Intermediate Accounting 7th Edition By Spiceland – Test Bank

Chapter 11 Property, Plant, and Equipment and Intangible Assets: Utilization and Impairment

EXERCISES
Exercise 11-1
1. Straight-line:

$240,000 – 20,000
= $27,500 per year
8 years

2. Sum-of-the-years’ digits:

Sum-of-the-digits is {[8 (8 + 1)]÷2} = 36

2013 $220,000 x 8/36 = $48,889
2014 $220,000 x 7/36 = 42,778

3. Double-declining balance:

Straight-line rate is 12.5% (1 ÷ 8 years) x 2 = 25% DDB rate

2013 $240,000 x 25% = $60,000
2014 ($240,000 – 60,000) x 25% = $45,000

4. One hundred fifty percent declining balance:

Straight-line rate is 12.5% (1 ÷ 8 years) x 1.5 = 18.75% rate

2013 $240,000 x 18.75% = $45,000
2014 ($240,000 – 45,000) x 18.75% = $36,563

5. Units-of-production:

$240,000 – 20,000
= $4 per unit depreciation rate
55,000 units

2013 8,000 units x $4 = $32,000
2014 12,000 units x $4 = $48,000
Exercise 11-2
1. Straight-line:

$240,000 – 20,000
= $27,500 per year
8 years

2013 $27,500 x 8/12 = $18,333
2014 $27,500 x 12/12 = $27,500

2. Sum-of-the-years’ digits:

Sum-of-the-digits is {[8 (8 + 1)]/2} = 36

2013 $220,000 x 8/36 x 8/12 = $32,593

2014 $220,000 x 8/36 x 4/12 = $16,296
+ $220,000 x 7/36 x 8/12 = 28,519
$44,815

3. Double-declining balance:

Straight-line rate is 8% (1 ÷ 8 years) x 2 = 25% DDB rate

2013 $240,000 x 25% x 8/12 = $40,000

2014 $240,000 x 25% x 4/12 = $20,000
+ ($240,000 – 60,000) x 25% x 8/12 = 30,000
$50,000
or,
2014 ($240,000 – 40,000) x 25% = $50,000

4. One hundred fifty percent declining balance:

Straight-line rate is 12.5% (1 ÷ 8 years) x 1.5 = 18.75% rate

2013 $240,000 x 18.75% x 8/12 = $30,000

2014 $240,000 x 18.75% x 4/12 = $15,000
+ ($240,000 – 45,000) x 18.75% x 8/12 = 24,375
$39,375
Or,
2014 ($240,000 – 30,000) x 18.75% = $39,375
Exercise 11-2 (concluded)

5. Units-of-production:

$220,000 – 20,000
= $4 per unit depreciation rate
55,000 units

2013 6,000 units x $4 = $24,000
2014 12,000 units x $4 = $48,000

Exercise 11-3
Requirement 1
$2,000,000
Depletion per ton = = $2.00 per ton
1,000,000 tons

2013 depletion = $2.00 x 400,000 tons = $800,000
Requirement 2
Depletion is part of product cost and is included in the cost of the inventory of coal, just as the depreciation on manufacturing equipment is included in inventory cost. The depletion is then included in cost of goods sold in the income statement when the coal is sold.
Exercise 11-4
Requirement 1
a. To record the purchase of a patent.

June 30, 2011
Patent 1,000,000
Cash 1,000,000

To record amortization on the patent.

December 31, 2011
Amortization expense ($1,000,000 ÷ 5 years x 1/2) 100,000
Patent 100,000

December 31, 2012
Amortization expense ($1,000,000 ÷ 5 years) 200,000
Patent 200,000

b. To record the purchase of a franchise.

2013
Franchise 40,000
Cash 40,000

Exercise 11-4 (concluded)

Year-end adjusting entries

Patent: To record amortization on the patent.

December 31, 2013
Amortization expense (determined below) 100,000
Patent 100,000

Calculation of annual amortization after the estimate change:
($ in thousands)

$1,000 Cost
300 Amortization to date (2011-2012)
700 Unamortized cost (balance in the patent account)
÷ 7 Estimated remaining life
$100 New annual amortization

Franchise: To record amortization of franchise.

December 31, 2013
Amortization expense ($40,000 ÷ 20 years) 2,000
Franchise 2,000
Requirement 2

Intangible assets:

Patent $600,000 [1]
Franchise 38,000 [2]
Total intangibles $638,000

[1] $1,000,000 – 400,000
[2] $40,000 – 2,000
Exercise 11-5

Depreciation expense (determined below) 48,889
Accumulated depreciation 48,889

Calculation of annual depreciation after the estimate change:

$640,000 Cost
$60,000 Previous annual depreciation ($600,000 ÷ 10 years)
x 3 years 180,000 Depreciation to date (2010-2012)
460,000 Book value
20,000 Revised residual value
440,000 Revised depreciable base
÷ 9 Estimated remaining life (12 years – 3 years)
$ 48,889 New annual depreciation
Exercise 11-6

Analysis:
Correct Incorrect
(Should Have Been Recorded) (As Recorded)

2010 Machine 200,000 Expense 200,000
Cash 200,000 Cash 200,000

2010 Expense 22,500 Depreciation entry omitted
Accum. deprec. 22,500

2011 Expense 22,500 Depreciation entry omitted
Accum. deprec. 22,500

2012 Expense 22,500 Depreciation entry omitted
Accum. deprec. 22,500

During the three-year period, depreciation expense was understated by $67,500, but other expenses were overstated by $200,000, so net income during the period was understated by $132,500, which means retained earnings is currently understated by that amount.

During the three-year period, accumulated depreciation was understated, and continues to be understated by $67,500.

To correct incorrect accounts
Machine 200,000
Accumulated depreciation ($22,500 x 3 years) 67,500
Retained earnings ($200,000 – 67,500) 132,500
PROBLEMS

Problem 11-1
1. Depreciation for 2011 and 2012.

December 31, 2011
Depreciation expense ($60,000 ÷ 6 years x 8/12) 6,667
Accumulated depreciation – equipment 6,667

December 31, 2012
Depreciation expense ($60,000 ÷ 6 years) 10,000
Accumulated depreciation – equipment 10,000

2. The year 2013 expenditure.

January 4, 2013
Repair and maintenance expense 4,000
Equipment 11,000
Cash 15,000

3. Depreciation for the year 2013.

December 31, 2013
Depreciation expense (determined below) 8,579
Accumulated depreciation – equipment 8,579

Calculation of annual depreciation after the estimate change:

$ 60,000 Cost
16,667 Depreciation to date ($5,557 + 10,000)
43,333 Book value
11,000 Asset addition
54,333 New depreciable base
÷ 6 1/3 Estimated remaining life (8 years – 1 2/3 years)
$ 8,579 New annual depreciation
Problem 11-2
Requirement 1
Machine 651:

$150,000 – 10,000
= $14,000 per year x 3 years = $42,000
10 years

Machine 652:

$280,000
= $40,000 per year x 2.5 years = 100,000
7 years

Machine 653:

$110,000 – 5,000
= $13,125 per year x 3/12 = 3,281
8 years

Accumulated depreciation, 12/31/12 $145,281

Requirement 2
Building:
Useful life of the building:

$300,000
= $60,000 in depreciation per year
5 years
(2008-2012)

$1,250,000 – 50,000
= 20-year useful life
$60,000

Problem 11-2 (concluded)

To record depreciation on the building.

Depreciation expense [($1,250,000 – 50,000) ÷ 20 years] 60,000
Accumulated depreciation – building 60,000

To record depreciation on the equipment.

Depreciation expense (determined below) 74,725
Accumulated depreciation – equipment 74,725

Equipment:
Machine 652 (determined above) $40,000
Machine 653 (determined above) 13,125
Machine 651:
Cost $150,000
Less: Accumulated depreciation 42,000
Book value, 12/31/12 108,000
Revised remaining life (8 years – 3 years) ÷ 5 years 21,600
$74,725

Problem 11-3
Requirement 1
Plant and equipment:
Depreciation to date:
$120 million  8 years = $15 million per year x 3 years = $45 million
Book value: $120 million – $45 million = $75 million

Developed technology:
Amortization to date:
$60 million  6 years = $10 million per year x 3 years = $30 million
Book value: $60 million – $30 million = $30 million
Requirement 2
Property, plant, and equipment and finite-life intangible assets are tested for impairment only when events or changes in circumstances indicate book value may not be recoverable.
Requirement 3
Goodwill should be tested for impairment on an annual basis and in between annual test dates if events or circumstances indicate that the fair value of the reporting unit is below its book value. A company has the option of avoiding annual testing by making qualitative evaluations of the likelihood of goodwill impairment to determine if step one is necessary.

Requirement 4
Plant and equipment:
An impairment loss is indicated because the book value of the assets, $75 million, is greater than the $65 undiscounted sum of future cash flows. The amount of the impairment loss is determined as follows:

Book value $75 million
Fair value (50) million
Impairment loss 25 million
Problem 11-3 (concluded)

Developed technology:
An impairment loss is indicated because the book value of the asset, $30 million, is greater than the $15 undiscounted sum of future cash flows. The amount of the impairment loss is determined as follows:

Book value $30 million
Fair value (10) million
Impairment loss 20 million

Goodwill:
An impairment loss is indicated because the book value of the assets of the reporting unit, $310 million, is greater than the $300 million fair value of the reporting unit. The amount of the impairment loss is determined as follows:

Determination of implied goodwill:
Fair value of Valpo $300 million
Fair value of Valpo’s net assets (excluding goodwill) (250) million
Implied value of goodwill $ 50 million

Measurement of impairment loss:
Book value of goodwill $80 million
Implied value of goodwill (50) million
Impairment loss $30 million