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# Chap006 - Accounting for and Presentation of Noncurrent...

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Accounting for and Presentation of Noncurrent Assets SOLUTIONS: E6-1. a. Allocate the purchase cost in proportion to appraised values. Cost of land = (\$20,000 / (\$80,000 + \$20,000)) * \$90,000 = \$18,000 b. Land is not a depreciable asset. Management would want as much of the purchase price as feasible to be assigned to assets whose cost will become a tax-deductible expense in future years -- reducing taxable income and income taxes payable. c. All ordinary and necessary costs incurred by Dorsey Co. in order to get the land ready for its intended use should be added to the Land account. Thus, the cost included in the Land account is the total amount paid, plus the cost of razing building. Note that no costs are added to Dorsey Co.’s Buildings account because the building was not acquired with the intent to be used as a building. Cost of land = \$90,000 + \$10,000 = \$100,000 d. Appraised values are be used because they represent the current asset values (at the time of purchase by Dorsey Co.). The old original cost data represent what the relative asset values were (at the time of purchase by Bibb Co.), which is not relevant to Dorsey Co. E6-2. a. The cost of the equipment plus the cost of moving and installation are allocated on the basis of the appraiser's estimate of fair value. The list price of the same items if new does not represent the value of the used items being purchased. Likewise, the net book value of the items on the selling company’s books is not relevant to their value to the purchaser. Appraiser's Total Purchase Estimate of Percent Amount Price Fair Value of Total Allocated Allocation Punch press . .................................... \$ 6,000 60% * \$9,200 \$5,520 Lathe ............................................... 3,000 30% * 9,200 2,760 Welder ............................................. 1,000 10% * 9,200 920 Total ................................................ \$10,000 \$9,200 b. The remaining useful life of the asset to Crow Co. is the appropriate life to be used for Crow Co.'s depreciation calculation because depreciation is the process of spreading cost over the estimated useful life of the asset to the owner of the asset. E6-3. a. Expense. Routine repair and maintenance costs would not increase the useful life or estimated salvage of the vehicles, so the “economic benefits” of these expenditures relate

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Chapter 6 only to the current year. b. Asset. The cost of developing the coal mine should be capitalized (as a natural resource) because the extraction of coal will generate revenues in future years. The \$60,000 cost of developing the coal mine will be recorded as depletion expense (at a rate of six cents per ton extracted). c. Asset. This cost should be added to the Building account because it will extend the useful life of the asset. d. Expense. Advertising costs are always treated as expenses in the year incurred because it is impossible to determine to what extent, if any, future-period revenues will be affected by current-period advertising expenditures. e. Asset. This cost should be added to the Land account because it is an ordinary and necessary cost incurred to get the land ready for its intended use.
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Chap006 - Accounting for and Presentation of Noncurrent...

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