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Tutorial QuestionsQuestion 1Prescott College recently purchased new computing equipment for its library. The followinginformation refers to the purchase and installation of this equipment:i) The list price of the equipment was $275,000; however, Prescott College qualified for an?education discount? of $25,000. It paid $50,000 cash for the equipment, and issued a 3-month, 9%note for the remaining balance. The note, plus accrued interest charges of $4,500, was paidpromptly at the maturity date.ii) In addition to the amounts described in 1. Prescott paid sales taxes of $15,000 at the date ofpurchaseiii) Freight charges for delivery of the equipment totalled $1,000iv) Installation and training costs related to the equipment amounted to $5,000.v) During installation, one of the computer terminals was accidentally damaged by a libraryemployee. It cost the college $500 to repair this damage.vi) As soon as the computers were installed, the college paid $4,000 to print admissions brochuresfeaturing the library?s new, state-of-the-art computing facilities.Instructions:a) In one sentence, make a general statement summarizing the nature of expenditures that qualifyfor inclusion in the cost of plant assets such as computing equipment.b) For each of the six numbered paragraphs, indicate which items should be included by PrescottCollege in the total cost debited to its Computing Equipment account. Also briefly indicate theproper accounting treatment of those items that are not included in the cost of the equipment.c) Compute the total cost debited to the college?s Computing Equipment accountd) Prepare a journal entry at the end of the current year to record depreciation on the computingequipment. Prescott College will depreciate this equipment by the straight-line method over anestimated useful life of 5 years. Assume a zero residual value.- 3 -Question 2On January 1, 20X2, The GenKota Winery purchased a new bottling system. The system has anexpected life of 5 years. The system cost $325,000. Shipping, installation, and set up were anadditional $35,000. At the end of the useful life, Julie Hayes, chief accountant for GenKota, expects todispose of the bottling system for $26,000. She further anticipates total output of 668,000 bottles overthe useful life. The output for 20x2 was 108,000 bottles, 130,000 (20x3), 150,000 (20X4), 160,000(20X5), and 120,000 (20X6).i) Prepare depreciation schedules assuming use of the:(a) straight-line depreciation method(b) units-of-production depreciation method(c) sum-of-the-years digits depreciation method(d) double-declining balance depreciation methodii) Assuming use of the straight-line method, prepare revised depreciation calculations if the usefullife estimate was revised at the beginning of 20X4, to anticipate a remaining useful life of 4additional years (in other words, a total life of 6 years). The revised useful life was accompaniedby a change in estimated salvage value to $34,400.Question 3Nelson Lewis provides freight service in Missouri, Kansas, and Illinois. The company?s balance sheetincludes Land, Buildings and Motor-Carrier Equipment. Lewis has a separate accumulateddepreciation account for each depreciable asset. During 20X7 Lewis completed the followingtransactions:January 1 Traded in motor-carrier equipment with accumulated depreciation of $90,000 (costof $130,000) for similar new equipment with a cash cost of $176,000. Lewisreceived a trade-in allowance of $70,000 on the equipment and paid the remainderin cashJuly 1 Sold a building that cost $550,000 and had accumulated depreciation of $250,000through December 31 of the preceding year. Depreciation is calculated on astraight-line basis. The building has a 40-year useful life and a residual value of$50,000. Lewis received $100,000 cash and a $600,000 note receivable.October 31 Purchased land and a building for a cash payment of $300,000. An independentappraisal valued the land at $115,000 and the building at $230,000.December 31 Recorded depreciation as follows:Motor-carrier equipment has an expected useful life of 1,000,000 miles and anestimated residual value of $26,000. Depreciation is units-of-production. Duringthe year, Lewis drove his truck 150,000 miles.Depreciation on buildings is straight-line. The new building has a 40-year life and aresidual value equal to $20,000a) Prepare journal entries to record each of the transactions in Nelson Lewis?s journal.b) Will the gains and losses on disposal of plant assets affect the gross profit reported in the income




Tutorial QuestionsQuestion 1a) What does a lock-box system accomplish?b) In each of the following situations, identify the internal control weakness as well as the business?spotential problem and propose a solution to each internal control problem.i) Law firms use paraprofessional employees to perform routine tasks. For example,paraprofessionals might prepare first drafts of documents to assist a lawyer. In the law firm of Lee& Dunham. Joseph Lee, the senior partner, turns over most of his legal research to new members ofhis paraprofessional staff.ii) Aimee Atkins has worked for Michael Riggs, MD, for many years. Atkins perform all accountingduties, including opening the mail, recording and depositing cash receipts, writing cheques, as wellas preparing monthly bank reconciliation. Riggs trust Atkins completely.iii) In evaluating internal control over cash payments, an auditor learns that the purchasing agent isresponsible for purchasing diamonds for use in the company?s manufacturing process. Thepurchasing agent also approves the invoices for payment and signs the cheques.iv) Tobey Keith purchases supplies for Darcey Company and stores them in a locked room for whichhe has the key. He is also responsible for distributing these supplies to employees upon request. Atthe end of each month, Tobey takes an inventory of the supplies on hand and notifies theaccounting department of the amount of the adjusting entry for supplies used.Question 2The May 31 bank statement of Marlow Furniture Co. has just arrived from the First State Bank. Toprepare the bank reconciliation, you gather the following data.i) The May 31 bank balance is $19,209.82ii) The bank statement includes two charges for returned cheques from customers. One is a $67.50NSF cheque received from Sarah Batten and deposited on May 19. The other is a $195.03 chequereceived from Lena Masters and deposited on May 21. It was returned due to ?UnauthorizedSignature.?iii) The following Marlow cheques are outstanding at May 31Cheque #616802806809810811Amount$403.0074.2536.60161.38229.0548.91iv) Marlow collects from a few customers by EFT. The May bank statement lists a $200 depositfor a collection on account from customer Jack Oates.Mona School of Business & Management Studies, University of the West Indies at Mona. - 5 -v) The bank statement includes two special deposits: $899.14, for dividend revenue and $16.86,the interest revenue Marlow earned on its bank balance during May.vi) The bank statement lists a $6.25 subtraction for the bank service charges.vii) On May 31, the Marlow treasurer deposited $381.14, but this deposit does not appear on thebank statement.viii) The bank statement includes a $410.00 deduction for a cheque drawn by Marimont freightCompany. Marlow notified the bank of this bank error.ix) Marlow?s cash account shows a balance of $18,200.55 on May 31.Required:a) Prepare the bank reconciliation for Marlow Furniture at May 31.b) Prepare the journal entries necessary to bring the company?s book balance of cash in conformitywith the reconciled cash balance as of May 31. Assume that the accounts have not been closed.Question 3Dialex Watches completed the following selected transactions during 2007 & 2008:2007Dec. 31 Estimated that uncollectible-account (bad-debt) expense for the year was 1% ofcredit sales of $400,000 and recorded the amount as expense. Use the allowancemethod.Dec. 31 Made the closing entry for uncollectible-account expense.2008Jan. 17 Sold inventory to Mitch Vanez, $600, on account. Ignore cost of goods sold.June. 29 Wrote off Mitch Vanez?s account as uncollectible after repeated effort to collectfrom him.Aug. 6 Received $200 from Mitch Vanez, along with a letter apologizing for being so late.Reinstated Vanez?s account in full and recorded the cash receipt.Dec. 31 Made a compound entry to write off the following accounts as uncollectible:Bernard Klaus, $1,700; Marie Moner, $1,300.Dec. 31 Estimated that uncollectible expense for the year was 1% of credit sales of$480,000, and recorded that amount as expenseDec. 31 Made the closing entry for uncollectible-account expense.Requirements:a) Open general ledger accounts for Allowance for Uncollectible Accounts and UncollectibleAccountsExpense. Keep running balances. All accounts begin with zero balance.b) Record the transactions in the general journal and post to the two ledger accounts.c) The December 31, 2008 balance of Accounts Receivable is $139,000. Show how AccountsReceivable would be reported on the balance sheet at that date.Mona School of Business & Management Studies, University of the West Indies at Mona. - 6 -Question 4The June 30, 20X9, balance sheet of Ram Technologies reports the following:Accounts Receivable?????????????. $265,000Allowance for Uncollectible Accounts (Cr)????. 7,100At the end of each quarter, RAM estimates uncollectible-account expense to be 2% of credit sales. Atthe end of the year, RAM ages its accounts receivable. RAM then adjusts the balance in the Allowancefor Uncollectible Accounts to correspond to the aging schedule.During the second half of 20X9, RAM completed the following transactions:July 14 Made a compound entry to write off uncollectible accounts:T.J. Dooley, $700; Design Works, $2,400; and S. DeWitt, $100.Sept. 30 Recorded uncollectible-account expense equal to 2% of credit sales of $140,000Nov. 22 Wrote off accounts receivable as uncollectible:Transnet, $1,300; Webvan, $2,100; and Alpha Group, $700.Dec. 31 Recorded uncollectible-account expense based on the aging of receivables.Age of AccountsTotal1-30Days31 ? 60Days61 ? 90DaysOver 90Days$255,000 $120,000 $80,000 $40,000 $15,000Estimated percent (%) uncollectible 0.5% 1.0% 4% 50%Required:i) Record the transactions in the journal.ii) Open the Allowance for Uncollectible accounts, and post entries affecting that account. Keep arunning balance.iii)Show how RAM Technologies should report accounts receivable on its December 31, 20X9,balance sheet.


UNIVERSITY OF THE WEST INDIES

 

Mona School of Business & Management

 

ACCT 1005 - FINANCIAL ACCOUNTING

 


 

Worksheet #4 ? Plant Assets

 

Lecture Questions

 

Question 1

 

Caramel Apartments incurred the following costs to acquire land, make land improvements and

 

construct and furnish an apartment building.

 

a)

 

b)

 

c)

 

d)

 

e)

 

f)

 

g)

 

h)

 

i)

 

j)

 

k)

 

l)

 

m)

 

n)

 

o)

 

p)

 


 

Purchase price of 3 acres of land

 

$150,000

 

Delinquent real estate taxes on the land to be paid by Caramel

 

3,700

 

Demolition & removal of old structure on property

 

6,100

 

Fence around the boundary of the property

 

44,200

 

Building permit for the apartment building

 

200

 

Architect?s fee for the design of the building

 

32,000

 

Signs near the approaches to the property

 

20,900

 

Materials used to construct the building

 

814,000

 

Labour to construct the building

 

734,000

 

Interest cost on construction loan for the building

 

3,400

 

Parking lots & concrete walkways on the property

 

17,500

 

Lights for the parking lots & walkways

 

8,900

 

Salary of construction supervisor (90% to building; 10% to parking lots & concrete

 

55,000

 

Walkways

 

Furniture

 

123,500

 

Transportation of furniture from seller to building

 

1,100

 

Landscaping (trees & shrubs)

 

9,000

 


 

Determine the total cost of each asset.

 

Question 2

 

On January 2, 20x4, Tim Flanagan, Inc., paid $224,000 for equipment used in manufacturing

 

automotive supplies. In addition to the basic purchase price, the company paid $700 transportation

 

charges, $100 insurance for the equipment while in transit, $12,100 sales tax and $3,100 for a special

 

platform on which to place the equipment in the plant. Flanagan management estimates that the

 

equipment will remain in service for five years and will have a residual value of $20,000. The

 

equipment will produce 50,000 units in the first year, with annual production decreasing by 5,000 units

 

during each of the next four years (i.e. 45,000 units in year 2, 40,000 units in year 3 and so on; a total

 

of 200,000 units). In trying to decide which depreciation method to use, Flanagan has requested a

 

depreciation schedule for each of the four methods (straight line, units-of-production, sum-of-theyears-digits and double-declining-balance).

 

(i) For each of the methods, prepare a depreciation schedule showing, asset cost, depreciation

 

expense, accumulated depreciation and asset book value.

 

(ii) Flanagan prepares financial statements using the depreciation method that reports the highest

 

income in the early years of the asset use. For income tax purposes, the company uses the

 

depreciation method that minimizes income taxes in the early years. Consider the first year

 

-1-

 


 

Flanagan uses the equipment. Identify the depreciation methods that meet Flanagan?s objectives,

 

assuming the income tax authorities, permit the use of any of the methods.

 

(iii)Assume that the equipment was purchased on October 1, 20x4, how would this affect the straightline depreciation schedule?

 

(iv) At the start of 20x6, the accountant revised the estimates to read an extended useful life of 7 years

 

with a new residual value of $12,000. What is the depreciation expense for each of the remaining

 

years?

 

Question 3

 

It is now March 31, 2008, and you are contemplating the disposal of an old piece of equipment. The

 

equipment cost $36,000 and has accumulated depreciation of $20,000 at December 31 of the prior

 

calendar year-end. The equipment is being depreciated over 10 years down to a residue of $6,000

 

Record the sale of the equipment at March 31, 2008 assuming:

 

a) The equipment is discarded

 

b) The equipment is sold for $6,000, $10,000 or $20, 000.

 

c) The equipment is exchanged for new, similar equipment having a cost of $42,000. Trade-inAllowance for the old equipment is $18,000.

 


 

Tutorial Questions

 

Question 1

 

Prescott College recently purchased new computing equipment for its library. The following

 

information refers to the purchase and installation of this equipment:

 

i)

 


 

ii)

 

iii)

 

iv)

 

v)

 

vi)

 


 

The list price of the equipment was $275,000; however, Prescott College qualified for an

 

?education discount? of $25,000. It paid $50,000 cash for the equipment, and issued a 3-month, 9%

 

note for the remaining balance. The note, plus accrued interest charges of $4,500, was paid

 

promptly at the maturity date.

 

In addition to the amounts described in 1. Prescott paid sales taxes of $15,000 at the date of

 

purchase

 

Freight charges for delivery of the equipment totalled $1,000

 

Installation and training costs related to the equipment amounted to $5,000.

 

During installation, one of the computer terminals was accidentally damaged by a library

 

employee. It cost the college $500 to repair this damage.

 

As soon as the computers were installed, the college paid $4,000 to print admissions brochures

 

featuring the library?s new, state-of-the-art computing facilities.

 

Instructions:

 

a) In one sentence, make a general statement summarizing the nature of expenditures that qualify

 

for inclusion in the cost of plant assets such as computing equipment.

 

b) For each of the six numbered paragraphs, indicate which items should be included by Prescott

 

College in the total cost debited to its Computing Equipment account. Also briefly indicate the

 

proper accounting treatment of those items that are not included in the cost of the equipment.

 

c) Compute the total cost debited to the college?s Computing Equipment account

 

d) Prepare a journal entry at the end of the current year to record depreciation on the computing

 

equipment. Prescott College will depreciate this equipment by the straight-line method over an

 

estimated useful life of 5 years. Assume a zero residual value.

 

-2-

 


 

Question 2

 

On January 1, 20X2, The GenKota Winery purchased a new bottling system. The system has an

 

expected life of 5 years. The system cost $325,000. Shipping, installation, and set up were an

 

additional $35,000. At the end of the useful life, Julie Hayes, chief accountant for GenKota, expects to

 

dispose of the bottling system for $26,000. She further anticipates total output of 668,000 bottles over

 

the useful life. The output for 20x2 was 108,000 bottles, 130,000 (20x3), 150,000 (20X4), 160,000

 

(20X5), and 120,000 (20X6).

 

i) Prepare depreciation schedules assuming use of the:

 

(a) straight-line depreciation method

 

(b) units-of-production depreciation method

 

(c) sum-of-the-years digits depreciation method

 

(d) double-declining balance depreciation method

 

ii) Assuming use of the straight-line method, prepare revised depreciation calculations if the useful

 

life estimate was revised at the beginning of 20X4, to anticipate a remaining useful life of 4

 

additional years (in other words, a total life of 6 years). The revised useful life was accompanied

 

by a change in estimated salvage value to $34,400.

 

Question 3

 

Nelson Lewis provides freight service in Missouri, Kansas, and Illinois. The company?s balance sheet

 

includes Land, Buildings and Motor-Carrier Equipment. Lewis has a separate accumulated

 

depreciation account for each depreciable asset. During 20X7 Lewis completed the following

 

transactions:

 

January 1

 


 

Traded in motor-carrier equipment with accumulated depreciation of $90,000 (cost

 

of $130,000) for similar new equipment with a cash cost of $176,000. Lewis

 

received a trade-in allowance of $70,000 on the equipment and paid the remainder

 

in cash

 


 

July 1

 


 

Sold a building that cost $550,000 and had accumulated depreciation of $250,000

 

through December 31 of the preceding year. Depreciation is calculated on a

 

straight-line basis. The building has a 40-year useful life and a residual value of

 

$50,000. Lewis received $100,000 cash and a $600,000 note receivable.

 


 

October 31

 


 

Purchased land and a building for a cash payment of $300,000. An independent

 

appraisal valued the land at $115,000 and the building at $230,000.

 


 

December 31

 


 

Recorded depreciation as follows:

 

Motor-carrier equipment has an expected useful life of 1,000,000 miles and an

 

estimated residual value of $26,000. Depreciation is units-of-production. During

 

the year, Lewis drove his truck 150,000 miles.

 

Depreciation on buildings is straight-line. The new building has a 40-year life and a

 

residual value equal to $20,000

 


 

a) Prepare journal entries to record each of the transactions in Nelson Lewis?s journal.

 

b) Will the gains and losses on disposal of plant assets affect the gross profit reported in the income

 

statement?

 

-3-

 


 

Practice Questions

 

Question 1

 

Purdue Company purchased equipment on April 1, 2012 for $270,000 cash. The equipment was

 

expected to have a useful life of 3 years or 18,000 operating hours and a residual value of $9,000. The

 

equipment was used for 7,500 hours during 2012, 5,500 in 2013, 4,000 hours in 2014 and 1,000 hours

 

in 2015.

 

i) Prepare the journal entries to record the purchase of the equipment on April 1, 2012

 

ii) Determine the depreciation expense for the years ended December 31, 2012, 2013, 2014 and

 

2015 by (a) the straight-line method, (b) the unit-of-production method & (c) the doubledeclining method.

 

Question 2

 

Nagy Company negotiates a lump-sum purchase of several assets from a contractor who is relocating.

 

The purchase is completed on August 31, 2008, at a total cash price of $2,400,000 for building, land,

 

land improvements and equipment. An independent appraisal was conducted and the building was

 

valued at $890,000; land $427,200; land improvement $249,200 and equipment at $213,600.

 

The company?s financial year ends December 31.

 

Determine the correct cost allocation to the separate assets purchased. Prepare the journal entry to

 

record the purchase.

 

Question 3

 

On January 1, 20X5, a company purchased a new machine for $130,000. They expected to use the

 

machine for 5 years, down to a residue of $6,500.

 

i)

 


 

Prepare the journal entry necessary to record the purchase of the equipment.

 


 

ii)

 


 

What is the book value of the equipment on December 31, 20X6 if the company uses the

 

straight-line method of depreciation?

 


 

iii)

 


 

If the company uses the double declining balance method of depreciation, what is the

 

depreciation expense for 20X6?

 


 

iv)

 


 

The company uses the straight-line method of depreciation and sells the equipment for $30,000

 

at the end of 4 years. State the journal entries to record the sale.

 


 

v)

 


 

Assume the company uses the straight-line method of depreciation. After recording two full

 

years of depreciation, they decide that the machine will last a total of 6 years, rather than 5.

 

Residual value at the end of 6 years will be $8,000. What is the 20X7 depreciation expense?

 


 

Question 4

 

Veradis Company owns a building that appears on its prior year-end balance sheet at its original cost

 

of $572,000 less accumulated depreciation of $429,000. The building is depreciated on a straight-line

 

basis assuming a 20-year life and no residual value. During the first week in January of the current

 

calendar year, major structural repairs are completed on the building at a cost of $68,344. The costs

 

extended its useful life for 7 years beyond the 20 years originally estimated.

 

i)

 

ii)

 

iii)

 

iv)

 


 

Determine the building?s age (plant asset age) as of the prior-year end balance sheet date.

 

Prepare the entry to record the costs of the structural repairs that are paid in cash.

 

Determine the book value of the building immediately after repairs are recorded

 

Prepare the entry to record the current calendar year?s depreciation

 

-4-

 


 

 

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