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Office Equipment.............................................................. 5,000Accumulated Depreciation............................................... 3,000Loss on Disposal of Machine.......................................... 3,000
Truck.................................................................................. 35,000Accumulated Depreciation............................................... 27,000Loss on Disposal of Truck............................................... 1,000
Truck.................................................................................. 35,000Accumulated Depreciation............................................... 17,000Loss on Disposal of Truck............................................... 1,000
Machinery................................................................. 20,000Gain on Disposal of Machinery.............................. 1,500
BRIEF EXERCISE 10-15
(a) Depreciation Expense ($3,000 X 8/12)............................. 2,000Accumulated Depreciation..................................... 2,000
(b) Cash................................................................................... 5,200Loss on Disposal of Machinery....................................... 3,800Accumulated Depreciation...............................................11,000
*(The accumulated depreciation account can be ignored for
this part
of the problem.)
PROBLEM 10-2 (Continued)
Schedule 1
Computation of Fair Value of Plant Facility Acquired fromKen Norman Company and Allocation to Land and Building
20,000 shares of Webb common stock at $37 quoted market price on date of exchange (20,000 X $37) $740,000
Allocation to land and building accounts in proportion to appraised values at the exchange date:
Amount
Percentage
of total
Land $230,000 25
Building 690,000 75
Total $920,000 100
Land ($740,000 X 25%) $185,000
Building ($740,000 X 75%) 555,000
Total $740,000
(b) Items in the fact situation that were not used to determine the answer to (a) above, are as follows:
1. The tract of land, which was acquired for $150,000 as a potential future building site, should be included in Webb’s balance sheet as an investment in land.
2. The $110,000 and $320,000 book values respective to the land and building carried on Ken Norman’s books at the exchange date are not used by Webb.
3. The $12,080 loss (Schedule 2) incurred on the scrapping of a machine on June 30, 2007, should be included in the other expenses and losses section in Webb’s income statement. The $67,920 accumulated
depreciation (Schedule 3) should be deducted from the accumulated depreciation—machinery and equipment account in Webb’s balance sheet.
PROBLEM 10-2 (Continued)
1. The $3,000 loss on sale of a machine on July 1, 2007 (Schedule 4) should be included in the other expenses and losses section of Webb’s income statement. The $21,000 accumulated depreciation (Schedule 4) should be deducted from the accumulated depre-ciation—machinery and equipment account in Webb’s balance sheet.
Cost, January 1, 2004 $44,000Depreciation (straight-line method, salvage value of $2,000, 7-year life) January 1, 2004, to July 1, 2007 [31/2 years ($44,000 – $2,000) ÷ 7] (21,000)Asset book value July 1, 2007 $23,000
Asset book value $23,000Proceeds from sale (20,000 )Loss on sale $ 3,000
PROBLEM 10-3
(a) 1. Land (Schedule A).............................................. 180,700Building (Schedule B)........................................ 146,250Insurance Expense (6 months X $95)............... 570Prepaid Insurance (16 months X $95)............... 1,520Organization Expense........................................ 610Retained Earnings.............................................. 43,800Salary Expense................................................... 32,100
Land and Building..................................... 399,950Additional Paid-in Capital......................... 5,600 (800 shares X $7)
Schedule A
Amount Consists of:Acquisition Cost ($80,000 + [800 X $107] $165,600Removal of Old Building 9,800Legal Fees (Examination of title) 1,300Special Tax Assessment 4,000 Total $180,700
2. Land and Building............................................. 4,000Depreciation Expense.............................. 2,537Accumulated Depreciation—Building...... 1,463
PROBLEM 10-3 (Continued)
Schedule C
Depreciation taken $ 4,000Depreciation that should be taken (1% X $146,250) (1,463 )Depreciation adjustment $ 2,537
(b) Plant, Property, and Equipment:Land $180,700Building $146,250
Less: Accumulated depreciation 1,463 144,787 Total $325,487
PROBLEM 10-4
The following accounting treatment appears appropriate for these items:
Land—The loss on the condemnation of the land of $9,000 ($40,000 – $31,000) should be reported as an extraordinary item on the income statement. If condemnations are either usual or recurring, then an ordinary or unusual classification is more appropriate. The $35,000 land purchase has no income statement effect.
Building—There is no recognized gain or loss on the demolition of the building. The entire purchase cost ($15,000), decreased by the demolition proceeds ($3,600), is allocated to land.
Warehouse—The gain on the destruction of the warehouse should be reported as an extraordinary item, assuming that it is unusual and infrequent. The gain is computed as follows:
Some contend that a portion of this gain should be deferred because the proceeds are reinvested in similar assets. We do not believe such an approach should be permitted. Deferral of the gain in this situation is not permitted under GAAP.
Machine—The recognized gain on the transaction would be computed as follows:
Fair market value of old machine $7,200Deduct: Book value of old machine Cost $8,000 Less: Accumulated depreciation 3,200 4,800 Total gain $2,400
Total gain recognized = $2,400 X$900
= $300$900 + $6,300
The gain deferred is $2,100 ($2,400 – $300)
PROBLEM 10-4 (Continued)
This gain would probably be reported in other revenues and gains. It might be reported as an unusual item if the company believes that such a situation occurs infrequently and if material. The cost of the new machine would be capitalized at $4,200.
Fair market value of new machine $6,300Less: Gain deferred ($2,400 – $300) 2,100 Cost of new machine $4,200
Furniture—The contribution of the furniture would be reported as a contribution expense of $3,100 with a related gain on disposition of furniture of $950: $3,100 – ($10,000 – $7,850). The contribution expense and the related gain may be netted, if desired.
Automobile—The loss on sale of the automobile of $1,580: [$2,960 – ($8,000 – $3,460)] should probably be reported in the other expenses or losses section. It might be reported as an unusual item if the company believes that such a situation occurs infrequently.
PROBLEM 10-5
(a) George Solti Corporation
Cost of Land (Site #101)
As of September 30, 2008
Cost of land and old building $600,000
Real estate broker’s commission 36,000
Legal fees 6,000
Title insurance 18,000
Removal of old building 54,000
Cost of land $714,000
(b) George Solti Corporation
Cost of Building
As of September 30, 2008
Fixed construction contract price $3,000,000
Plans, specifications, and blueprints 21,000
Architects’ fees 82,000
Interest capitalized during 2007 (Schedule 1) 120,000
Interest capitalized during 2008 (Schedule 2) 190,000
Cost of building $3,413,000
Schedule 1
Interest Capitalized During 2007 and 2008
Weighted-average
accumulated construction
expenditures X Interest rate =
Interest to be
capitalized
2007: $1,200,000 X 10% = $120,000
2008: $1,900,000 X 10% = $190,000
PROBLEM 10-6
Interest Capitalization
Balance in the Land Account
Purchase Price $142,000
Surveying Costs 2,000
Title Insurance Policy 4,000
Demolition Costs 3,000
Salvage (1,000 )
Total Land Cost $150,000
Expenditures (2005) Weighted—Average
Accumulated ExpendituresDate Amount Fraction
1-Dec $150,000 1/12 $12,500
1-Dec 30,000 1/12 2,500
1-Dec 3,000 1/12 250
$183,000 $15,250
Interest Capitalized for 2005
Weighted—Average
Accumulated Expenditures
Interest
Rate
Amount
Capitalizable
$15,250 0.08 $1,220
Interest charged to Interest Expense
[($600,000 X .08 X 1/12) – $1,220]
$2,780
PROBLEM 10-6 (Continued)
Expenditures (2006)
Fraction
Weighted
ExpenditureDate Amount
1-Jan $183,000 6/12 $ 91,500
1-Jan 1,220 6/12 610
1-Mar 240,000 4/12 80,000
1-May 360,000 2/12 60,000
1-Jul 60,000 0 0
$844,220 $232,110
Interest Capitalized for 2006
Weighted
Expenditure
Interest
Rate
Amount
Capitalizable
$232,110 0.08 $18,568.80
Interest charged to Interest Expense
[($600,000 X .08) – $18,568.80]
$29,431.20
(a) Balance in Land Account—2005 and 2006 150,000.00
Cost of Goods Sold........................................... 165,000Equipment Inventory................................ 165,000
(b) Lacks Commercial Substance
(1) Garrison Construction should record the same entry as in part (a) above, since the exchange resulted in a loss.
(2) Keillor should record the same entry as in part (a) above. No gain is deferred because we are assuming that Garrison is a customer. In addition, because the cash involved is greater than 25% of the value of the exchange, the entire transaction is considered a monetary transaction and a gain is recognized.
Gain on Disposal of Plant Assets........... 18,000**Computation of gain: Book value of old crane ($140,000 – $60,000) $80,000 Fair value of old crane 98,000 Gain on disposal of plant assets $18,000
Cost of Goods Sold.......................................... 165,000Equipment Inventory............................... 165,000
Same reasons as cited in (b) (2) above.
Note: Even though the exchange lacks commercial substance, cash paid exceeds 25% of total fair value so the transaction is treated as a monetary exchange and recorded at fair value (EITF 86-29). Note that with this much cash involved, it is unlikely that the exchange would lack commercial substance.
Cost $900,000Accumulated depreciation 400,000 Carrying amount 500,000Fair value 230,000 Loss on impairment $270,000
(b) It may be reported in the other expenses and losses section or it may be highlighted as an unusual item in a separate section. It is not reported as an extraordinary item.
(c) No entry necessary. Restoration of any impairment loss is not permitted.
(d) Management first had to determine whether there was an impairment. To evaluate this step, management does a recoverability test. The recoverability test estimates the future cash flows expected from use of that asset and its eventual disposition. If the sum of the expected future net cash flows (undiscounted) is less than the carrying amount
of the asset, an impairment results. If the recoverability test indicates that an impairment has occurred, a loss is computed. The impairment loss is the amount by which the carrying amount of the asset exceeds its fair value.
*BRIEF EXERCISE 11-11
2008: $40,000 X 20% = $ 8,000
2009: $40,000 X 32% = 12,800
2010: $40,000 X 19.2% = 7,680
2011: $40,000 X 11.52% = 4,608
2012: $40,000 X 11.52% = 4,608
2013: $40,000 X 5.76% = 2,304
$40,000
PROBLEM 11-1
(a) (1) Depreciable Base Computation:
Purchase price $73,500
Less: Purchase discount (2%) (1,470)
Freight-in 970
Installation 3,800
76,800
Less: Salvage value 1,200
Depreciation base $75,600
2007—Straight line: ($75,600 ÷ 8 years) X 2/3 year =
Note: An impairment has occurred because expected net future cash
flows ($190,000) are less than the carrying amount ($330,000). The loss
is measured as the difference between the carrying amount and fair
value ($110,000).
BRIEF EXERCISE 12-8
Because the fair value of the division exceeds the carrying amount of the
assets, goodwill is not considered to be impaired. No entry is necessary.
BRIEF EXERCISE 12-9
Loss on Impairment ($400,000 – $325,000).............................. 75,000Goodwill............................................................................. 75,000
The fair value of the reporting unit ($750,000) is less than the carrying value ($800,000)—an impairment has occurred. The loss is the difference between the recorded goodwill and the implied goodwill.
BRIEF EXERCISE 12-10
Research and Development Expense........................................ 450,000Cash................................................................................... 450,000
Carrying amount $325,000Less: Amortization of Patent (12 X $2,500) (30,000) Legal costs Amortization (1 X $1,000) (1,000)Carrying amount 12/31/07 $294,000
BRIEF EXERCISE 12-13
Copyright No. 1 for $9,900 should be expensed and therefore not reported on the balance sheet.
Copyright No. 2 for $19,200 should be capitalized. Because the useful life is indefinite, copyright No. 2 should be tested at least annually for impairment using a fair value test. It would be reflected on the December 31, 2007 balance sheet at its cost of $19,200.
*BRIEF EXERCISE 12-14
Percent of revenue approach
$700,000 X $420,000 = $210,000
$1,400,000*
*($420,000 + $980,000)
Straight-line approach
$700,000 X 1/4 = $175,000
Amortization is $210,000
EXERCISE 12-11
(a) Patent ALife in years 17Life in months (12 X 17) 204Amortization per month ($30,600 ÷ 204) $150Number of months amortized to date
Year Month
2003 102004 122005 122006 12
46
Book value 12/31/06 $23,700: ($30,600 – [46 X $150])
EXERCISE 12-11 (Continued)
Patent B
Life in years 10
Life in months (12 X 10) 120
Amortization per month ($15,000 ÷ 120) $125
Number of months amortized to date
Year Month
2004 6
2005 12
2006 12
30
Book value 12/31/06 $11,250: ($15,000 – [$125 X 30])
Patent C
Life in years 4
Life in months (12 X 4) 48
Amortization per month ($14,400 ÷ 48) $300
Number of months amortized to date
Year Month
2005 4
2006 12
16
Book value 12/31/06 $9,600: ($14,400 – [$300 X 16])
At December 31, 2006
Patent A $23,700
Patent B 11,250
Patent C 9,600
Total $44,550
EXERCISE 12-11 (Continued)
(b) Analysis of 2007 transactions
1. The $245,700 incurred for research and development
should be expensed.
2. The book value of Patent B is $11,250 and its estimated
future cash flows are $6,000: (3 X $2,000); therefore Patent
B is impaired. The impairment loss is imputed as follows:
Book value $11,250
Less: Present value of future
cash flows ($2,000 X 2.57710) 5,154
Loss recognized $ 6,096
Patent B carrying amount (12/31/07) $5,154
At December 31, 2007
Patent A $21,900 ($23,700 – [12 X $150])
Patent B 5,154 (Present value of future cash flows)
Patent C 6,000 ($9,600 – [12 X $300])
Patent D 34,560 ($36,480 – $1,920*)
Total $67,614
Patent D amortization
Life in years 9 1/2
Life in months 114
Amortization per month ($36,480 ÷ 114) $320
$320 X 6 = $1,920
EXERCISE 12-12
Net assets of Zweifel as reported $225,000Adjustments to fair value
Increase in land value 30,000Decrease in equipment value (5,000) 25,000
Net assets of Zweifel at fair value 250,000Selling price 350,000Amount of goodwill to be recorded $100,000
The journal entry to record this transaction is as follows:
The fair value of the reporting unit ($335 million) is below its carrying value ($350 million). Therefore, an impairment has occurred. To determine
the impair-ment amount, we first find the implied goodwill. We then compare this implied fair value to the carrying value of the goodwill to determine the amount of the impairment to record.
EXERCISE 12-15 (Continued)
Fair value of division $335,000,000Carrying amount of division, net of goodwill 150,000,000Implied value of goodwill 185,000,000Carrying value of goodwill (200,000,000)Loss on impairment $ 15,000,000
(b) No entry necessary. After a goodwill impairment loss is recognized, the adjusted carrying amount of the goodwill is its new accounting basis. Subsequent reversal of previously recognized impairment losses is not permitted under SFAS No. 142.
PROBLEM 12-4
(a) Income statement items and amounts for the year ended December 31, 2007:
Research and development expenses* $286,000Amortization of patent ($80,000 ÷ 10 years) 8,000
*The research and development expenses could be listed by the components rather than in one total. The detail of the research and development expenses are as follows:
(b) Balance sheet items and amounts as of December 31, 2007:
Land $ 60,000Building (net of accumulated depreciation of $14,000) 266,000Patent (net of amortization of $14,000)* 66,000
*([$80,000 ÷ 10] X 3/4) + ($80,000 ÷ 10)
All research and development costs should be charged to expense when incurred (see Statement of Financial Accounting Standards No. 2, “Accounting for Research and Development Costs”). Therefore, all of Florence Nightingale Tool Company’s costs related to its research and development activities for 2007 would be expensed regardless of the long-term benefits.
The patent was acquired for manufacturing rights rather than for use in research and development activities. Consequently, the cost of the patent can be capitalized as an intangible asset and amortized over its useful life.
PROBLEM 12-5
(a)Goodwill = Fair value of the division less the fair value of the identi-fiable assets:
$3,000,000 – $2,650,000 = $350,000
(b)No impairment loss is recorded, because the fair value of Mendota ($1,850,000) is greater than carrying value of the net assets ($1,650,000).
(c)Computation of impairment:
Implied fair value of goodwill = Fair value of division less the carrying value of the division (adjusted for fair value changes), net of goodwill:
Fair value of Mendota division $1,500,000Carrying value of division $1,650,000Increase in fair value of PP&E 150,000Less: Goodwill (350,000)
(1,450,000)Implied fair value of goodwill 50,000Carrying value of goodwill (350,000)Impairment loss ($ 300,000)
(d) Loss on Impairment.............................................. $300,000Goodwill................................................................................. 300,000
This loss will be reported in income as a separate line item before the subtotal “income from continuing operations.”
PROBLEM 12-6
(a) Montana Matt’s Golf Inc.INTANGIBLES SECTION OF BALANCE SHEET
December 31, 2006
Trade name $ 10,000Copyright (net accumulated amortization of $250) (Schedule 1) 19,750Goodwill (Schedule 2) 150,000Total intangibles $179,750
Schedule 1 Computation of Value of Old Master CopyrightCost of copyright at date of purchase $20,000Amortization of Copyright for 2006 [($20,000 ÷ 40) X 1/2 year] (250)
Cost of copyright at December 31 $19,750
Schedule 2 Goodwill MeasurementPurchase price $750,000Fair value of assets $800,000Fair value of liabilities (200,000)
Fair value of net assets 600,000Value assigned to goodwill $150,000
Amortization expense for 2006 is $250 (see Schedule 1). There is no amortization for the goodwill or the trade name, which is considered an indefinite life intangible.
There is a full year of amortization on the Copyright. There is no amortization for the goodwill or the trade name, which is considered an indefinite life intangible.
PROBLEM 12-6 (Continued)
Montana Matt’s Golf Inc.INTANGIBLES SECTION OF BALANCE SHEET
December 31, 2007
Trade name $ 10,000Copyright (net accumulated amortization of $750) (Schedule 1) 19,250Goodwill 150,000Total intangibles $179,250
Schedule 1 Computation of Value of Old Master CopyrightCost of Copyright at date of purchase $20,000Amortization of Copyright for 2006, 2007 [($20,000 ÷ 40) X 1.5 years] (750)
Cost of copyright at December 31 $19,250
(c)
Loss on Impairment.................................................................. 77,000Goodwill ($150,000 – $80,000*)...................................... 70,000Trade name ($10,000 – $3,000)...................................... 7,000
*Fair value of Old Master reporting unit $430,000 Net identifiable assets (excluding goodwill) ($500,000 – $150,000) (350,000) Implied value of goodwill $ 80,000
The Goodwill is considered impaired because the fair value of the business unit ($430,000) is less than its carrying value ($500,000). The copyright is not considered impaired because the expected net future cash flows ($30,000) exceed the carrying amount ($20,000).