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Chapter 11: Q19 Q (page 583)

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

Short Answer

Expert verified

Answer

Impaired asset losses are reported as part of the income from continuing operations.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Impairment of Asset

The term "impairment" refers to a reduction in the market value of fixed or intangible assets, indicative of a reduction in quantity, quality, or market value of an asset. The idea is that an asset should never be reported in a business's financial statements above the maximum amount that could be recouped through its sale.

02

Explaining reporting of gains or losses on impaired assets.

Impairment losses are normally included in "Other costs and losses" column of income from continuing operations. Impairment losses (and the recovery of losses for assets that are to be disposed of) are similar to other operational expenditures. As a result, profits (recoveries of losses) on assets to be disposed of should be recorded in "Other revenues and gains" section as part of the income from continuing activities.

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Most popular questions from this chapter

(Depletion Computations鈥擬inerals) At the beginning of 2017, Aristotle Company acquired a mine for \(970,000. Of this amount, \)100,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 12,000,000 units of ore appear to be in the mine. Aristotle incurred \(170,000 of development costs associated with this mine prior to any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the mineral has been removed was \)40,000. During 2017, 2,500,000 units of ore were extracted and 2,100,000 of these units were sold.

Instructions

Compute the following.

  1. The total amount of depletion for 2017.
  2. The amount that is charged as an expense for 2017 for the cost of the minerals sold during 2017.

Question: (Comprehensive Depreciation Computations) Kohlbeck Corporation, a manufacturer of steel products, began operations on October 1, 2016. The accounting department of Kohlbeck has started the fixed-asset and depreciation schedule presented on page 595. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company鈥檚 records and personnel.

  1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
  2. Land A and Building A were acquired from a predecessor corporation. Kohlbeck paid \(800,000 for the land and building together. At the time of acquisition, the land had an appraised value of \)90,000, and the building had an appraised value of \(810,000.
  3. Land B was acquired on October 2, 2016, in exchange for 2,500 newly issued shares of Kohlbeck鈥檚 common stock. At the date of acquisition, the stock had a par value of \)5 per share and a fair value of \(30 per share. During October 2016, Kohlbeck paid \)16,000 to demolish an existing building on this land so it could construct a new building.
  4. Construction of Building B on the newly acquired land began on October 1, 2017. By September 30, 2018, Kohlbeck had paid \(320,000 of the estimated total construction costs of \)450,000. It is estimated that the building will be completed and occupied by July 2019.
  5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair value at \(40,000 and the salvage value at \)3,000.
  6. Machinery A鈥檚 total cost of \(182,900 includes installation expense of \)600 and normal repairs and maintenance of \(14,900. Salvage value is estimated at \)6,000. Machinery A was sold on February 1, 2018.
  7. On October 1, 2017, Machinery B was acquired with a down payment of \(5,740 and the remaining payments to be made in 11 annual installments of \)6,000 each beginning October 1, 2017. The prevailing interest rate was 8%. The following data were abstracted from present value tables (rounded).
    Present Value of \(1.00 at 8%

    10 years

    .463

    11 years

    .429

    15 years

    .315

Present Value of an Ordinary Annuity of \)1.00 at 8%

10 years

6.710

11 years

7.139

15 years

8.559

KOHLBECK CORPORATION

Fixed-Asset and Depreciation Schedule

For Fiscal Years Ended September 30, 2017, and September 30, 2018

Depreciation

Expense year

ended

September 30

Assets

Acquisition

Date

Cost

Salvage

Deprecation

method

Estimated

Life in

years

2017

2018

Land A

October 1, 2016

\( (1)

N/A*

N/A

N/A

N/A

N/A

Building A

October 1, 2016

(2)

\)40,000

Straight-line

(3)

\(13,600

(4)

Land B

October 2, 2016

(5)

N/A

N/A

N/A

N/A

N/A

Building B

Under construction

\)320,000 to date

鈥�

Straight-line

30

鈥�

(6)

Donated Equipment

October 2, 2016

(7)

3,000

150% declining-balance

10

(8)

(9)

Machinery A

October 2, 2016

(10)

6,000

Sum-of-the-years-digits

8

(11)

(12)

Machinery B

October 1, 2017

(13)

鈥�

Straight-line

20

鈥�

(14)

Instructions

For each numbered item on the schedule above, supply the correct amount. (Round each answer to the nearest dollar.)

Everly Corporation acquires a coal mine at a cost of \(400,000. Intangible development costs total \)100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is \(80,000), after which it can be sold for \)160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.

Electroboy Enterprises, Inc. operates several stores throughout the western United States. As part of an operational and financial reporting review in a response to a downturn in its markets, the company鈥檚 management has decided to perform an impairment test on five stores (combined). The five stores鈥� sales have declined due to aging facilities and competition from a rival that opened new stores in the same markets. Management has developed the following information concerning the five stores as of the end of fiscal 2016.

Original cost \(36million

Accumulated depreciation \)10 million

Estimated remaining useful life 4 years

Estimated expected future

annual cash flows (not discounted) \(4.0 million per year

Appropriate discount rate 5 percent

Accounting

  1. Determine the amount of impairment loss, if any, that Electroboy should report for fiscal 2016 and the book value at which Electroboy should report the five stores on its fiscal year-end 2016 balance sheet. Assume that the cash flows occur at the end of each year.
  2. Repeat part (a), but instead assume that (1) the estimated remaining useful life is 10 years, (2) the estimated annual cash flows are \)2,720,000 per year, and (3) the appropriate discount rate is 6 percent.

Analysis

Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2017 (before Electroboy closes the books on fiscal 2016). During the conference call, you learn that management is considering selling the five stores, but the sale won鈥檛 likely be completed until the second quarter of fiscal 2017. Briefly discuss what implications this would have for Electroboy鈥檚 2016 financial statements. Assume the same facts as in part (b) above.

Principles

Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting.

(Depreciation for Partial Periods鈥擲L, Act., SYD, and DDB) On January 1, 2015, a machine was purchased for \(90,000. The machine has an estimated salvage value of \)6,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2015, 20,000 hours; 2016, 25,000 hours; 2017, 15,000 hours; 2018, 30,000 hours; and 2019, 10,000 hours.

Instructions

(a) Compute the annual depreciation charges over the machine鈥檚 life assuming a December 31 year-end for each of the following depreciation methods.

  1. Straight-line method.
  2. Activity method.
  3. Sum-of-the-years鈥�-digits method.
  4. Double-declining-balance method.

(b) Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset鈥檚 life applying each of the following methods.

  1. Straight-line method.
  2. Sum-of-the-years鈥�-digits method.
  3. Double-declining-balance method
See all solutions

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