Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
123. Gonzaga Company has used the double-declining-balance method for depreciation since it
started business in 2012. At the beginning of 2016, the company decided to change to the
straight-line method. Depreciation as reported and what it would have been reported if the
company had always used straight-line is listed below:
Straight-
Year
Line
DDB
2012
$32,000
$64,000
2013
35,000
50,000
2014
39,000
58,000
2015
39,000
48,000
Required:
What journal entry, if any, should Gonzaga make to record the effect of the accounting change
(ignore income taxes)? Explain.
124. In December of 2016, XL Computer’s internal auditors discovered that office equipment
costing $800,000 was charged to expense in 2014. The asset had an expected life of 10 years
with no residual value. XL would have recorded a half year of depreciation in 2014.
Required:
Prepare the necessary correcting entry that would be made in 2016 (ignore income taxes), and
the entry to record depreciation for 2016.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
Use the following to answer questions 125 and 126:
El Dorado Foods Inc. owns a chain of specialty stores in the Pacific Northwest. Recently, four of the
stores have experienced declining profits due to market saturation in the area. As a result, management
gathered data about possible impairment of the assets of the stores. The information gathered was as
follows:
Book value: $17.5 million
Fair value: $14.9 million
Undiscounted sum of future cash flows: $16.5 million
125. Required:
Determine the amount, if any, of the impairment loss that El Dorado must recognize on these
assets.
126. Required:
Assume that the undiscounted sum of future cash flows is $18.2 million, instead of $16.5
million. Determine the amount, if any, of the impairment loss that El Dorado must recognize
on these assets.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
Use the following to answer questions 127 and 128:
In 2015, Dooling Corporation acquired Oxford Inc. for $250 million, of which $50 million was
attributed to goodwill. At the end of 2016, Dooling’s accountants derive the following information for
a required goodwill impairment test:
Book value of Oxford (including goodwill):
Fair value of Oxford’s tangible and intangible assets
(excluding goodwill):
Fair value of Oxford (the reporting unit):
127. Required: Determine the amount, if any, of the goodwill impairment loss that Dooling must
recognize on these assets.
128. 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.
129. 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
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
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.
Answer:
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
130. In 2014, 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, 2016. 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 2016, if any.
3. If an impairment loss is required, prepare the journal entry to record the loss.
Answer:
131. Atlas Trucking incurred the following costs during 2016:
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.
Answer:
132. On March 30, 2016, 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.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
Required:
1. Calculate depreciation on the drilling machine for 2016 and 2017 applying the typical
U.S. GAAP treatment.
2. Repeat requirement 1 applying IFRS.
Answer:
133. Synthetic Fuels Corporation prepares its financial statements according to IFRS. On
June 30, 2016, 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, 2016,
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 2016.
2. Prepare the journal entry at the end of 2016 to record the revaluation of the
equipment.
3. Calculate depreciation for 2017.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
4. Repeat requirement 2 assuming that the fair value of the equipment at the end of
2016 is $338,000.
134. Smithson Ltd. prepares its financial statements according to IFRS. On March 30,
2016, 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, 2016, 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.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
Required:
1. Calculate amortization for 2016.
2. Prepare the journal entry to record the revaluation of the patent.
3. Calculate amortization for 2017.
Answer:
135. 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.
Answer:
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
136. Kentfield Corporation has $260 million of goodwill on its book from the 2013 acquisition of
Seaford Shipping. At the end of its 2016 fiscal year, management has provided the following
information for a required goodwill impairment test ($ 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).
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
137. On June 30, 2014, 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 2016, Mobley
successfully defended its patent against infringement. Litigation costs totaled $650,000.
Required:
1. Calculate patent amortization for 2014 and 2015.
2. Prepare the journal entry to record the 2016 litigation costs.
3. Calculate amortization for 2016.
4. Repeat requirements 2 and 3 assuming that Mobley prepares its financial statements
according to International Financial Reporting Standards (IFRS).
Answer:
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
Essay
Instructions:
The following answers point out the key phrases that should appear in students’ answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
138. Notsofast Inc. acquired land for $500,000 on July 1, 2015. It erroneously recorded the full
amount as an expense. Explain what Notsofast must do when it discovers the error in 2016.
139. Briefly explain the following statement. Depreciation is a process of cost allocation, not
valuation.
140. Briefly discuss the factors that determine the service life of a depreciable asset.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
141. Briefly explain the differences between the terms depreciation, depletion, and amortization.
142. Briefly explain the disclosures that are required relative to depreciable assets.
143. Briefly differentiate between activity-based and time-based allocation methods.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
144. Briefly discuss why straight-line is the most common depreciation method used in practice.
145. Briefly explain how to account for a change in depreciation method.
Chapter 11 Property, Plant, and Equipment and Intangible Assets:
Utilization and Impairment
146. 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?
Answer: