E11-4 (Depreciation Computations—Five Methods) WennerFurnace Corp. purchased machinery for $279,000 on May 1,2010. It is estimated that it will have a useful life of 10 years,salvage value of $15,000, production of 240,000 units, and workinghours of 25,000. During 2011 Wenner Corp. uses the machinery for2,650 hours, and the machinery produces 25,500 units.
Instructions
From the information given, compute the depreciation charge for2011 under each of the following
methods. (Round to the nearest dollar.)
(a) Straight-line.
(b) Units-of-output.
(c) Working hours.
(d) Sum-of-the-years’-digits.
(e) Double-declining-balance.
P11-6 (Depletion, Timber, and Extraordinary Loss) ConanO’Brien Logging and Lumber Company owns 3,000 acresof timberland on the north side of Mount Leno, which was purchasedin 1998 at a cost of $550 per acre. In 2010, O’Brien beganselectively logging this timber tract. In May of 2010, Mount Lenoerupted, burying the timberland of O’Brien under a foot of ash. Allof the timber on the O’Brien tract was downed. In addition, thelogging roads, built at a cost of $150,000, were destroyed, as wellas the logging equipment, with a net book value of $300,000.
At the time of the eruption, O’Brien had logged 20% of theestimated 500,000 board feet of timber.
Prior to the eruption, O’Brien estimated the land to have a valueof $200 per acre after the timber was
harvested. O’Brien includes the logging roads in the depletionbase.
O’Brien estimates it will take 3 years to salvage the downed timberat a cost of $700,000. The timber
can be sold for pulp wood at an estimated price of $3 per boardfoot. The value of the land is unknown,
but must be considered nominal due to future uncertainties.
Instructions
(a) Determine the depletion cost per board foot for the timberharvested prior to the eruption of Mount
Leno.
(b) Prepare the journal entry to record the depletion prior to theeruption.
(c) If this tract represents approximately half of the timberholdings of O’Brien, determine the
amount of the extraordinary loss due to the eruption of Mount Lenofor the year ended
December 31, 2010.
E12-16 (Accounting for R&D Costs) Margaret AveryCompany from time to time embarks on a research programwhen a special project seems to offer possibilities. In 2009 thecompany expends $325,000 on a research project, but by the end of2009 it is impossible to determine whether any benefit will bederived from it.
Instructions
(a) What account should be charged for the $325,000, and how shouldit be shown in the financial
statements?
(b) The project is completed in 2010, and a successful patent isobtained. The R&D costs to complete the project are $130,000.The administrative and legal expenses incurred in obtaining patentnumber 472-1001-84 in 2010 total $24,000. The patent has anexpected useful life of 5 years. Record
these costs in journal entry form. Also, record patent amortization(full year) in 2010.
(c) In 2011, the company successfully defends the patent inextended litigation at a cost of $47,200,
thereby extending the patent life to December 31, 2018. What is theproper way to account for this
cost? Also, record patent amortization (full year) in 2011.
(d) Additional engineering and consulting costs incurred in 2011required to advance the design of a
product to the manufacturing stage total $60,000. These costsenhance the design of the product
considerably. Discuss the proper accounting treatment for thiscost.
P12-1 (Correct Intangible Asset Account) Reichenbach Co.,organized in 2009, has set up a single account for allintangible assets. The following summary discloses the debitentries that have been recorded during 2009 and 2010.
Intangible Assets
7/1/09 8-year franchise; expiration date 6/30/17 $ 48,000
10/1/09 Advance payment on laboratory space (2-year lease)24,000
12/31/09 Net loss for 2009 including state incorporation fee,$1,000,
and related legal fees of organizing, $5,000 (all fees
incurred in 2009) 16,000
1/2/10 Patent purchased (10-year life) 84,000
3/1/10 Cost of developing a secret formula (indefinite life)75,000
4/1/10 Goodwill purchased (indefinite life) 278,400
6/1/10 Legal fee for successful defense of patent purchased above12,650
9/1/10 Research and development costs 160,000
Prepare the necessary entries to clear the Intangible Assetsaccount and to set up separate accounts for distinct types ofintangibles. (List multiple deb/credit entries from largest tosmaller amount, e.g. 10,5, 2)
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