Requirement 2:
Axis Construction:
Net Income
÷
Average Total Assets
=
Return on
Assets
$4,395
÷
($44,324 + $52,263)/2
=
9.1%
Net Income
÷
Sales
=
Profit Margin
$4,395
÷
$77,349
=
5.7%
Sales
÷
Average Total Assets
=
Asset Turnover
$77,349
÷
($44,324 + $52,263)/2
=
1.60 times
Requirement 3:
Allied has a slightly better (higher) profit margin and a slightly better (higher) asset turnover
resulting in a higher return on assets.
Difficulty: 3 Hard
Topic: Analysis – Return on assets; Analysis – Profit Margin; Analysis – Asset Turnover
Learning Objective: 07-07 Describe the links among return on assets, profit margin, and asset
turnover.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement/Keyboard Navigation
225) ACME Drilling is evaluating an offshore oil-drilling platform for possible impairment. The
company estimates the following: book value, $18.5 million; fair value, $12 million; sum of
estimated future cash flows generated from the oil-drilling platform, $16 million. What amount of
impairment loss, if any, should ACME record?
102
226) Northwest Catering owns and operates several restaurant services in Oregon, Washington,
and Idaho. One restaurant chain has experienced sharply declining profits. The company’s
management has decided to test the operational assets for possible impairment. The relevant
information for these assets is presented below:
$4.5 million
5.0 million
3.5 million
Determine the amount of the impairment loss, if any.
103
227) China Express purchased land for $140,000. Prior to construction on the new building, the
land had to be cleared of trees and brush. Costs incurred during the first year are listed below:
Land clearing costs
$5,000
Architect fees (for new building)
30,000
Legal fees for title investigation of land
1,000
Property taxes on land (for the first year)
2,500
Building construction costs
440,000
Required:
Determine the amounts that should be recorded in the land and the new building accounts.
Purchase price of land
140,000
Land clearing costs
5,000
Architect fees (for new building)
$30,000
Legal fees (for title investigation of land)
Building construction costs
Totals
228) El Tapitio purchased equipment from Old World Deli. Old World Deli was closing its
business and sold its restaurant equipment for $80,000. In addition to the purchase price, El Tapitio
paid shipping costs of $2,000. Employees of El Tapitio installed the ovens; labor costs were
$10,000. An outside contractor performed some of the electrical work for $2,200. El Tapitio
incurred costs of $800 in testing the equipment.
Required:
1. Prepare a schedule showing the amount at which the equipment should be recorded in El
Tapitio’s equipment account.
2. Indicate where any amounts not included in the equipment account should be recorded.
105
229) Nordic Outfitters purchased all the outstanding common stock of European Retail for
$3,000,000 in cash. The book values and fair values of European Retail’s assets and liabilities
were:
Book Value
Fair Value
$250,000
$250,000
2,000,000
2,400,000
200,000
500,000
(650,000)
(650,000)
$1,800,000
$2,500,000
Required:
1. Calculate the amount paid for goodwill.
2. Record Nordic Outfitters’ acquisition of European Retail.
Answer:
Purchase price
$3,000,000
Less:
3,150,000
(650,000)
2,500,000
Goodwill
Receivables (at fair value)
250,000
Property, plant, and equipment (at fair value)
2,400,000
Intangible assets (at fair value)
500,000
650,000
3,000,000
106
230) Lincoln Driving Academy purchased a used car to use in its driver’s education program.
Lincoln incurred the following expenses related to the car:
1. Painted the car and fixed a dent on the side of the car at a cost of $2,700. The repairs are
considered extensive and increase future benefits.
2. Installed a driver’s side brake to be used by the instructor if necessary.
3. Paid the annual registration fees of $120.
4. Performed annual maintenance and repairs at $400.
5. Overhauled the engine at a cost of $2,600, increasing the service life of the car by an estimated
four years.
Required:
Indicate whether Lincoln should capitalize or expense each of these expenditures. How could
Lincoln use expenditures like these to increase reported earnings?
231) Diamond Autobody purchased new equipment for $90,000. Residual value at the end of an
estimated four-year service life is expected to be $10,000. During the four-year period, the
company expects to use the equipment a total of 5,000 hours.
Required:
Prepare a depreciation schedule for the four-year life of the equipment using the following
methods:
1. Straight-line.
2. Double-declining-balance.
3. Activity-based. Actual use per year was as follows:
Year
Hours Used
1
1,200
2
1,400
3
1,500
4
1,100
232) The Snack Stop had the following long-term asset balances as of January 1, 2021:
Cost
Accumulated
Depreciation
Book Value
Land
$90,000
—
$90,000
Building
600,000
($60,000)
540,000
Equipment
200,000
(72,000)
128,000
Patent
80,000
(20,000)
60,000
All of the assets were purchased at the beginning of 2020. The building is depreciated over a
20-year service life using the straight-line method and estimating no residual value. The
equipment is depreciated over a 10-year useful life using the double-declining-balance method
with an estimated residual value of $10,000. The patent is estimated to have an eight-year service
life with no residual value and is amortized using the straight-line method. Depreciation and
amortization have already been calculated for the first two years.
Required:
1. For the year ended December 31, 2022, record depreciation expense for buildings and
equipment. Land is not depreciated.
2. For the year ended December 31, 2022, record amortization expense for the patent.
3. Calculate the book value for each of the four long-term assets at December 31, 2022.
Depreciation Expense ($600,000/20)
30,000
30,000
Depreciation Expense ($128,000 × 2/10)
25,600
25,600
Amortization Expense ($80,000/8)
10,000
10,000