102. U.S. GAAP provisions require a three-step procedure for measuring and recording impairments for
long-lived assets other than nonamortized intangibles and goodwill. An asset impairment loss arises when the
carrying values of the assets
103. Applying IFRS, the test for an impairment loss for long-lived assets other than nonamortized intangibles
and goodwill compares the balance sheet carrying value with the asset’s
104. Washington Company owns an apartment building that originally cost $40 million and by the end of the
current period has accumulated depreciation of $10 million, with net carrying value of $30 million. Washington
Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the
building for $16 million. Unanticipated placement of a new shopping center has caused Washington Company
to reassess the future rentals. Washington Company expects the building to provide rentals for only 15 more
years before Washington will sell it. Washington Company uses a discount rate of 8% per year in discounting
expected rentals from the building.
Washington now expects to receive annual rentals of $2.7 million per year for 15 years and to sell the building
for $10.0 million after 15 years; these payments, in total, have a present value of $26.2 million when discounted
at 8% per year. The building’s fair value is $25 million today. Costs to sell are estimated at $1,000,000.
(Refer to the Washington Company information) Under U.S. GAAP
105. Washington Company owns an apartment building that originally cost $40 million and by the end of the
current period has accumulated depreciation of $10 million, with net carrying value of $30 million. Washington
Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the
building for $16 million. Unanticipated placement of a new shopping center has caused Washington Company
to reassess the future rentals. Washington Company expects the building to provide rentals for only 15 more
years before Washington will sell it. Washington Company uses a discount rate of 8% per year in discounting
expected rentals from the building.
Washington now expects to receive annual rentals of $2.7 million per year for 15 years and to sell the building
for $10.0 million after 15 years; these payments, in total, have a present value of $26.2 million when discounted
at 8% per year. The building’s fair value is $25 million today. Costs to sell are estimated at $1,000,000.
(Refer to the Washington Company information) Applying IFRS,
106. Madison Company owns an apartment building that originally cost $40 million and by the end of the
current period has accumulated depreciation of $10 million, with net carrying value of $30 million. Madison
Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the
building for $16 million. Unanticipated placement of a new shopping center has caused Madison Company to
reassess the future rentals. Madison Company expects the building to provide rentals for only 15 more years
before Madison will sell it. Madison Company uses a discount rate of 8% per year in discounting expected
rentals from the building.
Madison now expects to receive annual rentals of $1,200,000 per year for 15 years and to sell the building for
$6.0 million after 15 years; these payments, in total, have a present value of $12.2 million when discounted at
8% per year. The building’s fair value is $11.0 million today and costs to sell are $600,000.
Under U.S. GAAP, Madison recognizes
107. Madison Company owns an apartment building that originally cost $40 million and by the end of the
current period has accumulated depreciation of $10 million, with net carrying value of $30 million. Madison
Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the
building for $16 million. Unanticipated placement of a new shopping center has caused Madison Company to
reassess the future rentals. Madison Company expects the building to provide rentals for only 15 more years
before Madison will sell it. Madison Company uses a discount rate of 8% per year in discounting expected
rentals from the building.
Madison now expects to receive annual rentals of $1,200,000 per year for 15 years and to sell the building for
$6.0 million after 15 years; these payments, in total, have a present value of $12.2 million when discounted at
8% per year. The building’s fair value is $11.0 million today and costs to sell are $600,000.
Under U.S. GAAP, Madison would record the following entry
108. Madison Company owns an apartment building that originally cost $40 million and by the end of the
current period has accumulated depreciation of $10 million, with net carrying value of $30 million. Madison
Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the
building for $16 million. Unanticipated placement of a new shopping center has caused Madison Company to
reassess the future rentals. Madison Company expects the building to provide rentals for only 15 more years
before Madison will sell it. Madison Company uses a discount rate of 8% per year in discounting expected
rentals from the building.
Madison now expects to receive annual rentals of $1,200,000 per year for 15 years and to sell the building for
$6.0 million after 15 years; these payments, in total, have a present value of $12.2 million when discounted at
8% per year. The building’s fair value is $11.0 million today and costs to sell are $600,000.
Under IFRS, Madison recognizes
109. Madison Company owns an apartment building that originally cost $40 million and by the end of the
current period has accumulated depreciation of $10 million, with net carrying value of $30 million. Madison
Company had originally expected to collect rentals of $3.34 million each year for 30 years before selling the
building for $16 million. Unanticipated placement of a new shopping center has caused Madison Company to
reassess the future rentals. Madison Company expects the building to provide rentals for only 15 more years
before Madison will sell it. Madison Company uses a discount rate of 8% per year in discounting expected
rentals from the building.
Madison now expects to receive annual rentals of $1,200,000 per year for 15 years and to sell the building for
$6.0 million after 15 years; these payments, in total, have a present value of $12.2 million when discounted at
8% per year. The building’s fair value is $11.0 million today and costs to sell are $600,000.
Applying IFRS, Madison would record the following entry
110. U.S. GAAP requires firms to recognize an impairment loss on a nonamortized intangible other than
goodwill whenever the carrying value of the asset exceeds its
111. Adams Company’s balance sheet shows a trade name acquired as part of a business combination with a
carrying value of $30 million. The trade name has an indefinite life and therefore Adams does not amortize it.
Negative publicity regarding the product carrying the trade name has reduced its fair value to $24 million and
its value in use to $22 million. The entry is as follows:
112. Bush Company’s balance sheet shows a trade name acquired as part of a business combination with a
carrying value of $60 million. The trade name has an indefinite life and therefore Bush does not amortize it.
Negative publicity regarding the product carrying the trade name has reduced its fair value to $48 million and
its value in use to $44 million. The entry is as follows:
113. U.S. GAAP or IFRS require firms to test
114. Taylor Company office equipment costs $10,000, has an expected life of four years and a salvage value of
$400. The firm has depreciated this asset on a straight-line basis. The firm has recorded depreciation for two
years and sells the equipment at midyear in the third year.
What is the entry to record depreciation charges up to the date of sale.
115. Taylor Company office equipment costs $10,000, has an expected life of four years and a salvage value of
$400. The firm has depreciated this asset on a straight-line basis. The firm has recorded depreciation for two
years and sells the equipment at midyear in the third year.
If the firm sells the equipment for cash at 4,000, the entry to record the sale would be as follows:
116. Taylor Company office equipment costs $10,000, has an expected life of four years and a salvage value of
$400. The firm has depreciated this asset on a straight-line basis. The firm has recorded depreciation for two
years and sells the equipment at midyear in the third year.
If the firm sells the equipment for $4,600 cash, the entry to record the sale would be as follows:
117. Taylor Company office equipment costs $10,000, has an expected life of four years and a salvage value of
$400. The firm has depreciated this asset on a straight-line basis. The firm has recorded depreciation for two
years and sells the equipment at midyear in the third year.
If the firm sells the equipment for $3,000 cash, the entry to record the sale would be as follows:
118. Which of the following is true regarding asset abandonment?
119. A firm may retire an asset from service by trading it in on a new asset. U.S. GAAP and IFRS require that
firms record trade-in transactions at _____ unless they lack commercial substance.
120. A firm may retire an asset from service by trading it in on a new asset. U.S. GAAP and IFRS require that
firms record a trade-in that lacks commercial substance at
121. Roadwarrior Express Inc. owns a moving van that originally cost $500,000 and currently has $450,000 of
accumulated depreciation. The fair value of the moving van is $120,000. Roadwarrior Express Inc. exchanges
the van plus $480,000 in cash for a new moving van costing $600,000. The entry to record the transaction is as
follows:
122. How are tangible long-lived assets’ acquisition cost and accumulated depreciation disclosed?
123. Depreciation and amortization expenses appear in the income statement, and are sometimes
124. The financial statements and notes provide information for analyzing changes in property, plant, and
equipment. What ratios are used by analysts?
125. Why is analysis of intangible assets more challenging than the analysis of tangible long-lived assets?
126. Blue Company decided to construct its own manufacturing building. Blue Company should capitalize
which of the following interest costs?
127. 3-E Company depreciates an asset with a cost of $55,000 over 10 years using the straight-line method of
depreciation and the yearly depreciation expense is $4,000, what is the estimated salvage value of the asset?
128. Which method of depreciation will result in the greatest depreciation charge in the last year of the asset’s
life?
129. (CMA adapted, Jun 90 #27) When a fixed plant asset with a five-year estimated useful life is sold during
the second year, how would the use of a double declining balance method of depreciation instead of the
straight-line method affect the gain or loss on the sale of the fixed plant asset?
Gain Loss
130. In Year 1, a firm purchased a truck for $12,000. The estimated salvage value was $2,000 and the estimated
useful life was 10 years. In Year 4, it was determined that the salvage value would only be $1,000 and that the
truck would have a total estimated useful life of 7 years rather than 10. Assuming the straight-line method is
used, what is the depreciation expense for Year 4 of the truck?
131. Repairs and maintenance do not include
132. During Year 3, Thomas Company made the following expenditures relating to plant machinery and
equipment:
·
Continuing, frequent, and low cost repairs
$36,000
·
Special long-term protection devices were attached to ten machines
11,000
·
A broken gear on a machine was replaced
2,000
How much should be charged to repairs and maintenance in Year 3?
133. A firm acquires a car for company business. The car costs $12,000, has a useful life of 5 years, and a
salvage value of $2,000. The straight-line method of depreciation is used. What is the gain or loss on retirement
if the car is sold for $5,000 after three years of use?
134. Goodwill that was internally developed should be amortized over a life not to exceed
135. Which of the following is not capitalized as an intangible asset?
136. (CMA adapted, Dec 86 #12) A patent is granted by the federal government to an inventor for a period of
several years. Costs that are capitalized with regard to a patent would include
137. The Purple Company spent $300,000 on research and development during Year 8 to generate new product
lines. One of the three projects resulted in a successful patented product while the other two projects resulted in
unsuccessful efforts. How much of the $300,000 should be recognized as an expense in Year 8?
138. The Purple Company spent $300,000 on research and development during Year 8 to generate new product
lines. One of the three projects looks like it will ultimately be technologically feasible while the other two
projects resulted in unsuccessful efforts. For the project which may become technologically feasible, a total of
$125,000 was incurred during Year 8. Under U. S. GAAP, how much of the $300,000 should be recognized as
an expense in Year 8?
139. Valley Company reports its net assets at a book value of $150,000. Recent investigation revealed that the
net assets had a market value of $175,000. In addition, Valley had been offered $220,000 for the net assets by a
company named S.Com. What is the amount of goodwill that should be recorded by Valley Co.?
140. Firms that incur research and development costs to develop a patented product.
141. An impairment loss on all assets except intangibles that do notrequire amortization arises when
142. An impairment loss on all intangibles that do not require amortization, except goodwill, arises when
143. An impairment loss on a trademark arises when
144. An impairment loss on a brand name arises when
145. The economic value of a tangible asset may decline below its book value but an impairment loss would not
be recognized when the
146. The economic value of a building may decline below its book value but an impairment loss would not be
recognized when the
147. U.S. GAAP
148. Regarding a firm that abandons an asset,
149. Z-Best Realty has decided to construct its own office building. The construction will be partially financed
through a construction loan and any remainder will be financed from internally generated funds. The internal
accountants have collected the following information concerning the construction.
Average Balance
Construction
Other
Year
Construction Account
Debt @ 6%
Debt @ 10%
1
$2,000,000
$1,000,000
$500,000
2
$4,000,000
$1,000,000
$250,000
3
$3,000,000
$800,000
$200,000
The amount, if any, of capitalized interest cost for Year 1 is
150. Z-Best Realty has decided to construct its own office building. The construction will be partially financed
through a construction loan and any remainder will be financed from internally generated funds. The internal
accountants have collected the following information concerning the construction.
Average Balance
Construction
Other
Year
Construction Account
Debt @ 6%
Debt @ 10%
1
$2,000,000
$1,000,000
$500,000
2
$4,000,000
$1,000,000
$250,000
3
$3,000,000
$800,000
$200,000
The amount, if any, of capitalized interest cost for Year 2 is
151. Assume a firm has acquired an asset for $100,000 on January 1, Year 1. The asset has a 6-year life and a
salvage value of $10,000. The firm calculates the depreciation expense using the straight-line
depreciation. What was the depreciation for Year 4?
152. The Plant Company has decided to construct its own warehouse facility. The construction will be partially
financed through a construction loan and the remainder will be financed from internally generated funds. The
internal accountants have collected the following information concerning the construction.
Average Balance
Construction
Other
Year
Construction Account
Debt @ 14%
Debt @ 10%
1
$1,000,000
$1,000,000
$1,500,000
2
$2,000,000
$1,700,000
$1,700,000
3
$2,500,000
$2,000,000
$1,300,000
Required:
Determine the amount, if any, of capitalized interest cost for each year.
a.
Year 1
b.
Year 2
c.
Year 3
153. An engineering firm has decided to construct its own office building. The construction will be partially
financed through a construction loan and any remainder will be financed from internally generated funds. The
internal accountants have collected the following information concerning the construction.
Average Balance
Construction
Other
Year
Construction Account
Debt @ 10%
Debt @ 12%
1
$1,000,000
$1,000,000
$500,000
2
$1,500,000
$1,000,000
$250,000
3
$2,000,000
$ 800,000
$200,000
Required:
Determine the amount, if any, of capitalized interest cost for each year.
a.
Year 1
b.
Year 2
c.
Year 3
a.
$100,000 ($1,000,000 ´ .10)
b.
$130,000 ($1,000,000 ´ .10) + ($250,000 ´ .12)
c.
$104,000 ($800,000 ´ .10) + ($200,000 ´ .12)
154. On January 1, Year 1, Jayco purchased a machine for $6,000. It had an estimated salvage value of $1,200
and a life of six years. The straight-line method of depreciation was used. At, midyear in Year 4, Jayco sold the
machine for $4,500 cash.
Required:
a.
What is the book value of the machine at the time of the sale?
b.
Give the journal entry to record the sale of the machine.
a.
($6,000 – $1,200) / 6 = $800 yearly depreciation
Depreciation midway at year 4 = ($800 ´ 3) + ($800 / 2) = $2,800
Book value = $6,000 – $2,800 = $3,200
Gain = $4,500 – $3,200 = $1,300
b.
Cash
4,500
Accumulated Depreciation
2,800
Equipment
6,000
Gain on Retirement of Equipment
1,300
155. The Elmo Company purchased equipment in Year 1 at a cost of $26,000. The equipment was estimated to
last for 8 years and have a salvage value of $2,000. In Year 5, it was determined that the life of the equipment
was really 12 years, and the salvage value was expected to remain unchanged. What amount of depreciation
was recorded for the equipment for years 1 through 12? The firm uses the straight-line method of depreciation.
Year
Depreciation
1
$3,000 [($26,000-$2,000)/8]
2
$3,000
3
$3,000
4
$3,000
5
$1,500 ($26,000-$2,000- ($3,000 ´ 4))/(12-4)
6
$1,500
7
$1,500
8
$1,500
9
$1,500
10
$1,500
11
$1,500
12
$1,500
156. Iowa Steakhouse opened a new restaurant on the site of an existing building. It paid the owner $520,000
for the land and building, of which it attributes $104,000 to the land and $416,000 to the building. Iowa
incurred legal costs of $25,200 to conduct a title search and prepare the necessary legal documents for the
purchase. It then paid $71,800 to renovate the building to make it suitable for Iowa’s use. Property and liability
insurance on the land and building for the first year was $24,000, of which $8,000 applied to the period during
renovation and $16,000 applied to the period after opening. Property taxes on the land and building for the first
year totaled $30,000, of which $10,000 applied to the period during renovation and $20,000 applied to the
period after opening. Calculate the amounts that Iowa Steakhouse should include in the Land account and in the
Building account.
Iowa Steakhouse; calculating acquisition costs of long-lived assets.
The relative market values of the land and building are 20% (= $104,000/$520,000) for the land and 80% (=
$416,000/$520,000) for the building.
We use these percentages to allocate joint cost of the land and building.
Land Building
Purchase Price of
operation.
157. GU acquires a machine for $177,600. It expects the machine to last six years and to operate for 30,000
hours during that time. Estimated salvage value is $9,600 at the end of the machine’s useful life. Calculate the
depreciation charge for each of the first three years using each of the following methods:
a. The straight-line (time) method.
b. The straight-line (use) method, with the following operating times: first year, 4,500 hours; second year,
5,000 hours; third year, 5,500 hours.
GU calculations for various depreciation methods.
Year 1 Year 2 Year 3