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Chapter10: Property, Plant, and Equipment and Intangible Assets: Acquisition and Disposition

Brief Exercises

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BE 10-1

 

Acquisition cost; machine

 

 LO1

Beaverton Lumber purchased a milling machine for $35,000. In addition to the purchase price, Beaverton made the following expenditures: freight, $1,500; installation, $3,000; testing, $2,000; personal property tax on the machine for the first year, $500. What is the initial cost of the machine?

BE 10-2

 

Acquisition cost; land and building

 

 LO1

Fullerton Waste Management purchased land and a warehouse for $600,000. In addition to the purchase price, Fullerton made the following expenditures related to the acquisition: broker's commission, $30,000; title insurance, $3,000; miscellaneous closing costs, $6,000. The warehouse was immediately demolished at a cost of $18,000 in anticipation of the building of a new warehouse. Determine the amounts Fullerton should capitalize as the cost of the land and the building.

BE 10-3

 

Lump-sum acquisition

 

 LO2

Refer to the situation described in BE 10-2. Assume that Fullerton decides to use the warehouse rather than demolish it. An independent appraisal estimates the fair values of the land and warehouse at $420,000 and $280,000, respectively. Determine the amounts Fullerton should capitalize as the cost of the land and the building.

BE 10-4

 

Cost of a natural resource

 

 LO1

Smithson Mining operates a silver mine in Nevada. Acquisition, exploration, and development costs totaled $5.6 million. After the silver is extracted in approximately five years, Smithson is obligated to restore the land to its original condition, including constructing a wildlife preserve. The company's controller has provided the following three cash flow possibilities for the restoration costs: (1) $500,000, 20% probability; (2) $550,000, 45% probability; and (3) $650,000, 35% probability. The company's credit-adjusted, risk-free rate of interest is 6%. What is the initial cost of the silver mine?

BE 10-5

 

Cost of a natural resource

 

 LO1

Refer to the situation described in BE 10-4. What is the carrying value of the asset retirement liability at the end of one year? Assuming that the actual restoration costs incurred after extraction is completed are $596,000, what amount of gain or loss will Smithson recognize on retirement of the liability?

BE 10-6

 

Goodwill

 

 LO1

Pro-tech Software acquired all of the outstanding stock of Reliable Software for $14 million. The book value of Reliable's net assets (assets minus liabilities) was $8.3 million. The fair values of Reliable's assets and liabilities equaled their book values with the exception of certain intangible assets whose fair values exceeded book values by $2.5 million. Calculate the amount paid for goodwill.

BE 10-7

 

Acquisition cost; noninterest-bearing note

 

 LO3

On June 30, 2011, Kimberly Farms purchased custom-made harvesting machinery from a local producer. In payment, Kimberly signed a noninterest-bearing note requiring the payment of $60,000 in two years. The fair value of the machinery is not known, but an 8% interest rate properly reflects the time value of money for this type of loan agreement. At what amount will Kimberly initially value the machinery? How much interest expense will Kimberly recognize in its income statement for this note for the year ended December 31, 2011?

BE 10-8

 

Acquisition cost; issuance of equity securities

 

 LO4

Shackelford Corporation acquired a patent from its founder, Jim Shackelford, in exchange for 50,000 shares of the company's nopar common stock. On the date of the exchange, the common stock had a fair value of $22 per share. Determine the cost of the patent.

BE 10-9

 

Fixed-asset turnover ratio; solve for unknown

 

 LO5

The balance sheets of Pinewood Resorts reported net fixed assets of $740,000 and $940,000 at the end of 2010 and 2011, respectively. The fixed-asset turnover ratio for 2011 was 3.25. Calculate Pinewood's net sales for 2011.

p. 537

BE 10-10

 

Disposal of property, plant, and equipment

 

 LO6

Lawler Clothing sold manufacturing equipment for $16,000. Lawler originally purchased the equipment for $80,000, and depreciation through the date of sale totaled $71,000. What was the gain or loss on the sale of the equipment?

BE 10-11

 

Nonmonetary exchange

 

 LO6

Calaveras Tire exchanged machinery for two pickup trucks. The book value and fair value of the machinery were $20,000 (original cost of $65,000 less accumulated depreciation of $45,000) and $17,000, respectively. To equalize fair values, Calaveras paid $8,000 in cash. At what amount will Calaveras value the pickup trucks? How much gain or loss will the company recognize on the exchange? Assume the exchange has commercial substance.

BE 10-12

 

Nonmonetary exchange

 

 LO6

Refer to the situation described in BE 10-11. Answer the questions assuming that the fair value of the machinery was $24,000, instead of $17,000.

BE 10-13

 

Nonmonetary exchange

 

 LO6

Refer to the situation described in BE 10-12. Answer the questions assuming that the exchange lacks commercial substance.

BE 10-14

 

Interest capitalization

 

 LO7

A company constructs a building for its own use. Construction began on January 1 and ended on December 30. The expenditures for construction were as follows: January 1, $500,000; March 31, $600,000; June 30, $400,000; October 30, $600,000. To help finance construction, the company arranged a 7% construction loan on January 1 for $700,000. The company's other borrowings, outstanding for the whole year, consisted of a $3 million loan and a $5 million note with interest rates of 8% and 6%, respectively. Assuming the company uses the specific interest method, calculate the amount of interest capitalized for the year.

BE 10-15

 

Interest capitalization

 

 LO7

Refer to the situation described in BE 10-14. Assuming the company uses the weighted-average method, calculate the amount of interest capitalized for the year.

BE 10-16

 

Research and development

 

 LO8

Maxtor Technology incurred the following costs during the year related to the creation of a new type of personal computer monitor:

  Salaries

$220,000

  Depreciation on R&D facilities and equipment

125,000

  Utilities and other direct costs incurred for the R&D facilities

66,000

  Patent filing and related legal costs

22,000

  Payment to another company for performing a portion of the development work

120,000

  Costs of adapting the new monitor for the specific needs of a customer

80,000

What amount should Maxtor report as research and development expense in its income statement?

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