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Exam 7: Long-Term Assets

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Question 1

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Lake Incorporated purchased all of the outstanding stock of Huron Company paying $850,000 cash. Lake assumed all of the liabilities. Book values and fair values of acquired assets and liabilities were: $\begin{array}{l}\text { Current assets (net) }\\\begin{array} { r r } \text { Book Value } & \text { Fair Value } \\\hline \$ 130,000 & \$ 125,000 \\600,000 & 750,000 \\175,000 & 175,000\end{array}\end{array}$ Lake would record goodwill of:

A) $0.
B) $150,000.
C) $345,000.
D) $850,000.

E) None of the above
F) All of the above

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B

Question 2

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In accounting, goodwill

A) Is never recorded.
B) May be recorded when a company's level of net income exceeds the industry average.
C) Must be expensed in the period when it is acquired.
D) May be recorded when the company purchases another business.

E) A) and B)
F) A) and C)

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Question 3

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Accounting for impairment losses:

We record a gain if we sell an asset for less than book value.

The franchisee's initial fee is recorded as an expense on the income statement.

Straight-line depreciation assumes that the benefits we derive from the use of an asset are the same each year.

If a company initially records an expense incorrectly as an asset, explain how this mistake affects the income statement and the balance sheet.

Woods Company made an ordinary repair to a delivery truck at a cost of $500. Woods' accountant debited the asset account, Equipment. Was this treatment an error, and if so, what will be the effect on the financial statements of Woods?

Why don't we depreciate land? What are land improvements? Why do we record land and land improvements separately?

ABO purchased a truck at the beginning of 2012 for $140,000. They sold the truck at the end of 2013 for $95,000. If the expected life of the truck was six years with a residual value of $20,000 and ABO uses straight-line depreciation, which of the following is true regarding the entry to record the sale of the truck?

Accumulated Depreciation is a liability account that is increased by credits.

Management must review long-term assets for impairment when events or changes in circumstances indicate that book value might not be recoverable.

Cash received from the sale of salvaged materials increases the total cost of land.

China Dragon purchased new restaurant equipment on September 1, 2012, for $8,000. Residual value at the end of an estimated 5 year service life is expected to be $2,000. Calculate depreciation expense using the straight-line method for 2012 and 2013, assuming a December 31 year-end.

Burger Chef acquired a delivery truck on March 1, 2012 for $26,000. The company estimates a residual value of $2,000 and a 6-year service life. It expects to drive the truck 80,000 miles. Actual mileage was 12,000 miles in 2012 and 16,000 miles in 2013. Calculate depreciation expense using the activity-based method for 2012 and 2013, assuming a December 31 year-end.

Fruitasia purchased land, a building, and equipment for $800,000. The estimated fair values of the land, building, and equipment are $100,000, $700,000, and $200,000, respectively. At what amount would the company record the land?

Which of the following subsequent expenditures would be capitalized?

Allied Construction and Axis Construction reported the following information in their annual financial statements ($ in millions): $\begin{array} { c r r } \text { Allied Construction } & \mathbf { 2 0 1 2 } & \mathbf { 2 0 1 1 } \\\text { Sales } & \$ 48,283 & \$ 46,927 \\\text { Net income } & 2,809 & 3,105 \\\text { Total assets } & 30,869 & 27,767\end{array}$ $\begin{array} { c r r } \text { Axis Construction } & \mathbf { 2 0 1 2 } & \mathbf { 2 0 1 1 } \\\text { Sales } & \$ 77,349 & \$ 90,837 \\\text { Net income } & 4,395 & 5,761 \\\text { Total assets } & 44,324 & 52,263\end{array}$ Required: 1. Calculate Allied Construction's return on assets, profit margin, and asset turnover ratio for 2012. 2. Calculate Axis Construction's return on assets, profit margin, and asset turnover ratio for 2012. 3. Which company has the better profit margin and which company has the better asset turnover?

Profit margin is net income divided by net sales.

Most companies use straight-line amortization for intangibles and credit the amount of amortization to the intangible asset account itself rather than to Accumulated Amortization.