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Chapter 9: 11RQ (page 488)
If a business changes the estimated useful life or estimated residual value of a plant asset, what must the business do in regard to depreciation expense?
While changing the estimated life and residual value the business recalculate the depreciation expenses as per new estimates.
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What is goodwill? Is goodwill amortized? What happens if the value of goodwill has decreased at the end of the year?
Making a lump-sum asset purchase
Concord Pet Care Clinic paid \(210,000 for a group purchase of land, building, and equipment. At the time of the acquisition, the land had a market value of \)110,000, the building \(88,000, and the equipment \)22,000. Journalize the lump-sum purchase of the three assets for a total cost of $210,000, the amount for which the business signed a note payable.
Whitney Plumb Associates surveys American eating habits. The company鈥檚 accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:
Jan. 1 Purchased office equipment, \(117,000. Paid \)77,000 cash and financed the remainder with a note payable.
Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(350,000 paid in cash. An independent appraisal valued the land at \)275,625 and the communication equipment at \(91,875.
Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Whitney Plumb received \)390,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.
Dec. 31 Recorded depreciation as follows:
Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value. Office equipment is depreciated using the double-declining-balance method over five years with a \)2,000 residual value.
Record the transactions in the journal of Whitney Plumb Associates.
What does the word capitalize mean?
Dylan worked for a propane gas distributor as an accounting clerk in a small Midwestern
town. Last winter, his brother Mike lost his job at the machine plant. By January,
temperatures were sub-zero, and Mike had run out of money. Dylan saw that Mike鈥檚
account was overdue, and he knew Mike needed another delivery to heat his home. He
decided to credit Mike鈥檚 account and debit the balance to the parts inventory because he
knew the parts manager, the owner鈥檚 son, was incompetent and would never notice the
extra entry. Months went by, and Dylan repeated the process until an auditor ran across
the charges by chance. When the owner fired Dylan, he said, 鈥淚f you had only come to
me and told me about Mike鈥檚 situation, we could have worked something out.鈥�
Requirements
1. What can a business like this do to prevent team member fraud of this kind?
2. What effect would Dylan鈥檚 actions have on the balance sheet? The income statement?
3. How much discretion does a business have about accommodating
hardship situations?
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