Chapter 7 (Week 9 lecture)

Tutorial question (P7-5A, P7-7A, P7-8A)

P7–5A University Car Wash built a deluxe car wash across the street from campus. The new machines
cost $270,000 including installation. The company estimates that the equipment will have a residual
value of $24,000. University Car Wash also estimates it will use the machine for six years or about 12,000
total hours. Required: Prepare a depreciation schedule for six years using the following methods:

1. Straight-line.
Depreciable x Depreciable = Depreciation Accumulated
Year Book value
cost Rate Expense depreciation
1
2
3
4
5
6

2. Double-declining
Depreciable x Depreciable = Depreciation Accumulated
Year Book value
cost Rate Expense depreciation
1
2
3
4
5
6

3. Activity-based - Actual use per year was as follows:

Hours Used x Depreciable = Depreciation Accumulated
Year Book value
Rate Expense depreciation
1 3,100
2 1,100
3 1,200
4 2,800
5 2,600
6 1,200
P7–7A Solich Sandwich Shop had the following long-term asset balances as of December 31, 2023:
Cost Accumulated Book Value
Depreciation

Land $ 95,000 − $ 95,000

Building 460,000 $(165,600) 294,400

Equipment 235,000 (50,000) 185,000

Patent 250,000 (100,000) 150,000

Additional information:
1. Solich purchased all the assets at the beginning of 2022.
2. The building is depreciated over a 10-year service life using the double-declining-balance method and
estimating no residual value
3. The equipment is depreciated over a nine-year service life using the straight-line method with an estimated
residual value of $10,000.
4. The patent is estimated to have a five-year useful life with no residual value and is amortized using the
straight-line method.
5. Depreciation and amortization have been recorded for 2022 and 2023 (first two years).
Required:

1. For the year ended December 31, 2024, record depreciation expense for buildings and
equipment. Land is not depreciated.
2. For the year ended December 31, 2024, record amortization expense for the patent.

3. Calculate the book value for each of the four long-term assets at December 31, 2024.

P7–8A New Morning Bakery is in the process of closing its operations. It sold its two-year-old bakery
ovens to Great Harvest Bakery for $700,000. The ovens originally cost $910,000, had an estimated
service life of 10 years, had an estimated residual value of $60,000, and were depreciated using straight-
line depreciation. Complete the requirements below for New Morning Bakery.

Required:
1. Calculate the balance in the Accumulated Depreciation account at the end of the second year.

2. Calculate the book value of the ovens at the end of the second year.

3. What is the gain or loss on the sale of the ovens at the end of the second year?

4. Record the sale of the ovens at the end of the second year.
Take-home question (P7-1A, P7-4A, P7-6A, RWP7-6)
P7–1A The Italian Bread Company purchased land as a factory site for $70,000. An old building on the
property was demolished, and construction began on a new building. Costs incurred during the first year
are listed as follows:

Demolition of old building $ 9,000

Sale of salvaged materials (1,100)

Architect fees (for new building) 20,000

Legal fees (for title investigation of land) 3,000

Property taxes on the land (for the first year) 4,000

Building construction costs 600,000

Interest costs related to the construction 23,000

Required:

Determine the amounts that the company should record in the Land and the Building accounts.

P7–4A Several years ago, Health Services acquired a helicopter for use in emergency situations. Health
Services incurred the following expenditures related to the helicopter delivery operations in the current
year:

1. Overhauled the engine at a cost of $7,500. Health Services estimated the work would increase the
service life for an additional five years.

2. Cleaned, repacked, and sealed the bearings on the helicopter at a cost of $800. This repair is
performed annually.

3. Added new emergency health equipment to the helicopter for $25,000.

4. Modified the helicopter to reduce cabin noise by installing new sound barrier technology at a cost of
$15,000.

5. Paid insurance on the helicopter for the current year, which increased 15% over the prior year to
$9,000.

6. Performed annual maintenance and repairs at a cost of $39,000.

Required:

Indicate whether Health Services should capitalize or expense each of these expenditures.
P7–6A The following information relates to the intangible assets of University Testing Services (UTS):

a. On January 1, 2024, UTS completed the purchase of Heinrich Corporation for $3,510,000 in cash.
The fair value of the net identifiable assets of Heinrich was $3,200,000.

b. Included in the assets purchased from Heinrich was a patent valued at $82,250. The original legal
life of the patent was 20 years; there are 12 years remaining, but UTS believes the patent will be
useful for only 7 more years.

c. UTS acquired a franchise on July 1, 2024, by paying an initial franchise fee of $333,000. The
contractual life of the franchise is 9 years.

Required:

1. Record amortization expense for the intangible assets at December 31, 2024.

2. Prepare the intangible asset section of the December 31, 2024, balance sheet.
RWP7–6 Companies often are under pressure to meet or beat Wall Street earnings projections in oder to
increase stock price and also to increase the value of stock options. Such pressure may cause same
managers to alter their estimates for depreciation to artificially create desired results.

Required:

1. Understand the reporting effect: Do estimates by managment affect the amount of depreciation in its
company's financial statements?

2. Sepecify the options: To increase earnings in the initial years following the purchase of a depreciable asset,
would management (a) choose straight-line or double-declining balance, (b) estimate a longer or shorter
service life, and (c) estimate a higher or lower residual value?

3. Identify the impact: Are decisions of investors and creditors affected by accounting estimates?

4. Make a decision: Should a company alter depreciation estimates for the sole purpose of meeting
expectations of Wall Street analysts?