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1.Lockard
C
ompany purchased machinery on January 1,
2
012, for $167,2
8
0. The machinery is estimated to have a salvage value of $16,728 after a useful life of 8
years
.
(a
)
Compute
2012
depreciation expense using the sum-of-the-years’-digits method.
(b)
Compute 2012 depreciation expense using the sum-of-the-years’-digits method assuming the machinery was purchased on
A
pril 1, 2012.
(Do not round intermediate calculations. Round final answers to 0 decimal places, e.g. 2,520.)
(a)
Depreciation expense
$
(b)
Depreciation expense
$
($167,280 – $16,728 )
x
8/36*
=
$33,456
[($167,280 – $16,728 ) x 8/36] x
9
/12
=
$25,092
*[8(8 + 1)] ÷ 2 = 36
2.Dickinson Inc. owns the following assets.
|
Asset |
Cost |
Salvage |
Estimated Useful Life |
|||
| A |
$71,600 |
$7,160 |
10 years |
|||
|
B |
68,900 |
6,890 |
5 years |
|||
| C |
195,160 |
9,520 |
12 years |
Compute the composite depreciation rate and the composite life of Dickinson’s assets.
(Round answers to 1 decimal place, e.g. 4.8
%
or 4.8 years.)
|
Composite depreciation rate |
% | |
|
Composite life |
years | |
|
Depreciation Expense |
||
|
($71,600 – $7,160)/10 |
$ 6,444 |
|
|
($68,900 – $6,890)/5 |
12,402 |
|
|
($195,160 – $9,520)/12 |
15,470 |
|
|
$34,316 |
|
Composite rate = $34,316/$335,660 = 10.2 % |
|
Composite life = $312,090*/$34,316 = 9.1 years |
3.Jurassic Company owns equipment that cost $1,524,600 and has accumulated depreciation of $643,720. The expected future net cash flows from the use of the asset are expected to be $847,000. The fair value of the equipment is $677,600.
Prepare the journal entry, if any, to record the impairment loss.
(If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
|
Account Titles and Explanation |
Debit |
Credit |
|||||||||||||||
4.Wenner Furnace Corp. purchased machinery for $315,270 on May 1, 2012. It is estimated that it will have a useful life of 10 years, salvage value of $16,950, production of 271,200 units, and working hours of 25,000. During 20
13
, Wenner Corp. uses the machinery for 2,650 hours, and the machinery produces 28,815 units.
From the information given, compute the depreciation charge for
2013
under each of the following methods.
(Round answers to 0 decimal places, e.g. $45,892.)
Straight-line
$
Units-of-output
$
(c)
Working hours
$
(d)
Sum-of-the-years’-digits
$
(e)
Double-declining-balance
$
$315,270 – $16,950
=
$298,320
; $298,320 ÷ 10 yrs.
=
$29,832
$298,320 ÷ 271,200 units
=
$1.10; 28,815 units x $1.10
=
$31,697
(c)
$298,320 ÷ 25,000 hours
=
$11.93 per hr.; 2,650 hrs. x $11.93
=
$31,615
|
(d) |
10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55 |
OR |
n(n + 1) |
10(11) |
55 | ||||||
| 2 |
| 10 | x | $298,320 |
1/3 |
$18,080 |
||||
| 9 |
2/3 |
32,544 |
||||||
|
Total for 2013 |
$50,624 |
|
$315,270 x 20% x 1/3 |
$21,018 |
|
[$315,270 – ($315,270 x 20%)] x 20% x 2/3 |
33,629 |
|
$54,647 |
5.In 1985, Abraham Company completed the construction of a building at a cost of $4,313,000 and first occupied it in January 1986. It was estimated that the building will have a useful life of 40 years and a salvage value of $
136,200
at the end of that time.
Early in 1996, an addition to the building was constructed at a cost of $1,066,900. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years, and that the addition would have a life of 30 years and a salvage value of $
45,
400
.
In
20
14
, it is determined that the probable life of the building and addition will extend to the end of 2045 or 20 years beyond the original estimate.
(a) Using the straight-line method, compute the annual depreciation that would have been charged from 1986 through 1995.
(Round answer to 0 decimal places, e.g. $45,892.)
|
Annual depreciation from 1986 through 1995 |
(b) Compute the annual depreciation that would have been charged from 1996 through 2013.
(Round answer to 0 decimal places, e.g. $45,892.)
|
Annual depreciation from 1996 through 2013 |
(c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in
2014
.
(If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
(d) Compute the annual depreciation to be charged beginning with 2014.
(Round answer to 0 decimal places, e.g. $45,892.)
|
Annual depreciation expense—building |
(a) 1986–1995—($4,313,000 – $136,200) ÷40 =
$104,420/yr
.
|
1996–2013— Building ($4,313,000 – $136,200) ÷40 |
$104,420/yr |
|
Addition ($ 1,066,900 – $45,400) ÷ 30 |
34,050/yr. |
|
$138,470/yr. |
|
Revised annual depreciation |
|||
| Building | |||
|
Book value: ($4,313,000 – $2,923,760*) |
$ 1,389,240 |
||
|
Salvage value |
136,200 | ||
|
1,253,040 |
|||
|
Remaining useful life |
÷ 32 years |
||
| Annual depreciation |
$ 39,158 |
||
|
*$104,420 x 28 years = $2,923,760 |
|||
| Addition | |||
|
Book value: ($1,066,900 – $612,900**) |
$454,000 |
||
| 45,400 | |||
|
408,600 |
|||
|
$ 12,769 |
|||
|
**$34,050 x 18 years = $612,900 |
|||
|
Annual depreciation expense—building ($39,158 + $12,769) |
$51,927 |
6.Presented below is information related to equipment owned by Pujols Company at December 31, 2012.
|
$22,104,000 |
|||
|
Accumulated depreciation to date |
2,456,000 |
||
|
Expected future net cash flows |
17,192,000 |
||
|
Fair value |
10,806,400 |
Assume that Pujols will continue to use this asset in the future. As of December 31, 2012, the equipment has a remaining useful life of 5 years.
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2012.
(If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
(b) Prepare the journal entry to record depreciation expense for 2013 using straight-line method.
(If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
(c) The fair value of the equipment at December 31, 2013, is $12,52
5,600
. Prepare the journal entry (if any) necessary to record this increase in fair value.
(If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
(a)
| Accumulated depreciation | |
|
Carrying amount |
19,648,000 |
|
Loss on impairment |
$8,841,600 |
(b)
|
New carrying amount |
$10,806,400 |
|
Useful life |
|
|
Depreciation per year |
$2,161,280 |
7.Conan O’Brien Logging and Lumber Company owns 3,400 acres of timberland on the north side of Mount Leno, which was purchased in 2000 at a cost of $610 per acre. In 2012, O’Brien began selectively logging this timber tract. In May of 2012, 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 $
159,000
, were destroyed, as well as the logging equipment, with a net book value of $
346,500
.
At the time of the eruption, O’Brien had logged 20% of the estimated 540,000 board feet of timber. Prior to the eruption, O’Brien estimated the land to have a value of $230 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 $
700,500
. The timber can be sold for pulp wood at an estimated price of $2 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 of Mount Leno.
(Round per unit answer to 2 decimal places, e.g. 0.45.)
|
Depletion cost per board foot |
(b) Prepare the journal entry to record the depletion prior to the eruption.
(Round per unit answer to 2 decimal places, e.g. 0.45 for computational purpose and final answer to 0 decimal places, e.g. $45,892. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)
Account Titles and Explanation
Debit
Credit
(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, 2012.
|
Extraordinary loss due to the eruption of Mount Leno |
(a)
|
Original cost |
$610 x 3,400 |
$2,074,000 |
|
|
Deduct residual value of land |
$230 x 3,400 |
782,000 |
|
|
1,292,000 |
|||
|
Cost of logging road |
159,000 | ||
|
Depletion base |
$1,451,000 |
|
$2.69 depletion per board foot |
|
540,000 ft. |
(b)
|
Depletion, 2012: 20% x 540,000 bd. ft. |
108,000 bd. ft.; |
|
108,000 bd. ft x $2.69 |
$290,520 |
(c)
|
Loss of timber [$1,292,000 – ($1,292,000 x 20%)] |
$1,033,600 |
|||||||
|
Cost of salvaging timber |
700,500 | |||||||
|
Less recovery ($2 x 432,000 bd. ft.) |
(864,000 |
) |
$870,100 |
|||||
|
Loss of land value |
||||||||
|
Loss of logging roads [($159,000 – (20% x $159,000)] |
127,200 |
|||||||
|
Logging equipment |
346,500 | |||||||
|
Extraordinary loss due to the eruption of Mt. Leno |
$2,125,800 |
1.AMR Corporation (parent company of American Airlines) reported the following for 2009 (in millions).
|
Service cost |
$333 |
|||
|
Interest on P.B.O. |
712 |
|||
|
Return on plan assets |
566 |
|||
|
Amortization of prior service cost |
13 | |||
|
Amortization of net loss |
145 |
Compute AMR Corporation’s 2009 pension expense.
|
Pension expense |
$ millions |
|
|
$333,000,000 |
||
|
712,000,000 |
||
|
(566,000,000 |
||
|
13,000,000 |
||
|
145,000,000 |
||
|
$ 637,000,000 |
2.Mancuso Corporation amended its pension plan on January 1, 2012, and granted $154,770 of prior service costs to its employees. The employees are expected to provide 2,010 service years in the future, with 365 service years in 2012.
Compute prior service cost amortization for 2012.
|
Prior service cost amortization for 2012 |
|
|
Cost per service year: |
|
|
$154,770/2,010 |
$77 |
|
2012 amortization: |
|
|
365 x $77 |
$28,105 |
3.Lahey Corp. has three defined benefit pension plans as follows.
|
Pension Assets |
Projected Benefit |
||||
|
Plan X |
$615,200 |
$543,900 |
|||
|
Plan Y |
942,000 |
762,400 |
|||
|
Plan Z |
561,200 |
722,500 |
How will Lahey report these multiple plans in its financial statements?
Pension
$
Pension
$
Pension Assets
(at Fair Value)
Projected Benefit
Obligation
Pension Asset/
Liability
$615,200
$543,900
$71,300 asset
942,000
762,400
$179,600 asset
Plan Z
561,200
722,500
$161,300 liability
4. The following facts apply to the pension plan of Boudreau Inc. for the year 2012.
|
Plan assets, January 1, 2012 |
$ 490,400 |
|
Projected benefit obligation, January 1, 2012 |
490,400 |
|
Settlement rate |
8 |
|
42,360 |
|
|
Contributions (funding) |
25,320 |
|
Actual and expected return on plan assets |
48,040 |
|
Benefits paid to retirees |
33,690 |
Using the preceding data, compute pension expense for the year 2012. As part of your solution, prepare a pension worksheet that shows the journal entry for pension expense for 2012 and the year-end balances in the related pension accounts.
|
BOUDREAU INC. |
|||
|
General Journal Entries |
Memo Record |
||
|
Items |
Annual Pension |
Cash |
Plan |
|
Balance, January 1, 2012 |
|||
|
Interest cost |
|||
|
Actual return |
|||
| Contributions | |||
| Benefits | |||
|
Journal entry, December 31 |
|||
|
Balance, December 31, 2012 |
|
5.Ferreri Company received the following selected information from its pension plan trustee concerning the operation of the company’s defined benefit pension plan for the year ended December 31, 2012. January 1, 2012 December 31, 2012 Projected benefit obligation $1,421,300 $1,451,200 Market-related and fair value of plan assets 885,100 1,280,410 Accumulated benefit obligation 1,673,800 1,794,160 Accumulated OCI (G/L)—Net gain 0 (192,130 ) The service cost component of pension expense for employee services rendered in the current year amounted to $79,900 and the amortization of prior service cost was $120,360. The company’s actual funding (contributions) of the plan in 2012 amounted to $306,800. The expected return on plan assets and the actual rate were both 10%; the interest/discount (settlement) rate was 10%. Accumulated other comprehensive income (PSC) had a balance of $1,203,600 on January 1, 2012. Assume no benefits paid in 2012. |
|
(a) Determine the amounts of the components of pension expense that should be recognized by the company in 2012. Components of Pension Expense $ Interest on projected benefit obligation = (10% x $1,421,300) = $142,130 Expected return on plan assets = (10% x $885,100) = ($88,510) |
6.The actuary for the pension plan of Gustafson Inc. calculated the following net gains and losses.
|
Incurred during the Year |
(Gain) or Loss |
|||||
| 2012 |
$ 308,400 |
|||||
| 2013 |
489,000 |
|||||
| 2014 |
(238,600 |
|||||
|
2015 |
(295,600 |
Other information about the company’s pension obligation and plan assets is as follows.
|
As of January 1, |
Plan Assets |
||
|
$4,005,700 |
$2,404,800 |
||
|
4,522,600 |
2,209,300 |
||
|
5,001,800 |
2,605,600 |
||
|
4,244,400 |
3,046,300 |
Gustafson Inc. has a stable labor force of 400 employees who are expected to receive benefits under the plan. The total service-years for all participating employees is 5,600. The beginning balance of accumulated OCI (G/L) is zero on January 1, 2012. The market-related value and the fair value of plan assets are the same for the 4-year period. Use the average remaining service life per employee as the basis for amortization.
Compute the minimum amount of accumulated OCI (G/L) amortized as a component of net periodic pension expense for each of the years 2012, 2013, 2014, and 2015. Apply the “corridor” approach in determining the amount to be amortized each year.
(Round answers to 0 decimal places, e.g. 2,500.)
|
Year |
Minimum Amortization of (Gain) Loss |
|
The excess of the cumulative net gain or loss over the corridor amount is amortized by dividing the excess by the average remaining service period of employees. The average remaining service period is computed as follows:
|
Expected future years of service |
Average remaining service life per employee |
|
|
Number of employees |
||
| 5,600 | 14 | |
| 400 |
|
Amortization of Net (Gain) or Loss |
|
|
(Gain) or Loss For the Year |
Amount |
| 308,400 |
|
Projected Benefit |
Plan |
Corridor (b) |
Accumulated |
Minimum Amortization |
|
$400,570 |
$0 |
$0 |
||
|
452,260 |
0 | |||
|
500,180 |
797,400 |
21,230 |
||
|
424,440 |
537,570 |
8,081 |
|
As of the beginning of the year. |
|
The corridor is 10 percent of the greater of the projected benefit obligation or plan assets. |
|
$797,400 – $500,180 = $297,220; $297,220/14 = $21,230 |
|
$797,400 – $21,230 – $238,600 = $537,570 |
|
$537,570 – $424,440 = $113,130; $113,130/14 = $8,081 |
|
7.Gordon Company sponsors a defined benefit pension plan. The following information related to the pension plan is available for 2012 and 2013. 2012 2013 Plan assets (fair value), December 31 $1,407,786 $1,709,886 Projected benefit obligation, January 1 1,409,800 1,611,200 Pension asset/liability, January 1 281,960 Cr. ? Prior service cost, January 1 503,500 483,360 Service cost 120,840 181,260 Actual and expected return on plan assets 48,336 60,420 Amortization of prior service cost 20,140 24,168 Contributions (funding) 231,610 241,680 Accumulated benefit obligation, December 31 1,007,000 1,107,700 Interest/settlement rate 8 % 8 % |
|
(a) Compute pension expense for 2012 and 2013. Pension expense for 2012 $ Pension expense for 2013 $ 2012 2013 Service cost $120,840 $ 181,260 Interest cost ($1,409,800 x8%) and ($1,611,200 x8%) 112,784 128,896 Expected return on plan assets (48,336 ) (60,420 ) Amortization of prior service cost 20,140 24,168 Pension expense $205,428 $273,904 |
Interest cost = $490,400 x 0.08 = $39,232
Note: We show actual return on the worksheet to ensure that plan assets are properly reported. If expected and actual return differ, then an additional adjustment is made to compute the proper amount of pension expense.
Lahey reports a pension asset of $250,900 ($71,300 + $179,600) and a pension liability of $161,300.
[May also be computed as 20% of ($315,270 – 2/3 of 20% of $315,270)]
Accumulated Depreciation— Equipment = ($880,880 – $677,600) = $203,280
Recoverability test:
Future net cash flows ($847,000) < Carrying amount ($880,880); therefore, the asset has been impaired.
*($64,440 + $62,010 + $185,640) = $312,090
