Accounting for intangibles
Midland States Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Midland States Telecom purchased goodwill as part of the acquisition of Sheldon Wireless Enterprises, which had the following figures:
Book value of assets $ 900,000
Market value of assets 1,400,000
Market value of liabilities 530,000
1. Journalize the entry to record Midland States Telecom’s purchase of Sheldon Wireless for $440,000 cash plus a $660,000 note payable.
2. What special asset does Midland States Telecom’s acquisition of Sheldon Wireless identify? How should Midland States Telecom account for this asset after acquiring Sheldon Wireless? Explain in detail.
Goodwill is $230,000
The assets that increase the value of the business organization even without physical existence are known as intangible assets. Goodwill and patents are some of the intangible assets.
Accounts & Explanation
Goodwill (refer working note)
(To record purchase of Sheldon wireless)
Working note: Calculation of Goodwill
Purchase Price to acquire Sheldon Wireless ($440,000+$660,000)
Market value of Sheldon Wireless Assets $1,400,000
Less: Market value of Sheldon Wireless Liabilities (530,000)
Midland State Telecom will identify goodwill on the acquisition of Sheldon wireless. This goodwill arises because Midland has paid an amount of consideration that is more than the market value of the net assets of the Sheldon wireless.
Midland State Telecom will report goodwill of $230,000 on the balance sheet.
Calculating partial-year depreciation
On February 28, 2017, Rural Tech Support purchased a copy machine for $53,400. Rural Tech Support expects the machine to last for six years and have a residual value of $3,000. Compute depreciation expense on the machine for the year ended December 31, 2017, using the straight-line method.
Selling an asset at gain or loss Peter Company purchased equipment on January 1, 2018, for $28,000. Suppose Peter Company sold the equipment for $4,000 on December 31, 2019. Accumulated Depreciation as of December 31, 2019, was $11,000. Journalize the sale of the equipment, assuming straight-line depreciation was used.
Question: P9-36B Determining asset cost and recording partial-year depreciation
Safe Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:
Purchase price of three acres of land
Delinquent real estate taxes on the land to be paid by safe parking
Additional dirt and earth removing
Title insurance and the land acquisition
Fence around the boundary of the property
Building permit for building
Architect’s fee for design of building
Signs near the front of property
Material used to construct the building
Labor to construct the building
Interest cost on construction loan for the building
Parking lots on the property
Lights for parking lots
Salary of construction supervisor (80% to building; 20% to parking lot and concrete walks)
Transportation of furniture from seller to the building
Safe Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value.
1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.
2. All construction was complete and the assets were placed in service on September 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar.
Jim Reed manages a fleet of utility trucks for a rural county government. He’s been in his job for 30 years, and he knows where the angles are. He makes sure that when new trucks are purchased, the residual value is set as low as possible. Then, when they become fully depreciated, they are sold off by the county at residual value. Jim makes sure his buddies in the construction business are first in line for the bargain sales, and they make sure he gets a little something back. Recently, a new county commissioner was elected with vows to cut expenses for the taxpayers. Unlike other commissioners, this man has a business degree, and he is coming to visit Jim tomorrow.
1. When a business sells a fully depreciated asset for its residual value, is a gain or loss recognized?
2. How do businesses determine what residual values to use for their various assets? Are there “hard and fast” rules for residual values?
3. How would an organization prevent the kind of fraud depicted here?
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