The document provides information about depreciation calculations for equipment purchased by Montoni Company using straight-line, sum-of-the-years'-digits, and double-declining balance methods for years 1 through 3. It also provides information about construction of an office building by Harrisburg Furniture Company, including avoidable interest calculations and depreciation expense. Finally, it discusses amortization and impairment of intangible assets for Alatorre Company.
The document provides information about depreciation calculations for equipment purchased by Montoni Company using straight-line, sum-of-the-years'-digits, and double-declining balance methods for years 1 through 3. It also provides information about construction of an office building by Harrisburg Furniture Company, including avoidable interest calculations and depreciation expense. Finally, it discusses amortization and impairment of intangible assets for Alatorre Company.
The document provides information about depreciation calculations for equipment purchased by Montoni Company using straight-line, sum-of-the-years'-digits, and double-declining balance methods for years 1 through 3. It also provides information about construction of an office building by Harrisburg Furniture Company, including avoidable interest calculations and depreciation expense. Finally, it discusses amortization and impairment of intangible assets for Alatorre Company.
The document provides information about depreciation calculations for equipment purchased by Montoni Company using straight-line, sum-of-the-years'-digits, and double-declining balance methods for years 1 through 3. It also provides information about construction of an office building by Harrisburg Furniture Company, including avoidable interest calculations and depreciation expense. Finally, it discusses amortization and impairment of intangible assets for Alatorre Company.
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ASSIGNMENT
Exercise 10-12
Montoni Company purchases equipment on January 1, year 1, at a cost of $469,000. The asset is expected to have a service life of 12 years and a salvage value of $40,000.
INSTRUCTIONS a. Compute the amount of depreciation for each of years 1 through 3 using the straight-line depreciation method. $469,000 - $40,000 = $35,750 12
b. Compute the amount of depreciation for each of years 1 through 3 using the sum-of-the- years'-digits method. 12 * 13 = 78 2
Harrisburg Furniture Company started construction of a combination office and warehouse
building for its own use as an estimated cost of $5,000,000 on January 1, 2008. Harrisburg expected to complete the building by December 31, 2008. Harrisburg has the following debt obligations outstanding during the construction period.
Construction Loan - 12% interest, payable semiannually, issued $2,000,000
December 31, 2007 Short-term loan - 10% interest, payable monthly, and principal payable at $1,400,000 maturity on May 30, 2009 Long-term loan - 11% interest, payable on January 1 of each year. Principal $1,000,000 payable on January 1, 2012 INSTRUCTIONS a. Assume that Harrisburg completed the office and warehouse building on December 31, 2008, as planned, at a total cost of $5,200,000. The weighted average of accumulated expenditures was $3,600,000. Compute the avoidable interest on this project.
b. Compute the depreciation expense for the year ended December 31, 2009. Harrisburg elected to depreciate the building on a straight-line basis and determined that the asset has a useful lift of 30 years and a salvage value of $300,000.
Actual Interest Initial Construction Loan $2,000,000 * 12% = $240,000 Short-term Loan $1,400,000 * 10% = $140,000 Long-term Loan $1,000,000 * 11% = $110,000 Total $490,000 In this case, the avoidable interest is lower than the actual interest, so we will use the avoidable interest.
Cost $5,200,000 Interest Capitalized $406,720 Total Cost $5,606,720
$5,606,720 - $300,000 Depreciation Expense = = $176,891 30 years
Exercise 11-4
Presented below is selected information for Alatorre Company
1. Alatorre purchased a patent from Vania Co. for $1,000,000 on January 1, 2006. The patent is being amortized over its remaining legal life for 10 years, expiring on January 1, 2016. During 2008, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2008?
Amortization for 2006 & 2007 ($1,000,000/10) * 2 $200,000
2008 amortization ($1,000,000 - $200,000) / (6 - 2) $200,000 Accumulated amortization for December 31, 2008 $400,000
On the December 31, 2008 balance sheet, Alatorre will report the patent of $600,000 ($400,000 net of accumulated amortization).
2. Alatorre bought a franchise from Alexander Co. on January 1, 2007, for $400,000. The carrying amount of the franchise on Alexander's books on January 1, 2007, was $500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2016, it is unlikely that the franchise will be retained beyond 2016. What amount should be amortized for the year ended December 31, 2008?
In this case Alatorre will amortize the franchise over its full estimated useful life because it is uncertain if Alatorre will be able to keep the franchise at the end of 2015. So, because of this uncertainty, the franchise should be amortized over 10 years. The amount of this amortization as of December 31, 2008 will be $400,000 / 10 or $40,000.
3. On January 1, 2008, Alatorre incurred organization costs of $275,000. What amount of
organization expense should be reported in 2008?
The amount of organization expense which should be reported in 2008 is $275,000 because the expense should be expensed as they are incurred.
4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2008, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2008?
Based on the information that the license can renewed, at nominal costs, it is considered to have an indefinite life. Because of this there will be no amortization recorded at this time. However, Alatorre will need to test the license for impairment in future periods.
INSTRUCTIONS Answer the questions asked about each of the factual situations. Exercise 11-18
Presented below is net asset information related to the Carlos Division of Santana, Inc. Carlos Division Net Assets As of December 31, 2008 (in millions) Cash $50 Receivables $200 Property, plant, and equipment (net) $2,600 Goodwill $200 Less: Notes Payable ($2,700) Net Assets $360
The purpose of the Carlos division is to develop a nuclear-powered aircraft. If successful,
traveling delays associated with refueling could be substantially reduced. Many other benefits would also occur. To date, management has not had much success and is deciding whether a write-down at this time is appropriate. Management estimated its future net cash flows from the project to be $400 million. Management has also received an offer to purchase the division for $335 million. All identifiable assets' and liabilities' book and fair value amounts are the same.
INSTRUCTIONS
a. Prepare the journal entry (if any) to record the impairment at December 31, 2008.
Because the fair value of the unit is $15 million less than its carrying value of $350 million, we know that an impairment has occurred. Now we have to determine what the amount of the impairment will be. In order to figure out how much of the impairment to record we need to find the value of goodwill and then compare the implied fair value with the carrying value of the goodwill.
Fair value of division $335,000,000
Carrying amount of division, net of goodwill $150,000,000 Implied value of goodwill $185,000,000 Carrying value of goodwill ($200,000,000) Loss on impairment $15,000,000
Loss on impairment $15,000,000
Goodwill $15,000,000
b. At December 31, 2009, it is estimated that the division's fair value increased to $345 million. Prepare the journal entry (if any) to record this increase in fair value. After a loss is recognized in goodwill impairment the adjusted carrying amount of goodwill is the new accounting basis. Because of this, Under SFAS No. 142 reversal of any previously recognized impairment losses is not permitted so there is no entry necessary for this transaction.
Exercise 14-6
The following information is available for Barkley Company at December 31, 2008, regarding its investments. Securities Cost Fair Value 3,000 shares of Myers Corporation Common Stock $40,000 $48,000 1,000 shares of Cole Incorporated Preferred Stock $25,000 $22,000 $65,000 $70,00
INSTRUCTIONS
a. Prepare the adjusting entry (if any) for 2008, assuming the securities are classified as trading
Securities Fair Value Adjustment - Trading $5,000
Unrealized Holding Gain and Loss - Income $5,000
b. Prepare the adjusting entry (if any) for 2008, assuming the securities are classified as available-for-sale
Securities Fair Value Adjustment - Available-for-sale $5,000
Unrealized Holding Gain and Loss - Equity $5,000
c. Discuss how the amounts reported in the financial statements are affected by the entries in (a) and (b)
Barkley Company's Unrealized Holding Gain and Loss-Equity account will be reported as Other Comprehensive Income and also as a Component of Stockholders' equity until realized. The Unrealized Holding Gain and Loss-Income account of Barkley Company will be reported as Other Revenues and Gains on the Income Statement. Finally the Securities Fair Value Adjustment account should be added to the Cost of the Available-for-sale of Trading Securities account in order to arrive at the fair value.
Exercise 14-13 Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out 40% of net income in dividends each year.
INSTRUCTIONS
Use the information in the following T-account for the investment in Sub to answer the following questions. Investment in Sub Co. $1,000,000 $110,000 $44,000
a. How much was Parent Co's share of Sub Co's net income for the year? The Parent Co's shares of Sub Co's net income for the year are $110,000 (increase to the investment account).
b. How much was Parent Co's share of Sub Co's dividends for the year? Since the payout ratio is 40%, it would make sense that 40% of Sub Co's net income would be Parent Co's which would make Parent Co's shares of the dividends to be 44,000.
c. What was Sub Co's total net income for the year? Since Sub Co's shares are 25% their total net income would be multiplies by 25% for a total of $110,000 for the year. ($440,000 / 25% = $110,000)
d. What was Sub Co's total dividends for the year?
Sub Co's total dividends for the year are $176,000 or $44,000 / 25$.
