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Chapter11: Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment

Exercises

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

E 11-1

 

Depreciation methods

 

 LO2

On January 1, 2011, the Excel Delivery Company purchased a delivery van for $33,000. At the end of its five-year service life, it is estimated that the van will be worth $3,000. During the five-year period, the company expects to drive the van 100,000 miles.

Required:

Calculate annual depreciation for the five-year life of the van using each of the following methods. Round all computations to the nearest dollar.

1.

 

Straight line.

2.

 

Sum-of-the-years' digits.

3.

 

Double-declining balance.

4.

 

Units of production using miles driven as a measure of output, and the following actual mileage:

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E 11-2

 

Depreciation methods

 

 LO2

On January 1, 2011, the Allegheny Corporation purchased machinery for $115,000. The estimated service life of the machinery is 10 years and the estimated residual value is $5,000. The machine is expected to produce 220,000 units during its life.

Required:

Calculate depreciation for 2011 and 2012 using each of the following methods. Round all computations to the nearest dollar.

1.

 

Straight line.

2.

 

Sum-of-the-years' digits.

3.

 

Double-declining balance.

4.

 

One hundred fifty percent declining balance.

5.

 

Units of production (units produced in 2011, 30,000; units produced in 2012, 25,000).

E 11-3

 

Depreciation methods; partial years

 

 LO2

[This is a variation of the previous exercise modified to focus on depreciation for partial years.]

   On October 1, 2011, the Allegheny Corporation purchased machinery for $115,000. The estimated service life of the machinery is 10 years and the estimated residual value is $5,000. The machine is expected to produce 220,000 units during its life.

Required:

Calculate depreciation for 2011 and 2012 using each of the following methods. Partial-year depreciation is calculated based on the number of months the asset is in service. Round all computations to the nearest dollar.

1.

 

Straight line.

2.

 

Sum-of-the-years' digits.

3.

 

Double-declining balance.

4.

 

One hundred fifty percent declining balance.

5.

 

Units of production (units produced in 2011, 10,000; units produced in 2012, 25,000).

p. 599

E 11-4

 

Depreciation methods; asset addition

 

 LO2 LO9

Funseth Company purchased a five-story office building on January 1, 2009, at a cost of $5,000,000. The building has a residual value of $200,000 and a 30-year life. The straight-line depreciation method is used. On June 30, 2011, construction of a sixth floor was completed at a cost of $1,650,000.

Required:

Calculate the depreciation on the building and building addition for 2011 and 2012 assuming that the addition did not change the life or residual value of the building.

E 11-5

 

Depreciation methods; solving for unknowns

 

 LO2

For each of the following depreciable assets, determine the missing amount (?). Abbreviations for depreciation methods are SL for straight line, SYD for sum-of-the-years' digits, and DDB for double-declining balance.

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E 11-6

 

Depreciation methods

 

 LO2

On April 29, 2011, Quality Appliances purchased equipment for $260,000. The estimated service life of the equipment is six years and the estimated residual value is $20,000. Quality's fiscal year ends on December 31.

Required:

Calculate depreciation for 2011 and 2012 using each of the three methods listed. Quality calculates partial year depreciation based on the number of months the asset is in service. Round all computations to the nearest dollar.

1.

 

Straight-line.

2.

 

Sum-of-the-years' digits.

3.

 

Double-declining balance.

E 11-7

 

IFRS; depreciation

 

 LO2 LO10

On June 30, 2011, Rosetta Granite purchased a machine for $120,000. The estimated useful life of the machine is eight years and no residual value is anticipated. An important component of the machine is a specialized high-speed drill that will need to be replaced in four years. The $20,000 cost of the drill is included in the $120,000 cost of the machine. Rosetta uses the straight-line depreciation method for all machinery.

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Required:

1.

 

Calculate depreciation for 2011 and 2012 applying the typical U.S. GAAP treatment.

2.

 

Repeat requirement 1 applying IFRS.

E 11-8

 

IFRS; revaluation of machinery; depreciation

 

 LO2 LO10

Dower Corporation prepares its financial statements according to IFRS. On March 31, 2011, the company purchased equipment for $240,000. The equipment is expected to have a six-year useful life with no residual value. Dower uses the straight-line depreciation method for all equipment. On December 31, 2011, the end of the company's fiscal year, Dower chooses to revalue the equipment to its fair value of $220,000.

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Required:

1.

 

Calculate depreciation for 2011.

2.

 

Prepare the journal entry to record the revaluation of the equipment. Round calculations to the nearest thousand.

3.

 

Calculate depreciation for 2012.

4.

 

Repeat requirement 2 assuming that the fair value of the equipment at the end of 2011 is $195,000.

E 11-9

 

Group depreciation

 

 LO2

Highsmith Rental Company purchased an apartment building early in 2011. There are 20 apartments in the building and each is furnished with major kitchen appliances. The company has decided to use the group depreciation method for the appliances. The following data are available:

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   In 2014, three new refrigerators costing $2,700 were purchased for cash. The old refrigerators, which originally cost $1,500, were sold for $200.

Required:

1.

 

Calculate the group depreciation rate, group life, and depreciation for 2011.

2.

 

Prepare the journal entries to record the purchase of the new refrigerators and the sale of the old refrigerators.

p. 600

E 11-10

 

Double-declining-balance method; switch to straight line

 

 LO2 LO6

On January 2, 2011, the Jackson Company purchased equipment to be used in its manufacturing process. The equipment has an estimated life of eight years and an estimated residual value of $30,625. The expenditures made to acquire the asset were as follows:

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Jackson's policy is to use the double-declining-balance (DDB) method of depreciation in the early years of the equipment's life and then switch to straight line halfway through the equipment's life.

Required:

1.

 

Calculate depreciation for each year of the asset's eight-year life.

2.

 

Discuss the accounting treatment of the depreciation on the equipment.

E 11-11

 

Depletion

 

 LO3

On April 17, 2011, the Loadstone Mining Company purchased the rights to a coal mine. The purchase price plus additional costs necessary to prepare the mine for extraction of the coal totaled $4,500,000. The company expects to extract 900,000 tons of coal during a four-year period. During 2011, 240,000 tons were extracted and sold immediately.

Required:

1.

 

Calculate depletion for 2011.

2.

 

Discuss the accounting treatment of the depletion calculated in requirement 1.

E 11-12

 

Depreciation and depletion

 

 LO2 LO3

At the beginning of 2011, Terra Lumber Company purchased a timber tract from Boise Cantor for $3,200,000. After the timber is cleared, the land will have a residual value of $600,000. Roads to enable logging operations were constructed and completed on March 30, 2011. The cost of the roads, which have no residual value and no alternative use after the tract is cleared, was $240,000. During 2011, Terra logged 500,000 of the estimated five million board feet of timber.

Required:

Calculate the 2011 depletion of the timber tract and depreciation of the logging roads assuming the units-of-production method is used for both assets.

E 11-13

 

Cost of a natural resource; depletion and depreciation; Chapters 10 and 11

 

 LO2 LO3

[This exercise is a continuation of Exercise 10-4 in Chapter 10 focusing on depletion and depreciation.]

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 for an estimated residual amount of $20,000. There will be no residual value for the copper mine. The credit-adjusted risk-free rate of interest is 10%.

   The company expects to extract 10 million pounds of copper from the mine. Actual production was 1.6 million pounds in 2011 and 3 million pounds in 2012.

Required:

1.

 

Compute depletion and depreciation on the mine and mining equipment for 2011 and 2012. The units-of-production method is used to calculate depreciation.

2.

 

Discuss the accounting treatment of the depletion and depreciation on the mine and mining equipment.

E 11-14

 

Amortization

 

 LO4 LO5

Janes Company provided the following information on intangible assets:

a.

 

A patent was purchased from the Lou Company for $700,000 on January 1, 2009. Janes estimated the remaining useful life of the patent to be 10 years. The patent was carried on Lou's accounting records at a net book value of $350,000 when Lou sold it to Janes.

p. 601

b.

 

During 2011, a franchise was purchased from the Rink Company for $500,000. The contractual life of the franchise is 10 years and Janes records a full year of amortization in the year of purchase.

c.

 

Janes incurred research and development costs in 2011 as follows:

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d.

 

Effective January 1, 2011, based on new events that have occurred, Janes estimates that the remaining life of the patent purchased from Lou is only five more years.

Required:

1.

 

Prepare the entries necessary in 2009 and 2011 to reflect the above information.

2.

 

Prepare a schedule showing the intangible asset section of Janes's December 31, 2011, balance sheet.

E 11-15

 

Patent amortization; patent defense

 

 LO4 LO9

On January 2, 2011, David Corporation purchased a patent for $500,000. The remaining legal life is 12 years, but the company estimated that the patent will be useful only for eight years. In January 2013, the company incurred legal fees of $45,000 in successfully defending a patent infringement suit. The successful defense did not change the company's estimate of useful life.

Required:

Prepare journal entries related to the patent for 2011, 2012, and 2013.

E 11-16

 

Change in estimate; useful life of patent

 

 LO4 LO5

Van Frank Telecommunications has a patent on a cellular transmission process. The company has amortized the patent on a straight-line basis since 2007, when it was acquired at a cost of $9 million at the beginning of that year. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2011 (before adjusting and closing entries).

Required:

Prepare the appropriate adjusting entry for patent amortization in 2011 to reflect the revised estimate.

E 11-17

 

IFRS; revaluation of patent; amortization

 

 LO4 LO10

Saint John Corporation prepares its financial statements according to IFRS. On June 30, 2011, the company purchased a franchise for $1,200,000. The franchise is expected to have a 10-year useful life with no residual value. Saint John uses the straight-line amortization method for all intangible assets. On December 31, 2011, the end of the company's fiscal year, Saint John chooses to revalue the franchise. There is an active market for this particular franchise and its fair value on December 31, 2011, is $1,180,000.

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Required:

1.

 

Calculate amortization for 2011.

2.

 

Prepare the journal entry to record the revaluation of the patent.

3.

 

Calculate amortization for 2012.

E 11-18

 

Change in estimate; useful life and residual value of equipment

 

 LO2 LO5

Wardell Company purchased a minicomputer on January 1, 2009, at a cost of $40,000. The computer was depreciated using the straight-line method over an estimated five-year life with an estimated residual value of $4,000. On January 1, 2011, the estimate of useful life was changed to a total of 10 years, and the estimate of residual value was changed to $900.

Required:

1.

 

Prepare the appropriate adjusting entry for depreciation in 2011 to reflect the revised estimate.

2.

 

Repeat requirement 1 assuming that the company uses the sum-of-the-years'-digits method instead of the straight-line method.

E 11-19

 

Change in principle; change in depreciation methods

 

 LO2 LO6

Alteran Corporation purchased a machine for $1.5 million in 2008. The machine is being depreciated over a 10-year life using the sum-of-the-years'-digits method. The residual value is expected to be $300,000. At the beginning of 2011, Alteran decided to change to the straight-line depreciation method for this machine.

Required:

Prepare the 2011 depreciation adjusting entry.

p. 602

E 11-20

 

Change in principle; change in depreciation methods

 

 LO2 LO6

For financial reporting, Clinton Poultry Farms has used the declining-balance method of depreciation for conveyor equipment acquired at the beginning of 2008 for $2,560,000. Its useful life was estimated to be six years, with a $160,000 residual value. At the beginning of 2011, Clinton decides to change to the straight-line method. The effect of this change on depreciation for each year is as follows:

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Required:

1.

 

Briefly describe the way Clinton should report this accounting change in the 2010–2011 comparative financial statements.

2.

 

Prepare any 2011 journal entry related to the change.

E 11-21

 

Error correction

 

 LO2 LO7

In 2011, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $350,000 cost of a machine purchased on January 1, 2008. The machine's life was expected to be five years with no residual value. Straight-line depreciation is used by PKE.

Required:

1.

 

Prepare the appropriate correcting entry assuming the error was discovered in 2011 before the adjusting and closing entries. (Ignore income taxes.)

2.

 

Assume the error was discovered in 2013 after the 2012 financial statements are issued. Prepare the appropriate correcting entry.

E 11-22

 

Impairment; property, plant, and equipment

 

 LO8

Chadwick Enterprises, Inc., operates several restaurants throughout the Midwest. Three of its restaurants located in the center of a large urban area have experienced declining profits due to declining population. The company's management has decided to test the assets of the restaurants for possible impairment. The relevant information for these assets is presented below.

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Required:

1.

 

Determine the amount of the impairment loss, if any.

2.

 

Repeat requirement 1 assuming that the estimated undiscounted sum of future cash flows is $6.8 million and fair value is $5 million.

E 11-23

 

IFRS; impairment; property, plant, and equipment

 

 LO8 LO10

Refer to the situation described in Exercise 11-22.

Required:

How might your solution differ if Chadwick Enterprises, Inc., prepares its financial statements according to International Accounting Standards? Assume that the fair value amount given in the exercise equals both (a) the fair value less costs to sell and (b) the present value of estimated future cash flows.

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E 11-24

 

Impairment; property, plant, and equipment

 

 LO8

General Optic Corporation operates a manufacturing plant in Arizona. Due to a significant decline in demand for the product manufactured at the Arizona site, an impairment test is deemed appropriate. Management has acquired the following information for the assets at the plant:

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   The fair value of the Arizona plant is estimated to be $11,000,000.

Required:

1.

 

Determine the amount of impairment loss, if any.

2.

 

If a loss is indicated, where would it appear in General Optic's multiple-step income statement?

p. 603

3.

 

If a loss is indicated, prepare the entry to record the loss.

4.

 

Repeat requirement 1 assuming that the estimated undiscounted sum of future cash flows is $12,000,000 instead of $15,000,000.

5.

 

Repeat requirement 1 assuming that the estimated undiscounted sum of future cash flows is $19,000,000 instead of $15,000,000

E 11-25

 

Impairment; goodwill

 

 LO8

In 2009, Alliant Corporation acquired Centerpoint Inc. for $300 million, of which $50 million was allocated to goodwill. Alliant tests for goodwill impairment at the end of each year. At the end of 2011, management has provided the following information:

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Required:

1.

 

Determine the amount of the impairment loss.

2.

 

Repeat requirement 1 assuming that the fair value of Centerpoint is $270 million.

E 11-26

 

IFRS; impairment; goodwill

 

 LO8 LO10

Refer to the situation described in E 11-25. Alliant prepares its financial statements according to IFRS, and Centerpoint is considered a cash-generating unit. Assume that Centerpoint's fair value of $220 million approximates fair value less costs to sell and that the present value of Centerpoint's estimated future cash flows is $225 million.

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Required:

Determine the amount of goodwill impairment loss Alliant should recognize.

E 11-27

 

Goodwill valuation and impairment; Chapters 10 and 11

 

 LO8

On May 28, 2011, Pesky Corporation acquired all of the outstanding common stock of Harman, Inc., for $420 million. The fair value of Harman's identifiable tangible and intangible assets totaled $512 million, and the fair value of liabilities assumed by Pesky was $150 million.

   Pesky performed the required goodwill impairment test at the end of its fiscal year ended December 31, 2011. Management has provided the following information:

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Required:

1.

 

Determine the amount of goodwill that resulted from the Harman acquisition.

2.

 

Determine the amount of goodwill impairment loss that Pesky should recognize at the end of 2011, if any.

3.

 

If an impairment loss is required, prepare the journal entry to record the loss.

E 11-28

 

FASB codification research

 

 LO8

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

Required:

1.

 

Obtain the relevant authoritative literature on the impairment or disposal of long-lived assets using the FASB's Codification Research System at the FASB website (www.fasb.org). Indicate the Codification topic number that provides guidance on accounting for the impairment of long-lived assets.

2.

 

What is the specific citation that discusses the disclosures required in the notes to the financial statements for the impairment of long-lived assets classified as held and used?

3.

 

Describe the disclosure requirements.

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E 11-29

 

FASB codification research

 

 LO2 LO4 LO6 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.

 

Depreciation involves a systematic and rational allocation of cost rather than a process of valuation.

2.

 

The calculation of an impairment loss for property, plant, and equipment.

3.

 

Accounting for a change in depreciation method.

4.

 

Goodwill should not be amortized.

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p. 604

E 11-30

 

Subsequent expenditures

 

 LO9

Belltone Company made the following expenditures related to its 10-year-old manufacturing facility:

1.

 

The heating system was replaced at a cost of $250,000. The cost of the old system was not known. The company accounts for improvements as reductions of accumulated depreciation.

2.

 

A new wing was added at a cost of $750,000. The new wing substantially increases the productive capacity of the plant.

3.

 

Annual building maintenance was performed at a cost of $14,000.

4.

 

All of the machinery on the assembly line in the plant was rearranged at a cost of $50,000. The rearrangement clearly increases the productive capacity of the plant.

Required:

Prepare journal entries to record each of the above expenditures.

E 11-31

 

IFRS; amortization; cost to defend a patent

 

 LO4 LO9 LO10

On September 30, 2009, Leeds LTD. acquired at patent in conjunction with the purchase of another company. The patent, valued at $6 million, was estimated to have a 10-year life and no residual value. Leeds uses the straight-line method of amortization for intangible assets. At the beginning of January 2011, Leeds successfully defended its patent against infringement. Litigation costs totaled $500,000.

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Required:

1.

 

Calculate amortization of the patent for 2009 and 2010.

2.

 

Prepare the journal entry to record the 2011 litigation costs.

3.

 

Calculate amortization for 2011.

4.

 

Repeat requirements 2 and 3 assuming that Leeds prepares its financial statements according to IFRS.

E 11-32

 

Depreciation methods; disposal; Chapters 10 and 11

 

 LO2

Howarth Manufacturing Company purchased a lathe on June 30, 2007, at a cost of $80,000. The residual value of the lathe was estimated to be $5,000 at the end of a five-year life. The lathe was sold on March 31, 2011, for $17,000. Howarth uses the straight-line depreciation method for all of its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service.

Required:

1.

 

Prepare the journal entry to record the sale.

2.

 

Assuming that Howarth had instead used the sum-of-the-years'-digits depreciation method, prepare the journal entry to record the sale.

E 11-33

 

Concepts; terminology

 

 LO1 through LO6 LO8

Listed below are several items and phrases associated with depreciation, depletion, and amortization. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.

List A

List B


____

1.

Depreciation

a.

Cost allocation for natural resource.

____

2.

Service life

b.

Accounted for prospectively.

____

3.

Depreciable base

c.

When there has been a significant decline in value.

____

4.

Activity-based methods

d.

The amount of use expected from plant and equipment and finite-life intangible assets.

____

5.

Time-based methods

e.

Estimates service life in units of output.

____

6.

Double-declining balance

f.

Cost less residual value.

____

7.

Group method

g.

Cost allocation for plant and equipment.

____

8.

Composite method

h.

Does not subtract residual value from cost.

____

9.

Depletion

i.

Accounted for in the same way as a change in estimate.

____

10.

Amortization

j.

Aggregates assets that are similar.

____

11.

Change in useful life

k.

Aggregates assets that are physically unified.

____

12.

Change in depreciation method

l.

Cost allocation for an intangible asset.

____

13.

Write-down of asset

m.

Estimates service life in years.

E 11-34

 

Retirement and replacement depreciation

 

Cadillac Construction Company uses the retirement method to determine depreciation on its small tools. During 2009, the first year of the company's operations, tools were purchased at a cost of $8,000. In 2011, tools originally costing $2,000 were sold for $250 and replaced with new tools costing $2,500.

Required:

1.

 

Prepare journal entries to record each of the above transactions.

2.

 

Repeat requirement 1 assuming that the company uses the replacement depreciation method instead of the retirement method.

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