a salvage value of $400. Based on straight-line depreciation, the accumulated depreciation as of December 31, 2020 was $3,450.

a. Prepare the journal entry to record depreciation up to the date of disposal of the computer.
b. Prepare the journal entry to record the disposal of the computer.

69) On April 1 of the current year, a company sold a truck that had originally cost $20,000 for $2,200 cash. The truck had a salvage value of $2,000, and a useful life of 5 years. The accounting records showed accumulated depreciation for this truck of $17,000 as of April 1 of the current year. Prepare the journal entry to record the sale of the truck.

70) Anderson Company sold a piece of equipment for $28,000 cash on December 31 after recording the annual depreciation on the asset. The equipment had an original cost of $97,500 and accumulated depreciation of $63,000. Prepare the general journal entry to record the sale of this asset.

71) A company purchased mining property for $1,560,000. The property was estimated to contain 13,000,000 tons of ore. In the current year, the company removed and sold 263,000 tons of ore. Calculate the depletion expense for the current year.

72) A company purchased a mine for $4,875,000 containing an estimated 15,000,000 tons of ore. In Year 1, it mined and sold 689,000 tons of ore. In Year 2, it mined and sold 935,000 tons. Calculate the depletion expense for Year 1 and Year 2 and determine the book value of the property at the end of Year 2.

73) A company purchased a mine for $1,837,500 containing an estimated 7,350,000 tons of ore. When mining is complete, the property will have no salvage value. In Year 1, it mined and sold 857,000 tons of ore. Calculate the depletion expense for Year 1 and prepare the journal entry to record the depletion.

74) Record the following events and transactions for Leonard Company for the current year.
1. On January 1, Leonard purchased a patent for $35,000 with a remaining useful life of 10 years. Prepare the journal entry to amortize the patent at the end of the first year.
2. On January 2, Leonard purchased a music distributor’s collection of lyrics and songs for $1,425,000. The copyrights have a remaining life of another 30 years. Prepare the journal entry to amortize the copyright at the end of the first year.

75) A company traded an old forklift for a new forklift, receiving a $13,500 trade-in allowance and paying the remaining $47,200 in cash. The old forklift had cost $43,000, a 5-year useful life and a $5,000 salvage value. Straight-line accumulated depreciation of $27,200 had been recorded as of the exchange date.

1. What was the book value of the old forklift on the date of the exchange?
2. What amount of gain or loss (indicate which) should be recognized in recording the exchange, assuming the transaction has commercial substance?
3. What amount should be recorded as the cost of the new forklift?

76) A machine had an original cost of $60,000. After $45,000 of depreciation was recorded, the machine was traded in on a new machine priced at $75,000. A $10,500 trade-in allowance was received on the old machine and the balance of $64,500 was paid in cash. This transaction has commercial substance. Prepare the general journal entry to record this trade-in.

77) A company exchanged its used machine for a new machine in a transaction that had commercial substance. The old machine cost $68,000, and the new one had a cash price of $95,000. The company had taken $59,000 depreciation on the old machine and was allowed a $2,500 trade-in allowance and the balance of $92,500 was paid in cash. What gain or loss should be recorded on the exchange?

78) A company exchanged an old automobile for a newer model. The old automobile had a cost of $36,000 and accumulated depreciation of $25,000 as of the exchange date. The new automobile had a cash price of $34,000, but the company was given a $15,000 trade-in allowance and the balance of $19,000 was paid in cash. Prepare the journal entry to record the exchange, if the transaction has commercial substance.

79) During the current year, a company exchanged an old truck costing $58,000 with accumulated depreciation of $52,000 for a new truck. The new truck had a cash price of $80,000 and the company received a $16,000 trade-in allowance on the old truck with the balance of $64,000 paid in cash. Prepare the journal entry to record the exchange, assuming the transaction has commercial substance.

80) During the current year, Beldon Company acquired a new $12,800 computer by exchanging an old one on which the company received a $1,500 trade-in allowance (with the balance of $11,300 paid in cash). The old computer cost $9,000 and its accumulated depreciation was $5,500 as of the exchange date. Assuming the exchange transaction had commercial substance, prepare the journal entry to record the exchange.

81) A company acquired $4,300 of store equipment by trading in old equipment with a cost of $2,000 and that had accumulated depreciation of $1,900 as of the exchange date. The company received a $75 trade-in allowance for the old equipment with the balance of $4,225 paid in cash. Prepare the journal entry to record the exchange, assuming the transaction had commercial substance.

82) On April 1 of the current year, a company traded an old machine that originally cost $32,000 and that had accumulated depreciation of $24,000 for a similar new machine that had a cash price of $40,000.

1. Prepare the entry to record the exchange under the assumption that a $5,000 trade-in allowance was received and the balance of $35,000 was paid in cash. Assume the exchange transaction had commercial substance.
2. Prepare the entry to record the exchange under the assumption that instead of a $5,000 trade-in allowance, a $12,500 trade-in allowance was received and the balance of $27,500 was paid in cash. Assume the exchange transaction has commercial substance.

83) Identify the balance sheet classification of each of the following assets by placing an X in the correct classification: Plant Assets, Natural Resources, or Intangibles.

84) A machine costing $450,000 with a 4-year life and an estimated salvage value of $30,000 is installed by Peters Company on January 1. The company estimates the machine will produce 1,050,000 units of product during its life. Its usage is as follows for the first 2 years: Year 1, production of 260,000 units; Year 2, production of 275,000 units. Enter the depreciation amounts for years 1 and 2 in the table below for each depreciation method. Show calculation of amounts below the table.

85) On July 1 of the current year, Glover Mining Company pays $5,400,000 for an ore mine estimated to contain 7,200,000 tons of recoverable ore. It installs machinery on July 3 costing $864,000 that has an 8-year life and no salvage value and is capable of mining the ore deposit in six years. The company removes and sells 745,000 tons of ore during its first six months of operations ending on December 31. Depreciation of the machinery is in proportion to the mine’s depletion as the machinery will be abandoned after the ore is mined. Prepare the entries Glover must record for (a) the purchase of the ore mine, (b) the costs and installation of the machinery, (c) the depletion assuming the ore mine has a zero salvage value, and (d) the depreciation on the machinery.

86) On July 1 of the current year, Timberlake Company signed a contract to lease space in a building for 7 years. After taking possession of the leased space, Timberlake pays $140,000 for improving the office portion of the lease space. The improvements are paid on July 2 of the current year and are estimated to have a useful life equal to 13 years. Prepare entries for Timberlake to record (a) its payment for the leasehold improvements, (b) the December 31 year-end entry to amortize the leasehold improvements.

87) Westport Company reports the following: net sales of $25,200 for Year 2 and $22,640 for Year 1; end-of-year total assets of $14,875 for Year 2 and $13,125 for Year 1. Compute its total asset turnover for Year 2 and assess its level if competitors average a total asset turnover of 2.0 times.

Answer Key

Test name: John Wild Ch08 Problem Material

1) Salvage value (or residual value or scrap value)

2) inadequacy

3) Obsolescence

4) change in accounting estimate

5) MACRS (Modified Accelerated Cost Recovery System)

6) straight-line

7) units-of-production

8) declining-balance

9) extraordinary repairs

10) revenue expenditures

11) capital expenditures

12) ordinary repairs

13) Betterments

14) Plant assets are tangible assets used in the operations of a company that have useful lives of more than one accounting period. The four main accounting issues related to plant assets include (1) computing their costs, (2) allocating their costs, (3) accounting for subsequent expenditures such as repairs and improvements, (4) and recording their disposal.

15) Depreciation is the process of allocating the cost of a plant asset to expense while it is in use. Three factors determine depreciation: cost of the asset, salvage value, and useful life. In addition, the company must determine the depreciation method to use.

16) MACRS is U.S. tax law for depreciating assets. It allows straight-line depreciation for some assets but requires accelerated depreciation for most kinds of assets. MACRS is not acceptable for financial reporting because it does not consider an asset’s useful life or salvage value.

17) Partial years’ depreciation is often required because assets are bought and sold throughout the year. Depreciation for assets owned for less than one year is commonly calculated as the annual depreciation prorated for the number of months the assets are owned during the year. This is done so that the year of purchase or the year of disposal is charged with its share of the asset’s depreciation.

18) Depreciation is revised when changes in estimates such as salvage value and useful life occur. If the asset’s useful life and/or salvage value changes, the remaining depreciable cost is allocated over the remaining revised useful life of the asset. The new estimate is used to compute depreciation for current and future periods.

19) The amount of depreciation expense per period is usually different for different methods. Yet total depreciation expense over the life of the asset is the same for all methods. Specifically, the straight-line method yields the same amount of depreciation for each full accounting period. The units-of-production method results in depreciation expense that increases or decreases with the amount of asset usage. The double-declining-balance method is an accelerated method that yields more depreciation expense in the earlier years of ownership than straight-line depreciation.

20) Total asset turnover is calculated by dividing net sales by average total assets. The result is interpreted as the amount of net sales generated by each dollar of assets. Thus, the ratio reflects a company’s ability to efficiently and effectively use its assets to generate sales. A high number is desirable; however, it must be interpreted in comparison with prior years as well as with competitors and industry standards.

21) Plant assets should be recorded at cost when acquired. Cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. The cost of a lump-sum purchase is allocated among its individual assets based on their relative market (or appraised) values.

22) Straight-line depreciation is calculated by subtracting salvage value from the cost of the plant asset and then dividing the result by the useful life. When useful life is measured in years, the resulting amount is the annual depreciation expense for the asset.<br><br>Units-of-production depreciation is calculated by subtracting salvage value from the cost of the plant asset and then dividing the result by the estimated total units of production. The resulting amount is the depreciation expense per unit. That amount is multiplied by the number of units produced during each accounting period to determine the total amount of depreciation expense for that period.<br><br>The double-declining-balance method uses twice the straight-line rate (100%/useful life in years) multiplied by the beginning-of-period book value of the asset. The resulting amount is the depreciation expense for that period.

23) Revenue expenditures do not materially increase a plant asset’s life or productive capabilities. An example is ordinary repairs where benefits expire in the current accounting period. Revenue expenditures are debited to expense and are thus matched with current revenues. Capital expenditures are costs of plant assets that provide benefits for longer than the current period. They make a plant asset more productive or extend its useful life. Examples are extraordinary repairs and betterments that benefit future periods. Capital expenditures are debited to asset accounts and are matched with future periods through depreciation expense.

24) The first step in the accounting process for asset disposals is to bring the amount of depreciation up to date. The second step is to then remove the cost of the asset and its related accumulated depreciation from the accounting records. The third step is to recognize the amount of cash and/or other assets involved in the transaction. Fourth, record any gain or loss from the asset disposal by comparing the asset book value to the market value of any asset received. Exceptions to the fourth step are exchanges without commercial substance. No gain or loss is recorded for exchanges without commercial substance.

25) The costs of natural resources are recorded as assets. Depletion is the process of allocating the cost of a natural resource to the period when it is consumed. Depletion is calculated by subtracting salvage value from cost and then dividing the result by the expected total unit production of the resource. The resulting amount is depletion expense per unit. The depletion per unit is multiplied by total units for the period to calculate the depletion expense for that period. Total depletion is carried in an accumulated depletion account. Natural resources are reported on the balance sheet at their cost minus accumulated depletion.

26) Intangible assets are recorded at acquisition cost and are debited to asset accounts. Allocation of the cost of an intangible asset with a definite life to expense is done by using the straight-line method and is called amortization. Amortization is recorded with a credit to accumulated amortization. Intangible assets with indefinite lives are not amortized. Intangible assets are reported on the balance sheet at their cost minus accumulated amortization.

27) Machine A:
Year 1: [($42,000 − $3,000)/3] × 3/12 = $3,250
Year 2: ($42,000 − $3,000)/3 = $13,000

Machine B:
Year 1: $86,000 × 40% × 6/12 = $17,200
Year 2: ($86,000 − $17,200) × 40% = $27,520

* Double-declining balance depreciation rate = 1/5 × 2 = 40%

28) Machine A:
Years 1 & 2: [($82,000 − $8,000)/4] = $18,500

Machine B:
Year 1: $46,000 × 40% × 6/12 = $9,200
Year 2: ($46,000 − $9,200) × 40% = $14,720

* Double-declining balance depreciation rate = 1/5 × 2 = 40%

29) Year 1 [($450,000 − $30,000)/7] × 3/12 = $15,000
Year 2 ($450,000 − $30,000)/7 = $60,000

30) Year 1: $154,000 × 20% = $30,800
Year 2: ($154,000 − $30,800) × 20% = $24,640

* Double-declining balance depreciation rate = 1/10 × 2 = 20%

31) 1. [($40,000 − $2,200)/6] × 3/12 = $1,575
2. Cost − Accumulated Depreciation = Book Value; $40,000 − $1,575 = $38,425

32) ($370,000 − $10,000)/20 = $18,000 Original annual depreciation
$18,000 × 10 years = $180,000 Accumulated depreciation after 10 years
$370,000 − $180,000 = $190,000 Book value after 10 years

($190,000 − $16,000)/8 years = $21,750 Annual depreciation in last 8 years

33) ($75,000 − $6,000)/6 = $11,500 Original annual depreciation
$11,500 × 3 years = $34,500 Accumulated depreciation after 3 years
$75,000 − $34,500 = $40,500 Book value after 3 years
($40,500 − $5,500)/7 years = $ 5,000 Annual depreciation in the 4th year

34)