Kieso Intermediate Accounting Brief Exercises Chapters 10-11-12

BE 11-4 (LO1) Lockard Company purchased machinery on January 1, 2017, for $80,000. The machinery is estimated to have a salvage value of $8,000 after a useful life of 8 years. Compute 2017 depreciation expense using the double-declining-balance method.

$80,000 X 25%* = $20,000 *[(80,000 - 8,000) / 8] = 9,000 / (80,000 - 8,000) = 12.5% x 2 = 25%

BE 11-10 (LO5) In its 2014 annual report, Campbell Soup Company reports beginning-of-the-year total assets of $8,113 million, end-of-the-year total assets of $8,323 million, total sales of $8,268 million, and net income of $807 million. Compute Campbell's return on assets using net income. (Round to two decimal places.)

$807 / [($8,113 + $8,323) / 2] = 9.82%

BE 12-3 (LO1,2) Stephan Curry, Inc., spent $68,000 in attorney fees while developing the trade name of its new product, the Mean Bean Machine. Prepare the journal entries to record the $68,000 expenditure and the first year's amortization, using an 8-year life.

Trade Names .................................................................. 68,000 Cr. Cash....................................................................... 68,000 Amortization Expense ................................................... 8,500 Cr. Trade Names ($68,000 X 1/8 = $8,500) ................ 8,500

BE 11-2 (LO1) Lockard Company purchased machinery on September 1, 2017, for $80,000. The machinery is estimated to have a salvage value of $8,000 after a useful life of 8 years. Compute 2017 depreciation expense using the straight-line method.

[($80,000 - $8,000) / 8] X 4/12 = $3,000

BE 11-3 (LO1) Lockard Company purchased machinery on April 1, 2017, for $80,000. The machinery is estimated to have a salvage value of $8,000 after a useful life of 8 years. Compute 2017 depreciation expense using the sum-of-the-years'-digits method.

[($80,000 - $8,000) X 8/36*] X 9/12 = $12,000 *[8(8 + 1)] ÷ 2 = 36

BE 10-4 (LO3) Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,800,000 on March 1, $1,200,000 on June 1, and $3,000,000 on December 31. Hanson borrowed $1,000,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $2,000,000 note payable and an 11%, 4-year, $3,500,000 note payable. Compute avoidable interest for Hanson Company.

$1,000,000 x 12% = $120,000 1,200,000 x 10.64% = $127,680 Total Acc. Expenditures->$2,200,000 Total Avoidable Interest->$247,680

BE 12-13 (LO5) Indicate whether the following items are capitalized or expensed in the current year. -Costs incurred internally to create goodwill.

Expense

BE 10-1 (LO1) Previn Brothers Inc. purchased land at a price of $27,000. Closing costs were $1,400. An old building was removed at a cost of $10,200. What amount should be recorded as the cost of the land?

$27,000 + $1,400 + $10,200 = $38,600

BE 11-2 (LO1) Lockard Company purchased machinery on January 1, 2017, for $80,000. The machinery is estimated to have a salvage value of $8,000 after a useful life of 8 years. Compute 2017 depreciation expense using the straight-line method.

($80,000 - $8,000) / 8 = $9,000

BE 11-3 (LO1) Lockard Company purchased machinery on January 1, 2017, for $80,000. The machinery is estimated to have a salvage value of $8,000 after a useful life of 8 years. Compute 2017 depreciation expense using the sum-of-the-years'-digits method.

($80,000 - $8,000) X 8/36* = $16,000 *[8(8 + 1)] ÷ 2 = 36

BE 11-4 (LO1) Lockard Company purchased machinery on October 1, 2017, for $80,000. The machinery is estimated to have a salvage value of $8,000 after a useful life of 8 years. Compute 2017 depreciation expense using the double-declining-balance method.

($80,000 X 25%*) X 3/12 = $5,000 **[(80,000 - 8,000) / 8] = 9,000 / (80,000 - 8,000) = 12.5% x 2 = 25%

BE 11-7 (LO2) Holt Company purchased a computer for $8,000 on January 1, 2016. Straight-line depreciation is used, based on a 5-year life and a $1,000 salvage value. In 2018, estimates are revised. Holt now feels the computer will be used until December 31, 2019, when it can be sold for $500. Compute the 2018 depreciation.

Annual depreciation expense: ($8,000 - $1,000)/5 = $1,400 Book value, 1/1/18: $8,000 - (2 x $1,400) = $5,200 Depreciation expense, 2018: ($5,200 - $500)/2 = $2,350

BE 10-9 (LO4) Navajo Corporation traded a used truck (cost $20,000, accumulated depreciation $18,000) for a small computer with a fair value of $3,300. Navajo also paid $500 in the transaction. Prepare the journal entry to record the exchange. (The exchange lacks commercial substance.)

Equipment ($3,300 - $800)..................................... 2,500 Accumulated Depreciation—Trucks ..................... 18,000 Cr. Trucks............................................................. 20,000 Cr. Cash................................................................ 500

BE 12-4 (LO1,2) Gershwin Corporation obtained a franchise from Sonic Hedgehog Inc. for a cash payment of $120,000 on April 1, 2017. The franchise grants Gershwin the right to sell certain products and services for a period of 8 years. Prepare Gershwin's April 1 journal entry and December 31 adjusting entry.

Franchises...................................................................... 120,000 Cr. Cash....................................................................... 120,000 Amortization Expense ................................................... 11,250 Cr. Franchises ($120,000 X 1/8 X 9/12 = $11,250)..... 11,250

BE 10-5 (LO4) Garcia Corporation purchased a truck by issuing an $80,000, 4-year, zero-interest-bearing note to Equinox Inc. The marketing rate of interest for obligations of this nature is 10%. Prepare the journal entry to record the purchase of this truck.

Trucks ($80,000 X .68301*)...................................... 54,641 Discount on Notes Payable ................................... 25,359 Cr. Notes Payable................................................ 80,000 *from Present Value of Single Sum sheet

BE 10-3 (LO3) Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,800,000 on March 1, $1,200,000 on June 1, and $3,000,000 on December 31. Hanson borrowed $1,000,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $2,000,000 note payable and an 11%, 4-year, $3,500,000 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.

10%, 5-year note Principal->$2,000,000 Interest->$200,000 11%, 4-year note Principal->3,500,000 Interest->385,000 Principal total->$5,500,000 Interest total->$585,000 Weighted-average interest rate = $585,000 / $5,500,000 = 10.64%

BE 11-1 (LO1) Fernandez Corporation purchased a truck at the beginning of 2017 for $50,000. The truck is estimated to have a salvage value of $2,000 and a useful life of 160,000 miles. It was driver 23,000 miles in 2017 and 31,000 miles in 2018. Compute depreciation expense for 2017 and 2018.

2017: ([$50,000 - $2,000) X 23,000] / 160,000 = $6,900 2018: [($50,000 - $2,000) X 31,000] / 160,000 = $9,300

BE 11-6 (LO2) Dickinson Inc. owns the following assets: Asset A->Costs $70,000->Salvage of $7,000->Est. Life is 10 years Asset B->Costs $50,000->Salvage of $5,000->Est. Life is 5 years Asset C->Costs $82,000->Salvage of $4,000->Est. Life is 12 years Compute the composite depreciation rate and the composite life of Dickinson's assets.

A->($70,000 - $7,000)/10 = $6,300 B->($50,000 - $5,000)/5 = 9,000 C->($82,000 - $4,000)/12 = 6,500 Total->$21,800 Composite rate =$21,800/$202,000 = 10.8% Composite life =$186,000*/$21,800 = 8.5 years *[(70,000 - 7,000) + (50,000 - 5,000) + (82,000 - 4000)] = 186,000

BE 11-10 (LO5) In its 2014 annual report, Campbell Soup Company reports beginning-of-the-year total assets of $8,113 million, end-of-the-year total assets of $8,323 million, total sales of $8,268 million, and net income of $807 million. Compute Campbell's asset turnover. (Round to two decimal places.)

Asset turnover: $8,268 / [($8,113 + $8,323) / 2] = 1.01 times

BE 12-7 (LO4) Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of $400,000. The Johnson Division's net assets, including the goodwill, have a carrying amount of $800,000. The fair value of the division is estimated to be $1,000,000. Prepare Waters' journal entry, if necessary, to record impairment of the goodwill.

Because the fair value of the division exceeds the carrying amount of the assets, goodwill is not considered to be impaired. No entry is necessary.

BE 12-13 (LO5) Indicate whether the following items are capitalized or expensed in the current year. -Purchase cost of a patent from a competitor.

Capitalize

BE 10-15 (LO6) Ottawa Corporation owns machinery that cost $20,000 when purchased July 1, 2014. Depreciation has been recorded at a rate of $2,400 per year, resulting in a balance in accumulated depreciation of $8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for $5,200. Prepare journal entries to update depreciation for 2018.

Depreciation Expense ($2,400 X 8/12)...................... 1,600 Cr. Accumulated Depreciation—Machinery ......... 1,600

BE 12-9 (LO1,2,5) Nieland Industries had one patent recorded on its books as of January 1, 2017. This patent had a book value of $288,000 and a remaining useful life of 8 years. During 2017, Nieland incurred research and development costs of $96,000 and brought a patent infringement suit against a competitor. On December 1, 2017, Nieland received the good news that its patent was valid and that its competitor could not use the process Nieland had patented. The company incurred $85,000 to defend this patent. At what amount should patent(s) be reported on the December 31, 2017, balance sheet, assuming monthly amortization of patents?

Carrying Amount->Life in Months->Amortization Per Month->Months Amortization Patent (1/1/17) $288,000->96->$3,000->12 Legal costs (12/1/17) 85,000->85->$1,000->1 Carrying amount ........................................................ $373,000 Less: Amortization of patent (12 X $3,000)............. (36,000) Less: Legal costs amortization (1 X $1,000) .......... (1,000) Carrying amount 12/31/17 ......................................... ) $336,000

BE 10-14 (LO6) Ottawa Corporation owns machinery that cost $20,000 when purchased July 1, 2014. Depreciation has been recorded at a rate of $2,400 per year, resulting in a balance in accumulated depreciation of $8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for $10,500. Prepare journal entries to record the sale.

Cash ............................................................................ 10,500 Accumulated Depreciation—Machinery ($8,400 + $1,600).................................................... 10,000 Cr. Machinery.......................................................... 20,000 Cr. Gain on Disposal of Machinery ....................... 500

BE 10-15 (LO6) Ottawa Corporation owns machinery that cost $20,000 when purchased July 1, 2014. Depreciation has been recorded at a rate of $2,400 per year, resulting in a balance in accumulated depreciation of $8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for $5,200. Prepare journal entries to record the sale.

Cash ............................................................................ 5,200 Loss on Disposal of Machinery ................................ 4,800 Accumulated Depreciation—Machinery ($8,400 + $1,600).................................................... 10,000 Cr. Machinery.......................................................... 20,000

BE 12-10 (LO1,2,5) Sinise Industries acquired two copyrights during 2017. One copyright related to a textbook that was developed internally at a cost of $9,900. This textbook is estimated to have a useful life of 3 years from September 1, 2017, the date it was published. The second copyright (a history research textbook) was purchased from University Press on December 1, 2017, for $24,000. This textbook has an indefinite useful life. How should these two copyrights be reported on Sinise's balance sheet as of December 31, 2017?

Copyright No. 1 for $9,900 should be expensed and therefore not reported on the balance sheet. Copyright No. 2 for $24,000 should be capitalized. Because the useful life is indefinite, copyright No. 2 should be tested at least annually for impairment using a fair value test. It would be reflected on the December 31, 2017 balance sheet at its cost of $24,000.

BE 11-5 (LO1) Cominsky Company purchased a machine on July 1, 2018, for $28,000. Cominsky paid $200 in title fees and county property tax of $125 on the machine. In addition, Cominsky paid $500 shipping charges for delivery, and $475 was paid to a local contractor to build and wire a platform for the machine on the plant floor. The machine has an estimated useful life of 6 years with a salvage value of $3,000. Determine the depreciation base of Cominsky's new machine. Cominsky uses straight-line depreciation.

Depreciable Base = ($28,000 + $200 + $125 + $500 + $475) - $3,000 = $26,300

BE 10-14 (LO6) Ottawa Corporation owns machinery that cost $20,000 when purchased July 1, 2014. Depreciation has been recorded at a rate of $2,400 per year, resulting in a balance in accumulated depreciation of $8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for $10,500. Prepare journal entries to update depreciation for 2018.

Depreciation Expense ($2,400 X 8/12)...................... 1,600 Cr. Accumulated Depreciation—Machinery ......... 1,600

BE 10-10 (LO4) Mehta Company traded a used welding machine (cost $9,000, accumulated depreciation $3,000) for office equipment with an estimated fair value of $5,000. Mehta also paid $3,000 cash in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

Equipment ............................................................... 5,000 Accumulated Depreciation—Machinery ............... 3,000 Loss on Disposal of Machinery ............................. 4,000 Cr. Machinery....................................................... 9,000 Cr. Cash................................................................ 3,000

BE 10-8 (LO4) Navajo Corporation traded a used truck (cost $20,000, accumulated depreciation $18,000) for a small computer with a fair value of $3,300. Navajo also paid $500 in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

Equipment............................................................... 3,300 Accumulated Depreciation—Trucks..................... 18,000 Cr. Trucks ............................................................ 20,000 Cr. Cash ............................................................... 500 Cr. Gain on Disposal of Trucks.......................... 800

BE 10-2 (LO3) Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,800,000 on March 1, $1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson's weighted-average accumulated expenditures for interest capitalization purposes.

Expenditures 3/1 $1,800,000 10/12 $1,500,000 6/1 $1,200,000 7/12 $700,000 12/31 $3,000,000 0 $0 Total amount $6,000,000 Total Acc. Expenditures $2,200,000

BE 12-13 (LO5) Indicate whether the following items are capitalized or expensed in the current year. -Organized costs.

Expense

BE 12-13 (LO5) Indicate whether the following items are capitalized or expensed in the current year. -Research and development costs.

Expense

BE 11-9 (LO4) Everly Corporation acquires a coal mine at a cost of $400,000. Intangible development costs total $100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is $80,000), after which it can be sold for $160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.

Inventory.................................................................. 73,500 Cr. Coal Mine........................................................ 73,500 ($400,000 + $100,000 + $80,000 - $160,000) / 4,000 = $105 per ton 700 X $105 = $73,500

BE 10-7 (LO4) Fielder Company obtained land by issuing 2,000 shares of its $10 par value common stock. The land was recently appraised at $85,000. The common stock is actively traded at $40 per share. Prepare the journal entry to record the acquisition of the land.

Land (2,000 X $40) .................................................. 80,000 Cr. Common Stock (2,000 X $10) ....................... 20,000 Cr. Paid-in Capital in Excess of Par— Common Stock......................................... 60,000

BE 10-6 (LO4) Mohave Inc. purchased land, building, and equipment from Laguna Corporation for a cash payment of $315,000. The estimated fair values of the assets are land $60,000, building $220,000, and equipment $80,000. At what amounts should each of the three assets be recorded?

Land FV-$60,000 %-60/360 X Cost-$315,000 Recorded-$52,500 Building FV-220,000 %-220/360 X Cost-$315,000 Recorded-192,500 Equipment FV-80,000 %-80/360 X Cost-$315,000 Recorded-70,000 Total FV -> $360,000 Total Recorded -> $315,000

BE 12-8 (LO4) Waters Corporation purchased Johnson Company 3 years ago and at that time recorded goodwill of $400,000. The Johnson Division's net assets, including the goodwill, have a carrying amount of $800,000. The fair value of the division is estimated to be $750,000 and implied goodwill is $350,000. Prepare Waters' journal entry, if necessary, to record impairment of the goodwill.

Loss on Impairment ($400,000 - $350,000).................50,000 Cr. Goodwill................................................................ 50,000 The fair value of the reporting unit ($750,000) is less than the carrying value ($800,000)—an impairment has occurred. The loss is the difference between the recorded goodwill of $400,000 and the implied goodwill of $350,000.

BE 12-6 (LO4) Kenoly Corporation owns a patent that has a carrying amount of $300,000, Kenoly expects future net cash flows from this patent to total $210,000. The fair value of the patent is $110,000. Prepare Kenoly's journal entry, if necessary, to record the loss on impairment.

Loss on Impairment ...................................................... 190,000 Cr. Patents ($300,000 - $110,000)............................. 190,000 Note: An impairment has occurred because expected net future cash flows ($210,000) are less than the carrying amount ($300,000). The loss is measured as the difference between the carrying amount and fair value ($110,000).

BE 10-13 (LO5) Indicate which of the following costs should be expended when incurred. (a) $13,000 paid to rearrange and reinstall machinery. (b) $200,000 paid for addition to building. (c) $200 paid for a tune-up and oil change on delivery truck. (d) $7,000 paid to replace a wooden floor with a concrete floor. (e) $2,000 paid for a major overhaul on a truck, which extends the useful life.

Only cost (c) is expensed when incurred.

BE 12-11 (LO5) R. Wilson Corporation commenced operations in early 2017. The corporation incurred$60,000 of costs such as fees to underwriters, legal fees, state fees, and promotional expenditures during its formation. Prepare journal entries to record the $60,000 expenditure and 2017 amortization, if any.

Organization Expense ................................................... 60,000 Cr. Cash............................................................. 60,000

BE 12-2 (LO1,2) Taylor Swift Corporation purchases a patent from Salmon Company on January 1, 2017, for $54,000. The patent has a remaining legal life of 16 years. Taylor Swift feels the patent will be useful for 10 years. On January 1, 2019, the carrying amount of the patent on Taylor Swift's books is $43,200. In January, Taylor Swift spends $24,000 successfully defending a patent suit. Taylor Swift still feels the patent will be useful until the end of 2026. Prepare the journal entries to record the $24,000 expenditure and 2019 amortization.

Patents............................................................................ 24,000 Cr. Cash....................................................................... 24,000 Amortization Expense ................................................... 8,400 Cr. Patents [($43,200 + $24,000) X 1/8 = $8,400]......... 8,400

BE 12-1 (LO1,2) Taylor Swift Corporation purchases a patent from Salmon Company on January 1, 2017, for $54,000. The patent has a remaining legal life of 16 years. Taylor Swift feels the patent will be useful for 10 years. Prepare Taylor Swift's journal entries to record the purchase of the patent and 2017 amortization.

Patents............................................................................ 54,000 Cr. Cash....................................................................... 54,000 Amortization Expense ................................................... 5,400 Cr. Patents ($54,000 X 1/10 = $5,400)........................ 5,400

BE 11-10 (LO5) In its 2014 annual report, Campbell Soup Company reports beginning-of-the-year total assets of $8,113 million, end-of-the-year total assets of $8,323 million, total sales of $8,268 million, and net income of $807 million. Compute Campbell's profit margin on sales. (Round to two decimal places.)

Profit margin on sales: $807 / $8,268 = 9.76%

BE 12-5 (LO3) On September 1, 2017, Winans Corporation acquired Aumont Enterprises for a cash payment of $700,000. At the time of purchase, Aumont's balance sheet showed assets of $620,000, liabilities of $200,000, and owners' equity of $420,000. The fair value of Aumont's assets is estimated to be $800,000. Compute the amount of goodwill acquired by Winans.

Purchase price $700,000 Fair value of assets->$800,000 Fair value of liabilities->200,000 Fair value of net assets $600,000 Value assigned to goodwill $100,000

BE 11-8 (LO3) Jurassic Company owns equipment that cost $900,000 and has accumulated depreciation of $380,000. The expected future net cash flows from the use of the asset are expected to be $500,000. The fair value of the equipment is $400,000. Prepare the journal entry, if any, to record the impairment loss.

Recoverability test: Future net cash flows ($500,000) < Carrying amount ($520,000); therefore, the asset has been impaired. Journal entry: Loss on Impairment ............................................... 120,000 Cr. Accumulated Depreciation— Equipment ($520,000 - $400,000) ........... 120,000

BE 12-12 (LO5) Treasure Land Corporation incurred the following costs in 2017. ~Cost of laboratory research aimed at discovery of new knowledge -> $120,000 ~Cost of testing in search for product alternatives -> $100,000 ~Cost of engineering activity required to advance the design of a product to the manufacturing stage -> $210,000 Prepare the necessary 2017 journal entry or entries for Treasure Land.

Research and Development Expense....................... 430,000 Cr. Cash ................................................................... 430,000

BE 11-10 (LO5) In its 2014 annual report, Campbell Soup Company reports beginning-of-the-year total assets of $8,113 million, end-of-the-year total assets of $8,323 million, total sales of $8,268 million, and net income of $807 million. Compute Campbell's return on assets using asset turnover and profit margin. (Round to two decimal places.)

Return on assets: 1.01* X 9.76%** = 9.86% *Asset Turnover: 8,268 / [(8,113 + 8,323) / 2] = 1.01 **Profit margin on sales: $807 / $8,268 = 9.76%

BE 10-12 (LO4) Slaton Corporation traded a used truck for a new truck. The used truck costs $20,000 and has accumulated depreciation of $17,000. The new truck is worth $35,000. Slaton also made a cash payment of $33,000. Prepare Slaton's entry to record the exchange. (The exchange has commercial substance.)

Trucks (new)............................................................ 35,000 Accumulated Depreciation—Trucks ..................... 17,000 Loss on Disposal of Trucks ................................... 1,000 Cr. Trucks (used) ................................................. 20,000 Cr. Cash................................................................ 33,000

BE 10-11 (LO4) Cheng Company traded a used truck for a new truck. The used truck cost $30,000 and has accumulated depreciation of $27,000. The new truck is worth $37,000. Cheng also made a cash payment of $36,000. Prepare Cheng's entry to record the exchange. (The exchange lacks commercial substance.)

Trucks (new)............................................................ 37,000 Accumulated Depreciation—Trucks ..................... 27,000 Loss on Disposal of Trucks ................................... 2,000 Cr. Trucks (used) ................................................. 30,000 Cr. Cash................................................................ 36,000