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Exam 8: Reporting and Analyzing Long-Term Operating Assets

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Question 31

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At what point is an asset considered to be impaired?

A) When the net book value is greater than the sum of undiscounted expected cash flows
B) When the net book value is less than the sum of discounted expected cash flows
C) When the net book value is less than the sum of undiscounted expected cash flows
D) When the net book value is greater than the sum of discounted expected cash flows

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Question 32

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R&D expense is treated as an operating expense, not a capital expenditure, unless the assets have an alternative future use.

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Question 33

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Green Garden Company purchased a tractor at a cost of $240,000. The tractor has an estimated residual value of $40,000 and an estimated life of 8 years, or 10,000 hours of operation. The tractor was purchased on January 1, 2015 and was used 2,400 hours in 2015 and 2,100 hours in 2016. On January 1, 2017, the company decided to sell the tractor for $140,000. Green Garden Co. uses the units-of- production method to account for the depreciation on the tractor. Based on this information, the entry to record the sale of the tractor will show:

Depreciation requires only two estimates-useful life and residual value-both of which are specified by GAAP depending on the asset type.

EMG Industries, a large clothing mail-order retailer, purchased a new industrial sewing machine for $208,000. This machine is expected to operate for 5 years after which it will be sold for salvage value estimated to be $12,000. What is the yearly depreciation expense under the straight-line method?

For each of the following items, indicate whether the costs should be capitalized or expensed immediately. 1. Purchased a patent for $48,000 2. Paid $22,000 to overhaul a drilling rig. The overhaul will extend the useful life by 3 years. 3. Paid $2,400 for routine maintenance and lubrication of a tractor. 4. Paid $26,000 to install new equipment in the production line that will "super-cool" the product and allow for faster shipping of fresher merchandise 5. Equipment is purchased for $32,000 for a specific R&D project

True Sound Wireless, Inc. acquired Clarity Networks, Inc. in 2015. The carrying amount of the investment on the balance sheet is reported as $700 million, including goodwill of $200 million. In performing its annual impairment test in 2016, True Sound estimates that the fair market value of Clarity Network's assets and liabilities, including identifiable intangible assets, to be $600 million, and estimates goodwill is impaired by $100 million. What effect, if any, will this analysis have on True Sound's financial statements?

In 2015, Marvin's Mining Company purchased land for $41,600,000 that had a natural resource reserve estimated to be 690,000 tons. Development and road construction costs on the land were $1,440,000 and a building was constructed at a cost of $880,000. When the natural resources are completely extracted, the land has an estimated residual value of $5,600,000. In addition, the cost to restore the property to comply with environmental regulations is estimated to be $3,080,000. Production in 2015 and 2016 was 50,000 tons and 65,000 tons, respectively. A. Compute the depletion charge for 2015 and 2016. Include depreciation on the building, if any, as part of the depletion charge. B. Prepare a journal entry to record each year's depletion expense.

How is the gain (loss) on a plant asset sale calculated?

Under which section of a statement of cash flows would the proceeds received from the sale of long-term depreciable assets most likely appear?

Which of the following estimates are required when calculating depreciation expense? 1) Depreciation rate 2) Useful life 3) Expected maintenance costs 4) Salvage value

Which of the following purchased assets would not be capitalized?

On January 1, 2015, Dunlop Company purchased a copy machine. The machine costs $600,000, its estimated useful life is 8 years, and its expected salvage value is $40,000. What is the depreciation expense for 2016 using double-declining-balance method?

Depreciation is the recognition of the change in market value of a plant asset over time.

The following are the income statement and a portion of the long-term asset section of NASDAQ EGN Group's balance sheet for 2016. Amounts are in millions. NASDAQ EGN Group's property and equipment is primarily shorter-term data processing equipment without the long-term buildings or other real estate owned. This equipment readily defines the company through its primary business, the running of exchanges for the stock market. The company is very active in reacting to changes in the way trading is done by also acquiring other global companies (exchanges). A. Compute property, plant and equipment turnover for 2016 and 2015 and explain any changes. Net plant and equipment for 2014 totaled $492 million. Are there any unique considerations for a company like NASDAQ EGN Group? Explain. B. How much has NASDAQ EGN Group invested in property plant and equipment as compared to intangibles, primarily goodwill in 2016? Does this seem odd? What may account for this?

Perfect Weld buys a specialty table saw for its metal fabrication business on January 1, 2016. The machine cost $240,000 and is expected to be used for five years. At the end of the five years it is expected that the machine can be sold for $16,000. Compute the depreciation expense for the third year (2018) using both straight-line and double-declining-balance depreciation methods.

Leaping Deer Company purchased a tractor at a cost of $440,000. The tractor has an estimated residual value of $40,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2015 and was used 2,400 hours in 2015 and 2,200 hours in 2016. What amount will Leaping Deer Company report as depreciation expense over the 8-year life of the equipment using straight-line depreciation?

What are the main issues in reporting a company's gains (losses) on asset sales? What is the related concern in the analysis of the company?