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E9-21 Trade in asset—two situations
Community Bank recently traded in office fixtures. Here are the facts:
1. Record Community Bank’s trade-in of old fixtures for new ones.
2. Now let’s change one fact and see a different outcome. Community Bank feels
compelled to do business with Mountain Furniture, a bank customer, even
though the bank can get the fixtures elsewhere at a better price. Community
Bank is aware that the new fixtures’ market value is only $127,000. Now record
E9-24 Acquisition of patent, amortization, and change in useful life
Miracle Printers (MP) manufactures printers. Assume that MP recently paid $600,000
for a patent on a new laser printer. Although it gives legal protection for 20 years, the
patent is expected to provide a competitive advantage for only eight years.
1. Assuming the straight-line method of amortization, make journal entries to
record (a) the purchase of the patent and (b) amortization for year 1.
2. After using the patent for four years, MP learns at an industry trade show that
another company is designing a more efficient printer. On the basis of this new information, MP decides, starting with year 5, to amortize the remaining cost of
the patent over two remaining years, giving the patent a total useful life of six
years. Record amortization for year 5.
P9-28A Capitalized asset cost and first year depreciation, and identifying depreciation results that meet management objectives
On January 3, 2012, Trusty Delivery Service purchased a truck at a cost of $90,000.
Before placing the truck in service, Trusty spent $3,000 painting it, $1,500 replacing
tires, and $4,500 overhauling the engine. The truck should remain in service for
five years and have a residual value of $9,000.
The truck’s annual mileage is expected
to be 22,500 miles in each of the first four years and 10,000 miles in the fifth year—
100,000 miles in total. In deciding which depreciation method to use, Mikail
Johnson, the general manager, requests a depreciation schedule for each of the depreciation
methods (straight-line, units-of-production, and double-declining-balance).
1. Prepare a depreciation schedule for each depreciation method, showing asset
cost, depreciation expense, accumulated depreciation, and asset book value.
2. Trusty prepares financial statements using the depreciation method that reports
the highest net income in the early years of asset use. For income tax purposes,
the company uses the depreciation method that minimizes income taxes in the
early years. Consider the first year that Trusty uses the truck. Identify the depreciation
methods that meet the general manager’s objectives, assuming the income
tax authorities permit the use of any of the methods.
P10-15A Journalizing liability transactions
The following transactions of Denver Pharmacies occurred during 2011 and 2012:
Purchased computer equipment at a cost of $9,000, signing a six-month,
6% note payable for that amount.
Recorded the week’s sales of $64,000, three-fourths on credit, and
one-fourth for cash. Sales amounts are subject to a 6% state sales tax.
Sent the last week’s sales tax to the state.
Borrowed $204,000 on a four-year, 10% note payable that calls for $51,000
annual installment payments plus interest. Record the current and
long-term portions of the note payable in two separate accounts.
Paid the six-month, 6% note, plus interest, at maturity.
Purchased inventory for $12,000, signing a six-month, 9% note payable.
Accrued warranty expense, which is estimated at 2% of sales of $603,000.
Accrued interest on all outstanding notes payable. Make a separate
interest accrual for each note payable.
Paid the first installment and interest for one year on the four-year note
payable. Paid off the 9% note plus interest at maturity.
1. Journalize the transactions in Denver’s general journal. Explanations are not
P10-18A Computing and journalizing payroll amounts
Louis Welch is general manager of United Tanning Salons. During 2012, Welch
worked for the company all year at a $6,200 monthly salary. He also earned a yearend
bonus equal to 10% of his salary.
Welch’s federal income tax withheld during 2012 was $850 per month, plus $924
on his bonus check. State income tax withheld came to $70 per month, plus $40 on the
bonus. The FICA tax withheld was 7.65% of the first $106,800 in annual earnings.
Welch authorized the following payroll deductions: Charity Fund contribution of 1%
of total earnings and life insurance of $5 per month.
United incurred payroll tax expense on Welch for FICA tax of 7.65% of the first
$106,800 in annual earnings. The company also paid state unemployment tax of 5.4%
and federal unemployment tax of 0.8% on the first $7,000 in annual earnings. In addition,
United provides Welch with health insurance at a cost of $150 per month. During
2012, United paid $4,000 into Welch’s retirement plan.
1. Compute Welch’s gross pay, payroll deductions, and net pay for the full year
2012. Round all amounts to the nearest dollar.
2. Compute United’s total 2012 payroll expense for Welch.
3. Make the journal entry to record United’s expense for Welch’s total earnings for
the year, his payroll deductions, and net pay. Debit Salary expense and Bonus
expense as appropriate. Credit liability accounts for the payroll deductions and
Cash for net pay. An explanation is not required.