9 16 EXERCISE 9 14 a A company should depreciate its buildings because

9 16 exercise 9 14 a a company should depreciate its

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9-16
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EXERCISE 9-14 (a) A company should depreciate its buildings because depreciation is necessary in order to allocate the cost of the buildings to the periods in which they are in use. This allows the cost of the buildings to be matched against the revenues generated each year in accordance with the matching principle. (b) A building can have a zero book value if it has no salvage value and it is fully depreciated—that is, if it has been used for a period at least as long as its expected life. Because depreciation is used to allocate cost rather than to reflect actual value, it is not at all unlikely that a building could have a low or zero book value, but a substantial market value. (c) Examples of intangibles that might be found on a college campus are franchise of a bookstore chain, license to operate radio station, a patents developed by professors, and a permit to operate a bus service. (d) Typical company or product trade names are: Clothes—Gap, Gitano, Dockers, Calvin Klein, Chaus, Guess. Perfume—Passion, Ruffles, Chanel No. 5, Diamonds. Cars—TransAm, Nova, Prelude, Coupe DeVille, Eclipse. Shoes—Nike, Florsheim, L.A. Gear, Adidas. Breakfast cereals—Cheerios, Wheaties, Frosted Mini-Wheats, Rice Krispies. Trade names and trademarks are reported on a balance sheet if there is a cost attached to them. If the trade name or trademark is purchased, the cost is the purchase price. If it is developed by the enterprise, the cost includes attorney’s fees, registration fees, design costs, success- ful legal defense costs, and other expenditures directly related to securing the trade name or trademark. 9-17
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*EXERCISE 9-15 (a) Depreciation cost per unit is $.70 per mile [($120,000 – $8,000) ÷ 160,000]. (b) Computation End of Year Annual Units of Depreciation Depreciation Accumulated Book Years Activity X Cost/Unit = Expense Depreciation Value 2007 40,000 $.70 $28,000 $ 28,000 $92,000 2008 52,000 .70 36,400 64,400 55,600 2009 41,000 .70 28,700 93,100 26,900 2010 27,000 .70 18,900 112,000 8,000 *EXERCISE 9-16 (a) Declining-balance method: 2007 depreciation = $96,000 X 25%* X 4/12 = $8,000 Book value January 1, 2008 = $96,000 – $8,000 = $88,000 2008 depreciation = $88,000 X 25% = $22,000 . *(1/8) X 2 = 25% (b) Units-of-activity method: $96,000 - $6,000 70,000 = $1.29 per hour (rounded) 2007 depreciation = 2,900 hours X $1.29 = $3,741 . 9-18
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SOLUTIONS TO PROBLEMS Item Land Building Other Accounts 1 $280,000 2 $ 6,800 Land Improvements 3 19,000 4 $ 23,000 5 2,179 6 29,000 Land Improvements 7 38,000 8 5,800 Property Tax Expense 9 640,000 10 (8,000 ) $293,179 $701,000 9-19 PROBLEM 9-1A
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(a) April 1 Land ......................................................... 2,200,000 Cash .................................................. 2,200,000 May 1 Depreciation Expense ............................ 22,000 Accumulated Depreciation— Equipment .................................. 22,000 ($660,000 X 1/10 X 4/12) 1 Cash ......................................................... 200,000 Accumulated Depreciation— Equipment ........................................ 484,000 Equipment .................................. 660,000 Gain on Disposal ........................ 24,000 Cost ........................................... $660,000 Accum. depr.—Equipment ..... 484,000 [($660,000 X 1/10) X 7 + $22,000)] Book value ................................ 176,000 Cash proceeds ......................... 200,000 Gain on disposal ...................... $ 24,000 June 1 Cash ......................................................... 1,800,000 Land .................................................. 700,000 Gain on Disposal ............................. 1,100,000 July 1 Equipment ............................................... 1,300,000 Cash ................................................... 1,300,000 Dec. 31 Depreciation Expense ............................. 50,000 Accumulated Depreciation— Equipment .................................... 50,000 ($500,000 X 1/10) 31 Accumulated Depreciation— Equipment ......................................... 500,000 Equipment .................................... 500,000 9-20 PROBLEM 9-2A
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PROBLEM 9-2A (Continued) Cost .......................................... $500,000 Accum. depr.—Equipment ($500,000 X 1/10 X 10) ......... 500,000 Book value .............................. $ 0 (b) Dec. 31 Depreciation Expense ............................. 662,500 Accumulated Depreciation— Buildings ...................................... 662,500 ($26,500,000 X 1/40) 31 Depreciation Expense ............................. 3,949,000 Accumulated Depreciation— Equipment .................................... 3,949,000 $38,840,000* X 1/10 ............... $3,884,000
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