Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Chapter 10 Operational Assets: Acquisition and Disposition QUESTIONS FOR REVIEW OF KEY TOPICS 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 market value of the net assets acquired The market value of the net assets equals the market value of all identifiable tangible and intangible assets less the market value of any liabilities of the selling company assumed by the buyer Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-1 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Answers to Questions (continued) Question 10-6 A lump-sum purchase price generally is allocated based on the relative market values of the individual assets The relative market 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., 2007 10-2 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 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 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 specifically excludes from current R&D expense the cost of operational assets that have “alternative future uses” beyond the current R&D project However, the depreciation or amortization of these assets will be included as R&D expenses in the future periods the assets are used for R&D activities If the equipment has no alternative future use, its cost is expensed as R&D immediately Question 10-18 GAAP require the capitalization of software development costs incurred after technological feasibility is established Technological feasibility is established “when the enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements.” Costs incurred after technological feasibility but before the product is available for general release to customers are capitalized as an intangible asset These costs include coding and testing costs and the production of product masters Similar to SFAS 2, costs incurred after commercial production begins usually are not R&D expenditures Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-3 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Answers to Questions (concluded) Question 10-19 The cost of developed technology is capitalized and expensed over its expected useful life The cost of in-process R&D is expensed in the period of the acquisition Developed technology relates to those projects that have reached technological feasibility Question 10-20 The successful efforts method allows companies to capitalize only exploration costs resulting in successful wells The full-cost method allows companies to capitalize all exploration costs incurred within a geographical area © The McGraw-Hill Companies, Inc., 2007 10-4 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com BRIEF EXERCISES Brief Exercise 10-1 Capitalized cost of the machine: Purchase price Freight Installation Testing Total cost $35,000 1,500 3,000 2,000 $41,500 Note: Personal property taxes on the machine for the period after acquisition are not part of acquisition cost They are expensed in the period incurred Brief Exercise 10-2 Capitalized cost of land: Purchase price Broker’s commission Title insurance Miscellaneous closing costs Demolition of old building Total cost $600,000 30,000 3,000 6,000 18,000 $657,000 All of the expenditures, including the costs to demolish the old building, are included in the initial cost of the land Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-5 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 10-3 Cost of land and building: Purchase price Broker’s commission Title insurance Miscellaneous closing costs Total cost $600,000 30,000 3,000 6,000 $639,000 The total must be allocated to the land and building based on their relative market values: Percent of Total Market Value Asset Land Building Market Value $420,000 280,000 $700,000 60% 40 100% Initial Valuation (Percent x $639,000) $383,400 255,600 $639,000 Brief Exercise 10-4 Cost of silver mine: Acquisition, exploration, and development Restoration costs † $5,600,000 429,675 † $6,029,675 $500,000 x 20% = $100,000 550,000 x 45% = 247,500 650,000 x 35% = 227,500 $575,000 x 74726* = $429,675 *Present value of $1, n = 5, i = 6% (from Table 2) © The McGraw-Hill Companies, Inc., 2007 10-6 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 10-5 After one year, the liability will increase to $455,456 ($429,675† + ($429,675 x 6%) = $455,456) † $500,000 x 20% = $100,000 550,000 x 45% = 247,500 650,000 x 35% = 227,500 $575,000 x 74726* = $429,675 *Present value of $1, n = 5, i = 6% (from Table 2) Actual restoration costs Less: Asset retirement liability Loss on retirement $596,000 (575,000) $ (21,000) Brief Exercise 10-6 Calculation of goodwill: Purchase price Less fair value of net assets: Book value of assets Plus: Excess of fair value over book value of intangible assets Goodwill Solutions Manual, Vol.1, Chapter 10 $14,000,000 $8,300,000 2,500,000 (10,800,000) $ 3,200,000 © The McGraw-Hill Companies, Inc., 2007 10-7 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 10-7 The initial value of machinery and note will be the present value of the note payment: PV = $60,000 (.85734* ) = $51,440 * Present value of $1: n = 2, i = 8% (from Table 2) Interest expense for 2006: $51,440 x 8% x 6/12 = $2,058 Brief Exercise 10-8 The cost of the patent equals the market value of the stock given in exchange: 50,000 x $22 = $1,100,000 Brief Exercise 10-9 Average PP&E for 2006 = ($740,000 + 940,000) ÷ = $840,000 Net sales ÷ Average PP&E = Fixed-asset turnover ratio ? ÷ $840,000 = 3.25 Average PP&E x Fixed-asset turnover ratio = Net sales $840,000 x 3.25 = $2,730,000 © The McGraw-Hill Companies, Inc., 2007 10-8 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 10-10 Proceeds Less book value: Gain on sale of equipment $16,000 $80,000 (71,000) 9,000 $ 7,000 Journal entry (not required): Cash Accumulated depreciation (account balance) Gain (difference) Equipment (account balance) 16,000 71,000 7,000 80,000 Brief Exercise 10-11 Pickup trucks = Fair value of machinery less cash received $17,000 – 8,000 = $9,000 Loss on exchange = $20,000 (book value) – 17,000 (fair value) = $3,000 Journal entry (not required): Cash Pickup trucks (determined above) Accumulated depreciation (account balance) Loss (difference) Machinery (account balance) Solutions Manual, Vol.1, Chapter 10 8,000 9,000 45,000 3,000 65,000 © The McGraw-Hill Companies, Inc., 2007 10-9 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Brief Exercise 10-12 Pickup trucks = Fair value of machinery less cash received $24,000 – 8,000 = $16,000 Gain on exchange = $24,000 (fair value) – 20,000 (book value ) = $4,000 Journal entry (not required): Cash Pickup trucks (determined above) Accumulated depreciation (account balance) Gain (difference) Machinery (account balance) 8,000 16,000 45,000 4,000 65,000 Brief Exercise 10-13 Pickup trucks = Book value of machinery less cash received $20,000 – 8,000 = $12,000 No gain is recognized in this situation Journal entry (not required): Cash Pickup trucks (determined above) Accumulated depreciation (account balance) Machinery (account balance) © The McGraw-Hill Companies, Inc., 2007 10-10 8,000 12,000 45,000 65,000 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Research Case 10-2 Requirement SFAS No 143, “Accounting for Asset Retirement Obligations,” requires that an existing legal obligation associated with the retirement of a tangible, long-lived asset be recognized as a liability and measured at fair value When the liability is credited, the offsetting debit is to the related operational asset Usually, the fair value is estimated by calculating the present value of estimated future cash outflows Traditionally, the way uncertainty has been considered in present value calculations has been by discounting the “best estimate” of future cash flows applying a discount rate that has been adjusted to reflect the uncertainty or risk of those cash flows That's not the approach taken here Instead, we follow the approach described in the FASB’s Concept Statement No which is to adjust the cash flows, not the discount rate, for the uncertainty or risk of those cash flows This expected cash flow approach incorporates specific probabilities of cash flows into the analysis We use a discount rate equal to the credit-adjusted risk free rate The higher a company’s credit risk, the higher will be the discount rate Requirement The cost of the coal mine is $24,513,419 determined as follows: Mining site $15,000,000 Development costs 6,000,000 Restoration costs 3,513,419 † $24,513,419 † $3 million x 20% million x 30% million x 25% million x 25% = = = = $ 600,000 1,200,000 1,250,000 1,500,000 $4,550,000 x 77218* = $3,513,419 *Present value of $1, n = 3, i = 9% Requirement Coal mine (determined above) 24,513,419 Cash ($15,000,000 + 6,000,000) 21,000,000 Asset retirement liability (determined above) 3,513,419 Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-49 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Case 10-2 (concluded) Requirement $3,513,419 x 9% = $316,208 x 6/12 = $158,104 Requirement If the actual restoration costs are more (less) than the recorded liability at the retirement date, a loss (gain) on retirement of the obligation is recognized for the difference Asset retirement liability (maturity amount) 4,550,000 Loss (difference) 150,000 Cash 4,700,000 Requirement An entity shall disclose the following information about its asset retirement obligations: a b c A general description of the asset retirement obligations and the associated long-lived assets The fair value of assets that are legally restricted for purposes of settling asset retirement obligations A reconciliation of the beginning and ending aggregate carrying amount (book value) of asset retirement obligations showing separately the changes attributable to (1) liabilities incurred in the current period, (2) liabilities settled in the current period, (3) accretion expense (interest expense), and (4) revisions in estimated cash flows, whenever there is a significant change in one or more of those four components during the reporting period If the fair value of an asset retirement obligation cannot be reasonably estimated, that fact and the reasons therefor shall be disclosed © The McGraw-Hill Companies, Inc., 2007 10-50 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Judgment Case 10-3 Requirement The cost of a self-constructed asset includes identifiable materials and labor and a portion of the company's manufacturing overhead costs Requirement The treatment of manufacturing overhead cost and its allocation between construction projects and normal production is a difficult issue One alternative is to include only the incremental overhead costs in the total cost of construction That is, only those additional costs that are incurred because of the decision to construct the asset should be added to the cost of the asset This would exclude such indirect costs as depreciation and the salaries of supervisors that would be incurred whether or not the construction project is undertaken If, however, a new construction supervisor were hired specifically to work on the project, then that salary would be included in asset cost A second alternative is to assign overhead on the same basis that is used for the regular manufacturing process For example, all overhead costs might be allocated both to production and to self-constructed assets based on the relative amount of labor hours incurred This is known as the full-cost approach and is the generally accepted method used to determine the cost of a self-constructed asset Requirement Generally accepted accounting principles provide specific guidelines for the treatment of interest costs incurred during construction These guidelines pertain to 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 construction of equipment by the Chilton Company appears to qualify for interest capitalization The cost of the equipment would include interest if, during the construction period, interest costs were actually being incurred Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-51 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Judgment Case 10-4 Requirement Only assets that are constructed as discrete projects qualify for interest capitalization 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 Requirement The capitalization period for a self-constructed asset starts when (1) expenditures (materials, labor and overhead) have been made and (2) interest cost is being incurred The interest cost incurred does not have to pertain to specific borrowings related to the construction project The capitalization period ends either when the asset is substantially complete and ready for use or when interest costs are no longer incurred Requirement Average accumulated expenditures is an approximation of the average amount of debt that the company would have had outstanding during the period if every dollar spent on the project was borrowed 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 Requirement One method that could be used to determine the appropriate interest rate(s) to be used in capitalizing interest is the specific interest method If debt financing has been obtained specifically for the construction project, its interest rate is applied to the average accumulated expenditures up to the amount of the specific borrowing Any remaining average accumulated expenditures in excess of specific borrowings is multiplied by the weighted-average rate on all other outstanding interest-bearing debt Sometimes it is difficult to associate specific borrowings with projects In these situations, it is easier to just use the weighted-average rate on all interest-bearing debt, including all construction loans This is the weighted-average method © The McGraw-Hill Companies, Inc., 2007 10-52 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Case 10-4 (concluded) Requirement The three steps used to determine the amount of interest capitalized during a period are: Determine the average accumulated expenditures for the period Multiply average accumulated expenditures by the appropriate interest rate(s) Compare interest capitalized with total interest cost incurred Interest capitalized can’t exceed interest cost incurred Research Case 10-5 (Note: This case requires the student to reference a journal article.] Requirement The FASB has tentatively decided that purchased goodwill does meet the criteria in Concepts Statement for initial recognition as an asset Goodwill does represent “future economic benefits” that are in the “control” of the enterprise and that have arisen from a “past transaction or event.” Requirement Some believe that goodwill is not an asset because of concerns about 1) equating costs and assets, 2) exchangeability of goodwill, and 3) controllability Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-53 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Real World Case 10-6 ($ in millions) Decrease in property, plant and equipment, net Decrease in intangible assets, net ($981 – 702) Net decrease Add: Depreciation and amortization for the year Less: Additions to property, plant and equipment $(6) (279) (285) 893 (755) Book value of equipment sold * Proceeds from sale of equipment Gain on sale of equipment (147) 341 $194 ($6,097 – 6,091) *OR, Book value of property, plant and equipment and intangibles, beginning of the year Add: additions Less: depreciation and amortization Less: book value of property, plant and equipment and intangibles, end of the year Book value of equipment sold © The McGraw-Hill Companies, Inc., 2007 10-54 $7,078 755 (893) (6,793) $ 147 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Judgment Case 10-7 Requirement Goodwill represents the unique value of a 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 Requirement The controller would be correct in her valuation of goodwill only if the total fair value of all of the identifiable net assets (assets less liabilities) of Georgia, Inc equals the total book value of Georgia’s net assets ($2,800,000) Goodwill, by definition, is the excess of purchase price over the fair value of net assets, not the book value of net assets Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-55 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Judgment Case 10-8 Requirement A company undertakes an R&D project because it believes the project will eventually provide benefits that exceed the current expenditures Unfortunately, though, it’s difficult to predict which individual research and development projects will ultimately provide benefits In fact, only one in ten actually reach commercial production Moreover, even for those projects that pan out, a direct relationship between research and development costs and specific future revenue is difficult to establish In other words, even if R&D costs lead to future benefits, it’s difficult to objectively determine the size of the benefits and in which periods the costs should be expensed if they are capitalized These are the issues that prompted the FASB to require immediate expensing Requirement Possible reasons include: The larger a firm is, the more likely it is to prefer income-reducing accounting methods (e.g., expense R&D) This is particularly true in politically sensitive industries where excessive profits could trigger intervention into a firm's activities by government, unions, and other special interest groups Large firms may tend to have more R&D activities occurring simultaneously, creating a portfolio effect That is, the number of successful R&D projects relative to total projects may be fairly stable from year to year in large firms There may be much more variability in smaller firms creating larger variability in income if R&D is expensed Earnings-based management compensation schemes may be more prevalent in smaller R&D companies, thus creating a preference for accounting methods that can be more easily manipulated (e.g., capitalize R&D) Smaller companies may be more dependent on debt financing Debt covenants (contractual limitations on debt) could create a preference for accounting methods that can be more easily manipulated (e.g., capitalize R&D) © The McGraw-Hill Companies, Inc., 2007 10-56 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Judgment Case 10-9 Requirement The costs of research equipment used exclusively for Trouver would be reported as research and development expenses in the period incurred The costs of research equipment used on both Trouver and future research projects would be capitalized and shown as equipment (less accumulated depreciation) in the balance sheet An appropriate method of depreciation should be used Depreciation on capitalized research equipment should be reported as a research and development expense Requirement a Matching refers to the process of expense recognition by associating costs with revenues on a cause and effect basis b Research and development costs usually are expensed in the period incurred and may not be matched with revenues This accounting treatment is justified by the high degree of uncertainty regarding the amount and timing of future benefits A direct relationship between research and development costs and future revenues generally cannot be demonstrated Requirement Corporate headquarters’ costs allocated to research and development would be classified as general and administrative expenses in the period incurred, because they are not clearly related to research and development activities Requirement The legal expenses incurred in defending the patent should be capitalized as part of the cost of the intangible asset, patent Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-57 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Communication Case 10-10 You may wish to suggest to your students that they consult Appendix B of SFAS 2, Basis for Conclusions, which discusses factors deemed significant by members of the FASB in reaching their conclusion, including the various alternatives considered and reasons for accepting some and rejecting others While SFAS does dictate GAAP in this case, both views, expense and capitalize, can and often are convincingly defended The process of developing and synthesizing the arguments will likely be more beneficial than just acceptance of the standard Each student should benefit from participating in the process, interacting first with his or her partner, and then witnessing or participating in a debate on the issue It is important that each student actively participate in the process of arriving at a consensus argument Domination by one individual should be discouraged Arguments supporting the expense view should include the reasons cited by the FASB as factors they deemed significant in arriving at their conclusion Arguments supporting the capitalize view should include reference to violations to the matching principle for successful R&D projects Trueblood Accounting Case 10-11 A solution and extensive discussion materials accompany each case in the Deloitte & Touche Trueblood Case Study Series © The McGraw-Hill Companies, Inc., 2007 10-58 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Communication Case 10-12 Suggested Grading Concepts and Grading Scheme: Content (70%) 20 Defines research and development according to SFAS 30 Explains the conceptual reasons for the conclusion reached by the FASB on accounting for R&D High degree of uncertainty regarding the amount and timing of future benefits Lack of direct relationship between R&D costs and future revenues 20 Describes the treatment of equipment costs $200,000 should be expensed as R&D $300,000 should be capitalized and depreciated _ 70 points Writing (30%) Terminology and tone appropriate to the audience of a company president 12 Organization permits ease of understanding Introduction that states purpose Paragraphs that separate main points 12 English Sentences grammatically clear and well organized, concise Word selection Spelling Grammar and punctuation _ 30 points Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-59 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Ethics Case 10-13 Requirement If the equipment is to be used only in the single R&D project (as is likely) the correct treatment is to expense the entire $30 million If capitalized, only $6 million would be expensed ($30 million divided by years) Therefore, Alice's treatment will increase before tax earnings by $24 million ($30 million - million) Requirement Discussion should include these elements Ethical Dilemma: Is Alice's responsibility to follow GAAP by expensing the equipment purchase greater than her responsibility to assist the company in seeking new financing? Who is affected? Alice President and other managers Other employees Shareholders Potential shareholders Creditors Company auditors © The McGraw-Hill Companies, Inc., 2007 10-60 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com International Case 10-14 Heineken's disclosures indicate significant differences between the Netherlands and the U.S.A in the valuation of operational assets The cost of goodwill is capitalized, but, unlike the U.S., it is amortized In the area of tangible fixed assets, Heineken values these assets at replacement cost In the U.S.A., operational assets are valued at historical cost Analysis Case 10-15 Requirement The fixed-asset turnover ratio is computed by dividing net sales by average fixed assets A ratio of 2.87 for National indicates that they are able to generate $2.87 in net sales for each dollar invested in fixed assets (property, plant, and equipment) Requirement ($ in millions) Book value of PP&E, beginning of 2004 Add: purchases during 2004 Deduct: depreciation for 2004 Book value of PP&E, end of 2004 $681 215 (196) $700 Average PP&E for 2004 = ($681 + 700) ÷ = $690.5 Turnover ratio = Net sales ÷ Average PP&E 2.87 = Net sales ÷ $690.5 Net sales = $1,982 Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-61 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Judgment Case 10-16 Requirement 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 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 The following is based on Home Depot's 2004 (year ending January 30, 2004) 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 $3,948 million c Note indicates that $40 million of interest was capitalized in fiscal 2004 d Fixed-asset turnover ratio = Net sales ÷ Average PP&E ($ in millions) = $73,094 = 3.42 $21,394.5* * Average PP&E for 2004 = ($22,726 + 20,063) ữ = $21,394.5 â The McGraw-Hill Companies, Inc., 2007 10-62 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Analysis Case 10-18 Requirement Under the Property and equipment classification, the company lists aircraft and related equipment, package handling and ground support equipment and vehicles, computer and electronic equipment, and other The intangible asset goodwill is included with Other assets as is a separate category of intangible assets Requirement Note indicates that the company capitalized interest of $11 million in 2004 Requirement The statement of cash flows reports that $1,271 million cash was used for capital expenditures in 2004 This compares with capital expenditures of $1,511 million in 2003 and $1,615 million in 2002 Requirement The fixed-asset turnover ratio is computed by dividing net sales (revenues) by average fixed assets Using 2004 data, the ratio for FedEx is 2.79, which is 15% higher than that of United Parcel Service ($ in millions) $24,710 = 2.79 $8,868.5* * Average plant and equipment for 2004 = ($9,037 + 8,700) ÷ = $8,868.5 The ratio is intended to measure a company's effectiveness in managing property, plant, and equipment It indicates the level of sales generated by the company's investment in these assets Like any ratio, it is but one piece of a larger puzzle and should not be interpreted in isolation Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-63 ... equipment by the issuance of stock Equipment Common stock © The McGraw-Hill Companies, Inc., 2007 10-24 24,000 24,000 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual. .. begins usually are not R&D expenditures Solutions Manual, Vol.1, Chapter 10 © The McGraw-Hill Companies, Inc., 2007 10-3 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com... geographical area © The McGraw-Hill Companies, Inc., 2007 10-4 Intermediate Accounting, 4/e Find more slides, ebooks, solution manual and testbank on www.downloadslide.com BRIEF EXERCISES Brief