Accounting for

Property, Plant
Equipment, and
Intangible Assets

16

ANSWERS TO DISCUSSION QUESTIONS

1.
2.
3.
4.

5.
6.
7.
8.
9.
10.
11.
12.

The payments involved in acquiring it and getting the asset in position and condition for use in the
company.
The Land Improvements account records improvements to land with a limited useful life.
Improvements are subject to depreciation.
Revenue expenditures debit expenses relating to plant assets that do not extend the plant assets useful
life but maintain its normal operation. Capital expenditures improve or enlarge existing assets and are
debited to the asset account. (Extraordinary repairs are debited to Accumulated Depreciation.)
Straight line: Depreciation expense is the same each year.
Units-of-Production: Depreciation is related to use and not passage of time.
Declining-Balance: Accelerated method, rate times book value at beginning of year.
Sum-of-the-Years-Digits: Accelerated method, cost less salvage times fraction for year.
The Modified Accelerated Cost Recovery System is used for tax purposes. It speeds up the
depreciation schedule.
False; it is a capital expenditure.
Declining-balance method.
False. If cash received is less than the book value, a loss results.
True.
Income tax method absorbs loss into cost of new asset. Only if loss is considered immaterial will the
loss be absorbed into cost of new asset by the Accounting Principles Board ruling.
It is a contra-asset that recorded the amount of depletion accumulated.
Patent: An exclusive right to sell or produce a discovery or invention.
Copyright: Exclusive rights to owners to publish an artistic or literary work.
Goodwill: Cost of assets purchased, value of assets identified.

566

SOLUTIONS TO CHAPTER 16 MINI EXERCISES

1.

+
+
+

2.

(.05 $2,000)

$6,000 $1,000 $5,000

=
10 years
10

3.

4.

$2,000
100
$1,900
50
150
50
$2,150

$4,000
1,000
$3,000

= $500 Depreciation per year

Book Value

$6,000 $1,000
$5,000
=
= $.05
100,000
100,000
8,000 $.05 = $400 Depreciation year 1

5. $6,000 .20 = $1,200

6. 10(10 + 1) = 55
2
10
$5,000 = $909
55
7. A.
B.
C.
D.

Revenue Expenditure
Capital Expenditure (Betterment)
Extraordinary Repair (Capital Expenditure)
Capital Expenditure (Addition)

8. A.
B.
C.

Acc. Depletion
Loss on Disposal of Plant Assets
Gain on Sale of Plant Assets

9. A.

$10,000
6,000
$ 4,000
3,000
$ 1,000

contra asset
other expense
other income

B.V.
Trade-In
Loss

567

Balance Sheet
Income Statement
Income Statement

B.

10.

11.

Machinery
Loss on exchange of Machinery
Acc. Dep., Machinery
Machinery
Cash
$5,000
4,000
$1,000

13,000
1,000
6,000
10,000
10,000

Trade-In
B.V
Gain

Machinery
Acc. Dep., Machinery
Machinery
Cash
Machinery
Acc. Dep. Machinery
Machinery
Cash

12,000
6,000
10,000
8,000
14,000
6,000
10,000
10,000

568

SOLUTIONS TO EXERCISES
16-1.
List Price

$30,000

Less: Cash Discount (.10 $30,000)

3,000

Net Purchase Price

27,000

Freight

500

Assembly

1,400

Special Base

505

Total Cost of Machine

$29,405

16-2.(A) Straight-Line
$1,440 $240
= $240
5 yrs
Yr.
Cost
Dep. Exp.
Acc. Dep. E.O.Y.
1
$1,440
$240
$240
2
$1,440
$240
$480
(B) Units-of-Production
$1,440 $240
= $2
600
Yr.
1
2

Cost
$1,440
$1,440

Output
100
200

Acc. Dep.
$200
$600

Bk. Value
$1,240
$ 840

Bk. Value
B.O.Y.
$1,440
$ 864

Dep. Exp.
$576
$345.60*

Acc. Dep.
E.O.Y.
$576
$921.60

(D) Sum-of-the-Years-Digits (Optional)

Cost Less
Fraction
Yearly
Yr.
Residual for Year = Dep. Exp.
1
$1,200 5/15 =
$400
2
$1,200 4/15 =
$320

Acc. Dep.
E.O.Y.
$400
$720

Bk. Value
E.O.Y.
$1,040
$ 720**

(C) Declining-Balance
Acc. Dep.
Yr.
Cost
B.O.Y.
1
$1,440

2
$1,440
$576

Dep. Exp.
$200
$400

Bk. Value E.O.Y.

$1,200
$ 960

*The depreciation formula for year 1: $1,440 .40 = $576; for year 2: $864 .40 = $345.60.

569

Bk. Value
E.O.Y.
$864
$518.40

16-3. (A) Straight Line

$6,800 $800
= $600
10 yrs
Yr.
1
2

Cost
$6,800
$6,800

Dep. Exp.
$600
$600

(B) Declining-Balance
Acc. Dep.
Yr.
Cost
B.O.Y.
1
$6,800

2
$6,800
$1,360

Acc. Dep. E.O.Y.

$600
$1,200

Bk. Value
B.O.Y.
$6,800
$5,440

Bk. Value E.O.Y.

$6,200
$5,600

Dep. Exp.
$1,360
$1,088

Acc. Dep.
E.O.Y.
$1,360
$2,448

Bk. Value
E.O.Y.
$5,440
$4,352

Book Value = original cost minus accumulated depreciation at end of year.

Depreciation Expense = book value multiplied by the doubled annual rate, which in this case is 20 percent.

(C) Sum-of-the-Years Digits (Optional)

Cost Less
Fraction
Yearly
Yr.
Residual for Year = Dep. Exp.
1
$6,000 10/55 = $1,090.91
2
$6,000 9/55 = $ 981.82
16-4. (A) Cost Acc. Dep.
$9,000 $3,900

Acc. Dep.
Bk. Value
E.O.Y.
E.O.Y.
$1,090.91 $5,709.09
$2,072.73
$3,927.27

= Bk. Value
= $5,100

(B) Loss = $5,100 $800 = $4,300

(C)
Machinery (new)
Loss on Exchange
Acc. Dep. Machinery
Machinery (Old)
Cash
(D) Cost of Old Mach.
Acc. Dep.
Book Value
+ Cash paid
Cost Basis of New Machine

5
4
3

8 0 0 00
3 0 0 00
9 0 0 00
9
5

0 0 0 00
0 0 0 00

9
5

0 0 0 00
0 0 0 00

$ 9,000
3,900
5,100
+ 5,000
$10,100

Machinery (new)
Acc. Dep., Machinery
Machinery
Cash

10
3

570

1 0 0 00
9 0 0 00

16-5.

$5000
= $500 per year
10 yrs

20X1
Dec. 31

20X2
Dec. 31

16-6.

.20
.32
.1920
.1152
.1152
.0576

Amortization of Patents
Patents
$500 8/12 = $333.33

3 3 3 33

Amortization of Patents
Patents

5 0 0 00

$9,000
9,000
9,000
9,000
9,000
9,000

3 3 3 33

5 0 0 00

= $1,800.00
= 2,800.00
= 1,728.00
= 1,036.80
= 1,036.00
=
518.40
$9,000.00

571

SOLUTIONS TO A PROBLEMS
PROBLEM 16A-1
ORANGE CO. GENERAL JOURNAL
PAGE 4

Date
20XX
Feb. 5
18
Mar. 24

29
May 10
Jun. 15
Jul.

Oct. 15
Nov 30
Dec. 30
31

Account Titles and Description

Land
Cash
Land Improvements
Cash
Building
Cash
Mortgage Payable
Equipment
Cash
Building
Cash
Repairs Expense
Cash
Truck
Cash
Truck
Cash
Repairs Expense
Cash
Accumulated Depreciation, Truck
Cash
Repairs Expense
Cash

PR

Dr.
86 0 0 0 00

Cr.
86 0 0 0 00

5 4 0 0 00
5 4 0 0 00
90 0 0 0 00
27 0 0 0 00
63 0 0 0 00
36 0 0 0 00
36 0 0 0 00
175 0 0 0 00
175 0 0 0 00
7 5 0 00
7 5 0 00
14 0 0 0 00
14 0 0 0 00
2 2 0 0 00
2 2 0 0 00
3 3 00
3 3 00
9 0 0 00
9 0 0 00
3 2 5 00
3 2 5 00

572

PROBLEM 16A-2
(A)
$ 58,000 $ 18,000 = $ 40,000
4 Years
4

END OF
YEAR
20X1
20X2
20X3
20X4

COST OF
EQUIPMENT
$58,000
58,000
58,000
58,000

YEARLY DEP.
EXPENSE
$10,000
10,000
10,000
10,000

$ 10,000

ACC. DEP.
END OF YEAR
$10,000
20,000
30,000
40,000

BOOK VALUE
END OF YEAR
$48,000
38,000
28,000
18,000

(B)
$ 58,000 $ 18,000 = $ 40,000
80,000
80,000

END OF
YEAR
20X1
20X2
20X3
20X4

COST OF
EQUIPMENT
$58,000
58,000
58,000
58,000

UNITS
PRODUCED
12,000
27,000
15,000
26,000

YEARLY
DEPRECIATION
EXPENSE
$6,000
13,500
7,500
13,000

*If units exceeded 80,000 depreciation would be taken only on the 80,000 units.

573

$.50*

ACCUMULATED
DEPRECIATION
END OF YEAR
$6,000
19,500
27,000
40,000

BOOK VALUE
END OF YEAR
$52,000
38,500
31,000
18,000

574

$58,000
$58,000
29,000

ACC. DEP.
BEG. OF YEAR

*In year 2, depreciate only up to $11,000 so that book value does not go below residual value of $18,000.

ACCUMULATED
DEPRECIATION
END OF YEAR
$16,000
28,000
36,000
40,000

DEPRECIATION
ACC. DEP.
EXPENSE
END OF YEAR
$29,000
(58,000 .50)
$29,000
11,000*
40,000

YEARLY
DEPRECIATION
EXPENSE
$16,000
12,000
8,000
4,000

$58,000
29,000

BOOK VALUE
BEG. OF YEAR

(COST - RESIDUAL) RATE =

$40,000 4/10
40,000 3/10
40,000 2/10
40,000 1/10

(OPTIONAL)

END OF
YEAR
20X1
20X2
20X3
20X4

(D)

20X1
20X2
20X3
20X4

END OF
YEAR
COST

(C)

BOOK VALUE
END OF YEAR
$42,000
30,000
22,000
18,000

$29,000
18,000

BOOK VALUE
END OF YEAR

575

20X3

20X2

20X1

END OF
YEAR

$1,190
2,635

$3,840 4/10 7/12

$3,840 4/10 5/12
$3,840 3/10 7/12
$3,840 3/10 5/12
$3,840 2/10 7/12

(COST - RESIDUAL) RATE =

(OPTIONAL)

$4,080
4,080
4,080

20X1
20X2
20X3

(C)

COST OF
EQUIP.

END OF
YEAR

ACC. DEP.
BEG. OF YEAR

$4,080
4,080
4,080

20X1
20X2
20X3

(B)

COST OF EQUIPMENT

$4,080 $240
= $960
4

END OF
YEAR

(A)

PROBLEM 16A-3

$896
1,312
640 + 672
928
480 + 448

YEARLY
DEPRECIATION
EXPENSE

$4,080
$2,890
$1,445

BOOK VALUE
BEG. OF YEAR

YEARLY DEP.
EXPENSE
$560
($960 7/12)
960
960

3,136

2,208

$896

ACCUMULATED
DEPRECIATION
END OF YEAR

DEPRECIATION
EXPENSE
$1,190
($4,080 .50 7/12)
$1,445
722.50

$560
1,520
2,480

ACC. DEP.
END OF YEAR

944

1,872

BOOK VALUE
END OF YEAR
$3,184
(4,080 896)

$1,190
$2,635
3,357.50

ACC. DEP.
END OF YEAR

$3,520
2,560
1,600

BOOK VALUE
END OF YEAR

$2,890
1,445
722.50

BOOK VALUE
END OF YEAR

PROBLEM 16A-4
ROBE CO. GENERAL JOURNAL
PAGE 3

Date
20XX
Jan. 1

Account Titles and Description

Cash
Accumulated Depreciation, Truck
Truck
Gain on Sale of Plant Asset

$6,750
6,100
BV $ 650

Feb. 10

Cr.

$1,250
650
$ 600 Gain

3 0 0 00
4 5 0 00
2 4 5 0 00
3 2 0 0 00

$750 BV
300 Ins.
$ 450 Loss

Machinery
Loss on Exchange of Machinery
Accumulated Depreciation, Machinery
Machinery
Cash
$19,400
16,500
BV $ 2,900

Dr.
1 2 5 0 00
6 1 0 0 00

6 7 5 0 00
6 0 0 00

Cash
Loss From Fire
Accumulated Depreciation, Machinery
Machinery
$3,200
2,450
BV $ 750

May 1

PR

$2,900 BV
2,700 -Trade-In
$ 200 Loss

Cash Paid: ($25,000 2,700 = $22,400)

576

25 1 0 0 00
2 0 0 00
16 5 0 0 00
19 4 0 0 00
22 4 0 0 00

PROBLEM 16A-4 (CONCLUDED)

Date
20XX
Jul. 8

Account Titles and Description

Machinery
Accumulated Depreciation, Machinery
Machinery
Cash

PR

Dr.
43 0 0 0 00
34 0 0 0 00

Cr.

40 0 0 0 00
37 0 0 0 00

$40,000
34,000
$ 6,000 BV
+37,000 (Cash Paid) ($45,000 8,000)
$43,000

Aug. 9

Machinery
Accumulated Depreciation, Machinery
Machinery
Cash

25 3 0 0 00
16 5 0 0 00
19 4 0 0 00
22 4 0 0 00

BV $2,900 + $22,400 = $25,300

($25,100 $2,700 = $22,400)

Sept. 12

Accumulated Depreciation, Truck

Truck

7 0 0 0 00
7 0 0 0 00

577

SOLUTIONS TO B PROBLEMS
PROBLEM 16B-1
ORANGE CO. GENERAL JOURNAL
PAGE 4

Date
20XX
Apr. 1
8
15

29
May 1
8
30
Jun. 30
Jul. 30
Sept. 30

Account Titles and Description

Machinery
Cash
Land
Cash
Building
Cash
Mortgage Payable
Land
Cash
Repairs Expense
Cash
Building
Cash
Airplane
Cash
Truck
Cash
Accumulated Depreciation, Airplane
Cash
Accumulated Depreciation, Building
Cash

578

PR

Dr.
91 0 0 0 00

Cr.
91 0 0 0 00

22 0 0 0 00
22 0 0 0 00
90 0 0 0 00
9 0 0 0 00
81 0 0 0 00
1 9 0 0 00
1 9 0 0 00
1 6 0 00
1 6 0 00
2 9 0 0 00
2 9 0 0 00
65 0 0 0 00
65 0 0 0 00
2 9 0 0 00
2 9 0 0 00
7 9 0 0 00
7 9 0 0 00
30 0 0 0 00
30 0 0 0 00

PROBLEM 16B-2
(A)
$ 117,000 $ 9,000 = $ 27,000
4

END OF
YEAR
20X1
20X2
20X3
20X4

COST OF
EQUIPMENT
$117,000
$117,000
$117,000
$117,000

YEARLY DEP.
EXPENSE
$27,000
$27,000
$27,000
$27,000

ACC. DEP.
END OF YEAR
$27,000
54,000
81,000
108,000

BOOK VALUE
END OF YEAR
$90,000
63,000
36,000
9,000

(B)
$ 117,000 $ 9,000 = $ 1.20
90,000

END OF
YEAR
20X1
20X2
20X3
20X4

COST OF
EQUIPMENT
$117,000
$117,000
$117,000
$117,000

UNITS
PRODUCED
11,000
9,000
11,000
59,000

YEARLY
DEPRECIATION
EXPENSE
$13,200
10,800
13,200
70,800

*If units exceeded 80,000 depreciation would be taken only on the 80,000 units.

579

ACCUMULATED
DEPRECIATION
END OF YEAR
$13,200
24,000
37,200
108,000

BOOK VALUE
END OF YEAR
$103,800
93,000
79,800
9,000

580

$117,000
$117,000
$117,000

20X2
20X3
20X4

87,750
102,375
108,000

$58,500

ACCUMULATED
BOOK VALUE
END OF YEAR
$73,800
41,400
19,800
9,000

29,250
14,625
9,000

58,500

ACC. DEP.
BOOK VALUE
END OF YEAR END OF YEAR

YEARLY
DEPRECIATION
END OF YEAR
$43,200
75,600
97,200
108,000

DEPRECIATION
EXPENSE
$58,500
(.50 117,000)
29,250
(.50 58,500
14,625
5,625*

DEPRECIATION
EXPENSE
$43,200
32,400
21,600
10,800

58,500
29,250
14,625

$117,000

BOOK VALUE
BEG. OF YEAR

(COST - RESIDUAL) RATE =

$108,000 4/10
108,000 3/10
108,000 2/10
108,000 1/10

58,500
87,750
102,375

ACC. DEP.
BEG. OF YEAR

*In year 4, depreciate only up to $11,000 so that book value does not go below residual value of $9,000.

END OF
YEAR
20X1
20X2
20X3
20X4

(OPTIONAL)

$117,000

20X1

(D)

COST

END OF
YEAR

(C)

PROBLEM 16B-2 (CONCLUDED)

581

6,200

6,200

20X2

20X3

20X3

20X2

20X1

END OF
YEAR

$3,596

$1,860

$6,000 5/15 9/12

$6,000 5/15 3/12 = 500
$6,000 4/15 9/12 = 1,200
$6,000 4/15 3/12 = 400
$6,000 3/15 9/12 = 900

(COST - RESIDUAL) RATE =

(OPTIONAL)

$6,200

20X1

(C)

COST OF
EQUIP.

END OF
YEAR

ACC. DEP.
BEG. OF YEAR

$6,200
6,200
6,200

20X1
20X2
20X3

(B)

COST OF EQUIPMENT

$6,200 - $200/5 = $6,000/5 = $1,200

END OF
YEAR

(A)

PROBLEM 16B-3

1,300

1,700

$1,500

$900
2,100
3,300

ACC. DEP.
END OF YEAR

4,500

3,200

$1,500

ACCUMULATED
DEPRECIATION
END OF YEAR

DEPRECIATION
EXPENSE
$1,860
($6,200 .40 9/12)
1,736
(4,340 .40)
1,041.60
(2,604 .40)

YEARLY
DEPRECIATION
EXPENSE

2,604

4,340

$6,200

BOOK VALUE
BEG. OF YEAR

YEARLY DEP.
EXPENSE
$900
($1,200 9/12)
1,200
1,200

1,700

3,000

BOOK VALUE
END OF YEAR
$4,700
(6,200 1,500)

4,637.60

3,596

$1,860

ACC. DEP.
END OF YEAR

$5,300
4,100
2,900

BOOK VALUE
END OF YEAR

1,562.40

2,604

$4,340

BOOK VALUE
END OF YEAR

PROBLEM 16B-4
ROBE CO. GENERAL JOURNAL
PAGE 3

Date
20XX
Jan. 1

Account Titles and Description

Cash
Accumulated Depreciation, Truck
Truck
Gain On Sale Of Plant Assets
$12,800
10,900
BV 1,900

Feb. 8

Cr.

$3,600 Sale Pr.

1,900 BV
$1,700 Gain

1 5 0 00
4 6 0 00
3 3 9 0 00
4 0 0 0 00

$610 BV
150 Ins.
$460 Loss

Machinery
Loss On Exchange Of Machinery
Accumulated Depreciation, Machinery
Machinery
Cash
$18,500
15,750
BV $2,750

Dr.
3 6 0 0 00
10 9 0 0 00

12 8 0 0 00
1 7 0 0 00

Cash
Loss From Fire
Accumulated Depreciation, Machinery
Machinery
$4,000
3,390
BV $610

May 9

PR

$2,750 BV
2,600 Trade-in
$150 Loss

Payment: $26,200 2,600 = $23,600

582

26 2 0 0 00
1 5 0 00
15 7 5 0 00
18 5 0 0 00
23 6 0 0 00

PROBLEM 16B-4 (CONCLUDED)

Date
20XX
Jul. 10

Aug. 19

Account Titles and Description

Machinery
Accumulated Depreciation, Machinery
Machinery
Cash

$39,500
35,700
$ 3,800 + $32,500 ($44,000 $11,500) = $36,300
Machinery
Accumulated Depreciation, Machinery
Machinery
Cash

BV

Sept. 12

PR

Dr.
36 3 0 0 00
35 7 0 0 00

Cr.

39 5 0 0 00
32 5 0 0 00

26 3 5 0 00
15 7 5 0 00
18 5 0 0 00
23 6 0 0 00

$2,750 + $23,600 = $26,350

($26,200 - $2,600 = $23,600)

Accumulated Depreciation, Truck

Truck

11 0 0 0 00
11 0 0 0 00

583

SOLUTION TO REAL WORLD APPLICATION #1

Cost
- Acc. Dep.
= Book Value
- Salvage

By MACRS

$102,000
36,250
65,750
12,000
53,750
+15,000
$68,750
.20
.32
.1920
.1152
.1152
.0576

($96,000 + $6,000)
($6,250 + $15,000 + $15,000)
$68,750 12 = $12,313.43 per year
67 months

$100,000
$100,000
$100,000
$100,000
$100,000
$100,000

= $20,000
= 32,000
= 19,200
= 11,520
= 11,520
=
5,760

By MACRS, a new truck substantially increases depreciation expense. The overhaul may be appropriate if
liquidity is a problem for Hope Co. Since a trade-in brings in only $12,000, additional cash or financing will
be needed. There is no question of the tax savings effect of MACRS.
SOLUTION TO REAL WORLD APPLICATION #2
MACRS is generally not acceptable in preparing financial reports. It is acceptable for tax purposes. There is
no question that MACRS will result in writing off the truck in 5 years.
.20
.32
.1920
.1152
.1152
.0576

$20,000
$20,000
$20,000
$20,000
$20,000
$20,000

=
=
=
=
=
=

MACRS
$4,000
$6,400
$3,840
$2,304
$2,304
$1,152

Note that in a straight-line method only $3,000 of depreciation would be taken each year.
Straight-line:

$20,000 $5,000 $15,000

=
= $3,000 Depreciation Expense per year
5
5

584

SOLUTION TO REAL WORLD APPLICATION #3

The question in this case is whether the dealer is being fair to Pete. It does not seem that the dealer is telling
Pete the truth about buying a car. Sure some cars appreciate, but most do not. Also, leasing is becoming
more popular every year. Thus, I feel that the dealer is being unethical in his selling approach to Pete.

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