Intermediate Accounting 18th Edition By Stice – Test Bank

Chapter 11 429
PRACTICE 11–5 COMPUTING SERVICE-HOURS DEPRECIATION
1. and 2.
Rate per service hour: [($81,000 – $15,000)/20,000 hours] = $3.30 per hour
Depreciation Accumulated Book
Year Computation Amount Depreciation Value
1 9,000 hours × $3.30 per hour $29,700 $29,700 $51,300
2 5,000 hours × $3.30 per hour 16,500 46,200 34,800
3 4,000 hours × $3.30 per hour 13,200 59,400 21,600
4 2,000 hours × $3.30 per hour 6,600 66,000 15,000
PRACTICE 11–6 COMPUTING PRODUCTIVE-OUTPUT DEPRECIATION
1. and 2.
Rate per unit: [($70,000 – $5,000)/13,000 units)] = $5 per unit
Depreciation Accumulated Book
Year Computation Amount Depreciation Value
1 3,000 units × $5 per unit $15,000 $15,000 $55,000
2 5,000 units × $5 per unit 25,000 40,000 30,000
3 2,000 units × $5 per unit 10,000 50,000 20,000
4 3,000 units × $5 per unit 15,000 65,000 5,000
PRACTICE 11–7 COMPUTING GROUP DEPRECIATION
Acquisition Salvage Useful
Cost Value Life Expense
Asset 1 $ 64,000 $ 4,000 6 years $10,000
Asset 2 90,000 10,000 10 8,000
Asset 3 42,000 6,000 9 4,000
Asset 4 30,000 0 5 6,000
Totals $226,000 $28,000
$28,000/$226,000 = 0.12389
This percentage is applied to the total original cost of all assets in the group in order to
compute total annual depreciation expense.

PRACTICE 11–8 GROUP DEPRECIATION: RECORDING ASSET SALES
1. With group depreciation, gains and losses are typically not recognized on the sale
of individual assets.
Cash……………………………………………………………………………………….. 22,000
Accumulated Depreciation ………………………………………………………. 20,000
Asset 3 ………………………………………………………………………………. 42,000
Accumulated Depreciation is the plug figure in this entry. We assume that the
overall depreciation policy is accurate, so no gains or losses are recorded when
disposing of group assets.
2. The group rate percentage is normally left the same unless there is persuasive
evidence for the need of a change.
($64,000 + $90,000 + $30,000 + $50,000) × 0.12389 = $28,990
PRACTICE 11–9 ASSET RETIREMENT OBLIGATION
The present value of the asset retirement obligation is computed as follows:
Business calculator keystrokes:
FV = $250,000; I = 6%; N = 12 years → $124,242
The total cost of the landfill site is $649,242 = $525,000 + $124,242
Depreciation expense: $649,242/12 years = $54,104
Accretion expense: $124,242 × 0.06 = $7,455
PRACTICE 11–10 COMPUTING DEPLETION EXPENSE
1. Depletion rate = (January 1 cost – Residual value)/January 1 tons
($100,000 – $20,000)/5,000 tons = $16.00 per ton
900 tons × $16.00 per ton = $14,400 depletion expense
2. Depletion Expense ………………………………………………………………….. 14,400
Accumulated Depletion (or Mine)………………………………………… 14,400
PRACTICE 11–11 CHANGE IN ESTIMATED LIFE
Annual depreciation using the original estimates:
($40,000 – $4,000)/9 years = $4,000 annual depreciation expense
Total accumulated depreciation after three years:
$4,000 annual depreciation expense × 3 years = $12,000

PRACTICE 11–11 (Concluded)
Remaining useful life after three years:
New estimate of 7 years – 3 years already elapsed = 4 years remaining
Annual depreciation using the revised estimates in the fourth year:
[($40,000 – $12,000 accumulated depreciation) – $8,000]/4 years = $5,000 annual
depreciation expense
PRACTICE 11–12 CHANGE IN ESTIMATED UNITS OF PRODUCTION
1. Depletion rate for Year 1 = January 1 cost/January 1 tons
$300,000/2,000 tons = $150.00 per ton
900 tons × $150.00 per ton = $135,000 depletion expense
2. Depletion rate for Year 2 = January 1 cost/January 1 tons
($300,000 – $135,000 + $120,000)/(600 tons + 700 tons) = $219.23 per ton
600 tons × $219.23 per ton = $131,538
PRACTICE 11–13 CHANGE IN DEPRECIATION METHOD
Annual depreciation using the original estimates:
($80,000 – $8,000)/8 years = $9,000 annual depreciation expense
Total accumulated depreciation after three years:
$9,000 annual depreciation expense × 3 years = $27,000
Book value at the end of three years:
$80,000 – $27,000 = $53,000
Straight-line rate – 100%/5 = 20%
Double the straight-line rate: 20% × 2 = 40%
Year 4 depreciation expense: $53,000 × 40% = $21,200
PRACTICE 11–14 DETERMINING WHETHER A TANGIBLE ASSET IS IMPAIRED
The equipment is not impaired. The relevant comparison is the book value of the
asset to the sum of the expected future cash flows.
Sum of future cash flows ($65,000 × 14 years) $910,000
Book value ($1,500,000 – $600,000) 900,000
Because the sum of future cash inflows is more than the book value of the asset, no
impairment has occurred. In testing for impairment, the current value of the asset is
not used. Therefore, the equipment should continue to be reported in the company’s
books at its net book value of $900,000.

PRACTICE 11–15 RECORDING A TANGIBLE ASSET IMPAIRMENT
1. The building is impaired. The relevant comparison is the book value of the building
to the sum of the expected future cash flows.
Sum of future cash flows ($40,000 × 30 years) $1,200,000
Book value ($1,500,000 – $250,000) 1,250,000
Because the sum of future cash inflows is less than the book value of the asset,
the building is impaired.
2. Accumulated Depreciation ………………………………………………………. 250,000
Loss on Impairment ($1,250,000 – $600,000)…………………………….. 650,000
Building……………………………………………………………………………… 900,000
PRACTICE 11–16 RECORDING UPWARD ASSET REVALUATIONS
Building ($730,000 – $500,000)…………………………………………………. 230,000
Accumulated Depreciation ………………………………………………………. 40,000
Revaluation Equity Reserve ……………………………………………….. 270,000
PRACTICE 11–17 RECORDING AMORTIZATION EXPENSE
Amortization Expense……………………………………………………………… 62,500
Accumulated Amortization …………………………………………………. 62,500
$250,000/4 years = $62,500 annual amortization expense
(Note: Straight-line amortization is used unless there is compelling evidence for
using another method.)
PRACTICE 11–18 GOODWILL IMPAIRMENT
Estimated fair value of the Manufacturing reporting unit:
Present value of $700 per year for 10 years at 10% = $4,301
With a business calculator:
Make sure to toggle so that the payments are assumed
to occur at the end (END) of the period.
PMT = $700; N = 10; I = 10% → PV = $4,301
Net book value of the assets and liabilities of the Manufacturing reporting unit:
Assets ($7,000 + $2,000) – Liabilities ($4,000) = $5,000
Because the estimated fair value of the reporting unit ($4,301) is less than the net book
value of the reporting unit ($5,000), further computations are needed to determine the
amount of a goodwill impairment loss, if any.

PRACTICE 11–18 (Concluded)
Implied fair value of goodwill as of December 31:
Fair value of identifiable assets + Fair value of goodwill – Fair value of liabilities =
Total fair value
$8,000 + Fair value of goodwill – $4,000 = $4,301
Fair value of goodwill = $301
Journal entry necessary to recognize the goodwill impairment loss:
Goodwill Impairment Loss……………………………………………………….. 1,699
Goodwill ($2,000 – $301) …………………………………………………….. 1,699
PRACTICE 11–19 EXCHANGE OF ASSETS
1. Land ……………………………………………………………………………………….. 400,000
Accumulated Depreciation ………………………………………………………. 340,000
Gain on Exchange ($400,000 – $360,000)…………………………….. 40,000
Building……………………………………………………………………………… 700,000
2. Land ……………………………………………………………………………………….. 200,000
Accumulated Depreciation ………………………………………………………. 340,000
Loss on Exchange ($360,000 – $200,000) …………………………………. 160,000
Building……………………………………………………………………………… 700,000
PRACTICE 11–20 CLASSIFYING AN ASSET AS HELD FOR SALE
1. Building—Held for Sale ($145,000 – $9,000)……………………………… 136,000
Loss on Held-for-Sale Classification………………………………………… 14,000
Accumulated Depreciation—Building ………………………………………. 225,000
Building……………………………………………………………………………… 375,000
2. Building Held for Sale ……………………………………………………………… 14,000
Gain on Recovery of Value—Held for Sale…………………………… 14,000
Computation of gain: ($170,000 – $9,000) – $136,000 = $25,000; maximum gain that
can be recognized is the amount of the initial loss recognized upon classification
as held for sale = $14,000.
PRACTICE 11–21 EXCHANGE OF ASSETS
1. New Asset……………………………………………………………………………….. 150
Accumulated Depreciation (old asset) ……………………………………… 850
Old Asset …………………………………………………………………………… 1,000

PRACTICE 11–21 (Concluded)
2. Cash……………………………………………………………………………………….. 300
New Asset……………………………………………………………………………….. 100
Accumulated Depreciation (old asset) ……………………………………… 850
Gain on Exchange ($400 – $150 book value) ……………………….. 250
Old Asset …………………………………………………………………………… 1,000
3. Cash……………………………………………………………………………………….. 80
New Asset……………………………………………………………………………….. 120
Accumulated Depreciation (old asset) ……………………………………… 850
Gain on Exchange………………………………………………………………. 50
Old Asset …………………………………………………………………………… 1,000
Market value of old asset = $400
Indicated gain on exchange of old asset = $400 – $150 book value = $250 implied
gain
Recognized gain = [$80/($80 + $320)] × $250 = $50
Recorded asset value = $320 less deferred gain of $200 = $120
PRACTICE 11–22‡
DEPRECIATION FOR PARTIAL PERIODS
1. Depreciation expense this year:
($100,000 – $15,000) × (5/15) × (9/12) = $21,250
Depreciation expense next year:
($100,000 – $15,000) × (4.25/15) = $24,083
2. Double-declining-balance percentage: (100%/5 years) × 2 = 40%
Depreciation expense this year:
$100,000 × 0.40 × (9/12) = $30,000
Depreciation expense next year:
($100,000 – $30,000) × 0.40 = $28,000
PRACTICE 11–23‡
INCOME TAX DEPRECIATION
According to the MACRS class-life definitions, ships are 10-year property, and 200%
declining-balance depreciation, with a half-year convention, is used.
Double-declining-balance percentage: (1.00/10 years) × 2 = 0.20, or 20%
Depreciation deduction this year:
$850,000 × 0.20 × (6/12) = $85,000
Depreciation deduction next year:
($850,000 – $85,000) × 0.20 = $153,000
‡
Relates to Expanded Material.

Chapter 11 435
EXERCISES
11–24. 1. Purchase price …………………………………………… $38,400
Freight costs………………………………………………. 3,000
Installation costs………………………………………… 1,600
Machine cost ……………………………………………… $43,000
2. (a) Straight-line method: ($43,000 – $600) × 1/8 = $5,300
(b) Service-hours method: ($43,000 – $600) = $1.33 * per hr. × 3,000 hrs.
32,000 hours used = $3,990
*Rounded
11–25.
Purchase of mixer:
2013
Jan. 1 Mixing Equipment………………………………………… 54,000
Prepaid Maintenance …………………………………… 3,000
Cash ………………………………………………………. 57,000
To record purchase of mixer.
Dec. 31 Depreciation Expense………………………………….. 6,750*
Accumulated Depreciation—Mixing
Equipment ……………………………………………… 6,750
To record depreciation for year.
*($54,000/20,000 = $2.70 per hour × 2,500 hrs. = $6,750)
31 Maintenance Expense………………………………….. 1,500
Prepaid Maintenance………………………………. 1,500
Assume written off over two years of
contract.
2014
Dec. 31 Depreciation Expense………………………………….. 8,100*
Accumulated Depreciation—Mixing
Equipment ……………………………………………… 8,100
*($54,000/20,000 = $2.70 per hour × 3,000 hrs. = $8,100)
31 Maintenance Expense………………………………….. 1,500
Prepaid Maintenance………………………………. 1,500

11–26. 1. Equipment:
Total depreciable cost
Annual depreciation expense = Average useful life
($250,000 $160,000)
($680,000 $68,000)
−
− = 6.8 years
2. Buildings:
Total depreciable cost
Annual depreciation expense = Average useful life
($2, , $245, )
($340, $230, )
450 000 000
000 000
−
− = 20.0 years
11–27. 1. Double-declining-balance method:
$196,000 × 0.22222 × 6/12 = $21,778
2. Productive-output method:
$ 196,000
– 20,000
$ 176,000/375,000 yds. = $0.46933 × 49,500 yds. = $23,232
3. Service-hours method:
$ 196,000
– 20,000
$ 176,000/50,000 hrs. = $3.52 × 6,500 hrs. = $22,880
4. Straight-line method:
$ 196,000
– 20,000
$ 176,000 × 0.1111 × 6/12 = $9,777
The productive-output method allows the greatest depreciation expense for
2013.
11–28. 1. Depreciation rate per
thousand units produced:
$100, $4, $320 000 000
300
− =
Balance of
End of Unit Accumulated Asset
Year Output Depreciation Expense Depreciation Book Value
$100,000
2011 80,000 (80 × $320) = $25,600 $25,600 74,400
2012 120,000 (120 × 320) = 38,400 64,000 36,000
2013 40,000 (40 × 320) = 12,800 76,800 23,200
240,000 $76,800
2. Accumulated Depreciation—Equipment …………………….. 76,800
Loss on Disposal of Damaged Equipment………………….. 23,200
Equipment……………………………………………………………. 100,000
To write off damaged equipment.
11–29. Description Cost Salvage Base Life Depr.
Delivery truck……… $37,000 $8,000 $29,000 7 yrs. $4,143
Circular saws ……… 725 180 545 5 109
Workbench …………. 460 0 460 10 46
Forklift………………… 11,000 950 10,050 6 1,675
Totals……………… $49,185 $9,130 $40,055 $5,973
1. $5,973
2. $5,973/$49,185 = 12.14%
3. $40,055/$5,973 = 6.7 years
11–30. 1. 2013 Furniture ………………………………………………… 35,000
Cash ……………………………………………………. 35,000
Cash………………………………………………………. 8,000
Accumulated Depreciation—Furniture…….. 19,000
Furniture ……………………………………………… 27,000
Depreciation Expense …………………………….. 27,930*
Accumulated Depreciation—Furniture….. 27,930
*[($125,000 + $35,000 – $27,000) × 0.21
= $27,930]
2014 Furniture ………………………………………………… 27,600
Cash ……………………………………………………. 27,600
Cash………………………………………………………. 6,000
Accumulated Depreciation—Furniture…….. 9,000
Furniture ……………………………………………… 15,000
Depreciation Expense …………………………….. 30,576*
Accumulated Depreciation—Furniture….. 30,576
*[($133,000 + $27,600 – $15,000) × 0.21
= $30,576]
2015 Furniture ………………………………………………… 24,500
Cash ……………………………………………………. 24,500
Cash………………………………………………………. 8,000
Accumulated Depreciation—Furniture…….. 24,000
Furniture ……………………………………………… 32,000
Depreciation Expense …………………………….. 29,001*
Accumulated Depreciation—Furniture….. 29,001
*[($145,600 + $24,500 – $32,000) × 0.21
= $29,001]