Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
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Chapter 9, Problem 3CP

Analyzing and Recording Long-Lived Asset Transactions with Partial-Year Depreciation

Palmer Cook Productions manages and operates two rock bands. The company entered into the following transactions during a recent year.

January 2 Purchased a tour bus for $80,000 by paying $20,000 cash and signing a $60,000 note due in two years.
January 8 The bus was painted with the logos of the two bands at a cost of $350, on account.
January 30 Wrote a check for the amount owed on account for the work completed on January 8.
February 1 Purchased new speakers and amplifiers and wrote a check for the full $12,000 cost.
February 8 Paid $250 cash to tune up the tour bus.
March 1 Paid $20,000 cash and signed a $190,000 five-year note to purchase a small office building and land. An appraisal indicated that the building and land contributed equally to the total price.
March 31 Paid $90,000 cash to acquire the goodwill and certain tangible assets of Kris’ Myth. Inc. The fair values of the tangible assets acquired were $20,000 for band equipment and $60,000 for recording equipment.

Required:

  1. 1. Analyze the accounting equation effects and record journal entries for each of the transactions.

  TIP: Goodwill is recorded as the excess of the purchase price over the fair value of individual assets.

  1. 2. For the tangible and intangible assets acquired in the preceding transactions, determine the amount of depreciation and amortization that Palmer Cook Productions should report for the quarter ended March 31. For convenience, the equipment and vehicle are depreciated the same way, using the straight-line method with a useful life of five years and no residual value. The building is depreciated using the double-declining-balance method, with a 10-year useful life and residual value of $20,000.

  TIP: Calculate depreciation from the acquisition date to the end of the quarter.

  1. 3. Prepare a journal entry to record the depreciation calculated in requirement 2.

(1)

Expert Solution
Check Mark
To determine

To indicate: The effect of given transactions, on the accounting equation, and journalize the transactions

Explanation of Solution

Accounting equation: Accounting equation is an accounting tool expressed in the form of equation, by creating a relation between resources or assets of a company and claims of resources to creditors and owners.

Accounting equation is expressed as shown below:

Assets = Liabilities + Stockholders' Equity

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Effect of transaction occurred on January 2:

Assets = Liabilities + Stockholders’ Equity
Cash (–$20,000)   Notes Payable (+$60,000)    
Vehicle (+$80,000)        

Table (1)

Prepare journal entry for the transaction occurred on January 2.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 2 Vehicle   80,000  
      Cash     20,000
      Notes Payable     60,000
    (To record purchase of equipment)      

Table (2)

Description:

  • Vehicle is an asset account. Since vehicle is bought, asset account increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
  • Notes Payable is a liability account. Since the amount to be paid increased, liability increased, and an increase in liability is credited.

Effect of transaction occurred on January 8:

Assets = Liabilities + Stockholders’ Equity
    Accounts Payable (+$350)   Repairs and Maintenance Expense (–$350)

Table (3)

Prepare journal entry for the transaction occurred on January 8.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 8 Repairs and Maintenance Expense   350  
      Accounts Payable     350
    (To record expense incurred on account)      

Table (4)

Description:

  • Repairs and Maintenance Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Accounts Payable is a liability account. Since the amount to be paid increased, liability increased, and an increase in liability is credited.

Effect of transaction occurred on January 30:

Assets = Liabilities + Stockholders’ Equity
Cash (–$350)   Accounts Payable (–$350)    

Table (5)

Prepare journal entry for the transaction occurred on January 30.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
January 30 Accounts Payable   350  
      Cash     350
    (To record payment of on account purchases)      

Table (6)

Description:

  • Accounts Payable is a liability account. Since the amount to be paid is paid, liability decreased, and a decrease in liability is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Effect of transaction occurred on February 1:

Assets = Liabilities + Stockholders’ Equity
Cash (–$12,000)        
Equipment (+$12,000)        

Table (7)

Prepare journal entry for the transaction occurred on February 1.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
February 1 Equipment   12,000  
      Cash     12,000
    (To record purchase of equipment)      

Table (8)

Description:

  • Equipment is an asset account. Since equipment is bought, asset account increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Effect of transaction occurred on February 8:

Assets = Liabilities + Stockholders’ Equity
Cash (–$250)       Repairs and Maintenance Expense (–$250)

Table (9)

Prepare journal entry for the transaction occurred on February 8.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
February 8 Repairs and Maintenance Expense   250  
      Cash     250
    (To record payment of expense)      

Table (10)

Description:

  • Repairs and Maintenance Expense is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

Effect of transaction occurred on March 1:

Assets = Liabilities + Stockholders’ Equity
Cash (–$20,000)   Notes Payable (+$190,000)    
Land ($105,000)        
Building (+$105,000)        

Table (11)

Prepare journal entry for the transaction occurred on March 1.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
March 1 Land   105,000  
    Building   105,000  
      Cash     20,000
      Notes Payable     190,000
    (To record purchase of land and building)      

Table (12)

Description:

  • Land is an asset account. Since land is bought, asset account increased, and an increase in asset is debited.
  • Building is an asset account. Since building is bought, asset account increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
  • Notes Payable is a liability account. Since the amount to be paid increased, liability increased, and an increase in liability is credited.

Effect of transaction occurred on March 31:

Assets = Liabilities + Stockholders’ Equity
Cash (–$90,000)        
Equipment ($80,000)        
Goodwill (+$10,000)        

Table (13)

Prepare journal entry for the transaction occurred on March 31.

Date Account Titles and Explanations Post. Ref. Debit ($) Credit ($)
March 31 Equipment   80,000  
    Goodwill   10,000  
      Cash     90,000
    (To record acquisition of equipment and goodwill)      

Table (14)

Description:

  • Land is an asset account. Since land is bought, asset account increased, and an increase in asset is debited.
  • Building is an asset account. Since building is bought, asset account increased, and an increase in asset is debited.
  • Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.

(2)

Expert Solution
Check Mark
To determine
The depreciation expense and amortization expense as on March 31

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.

Straight-line 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.

Formula of depreciation expense under straight-line method:

Depreciation expense}=Depreciable cost   ×    Depreciation rate(Cost–Residual value)×1Useful life

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.

Formula for double-declining-balance depreciation method:

Depreciation expense}=(Book value at the beginning of the period )  ×    Depreciation rate(Cost–Accumulated depreciation)×2Useful life

Determine the depreciation expense for the vehiclefor 3 months (from January2 to March 31) under straight-linemethod, if cost of vehicle is $80,000, useful life is 5 years, and residual value is $0.

Depreciation expense}=Depreciable cost   ×    Depreciation rate(Cost–Residual value)×1Useful life×Time period =($80,000$0)×15 years×312=$4,000

Determine the depreciation expense for the equipmentfor 2 months (from February 1 to March 31) under straight-linemethod, if cost of equipment is $12,000, useful life is 5 years, and residual value is $0.

Depreciation expense}=Depreciable cost   ×    Depreciation rate(Cost–Residual value)×1Useful life×Time period =($12,000$0)×15 years×212=$400

Determine the depreciation expense for the buildingfor 1 month (from March 1 to March 31) under double-declining-balancemethod, if cost of building is $105,000, useful life is 10 years, and accumulated depreciation is $0.

Depreciation expense}=Depreciable cost   ×    Depreciation rate(Cost–Accumulated depreciation)×2Useful life×Time period =($105,000$0)×210 years×112=$1,750

The intangible assets would be amortized over their useful life or definite life or limited life, and those with unlimited life are not amortized. Goodwill has unlimited life and hence, could not be amortized.

(3)

Expert Solution
Check Mark
To determine

To journalize: The entries for depreciation expense computed in Requirement (2)

Explanation of Solution

Prepare journal entry for the depreciation expense reported on March 31 (Refer to Requirement (2) for the expense values).

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
March 31 Depreciation Expense–Vehicle   4,000  
    Depreciation Expense–Equipment   400  
    Depreciation Expense–Building   1,750  
      Accumulated Depreciation–Vehicle     4,000
      Accumulated Depreciation–Equipment     400
      Accumulated Depreciation–Building     1,750
    (To record depreciation expense)      

Table (15)

Description:

  • Depreciation Expense–Vehicle is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Depreciation Expense–Equipment is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Depreciation Expense–Building is an expense account. Since expenses decrease equity, equity value is decreased, and a decrease in equity is debited.
  • Accumulated Depreciation–Vehicle is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.
  • Accumulated Depreciation–Equipment is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.
  • Accumulated Depreciation–Building is a contra-asset account, and contra-asset accounts would have a normal credit balance, hence, the account is credited.

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Chapter 9 Solutions

Fundamentals Of Financial Accounting

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