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Chapter 11: Q11-9BE (page 594)

Everly Corporation acquires a coal mine at a cost of \(400,000. Intangible development costs total \)100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is \(80,000), after which it can be sold for \)160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.

Short Answer

Expert verified

Answer

Inventory = $73,500

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Depletion

Depletion is defined as a reduction in the quantity of a production factor due to the manufacturing process. Companies generate new products by combining current goods and services. When old items are turned into new products, it is termed a production process.

02

Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Inventory

73,500

Coal Mine

73,500

Working notes:

Calculating inventory per ton value

滨苍惫别苍迟辞谤测鈥塸别谤鈥塼辞苍=颁辞蝉迟鈥塷蹿鈥塩辞补濒鈥尘颈苍别+顿别惫别濒辞辫尘别苍迟鈥塩辞蝉迟+贰蝉迟颈尘补迟别诲鈥塮补颈谤鈥塿补濒耻别鈭�厂补濒别蝉鈥塿补濒耻别罢辞迟补濒鈥塭蝉迟颈尘补迟别诲鈥塩辞补濒=$400,000+$100,000+$80,000鈭�$160,0004,000=$105鈥塸别谤鈥塼辞苍

Calculating the value of inventory

Inventory=罢辞迟补濒鈥塩辞补濒鈥塭虫迟谤补肠迟别诲脳Value鈥塸别谤鈥塼辞苍=700脳$105=$73,500

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Most popular questions from this chapter

(Impairment) The management of Petro Garcia Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of \(900,000 with depreciation to date of \)400,000 as of December 31, 2017. On December 31, 2017, management projected its future net cash flows from this equipment to be \(300,000 and its fair value to be \)230,000. The company intends to use this equipment in the future.

Instructions

  1. Prepare the journal entry (if any) to record the impairment at December 31, 2017.
  2. Where should the gain or loss (if any) on the write-down be reported in the income statement?
  3. At December 31, 2018, the equipment鈥檚 fair value increased to $260,000. Prepare the journal entry (if any) to record this increase in fair value.
  4. What accounting issues did management face in accounting for this impairment?

(Depreciation Computations鈥擲L, SYD, DDB) Deluxe Ezra Company purchases equipment on January 1, Year 1, at a cost of \(469,000. The asset is expected to have a service life of 12 years and a salvage value of \)40,000.

Instructions

  1. Compute the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method.
  2. Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years鈥�-digits method.
  3. Compute the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method. (In performing your calculations, round constant percentage to the nearest one-hundredth of a point and round answers to the nearest dollar.)

(Book vs. Tax (MACRS) Depreciation) Futabatei Enterprises purchased a delivery truck on January 1, 2017, at a cost of \(27,000. The truck has a useful life of 7 years with an estimated salvage value of \)6,000. The straight-line method is used for book purposes. For tax purposes, the truck, having an MACRS class life of 7 years, is classified as 5-year property; the optional MACRS tax rate tables are used to compute depreciation. In addition, assume that for 2017 and 2018 the company has revenues of \(200,000 and operating expenses (excluding depreciation) of \)130,000.

Instructions

  1. Prepare income statements for 2017 and 2018. (The final amount reported on the income statement should be income before income taxes.)
  2. Compute taxable income for 2017 and 2018.
  3. Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes.
  4. Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciable asset.

Use the information for Lockard Company given in BE11-2. (a) Compute 2017 depreciation expense using the double-declining-balance method. (b) Compute 2017 depreciation expense using the double-declining-balance method, assuming the machinery was purchased on October 1, 2017.

(Depreciation for Partial Period鈥擲L, SYD, and DDB) Alladin Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May.

Price

\(85,000

Credit terms

2/10, n/30

Freight-in

\) 800

Preparation and installation costs

\( 3,800

Labor costs during regular production operations

\)10,500

It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2017. Alladin uses the calendar year as the basis for the preparation of financial statements.

Instructions

  1. Compute the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.)
    1. Straight-line method for 2017.
    2. Sum-of-the-years鈥�-digits method for 2018.
    3. Double-declining-balance method for 2017.
  2. Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company鈥檚 depreciation expense to the early years and more to later years of the assets鈥� lives. What method would you recommend?
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