1.

EXERCISE 11-18 ( IMPAIRMENT) KIESO

Presented below is information related to equipment owned by Pujols company at December
31,2010.
Cost €9,000,000
Accumulated depreciation to date €1,000,000
Vaule-in use €7,000,000
Fair value less cost of disposal €4,400,000
Assume that Pujols will continue to use this asset in the future. As of December 31,2010 the
equipment has a remaining useful life of 4 years.
Instructions
a.prepare the journal entry(if any) to record the impairment of asset at December 31,2010.
b.preapre the journal entry to record depreciation expense for 2011
c.the recoverable amount of the equipment at December 21,2011 is €7,050,000. Prepare the
journal entry necessary to record this increase
(a) December 31, 2010
Loss on Impairment...................................................... 1,000,000
Accumulated Depreciation—Equipment..... 1,000,000

Cost...................................................... €9,000,000
Accumulated depreciation .................. (1,000,000)
Carrying amount................................... 8,000,000
Fair value less cost of disposal............. (7,000,000)
Loss on impairment............................... €1,000,000

(b) December 31, 2011

Depreciation Expense.................................................. 1,750,000
Accumulated Depreciation—Equipment..... 1,750,000

New carrying amount........................ €7,000,000

Useful life .............................................. ÷ 4 years
Depreciation per year........................ €1,750,000
(c) Accumulated Depreciation—Equipment.................... 1,800,000
Recovery of Impairment Loss........................ 1,800,000

2. P10-9, (Nonmonetary Exchanges) kieso

On August 1, Hyde, Inc. exchanged productive assets with Wiggins, Inc. Hyde’s asset is referred
to below as “Asset A,” and Wiggins’ is referred to as “Asset B.” The following facts pertain to
these assets.
Asset A AssetB
Original cost $96,000 $110,000
Accumulated depreciation (to date of exchange) 40,000 47,000
Fair value at date of exchange 60,000 75,000
Cash paid by Hyde, Inc. 15,000
Cash received by Wiggins, Inc. 15,000
Instructions
(a) Assuming that the exchange of Assets A and B has commercial substance, record the exchange for
both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
(b) Assuming that the exchange of Assets A and B lacks commercial substance, record the exchange for
both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
(a) Exchange has commercial substance:
Hyde, Inc.’s Books
Asset B..................................................................... 75,000
Accumulated Depreciation—Asset A ...................... 40,000
Asset A..................................................... 96,000
Gain on Disposal of Plant Assets
($60,000 – [$96,000 – $40,000]) ......... 4,000
Cash......................................................... 15,000

Wiggins, Inc.’s Books

Cash......................................................................... 15,000
Asset A..................................................................... 60,000
Accumulated Depreciation—Asset B ...................... 47,000
Asset B..................................................... 110,000
Gain on Disposal of Plant Assets
($75,000 – [$110,000 – $47,000])......... 12,000

(b) Exchange lacks commercial substance:

Hyde, Inc.’s Books
Asset B ($75,000 – $4,000) ..................................... 71,000*
Accumulated Depreciation—Asset A ...................... 40,000
Asset A..................................................... 96,000
Cash......................................................... 15,000

*Computation of gain deferred:

Fair value $60,000
Book value (56,000)
Gain deferred $ 4,000

Wiggins, Inc.’s Books

Cash....................................................................... 15,000
Asset A ($60,000 – $12,000*) ............................... 48,000
Accumulated Depreciation—Asset B..................... 47,000
Asset B .................................................. 110,000

Computation of gain deferred:

Fair value of Asset B $75,000
Book value of Asset B (63,000)
Gain deferred $12,000*

P12-2(accounting for Patents) fields laboratories holds a valuable patent(NO.758-

6002-1A) on a precipitator that prevents certain types of air pollution. Fields does
not manufacture or sell the pruducts and processes it develops. Instead , it conducts
research and develops products and processes which it patents,and then assigns the
patents to manufacturers on a royalt basis. Occasionally,it sells a patent. the history
of Fields patent number 758-6002-1A is as follows.
 Date activity cost
2001-2002 research conducted to develop precipitator $384,000
Jan,2003 design and construction of a prototype 87,000
March 2003 testing of models 42,000
Jan.2004 fees paid engineers and lawyers to prepare patent
Application; patent granted june 30,2004 59,500
Nov.2005 engineering activity necessary to advance the design
Of the precipitator to the manufacturing stage 81,500
Dec.2006 legal fees paid to successfully defend precipitator
Patent 42,000
May.2007 research aimed at modifying the design of the patented
Precipitator 49,000
July.2011 legal fees paid in unsuccessful patent infringement suit
Againts a competitor 34,000

Based on execution of a royalty contract in march 2007,the patent is deemed to be

economically viable. Fields assumed a useful life of 17 years when it received the initial
precipitator patent. on January1,2009,it revised its useful life estimate downward to 5
remaining years. Amortization is computed for a full year if the cost is incurred prior to
july 1, and no amortization for the year if the cost is incurred after June 30. The
company’s year ends December 31.
Instructions
Compute the carrying value of patent No.758-6002-1A on each of the following dates:
a. December 31,2004
b. December 31,2008
c. December 31,2011

(a) Costs to obtain patent Jan. 2004........................$59,500

2004 amortization ($59,500 ÷ 17)....................... (3,500)
Carrying value, 12/31/04..................................... $56,000
related to research and
development activities and were expensed as incurred in accordance
with IFRS.
 (b) 1/1/05 carrying value of patent................... $ 56,000
2005 amortization ($59,500 ÷ 17)..........................$3,500
2006 amortization ................................................... 3,500 (7,000)
49,000
Legal fees to defend patent 12/06..................... 42,000
Carrying value, 12/31/06....................................... 91,000
Capitalized research costs 5/07......................... 49,000
2007 amortization ($91,000 ÷ 14) +
($49,000 ÷ 14)........................................................ 10,000
2008 amortization ($91,000 ÷ 14) +
($49,000 ÷ 14)........................................................ 10,000 (20,000)
Carrying value, 12/31/08....................................... $120,000

The costs incurred in 2005 are related to research and development

activities and are expensed as incurred.

(c) 1/1/09 carrying value ............................................. $120,000

2009 amortization ($120,000 ÷ 5)....................... $24,000
2010 amortization ................................................... 24,000
2011 amortization ................................................... 24,000 (72,000)
Carrying value, 12/31/11....................................... $ 48,000

The legal costs in 2011 were expensed because the suit was
unsuccessful.

P12-5 (Goodwill,Impairment) On July 31,2010, mexico Company paid $3,000,000 to

acquire all of the ordinary shares of conchita incorporated,which became a division (cash-
generating unit) of mexico. Conchita reported the following statement of financial position
at the time of the acquisition.
Non-current assets $2,700,000 equity $2,400,000
Current assets 800,000 Non-current liabilities 500,000
 Total assets $3,500,000 current liabilities 600,000
Total equity and liabilities $3,500,000
It was determined at the date of the purchase that the fair value of the identifiable net assets
of Conchita wa $2,750,000. Over the next 6 months of operations ,the newly purchased division
experienced operating losses. In addition, it now appears that it will generate substansial losses for
the foreseeable future. At December 31,2010 conchita reports the following statement of financial
position information.
Current assest $450,000
Non current assets( uncluding goodwill recognized inpurchased) 2,400,000
Current liabilities (700,000)
Non-current liabilities (500,000)
Net assets 1,650,000
It is determined that the recoverable amount of the Conchita division is $1,850,000
Instruction
a. Compute the amount of goodwill recognized, if any,on July 31,2010.
b. Determine the impairtment loss,if any,to be recorded on December 31,2010
c. Assume that the recovarble amount of the Conchita division is $1,600,000 instead of
$1,800,000 determine the impairment loss ,if any,tobe recorded on December 31,2010
d. Prepare then journal entry to record the imparment loss ,if any,and indicate where the
loss would be reported in the income statement.

(a) Goodwill = Excess of the cost of the division over the fair value of the
identifiable assets:

$3,000,000 – $2,750,000 = $250,000

(b) No impairment loss is recorded, because the recoverable amount of

Conchita ($1,850,000) is greater than carrying value of the net assets
($1,650,000).

(c) Computation of impairment:

Goodwill impairment = Recoverable amount of division less the carrying

value of the division (adjusted for fair value changes), net of goodwill:

Recoverable amount of Conchita division...... $1,600,000

Carrying value of division .................................... 1,800,000
Impairment loss ....................................................... ($ 200,000)

(d) Loss on Impairment................................................ $200,000

Goodwill............................................................. 200,000

This loss will be reported in income as a separate line item before the
subtotal “income from continuing operations.