Problem 8-25B: Accounting for acquisition of assets including a basket purchase

Floyd Company made several purchases of long-term assets in Year 1. The details of each purchase are presented here.

New Office Equipment

1. List price: $50,000; terms: 1/10 n/30; paid within the discount period.
2. Transportation-in: $1,200.
3. Installation: $1,000.
4. Cost to repair damage during unloading: $700.
5. Routine maintenance cost after eight months: $240.

Basket Purchase of Office Furniture, Copier, Computers, and Laser Printers for $70,000 with Fair Market Values

1. Office furniture, $48,000.
2. Copier, $12,000.
3. Computers and printers, $20,000.

Land for New Headquarters with Old Barn Torn Down

1. Purchase price, $100,000.
2. Demolition of barn, $7,000.
3. Lumber sold from old barn, $2,000.
4. Grading in preparation for new building, $11,000.
5. Construction of new building, $310,000.

Required

In each of these cases, determine the amount of cost to be capitalized in the asset accounts.

Problem 8-26B: Determining the effect of depreciation expense on financial statements

Three different companies each purchased a machine on January 1, Year 1, for $64,000. Each machine was expected to last five years or 200,000 hours. Salvage value was estimated to be $6,000.

All three machines were operated for 50,000 hours in Year 1, 55,000 hours in Year 2, 40,000 hours in Year 3, 44,000 hours in Year 4, and 31,000 hours in Year 5. 

Each of the three companies earned $30,000 of cash revenue during each of the five years. Company A uses straight-line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of-production depreciation.

Required

Answer each of the following questions. Ignore the effects of income taxes.

a. Which company will report the highest amount of net income for Year 1?

b. Which company will report the lowest amount of net income for Year 3?

c. Which company will report the highest book value on the December 31, Year 3, balance sheet?

d. Which company will report the highest amount of retained earnings on the December 31, Year 4, balance sheet?

e. Which company will report the lowest amount of cash flow from operating activities on the Year 3 statement of cash flows?