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Exam 6: Accounting for Long-Term Operational Assets

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Question 1

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On May 4, 2014, Regan Company purchased a tract of land as a factory site for $3,000,000. An existing building on the property was demolished, and construction was begun on a new factory building in July 2014 and completed December 15, 2014. Cost data are shown below. Required: Compute the amounts that should be recorded as the cost of a) the land and b) the new factory building.

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Question 2

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Reno Company purchased equipment on January 1, 2010 for $82,000. The equipment is estimated to have a 5-year life and a salvage value of $5,000. The company used the straight-line depreciation method. At the beginning of 2015, Reno revised the expected life to eight years. The annual amount of depreciation expense for each of the remaining years would be:

A) $6,220.
B) $7,160.
C) $6,160.
D) $7,700.

E) C) and D)
F) All of the above

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Question 3

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The use of estimates and revision of estimates are uncommon in financial reporting.

On January 6, 2014, the Eldorado Corporation purchased a tract of land for a factory site for $500,000. An existing building on the site was demolished and the new factory was completed on October 11, 2014. Additional cost data are shown below: Which of the following correctly states the cost that should be recorded for (a) the land and (b) the new building?

Different depreciation methods affect the total amount of depreciation that can be taken over an asset's useful life.

Give an example of an intangible asset with an identifiable useful life.

On January 1, 2010, Rusu Company purchased an asset that had cost $26,000. The asset had a 6-year useful life and an estimated salvage value of $2,000. Rusu depreciates its assets on the straight-line basis. On January 1, 2014 the company spent $12,000 to improve the quality of the asset. Based on this information the recognition of depreciation expense in 2014 would act to:

An impairment of an intangible asset reduces the asset, stockholders' equity, and net income.

Muller Corporation purchased a new truck on January 1, 2012 for $55,000 cash. Muller estimated the truck would have a salvage value of $4,000 at the end of the useful life of 5 years. On January 2, 2016 Muller had to replace the engine of the truck paying $7,500 cash. Due to the replaced engine, Muller estimates that the truck will continue a productive life for another four years. Required: Assuming straight-line depreciation is used, calculate the depreciation expense for 2016.

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ Using double declining balance depreciation, instead of straight line, will have what effect on the financial statements in the first year of an asset's life? $\begin{array}{|l|l|l|l|l|l|}\text { Assets Liabilities } & \text { Equity } & \text { Revenues } & \text { Expenses } & \begin{array}{c}\text { Net } \\\text { Income }\end{array} & \begin{array}{c}\text { Cash } \\\text { Flow }\end{array}\\\hline&&&\end{array}$

Parker Company purchased Eynon Corporation in 2009, recording $80,000 in goodwill at the time of purchase. In January, 2014, Parker decides that the value of the goodwill has declined substantially due to local economic and demographic changes. Parker estimates that the true value of the goodwill should only be $30,000. Which of the following shows the effect of this situation on the financial statements?

Give two examples of natural resources.

Which method of depreciation is used by most U. S. companies for financial reporting purposes?

On which financial statement(s) would the account "Loss on Sale of Land" appear?

Reno Company purchased equipment on January 1, 2010 for $82,000. The equipment is estimated to have a 5-year life and a salvage value of $5,000. The company used the straight-line depreciation method. If the original expected life remained the same (i.e., 5-years) , but at the beginning of 2015 the salvage value were revised to $6,000, the annual depreciation expense for each of the remaining years would be:

How is an expenditure that improves the quality of a piece of equipment recorded?

Explain how a business using the straight-line method would compute the amount of annual depreciation after revising the estimate for the useful life of equipment or a building.

Why is land classified separately from other tangible long-term assets?

On April 1, 2014, Marlin Company purchased a producing oil well at a cash cost of $3,500,000. It is estimated that 500,000 barrels of oil can be produced over the remaining life of the well. By December 31, 2014, 25,000 barrels of oil had been produced and sold. The amount of depletion expense on this well for 2014 would be:

Which of the following terms is used to identify the expense recognition for intangible assets?