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9-1
Chapter 9
Plant Assets, Natural
Resources, and Intangibles
Demonstration Problems
© 2016 Pearson Education, Inc.
9-2
Demonstration of E9-21
Silver Tree Inc. purchased a building for $1,500,000 and depreciated it on a straight-line basis over a 30-year period. The estimated residual value is $250,000. After using the building for 10 years, Silver Tree realized that wear and tear on the building would wear it out before 30 years and that the estimated residual value should be $220,000. Starting with the 11th year, Silver Tree began depreciating the building over a revised total life of 20 years using the new residual value.
Requirement
Journalize depreciation expense on the building for years 10 and 11.
© 2016 Pearson Education, Inc.
9-3
Straight-line depreciation ═Cost − Residual value
Useful life
═ $1,500,000 − $250,00030 years
═ $41,667
Cost $1,500,000Residual value 250,000Useful life 30 years
Demonstration of E9-21
© 2016 Pearson Education, Inc.
9-4
Straight-line depreciation ═Cost − Residual value
Useful life
═ $1,500,000 − $250,00030 years
═ $41,667
Cost $1,500,000Residual value 250,000Useful life 30 years
Accumulated depreciation after 10 years ═ $41,667 × 10 years
═$416,667
Demonstration of E9-21
© 2016 Pearson Education, Inc.
9-5
Depreciation expense on the building for year 10.
Date Accounts and Explanation Debit Credit
Year 10 Depreciation Expense—Building 41,667
Accumulated Depreciation—Building 41,667
To record depreciation on building.
Demonstration of E9-21
© 2016 Pearson Education, Inc.
9-6
Book value after 10 years ═ Cost − Accumulated depreciation
═ $1,500,000 − $416,667
═ $1,083,333
Cost $1,500,000Accumulated depreciation 416,667Revised residual value 220,000Revised useful life remaining 10 years
Demonstration of E9-21
© 2016 Pearson Education, Inc.
9-7
Book value after 10 years ═ Cost − Accumulated depreciation
═ $1,500,000 − $416,667
═ $1,083,333
Cost $1,500,000Accumulated depreciation 416,667Revised residual value 220,000Revised useful life remaining 10 years
Revised depreciation ═Book value − Revised residual value
Revised useful life remaining
═$1,083,333 − $220,000
10 years
═$863,33310 years
═ $86,333 per year
Demonstration of E9-21
© 2016 Pearson Education, Inc.
9-8
Depreciation expense on the building for the year 11.
Date Accounts and Explanation Debit Credit
Year 11 Depreciation Expense—Building 86,333
Accumulated Depreciation—Building 86,333
To record depreciation on building.
Demonstration of E9-21
© 2016 Pearson Education, Inc.
9-9
Demonstration of E9-24
Mountain View Mining paid $500,000 for the right to extract mineral assets from a 600,000-ton deposit. In addition to the purchase price, Mountain View also paid a $600 filing fee, a $1,200 license fee to the state of Arizona, and $70,000 for a geological survey of the property. Because Mountain View purchased the rights to the minerals only, it expects the asset to have zero residual value. During the first year, Mountain View removed and sold 75,000 tons of the minerals.
Requirement
Make journal entries to record:(a) purchase of the minerals (debit Minerals)(b) payment of fees and other costs(c) depletion for the first year
© 2016 Pearson Education, Inc.
9-10
Purchase price of minerals $500,000 Add related costs:Filing fee $600 License 1,200
Geological survey 70,000
71,800 Total cost of minerals $571,800
Purchase price $500,000Filing fee 600License fee 1,200Geological survey of property 70,000
Demonstration of E9-24
© 2016 Pearson Education, Inc.
9-11
a. Purchase of the minerals.
Date Accounts and Explanation Debit Credit
a. Minerals 500,000
Cash 500,000
To record purchase of mineral rights.
Demonstration of E9-24
© 2016 Pearson Education, Inc.
9-12
b. Payment of fees and other costs.
Date Accounts and Explanation Debit Credit
b. Minerals 71,800
Cash 71,800
To record payment of costs associated with purchase of minerals.
Demonstration of E9-24
© 2016 Pearson Education, Inc.
9-13
Cost $571,800Residual value 0Estimated total units 600,000Units extracted 75,000
Depletion per unit ═Cost − Residual valueEstimated total units
═ $571,000 − $0600,000 tons
═ $0.953 per ton
Demonstration of E9-24
© 2016 Pearson Education, Inc.
9-14
Cost $571,800Residual value 0Estimated total units 600,000Units extracted 75,000
Depletion per unit ═Cost − Residual valueEstimated total units
═ $571,000 − $0600,000 tons
═ $0.953 per ton
Depletion expense ═ Depletion per unit × Number of units extracted
═ 0.953 × 75,000
═ $71,475
Demonstration of E9-24
© 2016 Pearson Education, Inc.
9-15
c. Depletion for the first year.
Date Accounts and Explanation Debit Credit
c. Depletion Expense—Minerals 71,475
Accumulated Depletion—Minerals 71,475
To record depletion.
Demonstration of E9-24
© 2016 Pearson Education, Inc.
9-16
Demonstration of E9-25
Great Electric Industries Corp. manufactures air conditioners. Assume that Great Electric recently paid $500,000 for a patent on a AC induction motors. Although it gives legal protection for 20 years, the patent is expected to provide a competitive advantage for only ten years.
Requirements
1. Assuming the straight-line method of amortization, make journal entries to record (a) the purchase of the patent and (b) amortization for the first full year.
2. After using the patent for five years, Great Electric learns at an industry trade show that another company is designing a more efficient AC induction motors. On the basis of this new information, Great Electric decides, starting with year 6, to amortize the remaining cost of the patent over three remaining years, giving the patent a total useful life of eight years. Record amortization for year 6.
© 2016 Pearson Education, Inc.
9-17
Cost $500,000Residual value 0Useful life 10 years
Amortization expense ═Cost − Residual value
Useful life
═ $500,000 − $010 years
═ $50,000
Demonstration of E9-25
© 2016 Pearson Education, Inc.
9-18
a. Purchase of the patent.
Date Accounts and Explanation Debit Credit
a. Patent 500,000
Cash 500,000
To record purchase of patent.
Demonstration of E9-25
© 2016 Pearson Education, Inc.
9-19
b. Amortization for the first full year.
Date Accounts and Explanation Debit Credit
b. Amortization Expense—Patent 50,000
Patent 50,000
To record amortization.
Demonstration of E9-25
© 2016 Pearson Education, Inc.
9-20
Cost $500,000Amortization expense $50,000Revised useful life remaining 3 years
Accumulated amortization after 5 years ═ $50,000 per year × 5 years
═ $250,000
Demonstration of E9-25
© 2016 Pearson Education, Inc.
9-21
Cost $500,000Amortization expense $50,000Revised useful life remaining 3 years
Accumulated amortization after 5 years ═ $50,000 per year × 5 years
═ $250,000
Book value after 5 years ═ Cost − Accumulated depreciation
═ $500,000 − $250,000
═ $250,000
Demonstration of E9-25
© 2016 Pearson Education, Inc.
9-22
Cost $500,000Amortization expense $50,000Revised useful life remaining 3 years
Revised amortization ═Book value − Revised residual value
Revised useful life remaining
═ $250,000 − $03 years
═ $83,333(Rounded)
Accumulated amortization after 5 years ═ $50,000 per year × 5 years
═ $250,000
Book value after 5 years ═ Cost − Accumulated depreciation
═ $500,000 − $250,000
═ $250,000
Demonstration of E9-25
© 2016 Pearson Education, Inc.
9-23
Amortization for year 6.
Date Accounts and Explanation Debit Credit
Amortization Expense—Patent 83,333
Patent 83,333
To record amortization.
Demonstration of E9-25
© 2016 Pearson Education, Inc.
End of Chapter 9
9-24© 2016 Pearson Education, Inc.