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Exam 10: Property, Plant, and Equipment and Intangible Assets: Acquisition

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Question 41

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Juliana Corporation purchased all of the outstanding stock of Caldwell Inc., paying $2,700,000 cash. Juliana assumed all of the liabilities of Caldwell. Book values and fair values of acquired assets and liabilities were: Juliana would record goodwill of:

A) $1,180,000.
B) $600,000.
C) $880,000.
D) $100,000.

E) None of the above
F) A) and B)

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Question 42

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On September 30, 2018, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2020. An interest rate of 8% reflects the time value of money for this type of loan agreement. - Corso should record the acquisition of the patent on September 30, 2018, for what amount?

A) $2,000,000.
B) $1,912,385.
C) $1,857,340.
D) $1,714,678.

E) B) and D)
F) B) and C)

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Question 43

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In computing capitalized interest, average accumulated expenditures:

Below is information relative to an exchange of similar assets by Grand Forks Corp. Assume the exchange has commercial substance. $\begin{array} { l l l c } & { \text { Old Equipment } } && \text { Cash } \\& \text { Book Value } & \text { Fair Value } & \text { Paid } \\\text { Case A } & \$ 50,000 & \$ 60,000 & \$ 15,000 \\\text { Case B }& \$ 40,000 & \$ 35,000 & \$ 8,000\end{array}$ - In Case A, Grand Forks would record the new equipment at:

It's not unusual for one company to buy another company in order to obtain technology that the acquired company has developed or is in the process of developing. Required: Explain the accounting treatment of purchased technology.

Liddy Corp. began constructing a new warehouse for its operations during the current year. In the year Liddy incurred interest of $30,000 on a working capital loan, and interest on a construction loan for the warehouse of $60,000. Interest computed on the average accumulated expenditures for the warehouse construction was $50,000. What amount of interest should Liddy expense for the year?

Watson Company purchased assets of Holmes Ltd. at auction for $1,300,000. An independent appraisal of the fair value of the assets acquired is listed below: $\begin{array} { l r } \text { Land } & \$ 214,500 \\\text { Building } & 357,500 \\\text { Equipment } & 572,000 \\\text { Inventories } & 286,000\end{array}$ Required: Prepare the journal entry to record the purchase of the assets.

Beacon Inc. received a gift of land and building in Twin Pines Park as an inducement to relocate. The land and buildings have fair values of $45,000 and $455,000. Required: Prepare journal entries to record the above transactions.

A company that prepares its financial statements according to International Financial Reporting Standards (IFRS) accounts for a government grant by recognizing revenue for the amount of the grant.

During the current year, Peterson Data Corporation acquired all of the outstanding common stock of Junior Jackson Inc. (JJI), paying $36 million in cash. Peterson recorded the assets acquired as follows: $\begin{array} { l r } \text { Accounts receivable } & \$ 2,500,000 \\\text { Inventory } & 9,000,000 \\\text { Property, plant, and equipment } & 25,500,000 \\\text { Goodwill } & 6,000,000\end{array}$ The book value of JJI's assets and owners' equity before the acquisition were $22 million and $18 million, respectively. Required: Compute the fair value of JJI's liabilities that Peterson assumed in the acquisition.

Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare metals from land owned by the state of Montana. To obtain the rights, MMC agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. MMC incurred exploration and development costs of $60 million on the project. MMC has a credit-adjusted risk free interest rate is 7%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: $\begin{array}{lc}\text { Cash Outflow } & \text { Probability } \\\$ 10 \text { million } & 60 \% \\\$ 30 \text { million } & 40 \%\end{array}$ - The asset retirement obligation (rounded) that should be recognized by MMC at the beginning of the extraction activities is:

On January 1, 2018, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2019. Expenditures on the project were as follows: Kendall borrowed $750,000 on a construction loan at 12% interest on January 1, 2018. This loan was outstanding throughout the construction period. The company had $4,500,000 in 9% bonds payable outstanding in 2018 and 2019. - Interest capitalized for 2018 was:

Why would an oil company argue to use the full-cost method of accounting for oil and gas exploration costs?

Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare metals from land owned by the state of Montana. To obtain the rights, MMC agreed to restore the land to a suitable condition for other uses after its exploration and extraction activities. MMC incurred exploration and development costs of $60 million on the project. MMC has a credit-adjusted risk free interest rate is 7%. It estimates the possible cash flows for restoring the land, three years after its extraction activities begin, as follows: $\begin{array}{cc}\text { Cash Outflow } & \text { Probability } \\\$ 10 \text { million } & 60 \% \\\$ 30 \text { million } & 40 \%\end{array}$ -The asset retirement obligation (rounded) that should be reported on MMC's balance sheet one year after the extraction activities begin is:

Montgomery Industries spent $600,000 in 2017 on a construction project to build a library. Montgomery also capitalized $30,000 of interest on the project in 2015. Montgomery financed 100% of the construction with a 10% construction loan. The project was completed on September 30, 2018. Additional expenditures in 2018 were as follows: $\begin{array} { l r } \text { Feb. 28 } & \$ 90,000 \\\text { Apr. 30 } & 180,000 \\\text { Jul. 1 } & 36,000 \\\text { Sept. 30 } & 64,000\end{array}$ Required: Determine the completed cost of the library. Show supporting computations.

On September 30, 2018, Corso Steel acquired a patent from Thermo Steel. The agreement specified that Corso will pay Thermo $1,000,000 immediately and then another $1,000,000 on September 30, 2020. An interest rate of 8% reflects the time value of money for this type of loan agreement. -What amount of interest expense, if any, would Corso record on December 31, 2019, the company's fiscal year end?

During the current year, Brewer Company acquired all of the outstanding common stock of Miller Inc. paying $12,000,000 cash. The book values and fair values of Miller's assets and liabilities acquired are listed below: Required: Prepare the journal entry to record the acquisition by Brewer Company.

Cool Globe Inc. entered into two transactions, as follows: 1. Purchased equipment paying $20,000 at the date of purchase and signing a noninterest-bearing note requiring the balance to be paid in four annual installments of $20,000 on the anniversary date of the contract. Based on Cool Globe's 12% borrowing rate for such transactions, the implicit interest cost is $19,253. 2. Purchased a tract of land in exchange for $10,000 cash that was paid immediately and signed a noninterest-bearing note requiring five $10,000 annual payments. The first annual payment of the note is due in one year. The fair value of the land is $46,000. Required: Prepare the journal entries for these transactions.

The basic principle used to value an asset acquired in a nonmonetary exchange is to value it at:

Which of the following does not pertain to accounting for asset retirement obligations?