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Financial Accounting: In an Economic Context by Jamie Pratt

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EXERCISES

E9-1

Determining the capitalized cost and depreciation base

Lowery, Inc. purchased new plant equipment on January 1, 2011. The company paid $920,000 for the equipment, $62,000 for transportation of the equipment, and $10,000 for insurance on the equipment while it was being transported. The company also estimates that over the equipment's useful life it will require additional power, which will cause utility costs to increase $90,000. The equipment has an estimated salvage value of $50,000.

a. What amount should the company capitalize for this equipment on January 1, 2011?

b. What is the depreciation base of this equipment?

c. What amount will be depreciated over the life of this equipment?

E9-2

Allocating cost on the basis of relative market value

AJB Real Estate purchased a ten-acre tract of land for $320,000. The company divided the land into four lots of two and one-half acres each. Lot 1 had a beautiful view of the mountains and was valued at $160,000. Lot 2 had a stream running through it and was valued at $120,000. Lots 3 and 4 were each valued at $60,000. Assume that each lot is sold for the values indicated. Compute the profit on each of the four sales.

E9-3

Which costs are subject to depreciation?

Firton Brothers purchased for $90,000 a tract of land that included an abandoned warehouse. The warehouse was razed, and the site was prepared for a new building at a cost of $10,000. Scrap materials from the warehouse were sold for $7,000. A building was then constructed ...

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