Problem 8-25A Accounting for acquisition of assets including a basket purchase

Accounting for Long-Term Operational Assets

Problem 8-25A Accounting for acquisition of assets including a basket purchase

Trinkle Co., Inc. made several purchases of long-term assets in Year 1. The details of each purchase are presented here.

New Office Equipment

1. List price: $60,000; terms: 2/10 n/30; paid within discount period.
2. Transportation-in: $1,500.
3. Installation: $2,500.
4. Cost to repair damage during unloading: $650.
5. Routine maintenance cost after six months: $350.

Basket Purchase of Copier, Computer, and Scanner for $30,000 with Fair Market Values

1. Copier, $22,000.
2. Computer, $10,000.
3. Scanner, $8,000.

Land for New Warehouse with an Old Building Torn Down

1. Purchase price, $250,000.
2. Demolition of building, $18,000.
3. Lumber sold from old building, $6,000.
4. Grading in preparation for new building, $22,000.
5. Construction of new building, $510,000.

Required

In each of these cases, determine the amount of cost to be capitalized in the asset accounts.

Problem 8-26A Determining the effect of depreciation expense on financial statements

Three different companies each purchased trucks on January 1, Year 1, for $50,000. Each truck was expected to last four years or 200,000 miles. Salvage value was estimated to be $5,000. All three trucks were driven 66,000 miles in Year 1, 42,000 miles in Year 2, 40,000 miles in Year 3, and 60,000 miles in Year 4. Each of the three companies earned $40,000 of cash revenue during each of the four years. Company A uses straight-line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of-production depreciation.

Required
Answer each of the following questions. Ignore the effects of income taxes.
a. Which company will report the highest amount of net income for Year 1?
b. Which company will report the lowest amount of net income for Year 4?
c. Which company will report the highest book value on the December 31, Year 3, balance sheet?
d. Which company will report the highest amount of retained earnings on the December 31, Year 4, balance sheet?
e. Which company will report the lowest amount of cash flow from operating activities on the Year 3 statement of cash flows?

Problem 8-27A Effect of straight-line versus double-declining-balance depreciation on the recognition of expense and gains or losses

Becker Office Service purchased a new computer system in Year 1 for $40,000. It is expected to have a five-year useful life and a $5,000 salvage value. The company expects to use the system more extensively in the early years of its life.

Required
a. Calculate the depreciation expense for each of the five years, assuming the use of straight-line depreciation.
b. Calculate the depreciation expense for each of the five years, assuming the use of double-declining balance depreciation.
c. Would the choice of one depreciation method over another produce a different amount of cash flow for any year? Why or why not?
d. Assume that Becker Office Service sold the computer system at the end of the fourth year for $15,000. Compute the amount of gain or loss using each depreciation method.
e. Explain any differences in gain or loss due to using the different methods.

Problem 8-28A Accounting for depreciation over multiple accounting cycles: straight-line depreciation

Bensen Company started business by acquiring $60,000 cash from the issue of common stock on January 1, Year 1. The cash acquired was immediately used to purchase equipment for $50,000 that had a $10,000 salvage value and an expected useful life of four years. The equipment was used to produce the following revenue stream (assume that all revenue transactions are for cash). At the beginning of the fifth year, the equipment was sold for $8,800 cash. Bensen uses straight-line depreciation.

Required

Prepare income statements, statements of changes in stockholders’ equity, balance sheets, and statements of cash flows for each of the five years. Present the statements in the form of a vertical statements model.