Chapter 07 - Long-Term Assets
PROBLEMS: SET C
Determine the acquisition cost of land and building
(LO7-1)
P7-1C China Express purchased land for $140,000. Prior to construction on the new building, the land had to be cleared of trees and brush. Construction costs incurred during the first year are listed below:
Architect fees (for new building) / 30,000
Legal fees fortitle investigation of land / 1,000
Property taxes on land (for the first year) / 2,500
Building construction costs / 440,000
Required:
Determine the amounts that should be recorded in theland and the new building accounts.
Determine the acquisition cost of equipment
(LO7-1)
P7-2C El Tapitio purchased equipment from OldWorldDeli. OldWorldDeli was closing itsbusiness and sold its restaurant equipmentfor $80,000. In addition to the purchase price, El Tapitiopaid shipping costs of $2,000. Employees of El Tapitioinstalled the ovens; labor costs were $10,000. An outside contractor performed some of the electrical work for $2,200. El Tapitioincurred costs of $800 in testing the equipment.
Required:
- Prepare a schedule showing the amount at which the equipment should be recorded in El Tapitio’s equipment account.
- Indicate where any amounts not included in the equipment account should be recorded.
Calculate and record goodwill
(LO7-2)
P7-3C Nordic Outfitters purchased all the outstanding common stock of European Retailfor $3,000,000 in cash. The book value of Pioneer’s net assets (assets minus liabilities) was $1,800,000. The book values and fair values of Pioneer’s assets and liabilities were:
Receivables / $250,000 / $250,000
Property, plant, and equipment / 2,000,000 / 2,400,000
Intangible assets / 200,000 / 500,000
Liabilities / (650,000) / (650,000)
Net Assets / $1,800,000 / $2,500,000
Required:
1. Calculate the amount paid for goodwill.
2. Record Nordic Outfitters’ acquisition of European Retail.
Record expenditures after acquisition
(LO7-3)
P7-4C Lincoln Driving Academypurchased a used car to use in its driver’s education program. Lincoln incurred the following expenses related to the car:
- Painted the car and fixed a dent on the side of the car at a cost of $2,700. The repairs are considered extensive and increase future benefits.
- Installed a driver’s side brake to be used by the instructor if necessary.
- Paid the annual registration fees of $120.
- Performed annual maintenance and repairs at $400.
- Overhauled the engine at a cost $2,600, increasing the service life of the car by an estimated four years.
Required:
Indicate whether Lincoln should capitalize or expense each of these expenditures.How could Lincoln use expenditures like these to increasereported earnings?
Determine depreciation under three methods (LO7-4)
P7-5C Diamond Autobody purchased some new equipment. The new equipment cost $90,000. The company estimates the equipment will have a residual value of $10,000. Cheetah Copy also estimates it will use the equipment for four years or about 5,000 total hours.
Required:
Prepare a depreciation schedule for three years using the following methods:
1. Straight-line.
2. Double-declining-balance.
3. Activity-based. Actual use per year was as follows:
1 / 1,200
2 / 1,400
3 / 1,500
4 / 1,100
Record amortization and prepare the intangible assets section
(LO7-5)
P7-6CThe following information relates to the intangible assets of University Hero:
a. On January 1, 2015, University Hero completed the purchase of Whole Grain Foods for $800,000 in cash. The fair value of the identifiable net assets of Farmers Produce was $625,000.
b. Included in the assets purchased from Whole grain Foods was a patent valued at $75,000. The original legal life of the patent was 20 years. There are still 8 years left on the patent, but Lettuce Express estimates the patent will be useful for only3 more years.
c. University Hero acquired a franchise on July 1, 2015, by paying an initial franchise fee of $100,000. The contractual life of the franchise is 5 years.
Required:
1. Record amortization expense for the intangible assets at December 31, 2015.
2. Prepare the intangible asset section of the December 31, 2015, balance sheet.
Compute depreciation, amortization, and book value of long-term assets
(LO7-4, 5)
P7-7C The Snack Stop had the following long-term asset balances as of January 1, 2015:
Cost / AccumulatedDepreciation / Book
Value
Land / $90,000 / – / $90,000
Building / 600,000 / ($60,000) / 540,000
Equipment / 200,000 / (72,000) / 128,000
Patent / 80,000 / (20,000) / 60,000
All of the assets were purchased at the beginning of 2013. The building is depreciated over a 20-year service life using the straight-line methodand estimating no residual value. The equipment is depreciated over a 10-year useful life using the double-declining-balance method with an estimated residual value of $10,000. The patent is estimated to have an 8-year service life with no residual value and is amortized using the straight-line method. Depreciation and amortization has already been calculated for the first two years.
Required:
1. For the year ended December 31, 2015,record depreciation expense for buildings and equipment. Land is not depreciated.
2. For the year ended December 31, 2015,record amortization expense for the patent.
3. Calculatethe book value for each of the four long-term assets at December 31, 2015.
Record the disposal of equipment
(LO7-6)
P7-8C Old World Deli is in the process of closing itsoperations. It sold its three-year-old restaurant equipment to El Tapitiofor $80,000. The equipment originally cost $220,000 and had an estimated service life of 5 years and an estimated residual value of $20,000. Old World Deli uses straight-line depreciation for all equipment.
Required:
1. Calculate the balance in the accumulated depreciation account at the end of the third year.
2. Calculate the book value of the equipment at the end of the third year.
3. What is the gain or loss on the sale of the equipment at the end of the third year?
4. Record the sale of the equipment at the end of the third year.
Calculate and
interpret ratios
(LO7-7)
P7-9C Reported below is selected financial information from two competing retail companies ($ in millions):
Company A / 2015 / 2014Sales / $405,607 / $378,799
Net income / $13,400 / $12,731
Total assets / $163,429 / $163,514
Company B / 2015 / 2014
Sales / $64,948 / $63,367
Net income / $2,214 / $2,849
Total assets / $44,106 / $44,560
Required:
1. Calculate the return on assets, profit margin, and asset turnover ratio for Company A.
2. Calculate the return on assets, profit margin, and asset turnover ratio for Company B.
3. Which company has the higher profit margin and which company has the higher asset turnover?
Calculate and
interpret ratios
(LO7-7)
P7-10C Kelli Davis is in the flower business. While business has been steady, she wonders if she should expand her business to include candy as well. Both flowers and candy fit well into her business model. Kelli provides the following projections of annual sales, net income, and average total assets for the flower business alone and for the business if both flowers and candy were sold.
Flowers Only / Flowersand Candy
Sales / $380,000 / $500,000
Net income / 40,000 / 60,000
Average total assets / 200,000 / 250,000
Required:
1.Calculate Kelli’s return on assets, profit margin, and asset turnover for flowers only.
2.Calculate Kelli’s return on assets, profit margin, and asset turnover for flowers and candy.
3.Based on these ratios, what recommendation would you make?
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Financial Accounting, 3eThe McGraw-Hill Companies, Inc., 2014