Handout 19

Chapter 9, Long-Lived Tangible and Intangible Assets

On January 1, Bordick Company purchased a new machine. The manufacturer agreed to sell the machine
to Bordick for $13,600 plus a 2% discount. Sales tax on the machine was $522 and delivery charges were
$250. Bordick built a special table for the machine at a cost of $130. Labor charges to install the machine
and table were $145. As the machine was being carried into the factory, it was dropped, resulting in $550
cost to Bordick to repair the machine. During the year, ordinary maintenance costs for the machine
amounted to $95. How much should the machine account be debited for the cost of the machine?

For each of the following items, indicate whether the payment should be capitalized as part of a long-lived
asset or expensed.
Cap Exp Expenditure for installing machinery.
Cap Exp Expenditure for insurance on machinery after it is in operation.
Cap Exp Payment of delinquent taxes on a newly purchased building (taxes were delinquent at the
date of purchase of the building).
Cap Exp Expenditure for extensive plumbing repairs to make a newly purchased building usable.
Cap Exp Sales tax on new machinery just purchased.
Cap Exp Payment for the right to operating a Holiday Inn.
Cap Exp Expenditure for a major overhaul that restores an aircraft engine to its original condition
and extends its useful life.
Cap Exp Expenditure for an addition to a building that is leased for 20 years.
Cap Exp Amount paid for a business in excess of the appraised value of the net assets.
Cap Exp Ordinary repair to an aircraft engine after it is in operation.
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Sonic Corporation purchased and installed electronic payment equipment at its drive-in restaurants in
San Marcos, TX, at a cost of $27,000. The equipment has an estimated residual value of $1,500. The
equipment is expected to process 255,000 payments over its three-year useful life. Per year, expected
payment transactions are 61,200, year 1; 140,250, year 2; and 53,550, year 3. Calculate the amount of
depreciation to be recorded, for each of the three years, under each of the alternative methods.

STRAIGHT-LINE METHOD:

UNITS-OF-PRODUCTION METHOD:

DOUBLE-DECLINING-BALANCE FORMULA

On July 1, Year 1, Cameo Company purchased a delivery truck for $52,000. The estimated useful life of
the truck is four years, during which time it will be driven about 150,000 miles. Estimated residual value
is $4,000.
1. If Cameo Company uses the double-declining-balance method of depreciation, the accumulated
depreciation balance at December 31, Year 3, (after adjusting entries) will be:
A. $42,250
B. $44,250
C. $13,000
D. $32,500
 Chapter 9, Long-Lived Tangible and Intangible Assets Handout 20

On January 2, Year 1, Fly Fast Airlines bought a new aircraft for $5,000,000. At the end of its EUL, it is
expected to have a residual value of $600,000. Fly Fast estimates that the aircraft will be used in its
operations for 16 years. How much depreciation expense would Fly Fast record for the year ended
December 31, Year 1, under each of the following assumptions:
a. The straight-line method is used.

b. The double declining balance method is used

c. The units of production method is used. It is estimated that the new aircraft have a useful life of
80,000 flying hours. It was flown 2,200 hours in Year 1.

Ouch Company rents computers to local businesses and schools. You have 1,000 computers with an
original cost of $200,000 and a book value of $160,000. As a result of changing technology, your
computers are more difficult to rent so you must drastically reduce your rental price, which causes a
decrease in estimated future cash flows. The fair value of the computers is estimated to be $125,000
because of their outdated technology. Your company should report an asset impairment loss of:
A. $160,000
B. $125,000
C. $35,000
D. $0

What are the journal entries (there are two) to record the impairment loss?

On June 30, Year 3, Drew Corporation sold, for $50,000 cash, a piece of drilling machinery that had been
in use since January 1, Year 1. The original cost of the machine was $100,000 and was depreciated using
the double-declining-balance method with 10,000 residual value and a useful life of 5 years. Depreciation
for Year 3 had not yet been recorded.
Calculate the equipment’s book value at the date of sale.

Calculate the gain or loss to be recorded at the date of sale.

The journal entry to be recorded at the date of sale is:

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Amazon and Walmart are the two largest eCommerce companies in the United States. However,
Amazon’s market share is a whopping 37.8% compared to Walmart’s 6.3%. Complete the following
analysis and then we’ll discuss!  Round all numbers to one decimal point.

Amazon Walmart

(all numbers in millions) 2021 2020 2019 2021 2020 2019

Net Sales Revenue $ 469,822 $ 386,064 $ 280,522 $ 567,762 $ 555,233 $ 519,926

Net Income 33,364 21,331 11,588 13,673 13,510 14,881

Profit Margin %
(net income / sales revenue)
Net Tangible Fixed Assets, year-end 160,281 113,114 72,705 94,515 92,201 105,208
Average Net Tangible Fixed Assets
(year 1 + year 2 / 2)
Fixed Asset Turnover Ratio
(sales revenue / average assets)

Which company, in which year, most effectively used their long-lived tangible assets to generate
revenues?
A. Amazon, 2021
B. Amazon, 2020
C. Walmart, 2021
D. Walmart, 2020
 Handout 21
Chapter 10, Liabilities

Online Games, Inc., reported the following information in its accounting records on December 31.
Gross salaries earned by employees (December 26-31) $ 3,600
Income taxes withheld from employees (December 26-31) 550
FICA taxes withheld from employees (December 26-31) 210
Net payment to employees (made on December 31) 2,840
The employees were paid $2,840 on December 31, but the withholdings have not yet been remitted nor
have the matching employer FICA contributions.
1. Compute the total payroll costs relating to the period from December 26-31 (assume $280 in total
unemployment taxes).
2. Show the journal entries on December 31 to adjust for (a) salaries and wages and (b) payroll taxes
relating to December 26-31.

Recording Sales and State Tax: Grandpa Clocks, Inc. (GCI), is a retailer of wall, mantle, and grandfather
clocks. Assume GCI sells a grandfather clock fr $10,000 cash plus 4 percent sales tax. The clock had
originally cost GCI $6,000. Show the accounting equation effects and prepare the journal entries related
to this transaction. Assume GCI uses a perpetual inventory system, as explained in Chapter 6.
ACCT 2001 Page 2 of 2

Culver, Inc. issues $250,000 of 10-year, 10% bonds on January 1.

Journalize the bond issuance on January 1 under each of the following assumptions:
1. The bonds are sold at 100.

2. The bonds are sold at 104.

3. The bonds are sold at 98.

On January 1, Year 1, Effron Inc. sells $2 million of 8% bonds at face value with interest to be
paid at the end of each year. Effron accrues interest at the end of each quarter during the year.

1. Prepare the journal entry to record the bond issuance.

2. Prepare the required adjusting journal entry as of March 31, Year 1.

3. Assume the required adjusting journal entries were recorded on June 30 and September
30, Year 1. Prepare the journal entry to record the payment of interest to bondholders
on December 31, Year 1.

On July 1, Year 5, immediately after recording interest payments, Salsa, Inc. retired one fifth of
its $500,000 of bonds payable for $97,500. The bonds were originally issued at par value in Year
1. Which of the following statements is correct?
A. A gain of $402,500 will be reported on the income statement.
B. A gain of $2,500 will be reported on the income statement.
C. Stockholders' equity is not affected by the bond retirement.
D. A loss of $2,500 will be reported on the income statement.
ACCT 2001 Handout 22
Chapter 10, Liabilities, continued

Installment note:
Access an online loan calculator with annual payments, such as the one at mycalculators.com, to produce
an amortization schedule for Welton Corp.’s installment note that has original principal of $25,000,
interest of 6 percent compounded annually, and a term of 3 years.
1. What is the annual payment?
2. Of this amount, how much represents interest in year 1?
3. How much principal is included in the year 1 payment?
4. How much interest is included in the year 2 payment?
5. Over time, has the interest become a smaller or larger component of the annual payment?
6. Prepare Welton Corp.’s journal entries on January, Year 1; December 31, Year 1; December 31,
year 2 and December 31, year 3. Round amounts in years 1 and 2 to the nearest dollar. In Year 3,
ensure the rounded amounts eliminate the Notes Payable balance and maintain the same annual
cash repayment.
 ACCT 2001

Bonds: On January 1, Applied Technologies Corporation (ATC) issued $500,000 in bonds that mature in 10
years. The bonds have a stated interest rate of 10 percent. When the bonds were issued, the market
interest rate was 10 percent. The bonds pay interest once per year on December 31.
Since the market rate of interest is equal to the stated rate, these bonds will sell at face value. The journal
entry to record the bond issuance would therefore be:

The journal entry to record the first interest payment on December 31 assuming no interest has been
accrued earlier in the year is:

Instead, assume that the market rate of interest is higher than the stated rate. The bonds will therefore
issue at a . If the amount of the is $50,000, what would be the
journal entry to record the bond issuance?

Instead assume that the market rate of interest is lower than the stated rate. The bonds will therefore
issue at a . If the amount of the is $50,000, what would be the
journal entry to record the bond issuance?

At the beginning of the year, Norwood Pass Industries had $240,000 in total assets and a debt-to-assets
ratio of 0.5 or 50%. During the year, Norwood's assets increased by $80,000, and its liabilities increased by
$72,000. What is the debt-to-assets ratio at the end of the year?

A. .4 or 40%
B. 1.7 or 170%
C. .9 or 90%
D. .6 or 60%

Odessa Co. has current assets of $10 million and net income of $20 mil ion. Current liabilities
total $5 million, interest expense is $4 million, and income tax expense is $6 million. What is the times
interest earned ratio for this company?

A. 2.0
B. 0.5
C. 7.5
D. 0.3