Page 438 - Accounting Principles (A Business Perspective)

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➢ Nancy Company purchased a machine that originally had an estimated eight years of useful life. At
the end of the third year, Nancy determined that the machine would last only three more years. Does
this revision affect past depreciation taken?

➢ What does the balance in the accumulated depreciation account represent? Does this balance
represent cash that can be used to replace the related plant asset when it is completely depreciated?
➢ What is the justification for reporting plant assets on the balance sheet at undepreciated cost (book
value) rather than market value?

➢ Distinguish between capital expenditures and revenue expenditures.
➢ For each of the following, state whether the expenditure made should be charged to an expense, an
asset, or an accumulated depreciation account:
➢ Cost of installing air-conditioning equipment in a building that was not air-conditioned.
➢ Painting of an owned factory building every other year.
➢ Cost of replacing the roof on a 10-year-old building that was purchased new and has an
estimated total life of 40 years. The expenditure did not extend the life of the asset beyond the
original estimate.
➢ Cost of repairing an electric motor. The expenditure extended the estimated useful life beyond
the original estimate.

➢ Indicate which type of account (asset, accumulated depreciation, or expense) would be debited for
each of the following expenditures:
➢ Painting an office building at a cost of USD 1,000. The building is painted every year.
➢ Adding on a new plant wing at a cost of USD 24,000,000.
➢ Expanding a paved parking lot at a cost of USD 144,000.

➢ Replacing a stairway with an escalator at a cost of USD 20,000.
➢ Replacing the transmission in an automobile at a cost of USD 1,600, thus extending its useful life
two years beyond the original estimate.
➢ Replacing a broken fan belt at a cost of USD 600.
➢ How do subsidiary records provide control over a company's plant assets?
➢ What advantages can accrue to a company that maintains plant asset subsidiary records?
➢ Real world question Based on the financial statements and the notes to those statements of The
Limited, Inc., contained in the Annual report appendix, what was the 2000 ending net property and
equipment balance? Did the company acquire any of these assets in 2000? What depreciation
method did the company use?

Exercises
Exercise A Stephon Company paid USD 640,000 cash for a tract of land on which it plans to erect a new
warehouse, and paid USD 8,000 in legal fees related to the purchase. Stephon also agreed to assume responsibility
for USD 25,600 of unpaid taxes on the property. The company incurred a cost of USD 28,800 to remove an old
apartment building from the land. Prepare a schedule showing the cost of the land acquired.

Exercise B Laural Company paid USD 840,000 cash for real property consisting of a tract of land and a
building. The company intended to remodel and use the old building. To allocate the cost of the property acquired,

Accounting Principles: A Business Perspective 439 A Global Text