Exam 8: Property, Plant and Equipment

Which of the following is a not characteristic of property, plant and equipment (PPE)?

Aye Corp acquired land and a building on June 1, 2019 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, 2029, 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, 2019, depreciation expense for 2019 and 2020, and all entries required to record the disposal of the property on September 1, 2029.

What is the meaning of "depreciable amount"?

Polar Sky Railway (PSR), a transportation company, has substantial investments in property, plant, and equipment. In 2020, the company exchanged some of these assets with other companies. [Note: any depreciation expense prior to the following transaction has already been properly recorded.] PSR transported some luxury automobiles from the port in Vancouver to Winnipeg "for free." The company does not usually transport cars on this route, so a fair value was not determinable. However, there were negligible incremental costs because doing this involved simply attaching a few extra railcars to an existing train bound for Winnipeg. For doing this, PSR received two luxury cars, which the company awarded to executives as perquisites (perks). These cars had a retail value totaling $450,000. Required: Record the journal entry for the above transaction on PSR's books. State your reason(s)for the chosen accounting method.

A large lathe was bought on January 1, 2019 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 2024, 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 2019 and 2024.

What is the meaning of "exit value"?

FeelGood Corp. purchased equipment on January 1, 2020 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. Assuming the double-declining-balance depreciation method is used, what is the net book value (carrying value)of the asset on December 31, 2021?

ReelGood Corp. purchased equipment on January 1, 2021 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. Assuming the double-declining-balance depreciation method is used, what is the net book value (carrying value)of the asset on December 31, 2021?

In December 2019, Bea, the owner of Walnut Corp, paid for a parcel of land along with a warehouse on behalf of Walnut, the registered owner of the property, for a total cost of $1,500,000. Bea also paid a real estate commission of $40,000 and legal fees of $10,000 in connection with this purchase, plus $30,000 for the demolition of the warehouse. Walnut will reimburse Bea for these costs in January 2020 and will begin construction of an office building on this land. Prior to the purchase, the land and warehouse were appraised at $900,000 and $600,000, respectively. On December 31, 2019, Walnut Corp and Teak Corp. exchanged equipment. The exchange met the test for commercial substance for accounting purposes. Details of the carrying values and fair values of the equipment on the date of the exchange were as follows: Walnut equipment Teak equipment Cost \ 800,000 \ 915,000 Accumulated depreciation 400,000 490,000 Fair value 460,000 Not determinable On October 1, 2019, Walnut purchased some land by signing a three-year non-interest-bearing note payable for $500,000. Walnut pays interest at the rate of 12% on other loans and was pleased to get a non-interest-bearing note payable on this deal. Required: Prepare the required journal entries for these transactions, as well as any related year-end adjustments. Ignore income taxes. Round all values to the nearest dollar, if necessary.

What is the meaning of "units-of-production method"?

Growth Industries incurred the following costs in fiscal 2020: Additional information: •Growth Industries estimates that future site restoration of $1 million will be required in 20 years at an interest rate of 8%. •While the equipment has a useful life of 10 years, the engine in the equipment will require replacement in 3 years. The engine has a fair value of $150,000. •The landscaping, parking lot and fences will need to be replaced every 4 years. •The useful life of the building and roof will be 20 years. The heating and air conditioning system will have a useful life of only 10 years. Required: a)Determine how much should be capitalized to property, plant and equipment. b)Provide the journal entries required to record all of these transactions. c)Provide all the adjusting journal entries required at year end for fiscal 2020. d)Assume that the building is painted in fiscal 2021 at a cost of $45,000. Prepare the required journal entry. e)Assume that the engine for the machine requires replacing after 2 years at a cost of 125,000. Prepare the required journal entries. Round all values to the nearest dollar, if necessary.

What is the meaning of "net realizable value"?

Plastic Moulds purchased equipment on January 1, 2019 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: Year Units of Output 2019 2,100 2020 2,000 2021 1,700 022 2,300 2023 1,900 Assuming the company uses the units-of-production depreciation method, what is the depreciation rate per unit for 2019?

Welcome Corporation purchased equipment for $267,000. The equipment is estimated to have a useful life of 10 years and a residual value of $27,000. Welcome uses straight-line depreciation and has a December 31 year end. On January 1, 2023, the net book value of the equipment is $211,000. What is the date of purchase of the equipment?

A machine was acquired on January 1, 2021 for $4,000,000. At that time it was estimated the machine would last eight years and have a residual value of $560,000. Due to reduced levels of activity during 2023, management revised the estimate of useful life to 10 more years (i.e., the machine was to be operational until December 31, 2032, 12 years in total)and its residual value would be $410,000. The company has a December 31 year-end. Required: Case A: Prepare the journal entries to record depreciation for 2021 and 2023. The company uses straight-line depreciation. Case B: Same as Case A except the company uses the double-declining balance method. The rate used will be 25% for the first two years and then 20% thereafter. Prepare the journal entries to record depreciation for 2021 and 2023.

On March 31, 2019, a machine costing $3,000,000 was acquired. The company estimates that the asset will have an estimated useful life of five years and a residual value of $450,000. On April 1, 2024, the asset is sold for $550,000. The company uses straight-line depreciation. The company has a December 31 year-end, and 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. Required: Prepare the entries to record depreciation expense for 2019 and 2020, and all entries required for 2024 as they relate to this asset.

Steep Mountain Ski Resort has been granted a 20-year permit to develop and operate a snow skiing operation in a national park. After 20 years the site must be returned to its original condition. The roads may remain, as they can be used for fire prevention purposes. In the spring and summer before the ski hill opened, the following transactions and events occurred: i.Installed three ski lifts for a total cost of $120,000,000. ii.Built a ski chalet for $60,000,000. iii. Removed trees and cleared the area for ski runs at a cost of $20,000,000. iv. Received $8,000,000 for the trees that were removed for the ski runs. v. Put in roads for a cost of $68,000,000. vi. Paved an area at the base of the mountain for a parking lot at a cost of $11,000,000. vii. Estimated that it would cost $36,000,000 to dismantle the ski lifts in 20 years but that these lifts could be sold as scrap steel for $2,000,000. The chalet could be removed for $24,000,000. Reforesting the site would cost $7,000,000. Removing the parking lot will cost $3,800,000. Required: a. Prepare journal entries to record transactions i. to vi. b. Prepare a journal entry to record transaction vii. Assume all these costs will be set up in a single account called "site restoration cost." Assume a 6% discount rate. Round to the nearest dollar. c. Record all year-end journal entries for the above items for the first year of operations. The company uses straight-line depreciation for all assets. Round to the nearest dollar.

What costs should not be capitalized to "building"?

Ronald exchanged similar assets with Silver Company in a transaction without commercial substance. Ronald gave up equipment that had a net book value of $47,000 (fair value $49,000)and Silver exchanged equipment with a net book value of $36,000 (fair value $35,000). What is the correct value at which Ronald should record the new equipment?

When is property, plant, and equipment (PPE)not derecognized?