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Chapter 9: Q2RQ (page 525)
Plant assets are recorded at historical cost. What does the historical cost of a plant asset include?
Yes, Plant assets are recorded at historical cost.
Historical costs include the entire amount paid to acquire the assets and make them ready for use.
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Amplify Petroleum holds huge reserves of oil. Assume that at the end of 2017, Amplify Petroleum鈥檚 cost of oil reserves totaled $80,000,000, representing 100,000,000 barrels of oil. Suppose Amplify Petroleum removed and sold 20,000,000 barrels of oil during 2018. Journalize depletion expense for 2018.
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?
Calculating partial-year depreciation
On February 28, 2017, Rural Tech Support purchased a copy machine for \(53,400. Rural Tech Support expects the machine to last for six years and have a residual value of \)3,000. Compute depreciation expense on the machine for the year ended December 31, 2017, using the straight-line method.
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.
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.
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