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

Wilbur Company acquired Smith Company on January 1, 2011. As part of the acquisition, $1,000,000 in goodwill was recognized and assigned to Wilbur's Transportation reporting unit. For 2011, earnings from the Transportation reporting unit were $450,000. Separately traded companies with operations similar to the Transportation reporting unit had market values approximately equal to five times earnings. As of December 31, 2011, book values and fair values of the Transportation reporting unit were: Prepare the impairment test of goodwill as well as any entry needed to record an impairment loss.

A company owns a piece of land that originally cost $10,000 and has a fair market value of $8,000. It is exchanged along with $5,000 cash for another piece of land having a fair value of $13,000. The exchange had commercial substance. The proper journal entry to record this transaction is

Use-factor depreciation methods view asset consumption as related primarily to asset use or output. These methods provide periodic depreciation charges based on the amount of use of the asset in a given period. The service life of assets under the use-factor methods may be expressed either as hours of service or units of production. Required: Identify the general limitations of the use-factor depreciation methods.

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. Net cash inflow from the equipment will be $80,000 per year. The fair value of the equipment is $240,000.

Riley Company owns a machine that cost $560,000, has a book value of $240,000, and an estimated fair value of $480,000. Fizzer Company has a machine that cost $720,000, has accumulated depreciation of $400,000, and an estimated fair value of $640,000. Riley pays Fizzer cash of $160,000. Assume the trade has commercial substance.

Which of the following depreciation methods is computed in the same way as depletion?

Information needed to compute a depletion charge per unit includes the

Joseph Company acquired a tract of land containing an extractable natural resource. Joseph is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 2,500,000 tons and that the extraction will be completed in five years. Relevant cost information follows: What should be the depletion charge per ton of extracted material?

On July 1, Phoenix Corporation, a calendar-year company, received a condemnation award of $150,000 as compensation for the forced sale of a plant located on company property that stood in the path of a new highway. On this date, the plant building had a depreciated cost of $75,000 and the land cost was $25,000. On October 1, Phoenix purchased a parcel of land for a new plant site at a cost of $62,500. Ignoring income taxes, Phoenix should report in its income statement for the year ended December 31 a gain of

On January 1, 2009, Kalos Co. purchased a new machine for $2,500,000. The new machine has an estimated useful life of five years and the salvage value was estimated to be $250,000. Kalos uses the sum-of-the-years'-digits method of depreciation. The amount of depreciation expense for 2011 is

Bunker Construction Company recently exchanged an old truck, which cost $108,000 and was one-third depreciated, and paid $70,000 cash for a used crane having a current fair value of $130,000. Assuming the exchange has commercial substance, at what amount should the crane be recorded on the books of Bunker?

Hendricks Construction purchased a crane on January 1, 2010, for $102,750. At the time of purchase, the crane was estimated to have a life of six years and a residual value of $6,750. In 2012, Hendricks determined that the crane had a total useful life of seven years and a residual value of $4,500. If Hendricks uses the straight-line method of depreciation, what will be the depreciation expense for the crane in 2012?

The composite depreciation method

The Fitzsimmons Company applied for and received numerous patents at a total cost of $286,500 at the beginning of 2008. It is assumed the patents will be useful evenly during their full legal lives. At the beginning of 2010, the company paid $48,600 in legal fees for successful defense in a patent infringement suit. At the beginning of 2011, information became available that caused the company to reduce the remaining life of the patents to five years. Calculate the amortization expense for the years 2008, 2009, 2010, and 2011. Round to the nearest dollar.

A recently issued FASB standard requires that an impairment loss be recognized if the sum of the expected future net cash inflows (undiscounted and without interest charges) is less than the carrying value of the asset. The amount of the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the fair value of the asset. Provide examples of events or changes in circumstances that indicate that the recoverability of the carrying amount of an asset may have been impaired. Evaluate the recognition criterion proposed by the FASB, specifically addressing the issue of using the undiscounted sum of the future net cash flows.

Monier Carpet traded cleaning equipment with a cost of $17,000 and accumulated depreciation of $3,250 for new equipment with a fair market value of $11,500. Assuming the exchange lacks commercial substance, Monier should record the new equipment at

Legal fees incurred in successfully defending a patent suit should be capitalized when the patent has been

Pastel Co. purchased a patent on January 1, 2008, for $714,000. The patent was being amortized over its remaining legal life of 15 years expiring on January 1, 2023. During 2011, Pastel determined that the economic benefits of the patent would not last longer than 10 years from the date of acquisition. What amount should be charged to patent amortization expense for the year ended December 31, 2011?

In January, Hunter Corporation entered into a contract to acquire a new machine for its factory. The machine, which had a cash price of $300,000, was paid for as follows: Prior to the machine's use, installation costs of $8,000 were incurred. The machine has an estimated useful life of ten years and an estimated salvage value of $10,000. What should Hunter record as depreciation expense for the first year under the straight-line method?

In order to calculate the third year's depreciation on an asset using the sum-of- the-years'-digits method, which of the following must be known about the asset?