Problem 1) Classic Irons, Inc. purchased manufacturing equipment with an expected useful life of five years or 5,000 hours of usage. The equipment was purchased on January 1, 2008, for $460,000. It is expected to have a salvage value of $60,000 at the end of five years. During 2008, the equipment was used for 1,200 hours. Assume that usage for the next four years will be $1,100 hours, 900 hours, 1,300 hours, and 500 hours, respectively.
a.) What is the amount of depreciation expense for each of the five years using the straight-line method?
b.) What is the amount of depreciation expense for each of the five years using the double declining balance method?
c.) What is the amount of depreciation expense for each of the five years using the units of production method? (Hours are production units in this example).
Problem 2) Smith Steakhouse is a restaurant catering to a variety of customers. They purchased a new power oven at a cost of $100,000 on January 1, 2006. The oven has an expected useful life of four years and an estimated salvage value of $10,000. Smith Steakhouse uses straight-line depreciation for all of its depreciable assets.
On May 1, 2008 the owner of the restaurant was persuaded to purchase a new oven that operated more efficiently. The old oven was sold at that time for $15,000.
a.) What was the amount of depreciation expense recorded on the old machine for each year of use? (Show computations).
b.) What is the amount of gain or loss on the disposal of the old machine? (Show computations).
Problem 3) Staffing Company purchased the net assets (i.e., assets minus liabilities) of Time Management, Inc. for $390,000. Time Management, Inc. is a retailer of software, books, seminars, and related items. Its net assets have been carried on its own books at a total of $183,000. An appraisal of all time Managementâ??s assets and liabilities revealed a net fair market value of $299,000,Staffing Company is willing to pay extra because of Time Management's very loyal customers, most of who have dealt exclusively with the company for many years and also their loyal employees who have been with the company for many years.
a.) What is the amount of goodwill that Staffing Company should record at acquisition of Time Management, Inc.?
Problem 4) On January 1, Highland Corporation purchased $85,000 of six percent, three-year bonds as a long-term investment. Interest is paid annually. The company is not involved in active trading of securities.
a.) What accounts are increased and/or decreased by the purchase of this bond and by which amount?
b.) What accounts are increased and/or decreased by the receipt of the first interest payment on the bonds in part A and by which amount?
c.) Assuming the company intends to hold the bonds to maturity, what accounts are increased and/or decreased at the end of the first year if the market value of the bonds is $88,500 at that time?
d.) How would you answer to part C differ if the company does not intend to hold the bonds to maturity? What accounts would be increased and/or decreased at the end of the first year then and by what amount?