Columbia College

ACCT 383

Use the following to answer questions 1-3:

On January 1, 2006, Hobart Mfg. Co. purchased a drill press at a cost of $36,000. The drill press is expected to last 10 years and have a residual value of $6,000. During its ten-year life, the equipment is expected to produce 500,000 units of product. In 2006 and 2007, 25,000 and 84,000 units, respectively, were produced.

1)Required:

Compute depreciation expense for 2006 and 2007 and the book value of the drill press at December 31, 2006 and 2007, assuming the double-declining-balance method is used.

2. Required:

Compute depreciation expense for 2006 and 2007 and the book value of the drill press at December 31, 2006 and 2007, assuming the sum-of-the-years'-digits method is used.

3. Required:

Compute depreciation expense for 2006 and 2007 and the book value of the drill press at December 31, 2003 and 2004, assuming the units-of-production method is used.

Use the following to answer questions 04-07:

On January 1, 2006, Morrow Inc. purchased a spooler at a cost of $40,000. The equipment is expected to last eight years and have a residual value of $4,000. During its eight-year life, the equipment is expected to produce 250,000 units of product. In 2006 and 2007, 42,000 and 76,000 units respectively were produced.

4. Required:

Compute depreciation expense for 2006 and 2007 and the book value of the spooler at December 31, 2006 and 2007, assuming the straight-line method is used.

5. Required:

Compute depreciation expense for 2006 and 2007 and the book value of the spooler at December 31, 2006 and 2007, assuming the double-declining-balance method is used.

6. Required:

Compute depreciation expense for 2006 and 2007 and the book value of the spooler at December 31, 2006 and 2007, assuming the sum-of-the-years'-digits method is used.

7. Required:

Compute depreciation expense for 2006 and 2007 and the book value of the spooler at December 31, 2006 and 2007, assuming the units-of-production is used.

8. Nature Power Company uses the composite method and straight-line depreciation for its power plant equipment. The Apple River plant, which began generating electricity January 1, 2006, had the following equipment:

Required:

1. Compute the composite depreciation rate.
2. Compute the average service life.
3. Compute 2006 depreciation expense.

 Use the following to answer questions 9-10:

On April 1, 2006, Parks Co. purchased machinery at a cost of $42,000. The machinery is expected to last ten years and to have a residual value of $6,000.

Required:

9. Compute depreciation expense for 2006 and 2007 and the book value of the machinery at December 31, 2006 and 2007, assuming the sum-of-the-years'-digits method is used.

10. Compute depreciation expense for 2006 and 2007 and the book value of the machinery at December 31, 2006 and 2007, assuming double-declining balance method is used.

11. Meca Concrete purchased a mixer on January 1, 2004, at a cost of $45,000. Straight-line depreciation for 2004 and 2005 was based on an estimated 8-year life and $3,000 estimated residual value. In 2006, Meca revised its estimate and now believes the mixer will have a total service life of only six years, and that the residual value will be only $2,000.

12. Eckland Manufacturing Co. purchased equipment on January 1, 2004, at a cost of $90,000. Depreciation for 2004 and 2005 was based on an estimated eight-year life and $2,000 estimated residual value. In 2006, Eckland revised its estimate and now believes the equipment will have a total service life of only six years.

13. Zvinakis Mining Company paid $200,000 for the rights to mine lead in Southeast Missouri. The cost to drill and erect a mine shaft was $2,400,000 and equipment to process the lead ore before shipment to the smelter was $1,800,000. The mine is expected to yield 2,000,000 tons of ore during the 5 years it is expected to be operating. The equipment is salvageable and is expected to be worth $150,000 when mining is concluded. The mine started operations on April 30, 2006. In 2006, 300,000 tons of ore were extracted and in 2007, 700,000 tons were mined.

Required:

1. Compute the depletion rate and the units-of-production depreciation rate.
2. Compute depletion and depreciation for 2006 and 2007.

14. On February 20, 2006, Genoa Mining Company incurred costs of $3,600,000 to acquire and prepare to extract an estimated 4,000,000 tons of mineral deposits. 450,000 tons of ore were mined in 2006. At the beginning of 2007, Genoa geologists estimated that 3,900,000 tons of ore still remained. 700,000 tons of ore were mined in 2007.

Required:

Compute depletion expense for 2006 and 2007.

15. Weaver Textiles Inc. has used the straight-line method for depreciation of its equipment since it started business in 2002. At the beginning of 2006, the company decided to change to the double-declining-balance (DDB) method. Depreciation expense as reported and as it would have been reported if the company had always used DDB is listed below:

Required:

What journal entry, if any, should Weaver make to record the effect of the accounting change? Explain.

16. Gonzaga Company has used the double-declining-balance method for depreciation since it started business in 2002. At the beginning of 2006, the company decided to change to the straight-line method. Depreciation expense as reported and what it would have been reported if the company had always used straight-line is listed below:

Required:

What journal entry, if any, should Gonzaga make to record the effect of the accounting change? Explain.

17. XL Computer's internal auditors in December, 2006, discovered that machinery costing

$800,000 was charged to expense in 2004. The asset had an expected life of 10 years with no salvage value. XL would have recorded a half year of depreciation in 2004.

Required:

Prepare the necessary correcting entry that would be made in 2006 (ignore income taxes), and the entry to record depreciation for 2006.

18. Atlas Trucking incurred the following costs during 2006:

(a.) Spent $15,000 on a major overhaul for a tractor-trailer rig. The overhaul is expected to increase the service life of the rig by three years.

(b.) Repaired the air conditioning system for $3,000.

(c.) Rearranged and reconfigured the maintenance, loading, and unloading facilities at a cost of $75,000. The rearrangement is expected to result in substantial cost savings and increased efficiency over the next several years.

Required:

Prepare journal entries to record the above costs.

19. On September 30, 2006, Sternberg Company sold for $12,000, equipment that it purchased on March 31, 2003, for $24,000. The asset was being depreciated over a five-year life using straight-line, with depreciation based on months in service. No residual value was anticipated.

20. Ellen's Antiques reported the following on its December 31, 2005, balance sheet: Equipment…..$4,000,000

Accumulated depreciation—equipment….$3,150,000

In a footnote, Ellen's indicates that it uses straight-line depreciation over 8 years and estimates salvage value as 10% of cost.

Required: Compute the average age of Ellen's equipment at 12/31/05.

21. Comet Cleaning Co. reported the following on its December 31, 2005, balance sheet: Equipment (at cost)….. $3,000,000

In a footnote, Comet indicates that it uses straight-line depreciation over 6 years and estimates salvage value as 10% of cost. Comet's equipment averages 4.5 years at December 31, 2005.

Required:

What is the book value of Comet's equipment at December 31, 2005?

22. In the table below, data on depreciation for equipment are shown. Some data are missing.

Required: Fill in the missing data in the table.

Use the following to answer questions 123-124:

El Dorado Foods Inc. owns a chain of specialty stores in the Pacific Northwest. Recently, four of the stores have experienced declining profits due to market saturation in the area. As a result, management gathered data about possible impairment of operational assets. The information gathered was as follows:

Book value: $17.5 million Fair value:              $14.9 million

Undiscounted sum of future cash flows: $16.5 million

23. Required:

Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.

24. Required:

Assume that the undiscounted sum of future cash flows is $18.2 million, instead of $16.5 million. Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.

25. Required: Determine the amount, if any, of the goodwill impairment loss that Dooling must recognize on these assets.

26. Assume the same facts as above, except that the fair value of Oxford (the reporting unit) is

$225 million.

Required: Determine the amount, if any, of the goodwill impairment loss that Dooling must recognize on these assets.

27. In its 2004 annual report to shareholders, Martin Marietta Materials, Inc. included the following in its financial statement footnotes:

NOTE E: PROPERTY, PLANT AND EQUIPMENT, NET

December 31

(in thousands)                                                                            2004                         2003

Land and improvements                                                        $ 299,729           $ 280,926 Mineral reserves                                                              190,247                           184,955

Buildings                                                                                85,075                                 80,571

Machinery and equipment                                                   1,674,476             1,611,403

Construction in progress                                                 60,010                                 47,610

2,309,537             2,205,465

Less allowances for depreciation and

depletion                                                                                   (1,244,322)          (1,163,033)

Total                                                                                            $ 1,065,215          $ 1,042,432

In another footnote, the company reported:

Depreciation, depletion and amortization were as follows:

Finally, the company stated the following among its accounting policies: "Depletion of mineral deposits is calculated over estimated recoverable quantities, principally by the units- of-production method."

Required:

Compute the percentage of estimated recoverable quantities of mineral deposits depleted in 2004.

Essay

Instructions:

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

28. Notsofast Inc. acquired land for $50,000 on 7/1/05. It erroneously recorded the full amount as an expense. Explain what Notsofast must do when it discovers the error in 2006.

29. Briefly explain the following statement. Depreciation is a process of cost allocation, not valuation.

30. Briefly discuss the factors that determine the service life of a depreciable asset.

31. Briefly differentiate between activity-based and time-based allocation methods.

32. Briefly discuss why straight-line is most common depreciation method used in practice.

33. Briefly explain how a change in depreciation method is handled.

34. Briefly explain the differences between the terms depreciation, depletion, and amortization.

35. Briefly explain the disclosures that are required relative to depreciable assets.

36. How might the terrorist attacks of September 11, 2001 affect the impairment of operational assets for an aircraft manufacturer like The Boeing Company?

37. In its 2001 annual report to shareholders, American Airlines disclosed the following in one of its financial statement footnotes:

In conjunction with the acquisition of TWA, coupled with revisions to the Company's fleet plan to accelerate the retirement dates of its Fokker 100 aircraft, during the second quarter of 2001 the Company determined these aircraft were impaired under SFAS 121. As a result, during the second quarter of 2001, the Company recorded an asset impairment charge of approximately $586 million…

Required:

Explain how American Airlines determined the impairment described in the footnotes.