P11-5 on page 608 and P11-7 on page 610
P11-5 on page 608 - Thompson Corporation - Property, plant, and equipment and intangible assets; comprehensive ● LO2
The Thompson Corporation, a manufacturer of steel products, began operations on October 1, 2009. The accounting department of Thompson has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel: a. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition. b. Land A and Building A were acquired from a predecessor corporation. Thompson paid $812,500 for the land and building together. At the time of acquisition, the land had a fair value of $72,000 and the building had a fair value of $828,000. c. Land B was acquired on October 2, 2009, in exchange for 3,000 newly issued shares of Thompson’s common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $25 per share. During October 2009, Thompson paid $10,400 to demolish an existing building on this land so it could con- struct a new building. d. Construction of Building B on the newly acquired land began on October 1, 2010. By September 30, 2011, Thompson had paid $210,000 of the estimated total construction costs of $300,000. Estimated completion and occupancy are July 2012. e. Certain equipment was donated to the corporation by the city. An independent appraisal of the equipment when donated placed the fair value at $16,000 and the residual value at $2,000. f. Machine A’s total cost of $110,000 includes installation charges of $550 and normal repairs and maintenance of $11,000. Residual value is estimated at $5,500. Machine A was sold on February 1, 2011. g. On October 1, 2010, Machine B was acquired with a down payment of $4,000 and the remaining payments to be made in 10 annual installments of $4,000 each beginning October 1, 2011. The prevailing interest rate was 8%.
Required:
Supply the correct amount for each numbered item on the schedule. Round each answer to the nearest dollar. Problem 11-5 (1) $65,000 Allocation in proportion to appraised values at date of exchange: % of Amount Total Land $72,000 8 Building 828,000 92 $900,000 100 Land $812,500 x 8% = $ 65,000 Building $812,500 x 92% = 747,500 $812,500 (2) $747,500 (3) 50 years $747,500 - 47,500
$14,000 annual depreciation (4) $ 14,000 Same as prior year, since method used is straight-line. (5) $ 85,400 3,000 shares x $25 per share = $75,000 Plus demolition of old building 10,400 $85,400 (6) None No depreciation before use. (7) $ 16,000 Fair value. (8) $ 2,400 $16,000 x 15% (1.5 x Straight-line rate of 10%). (9) $ 2,040 ($16,000 - 2,400) x 15%. (10) $ 99,000 Total cost of $110,000 - $11,000 in normal repairs. (11) $ 17,000 ($99,000 - 5,500) x 10/55. (12) $ 5,100 ($99,000 - 5,500) x 9/55 x 4/12. (13) $ 30,840 PVAD = $4,000 (7.71008 ) Present value of an annuity due of $1: n = 11, i = 8% (from Table 6) (14) $ 2,056 $30,840
15 years P11-7 on page 610 - Marion Company - Depletion; change in estimate ● LO3 LO5 (see attached excel file)
In 2011, the Marion Company purchased land containing a mineral mine for $1,600,000. Additional costs of $600,000 were incurred to develop the mine. Geologists estimated that 400,000 tons of ore would be extracted. After the ore is removed, the land will have a resale value of $100,000.
To aid in the extraction, Marion built various structures and small storage buildings on the site at a cost of $150,000. These structures have a useful life of 10 years. The structures cannot be moved after the ore has been removed and will be left at the site. In addition, new equipment costing $80,000 was purchased and installed at the site. Marion does not plan to move the equipment to another site, but estimates that it can be sold at auction for $4,000 after the mining project is completed.
In 2011, 50,000 tons of ore were extracted and sold. In 2012, the estimate of total tons of ore in the mine was revised from 400,000 to 487,500. During 2012, 80,000 tons were extracted, of which 60,000 tons were sold.
Required:
1. Compute depletion and depreciation of the mine and the mining facilities and equipment for 2011 and 2012. Marion uses the units-of-production method to determine depreciation on mining facilities and equipment.
2. Compute the book value of the mineral mine, structures, and equipment as of December 31, 2012.
3. Discuss the accounting treatment of the depletion and depreciation on the mine and mining facilities and equipment. Problem 11-7
Requirement 1 Cost of mineral mine: Purchase price $1,600,000 Development costs 600,000 $2,200,000 Depletion:
$2,200,000 - 100,000 Depletion per ton = = $5.25 per ton 400,000 tons
2011 depletion = $5.25 x 50,000 tons = $262,500 2012 depletion: Revised depletion rate = ($2,200,000 - 262,500) - 100,000 = $4.20 487,500 - 50,000 tons
2012 depletion = $4.20 x 80,000 tons = $336,000
Depreciation:
Structures: $150,000 Depreciation per ton = = $.375 per ton 400,000 tons
2011 depreciation = $.375 x 50,000 tons = $18,750
2012 depreciation: Revised depreciation rate = $150,000 - 18,750 = $.30 487,500 - 50,000 tons
2012 depreciation = $.30 x 80,000 tons = $24,000
Equipment: $80,000 - 4,000 Depreciation per ton = = $.19 per ton 400,000 tons
2011 depreciation = $.19 x 50,000 tons = $9,500
2012 depreciation: Revised depreciation rate = ($80,000 - 9,500) - 4,000 = $.152 487,500 - 50,000 tons 2012 depreciation = $.152 x 80,000 tons = $12,160
Requirement 2 Mineral mine: Cost $ 2,200,000 Less accumulated depletion: 2011 depletion $262,500 2012 depletion 336,000 598,500 Book value, 12/31/12 $1,601,500
Structures: Cost $ 150,000 Less accumulated depreciation: 2011 depreciation $18,750 2012 depreciation 24,000 42,750 Book value, 12/31/12 $107,250
Equipment: Cost $ 80,000 Less accumulated depreciation: 2011 depreciation $ 9,500 2012 depreciation 12,160 21,660 Book value, 12/31/12 $58,340
Requirement 3 Depletion of natural resources and depreciation of assets used in the extraction of natural resources are part of product cost and are included in the cost of the inventory of the mineral, just as the depreciation on manufacturing equipment is included in inventory cost. The depletion and depreciation are then included in cost of goods sold in the income statement when the mineral is sold.
In 2011, since all of the ore was sold, all of 2011’s depletion and depreciation is included in cost of goods sold. In 2012, since not all of the extracted ore was sold, a portion of both 2012’s depletion and depreciation remains in inventory.