Accounting Units of Production

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1. SMG Company traded machinery with an original cost of $370,000, accumulated depreciation of $250,000, and a fair value of $200,000. It received in exchange from Lewis Company a machine with a fair value of $180,000 and cash of $20,000. Assume that the exchange lacked commercial substance.

A. Calculate the gain or loss associated with the transaction for SMG Company.

B. Give the journal entries to record the acquisition of the semi-truck.

2. On March 31 of the current year, a truck was purchased for $63,700. The truck has an estimated residual value of $4,200 and is expected to be driven 100,000 miles over the next 5 years. During the current year, the truck will be driven 12,600 miles. The firm wishes to avoid the depreciation method that will give them the highest depreciation expense for the current year ended December 31. How much higher or lower will depreciation expense be in the current reporting year if the firm uses the units-of-production method instead of the straight-line (SL) method?

3. On January 1, 1998, a machine costing $159,000 was purchased. The machine was expected to have a useful life of 8 years and an estimated residual value of $5,400. The straight-line method of depreciation is being used. On January 1, 2001, it was determined that the machine would last an additional 10 years (i.e. until 12/31/2010) from that date, residual value remaining unchanged. What amount of depreciation expense will be recorded on this machine for the year ended December 31, 2001?

4. A delivery truck was acquired on January 1, 1998. The cash price of the truck was $142,400 and $16,000 was spent preparing the truck for operation. During the first year of operations, the truck’s oil was changed several times for a total cost of $1,000. The truck has an 8-year useful life and a $32,000 residual value; double-declining balance depreciation is being used. What is reported on the income statement as depreciation expense for the year ended December 31, 2000?

5. A plant asset with a cash price of $405,000 and zero residual value was acquired on January 1, 2002 and $315,000 was spent to prepare it for operation. After it was placed into use, $20,000 was spent to maintain the machine in 2002 and $25,000 in 2003. Units-of-production depreciation is used and it is estimated the asset will produce 800,000 units over its useful life. During 2002, 90,000 units were produced. In 2003, 110,000 units were produced.

A. How much accumulated depreciation is reported as of December 31, 2003?

B. Assuming your previous answer in A. is correct, what is the Net Book Value of the plant asset reported on the Dec. 31, 2003 balance sheet?

6. International Paper Company owns several hundred thousand acres of forestland in New Zealand. Assume the firm paid $49,200,000 in 2004 to acquire this land and the timber on it. In addition, they paid $3,600,000 to have some old buildings removed to prepare the land for harvesting. After the timber is harvested, the land will have a residual value of $12,000,000. The estimated amount of recoverable timber on the land is 6,000,000 cubic meters. What is the depletion rate per cubic meter for this timber for 2004?

7. Assume United Airlines sold one used aircraft. This aircraft was acquired on January 1, 2003 at a cost of $12,600,000. It was being depreciated using the straight-line depreciation method. At the time of purchase, it had a 12-year estimated useful life and a $4,500,000 estimated residual value. The aircraft was sold on October 31, 2005, for $10,000,000. Compute the gain or loss that resulted from this sale.

8. SMG Company has the following account balances for the year ended December 31, 2002.

12/31/02 12/31/01

PPE $900,000 $650,000

Acc. Dep. 360,000 310,000

During 2002, SMG sold for $75,000 in cash a piece of equipment and purchase a new machine for $400,000. The depreciation expense for 2002 is 120,000. Compute the gain or loss that resulted from this sale.

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