Expert Answers

P11-10 (Comprehensive Depreciation Computations)

Kohlbeck Corporation, a manufacturer of steel products, began operations on October 1, 2009. The accounting department of Kohlbeck has started the fixed-asset and depreciation schedule presented on page 581. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel.

1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.

2. Land A and Building A were acquired from a predecessor corporation. Kohlbeck paid $800,000 for the land and building together. At the time of acquisition, the land had an appraised value of $90,000, and the building had an appraised value of $810,000.

3. Land B was acquired on October 2, 2009, in exchange for 2,500 newly issued shares of Kohlbeck’s common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $30 per share. During October 2009, Kohlbeck paid $16,000 to demolish an existing building on this land so it could construct a new building.

4. Construction of Building B on the newly acquired land began on October 1, 2010. By September 30, 2011, Kohlbeck had paid $320,000 of the estimated total construction costs of $450,000. It is estimated that the building will be completed and occupied by July 2012.

5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair market value at $40,000 and the salvage value at $3,000.

6. Machinery A’s total cost of $182,900 includes installation expense of $600 and normal repairs and maintenance of $14,900. Salvage value is estimated at $6,000. Machinery A was sold on February 1, 2011.

7. On October 1, 2010, Machinery B was acquired with a down payment of $5,740 and the remaining payments to be made in 11 annual installments of $6,000 each beginning October 1, 2010. The prevailing interest rate was 8%. The following data were abstracted from present-value tables (rounded). Present value of $1.00 at 8% Present value of an ordinary annuity of $1.00 at 8% 10 years .463 10 years 6.710 11 years .429 11 years 7.139 15 years .315 15 years 8.559 KOHLBECK CORPORATION Fixed-Asset and Depreciation Schedule For Fiscal Years Ended September 30, 2010, and September 30, 2011 Assets Acquisition Date Cost Salvage Depreciation Method Estimated Life in Years Depreciation Expense Year Ended September 30 2010 2011 Land A October 1, 2009 $

(1) N/A N/A N/A N/A N/A Building A October 1, 2009 (2) $40,000 Straight-line (3) $13,600 (4) Land B October 2, 2009 (5) N/A N/A N/A N/A N/A Building B Under Construction $320,000 to date — Straight-line 30 — (6) Donated Equipment October 2, 2009 (7) 3,000 150% declining-balance 10 (8) (9) Machinery A October 2, 2009 (10) 6,000 Sum-of-the-years’-digits 18 (11) (12) Machinery B October 1, 2010 (13) — Straight-line 20 — (14) N/A—Not applicable

Instructions

For each numbered item on the schedule above, supply the correct amount. Round each answer to the nearest dollar.

Question 1

(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). $

Question 2

(Depletion, Timber, and Extraordinary Loss) Conan O’Brien Logging and Lumber Company owns 3,000 acres of timberland on the north side of Mount Leno, which was purchased in 1998 at a cost of $550 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 $150,000, were destroyed, as well as the logging equipment, with a net book value of $300,000. 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 $200 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 $700,000. The timber can be sold for pulp wood at an estimated price of $3 per board foot. The value of the land is unknown, but must be considered nominal due to future uncertainties.

Determine the depletion cost per board foot for the timber harvested prior to the eruption of Mount Leno. (Round answer to 2 decimal places.) $ Prepare the journal entry to record the depletion prior to the eruption. Description/Account Debit Credit 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. $

Question 3

(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. What account should be charged for the $325,000? Account charged: 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(NNN) NNN-NNNN84 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. Account/Description Debit Credit (To record research and development costs) (To record costs to obtain patent #472-1001-84) (To record one year’s amortization expense) 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. Account/Description Debit Credit (To record legal cost of successfully defending patent) (To record one year’s amortization expense)

Question 4

(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 7/1/09 8-year franchise; expiration date 6/30/17 $ 48,000 10/1/09 Advance payment on laboratory space (2-year lease) 24,000 12/31/09 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 1/2/10 Patent purchased (10-year life) 84,000 3/1/10 Cost of developing a secret formula (indefinite life) 75,000 4/1/10 Goodwill purchased (indefinite life) 278,400 6/1/10 Legal fee for successful defense of patent purchased above 12,650 9/1/10 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.) Account/Description Debit Credit (To clear out the intangible asset account) (To establish accounts associated with franchises) (To establish accounts associated with rent) (To establish accounts associated with patents)