Exercise 8-14B Computing depreciation for tax purposes

Accounting for Long-Term Operational Assets

Exercise 8-14B Computing depreciation for tax purposes

Ripley Lumber Company purchased $240,000 of equipment on September 1, Year 1.

Required
a. Compute the amount of depreciation expense that is deductible under MACRS for Year 1 and Year 2, assuming that the equipment is classified as a seven-year property.
b. Compute the amount of depreciation expense that is deductible under MACRS for Year 1 and Year 2, assuming that the equipment is classified as a five-year property.

Exercise 8-15B Revision of estimated useful life

On January 1, Year 1, Mead Machining Co. purchased a compressor and related installation equipment for $72,500. The equipment had a three-year estimated life with a $12,500 salvage value. Straight-line depreciation was used. At the beginning of Year 3, Mead revised the expected life of the asset to four years rather than three years. The salvage value was revised to $2,500.

Required
Compute the depreciation expense for each of the four years.

Exercise 8-16B Distinguishing between revenue expenditures and capital expenditures

Efficient Shredding Service has just completed a minor repair on a shredding machine. The repair cost was $1,900, and the book value prior to the repair was $6,000. In addition, the company spent $12,000 to replace the roof on a building. The new roof extended the life of the building by five years. Prior to the roof replacement, the general ledger reflected the Building account at $110,000 and related Accumulated Depreciation account at $30,000.

Required
After the work was completed, what book value should Efficient have reported on the balance sheet for the shredding machine and the building?

Exercise 8-17B Effect of revenue expenditures versus capital expenditures on financial statements

Ford Construction Company purchased a forklift for $150,000 cash. It had an estimated useful life of four years and a $10,000 salvage value. At the beginning of the third year of use, the company spent an additional $9,000 that was related to the forklift. The company’s financial condition just prior to this expenditure is shown in the following statements model:

Required
Record the $9,000 expenditure in the statements model under each of the following independent assumptions:
a. The expenditure was for routine maintenance.
b. The expenditure extended the forklift’s life.
c. The expenditure improved the forklift’s operating capacity.

Exercise 8-18B Effect of revenue expenditures versus capital expenditures on financial statements

On January 1, Year 1, Midstate Power Company overhauled four turbine engines that generate power for customers. The overhaul resulted in a slight increase in the capacity of the engines to produce power. Such overhauls occur regularly at two-year intervals and have been treated as a maintenance expense in the past. Management is considering whether to capitalize this year’s $22,000 cash cost in the engine asset account or to expense it as a maintenance expense. Assume that the engines have a remaining useful life of two years and no expected salvage value. Assume straight-line depreciation.

Required
a. Determine the amount of additional depreciation expense Midstate would recognize in Year 1 and Year 2 if the cost were capitalized in the Engine account.
b. Determine the amount of expense Midstate would recognize in Year 1 and Year 2 if the cost were recognized as maintenance expense.
c. Determine the effect of the overhaul on cash flow from operating activities for Year 1 and Year 2 if the cost were capitalized and expensed through depreciation charges.
d. Determine the effect of the overhaul on cash flow from operating activities for Year 1 and Year 2 if the cost were recognized as maintenance expense.