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Lecture

FFA_3e_Solutions_ch08.doc

34 Pages
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Department
Accounting
Course Code
ACC 110
Professor
Marla Spergel

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Description
CHAPTER 8 Capital Assets EXERCISES E8-1. a. $60,900 would be capitalized ($58,000 + $2,900) as this was the cost of acquiring the asset. (Note: in some provinces the GST has been replaced by the HST. Also, GST paid for assets used for commercial activities are recoverable by an input tax credit. However, it isnt expected that students would know this.) b. The $9,200 would be capitalized as the repairs were required to get the asset ready for use or make it useable. c. The $2,000 in damage should be expensed as these costs werent necessary to get the equipment ready for use. d. The $2,500 should be capitalized as the cost of rearranging the kitchen was required to properly install the asset. E8-3. Declining balance depreciation method a. Stamping machine $225,000 Taxes 28,000 Delivery 12,000 Installation 5,000 Testing 22,000 Total cost $292,000 Dr. Machine (asset +) 292,000 Cr. Cash (asset -) 292,000 *Its assumed everything was paid in cash; other assumptions are reasonable. b. Declining balance Accumulated Carrying Depreciation Cost Depreciation Amount Expense Purchase date $292,000 $0 $292,000 $0 End year 1 292,000 58,400 233,600 58,400 End year 2 292,000 151,840 140,160 93,440 End year 3 292,000 207,904 84,096 56,064 End year 4 292,000 241,542 50,458 33,638 End year 5 292,000 261,725 30,275 20,183 End year 6 292,000 267,000 25,000 5,275 Total $267,000 Cost $292,000 Copyright 2010 McGraw-Hill Ryerson Ltd. 1 Rate 40% Residual value 25,000 The depreciation expense in Year 6 brings the carrying amount to the residual value at the end of the year. c. The machine is sold at the end of year 3 for $75,000. The entry for the year 3 depreciation expense would be made before the gain or loss is calculated. Dr. Depreciation expense 56,064 Cr. Accumulated depreciation 56,064 To record the depreciation expense for year 3. Proceeds $75,000 Carrying Amount 84,096 Loss ($9,096) There is a loss of $9,096. Dr. Cash 75,000 Accumulated depreciation 207,904 Loss on disposal of machine 9,096 Cr. Machine 292,000 To record the sale of the machine in year 3 for $75,000 E8-5. a. Cost $320,000 Taxes 38,400 Installation 25,000 Training 20,000 Preparation 50,000 $453,400 Dr. Computer equipment 453,400 Cr. Cash 453,400 To record the purchase of computer equipment. [Note that all costs except for the service contract, which is an operating cost, are capitalized.] b. Accumulated Carrying Depreciation Year End Depreciation Amount Expense Cost Copyright 2010 McGraw-Hill Ryerson Ltd. 2 Purchase date $453,400 $0 $453,400 $0 Dec. 31, 2014 453,400 84,680 368,720 84,680 Dec. 31, 2015 453,400 169,360 284,040 84,680 Dec. 31, 2016 453,400 254,040 199,360 84,680 Dec. 31, 2017 453,400 338,720 114,680 84,680 Dec. 31, 2018 453,400 423,400 30,000 84,680 Total $423,400 Cost $453,400 Residual value 30,000 Useful life 5 years Depreciation expense = Cost residual value Useful life = $453,400 $30,000 5 years Depreciation expense = $84,680 c. The new computer equipment is sold at the end of 2016 for $75,000. The entry for the 2016 depreciation expense would be made before the gain or loss is calculated. At the time of sale, it would be first necessary to record depreciation for the third year: Dr. Depreciation expense 84,680 Cr. Accumulated depreciation 84,680 To record the depreciation expense for 2016. Proceeds $75,000 Carrying amount 199,360 Loss ($124,360) There is a loss of $124,360 Dr. Cash 75,000 Dr. Accumulated depreciation 254,040 Dr Loss on disposal of computer equipment 124,360 Cr. Computer equipment 453,400 To record the sale of the computer equipment in 2016. E8-7. a. Stamping machine $100,000 Copyright 2010 McGraw-Hill Ryerson Ltd. 3 Taxes 13,000 Delivery & installation 12,000 Total $125,000 Dr. Machinery 125,000 Cr. Cash 125,000 To record the purchase of the stamping machine. (Payments are assumed to be in cash. Other assumptions are also possible. b. Straight line Accumulated Carrying Depreciation Year End Cost Depreciation Amount Expense Purchase date $125,000 $0 $125,000 $0 Dec. 31, 2014 125,000 40,333 84,667 40,333 Dec. 31, 2015 125,000 80,667 44,333 40,334 Dec. 31, 2016 125,000 121,000 4,000 40,333 Total $121,000 Cost 125,000 Residual value 4,000 Useful life 3 Depreciation expense = Cost residual value Useful life = $125,000 $4,000 3 years Depreciation expense = $40,333 This assumes that the machine was purchased early in 2014. c. The machine is sold at the end of 2015 for $2,000. The entry for the 2015 depreciation expense would be made before the gain or loss is calculated. Dr. Depreciation expense 40,333 Cr. Accumulated depreciation 40,333 To record the depreciation expense for 2015. Proceeds $2,000 Carrying amount 45,333 Loss ($42,333) There is a loss of $42,333 Dr. Cash 2,000 Copyright 2010 McGraw-Hill Ryerson Ltd. 4
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