Question

1. Perry Corporation acquired land, buildings, and equipment from a bankrupt company at a lump-sum price of $825,000. At the time of acquisition Perry paid $30,000 to have the assets appraised. The appraisal disclosed the following values:

Land	$480,000
Buildings	348,000
Equipment	96,000

What cost should be assigned to the land, buildings, and equipment, respectively?

	$427,500, $342,000, and $85,500.
	$412,500, $330,000, and $82,500.

	$480,000, $384,000, and $96,000.
	$285,000, $285,000, and $285,000.

2. Davis Company purchased a new piece of equipment on July 1, 2017 at a cost of $2,400,000. The equipment has an estimated useful life of 5 years and an estimated salvage value of $200,000. The current year end is 12/31/18. Davis records depreciation to the nearest month.

A)What is straight-line depreciation for 2018?

	$220,000.
	$440,000.

	$480,000.
	$240,000.

B)What is sum-of-the-years'-digits depreciation for 2018?

	$660,000.
	$720,000.

	$781,485.
	$586,667.

C)What is double-declining-balance depreciation for 2018?

	$880,000.
	$960,000.

	$768,000.
	$576,000.

D)If Davis expensed the total cost of the equipment at 7/1/17, what was the effect on 2017 and 2018 income before taxes, assuming Davis uses straight-line depreciation?

	$2,400,000 understated and $240,000 overstated.
	$2,180,000 understated and $440,000 overstated.

	$1,960,000 understated and $440,000 overstated.
	$2,160,000 understated and $240,000 overstated.

E)If, at the end of 2019, Davis Company decides the equipment still has five more years of life beyond 12/31/19, with a salvage value of $200,000, what is straight-line depreciation for 2019? (Assume straight-line used in all years.)

	$290,000.
	$440,000.

	$256,667.
	$240,000.

3. Sawyer Corporation has a machine (Machine A) that it acquired on 1/1/18 for $900,000. On 12/31/18 such machines have a selling price and fair value of $1,035,000. When used in production, such machines have an estimated useful life of 10 years with no salvage value. Use the straight-line method.

Brown Corporation has a machine (Machine B) that it acquired on 1/1/18 for $1215,000. On 12/31/18 such machines have a selling price and fair value of $900,000. When used in production, such machines have an estimated useful life of 10 years with no salvage value. Use the straight-line method.

On 12/31/18 Brown gave Machine B plus $135,000 cash to Sawyer in return for
Machine A.

A)Assume that both Sawyer and Brown are new machine dealers and that the machines are still new. Also assume that the exchange lacks commercial substance. At what amount will Machine A be recorded on Brown’s books?

	$1,215,000.
	$1,350,000.

	$1,035,000.
	$900,000.

B)Given the assumptions in 10 above, at what amount will Machine B be recorded on Sawyer's books?

	$1,052,610.
	$900,000.

	$1,215,000.
	$782,609.

C)Assume that instead of dealers, both Sawyer and Brown are machine manufacturers and use the machines in production. Assume the exchange lacks commercial substance. At what amount will Brown record Machine A?

	$1,215,000.
	$1,350,000.

	$900,000.
	$1,035,000.

D)Given the assumption in 12 above, at what amount will Sawyer record Machine B?

	$704,348.
	$929,348.

	$675,000.
	$839,340.

E)Given the assumption in 12 above except that the fair values of Machines A and B are $840,000 and $1,125,000, respectively, at what amount will Brown record Machine A?

	$1,228,500.
	$1,260,000.

	$1,125,000.
	$1,093,500.

F)Return to the original problem. Assume that Sawyer is a dealer selling new machines and that Brown is a manufacturer. Assume that the exchange has commercial substance. For this transaction, at what amount will Sawyer record the truck?

	$1,035,000.
	$1,228,500.

	$900,000.
	$1,093,500.

G)Given the assumptions in 15 above, at what amount will Brown record Machine A?

	$1,228,500.
	$1,093,500.

	$1,035,000.
	$900,000.

H)Given the assumptions in 15 above except that the selling prices and fair market values of A and B are $1,260,000 and $1,125,000, respectively, at what amount will Brown record Machine A?

	$1,260,000.
	$1,125,000.

	$1,093,500.
	$1,012,500.

Answer 1

Answer to Question 1:

Total Amount Paid = $825,000 + $30,000 = $855,000

Total Appraised disclosed Value = $480,000 + $348,000 + $96,000
Total Appraised disclosed Value = $924,000

Cost assigned to Land = 480,000 / 924,000 * 855,000
Cost assigned to Land = $444,156

Cost assigned to Buildings = 348,000 / 924,000 * 855,000
Cost assigned to Buildings = $322,013

Cost assigned to Equipment = 96,000 / 924,000 * 855,000
Cost assigned to Equipment = $88,831

Answer to Question 2:

Part a)

Option 1 i.e. $440,000

Straight Line Depreciation per year = (Cost – Salvage Value) / Useful Life
Straight Line Depreciation per year = ($2,400,000 - $200,0000) / 5
Straight Line Depreciation per year = $440,000

Straight Line Depreciation for 2018 = $440,000

Part b)

Option 1 i.e. $660,000

Sum of Years’ digit = 5 (5 +1) / 2
Sum of Years’ digit = 15

Sum of Year’s digit Depreciation = (Cost – Salvage Value) * Depreciation Factor

Sum of Year’s digit Depreciation for 2018 = (2,400,000 – 200,000) * 5/15 * ½ + (2,400,000 – 200,000) * 4/15 * ½
Sum of Year’s digit Depreciation for 2018 = $366,667 + $293,333
Sum of Year’s digit Depreciation for 2018 = $660,000

Part c)

Option 3 i.e. $768,000

Double Declining Depreciation Rate = 2 * Straight Line Depreciation Rate
Straight Line Depreciation Rate = 1 / Useful Life
Straight Line Depreciation Rate = 1 /5 = 20%

Double Declining Depreciation Rate = 2 * 20% = 40%

Double Declining Depreciation for 2017 = $2,400,000 * 40% * 6/12 = $480,000
Double Declining Depreciation for 2018 = ($2,400,000 - $480,000) * 40%
Double Declining Depreciation for 2018 = $768,000

Part d)

Option 2 i.e. $2,180,000 Understated and $440,000 overtstated

If Davis expensed the cost of the Equipment on 7/1/17, the Income before Taxes for 2017 would be understated by $2,180,000, as Excess expenses of $2,400,000 is recorded and expenses for $220,000 is recorded. And, in the year 2018, the Income before Taxes are Overstated by $440,000, as the Depreciation Expense of $440,000 would not be recorded.