Chapter 7 Exercises COMPLETE

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Southern New Hampshire University *

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520

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Accounting

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Apr 29, 2024

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E7-1 McCoy's Fish House purchases a tract of land and an existing building for $1,000,000. The company plans to remove the old building and construct a new restaurant on the site. In addition to the purchase price, McCoy pays closing costs. Including title insurance of $3,000. The company also pays $14,000 in property taxes, which includes $9,000 of back taxes (unpaid taxes from previous years) paid by McCoy on bahalf of the seller and $5,000 due for the current fiscal year after the purchase date. Shortly after closing, the company pays a contractor $50,000 to tear down the old building and remove it from the site. McCoy is able to sell salvaged materials from the old building for $5,000 and pays an aidditional $11,000 to level the land. Required: Determine the amount McCoy's Fish House should record as the cost of the land. Purchase price of land (and building to be removed) $1,000,000 Title insurance 3,000 Back property taxes 9,000 Cost of removing the building 50,000 Less: Salvaged materials (5,000) Level the land 11,000 Total cost of the land $1,068,000 For property taxes, $5,000 relates only to the current period and we expense it in the current period. All of the other costs, including the $9,000 in back property taxes, are necessary to acquire the land so we capitalize them. Note that the salvaged materials that were sold for $5,000 reduce the overall cost of the land. E7-3 Red Rock Bakery purchases land, building, and equipment for a single purchase price of $600,000. However, the estimated fair values of the land, building, and equipment are $175,000, $455,000, and $70,000, respectively, for a total estimated fair value of $700,000. Required: Determine the amounts Red Rock should record in the separate accounts for the land, the building, and the equipment. Estimated Recorded Fair Value Amount Land $175,000 $150,000 Building 455,000 390,000 Equipment 70,000 60,000 Total $700,000 $600,000 E7-4 Micro Facilities incurs the following costs during the year. * A new patent is purchased for $600,000 from Techno Company. The patent gives Micro exclusive right to sell specialized data storage units. * Internal costs of $500,000 werew used to research and de3velop a new high-resolution monitor. The company expects production to begin next year, and sales to customers to occur over the next five years. $70,000/$700,000 = 10% x $600,000 $455,000/$700,000 = 65% x $600,000 Amount of Allocation Percentage Basket Purchase $175,000/$700,000 = 25% x $600,000

* An integrated sound component for video capture processes is developed using internal resources at a cost of $450,000. By the end of the year, the company applieds for and receives a patent on the sound component. * Advertising costs of $250,000 were used in the current year to promote the company's products and services, including those expected to be released next year. Required: Record the expenditures. Assume all expenditures were paid in cash. Debit Credit 1. Patents 600,000 Cash 600,000 (Purchase patent) 2. Research and development expense 500,000 Cash 500,000 (Incur research and development costs) 3. Research and development expense 450,000 Cash 450,000 (Incur research and development costs) 4. Advertising expense 250,000 Cash 250,000 (Incur advertising costs) E7-5 Brick Oven Corporation made the following expenditures during the first month of operations: Attorney's fees to organize the corporation $9,000 Purchase of a patent 40,000 Legal and other fees for transfer of the patent 2,500 Advertising 80,000 Total $131,500 Required: Record the $131,500 in cash expenditures. Debit Credit Legal Fees Expense 9,000 Patents 42,500 Advertising Expense 80,000 Cash 131,500 (Record cash expenditures) E7-6 Mainline Produce Corporation acquired all the o9utstanding common stock of Iceberg Lettuce Corporation for $30,000,000 in cash. The book values and fair market values of Iceberg's assets and liabilities were as follows: Book Value Fair Value Current assets $11,400,000 $14,400,000 Property, plant, and equipment 20,200,000 26,200,000 Other assets 3,400,000 4,400,000

Current liabilities 7,800,000 7,800,000 Long-term liabilities 13,200,000 12,200,000 Required: Calculate the amount paid for goodwill. (amounts in millions) Purchase price $30 Less: Fair value of assets acquired $45 Less: fair value of liabilities assumed (20) Fair value of identifiable net assets $25 Goodwill $5 million E7-7 Satellite Systems modified its model Z2 satellite to incorporate a new communication device. The company made the following expenditures: Basic research to develop the technology $3,900,000 Engineering design work 1,180,000 Development of a prototype device 590,000 Testing and modification of the prototype 390,000 Legal fees for patent application 79,000 Legal fees for successful defense of the new patent 39,000 Total 6,178,000 During your year-end review of the accounts related to intangibles, you discover that the company has capitalized all costs of th patent. Management contends that the device represents an improvement of the existing communication system of the satellit and, therefore, should be capitalized. Required: 1. Which of the costs should Satellite Systems capitalize to the Patent account in the balance sheet? 2. Which of the costs should Satellite Systems report as research and development expense in the income statement? 3. What are the basic criteria for determining whether to capitalize or expense intangible related costs? Requirement 1 Patent costs capitalized Legal fees for patent application $79,000 Legal fees for successful defense 39,000 Total costs capitalized $118,000 Requirement 2 Expense items on income statement Basic research to develop the technology $3,900,000 Engineering design work 1,180,000 Development of prototype device 590,000 Testing and modification of the prototype 390,000 Total R&D Expense $6,060,000 Requirement 3

E7-8 Listed below are several terms and phrases associated with operational assets. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it. List A List B f 1. Depreciation a. Exclusive right to display a word, a symbol, or an emblem. e 2. Goodwill b. Exclusive right to benefit from a creative work. g 3. Amortization c. Assets that represent contractual rights. d 4. Natural resources d. Oil and gas deposits, timber tracts, and mineral deposits. c 5. Intangible assets e. Purchase price less fair value of net identifiable assets. b 6. Copyright f. The allocation of cost for plant and equipment. a 7. Trademark g. The allocation of cost for intangible assets. E7-11 On January 2, Speedy Delivery Company purchases a delivery van for $90,000. Speedy estimates tat at the end of its six-year ser life, the van will be worth $30,000. During the six-year period, the company expects to drive the van 200,000 miles. Required: Calculate the annual depreciation for the first two years using each of the following methods. Round all amounts to the nearest dollar. 1. Straight-line. 2. Double-declining-balance. 3. Activity-based. Actual miles driven each year were 32,000 miles in year 1 and 35,000 miles in year 2. Requirement 1 Straight-line Depreciation = = $10,000 per year Expense Requirement 2 Double-declining-balance Beginning Depreciation Deprec. Accumulated Book Year Book Value x Rate* = Expense Depreciation Value** 1 90,000 x 2/6 30,000 30,000 60,000 40,000 2 60,000 x 2/6 20,000 50,000 * 2 x 1/6 SL rate = 2/6 per year ** $90,000 cost minus accumulated depreciation Requirement 3 Activity-based Miles Depreciation Deprec. Accumulated Book Year Used x Rate* = Expense Depreciation Value** 1 32,000 x $0.30 9,600 9,600 80,400 $90,000 - $30,000 6 years Calculation End-of-Year Amounts Calculation End-of-Year Amounts

2 35,000 x $0.30 10,500 20,100 69,900 * (90,000 - $30,000) / 200,000 miles = $0.30 per mile. ** $90,000 cost minus accumulated depreciation E7-12 Togo's Sandwiches acquired equipment on April 1, 2024, for $18,000. The company estimates a residual value of $2,000 and a f year service life. Required: Calculate depreciation expense using the straight-line method for 2024 and 2025, assuming a December 31 year-end. Year 2024 = $3,200 x 9/12 = $2,400 2025 = $3,200 E7-17 Abbott Landscaping purchased a tractor at acost of $42,000 and sold it three years later for $21,600. Abbott recorded depreciat using the straight-line method, a five-year service life, and a %3,000 residual value. Tractors are included in the Equipment acco Required: 1. Record the sale. 2. Assume the tractor was sold for $13,600 instead of $21,600. Record the sale. Requirement 1 Debit Credit Cash 21,600 Accumulated Depreciation 23,400 *** ($42,000 - $3,000)/5 = $7,800 per year x 3 years = Equipment 42,000 Gain 3,000 (Sell equipment for a gain) Requirement 2 Cash 13,600 Accumulated Depreciation 23,400 Loss 5,000 Equipment 42,000 (Sell equipment for a loss) E7-20 Midwest Services, Inc., operates several restaurant chains throughout the Midwest. One restaurant chain has experienced sharp declining profits. The company's management has decided to test the operational assets of the restaurants for possible impairm The relevant information for these assets is presented below. Book value $8.6 million Estimated total future cash flows 7.1 million Fair value 5.9 million Required: 5 years ($18,000 - $2,000) 5 years ($18,000 - $2,000)

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