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The historical costof aparticular asset

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Unformatted text preview: be used are not yet known. Consequently, Garmen Oil Company must select either the straight­line method or an accelerated method to depreciate the mobile home. d. Depletion: 2011: Depletion (E, –SE) 240,000 Drilling Equipment (or Accumulated Depletion) (–A) 240,000 Depleted drilling equipment. 2012: Depletion (E, –SE) 300,000 Loss on Oil Field (Lo, –SE) 260,000* Drilling Equipment (or Accumulated Depletion) (–A) 560,000 Depleted drilling equipment. * Since the well is dry, the drilling equipment will not provide any future benefits; hence, the remaining cost of $260,000 [($800,000 – ($240,000 + $300,000)] should be written off. 2013: No journal entries are necessary. Depreciation: 33 Since the mobile home is not site­specific, the entries for depreciation would be the same as in part (c). P9–12 a. Cash (+A) 325,000 Accumulated Depreciation (+A) 240,000* Machinery (–A) Gain on Sale of Machinery (Ga, +SE) Sold machinery. * b. 500,000 65,000 $240,000 = [($500,000– $100,000) ÷ 5 years] 3 years used Depreciation Expense (E, –SE) 40,000* Accumulated Depreciation (–A) Depreciated machinery for January 1 – June 30. * $40,000 = [($500,000 – $100,000) ÷ 5 years] 1/2 year Cash (+A) 320,000 Accumulated Depreciation (+A) Machinery (–A) Gain on Sale of Machinery (Ga, +SE) Sold machinery. c. 34 40,000 FMV of asset received: Land (+A) 210,000 Accumulated Depreciation (+A) Loss on Trade­in (Lo, –SE) Machinery (–A) Cash (–A) Exchanged machinery for land. 280,000 500,000 100,000 240,000 225,000 500,000 175,000 FMV of assets given up: Land (+A) 250,000* Accumulated Depreciation (+A) Loss on Trade­in (Lo, –SE) Machinery (–A) Cash (–A) Exchanged machinery for land. * 240,000 185,000 500,000 175,000 $250,000 = Cash given up + Appraised value of machinery given up P9–13 a. Most assets are reported on the balance sheet at historical cost or at historical cost less accumulated depreciation. The historical cost of a particular asset is constant over time. However, the fair market value of that same asset fluctuates over time. Consequently, the fair market value of assets can be less than, equal to, or greater than the historical cost of the assets at any point in time. b. Diversified would pay more for Spets due to goodwill (i.e., synergy). Spets' assets considered as a package are worth more than the sum of their individual values. Goodwill arises because certain "assets" are not included on a company's balance sheet. Items that cannot be given a value (i.e., cannot be quantified) are omitted from a balance sheet. Examples include customer loyalty and the company's name recognition. c. Assets (+A) Goodwill (+A) Liabilities (+L) Cash (–A) 1,350,000 700,000 250,000 1,800,000 Purchased Spets, Inc. d. Until recently under GAAP, goodwill was capitalized at the time of acquisition and then amortized over a maximum of 40 years. The school of thought holding the opposite viewpoint espouses that goodwill should be expensed at the time of acquisition. They maintain that since goodwill is a plug number on the books of the acquired company and its amortization period is totally arbitrary, it need not be put on the balance sheet. Further, goodwill should be periodically tested to see if it has been “impaired” (i.e., if the fair value of the assets acquired has dropped). P9–14 a. 35 Goodwill would be calculated by taking the purchase price less the fair value of the net assets. In this case $3.4 billion was paid and the fair value of the net assets was $1.3 billion ($2.3 less $1.0). Therefore, Goodwill is $2.1 billion. b. 36 There may be a number of reasons why Zimmer paid over the fair value of Centerplus. There may be assets that are not recorded on Centerplus’s books. This usually would be the value of the brand name or a high quality workforce. Another reason could be that Zimmer foresees that there will be significant synergy between the two companies. It may be that these additional locations will have a significant competitive benefit to Zimmer. Another possible reason would be to block another competitor from buying Centerplus. Other reasons could be that Zimmer management just want to make Zimmer a bigger company (management compensation is sometimes based on the size of the company), or it could be that Zimmer overpaid. ISSUES FOR DISCUSSION ID9–1 a. Gains and losses resulting from the disposal of fixed assets are based on the difference between the proceeds received from the disposal and the asset's book value. Thus, one would have to know the book value of each individual casino and the land to be able to determine the gain or loss from selling one of the casinos. Book value equals the original cost of the fixed asset less any accumulated depreciation associated with the fixed asset. Since MGM Grand, Inc., held the casino it sold for just a short time, the casino's book value is essentially identical to its cost. Thus, in this case, one would need to know the individual costs of the two c...
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