The following transactions and adjusting entries were completed by a paper-packa

Question

The following transactions and adjusting entries were completed by a paper-packaging company called Gravure Graphics International during 2015 and 2016. The company uses straight-line depreciation for trucks and other vehicles, double-declining-balance depreciation for buildings, and straight-line amortization for patents Paid $96,000 cash to purchase storage shed components. Paid $6,000 cash to have the storage shed erected. The storage shed has an estimated life of 10 years and a residual value of $9,000 Paid $42,000 cash to purchase a pickup truck for use in the business. The truck has an estimated useful life of five years and a residual value of $7,000 Paid $600 cash for repairs to the pickup truck. Paid $19,000 cash to purchase patent rights on a new paper bag manufacturing process. The patent is estimated to have a remaining useful life of five years Recorded depreciation and amortization on the pickup truck, storage shed, and patent. Sold the pickup truck for $36,000 cash. (Record the depreciation on the truck prior to recording its disposal.) Recorded depreciation on the storage shed. Determined that the patent was impaired and wrote off its remaining book value (i.e., wrote down the book value to zero) January January 2, 2015 3, 2015 1, 2015 13, 2015 April May 1, 2015 December 31, 2015 June30, 2016 December 31, 2016

Explanation / Answer

Note: Accumulated amortization account is not maintained and the amortization expense is directly credited to the patent account.

Workings:

Annual depreciation on truck = ($42000 - $7000)/5 years = $7000

Annual amortization of patent = $19000/5 years = $3800

Depreciation of building:

Straight-line depreciation rate = 100%/10 years = 10%

Double-declining depreciation rate = 10% x 200% = 20%

Depreciation on building for 2015 = 20% x $102000 = $20400

Depreciation on building for 2016 = 20% x ($102000 - $20400) = $16320

Date Account Titles and Explanation Debit Credit 5 Jul. 15, 2015 Patent 19000 Cash 19000 (To record purchase of patent) 6 Dec. 31, 2015 Depreciation expense 25650 Amortization expense 1900 Accumulated depreciation-Truck ($7000 x 9/12) 5250 Accumulated depreciation-Building 20400 Patent ($3800 x 6/12) 1900 (To record depreciation and amortization expense) 7 Jun. 30, 2016 Depreciation expense 3500 Accumulated depreciation-Truck ($7000 x 6/12) 3500 (To record depreciation on truck) 8 Jun. 30, 2016 Cash 36000 Accumulated depreciation-Truck ($5250 + $3500) 8750 Truck 42000 Gain on sale of truck 2750 (To record sale of truck) 9 Dec. 31, 2016 Depreciation expense 16320 Accumulated depreciation-Building 16320 (To record depreciation on building) 10 Dec. 31, 2016 Loss on impairment ($19000 - $1900) 17100 Patent 17100 (To record impairment of patent)

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