On 6/1/2010 Vandalay Industries began the process of constructing a new factory by purchasing land and the building sitting on the land for a total of $2,000,000. The fair value of the land at that time was $1,600,000 and the fair value of the building was $500,000. Vandalay paid Wreck It Ralph $50,000 to tear down the building. Vandalay Industries took out a construction loan to finance the construction of the new building on 9/1/2010 in the amount of $5,000,000. The interest rate on this loan was 12%. They also had other debt outstanding as follows:
Long term bank loan $4,000,000 @ 11%
Corporate bond issuance $6,000,000 @ 6%
On the same day, 9/1/2010, construction began. The building was ultimately finished and ready for use
on 3/31/2012. The timing of construction expenses is as follows:
Date Expense
9/1/2010 $1,350,000

11/1/2010. $1,600,000

12/31/2010. $1,500,000

4/1/2011. $3,000,000

10/1/2011. $856,000

2/1/2012 $2,022,000

Total $10,328,000

Vandalay has a policy of capitalizing interest on self-constructed assets when allowable under GAAP but does not capitalize any interest on costs associated with the purchase of land. Vandalay uses straight line depreciation for all of its buildings and estimates this building has a salvage value of $34,000 and a useful life of 24 years. For buildings Vandalay calculated depreciation for partial periods on the basis of the nearest full month.
On the same day the building was completed, 3/31/2012, Vandalay paid $500,000 to purchase a machine to be used in the new factory that came with a 2 year warranty that covered any necessary
repairs due to malfunctioning parts. The fair value of the machine and warranty separately were $450,000 and $112,500. Vandalay also had to pay $20,000 to transport the machine to its new facility
and $30,000 to have the machine installed. Vandalay uses the double declining balance method to depreciate this machine as well as the half year method and expects the machine to have a useful life of 10 years and a salvage value of $50,000.
In the beginning of the third calendar year of the machine’s useful life, January 2014, there was a sudden downturn in the market which prompted Vandalay’s Controller to undertake an impairment test related to the machine. At that time it was determined that the future undiscounted cash flows associated with the machine totaled $330,000 and the present value of those cash flows totaled $240,000.
In January 2015 Vandalay changed how it was using the machine to generate future cash flows. This change led to an estimate of future undiscounted cash flows resulting from the use of the machine

totaling $220,000. There was no market for this machine, but the present value of these projected future cash flows was $182,000. The change in the use of the machine did not affect Vandalay’s
estimate of either salvage value or useful life of the machine.
In March 2015, Vandalay determined that the machine would ultimately only have a salvage value of $14,000 as opposed to the originally estimated $50,000. At that time they also changed depreciation methods on the machine to the straight line method and determined that remaining useful life of the machine was 5 years instead of 7 years.

On 9/1/2017 Vandalay entered into a non-monetary exchange agreement with Putty Pros LLP. Vandalay gave Putty the machine which at that time had a fair value of $100,000 along with $15,000 cash in exchange for a newer machine that would be able to handle additional demand that Vandalay had been experiencing currently and would result in an increase to both production and revenue. The new machine was carried on Putty’s books at an initial cost of $150,000 and accumulated depreciation of $50,000.
Required
1) Determine the initial value that will be recorded on the balance sheet of Vandalay Industries for a) the land, b) the building and c) the original machine.
2) Calculate the amount of depreciation expense to be recorded by Vandalay for both the building and the original machine for the years 2012 – 2016.
3) Record any journal entries necessary to recognize an impairment loss on either the building or the original machine using the information that is provided in the case.
4) Record the journal entry on both Vandalay’s and Putty’s books to reflect the exchange of goods that takes place on 9/1/2017. (Don’t forget to take depreciation into account up to the point in
time when the exchange takes place. Assume the $50,000 of accumulated depreciation on Putty’s books includes depreciation expense for the first 8 months of 2017).
5) Record the same journal entries in 4) but under the assumption that the exchange lacks commercial substance.

Answer rating: 100% (QA)

1 a 2050000 b 11444110 c 450000 2 2012 2013 2014 2015 2016 Part 3 Loss on Impairmen... View the full answer