210 CHAPTER 16 Problem 16-1 C D D D B Problem 16-2 Cash paid for land and old building Removal of old building Payment to tenants of old building to vacate premises Architect fee Building permit Fee for title search Survey before construction Excavation Cost of new building constructed Assessment fee Cost of grading, leveling and landfill Driveways and walks Temporary quarters for construction crew Temporary building to house tools and materials Cost of construction changes Land 1,000,000 50,000 15,000 Building 200,000 30,000 10,000 20,000 100,000 6,000,000 5,000 45,000 _ 1,145,000 40,000 80,000 60,000 50,000 6,560,000 Note: The cost of replacing windows is treated as expense Problem 16-3 Land Land improvement Cost of land Legal fees Payment of mortgage Payment of taxes Cost of razing building Proceeds from sale of materials Grading and drainage Architect fee Payment to contractor Interest cost Driveway and parking lot Cost of trees, shrubs and other landscaping Cost of installing lights in parking lot Premium for insurance 2,000,000 10,000 50,000 20,000 30,000 ( 15,000 Building 5,000) 200,000 8,000,000 300,000 _ 2,120,000 25,000 8,525,000 40,000 55,000 5,000 _ 100,000 The payment for medical bills and the cost of open house party are outright expenses because they are not a necessary cost of acquiring the land and building 211 Problem 16-4 Office Land improvements Purchase price Materials Excavation Labor Remodeling Cash discounts Supervision Compensation insurance Clerical and other expenses Paving of streets Plans and specifications Legal cost - land 1,300,000 Factory building building Land 700,000 3,200,000 100,000 2,500,000 200,000 ( 60,000) 30,000 50,000 30,000 40,000 10,000 1,310,000 900,000 150,000 6,000,000 40,000 The imputed interest on corporation’s own money is not capitalizable The payment of claim for injuries not covered by insurance and the legal cost of injury claim are treated as expense Saving on construction is not recognized Problem 16-5 Taxes in arrears Payment for land Demolition of old building Total cost of land 50,000 1,000,000 100,000 1,150,000 Architect fee Payment to city hall Contract price Safety fence around construction site Safety inspection on building 30,000 Removal of safety fence Total cost of factory building 230,000 120,000 5,000,000 35,000 20,000 5,435,000 Problem 16-6 Purchase price Title clearance fee Cost of razing old building Scrap value of old building Total cost of land Construction cost of new building 3,000,000 50,000 100,000 ( 10,000) 3,140,000 8,000,000 212 Problem 16-7 Purchase price 4,000,000 Remodeling Salvage materials Grading, leveling and other permanent improvement Repairs Land Building 1,000,000 150,000 5,000) ( 50,000 1,050,000 10,000 4,155,000 The repairs are capitalized because they are necessary prior to the occupancy and intended use of the building Problem 16-8 Land Machinery Fair value Repairs Remodeling Invoice price Discount Base 1,500,000 _ 1,500,000 Building 5,000,000 200,000 300,000 1,000,000 ( 20,000) _ 50,000 5,500,000 1,030,000 The driveway and parking lot are charged to land improvements Problem 16-9 Land Machinery Fair value 1,500,000 Repairs Special tax assessment Platform Remodeling Purchase price Discount Freight Installation 1,500,000 Building 4,000,000 200,000 30,000 70,000 400,000 ( _ 1,530,000 _ 4,600,000 800,000 40,000) 20,000 30,000 2,380,000 Problem 16-10 Purchase price Commission 2,000,000 100,000 Contract price 6,000,000 Plans, specification Legal fees Title guarantee Cost of razing old building Salvage value of materials Cost of land 50,000 10,000 75,000 ( 5,000) 2,230,000 and blueprint Architectural fee Cost of new building 100,000 250,000 6,350,000 213 Problem 16-11 Land Leasehold Building improvements Machinery Balances, Jan 1,000,000 Acquisition of land - #621: Purchase price Commission Clearing cost Sale of timber and gravel Acquisition of land - #622: Purchase price Cost of demolition New building: Construction cost Excavation fee Architectural design Building permit Improvements: Electrical work Construction extension (800,000 x 1/2) Improvements on office space Purchase of new machine: Invoice price Freight Unloading charge Balances, December 31 2,800,000 1,500,000 4,000,000 500,000 3,000,000 60,000 15,000 ( 5,000) 4,000,000 300,000 5,000,000 50,000 150,000 40,000 350,000 400,000 650,000 _ 8,870,000 1,750,000 20,000 _ _ 30,000 9,240,000 1,900,000 The third tract of land should be presented as current asset because it was “classified as held for sale” Problem 16-12 Land Land improvements Building Machinery Balances, Jan 1,500,000 Land acquired Issuance of share capital: 3,500,000 1,250,000 900,000 7,000,000 12/36 x 4,500,000 24/36 x 4,500,000 New machinery New parking lot, street and sidewalk Machinery sold Balances, Dec 31 4,400,000 1,500,000 3,000,000 3,400,000 6,250,000 750,000 _ ( 500,000) 1,650,000 10,000,000 The “assessed values” not represent the fair values of the land and building but are used in allocating the market value of the share capital 214 Problem 16-13 Invoice price Cash discount Freight Installation cost Testing cost Problem 16-14 3,000,000 Invoice cost 4,000,000 ( 150,000) Discount (5% x 4,000,000) ( 200,000) 50,000 Transportation 40,000 30,000 Installation 100,000 20,000 Trial run-salary of engineer 50,000 2,950,000 Cash allowance ( 60,000) 3,930,000 Problem 16-15 Cost paid (896,000 – 96,000) 800,000 Cost of transporting machine Installation cost Testing cost Safety rails and platform Water device Cost of adjustment Estimated dismantling cost Total cost of machine 30,000 50,000 40,000 60,000 80,000 75,000 65,000 1,200,000 Note that the estimated dismantling cost is capitalized because the company has a present obligation as required by contract In the absence of a present obligation, the estimated dismantling cost is not capitalized Problem 16-16 Second hand market value Overhaul and repairs Installation Testing Hauling Safety device 2,400,000 150,000 80,000 110,000 10,000 250,000 3,000,000 Problem 16-17 Materials Labor Installation 600,000 400,000 60,000 Trial run Discount Overhead ( 30,000 40,000) 150,000 1,200,000 Adjusting entries: Loss on retirement of old machinery Machinery (20,000 – 14,000) 6,000 6,000 215 Purchase discount Machinery 40,000 Machinery Factory overhead 150,000 Profit on construction Machinery 100,000 40,000 150,000 100,000 Tools Machinery 90,000 Depreciation – tools Tools (90,000 / x 4/12) 10,000 Machinery Accumulated depreciation Depreciation – machinery 90,000 10,000 128,600 40,000 88,600 Depreciation recorded Correct depreciation (1,200,000 / 10 x 4/12) Overdepreciation 128,600 40,000 88,600 Problem 16-18 Initial design fee Executive chairs and desks Storm windows and installation Installation of automatic door opening system Overhead crane Total capital expenditures 150,000 200,000 500,000 200,000 350,000 1,400,000 Problem 16-19 Accumulated depreciation Loss on retirement of building Building Building Cash Depreciation (8,100,000 / 20) 400,000 1,600,000 2,000,000 2,500,000 2,500,000 405,000 Accumulated depreciation 405,000 Building (9,000,000 + 2,500,000 – 2,000,000) 9,500,000 Accumulated depreciation (1,800,000 – 400,000) 1,400,000 Book value Accumulated depreciation (1,960,000 x 20%) Loss on retirement of building Building (2,500,000 x 784) 8,100,000 392,000 1,568,000 1,960,000 216 Building Cash Depreciation (8,132,000 / 20) Accumulated depreciation 2,500,000 2,500,000 406,600 406,600 Building (9,000,000 – 1,960,000 + 2,500,000) 9,540,000 Accumulated depreciation (1,800,000 – 392,000) 1,408,000 Book value 8,132,000 Problem 16-20 a Annual depreciation (8,400,000 / 30) 280,000 Age of building (7,000,000 / 280,000) b Building Cash 25 years 2,500,000 2,500,000 c Building (8,400,000 + 2,500,000) 10,900,000 Less: Accumulated depreciation Book value d Depreciation (3,900,000 / 15) Accumulated depreciation 7,000,000 3,900,000 260,000 260,000 Original life 30 Less: Expired life Remaining useful life, beginning of current year 25 Add: Extension in life Revised useful life 10 15 Problem 16-21 Building Cash Depreciation Accumulated depreciation Building Cash Accumulated depreciation (2,500,000 / 50 x 2) Loss on retirement of building Cash 10,500,000 10,500,000 200,000 200,000 3,000,000 3,000,000 100,000 2,400,000 2,500,000 Depreciation (10,700,000 – 500,000 / 48) Accumulated depreciation 212,500 212,500 217 Building (10,500,000 + 3,000,000 – 2,500,000) 11,000,000 Accumulated depreciation (400,000 – 100,000) 300,000 Book value – 1/1/2008 10,700,000 Problem 16-22 Machinery Cash Depreciation Accumulated depreciation Depreciation (3,600,000 / 6) Accumulated depreciation Cost Accumulated depreciation: 2005 2006 Book value Residual value Remaining depreciable cost – 1/1/2007 5,000,000 5,000,000 450,000 450,000 600,000 600,000 5,000,000 450,000 450,000 Machinery Cash 300,000 Depreciation (3,300,000 / 5) Accumulated depreciation 660,000 Cost Accumulated depreciation (900,000 + 600,000) 1,500,000 Book value – 1/1/2008 900,000 4,100,000 500,000 3,600,000 300,000 660,000 5,300,000 3,800,000 Residual value Remaining depreciable cost – 1/1/2008 500,000 3,300,000 Problem 16-23 Depreciation (60,000 x 3/12) Accumulated depreciation Accumulated depreciation (480,000 + 15,000) Loss on retirement of store equipment Store equipment Depreciation (150,000 x 4/12) Accumulated depreciation 15,000 15,000 495,000 105,000 600,000 50,000 50,000 218 Cash Accumulated depreciation (1,050,000 + 50,000) Loss on sale of office equipment Office equipment Depreciation (600,000 x 5/12) Accumulated depreciation Delivery equipment – new Accumulated depreciation Cash (5,000,000 – 750,000) Delivery equipment – old Gain on exchange (750,000 – 350,000) 100,000 1,100,000 300,000 1,500,000 250,000 250,000 5,000,000 2,650,000 4,250,000 3,000,000 400,000 Original cost Less: Accumulated depreciation to date (2,400,000 + 250,000) 2,650,000 Book value Accumulated depreciation Office equipment Depreciation (900,000 x 9/12) Accumulated depreciation Accumulated depreciation (2,700,000 + 675,000) Fire loss Machinery 3,000,000 350,000 1,200,000 1,200,000 675,000 675,000 3,375,000 1,125,000 4,500,000 Problem 16-24 Discount on bonds payable Machinery 500,000 500,000 Interest expense (500,000 / 10 x 9/12) Discount on bonds payable 37,500 Accumulated depreciation Depreciation 75,000 37,500 75,000 Depreciation for months 600,000 Depreciation for 12 months (600,000 / 9/12) Depreciable cost (800,000 x years) Cost Less: Residual value Depreciable cost 800,000 4,000,000 Per book 5,000,000 1,000,000 4,000,000 Adjusted 4,500,000 1,000,000 3,500,000 219 Correct depreciation for months (3,500,000 / x 9/12) 525,000 Less: Depreciation recorded Overstatement Interest expense Machinery (3,500,000 – 3,200,000) Machinery Freight in Accumulated depreciation Depreciation 600,000 75,000 300,000 300,000 150,000 150,000 30,000 30,000 Depreciation per book Correct depreciation (3,350,000 / 5) Overstatement Loss on exchange Machinery Cost per book Correct cost Trade in value Add: Cash paid Overstatement 700,000 670,000 30,000 390,000 390,000 3,000,000 150,000 2,460,000 Trade in value Less: Book value Loss on exchange Allowance for doubtful accounts Loss on exchange – accounts receivable 2,610,000 390,000 150,000 540,000 (390,000) 840,000 60,000 Patent (60,000 / 10) 2010 Patent Cash 6,000 600,000 600,000 Original cost New patent Total cost Less: Amortization for 2008 Balance – January 1, 2009 Amortization of patent (654,000 / 15) Patent 2011 Amortization of patent Patent Patent written off Patent Balance – 1/1/2010 Less: Amortization 2010 2011 Unamortized cost 60,000 600,000 660,000 6,000 654,000 43,600 43,600 43,600 43,600 566,800 566,800 654,000 43,600 43,600 87,200 566,800 262 Problem 20-6 Patent Cash 7,140,000 7,140,000 Amortization of patent Patent (7,140,000 / 15) 476,000 Amortization of patent Patent (5,712,000 / 7) 816,000 816,000 Acquisition cost Amortization for 2005, 2006 and 2007 (476,000 x 3) (1,428,000) Carrying amount – 1/1/2008 Amortization for 2008 ( 816,000) Carrying amount – 12/31/2008 Problem 20-7 476,000 7,140,000 5,712,000 4,896,000 Patent Cash Amortization of patent Patent (900,000 / 10) 90,000 Patent written off Patent 900,000 900,000 90,000 540,000 540,000 Cost Amortization for 2005, 2006, 2007 and 2008 (90,000 x 4) (360,000) Carrying amount – 12/31/2008 900,000 540,000 Problem 20-8 Patent Cash Legal expenses Cash Amortization of patent Patent 6,200,000 6,200,000 450,000 450,000 1,050,000 1,050,000 X (1,200,000 / 8) Y (2,000,000 / 5) Z (3,000,000 / 6) 150,000 400,000 500,000 1,050,000 263 Problem 20-9 Retained earnings Patent 500,000 Patent Retained earnings 510,000 500,000 510,000 No adjustment Loss on damages Legal expense Accrued liabilities 100,000 30,000 Patent Retained earnings 24,500 Amortization per book (500,000 – 450,000) Correct amortization for 2007 (510,000 / 20) Overamortization 130,000 24,500 50,000 25,500 24,500 Amortization of patent Patent 25,500 25,500 Problem 20-10 2008 Copyright Cash Amortization of copyright Copyright 285,000 285,000 150,000 150,000 285,000 / 95,000 = per copy 50,000 x = 150,000 2009 Amortization of copyright Copyright (30,000 x 3) 90,000 90,000 Problem 20-11 Copyright Retained earnings 240,000 240,000 Cost of copyright Less: Amortization (300,000 / 5) Book value Amortization of copyright Copyright 300,000 60,000 240,000 60,000 60,000 264 Problem 20-12 Copyright Patent Retained earnings 620,000 400,000 1,020,000 Copyright Less: Amortization from 1/1/2004 to 12/31/2007 (400,000 / 20 x 4) 80,000 Book value Copyright Less: Amortization from 7/1/2005 to 12/31/2007 (360,000 / 15 x 2.5) Book value Patent Less: Amortization for 2006 and 2007 (500,000 / 10 x 2) 100,000 Book value Amortization of copyright (20,000 + 24,000) Amortization of patent 400,000 320,000 360,000 60,000 300,000 500,000 400,000 44,000 50,000 Copyright Patent 44,000 50,000 Problem 20-13 Books of Franchisee Franchise Cash 6,000,000 6,000,000 Amortization of franchise Franchise (6,000,000 / 20) 300,000 300,000 Cash Sales 25,000,000 Franchise fee expense Cash (25,000,000 x 5%) 1,250,000 25,000,000 1,250,000 Problem 20-14 Books of Franchisee Franchise Cash Note payable Note payable (15,000,000 / 4) Interest expense (15,000,000 x 10%) Cash 20,000,000 5,000,000 15,000,000 3,750,000 1,500,000 5,250,000 265 There is no amortization because the franchise is for an indefinite period Problem 20-15 Books of Franchisee Franchise (3,000,000 + 3,790,000) Discount on note payable Cash Note payable 6,790,000 1,210,000 3,000,000 5,000,000 Note payable Present value of note (1,000,000 x 3.79) 3,790,000 Implied interest Amortization of franchise Franchise (6,790,000 / 10) Note payable 5,000,000 1,210,000 679,000 679,000 1,000,000 Cash Interest expense (10% x 3,790,000) Discount on note payable 1,000,000 379,000 379,000 Problem 20-16 Requirement a Leasehold improvement – building Cash Rent expense (50,000 x 12) Cash Depreciation (5,000,000 / 10) Accumulated depreciation 5,000,000 5,000,000 600,000 600,000 500,000 500,000 Requirement b Accumulated depreciation Loss on leasehold cancelation Leasehold improvement – building 2,500,000 2,500,000 5,000,000 Problem 20-17 Rent expense Prepaid rent Cash 1,200,000 1,200,000 2,400,000 266 Leasehold Cash 2,000,000 2,000,000 Leasehold improvement Cash 500,000 Amortization of leasehold Leasehold (2,000,000 / 5) 400,000 Depreciation (500,000 / 5) Accumulated depreciation 500,000 400,000 100,000 100,000 Problem 20-18 Leasehold Cash 1,000,000 Rent expense (150,000 x 12) Cash 1,800,000 1,000,000 1,800,000 Leasehold improvement Cash 400,000 Leasehold improvement Cash 100,000 Amortization of leasehold Leasehold (1,000,000 / 10) 100,000 Depreciation Accumulated depreciation 60,000 400,000 100,000 100,000 60,000 400,000 / 10 40,000 100,000 / 20,000 60,000 Problem 20-19 Rent expense Cash 600,000 Leasehold Cash 100,000 Leasehold improvement Cash 200,000 Leasehold improvement Cash 50,000 600,000 100,000 200,000 50,000 267 Amortization of leasehold Leasehold (100,000 / 5) 20,000 Depreciation Accumulated depreciation 52,500 20,000 52,500 200,000 / 50,000 / 40,000 12,500 52,500 Problem 20-20 Amortization of patent Accumulated amortization (1,920,000 – 240,000 / 6) 280,000 Trademark (800,000 x 3/4) Noncompetition agreement Cash 600,000 200,000 Amortization of noncompetition agreement 280,000 800,000 40,000 Accumulated amortization (200,000 / 5) Royalty expense Cash 40,000 50,000 50,000 Problem 20-21 Acquisition cost Net assets acquired (4,600,000) Goodwill Cash Accounts receivable Inventory Property, plant and equipment Goodwill Accounts payable Note payable – bank Cash 7,500,000 2,900,000 50,000 800,000 1,350,000 4,300,000 2,900,000 900,000 1,000,000 7,500,000 Problem 20-22 Acquisition cost Net assets acquired at fair value (3,300,000) Goodwill 6,000,000 Total assets at fair value Total liabilities Net assets acquired at fair value 5,300,000 2,000,000 3,300,000 2,700,000 268 Cash Accounts receivable Inventory Patent Property, plant and equipment Goodwill Accounts payable Cash 50,000 500,000 1,500,000 250,000 3,000,000 2,700,000 2,000,000 6,000,000 Problem 20-23 Cash Inventory In-process R and D Total assets Total liabilities Net assets 1,000,000 500,000 5,000,000 6,500,000 3,000,000 3,500,000 Acquisition cost 8,000,000 Net assets acquired at fair value (3,500,000) Goodwill 4,500,000 The goodwill includes the fair value of the assembled workforce of P1,200,000 The assembled workforce is not accounted for separately as an asset Cash Inventory In process R and D Goodwill Accounts payable Notes payable Cash 1,000,000 500,000 5,000,000 4,500,000 2,600,000 400,000 8,000,000 Problem 20-24 Average earnings Divide by Net assets including goodwill Less: Net assets before goodwill Goodwill Average earnings Less: Normal earnings (8% x 1,700,000) 136,000 Excess earnings Divide by Goodwill 250,000 10% 2,500,000 1,700,000 800,000 250,000 114,000 15% 760,000 269 Average earnings Less: Normal earnings (10% x 1,700,000) 170,000 Excess earnings Multiply by Goodwill 250,000 Excess earnings Multiply by Goodwill 80,000 5.65 452,000 80,000 400,000 Problem 20-25 Average earnings or prior years (1,500,000 / 3) Increase in average earnings (10% x 500,000) Total Less: Patent amortization (500,000 / years) 100,000 500,000 50,000 550,000 Earnings for goodwill computation a Average future earnings Divide by Net assets including goodwill Less: Net assets excluding goodwill Goodwill 450,000 450,000 8% 5,625,000 5,000,000 625,000 b Average earnings Less: Normal earnings (8% x 5,000,000) 400,000 Average excess earnings Divide by Goodwill 450,000 c Goodwill (50,000 x 3.17) 158,500 50,000 10% 500,000 Problem 20-26 a Average earnings Expected increase (1,000,000 – 900,000) 100,000 Total Less: Normal earnings (4,800,000 x 10%) 480,000 Excess earnings 750,000 850,000 370,000 Goodwill (370,000 x 4) 1,480,000 Shareholders’ equity per book Less: Recorded goodwill Net assets before goodwill 5,000,000 200,000 4,800,000 b Goodwill (370,000 / 20%) 1,850,000 270 Problem 20-27 Share capital Retained earnings Total shareholders’ equity 3,500,000 Less: Recorded goodwill Net assets before goodwill Average earnings (1,200,000 + 150,000 / 3) Less: Normal earnings (10% x 2,500,000) 250,000 Excess earnings Divide by Goodwill 2,000,000 1,500,000 1,000,000 2,500,000 450,000 200,000 16% 1,250,000 Net assets before goodwill Goodwill Purchase price 2,500,000 1,250,000 3,750,000 Problem 20-28 Value in use Net assets including goodwill at carrying amount Impairment loss ( 4,000,000) Impairment loss Goodwill 38,000,000 42,000,000 4,000,000 4,000,000 Problem 20-29 Value in use Net assets including goodwill at carrying amount Impairment loss (15,000,000) Impairment loss Goodwill Accounts receivable Inventory Accumulated depreciation 60,000,000 75,000,000 15,000,000 5,000,000 2,000,000 3,000,000 5,000,000 The remaining impairment loss of P10,000,000, after deducting the loss applicable to goodwill, is allocated to the other noncash assets on a prorata basis Problem 20-30 Present value of indefinite cash flows (200,000 / 10%) 2,000,000 Trademark Impairment loss (4,000,000) 6,000,000 271 Present value of cash flows from cash generating unit (9,000,000 x 8.51) 76,590,000 Net assets including goodwill at carrying amount 80,000,000 Impairment loss ( 3,410,000) Impairment loss Trademark Goodwill Problem 20-31 7,410,000 4,000,000 3,410,000 Total carrying amount Value in use Impairment loss Impairment loss Goodwill Accumulated depreciation – building (25/45 x 270,000) Inventory (15/45 x 270,000) Trademark (5/45 x 270,000) 5,000,000 4,230,000 770,000 770,000 500,000 150,000 90,000 30,000 Problem 20-32 12/31/2008 1/1/2009 7/1/2009 11/1/2009 R and D expense Cash 2,500,000 R and D expense Cash 1,200,000 R and D expense Cash 500,000 Patent 350,000 2,500,000 1,200,000 500,000 Cash 11/15/2009 Patent 350,000 800,000 Cash 12/31/2009 Patent 800,000 100,000 Cash 100,000 Problem 20-33 Product costs which are associated wit inventory items are: Duplication of computer software and training materials Packaging product Total inventory 2,500,000 900,000 3,400,000 The costs incurred from the time of technological feasibility to the time when product costs are incurred should be capitalized as computer software cost 272 Other coding costs after establishment of technological feasibility Other testing costs after establishment of technological feasibility Costs of producing product masters for training materials Total costs to be capitalized Completion of detail program design Cost incurred for coding and testing to establish technological feasibility Total costs charged as expense 2,400,000 2,000,000 1,500,000 5,900,000 1,300,000 1,000,000 2,300,000 Problem 20-34 Designing and planning Code development Testing Total R and D expense in 2008 1,000,000 1,500,000 500,000 3,000,000 The cost of producing the product master of P2,500,000 is capitalized as software cost to be subsequently amortized Cost of producing the software program in 2009 Amortization of software cost (2,500,000 / 4) Total expense in 2009 1,000,000 625,000 1,625,000 Problem 20-35 Answer C Cost Accumulated amortization from 2005 to 2007 (357,000 / 15 x 3) 71,400 Book value – 12/31/2007 Amortization for 2008 (285,600 / 7) 40,800 Book value – 12/31/2008 357,000 285,600 244,800 Problem 20-36 Answer C Cost 1/1/2003 Accumulated depreciation – 12/31/2007 (6,000,000 / 15 x 5) Book value – 1/1/2008 6,000,000 2,000,000 4,000,000 Amortization for 2008 (4,000,000 / 5) 800,000 Problem 20-37 Answer C Cumulative earnings Less: Gain on sale Adjusted cumulative earnings 550,000 50,000 500,000 273 Average earnings (500,000 / 5) Divide by capitalization rate Net assets including goodwill 1,000,000 Less: Net assets before goodwill Goodwill 100,000 10% 750,000 250,000 Problem 20-38 Answer C Net assets Multiply by excess rate (16% minus 10%) Excess earnings Multiply by present value factor Goodwill 1,800,000 6% 108,000 3.27 353,160 Problem 20-39 Answer D Purchase price Less: Goodwill Net assets before goodwill Estimated annual earnings (squeeze) Less: Normal earnings (4,500,000 x 10%) Excess or superior earnings Divide by capitalization rate Goodwill 5,000,000 500,000 4,500,000 550,000 450,000 100,000 20% 500,000 Problem 20-40 Answer C Accounts receivable Inventory Equipment Short-term payable (2,000,000) Net assets at fair value 2,000,000 500,000 500,000 Acquisition cost Net assets at fair value (1,000,000) Goodwill 5,000,000 1,000,000 4,000,000 Problem 20-41 Answer A Problem 20-42 Answer C Downpayment Present value of annual payment for years (1,000,000 x 2.91) Cost of franchise 2,000,000 2,910,000 4,910,000 274 Problem 20-43 Answer A Design costs Legal fees of registering trademark Registration fee with Patent Office Total cost of trademark 1,500,000 150,000 50,000 1,700,000 Problem 20-44 Answer B Original lease Extension Total life Less: Years expired (2006 and 2007) Remaining life years Life of improvement (shorter) years Leasehold improvement Less: Depreciation for 2008 (540,000 / 15) Book value 12 years 20 18 15 540,000 36,000 504,000 Problem 20-45 Answer D Depreciation (3,600,000 / 6) 600,000 Problem 20-46 Answer C Depreciation of equipment Materials used Compensation costs of personnel Outside consulting fees Indirect costs allocated 135,000 200,000 500,000 150,000 250,000 1,235,000 Problem 20-47 Answer A Modification to the formulation of a chemical product Design of tools, jigs, molds and dies 170,000 Laboratory research Total research and development expense 135,000 215,000 520,000 Problem 20-48 Answer D All costs are charged to R and D expense 275 Problem 20-49 Answer A Trademark Value in use (120,000 / 6%) Impairment loss 3,000,000 2,000,000 1,000,000 Patent Amortization for 2008 (2,000,000 / 5) 400,000 Book value – 12/31/2008 Value in use (500,000 x 3.47) 1,735,000 Impairment loss 2,000,000 1,600,000 -_ _ Problem 20-50 Answer B Carrying amount of net assets Value in use (8,000,000 x 1.5) 12,000,000 Impairment loss – applicable to goodwill 16,000,000 4,000,000 ... Acquisition cost 200 8 200 9 201 0 201 1 201 2 Depreciation 120, 000 120, 000 120, 000 120, 000 120, 000 600,000 Accumulated depreciation Book 635,000 515,000 395,000 275,000 155,000 35,000 120, 000 240,000... Allowance for doubtful accounts (20% x 4 ,200 ,000) Loss on accounts receivable Accounts receivable 4 ,200 ,000 4 ,200 ,000 4 ,200 ,000 4 ,200 ,000 3,300,000 840,000 60,000 4 ,200 ,000 220 Treasury shares Machinery... declining balance: 200 8 (570,000 x 20% x 6/12) 57,000 200 9 (570,000 – 57,000 x 20% ) 102,600 Problem 17-5 Fixed rate = 1.00 - 5623 or 4377 200 8 (500,000 200 9 (500,000 201 0 (500,000 201 1 (500,000 38,895