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Intermediate Accounting 10th Edition Loren A Nikolai, D. Bazley and Jefferson P. Jones - Solutions
The Kam Company purchased a machine on January 2, 2007 for $20,000. The machine had an expected life of eight years and a residual value of $300. The double-declining-balance method of depreciation is used.Required1. Compute the depreciation for each year of the asset’s life.2. Assuming that the
The Heist Company purchased a machine on January 2, 2007 and uses the 150%-declining-balance depreciation method. The machine has an expected life of 10 years and an expected residual value of $5,000. The following costs relate to the acquisition and use of the machine during the first year of its
The following assets are owned by the Dinnell Company:In the year of acquisition and retirement of an asset, the company records depreciation for one-half year. During 2008, asset A was sold for $7,000.RequiredPrepare the journal entries to record depreciation on each asset for 2005 through 2008
The Cheadle Company purchased a fleet of 20 delivery trucks for $8,000 each on January 2, 2007. It decided to use composite depreciation on a straight-line basis, and calculated the depreciation from the following schedule:The company actually retired the trucks according to the following schedule
The Borrell Company purchased four delivery trucks on January 2, 2007 for $22,000 each. The company expected two of the trucks to last five years and have a residual value of $3,500 each. The other two trucks had an expected life of eight years and no residual value. The company uses straight-line
On January 1, 2002, the Borstad Company purchased a factory for $180,000 and machinery for $1 million. It is depreciating the factory over 30 years and the machinery over 20 years, both by the straight-line method to zero residual values. Late in 2007, because of technological changes in the
The Hunter Company purchased a light truck on January 2, 2007 for $18,000. The truck, which will be used for deliveries, has the following characteristics:Estimated life: 5 yearsEstimated residual value: $3,000Depreciation for financial statements: straight-lineDepreciation for income tax purposes:
On January 2, 2007, the Whistler Company purchased land for $450,000, from which it is estimated that 400,000 tons of ore could be extracted. It estimates that it will cost $80,000 to restore the land, after which it could be sold for $30,000.During 2007, the company mined 80,000 tons and sold
On July 1, 2007, the Amplex Company purchased a coal mine for $2 million. The estimated capacity of the mine was 800,000 tons. During 2007, the company mines 10,000 tons of coal per month and sells 9,000 tons per month. The selling price is $30 per ton and production costs (excluding depletion and
During 2007, the controller of the Ryel Company asked you to prepare correcting journal entries for the following three situations:1. Machine A was purchased for $50,000 on January 1, 2002. Straight-line depreciation has been recorded for five years, and the Accumulated Depreciation account has a
You are engaged in the examination of the financial statements of the Madle Corporation for the year ended December 31, 2007. The schedules for the property, plant, and equipment and the related accumulated depreciation accounts that follow have been prepared by the client. You have checked the
On December 31, 2007, the Vail Company owned the following assets:a. Straight-line depreciationb. Double-declining-balance depreciationc. Sum-of-the-years'-digits depreciationThe company computes depreciation and amortization expense to the nearest whole year. During 2008, the company engaged in
On January 2, 2007, Brock Corporation purchased a tract of land (site number 101) with a building for $600,000. Additionally, Brock paid a real estate broker’s commission of $36,000, legal fees of $6,000, and title guarantee insurance of $18,000. The closing statement indicated that the land
Logan Corporation, a manufacturer of steel products, began operations on October 1, 2006. The accounting department of Logan has started the fixed asset and depreciation schedule shown as follows:You have been asked to assist in completing this schedule. In addition to ascertaining that the data
Soon after December 31, 2007 the auditor requested a depreciation schedule for trucks of the Jarrett Trucking Company, showing the additions, retirements, depreciation, and other data affecting the income of the company in the four-year period 2004 to 2007, inclusive. The following data were in the
Information for Blake Corporation's property, plant, and equipment for 2007 is:Depreciation Method and Useful LifeBuilding: 150%-declining-balance; 25 years.Machinery and equipment: Straight-line; 10 years.Automotive equipment: Sum-of-the-years'-digits; 4 years.Leasehold improvements:
The Plant Asset and Accumulated Depreciation accounts of Pell Corporation had the following balances at December 31, 2006:Depreciation method and useful lives:• Land improvements: Straight-line; 15 years.• Building: 150%-declining-balance; 20 years.• Machinery and equipment:
The Lurch Company's December 31, 2006 balance sheet follows:During 2007, the following transactions occurred:1. To avoid paying monthly rent of $5,000 on existing plant facilities, the company decided to buy a tract of land and construct a building of its own on it. On January 2, 2007, Lurch
The certified public accountant is frequently called upon by management for advice regarding methods of computing depreciation. Although the question arises less frequently, of comparable importance is whether the depreciation method should be based on the consideration of the assets as units, as a
Gehl Company purchased significant amounts of new equipment this year to be used in its operations. The equipment was delivered by the suppliers, installed by Gehl, and placed into operation. Gehl purchased some for cash with discounts available for prompt payments. It purchased some under
At the beginning of the year, Patrick Company acquired a computer to be used in its operations. The computer was delivered by the supplier, installed by Patrick, and placed into operation. The estimated useful life of the computer is five years, and its estimated residual (salvage) value is
Portland Co. uses the straight-line depreciation method for depreciable assets. All assets are depreciated individually, except manufacturing machinery, which is depreciated by the composite method. During the year, Portland exchanged a delivery truck with Maine Co. for a larger delivery truck. It
Property, plant, and equipment (plant assets) generally represent a material portion of the total assets of most companies. Accounting for the acquisition and usage of such assets is, therefore, an important part of the financial reporting process.Required1. Distinguish between operating (revenue)
Depreciation continues to be one of the most controversial, difficult, and important problem areas in accounting.Required1. a. Explain the conventional accounting concept of depreciation accounting, andb. Discuss its conceptual merit with respect to (1) The value of the asset, (2) The amount(s)
Prepare a short report that evaluates each of the following statements separately:1. “Since our plant was shut down for part of the year, we will not depreciate it. Depreciating it for the full year would increase our costs and overstate the inventory.”2. “I think we should have increasing
May Manufacturing Company was organized January 2, 2007. During 2007, it has used in its reports to management the straight-line method of depreciating its plant assets.On November 9, you are having a conference with May€™s officers to discuss the depreciation method to be used for income
NBC paid $401 million for the rights to televise the 1992 Summer Olympic Games, and it was widely reported that it had a loss of more than $60 million. CBS purchased the rights to the 1992 and 1994 Winter Olympic Games for a combined $543 million. CBS reported a $322 million pretax loss on its
Refer to the financial statements and related notes of the Coca-Cola Company in Appendix A of this book.Required1. Which depreciation method does the company use? Why do you think the company selected this method?2. Compute the estimated average age of the property, plant, and equipment.3.
You are auditing the financial records of a company and are reviewing the depreciation computations. Included in the assets are two buildings and numerous machines in each building. One of the buildings is used to manufacture components of toys and the other for assembly and packing, using the
Situation The Magic Movie Company has been formed to produce films for showing in movie theaters. The president knows that there are some unusual accounting issues regarding asset valuation and income recognition and has asked for your advice.Directions1. Research the related generally accepted
Situation Scientific Software sells software to the oil industry. Its policy is to recognize revenue when it signs a licensing agreement for the software. It uses a 13-year amortization period for the software products it capitalizes. The president has asked you to evaluate these revenue
How are intangible assets distinguished from tangible assets? What do they have in common?
How are identifiable intangibles distinguished from unidentifiable intangibles?
Explain how a company accounts for the cost of identifiable and unidentifiable intangibles.
Are all intangible assets amortized? If not, which ones are not? Why?
Which amortization method is required for intangibles? Are there any exceptions?
What factors should a company consider in estimating the useful life of an intangible?
What is meant by the terms research and development?
What activities are included in R&D? Which are excluded?
What expenditures for R&D does a company include in R&D costs?
What alternative methods of accounting for R&D were considered in FASB Statement No. 2? List an argument in favor and one against each alternative.
Over how many years are patents amortized? Trademarks? Goodwill?
How does a company record a patent worth $100,000 if: (a) It has just purchased it for $90,000? (b) The company has developed it?
List four possible causes of goodwill.
What is the definition of goodwill from an asset valuation perspective? From an income perspective?
What are the three factors that may account for the difference between the value of the company as a whole and the book value of the net assets?
Under what conditions is goodwill capitalized at acquisition? Expensed at acquisition? Explain the arguments used to justify this accounting.
Distinguish between internal and external goodwill. In which situations is each capitalized or expensed?
Under what conditions is purchased goodwill amortized? Explain how a company determines its goodwill impairment, if any.
It has been proposed that purchased goodwill should be written off immediately to stockholders’ equity. Evaluate the arguments in favor of and against this proposal.
What is meant by the term negative goodwill? How is it recorded?
(Multiple Choice)The Plaza Company originated late in 2006 and began operations on January 2, 2007. Plaza is engaged in conducting market research studies on behalf of manufacturers. Prior to the start of operations, the following costs were incurred:Attorney€™s fees in connection
The Befort Company filed for a patent on a new type of machine. The application costs totaled $12,000. R&D costs incurred to create the machine were $75,000. In the year in which the company filed for and received the patent, it spent $20,000 in the successful defense of a patent infringement
On January 3, 2007 the Franc Company purchased for $27,000 a patent that had been filed eight years earlier. The patent covers a manufacturing process that the company plans to use for 15 years. On January 2, 2008 the company paid its lawyers $10,000 for successfully defending the patent in a
On January 10, 2007 the Hughes Company applied for a tradename. Legal costs associated with the application were $20,000. In January 2008 the company incurred $8,000 of legal fees in a successful defense of its tradename. The tradename was not impaired in 2007 and 2008.RequiredCompute the ending
Kling Company was organized in late 2007 and began operations on January 2, 2008. Prior to the start of operations, it incurred the following costs:Costs of hiring new employees ............... $ 3,000Attorney’s fees in connection with the organization of the company . 12,000Improvements to
The KLK Clothing Company manufactures professional clothing for women. In order to keep costs low while still producing quality clothes, KLK conducts many research and development projects. On a current project, KLK researchers used $35,000 of cotton and $27,000 of wool from its inventory. KLK paid
In 2007, Lalli Corporation incurred R&D costs as follows:Materials and equipment ... $100,000Personnel .......... 100,000Indirect costs ......... 50,000 $250,000These costs relate to a product that will be marketed in 2008. The company estimates
Which of the following activities are considered R&D? Justify your reasons for each answer.1. Building an oil shale plant to test the feasibility of large-scale exploitation2. Testing a new type of machine to evaluate its potential usefulness in production3. Modifying a machine to make it suitable
Which of the following are included in R&D costs of the current period? Justify each answer.1. Current-period depreciation on the building housing the R&D activities2. Cost of a market research study3. Current-period depreciation on a machine used in R&D activities4. Salary of the director of R&D5.
The Barnum Company acquired several small companies at the end of 2006 and, based on the acquisitions, reported the following intangibles in its December 31, 2006 balance sheet:Patent ........ $20,000Tradename ...... 35,000Computer software .... 10,000Goodwill ....... 90,000The company’s
Probst Company acquired a tradename several years ago at a cost of $60,000. The company has never considered the tradename to be impaired. However, at the end of 2007, the company has determined that the tradename is impaired because of a change in market conditions. It estimates that the tradename
Several years ago, Blaha Company purchased Husker Company as a subsidiary. At that time, Blaha Company recorded goodwill of $100,000 related to the purchase. Since that time, the company has not considered the goodwill to be impaired. However, at the end of 2007, Blaha Company decides to evaluate
The Marino Company had the following balance sheet on January 1, 2007:On January 2, 2007 the Paul Company purchased the Marino Company by acquiring all its outstanding shares for $300,000 cash. On that date the fair value of the current assets was $40,000, and the fair value of the property,
The Brush Company engaged in the following transactions at the beginning of 2007:1. Purchased a patent for $70,000 that had originally been filed in January 2001. The purchase was made to protect another patent that the company had filed for in January 2003 and subsequently received.2. Purchased
The Byrd Corporation engaged in the following transactions at the beginning of 2007:1. Purchased a Hogburger franchise for a five-year, $60,000, 10%-interest-bearing note. The franchise has an indefinite life providing the terms of the franchise are not violated.2. Sold a tradename for $50,000. The
During the current year, the accountant for the Cartwright Corporation recorded numerous transactions in an account labeled Intangibles as follows:Jan. 2 Incorporation fees $17,500Jan. 10 Legal fees for the organization of the company 7,500Jan. 25 Paid for large-scale advertising campaign for the
During the year-end audit of the Cressman Corporation’s financial statements for 2007, you discover the following items:1. The company had capitalized $57,000 to the Patent account at the beginning of 2006 for the cost of a patent. This amount included $50,000 of R&D costs. The patent was
The Davis Research Company engaged in the following six transactions during 2007:1. Purchased a patent for $35,000. Legal costs of $5,000 were also incurred.2. Costs of improving patent:Engineering costs ........ $20,000Assembling and testing prototypes . 10,000Other R&D costs ........ 25,0003.
Cressman Company incurred research and development costs in 2007 as follows:Materials used in research and development projects ............ $ 400,000Equipment acquired that will have alternate future uses in future research and development projects for four years .......................
The Jolis Company has provided information on the following items:1. A patent was purchased from the Totley Company for $500,000 on January 1, 2006. At that time, Jolis estimated the remaining useful life to be 10 years. The patent was carried on Totley’s books at $20,000 when it sold the
The Gansac Publishing Company signed a contract with an author to publish her book. The signing took place on January 1, 2007 and a payment of $20,000 was made. The agreement was that the author would receive 10% of the selling price of $10 per book. The company expects sales of the book to be
The controller of the Halpern Company prepared the following income statement and balance sheet at the end of the first year of the company€™s existence:Income StatementSales revenue ...... $40,000Cost of sales .... (20,000)Operating expenses . (8,000)Net income .... $12,000Investigation
The Bailey Company was formed in January 2005 and is preparing its financial statements under GAAP for the first time at the end of 2007. Its general ledger at December 31, 2007 includes the following assets:Patent ........... $120,000Copyright .......... 140,000Tradename ........ 150,000Computer
Wember Company acquired a subsidiary company on December 31, 2003, and recorded the cost of the intangible assets it acquired as follows:Patent ..... $100,000Tradename ..... 80,000Goodwill ..... 150,000The patent is being amortized by the straight-line method over an expected life of 10 years with
The Hamilton Company balance sheet on January 1, 2007 was as follows:The Korbel Company is considering purchasing the Hamilton Company (a privately held company) and discovers the following about the Hamilton Company:1. No allowance for uncollectibles has been established. A $10,000 allowance is
Munn, Inc., had the following intangible account balances at December 31, 2006:Patent .......... $192,000Accumulated amortization ... (24,000)Transactions during 2007 and other information relating to Munn’s intangible assets were as follows:1. The patent was purchased from Grey Company for
The Barb Company has provided information on intangible assets as follows:1. A patent was purchased from the Lou Company for $1,500,000 on January 1, 2006. Barb estimated the remaining useful life of the patent to be 10 years. The patent was carried in Lou’s accounting records at a net book value
Lee Manufacturing Corporation was incorporated on January 3, 2006. The corporation’s financial statements for its first year’s operations were not examined by a CPA. You have been engaged to examine the financial statements for the year ended December 31, 2007, and your examination is
Information concerning Tully Corporation’s intangible assets is as follows:a. On January 1, 2007 Tully signed an agreement to operate as a franchisee of Rapid Copy Service, Inc., for an initial franchise fee of $85,000. Of this amount, $25,000 was paid when the agreement was signed, and the
Bryant Corporation was incorporated on December 1, 2006 and began operations one week later. Before closing the books for the fiscal year ended November 30, 2007, Bryant's controller prepared the following financial statements:Bryant Corporation is in the process of negotiating a loan for expansion
The Elm Company is considering purchasing the EKC Company. The balance sheet of the EKC Company at December 31, 2007 is as follows:At December 31, 2007 the Elm Company discovered the following about the EKC Company:1. No allowance for uncollectible accounts has been established. An allowance of
In examining the books of Samson Manufacturing Company, you find on the December 31, 2007 balance sheet the item, “Costs of patents, $308,440.” Referring to the ledger accounts, you note the following items regarding one patent acquired in 2004:2004 Legal costs incurred in defending
Clonal, Inc., a biotechnology company, developed and patented a diagnostic product called Trouver. Clonal purchased some research equipment to be used exclusively for Trouver and other research equipment to be used on Trouver and subsequent research projects. Clonal defeated a legal challenge to
The Gratwick Company is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this new product. As of year-end (December 31, 2006), the new product has not been manufactured for resale; however, a prototype unit was
After extended negotiations, Rothman Corporation bought from Felzar Company most of the latter€™s assets on June 30, 2007. At the time of the sale, Felzar€™s accounts (adjusted to June 30, 2007) reflected the following descriptions and amounts for the assets transferred:You
Elson Corporation, a retail fuel oil distributor, has increased its annual sales volume to a level three times greater than the annual sales of a dealer it purchased in 2003 in order to begin operations. The board of directors recently received an offer to negotiate the sale of Elson Corporation to
Some intangibles that companies may report on their balance sheets include patents, copyrights, tradenames, computer software, and goodwill.Required1. Which of these intangibles would typically be amortized? How would they be amortized? Which of these intangibles would typically not be amortized?
The Johnson Company operates several plants at which it processes limestone into quicklime and hydrated lime. The Bland Plant, where most of the equipment was installed many years ago, continually deposits a dusty white substance over the surrounding countryside. Citing the unsanitary condition of
On June 30, 2007 your client, Sprauge Corporation, was granted two patents covering plastic cartons that it has been producing and marketing profitably for the past three years. One patent covers the manufacturing process and the other covers the related products. Sprauge executives tell you that
After securing lease commitments from several major stores, Silver Springs Shopping Center, Inc., was organized and built a shopping center in a growing suburb. The shopping center would have opened on schedule on January 2, 2008 if it had not been struck by a severe tornado in December; it opened
Refer to the financial statements and related notes of the Coca-Cola Company in Appendix A of this book.Required1. What was the total amount of intangible assets that the company reported at the end of 2004, and what was the amount of each component?2. Do you think that the company has additional
You are auditing the financial records of a company and you are aware that it has grown quickly in the last few years by acquiring other companies. You look up the disclosure in last year’s annual report, which states, “The company amortizes its intangibles over periods ranging from 3 to 15
Distinguish among the use of the terms depreciation, depletion, and amortization.
Define liabilities. Explain the meanings of probable and obligations in the context of a liability.
Distinguish between a legal and a non-legal (accounting) liability. Give an example of each.
List the three characteristics of a liability. Discuss briefly.
Before a liability can be reported, a company must know the identity of the recipient. True or false? Justify your answer.
What are the primary issues in accounting for current liabilities?
Define a company’s operating cycle.
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