Exam 9: Long-Lived Assets

The cost incurred to enhance the service potential of a capital asset is betterment and should be expensed immediately.

Firm B (buyer) agreed to buy all the outstanding common shares of firm S (seller). Relevant data for S at the time of the purchase: Total owners' equity \ 10,000 Total market value of identifiable assets 50,000 Total market value of liabilities 20,000 Average earnings per year 20,000 The average rate of return for S's industry is 30%, based on net assets. B demands a 10% return on its investment, but allows the average rate of return to be applied to S's market value of net assets for purposes of computing goodwill. Any earnings in excess of the industry average are considered to extend for 5 years after purchase. How much did B pay for S's shares if the two parties agree to value goodwill at the present value of excess earnings over the industry average?

Internally generated intangibles will sometimes be eligible for capitalization.

Goodwill can be:

On December 1, 2013, HC acquired a new delivery truck in exchange for an old delivery truck that it had acquired in 2011. The old truck was purchased for $28,000 and had a book value of $11,200. On the date of the exchange, the old truck had a market value of $12,000. In addition, HC paid $14,000 cash for the new truck, which had a cash price of $32,000. At what amount should HC record the new truck for financial accounting purposes?

CT has been using the "expense as incurred" approach in recording ordinary repairs. For 2013, CT decided to use the allocation approach on an annual basis. Estimated expenditures for ordinary repairs for the year 2013 were $6,000. Actual cash expenditures for ordinary repairs for January 2013 were $550. Give the indicated journal entries for January 2013.

CK incurred $68,000 of research and development costs in its laboratory to develo a patent, which was granted on January 2, 2001. Legal fees and other costs associated with registration of the patent totalled $27,201. CK estimates that the economic life of the patent will be eight years. What amount should CK charge to patent amortization expense for the year ended December 31, 2008?

ABC acquired equipment on January 1^st, 2014 for $3,000 cash, plus a note which is payable in 5 annual instalments of $2,000 each beginning on 12/31/2014. If the market interest rate on similar notes is 10 percent (and is implicitly included in the annual instalments) the cost of the equipment (rounded to the nearest dollar) is:

On January 1, 2014, RC purchased a machine for capital use. The invoice price was $5,000; terms 2/10, n/31. Provincial sales tax on the invoice price was 4 percent. Other cash payments by RC were: shipping, $250; installation, $500; breaking-in, $100, and $300 for a 3-year insurance policy on the machine. RC paid the invoice on January 15, 2014. The machine account should be debited for:

What is the rationale for the difference in accounting treatment for exchanges of similar and dissimilar assets? Comment on both cases where cash is paid and cash is received.

Apportionment of the purchase price in a lump-sum acquisition of different assets may be based on all of the following except:

Under the cost model (IFRS) impairment losses are irreversible.

Goodwill is the premium above fair market value that a company is willing to pay for an acquired company's superior earnings potential.

Indicate for each transaction below the account(s) and amount(s) that should be debited and credited. Use abbreviated account titles. tem Accounts Amounts (a) Jan. 1, 2001 purchased land with a usable office building thereon for cash of \ 200,000 . Tax assessment values: Land \ 20,000 ; building \ 60,000 (b) Jan. 1. 2001 purchased land for future building site for a cash cost of \ 40.000 ; an old building on this site, appraised at \ 2,000 at the date of purchase, is to be torn down immediately. (c) Net cash cost of demolishing the old building in (b) above amounted to \ 2,000 . (d) Cash cost of excavation for basement of the new building (b above) was \ 6.000 . (e) Lawyers' fees paid in connection with purchase of real estate in (b) \ 900 . (f) Taxes paid on land purchased in (b) assessed before completion of building. \ 300 . (g) Factory superintendent's salary for 2001 was \ 24,000 . During 2001, the superintendent spent the first six months supervising construction of the new building; the next three months supervising installation of productive machinery in the new building. and the last three months supervising operations in the new building. (h) Cost of grading and paying parking space and walks behind new building. \ 9.500 .

AB recently purchased an old building and the land on which it is located. The old building will be demolished at a net cost of $10,000. A new building will be built on the site. The demolition cost should be:

XYZ purchased a plant, including land, building, and machinery, for $110,000. These items were carried on the books of the seller as follows: land, $30,000; building, $80,000, and machinery, $40,000. Immediately after the purchase, the assets were appraised at the following values: land, $24,000; building, $30,000, and machinery, $66,000. What cost should XYZ record for the land, building and machinery?

	Land	Building	Machinery
1	$22,000	$27,500	$60,500
2	$36,666	$36,667	$36,667
3	$30,000	$80,000	$40,000
4	$22,000	$58,667	$29,333

In conformity with the historical cost principle, property donated to a corporation should be recorded by the recipient at the cost to the donor.

The cost of a major inspection of an airplane engine would be capitalized if it occurred several times per year.

Donations of land and building usually result in an increase to equity.

On April 30, 2013, a fire destroyed a machine that cost $24,000 when acquired on January 1, 2011. The machine has an estimated 4-year useful life and no residual value. Straight-line amortization on the machine has been recognized through December 31, 2011. Give the entries at date of the fire to record the fire loss, assuming the insurance company paid $9,000 cash on the claim.