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

Exercises

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An alternate exercise and problem set is available on the text website: www.mhhe.com/spiceland6e

E 10-1 Acquisition costs; land and building 
 LO1

On March 1, 2011, Beldon Corporation purchased land as a factory site for $60,000. An old building on the property was demolished, and construction began on a new building that was completed on December 15, 2011. Costs incurred during this period are listed below:

   Demolition of old building

$ 4,000

   Architect's fees (for new building)

12,000

   Legal fees for title investigation of land

2,000

   Property taxes on land (for period beginning March 1, 2011)

3,000

   Construction costs

500,000

   Interest on construction loan

5,000

p. 538

   Salvaged materials resulting from the demolition of the old building were sold for $2,000.

Required:

Determine the amounts that Beldon should capitalize as the cost of the land and the new building.

E 10-2 Acquisition cost; machinery 
  LO1

Oaktree Company purchased a new machine and made the following expenditures:

   Purchase price

$45,000

   Sales tax

2,200

   Freight charges for shipment of machine

700

   Insurance on the machine for the first year

900

   Installation of machine

1,000

   The machine, including sales tax, was purchased on open account, with payment due in 30 days. The other expenditures listed above were paid in cash.

Required:

Prepare the necessary journal entries to record the above expenditures.

E 10-3 Acquisition costs; lump-sum acquisition 
  LO1 LO2

Semtech Manufacturing purchased land and building for $4 million. In addition to the purchase price, Semtech made the following expenditures in connection with the purchase of the land and building:

   Title insurance

$16,000

   Legal fees for drawing the contract

5,000

   Pro-rated property taxes for the period after acquisition

36,000

   State transfer fees

4,000

An independent appraisal estimated the fair values of the land and building, if purchased separately, at $3.3 and $1.1 million, respectively. Shortly after acquisition, Semtech spent $82,000 to construct a parking lot and $40,000 for landscaping.

Required:

1.

 

Determine the initial valuation of each asset Semtech acquired in these transactions.

2.

 

Repeat requirement 1, assuming that immediately after acquisition, Semtech demolished the building. Demolition costs were $250,000 and the salvaged materials were sold for $6,000. In addition, Semtech spent $86,000 clearing and grading the land in preparation for the construction of a new building.

E 10-4 Cost of a natural resource 
  LO1

Jackpot Mining Company operates a copper mine in central Montana. The company paid $1,000,000 in 2011 for the mining site and spent an additional $600,000 to prepare the mine for extraction of the copper. After the copper is extracted in approximately four years, the company is required to restore the land to its original condition, including repaving of roads and replacing a greenbelt. The company has provided the following three cash flow possibilities for the restoration costs:

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To aid extraction, Jackpot purchased some new equipment on July 1, 2011, for $120,000. After the copper is removed from this mine, the equipment will be sold. The credit-adjusted, risk-free rate of interest is 10%.

Required:

1.

 

Determine the cost of the copper mine.

2.

 

Prepare the journal entries to record the acquisition costs of the mine and the purchase of equipment.

E 10-5 Intangibles 
  LO1

Freitas Corporation was organized early in 2011. The following expenditures were made during the first few months of the year:

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Required:

Prepare a summary journal entry to record the $107,000 in cash expenditures.

E 10-6  Goodwill 
  LO1

p. 539

On March 31, 2011, Wolfson Corporation acquired all of the outstanding common stock of Barney Corporation for $17,000,000 in cash. The book values and fair values of Barney's assets and liabilities were as follows:

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Required:

Calculate the amount paid for goodwill.

E 10-7  Goodwill 
  LO1

Johnson Corporation purchased all of the outstanding common stock of Smith Corporation for $11,000,000 in cash. The book value of Smith's net assets (assets minus liabilities) was $7,800,000. The fair values of all of Smith's assets and liabilities were equal to their book values with the following exceptions:

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Required:

Calculate the amount paid for goodwill.

E 10-8  Lump-sum acquisition 
  LO2

Pinewood Company purchased two buildings on four acres of land. The lump-sum purchase price was $900,000. According to independent appraisals, the fair values were $450,000 (building A) and $250,000 (building B) for the buildings and $300,000 for the land.

Required:

Determine the initial valuation of the buildings and the land.

E 10-9 Acquisition cost; noninterest-bearing note 
  LO3

On January 1, 2011, Byner Company purchased a used tractor. Byner paid $5,000 down and signed a noninterest-bearing note requiring $25,000 to be paid on December 31, 2013. The fair value of the tractor is not determinable. An interest rate of 10% properly reflects the time value of money for this type of loan agreement. The company's fiscal year-end is December 31.

Required:

1.

 

Prepare the journal entry to record the acquisition of the tractor. Round computations to the nearest dollar.

2.

 

How much interest expense will the company include in its 2011 and 2012 income statements for this note?

3.

 

What is the amount of the liability the company will report in its 2011 and 2012 balance sheets for this note?

E 10-10  Acquisition costs; noninterest-bearing note 
  LO1 LO3

Teradene Corporation purchased land as a factory site and contracted with Maxtor Construction to construct a factory. Teradene made the following expenditures related to the acquisition of the land, building, and machinery to equip the factory:

    Purchase price of the land

$1,200,000

    Demolition and removal of old building

80,000

    Clearing and grading the land before construction

150,000

    Various closing costs in connection with acquiring the land

42,000

    Architect's fee for the plans for the new building

50,000

    Payments to Maxtor for building construction

3,250,000

    Machinery purchased

860,000

    Freight charges on machinery

32,000

    Trees, plants, and other landscaping

45,000

    Installation of a sprinkler system for the landscaping

5,000

    Cost to build special platforms and install wiring for the machinery

12,000

    Cost of trial runs to ensure proper installation of the machinery

7,000

    Fire and theft insurance on the factory for the first year of use

24,000

In addition to the above expenditures, Teradene purchased four forklifts from Caterpillar. In payment, Teradene paid $16,000 cash and signed a noninterest-bearing note requiring the payment of $70,000 in one year. An interest rate of 7% properly reflects the time value of money for this type of loan.

Required:

Determine the initial valuation of each of the assets Teradene acquired in the above transactions.

E 10-11  Acquisition cost; issuance of equity securities and donation 
  LO4

p. 540

On February 1, 2011, the Xilon Corporation issued 5,000 shares of its nopar common stock in exchange for five acres of land located in the city of Monrovia. On the date of the acquisition, Xilon's common stock had a fair value of $18 per share. An office building was constructed on the site by an independent contractor. The building was completed on November 2, 2011, at a cost of $600,000. Xilon paid $400,000 in cash and the remainder was paid by the city of Monrovia.

Required:

Prepare the journal entries to record the acquisition of the land and the building.

E 10-12  Fixed-asset turnover ratio; Cisco 
  LO5

Cisco Systems, Inc., reported the following information in its 2009 financial statements ($ in millions):

 

Real World Financials

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Required:

1.

 

Calculate Cisco's 2009 fixed-asset turnover ratio.

2.

 

How would you interpret this ratio?

E 10-13  Disposal of property, plant, and equipment 
  LO6

Funseth Farms, Inc. purchased a tractor in 2008 at a cost of $30,000. The tractor was sold for $3,000 in 2011. Depreciation recorded through the disposal date totaled $26,000.

Required:

1.

 

Prepare the journal entry to record the sale.

2.

 

Assuming that the tractor was sold for $10,000, prepare the journal entry to record the sale.

E 10-14  Nonmonetary exchange 
  LO6

Cedric Company recently traded in an older model computer for a new model. The old model's book value was $180,000 (original cost of $400,000 less $220,000 in accumulated depreciation) and its fair value was $200,000. Cedric paid $60,000 to complete the exchange which has commercial substance.

Required:

Prepare the journal entry to record the exchange.

E 10-15  Nonmonetary exchange 
  LO6

[This is a variation of the previous exercise.]

Required:

Assume the same facts as in Exercise 10-14, except that the fair value of the old equipment is $170,000. Prepare the journal entry to record the exchange.

E 10-16  Nonmonetary exchange 
  LO6

The Bronco Corporation exchanged land for equipment. The land had a book value of $120,000 and a fair value of $150,000. Bronco paid the owner of the equipment $10,000 to complete the exchange which has commercial substance.

Required:

1.

 

What is the fair value of the equipment?

2.

 

Prepare the journal entry to record the exchange.

E 10-17  Nonmonetary exchange 
  LO6

[This is a variation of the previous exercise.]

Required:

Assume the same facts as in Exercise 10-16 except that Bronco received $10,000 from the owner of the equipment to complete the exchange.

1.

 

What is the fair value of the equipment?

2.

 

Prepare the journal entry to record the exchange.

E 10-18  Nonmonetary exchange 
  LO6

The Tinsley Company exchanged land that it had been holding for future plant expansion for a more suitable parcel located farther from residential areas. Tinsley carried the land at its original cost of $30,000. According to an independent appraisal, the land currently is worth $72,000. Tinsley gave $14,000 in cash to complete the transaction.

Required:

1.

 

What is the fair value of the new parcel of land received by Tinsley?

2.

 

Prepare the journal entry to record the exchange assuming the exchange has commercial substance.

3.

 

Prepare the journal entry to record the exchange assuming the exchange lacks commercial substance.

p. 541

E 10-19

 

Acquisition cost; multiple methods

 

 LO1 LO3 LO4 LO6

Connors Corporation acquired manufacturing equipment for use in its assembly line. Below are four independent situations relating to the acquisition of the equipment.

1.

 

The equipment was purchased on account for $25,000. Credit terms were 2/10, n/30. Payment was made within the discount period and the company records the purchases of equipment net of discounts.

2.

 

Connors gave the seller a noninterest-bearing note. The note required payment of $27,000 one year from date of purchase. The fair value of the equipment is not determinable. An interest rate of 10% properly reflects the time value of money in this situation.

3.

 

Connors traded in old equipment that had a book value of $6,000 (original cost of $14,000 and accumulated depreciation of $8,000) and paid cash of $22,000. The old equipment had a fair value of $2,500 on the date of the exchange. The exchange has commercial substance.

4.

 

Connors issued 1,000 shares of its nopar common stock in exchange for the equipment. The market value of the common stock was not determinable. The equipment could have been purchased for $24,000 in cash.

Required:

For each of the above situations, prepare the journal entry required to record the acquisition of the equipment. Round computations to the nearest dollar.

E 10-20

 

FASB codification research

 

 LO6

Required:

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles.

Required:

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1.

 

Obtain the relevant authoritative literature on nonmonetary exchanges using the FASB's Codification Research System at the FASB website (www.fasb.org). Identify the Codification topic number for nonmonetary transactions.

2.

 

What are the specific citations that list the disclosure requirements for nonmonetary transactions?

3.

 

Describe the disclosure requirements.

E 10-21

 

FASB codification research

 

 LO1 LO6 LO7 LO8

Access the FASB's Codification Research System at the FASB website (www.fasb.org). Determine the specific citation for each of the following items:

1.

 

The disclosure requirements in the notes to the financial statements for depreciation on property, plant, and equipment.

2.

 

The criteria for determining commercial substance in a nonmonetary exchange.

3.

 

The disclosure requirements for interest capitalization.

4.

 

The elements of costs to be included as R&D activities.

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E 10-22  Interest capitalization 
  LO7

On January 1, 2011, the Marjlee Company began construction of an office building to be used as its corporate headquarters. The building was completed early in 2012. Construction expenditures for 2011, which were incurred evenly throughout the year, totaled $6,000,000. Marjlee had the following debt obligations which were outstanding during all of 2011:

     Construction loan, 10%

$1,500,000

     Long-term note, 9%

2,000,000

     Long-term note, 6%

4,000,000

Required:

Calculate the amount of interest capitalized in 2011 for the building using the specific interest method.

E 10-23  Interest capitalization 
  LO7

On January 1, 2011, the Shagri Company began construction on a new manufacturing facility for its own use. The building was completed in 2012. The only interest-bearing debt the company had outstanding during 2011 was long-term bonds with a book value of $10,000,000 and an effective interest rate of 8%. Construction expenditures incurred during 2011 were as follows:

     January 1

$500,000

     March 1

600,000

     July 31

480,000

     September 30

600,000

     December 31

300,000

Required:

Calculate the amount of interest capitalized for 2011.

E 10-24 Interest capitalization 
  LO7

p. 542

On January 2, 2011, the Highlands Company began construction on a new manufacturing facility for its own use. The building was completed in 2012. The company borrowed $1,500,000 at 8% on January 1 to help finance the construction. In addition to the construction loan, Highlands had the following debt outstanding throughout 2011:

     $5,000,000, 12% bonds

     $3,000,000, 8% long-term note

Construction expenditures incurred during 2011 were as follows:

     January 1

     $ 600,000

     March 31

1,200,000

     June 30

800,000

     September 30

600,000

     December 31

400,000

Required:

Calculate the amount of interest capitalized for 2011 using the specific interest method.

E 10-25 Research and development 
  LO8

In 2011, Space Technology Company modified its model Z2 satellite to incorporate a new communication device. The company made the following expenditures:

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   The equipment will be used on this and other research projects. Depreciation on the equipment for 2011 is $10,000.

   During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all of the above as costs of the patent. Management contends that the device simply represents an improvement of the existing communication system of the satellite and, therefore, should be capitalized.

Required:

Prepare correcting entries that reflect the appropriate treatment of the expenditures.

E 10-26 Research and development 
  LO8

Delaware Company incurred the following research and development costs during 2011:

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   The equipment has a seven-year life and will be used for a number of research projects. Depreciation for 2011 is $120,000.

Required:

Calculate the amount of research and development expense that Delaware should report in its 2011 income statement.

E 10-27

 

IFRS; research and development

 

 LO8 LO9

Janson Pharmaceuticals incurred the following costs in 2011 related to a new cancer drug:

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   The development costs were incurred after technological and commercial feasibility was established and after the future economic benefits were deemed probable. The project was successfully completed and the new drug was patented before the end of the 2011 fiscal year.

p. 543

Required:

1.

 

Calculate the amount of research and development expense Janson should report in its 2011 income statement related to this project.

2.

 

Repeat requirement 1 assuming that Janson prepares its financial statements according to International Financial Reporting Standards.

E 10-28

 

Concepts; terminology

 

 LO1 LO4 LO6 LO7

Listed below are several terms and phrases associated with property, plant, and equipment and intangible assets. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.

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E 10-29 Software development costs 
  LO8

Early in 2011, the Excalibur Company began developing a new software package to be marketed. The project was completed in December 2011 at a cost of $6 million. Of this amount, $4 million was spent before technological feasibility was established. Excalibur expects a useful life of five years for the new product with total revenues of $10 million. During 2012, revenue of $4 million was recognized.

Required:

1.

 

Prepare a journal entry to record the 2011 development costs.

2.

 

Calculate the required amortization for 2012.

3.

 

At what amount should the computer software costs be reported in the December 31, 2012, balance sheet?

E 10-30 Full-cost and successful efforts methods compared 

 Appendix

The Manguino Oil Company incurred exploration costs in 2011 searching and drilling for oil as follows:

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   It was determined that Wells 104–108 were dry holes and were abandoned. Wells 101, 102, and 103 were determined to have sufficient oil reserves to be commercially successful.

Required:

1.

 

Prepare a summary journal entry to record the indicated costs assuming that the company uses the full-cost method of accounting for exploration costs. All of the exploration costs were paid in cash.

2.

 

Prepare a summary journal entry to record the indicated costs assuming that the company uses the successful efforts method of accounting for exploration costs. All of the exploration costs were paid in cash.

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