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Homework answers / question archive / Chapter 13—Investments in Noncurrent Operating Assets-Utilization & Retirement   MULTIPLE CHOICE 1) Depreciation of noncurrent operating assets is an accounting process for the purpose of a

Chapter 13—Investments in Noncurrent Operating Assets-Utilization & Retirement   MULTIPLE CHOICE 1) Depreciation of noncurrent operating assets is an accounting process for the purpose of a

Accounting

Chapter 13—Investments in Noncurrent Operating Assets-Utilization & Retirement

 

MULTIPLE CHOICE

1) Depreciation of noncurrent operating assets is an accounting process for the purpose of

a.

reporting declining asset values on the balance sheet.

b.

allocating asset costs over the periods benefited by use of the assets.

c.

accounting for costs to reflect the change in general price levels.

d.

setting aside funds to replace assets when their economic usefulness expires.

 

 

 

 

  2.   Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

a.

Partial recognition

b.

Immediate recognition

c.

Systematic and rational allocation

d.

Associating cause and effect

 

 

 

 

  3.   Information needed to compute a depletion charge per unit includes the

a.

estimated total amount of resources available for removal.

b.

amount of resources removed during the period.

c.

cumulative amount of resources removed.

d.

amount of resources sold during the period.

 

 

 

 

  4.   The composite depreciation method

a.

is applied to a group of homogeneous assets.

b.

is an accelerated method of depreciation.

c.

does not recognize gain or loss on the retirement of specific assets in the group.

d.

excludes salvage value from the base of the depreciation calculation.

 

 

 

 

  5.   The sum-of-the-years'-digits method of depreciation is being used for a machine with a five-year estimated useful life. What would be the fraction applied to the cost to be depreciated in the fourth year?

a.

4/5

b.

2/5

c.

4/15

d.

2/15

 

 

 

 

  6.   In order to calculate the third year's depreciation on an asset using the sum-of- the-years'-digits method, which of the following must be known about the asset?

a.

Its acquisition cost

b.

Its estimated salvage value

c.

Its estimated useful life

d.

All the above must be known.

 

 

 

  7.   Which of the following statements is the assumption on which straight-line depreciation is based?

a.

The operating efficiency of the asset decreases in later years.

b.

Service value declines as a function of time rather than use.

c.

Service value declines as a function of obsolescence rather than time.

d.

Physical wear and tear are more important than economic obsolescence.

 

 

 

 

  8.   A method that ignores salvage value in calculating periodic depreciation expense is the

a.

productive-output method.

b.

group composite method.

c.

sum-of-the-years'-digits method.

d.

double-declining-balance method.

 

 

 

 

  9.   Which of the following is not required to be reported in the financial statements or disclosed in the accompanying notes?

a.

Balances of major classes of noncurrent operating assets at the balance sheet date

b.

Gross historical cost and accumulated amortization for intangible assets at the balance sheet date

c.

Gross historical cost and accumulated depreciation for tangible noncurrent operating assets at the balance sheet date

d.

A general description of the cost allocation methods used with respect to major classes of noncurrent operating assets

 

 

 

 

10.   Which of the following depreciation methods most closely approximates the method used to deplete the cost of natural resources?

a.

Straight-line method

b.

Double-declining-balance method

c.

Sum-of-the-years'-digits method

d.

Units-of-production method

 

 

 

 

11.   In accordance with generally accepted accounting principles, which of the following methods of amortization is normally recommended for intangible assets?

a.

Sum-of-the-years'-digits

b.

Straight-line

c.

Group composite

d.

Double-declining-balance

 

 

 

 

12.   Which of the following depreciation methods applies a uniform depreciation rate each period to an asset's book value?

a.

Straight-line

b.

Units-of-production

c.

Declining-balance

d.

Sum-of-the-years'-digits

 

 

 

 

 

13.   Which of the following reasons provides the best theoretical support for accelerated depreciation?

a.

Assets are more efficient in early years and initially generate more revenue.

b.

Expenses should be allocated in a manner that "smooths" earnings.

c.

Repairs and maintenance costs will probably increase in later periods, so depreciation should decline.

d.

Accelerated depreciation provides easier replacement because of the time value of money.

 

 

 

 

14.   When the estimate of an asset's useful life is changed,

a.

depreciation expense for all past periods must be recalculated.

b.

there is no change in the amount of depreciation expense recorded for future years.

c.

only the depreciation expense in the remaining years is changed.

d.

None of the above are true.

 

 

 

 

15.   Which of the following depreciation methods is computed in the same way as depletion?

a.

Straight-line

b.

Sum-of-the-years'-digits

c.

Double-declining-balance

d.

Productive-output

 

 

 

 

16.   The sale of a depreciable asset resulting in a loss indicates that the proceeds from the sale were

a.

less than current market value.

b.

greater than cost.

c.

greater than book value.

d.

less than book value.

 

 

 

 

17.   When an exchange of similar assets involves a gain,

a.

the recorded amount of the new asset is the cost of the old asset plus any cash paid.

b.

the recorded amount of the new asset is its fair market value less any cash paid.

c.

the recorded amount of the new asset is the net book value of the old asset plus any cash paid.

d.

None of the above are true.

 

 

 

 

18.   On January 1 Stockton Company acquired a machine with a four-year useful life. Stockton estimates the salvage value of the machine will be equal to ten percent of the acquisition cost. The company is debating between using either the double-declining-balance method or the sum-of-the-years'-digits method of depreciation. Comparing the depreciation expense for the first two years computed using these methods, the depreciation expense for the double-declining-balance method (compared to the sum-of-the-years'-digits method) will match which of the following patterns?

 

 

 

 

 

 

First

Second

Year

Year

 

a.

 Lower       Lower

b.

 Lower       Higher

c.

 Higher      Lower

d.

 Higher      Higher

 

 

 

 

19.   Legal fees incurred in successfully defending a patent suit should be capitalized when the patent has been

 

Internally

Purchased from

Developed

an Inventor

 

a.

 Yes             No

b.

 Yes             Yes

c.

 No              Yes

d.

 No              No

 

 

 

 

20.   Which of the following utilizes the straight-line depreciation method?

 

  Composite

      Group

Depreciation

Depreciation

 

a.

 Yes              Yes

b.

 Yes              No

c.

 No               Yes

d.

 No               No

 

 

 

 

21.   A depreciable asset has an estimated 15 percent salvage value. At the end of its estimated useful life, the accumulated depreciation would equal the original cost of the asset under which of the following depreciation methods?

 

Productive-

Sum-of-the-

Double-

Output

Years'-Digits

Declining-Balance

 

a.

 Yes           No              No

b.

 No            No              No

c.

 No            Yes             No

d.

 Yes           Yes             Yes

 

 

 

 

22.   When similar assets are exchanged at a loss, the basis of the new asset is usually

a.

the list price of the new asset.

b.

the book value of the old asset plus any cash paid on the trade-in.

c.

the fair market value of the new asset.

d.

Either b or c.

 

 

 

23.   A company using the group depreciation method for its delivery trucks retired one of the trucks after the average service life of the group was reached. Cash proceeds were received from a salvage company. The net carrying amount of these group asset accounts would be decreased by the

a.

original cost of the truck.

b.

original cost of the truck less the cash proceeds.

c.

cash proceeds received.

d.

cash proceeds received and original cost of the truck.

 

 

 

 

24.   In recording the trade of one asset for another, which of the following accounts is usually debited?

a.

Accumulated Depreciation-Old Asset

b.

Cash

c.

Gain on Exchange of Asset

d.

None of the above

 

 

 

 

25.   Dewey Company purchased a machine that was installed and placed in service on January 2, 2004, at a total cost of $480,000. Residual value was estimated at $80,000. The machine is being depreciated over ten years by the double-declining-balance method. For the year 2005, Dewey should record depreciation expense of

a.

$64,000.

b.

$76,800.

c.

$80,000.

d.

$96,000.

 

 

 

 

26.   Luther Soaps purchased a machine on January 1, 2004, for $18,000 cash. The machine has an estimated useful life of four years and a salvage value of $4,700. Luther uses the double-declining-balance method of depreciation for all its assets. What will be the machine's book value as of December 31, 2005?

a.

$5,100

b.

$4,700

c.

$4,500

d.

$4,300

 

 

 

 

27.   Malone Company traded in an old machine with a book value of $15,000 on a new similar machine. The new machine, which had a cash price of $75,000, was purchased for $64,000 cash plus the old machine. Malone should record the cost of the new machine as

a.

$64,000.

b.

$71,000.

c.

$75,000.

d.

$79,000.

 

 

 

 

28.   Overberg Company purchased a machine on January 2, 2004, for $1,000,000. The machine has an estimated useful life of five years and a salvage value of $100,000. Depreciation was computed by the 150% declining-balance method. The accumulated depreciation balance at December 31, 2005, should be

a.

$360,000.

b.

$459,000.

c.

$490,000.

d.

$510,000.

 

 

 

 

29.   Jordan Company exchanged a used autograph-signing machine with Rodman Company for a similar machine with less use. Jordan's old machine originally cost $50,000 and had accumulated depreciation of $40,000, as well as a market value of $40,000, at the time of the exchange. Rodman's old machine originally cost $60,000 and at the time of the exchange had a book value of $30,000 and a market value of $32,000. Rodman gave Jordan $8,000 cash as part of the exchange. Jordan should record the cost of the new machine at

a.

$8,000.

b.

$10,000.

c.

$16,000.

d.

$32,000.

 

 

 

 

30.   XYZ Corporation bought a machine on January 1, 2005. In purchasing the machine, the company paid $50,000 cash and signed an interest-bearing note for $100,000. The estimated useful life of the machine is five years, after which time the salvage value is expected to be $15,000. Given this information, how much depreciation expense would be recorded for the year ending December 31, 2006, if the company uses the sum-of-the-years'-digits depreciation method?

a.

$45,000

b.

$40,000

c.

$36,000

d.

$34,000

 

 

 

 

31.   On January 1, 2005, Carson Company purchased equipment at a cost of $420,000. The equipment was estimated to have a useful life of five years and a salvage value of $60,000. Carson uses the sum-of-the-years'-digits method of depreciation. What should the accumulated depreciation be at December 31, 2008?

a.

$240,000

b.

$288,000

c.

$336,000

d.

$360,000

 

 

 

 

32.   On June 30, 2005, a fire in Oak Company's plant caused the total loss of a production machine. The machine was being depreciated at $20,000 annually and had a carrying amount of $160,000 at December 31, 2004. On the date of the fire, the fair value of the machine was $220,000, and Pine received insurance proceeds of $200,000 in October 2005. In its income statement for the year ended December 31, 2005, what amount should Oak recognize as a gain or loss on disposition?

a.

$0

b.

$20,000 loss

c.

$40,000 gain

d.

$50,000 gain

 

 

 

 

33.   On January 1, 2003, Kalos Co. purchased a new machine for $2,500,000. The new machine has an estimated useful life of five years and the salvage value was estimated to be $250,000. Kalos uses the sum-of-the-years'-digits method of depreciation. The amount of depreciation expense for 2005 is

a.

$450,000.

b.

$600,000.

c.

$666,667.

d.

$750,000.

 

 

 

 

34.   On December 2, 2005, Part Company, which operates a furniture rental business, traded in a used delivery truck with a carrying amount of $5,400 for a new delivery truck having a list price of $16,000 and paid a cash difference of $7,500 to the dealer. The used truck had a fair value of $6,000 on the date of the exchange. At what amount should the new truck be recorded on Part's books?

a.

$10,600

b.

$12,900

c.

$13,500

d.

$16,000

 

 

 

 

35.   On January 1, 2005, Carson Company purchased equipment at a cost of $570,000. The equipment was estimated to have a useful life of five years and a salvage value of $60,000. Carson uses the sum-of-the-years'-digits method of depreciation. What should the accumulated depreciation be at December 31, 2007?

a.

$340,000

b.

$408,000

c.

$456,000

d.

$510,000

 

 

 

 

36.   In January, Hunter Corporation entered into a contract to acquire a new machine for its factory. The machine, which had a cash price of $300,000, was paid for as follows:

 

Down payment ..........................................

$ 30,000

Note payable in 10 equal monthly installments .........

240,000

1,000 shares of Hunter common stock with an agreed

  value of $50 per share ..............................

  50,000

Total .................................................

$320,000

 

Prior to the machine's use, installation costs of $8,000 were incurred. The machine has an estimated useful life of ten years and an estimated salvage value of $10,000. What should Hunter record as depreciation expense for the first year under the straight-line method?

a.

$29,800

b.

$30,000

c.

$31,000

d.

$31,800

 

 

 

37.   Melvin Motor Sales exchanged a car from its inventory for a computer to be used as a noncurrent operating asset. The following information relates to this exchange that took place on July 31, 2005:

 

Carrying amount of the car ............................

$30,000

Listed selling price of the car .......................

45,000

Fair value of the computer ............................

43,000

Cash difference paid by Melvin ........................

5,000

 

On July 31, 2005, how much profit should Melvin recognize on this exchange?

a.

$0

b.

$8,000

c.

$10,000

d.

$13,000

 

 

 

 

38.   The Bucol Company purchased a tooling machine in 1995 for $120,000. The machine was being depreciated on the straight-line method over an estimated useful life of 20 years, with no salvage value. At the beginning of 2005, when the machine had been in use for ten years, the company paid $20,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional five years. What would be the depreciation expense recorded for the above machine in 2005?

a.

$4,000

b.

$5,333

c.

$6,000

d.

$7,333

 

 

 

 

39.   Tillman Company owns a machine that was bought on January 2, 2002, for $376,000. The machine was estimated to have a useful life of five years and a salvage value of $24,000. Tillman uses the sum-of-the-years'-digits method of depreciation. At the beginning of 2005, Tillman determined that the useful life of the machine should have been four years and the salvage value $35,200. For the year 2005, Tillman should record depreciation expense on this machine of

a.

$19,200.

b.

$44,400.

c.

$59,200.

d.

$70,400.

 

 

 

 

40.   Hendricks Construction purchased a crane on January 1, 2004, for $102,750. At the time of purchase, the crane was estimated to have a life of six years and a residual value of $6,750. In 2006, Hendricks determined that the crane had a total useful life of seven years and a residual value of $4,500. If Hendricks uses the straight-line method of depreciation, what will be the depreciation expense for the crane in 2006?

a.

$16,000

b.

$13,250

c.

$9,464

d.

$8,000

 

 

 

 

41.   At the start of its business, Snell Corp. decided to use the composite method of depreciation and prepared the following schedule of machinery owned.

 

 

Total

Estimated

Estimated Life

 

Cost

Salvage Value

in Years

Machine A

$275,000

$25,000

20

Machine B

 100,000

 10,000

15

Machine C

  20,000

   --

 5

 

Snell computes depreciation on the straight-line method. Based on the information presented, the composite life of these assets (in years) should be

a.

13.3.

b.

16.0.

c.

18.0.

d.

19.8.

 

 

 

 

42.   A truck that cost $8,000 was originally being depreciated over four years using the straight-line method with no salvage value. If after one year, it was decided that the truck would last an additional four years (or a total of five years), the second year's depreciation would be

a.

$2,000.

b.

$1,000.

c.

$1,500.

d.

$2,500.

 

 

 

 

43.   On January 1, 2004, Herschel Locks Corporation purchased drilling equipment for $11,500. The equipment has an estimated useful life of four years and a salvage value of $200. Given this information, if Herschel uses the sum-of-the-years'-digits method of depreciation and then trades the equipment for new, dissimilar equipment with a fair market value of $16,000 on December 31, 2005, and pays $8,000 cash in the exchange, the new equipment should be recorded at

a.

$16,000.

b.

$12,475.

c.

$11,590.

d.

$8,110.

 

 

 

 

44.   On January 1, 2004, Herschel Locks Corporation purchased drilling equipment for $11,500. The equipment has an estimated useful life of four years and a salvage value of $200. Assuming that Herschel uses the straight-line method of depreciation, if it trades the equipment for new similar equipment with a list price of $15,500 on December 31, 2005, and pays $4,050 in the exchange, the new equipment should be recorded at

a.

$15,500.

b.

$11,450.

c.

$9,850.

d.

$9,900.

 

 

 

 

45.   Pastel Co. purchased a patent on January 1, 2002, for $714,000. The patent was being amortized over its remaining legal life of 15 years expiring on January 1, 2017. During 2005, Pastel determined that the economic benefits of the patent would not last longer than 10 years from the date of acquisition. What amount should be charged to patent amortization expense for the year ended December 31, 2005?

a.

$47,600

b.

$71,400

c.

$81,600

d.

$142,800

 

 

 

 

46.   Hartwell Trucking traded a used truck with a book value of $1,700 and a fair market value of $2,300 for a new similar truck with a list price of $17,800. Hartwell agreed to pay $13,000 in cash for the exchange in addition to giving up the used truck. At what amount should the new truck be recorded?

a.

$17,800

b.

$15,300

c.

$14,700

d.

None of the above

 

 

 

 

47.   Monier Carpet traded cleaning equipment with a cost of $17,000 and accumulated depreciation of $3,250 for new similar equipment with a fair market value of $11,500. Monier should record the new equipment at

a.

$14,750.

b.

$13,750.

c.

$11,500.

d.

$7,500.

 

 

 

 

48.   During 2000, Volvo Machine Company spent $352,000 on research and development costs for an invention. This invention was patented on January 2, 2001, at a nominal cost that was expensed in 2001. The patent has a legal life of 17 years and an estimated useful life of 8 years. In January 2005, Volvo paid $32,000 for legal fees in a successful defense of the patent. Amortization for 2005 should be

a.

$2,462.

b.

$8,000.

c.

$32,000.

d.

$52,000.

 

 

 

 

49.   On January 1, 2001, Barry Company purchased for $600,000, a trademark with an estimated useful life of 16 years. In January 2005, Barry paid $90,000 for legal fees in a successful defense of the trademark. Trademark amortization expense for the year ended December 31, 2005, should be

a.

$37,500.

b.

$43,125.

c.

$45,000.

d.

$90,000.

 

 

 

50.   Joseph Company acquired a tract of land containing an extractable natural resource. Joseph is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons and that the land will have a value of $1,000,000 after restoration. Relevant cost information follows:

 

Land .................................................

$9,000,000

Estimated restoration costs ..........................

1,500,000

 

What should be the depletion charge per ton of extracted material?

a.

$4.00

b.

$3.80

c.

$3.60

d.

$3.20

 

 

 

 

51.   Bunker Construction Company recently exchanged an old truck, which cost $108,000 and was one-third depreciated, and paid $70,000 cash for a used crane having a current fair value of $130,000. At what amount should the crane be recorded on the books of Bunker?

a.

$70,000

b.

$108,000

c.

$130,000

d.

$142,000

 

 

 

 

52.   In January 2005, Vance Mining Corporation purchased a mineral mine for $7,200,000 with removable ore estimated by geological surveys at 4,320,000 tons. The property has an estimated value of $720,000 after the ore has been extracted. Vance incurred $2,160,000 of development costs preparing the property for the extraction of ore. During 2005, 540,000 tons were removed and 480,000 tons were sold. For the year ended December 31, 2005, Vance should include what amount of depletion in its cost of goods sold?

a.

$720,000

b.

$810,000

c.

$960,000

d.

$1,080,000

 

 

 

 

53.   In 2004, Newman Company paid $1,000,000 to purchase land containing a total estimated 160,000 tons of extractable mineral deposits. The estimated value of the property after the mineral has been removed is $200,000. Extraction activities began in 2005, and by the end of the year, 20,000 tons had been recovered and sold. In 2006, geological studies indicated that the total amount of mineral deposits had been underestimated by 25,000 tons. During 2006, 30,000 tons were extracted, and 28,000 tons were sold. What is the depletion rate per ton (rounded to the nearest cent) in 2006?

a.

$4.24

b.

$4.32

c.

$4.85

d.

$5.19

 

 

 

 

54.   In January 2005, Bevis Company exchanged an old machine, with a book value of $156,000 and a fair value of $160,000, and paid $40,000 cash for a similar used machine having a fair value of $200,000. At what amount should the machine acquired in the exchange be recorded on Bevis' books?

a.

$156,000

b.

$196,000

c.

$200,000

d.

$204,000

 

 

 

 

55.   Ellis Construction Company recently exchanged an old truck, which cost $108,000 and was one-third depreciated, and paid $70,000 cash for a similar truck having a current fair value of $130,000. At what amount should the truck be recorded on the books of Ellis?

a.

$70,000

b.

$108,000

c.

$130,000

d.

$142,000

 

 

 

 

56.   On July 1, Phoenix Corporation, a calendar-year company, received a condemnation award of $150,000 as compensation for the forced sale of a plant located on company property that stood in the path of a new highway. On this date, the plant building had a depreciated cost of $75,000 and the land cost was $25,000. On October 1, Phoenix purchased a parcel of land for a new plant site at a cost of $62,500. Ignoring income taxes, Phoenix should report in its income statement for the year ended December 31 a gain of

a.

$0.

b.

$12,500.

c.

$37,500.

d.

$50,000.

 

 

 

 

57.   The John Company purchased a machine on November 1, 1996, for $148,000. At the time of acquisition, the machine was estimated to have a useful life of ten years and an estimated salvage value of $4,000. John has recorded monthly depreciation using the straight-line method. On July 1, 2005, the machine was sold for $13,000. What should be the loss recognized from the sale of the machine?

a.

$4,000

b.

$5,000

c.

$10,200

d.

$13,000

 

 

 

 

58.   In January 2005, Butz Company exchanged an old machine, with a book value of $156,000 and a fair value of $140,000, and paid $40,000 cash for a similar used machine having a list price of $200,000. At what amount should the machine acquired in the exchange be recorded on Butz's books?

a.

$200,000

b.

$196,000

c.

$184,000

d.

$180,000

 

 

 

59.   Eagle Company owns a tract of land that it purchased in 2002 for $200,000. The land is held as a future plant site and has a fair market value of $280,000 on July 1, 2005. Hall Company also owns a tract of land held as a future plant site. Hall paid $360,000 for the land in 2004 and the land has a fair market value of $380,000 on July 1, 2005. On this date, Eagle exchanged its land and paid $100,000 cash for the land owned by Hall. At what amount should Eagle record the land acquired in the exchange?

a.

$280,000

b.

$300,000

c.

$320,000

d.

$380,000

 

 

 

 

60.   A company owns a piece of land that originally cost $10,000 and has a fair market value of $8,000. It is exchanged along with $5,000 cash for another piece of land having a fair value of $13,000. The proper journal entry to record this transaction is

a.

Land (new)........................   15,000

  Land (old)......................                       10,000

  Cash ...........................                        5,000

b.

Land (new) .......................   13,000

Loss on Exchange .................    2,000

  Land ...........................                       10,000

  Cash ...........................                        5,000

c.

Land (new)........................  18,000

  Land (old) .....................                       10,000

  Cash ...........................                        5,000

  Gain on Exchange ...............                        3,000

d.

Land (new)........................   13,000

Retained Earnings ................    2,000

  Land (old)......................                       10,000

  Cash ...........................                        5,000

 

 

 

 

61.   In October 2005, Daryl Company exchanged a used packaging machine having a book value of $240,000 for a dissimilar new machine and paid a cash difference of $30,000. The market value of the used packaging machine was determined to be $280,000. In its income statement for the year ended December 31, 2005, how much gain should Daryl recognize on this exchange?

a.

$0

b.

$10,000

c.

$30,000

d.

$40,000

 

 

 

 

62.   Which of the following assets generally is required to be tested at least annually for impairment?

a.

Machinery

b.

Patent

c.

Renewable broadcast license

d.

Copyright

 

 

 

 

    

 

63.   Which of the following represents the maximum amortization period mandated by current generally accepted accounting principles for amortizable intangible asset?

a.

10 years

b.

20 years

c.

40 years

d.

No arbitrary cap on the useful life of amortizable intangible assets has been established.

 

 

 

 

64.   The impairment test for an intangible asset with an indefinite life compares the

a.

fair value of the asset to its book value.

b.

sum of the undiscounted cash flows expected to be generated by the asset to its book value.

c.

sum of the discounted cash flows expected to be generated by the asset to its fair value.

d.

sum of the undiscounted cash flows expected to be generated by the asset to its fair value.

 

 

 

 

65.   The impairment test for an intangible asset with a definite life compares the

a.

fair value of the asset to its book value.

b.

sum of the undiscounted cash flows expected to be generated by the asset to its book value.

c.

sum of the discounted cash flows expected to be generated by the asset to its fair value.

d.

sum of the undiscounted cash flows expected to be generated by the asset to its fair value.

 

 

 

 

66.   Which of the following assets generally is required to be tested at least annually for impairment?

a.

Machinery

b.

Patent

c.

Goodwill

d.

Copyright

 

 

 

 

67.   Five years ago, Goodman, Inc., purchased a patent for $110,000.  Lower demand for the product produced under this patent necessitates that an impairment test be made.  On the date of purchase, the patent had an estimated useful life of eleven years.  It currently has a remaining useful life of four years.  The current fair value of the patent is $43,000.  Company management estimates that the patent will generate future cash flows of $12,000 per year for the next four years. 

 

The amount of the impairment loss to be recognized is

a.

$50,000.

b.

$60,000.

c.

$12,000.

d.

$17,000.

 

 

 

 

PROBLEMS

 

  1.   The following is a schedule of machinery owned by Martin Manufacturing Company.

 

 

 

Estimated

Estimated

 

Total

Salvage

Life in

 

Cost

Value

Years

Machine A

$  600,000

$110,000

20

Machine B

   315,000

  30,000

10

Machine C

    84,000

       0

15

Machine D

   107,000

   7,000

 5

 

$1,106,000

 

 

 

Martin computes depreciation on the straight-line basis. Based on the information presented, compute the:

 

(1)

Composite life of these assets (in years).

(2)

Composite depreciation rate.

 

 

 

 

 

 

  2.   Hearsa Manufacturing Inc. purchased a new machine on January 2, 2005, that was built to perform one function on its assembly line. Data pertaining to this machine are:

 

Acquisition cost           $330,000

Residual value $30,000

Estimated service life:

Years   5

Service hours   250,000

Production output        300,000

 

Using each of the following methods, compute the annual depreciation rate and charge for the years ended December 31, 2005 and 2006:

 

(1)

Straight-line

(2)

Service hours (assume 32,000 hours for 2005 and 36,000 hours for 2006).

(3)

Productive-output (assume 31,000 units for 2005 and 37,000 units for 2006).

 

 

 

 

 

 

  3.   The Fitzsimmons Company applied for and received numerous patents at a total cost of $286,500 at the beginning of 2002. It is assumed the patents will be useful evenly during their full legal lives. At the beginning of 2004, the company paid $48,600 in legal fees for successful defense in a patent infringement suit. At the beginning of 2005, information became available that caused the company to reduce the remaining life of the patents to five years.

 

Calculate the amortization expense for the years 2002, 2003, 2004, and 2005. Round to the nearest dollar.

 

 

 

 

 

  4.   In 2004, Silverspur Mining Inc. purchased land for $5,600,000 that had a natural resource supply estimated at 4,000,000 tons. When the natural resources are removed, the land has an estimated value of $640,000. The required restoration cost for the property is estimated to be $800,000.

 

Development and road construction costs on the land were $560,000, and a building was constructed at a cost of $88,000 with an estimated $8,000 salvage value when all the natural resources have been extracted.

 

During 2005, additional development costs of $272,000 were incurred, but additional resources were not discovered. Production for 2004 and 2005 was 700,000 tons and 900,000 tons, respectively.

 

Compute the depletion charge for 2004 and 2005. (Include depreciation on the building, if any, as a depletion charge.) Round depletion charge to the nearest cent.

 

 

 

 

 

  5.   Information concerning Thomas Corporation's intangible assets is as follows:

 

Thomas incurred $352,000 of experimental and development costs in its laboratory to develop a patent that was granted on January 2, 2005. Legal fees and other costs associated with registration of the patent totaled $65,600. Thomas estimates that the useful life of the patent will be eight years.

 

A second patent was purchased from Johnson Company for $160,000 on July 1, 2002. Expenditures for successful litigation in defense of this patent totaling $40,000 were paid on July 1, 2005. Thomas estimates that the useful life of the patent will be 20 years from the date of acquisition.

 

Prepare a schedule showing the intangible assets section of Thomas' balance sheet at December 31, 2005.

 

 

 

 

 

  6.   Riley Company owns a machine that cost $560,000, has a book value of $240,000, and an estimated fair value of $480,000. Fizzer Company has a machine that cost $720,000, has accumulated depreciation of $400,000, and an estimated fair value of $640,000. The machines of both companies are of the same type and perform the same function. Riley and Fizzer, both in the same line of business, trade assets and Riley pays Fizzer cash of $160,000.

 

(1)

Record the exchange on Riley Company's books.

(2)

Record the exchange on Fizzer Company's books.

 

 

 

 

 

 

  7.   The Chase Company exchanged equipment costing $240,000 with accumulated depreciation of $90,000 for equipment owned by Jones Corporation. The Jones equipment cost $330,000 with accumulated depreciation of $120,000. The fair value of both pieces of equipment was $300,000.

 

Provide the necessary entries to record the transaction on both companies' books assuming:

 

(1)

The assets exchanged are similar and Chase and Jones are in the same line of business.

(2)

The assets exchanged are dissimilar.

 

 

 

 

 

 

  8.   Seaver Inc. exchanged a machine costing $400,000 with accumulated depreciation of $280,000 for a machine from the Goodin Company. Goodin paid $20,800 cash in addition to its machine (which cost $200,000 with accumulated depreciation of $68,000) for the Seaver machine. The Goodin machine has a fair value of $160,000.

 

Provide the necessary entries to record the transactions on both companies' books assuming the machines are similar and Seaver and Goodin are in the same line of business.

 

 

 

 

  9.   Johnson Company purchased equipment 8 years ago for $1,000,000. The equipment has been depreciated using the straight-line method with a 20-year useful life and 10% residual value. Johnson's operations have experienced significant losses for the past 2 years and, as a result, the company has decided that the equipment should be evaluated for possible impairment. The management of Johnson Company estimates that the equipment has a remaining useful life of 7 years. Net cash inflow from the equipment will be $80,000 per year. The fair value of the equipment is $240,000.

 

(1)

Determine if an impairment loss should be recognized.

(2)

Determine the amount of the loss and prepare the journal entry to record the loss.

(3)

How would your answer to (1) change if the fair value of the building was $500,000?

 

 

 

 

 

10.   Johnson Company is located in Hong Kong and uses international accounting standards. Johnson Company purchased equipment 8 years ago for $1,000,000. The equipment has been depreciated using the straight-line method with a 20-year useful life and 10% residual value. Johnson's operations have experienced significant losses for the past 2 years and, as a result, the company has decided that the equipment should be evaluated for possible impairment. The management of Johnson Company estimates that the equipment has a remaining useful life of 7 years. Net cash inflow from the equipment will be $80,000 per year. The fair value of the equipment is $240,000. No goodwill was associated with the purchase of the equipment. Johnson Company has chosen to recognize increases in the value of long-term operating assets in accordance to the allowable alternative under IAS 16.

 

(1)

Determine if an impairment loss should be recognized.

(2)

Determine the amount of the loss and prepare the journal entry to record the loss.

(3)

What journal entry should Johnson Company make if the fair value of the building was $980,000?

 

 

 

 

 

11.   A recently issued FASB standard requires that an impairment loss be recognized if the sum of the expected future net cash inflows (undiscounted and without interest charges) is less than the carrying value of the asset. The amount of the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

Provide examples of events or changes in circumstances that indicate that the recoverability of the carrying amount of an asset may have been impaired.

 

Evaluate the recognition criterion proposed by the FASB, specifically addressing the issue of using the undiscounted sum of the future net cash flows.

 

 

 

12.   Anaconda Mining Company has a copper mine in Nevada operating at a reduced level of production for the past two years.  The market for copper has been adversely affected by weak prices, low demand, and foreign competition.  Management believes that the market likely will improve next year and does not plan to abandon this facility.  Nevertheless, the contoller of the company plans to test the plant and equipment of the operation for impairment due to the decrease in its use.  The plant and equipment used in this operation were acquired five years ago for $1,600,000 and have been depreciated using straight-line depreciation over a 20-year life with no residual value.  The controller estimates that the assets have a remaining useful life of 15 years and that the following two cash flow scenarios are possible, with the indicated probabilites:

           

 

Future Cash Inflows

Probability

Scenario 1

$58,000 per year for 15 years

80%

Scenario 2

$100,000 per year for 15 years

 

20%

 

The fair value of the plant and equipment is estimated to be $890,000.

 

Prepare the entry (if any) required to recognize the impairment loss. 

 

 

 

13.   Bingham Mining Company has a copper mine in Australia. The company is subject to the pronouncements of the International Accounting Standards Board, and, specifically, IFRS 16.          

The plant and equipment used in this operation were acquired five years ago for $1,600,000 and have been depreciated using straight-line depreciation over a 20-year life.  The controller estimates that the assets have a remaining useful life of 15 years. 

 

The controller of the company is preparing the financial statements for the year just ended and notes that the fair value of the plant and equipment is estimated to be $1,300,000 at the close of last year.

 

Prepare the entry (if any) the controller should make under IFRS 16 relating to the current fair value of the plant & equipment.  Additionally, assume that the company sold the plant & equipment for $1,300,000 immediately after the end of last year.  Prepare the entry (if any) required under IFRS 16.

 

 

 

14.   Bellows Bottling purchased for $800,000 a trademark for a very successful soft drink it markets under the name BLAST!.  The trademark was determined to have an indefinite life.  A competitor recently introduced a product that is in direct competition with the BLAST! product, thus suggesting the need for an impairment test.  Data gathered by Bellows suggests that the useful life of the trademark is still indefinite, but the cash flows expected to be generated by the trademark have been reduced either to $30,000 per year (with a probability of 80%) or to $60,000 per year (with 20% probability).  The appropriate risk-free interest rate is 5%.  The appropriate risk-adjusted interest rate is 10%.

 

Prepare the appropriate journal entry (if needed) to record the effect of the events described above.

 

 

 

15.   Wilbur Company acquired Smith Company on January 1, 2005.  As part of the acquisition, $1,000,000 in goodwill was recognized and assigned to Wilbur's Transportation reporting unit.  For 2005, earnings from the Transportation reporting unit were $450,000.  Separately traded companies with operations similar to the Transprotation reporting unit had market values approximately equal to five times earnings.  As of December 31, 2005, book values and fair values of the Transportation reporting unit were:

 

 

Book Values

Fair Values

Intangible Assets

$4,000,000

$4,500,000

Goodwill

$1,000,000

-

Liabilities

$2,500,000

$2,500,000

 

Prepare the impairment test of goodwill as well as any entry needed to record an impairment loss.   

 

 

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