Exam 11: Operational Assets: Utilization and Impairment

Required: Assume that the undiscounted sum of future cash flows is $18.2 million, instead of $16.5 million. Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.

In 2008, Antle Inc. had acquired Demski Co. and recorded goodwill of $245 million as a result. The net assets (including goodwill) from Antle's acquisition of Demski Co. had a 2009 year-end book value of $580 million. Antle assessed the fair value of Demski at this date to be $700 million, while the fair value of all of Demski's identifiable tangible and intangible assets (excluding goodwill) was $550 million. The amount of the impairment loss that Antle would record for goodwill at the end of 2009 is:

Zvinakis Mining Company paid $200,000 for the rights to mine lead in Southeast Missouri. The cost to drill and erect a mine shaft was $2,400,000 and equipment to process the lead ore before shipment to the smelter was $1,800,000. The mine is expected to yield 2,000,000 tons of ore during the five years it is expected to be operating. The equipment is salvageable and is expected to be worth $150,000 when mining is concluded. The mine started operations on April 30, 2009. In 2009, 300,000 tons of ore were extracted and in 2010, 700,000 tons were mined. Required: 1. Compute the depletion rate and the units-of-production depreciation rate. 2. Compute depletion and depreciation for 2009 and 2010.

Total depreciation is the same over the life of an asset regardless of the method of depreciation used.

Depreciation for 2009, using the straight-line method is:

Depreciation (to the nearest dollar) for 2009, using sum-of-the-years' digits, would be:

Meca Concrete purchased a mixer on January 1, 2007, at a cost of $45,000. Straight-line depreciation for 2007 and 2008 was based on an estimated 8-year life and $3,000 estimated residual value. In 2009, Meca revised its estimate and now believes the mixer will have a total service life of only six years, and that the residual value will be only $2,000. Required: Compute depreciation for 2009 and 2010.

Fryer Inc. owns equipment for which it paid $90 million. At the end of 2009, it had accumulated depreciation on the equipment of $27 million. Due to adverse economic conditions, Fryer's management determined that it should assess whether an impairment should be recognized for the equipment. The estimated undiscounted future cash flows to be provided by the equipment total $60 million, and the equipment's fair value at that point is $40 million. Under these circumstances, Fryer:

Notsofast Inc. acquired land for $500,000 on 7/1/08. It erroneously recorded the full amount as an expense. Explain what Notsofast must do when it discovers the error in 2009.

By the replacement depreciation method, depreciation is recorded when assets are replaced.

Atlas Trucking incurred the following costs during 2009: 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.

Any method of depreciation should be both systematic and rational.

In the table below, data on depreciation for equipment are shown. Some data are missing. Required: Fill in the missing data in the table.

Prego would report depreciation in 2010 of:

A change from the straight-line method to the sum-of-years'-digits method of depreciation is handled as:

Advocates of accelerated depreciation methods argue that their use tends to level out the total cost of ownership of an asset over its benefit period if one considers both depreciation and repair and maintenance costs.

In 2007, 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 the required goodwill impairment test at the end of its fiscal year ended December 31, 2009. Management has provided the following information: 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 2009, if any. 3. If an impairment loss is required, prepare the journal entry to record the loss. Fair value of Penlight \1 15 million Fair value of Penlight's net assets (excluding goodwill) 107 million Book value of Penlight's net assets (including goodwill) 125 million

The replacement of a major component increased the productive capacity of production equipment from 10 units per hour to 18 units per hour. The expenditure should be debited to:

Once selected for existing assets, a company must consistently use the same method of depreciation for all subsequent fixed asset acquisitions.

Jennings Advertising Inc. reported the following in its December 31, 2009, balance sheet: In a disclosure note, Jennings indicates that it uses straight-line depreciation over 10 years and estimates salvage value at 10% of cost. What is the average age of the equipment owned by Jennings?