Exercise #1
The following transactions occurred during 2017. Assume that depreciation of 10% per year is charged on
all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value.
Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is
charged on fixed assets disposed of during the year.
Jan 30 A building that cost $132,000 in 2000 is torn down to make room for a new building.
The wrecking contractor was paid $5,100 and was permitted to keep all materials
salvaged.
March 10 Machinery that was purchased in 2010 for $16,000 is sold for $2,900 cash, f.o.b.
purchaser’s plant. Freight of $300 is paid on the sale of this machinery.
March 20 A gear breaks on a machine that cost $9,000 in 2009. The gear is replaced at a cost
of $2,000. The replacement does not extend the useful life of the machine but does
make the machine more efficient.
May 18 A special base installed for a machine in 2011 when the machine was purchased has
to be replaced at a cost of $5,500 because of defective workmanship on the original
base. The cost of the machinery was $14,200 in 2011. The cost of the base was
$3,500, and this amount was charged to the Machinery account in 2011.
June 23 One of the buildings is repainted at a cost of $6,900. It had not been painted since it
was constructed in 2013.
Instructions:
Prepare general journal entries for the transactions. (Round to the nearest dollar.)
2
Exercise #2
Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance
sheet at December 31, 2016, had the following balances.
During 2017, the following transactions occurred.
1. A tract of land was acquired for $150,000 as a potential future building site.
2. A plant facility consisting of land and building was acquired from Mendota Company in exchange
for 20,000 shares of Lobo’s common stock. On the acquisition date, Lobo’s stock had a closing
market price of $37 per share on a national stock exchange. The plant facility was carried on
Mendota’s books at $110,000 for land and $320,000 for the building at the ex- change date. Current
appraised values for the land and building, respectively, are $230,000 and $690,000.
3. Items of machinery and equipment were purchased at a total cost of $400,000. Additional costs
were incurred as follows.
4. Expenditures totaling $95,000 were made for new parking lots, streets, and sidewalks at the
corporation’s various plant locations. These expenditures had an estimated useful life of 15 years.
5. A machine costing $80,000 on January 1, 2009, was scrapped on June 30, 2017. Double-decliningbalance
depreciation has been recorded on the basis of a 10-year life.
6. A machine was sold for $20,000 on July 1, 2017. Original cost of the machine was $44,000 on
January 1, 2014, and it was depreciated on the straight-line basis over an estimated useful life of 7
years and a salvage value of $2,000.
Instructions:
(Round to the nearest dollar.)
(a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for
2017.
3
Hint: Disregard the related accumulated depreciation accounts.)
(b) List the items in the fact situation that were not used to determine the answer to (a), showing the
pertinent amounts and supporting computations in good form for each item. In addition, indicate
where, or if, these items should be included in Lobo’s financial statements.
Exercise #3
In 1990, Herman Moore Company completed the construction of a building at a cost of $2,000,000 and
first occupied it in January 1991. It was estimated that the building will have a useful life of 40 years and a
salvage value of $60,000 at the end of that time.
Early in 2001, an addition to the building was constructed at a cost of $500,000. At that time, it was
estimated that the remaining life of the building would be, as originally estimated, an additional 30 years,
and that the addition would have a life of 30 years and a salvage value of $20,000.
In 2019, it is determined that the probable life of the building and addition will extend to the end of 2050, or
20 years beyond the original estimate.
Instructions:
(a) Using the straight-line method, compute the annual depreciation that would have been charged
from 1991 through 2000.
(b) Compute the annual depreciation that would have been charged from 2001 through 2018.
(c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the
estimated life in 2019.
(d) Compute the annual depreciation to be charged, beginning with 2019.
Exercise #4
The 2014 annual report of Tootsie Roll Industries contains the following:
4
Instructions:
Compute the following ratios for Tootsie Roll for 2014.
(a) Asset turnover.
(b) Return on assets.
(c) Profit margin on sales.
(d) How can the asset turnover be used to compute the return on assets?
Exercise #5
The certified public accountant is frequently called upon by management for advice regarding methods of
computing depreciation. Of comparable importance, although it arises less frequently, is the question of
whether the depreciation method should be based on consideration of the assets as units, as a group, or
as having a composite life.
Instructions:
(a) Briefly describe the depreciation methods based on treating assets as (1) units and (2) a group
or as having a composite life.
(b) Present the arguments for and against the use of each of the two methods.
(c) Describe how retirements are recorded under each of the two methods
