Property Plant and Equipment Paper 19

Correct answer: (C)
$2,500

Correct answer: (A)
$15,000

Correct answer: (B)
$11,000

Answer (B) is correct. REQUIRED: The amount to be recorded in the land account. DISCUSSION: The cost of acquiring and preparing land for its expected use is capitalized. The amount to be recorded in the land account is $83,420, consisting of the $75,800 purchase price, the $820 closing costs, and the $6,800 site preparation costs. Answer (A) is incorrect. The amount of $76,620 results from excluding the cost of clearing, grading, and filling. Answer (C) is incorrect. The amount of $87,720 results from including the cost of the building’s foundation. Answer (D) is incorrect. The amount of $90,480 results from including the cost of the parking lot and driveways. This cost should be recognized in the land improvements account.

Answer (C) is correct. REQUIRED: The second year’s depreciation on the equipment. DISCUSSION: Under the double-declining balance method, the full cost of the asset, or $100,000, is depreciated, but not below salvage value. Because the straight-line rate for a 10-year asset is 10% (100% * 10), the double-declining balance rate is 20% (10% x 2). The first year’s depreciation is $20,000 ($100,000 x 20%), leaving a carrying amount for the second year of $80,000 ($100,000 - $20,000). The second year’s depreciation is thus $16,000 ($80,000 * 20%). Answer (A) is incorrect. The amount of $8,500 is the first year’s straight-line depreciation after improperly subtracting salvage value. Answer (B) is incorrect. The amount of $13,600 is the second year’s depreciation after improperly subtracting salvage value. Answer (D) is incorrect. The amount of $20,000 is the first year’s depreciation.

Answer (B) is correct. REQUIRED: The correct carrying value of the equipment. DISCUSSION: The straight-line depreciation that should have been charged to the equipment had it been properly capitalized is $30,000 [$100,000 * (3 + 10 years)]. Thus, after correction of the error, the carrying amount of the equipment will be $70,000 ($100,000- $30,000). Answer (A) is incorrect. The amount of $30,000 is the depreciation expense that should have been recognized over the previous 3 years. Answer (C) is incorrect. The amount of $80,000 is the equipment’s correct carrying amount after 2 years. Answer (D) is incorrect. The amount of $100,000 is the full original cost of the equipment.

Answer (C) is correct. REQUIRED: The SYD depreciation for the first year. DISCUSSION: The SYD method multiplies a constant depreciable base (cost minus residual value) by a declining fraction. The numerator is the number of years of the useful life minus the years elapsed (5- 0 = 5). The denominator is the sum of the digits of the years in the asset’s useful life (1 + 2 + 3 + 4 + 5). The first year’s depreciation expense is therefore $16,667 [$50,000 x (5 + 15)]. Answer (A) is incorrect. The amount of $10,000 is the straight-line depreciation expense. Answer (B) is incorrect. The amount of $15,000 results from using the 150% declining balance method. Answer (D) is incorrect. The amount of $20,000 results from using the double-declining balance method.

Answer (D) is correct. REQUIRED: The costs to be expensed or capitalized. DISCUSSION: Expenditures on capital assets that improve the asset’s performance or extend its useful life are capitalized as part of the asset’s cost. Accordingly, the building repairs are capitalized. The substitution of a better computer system is classified as an improvement, and the costs also should be capitalized. Moreover, the entity capitalizes the costs of a rearrangement of the configurations of the offices and open work spaces that (1) requires material outlays, (2) is separable from recurring expenses, and (3) provides probable future benefits. However, expenditures that merely maintain the asset at an acceptable level of productivity are expensed as they are incurred. Thus, the costs of painting the building are routine, minor outlays that should be expensed immediately. Answer (A) is incorrect. The only costs that should be expensed are those for painting. Answer (B) is incorrect. The costs of additions, improvements, and rearrangements should be capitalized, but painting is routine maintenance. Such costs are expensed as incurred. Answer (C) is incorrect. The costs of the upgrade of the phone and electrical systems should be capitalized. They improve the performance of the asset (the building).