AC1220 Lab 5.1

Introduction

Jake determines that owning the building where Jake’s Computer Sales and Repair operates makes more sense than leasing the facility. On June 1, 20×1, Jake exchanges a \$180,000 note payable for the following fixed assets:

·       Land

·       Land improvements, including fencing, paving, lighting, and signage

·       Building

Jake hires an independent appraiser who assigns the following market values to the assets:

 Asset Fair Market Value Land \$23,500 Land improvements \$8,000 Building \$164,500

Requirement 1

Jake must allocate the \$195,000 among three asset classes: land, land improvements, and building.

a.         Compute the total fair market value (FMV) of the lump-sum purchase of assets.

 Asset Fair Market Value Land \$23,500 Land improvements 8,000 Building 164,000 Total

b.         Express land improvements and building as a percentage of the total FMV and allocate the purchase price of \$180,000 to land improvements and building—the computation is completed for land.

 Asset Fair Market Value % of Total Fair Market Value Purchase Price Cost of Asset Land \$23,500 12% \$180,000 \$21,600 Land improvements 180,000 Building 180,000 Total

c.         Journalize the purchase of the assets, using the allocated costs computed in Requirement 1b.

 Date Account and Explanation Debit Credit 6/1/x1 To record purchase of land, land improvements, and building

Requirement 2

a.         Classify each of the following spending items as either a capital expenditure or an expense. Indicate the correct choice with an “x”:

 Spending Capital Expenditure Expense Routine repairs to fencing, \$120 (cash) Renovation of building, including addition to warehouse, \$15,000 (on account) Resurfaced paving, extending the remaining useful life of the paving from 3 to 5 years, \$1,000 (cash)

b.         Journalize the expenditures described in Requirement 2a.

 Date Account and Explanation Debit Credit 6/1/x1 To record repairs to fencing 6/1/x1 To record renovation of building 6/1/x1 To record extraordinary repair

Requirement 3

a.         Using the straight-line depreciation method, compute the depreciation expense and the accumulated depreciation that would be recorded at December 20×1. Completing the shaded cells in the following table:

 Date Asset Cost Depreciable Cost Straight-line Depreciation Rate Depreciation Expense Accumulated Depreciation Book Value Jun 1, 20×1 1/5 x 6/12

b.         Using the double-declining balance method, compute the depreciation expense and the accumulated depreciation that would be recorded at December 20×1. Complete the shaded cells in the following table:

 Date Asset Cost Depreciable Cost Double-Declining Depreciation Rate Depreciation Expense Accumulated Depreciation Book Value Jun 1, 20×1

c.         Assume that a truck is expected to be driven 7,000 miles through December 31, 20×1, and that each mile driven represents one production unit. Using the units-of-productions method, compute the depreciation expense and the accumulated depreciation that would be recorded at December 20×1. Complete the shaded cells in the following table:

 Date Asset cost Depreciation per Unit Number of Units Depreciation Expense Accumulated Depreciation Book Value Jun 1, 20×1

d.         Which of the three depreciation methods applied in Requirements 2a through 2c will result in the highest depreciation expense charge at December 31, 20×1? Determine the amount.

e.         Journalize the depreciation charge at December 31, 20×1, using the amount from Requirement 2c.

 Date Account and Explanation Debit Credit 6/1/x1 To record depreciation expense

Requirement 4

a.         On June 1, 20×1, Jake acquires a license for \$6,000 in cash. The license grants Jake’s Computer Sales and Repair exclusive rights to sell the A-line tablet computers for four years. Journalize the acquisition cost of the license—an intangible asset.

 Date Account and Explanation Debit Credit 6/1/x1 To record acquisition cost of license

b.         Journalize the amortization expense related to the license for the six months ended Dec 31, 20×1.

 Date Account and Explanation Debit Credit 6/1/x1 To record amortization of license

c.         At what amount will the license be reported on the balance sheet at December 31, 20×1?