Question 1: For each of the following situations, indicate whether it is a capit

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Question 1: For each of the following situations, indicate whether it is a capital or revenue expenditure. 1. Purchased land and a building at a cost of $750,000 by paying $200,000 down and signing a two-year note payable for the remainder. 2. Spent $325 on a tune-up for a truck used in making deliveries. 3. The owner of a restaurant paid a plumber $400 to install a new dishwasher in the kitchen. 4. Paid $1,300 in sales tax on a new delivery van when registering the van at the Registry of Motor Vehicles. 5. A new machine was accidently damaged during installation. The uninsured cost to repair the machine was $1,250.

Question 2: Winters Company purchased a new van to expand its business. The invoice price of the van was $35,400, with additional costs of $950 for dealer prep and $675 in destination charges. Winters also had the dealer install special roof racks at a cost of $1,450 and paid $2,255 in sales tax, $175 in annual registration fees, and $60 for the title. The annual insurance bill totaled $1,960, and Winters opted for an extended warranty package costing $935. Within one month’s time, Winters spent $330 for gasoline. Determine the dollar amount that Winters should debit to Vehicles account.

Question 3: Dray Enterprises recently acquired a new machine at a cost of $59,000. The machine has an estimated useful life of six years or 45,000 production hours and salvage value is estimated at $5,000. During the first two years of the asset’s life, 8,000 and 7,500 production hours, respectively, were logged by the machine. Calculate the depreciation charge for the first two years of the asset’s life using the (a) straight-line method, (b) units-of-production method and (c) double-declining-balance method.

Question 4: Shenefelt Medical Center wants to dispose of its CAT scan machine. The original cost of the machine was $445,000, and depreciation of $374,000 has been recorded to date. The purchasing manager is contemplating the following alternatives to dispose of the machine. (Treat each alternative independently.)

1. Mainland Medical Supply is willing to take the old machine and give Shenefelt a $85,000 trade-in allowance toward the purchase of a new CAT scan machine with a list price of $310,000. The balance of the price must be paid in cash.

2. Cornell Medical Supply is willing to give Shenefelt a $65,000 trade-in allowance on a new CAT scan machine with a list price of $325,000, the balance to be paid in cash.

3. Century Medical Center is willing to make an even exchange. Century will exchange its CAT scan machine for Shenefelt's CAT scan . Shenefelt's CAT scan has a fair market value of $80,000. The CPA for Shenefelt says this exchange has no commercial substance.

4. Saxony Medical Center is willing to give Shenefelt an ambulance with a fair market value of $65,000 and $20,000 cash for Shenefelt's CAT scan. Prepare Shenefelt's journal entry to record each of these alternatives for financial statement purposes.

Explanation / Answer

Question 1 1. Purchase of land and building at a cost of $750,000 by paying $200,000 down and signing two year notes payable for remaining. This expense is for fixed asset therefore it is a capital expenditure. 2. Tune up for a truck used in making deliveries is a repairing expenses for truck. Therefore it is treated as revenue expenditure. 3. The owner of a restaurant paid a plumber $400 to install a new dishwasher in the kitchen. This expense incurred for instalation of diswasher therefore included in the cost of dish washer as capital expenditure. 4. Paid $1,300 in sales tax on a new delivery van when registering the van at the Registry of Motor Vehicles: This expense has been incurred at the time of purchase of delivery van therefore it should be included in the cost of delivery van as a capital expenditure. 5. A new machine was accidently damaged during installation. The uninsured cost to repair the machine was $1,250.This expenditure has been incurred to install the machine and make the machine in running condition therefore it is a capital expenditure. 2 The vehichle account includes all the costs which increase the earning capacity of the vehicle. The vehichle account will be debited with the amount of costs which are expended for purchase and installation of an asset to make it in running condition. Purchase cost, dealer prep cost, destination charges(freight expenses to bring the vehicle to its destination), special roof racks expenses(this expense is to install the vehicle), Sales tax expense paid at the time of purchase, annual registration fee and title fee, warranty package expenses. Gasoline expense is a revenue expenditure. Purchase cost $                                35,400 Dealer prep. Cost $                                      950 Destination charges $                                      675 special roof racks $                                   1,450 sales tax expenses $                                   2,250 Annual registration fee $                                      175 Title fee $                                         60 Warranty package expenses $                                      935 Total vehicle cost $                                41,895 The vehicle cost should be capitalized with the amount of $41,895. 3 Depreciation charge for the first two years of the asset using Straight line method is as under: Cost of the machine $59,000 Estimated useful life of asset 6 years 45000 production hours Salvage value $5,000 As per staight line method depreciation for two years would be as under: Depreciation=(Cost-Salvage value)/Estimated useful life of asset ='($59,000-$5,000)/6 =9000 The depreciation under Straight line method would be same in every year therefore depreciation in two years would be Ist year 2nd Year Depreciation $9,000 $9,000 b. Depreciation charge for the first two years of the asset using units of production method is as under: For Ist year: Depreciation=[(Cost-Salvage value)/Estimated production hours]*Estimated no. of hours in Ist year =]($59,000-$5,000)/45,000]*8,000 =$9,600 For 2nd year: Depreciation=[(Cost-Salvage value)/Estimated production hours]*Estimated no. of hours in Ist year =]($59,000-$5,000)/45,000]*7,500 =$9,000 c. Depreciation charge for the first two years of the asset using double declining balance method is as under: double declining balance depreciation rate=200% of Straight line depreciation rate Straight line depreciation rate=($59,000-$5,000/6)/($59,000-$5,000) = 16.67% Double declining balance depreciation rate=200% of Straight line depreciation rate =200% of 16.67% Double declining balance depreciation rate= 33% Deprecaition for two year would be using Double declining balance depreciation rate of 33.33% is as under; 1st year =$59,000*33.33% 19665 2nd year =($59,000-$19,665)*33.33% $13,112

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