Exam 8: Property, Plant, and Equipment

Fantasmic Moulds purchased equipment on January 1, 2009 for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year end. Additional Information Assuming the company uses the units-of-production depreciation method, what is the depreciation expense for 2009?

The following entry was recorded by Alex Corp.: What is the effect of this entry on the financial statements?

Billu Limited purchased equipment on January 1, 2009 for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year end. Additional Information Assuming the company uses the units-of-production depreciation method, calculate the accumulated depreciation at the end of 2012.

What costs should not be capitalized to "equipment"?

A large lathe was bought on January 1, 2013 for $15,000,000. It was expected to last for 12 years and have a residual value of $300,000. The company uses straight-line depreciation. At the beginning of 2018, the remaining useful life of the lathe was revised to be four more years (for nine years in total). Management also felt that all equipment should now be depreciated using the declining balance method at a 25% rate. The company has a December 31 year-end. Required: Prepare the entries to record depreciation for 2013 and 2018.

Praguian Company built two similar buildings. Each building took one year to build and required $30,000,000 in construction costs. The Company had limited internal financial resources, so it could fund only Building A internally and financed Building B by borrowing the $30,000,000 evenly over the year (i.e., zero at the beginning and increasing to $30 million by the end of the year). The interest rate on the loan is 10%. Both projects were finished on December 31, 2012 and were ready for occupancy immediately. The buildings are estimated to have a useful life of 20 years and no residual value. The Company uses the straight-line method for depreciation. Required: a. How much interest cost can be capitalized on Building B? b. What will be the annual depreciation expense for each of the two buildings? c. ASPE allows interest capitalization while IFRS recommends capitalization of interest on construction-specific loans. Ignoring the complexities of how to determine how much interest to capitalize, which treatment of interest costs is conceptually more correct? Explain your conclusion. d. Why can interest costs not continue to be capitalized after the self-construction period is completed?

What is the meaning of "historical cost"?

What is the meaning of "net realizable value"?

Ontario Ltd. owns a machine that it purchased on Jan 1, 2010 for $750,000. The machine had an estimated useful life of 5 years and an estimated residual value of $50,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2013 for $200,000. What was the annual depreciation expense?

A large piece of earth-moving equipment was upgraded at a cost of $440,000 so that it could self-unload. After the upgrade was completed, management estimated that this feature would save the company $40,000 a year for the next six years. Prepare the necessary journal entry to record the transaction. Provide a short justification for your chosen treatment.

What costs should be capitalized to "land"?

What costs should not be capitalized to "building"?

Under IFRS, what is the acceptable treatment for borrowing costs on a self constructed property, plant and equipment?

Mathew Corp exchanged similar assets with Simone Company in a transaction with commercial substance. Mathew gave up equipment that had a net book value of $47,000 (fair value $49,000)and Simone exchanged equipment with a net book value of $36,000 (fair value $35,000). What is the correct value at which Mathew should record the new equipment?

Aye Corp acquired land and a building on June 1, 2013 for $13,000,000. An expert in real estate appraisal estimates that the land is worth 40% of the total purchase price. The building is estimated to have a useful life of 25 years and a residual value of $450,000. On September 1, 2023, Aye moved and sold the property for $17,000,000. The buyer and seller agreed that 50% of the proceeds should be allocated to land. Aye depreciates buildings using the straight-line method, and has a December 31 year-end. Aye records partial depreciation in the year of acquisition or disposal based on the number of months the asset is available for use in the year. Prepare the entry to record the purchase on June 1, 2013, depreciation expense for 2013 and 2014, and all entries required to record the disposal of the property on September 1, 2023.

Billu Limited purchased equipment on January 1, 2009 for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year end. Additional information: Assuming the company uses the units-of-production depreciation method, calculate the depreciation expense for 2012.

What costs should not be capitalized to "equipment"?

Daniel Manufacturing Limited (DML)purchased a large lathe. The invoice cost of the lathe was $6,200,000 but DML was able to get the price reduced to $5,800,000. The seller provided terms whereby if the entire amount was paid within 30 days a further discount of 3% was available. DML paid on the 25th day. Transportation of the machine cost DML $70,000. Insurance while in transit was $30,000. To encourage DML to purchase another machine, the manufacturer gave DML a $50,000 discount voucher on its next purchase of a similar machine. Workers were paid $45,000 to install the machine. Start-up and testing costs were $45,000. Unfortunately, during the installation, one of the workers accidentally damaged the machine, and it cost $15,000 to repair the damage. Non-refundable sales taxes paid were $700,000, however, later a sales tax rebate of $80,000 was received relating to this transaction. During installation, part of the plant had to be shut down; lost profit from the shutdown was $100,000. Required: For each expenditure, identify whether it should be included in the cost of the lathe or expensed. Briefly justify each of your responses.

Forest Company paid $38,000,000 for a warehouse and related assets from a company that was in bankruptcy. The warehouse includes land, building, moving equipment, and heating /ventilation/air conditioning (HVAC)system. An independent appraiser valued these items individually as follows: Required: Allocate the purchase price among the assets acquired.

What is the meaning of "depreciation"?