Chapter 8

# Chapter 8 - CHAPTER 8 CHAPTER 8 BRIEF EXERCISE 8-3 Land...

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CHAPTER 8 CHAPTER 8 BRIEF EXERCISE 8-3 Land \$ 700,000 Building 300,000 Total \$1,000,000 Land: \$800,000 × (\$700,000/\$1,000,000) = \$560,000 Building: \$800,000 × (\$300,000/\$1,000,000) = \$240,000 BRIEF EXERCISE 8-5 1. Straight-line rate of 1/10 × 2 = 20%* 2. First-year depreciation: \$40,000 × 20%* = \$8,000 Second-year depreciation: (\$40,000 – \$8,000) × 20%* = \$6,400 3. The maximum amount that can be treated as depreciation over ten years is \$36,000.** \$40,000 – \$4,000** residual value = \$36,000.** *This rate, 1/10 × 2= 20%, will be applied in all years to the asset’s book value at the beginning of each year. As depreciation is recorded, the book value declines. Thus, a constant rate is applied to a declining amount. This constant rate is applied to the full cost or initial book value, not to cost minus residual value as in the other methods. However, the machine cannot be depreciated below its residual value of \$4,000.** BRIEF EXERCISE 8-8 Loss = Book Value – Sales Price \$6,000 = \$20,000 – X Solving for X indicates sales price, and cash received was \$14,000. Hint: This machine had to be sold for \$20,000, which is the book value at the time of the sale in order to have no loss or gain on the sale. 1

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CHAPTER 8 EXERCISE 8-1 The acquisition cost of the asset should be computed as follows: List price \$60,000 Less: Discount of 2% (1,200) Freight 1,000 Pollution control device 2,500 Architect’s fee 6,000 Total acquisition cost \$ 68,300 Note: Repair costs of \$4,000 are not included because they are not normal or necessary to the acquisition. Insurance cost of \$8,000 should be treated as prepaid insurance. Interest cost of \$3,000 is not included unless an asset is constructed over time. 2
CHAPTER 8 EXERCISE 8-2 1. The total market value is calculated as follows: Land \$200,000 Building 150,000 Equipment 250,000 Total \$600,000 Amount allocated to each account should be as follows: Land \$520,000 × \$200,000/\$600,000 = \$173,333 Building \$520,000 × \$150,000/\$600,000 = \$130,000 Equipment \$520,000 × \$250,000/\$600,000 = \$216,667 The journal entry would be as follows: Jan. 1 Land 173,333 Building130,000 Equipment 216,667 Cash 520,000 To record the purchase of assets for a lump-sum amount. Balance Sheet Income Statement Assets = Liabilities + Stockholders’ Equity Revenues Expenses = Net Income Land 173,333 Build- ing 130,000 Equip- ment 216,667 Cash (520,000) 2. The amount of depreciation expense that should be recorded for 2010 is as follows: 3

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CHAPTER 8 Land = \$0 Building \$130,000/20 years = \$6,500 Equipment \$216,667/20 years = \$10,833 3. The assets would appear on the balance sheet as follows: Long-term assets: Land \$173,333 Building \$130,000 Less: Accumulated depreciation 6,500 123,500 Equipment \$216,667 Less: Accumulated depreciation 10,833 205,834 Total long-term
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## This note was uploaded on 04/14/2011 for the course ACCT 2101 taught by Professor Christianwurst during the Spring '08 term at Temple.

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Chapter 8 - CHAPTER 8 CHAPTER 8 BRIEF EXERCISE 8-3 Land...

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