Required:

Prepare journal entries to record the above costs.

Answer:

(a.)	Accumulated depreciation	15,000
	Cash		15,000
(b.)	Repairs and maintenance expense	3,000
	Cash		3,000
(c.)	Buildings	75,000
	Cash		75,000

Learning Objective: 9 Level of Learning: 3

119. On September 30, 2006, Sternberg Company sold for $12,000, equipment that it purchased on March 31, 2003, for $24,000. The asset was being depreciated over a five-year life using straight-line, with depreciation based on months in service. No residual value was anticipated.

Required:

Prepare the journal entry to record the sale.

Answer:

Cost		$24,000
Service life (months)		÷ 60
Depreciation per month		$400
Months in service (Mar. 31, 2003 - Sep. 30, 2006)		x 42
Accumulated depreciation		$16,800
Depreciation expense (9 x $400)	3,600
Accumulated depreciation		3,600
(2006 depreciation expense)
Cash	12,000
Accumulated depreciation	16,800
Equipment		24,000
Gain on sale of equipment		4,800

Learning Objective: 2 Level of Learning: 3

120. Ellen's Antiques reported the following on its December 31, 2005, balance sheet:

Equipment…..$4,000,000

Accumulated depreciation—equipment….$3,150,000

In a footnote, Ellen's indicates that it uses straight-line depreciation over 8 years and estimates salvage value as 10% of cost.

Required: Compute the average age of Ellen's equipment at 12/31/05.

Answer:

Annual depreciation is ($4,000,000 - 400,000)/8 = $450,000

Accumulated depreciation/Annual depreciation = $3,150,000/$450,000 = 7 years

Learning Objective: 1 Level of Learning: 3

121. Comet Cleaning Co. reported the following on its December 31, 2005, balance sheet:

Equipment (at cost)….. $3,000,000

In a footnote, Comet indicates that it uses straight-line depreciation over 6 years and estimates salvage value as 10% of cost. Comet's equipment averages 4.5 years at December 31, 2005.

Required:

What is the book value of Comet's equipment at December 31, 2005?

Answer:

Annual depreciation is ($3,000,000 - 300,000)/6 = $450,000

Depreciation for 4.5 years is $450,000 x 4.5 = $2,025,000

Book value = $3,000,000 – 2,025,000 = $975,000

Learning Objective: 1 Level of Learning: 3

122. In the table below, data on depreciation for equipment are shown. Some data are missing.

Required: Fill in the missing data in the table.

Acquisition Date	1/1/04	1/1/04	1/1/04	1/1/05	1/1/05
Cost	$100,000		$100,000	$330,000
Accumulated Depreciation, 12/31/06		$90,000
Depreciation Expense 2005	$10,000		$27,000		$200,000
Depreciation Expense 2006	$10,000		$18,000	$80,000
Book value, 12/31/05		$140,000	$37,000		$300,000
Book value, 12/31/06	$70,000
Estimated service life		6	4	5	5
Estimated salvage value	0		$10,000		0
Depreciation method		Straight-line		Sum-of-Years-Digits	Double-declining balance

Answer:

Acquisition Date	1/1/04	1/1/04	1/1/04	1/1/05	1/1/05
Cost	$100,000	$200,000	$100,000	$330,000	$500,000
Accumulated Depreciation, 12/31/06	$30,000	$90,000	$81,000	$180,000	$320,000
Depreciation Expense 2005	$10,000	$30,000	$27,000	$100,000	$200,000
Depreciation Expense 2006	$10,000	$30,000	$18,000	$80,000	$120,000
Book value, 12/31/05	$80,000	$140,000	$37,000	$230,000	$300,000
Book value, 12/31/06	$70,000	$110,000	$19,000	$150,000	$180,000
Estimated service life	10	6	4	5	5
Estimated salvage value	0	$20,000	$10,000	$30,000	0
Depreciation method	Straight-line	Straight-line	Sum-of-Years-Digits	Sum-of-Years-Digits	Double-declining balance

Learning Objective: 2 Level of Learning: 3

Use the following to answer questions 123-124:

El Dorado Foods Inc. owns a chain of specialty stores in the Pacific Northwest. Recently, four of the stores have experienced declining profits due to market saturation in the area. As a result, management gathered data about possible impairment of operational assets. The information gathered was as follows:

Book value: $17.5 million

Fair value: $14.9 million

Undiscounted sum of future cash flows: $16.5 million

123. Required:

Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.

Answer: An impairment loss must be recognized because the undiscounted sum of future cash flows from the assets are less than the book value. The loss is the difference between the book value and the fair value-- $17.5 million – 14.9 million = $2.6 million

Learning Objective: 8 Level of Learning: 3

124. Required:

Assume that the undiscounted sum of future cash flows is $18.2 million, instead of $16.5 million. Determine the amount, if any, of the impairment loss that El Dorado must recognize on these assets.

Answer: An impairment loss must be recognized when the undiscounted sum of future cash flows from the assets are less than the book value. In this case, no loss will be recognized.

Learning Objective: 8 Level of Learning: 3

Use the following to answer question 125-126:

In 2005, Dooling Corporation acquired Oxford Inc. for $250 million, of which $50 million was attributed to goodwill. Dooling tests for goodwill impairment at the end of each subsequent year. At the end of 2006. Dooling's accountants derive the following information:

Book value of Oxford (including goodwill):	$234.5 million
Fair value of Oxford (excluding goodwill):	$204.9 million
Fair value of Oxford (the reporting unit):	$260 million

125. Required: Determine the amount, if any, of the goodwill impairment loss that Dooling must recognize on these assets.

Answer: An impairment loss must be recognized if book value of the reporting unit acquired exceeds it fair value. In this case, it does not, so no impairment loss is recognized.

Learning Objective: 8 Level of Learning: 3

126. Assume the same facts as above, except that the fair value of Oxford (the reporting unit) is $225 million.

Required: Determine the amount, if any, of the goodwill impairment loss that Dooling must recognize on these assets.

Answer: An impairment loss must be recognized if book value of the reporting unit acquired exceeds its fair value. In this case, it does. The amount of the loss is based on the implied value of goodwill at the time of impairment relative to its recorded book value. In this case, the implied value is $20.1 million ($225 million – 204.9 million). The impairment loss recorded is $29.9 million ($50 million – 20.1 million).

Learning Objective: 8 Level of Learning: 3