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Alcide Mining Company purchased land on February 1, 2014, at a cost of $1,190,000. It estimated that a total of 60,000 tons of mineral was available for mining.
\r\nAfter it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at $90,000. It believes it will be able to sell the property afterwards for $100,000. It incurred developmental costs of $200,000 before it was able to do any mining. In 2014, resources removed totaled 30,000 tons. The company sold 22,000 tons.
\r\nInstructions
\r\nCompute the following information for 2014.
\r\n(a) Per unit material cost.
\r\n(b) Total material cost of December 31, 2014, inventory.
\r\n(c) Total material cost in cost of goods sold at December 31, 2014.
What is the difference between a sales tax and a use tax?
Forda Lumber Company owns a 7,000-acre tract of timber purchased in 2000 at a cost of $1,300 per acre. At the time of purchase, the land was estimated to have a value of $300 per acre without the timber. Forda Lumber Company has not logged this tract since it was purchased. In 2014, Forda had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. In 2014, Forda built 10 miles of roads at a cost of $7,840 per mile. After the roads were completed, Forda logged and sold 3,500 trees containing 850,000 board feet.
\r\nInstructions
\r\n(a) Determine the cost of timber sold related to depletion for 2014.
\r\n(b) If Forda depreciates the logging roads on the basis of timber cut, determine the depreciation expense for 2014.
\r\n(c) If Forda plants five seedlings at a cost of $4 per seedling for each tree cut, how should Forda treat the reforestation?
The state of Georgia recently increased its tax on a pack of cigarettes by $2. What type of tax is this? Why might Georgia choose this type of tax?
What are some of the taxes that currently are unique to state and local governments? What are some of the taxes that the federal, state, and local governments each utilize?
What is the distinguishing feature of an excise tax?
What are unemployment taxes?
Diderot Drilling Company has leased property on which oil has been discovered. Wells on this property produced 18,000 barrels of oil during the past year that sold at an average sales price of $55 per barrel. Total oil resources of this property are estimated to be 250,000 barrels.
\r\nThe lease provided for an outright payment of $500,000 to the lessor (owner) before drilling could be commenced and an annual rental of $31,500. A premium of 5% of the sales price of every barrel of oil removed is to be paid annually to the lessor. In addition, Diderot (lessee) is to clean up all the waste and debris from drilling and to bear the costs of reconditioning the land for farming when the wells are abandoned. The estimated fair value, at the time of the lease, of this clean-up and reconditioning is $30,000.
\r\nInstructions
\r\nFrom the provisions of the lease agreement, you are to compute the cost per barrel for the past year, exclusive of operating costs, to Diderot Drilling Company.
What is the tax base for the Social Security and Medicare taxes for an employee or employer? What is the tax base for Social Security and Medicare taxes for a self-employed individual? Is the self-employment tax in addition to or in lieu of federal income tax?
Which is the largest tax collected by the U.S. government? What types of taxpayers are subject to this tax?
Arnold and Lilly recently had a discussion about whether a sales tax is a proportional tax or a regressive tax. Arnold argued that a sales tax is regressive. Lilly countered that the sales tax is a flat tax. Who was correct?
Stanislaw Timber Company owns 9,000 acres of timberland purchased in 2003 at a cost of $1,400 per acre. At the time of purchase, the land without the timber was valued at $400 per acre. In 2004, Stanislaw built fire lanes and roads, with a life of 30 years, at a cost of $84,000. Every year, Stanislaw sprays to prevent disease at a cost of $3,000 per year and spends $7,000 to maintain the fire lanes and roads. During 2005, Stanislaw selectively logged and sold 700,000 board feet of timber, of the estimated 3,500,000 board feet. In 2006, Stanislaw planted new seedlings to replace the trees cut at a cost of $100,000.
\r\nInstructions
\r\n(a) Determine the depreciation expense and the cost of timber sold related to depletion for 2005.
\r\n(b) Stanislaw has not logged since 2005. If Stanislaw logged and sold 900,000 board feet of timber in
\r\n2016, when the timber cruise (appraiser) estimated 5,000,000 board feet, determine the cost of timber sold related to depletion for 2016.
Describe the differences between a proportional, progressive, and regressive tax rate structures.
Which is a more appropriate tax rate to use to compare taxpayers’ tax burdens – the average or the effective tax rate? Why?
The management of Petro Garcia Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2014. On December 31, 2014, management projected its future net cash flows from this equipment to be $300,000 and its fair value to be $230,000.
\r\nThe company intends to use this equipment in the future.
\r\nInstructions
\r\n(a) Prepare the journal entry (if any) to record the impairment at December 31, 2014.
\r\n(b) Where should the gain or loss (if any) on the write-down be reported in the income statement?
\r\n(c) At December 31, 2015, the equipment’s fair value increased to $260,000. Prepare the journal entry (if any) to record this increase in fair value.
\r\n(d) What accounting issues did management face in accounting for this impairment?
Describe the three different tax rates discussed in the chapter and how taxpayers might use them.
Assume the same information as E11-16, except that Suarez intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be $20,000.
\r\nInstructions
\r\n(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014.
\r\n(b) Prepare the journal entry (if any) to record depreciation expense for 2015.
\r\n(c) The asset was not sold by December 31, 2015. The fair value of the equipment on that date is $5,300,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still $20,000.
Presented below is information related to equipment owned by Suarez Company at
\r\nDecember 31, 2014.
\r\nCost $9,000,000
\r\nAccumulated depreciation to date 1,000,000
\r\nExpected future net cash fl ows 7,000,000
\r\nFair value 4,800,000
\r\nAssume that Suarez will continue to use this asset in the future. As of December 31, 2014, the equipment has a remaining useful life of 4 years.
\r\nInstructions
\r\n(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014.
\r\n(b) Prepare the journal entry to record depreciation expense for 2015.
\r\n(c) The fair value of the equipment at December 31, 2015, is $5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.
On March 10, 2016, Lost World Company sells equipment that it purchased for $192,000 on August 20, 2009. It was originally estimated that the equipment would have a life of 12 years and a salvage value of $16,800 at the end of that time, and depreciation has been computed on that basis. The company uses the straight-line method of depreciation.
\r\nInstructions
\r\n(a) Compute the depreciation charge on this equipment for 2009, for 2016, and the total charge for the period from 2010 to 2015, inclusive, under each of the six following assumptions with respect to partial periods.
\r\n(1) Depreciation is computed for the exact period of time during which the asset is owned. (Use
\r\n365 days for base.)
\r\n(2) Depreciation is computed for the full year on the January 1 balance in the asset account.
\r\n(3) Depreciation is computed for the full year on the December 31 balance in the asset account.
\r\n(4) Depreciation for one-half year is charged on plant assets acquired or disposed of during the year.
\r\n(5) Depreciation is computed on additions from the beginning of the month following acquisition and on disposals to the beginning of the month following disposal.
\r\n(6) Depreciation is computed for a full period on all assets in use for over one-half year, and no depreciation is charged on assets in use for less than one-half year. (Use 365 days for base.)
\r\n(b) Briefly evaluate the methods above, considering them from the point of view of basic accounting theory as well as simplicity of application.
Dontae stated that he didn’t want to earn any more money because it would “put him in a higher tax bracket.” What is wrong with Dontae’s reasoning?
Mike Devereaux Company shows the following entries in its Equipment account for 2015. All amounts are based on historical cost.
\r\nEquipment
\r\n2015 2015
\r\nJan. 1 Balance 134,750 June 30 Cost of equipment sold
\r\nAug. 10 Purchases 32,000 (purchased prior
\r\n12 Freight on equipment to 2015) 23,000 purchased 700
\r\n25 Installation costs 2,700
\r\nNov. 10 Repairs 500
\r\nInstructions
\r\n(a) Prepare any correcting entries necessary.
\r\n(b) Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2015 under each of the methods listed below.
\r\nAssume an estimated life of 10 years, with no salvage value. The machinery included in the January
\r\n1, 2015, balance was purchased in 2013.
\r\n(1) Straight-line. (2) Sum-of-the-years’-digits.
Mike Devereaux Company shows the following entries in its Equipment account for 2015. All amounts are based on historical cost.
\r\nEquipment
\r\n2015 2015
\r\nJan. 1 Balance 134,750 June 30 Cost of equipment sold
\r\nAug. 10 Purchases 32,000 (purchased prior
\r\n12 Freight on equipment to 2015) 23,000 purchased 700
\r\n25 Installation costs 2,700
\r\nNov. 10 Repairs 500
\r\nInstructions
\r\n(a) Prepare any correcting entries necessary.
\r\n(b) Assuming that depreciation is to be charged for a full year on the ending balance in the asset account, compute the proper depreciation charge for 2015 under each of the methods listed below.
\r\nAssume an estimated life of 10 years, with no salvage value. The machinery included in the January
\r\n1, 2015, balance was purchased in 2013.
\r\n(1) Straight-line. (2) Sum-of-the-years’-digits.
One common argument for imposing so-called sin taxes is the social goal of reducing demand for such products. Using cigarettes as an example, is there a segment of the population that might be sensitive to price and for whom high taxes might discourage purchases?
In 1987, Herman Moore Company completed the construction of a building at a cost of $2,000,000 and first occupied it in January 1988. It was estimated that the building will have a useful life of 40 years and a salvage value of $60,000 at the end of that time.
\r\nEarly in 1998, an addition to the building was constructed at a cost of $500,000. At that time, it was estimated that the remaining life of the building would be, as originally estimated, an additional 30 years, and that the addition would have a life of 30 years and a salvage value of $20,000.
\r\nIn 2016, it is determined that the probable life of the building and addition will extend to the end of 2047, or 20 years beyond the original estimate.
\r\nInstructions
\r\n(a) Using the straight-line method, compute the annual depreciation that would have been charged from 1988 through 1997.
\r\n(b) Compute the annual depreciation that would have been charged from 1998 through 2015.
\r\n(c) Prepare the entry, if necessary, to adjust the account balances because of the revision of the estimated life in 2016.
\r\n(d) Compute the annual depreciation to be charged, beginning with 2016.
Machinery purchased for $60,000 by Tom Brady Co. in
\r\n2010 was originally estimated to have a life of 8 years with a salvage value of $4,000 at the end of that time. Depreciation has been entered for 5 years on this basis. In 2015, it is determined that the total estimated life should be 10 years with a salvage value of $4,500 at the end of that time. Assume straight-line depreciation.
\r\nInstructions
\r\n(a) Prepare the entry to correct the prior years’ depreciation, if necessary.
\r\n(b) Prepare the entry to record depreciation for 2015.
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