Chapter 11: Q19 Q (page 583)
Explain how gains or losses on impaired assets should be reported in income.
Answer
Impaired asset losses are reported as part of the income from continuing operations.
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Jurassic Company owns equipment that cost \(900,000 and has accumulated depreciation of \)380,000. The expected future net cash flows from the use of the asset are expected to be \(500,000. The fair value of the equipment is \)400,000. Prepare the journal entry, if any, to record the impairment loss.
(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.)
Shumway Oil uses successful-efforts accounting and also provides full-cost results as well. Under fullcost, Shumway Oil would have reported retained earnings of \(42 million and net income of \)4 million. Under successful effort, retained earnings were \(29 million, and net income was \)3 million. Explain the difference between full-costing and successful-efforts accounting.
Lockard Company purchased machinery on January 1, 2017, for \(80,000. The machinery is estimated to have a salvage value of \)8,000 after a useful life of 8 years. (a) Compute 2017 depreciation expense using the straight-line method. (b) Compute 2017 depreciation expense using the straight-line method assuming the machinery was purchased on September 1, 2017.
(Depreciation Concepts) As a cost accountant for San Francisco Cannery, you have been approached by Phil Perriman, canning room supervisor, about the 2017 costs charged to his department. In particular, he is concerned about the line item “depreciation.” Perriman is very proud of the excellent condition of his canning room equipment. He has always been vigilant about keeping all equipment serviced and well oiled. He is sure that the huge charge to depreciation is a mistake; it does not at all reflect the cost of minimal wear and tear that the machines have experienced over the last year. He believes that the charge should be considerably lower.
The machines being depreciated are six automatic canning machines. All were put into use on January 1, 2017. Each cost \(625,000, having a salvage value of \)55,000 and a useful life of 12 years. San Francisco depreciates this and similar assets using double-declining-balance depreciation. Perriman has also pointed out that if you used straight-line depreciation, the charge to his department would not be so great.
Instructions
Write a memo dated January 22, 2017, to Phil Perriman to clear up his misunderstanding of the term “depreciation.” Also, calculate year-1 depreciation on all machines using both methods. Explain the theoretical justification for double-declining-balance and why, in the long run, the aggregate charge to depreciation will be the same under both methods.
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