Accounting 220 Help Week 5- Chapter 10 & 11

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B-11.01

Scott Drilling Company owns an oil and gas drilling rig. The company is continually spending money to repair, maintain, refurbish, and upgrade this unit. Below is a listing of various costs incurred. Indicate, by placing check marks in the appropriate boxes, if each cost is a "capital" or "revenue" expenditure. If a capital item, indicate whether the cost is more likely considered to be a "replacement" or a "betterment."
	CLASSIFICATION:		FOR CAPITAL ITEMS:
	Capital	Revenue	Replacement	Betterment
Routine cleaning and repainting		✓
Replace of expensive cables and pulleys
Addition of directional drilling motor
Safety inspection fee
Raising and lowering rig at each new drill site
Interest cost on loan to buy rig
Installation of additional advanced lighting system technology
Turntable, deck, and bearings in place of similar worn out unit
Lubrication of all moving parts
Welding broken outrigger mount
Installation of anti-slip flooring on all smooth surface walk ways

&R&"Myriad Web Pro,Bold"&20B-11.01

B-11.01

Worksheet B-11.01


	CLASSIFICATION:		FOR CAPITAL ITEMS:
	Capital	Revenue	Replacement	Betterment
Routine cleaning and repainting		✓
Replace of expensive cables and pulleys
Addition of directional drilling motor
Safety inspection fee
Raising and lowering rig at each new drill site
Interest cost on loan to buy rig
Installation of additional advanced lighting system technology
Turntable, deck, and bearings in place of similar worn out unit
Lubrication of all moving parts
Welding broken outrigger mount
Installation of anti-slip flooring on all smooth surface walk ways

&L&"Myriad Web Pro,Bold"&12Name: Date: Section: &R&"Myriad Web Pro,Bold"&20B-11.01

B-11.01

B-11.02

Robinson Corporation recently requested a contractor to prepare a proposal to refurbish the exterior of its office building. Robinson wanted to give its building a "face lift." The contractor provided the following bid document:
	ROBINSON CORPORATION BID
	Add extension to front porch approach	$ 20,000
	Install shrubs and trees	2,500
	Replace rotting exterior siding material	7,500
	Replace burned out exterior light bulbs	500
	Total for all work:	$30,500
Assume that Robinson Corporation agreed to the bid, and authorized the work. What journal entry would be appropriate for each of the above expenditures?

B-11.02

Worksheet B-11.02


GENERAL JOURNAL
Date	Accounts	Debit	Credit
	To record addition to existing building
	To record addition of landscaping
	To record replacement of siding material
	To record replacement of light bulbs

B-11.02

B-11.03

Ng's Shrimp Company owns a fishing vessel that originally cost $250,000, with a 20-year life, and no anticipated salvage value. Ng uses the straight-line depreciation method. Review the following three independent cases, and prepare the journal entry to reflect the disposition of the boat in each case.
Case 1	After 8 years of ownership, the boat was taken by a storm.
Case 2	After 12 years of ownership, the boat was sold for $175,000.
Case 3	After 15 years of ownership, the boat was sold for $60,000.

B-11.03

Worksheet B-11.03


GENERAL JOURNAL
Date	Accounts	Debit	Credit
Case 1
Case 2
Case 3

B-11.03

B-11.04

Wasson Farming Corporation owned many tractors. The company has usually contracted with a trucking company to haul the tractors to the tractor dealership for repairs. With the aging of the tractors, the company is incurring substantial hauling costs because of the increasing frequency of repairs. The company is considering trading a tractor for a trailer, thereby enabling it to haul tractors without having to hire a trucking company. This exchange transaction would significantly improve the company's cash flow and does have "commercial substance."
The trailer that will be acquired in the exchange has a fair value of $35,000. Wasson owns two tractors that are currently valued at $35,000. One of these two tractors will be exchanged (and no boot will be involved). The owner of Wasson Farming is deciding which tractor to give up, and is interested in learning about the financial statement impact of the exchange. Prepare alternative journal entries, assuming an exchange of Tractor A versus Tractor B. Facts about each tractor follow:
Tractor A	Cost, $100,000; accumulated depreciation $80,000
Tractor B	Cost, $75,000; accumulated depreciation $25,000

B-11.04

Worksheet B-11.04


GENERAL JOURNAL
Date	Accounts	Debit	Credit
Tractor A
Tractor B

B-11.04

B-11.05

Leonard Heinz was recently put in charge of the construction division of McMahan Industries. He has reviewed the plant assets and their related accounting records, and believes certain items are "impaired" and should be charged off to a loss account. Examine the following list and decide if you believe the item is impaired.
	Impaired?
	Yes	No
An abandoned building is slated for demolition	✓
Equipment that will continue to be used as planned in the production of profitable projects; however, a forced sale of the equipment would not recover its book value
Used equipment is no longer in use, but will be sold for more than its book value
Newly purchased assets for which the company significantly overpaid, and which have costs that will not be recovered from future cash flows
Actions of competitors have forced McMahan to permanently lower prices, and certain items of equipment continue to be used at full capacity, even though the resulting production is unprofitable and will not recover cost
The maintenance department failed to properly lubricate the bearings on a crane, and it is now significantly damaged

B-11.05

Worksheet B-11.05


	Impaired?
	Yes	No
An abandoned building is slated for demolition	✓
Equipment that will continue to be used as planned in the production of profitable projects; however, a forced sale of the equipment would not recover its book value
Used equipment is no longer in use, but will be sold for more than its book value
Newly purchased assets for which the company significantly overpaid, and which have costs that will not be recovered from future cash flows
Actions of competitors have forced McMahan to permanently lower prices, and certain items of equipment continue to be used at full capacity, even though the resulting production is unprofitable and will not recover cost
The maintenance department failed to properly lubricate the bearings on a crane, and it is now significantly damaged

B-11.05

B-11.06

McCurdy Oil acquired an existing oil well and all related equipment used in the production of oil. McCurdy paid $2,500,000, of which 20% was attributable to pumps, pipelines, and tanks. The oil well is expected to produce oil as follows:
	Year 1	100 barrels per day
	Year 2	80 barrels per day
	Year 3	60 barrels per day
	Year 4	40 barrels per day
	Year 5	20 barrels per day
At the end of the 5th year, McCurdy anticipates selling the oil well and equipment for $1,000,000. Of this amount, $250,000 is expected to be attributable to the equipment.
Assuming the preceding estimates serve as the basis for depletion, calculate depletion cost for the 3rd year. Prepare an approriate journal entry for depletion. In preparing the entry, assume that all oil is sold at the time of its production (i.e., none of the oil remains in inventory).

B-11.06

Worksheet B-11.06


GENERAL JOURNAL
Date	Accounts	Debit	Credit
Year 3
	To record depletion of oil well

B-11.06

B-11.07

The general journal of Kevin Berry Industries included the following entries relating to various expenditures during 20X5. Review this information and prepare corresponding entries to record any necessary straight-line amortization or other impairment for the year ending December 31.
	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
	1-Jan	Patent	30,000
		Cash		30,000
		Acquired a patent from an inventor. The patent has a 15-year remaining legal life, but it is expected that Berry will utilize the patent for only 5 years.
	15-May	Research Expense	12,000
		Cash		12,000
		Incurred costs in research and development activity. It is possible these costs will result in new product with a 48-month life.
	1-Sep	Inventory	25,000
		Building	75,000
		Goodwill	50,000
		Cash		150,000
		To record purchase of business, expected to be operated successfully for an indefinite number of future years.
	20-Dec	Copyright	10,000
		Cash		10,000
		Purchased copyright to a video production, but concluded that it was worthless by year's end.

B-11.07

Worksheet B-11.07


GENERAL JOURNAL
Date	Accounts	Debit	Credit

B-11.07

I-11.01

Tidwell Corporation's accounting staff was unsure of how to account for certain expenditures relating to its property, plant, and equipment. As a result, the company has delayed recording entries related to the following transactions. In addition, until these items are resolved, the determination of depreciation expense for the year has been delayed.
Item A	The company's delivery truck, originally costing $90,000 and having a 6-year life with no salvage value, was substantially overhauled at a cost of $10,000. This expenditure occurred at the beginning of the year, when the truck was two years old. This action restored the truck to "like-new" condition, and extended the useful life by an additional three years.
Item B	At mid-year, the company added a new $65,000 dust handling unit to the heating and ventilation system in its inventory warehouse. This new feature is supposed to reduce dust from the air and provide for a cleaner environment in which to store inventory. The new dust unit has a 10-year physical life, but it is anticipated that it will be scraped six and one-half years after its installation, when the primary heating system is replaced. As of the beginning of the year, the heating and ventilation system had a cost of $240,000 and accumulated depreciation of $100,000.
Item C	The company entered into a 5-year contract with Reliable Maintenance Services Company. The agreement provides for Tidwell to make monthly payments of $1,500 for all routine cleaning and maintenance activities on shop equipment. Two months of services had been provided and paid as of the end of the year. As of the beginning of the year, shop equipment had a remaining net book value of $300,000, and a remaining life of three years.
Item D	Tidwell entered into a joint agreement with several other companies to mutually acquire an easement on an adjoining tract of land. The easement was needed to provide right-of-way for a future rail transport line extension that will benefit all of the participating companies. Tidwell paid $10,000 for its share of the access easement. The easement is perpetual in nature.
Prepare journal entries for each of the four described expenditures. Then, calculate depreciation, as appropriate, for the expenditure and/or related assets. Assume straight-line depreciation in each case.

I-11.01

Worksheet I-11.01


GENERAL JOURNAL
Date	Accounts	Debit	Credit
Item A

I-11.01

I-11.02

Pierce Corporation recently hired a new manager for its struggling construction division. The manager was given responsibility for streamlining operations and restoring profitability. Selling selected assets is one option under consideration. Begin by reviewing the following asset listing, and prepare hypothetical entries "as if" each asset were sold for cash at its estimated fair value. Then, determine which asset should be sold if the objective becomes to (a) have the largest immediate accounting gain, (b) have the largest immediate accounting loss, (c) result in the highest avoidance of future depreciation expense in periods subsequent to the period of asset sale, (d) produce the most immediate cash inflow, (e) have the largest total asset position, or (f) have no change in total assets.
	Cost	Accumulated Depreciation	Fair Value
Asset A	$ 2,500,000	$ 1,000,000	$ 3,000,000
Asset B	800,000	100,000	700,000
Asset C	4,600,000	500,000	4,000,000
Asset D	3,250,000	1,250,000	1,250,000

I-11.02

Worksheet I-11.02


	GENERAL JOURNAL
	Date	Accounts	Debit	Credit
		To record sale of Asset A
		To record sale of Asset B
		To record sale of Asset C
		To record sale of Asset D
(a)	Largest gain
(b)	Largest loss
(c)	Highest depreciation to avoid
(d)	Largest immediate cash flow
(e)	Largest addition to total assets
(f)	No change in assets

I-11.02