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Chapter 11: Q4Q (page 582)
Explain how estimation of service lives can result in unrealistically high carrying values for fixed assets.
Answer
Charges for depreciation and accumulated depreciation should be reduced.
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Electroboy Enterprises, Inc. operates several stores throughout the western United States. As part of an operational and financial reporting review in a response to a downturn in its markets, the company’s management has decided to perform an impairment test on five stores (combined). The five stores’ sales have declined due to aging facilities and competition from a rival that opened new stores in the same markets. Management has developed the following information concerning the five stores as of the end of fiscal 2016.
Original cost \(36million Accumulated depreciation \)10 million Estimated remaining useful life 4 years Estimated expected future annual cash flows (not discounted) \(4.0 million per year Appropriate discount rate 5 percent |
Accounting
Analysis
Assume that you are a financial analyst and you participate in a conference call with Electroboy management in early 2017 (before Electroboy closes the books on fiscal 2016). During the conference call, you learn that management is considering selling the five stores, but the sale won’t likely be completed until the second quarter of fiscal 2017. Briefly discuss what implications this would have for Electroboy’s 2016 financial statements. Assume the same facts as in part (b) above.
Principles
Electroboy management would like to know the accounting for the impaired asset in periods subsequent to the impairment. Can the assets be written back up? Briefly discuss the conceptual arguments for this accounting.
Francisco Corporation is constructing a new building at a total initial cost of \(10,000,000. The building is expected to have a useful life of 50 years with no residual value. The building’s finished surfaces (e.g., roof cover and floor cover) are 5% of this cost and have a useful life of 20 years. Building services systems (e.g., electric, heating, and plumbing) are 20% of the cost and have a useful life of 25 years. The depreciation in the first year using component depreciation, assuming straight-line depreciation with no residual value, is:
Everly Corporation acquires a coal mine at a cost of \(400,000. Intangible development costs total \)100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is \(80,000), after which it can be sold for \)160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.
(Different Methods of Depreciation) Jackel Industries presents you with the following information.
Description | Date Purchased | Cost | Salvage Value | Life in years | Depreciation Method | Accumulated depreciation to 12/31/18 | Depreciation for 2019 |
Machine A | 2/12/17 | \(142,500 | \)16,000 | 10 | (a) | $33,350 | (b) |
Machine B | 8/15/16 | (c) | 21,000 | 5 | SL | 29,000 | (d) |
Machine C | 7/21/15 | 75,400 | 23,500 | 8 | DDB | (e) | (f) |
Machine D | 10/12/(g) | 219,000 | 69,000 | 5 | SYD | 70,000 | (h) |
Instructions
Complete the table for the year ended December 31, 2019. The company depreciates all assets using the half-year convention.
Last year, Wyeth Company recorded an impairment on an asset held for use. Recent appraisals indicate that the asset has increased in value. Should Wyeth record this recovery in value?
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