Accounting Chapter 10 Homework Illustration 1014 Retirements And Abandonments Are

subject Type Homework Help
subject Pages 10
subject Words 2223
subject Authors David Spiceland, James Sepe, Mark Nelson, Wayne Thomas

Unlock document.

This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
page-pf1
GOODWILL
(continued)
The Smithson Corporation acquired all of the outstanding common stock
of the Rider Corporation in exchange for $18 million in cash. Smithson
assumed all of Rider’s long-term debt which had a fair value of $12
million at date of acquisition. The fair values of all identifiable assets of
Rider are as follows ($ in millions):
Receivables $ 5
The cost of the goodwill resulting from the acquisition is $5 million:
Fair value of consideration exchanged $18
Less: Fair value of assets acquired
The following journal entry captures the effect of the acquisition on
Smithson’s assets and liabilities:
Receivables (fair value) ........................................ 5
Inventory (fair value) ............................................ 7
Illustration 10-8
T10-9 (continued)
page-pf2
10-22 Intermediate Accounting, 8/e
LUMP-SUM PURCHASES
The purchase price is allocated in proportion to the relative
fair values of the assets acquired.
The Smyrna Hand & Edge Tools Company purchased an existing
factory for a single sum of $2,000,000. The price included title to the
land, the factory building, and the manufacturing equipment in the
building, a patent on a process the equipment uses, and inventories of
raw materials. An independent appraisal estimated the fair values of
the assets (if purchased separately) at $330,000 for the land, $550,000
for the building, $660,000 for the equipment, $440,000 for the patent
and $220,000 for the inventories. The lump-sum purchase price of
$2,000,000 is allocated to the separate assets as follows:
Fair values
Land $ 330,000 15%
Building 550,000 25
Illustration 10-9
page-pf3
DEFERRED PAYMENTS
On January 2, 2016, the Midwestern Steam Gas Corporation
purchased an industrial furnace. In payment, Midwestern signed
a noninterest-bearing note requiring $50,000 to be paid on
December 31, 2017. If Midwestern had borrowed cash to buy the
furnace, the bank would have required an interest rate of 10%.
The furnace should be recorded at its real cost, $41,323, as follows:
Furnace (determined above) ......................... 41,323
Illustration 10-10
T10-11
page-pf4
10-24 Intermediate Accounting, 8/e
ISSUANCE OF EQUITY SECURITIES
Assets acquired by issuing equity securities are valued at the
fair value of the securities or the fair value of the assets;
whichever is more clearly evident.
On March 31, 2016 the Elcorn Company issued 10,000 shares of
its nopar common stock in exchange for land. On the date of the
transaction, the fair value of the common stock, evidenced by its
market price, was $20 per share. The journal entry to record this
transaction is:
Illustration 10-12
If the fair value of the common stock had not been reliably
determinable, the value of the land as determined through an
T10-12
page-pf5
DONATED ASSETS
Donated assets are valued at their fair values.
Revenue is recorded for the amount contributed by an
unrelated party.
The Elcorn Company decided to relocate its office headquarters
to the city of Westmont. The city agreed to pay 20% of the $20
million cost of building the headquarters in order to entice Elcorn
to relocate. The building was completed on May 3, 2016. Elcorn
paid its portion of the cost of the building in cash. Elcorn records
the transaction as follows:
Illustration 10-13
T10-13
page-pf6
10-26 Intermediate Accounting, 8/e
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Government Grants. Both U.S. GAAP and IFRS require that companies value
donated assets at their fair values. For government grants, though, the way that value
is recorded is different under the two sets of standards. Unlike U.S. GAAP, donated
assets are not recorded as revenue under IFRS. IAS No. 20 requires that government
grants be recognized in income over the periods necessary to match them on a
systematic basis with the related costs that they are intended to compensate. So, for
example, IAS No. 20 allows two alternatives for grants related to assets:
1. Deduct the amount of the grant in determining the initial cost of the asset.
2. Record the grant as a liability, deferred income, in the balance sheet and
recognize it in the income statement systematically over the asset’s
useful life.
In Illustration 10-13, if a company chose the first option, the building would be
recorded at $16 million. If instead the company chose the second option, the building
would be recorded at $20 million, but rather than recognizing $4 million in revenue as
with U.S. GAAP, a $4 million credit to deferred income would be recorded and
recognized as income over the life of the building
Siemens, a global electronics and electrical engineering company based in Germany,
prepares its financial statements according to IFRS, and sometimes receives
government grants for the purchase or production of fixed assets. The following
disclosure note included with recent financial statements indicates that Siemens uses
the first option, deducting the amount of the grant from the initial cost of the asset.
Government Grants (in part)
Expenditures Grants awarded for the purchase or the production of fixed assets
(grants related to assets) are generally offset against the acquisition or productions
costs of the respective assets and reduce future depreciations accordingly.
T10-14
page-pf7
DECISION MAKERS’ PERSPECTIVE
The property, plant, and equipment and intangible asset
acquisition decision, often referred to as capital budgeting, is
among the most significant decisions that management must
make.
Investors and creditors monitor a company's investment in
property, plant, and equipment by calculating the fixed-asset
turnover ratio. The ratio measures a company's effectiveness
in managing property, plant, and equipment.
Fixed-asset turnover ratio = Net sales
Average fixed assets
T10-15
page-pf8
10-28 Intermediate Accounting, 8/e
DISPOSITION OF ASSETS
When assets are sold, a gain or loss is recognized for the
difference between the consideration received and the asset's
book value.
Illustration 10-14
Retirements and abandonments are treated similarly. The only
difference is that there will be no monetary consideration
received. A loss is recorded for the remaining book value of
the asset.
page-pf9
NONMONETARY EXCHANGES
An asset acquired in a nonmonetary exchange generally is
recorded at the fair value of the assets exchanged.
If we can't determine the fair value of either asset in the
exchange, the asset received is valued at the book value of the
asset given.
In exchanges that lack commercial substance, the asset
received is valued at the book value of the asset given.
T10-17
page-pfa
10-30 Intermediate Accounting, 8/e
NONMONETARY EXCHANGES
(continued)
The Elcorn Company traded its laser equipment for the newer air-cooled ion lasers
manufactured by American Laser Corporation. The old equipment had a book value
of $100,000 (cost of $500,000 less accumulated depreciation of $400,000) and a fair
value of $150,000. To equalize the fair values of the assets exchanged, in addition
to the old equipment, Elcorn paid American Laser $430,000 in cash. This means
that the fair value of the new laser equipment is $580,000. We know this because
American Laser was willing to trade the new lasers in exchange for old lasers worth
$150,000 plus $430,000 in cash. The following journal entry records the
transaction:
Illustration 10-15A
T10-17 (continued)
page-pfb
NONMONETARY EXCHANGES
(continued)
Exchange Lacks Commercial Substance
The Elcorn Company traded a tract of land to Sanchez Development for a similar
tract of land. The old land had a book value of $2,500,000 and a fair value of
$4,500,000. To equalize the fair values of the assets exchanged, in addition to the
land, Elcorn paid Sanchez $500,000 in cash. This means that the fair value of the
land acquired is $5,000,000. The following journal entry records the transaction,
assuming that the exchange lacks commercial substance:
Illustration 10-16
T10-17 (continued)
page-pfc
10-32 Intermediate Accounting, 8/e
INTEREST CAPITALIZATION
Interest is capitalized during the construction period for (a)
assets built for a company’s own use as well as for (b) assets
constructed as discrete projects for sale or lease (a ship or a
real estate development, for example).
Excludes inventories routinely manufactured in large
quantities on a repetitive basis and assets already in use or
ready for intended use.
page-pfd
INTEREST CAPITALIZATION ILLUSTRATION
On January 1, 2016, the Mills Conveying Equipment Company
began construction of a building to be used as its office
headquarters. The building was completed on June 30, 2017.
Expenditures on the project, mainly payments to subcontractors,
were as follows:
Illustration 10-17
T10-19
page-pfe
10-34 Intermediate Accounting, 8/e
INTEREST CAPITALIZATION ILLUSTRATION
(continued)
2016:
Step 1: Determine the average accumulated expenditures.
Actual Time-weighted
Expenditures Expenditures
Step 2: Calculate the amount of interest to be capitalized. Use the construction loan
rate because average accumulated expenditures is less than the specific
construction loan rate. This is known as the specific interest method.
Interest capitalized is limited to interest incurred.
Step 3: Compare calculated interest with actual interest incurred.
Actual Calculated
Loans Rate Interest Interest
$1,000,000 x 8% = $ 80,000
T10-19 (continued)
page-pff
INTEREST CAPITALIZATION ILLUSTRATION
(continued)
2017:
Step 1: Determine the average accumulated expenditures.
Actual Time-weighted
Expenditures Expenditures
Step 2: Calculate the amount of interest to be capitalized. The weighted-average
interest rate on all other debt is applied to the excess of average accumulated
expenditures over specific construction borrowings.
Loans Rate Interest
$2,000,000 x 6% = $120,000
Average
Accumulated Annual Fraction
Expenditures Rate of Year Interest
$2,176,000
T10-19 (continued)
page-pf10
10-36 Intermediate Accounting, 8/e
INTEREST CAPITALIZATION ILLUSTRATION
(continued)
Step 3: Compare calculated interest with actual interest incurred.
Actual Calculated
Loans Rate Interest Interest
$1,000,000 x 8% x 6/12 = $ 40,000
For the first six months of 2017, $98,800 interest would be
capitalized, bringing the total capitalized cost of the building

Trusted by Thousands of
Students

Here are what students say about us.

Copyright ©2022 All rights reserved. | CoursePaper is not sponsored or endorsed by any college or university.