Exam 8: Reporting and Analyzing Long-Term Operating Assets

A health care technology company purchases a machine in 2016 to conduct a 2-year test on the effectiveness of a product prototype that may revolutionize the health care industry. The product will either be produced or completely abandoned resulting in no future use of the machine. The machine costs $20 million. Technology is increasing such that it will only be useful for 2 years with no estimated value at the end of two years. A. How should the cost of this machine be accounted for under GAAP? B. What is the effect of the purchase of the machine on 2016's net income? C. What is the effect of the purchase of the machine on 2017's net income?

Which statement is true concerning the straight-line method of depreciation?

Franchise rights are considered to be an identifiable intangible asset and must be amortized.

Which of the following is not necessary in calculating the depreciation expense for the first year for a newly purchased factory forklift?

Which statement is true as it relates to IFRS' reporting requirements for internally-developed intangibles?

U.S. GAAP requires recognition of the impairment of property, plant, and equipment, while IFRS does not.

Yellow School Bus Company had machinery that had originally cost $328,000. The machinery was three years old and had been depreciated using the double-declining-balance method, over a five-year useful life with a residual value of $24,000. Answer each of the following independent questions: A. If the company sold the machinery for $140,000, prepare a journal entry to record the sale. B. If the company sold the machinery for $64,000, prepare a journal entry to record the sale.

Internally generated intangible assets are not capitalized, which allows the financial statements to be more transparent for users.

Mighty Mining Company acquired property for $20,000,000 containing a palladium mine on January 1, 2016. Mighty Mining Co. estimated that the mine would produce 1,200,000 tons of palladium and once mining is completed, the property could be sold for $2,000,000. During the first year, 200,000 tons were mined. What is the depletion expense per ton of palladium?

Under which section of an income statement would the amount of cost allocated to a particular accounting period for long-term depreciable assets most likely appear?

Mighty Mining Company acquired property for $16,800,000 containing platinum ore mine on January 1, 2016. Mighty Mining estimated that the mine would produce 500,000 tons of ore and once mining is completed, the property could be sold for $300,000. During 2016, 2017, and 2018, Mighty Mining recovered 40,000, 60,000, and 150,000 tons of ore, respectively. As a result, the mine should appear on Mighty Mining's balance sheet at what amount (net of depletion)?

Consider the following schedule from a footnote in the Adventure Corporation's 2016 financial statements related to its acquisition of Shoot for the Moon, Inc. (amounts in millions): Identify (1) the total value received by Shoot for the Moon, Inc. shareholders for the acquisition, (2) what portion of the sale was for existing intangibles?

Once amounts are debited to a plant asset account on the balance sheet, the cost is then allocated to an expense on the income statement as that asset is used in operations.

Foam Pellet Packaging sold a machine for $60,000. The company bought this machine for $160,000 seven years ago and was depreciating it on a straight-line basis over ten years to a $16,000 salvage value. What is the gain (loss) that Foam Pellet Packaging should report?

Oil Rig Company estimated that the oil reserve that it acquired on January 1, 2014 would produce 3,500,000 barrels of oil. The company extracted 250,000 barrels in 2014, 275,000 barrels in 2015, and 250,000 barrels in 2016. Oil Rig paid $56,000,000 for the oil reserve. The land is estimated to have no residual value once the oil is depleted. A. Compute the depletion expense for 2014, 2015, and 2016. B. Prepare the journal entries to record (1) the acquisition of the oil reserve and (2) the depletion for 2014, 2015, and 2016. C. Create T-accounts and post the entries for 2014.

NOLA Industries provides the following information relating to its land, buildings and equipment: Reported depreciation expense is $2,600 million. Calculate the plant assets' percent depreciated for 2016.

We can estimate the percent of a company's depreciable assets that are "used up," reflecting the percent of plant assets that are no longer productive, by the following formula: Accumulated depreciation / Cost of depreciable assets

Pollyanna Publishing, a textbook publishing firm, purchased a new machine for $80,000. This machine is expected to operate for 10 years, after which it will be sold for salvage value (estimated to be $8,000). How much will the first and second year's depreciation expense be under the double-declining-balance method?

Starbright International has the following plant, property, and equipment assets on its balance sheet for 2016 and 2015: Determine what percent of the company's depreciable assets are depreciated at the end of 2015 and 2016. What does this tell you about the company's future cash flows?

The following income statements, balance sheets, and plant asset disclosures are presented by Terrific Toys, Inc., a toy manufacturer, in its 2016 annual report. Terrific Toys, Inc.'s plant asset note disclosure follows: Property, Plant, and Equipment Property, plant, and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over estimated useful lives of 10 to 30 years for buildings, 3 to 10 years for machinery and equipment, and 10 to 20 years, not to exceed the lease term, for leasehold improvements. Tools, dies, and molds are amortized using the straight-line method over 3 years. Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. The carrying value of property, plant, and equipment is reviewed when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Any potential impairment identified is assessed by evaluating the operating performance and future undiscounted cash flows of the underlying assets. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is included in the results of operations. A. Compute property, plant, and equipment turnover (PPET) (disregard Other Noncurrent Assets) for 2016 and 2015. Property, plant and equipment, net for 2014 was $1,211,763. Is there any significant change? What assets may not be reflected on Terrific Toys' balance sheet? B. When does Terrific Toys check for asset impairment? What process do they use to assess impairment? Does this follow GAAP guidelines? Do these charges affect cash flows? How should these charges be treated for analysis purposes?