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Exam 11: Property, Plant, and Equipment and Intangible Assets: Utilization and Disposition

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Question 71

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On April 23, 2018, Trevors Mining entered into an agreement with the state of California to obtain the rights to operate a mineral mine in California for $12 million. Additional costs and purchases included the following: $\begin{array}{lr}\text { Preparation of site for excavation } & \$ 4,800,000 \\\text { Mining equipment } & 360,000 \\\text { Construction of various structures on site } & 240,000\end{array}$ After the minerals are removed from the mine, the equipment will be sold for an estimated residual value of $60,000. The structures will be torn down. The mine is expected to produce 1,400,000 tons of ore. After the ore is removed, the land will revert back to the state of California. During 2018, Trevors extracted 210,000 tons of ore from the mine. What total amount would be charged to depletion of the mine and depreciation of the mining equipment and structures for 2018, assuming that Trevors uses the units-of-production method for both depletion and depreciation? (Round your final calculations to the nearest whole thousand dollars.)

A) $2,601,000.
B) $2,520,000.
C) $2,610,000.
D) $2,565,000.

E) B) and C)
F) A) and D)

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Question 72

Multiple Choice

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Depreciation, depletion, and amortization:

A) All refer to the process of allocating the cost of long-term assets used in the business over future periods.
B) All generally use the same methods of cost allocation.
C) Are all handled the same in arriving at taxable income.
D) All of these answer choices are correct.

E) A) and B)
F) All of the above

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Question 73

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On January 1, 2018, Hobart Mfg. Co. purchased a drill press at a cost of $36,000. The drill press is expected to last 10 years and has a residual value of $6,000. During its 10-year life, the equipment is expected to produce 500,000 units of product. In 2018 and 2019, 25,000 and 84,000 units, respectively, were produced. -Required: Compute depreciation for 2018 and 2019 and the book value of the drill press at December 31, 2018 and 2019, assuming the straight-line method is used.

A company had the following expenditures related to developing its trademark. During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all the above as costs of the trademark. Management contends that all of the costs increase the value of the trademark; therefore, all the costs should be capitalized. Required: 1. Which of the above costs should the company capitalize to the Trademark account in the balance sheet? 2. Which of the above costs should the company report as expense in the income statement?

On April 1, 2018, Parks Co. purchased machinery at a cost of $42,000. The machinery is expected to last 10 years and to have a residual value of $6,000. -Required: Compute depreciation for 2018 and 2019 and the book value of the machinery at December 31, 2018 and 2019, assuming the sum-of-the-years'-digits method is used.

Kelly Company and its subsidiaries are engaged in the manufacture and marketing of ready-to-eat cereal and convenience foods. In its annual report to shareholders, Kelly disclosed the following: DISPOSITIONS Last year, the Company sold certain assets and liabilities of the Leader's Bagels business to Aura Foods Inc. for $275 million in cash. As a result of this transaction, the Company recorded a pretax charge of $178.9 million ($119.3 million after tax or $.29 per share). This charge included approximately $57 million for disposal of other assets associated with the Leader's business, which were not purchased by Aura. Disposal of these other assets was completed during the current year. The original reserve of $57 million exceeded actual losses from asset sales and related disposal costs by approximately $9 million. This amount was recorded as a credit to other income (expense), net during the current year. Required: Explain how the Kelly transactions described could be interpreted as an example of earnings management.

Sanders Corporation operates a factory in Arizona. Due to a change in business climate, an impairment test is deemed appropriate. Management has acquired the following information for the assets at the plant: Required: 1. Determine the amount of impairment loss, if any. 2. If a loss is indicated, prepare the entry to record the loss 3. Repeat requirement 1 assuming that Sanders prepares its financial statements according to International Financial Reporting Standards (IFRS). Also assume that the estimated fair value of the factory approximates fair value less costs to sell.

By the replacement depreciation method, depreciation is recorded when assets are replaced.

Oak Inc. has the following information regarding its assets: What amount of loss should be recorded due to asset impairments?

On January 1, 2018, Hobart Mfg. Co. purchased a drill press at a cost of $36,000. The drill press is expected to last 10 years and has a residual value of $6,000. During its 10-year life, the equipment is expected to produce 500,000 units of product. In 2018 and 2019, 25,000 and 84,000 units, respectively, were produced. -Required: Compute depreciation for 2018 and 2019 and the book value of the drill press at December 31, 2018 and 2019, assuming the double-declining-balance method is used.

Advocates of accelerated depreciation methods argue that their use tends to level out the total cost of ownership of an asset over its benefit period if one considers both depreciation and repair and maintenance costs.

Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. -Improvements

McLean Mfg. Company sold a three-speed lathe (equipment) for $24,000 cash. The lathe cost $66,200 and had a book value of $23,200. Required: Prepare the journal entry to record the sale.

Rice Industries owns a manufacturing plant in a foreign country. Political unrest in the country indicates that Rice should investigate for possible impairment. Below is information related to the plant's assets ($ in millions) : The amount of impairment loss that Rice should recognize according to U.S. GAAP and IFRS, respectively, is:

On June 30, 2018, Prego Equipment purchased a precision laser-guided steel punch that has an expected capacity of 300,000 units and no residual value. The cost of the machine was $450,000 and is to be depreciated using the units-of-production method. During the six months of 2018, 24,000 units of product were produced. At the beginning of 2019, engineers estimated that the machine can realistically be used to produce only another 230,000 units. During 2019, 70,000 units were produced. - Prego would report depreciation in 2019 of:

Listed below are 10 terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the correct term. -Straight-line method

El Dorado Foods Inc. owns a chain of specialty stores in the Pacific Northwest. Recently, four of the stores have experienced declining profits due to market saturation in the area. As a result, management gathered data about possible impairment of the assets of the stores. The information gathered was as follows: Book value: $17.5 million Fair value: $14.9 million Undiscounted sum of future cash flows: $16.5 million -Required: Assume that the undiscounted sum of future cash flows is $18.2 million, instead of $16.5 million. Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.

The legal life of a patent is:

A company made the following expenditures related to its restaurant: 1. Replaced the heating and air conditioning equipment a cost of $15,000. 2. Remodeled the restaurant building. The total cost of the project was $150,000. 3. Performed annual building maintenance at a cost of $47,000. 4. Paid annual insurance premium on the property for the coming year, $7,700. 5. Purchased a new delivery truck, $22,500. 6. Landscaped the property and added outdoor lights, $9,000. Required: Assume the company credits cash for each of these expenditures. Indicate the account to be debited for each of these expenditures.

Short Corporation acquired Hathaway, Inc., for $52,000,000. The fair value of all Hathaway's identifiable tangible and intangible assets was $48,000,000. Short will amortize any goodwill over the maximum number of years allowed. What is the annual amortization of goodwill for this acquisition?