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Intermediate Accounting Study Set 2
Quiz 11: Property, Plant, and Equipment and Intangible Assets: Utilization and Disposition
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Question 201
Essay
(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
\begin{array}{lr}\text { Fair value of Penlight } & \$ 115 \text { million } \\\text { Fair value of Penlight's net assets (excluding goodwill) } & 107 \text { million } \\\text { Book value of Penlight's net assets (including goodwill) } & 125 \text { million }\end{array}
Fair value of Penlight
Fair value of Penlight’s net assets (excluding goodwill)
Book value of Penlight’s net assets (including goodwill)
$115
million
107
million
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.
Question 202
Essay
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.
Question 203
Essay
Briefly explain the following statement. Depreciation is a process of cost allocation, not valuation.
Question 204
Essay
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.
Question 205
Essay
Which depreciation method is most common for financial reporting? Which depreciation method is most common for tax reporting? Why do companies choose these methods?.
Question 206
Essay
Briefly discuss why straight-line is the most common depreciation method used in practice.
Question 207
Essay
Why is land not depreciated? What are land improvements? Why do we record land and land improvements separately?
Question 208
Essay
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.
Question 209
Essay
Briefly explain the differences between the terms depreciation, depletion, and amortization.
Question 210
Essay
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.
Question 211
Essay
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:
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.
Question 212
Essay
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:
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.
Question 213
Essay
Briefly explain the disclosures that are required relative to depreciable assets.
Question 214
Essay
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.