Intermediate Accounting Exam

1)

Early in 2017, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs’s manufacturing facility. Construction was begun on June 1, 2017 and was completed on December 31, 2017. Dobbs made the following payments to Kiner, Inc. during 2017:

Date Payment 
June 1, 2017 $6,156,000 
August 31, 2017 9,084,000 
December 31, 2017 7,380,000 

In order to help finance the construction, Dobbs issued the following during 2017:

1.$5,050,000 of 10-year, 9% bonds payable, issued at par on May 31, 2017, with interest payable annually on May 31.
2.300,000 shares of no-par common stock, issued at $10 per share on October 1, 2017.

In addition to the 9% bonds payable, the only debt outstanding during 2017 was a $1,270,000, 12% note payable dated January 1, 2013 and due January 1, 2023, with interest payable annually on January 1.

Compute the amounts of each of the following:

1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost.
2. Avoidable interest incurred during 2017.
3. Total amount of interest cost to be capitalized during 2017.

2)

Problem 146

Beeman Company exchanged machinery with an appraised value of $3,551,000, a recorded cost of $5,490,000 and accumulated depreciation of $2,745,000 with Lacey Corporation for machinery Lacey owns. The machinery has an appraised value of $3,367,000, a recorded cost of $6,460,000, and accumulated depreciation of $3,553,000. Lacey also gave Beeman $184,000 in the exchange. Assume depreciation has already been updated.

Prepare the entries on both companies’ books assuming that the exchange had commercial substance. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Prepare the entries on both companies’ books assuming that the exchange lacked commercial substance. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 12,515.)

3)

On July 1, 2017, Sport Company purchased for $3,600,000 snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $150,000. Depreciation is taken for the portion of the year the asset is used.

Complete the form below by determining the depreciation expense and year-end book values for 2017 and 2018 using the

1. sum-of-the-years’-digits method.

2. double-declining balance method.

  2017 2018 
Sum-of-the-Years’-Digits Method     
Equipment $3,600,000 $3,600,000 
Less: Accumulated Depreciation $575000 $1610000 
Year-End Book Value 3025000 1990000 
Depreciation Expense for the Year 575000 1035000 
Double-Declining Balance Method     
Equipment $3,600,000 $3,600,000 
Less: Accumulated Depreciation $720000 $1872000 
Year-End Book Value 2880000 1728000 
Depreciation Expense for the Year 720000 1152000 

Assume the company had used straight-line depreciation during 2017 and 2018. During 2019, the company determined that the equipment would be useful to the company for only one more year beyond 2019. Salvage value is estimated at $200,000.

Compute the amount of depreciation expense for the 2019 income statement.

Depreciation expense 

Assume the company had used straight-line depreciation during 2017 and 2018. During 2019, the company determined that the equipment would be useful to the company for only one more year beyond 2019. Salvage value is estimated at $200,000.

What is the depreciation base of this asset?

Depreciation base                  

4)

Dolphin Company uses special strapping equipment in its packaging business. The equipment was purchased in January 2016 for $6,000,000 and had an estimated useful life of 8 years with no salvage value. At December 31, 2017, new technology was introduced that would accelerate the obsolescence of Dolphin’s equipment. Dolphin’s controller estimates that expected future net cash flows on the equipment will be $3,750,000 and that the fair value of the equipment is $3,300,000. Dolphin intends to continue using the equipment, but it is estimated that the remaining useful life is 4 years. Dolphin uses straight-line depreciation.

What is the carrying value of the asset?

Prepare the journal entry (if any) to record the impairment at December 31, 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)

Prepare any journal entries for the equipment at December 31, 2018. The fair value of the equipment at December 31, 2018, is estimated to be $3,450,000. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)

5)

On May 31, 2018, Armstrong Company paid $3,500,000 to acquire all of the common stock of Hall Corporation, which became a division of Armstrong. Hall reported the following balance sheet at the time of the acquisition:

Current assets $  900,000 Current liabilities $  600,000
Noncurrent assets 2,700,000 Long-term liabilities 500,000
    Stockholder’s equity 2,500,000
Total assets $3,600,000 Total liabilities and
  stockholder’s equity
 $3,600,000

It was determined at the date of the purchase that the fair value of the identifiable net assets of Hall was $3,100,000. At December 31, 2018, Hall reports the following balance sheet information:

Current assets $  800,000  
Noncurrent assets (including goodwill recognized in purchase) 2,400,000  
Current liabilities (700,000) 
Long-term liabilities (500,000) 
Net assets $2,000,000  

It is determined that the fair value of the Hall division is $2,200,000. The recorded amount for Hall’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value of $200,000 above the carrying value.

Compute the amount of goodwill recognized, if any, on May 31, 2018.

Determine the impairment loss, if any, to be recorded on December 31, 2018.

Assume that the fair value of the Hall division is $2,150,000 instead of $2,200,000. Prepare the journal entry to record the impairment loss, if any, on December 31, 2018. (If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

6)

On July 31, 2017, Crane Company paid $2,750,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Crane. Conchita reported the following balance sheet at the time of the acquisition.

Current assets $890,000 Current liabilities $580,000
Noncurrent assets 2,450,000 Long-term liabilities 480,000
   Total assets $3,340,000 Stockholders’ equity 2,280,000
       Total liabilities and stockholders’ equity $3,340,000

It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was $2,480,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2017, Conchita reports the following balance sheet information.

Current assets $430,000 
Noncurrent assets (including goodwill recognized in purchase) 2,370,000 
Current liabilities (600,000)
Long-term liabilities (400,000)
   Net assets $1,800,000 

It is determined that the fair value of the Conchita Division is $1,850,000. The recorded amount for Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value $100,000 above the carrying value.

Compute the amount of goodwill recognized, if any, on July 31, 2017.

Determine the impairment loss, if any, to be recorded on December 31, 2017.

Assume that fair value of the Conchita Division is $1,696,000 instead of $1,850,000. Determine the impairment loss, if any, to be recorded on December 31, 2017.

Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)

This loss will be reported in income as a separate line item before the subtotal 

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