1. they use financial resources to acquire assets a company needs to produce and sell its products

2. it may be longer than a year

3. False

4. Interstate Bridge Construction & Paving Company

5. held-to-maturity investment in bonds

6. only when it is considered impaired

7. results in lower net income in earlier years and higher net income in later years

8. 40 years or less

9.the cost of consuming plant assets is matched with the periods that benefit from using the assets

10. $9,360

Depreciation for the first year = 39,000 x 40% = 15,600

Depreciation for the Second year= (39000 - 15,600) x 40% = 9,360

11.

Produces a level amount of depreciation expense per unit of output-4: Units-of-production

Depreciation method that minimizes income tax expense at the beginning of the life of the asset 5: Double declining balance

Allocates an equal amount of the cost of a plant asset to expense during each period of an asset's expected useful life-3: Straight-line

The amount management expects to receive for an asset at the end of its useful life-2 Residual value

Cost of a plant asset minus accumulated depreciation 1: Book value

12.

Systematic allocation of the cost of natural resources to the periods that benefit from their use 5: Depletion

Outlays made to extend the life of existing plant assets 1: Capital expenditures

The process of allocating the cost of plant assets to expense over the periods that benefit from their use 6: Depreciation

The difference between income tax expense reported on the company’s books and income taxes payable 4: Deferred taxes

Method that adjusts the investment account of the investor in proportion to changes in the book value of the investee's stockholders' equity3: Equity method

Outlays to maintain plant assets that do not extend their life or enhance their value 2: Operating expenditures

13. On January 1, 2007, Brown Company acquired machinery at a cost of $132,000 including sales tax and installation charges. Management estimated the machinery would have a useful life of 6 years and a residual value of about $12,000. The company operates on a calendar year basis and eventually sold this machinery for $8,000 scrap on December 31, 2009.

a. What depreciation method did this company use if the book value of the machinery on the December 31, 2007 balance sheet was $112,000? Carefully and neatly prepare a schedule to prove your conclusion.

Straight Line Method is used.

Depriciation for 2007 = (132000-12000)/6= 20000

Value at End of 2007= 132000-20000 = 112000 (As given in the Question hence Straight Line method is used)

b. If the company uses the straight-line method, what will be the amount of depreciation expense for 2008

Depriciation for 2008 = (132000-12000)/6= 20000

  1. If the company uses the straight-line method, what amount of gain or loss will the company experience at disposal on December 31, 2009? Carefully and neatly prepare a schedule to prove your answer.

Book value at end on December 31, 2009= 132000-20000*3=72000

Loss on sale of Machinery = Sales Price – Book Value = 8000-72000=$64000

14

In 2007, Rockpit Mining Company purchased a bauxite mine for $12,000,000. At the time of purchase, Rockpit estimated that the mine contained 800,000 tons of bauxite. Rockpit mined and sold 110,000 tons in 2004 and 160,000 tons in 2008.

a. What is the depletion rate per ton?

Depletion Rate per ton = 12,000,000/800,000 =$15 Per ton

b. What amount of depletion should be reported 2007 and 2008?

Depletion for 2007 = 110000*15= $1,650,000

Depletion for 2008 = 160000*15= $2,400,000

15.Racing Engines, Inc. purchased a patent from Johnson Motors Corporation for $18,000,000 on January 1, 2007. The patent is being amortized over its remaining legal life, twelve years. Calculate the amount of amortization expense Racing Engines, Inc. should report in 2007.

Amortization Expense = Puraches Price/Legal life =18,000,000/12 = $1,500,000

16 Mozart Company purchased machinery on January 1, 2007, at a cost of $120,000. The machinery has an estimated useful life of eight years and a $8,000 residual value. Mozart uses the straight-line depreciation method. On December 31, 2009, Mozart sold the machinery for $90,000. Enter the December 31, 2009, transaction in the accounting system.

ASSETS = LIABILITIES + OWNER’S EQUITY

12000 = 0 + 12000

MACHINERY + CASH = LIABILITIES+ GAIN ON SALE OF MACHINERY

(78000)+ $90000 = 0 + $12000

Working

Deprication per year = (120000-8000)/8= 14000

Book value at end of 2009 = 120000-14000*3=$78000

Gain on Sale of Machinery = 90000-78000=12000

17 On June 30, 2007, semiannual secured bonds having a face value of $200,000, a life of 10 years and a coupon rate of 7% were purchased to yield 6%.
Assume that $214,878.28 was paid for the bonds.

a. What amount of interest revenue should be recorded at the first interest receipt date?

Interest Revenue = 214,878.28*3%=$6446.35

b.What amount of premium (or discount) will be amortized at the first interest receipt date?

Premium Amortized = 200000*3.5% - 6446.35= $553.65

  1. What is the amount of cash flow at the first interest receipt date?

Cash Flow = = 200000*3.5%= $7000

18 On January 1, 2007, Paris Corporation paid $8,000,000 to purchase Cardone Company. The current market value of Cardone 's net assets was $7,500,000. The book value of the net assets was $7,800,000

a. What amount of goodwill should Paris report as a result of this purchase?

Goodwill = 8,000,000-7,500,000 = 500,000

b. What amount of amortization should Paris record for 2004

No amortization will be recorded.

19 Distinguish between a capital expenditure and an operating expenditure.

Capital Expediture is the Outlays made to extend the life of existing plant assets

Operating expendituresOutlays to maintain plant assets that do not extend their life or enhance their value

20

Two four-year-old companies are identical in all respects except that Company A has used straight-line depreciation exclusively since inception while Company B has used double-declining balance depreciation exclusively since inception. The depreciable assets have estimated lives of approximately 20 years. Describe how this difference in accounting policy has affected the companies' financial statements over that period of time.

Company A depreciation expense would be less the Company B deprication expense during the intial year and hence Company A's net income will be more than company's B net income. Whereas during the later year Company B's depreciation expense will be less than company A's depreciation expense. And hence in the later years, Company B's Net Income will be more than company A net income