Chapter 9, Problem 8AP

a.

To determine

Prepare journal entries to record the given transactions.

Explanation of Solution

Plant Assets:

Plant assets are the long-term assets used by the company, which have physical existence, and can be seen, touched and felt. Some of the examples of the plant assets include equipment, buildings, furniture and fixtures, plant, property, and land.

1. 1. Prepare the journal entry to record the purchase of land and building for cash.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Land		90,000
	Building		810,000
	Cash			900,000
	(To record the purchase of land, and building for cash)

Table (1)

Working Note:

Compute the amount to be recorded on the books for each of the assets.

Assets	Fair Market Value (in $)	Percent of total=$\frac{\left(\begin{array}{l}\text{Market value of }\\ \text{specific asset}\end{array}\right)}{\left(\begin{array}{l}\text{Market value of }\\ \text{total assets}\end{array}\right)}$	Allocation of the purchase price based on the percentage of total$\left(\begin{array}{l}\$900,000\times \text{Specific asset's}\\ \text{ percentage of total}\end{array}\right)$
Land	80,000	$\frac{\$80,000}{\$800,000}$ =10%	90,000
Building	720,000	$\frac{\$720,000}{\$800,000}$=90%	810,000
Total	$800,000		$900,000

Table (2)

• Land is an asset account. Since land is purchased, the Land account is increased. Therefore, debit Land account by $90,000.
• Building is an asset account. Since building is purchased, the Building account is increased. Therefore, debit Building account by $810,000.
• Cash is an asset account. Since cash is paid for group purchase, amount of cash has reduced. Therefore, credit Cash account by $900,000.

1. 2. Prepare the journal entry to record the payment made for the construction of parking lot for customers.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Land improvement		30,000
	Cash			30,000
	(To record the payment made for the land improvement)

Table (3)

• Land improvement is an asset account and the Land account is increased. Therefore, debit Land account by $30,000.
• Cash is an asset account and it decreases the value of asset. Therefore, credit Cash account by $30,000.

1. 3. Prepare the journal entry to record the payment made for the construction of a new entrance.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Building		25,000
	Cash			25,000
	(To record the payment made for the construction)

Table (4)

• Building is an asset account and it increases the value of asset. Therefore, debit building account by $25,000.
• Cash is an asset account and it decreases the value of asset. Therefore, credit Cash account by $25,000.

1. 4. 5, and 6. Prepare the journal entry to record the purchase of store equipment and the payment made for the freight and repairs charges.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Equipment		74,900
	Freight expenses		220
	Repair expenses		1,500
	Cash			76,620
	(To record the purchase of equipment, and the payment made for the freight and repair charges)

Table (5)

• Equipment is an asset account. Since equipment is purchased, the equipment account is increased. Therefore, debit Equipment account by $74,900.
• A freight expense is an expense account and it is increased by $220. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Freight expenses account with $220.
• A repair expense is an expense account and it is increased by $1,500. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Repair expenses account with $1,500.
• Cash is an asset account and it decreases the value of asset. Therefore, credit Cash account by $76,620.

7. Prepare the journal entry to record the payment made for the umbrella holder.

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Building-Umbrella holder		40
	Cash			40
	(To record the payment made for the construction)

Table (6)

• Building-umbrella holder is an expense account and it is increased by $40. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Building-umbrella holder account with $40.
• Cash is an asset account and it decreases the value of asset. Therefore, credit Cash account by $40.

b.

To determine

Prepare journal entire to record the depreciation expenses for the year-end December 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:

In straight-line deprecation method the asset is used evenly throughout its useful life. This is because the amount of depreciation in straight line remains same for all the years of the useful life of the asset.

Double declining balance method:

Under the Double declining balance method, the asset is used twice the rate of straight-line method of the declining balance of the asset. This is because in order to determine the declining balance depreciation rate, the annual depreciation under straight-line method is multiplied with 2.

Prepare the journal entries to record the depreciation expenses for building under straight line method as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation Expense (E–) (1)		31,000
	Accumulated Depreciation –          Building (A–)			31,000
	(To record depreciation expense for building)

Table (7)

Description:

• Depreciation Expense is an expense account and it is increased by $31,000. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Depreciation Expenses account with $31,000.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $31,000.

Working Notes:

Compute depreciation expense:

$\begin{array}{c}\text{Depreciation = }\frac{\left[\begin{array}{l}\text{Acquisition cost of building}+\text{Buidling}\\ \text{(New entrance) – Salvage value}\end{array}\right]}{\text{Useful life}}\\ \text{= }\frac{\text{\$810,00 }+\text{\$25,000}-\text{\$60,000}}{\text{25 years}}\\ \text{= \$31,000}\end{array}$ (1)

Prepare the journal entries to record the depreciation expenses for Parking lot under straight line method as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation Expense (E–) (2)		2,500
	Accumulated Depreciation –          Parking lot (A–)			2,500
	(To record depreciation)

Table (8)

Description:

• Depreciation Expense is an expense account and it is increased by $2,500. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Depreciation Expenses account with $2,500.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $2,500.

Working Notes:

Compute depreciation expense:

$\begin{array}{c}\text{Depreciation = }\frac{\left[\text{Parking lot – Salvage value}\right]}{\text{Useful life}}\\ \text{= }\frac{\text{\$30,000}-\text{0}}{\text{12 years}}\\ \text{= \$2,500}\end{array}$ (2)

Prepare the journal entries to record the depreciation expenses for equipment under double declining method as follows:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Depreciation Expense (E–) (5)		16,344.25
	Accumulated Depreciation –          Equipment (A–)			16,344.25
	(To record depreciation expense)

Table (9)

Description:

• Depreciation Expense is an expense account and it is increased by $16,344.25. Expenses are the component of stockholder’s Equity and it decreases the value of equity. Therefore, debit Depreciation Expenses account with $16,344.25.
• Accumulated Depreciation is a contra-asset account and would have a normal credit balance. Therefore, credit Accumulated Depreciation account with $16,344.25.

Working Notes:

Compute depreciation expense:

$\begin{array}{c}\text{Double declining rate = }\left[\frac{100}{8\text{years}}\right]\times 2\\ =25\%\end{array}$ (3)

$\begin{array}{l}\begin{array}{l}\text{Acquisition cost}\\ \text{of Equipment}\end{array}\}\text{ = }\left[\begin{array}{l}\text{Equipment value}\\ -\text{Sales tax (7\%)}\end{array}\right]+\left[\begin{array}{l}\text{Freight expense}+\\ \text{repair expenses}\end{array}\right]\\ =\left[\text{\$74,900}-\text{\$5,243}\right]+\$220+\$1,500\\ \text{= \$71,377}\end{array}$ (4)

$\begin{array}{c}\text{Depreciation = }\left[\begin{array}{l}\text{Acquisition cost of}\\ \text{Equipment– Salvage value}\end{array}\right]\times \text{Double declining rate}\\ =\left[\text{\$71,377}-\text{\$6,000}\right]\times \frac{25}{100}\\ \text{= \$16,344}\text{.25}\end{array}$ (5)