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ACC422 WEEK 4 Team E11-18 P11-10 P12-3

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• Ch. 11: Exercise E11-18 & Problem P11-10
• Ch. 12: Problem P12-3

E11-18 (Impairment) The management of Petro Garcia Inc. was discussing whether certain equipment
should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2007. On December 31, 2007, management projected its future net cash flows from this equipment to be $300,000 and its fair value to be $230,000. The company intends to use this equipment in the future.

Instructions
(a) Prepare the journal entry (if any) to record the impairment at December 31, 2007.
(b) Where should the gain or loss (if any) on the write-down be reported in the income statement?
(c) At December 31, 2008, the equipment’s fair value increased to $260,000. Prepare the journal entry
(if any) to record this increase in fair value.
(d) What accounting issues did management face in accounting for this impairment?

P11-10 (Comprehensive Depreciation Computations) Sheryl Crow Corporation, a manufacturer of
steel products, began operations on October 1, 2006. The accounting department of Crow has started the fixed-asset and depreciation schedule presented on page 563. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel.
1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
2. Land A and Building A were acquired from a predecessor corporation. Crow paid $820,000 for the
land and building together. At the time of acquisition, the land had an appraised value of $90,000, and the building had an appraised value of $810,000.
3. Land B was acquired on October 2, 2006, in exchange for 2,500 newly issued shares of Crow’s common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $30 per share. During October 2006, Crow paid $16,000 to demolish an existing building on this land so it could construct a new building.
4. Construction of Building B on the newly acquired land began on October 1, 2007. By September
30, 2008, Crow had paid $320,000 of the estimated total construction costs of $450,000. It is estimated that the building will be completed and occupied by July 2009.
5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair market value at $30,000 and the salvage value at $3,000.

6. Machinery A’s total cost of $164,900 includes installation expense of $600 and normal repairs and maintenance
of $14,900. Salvage value is estimated at $6,000. Machinery A was sold on February 1, 2008.
7. On October 1, 2007, Machinery B was acquired with a down payment of $5,740 and the remaining
payments to be made in 11 annual installments of $6,000 each beginning October 1, 2007. The
prevailing interest rate was 8%. The following data were abstracted from present-value tables
(rounded).
Present value of $1.00 at 8% Present value of an ordinary annuity of $1.00 at 8%
10 years .463 10 years 6.710
11 years .429 11 years 7.139
15 years .315 15 years 8.559
SHERYL CROW CORPORATION
Fixed Asset and Depreciation Schedule
For Fiscal Years Ended September 30, 2007, and September 30, 2008
Depreciation
Expense
Estimated Year Ended
Acquisition Depreciation Life in September 30
Assets Date Cost Salvage Method Years 2007 2008
Land A October 1, 2006 $ (1) N/A N/A N/A N/A N/A
Building A October 1, 2006 (2) $40,000 Straight-line (3) $17,450 (4)
Land B October 2, 2006 (5) N/A N/A N/A N/A N/A
Building B Under $320,000 — Straight-line 30 — (6)
Construction to date
Donated Equipment October 2, 2006 (7) 3,000 150% declining 10 (8) (9)
balance
Machinery A October 2, 2006 (10) 6,000 Sum-of-the- 18 (11) (12)
years’-digits
Machinery B October 1, 2007 (13) — Straight-line 20 — (14)
N/A—Not applicable
Instructions
For each numbered item on the schedule above, supply the correct amount. Round each answer to the
nearest dollar.

P12-3 (Accounting for Franchise, Patents, and Trade Name) Information concerning Haerhpin Corporation’s intangible assets is as follows.
1. On January 1, 2007, Haerhpin signed an agreement to operate as a franchisee of Hsian Copy Service, Inc. for an initial franchise fee of $75,000. Of this amount, $15,000 was paid when the agreement was signed, and the balance is payable in 4 annual payments of $15,000 each, beginning January 1, 2008. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2007, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is $43,700. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. Haerhpin’s revenue from the franchise for 2007 was $950,000. Haerhpin estimates the useful life of the franchise to be 10 years. (Hint: You may want to refer to Appendix 18A to determine the proper accounting treatment for the franchise fee and payments.)

2. Haerhpin incurred $65,000 of experimental and development costs in its laboratory to develop a
patent that was granted on January 2, 2007. Legal fees and other costs associated with registration of the patent totaled $13,600. Haerhpin estimates that the useful life of the patent will be 8 years.

3. A trademark was purchased from Shanghai Company for $32,000 on July 1, 2004. Expenditures for
successful litigation in defense of the trademark totaling $8,160 were paid on July 1, 2007. Haerhpin estimates that the useful life of the trademark will be 20 years from the date of acquisition.

Instructions
(a) Prepare a schedule showing the intangible assets section of Haerhpin’s balance sheet at December 31, 2007. Show supporting computations in good form.

(b) Prepare a schedule showing all expenses resulting from the transactions that would appear on
Haerhpin’s income statement for the year ended December 31, 2007. Show supporting computations
in good form.

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