11 Depreciation, Impairments, and Depletion EXERCISES 11.2
E11-17 (L03) (Impairment) Assume the same information as E11-16, except that Suarez intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be $20,000.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
(b) Prepare the journal entry (if any) to record depreciation expense for 2018.
(c) The asset was not sold by December 31, 2018. The fair value of the equipment on that date is $5,300,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still $20,000.
E11-18 (L03) (Impairment) The management of Petro Garcia Inc. was discussing whether certain equipment should be written off as a charge to current operations because of obsolescence. This equipment has a cost of $900,000 with depreciation to date of $400,000 as of December 31, 2017. On December 31, 2017, management projected its future net cash flows from this equipment to be $300,000 and its fair value to be $230,000. The company intends to use this equipment in the future.
Instructions
(a) Prepare the journal entry (if any) to record the impairment at December 31, 2017.
(b) Where should the gain or loss (if any) on the write-down be reported in the income statement?
(c) At December 31, 2018, the equipment’s fair value increased to $260,000. Prepare the journal entry (if any) to record this increase in fair value.
(d) What accounting issues did management face in accounting for this impairment?
E11-19 (L04) (Depletion Computations—Timber) Stanislaw Timber Company owns 9,000 acres of timberland purchased in 2006 at a cost of $1,400 per acre. At the time of purchase, the land without the timber was valued at $400 per acre. In 2007, Stanislaw built fire lanes and roads, with a life of 30 years, at a cost of $84,000. Every year, Stanislaw sprays to prevent disease at a cost of $3,000 per year and spends $7,000 to maintain the fire lanes and roads. During 2008, Stanislaw selectively logged and sold 700,000 board feet of timber, of the estimated 3,500,000 board feet. In 2009, Stanislaw planted new seedlings to replace the trees cut at a cost of $100,000.
Instructions
(a) Determine the depreciation expense and the cost of timber sold related to depletion for 2008.
(b) Stanislaw has not logged since 2008. If Stanislaw logged and sold 900,000 board feet of timber in 2019, when the timber cruise (appraiser) estimated 5,000,000 board feet, determine the cost of timber sold related to depletion for 2019.
E11-20 (L04) (Depletion Computations—Oil) Diderot Drilling Company has leased property on which oil has been discovered.
Wells on this property produced 18,000 barrels of oil during the past year that sold at an average sales price of $55 per barrel. Total oil resources of this property are estimated to be 250,000 barrels.
The lease provided for an outright payment of $500,000 to the lessor (owner) before drilling could be commenced and an annual rental of $31,500. A premium of 5% of the sales price of every barrel of oil removed is to be paid annually to the lessor. In addition, Diderot (lessee) is to clean up all the waste and debris from drilling and to bear the costs of reconditioning the land for farming when the wells are abandoned. The estimated fair value, at the time of the lease, of this clean-up and reconditioning is $30,000.
Instructions
From the provisions of the lease agreement, you are to compute the cost per barrel for the past year, exclusive of operating costs, to Diderot Drilling Company. (Round to the nearest cent.)
E11-21 (L04) (Depletion Computations—Timber) Forda Lumber Company owns a 7,000-acre tract of timber purchased in 2003 at a cost of $1,300 per acre. At the time of purchase, the land was estimated to have a value of $300 per acre without the timber. Forda Lumber Company has not logged this tract since it was purchased. In 2017, Forda had the timber cruised. The cruise (appraiser) estimated that each acre contained 8,000 board feet of timber. In 2017, Forda built 10 miles of roads at a cost of $7,840 per mile. After the roads were completed, Forda logged and sold 3,500 trees containing 850,000 board feet.
Instructions
(a) Determine the cost of timber sold related to depletion for 2017.
(b) If Forda depreciates the logging roads on the basis of timber cut, determine the depreciation expense for 2017.
(c) If Forda plants five seedlings at a cost of $4 per seedling for each tree cut, how should Forda treat the reforestation?
E11-22 (L04) (Depletion Computations—Mining) Alcide Mining Company purchased land on February 1, 2017, at a cost of $1,190,000. It estimated that a total of 60,000 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at $90,000. It believes it will be able to sell the property afterwards for $100,000. It incurred developmental costs of $200,000 before it was able to do any mining. In 2017, resources removed totaled 30,000 tons. The company sold 22,000 tons.
Instructions
Compute the following information for 2017.
(a) Per unit material cost.
(b) Total material cost of December 31, 2017, inventory.
(c) Total material cost in cost of goods sold at December 31, 2017.
E11-23 (L04) (Depletion Computations—Minerals) At the beginning of 2017, Aristotle Company acquired a mine for $970,000. Of this amount, $100,000 was ascribed to the land value and the remaining portion to the minerals in the mine. Surveys conducted by geologists have indicated that approximately 12,000,000 units of ore appear to be in the mine. Aristotle incurred $170,000 of development costs associated with this mine prior to any extraction of minerals. It also determined that the fair value of its obligation to prepare the land for an alternative use when all of the mineral has been removed was $40,000. During 2017, 2,500,000 units of ore were extracted and 2,100,000 of these units were sold.
Instructions
Compute the following.
(a) The total amount of depletion for 2017.
(b) The amount that is charged as an expense for 2017 for the cost of the minerals sold during 2017.
E11-24 (L05) GROUPWORK (Ratio Analysis) The 2014 annual report of Tootsie Roll Industries contains the following information.
(in millions) December 31, 2014 December 31, 2013
Total assets $910.4 $888.4
Total liabilities 219.3 208.1
Net sales 539.9 539.6
Net income 63.2 60.8
Instructions
Compute the following ratios for Tootsie Roll for 2014.
(a) Asset turnover.
(b) Return on assets.
(c) Profit margin on sales.
(d) How can the asset turnover be used to compute the return on assets?
* E11-25 (L06) (Book vs. Tax (MACRS) Depreciation) Futabatei Enterprises purchased a delivery truck on January 1, 2017, at a cost of $27,000. The truck has a useful life of 7 years with an estimated salvage value of $6,000. The straight-line method is used for book purposes. For tax purposes, the truck, having an MACRS class life of 7 years, is classified as 5-year property; the optional MACRS tax rate tables are used to compute depreciation. In addition, assume that for 2017 and 2018 the company has revenues of $200,000 and operating expenses (excluding depreciation) of $130,000.
Instructions
(a) Prepare income statements for 2017 and 2018. (The final amount reported on the income statement should be income before income taxes.)
(b) Compute taxable income for 2017 and 2018.
(c) Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes.
(d) Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciable asset.
* E11-26 (L06) (Book vs. Tax (MACRS) Depreciation) Shimei Inc. purchased computer equipment on March 1, 2017, for $31,000. The computer equipment has a useful life of 10 years and a salvage value of $1,000. For tax purposes, the MACRS class life is 5 years.
Instructions
(a) Assuming that the company uses the straight-line method for book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2017 and (2) the tax return for 2017?
(b) Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2017 and (2) the tax return for 2017?
(c) Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both?
