Intermediate accounting answer chapter10.doc

The McGraw Hill Companies Inc 2009 Solutions Manual Vol 1 Chapter 1010 1 AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment Although schools departments and faculty may approach assessment and its documentation differently one approach is to provide specific questions on exams that become the basis for assessment To aid faculty in this endeavor we have labeled each question exercise and problem in Intermediate Accounting 5e with the following AACSB learning skills QuestionsAACSB TagsExercises cont AACSB Tags 10 1Reflective thinking10 9Analytic 10 2Reflective thinking10 10Analytic 10 3Reflective thinking10 11Analytic 10 4Reflective thinking10 12Analytic 10 5Reflective thinking10 13Analytic 10 6Reflective thinking10 14Analytic 10 7Reflective thinking10 15Analytic 10 8Reflective thinking10 16Analytic 10 9Reflective thinking10 17Analytic 10 10Reflective thinking10 18Analytic 10 11Reflective thinking10 19Analytic 10 12Reflective thinking10 20Analytic 10 13Reflective thinking10 21Analytic 10 14Reflective thinking Communications10 22Analytic 10 15Reflective thinking10 23Diversity 10 16Reflective thinking10 24Analytic 10 17Reflective thinking10 25Analytic 10 18Reflective thinking10 26Reflective thinking 10 19Reflective thinking Communications10 27Analytic 10 20Reflective thinking10 28Analytic Brief Exercises CPA CMA 10 1Analytic10 1Analytic 10 2Analytic10 2Analytic 10 3Analytic10 3Analytic 10 4Analytic10 4Analytic 10 5Analytic10 5Analytic 10 6Analytic10 6Analytic 10 7Analytic10 7Analytic 10 8Analytic10 8Analytic 10 9Analytic10 1Reflective thinking 10 10Analytic10 2Analytic 10 11Analytic10 3Analytic 10 12Analytic Problems 10 13Analytic10 1Analytic 10 14Analytic10 2Analytic Chapter 10 Operational Assets Acquisition and Disposition The McGraw Hill Companies Inc 2009 10 2Intermediate Accounting 5 e 10 15Analytic10 3Analytic 10 16Analytic10 4Analytic Exercises 10 5Analytic 10 1Analytic10 6Analytic 10 2Analytic10 7Analytic 10 3Analytic10 8Analytic 10 4Analytic10 9Analytic 10 5Analytic10 10Analytic 10 6Analytic10 11Analytic 10 7Analytic10 12Analytic 10 8Analytic The McGraw Hill Companies Inc 2009 Solutions Manual Vol 1 Chapter 1010 3 Question 10 1 The term operational asset is used to describe the broad category of long lived assets that are used in the production of goods and services The difference between tangible and intangible assets is that intangible assets lack physical substance and they primarily refer to the ownership of rights Question 10 2 The cost of an operational asset includes the purchase price less any discounts received from the seller transportation costs paid by the buyer to transport the asset to the location in which it will be used expenditures for installation testing legal fees to establish title and any other costs of bringing the asset to its condition and location for use Question 10 3 The cost of a developed natural resource includes the acquisition costs for the use of land the exploration and development costs incurred before production begins and the restoration costs incurred during or at the end of extraction Question 10 4 Purchased intangibles are valued at their original cost to include the purchase price and all other necessary costs to bring the asset to condition and location for use Research and development costs incurred to internally develop an intangible asset are expensed in the period incurred Filing and legal costs for both purchased and developed intangibles are capitalized Question 10 5 Goodwill represents the unique value of the company as a whole over and above all identifiable tangible and intangible assets This value results from a company s clientele and reputation its trained employees and management team its unique business location and any other unique features of the company that can t be associated with a specific asset Because goodwill can t be separated from a company it is not possible for a buyer to acquire it without also acquiring the whole company or a substantial portion of it Goodwill will appear as an asset in a balance sheet only when it was paid for in connection with the acquisition of another company The capitalized cost of goodwill equals the purchase price of the acquired company less the fair value of the net assets acquired The fair value of the net assets equals the fair value of all identifiable tangible and intangible assets less the fair value of any liabilities of the selling company assumed by the buyer QUESTIONS FOR REVIEW OF KEY TOPICS The McGraw Hill Companies Inc 2009 10 4Intermediate Accounting 5 e Answers to Questions continued Question 10 6 A lump sum purchase price generally is allocated based on the relative fair values of the individual assets The relative fair value percentages are multiplied by the lump sum purchase price to arrive at the initial valuation of each of the separate assets Question 10 7 Assets acquired in exchange for deferred payment contracts are valued at their fair value or the present value of payments using a realistic interest rate Theoretically both alternatives should lead to the same valuation Question 10 8 Assets acquired through the issuance of equity securities are valued at the fair value of the securities if known if not known the fair value of the assets received is used Question 10 9 Donated assets are valued at their fair values Question 10 10 When an operational asset is sold a gain or loss is recognized for the difference between the consideration received and the asset s book value Retirements and abandonments are handled in a similar fashion The only difference is that there will be no monetary consideration received A loss is recorded for the remaining book value of the asset Question 10 11 The basic principle used to value assets acquired in a nonmonetary exchange is to use the fair value of asset s given up plus minus monetary consideration cash paid received Question 10 12 The two exceptions are 1 when fair value is not determinable and 2 when the exchange lacks commercial substance Question 10 13 GAAP require the capitalization of interest incurred during the construction of assets for a company s own use as well as for assets constructed for sale or lease Assets qualifying for capitalization exclude inventories that are routinely manufactured in large quantities on a repetitive basis and assets that are in use or ready for their intended purpose Only assets that are constructed as discrete projects qualify for interest capitalization The McGraw Hill Companies Inc 2009 Solutions Manual Vol 1 Chapter 1010 5 Answers to Questions continued Question 10 14 Average accumulated expenditures for a period is an approximation of the average amount of debt the company would have had outstanding if it borrowed all of the funds necessary for construction If construction expenditures are incurred equally throughout the period the average accumulated expenditures for the period can be estimated by adding the accumulated expenditures at the beginning of the period to the accumulated expenditures at the end of the period and dividing by two If expenditures on the project are unequal throughout the period individual expenditures perhaps expenditures grouped by month should be weighted by the amount of time outstanding until the end of the construction period or the end of the company s fiscal year whichever comes first Question 10 15 Applying the specific interest method the interest rate on any construction related debt is used up to the amount of the construction debt and any excess average accumulated expenditures is multiplied by a weighted average interest rate of all other debt The weighted average method multiplies average accumulated expenditures by the weighted average interest rate of all debt including any construction related debt Question 10 16 SFAS No 2 defines research and development as follows Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about a significant improvement to an existing product or process Development is the translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use Question 10 17 SFAS No 2 specifically excludes from current R it is probable that the asset created will generate future economic benefits and the development cost of the asset can be measured reliably U S GAAP requires that both research and development expenditures be expensed in the period incurred The only exception is the capitalization of certain computer software development costs The McGraw Hill Companies Inc 2009 Solutions Manual Vol 1 Chapter 1010 73 Analysis Case 10 15 Requirement 1 The fixed asset turnover ratio is computed by dividing net sales by average fixed assets A ratio of 3 18 for National indicates that they are able to generate 3 18 in net sales for each dollar invested in fixed assets property plant and equipment Requirement 2 in millions Book value of PP E beginning of 2007 628 Add purchases during 2007107 Deduct book value of PP E sold during 2007 6 Deduct depreciation for 2007 145 Book value of PP E end of 2007 584 Average PP E for 2007 628 584 2 606 Turnover ratio Net sales Average PP E 3 18 Net sales 606 Net sales 1 927 The McGraw Hill Companies Inc 2009 10 74Intermediate Accounting 5 e Judgment Case 10 16 Requirement 1 Elegant was not correct in its treatment of the software development costs Generally accepted accounting principles require companies to expense costs incurred to develop computer software to be sold leased or otherwise marketed as R D costs until technological feasibility of the product or process has been established Only those costs incurred after technological feasibility has been attained and before the product is available for general release to customers can be capitalized Requirement 2 The amortization of capitalized computer software development costs begins with the start of commercial production The periodic amortization percentage is the greater of 1 the ratio of current revenues to current and anticipated revenues percentage of revenue method or 2 the straight line percentage over the useful life of the asset Real World Case 10 17 Requirement 3 The following is based on Home Depot s 2007 year ending January 30 2007 financial statements Answers will vary depending on the financial statement dates chosen a The company lists land buildings furniture fixtures and equipment leasehold improvements construction in progress and capital leases under Property and equipment Goodwill cost in excess of fair value of net assets acquired is listed as a separate noncurrent asset b 3 542 million c Note 4 indicates that 47 million of interest was capitalized in fiscal 2007 d Fixed asset turnover ratio Net sales Average PP E in millions 90 837 3 53 25 753 Average PP E for 2007 26 605 24 901 2 25 753 The McGraw