Page 445 - Accounting Principles (A Business Perspective)

10. Property, plant, and equipment

July 30 Payment to contractor on completion of new building 1,080,000
Aug. 5 Architect's fees for design of new building 48,000
Sept. 15 City assessment for sewers and sidewalks (considered permanent) 16,800
Oct. 6 Cost of landscaping (considered permanent) 9,600
Nov. 1 Cost of driveways and parking lots 60,000
Credits
Jan. 15 Proceeds received upon sale of salvaged materials from old
buildings 4,800
In addition to the entries in the account, you obtained the following information in your interview with the
accountant in charge of the Buildings account:
The company began using the new building on 2009 September 1. The building is estimated to have a 40-year
useful life and no salvage value.
The company began using the driveways and parking lots on 2009 November 1. The driveways and parking lots
have an estimated 10-year useful life and no salvage value.
The company uses the straight-line depreciation method to depreciate all of its plant assets.

Using all of this information, do the following:
a. Prepare a schedule that shows the separate cost of land, buildings, and land improvements.
b. Compute the amount of depreciation expense for 2009.
c. Complete the journal entries required to correct the accounts at 2009 December 31. Assume that closing
entries have not been made.
d. Write a brief statement describing to management why depreciation must be recorded and how recording
depreciation affects net income.
Business decision case B On 2010 October 1, Besler Company acquired and placed into use new equipment
costing USD 504,000. The equipment has an estimated useful life of five years and an estimated salvage value of

USD 24,000. Besler estimates that the equipment will produce 2 million units of product during its life. In the last
quarter of 2010, the equipment produced 120,000 units of product. As the company's accountant, management has
asked you to do the following:
a. Compute the depreciation for the last quarter of 2010, using each of the following methods:
Straight-line.
Units-of-production.
Double-declining-balance.

b. Prepare a written report describing the conditions in which each of these four methods would be most
appropriate.
Business decision case C The notes to the financial statements of Wolverine World Wide, Inc., in "A Broader
Perspective", stated that substantially all fixed assets are depreciated using the straight-line method. Explain why
the straight-line method of depreciation may be appropriate for this company.
Business decision case D Discuss the meaning of rate of return on operating assets, its elements, and what it
means to investors and management.
Calculate the rate of return on operating assets for The Limited in the Annual report appendix for the two most
recent years. Assume all assets are operating assets. Comment on the results.

Annual report analysis E The following footnote excerpted from a recent annual report of Kerr-McGee
Corporation describes the company's accounting policies for property, plant, and equipment:

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