Question & Answer

In 2014, Ghostbusters Corp. spent $420,000 for “goodwill” visits by sales personnel to key customers. The purpose of these visits was to build a solid, friendly relationship for the future and to gain insight into the problems and needs of the companies served. How should this expenditure be reported?

Why does the accounting profession make a distinction between internally created intangibles and purchased intangibles?

Intangibles have either a limited useful life or an indefinite useful life. How should these two different types of intangibles be amortized?

If intangibles are acquired for stock, how is the cost of the intangible determined?

What are the two main characteristics of intangible assets?

Matt Holmes recently joined Klax Company as a staff accountant in the controller’s office. Klax Company provides warehousing services for companies in several midwestern cities.

The location in Dubuque, Iowa, has not been performing well due to increased competition and the loss of several customers that have recently gone out of business. Matt’s department manager suspects that the plant and equipment may be impaired and wonders whether those assets should be written down.

Given the company’s prior success, this issue has never arisen in the past, and Matt has been asked to conduct some research on this issue.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

(a) What is the authoritative guidance for asset impairments? Briefly discuss the scope of the standard

(i.e., explain the types of transactions to which the standard applies).

(b) Give several examples of events that would cause an asset to be tested for impairment. Does it appear that Klax should perform an impairment test? Explain.

(c) What is the best evidence of fair value? Describe alternate methods of estimating fair value.

Matt Holmes recently joined Klax Company as a staff accountant in the controller’s office. Klax Company provides warehousing services for companies in several European cities. The location in Koblenz, Germany, has not been performing well due to increased competition and the loss of several customers that have recently gone out of business. Matt’s department manager suspects that the plant and equipment may be impaired and wonders whether those assets should be written down. Given the company’s prior success, this issue has never arisen in the past, and Matt has been asked to conduct some research on this issue.

Instructions

Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab andthen register for free eIFRS access if necessary.) When you have accessed the documents, you can use thesearch tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)

(a) What is the authoritative guidance for asset impairments? Briefly discuss the scope of the standard

(i.e., explain the types of transactions to which the standard applies).

(b) Give several examples of events that would cause an asset to be tested for impairment. Does it appear that Klax should perform an impairment test? Explain.

(c) What is the best evidence of fair value? Describe alternate methods of estimating fair value.

Companies following international accounting standards are permitted to revalue fixed assets above the assets’ historical costs. Such revaluations are allowed under various countries’ standards and the standards issued by the IASB. Liberty International, a real estate company headquartered in the United

Kingdom (U.K.), follows U.K. standards. In a recent year, Liberty disclosed the following information on revaluations of its tangible fixed assets. The revaluation reserve measures the amount by which tangible fixed assets are recorded above historical cost and is reported in Liberty’s stockholders’ equity.

Liberty International

Completed Investment Properties

Completed investment properties are professionally valued on a market value basis by external valuers at the balance sheet date. Surpluses and deficits arising during the year are reflected in the revalution reserve.

Liberty reported the following additional data. Amounts for Kimco Realty (which follows GAAP) in the same year are provided for comparison.

Liberty Kimco (pounds sterling, in thousands) (dollars, in millions)

Total revenues £ 741 $ 517

Average total assets 5,577 4,696

Net income 125 297

Instructions

(a) Compute the following ratios for Liberty and Kimco.

(1) Return on assets.

(2) Profit margin on sales.

(3) Asset turnover.

How do these companies compare on these performance measures?

(b) Liberty reports a revaluation surplus of £1,952. Assume that £1,550 of this amount arose from an increase in the net replacement value of investment properties during the year. Prepare the journal entry to record this increase.

(c) Under U.K. (and IASB) standards, are Liberty’s assets and equity overstated? If so, why? When comparing Liberty to U.S. companies, like Kimco, what adjustments would you need to make in order to have valid comparisons of ratios such as those computed in (a) above?

Falcetto Company acquired equipment on January 1, 2013, for $12,000. Falcetto elects to value this class of equipment using revaluation accounting. This equipment is being depreciated on a straightline basis over its 6-year useful life. There is no residual value at the end of the 6-year period. The appraised value of the equipment approximates the carrying amount at December 31, 2013 and 2015. On December

31, 2014, the fair value of the equipment is determined to be $7,000.

Instructions

(a) Prepare the journal entries for 2013 related to the equipment.

(b) Prepare the journal entries for 2014 related to the equipment.

(c) Determine the amount of depreciation expense that Falcetto will record on the equipment in 2015.

Assume the same information as in IFRS11-11, except that Pujols intends to dispose of the equipment in the coming year.

Instructions

(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014.

(b) Prepare the journal entry (if any) to record depreciation expense for 2015.

(c) The asset was not sold by December 31, 2015. The fair value of the equipment on that date is $5,100,000. Prepare the journal entry (if any) necessary to record this increase. It is expected that the cost of disposal is $20,000.

Presented below is information related to equipment owned by Pujols Company at December 31, 2014.

Cost (residual value $0) $9,000,000

Accumulated depreciation to date 1,000,000

Value-in-use 5,500,000

Fair value less cost of disposal 4,400,000

Assume that Pujols will continue to use this asset in the future. As of December 31, 2014, the equipment has a remaining useful life of 8 years. Pujols uses straight-line depreciation.

Instructions

(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2014.

(b) Prepare the journal entry to record depreciation expense for 2015.

(c) The recoverable amount of the equipment at December 31, 2015, is $6,050,000. Prepare the journal entry (if any) necessary to record this increase.

Jurassic Company owns machinery that cost $900,000 and has accumulated depreciation of $380,000.The present value of expected future net cash flows from the use of the asset are expected to be $500,000. The fair value less cost of disposal of the equipment is $400,000. Prepare the journal entry, if any, to record the impairment loss.

Brazil Group purchases a vehicle at a cost of $50,000 on January 2, 2014. Individual components of the vehicle and useful lives are as follows.

Cost Useful Lives

Tires $ 6,000 2 years

Transmission 10,000 5 years

Trucks 34,000 10 years

Instructions

(Assume no residual (salvage) value.)

(a) Compute depreciation expense for 2014, assuming Brazil depreciates the vehicle as a single unit.

(b) Compute depreciation expense for 2014, assuming Brazil uses component depreciation.

(c) Why might a company want to use component depreciation to depreciate its assets?

Tan Chin Company purchases a building for $11,300,000 on January 2, 2014. An engineer’s report shows that of the total purchase price, $11,000,000 should be allocated to the building (with a 40-year life), $150,000 to 15-year property, and $150,000 to 5-year property. No residual (salvage) value should be considered. Compute depreciation expense for 2014 using component depreciation.

Ortiz purchased a piece of equipment that cost $202,000 on January 1, 2014. The equipment has the following components.

Component Cost Residual Value Estimated Useful Life

A $70,000 $7,000 10 years

B 50,000 5,000 5 years

C 82,000 4,000 12 years

Compute the depreciation expense for this equipment at December 31, 2014.

Why might a company choose not to use revaluation accounting?

Tanaka Company has land that cost $15,000,000. Its fair value on December 31, 2014, is $20,000,000. Tanaka chooses the revaluation model to report its land. Explain how the land and its related valuation should be reported.

Explain how gains or losses on impaired assets should be reported in income.

Toro Co. has equipment with a carrying amount of $700,000. The value-in-use of the equipment is $705,000, and its fair value less costs of disposal is $590,000. The equipment is expected to be used in operations in the future. What amount (if any) should Toro report as an impairment to its equipment?

Last year, Wyeth Company recorded an impairment on an asset held for use. Recent appraisalsindicate that the asset has increased in value. Should Wyeth record this recovery in value?

Walkin Inc. is considering the write-down of its long-term plant because of a lack of profitability. Explain to the management of Walkin how to determine whether a write-down is permitted.

The financial statements of P&G are presented in Appendix 5B. The company’s complete annual report, including the notes to the financial statements, can be accessed at the book’s companion website, www.

wiley.com/college/kieso.

Instructions

Refer to P&G’s financial statements and the accompanying notes to answer the following questions.

(a) What descriptions are used by P&G in its balance sheet to classify its property, plant, and equipment?

(b) What method or methods of depreciation does P&G use to depreciate its property, plant, and equipment?

(c) Over what estimated useful lives does P&G depreciate its property, plant, and equipment?

(d) What amounts for depreciation and amortization expense did P&G charge to its income statement in 2011, 2010, and 2009?

(e) What were the capital expenditures for property, plant, and equipment made by P&G in 2011, 2010, and 2009?

Jerry Prior, Beeler Corporation’s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him.

Prior knows that depreciation is a major expense for Beeler. The company currently uses the doubledeclining- balance method for both financial reporting and tax purposes, and he’s thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of $2,000,000 and a fair value of $2,180,000. The gain on the sale would be reported in the income statement. He doesn’t want to highlight this method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.”

Instructions

Answer the following questions.

(a) Who are the stakeholders in this situation?

(b) What are the ethical issues involved?

(c) What should Prior do?

As a cost accountant for San Francisco Cannery, you have been approached by Phil Perriman, canning room supervisor, about the 2014 costs charged to his department. In particular, he is concerned about the line item “depreciation.” Perriman is very proud of the excellent condition of his canning room equipment. He has always been vigilant about keeping all equipment serviced and well oiled. He is sure that the huge charge to depreciation is a mistake; it does not at all reflect the cost of minimal wear and tear that the machines have experienced over the last year. He believes that the charge should be considerably lower.

The machines being depreciated are six automatic canning machines. All were put into use on January 1, 2014. Each cost $625,000, having a salvage value of $55,000 and a useful life of 12 years. San Francisco depreciates this and similar assets using double-declining-balance depreciation. Perriman has also pointed out that if you used straight-line depreciation, the charge to his department would not be so great.

Instructions

Write a memo to Phil Perriman to clear up his misunderstanding of the term “depreciation.” Also, calculate year-1 depreciation on all machines using both methods. Explain the theoretical justification for doubledeclining- balance and why, in the long run, the aggregate charge to depreciation will be the same under both methods.