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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Natural Resource and Intangible Accounting

In 2019, the Mudcat Gas Company purchased a small natural gas company with two assets-land and natural gas reserves-for $158,000 000. The fair value of the land was $1,500,000 and the fair value of the natural gas reserves was $155,250,000. At that time, estimated recoverable gas was 105,000,000 cubic feet.

Required:

1. Prepare the entry to record this acquisition in Mudcat’s journal. ( Hint: Record any cost in excess of fair value as goodwill.)

2. If Mudcat recovers and sells 2,500 000 cubic feet in a year, compute the depletion. Round your answer to the nearest dollar.

3. Prepare journal entries to record depletion for the 2,500 000 cubic feet of natural gas recovered and sold.

4. CONCEPTUAL CONNECTION Is the goodwill amortized? Explain your reasoning.

5. CONCEPTUAL CONNECTION Why is the land capitalized separately from the natural gas reserves?

To determine

(a)

Introduction:

If a company purchases another business and the purchase consideration was paid more than acquired assets, then extra amount should be recorded as Goodwill.

To choose:

Prepare the entry to record this acquisition in Mudcat’s Journal.

Explanation
Date Particular L.F Dr. Cr.
Land a/c

Natural Gas a/c

Goodwill a/c (bal...

To determine

(b)

Introduction:

These incorporate the cost of the asset, the rescue estimation of the asset, the normal existence of the asset and more. Aside from these, any type of expansion or deletion from the asset, amid a particular period, additionally influences the viable estimation of depreciation which will be charged to the profit and loss account.

To choose:

Calculate the amount of depletion of natural gas resource.

To determine

(c)

Introduction:

A journal entry, in accounting, is the logging of a transaction in an accounting journal that demonstrates a company’s charge and credit balances. The journal entry can comprise of several chronicles, each of which is either a charge or a credit.

To choose:

Prepare journal entry to record depletion for the 2,500,000 cubic feet of natural gas recovered and sold.

To determine

(d)

Introduction:

Goodwill is the reputation or name of the company. Goodwill is the built-up notoriety of a business viewed as a quantifiable resource and determined as a component of its esteem when it is sold. Goodwill is impracticable assets.

To choose:

Is goodwill amortized? Explain your reasons.

To determine

(e)

Introduction:

All assets should be capitalized separately if company acquire the assets or make expense on the assets for the purpose increase capacity then all expense should be capitalized.

To choose:

Why land is capitalized separately form the natural gas reserves?

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