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Chapter10-1
Chapter
10Plant Assets, Natural
Resources, and
Intangible Assets
Accounting Principles, Ninth Edition
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Chapter10-2
1. Describe how the cost principle applies to plant assets.2. Explain the concept of depreciation.
3. Compute periodic depreciation using different methods.
4. Describe the procedure for revising periodic depreciation.
5. Distinguish between revenue and capital expenditures, andexplain the entries for each.
6. Explain how to account for the disposal of a plant asset.
7. Compute periodic depletion of natural resources.
8. Explain the basic issues related to accounting for intangibleassets.
9. Indicate how plant assets, natural resources, and intangibleassets are reported.
Study Objectives
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Chapter10-3
Plant Assets
Determining the
cost of plant
assets
Depreciation
Expendituresduring useful life
Plant asset
disposals
Natural
Resources
Intangible
Assets
Statement
Presentation and
Analysis
Presentation
Analysis
Accounting for
intangibles
Research and
development
costs
Plant Assets, Natural Resources, andIntangible Assets
Depletion
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Chapter10-4
Used in operations and not for resale.Long-term in nature and usually depreciated.
Possess physical substance.
Plant assetsinclude land, land improvements,buildings, and equipment (machinery, furniture, tools).
Major characteristics include:
Section 1Plant Assets
Referred to as property, plant, and equipment; plant andequipment; and fixed assets.
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Chapter10-7
Land
Required: Determine amount to be reported as the cost ofthe land.
Determining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.
Cash price of property of $100,000
Old warehouse razed at a cost of $6,000Attorney's fees of $1,000 1,000
6,000
$100,000
$115,000Cost of Land
Real estate brokers commission of $8,000 8,000
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Chapter10-8
Includes all expenditures necessary to make theimprovements ready for their intended use.
Land Improvements
Determining the Cost of Plant Assets
Examples are driveways, parking lots, fences,landscaping, and underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of landimprovements over their useful lives.
SO 1 Describe how the cost principle applies to plant assets.
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Chapter10-9
Includes all costs related directly to purchase orconstruction.
Buildings
Purchase costs:Purchase price, closing costs (attorneys fees, titleinsurance, etc.) and real estate brokers commission.
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.Construction costs:
Contract price plus payments for architects fees,building permits, and excavation costs.
Determining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.
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Chapter10-10
Include all costs incurred in acquiring the equipmentand preparing it for use.
Costs typically include:
Equipment
purchase price,
sales taxes,
freight and handling charges,
insurance on the equipment while in transit,
assembling and installation costs, and
costs of conducting trial runs.
Determining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.
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Chapter10-11
Illustration: Assume Merten Company purchases factorymachinery at a cash price of $50,000. Related expendituresare for sales taxes $3,000, insurance during shipping $500,and installation and testing $1,000. Determine amount to be
reported as the cost of the machinery.
Determining the Cost of Plant Assets
SO 1 Describe how the cost principle applies to plant assets.
Machinery
Cash price
Sales taxes
Insurance during shipping 500
3,000
$50,000
$54,500Cost of Machinery
Installation and testing 1,000
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Chapter10-13
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, andequipment, not land.
Depreciable, because the revenue-producingability of asset will decline over the assetsuseful life.
Depreciationis the process of allocating the cost oftangible assets to expensein a systematic and rationalmanner to those periods expected to benefit from theuse of the asset.
Depreciation
SO 2 Explain the concept of depreciation.
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Chapter10-14
Factors in Computing Depreciation
Cost
Depreciation
SO 2 Explain the concept of depreciation.
Useful Life Salvage Value
Illustration 10-6
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Chapter10-15
Objective is to select the method that best measuresan assets contribution to revenue over its useful life.Examples include:
Depreciation Methods
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.
Depreciation
SO 3 Compute periodic depreciation using different methods.
Illustration 10-8Use of depreciationmethods in 600 largeU.S. companies
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Chapter10-16
Illustration: Barbs Florists purchased a small deliverytruck on January 1, 2010.
Required: Compute depreciation using the following.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
Depreciation
SO 3 Compute periodic depreciation using different methods.
Illustration 10-7
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Chapter10-17
Straight-Line
Depreciation
SO 3 Compute periodic depreciation using different methods.
Expense is same amount for each year.
Depreciable cost is cost of the asset less its
salvage value. Illustration 10-9
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Chapter10-18
Depreciable Annual Accum. Book
Year Cost x Rate = Expense Deprec. Value
Depreciation
SO 3 Compute periodic depreciation using different methods.
Illustration: (Straight-Line Method)
2010 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600
2011 12,000 20 2,400 4,800 8,200
2012 12,000 20 2,400 7,200 5,800
2013 12,000 20 2,400 9,600 3,400
2014 12,000 20 2,400 12,000 1,000
2010JournalEntry
Depreciation expense 2,400
Accumulated depreciation 2,400
Illustration 10-10
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Chapter10-19
Companies estimate total units of activity to calculatedepreciation cost per unit.
Expense varies based on units of activity.Depreciable cost iscost less salvagevalue.
Units-of-Activity
Depreciation
SO 3 Compute periodic depreciation using different methods.
Illustration 10-11
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Chapter10-20
Hours Rate per Annual Accum. Book
Year Used x Hour = Expense Deprec. Value
Depreciation
Illustration: (Units-of-Activity Method)
2010 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2011 30,000 0.12 3,600 5,400 7,600
2012 20,000 0.12 2,400 7,800 5,200
2013 25,000 0.12 3,000 10,800 2,200
2014 10,000 0.12 1,200 12,000 1,000
Depreciation expense 1,800
Accumulated depreciation 1,800
2010JournalEntry
Illustration 10-12
SO 3 Compute periodic depreciation using different methods.
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Chapter10-21
Decreasing annual depreciation expense over theassets useful life.
Declining-balance rate is double the straight-linerate.
Rate applied to book value.
Declining-Balance
Depreciation
SO 3 Compute periodic depreciation using different methods.
Illustration 10-13
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Chapter10-22
Declining
Beginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value
Depreciation
Illustration: (Declining-Balance Method)
2010 13,000 40% $ 5,200 $ 5,200 $ 7,800
2012 7,800 40 3,120 8,320 4,680
2013 4,680 40 1,872 10,192 2,808
2014 2,808 40 1,123 11,315 1,685
2015 1,685 40 685* 12,000 1,000
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
Depreciation expense 5,200
Accumulated depreciation 5,200
2010JournalEntry
Illustration 10-14
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Chapter10-23 SO 3 Compute periodic depreciation using different methods.
Comparison of Depreciation Methods
Depreciation
Illustration 10-15
Illustration 10-16
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Chapter10-24
The following five slides are included toillustrate the calculation of partial-yeardepreciation expense.
The amounts are consistent with the previousslides illustrating the calculation of depreciationexpense.
Depreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.
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Chapter10-25
Illustration: Barbs Florists purchased a small deliverytruck on October 1, 2010.
Required: Compute depreciation using the following.
(a) Straight-Line.
(b) Units-of-Activity.
(c) Declining Balance.
SO 3 Compute periodic depreciation using different methods.
Illustration 10-7
Depreciation for Partial Year
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Chapter10-26
CurrentDepreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.
2010 12,000$ x 20% = 2,400$ x 3/12 = 600$ 600$
2011 12,000 x 20% = 2,400 2,400 3,000
2012 12,000 x 20% = 2,400 2,400 5,4002013 12,000 x 20% = 2,400 2,400 7,800
2014 12,000 x 20% = 2,400 2,400 10,200
2015 12,000 x 20% = 2,400 x 9/12 = 1,800 12,000
12,000$
Journal entry:
2010 Depreciation expense 600
Accumultated depreciation 600
Depreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.
Illustration: (Straight-line Method)
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Chapter10-27
Hours Rate per Annual Accum. Book
Year Used x Hour = Expense Deprec. Value
Illustration: (Units-of-Activity Method)
2010 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200
2011 30,000 0.12 3,600 5,400 7,600
2012 20,000 0.12 2,400 7,800 5,200
2013 25,000 0.12 3,000 10,800 2,200
2014 10,000 0.12 1,200 12,000 1,000
Depreciation expense 1,800
Accumulated depreciation 1,800
2010JournalEntry
Illustration 10-12
Depreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.
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Chapter10-28
Illustration: (Declining-Balance Method)Declining Current
Beginning Balance Annual Partial Year Accum.Year Book Value Rate Expense Year Expense Deprec.
2010 13,000$ x 40% = 5,200$ x 3/12 = 1,300$ 1,300$
2011 11,700 x 40% = 4,680 4,680 5,980
2012 7,020 x 40% = 2,808 2,808 8,788
2013 4,212 x 40% = 1,685 1,685 10,473
2014 2,527 x 40% = 1,011 1,011 11,484
2015 1,516 x 40% = 607 Plug 516 12,000
12,000$
Journal entry:
2010 Depreciation expense 1,300
Accumultated depreciation 1,300
Depreciation for Partial Year
SO 3 Compute periodic depreciation using different methods.
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Chapter
10-29
IRS does not require taxpayer to use the samedepreciation method on the tax return that is used inpreparing financial statements.
IRS requires the straight-linemethod or a specialaccelerated-depreciation method called the ModifiedAccelerated Cost Recovery System(MACRS).
MACRS is NOT acceptable under GAAP.
Depreciation and Income Taxes
Depreciation
SO 3 Compute periodic depreciation using different methods.
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Chapter
10-30
Revising Periodic DepreciationAccounted for in the period of change andfuture periods (Change in Estimate).
Not handled retrospectively.Not considered error.
Depreciation
SO 4 Describe the procedure for revising periodic depreciation.
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Chapter
10-31
Illustration: Assume that Barbs Florists decides onJanuary 1, 2013, to extend the useful life of the truck oneyear because of its excellent condition. The company has
used the straight-line method to depreciate the asset to
date, and book value is $5,800 ($13,000 - $7,200).
Questions:
1. What is the journal entry to correctthe prior years depreciation?
2. Calculate the depreciation expensefor 2013.
No EntryRequired
Depreciation
SO 4 Describe the procedure for revising periodic depreciation.
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Chapter
10-32
Depreciation
Depreciation expense 1,600Accumulated depreciation 1,600
Journal entry for 2013
SO 4 Describe the procedure for revising periodic depreciation.
Book value, 1/1/13 $5,800Salvage value
Depreciable cost
Useful life (revised) /
Annual depreciation
First,establish
Book Valueat the dateof change in
estimate.
- 1,000
4,8003 years
$ 1,600
Illustration 10-17
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Chapter
10-33
Ordinary Repairs- expenditures to maintain theoperating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.
Expenditures During Useful Life
SO 5 Distinguish between revenue and capital expenditures,and explain the entries for each.
Additions and Improvements- costs incurred toincrease the operating efficiency, productive capacity, oruseful life of a plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.
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Chapter
10-34
Companies dispose of plant assets in three ways Retirement, Sale, or Exchange (appendix).
Plant Asset Disposals
SO 6 Explain how to account for the disposal of a plant asset.
Illustration 10-18
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and(2) crediting the asset account.
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Chapter
10-35
Illustration: Assume that Hobart Enterprises retiresits computer printers, which cost $32,000. The accumulateddepreciation on these printers is $32,000. The journal entryto record this retirement is?
Plant Asset Disposals - Retirement
SO 6 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 32,000
Printing equipment 32,000
Question: What happens if a fully depreciated plant asset is stilluseful to the company?
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Chapter
10-36
Illustration: Assume that Sunset Company discards deliveryequipment that cost $18,000 and has accumulateddepreciation of $14,000. The journal entry is?
Plant Asset Disposals - Retirement
SO 6 Explain how to account for the disposal of a plant asset.
Accumulated depreciation 14,000Loss on disposal 4,000
Companies report a loss on disposal in the Other expenses andlosses section of the income statement.
Delivery equipment 18,000
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Chapter
10-38
Illustration: Assume that on July 1, 2010, Wright Companysells office furniture for $16,000 cash. The office furnitureoriginally cost $60,000. As of January 1, 2010, it hadaccumulated depreciation of $41,000. Depreciation for thefirst six months of 2010 is $8,000. Prepare the journal entryto record depreciation expense up to the date of sale.
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
Depreciation expense 8,000
Accumulated depreciation 8,000
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Chapter
10-39
Illustration: Wright records the sale as follows.
SO 6 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals - Sale
Cash 16,000
Accumulated depreciation 49,000
Illustration 10-19Computation of gain on
disposal
Office equipment 60,000
Gain on disposal 5,000
July 1
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Chapter
10-40
Physically extracted in operations.
Replaceable only by an act of nature.
Natural resourcesconsist of standing timber andunderground deposits of oil, gas, and minerals.
Distinguishing characteristics:
Section 2Natural Resources
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Chapter
10-41
Depletionis to natural resources as depreciationis to plant assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the unitsextracted.
Cost - price needed to acquire the resource andprepare it for its intended use.
Depletion- allocation of the cost to expense in a rationaland systematic manner over the resources useful life.
Section 2Natural Resources
SO 7 Compute periodic depletion of natural resources.
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Chapter
10-42
Illustration: Assume that Lane Coal Company invests $5million in a mine estimated to have 10 million tons of coal andno salvage value. In the first year, Lane extracts and sells800,000 tons of coal. Lane computes the depletion expenseas follows:
Section 2Natural Resources
SO 7 Compute periodic depletion of natural resources.
$5,000,000 10,000,000 = $.50 depletion cost per ton
$.50 x 800,000 = $400,000 depletion expense
Depletion expense 400,000
Accumulated depreciation 400,000
Journal entry:
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Chapter
10-44
Intangible assetsare rights, privileges, andcompetitive advantages that do not possess physicalsubstance.
Section 3Intangible Assets
PatentsCopyrights
Franchises or licenses
Trademarks or trade namesGoodwill
Intangible assets are categorized as having either alimited life or an indefinite life.
Common types of intangibles:
SO 8 Explain the basic issues related to accounting for intangible assets.
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Chapter
10-45
Purchased Intangibles:
Recorded at cost.
Includes all costs necessary to make the intangibleasset ready for its intended use.
Valuation
Internally CreatedIntangibles:
Generally expensed.Only capitalize direct costs incurred in perfecting titleto the intangible, such as legal costs.
Accounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
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Chapter
10-47
PatentsExclusive right to manufacture, sell, or otherwisecontrol an invention for a period of 20 years from thedate of the grant.
Capitalize costs of purchasing a patent and amortizeover its 20-year life or its useful life, whichever isshorter.
Expense any R&D costs in developing a patent.Legal fees incurred successfully defending a patentare capitalized to Patent account.
Accounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
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Chapter
10-49
CopyrightsGive the owner the exclusive right to reproduce andsell an artistic or published work.
plays, literary works, musical works, pictures,photographs, and video and audiovisual material.
Copyrightis granted for the life of the creator plus70 years.
Capitalize acquisition costs.
Amortized to expense over useful life.
Accounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
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Chapter
10-51
Franchises and LicensesContractual arrangement between a franchisor and afranchisee.
Shell, Taco Bell, or Rent-A-Wreck are franchises.
Franchise(or license) with a limited life should beamortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at
cost and not amortized.
Accounting for Intangible Assets
SO 8 Explain the basic issues related to accounting for intangible assets.
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Chapter
10-53
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Chapter
10-54
Research and Development Costs
Frequently results in something that a companypatents or copyrights such as:
new product,
process,idea,
formula,
composition, orliterary work.
All R & D costs are expensed when incurred.
SO 8 Explain the basic issues related to accounting for intangible assets.
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Chapter
10-55
Presentation
Companies usually include natural resources under Property, plant,and equipment and show intangibles separately.
Statement Presentation and Analysis
SO 9 Indicate how plant assets, natural resources,and intangible assets are reported.
Illustration 10-24
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Chapter
10-56
Analysis
Each dollar invested in assets produced $0.56 in sales.
If a company is using its assets efficiently, each dollarof assets will create a high amount of sales.
Statement Presentation and Analysis
SO 9 Indicate how plant assets, natural resources,and intangible assets are reported.
Illustration 10-25
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Chapter
10-57
Ordinarily, companies record a gain or loss onthe exchange of plant assets.
The rationale for recognizing a gain or loss is
that most exchanges have commercialsubstance.
An exchange has commercial substanceif thefuture cash flows change as a result of the
exchange.
Exchange of Plant Assets
SO 10 Explain how to account for the exchange of plant assets.
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Chapter
10-58
Cost of old trucks $64,000Less: Accumulated depreciation 22,000
Book value 42,000
Fair market value of old trucks 26,000
Loss on disposal $16,000Fair market value of old trucks $26,000
Cash paid 17,000
Cost of new semi-truck $43,000
Illustration: Roland Co. exchanged old trucks (cost $64,000less $22,000 accumulated depreciation) plus cash of$17,000 for a new semi-truck. The old trucks had a fairmarket value of $26,000.
SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets
Illustration
10A-1 & 10A-2
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Chapter
10-59
Illustration: Roland Co. exchanged old trucks (cost $64,000less $22,000 accumulated depreciation) plus cash of$17,000 for a new semi-truck. The old trucks had a fairmarket value of $26,000.
Prepare the entry to record the exchange of assets byRoland Co.
SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets
Semi-truck 43,000
Accumulated depreciation 22,000
Loss on disposal 16,000
Used trucks 64,000
Cash 17,000
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Chapter
10-60
Illustration: Mark Express Delivery trades its old deliveryequipment (cost $40,000 less $28,000 accumulateddepreciation) for new delivery equipment. The old equipmenthad a fair market value of $19,000. Mark also paid $3,000.
SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets
Cost of old equipment $40,000Less: Accumulated depreciation 28,000
Book value 12,000
Fair market value of old equipment 19,000
Gain on disposal $
7,000Fair market value of old equipment $19,000
Cash paid 3,000
Cost of new equipment $22,000
Illustration10A-3 & 10A-4
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Chapter
10-61
Illustration: Mark Express Delivery trades its old deliveryequipment (cost $40,000 less $28,000 accumulateddepreciation) for new delivery equipment. The old equipmenthad a fair market value of $19,000. Mark also paid $3,000.
Prepare the entry to record the exchange of assets by MarkExpress.
SO 10 Explain how to account for the exchange of plant assets.
Exchange of Plant Assets
Delivery equipment (new) 22,000
Accumulated depreciation 28,000
Delivery equipment (used) 40,000
Gain on disposal 7,000
Cash 3,000
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