Chapter 9
Long-Lived Tangible and Intangible
Assets
Learning Objectives:
Define, classify, and explain the nature of long-lived assets
Apply the cost principle to the acquisition of long-lived assets
Apply the various depreciation methods as economic benefits are used up over time
Analyze the disposal of long-lived tangible assets
Analyze the acquisition, use, and disposal of long-lived assets
Interpret the fixed asset turnover ratio
DEPRECIATION METHODS AND GAIN (LOSS) ON SALE
Joel Harvey Florists acquired a truck on January 1, Year 1. The company paid $11,000 for the truck, $500
for destination charges, and $250 to paint the company name on the side of the truck. The company’s
accounting manager estimates the truck to have a five-year useful life and a residual value of $1,750. The
truck is expected to be driven 100,000 miles in five years. It is actually driven 15,000 miles in Year 1,
25,000 miles in Year 2, 30,000 miles in Year 3, 25,000 miles in Year 4, and 5,000 miles in Year 5.
Part 1
On January 1, Year 1, how much should Joel Harvey Florists capitalize for the cost of the truck?
Part 2
How much depreciation expenses would be recorded for the years Year 1 through Year 5 using each of
the following methods?
a. Straight-line
b. Unit-of-production
c. Declining-balance
Part 3
On December 31, Year 5, at the end of its useful life, Joel Harvey sold the truck for $3,000 cash.
Compute the gain or loss on sale.
Depreciation Methods
M9-4: A machine that cost $400,000 has an estimated residual value of $40,000 and an estimate useful
life of four years. The company uses straight-line depreciation. Calculate its book value at the end of
year 3.
M9-5: A machine that cost $400,000 has an estimated residual value of $40,000 and an estimate useful
life of 20,000 machine hours. The company uses units-of-production depreciation and tan the machine
3,000 hours in year 1, 8,000 hours in year 2, and 6,000 hours in year 3. Calculate its book value at the
end of year 3.
M9-6: A machine that cost $400,000 has an estimated residual value of $40,000 and an estimate useful
life of four years. The company uses double-declining balance depreciation. Calculate its book value at
the end of year 3. Round to the nearest dollar.
Gain/Loss
E9-9: FedEx Corporation is the world’s leading express-distribution company. In addition to its 643
aircraft, the company has more than 57,000 ground vehicles that puck up and deliver packages. Assume
that FedEx sold a delivery truck for $16,000. FedEx had originally purchased the truck for $28,000 and
had recorded depreciation for three years.
Required:
1. Calculate the amount of gain or loss on disposal, assuming that Accumulated Depreciation is (a)
$12,000, (b) $10,000, and (c) $15,000.
2. Using the following structure, indicate the effects (accounts, amounts, and + or - ) of the disposal
of the truck, assuming Accumulated Depreciation was (a) $12,000, (b) $10,000, and (c) $15,000.
Assets = Liabilities + Stockholders’ Equity
3. Based on the three preceding situations, explain how the amount of depreciation recorded to the
time of disposal affects the amount of gain or loss on disposal.
4. Prepare the journal entry to record the disposal of the truck, assuming Accumulated Depreciation
was (a) $12,000, (b) $10,000, and (c) $15,000.
Calculating partial-year depreciation
On September 30, 2015, Meggie Services purchased a copy machine for $38,000. Meggie Services
expects the machine to last for four years and have a residual value of $2,000. Compute depreciation
expense on the machine for the year ended December 31, 2015, using the straight-line method.
Changing the estimated life of an asset
Assume that ABC Catering Services paid $20,000 for equipment with a 10-year life and zero expected
residual value. After using the equipment for four years, the company determines that the asset will
remain useful for only three more years.
Requirements
1. Record depreciation expense on the equipment for year 5 by the straight-line method.
2. What is accumulated depreciation at the end of year 5?
Discarding of a fully depreciated asset
On June 15, 2015, Perfect Furniture discarded equipment that had a cost of $12,000, a residual value of
$0, and was fully depreciated. Journalize the disposal of the equipment.
Discarding an asset
On May 31, 2016, Choice Landscapes discarded equipment that had a cost of $29,400. Accumulated
Depreciation as of December 31, 2015, was $27,000. Assume annual depreciation on the equipment is
$2,400. Journalize the partial-year depreciation expense and disposal of the equipment.
Selling an asset at gain or loss
Mill Creek Golf Club purchased equipment on January 1, 2016, for $31,500. Suppose Mill Creek Golf
Club sold the equipment for $22,000 on December 31, 2018. Accumulated Depreciation as of December
31, 2018, was $21,000. Journalize the sale of the equipment, assuming straight-line depreciation was
used.
Selling an asset at gain or loss
Pelman Company purchased equipment on January 1, 2016, for $32,000. Suppose Pelman sold the
equipment for $5,000 on December 31, 2017. Accumulated Depreciation as of December 31, 2017, was
$22,000. Journalize the sale of the equipment, assuming straight-line depreciation was used.
