Chapter 11, Problem 20P

1.

To determine

Prepare a schedule that analyzes each of the plant assets of Company P during 2016.

Explanation of Solution

Property, Plant, and Equipment:

Property, Plant, and Equipment refers to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.

Prepare a schedule that analyzes each of the plant assets of Company P during 2016 as follows:

Corporation P
Analysis of Changes in Plant Assets
For the Year Ended December 31, 2016
Particulars	Balance as on December 31, 2015	Increase	Decrease	Balance as on December 31, 2016
Land	$350,000	$438,000 (1)	-	$788,000
Land improvements	180,000	-	-	180,000
Building	1,500,000	-	-	1,500,000
Machinery and equipment	1,158,000	287,000 (2)	58,000	1,387,000
Automobiles	150,000	19,000 (3)	18,000	151,000
Totals	$3,338,000	$744,000	$76,000	$4,006,000

Table (1)

Working note (1):

Compute the cost of land acquired:

Particulars	Amount ($)
Stock exchanged	$380,000
Legal fees and title insurance	23,000
Razing existing building	35,000
Cost of land acquired	438,000

Table (2)

Note:

10,000 shares which had a market price of $38 were exchanged $\left(\text{\$10,000}\times \text{\$38}\right)$.

Working note (2):

Compute the cost of machinery and equipment:

Particulars	Amount ($)
Invoice cost	$260,000
Installation  cost	27,000
Cost of Machinery	287,000

Table (3)

Working note (3):

1. Compute the depreciation rate under double declining rate:

Useful life = 2 years

$\begin{array}{c}\text{Depreciation rate}=\frac{\text{100\%}}{\text{2 years}}\times 1.5\\ =75\%\end{array}$

2. Calculate the carrying cost of trade –in:

$\begin{array}{c}\text{Carrying value}=\text{cost of auto mobile}-\text{Depreciation}\\ =\$18,000-\left[\$18,000\times \frac{75}{100}\right]\\ =\$18,000-\$13,500\\ =4,500\end{array}$

3. Compute the cost of new automobiles:

Particulars	Amount ($)
Carrying amount of trade-in	$4,500
Add: Cash paid	15,250
Sub total	19,750
Less: Loss on trade-in	750
Cost recorded for new automobile	19,000

Table (4)

2.

To determine

Prepare a schedule screening the depreciation expense for each asset of Company P for the year ended December 31, 2016.

Explanation of Solution

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Straight-line depreciation method: The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset is referred to as straight-line method.

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method.

Prepare a schedule screening the depreciation expense for each asset of Company P for the year ended December 31, 2016 as follows:

Depreciation and amortization expense:

Company B
Depreciation and amortization expense
For the year ended December 31, 2016
Particulars	$
Depreciation expense for Land improvement (5)	$12,000
Depreciation expense for building (7)	$86,250
Depreciation expense for equipment and machinery (11)	$140,150
Depreciation expense for automotive equipment (10)	$19,000
Total depreciation and amortization expense for 2016	$257,400

Table (5)

Working note (4):

Compute the straight line rate:

Useful life = 15 years

$\begin{array}{c}\text{Depreciation rate}=\frac{\text{100\%}}{\text{15 years}}\\ =6.67\%\end{array}$

Working note (5):

Calculate the depreciation expense of Land improvement:

$\begin{array}{c}\text{Depreciation expense}=\text{Land improvement}\times \text{Depreciation Rate }(5)\\ =\text{\$180,000}\times \frac{6.67}{100}\\ =\$12,000\end{array}$

Working note (6):

Compute the depreciation rate under 150% balance method:

Useful life = 20 years

$\begin{array}{c}\text{Depreciation rate}=\frac{\text{100\%}}{\text{20 years}}\times 1.5\\ =7.5\%\end{array}$

Working note (7):

Calculate the depreciation expense of building under 150%-declining balance method.

$\begin{array}{c}\text{Depreciation expense}=\left(\begin{array}{l}\text{Aquisition cost}-\\ \text{Accumulated depreciation}\end{array}\right)\times \text{Depreciation Rate }(6)\\ =\left(\text{\$1,500,000}-\$350,000\right)\times \frac{7.5}{100}\\ =\$1,150,000\times \frac{7.5}{100}\\ =\$86,250\end{array}$

Working note (8):

Calculate the depreciation expense of remaining machinery under straight line method.

$\begin{array}{c}\text{Depreciation expense = }\frac{\left(\begin{array}{l}\text{Cost of acquisition }-\\ \text{Residual value}\end{array}\right)-\left(\begin{array}{l}\text{Purchase cost of machinery}\\ \text{sold on March31, 2016 }\end{array}\right)}{\text{Estimated useful life}}\\ =\frac{\left(\$1,158,000-\$0\right)-\$58,000}{\text{10 years}}\\ =\$110,000\end{array}$

Working note (9):

Calculate the depreciation expense for machine purchased on January 2, 2016 under straight line method.

$\begin{array}{c}\text{Depreciation expense = }\left[\frac{\left(\begin{array}{l}\text{The cost of machine }\\ \text{purchased}+\text{Installation cost}\end{array}\right)}{\text{Estimated useful life}}\right]\\ =\frac{\$260,000+\$27,000}{\text{10 years}}\\ =\$28,700\end{array}$

Working note (10):

Calculate the depreciation expense for machinery sold under straight line method.

$\begin{array}{c}\text{Depreciation expense = }\left[\begin{array}{l}\frac{\left(\text{Cost of machine}-\text{Residual value }\right)}{\text{Estimated useful life}}\times \\ \frac{\text{Depreciation incurred}}{\text{Months in a year}}\end{array}\right]\\ =\frac{\$58,000-\$0}{\text{10 years}}\times \frac{\text{3 months (January to March)}}{12\text{ months}}\\ =\$1,450\end{array}$

Working note (11):

Calculate the total depreciation expense for machinery for 2016.

$\begin{array}{c}\begin{array}{l}\text{Total depreciation}\\ \text{expense}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Depreciation expense for remaining machinery}+\\ \text{Depreciation expense for machinery purchased}+\\ \text{Depreciation expense for machinery sold}\end{array}\right]\\ =\$110,000(8)+\$28,700(9)+\$1,450(10)\\ =\$140,150\end{array}$

Working note (12):

Compute the depreciation rate under 150% balance method:

Useful life = 3 years

$\begin{array}{c}\text{Depreciation rate}=\frac{\text{100\%}}{\text{3 years}}\times 1.5\\ =50\%\end{array}$

Working note (13):

Calculate the depreciation expense of automobiles under 150%-declining balance method.

$\begin{array}{c}\text{Depreciation expense}=\left(\begin{array}{l}\text{Aquisition cost}-\\ \text{Accumulated depreciation}\end{array}\right)\times \text{Depreciation Rate }(12)\\ =\left(\text{\$150,000}-\$112,000\right)\times \frac{50}{100}\\ =\$38,000\times \frac{50}{100}\\ =\$19,000\end{array}$

3.

To determine

Prepare a schedule screening the gain or loss from disposal of assets of Company P that would appear on the income statement for the year ended December 31, 2016.

Explanation of Solution

Prepare a schedule screening the gain or loss from disposal of assets of Company B that would appear on the income statement for the year ended December 31, 2016 as follows:

Company B
Gain or loss from disposal of assets
For the year ended December 31, 2016
Particulars	Amount	Amount
Gain on sale of machinery:
Selling price	$36,500
Less: Carrying value of machinery sold (15)	$33,350	$3,150
Less: Loss from trade-in:
Carrying amount of trade-in	4,500
Less: Trade in allowed $\left(\$9,000-\$15,250\right)$	$3,750	750
Net gain on asset disposal for 2016		$2,400

Table (6)

Working note (14):

Calculate the accumulated depreciation for machine sold.

$\begin{array}{c}\text{Depreciation expense = }\left[\begin{array}{l}\frac{\text{Cost of machinery}}{\text{Estimated useful life}}\\ \times \text{Number of year expense incurred}\end{array}\right]+\left[\begin{array}{l}\text{Depreciation }\\ \text{expense for 2016}\end{array}\right]\\ =\frac{\$58,000}{\text{ 10 years}}\times 4\text{ years (2012 to 2015)}+\$1,450(10)\\ \text{=\$23,200}+\$1,450(10)\\ =\$24,650\end{array}$

Working note (15):

Calculate the carrying cost of machinery sold:

$\begin{array}{c}\text{Carrying value}=\text{cost of machiner sold}-\text{Depreciation}\\ =\$58,000-\$24,650\text{ (14)}\\ =\$33,350\end{array}$