🏷️ LIMITED TIME OFFER: GET 20% OFF GRADE+ YEARLY SUBSCRIPTION →
Log in
Accounting
1
answer
0
watching
213
views

ABC Company purchased equipment on 1/5/12 for $3,000,000. Theequipment has been depreciated using the straight-line method witha 8-year useful life and residual value of $600,000.

At the end of 2015, ABC Company felt that technological advanceshad caused an impairment of its equipment. Consequently, thisequipment is expected to be useful for only four more years. Thereis no readily available market value for this equipment. ABCCompany expects the equipment will generate cash inflows of$350,000 and cash outflows of $100,000 for each of the next fouryears. The rate of return applied by this company is 8%.

REQUIRED:

(1) Run the U.S. GAAP impairment test on this asset at the endof 2015. Show your work, including supportingcalculations and clearly state your decision about impairment.

(2) If the asset is impaired, record the journal entry for theimpairment loss. Show supporting calculations.

Watch
1
answer
0
watching
213
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Jarrod Robel
Jarrod RobelLv2
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related questions

ABC Company purchased equipment on 1/5/12 for $3,000,000. Theequipment has been depreciated using the straight-line method witha 8-year useful life and residual value of $600,000.

At the end of 2015, ABC felt that technological advances hadcaused an impairment of its equipment. Consequently, this equipmentis expected to be useful for only four more years. There is noreadily available market value for this equipment. ABC Companyexpects the equipment will generate cash inflows of $350,000 andcash outflows of $100,000 for each of the next four years. The rateof return applied by this company is 8%.

REQUIRED:

(1) Run the U.S. GAAP impairment test on this asset at the endof 2015. Show your work, including supporting calculations andclearly state your decision about impairment.

(2) If the asset is impaired, record the journal entry for theimpairment loss. Show supporting calculations.

. Make all 16 adjustments to journal entries. Remember to include a description under each journal entry.
1 On March 1, ABC purchased a one-year liability insurance policy for $98,400.
Upon purchase, the following journal entry was made:
Dr Prepaid insurance 98,400
Cr Cash 98,400
The expired portion of insurance must be recorded as of 12/31/14.
Notice that the expired portion from March through November has been recorded already.
Make sure that the Prepaid Insurance balance after the adjusting entry is correct.
2 Depreciation expense must be recorded for the month of December.
The building was purchased with cash on February 1, 2014, for $150,000 with a remaining useful life of 30 years and a salvage value of $6,000.
The method of depreciation for the building is straight-line.
The equipment was purchased with cash on February 1, 2014, for $60,000 with a remaining useful life of 5 years and a salvage value of $3,000.
The method of depreciation for the equipment is double-declining balance.
Depreciation has been recorded for the building and equipment for months February through November.
3 On December 1, XYZ Co. agreed to rent space in ABC's building for $12,000 per month,
and XYZ paid ABC on December 1 in advance for the first three months' rent.
The entry made on December 1 was as follows:
Dr Cash 36,000
Cr Unearned rent revenue 36,000
The unearned revenue account must be adjusted to reflect the amount earned as of 12/31/14.
4 Per timecards, from the last payroll date through December 31, 2014, ABC's employees have worked a total of 250 hours.
Including payroll taxes, ABC's wage expense averages about $51 per hour. The next payroll date is January 5, 2015.
The liability for wages payable must be recorded as of 12/31/14.
5 On November 30, 2014, ABC borrowed $235,000 from American National Bank by issuing an interest-bearing note payable.
This loan is to be repaid in three months (on February 28, 2015), along with interest computed at an annual rate of 6%.
The entry made on November 30 to record the borrowing was: (for Statement of Cash Flow purposes, consider a financing item)
Dr Cash 235,000
Cr Notes payable 235,000
On February 28, 2015 ABC must pay the bank the amount borrowed plus interest.
Assume the beginning balance for Notes Payable is correct.
Interest through 12/31/14 must be accrued on the $235,000 note.
6 ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete
physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at
that time totaled $75,000, which reflects historical cost.
Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment.
Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level.
A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of
completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory
using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting
for adjustments of inventory to market value.
7 It would be unusual for a company to have an asset impairment in Year 1, but for the sake of this example, ABC realized
that their intangible asset might be impaired on December 31, 2014. Record the impairment if any.
The expected future net cash flows for this intangible asset totals $30,000, and the fair value of the asset is $27,500.
8 On 7/1/14, ABC purchased 7,000 shares of its own stock from existing stockholders as treasury stock. The cost of the treasury
stock was $7 per share, or $49,000 in total. The effects of this transaction are already shown in the unadjusted trial balance. On 12/31/14,
ABC reissued these 7,000 shares of treasury stock at $10 per share. Record the journal entry required for the reissuance of the treasury stock.
9 On 12/31/14, ABC issued 5,000 shares of $3 par value common stock at the closing market price of $7 per share. Prepare ABC's journal entry
to reflect the issuance of the stock on 12/31/14.
10 On 7/1/14, ABC sold 12% bonds having a maturity value of $800,000 for $861,771, resulting in an effective yield of 10%. The bonds are
dated 7/1/14, and mature 7/1/19. Interest is payable semiannually on July 1 and January 1. ABC uses the effective interest method of
amortization for bond premium or discount. Record the adjusting entry for the accrual of interest and the related amortization on 12/31/14.
Hint: Develop an abbreviated amortization schedule to accurately determine the interest expense.
11 The following information is available for ABC Corporation at 12/31/14 regarding its investments in stocks of other companies.
Securities Cost Fair Value
2,200 shares of Toyota Corporation Common Stock $ 100,000 $ 125,000
1,100 shares of G.M. Corporation Common Stock $ 67,000 $ 34,000
$ 167,000 $ 159,000
Prepare the adjusting entry (if any) for 2014, assuming the securities are classified as trading.
12 On 1/1/14, ABC Corporation purchased, as a held-to-maturity investment, $200,000 of the 8%, 5-year bonds of Intuit Corporation for $177,824,
which provides an 11% return. Prepare ABC's 12/31/14 journal entry to reflect the receipt of annual interest and discount amortization.
Assume the bond investment pays interest annually on 12/31 each year and that effective interest amortization is used.
Note: Notice that a discount account is not used for this investment. Therefore, for purposes of this adjusting entry, amortize the discount directly to the
investment account.
13 ABC Corporation prepares an aging schedule on 12/31/14 that estimates total uncollectible accounts at $25,000. Assuming that the allowance method is used,
prepare the entry to record bad debt expense.
14 On 1/1/14, ABC Corporation signed a 5-year noncancelable lease for a delivery vehicle. The terms of the lease called for ABC to Corporation to make
annual payments of $10,503 at the beginning of each year, starting January 1, 2014. The delivery vehicle has an estimated useful life of 6 years and a $7,000
unguaranteed residual value. The delivery vehicle reverts back to the lessor at the end of the lease term. ABC Corporation uses the straight-line method
of depreciation for the delivery vehicle. ABC Corporation's incremental borrowing rate is 10%, and the Lessor's implicit rate is unknown. No entries have yet
been made concerning this lease arrangement. After determining the type of lease arrangement (capital or operating), prepare the necessary multiple-part journal
entry for 2014 for ABC Corporation. (Hints: You will need to compute the present value of the minimum lease payments and 4 separate sub-entries for
this lease transaction. Also, for Statement of Cash Flow purposes, the principal portion of lease payments are correctly categorized as a financing activity.)
15 ABC Corporation provides a defined benefit pension plan for its employees. A combination adjusting entry should be made to correctly account for this type of pension
plan given the following items of information for the 2014 plan year, including the recording of pension expense and the employer's contribution to the pension plan in 2014.
Note: Use the summary entry method as demonstrated and discussed in the chapter lectures on pension accounting to prepare the adjusting entry.
Pension asset/liability (January 1) $0
Actual return on plan assets $40,000
Expected return on plan assets $20,000
Contributions (funding) in 2014 $37,000
Fair value of plan assets (December 31) $75,000
Settlement rate 10%
Projected benefit obligation (January 1) $0
Service cost $60,000
Benefits paid in 2014 $0
*For purposes of financial statement presentation, consider Pension Expense as an operating item and any resulting Pension Asset/Liability as long-term in nature.
16 On December 31, 2014, ABC Corporation issued 1,000 shares of restricted stock to its Chief Financial Officer. ABC stock had a fair value (closing market price) of
$10 per share on December 31, 2014. Additional information is as follows:
a. The service period related to the restricted stock is 2 years.
b. Vesting occurs if the CFO stays with the company for a two-year period.
c. The par value of the common stock is $3 per share.
Make the appropriate accounting entry as of the grant date, 12/31/14. Note: use the alternative method as described in your textbook for deferred compensation.
Do this step after preparing the Income Statement except for the Income taxes line: (You need to calculate Income Before Income Taxes in order to calcualte total Income Tax Expense)
17 Corporate taxes are due in four estimated quarterly payments on April 15, June 15, September 15, and December 15.
However, for the purposes of this ABC illustration, we will assume that estimates are not paid, and that the tax is paid in full
on the return's March 15, 2015 due date.
ABC's income tax rate is 40%. The entire year's income tax expense was estimated at the beginning of 2014 to be $69,600,
so January through November income tax expense recognized amounts to $63,800 (11/12 months).
Since we are assuming estimates are not made during the year, the balance in Income taxes payable represents
tax accrued for January through November. Assume no deferred tax assets or deferred tax liabilities.
Based on the income before income taxes figure from the income statement, record December's income tax expense
so that the entire year's total tax expense is correct.

Weekly leaderboard

Home
Homework Help 3,900,000
Accounting 580,000
Start filling in the gaps now
Log in