Exam 11: Investments in Noncurrent Operating Assets-Utilization and Retirement

Which of the following depreciation methods most closely approximates the method used to deplete the cost of natural resources?

In October 2011, Daryl Company exchanged a used packaging machine having a book value of $240,000 for a new machine and paid a cash difference of $30,000. The market value of the used packaging machine was determined to be $280,000. The exchange had commercial substance. In its income statement for the year ended December 31, 2011, how much gain should Daryl recognize on this exchange?

Seaver Inc. exchanged a machine costing $400,000 with accumulated depreciation of $280,000 for a machine from the Goodin Company. Goodin paid $20,800 cash in addition to its machine (which cost $200,000 with accumulated depreciation of $68,000) for the Seaver machine. The Goodin machine has a fair value of $160,000. Provide the necessary entries to record the transactions on both companies' books assuming the machine lacks commercial substance.

Tillman Company owns a machine that was bought on January 2, 2008, for $376,000. The machine was estimated to have a useful life of five years and a salvage value of $24,000. Tillman uses the sum-of-the-years'-digits method of depreciation. At the beginning of 2011, Tillman determined that the useful life of the machine should have been four years and the salvage value $35,200. For the year 2011, Tillman should record depreciation expense on this machine of

In January 2011, Butz Company exchanged an old machine, with a book value of $156,000 and a fair value of $140,000, and paid $40,000 cash for a similar used machine having a list price of $200,000. The exchange had commercial substance. At what amount should the machine acquired in the exchange be recorded on Butz's books?

Anaconda Mining Company has a copper mine in Nevada operating at a reduced level of production for the past two years. The market for copper has been adversely affected by weak prices, low demand, and foreign competition. Management believes that the market likely will improve next year and does not plan to abandon this facility. Nevertheless, the controller of the company plans to test the plant and equipment of the operation for impairment due to the decrease in its use. The plant and equipment used in this operation were acquired five years ago for $1,600,000 and have been depreciated using straight-line depreciation over a 20-year life with no residual value. The controller estimates that the assets have a remaining useful life of 15 years and that the following two cash flow scenarios are possible, with the indicated probabilities: The fair value of the plant and equipment is estimated to be $890,000. Prepare the entry (if any) required to recognize the impairment loss.

XYZ Corporation bought a machine on January 1, 2011. In purchasing the machine, the company paid $50,000 cash and signed an interest-bearing note for $100,000. The estimated useful life of the machine is five years, after which time the salvage value is expected to be $15,000. Given this information, how much depreciation expense would be recorded for the year ending December 31, 2012, if the company uses the sum-of-the-years'-digits depreciation method?

On June 30, 2011, a fire in Oak Company's plant caused the total loss of a production machine. The machine was being depreciated at $20,000 annually and had a carrying amount of $160,000 at December 31, 2010. On the date of the fire, the fair value of the machine was $220,000, and Pine received insurance proceeds of $200,000 in October 2011. In its income statement for the year ended December 31, 2011, what amount should Oak recognize as a gain or loss on disposition?

Which of the following reasons provides the best theoretical support for accelerated depreciation?

Jordan Company exchanged a used autograph-signing machine with Rodman Company for a similar machine with less use. Jordan's old machine originally cost $50,000 and had accumulated depreciation of $40,000, as well as a market value of $40,000, at the time of the exchange. Rodman's old machine originally cost $60,000 and at the time of the exchange had a book value of $30,000 and a market value of $32,000. Rodman gave Jordan $8,000 cash as part of the exchange. The exchange lacked commercial substance. Jordan should record the cost of the new machine at

Malone Company traded in an old machine with a book value of $15,000 on a new machine. The exchange did not have commercial substance. The new machine, which had a cash price of $75,000, was purchased for $64,000 cash plus the old machine. Malone should record the cost of the new machine as

In 2010, Silverspur Mining Inc. purchased land for $5,600,000 that had a natural resource supply estimated at 4,000,000 tons. When the natural resources are removed, the land will have an estimated value of $640,000. The present value of the expected cash outflows for the required restoration cost for the property is estimated to be $800,000. Development and road construction costs on the land were $560,000, and a building was constructed at a cost of $88,000 with an estimated $8,000 salvage value when all the natural resources have been extracted. During 2011, additional development costs of $272,000 were incurred, but additional resources were not discovered. Production for 2010 and 2011 was 700,000 tons and 900,000 tons, respectively. Compute the depletion charge for 2010 and 2011. (Include depreciation on the building, if any, as a depletion charge.) Round depletion charge to the nearest cent.

Which of the following represents the maximum amortization period mandated by current generally accepted accounting principles for amortizable intangible asset?

On January 1, 2010, Herschel Locks Corporation purchased drilling equipment for $11,500. The equipment has an estimated useful life of four years and a salvage value of $200. Given this information, if Herschel uses the sum-of-the-years'-digits method of depreciation and then trades the equipment for new equipment with a fair market value of $16,000 on December 31, 2011, and pays $8,000 cash in the exchange, assuming the exchange has commercial substance, the new equipment should be recorded at

When assets are exchanged at a loss in an exchange lacking commercial substance, the basis of the new asset is usually

In January 2011, Bevis Company exchanged an old machine, with a book value of $156,000 and a fair value of $160,000, and paid $40,000 cash for a similar used machine having a fair value of $200,000. The exchange lacked commercial substance. At what amount should the machine acquired in the exchange be recorded on Bevis's books?

When an exchange of similar assets involves a gain,

On January 1, 2011, Carson Company purchased equipment at a cost of $570,000. The equipment was estimated to have a useful life of five years and a salvage value of $60,000. Carson uses the sum-of-the-years'-digits method of depreciation. What should the accumulated depreciation be at December 31, 2013?

Johnson Company is located in Hong Kong and uses international accounting standards. Johnson Company purchased equipment 8 years ago for $1,000,000. The equipment has been depreciated using the straight-line method with a 20-year useful life and 10% residual value. Johnson's operations have experienced significant losses for the past 2 years and, as a result, the company has decided that the equipment should be evaluated for possible impairment. The management of Johnson Company estimates that the equipment has a remaining useful life of 7 years. The discounted value of the future net cash inflows from the use of the equipment is $220,000. The fair value of the equipment is $240,000. No goodwill was associated with the purchase of the equipment. Johnson Company has chosen to recognize increases in the value of long-term operating assets in accordance with the allowable alternative under IAS 36.

Five years ago, Goodman, Inc., purchased a patent for $110,000. Lower demand for the product produced under this patent necessitates that an impairment test be made. On the date of purchase, the patent had an estimated useful life of eleven years. It currently has a remaining useful life of four years. The current fair value of the patent is $43,000. Company management estimates that the patent will generate future cash flows of $12,000 per year for the next four years. The amount of the impairment loss to be recognized is