accounting 2

Accounting, 9e

E9-2

0

Partial year depreciation and sale of an asset

LO 2, 3 [10-1

5

minutes]

Students please fill-in areas that are shaded

Student Name

Oscar Gibbons

Course Name

Accounting 2

Student ID:

69193

Date:

10/2/13

On January 2,

2012

, Repeat Clothing Consignments purchased showroom fixtures

for

$1

1,000

cash, expecting the fixtures to remain in service for five years. Repeat

has depreciated the fixtures on a double-declining-balance basis, with zero residual

value. On October

31

,

2013

, Repeat sold the fixtures for $

6,200

cash.

Requirements

1.

Record both depreciation for 2013 and sale of the fixtures on October 31, 201

3.

Test Your Knowledge

Req. 1

Journal

DATE

ACCOUNTS AND EXPLANATIONS

DEBIT

CREDIT

Depreciation for 10 months:

Oct 31

Depreciation cost

4,400

11,000

X 2/5yr

Sale of fixtures:

Gain on sale of fixtures

1,800

Calculate 201

2

depreciation:

You can also use DDB function in excel:

DDB =

$4,400

for 2012

$2,200

for 10 mo. 2013

Calculate 2013 depreciation

Gain is computed

as follows:

Sale price of old fixtures

$6,200

Book value of old fixtures:

Cost

Less: Accm depreciation

Accm. Depr.

6,600

Gain on sale………………………………………………….

$1,800

15 points

E9-24

Acquisition of patent, amortization, and change in useful life

LO 5 [10-15 minutes]

Miracle Printers (MP) manufactures printers. Assume that MP recently paid $600,000

for a patent on a new laser printer. Although it gives legal protection for 20 years, the

patent is expected to provide a competitive advantage for only eight years.

Assuming the straight-line method of amortization, make journal entries to

record

(a)

the purchase of the patent and

(b)

amortization for year 1.

2.

After using the patent for four years, MP learns at an industry trade show that

another company is designing a more efficient printer. On the basis of this new

information, MP decides, starting with year 5, to amortize the remaining cost of

the patent over two remaining years, giving the patent a total useful life of six

years. Record amortization for year 5.

Purchase of patent

Patent Cost

600,000

Amortization for one year:

75,000

(Patent cost 600,000 X 1/8)

Req. 2

Amortization for year 5:

375,000

150,000

600,000/8 X 5yrs

Calculate book value

Orginal cost

$600,000

Accm Depreciation:

Year 1

Year 2

Year 3

225,000

Year 4

$300,000

Book value at beg of Yr 5

$

300,000

New estimated useful life remaining

New annual amortization

$150,000

6 points

Re-do

E10-11

Journalizing current liabilities

LO 1 [15 minutes]

Edmund O’Mally Associates reported short-term notes payable and salary payable

2011

Current liabilities (partial)

Short-term notes payable

$

16,400

$

15,600

Salary payable

3,400

3,100

During 2012, O’Mally paid off both current liabilities that were left over from 2011,

borrowed money on short-term notes payable, and accrued salary expense.

Journalize all four of these transactions for O’Mally during 2012.

EDMUND O’MALLY ASSOCIATE ACCOUNT

Short term loan for liabilities payable

Short Term Notes Payable

15600

Short Term Expense Payable

Notes Payable for 2011

Cash

Salary Expense

Payable for 2011

Salary Payable

3100

16400

Short Term Notes Payable for 2012

Short Trm Nts PayBl for ’12

Salary Expense Payable for 2012

3400

Salary Payable

E10-13

Computing and recording gross and net pay

LO 3,4 [10-15 minutes]

Henry Striker manages a Frosty Boy drive-in. His straight-time pay is $10 per hour,

with time-and-a-half for hours in excess of 40 per week. Striker’s payroll deductions

include withheld income tax of 8%, FICA tax of 7.65%, and a weekly deduction

of $5 for a charitable contribution to the United Fund. Striker worked 52

hours during the week.

Compute Striker’s gross pay and net pay for the week. Carry amounts to the

nearest cent.

Journalize Frosty Boy’s wage

expense

accrual for Striker’s work. An explanation

is not

required.

Journalize the subsequent payment of wages to Striker.

Straight-time earnings for 40 hours (40 X $10)

$400.00

Overtime pay for the next 12 hours:

180

Deductions:

Withheld income tax 8%

46.40

FICA tax 7.65%

44.37

United Fund contribution

5.00

Total deductions

95.77

Net pay

$

484.23

Wage expense

580.00

Wage Expense

Wage expense payable

Wages Payable

Req. 3

Wages payable

Income Tax payable

Employee Income Tax payable

Fica Tax payable

Fica Tax payable

United Fund Contribution

Employee United Fund Contribution

Employee Benefits payable

Employee Benefits payable

P9-

29

A

Lump sum asset purchases, partial year depreciation, and impairments

LO 2,3 [20-25 minutes]

Gretta Chung Associates surveys American eating habits. The company’s accounts

include

Land

,

Building

s, Office equipment, and Communication equipment, with a

separate accumulated depreciation account for each asset. During 2012 and 2013,

Gretta Chung completed the following transactions:

Jan 1

Traded in old office equipment with book value of $40,000 (cost of $

132,000

and accumulated depreciation of $

92,000

) for new equipment. Chung also

paid $

80,000

in cash. Fair value of the new equipment is $

11

9,000

.

Apr 1

Acquired land and communication equipment in a group purchase. Total

cost was $

270,000

paid in cash.

An independent appraisal valued the land

at $212,625 and the communication equipment at $70,875.

Sep 1

Sold a building that cost $

5

55,000

(accumulated depreciation of $255,000

through December 31 of the preceding year). Chung received $370,000

cash from the sale of the building. Depreciation is computed on a

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

value of $75,000.

Dec 31

Recorded depreciation as follows:

→Communication equipment is depreciated by the straight-line method over a

five-year life with zero residual value.

→Office equipment is depreciated using the double-declining-balance method over

five years with $2,000 residual value.

The company identified that the communication equipment suffered significant

decline in value. The fair value of the communication equipment was

determined to be $55,000.

Record the transactions in the journal of Gretta Chung Associates.

Jan. 1

Office equipment (new)

Depreciation expense

of equiptment & books

132,000

Loss on Sale

Accumulated depreciation

of equiptment & books

Off. Eqp. Old

Cash

Apr. 1

162,000

202,500

Equiptment

10

8,000

67,500

Sept. 1

255,000

370,000

Accumulated Depriciation

330,000

263,000

145,000

Gain on Sale

78,000

Dec. 31

Communication Equipt. Expense

23,800

10,125

Accumulated Depreciation

per year

(119000 x 1/5×12/12

–

Depreciation Expense Office Equipment

8,

28

2

47,600

Accumulated depreciation Office Equipment

(119000-2000) x 2/5 x 12/12

Accumulated Depreciation for 1 year

Communication Equiptment

11

9,000

2,375

Loss on impairment

95,200

Acc. Depr. Equipment

Loss of Impairments for 1 year

12,500

Communic.Equip

New Fair Value for Communication Equiptment

Please Re-do

P9-30A

Natural resource accounting

LO 4 [15-20 minutes]

10/02/13

McCabe Oil Company has an account titled Oil and gas properties. McCabe paid

$

6,200,000

for oil reserves holding an estimated 500,000 barrels of oil. Assume the

company paid $

5

10,000

for additional geological tests of the property and $490,000

to prepare for drilling. During the first year, McCabe removed 90,000 barrels of oil,

which it sold on account for $39 per barrel. Operating expenses totaled $850,000, all

Record all of McCabe’s transactions, including depletion for the first year.

Jan-13

RESERVE HOLDINGS FOR 500000 Oil Barrels

Oil & Gas Property

Geological test of property

Drilling Expenses

490,000

90000 barrels of oil sold at @ $39.00 per Barrel

3,510,000

Accts. Receivable

Sales Revenue

Operating expenses paid in cash

850,000

Depletion Expense

1296000

Accumulate Depletion – Oil

Balance on the Ledger

840,000

Operating Expenses

850000

Re-do

P10-15A

Journalizing liability transactions

LO 1, 2 [30-40 minutes]

The following transactions of Denver Pharmacies occurred during 2011 and 2012:

Jan 9

Purchased computer equipment at a cost of $9,000, signing a six-month,

6% note payable for that amount.

Recorded the week’s sales of $64,000, three-fourths on credit, and

one-fourth for cash. Sales amounts are subject to a 6% state sales tax.

Feb 5

Sent the last week’s sales tax to the state.

Borrowed $204,000 on a four-year, 10% note payable that calls for $51,000

annual installment payments plus interest. Record the current and

long-term portions of the note payable in two separate accounts.

Jul 9

Paid the six-month, 6% note, plus interest, at maturity.

Aug 31

Purchased inventory for $12,000, signing a six-month, 9% note

payable.

Accrued warranty expense, which is estimated at 2% of sales of $603,000.

Accrued interest on all outstanding notes payable. Make a separate

interest accrual for each note payable.

Feb 28

Paid the first installment and interest for one year on the four-year note

Paid off the 9% note plus interest at maturity.

Journalize the transactions in Denver’s general journal. Explanations are not

Computer Equipment:

note payable (6% of 9000)

540

Short Ter Note payable (6%)

Wrong

Jan 29

Cash ($64,000 X 1/4 X 1.06)

16,960

Credit ($ 64,000 X 3/4 X 1.06)

50,880

Total Sales Tax (64,000 X 6%)

3,840

Interest payable

Incomplete. Please Re-Do

P10-16A

LO 2 [20-25 minutes]

The following transactions of Brooks Garrett occurred during 2012:

Apr 30

Garrett is party to a patent infringement lawsuit of $200,000. Garrett’s attorney

is certain it is remote that Garrett will lose this lawsuit.

Jun 30

Estimated warranty expense at 2% of sales of $400,000.

Jul 28

Warranty claims paid in the amount of $6,000.

Sep 30

Garrett is party to a lawsuit for copyright violation of $100,000. Garrett’s

attorney advises that it is probable Garrett will lose this lawsuit.

Garrett estimates warranty expense on sales for the second half of the year of

$500,000 at 2%.

Journalize required transactions, if any, in Garrett’s general journal.

Explanations are not required.

What is the balance in

Estimated warranty payable

?

Not required to enter

No Entry Required

Warranty expense

8,000

Eswtimated Warranty Payable

Indent Explanations when recording credits

Estimated Warranty Claims payable

6,000

Estimated Warranty Payable

Copyright lawsuit expense

100,000

Loss for lawsuit expense

Estimateed lawsuit payable

Estimated Warranty expense

Warranty Expense

Re-do upper portion

Ok

End Bal

12,000