Depreciation, Impairments, and Depletion

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Contents

Continuing Case Solutions
Excel Template Solutions
Excel Templates
Exercise Set B Solutions
Instructor Manual - PDF Files
Rockford PS Solutions
Solution Manual - PDF Files
Test Bank - PDF Files

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QUESTIONS
1
. Distinguish among depreciation, depletion, and amortization.
2
. Identify the factors that are relevant in determining the annual depreciation charge, and explain whether these factors are determined objectively or whether they are based on judgment.
3
. Some believe that accounting depreciation measures the decline in the value of fixed assets. Do you agree?
Explain.
4
. Explain how estimation of service lives can result in unrealistically high carrying values for fixed assets.
5
. The plant manager of a manufacturing firm suggested in a conference of the company’s executives that accountants should speed up depreciation on the machinery in the finishing department because improvements were rapidly making those machines obsolete, and a depreciation fund big enough to cover their replacement is needed.
Discuss the accounting concept of depreciation and the effect on a business concern of the depreciation recorded for plant assets, paying particular attention to the issues raised by the plant manager.
6
. For what reasons are plant assets retired? Define inadequacy, supersession, and obsolescence.
7
. What basic questions must be answered before the amount of the depreciation charge can be computed?
8
. Workman Company purchased a machine on January 2,
2014, for $800,000. The machine has an estimated useful life of 5 years and a salvage value of $100,000. Depreciation was computed by the 150% declining-balance method. What is the amount of accumulated depreciation at the end of December 31, 2015?
9
. Silverman Company purchased machinery for $162,000 on January 1, 2014. It is estimated that the machinery will have a useful life of 20 years, salvage value of $15,000, production of 84,000 units, and working hours of 42,000.
During 2014, the company uses the machinery for 14,300 hours, and the machinery produces 20,000 units. Compute depreciation under the straight-line, units-of-output, working hours, sum-of-the-years’-digits, and doubledeclining- balance methods.
1
0. What are the major factors considered in determining what depreciation method to use?
1
1. Under what conditions is it appropriate for a business to use the composite method of depreciation for its plant assets? What are the advantages and disadvantages of this method?
1
2. If Remmers, Inc. uses the composite method and its composite rate is 7.5% per year, what entry should it make when plant assets that originally cost $50,000 and have been used for 10 years are sold for $14,000?
1
3. A building that was purchased on December 31, 2000, for $2,500,000 was originally estimated to have a life of 50 years with no salvage value at the end of that time. Depreciation has been recorded through 2014. During 2015, an examination of the building by an engineering firm discloses that its estimated useful life is 15 years after 2014.
What should be the amount of depreciation for 2015?
1
4. Charlie Parker, president of Spinners Company, has recently noted that depreciation increases cash provided by operations and therefore depreciation is a good source of funds. Do you agree? Discuss.
1
5. Andrea Torbert purchased a computer for $8,000 on July
1, 2014. She intends to depreciate it over 4 years using the double-declining-balance method. Salvage value is $1,000.
Compute depreciation for 2015.
1
6. Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.
1
7. Last year, Wyeth Company recorded an impairment on an asset held for use. Recent appraisals indicate that the asset has increased in value. Should Wyeth record this recovery in value?
1
8. Toro Co. has equipment with a carrying amount of $700,000. The expected future net cash flows from the equipment are $705,000, and its fair value is $590,000. The equipment is expected to be used in operations in the future. What amount (if any) should Toro report as an impairment to its equipment?
1
9. Explain how gains or losses on impaired assets should be reported in income.
2
0. It has been suggested that plant and equipment could be replaced more quickly if depreciation rates for income tax and accounting purposes were substantially increased. As a result, business operations would receive the benefit of more modern and more efficient plant facilities. Discuss the merits of this proposition.
2
1. Neither depreciation on replacement cost nor depreciation adjusted for changes in the purchasing power of the dollar has been recognized as generally accepted accounting principles for inclusion in the primary financial statements.
Briefly present the accounting treatment that might be used to assist in the maintenance of the ability of a company to replace its productive capacity.
2
2. List (a) the similarities and (b) the differences in the accounting treatments of depreciation and cost depletion.
2
3. Describe cost depletion and percentage depletion. Why is the percentage depletion method permitted?
2
4. In what way may the use of percentage depletion violate sound accounting theory?
2
5. In the extractive industries, businesses may pay dividends in excess of net income. What is the maximum permissible?
How can this practice be justified?
2
6. The following statement appeared in a financial magazine: “RRA—or Rah-Rah, as it’s sometimes dubbed—has kicked up quite a storm. Oil companies, for example, are convinced that the approach is misleading. Major accounting firms agree.” What is RRA? Why might oil companies believe that this approach is misleading?
2
7. Shumway Oil uses successful-efforts accounting and also provides full-cost results as well. Under full-cost,
Shumway Oil would have reported retained earnings of $42 million and net income of $4 million. Under successfulefforts, retained earnings were $29 million, and net income was $3 million. Explain the difference between full-costing and successful-efforts accounting.
2
8. Target in 2012 reported net income of $2.9 billion, net sales of $69.8 billion, and average total assets of $45.2 billion.
What is Target’s asset turnover? What is Target’s return on assets?
* 29. What is a modified accelerated cost recovery system
(MACRS)? Speculate as to why this system is now required for tax purposes.

 
BRIEF EXERCISES
B
E11-1 Fernandez Corporation purchased a truck at the beginning of 2014 for $50,000. The truck is estimated to have a salvage value of $2,000 and a useful life of 160,000 miles. It was driven 23,000 miles in 2014 and 31,000 miles in 2015. Compute depreciation expense for 2014 and 2015.
B
E11-2 Lockard Company purchased machinery on January 1, 2014, for $80,000. The machinery is estimated to have a salvage value of $8,000 after a useful life of 8 years. (a) Compute 2014 depreciation expense using the straight-line method. (b) Compute 2014 depreciation expense using the straight-line method assuming the machinery was purchased on September 1, 2014.
B
E11-3 Use the information for Lockard Company given in BE11-2. (a) Compute 2014 depreciation expense using the sum-of-the-years’-digits method. (b) Compute 2014 depreciation expense using the sum-of-the-years’-digits method, assuming the machinery was purchased on April 1, 2014.
BE11-4 Use the information for Lockard Company given in BE11-2. (a) Compute 2014 depreciation expense using the double-declining-balance method. (b) Compute 2014 depreciation expense using the double-declining-balance method, assuming the machinery was purchased on October 1, 2014.
B
E11-5 Cominsky Company purchased a machine on July 1, 2015, for $28,000. Cominsky paid $200 in title fees and county property tax of $125 on the machine. In addition, Cominsky paid $500 shipping charges for delivery, and $475 was paid to a local contractor to build and wire a platform for the machine on the plant floor. The machine has an estimated useful life of 6 years with a salvage value of $3,000. Determine the depreciation base of Cominsky’s new machine. Cominsky uses straight-line depreciation.
B
E11-6 Dickinson Inc. owns the following assets.
A
sset Cost Salvage Estimated Useful Life
A $70,000 $7,000 10 years
B 50,000 5,000 5 years
C 82,000 4,000 12 years
C
ompute the composite depreciation rate and the composite life of Dickinson’s assets.
B
E11-7 Holt Company purchased a computer for $8,000 on January 1, 2013. Straight-line depreciation is used, based on a 5-year life and a $1,000 salvage value. In 2015, the estimates are revised. Holt now feels the computer will be used until December 31, 2016, when it can be sold for $500. Compute the 2015 depreciation.
B
E11-8 Jurassic Company owns equipment that cost $900,000 and has accumulated depreciation of $380,000. The expected future net cash flows from the use of the asset are expected to be $500,000. The fair value of the equipment is $400,000. Prepare the journal entry, if any, to record the impairment loss.
B
E11-9 Everly Corporation acquires a coal mine at a cost of $400,000. Intangible development costs total $100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is $80,000), after which it can be sold for $160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.
B
E11-10 In its 2011 annual report, Campbell Soup Company reports beginning-of-the-year total assets of $6,276 million, end-of-the-year total assets of $6,862 million, total sales of $7,719 million, and net income of $805 million. (a) Compute Campbell’s asset turnover. (b) Compute Campbell’s profit margin on sales.
(c) Compute Campbell’s return on assets using (1) asset turnover and profit margin and (2) net income.
*BE11-11 Francis Corporation purchased an asset at a cost of $50,000 on March 1, 2014. The asset has a useful life of 8 years and a salvage value of $4,000. For tax purposes, the MACRS class life is 5 years. Compute tax depreciation for each year 2014–2019.
EXERCISES

E
11-1 (Depreciation Computations—SL, SYD, DDB) Deluxe Ezra Company purchases equipment on
January 1, Year 1, at a cost of $469,000. The asset is expected to have a service life of 12 years and a salvage value of $40,000.
I
nstructions
(
a)
Compute the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method.
(
b) Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’- digits method.
(
c) Compute the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method. (In performing your calculations, round constant percentage to the nearest one-hundredth of a point and round answers to the nearest dollar.)
E
11-2 (Depreciation—Conceptual Understanding) Rembrandt Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the-years’-digits method, and
(3) the double-declining-balance method.
Sum-of-the- Double-Declining-
Year Straight-Line Years’-Digits Balance
1 $ 9,000 $15,000 $20,000
2 9,000 12,000 12,000
3 9,000 9,000 7,200
4 9,000 6,000 4,320
5 9,000 3,000 1,480
Total $45,000 $45,000 $45,000
I
nstructions
A
nswer the following questions.
(
a) What is the cost of the asset being depreciated?
(
b) What amount, if any, was used in the depreciation calculations for the salvage value for this asset?
(
c) Which method will produce the highest charge to income in Year 1?
(
d) Which method will produce the highest charge to income in Year 4?
(
e) Which method will produce the highest book value for the asset at the end of Year 3?
(
f) If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?
E
11-3 (Depreciation Computations—SYD, DDB—Partial Periods) Judds Company purchased a new plant asset on April 1, 2014, at a cost of $711,000. It was estimated to have a service life of 20 years and a salvage value of $60,000. Judds’ accounting period is the calendar year.
I
nstructions
(
a)
Compute the depreciation for this asset for 2014 and 2015 using the sum-of-the-years’-digits method.
(
b) Compute the depreciation for this asset for 2014 and 2015 using the double-declining-balance method.
E
11-4 (Depreciation Computations—Five Methods) Jon Seceda Furnace Corp. purchased machinery for $315,000 on May 1, 2014. 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 2015, Seceda Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.
I
nstructions
F
rom the information given, compute the depreciation charge for 2015 under each of the following methods. (Round to the nearest dollar.)
(
a) Straight-line. (d) Sum-of-the-years’-digits.
(
b) Units-of-output. (e) Declining-balance (use 20% as the annual rate).
(
c) Working hours.
E
11-5 (Depreciation Computations—Four Methods) Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2014. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31.
I
nstructions
C
ompute the depreciation expense under the following methods. Each of the following should be considered unrelated.
(
a) Straight-line depreciation for 2014.
(
b) Activity method for 2014, assuming that machine usage was 800 hours.
(
c) Sum-of-the-years’-digits for 2015.
(
d) Double-declining-balance for 2015.
E
11-6 (Depreciation Computations—Five Methods, Partial Periods) Muggsy Bogues Company purchased equipment for $212,000 on October 1, 2014. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $12,000. Estimated production is 40,000 units and estimated working hours are 20,000. During 2014, Bogues uses the equipment for 525 hours and the equipment produces 1,000 units.
I
nstructions
C
ompute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31.
(
a) Straight-line method for 2014.
(
b) Activity method (units of output) for 2014.
(c) Activity method (working hours) for 2014.
(
d) Sum-of-the-years’-digits method for 2016.
(
e) Double-declining-balance method for 2015.
E
11-7 (Different Methods of Depreciation) Jackel Industries presents you with the following information.
A
ccumulated
Date Salvage Life in Depreciation Depreciation to Depreciation
Description Purchased Cost Value Years Method 12/31/15 for 2016
Machine A 2/12/14 $142,500 $16,000 10
(a) $33,350 (b)
M
achine B 8/15/13 (c) 21,000 5 SL 29,000 (d)
M
achine C 7/21/12 75,400 23,500 8 DDB (e) (f)
M
achine D 10/12/(g) 219,000 69,000 5 SYD 70,000 (h)
Instructions
C
omplete the table for the year ended December 31, 2016. The company depreciates all assets using the half-year convention.
E
11-8 (Depreciation Computation—Replacement, Nonmonetary Exchange) George Zidek Corporation bought a machine on June 1, 2012, for $31,000, f.o.b. the place of manufacture. Freight to the point where it was set up was $200, and $500 was expended to install it. The machine’s useful life was estimated at
10 years, with a salvage value of $2,500. On June 1, 2013, an essential part of the machine is replaced, at a cost of $1,980, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy.
On June 1, 2016, the company buys a new machine of greater capacity for $35,000, delivered, trading in the old machine which has a fair value and trade-in allowance of $20,000. To prepare the old machine for removal from the plant cost $75, and expenditures to install the new one were $1,500. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,000 at the end of that time. (The exchange has commercial substance.)
I
nstructions
A
ssuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2016. (Round to the nearest dollar.)
E
11-9 (Composite Depreciation) Presented below is information related to LeBron James Manufacturing
Corporation.
A
sset Cost Estimated Salvage Estimated Life (in years)
A $40,500 $5,500 10
B 33,600 4,800 9
C 36,000 3,600 9
D 19,000 1,500 7
E 23,500 2,500 6
I
nstructions
(
a)
Compute the rate of depreciation per year to be applied to the plant assets under the composite method.
(
b) Prepare the adjusting entry necessary at the end of the year to record depreciation for the year.
(
c) Prepare the entry to record the sale of asset D for cash of $4,800. It was used for 6 years, and depreciation was entered under the composite method.
E
11-10 (Depreciation Computations, SYD) Five Satins Company purchased a piece of equipment at the beginning of 2011. The equipment cost $430,000. It has an estimated service life of 8 years and an expected salvage value of $70,000. The sum-of-the-years’-digits method of depreciation is being used. Someone has already correctly prepared a depreciation schedule for this asset. This schedule shows that $60,000 will be depreciated for a particular calendar year.
I
nstructions
S
how calculations to determine for what particular year the depreciation amount for this asset will be $60,000.
E
11-11 (Depreciation—Change in Estimate) Machinery purchased for $60,000 by Tom Brady Co. in
2010 was originally estimated to have a life of 8 years with a salvage value of $4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2015, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation.
Instructions
(
a)
Prepare the entry to correct the prior years’ depreciation, if necessary.
(
b) Prepare the entry to record depreciation for 2015.
E
11-12 (Depreciation Computation—Addition, Change in Estimate) In 1987, Herman Moore Company completed the construction of a building at a cost of $2,000,000 and first occupied it in January 1988. It was estimated that the building will have a useful life of 40 years and a salvage value of $60,000 at the end of that time.
Early in 1998, an addition to the building was constructed at a cost of $500,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years, and that the addition would have a life of 30 years and a salvage value of $20,000.
In 2016, it is determined that the probable life of the building and addition will extend to the end of
2047, or 20 years beyond the original estimate.
I
nstructions
(
a)
Using the straight-line method, compute the annual depreciation that would have been charged from 1988 through 1997.
(
b) Compute the annual depreciation that would have been charged from 1998 through 2015.
(
c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2016.
(
d) Compute the annual depreciation to be charged, beginning with 2016.
E
11-13 (Depreciation—Replacement, Change in Estimate) Greg Maddox Company constructed a building at a cost of $2,200,000 and occupied it beginning in January 1995. It was estimated at that time that its life would be 40 years, with no salvage value.
In January 2015, a new roof was installed at a cost of $300,000, and it was estimated then that the building would have a useful life of 25 years from that date. The cost of the old roof was $160,000.
I
nstructions
(
a)
What amount of depreciation should have been charged annually from the years 1995 to 2014?
(Assume straight-line depreciation.)
(
b) What entry should be made in 2015 to record the replacement of the roof?
(
c) Prepare the entry in January 2015 to record the revision in the estimated life of the building, if necessary.
(
d) What amount of depreciation should be charged for the year 2015?
E
11-14 (Error Analysis and Depreciation, SL and SYD) Mike Devereaux Company shows the following entries in its Equipment account for 2015. All amounts are based on historical cost.
E
quipment
2015 2015
Jan. 1 Balance 134,750 June 30 Cost of equipment sold
Aug. 10 Purchases 32,000 (purchased prior
12 Freight on equipment to 2015) 23,000 purchased 700
25 Installation costs 2,700
Nov. 10 Repairs 500
I
nstructions
(
a)
Prepare any correcting entries necessary.
(
b) Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2015 under each of the methods listed below.
Assume an estimated life of 10 years, with no salvage value. The machinery included in the January
1, 2015, balance was purchased in 2013.
(
1) Straight-line. (2) Sum-of-the-years’-digits.
E
11-15 (Depreciation for Fractional Periods) On March 10, 2016, Lost World Company sells equipment that it purchased for $192,000 on August 20, 2009. It was originally estimated that the equipment would have a life of 12 years and a salvage value of $16,800 at the end of that time, and depreciation has been computed on that basis. The company uses the straight-line method of depreciation.
I
nstructions
(
a)
Compute the depreciation charge on this equipment for 2009, for 2016, and the total charge for the period from 2010 to 2015, inclusive, under each of the six following assumptions with respect to partial periods.
(1) Depreciation is computed for the exact period of time during which the asset is owned. (Use
365 days for base.)
(
2) Depreciation is computed for the full year on the January 1 balance in the asset account.
(
3) Depreciation is computed for the full year on the December 31 balance in the asset account.
(
4) Depreciation for one-half year is charged on plant assets acquired or disposed of during the year.
(
5) Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal.
(
6) Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year. (Use 365 days for base.)
(
b) Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application.
E
11-16 (Impairment) Presented below is information related to equipment owned by Suarez Company at
December 31, 2014.
C
ost $9,000,000
Accumulated depreciation to date 1,000,000
Expected future net cash fl ows 7,000,000
Fair value 4,800,000
A
ssume that Suarez will continue to use this asset in the future. As of December 31, 2014, the equipment has a remaining useful life of 4 years.
I
nstructions
(
a)
Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014.
(
b) Prepare the journal entry to record depreciation expense for 2015.
(
c) The fair value of the equipment at December 31, 2015, is $5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
E
11-17 (Impairment) Assume the same information as E11-16, except that Suarez intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be $20,000.
I
nstructions
(
a)
Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014.
(
b) Prepare the journal entry (if any) to record depreciation expense for 2015.
(
c) The asset was not sold by December 31, 2015. The fair value of the equipment on that date is $5,300,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still $20,000.
E
11-18 (Impairment) The management of Petro Garcia Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2014. On December 31, 2014, management projected its future net cash flows from this equipment to be $300,000 and its fair value to be $230,000.
The company intends to use this equipment in the future.
I
nstructions
(
a)
Prepare the journal entry (if any) to record the impairment at December 31, 2014.
(
b) Where should the gain or loss (if any) on the write-down be reported in the income statement?
(
c) At December 31, 2015, the equipment’s fair value increased to $260,000. Prepare the journal entry (if any) to record this increase in fair value.
(
d) What accounting issues did management face in accounting for this impairment?
E
11-19 (Depletion Computations—Timber) Stanislaw Timber Company owns 9,000 acres of timberland purchased in 2003 at a cost of $1,400 per acre. At the time of purchase, the land without the timber was valued at $400 per acre. In 2004, Stanislaw built fire lanes and roads, with a life of 30 years, at a cost of $84,000. Every year, Stanislaw sprays to prevent disease at a cost of $3,000 per year and spends $7,000 to maintain the fire lanes and roads. During 2005, Stanislaw selectively logged and sold 700,000 board feet of timber, of the estimated 3,500,000 board feet. In 2006, Stanislaw planted new seedlings to replace the trees cut at a cost of $100,000.
I
nstructions
(
a)
Determine the depreciation expense and the cost of timber sold related to depletion for 2005.
(
b) Stanislaw has not logged since 2005. If Stanislaw logged and sold 900,000 board feet of timber in
2016, when the timber cruise (appraiser) estimated 5,000,000 board feet, determine the cost of timber sold related to depletion for 2016.
E11-20 (Depletion Computations—Oil) Diderot Drilling Company has leased property on which oil has been discovered. Wells on this property produced 18,000 barrels of oil during the past year that sold at an average sales price of $55 per barrel. Total oil resources of this property are estimated to be 250,000 barrels.
The lease provided for an outright payment of $500,000 to the lessor (owner) before drilling could be commenced and an annual rental of $31,500. A premium of 5% of the sales price of every barrel of oil removed is to be paid annually to the lessor. In addition, Diderot (lessee) is to clean up all the waste and debris from drilling and to bear the costs of reconditioning the land for farming when the wells are abandoned. The estimated fair value, at the time of the lease, of this clean-up and reconditioning is $30,000.
I
nstructions
F
rom the provisions of the lease agreement, you are to compute the cost per barrel for the past year, exclusive of operating costs, to Diderot Drilling Company.
E
11-21 (Depletion Computations—Timber) Forda Lumber Company owns a 7,000-acre tract of timber purchased in 2000 at a cost of $1,300 per acre. At the time of purchase, the land was estimated to have a value of $300 per acre without the timber. Forda Lumber Company has not logged this tract since it was purchased. In 2014, Forda had the timber cruised. The cruise (appraiser) estimated that each acre contained
8,000 board feet of timber. In 2014, Forda built 10 miles of roads at a cost of $7,840 per mile. After the roads were completed, Forda logged and sold 3,500 trees containing 850,000 board feet.
I
nstructions
(
a)
Determine the cost of timber sold related to depletion for 2014.
(
b) If Forda depreciates the logging roads on the basis of timber cut, determine the depreciation expense for 2014.
(
c) If Forda plants five seedlings at a cost of $4 per seedling for each tree cut, how should Forda treat the reforestation?
E
11-22 (Depletion Computations—Mining) Alcide Mining Company purchased land on February 1,
2014, at a cost of $1,190,000. It estimated that a total of 60,000 tons of mineral was available for mining.
After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at $90,000. It believes it will be able to sell the property afterwards for $100,000. It incurred developmental costs of $200,000 before it was able to do any mining. In 2014, resources removed totaled
30,000 tons. The company sold 22,000 tons.
I
nstructions
C
ompute the following information for 2014.
(
a) Per unit material cost.
(
b) Total material cost of December 31, 2014, inventory.
(
c) Total material cost in cost of goods sold at December 31, 2014.
E
11-23 (Depletion Computations—Minerals) At the beginning of 2014, Aristotle Company acquired a mine for $970,000. Of this amount, $100,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 12,000,000 units of the ore appear to be in the mine. Aristotle incurred $170,000 of development costs associated with this mine prior to any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the mineral has been removed was $40,000. During 2014,
2,500,000 units of ore were extracted and 2,100,000 of these units were sold.
I
nstructions
C
ompute the following.
(
a) The total amount of depletion for 2014.
(
b) The amount that is charged as an expense for 2014 for the cost of the minerals sold during 2014.
E
11-24 (Ratio Analysis) The 2011 Annual Report of Tootsie Roll Industries contains the following information.
(
in millions) December 31, 2011 December 31, 2010
Total assets $857.9 $858.0
Total liabilities 191.9 190.6
Net sales 528.4 517.1
Net income 43.9 53.0
Instructions
C
ompute the following ratios for Tootsie Roll for 2011.
(
a) Asset turnover.
(
b) Return on assets.
(
c) Profit margin on sales.
(
d) How can the asset turnover be used to compute the return on assets? 
* E11-25 (Book vs. Tax (MACRS) Depreciation) Futabatei Enterprises purchased a delivery truck on January
1, 2014, at a cost of $27,000. The truck has a useful life of 7 years with an estimated salvage value of $6,000. The straight-line method is used for book purposes. For tax purposes, the truck, having an MACRS class life of 7 years, is classified as 5-year property; the optional MACRS tax rate tables are used to compute depreciation. In addition, assume that for 2014 and 2015 the company has revenues of $200,000 and operating expenses (excluding depreciation) of $130,000.
I
nstructions
(
a)
Prepare income statements for 2014 and 2015. (The final amount reported on the income statement should be income before income taxes.)
(
b) Compute taxable income for 2014 and 2015.
(
c) Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes.
(
d) Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciable asset.
* E11-26 (Book vs. Tax (MACRS) Depreciation) Shimei Inc. purchased computer equipment on March 1,
2014, for $31,000. The computer equipment has a useful life of 10 years and a salvage value of $1,000. For tax purposes, the MACRS class life is 5 years.
I
nstructions
(
a)
Assuming that the company uses the straight-line method for book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2014 and (2) the tax return for 2014?
(
b) Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2014 and (2) the tax return for 2014?
(
c) Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both?





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