Chapter 9, Problem 9.4AP

(a)

To determine

Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the salvage value is shown as below:

$\text{Depreciation cost = }\frac{\left(\text{Cost of the asset-Salvage value}\right)}{\text{Estimated useful life of the asset}}$

To Record: the journal entries for the accounts related property, plant, and equipment.

Explanation of Solution

Record the journal entries for the accounts related property, plant, and equipment.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2017
April	1	Land		4,400,000
		Cash			1,100,000
		Notes Payable			3,300,000
		(To record the issue of notes and cash paid for land purchase)
May	1	Depreciation Expense                   (1)		93,333
		Accumulated Depreciation-Equipment			93,333
		(To record the depreciation for the equipment sold )
May	1	Cash		300,000
		Accumulated Depreciation-Equipment                                    (2)		2,333,333
		Loss on Disposal of Plant Assets (3)		166,667
		Equipment			2,800,000
		(To record the sale of equipment)
June	1	Cash		900,000
		Notes Receivable		2,700,000
		Land			1,400,000
		Gain on Disposal of Plant Asset(4)			2,200,000
		(To record notes received on land sale)
July	1	Equipment		2,200,000
		Cash			2,200,000
		(To record purchase of equipment)
December	31	Depreciation Expense                   (5)		100,000
		Accumulated Depreciation-Equipment			100,000
		(To record  depreciation for equipment retired)
December	31	Accumulated Depreciation-Equipment                                    (6)		1,000,000
		Equipment			1,000,000
		(To record retirement of equipment)

Table (1)

Working Notes:

Calculate the current year depreciation for equipment sold on May 1, 2017.

Cost of the equipment =$2,800,000

Useful life= 10 years

Number of months used= 4 months (January 1, 2017- April 30, 2017)

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost}}{\text{Useful life}}\times \frac{\text{Number of month used}}{\text{12}}\\ =\frac{\$2,800,000}{10}\times \frac{4}{12}\\ =\$93,333\end{array}$ (1)

Calculate the amount of accumulated depreciation for equipment sold on May 1, 2017.

Cost of the equipment =$2,800,000

Useful life= 10 years

Number of years used= 8 years (January 1, 2009-December 31, 2016)

Number of months used in 2017 = 4 months (January 1, 2017-April 30, 2017)

$\begin{array}{c}\text{Accumulated depreciation }=\left[\begin{array}{l}\text{Cost}\times \frac{\text{Number of years used}}{\text{Useful life}}\\ \text{+Current year depreciation}\end{array}\right]\\ =\$2,800,000\times \frac{8}{10}+\$93,333\left(1\right)\\ =\$2,333,333\end{array}$ (2)

Calculate the amount of gain / (loss) on disposal of equipment.

$\begin{array}{c}\text{Gain/loss on disposal of asset = Sale}\text{proceeds}-\text{Book}\text{value}\\ \text{=Cash}\text{received}-\left(\begin{array}{l}\text{Equiment – }\\ \text{Accumulated Depreciation }\end{array}\right)\\ \text{= \$300,000}-\left(\text{\$2,800,000– \$2,333,333}\left(2\right)\right)\\ =\$300,000-\$466,667\\ \text{= }\left(\text{\$166,667}\right)\end{array}$ (3)

Calculate the amount of gain / (loss) on disposal of land.

$\begin{array}{c}\text{Gain/loss on disposal of land = Sale}\text{proceeds}-\text{Cost}\text{of}\text{land}\\ \text{=}\left(\text{Cash}+\text{Notes}\text{received}\right)-\text{Cost}\text{of}\text{land}\\ \text{= }\left(\text{\$900,000+\$2,700,000}\right)-\$1,400,000\\ \text{= \$2,200,000}\end{array}$ (4)

Calculate the amount of depreciation for equipment that is retired on December 31, 2017.

Cost of the equipment =$1,000,000

Useful life= 10 years

Number of months used in 2017 = 12 months (January 1, 2017-December 31, 2017)

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost}}{\text{Useful life}}\times \frac{\text{Number of month used}}{\text{12}}\\ =\frac{\$1,000,000}{10}\times \frac{12}{12}\\ =\$100,000\end{array}$ (5)

Calculate the amount of accumulated depreciation for equipment retired on December 31, 2017.

Cost of the equipment =$1,000,000

Useful life= 10 years

Number of years used= 10 years (January 1, 2007-December 31, 2017)

$\begin{array}{c}\text{Accumulated depreciation }=\left[\text{Cost}\times \frac{\text{Number of years used}}{\text{Useful life}}\right]\\ =\$1,000,000\times \frac{10}{10}\\ =\$1,000,000\end{array}$ (6)

Description:

April 1: Issued notes and cash paid to purchase land

• Land is an asset and is increased by $4,400,000 due to purchase of land. Therefore, Land account is debited with $4,400,000.
• Cash is an asset and is decreased by $1,100,000 due to the amount paid on purchase of land. Therefore, Cash account is credited with $1,100,000.
• Notes Payable is a liability and is increased by $3,300,000 due to the purchase of land. Therefore, Notes payable account is credited with $3,300,000.

May 1:  Record Depreciation expense for the equipment sold.

• Depreciation expense is an expense, and it decreases the stockholder’s equity by $93,333. Therefore, Depreciation expense – Equipment is debited with $93,333.
• Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $93,333 that decreases the value of assets by $93,333. Therefore, the Accumulated depreciation-Equipment account is credited with $93,333.

May 1: Sale of equipment

• Cash is an asset and increased by $300,000 due to sale of equipment. Therefore, Cash account is debited with $300,000.
• Accumulated depreciation-Equipment is a contra asset with a normal credit balance. Its decreased value increases the value of the asset by $2,333,333. Therefore, Accumulated depreciation-Equipment account is debited with $2,333,333.
• Loss on disposal of Plant assets decreases the revenue and thus the stockholders’ equity is decreased by $166,667. Therefore, the Loss on disposal of plant assets account is debited with $166,667.
• Equipment is an asset and decreased due to sale of equipment by $2,800,000. Therefore, Equipment account is credited with $2,800,000.

June 1:  Cash and Notes Received on sale of land.

• Cash is an asset and is increased by $900,000 due to the amount received on sale of land. Therefore, Cash account is debited with $900,000.
• Notes Receivable is an asset and is increased by $2,700,000 due to the sale of land. Therefore, Notes receivable account is debited with $2,700,000.
• Land is an asset and is decreased by $1,400,000 due to purchase of land. Therefore, Land account is debited with $1,400,000.

• Gain on disposal of Plant assets increases the revenue and thus the stockholders’ equity is increased by $2,200,000. Therefore, the Gain on disposal of plant assets account is credited with $2,200,000.

July 1: Purchased equipment for cash

• Equipment is an asset and increased due to purchase of equipment by $2,200,000. Therefore, Equipment account is debited with $2,200,000.
• Cash is an asset and is decreased by $2,200,000 due to the amount paid on purchase of equipment. Therefore, Cash account is credited with $2,200,000.

December 31:Record depreciation for the retirement of equipment

• Depreciation expense is an expense, and it decreases the stockholder’s equity by $100,000. Therefore, Depreciation expense – Equipment is debited with $100,000.
• Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $100,000 that decreases the value of assets by $100,000. Therefore, the Accumulated depreciation-Equipment account is credited with $100,000.

December 31: Record the retirement of equipment

• Accumulated depreciation is a contra asset with a normal credit balance. It is decreased by $1,000,000 that increases the value of assets by $1,000,000. Therefore, the Accumulated depreciation-Equipment account is debited with $1,000,000.
• Equipment is an asset and decreased due to disposal of equipment by $1,000,000. Therefore, Equipment account is credited with $1,000,000.

(b)

To determine

To record: the adjusting entries required at December 31, 2017.

Explanation of Solution

Record the adjusting entries required at December 31, 2017.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2017
December	31	Depreciation Expense                   (7)		2,435,000
		Accumulated Depreciation-Building			2,435,000
		(To record the depreciation for the building )
December	31	Depreciation Expense                   (8)		14,730,000
		Accumulated Depreciation-Equipment			14,730,000
		(To record the depreciation for the equipment )			93,333
December	31	Interest Expense                         (11)		148,500
		Interest Payable			148,500
		(To record the interest paid on notes payable)
December	31	Interest Receivable		78,750
		Interest Revenue                      (12)			78,750
		(To record interest received on notes receivable)

Table (2)

Working notes:

Calculate the current year depreciation for building as on December 31, 2017.

Cost of the Building =$97,400,000

Useful life= 40 years

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost}-\text{Salvage}\text{value}}{\text{Useful life}}\\ =\frac{\$97,400,000-\$0}{40\text{years}}\\ =\$2,435,000\end{array}$ (7)

Calculate the total depreciation expense for equipment for 2017.

$\begin{array}{c}\text{Total}\text{Depreciation }=\left(\begin{array}{l}\text{Depreciation}\text{expense}\\ \text{for}\text{remaing}\text{cost}\\ \text{of}\text{equipment}\end{array}\right)+\left(\begin{array}{l}\text{Deperciation}\text{expense}\\ \text{for}\text{new}\text{equipment}\end{array}\right)\\ =\$14,620,000\left(9\right)+\$110,000\left(10\right)\\ =\$14,730,000\end{array}$ (8)

Calculate the remaining cost of the equipment as on December 31, 2017.

Particulars	Amount ($)
Cost of the equipment as on January 1, 2017	150,000,000
Less: Sale of equipment on  May 1, 2017	(2,800,000)
Retired equipment on December 31, 2017	(1,000,000)
Remaining cost of the equipment	146,200,000

Table (4)

Calculate the depreciation expense for the remaining cost of the equipment.

Remaining Cost of the equipment =$146,200,000(Refer Table 4)

Useful life= 10 years

Number of months used in 2017 = 12 months (January 1, 2017-December 31, 2017)

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost}}{\text{Useful life}}\times \frac{\text{Number of months used}}{\text{12}}\\ =\frac{\$146,200,000}{10}\times \frac{12}{12}\\ =\$14,620,000\end{array}$ (9)

Calculate the depreciation expense for the cost of the new equipment.

Cost of the new equipment purchased on July 1, 2017 =$2,200,000

Useful life= 10 years

Number of months used in 2017 = 6 months (July 1, 2017-December 31, 2017)

$\begin{array}{c}\text{Depreciation }=\frac{\text{Cost}}{\text{Useful life}}\times \frac{\text{Number of months used}}{\text{12}}\\ =\frac{\$2,200,000}{10}\times \frac{6}{12}\\ =\$110,000\end{array}$ (10)

Calculate the interest expense on notes payable.

Cost of Notes Payable= $3,300,000

Interest Rate =6%

Number of months =9 months (April 1, 2017-December 31, 2017)

$\begin{array}{c}\text{Interest}\text{Expense }=\text{ Notes}\text{Payable }\times \text{Rate}\times \frac{\text{Number of months used}}{\text{12}}\\ =\$3,300,000\times \frac{6}{100}\times \frac{9}{12}\\ =\$148,500\end{array}$ (11)

Calculate the interest revenue on notes receivable.

Cost of Notes Receivable= $2,700,000

Interest Rate =5%

Number of months =7 months (June 1, 2017-December 31, 2017)

$\begin{array}{c}\text{Interest}\text{Revenue = Notes}\text{Receivable ×}\text{Rate}\times \frac{\text{Number of months used}}{\text{12}}\\ =\$2,700,000\times \frac{5}{100}\times \frac{7}{12}\\ =\$78,750\end{array}$ (12)

Description:

December 31:Record depreciation for the building

• Depreciation expense is an expense, and it decreases the stockholder’s equity by $2,435,000. Therefore, Depreciation expense is debited with $2,435,000.
• Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $2,435,000 that decreases the value of assets by $100,000. Therefore, the Accumulated depreciation-Building account is credited with $2,435,000.

December 31:Record depreciation for the equipment

• Depreciation expense is an expense, and it decreases the stockholder’s equity by $14,730,000. Therefore, Depreciation expense is debited with $$14,730,000.
• Accumulated depreciation is a contra asset with a normal credit balance. It is increased by $14,730,000 that decreases the value of assets by $100,000. Therefore, the Accumulated depreciation-Equipment account is credited with $14,730,000.

December 31:Record interest expense to be paid on notes payable

• Interest expense is an expense, and it decreases the stockholder’s equity by $148,500. Therefore, Interest expense is debited with $148,500.
• Interest Payable is a liability, and it increases the liabilities by $148,500. Therefore, Interest Payable is credited with $148,500.

December 31:Record interest revenue to be received on notes receivable.

• Interest receivable is an asset, and it increases assets by $78,750. Therefore, Interest receivable is debited with $78,750.
• Interest revenue is a revenue, and it increases the stockholders’ equity by $78,750. Therefore, Interest Revenue is credited with $78,750.

(c)

To determine

To Prepare: the property, plant, and equipment section of the company’s statement of financial position at December 31, 2017.

Explanation of Solution

Preparethe property, plant, and equipment section of the company’s statement of financial position at December 31, 2017.

Company Y
Statement of Financial Position (Partial)
December 31, 2017
Particulars	Amount ($)	Amount ($)
Property, Plant, and Equipment
Land		23,000,000
Buildings	97,400,000
Less: Accumulated Depreciation	64,635,000	32,765,000
Equipment	148,400,000
Less: Accumulated Depreciation	65,590,000	82,810,000
Total Property, Plant, and Equipment		138,575,000

Table (6)

Working notes:

Post the above journal entries in part (a) and adjusting entries in part (b) into the T-accounts to determine the balances of the property, plant, and equipment accounts.

Land is an asset with a normal debit balance.

Land Account
Date	Details	Debit ($)		Date	Details	Credit ($)
January 1, 2017	Beginning Balance	20,000,000		June 1, 2017	Cash	1,400,000
April 1, 2017	Cash	4,400,000		December 31,2018	Closing balance	23,000,000
December 31,2017	Total	24,400,000		December 31,2018	Total	5,200,000
January 1, 2018	Beginning Balance	23,000,000

Table (7)

Building is an asset with a normal debit balance.

Building Account
Date	Details	Debit ($)		Date	Details	Credit ($)
January 1, 2017	Beginning Balance	97,400,000		December 31,2017	Closing balance	97,400,000
December 31,2017	Total	97,400,000		December 31,2017	Total	97,400,000
January 1, 2018	Beginning Balance	97,400,000

Table (8)

Equipment is an asset with a normal debit balance.

Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
January 1, 2017	Beginning Balance	150,000,000		May 1, 2017	Cash	300,000
July 1, 2017	Cash	2,200,000		May 1, 2017	Accumulated Depreciation	2,333,333
				May 1, 2017	Loss on Disposal	166,667
				December 31, 2017	Accumulated Depreciation	1,000,000
				December 31,2017	Closing balance	148,400,000
December 31,2017	Total	152,200,000		December 31,2017	Total	152,200,000
January 1, 2018	Beginning Balance	148,400,000

Table (8)

Accumulated Depreciation-Buildings is a contra asset account with a normal credit balance.

Accumulated Depreciation-Buildings Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31,2017	Closing Balance	64,635,000		January 1, 2017	Beginning Balance	62,200,000
				December 31,2017	Depreciation expense	2,435,000
December 31,2017	Total	64,635,000		December 31,2018	Total	64,635,000

Table (9)

Accumulated Depreciation-Equipment is a contra asset account with a normal credit balance.

Accumulated Depreciation-Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
May 1, 2017	Equipment	2,333,333		January 1, 2017	Beginning Balance	54,000,000
December 31, 2017	Equipment	1,000,000		May 1, 2017	Depreciation expense	93,333
December 31, 2017	Closing Balance	65,590,000		December 31, 2017	Depreciation expense	100,000
				December 31, 2017	Depreciation expense	14,730,000
December 31,2017	Total	68,923,333		December 31,2017	Total	68,923,333

Table (10)