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Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
Topic Area: Types of assets
Topic Area: Costs to be capitalized
Topic Area: Noncash acquisitions ‒ Deferred payments
Topic Area: Dispositions
Topic Area: Exchanges
Topic Area: Self-constructed assets
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Problems
93. On July 1, 2016, Jekel & Hyde Inc. purchased land and incurred other costs relative to the
construction of a new warehouse. A summary of economic activities is listed below:
Purchase price
$185,000
Title insurance
$1,500
Legal fees to purchase land
$1,000
Cost of razing old building on lot
8,500
Proceeds from sale of salvageable materials
(1,200
)
Property taxes, January 1, 2016–June 30, 2016
3,000
Cost of grading and filling building site
9,000
Cost of building construction
620,000
Interest on construction loan
12,000
Cost of constructing driveway
8,000
Cost of parking lot and fencing
12,000
Required:
Indicate the accounts that would be affected by the above transactions and the resulting
balance in each account. Apply the interest on the construction loan to the cost of the building
only.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
94. Mad Hatter Enterprises purchased new equipment for $365,000, terms f.o.b. shipping point.
Other costs connected with the purchase were as follows:
State sales tax
29,200
Freight costs
5,600
Insurance while in transit
800
Insurance after equipment placed in service
1,200
Installation costs
2,000
Insurance for the first year of operations
2,400
Testing
700
Required:
Determine the capitalized cost of the equipment.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
95. During the current year, Brewer Company acquired all of the outstanding common stock of
Miller Inc. paying $12,000,000 cash. The book values and fair values of Miller's assets and
liabilities acquired are listed below:
Book Value
Fair Value
Accounts receivable
$1,800,000
$ 1,625,000
Inventories
2,700,000
4,000,000
Property, plant, and equipment
9,000,000
11,625,000
Accounts payable
3,000,000
3,000,000
Bonds payable
4,500,000
4,125,000
Required:
Prepare the journal entry to record the acquisition by Brewer Company.
96. On August 15, 2016, Willis Inc. acquired all of the outstanding common stock of Bork Inc.
paying $7,400,000 cash. The book values and fair values of Willis' assets and liabilities are
listed below:
Book Value
Fair Value
Accounts receivable
$1,080,000
$ 975,000
Inventories
1,620,000
2,400,000
Property, plant, and equipment
5,400,000
6,975,000
Accounts payable
1,800,000
1,800,000
Bonds payable
2,700,000
2,475,000
Required:
Prepare the journal entry to record the acquisition by Willis Inc.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
Use the following to answer questions 97 and 98:
In its 2013 annual report to shareholders, Boston Beer Company, Inc. included the following in a
disclosure note:
E. Property, Plant and Equipment
Property, plant and equipment for the years ended December 28, 2013, and December 29, 2012,
consisted of the following ($ in thousands):
2013
2012
Machinery and plant equipment
$ 259,664
$183,828
Kegs
60,350
46,899
Land
23,260
24,515
Building and building improvements
44,234
36,667
Office equipment and furniture
14,581
12,580
Leasehold improvements
7,600
6,193
409,689
310,682
Less: accumulated depreciation
143,131
120,734
$266,558
$189,948
The Company recorded depreciation related to these assets of $23,565 thousand in the 2013 fiscal
year.
Also, Boston Beer reported the following information in the annual report ($ in thousands):
Years ended
12/28/13
12/29/12
Cash flows for investing
activities:
Purchases of property,
plant, and equipment
(100,655)
(66,010)
Proceeds on disposal of
property, plant, and equipment
18
41
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
97. Use a T- account to show the balances and changes during 2013 in Boston Beer's: Property,
Plant and Equipment account and its Accumulated depreciation—Property, Plant &
Equipment account.
98. Show the journal entry to record Boston Beer's sale of property, plant and equipment during
2013.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
Use the following to answer questions 99 and 100:
In its 2016 annual report to shareholders, Plank Breweries included the following note:
Fixed Assets
Fixed assets consist of the following (in $ thousands):
December 31,
2016
2015
Brewery and retail
$ 14,465
$ 14,246
Equipment
Furniture and fixtures
918
772
Leasehold improvements
13,808
13,563
Construction in progress
584
165
Assets held for sale
_______
4
29,775
28,750
Less accumulated depreciation
(9,555
)
(7,625
)
$ 20,220
$ 21,125
Total depreciation expense was approximately $2.121 million and $2.179 million for the years ended
December 31, 2016 and 2015, respectively.
Also, Plank Breweries reported the following information in its annual report (in $ thousands):
Years Ended December 31,
2016
2015
Acquisition of fixed assets
1,279
808
Proceeds from sale of fixed assets
15
157
Required:
99. Use a T- account to show the balances and changes during 2016 in Plank Breweries:
Fixed assets account and Accumulated depreciation—fixed assets account (in $ thousands).
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
100. Show the journal entry to record Plank's disposal of the fixed assets during 2016.
101. In its 2016 annual report to shareholders, Custard Cup Inc. included the following note:
Note 4 Property, Plant, and Equipment
Property, plant, and equipment (PPE) at December 31, 2016, and December 31, 2015,
consisted of the following:
2016
2015
(In millions)
Machinery and equipment
$244
$237
Buildings and
90
89
improvements
Office furniture and
6
6
fixtures
_______
_______
340
332
Less: Accumulated
depreciation and
183
165
Amortization
_______
_______
157
167
Land
15
15
Construction in progress
24
6
$196
$188
Depreciation expense for property, plant and equipment was $26 million in 2016.
Required: Compute the Accumulated depreciation on PPE disposed of by Custard Cup during
2016.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
102. Schefter Mining operates a copper mine in Wyoming. Acquisition, exploration, and
development costs totaled $8.2 million. Extraction activities began on July 1, 2016. After the
copper is extracted in approximately six years, Schefter is obligated to restore the land to its
original condition, including constructing a park. The company’s controller has provided the
following three cash flow possibilities for the restoration costs:
Cash Flow Probability
1. $700,000 30%
2. 800,000 25%
3. 900,000 45%
The company’s credit-adjusted, risk-free rate of interest is 5%, and its fiscal year ends on
December 31.
Required:
1. What is the initial cost of the copper mine? (Round computations to nearest whole dollar.)
2. How much accretion expense will Schefter report in its 2016 income statement?
3. What is the book value of the asset retirement obligation that Schefter will report in its
2016 balance sheet?
4. Assume that actual restoration costs incurred in 2022 totaled $860,000. What amount of
gain or loss will Schefter recognize on retirement of the liability?
Answer:
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
103. Calegari Mining paid $2 million to obtain the rights to operate a coal mine in Tennessee.
Costs of exploring for the coal deposit totaled $1,500,000, and development costs of $5
million were incurred in preparing the mine for extraction, which began on January 2, 2016.
After the coal is extracted in approximately five years, Calegari is obligated to restore the land
to its original condition. The company’s controller has provided the following three cash flow
possibilities for the restoration costs:
Cash Flow Probability
1. $1,000,000 10%
2. 1,400,000 60%
3. 1,800,000 30%
The company’s credit-adjusted, risk-free rate of interest is 7%, and its fiscal year ends on
December 31.
Required:
1. What is the initial cost of the coal mine? (Round computations to nearest whole dollar.)
2. How much accretion expense will Calegari report in its 2016 and 2017 income
statements?
3. What is the book value of the asset retirement obligation that Calegari will report in its
2016 and 2017 balance sheets?
4. Assume that actual restoration costs incurred in 2021 totaled $1,370,000. What amount of
gain or loss will Calegari recognize on retirement of the liability?
Answer:
104. During the current year, Peterson Data Corporation acquired all of the outstanding common
stock of Junior Jackson Inc. (JJI), paying $36 million in cash. Peterson recorded the assets
acquired as follows:
Accounts receivable
$2,500,000
Inventory
9,000,000
Property, plant, and equipment
25,500,000
Goodwill
6,000,000
The book value of JJI's assets and owners' equity before the acquisition were $22 million and
$18 million, respectively.
Required: Compute the fair value of JJI's liabilities that Peterson assumed in the acquisition.
105. During the current year, Compton Crate Corporation acquired all of the outstanding common
stock of Little Lacy Ltd. (LLL), paying $60 million in cash. Compton recorded the assets
acquired as follows:
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
Accounts receivable
$5,500,000
Inventory
18,000,000
Property, plant, and equipment
45,500,000
Goodwill
22,000,000
The book value of LLL's assets and owners' equity before the acquisition were $50 million
and $30 million, respectively.
Required: Compute the fair value of LLL's liabilities that Compton assumed in the
acquisition.
106. On January 3, 2016, Michelson & Sons acquired a tract of land just outside the city limits. The
land and existing building were purchased for $2.4 million. Michelson paid $400,000 and
signed a noninterest-bearing note requiring the company to pay the remaining $2,000,000 on
December 31, 2017. An interest rate of 7% properly reflects the time value of money for this
type of loan agreement. Transfer taxes, title insurance, and other costs totaling $24,000 were
paid at closing.
During February, the old building was demolished at a cost of $120,000, and an additional
$100,000 was paid to clear and grade the land. Construction of a new building began on
March 1 and was completed on October 30. Construction expenditures were as follows:
March 30 $ 800,000
June 30 1,200,000
July 30 1,200,000
September 1 600,000
Michelson did not borrow specifically for the construction project, but did have the
following debt outstanding throughout 2016:
$6,000,000, 8% long-term note payable
$2,000,000, 5% long-term note payable
In December, the company purchased equipment and office furniture and fixtures for a
lump-sum price of $800,000. The fair values of the equipment and the furniture and fixtures
were $540,000 and $360,000, respectively. In December, Michelson paid $340,000 for the
construction of parking lots and landscaping.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
Required:
1. Determine the initial values of the various assets that Michelson acquired or constructed
during 2016.
2. How much interest expense will Michelson report in its 2016 income statement?
Answer:
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
107. Watson Company purchased assets of Holmes Ltd. at auction for $1,300,000. An independent
appraisal of the fair value of the assets acquired is listed below:
Land
$214,500
Building
357,500
Equipment
572,000
Inventories
286,000
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
Required:
Prepare the journal entry to record the purchase of the assets.
Answer:
108. Eli Company purchased assets of Whitney Inc. at auction for $1,560,000. An independent
appraisal of the fair value of the assets acquired is listed below:
Land
$171,600
Building
514,800
Equipment
600,600
Inventories
429,000
Required:
Prepare the journal entry to record the purchase of the assets.
Chapter 10 Property, Plant, and Equipment and Intangible Assets:
Acquisition and Disposition
109. Cool Globe Inc. entered into two transactions, as follows:
1. Purchased equipment paying $20,000 down and signed a noninterest-bearing note requiring
the balance to be paid in four annual installments of $20,000 on the anniversary date of the
contract. Based on Cool Globe's 12% borrowing rate for such transactions, the implicit
interest cost is $19,253.
2. Purchased a tract of land in exchange for $10,000 cash down payment and a noninterest-
bearing note requiring five $10,000 annual payments, with the first annual payment in one
year. The fair value of the land is $46,000.
Required:
Prepare the journal entries for these transactions.
110. Beacon Inc. received a gift of land and building in Twin Pines Park as an inducement to
relocate. The land and buildings have fair values of $45,000 and $455,000.
Required: Prepare journal entries to record the above transactions.
