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Financial Accounting By:

Tauseef A.Qureshi
Assignments No 7
Plant Assets & Depreciation

MACRS Depreciation Rates

Year 3 Years 5 years 7 years 10 years 15 years 20 Years

1 33.33% 20 % 14.29 % 10 % 5% 3.75 %
2 44.45 32 24.49 18 9.5 7.219
3 14.81 19.20 17.49 14.40 8.55 6.677
4 7.41 11.52 12.49 11.52 7.7 6.177
5 11.52 8.93 9.22 6.93 5.713
6 5.76 8.92 7.37 6.23 5.285
7 8.93 6.55 5.9 4.888
8 4.46 6.55 5.9 4.522
9 6.56 5.91 4.462
10 6.55 5.90 4.461
11 3.28 5.91 4.462

Problem 1: Argo Industries

On April 1,1998, Argo Industries purchased new equipment at a cost of $

325,000.The useful life of this equipment was estimated at 5 years, with a residual
value of $ 25,000.
For income tax purposes, however, this equipment is classified as “3 year property “.

Required:
Compute the annual depreciation expense for each year until equipment fully
depreciated under each depreciation method.
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a. Straight Line
b. 200 % - declining balance, with half year convention.
c. MACRS accelerated rates for : “3 year property”

Problem 2: Glass Recycling Company

On Nov 2, Glass recycling company purchased special-purpose equipment at a cost

of
$ 600,000. The useful Life of the equipment was estimated to be 5 years, with a
residual value of $ 90,000.The company uses straight-line depreciation ( half year
convention) for financial reporting purposes and the MACRS for tax purposes.

Required:
a. Compute the depreciation expense to be recognized each calendar year for
the financial reporting purposes.
b. Compute the depreciation expense to be recognized each calendar year for
tax reporting purposes ( Use Table).Assume that the equipment is “ 3 years
property’

Problem 3: Delta Company

On April 15,1999 Delta company acquired a new machine with an estimated useful
life of 5 years. Cost of the equipment was $ 55,000, with a residual value of $ 5,000.
For tax purposes this machinery is classifies as “5 years property”.

Required:
Compute the amounts of depreciation recognized in each of the first 3 years ( 1999,
2000 and 2001) under each of the three depreciation methods. In each case, assume
the half year convention is applied in 1999.( MACRS tables automatically apply the
half- year convention)
1. Straight Line.
2. Double declining method
3. MACRS

Problem 4: Ogilvie Construction

Ogilvie Construction traded in a used crane on a similar new one. The original cost of
the old crane was $ 60,000, and in both Oglivie’s accounting records and income tax
returns the accumulated depreciation amounted to $ 48,000.The new crane cost
$ 75,000 but Ogilvie was a given a trade-in allowance of $ 15,000.

Required:
a. What amount of cash must Ogilvie pay?
b. Compute the gain or loss that would be reported on disposal of the old crane
under GAAP.
c. Compute the cost basis of the new crane for income tax purposes.

Problem 5 : Crystal Car Wash

Early this summer, Crystal Car Wash purchased new business car washing equipment
for all 10 of its car washes. The following information refers to the purchase and
installation of this equipment.
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1. The list price of the brushless equipment was $7,200 for the equipment needed at
each car wash. Because Crystal Car Wash purchased 10 sets of equipment at one
time, it was given a special package price of $63,000 for all the equipment.
Crystal paid $23,000 of this amount in cash (no cash discount was allowed) and
issued a 90 day, 8% note payable for the remaining $40,000. Crystal paid this
note promptly at its maturity date, along with $800 in accrued interest charges.

2. In addition to the amounts described above, Crystal paid sales taxes of $3,780 at
the date of purchase.

3. Freight charges for the delivery of the equipment totaled 3,320.

4. Crystal paid a contractor $2,250 per location to install the equipment at six of
Crystal’s car washes. Management was able to find a less expensive contractor
who installed the equipment in the remaining four car washes at a cost of $1,900
per location.

5. During installation one of the new machines was accidentally damaged by an

employee of Crystal Car Wash. The cost to repair this damage, $914, was paid by
Crystal.

6. As soon as the machines were installed, Crystal Car Wash paid $5,700 for a
series of radio commercials advertising the fact that it now uses brushless
equipment in all of its car washes.

Required:

a) In one sentence make a general statement summarizing the nature of the

expenditures properly included in the cost of plant and equipment.

b) Prepare a list of expenditures that should be included in the cost of the

equipment. (Determine the total cost of the equipment at all 10 locations; do not
attempt to separate costs by location.)

c) Prepare a journal entry at the end of the current year to record

depreciation on this equipment. Crystal depreciates this equipment by the
straight-line method over an estimated useful life of 10 years, assumes zero
salvage value and applies the half-year convention.

Problem 6 Atlantic Iron works

On October 26, 1998, Atlantic Iron Works acquired new machinery at a cost of
$50,000. The machinery has an estimated useful life of 5 years, with a residual value
of $20,000. For income tax purposes, this machinery qualifies as 3-yer property.

Required:
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a) Compute the annual depreciation expense for each year using each of the two
depreciation methods listed below. Because you will record depreciation for only
a fraction of a year in 1998, the straight-line depreciation schedule will extend to
the year 2003.

1. straight-line, using the half-year convention

2. MACRS, the method Atlantic uses in its income tax returns

b) In this situation, would it be appropriate for Atlantic Iron to use MACRS in its
financial statements as well as in its income tax returns? Explain the reasoning
behind your answer.

Problem 7 Crown Developers

During the current year, Crown Developers disposed of plant assets in the
following transactions:

Feb. 10 Office equipment costing $14,000 was given to a scrap dealer. No

proceeds were received from the scrap dealer. At the date of disposal,
accumulated depreciation on the office equipment amounted to $11,900.

Apr. 1 Crown sold land a building to Villa Associates for $630,000, receiving
$200,000 in cash and a 5-year note, 10% note receivable for $430,000.
Crown’s accounting records showed the following amounts: land,
$120,000; building, $350,000; accumulated depreciation: building (as of
April 1), $115,000.

Aug. 15 Crown traded in an old truck for a new one. The old truck had cost
$11,000, and accumulated depreciation amounted to $7,000. the list price
of the new truck was $17,000; Crown received a $5,000 trade-in
allowance for the old truck and paid the $12,000 balance in cash. (trucks
are included in the vehicles account)

Oct. 1 Crown traded in its old computer system as part of the purchase of a new
system. The old computer had cost $150,000 and, as of October 1,
accumulated depreciation to $110,000. the new computer had a list price
of $90,000. Crown was granted a $10,000 trade in allowance for the old
computer system, paid $30,000 in cash, issued a $50,000, 2-year, 9% note
payable to Action Computers for the balance. (computers are included in
the office equipment account.)
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Required:

Prepare journal entries to record each of these transactions. Assume that

deprecation expense on each asset already has been recorded up to the date of
disposal. Thus you need not update the accumulated depreciation figures stated in
the problem.
Solution to Assignment 9 (Pant Assets & Depreciation)

Problem 1: Argo Industries

Ist Apr98 Equipment cost: $ 325,000 Life: 5 years Residual Value: $ 25,000

Dep per year = 325,000-25,000/5 = $ 60,000 $ 5,000 pm

Year St.Line 200 % declining balance MACRS

1998 $ 45,000 $ 65,000 325,000 x 33.33 % 108,322.50

1999 60,000 104,000 325,000 x 44.45 % 144,462.50
2000 60,000 62,400 325,000 x 14.81 % 48,132.50
2001 60,000 37,440 325,000x 7.41 % 24,082.50
2002 60,000 22,464 0
2003 15,000 8696 0___
$ 300,000 $ 300,000 $ 325,000

( b)Rate: St Line $ 60,000 is 20 % of Equipment cost ( 325,000 – 25,000)

200 % declining rate is 40 %
Cost Dep Exp Book Value
1998 $ 325,000 $ 65,000 $ 260,000
1999 260,000 104,000 156,000
2000 156,000 62,400 93,600
2001 93,600 37,440 56,160
2002 56,160 22,464 33,696
2003 33,696 8,696 25,000

Problem 2: Glass Recycling Company

Cost: $ 600,000 Useful Life: 5 Years Residual Value: $ 90,000

Year St.Line MACRS ( 5 year property)

( ½ year convention)
1 $ 51,000 600,000 x 33.33 % = $ 199,980
2 102,000 600,000 x 44.45 = 266,700
3 102,000 600,000 x 14.81 = 88,860
4 102,000 600,000 x 7.41 = 44,460
5 102,000 0
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6 51,000 0
$ 510,000 $ 600,000

Problem 3: Delta Company

Cost $ 55,000 Residual value: $ 5,000 Life 5 years
Dep expense = 10,000 per year

Year St.Line 200 % declining balance MACRS

1 5,000 55,000x40%x1/2 = 11,000 55,000x20% = 11,000

2 10,000 44,000x40% = 17,600 55,000x 32% = 17,600
3 10,000 26,400x40 % =10,560 55,000x 19.2% = 10,560

In early years MACRS and DD method are same because the MACRS rates are based upon declining
balance method with a half year convention

Problem 4: Ogilvie Construction

a. $ 60,000 ( $ 75,000 less $ 15,000 trade-in allowance)

b. Trade in allow $ 15,000
Less Book Value ( $ 60,000 - $ 48,000) 12,000
Gain on Trade in $ 3,000
c. $ 72,000 ( $ 12,000 BV of old crane, plus $ 60,000 cash paid)
d. A loss on a like-kind exchange is not deductible for IT purposes, but a loss on
a sale is. Therefore, if a loss will result, it would be advantageous for Ogilvie
to sell the old crane rather than trade it in.

Problem 5: Crystal Car Wash

a. The cost of pant and equipment includes all expenditure that are reasonably and
necessary in acquiring the asset and placing it in a position and condition for use in
the operation of business.

b. Expenditure that should be debited to the equipment account:

Purchase Price $ 63,000

Sales Tax 3,780
Freight Charges 3,320
Installation Chares 21,100 ( 2250x6+1900x4)
Total Cost $ 91,200

c. Depreciation Expense $ 4,560 ( 91,200 ÷10 years x ½)

Acc Depreciation $ 4,560
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Problem 6: Atlantic Iron works

Cost: 50,000 St.Line Dep = $ 50,000 – 20,000

Life: 5 years 5
Residual Value: $ 20,000 = 6000 per year

Year St.Line MACRS

1998 ( 6000 x ½) 3,000 50,000x33.33% = $ 16,665
1999 6,000 50,000x44.45 = 22,225
2000 6,000 50,000x14.81 = 7,405
2001 6,000 50,000x 7,41 = 3,705
2002 6,000 0
2003 3,000 ________
$ 30,000 $ 50,000

Problem 7 Crown Developers

Feb 10 Loss on disposal of Pant assets $ 2,100

Acc Dep – Office Equipment 11,900
Office Equipment 14,000

Apr 01 Cash $ 200,000

Notes Receivable 430,000
Acc Dep –Building 115,000
Land $ 120,000
Building 350,000
Gain on sale of plant assets 275,000

Aug 15 Vehicles ( new truck) $ 17,000

Acc Dep Vehicle (old) 7,000
Vehicles ( old) $ 11,000
Gain on disposal 1,000
Cash 12,000

Oct 01 Off equip ( new) 90,000

Loss on trade-in of palnt asset 30,000
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Acc Dep – Off Equip (old) 110,000

Office equipment ( old computer) 150,000
Cash 30,000
Notes Payable 50,000

Additonal Questions

Problem#1:

Sarasota sodas distribute soft drinks manufactured by other companies. On Dec31, 1994,
Sarasota had the following long-lived assets.

Land………………………………………………………...……………… 300,000
Building……………………………………………………..$ 250,000
Less: accumulated depreciation building……………………..22,500 227,500
Delivery equipment…………………………………………. $ 60,000
Less: accumulated depreciation delivery equipment……22,000 38,000

The following transactions and events affecting long lived assets occurred during 1995:

Jan1: sold a delivery truck for $23000.the truck had cost$35000 and has accumulated
depreciation on dec31, 1994 of 15000.

Feb1: acquired a patent for guava-fizz, a new soft drink for $30000.the patent is expected
to have an economic life of 5yrs and no salvage value.

Apr 1: purchase a canning machine for $320,000 and a packing machine for $150,000 to
use in canning and packing guava-fizz the canning machine is expected to have a useful
life of 8 yrs and a salvage value of $40,000 the packing machine is expected to last 6 yrs
and has a 3000 salvage the double declining balance method will be used to depreciate
the canning machine the sum of the years digit depreciation method will be used for the
packing machine.

Nov1: exchange an old delivery truck for a new one the old truck had cost $25,000 had
an estimated salvage value of $1000 and had an estimated useful life of 5 yrs .the straight
line method of depreciation was used. Accumulated depreciation on the old truck on Dec,
31, 1994 was $7000 .the new truck has a fair market value of $40000.sarasota gave the
old truck and $28,000 cash in the exchange.

Dec 31: the accounting year ended .record all depreciation and amortization. The building
has a useful life of 10 yrs and $25,000 salvage value; straight line depreciation is used.
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Straight line is used also for the new delivery truck, which has a useful life of 5 yrs and a
salvage value of $4000.

Required:
Prepare entries to record each of the transactions and events listed below.

Problem # 2:
Calculating depreciation when estimated life is revised
Darby dairy purchased automated milking and feeding equipment on Jan, 1, 1995, for
$937,500. The equipment was estimated to have a 10yrs useful life and a salvage value of
$37,500.on Jan 1, 1998, Darby’s management revised the useful life estimated to a total
of 15yrs (through Dec 31, 2009). This was necessary because equipment innovations had
not occurred as rapidly as originally expected .salvage is expected to remain at $37,500.
Required:
1. Calculate the depreciation that should be recorded on Dec, 31, 1995, 1996 and
1997.assume the Darby uses the straight line method of depreciation.
2. Calculate the depreciation that should be recorded on Dec, 31, 1998 based on the
revised useful life and straight line depreciation.
3. Calculate the depreciation that should be recorded on Dec, 31, 1995, 1996 and 1997.
Assume that the Darby uses the double declining balance method of depreciation.
4. Calculate the depreciation that should be recorded on Dec, 31, 1998, based on the
revised useful life and double declining balance depreciation.
(Check figure: 1998 double declining depreciation = $80000)

Problem # 3:
Recording acquisition, depreciation, and disposal of an asset and preparing a subsidiary
ledger record
People movers co. uses a system of subsidiary ledger records for each of its major
property, plant and equipment assets. The transactions described below relate to one of
those assets:
Nov 1, 1994 purchased a tram (serial no.22k3345rt) for 201,600 from Norris equipment
inc. the tram is assigned to the Trenton, New Jersey, branch and is the responsibility of
the branch manager. The chief property accountant assigned the tram an identification
number, 437-7450 and specified that it be depreciated on the straight line method. The
tram’s expected useful life is 8 yrs and its salvage value is estimated to be $17280.
Dec, 31, 1994 recorded depreciation for the year
Dec, 31, 1995 recorded depreciation for the year
Apr, 30, 1996 sold the tram for $172,000 cash. Recorded depreciation for the first 4
months for the year and recorded the sale.
Required:
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1. Prepare journal entries to record each of the transactions and events above. Trams are
recorded in general ledger accounts no.437, light equipment. Show calculations to
support each entry.
2. The head bookkeeper will post the transactions to the journal ledger accounts.
Establish a subsidiary ledger accounts and post the transactions to it.
(Check figure: gain on sale of tram = $4960)

Problem # 4:
Recording sales and exchange of long lived assets.
Topton Inc’s, dec.31, 1995 balance sheet includes the following property, plant and
equipment assets:
Land……………………………………………………………………………. $750,000
Building……………………………………………………….. $1,800,000
Less: accumulated depreciation………………………… 1,600,000 200,000
Refrigeration equipment ……………………………………….. $460,000
Less: accumulated depreciation……………………………………220,000 240,000

Delivery trucks …………………………………………………..$125,000

Less: accumulated depreciation……………………………..99,200 25,800

The following transactions affecting plant, property and equipment assets took place
during 1996:

a. on jan,1 the land and building were sold for $1,175,000.topton has decided to lease
space as soon as an acceptable facility can be located.

b. on june,1 the old refrigeration equipment was traded in for similar units with a larger
capacity. The fair market value of the new assets was $650,000.topton was required to
pay $450,000 cash in addition to giving the old equipment. Straight line depreciation on
the old equipment is $1000 per month.

c. on oct,1, the old delivery trucks were traded for new ones. Topton was required to pay
$158,000 in addition to trading the old trucks. The new trucks have a fair market value of
$182,000.straight line depreciation on the old truck is $1,600 per month.

Required:
Prepare journal entries to record each of the 1996 transactions. Support each entry with
clearly labeled calculations.
(Check figure: cost of new delivery trucks = 169,400)

Problem # 5:
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Recording acquisition, depreciation and disposal of a truck

Bucks co. was established to move hazardous waste to federally approve disposal
stations. Debra Dublin, owner of the company, entered into the following transactions
related to the truck during the first 2 years of operation:
1995
Mar.2 purchased a truck chassis for $30,000 cash.
Mar.3 paid $7050 to have the truck fitted with special shock absorbers, double walled
tanks and heavy duty bumpers.
Mar.15 paid $1350 to have the truck painted with the company’s color and logo.
Apr.1 places the truck in service and began to operate
Oct.14 paid $235 to willow garage for a tune-up and oil change.
Dec.31 recorded straight line depreciation on the truck beginning with the day it was
placed in service. Estimated life is 3yrs; estimated salvage value is $4380
1996
Aug.31 traded the truck for a new one. The new truck has a fair cash price of $105,000.
Debra gave the old truck and $81,465 cash .the new truck was placed in service the next
day.(record depreciation on the old truck for 8 months)
Oct.5 paid willow garage $1200 to perform routine maintenance on the new truck for the
next 12 months .bucks co.’s first service was oct.5
Dec.31 record straight line depreciation on the new truck .estimated life is four years;
estimated salvage value is $10,200
Dec.31 recorded the appropriate adjusting entry for maintenance contract.
Required:
Prepare entries in journal general form to record each of the transactions and events listed
.where appropriate, show calculations to support your entries.
(Check figure: depreciation expense.dec31, 1996= 7800)

Problem # 6:
Recording acquisition, depreciation and disposal of a truck.
Dauphin delivery specializes in delivering live animals to pet stores and zoos. The
following transactions related to the truck took place during the first two years of
operations:
1995
Jan2: purchased a used truck for $4250 cash.
Jan.3 paid $125 to have the truck towed to the city that serves as the base of operations.
Feb15: paid $1125 to have the engine, brakes and transmission overhauled.
Feb.21 paid$2000 to have cushioned, air conditioned compartments installed in the bed
of the truck.
Mar.1: placed the truck in service and began to operate.
July.27 paid $65 to Pete’s garage for a tune-up and oil change.
Dec31 recorded straight line depreciation on the truck beginning with the day it was
placed in service. Estimated life is 3yrs and estimated salvage value is $750.
1996
Nov30 traded the truck for a new one. the new truck has a fair cash price of $21000.
Dauphin gave the old truck and $16938 cash. The new truck was placed in service the
next day.(record depreciation on the old truck for 11 months)
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Dec.31 recorded straight line depreciation on the truck. Estimated life is 4yrs, and
estimated salvage value is $660.