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Chapter 9: 15RQ (page 488)
What is a natural resource? What is the process by which businesses spread the allocation of a natural resource鈥檚 cost over its usage?
Natural resources are assets that come from the earth and the process of spreading the allocation of natural resources is known as depletion.
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Question:Western Bank & Trust purchased land and a building for the lump sum of $3,000,000. To get the maximum tax deduction, Western allocated 90% of the purchase price to the building and only 10% to the land. A more realistic allocation would have been 70% to the building and 30% to the land.
Requirements
1. Explain the tax advantage of allocating too much to the building and too little to the land.
2. Was Western鈥檚 allocation ethical? If so, state why. If not, why not? Identify who was harmed.
Determining the cost of an asset
Highland Clothing purchased land, paying \(96,000 cash and signing a \)300,000 note payable. In addition, Highland paid delinquent property tax of \(1,100, title insurance costing \)600, and $4,600 to level the land and remove an unwanted building. Record the journal entry for purchase of the land.
Budget Banners pays \(200,000 cash for a group purchase of land, building, and equipment. At the time of acquisition, the land has a market value of \)22,000, the building \(187,000, and the equipment \)11,000. Journalize the lump-sum purchase.
Donahue Oil Incorporated has an account titled Oil and Gas Properties. Donahue paid \(6,400,000 for oil reserves holding an estimated 400,000 barrels of oil. Assume the company paid \)510,000 for additional geological tests of the property and $470,000 to prepare for drilling. During the first year, Donahue removed and sold 75,000 barrels of oil. Record all of Donahue鈥檚 transactions, including depletion for the first year.
Computing depreciation鈥攖hree methods Crispy Fried Chicken bought equipment on January 2, 2018, for \(33,000. The equipment was expected to remain in service for four years and to operate for 6,750 hours. At the end of the equipment鈥檚 useful life, Crispy鈥檚 estimates that its residual value will be \)6,000. The equipment operated for 675 hours the first year, 2,025 hours the second year, 2,700 hours the third year, and 1,350 hours the fourth year.
Requirements
1. Prepare a schedule of depreciation expense, accumulated depreciation, and book value per year for the equipment under the three depreciation methods: straight-line, unit鈥檚 of-production, and double-declining-balance. Show your computations. Note: Three depreciation schedules must be prepared.
2. Which method tracks the wear and tear on the equipment most closely?
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