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    Depreciation, Impairments, Depletion, and Intangible Assets

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    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?

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    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
    $3,000.00
    562 ? Chapter 11 Depreciation, Impairments, and Depletion
    (L0 2,
    3)
    (L0 5)
    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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    Please see the attached MS Excel document for the solutions to exercise E11-18 ...

    Solution Summary

    This solution is comprised of several intermediate accounting problems that deal with several different, but related topics. These topics include the following: depreciation, impairments, depletion, and intangible assets. Each problem has specific instructions. A problem concerning impairment requires journal entries, where the gain or loss should be reported on the income statement, and what accounting issues does management face for the impairment. A problem concerning comprehensive depreciation computations requires a schedule to be completed using the straight-line, declining balance, and sum-of-the-years' digits method. A third problem concerning accounting for franchise, patents, and trade name (trade mark) requires a schedule showing the intangible assets section of the balance sheet and a schedule on the income statement showing all expenses resulting from transactions.

    The problems shown here are taken from Intermediate Accounting, Wiley Publishing, however, the detail step-by-step explanation of how each of these problems ls completed provides students with a clear understanding of the concepts.

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