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    Tangible and Intangible assets

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    Problem 1
    Recording continuing Expenditures for plant Assets.

    Big Sky, Inc., recorded the following transactions over the life of a piece of equipment purchased in 2005;

    Jan 1,2005 Purchased the equipment for $36,000 cash, The equipment is estimated to have a 5 yr life and $6,000 salvage value and was to be depreciated using the straight-line method.
    12/31/05 - Recorded depreciation expense for 2005
    05/05/06- Undertook routine repairs costing $750
    12/31/06- Recorded depreciation expense for 2006
    01/01/07- Made an adjustment costing $3,000 to the equipment. It improves the quality of the out-put but did not affect the life estimate.
    12/31/07-Recorded depreciation expense for 2007
    03/01/08- Incurred$320 cost to oil and cleans the equipment
    12/31/08 Recorded depreciation expense for 2008
    01/01/09-Had the equipment completely overhauled at a cost of $7,500. The overhaul was estimated to extend the total life to 7 yrs and revised the salvage value to $4,000
    12/31/09 Recorded depreciation expense for 2009
    07/01/10- Sold the equipment for $9,000 cash

    Requirement:
    a. Use a horizontal statements model to show the effects of these transactions on the elements of the financial statements. Use + for increase, -for decrease, and n/a for not affected.
    b. Determine amount of depreciation expense Big Sky will report on the income statements for the years 2005 through 2009.
    c. Determine the book value (cost-accumulated depreciation) Big sky will report on the balance sheets at the end of the years 2005 through 2009.
    d. Determine the amount of the gain or loss Big Sky will report on the disposal of the equipment on July 1.2010.

    Problem 2

    Accounting for intangible assets

    Mia-Tora Company purchased a fast-food restaurant for $1,400,000. The fair market values of the assets purchases were as follows. No liabilities were assumed.
    Equipment .........$320,000
    Land................... 200,000
    Building...............650,000
    Franchise ( 5 yr life) 100,000

    Required

    a. Calculate the amount of goodwill purchased
    b. Prepare a journal entry to record the amortization of the franchise fee at the end of year one

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    Solution Preview

    Please see the attached files. I have given explanations in both of them.

    Problem 1
    Recording continuing Expenditures for plant Assets.

    Big Sky, Inc., recorded the following transactions over the life of a piece of equipment purchased in 2005;

    Jan 1,2005 Purchased the equipment for $36,000 cash, The equipment is estimated to have a 5 yr life and $6,000 salvage value and was to be depreciated using the straight-line method.

    Since the equipment is purchased for cash, the assets will increase and decrease. There will be no effect on liabilities, equity and net income. The cash outflow would be investing activity

    12/31/05 - Recorded depreciation expense for 2005

    Depreciation is a book entry and so there is no cash flow effect. This will reduce the asset account. The depreciation expense will reduce net income and so will reduce equity

    05/05/06- Undertook routine repairs costing $750

    Routine repairs would be expensed. The cash (asset) will reduce. Net income will reduce and so equity will reduce. The cash outflow would be operating activity.

    12/31/06- Recorded depreciation expense for 2006

    Depreciation is a book entry and so ...

    Solution Summary

    The solution explains the journal entries relating to tangible and intangible assets

    $2.19

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