205) Assume the same facts as above, except that the fair value of Oxford (the reporting unit) is
$225 million.
Required: Determine the amount, if any, of the goodwill impairment loss that Dooling must
recognize on these assets.
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206) Wicker Corporation operates a manufacturing plant in California. Due to a change in
business climate, an impairment test is deemed appropriate. Management has acquired the
following information for the assets at the plant:
Cost $58,500,000
Accumulated depreciation 26,400,000
Wicker’s estimate of the total cash flows to be generated
by selling the products manufactured at its California plant,
not discounted to present value 30,000,000
The fair value of the California plant is estimated to be $24,000,000.
Required:
1. Determine the amount of impairment loss, if any.
2. If a loss is indicated, where would it appear in Wicker’s multiple-step income statement?
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
$27,000,000 instead of $30,000,000.
5. Repeat requirement 1 assuming that the estimated undiscounted sum of future cash flows is
$34,000,000 instead of $30,000,000.
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207) (Note: The following problem requires students to determine the amount of goodwill in a
business acquisition, a Chapter 10 topic.)
In 2016, Quasar Ltd. acquired all of the common stock of Penlight Laser for $124 million. The
fair value of Penlight’s identifiable tangible and intangible assets totaled $205 million, and the
fair value of liabilities assumed by Quasar was $95 million. Quasar performed a required
goodwill impairment test at the end of its fiscal year ended December 31, 2018. Management has
provided the following information:
Fair value of Penlight $115 million
Fair value of Penlight’s net assets (excluding goodwill) 107 million
Book value of Penlight’s net assets (including goodwill) 125 million
Required:
1. Determine the amount of goodwill that resulted from the Penlight acquisition.
2. Determine the amount of goodwill impairment loss that Quasar should recognize at the end
of 2018, if any.
3. If an impairment loss is required, prepare the journal entry to record the loss.
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105
208) Atlas Trucking incurred the following costs during 2018:
1. Spent $15,000 on a major overhaul for a tractor-trailer rig. The overhaul is expected to
increase the service life of the rig by three years.
2. Repaired the air-conditioning system for $3,000.
3. Rearranged and reconfigured the maintenance, loading, and unloading facilities at a cost of
$75,000. The rearrangement is expected to result in substantial cost savings and increased
efficiency over the next several years.
Required:
Prepare journal entries to record the above costs.
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209) A company made the following expenditures related to its restaurant:
1. Replaced the heating and air conditioning equipment a cost of $15,000.
2. Remodeled the restaurant building. The total cost of the project was $150,000.
3. Performed annual building maintenance at a cost of $47,000.
4. Paid annual insurance premium on the property for the coming year, $7,700.
5. Purchased a new delivery truck, $22,500.
6. Landscaped the property and added outdoor lights, $9,000.
Required:
Assume the company credits cash for each of these expenditures. Indicate the account to be
debited for each of these expenditures.
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210) A company had the following expenditures related to developing its trademark.
General advertising costs
$300,000
Advertising specifically focused on trademark development
120,000
Legal fees to register trademark
52,000
Registration fees for the trademark
38,000
Legal fees for successful defense of the new trademark
33,000
Total
$543,000
During your year-end review of the accounts related to intangibles, you discover that the
company has capitalized all the above as costs of the trademark. Management contends that all of
the costs increase the value of the trademark; therefore, all the costs should be capitalized.
Required:
1. Which of the above costs should the company capitalize to the Trademark account in the
balance sheet?
2. Which of the above costs should the company report as expense in the income statement?
1. Trademark account in the balance sheet:
Legal fees to register trademark
$52,000
Registration fees for the trademark
38,000
Legal fees for successful defense of the new trademark
33,000
Total costs capitalized
$123,000
2. Expense in the income statement:
General advertising costs
$300,000
Advertising specifically focused on trademark development
120,000
Total costs expensed
$420,000
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211) On March 30, 2018, Calvin Exploration purchased a drilling machine for $840,000. The
estimated useful life of the machine is 10 years and no residual value is anticipated. An
important component of the machine is the drill housing component that will need to be replaced
in five years. The $200,000 cost of the drill housing component is included in the $840,000 cost
of the machine. Calvin uses the straight-line depreciation method for all machinery. The
company’s fiscal year ends on December 31.
Required:
1. Calculate depreciation on the drilling machine for 2018 and 2019 applying the typical U.S.
GAAP treatment.
2. Repeat requirement 1 applying IFRS.
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212) Synthetic Fuels Corporation prepares its financial statements according to IFRS. On June
30, 2018, the company purchased equipment for $350,000. The equipment is expected to have a
seven-year useful life with no residual value. Synthetic uses the straight-line depreciation method
for all depreciable assets. On December 31, 2018, the end of the company’s fiscal year, Synthetic
chooses to revalue the machinery to its fair value of $299,000.
Required:
1. Calculate depreciation for 2018.
2. Prepare the journal entry at the end of 2018 to record the revaluation of the equipment.
3. Calculate depreciation for 2019.
4. Repeat requirement 2 assuming that the fair value of the equipment at the end of 2018 is
$338,000.
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213) Smithson Ltd. prepares its financial statements according to IFRS. On March 30, 2018, the
company purchased a franchise for $3,000,000. The franchise has a 10-year contractual life with
no residual value. Smithson uses the straight-line amortization method for all intangible assets.
On December 31, 2018, the end of the company’s fiscal year, Smithson chooses to revalue the
franchise. There is an active market for this particular franchise and its fair value on December
31 is $2,860,000.
Required:
1. Calculate amortization for 2018.
2. Prepare the journal entry to record the revaluation of the patent.
3. Calculate amortization for 2019.
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214) Sanders Corporation operates a factory in Arizona. Due to a change in business climate, an
impairment test is deemed appropriate. Management has acquired the following information for
the assets at the plant:
Cost $243,000,000
Accumulated depreciation 122,000,000
Estimate of the total cash flows to be generated by selling the products manufactured at the
Arizona factory, not discounted to present value 110,000,000
Present value of estimated future cash flows 94,000,000
Estimated fair value of the Arizona factory determined by appraisal 90,000,000
Required:
1. Determine the amount of impairment loss, if any.
2. If a loss is indicated, prepare the entry to record the loss
3. Repeat requirement 1 assuming that Sanders prepares its financial statements according to
International Financial Reporting Standards (IFRS). Also assume that the estimated fair value of
the factory approximates fair value less costs to sell.
215) Kentfield Corporation has $260 million of goodwill on its book from the 2015 acquisition
of Seaford Shipping. At the end of its 2018 fiscal year, management has provided the following
information for a required goodwill impairment test ($ in millions):
Fair value of Seaford (approximates fair value less costs to sell) $ 810
Fair value of Seaford’s net assets (excluding goodwill) 650
Book value of Seaford’s net assets (including goodwill) 850
Present value of estimated future cash flows 825
Required:
Assuming that Seaford is considered a reporting unit for U.S. GAAP and a cash-generating unit
for IFRS, determine the amount of goodwill impairment loss that Kentfield should recognize
according to U.S. GAAP and International Financial Reporting Standards (IFRS).
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216) On June 30, 2016, Mobley Corporation acquired a patent for $4 million. The patent was
estimated to have an eight-year life and no residual value. Mobley uses the straight-line method
of amortization for intangible assets. At the beginning of January 2018, Mobley successfully
defended its patent against infringement. Litigation costs totaled $650,000.
Required:
1. Calculate patent amortization for 2016 and 2017.
2. Prepare the journal entry to record the 2018 litigation costs.
3. Calculate amortization for 2018.
4. Repeat requirements 2 and 3 assuming that Mobley prepares its financial statements
according to International Financial Reporting Standards (IFRS).
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217) Notsofast Inc. acquired land for $500,000 on July 1, 2017. It erroneously recorded the full
amount as an expense. Explain what Notsofast must do when it discovers the error in 2018.
218) Briefly explain the following statement. Depreciation is a process of cost allocation, not
valuation.
219) Briefly discuss the factors that determine the service life of a depreciable asset.
220) Briefly explain the differences between the terms depreciation, depletion, and amortization.
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221) Briefly explain the disclosures that are required relative to depreciable assets.
222) Briefly differentiate between activity-based and time-based allocation methods.
223) Briefly discuss why straight-line is the most common depreciation method used in practice.
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224) Which depreciation method is most common for financial reporting? Which depreciation
method is most common for tax reporting? Why do companies choose these methods?.
225) Why is land not depreciated? What are land improvements? Why do we record land and
land improvements separately?
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226) Kelly Company and its subsidiaries are engaged in the manufacture and marketing of ready-
to-eat cereal and convenience foods. In its annual report to shareholders, Kelly disclosed the
following:
DISPOSITIONS
Last year, the Company sold certain assets and liabilities of the Leader’s Bagels business to Aura
Foods Inc. for $275 million in cash. As a result of this transaction, the Company recorded a
pretax charge of $178.9 million ($119.3 million after tax or $.29 per share). This charge included
approximately $57 million for disposal of other assets associated with the Leader’s business,
which were not purchased by Aura. Disposal of these other assets was completed during the
current year. The original reserve of $57 million exceeded actual losses from asset sales and
related disposal costs by approximately $9 million. This amount was recorded as a credit to other
income (expense), net during the current year.
Required:
Explain how the Kelly transactions described could be interpreted as an example of earnings
management.
227) Briefly explain how to account for a change in depreciation method.
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228) Qualcomm Inc. engages in the development, design, manufacture, and marketing of digital
wireless telecommunications products and services. In a recent income statement the company
reported a $114 million goodwill impairment loss. The loss related to the goodwill of its
Firethorn reporting unit.
Required:
1. Why did Qualcomm conduct an impairment test of the goodwill of this reporting unit?
2. Describe the steps Qualcomm performed to conduct its impairment test.
3. Where would the impairment loss be shown in the company’s income statement?