ACTG3000 Santa Clara University Module 6 Application Problems Paper Module 6 Application Problems Chapter 9 E9-3: Which costs are subject to depreciat

ACTG3000 Santa Clara University Module 6 Application Problems Paper Module 6 Application Problems

Chapter 9

E9-3: Which costs are subject to depreciation?

Firton Brothers purchased for $90,000 a tract of land that included an abandoned warehouse. The warehouse was razed, and the site was prepared for a new building at a cost of $10,000. Scrap materials from the warehouse were sold for $7,000. A building was then constructed for $140,000, a driveway and parking lot were laid for $32,000, and permanent landscaping was completed for $4,000. Firton Brothers depreciates fixed assets over a 20-year period using the straight-line method.

Compute the amount of cost to be placed in the land, land improvements, and building accounts.
Assuming a salvage value of zero, compute the depreciation expense associated with the items above for the first year.

E9-4: Betterments or maintenance?

The following items represent common post-acquisition expenditures incurred on machinery:

Lubrication service
Painting costs
Cleaning expenditures
Rewiring costs to increase operating speed
Repairs
Replacement of defective parts
An overhaul to increase useful life
Cost of a muffler to reduce machine noise
Costs of redesign to increase output

Identify each item as a betterment or a maintenance item.

E9-7: Revising the estimated life

Portland Products purchased a machine on January 1, 2014, for $60,000 and estimated its useful life and salvage value at five years and $12,000, respectively. On January 1, 2017, the company added three years to the original useful-life estimate.

Compute the book value of the machine as of January 1, 2017, assuming that Portland uses the straight-line method of depreciation.
Prepare the journal entry entered by the company to record depreciation on December 31, 2017.

E9-11: The activity method of depreciation

Apex Trucking purchased a truck for $100,000 on January 1, 2017. The useful life of the truck was estimated to be either five years or 200,000 miles. Salvage value was estimated at $20,000. Over the actual life of the truck, it logged the following miles:

Year 1

48,000 miles

Year 2

35,000 miles

Year 3

40,000 miles

Year 4

25,000 miles

Year 5

35,000 miles

Year 6

10,000 miles

At the end of the sixth year, the truck was sold for $12,000.

Prepare the journal entries to record depreciation over the life of the truck and its sale, assuming these methods:

Activity method
Straight-line method

E9-14: Fixed asset sales

Savory Enterprises reported the following information regarding the company’s property, plant, and equipment in the footnotes to the company’s 2017 financial statements:

Equipment

$500,000

Less: Accumulated depreciation

300,000

200,000

Assume that Savory Enterprises sells all of its equipment for $235,000 in cash on January 1, 2018. Prepare the entry to record the sale.
Assume that Savory Enterprises sells all of its equipment for $185,000 in cash on January 1, 2018. Prepare the entry to record the sale.

E9-21: Recognition of goodwill

When Bristol-Myers Squibb purchased DuPont Pharmaceuticals from E.I. DuPont de Nemours for $7.8 billion in cash, it acquired assets with a fair market value of $5.1 billion and assumed the liabilities of DuPont Pharmaceuticals valued at $1.1 billion.

REQUIRED:
How much goodwill was recognized on the acquisition?
Describe how this transaction affected the basic accounting equation.

P9-1: How much to capitalize?

Stonebrecker International recently purchased new manufacturing equipment. The equipment cost $1 million. The company also incurred additional costs related to the acquisition of the equipment. The total cost to transport the equipment to Stonebrecker’s plant was $80,000, half of which was paid by Stonebrecker. The company also paid $8,000 to insure the equipment while it was being transported to its plant. The initial installation costs totaled $30,000. After installing the equipment, however, it was discovered that the floor under the equipment would have to be reinforced. Materials and direct labor to reinforce the floor totaled $15,000. Stonebrecker estimates that the equipment will have a salvage value of $100,000 in ten years.

REQUIRED:

a. What dollar amount should Stonebrecker capitalize on its books for this equipment?

b. Prepare the journal entry to capitalize the equipment.

c. What is the depreciation base of this equipment?

P9-13: Goodwill accounting

When Zimmer Holdings purchased the common stock of Centerplus AG, a Swiss manufacturer of medical devices, for $3.4 billion, the fair market value of the assets acquired and liabilities assumed was estimated to be $2.3 billion and $1 billion, respectively.

Compute the goodwill acquired in the transaction.
Discuss why Zimmer paid significantly more for Centerplus than was indicated by the fair market value of Centerplus’s net assets. MODULE 6 APPLICATION PROBLEMS
Chapter 9
E9-3: Which costs are subject to deprecation?
Firton Brothers purchased for $90,000 a tract of land that included an abandoned warehouse.
The warehouse was razed, and the site was prepared for a new building at a cost of $10,000.
Scrap materials from the warehouse were sold for $7,000. A building was then constructed
for $140,000, a driveway and parking lot were laid for $32,000, and permanent landscaping
was completed for $4,000. Firton Brothers depreciates fixed assets over a 20-year period
using the straight-line method.
a. Compute the amount of cost to be placed in the land, land improvements, and
building accounts.
b. Assuming a salvage value of zero, compute the depreciation expense associated with
the items above for the first year.
E9-4: Betterments or maintenance?
The following items represent common post-acquisition expenditures incurred on machinery:
a. Lubrication service
b. Painting costs
c. Cleaning expenditures
d. Rewiring costs to increase operating speed
e. Repairs
f. Replacement of defective parts
g. An overhaul to increase useful life
h. Cost of a muffler to reduce machine noise
i. Costs of redesign to increase output
Identify each item as a betterment or a maintenance item.
E9-7: Revising the estimated life
Portland Products purchased a machine on January 1, 2014, for $60,000 and estimated its
useful life and salvage value at five years and $12,000, respectively. On January 1, 2017, the
company added three years to the original useful-life estimate.
a. Compute the book value of the machine as of January 1, 2017, assuming that
Portland uses the straight-line method of depreciation.
b. Prepare the journal entry entered by the company to record depreciation on
December 31, 2017.
E9-11: The activity method of depreciation
Apex Trucking purchased a truck for $100,000 on January 1, 2017. The useful life of the
truck was estimated to be either five years or 200,000 miles. Salvage value was estimated at
$20,000. Over the actual life of the truck, it logged the following miles:
Year 1 48,000 miles
Year 2 35,000 miles
Year 3 40,000 miles
Year 4 25,000 miles
Year 5 35,000 miles
Year 6 10,000 miles
At the end of the sixth year, the truck was sold for $12,000.
Prepare the journal entries to record depreciation over the life of the truck and its sale,
assuming these methods:
1. Activity method
2. Straight-line method
E9-14: Fixed asset sales
Savory Enterprises reported the following information regarding the company’s property,
plant, and equipment in the footnotes to the company’s 2017 financial statements:
Equipment
$500,000
Less: Accumulated depreciation 300,000 200,000
a. Assume that Savory Enterprises sells all of its equipment for $235,000 in cash on
January 1, 2018. Prepare the entry to record the sale.
b. Assume that Savory Enterprises sells all of its equipment for $185,000 in cash on
January 1, 2018. Prepare the entry to record the sale.
E9-21: Recognition of goodwill
When Bristol-Myers Squibb purchased DuPont Pharmaceuticals from E.I. DuPont de
Nemours for $7.8 billion in cash, it acquired assets with a fair market value of $5.1 billion
and assumed the liabilities of DuPont Pharmaceuticals valued at $1.1 billion.
REQUIRED:
a. How much goodwill was recognized on the acquisition?
b. Describe how this transaction affected the basic accounting equation.
P9-1: How much to capitalize?
Stonebrecker International recently purchased new manufacturing equipment. The equipment
cost $1 million. The company also incurred additional costs related to the acquisition of the
equipment. The total cost to transport the equipment to Stonebrecker’s plant was $80,000,
half of which was paid by Stonebrecker. The company also paid $8,000 to insure the
equipment while it was being transported to its plant. The initial installation costs totaled
$30,000. After installing the equipment, however, it was discovered that the floor under the
equipment would have to be reinforced. Materials and direct labor to reinforce the floor
totaled $15,000. Stonebrecker estimates that the equipment will have a salvage value of
$100,000 in ten years.
REQUIRED:
a. What dollar amount should Stonebrecker capitalize on its books for this equipment?
b. Prepare the journal entry to capitalize the equipment.
c. What is the depreciation base of this equipment?
P9-13: Goodwill accounting
When Zimmer Holdings purchased the common stock of Centerplus AG, a Swiss
manufacturer of medical devices, for $3.4 billion, the fair market value of the assets acquired
and liabilities assumed was estimated to be $2.3 billion and $1 billion, respectively.
a. Compute the goodwill acquired in the transaction.
b. Discuss why Zimmer paid significantly more for Centerplus than was indicated by
the fair market value of Centerplus’s net assets.

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