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Exam 10: Operational Assets: Acquisition and Disposition

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Question 31

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Walker Corporation exchanged land and $4,500 cash for material handling equipment. The land had a book value of $45,000 and a fair value of $58,000. Assume the exchange has commercial substance. Required: Prepare the journal entry to record the exchange.

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Question 32

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Research and development costs for projects other than software development should be:

A) Expensed in the period incurred.
B) Expensed in the period they are determined to be unsuccessful.
C) Deferred pending determination of success.
D) Expensed if unsuccessful, capitalized if successful.

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Question 33

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Use a T- account to show the balances and changes during 2007 in Boston Beer's: Property, Plant, and Equipment account and its Accumulated depreciation-Property, Plant, & equipment account. ($ in thousands)

Kellogg 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, Kellogg disclosed the following: DISPOSITIONS Last year, the Company sold certain assets and liabilities of the Lender's Bagels business to Aurora 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 Lender's business, which were not purchased by Aurora. 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 Kellogg transactions described could be interpreted as an example of earnings management.

Eli Company purchased assets of Whitney Inc. at auction for $1,560,000. An independent appraisal of the fair value of the assets acquired is listed below: Required: Prepare the journal entry to record the purchase of the assets. $\begin{array} { l r } \text { Land } & \$ 171,600 \\\text { Building } & 514,800 \\\text { Equipment } & 600,600 \\\text { Inventories } & 429,000\end{array}$

During 2009, Prospect Oil Corporation incurred $4,000,000 in exploration costs for each of 15 oil wells drilled in 2009. Of the 15 wells drilled, 10 were dry holes. Prospect uses the successful efforts method of accounting. Assuming that Prospect depletes 30% of the oil discovered in 2009, what amount of these exploration costs would remain on its 12/31/09 balance sheet?

Grab Manufacturing Co. purchased a ten-ton draw press at a cost of $180,000 with terms of 5/15, n/45. Payment was made within the discount period. Shipping costs were $4,600, which included $200 for insurance in transit. Installation costs totaled $12,000, which included $4,000 for taking out a section of a wall and rebuilding it because the press was too large for the doorway. The capitalized cost of the ten-ton draw press is:

Interest capitalized for 2009 was:

How are assets valued when they are acquired by issuing stock?

During the current year, Brewer Company purchased all of the outstanding common stock of Miller Inc. paying $12,000,000 cash. The book values and fair values of Miller's assets and liabilities acquired are listed below: Required: Prepare the journal entry to record the acquisition by Brewer Company. $\begin{array}{lrr}&\text { Book Value } & \text { Fair Value } \\\text { Accounts receivable } & \$ 1,800,000 & \$ 1,625,000 \\\text { Inventories } & 2,700,000 & 4,000,000 \\\text { Property, plant, and equipment } & 9,000,000 & 11,625,000 \\\text { Accounts payable } & 3,000,000 & 3,000,000 \\\text { Bonds payable } & 4,500,000 & 4,125,000\end{array}$

Which of the following does not pertain to accounting for asset retirement obligations?

The initial cost of an operational asset includes all the identifiable expenditures necessary to bring the asset to its desired condition and location for use.

Asset retirement obligations:

The FASB's required accounting treatment for research and development costs often understates both net income and assets.

The cost of self-constructed fixed assets should:

The balance sheets of Davidson Corporation reported net fixed assets of $320,000 at the end of 2009. The fixed-asset turnover ratio for 2009 was 4.0 and sales for the year totaled $1,480,000. Net fixed assets at the end of 2008 were:

Schefter Mining operates a copper mine in Wyoming. Acquisition, exploration, and development costs totaled $8.2 million. Extraction activities began on July 1, 2009. After the copper is extracted in approximately six years, Schefter is obligated to restore the land to its original condition, including constructing a park. The company's controller has provided the following three cash flow possibilities for the restoration costs: The company's credit-adjusted, risk-free rate of interest is 5%, and its fiscal year ends on December 31. Required: 1. What is the initial cost of the copper mine? (Round computations to nearest whole dollar.) 2. How much accretion expense will Schefter report in its 2009 income statement? 3. What is the carrying value (book value) of the asset retirement obligation that Schefter will report in its 2009 balance sheet? 4. Assume that actual restoration costs incurred in 2015 totaled $860,000. What amount of gain or loss will Schefter recognize on retirement of the liability?

PeopleSoft recorded capitalized software amortization, included in Cost of license fees in the accompanying consolidated statements of operations, of $36.8 million in 2003, $14.4 million in 2002 and $6.5 million in 2001. PeopleSoft accounts for the development cost of software intended for sale in accordance with Statement of Financial Accounting Standards No. 86, Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, (SFAS 86). SFAS 86 requires product development costs to be charged to expense as incurred until technological feasibility is attained. Technological feasibility is attained when the Company s software has completed system testing and has been determined viable for its intended use. The time between the attainment of technological feasibility and completion of software development has been short with immaterial amounts of development costs incurred during this period. Accordingly, the Company did not capitalize material amounts of development costs in 2003 or 2002, other than product development costs acquired through business combinations or purchased from third parties. The Company capitalizes software acquired through technology purchases and business combinations if the related software under development has reached technological feasibility or if there are alternative future uses for the software. Required: Describe how software companies like PeopleSoft treat software development costs differently from the typical GAAP treatment of research and development costs in other industries. Why is this the case?

On March 15, 2009, Ellis Corporation issued 5,000 share of its no-par common stock in exchange for a patent. On the date of the transaction, the market price of the common stock was $22 per share. Ellis also received a tract of land from the City of Montrose. The land, which has a fair value of $310,000, was donated to Ellis as an enticement to build a new office building on the site. Required: Prepare the journal entries to record the transactions.

Liddy Corp. began constructing a new warehouse for its operations during the current year. In the year Liddy incurred interest of $30,000 on a working capital loan, and interest on a construction loan for the warehouse of $60,000. Interest computed on the average accumulated expenditures for the warehouse construction was $50,000. What amount of interest should Liddy expense for the year?