Acc422 Intermediate Accounting: Week 2 (BE11-2, BE11-6, E11-2, E11-9, P11-6, E11-4, E12-16,P12-1)

Acc422 Intermediate Accounting
Week 2 (BE11-2, BE11-6, E11-2, E11-9, P11-6, E11-4, E12-16,P12-1)

BE11-2
Lockhard Company purchased machinery on January 1, 2010, for \$80,000. The machinery is estimated to have a salvage value of \$8,000 after a useful life of 8 years.
a. Compute 2010 depreciation expense using the straight-line method.
b. Compute 2010 depreciation expense using the straight-line method assuming the machinery was purchased on September 1, 2010.

E11-2 (Depreciation-Conceptual Understanding)
Hasselback Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the-years'-digits method, and (3) the double-declining balance method.
Year Straight-Line Sum-if-the-Years'- Digits Double Declining Balance
1 9,000 15,000 20,000
2 9,000 12,000 12,000
3 9,000 9,000 7,200
4 9,000 6,000 4,320
5 9,000 3,000 1,480
Total 45,000 45,000 45,000
a. What is the cost of the asset being depreciated?
b. What amount, if any, was used in the depreciation calculations for the salvage value for this asset?
c. Which method will produce the highest charge to income in Year 1?
d. Which method will produce the highest charge to income in Year 4?
e. Which method will produce the highest book value for the asset at the end of Year 3?
f. If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?

E11-9 (Composite Depreciation)
Presented below is information related to Morrow Manufacturing Corporation.
Asset Cost Estimated Salvage Estimated Life (in years)
A 40,500 5,500 10
B 33,600 4,800 9
C 36,000 3,600 8
D 19,000 1,500 7
E 23,500 2,500 6
a. Compute the rate of depreciation per year to be applied to the plant assets under the composite method. (Round answers to 2 decimal places, i.e. 12.25.)
b. Prepare the adjusting entry necessary at the end of the year to record depreciation for the year.
c. Prepare the entry to record the sale of fixed asset D for cash of \$5,000. It was used for 6 years, and depreciation was entered under the composite method. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)

P11-6 (Depletion, Timber, and Extraordinary Loss)
Conan O'Brien Logging and Lumber Company owns 3,100 acres of timberland on the north side of Mount Leno, which was purchased in 1998 at a cost of \$600 per acre. In 2010, O'Brien began selectively logging this timber tract. In May of 2010,Mount Leno erupted, burying the timberland of O'Brien under a foot of ash. All of the timber on the O'Brien tract was downed. In addition, the logging roads, built at a cost of \$155,000, were destroyed, as well as the logging equipment, with a net book value of \$303,500.
At the time of the eruption, O'Brien had logged 20% of the estimated 500,000 board feet of timber. Prior to the eruption, O'Brien estimated the land to have a value of \$210 per acre after the timber was harvested. O'Brien includes the logging roads in the depletion base.
O'Brien estimates it will take 3 years to salvage the downed timber at a cost of \$728,900. The timber can be sold for pulp wood at an estimated price of \$5 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties.
a. Determine the depletion cost per board foot for the timber harvested prior to the eruption ofMountLeno. (Round answer to 2 decimal places.)
b. Prepare the journal entry to record the depletion prior to the eruption.
c. If this tract represents approximately half of the timber holdings of O'Brien, determine the amount of the extraordinary loss due to the eruption of Mount Leno for the year ended December 31, 2010. (Do not round intermediate computations and round your answer to 0 decimal places, i.e. 25,250.)

E11-4 (Depreciation Computations-Five Methods)
Wenner Furnace Corp. purchased machinery for \$279,000 on May 1, 2010. It is estimated that it will have a useful life of 10 years, salvage value of \$15,000, production of 240,000 units, and working hours of 25,000. During 2011 Wenner Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.
From the information given, compute the depreciation charge for 2011 under each of the following methods.
a. Straight-line.
b. Units-of-output. (Round depreciation cost per unit to 2 decimal places, i.e. 12.25 and and final answer to 0 decimal places, i.e. 25,240.)
c. Working hours.
d. Sum-of-the-years'-digits.
e. Declining-balance (use 20% as the annual rate).

E12-16 (Accounting for R & D Costs)
Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2009 the company expends \$325,000 on a research project, but by the end of 2009 it is impossible to determine whether any benefit will be derived from it.
a. What account should be charged for the \$325,000?
b. The project is completed in 2010, and a successful patent is obtained. The R & D costs to complete the project are \$130,000. The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2010 total \$24,000. The patent has an expected useful life of 5 years. Record these costs in journal entry form. Also, record patent amortization (full year) in 2010.
c. In 2011, the company successfully defends the patent in extended litigation at a cost of \$47,200, thereby extending the patent life to December 31, 2018. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2011.
d. Additional engineering and consulting costs incurred in 2011 required to advance the design of a product to the manufacturing stage total \$60,000. These costs enhance the design of the product considerably. Discuss the proper accounting treatment for this cost.

P12-1 (Correct Intangible Asset Account)
Reichenbach Co., organized in 2009, has set up a single account for all intangible assets. The following summary discloses the debit entries that have been recorded during 2009 and 2010.
Intangible Assets
01-Jul-09 8-year franchise; expiration date 6/30/17 48,000
01-Oct-09 Advance payment on laboratory space (2-year lease) 24,000
31-Dec-09 Net loss for 2009 including state incorporation fee, \$1,000,
and related legal fees of organizing, \$5,000 (all fees
incurred in 2009) 16,000
02-Jan-10 Patent purchased (10-year life) 84,000
01-Mar-10 Cost of developing a secret formula (indefinite life) 75,000
01-Apr-10 Goodwill purchased (indefinite life) 278,400
01-Jun-10 Legal fee for successful defense of patent purchased above 12,650
01-Sep-10 Research and development costs 160,000
Prepare the necessary entries to clear the Intangible Assets account and to set up separate accounts for distinct types of intangibles. Make the entries as of December 31, 2010, recording any necessary amortization and reflecting all balances accurately as of that date. (Ignore income tax effects.) (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)