Sincethecapitalized cost oftheequipmentis 1093000 and

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Unformatted text preview: incurred that were necessary and reasonable to get the equipment in a serviceable condition and location. The capitalizable costs are (1) the $1,000,000 purchase price, (2) the $40,000 transportation costs actually incurred by Stonebrecker, (3) the $8,000 insurance coverage, (4) the $20,000 installation fees, (5) the $15,000 to reinforce the floor, and (6) the $10,000 of employee downtime. Some accountants may disagree with capitalizing the last two items as part of the equipment. However, theoretically, these costs are necessary to get the equipment in a usable condition. Therefore, the total dollar amount that should be capitalized for the equipment is $1,093,000. b. Equipment (+A) Cash (–A) 1,093,000 Purchased equipment. c. The depreciation base represents the capitalized cost of a fixed asset that the company does not expect to recover over the asset's estimated useful life. Since the capitalized cost of the equipment is $1,093,000 and the company expects to sell the equipment for $100,000 after ten years, the company does not expect to recover $993,000 of the capitalized cost. Therefore, the depreciation base of the equipment is $993,000. d. As discussed in part [c], the depreciation base represents the dollar amount of a fixed asset that the company does not expect to recover from the asset at the end of the asset's estimated useful life. This implies that the depreciation base represents the dollar amount of a fixed asset that the company expects to consume over the asset's estimated useful life. Since the consumption of an asset is an outflow of that asset and since, by definition, outflows of assets are expenses, the depreciation base represents the amount that should be expensed over a fixed asset's useful life. This is true whether the company uses the straight­line method or the double­declining­balance method. Thus, every depreciation method will result in the same total amount being depreciated over a fixed asset's useful life. Although each method gives rise to the same total amount of depreciation, the timing of depreciation charges varies across depreciation methods. The straight­line method allocates depreciation evenly across time, while the double­decliningbalance method allocates the depreciation base more rapidly to the early years of the asset's useful life and more slowly to the later years of the asset's useful life. Thus, Stonebrecker will depreciate a total of $993,000 under both depreciation methods. 21 1,093,000 P9–2 a. Asset Building 1/1/11 FMV $ $1,000,000 Office equip. Relative FMV Purchase Price = 300,000 $ 150,000 300/1,200 250,000 150/1,200 125,000 75/1,200 62,500 75/1,200 62,500 600/1,200 500,000 1,200/1,200 1,000,000 1,000,000 Crane 1 75,000 1,000,000 Crane 2 75,000 1,000,000 Land Total 600,000 1,000,000 $ Building (+A) Office Equipment (+A) Cranes (+A) Land (+A) Cash (–A) 1,000,000 Purchased basket of assets. 1,200,000 $ 250,000 125,000 125,000 500,000 b. Depreciation Expense—Building (E, –SE) Depreciation Expense—Office Equipment (E, –SE) Depreciation Expense—Cranes (E, –SE) Accumulated Depreciation—Building (–A) Accumulated Depreciation—Office Equipment (–A) 30,000 Accumulated Depreciation—Cranes (–A) Depreciated fixed assets. 8,750a 30,000b 19,000c a $8,750 = ($250,000 – $75,000) ÷ 20 years b $30,000 = ($125,000 – $35,000) ÷ 3 years c $19,000 = [$125,000 – ($15,000 + $15,000)] ÷ 5 years c. 22 Cost Allocation Property, plant, and equipment: Land $500,000 Building 250,000 Office equipment 125,000 C ra n e s 125,000 Less: Accumulated depreciation (201,000)* Total property, plant, and equipment $799,000 8,750 19,000 * $201,000 = ($8,750 4 years) + ($30,000 3 years) + ($19,000 4 years) 23 P9–3 a. Cost = Purchase Price + Transportation + Installation = $950,000 + $100,000 + $130,000 = $1,180,000 b. (1) Double­declining­balance method: Depreciation Expense—Equipment (E, –SE) Accumulated Depreciation—Equipment (–A) Depreciated fixed asset. 590,000* 590,000 *$590,000 = $1,180,000 50% (2 ) Straight­line method: Depreciation Expense—Equipment (E, –SE) Accumulated Depreciation—Equipment (–A) Depreciated fixed asset. 282,500* 282,500 *$282,500 = ($1,180,000 – $50,000) ÷ 4 years c. (1) Double­declining­balance method: Cash (+A) 250,000 Accumulated Depreciation: Equipment (+A) Loss on Sale of Equipment (Lo, –SE) Equipment (–A) 1,180,000 Sold equipment. (2 ) Straight­line method: Cash (+A) 250,000 Accumulated Depreciation: Equipment (+A) Loss on Sale of Equipment (Lo, –SE) Equipment (–A) 1,180,000 Sold equipment. 24 590,000 340,000 282,500 647,500 P9–4 a. Truck (+A) Cash (–A) Purchased a truck. 48,000 48,000 b. Depreciation Per Books 2009 2010 Correct Depreciation $48,000 0 Difference $ 0 $48,000 12,000* 12,000 *$12,000 = ($48,000 – $12,000) ÷ 3 years Therefore, in 2009 expenses were overstated by $48,000, so net income was understated by $48,000. In 2010 expenses were understated by $12,000, so net income was overstated by $12,000. c. D...
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