Question

Crow Co. purchased some of the machinery of Hare Inc., a bankrupt competitor, at a liquidation sale for a total cost of $16,000. Crow’s cost of moving and installing the machinery totaled $2,900. The following data are available:

Item		Hare’s Net Book Value on the Date of Sale				List Price of Same Item If New				Appraiser’s Estimate of Fair Value
Punch press		$	10,050			$	17,000			$	14,000
Lathe			8,970				10,000				6,000
Welder			2,350				6,000				3,040

Required:
a. Calculate the amount that should be recorded by Crow Co. as the cost of each piece of equipment. (Do not round intermediate calculations.)



b. Which of the following alternatives should be used as the depreciable life for Crow Co.'s depreciation calculation?

• The remaining useful life to Hare Inc.

• The life of a new machine.

• The useful life of the asset to Crow Co.

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2. Barefoot Industrial acquired a new delivery truck at the beginning of its current fiscal year. The truck cost $27,000 and has an estimated useful life of four years and an estimated salvage value of $4,100.

Required:
a-1. Calculate depreciation expense for each year of the truck’s life using Straight-line depreciation.



a-2. Calculate depreciation expense for each year of the truck’s life using Double-declining-balance depreciation.



b. Calculate the truck's net book value at the end of its third year of use under each depreciation method.



c. Assume that Barefoot Industrial had no more use for the truck after the end of the third year and that at the beginning of the fourth year it had an offer from a buyer who was willing to pay $6,390 for the truck. Should the depreciation method used by Barefoot Industrial affect the decision to sell the truck?

• Yes

• No

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3.

Goodwill arises when one firm acquires the net assets of another firm and pays more for those net assets than their current fair value. Suppose that Target Co. had operating income of $56,400 and net assets with a fair value of $163,000. Takeover Co. pays $346,000 for Target Co.'s net assets and business activities.

Required:
a. How much goodwill will result from this transaction?

b. Calculate the ROI for Target Co. based on its present operating income and the fair value of its net assets. (Round your percentage answer to 2 decimal places.)



c. Calculate the ROI that Takeover Co. will earn if the operating income of the acquired net assets continues to be $56,400. (Round your percentage answer to 2 decimal places.)



d. Takeover Co. is willing to pay $183,000 more than fair value for the net assets acquired from Target Co. as it represents goodwill and the expected superior earnings in future years.

• True

• False

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4.

During the first month of its current fiscal year, Green Co. incurred repair costs of $23,000 on a machine that had 3 years of remaining depreciable life. The repair cost was inappropriately capitalized. Green Co. reported operating income of $150,000 for the current year.

Required:

a. Assuming that Green Co. took a full year's straight-line depreciation expense in the current year, calculate the operating income that should have been reported for the current year.

b. Assume that Green Co.'s total assets at the end of the prior year and at the end of the current year were $935,000 and $1,016,000, respectively. Calculate ROI (based on operating income) for the current year using the originally reported data and then using corrected data. (Round your answers to 1 decimal place. (e.g., 32.1))

Answer 1

a. Total cost of the asset equals original cost plus cost of moving and installing the machinery. Further, this shall be apportioned in ratio of appraiser’s estimate of fair value. Book value and list price shall be completely ignored

	Appraisers’ estimate of fair value	Weight (in %)	Amount to be recorded by Crow Co.
Punch Press	14,000	60.76%	11483.64
		(14000/23040)	((16000+2900)*60.76%)
Lathe	6000	26.04%	4921.56
		(6000/23040)	((16000+2900)*26.04%)
Welder	3040	13.19%	2492.91
		(3040/23040)	((16000+2900)*13.19%)
Total	23040	100.00%	18,898.11

b. The useful life of the asset to Crow Co.

As per accounting standard on depreciation, depreciation shall be computed on the basis of useful life of asset unless revision is necessary in the case of revaluation of asset.

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