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Semester Case – Cowboy Ice Cream, Inc.

In an effort to enable growth within the company, CIC is considering purchase of a building and the land on which it is located. They believe they’ve found the ideal property and have negotiated a purchase price of $625,000. The land has been appraised at $306,000 and building at $374,000.

If CIC makes this purchase, some substantial remodel work will need to be done to the building. They’ve selected a potential contractor and negotiated a price of $95,000 for labor and materials. 

CIC estimates that the building will have an estimated useful life of 30 years with a $50,000 salvage value.

Once the remodeling is complete, CIC will also purchase and install a freezer that has a list price of $3,700. The supplier offers a 3 percent discount if CIC pays cash (which it plans to do). Delivery terms were FOB shipping point and freight costs will be $450. The freezer will require special installation which will cost $250. CIC estimates the freezer will have an estimated useful life of 7 years and a salvage value of $300.

Opening this location will mean that CIC will likely generate additional wages and other operating expenses of $52,000 per year.

Before completing any of the above transactions, CIC would also acquire $800,000 by signing a note payable.

Assuming CIC enters into the above transactions and operates the new location for one year, record the impact of each of the above items on the statement model provided on the next page.CIC uses the straight line method of depreciation. Round all computations to the nearest whole dollar.

Additionally, complete the depreciation schedule for the life of the freezer.

  

   

  

Event

Assets

Liab

Equity

Rev

Exp

Net   Inc.

Cash   Flow

 

Cash

Equip.

Land

Building

Accum.   Depr.

 

Sign note 

 

Purch. building

 

Remodel building

 

Purch. & install freezer

 

Pay operating expenses

 

Record depr: building

 

Record depr: freezer

   

Depreciation schedule – freezer

  

Year

Depreciation   Expense

Equipment

Accumulated   Depreciation

Book   Value

 

 

 

 

 

 

 

  

E6-10 (modified)

Exact Photo Service purchase a new color printer at the beginning of 2019 for $28,000. The printer is expected to have a four-year useful life and a $3,500 salvage value. The expected print production is estimated at 1,500,000 pages. Actual print production for the four years was as follows:

   

Year

Pages   Printed

 

2018

390,000

 

2019

410,000

 

2020

400,000

 

2021

300,000

The printer was sold at the end of 2021 for $1,650.

(a) Compute the depreciation expense, accumulated depreciation and book value each year of the four years using the straight-line method.

(b) Compute the depreciation expense, accumulated depreciation and book value each year of the four years, using the units-of-production method.

(c) Calculate the amount of gain or loss from the sale of the asset.

  

(d) Record the 2021 depreciation expense and sale of the printer in the horizontal statements model for both the straight-line and units-of-production methods:

  

Event

Assets

Liab

Equity

Rev

Exp

Net   Inc.

Cash   Flow

 

Cash

Printer

Accum.   Depr.

 

Straight-line Method 

 

2021 Depreciation

 

Sale of Printer

 

Units-of-production Method

 

2021 Depreciation

 

Sale of Printer