Ch 7 Graded Assignment

Note: To receive partial credit on problems which require calculations, calculations must be shown.

Problem I: (22 points) Indicate whether each of the following statements is true (T) or false (F).

a.	__F_	The cost of an intangible asset, such as a patent or goodwill, should be capitalized regardless of whether the intangible asset was purchased or created internally by the company.
b.	_T__	Land is not subject to depreciation while land improvements are subject to depreciation.
c.	_T__	The allocation of cost of a natural resource is called amortization.
d.	_F__	The accounting definition of depreciation refers to the decrease in an operating assets fair market value over its useful life.
e.	__F_	The balance in the Accumulated Depreciation account should be reported on the income statement.
f.	__T_	As an asset is depreciated, its book value will decrease.
g.	__F_	Regardless of the depreciation method used, the book value of a depreciable asset at the end of its useful life should be equal to its residual (or salvage) value.
h.	_T__	When a long-term asset is sold and the cash received is less than the assets book value, a loss on the sale should be recorded.
i.	_F__	All else being equal, if Wolfpack Company has a higher return on assets than Tarheel Inc., Wolfpack is using its operating assets more effectively than Tarheel.
j.	_T__	The return on assets ratio can be separated into two components, profit margin and asset turnover, in order to provide a better analysis of what is driving the ratio.
k.	_F__	A company may use a depreciation method for tax purposes which is different than the one it uses for financial statement purposes.

Problem II: (24 points) Brennan Corp. incurred the following costs related to a machine it purchased to use in its business. The machine was purchased on 1/1/X1 and shipped to Brennan on 1/2/X1. It arrived on Brennans premises on 1/15/X1 and was immediately placed into service. The machine has an expected useful life of three years.

1/1/X1:	Purchased a machine costing $30,000 by taking out a one-year, 10%, promissory note. The notes face value plus interest is due on 12/31/X1.
1/2/X1:	Paid $800 in cash for shipping charges related to the shipment of the machine to Brennan.
1/2/X1:	Paid $200 in cash for an insurance policy to cover possible damages the machine may incur during the shipping period.
1/15/X1:	Paid $600 in cash for a 12-month insurance policy to cover the machine should it be damaged from fire or flood. The policy period will run from 1/15/X1 to 1/14/X2.
4/1/X1:	Paid $500 in cash for ordinary repairs and maintenance expenses related to the machine.
11/1/X1:	Paid $3,000 in cash for an addition to the machine which is expected to extend its useful life by an additional two years.
12/31/X1:	Paid off the note plus interest (refer to the Jan 1 transaction above).

Required: In the general journal below, record each of the above transactions. Each transaction should be recorded separately. Follow proper formatting rules for journal entries.

		Debit	Credit
1/1/X1
1/2/X1
1/2/X1
1/15/X1
4/1/X1
11/1/X1
12/31/X1

Problem III: (31 points) On January 1, 20X1, Woodson Distributors Inc. purchased and placed into service a machine costing $48,000. The machine is estimated to have a residual value of $2,000 and a four-year useful life. Woodson has a calendar year-end.

• In the following chart, compare how much depreciation expense should be recorded in each year of the assets life if the company uses the straight-line versus the double-declining balance depreciation (DDB) method. In order to receive partial credit, add or attach a page to the end of this document showing your work.

	Straight-line Method	DDB Method
Year 1 (20X1)	11500
Year 2 (20X2)	11500
Year 3 (20X3)	11500
Year 4 (20X4)	11500
Total over all four years	48000	48000

• Accounting Check The total amount of depreciation taken over all four years should be the same amount regardless of the depreciation method. In addition, the total depreciation taken over the entire life of the asset should be equal to its depreciable cost. If your totals above do not conform to these rules, please go back and re-check your calculations.

What do you notice about the pattern of depreciation taken over the entire life of the asset under both methods? (1 2 sentences)For 20X1, all else being equal, which method would yield the highest income before income tax, highest income tax expense, and highest net income? Answer: _____For 20X1, all else being equal, which method would yield the lowest income before income tax, lowest income tax expense, and lowest net income? Answer: _____Over the entire four years, the total income tax effect from having depreciation expense on the income statement is the same regardless of whether the straight-line or DDB method is used. If the total income tax expense over the entire four years is the same, what is the advantage of having the most tax savings in year one versus year four? (1 2 sentences)Using your earlier depreciation calculations, complete the following chart assuming all depreciation entries have been completed and its the end of the assets useful life.

Assuming the:	Accumulated Depreciation account balance at the end of the assets useful life	Book Value at the end of the assets useful life
Straight- line method
Double-declining balance method

If the asset had been placed into service on March 1, 20X1 instead of January 1, 20X1, what should be the amount of depreciation recorded for the year ending 12/31/X1 assuming the straight-line method? Round to the nearest whole dollar.In the general journal below, record the sale of the truck.

Debit

Credit

1/1/X1

• Accounting Check Does the gain or loss recorded in the above journal entry match the amount of gain or loss computed in part A? In addition, do the Truck and Accumulated Depreciation accounts have a zero balance? If your answer is not yes to both questions, please go back and check your calculations and/or entry.

Problem V: (10 points) On 1/1/X1, Henning Corp. purchased land and a building for a combined cost of $2,000,000. The land is estimated to have a fair market value of $294,000 and the building has a fair market value of $1,806,000.

Question: Rounding to the nearest whole dollar, how much of the $2,000,000 purchase price should be allocated to the building?

Answer: $___