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Comprehensive Problem

Comprehensive Problem. Comprehensive Problem Solution. $ 65,000 Allocate in proportion to appraised values at date of exchange: % of Amount Total Land $ 72,000 8% Building 828,000 92% $900,000 100% Land $ 812,500 x 8% = $ 65,000

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Comprehensive Problem

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  1. Comprehensive Problem

  2. Comprehensive Problem Solution • $65,000 Allocate in proportion to appraised values at date of exchange: % of Amount Total Land $ 72,000 8% Building 828,000 92% $900,000100% Land $812,500 x 8% = $ 65,000 Building $812,500 x 92% = 747,500 $812,500 • $747,500 From above

  3. Comprehensive Problem Solution • 50 years ($747,500 - 47,500) / $14,000 annual depreciation. • 14,000 Same as prior year, since straight-line. • $85,400 3,000 shx $25 per sh = $75,000 Plus demolition of old bldg 10,400 $85,400 • None No depreciation before use. • $16,000 Fair value. • $2,400 $16,000 x (1.5 / 10 years). • $2,040 ($16,000 - 2,400) x (1.5 / 10 years). • $99,000 Total cost of $110,000 – $11,000 in normal repairs.

  4. Comprehensive Problem Solution • $19,800 $99,000 x 2/10. • $5,280 ($99,000 – 19,800) x 2/10 x 4/12. • $30,840 PVbeg(pmt=$4,000, FV=0, n=11, i=8%). • $2,056 $30,840 / 15 years.

  5. Chapter 12 Example On May 28, 2011, Pesky Corporation acquired all of the outstanding common stock of Harman, Inc., for $420 million. The fair value of Harman’s identifiable tangible and intangible assets totaled $512 million, and the fair value of liabilities assumed by Pesky was $150 million. • Determine the amount of goodwill that resulted from the Harman acquisition.

  6. Chapter 12 Example Consideration exchanged $420 Lessfair value of net assets: Assets $512 Less: Liabilities assumed (150) (362) Goodwill$ 58

  7. Chapter 12 Example, part b On May 28, 2011, Pesky Corporation acquired all of the outstanding common stock of Harman, Inc., for $420 million. The fair value of Harman’s identifiable tangible and intangible assets totaled $512 million, and the fair value of liabilities assumed by Pesky was $150 million. Pesky performed the required goodwill impairment test at the end of its fiscal year ended December 31, 2011. Management has provided the following information: FV of Harman, Inc. $ 400 million FV of Harman’s net assets (excluding goodwill) 370 million BV of Harman’s net assets (including goodwill) 410 million • Determine the amount of goodwill impairment loss that Pesky should recognize at the end of 2011, if any. • If an impairment loss is required, prepare the journal entry to record the loss.

  8. Chapter 12 Example, part b Because the book value of the net assets ($410 million) exceeds fair value ($400 million) an impairment loss is indicated. Determination of implied goodwill: Fair value of Harman, Inc. $400 Fair value of Harman’s net assets (excluding goodwill) 370 Implied value of goodwill $ 30 Measurement of impairment loss: Book value of goodwill $ 58 Implied value of goodwill 30 Impairment loss $ 28 Entry to record the impairment loss: Loss on impairment of goodwill 28 Goodwill 28

  9. E22-16 You have been engaged to review the financial statements of Longfellow Corporation. In the course of your examination, you conclude that the bookkeeper hired during the current year is not doing a good job. You notice a number of irregularities as follows. • Year-end wages payable of $3,400 were not recorded because the bookkeeper thought that “they were immaterial.” • Accrued vacation pay for the year of $31,100 was not recorded because the bookkeeper “never heard that you had to do it.” • Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $3,300 because “the amount of the check is about the same every year.” • Reported sales revenue for the year is $1,908,000. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state’s Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that “the sales tax is a selling expense.” At the end of the current year, the balance in the Sales Tax Expense account is $103,400. Prepare the necessary correcting entries, assuming that Longfellow uses a calendar-year basis.

  10. E22-16 • Year-end wages payable of $3,400 were not recorded because the bookkeeper thought that “they were immaterial.” Did: Nothing SHB: Salaries Expense3,400 Salaries Payable 3,400 Adj: Salaries Expense 3,400 Salaries Payable 3,400

  11. E22-16 • Accrued vacation pay for the year of $31,100 was not recorded because the bookkeeper “never heard that you had to do it.” Did: Nothing SHB: Salaries Expense 31,100 Salaries Payable31,100 Adj: Salaries Expense 31,100 Salaries Payable31,100

  12. E22-16 • Insurance for a 12-month period purchased on November 1 of this year was charged to insurance expense in the amount of $3,300 because “the amount of the check is about the same every year.” Did: Insurance Expense 3,300 Cash 3,300 SHB: Prepaid Insurance 3,300 Cash 3,300 Insurance Expense (2/12) 550 Prepaid Insurance (2/12) 550 Adj: Prepaid Insurance 2,750 (3,300 – 550) Insurance Expense 2,750

  13. E22-16 • Reported sales revenue for the year is $1,908,000. This includes all sales taxes collected for the year. The sales tax rate is 6%. Because the sales tax is forwarded to the state’s Department of Revenue, the Sales Tax Expense account is debited. The bookkeeper thought that “the sales tax is a selling expense.” At the end of the current year, the balance in the Sales Tax Expense account is $103,400. Did: Cash 1,908,000 Sales 1,908,000 Sales Tax Expense 103,400 Cash 103,400 SHB: Cash 1,908,000 Sales 1,800,000 (1,908,000 / 1.06) Sales Tax Payable 108,000 (1,800,000 * 0.06) Sales Tax Payable 103,400 Cash 103,400 Adj: Sales 108,000 (1,908,000 – 1,800,000) Sales Tax Expense 103,400 Sales Tax Payable 4,600 (108,000 – 103,400)

  14. E11-6 MuggsyBogues Company purchased equipment for $212,000 on October 1, 2014. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $12,000. Estimated production is 40,000 units and estimated working hours are 20,000. During 2014, Bogues uses the equipment for 525 hours and the equipment produces 1,000 units. Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31. • Straight-line method for 2014. • Activity method (units of output) for 2014. • Activity method (working hours) for 2014. • Sum-of-the-years’-digits method for 2016. • Double-declining-balance method for 2015.

  15. E11-6: Continued

  16. E11-6: Continued

  17. E11-21 Jonas Lumber Company owns a 7,000-acre tract of timber purchased in 2005 at a cost of $1,300 per acre. At the time of purchase, the land was estimated to have a value of $300 per acre without the timber. Jonas Lumber Company has not logged this tract since it was purchased. In 2012, Jonas had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. In 2012, Jonas built 10 miles of roads at a cost of $8,400 per mile. After the roads were completed, Jonas logged and sold 3,500 trees containing 880,000 board feet. • Determine the cost of timber sold related to depletion for 2012. • If Jonas depreciates the logging roads on the basis of timber cut, determine the depreciation expense for 2012. • If Jonas plants five seedlings at a cost of $4 per seedling for each tree cut, how should Jonas treat the reforestation?

  18. E11-21 Jonas Lumber Company owns a 7,000-acre tract of timber purchased in 2005 at a cost of $1,300 per acre. At the time of purchase, the land was estimated to have a value of $300 per acre without the timber. Implies that: Land ($300 per acre) 2,100,000 Timber ($1,000 per acre) 7,000,000 Cash ($1,300 per acre) 9,100,000

  19. E11-21 Jonas Lumber Company owns a 7,000-acre tract of timber purchased in 2005 at a cost of $1,300 per acre. At the time of purchase, the land was estimated to have a value of $300 per acre without the timber. Jonas Lumber Company has not logged this tract since it was purchased. In 2012, Jonas had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. 7,000 acres with 8,000 board feet per acre implies total timber of 56,000,000 board feet.

  20. E11-21 Jonas Lumber Company owns a 7,000-acre tract of timber purchased in 2005 at a cost of $1,300 per acre. At the time of purchase, the land was estimated to have a value of $300 per acre without the timber. Jonas Lumber Company has not logged this tract since it was purchased. In 2012, Jonas had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. In 2012, Jonas built 10 miles of roads at a cost of $8,400 per mile. After the roads were completed, Jonas logged and sold 3,500 trees containing 880,000 board feet. • Determine the cost of timber sold related to depletion for 2012. 880,000 / 56,000,000 sold times $7,000,000 equals $110,000 as cost of timber sold

  21. E11-21 Jonas Lumber Company owns a 7,000-acre tract of timber purchased in 2005 at a cost of $1,300 per acre. At the time of purchase, the land was estimated to have a value of $300 per acre without the timber. Jonas Lumber Company has not logged this tract since it was purchased. In 2012, Jonas had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. In 2012, Jonas built 10 miles of roads at a cost of $8,400 per mile. After the roads were completed, Jonas logged and sold 3,500 trees containing 880,000 board feet. • If Jonas depreciates the logging roads on the basis of timber cut, determine the depreciation expense for 2012. 880,000 / 56,000,000 sold times $84,000 ($8,400 times 10 miles) equals $1,320 as depreciation for roads

  22. E11-21 Jonas Lumber Company owns a 7,000-acre tract of timber purchased in 2005 at a cost of $1,300 per acre. At the time of purchase, the land was estimated to have a value of $300 per acre without the timber. Jonas Lumber Company has not logged this tract since it was purchased. In 2012, Jonas had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. In 2012, Jonas built 10 miles of roads at a cost of $8,400 per mile. After the roads were completed, Jonas logged and sold 3,500 trees containing 880,000 board feet. • If Jonas plants five seedlings at a cost of $4 per seedling for each tree cut, how should Jonas treat the reforestation? Jonas should capitalize the cost of $70,000 (5 seedlings X $4 X 3,500 trees cut) and adjust the depletion the next time the timber is harvested.

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