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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Amortization and depletion entries

Data related to the acquisition of timber rights and intangible assets during the current year ended December 31 are as follows:

  1. a. Timber rights on a tract of land were purchased for $1,600,000 on February 22. The stand of timber is estimated at 5,000,000 board feet. During the current year, 1,100,000 board feet of timber were cut and sold.
  2. b. On December 31, the company determined that $3,750,000 of goodwill was impaired.
  3. c. Governmental and legal costs of $6,600,000 were incurred on April 3 in obtaining a patent with an estimated economic life of 12 years. Amortization is to be for three-fourths of a year.

Instructions

  1. 1. Determine the amount of the amortization, depletion, or impairment for the current year for each of the foregoing items.
  2. 2. Journalize the adjusting entries required to record the amortization, depletion, or impairment for each item.

1.

To determine

Amortization: It is the process of allocating the value of an intangible asset over its definite useful life such as patent, copyright, and trademark.

Impairment of Goodwill: It is a situation that arises when the carrying value of the goodwill listed on the acquired company’s balance sheet, exceeds its fair market value.

Depletion: It refers to the process of proportionately distributing the cost of the extracting natural resources such as coal, mines, and petroleum from the earth to the number of units extracted. The following is the formula to calculate the depletion expense:

Depletion Cost per Unit = Cost of the asset  Residual valueEstimated Number of Units

Depletion Expense=(Depletion Cost per Unit × Number of units Extracted and Sold)

To determine: the amount of the amortization, depletion expense or impairment for the current year.

Explanation

Determine the amount of the depletion expense for the current year.

Depletion rate =$0.32 per board foot (1)

Number of board feet of timber cut and sold =1,100,000 board feet

Depletion Expense = (Depletion rate×Number of timberscut and sold)=$0.32per boardfoot×1,100,000boardfeet=$352,000

The amount of the depletion expense for the current year for timber rights is $352,000.

Working note:

Determine the depletion rate.

Cost of the timber rights = $1,600,000

Estimated stand of timber = 5,000,000 board feet

Depletion Rate = Cost of the asset  Residual valueEstimated Number of units=$1,600,000$05,000,000boardfeet=$0

2.

To determine

To journalize: the adjusting entry on December 31 to record the amortization, depletion, or impairment.

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