HW2 Solution Key
UCDavis, 160a, Fall 2011 Ricardian Model Problem 1 Prof. Farshid Mojaver
You are given the information shown in the table about the production relationship between Wonderland and the rest of the world and use the standard Ricardian assump
Nature Power Company uses the composite method and straight-line depreciation for its power plant
equipment. Its Apple River plant, which began generating electricity January 1, 2011, had the following
Required: 1. Compute the composite de
Wicker Corporation operates a manufacturing plant in California. Due to a change in business climate,
an impairment test is deemed appropriate. Management has acquired the following information for the
assets at the plant:
The fair value of the Calif
Synthetic Fuels Corporation prepares its financial statements according to IFRS. On June 30, 2011, the
company purchased equipment for $350,000. The equipment is expected to have a seven-year useful
life with no residual value. Synthetic uses the str
131. In 2009, Quasar LTD. acquired all of the common stock of Penlight Laser for $124 million. The
fair value of Penlight's identifiable tangible and intangible assets totaled $205 million, and the fair value
of liabilities assumed by Quasar was $95
The Firm in
What is a firm?
The bible of standard economic theory says,
We view the supply side as composed of a number of
productive units, or, as we shall call them, firmsour model
of production possibilities is going t
Canliss Mining uses the replacement method to determine depreciation on its office equipment. During
2009, its first year of operations, office equipment was purchased at a cost of $14,000. Useful life of the
equipment averages 4 years and no salvage
Required: Compute depreciation for 2011 and 2012 and the book value of the drill press at December
31, 2011 and 2012, assuming the units-of-production method is used.
2011 depreciation: $.06 x 25,000 = $1,500
2012 depreciation: $.06 x 84,000 = $5,040
Required: Compute depreciation for 2011 and 2012 and the book value of the spooler at December 31,
2011 and 2012, assuming the double-declining-balance method is used.
Straight-line rate = 1/8 years = 12.5%. DDB = 2 x 12.5% = 25%
Compute depreciation for 2011 and 2012 and the book value of the machinery at December 31, 2011
and 2012, assuming double-declining balance method is used.
Straight-line rate = 1/10 years = 10%. DDB = 2 x 10% = 20%
On January 1, 2011, Hobart Mfg. Co. purchased a drill press at a cost of $36,000. The drill press is
expected to last 10 years and have a residual value of $6,000. During its 10-year life, the equipment is
expected to produce 500,000 units of product. In
In the table below, data on depreciation for equipment are shown. Some data are missing.
Required: Fill in the missing data in the table.
Learning Objective: 11-02 Determine periodic depreciation using both time-base
The normal treatment of litigation costs to successfully defend an intangible right under U.S. GAAP and
International Financial Reporting Standards (IFRS), respectively, is:
According to International Financial Reporting Standards, biological assets are valued at:
Cost less accumulated depreciation.
Fair value less estimated costs to sell.
Cost less accumulated depletion.
None of the above.
Kingston Corporation has $95 million of goodwill on its books from the 2009 acquisition of Reliant
Motors. At the end of its 2011 fiscal year, management has provided the following information for its
annual goodwill impairment test ($ in millions):
Robertson Inc. prepares its financial statements according to International Financial Reporting
Standards. At the end of its 2011 fiscal year, the company chooses to revalue its equipment. The
equipment cost $540,000, had accumulated depreciation of $
A major expenditure increased a truck's life beyond the original estimate of life. GAAP permits the
expenditure to be debited to:
None of the above.
AACSB: Reflective thinking
The amount of impairment loss is the excess of book value over:
Undiscounted future cash flows.
AACSB: Reflective thinking
Learning Objective: 11-08 Identify situations that i
Jung Inc. owns a patent for which it paid $66 million. At the end of 2011, it had accumulated
amortization on the patent of $16 million. Due to adverse economic conditions, Jung's management
determined that it should assess whether an impairment shoul
Fryer Inc. owns equipment for which it paid $90 million. At the end of 2011, it had accumulated
depreciation on the equipment of $27 million. Due to adverse economic conditions, Fryer's management
determined that it should assess whether an impairment
In 2011, the internal auditors of KJI Manufacturing discovered the following material errors made in
1. Equipment was purchased on June 30, 2009, for $100,000. The purchase was incorrectly recorded as
a debit to repair and maintenance ex
In its 2007 annual report to shareholders, Martin Marietta Materials, Inc. included the following in its
financial statement footnotes:
NOTE F: PROPERTY, PLANT AND EQUIPMENT, NET
In another disclosure note, the company reported:
138. On June 30, 2009, Mobley Corporation acquired a patent for $4 million. The patent was estimated
to have an eight-year life and no residual value. Mobley uses the straight-line method of amortization
for intangible assets. At the beginning of Jan
Notsofast Inc. acquired land for $500,000 on 7/1/2010. It erroneously recorded the full amount as an
expense. Explain what Notsofast must do when it discovers the error in 2011.
The $500,000 should have been capitalized as an asset, land, rather than
Atlas Trucking incurred the following costs during 2011:
1. Spent $15,000 on a major overhaul for a tractor-trailer rig. The overhaul is expected to increase the
service life of the rig by three years.
2. Repaired the air conditioning system for $3,0
Kentfield Corporation has $260 million of goodwill on its book from the 2008 acquisition of Seaford
Shipping. At the end of its 2011 fiscal year, management has provided the following information for its
annual goodwill impairment test ($ in millions
Sanders Corporation operates a factory in Arizona. Due to a change in business climate, an impairment
test is deemed appropriate. Management has acquired the following information for the assets at the
Required: 1. Determine the amount of impa
On March 30, 2011, Calvin Exploration purchased a drilling machine for $840,000. The estimated
useful life of the machine is 10 years and no residual value is anticipated. An important component of
the machine is the drill housing component that will
Smithson LTD. prepares its financial statements according to IFRS. On March 30, 2011, the company
purchased a franchise for $3,000,000. The franchise has a 10-year contractual life with no residual
value. Smithson uses the straight-line amortization
Gonzaga Company has used the double-declining-balance method for depreciation since it started
business in 2007. At the beginning of 2011, the company decided to change to the straight-line method.
Depreciation as reported and what it would have been