Plant Assets & Capitalization
What does it mean to capitalize a cost?
Adding the cost to the asset account on the balance sheet instead of immediately expensing it.
What is the process of allocating a plant asset's cost to expense over its useful life called?
Depreciation
What is a bond? Who is the bond issuer, and who is the bondholder?
A bond is a loan between an entity and an investor. The issuer borrows; the bondholder lends.
A company issues $100,000 of bonds with a 6% stated annual interest rate. Interest is paid semiannually.
How much cash interest is paid every six months?
$3,000
True or False: Land is depreciated over its estimated useful life.
False
A company purchases equipment for $40,000, pays $2,000 for transportation, $1,000 for installation, and $500 for insurance while the equipment is in transit. What is the total cost of the equipment?
$43,500
An asset costs $50,000, has a residual value of $5,000, and a useful life of 5 years. Calculate its annual depreciation expense using straight-line depreciation.
$9,000
A company issues $200,000 of bonds at a quoted price of 98. How much cash does the company receive?
$196,000
A company issues $100,000 of 5-year bonds at a $5,000 discount. Interest is paid semiannually.
Using straight-line amortization, how much discount is amortized each interest period?
$500 per period
A company has total liabilities of $300,000 and total assets of $600,000.
Calculate its leverage/debt ratio.
0.50 or 50%
A company purchases land and a building together for $300,000. The land has a market value of $100,000, and the building has a market value of $40 0,000. How much of the purchase price should be allocated to the building?
$240,000
A machine costs $420,000, has a residual value of $20,000, and is expected to operate for 6 years and 800,000 units. During the first year, it operates for 20,000 units.
Using units-of-production, calculate the first year's depreciation expense.
$10,000
A company's bonds have a stated interest rate of 8%. The market interest rate increases to 10%.
Will the bond price increase or decrease? Will the bonds sell at a premium or discount?
Bond price decreases; bonds sell at a discount because the market rate is higher than the stated rate.
A company issues $100,000 of 5-year bonds at a $10,000 premium. Interest is paid semiannually.
How much premium is amortized each interest period using straight-line amortization?
$1,000 per period
A company purchases equipment for $60,000, with a residual value of $10,000 and a useful life of 5 years.
What is its book value at the end of Year 2 using straight-line depreciation?
$40,000
A company spends money on the following items:
- $500 for routine maintenance
- $4,000 for a major engine improvement that extends useful life
- $300 for an oil change
Which cost should be capitalized, and which costs should be expensed?
Capitalize: $4,000 major improvement
Expense: $500 routine maintenance and $300 oil change
A company purchases equipment for $40,000 with a useful life of 5 years and no residual value.
Using the double-declining-balance method, what is the depreciation expense for Year 2?
$9,600
A corporation issues $100,000 of bonds at a quoted price of 96.
Prepare the journal entry to record the bond issuance.
Debit: Cash $96,000
Debit: Discount on BP $4,000
Credit: Bonds Payable $100,000
A company issues $100,000 of 8%, 5-year bonds at a $6,000 discount. Interest is paid semiannually.
Calculate the interest expense for the first interest payment.
$4,600
A company issues $100,000 of 8%, 5-year bonds at a $4,000 premium. Interest is paid semiannually. Calculate:
1. Cash interest per payment.
2. Premium amortization per period.
3. Interest expense per payment.
1. $4,000
2. $400
3. $3,600
A company purchases land and a building for a combined price of $600,000. The land's market value is $400,000, and the building's market value is $800,000.
Calculate the amount allocated to BOTH land and building (don't round intermediary numbers).
Land: $200,000
Building: $400,000
A company sells equipment that originally cost $50,000. Its accumulated depreciation is $35,000. The company receives $12,000 cash from the sale.
Calculate the book value and determine whether the company records a gain or loss. How much?
Book Value: $15,000
$3,000 loss
A corporation issues $100,000 of bonds at a quoted price of 102.
Prepare the journal entry to record the bond issuance.
Debit: Cash $102,000
Credit: Premium on BP $2,000
Credit: Bonds Payable $100,000
A company issues $150,000 of 6%, 5-year bonds at a $10,000 premium. Interest is paid semiannually.
Prepare the journal entry for the first interest payment using straight-line amortization.
Debit: Interest Expense $3,500
Debit: Premium on BP $1,000
Credit: Cash Payment $4,500
A company purchases equipment for $100,000, with a residual value of $10,000 and a useful life of 5 years. It uses straight-line depreciation.
At the end of Year 2, the company sells the equipment for $75,000 cash. Calculate:
1. Annual depreciation expense.
2. Accumulated depreciation after 2 years.
3. Book value at the date of sale.
4. Gain or loss on disposal.
1. $18,000
2. $36,000
3. $64,000
4. $11,000 Gain