# Therefore the total cost of the equipment is 992000 b

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: condition and location. These costs would be the actual purchase price of \$920,000, the transportation cost of \$62,000, and the insurance cost of \$10,000. Therefore, the total cost of the equipment is \$992,000. b. The depreciation base equals the dollar amount of a fixed asset's cost that the company does not expect to recover over the asset's useful life, but instead expects to consume over the asset's useful life. Since the plant equipment's total cost is \$992,000 and since Lowery, Inc., expects to sell the equipment for \$50,000 at the end of its useful life, Lowery, Inc., does not expect to recover \$942,000 of the asset's cost. Therefore, the depreciation base equals \$942,000. The depreciation base always equals the capitalized cost of a fixed asset less its estimated salvage value. c. The amount that will be depreciated over the life of the plant equipment is its depreciation base. The depreciation base equals the amount of the equipment's future benefits that the company will consume. The outflow of future benefits are expenses, in this case depreciation expense. Therefore, the total amount that Lowery, Inc., will depreciate over the equipment's useful life is \$942,000. E9–2 Lot 1 Revenue 60,000 Expenses 48,000* Net income 12,000 \$ \$ \$ \$ Lot 2 160,000 60,000 128,000* 48,000* 32,000 12,000 Lot 3 \$ Lot 4 120,000 \$ 96,000* \$ 24,000 * Expenses were calculated as follows: 1. Calculate total market value. Total Market value = \$160,000 + \$120,000 + \$60,000 + \$60,000 = \$400,000 2. Allocate costs to each lot based upon relative market values. Lot 1 = \$320,000 (160,000/400,000) = \$128,000 Lot 2 = \$320,000 (120,000/400,000) = \$ 96,000 Lot 3 = \$320,000 (60,000/400,000) = \$ 48,000 Lot 4 = \$320,000 (60,000/400000) = \$ 48,000 3 \$ E9–3 a. All costs that are necessary and reasonable to get an asset ready for its intended use should be capitalized as part of the cost of that asset. In the case of property, plant, and equipment, "ready for its intended use" means that the asset is in a serviceable condition and location. Item Tract of land\$90,000 Demolition of warehouse Scrap from warehouse Construction of building Driveway and parking lot Permanent landscaping Total b. Land Land Improvements Building 10,000 (7,000) \$140,000 \$32,000 4,000 \$ 97,000 \$32,000 \$140,000 Land: Since land is assumed to have an indefinite life, it is never depreciated. Land Improvements: Depreciation Expense—Land Improvements (E, –SE) Accumulated Depreciation—Land Improvements (–A) Depreciated land improvements. 1,600 1,600 Building: Depreciation Expense—Building (E, –SE) Accumulated Depreciation—Building (–A) Depreciated building. E9–4 a. b. c. d. e. f. g. h. i. 4 Maintenance Maintenance Maintenance Betterment Maintenance Maintenance Betterment Maintenance Betterment 7,000 7,000 Note: The classification of these expenditures can be quite subjective. Some accountants might very well classify some of these expenditures differently. For example, one might argue that the cost of the muffler in (h) is actually a betterment expenditure if the reduced noise allows workers to work more efficiently, thereby increasing the productive capacity of the machine. E9–5 a. (1 ) Expensed immediately: Income Statement 2014 Revenues 2013 \$ 65,000 65,000 Amortization 2012 \$ 65,000 \$ 0 0 20,000 20,000 40,000 Other expenses 45,000 12/31/14 Net income 20,000 \$ 5,000 12/31/13 \$ 45,000 \$ Balance Sheet Assets Current assets 45,000 Long­lived assets (including land) 50,000 Total assets 95,000 Liabilities and Stockholders' Equity Liabilities 35,000 Stockholders' equity 60,000 Total liabilities & stockholders' equity 95,000 5 \$ 135,000 12/31/12 \$ 50,000 90,000 \$ 50,000 \$ 185,000 \$ 140,000 \$ \$ 35,000 \$ 35,000 \$ 150,000 \$ 185,000 105,000 \$ 140,000 \$ E9–5 (2 ) Continued Amortized over two years: Income Statement 2014 Revenues 2013 \$ 65,000 65,000 Amortization 2012 \$ 65,000 \$ 0 20,000 20,000 20,000 20,000 Other expenses 45,000 12/31/14 Net income 20,000 \$ 25,000 12/31/13 \$ 25,000 \$ Balance Sheet Assets Current assets 45,000 Long­lived assets (including land) 70,000 Total assets 115,000 Liabilities and Stockholders' Equity Liabilities 35,000 Stockholders' equity 80,000 Total liabilities & stockholders' equity 115,000 (3 ) \$ 135,000 12/31/12 \$ 90,000 \$ 50,000 50,000 \$ 185,000 \$ 140,000 \$ \$ 35,000 \$ 35,000 \$ 150,000 \$ 185,000 105,000 \$ 140,000 \$ Amortized over three years: Income Statement 2014 Revenues 2013 \$ 65,000 65,000 Amortization 2012 \$ 65,000 \$ 13,334 13,333 20,000 20,000 13,333 Other expenses 31,666 12/31/14 Net income 20,000 \$ 31,667 12/31/13 \$ 31,667 \$ Balance Sheet Assets Current assets 6 \$ 135,000 12/31/12 \$ 90,000 \$ 45,000 Long­lived assets (including land) 76,667 Total assets 121,667 Liabilities and Stockholders' Equity Liabilities 35,000 Stockholders' equity 86,667 Total liabilities & stockholders' equity 121,667 b. 2014 Method 1: Method 2: Method 3: 7 50,000 63,334 \$ 185,000 \$ 153,334 \$ \$ 35,000 \$ 35,000 \$ 150,000 \$ 2013 \$45,000 \$45,000 \$ 5,000 \$95,000 45,000 25,000 25,000 95,000 31,666 31,667 31,667 95...
View Full Document

## This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

Ask a homework question - tutors are online