Chapter 7
Long-Term Assets
PART 1 – ACQUISITIONS
LO 1 Identify and record the major types of property, plant, and equipment.
i. Cost
ii. All expenditures necessary to get the asset ready to use
i. WorldCom–
Practice: If a company initially records an expense incorrectly as an asset, explain how this mistake affects the income statement and the balance sheet.
This mistake will overstate _________ on the income statement and overstate ________ on the balance sheet. If a company initially records an expense incorrectly as an asset, expenses are understated or too small.
Practice: Soccer Wholesale purchased land and a warehouse for $800,000. In addition to the purchase price, Soccer Wholesale incurred commissions of $48,000; property taxes of $10,000, title insurance, $3,000; and miscellaneous closing costs, $8,000. The warehouse is immediately demolished at a cost of $80,000. The $10,000 in property taxes includes $7,000 on behalf of the seller and $3,000 due for the current year after the purchase date. Determine the amount Soccer Wholesale should record as the cost of the land.
Land Improvements
i. Cost plus expenses to get it ___________
i. Unique – ___________on construction loan is _________
F. Natural resources
a. _depleted_ or used up.
i. Oil & gas
ii. Timber
Practice: Holiday Laboratories purchased a high speed industrial centrifuge at a cost of $420,000. Shipping costs totaled $15,000. Foundation work to house the centrifuge cost $8,000. An additional water line had to be run to the equipment at a cost of $3,000. Labor and testing costs totaled $6,000. Materials used up in testing cost $3,000. What is the total cost of the equipment? How much of this amount should be expensed immediately?
E7-4 Practice: Red Rock Bakery purchases land, building, and equipment for a single purchase price of $400,000. Red Rock paid cash. However, the estimated fair values of the land, building, and equipment are $150,000, $300,000, and $50,000, respectively, for a total estimated fair value of $500,000. Prepare the journal entry to record the purchase.
LO 2 Identify and record the major types of intangible assets.
i. Legal fees
ii. Filing fees
Practice: On March 31, 2012, the New Harvest Bakery acquired all the outstanding common stock of Red Rock Bakery for $68,000 in cash. The book values and market values of Red Rock’s assets and liabilities were as follows:
Calculate the amount paid for goodwill.
LO 3 Discuss the accounting treatment of expenditures after acquisition.
PART B – COST ALLOCATION
LO 4 Calculate depreciation of property, plant, and equipment.
i. Contra asset account
i. Capitalized asset less accumulated depreciation
ii. Does not refer to market value or selling price.
Cost – Residual Value = _______________
Depreciable cost / Service life
i. Purchased August 16 =
ii. Purchased August 14 =
Cost – accumulated depreciation =
Book value x (2 / service life)
Book value x double the straight-line percentage
JRS real-world easy method: (Book value / service life) x 2
Cost – Residual Value = ___________________
Depreciation rate per unit = Depreciable cost / Total units expected to be produced
Depreciation rate per unit x # of units of activity
Practice: Chicago Style Pizza purchases a delivery van at a cost of $30,000. On the date of purchase, the company estimates the van will have a residual value of $5,000. The company expects to use the van for five years or about 100,000 miles.
Required:
Prepare a depreciation schedule using each of the following methods:
1. Straight-line.
2. Double-declining-balance.
3. Activity-based. Actual use per year was as follows:
Year |
|
Miles Used |
1 |
|
22,000 |
2 |
|
24,000 |
3 |
|
18,000 |
4 |
|
21,000 |
5 |
|
20,000 |
Total |
|
105,000 |
LO 5 Calculate amortization of intangible assets.
PART C – ASSET DISPOSITION: SALE, RETIREMENT, OR EXCHANGE
LO 6 Account for the disposal of long-term assets.
Practice: Strawberry Fields purchased a tractor at a cost of $38,000 and sold it two years later for $25,000. Strawberry Fields recorded depreciation using the straight-line method, a five-year service life, and an $8,000 residual value. What was the gain or loss on the sale? Record the sale.
ANALYSIS
LO 7 Describe the relationship among return on assets, profit margin, and asset turnover.
a. It shows how efficiently a company uses its assets to produce income.
a. Profit margin equals _______________
i. Shows the percentage of each sales dollar that results in net income.
ii. A 12.5 percent profit margin, for example, means that 12.5 cents have been earned on each dollar of sales.
b. Asset turnover equals ______________________________________
i. It shows how efficiently assets are used to produce sales.
ii. Profit Margin x Asset Turnover = Return on Assets
Practice: Allied Construction and Axis Construction reported the following information in their annual financial statements ($ in millions):
1. Calculate Allied Construction’s return on assets, profit margin, and asset turnover ratio for 2012.
2. Calculate Axis Construction’s return on assets, profit margin, and asset turnover ratio for 2012.
3. Which company has the better profit margin and which company has the better asset turnover?
APPENDIX – ASSET IMPAIRMENT
LO 8 Identify impairment situations and describe the two-step impairment process.
Practice: Northwest Catering owns and operates several restaurant services in Oregon, Washington, and Idaho. One restaurant chain has experienced sharply declining profits. The company’s management has decided to test the operational assets of the restaurants for possible impairment. The relevant information for these assets is presented below:
Determine the amount of the impairment loss, if any.
More Practice: Listed below are five terms followed by a list of phrases that describe or characterize the terms. Match each phrase with the best term placing the number designating the term in the space provided.
1. Big bath |
Net sales divided by average total assets; which measures the sales per dollar of assets invested. |
|
2. Impairment |
Net income divided by net sales; indicates the earnings per dollar of sales. |
|
3. Profit margin |
Net income divided by average total assets; measures the amount of net income generated for each dollar invested in assets. |
|
4. Return on assets |
Recording all losses in one year to make a bad year even worse. |
|
5. Asset turnover |
Occurs when the future cash flows (future benefits) generated for a long-term asset fall below its book value (cost minus accumulated depreciation). |
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