1: (3 points) Fred Graf, owner of Graf Interiors, is negotiating for the purchase of Terrell Galleries. The balance sheet of Terrell is given in an abbreviated form below. TERRELL GALLERIES BALANCE SHEET AS OF DECEMBER 31, 2010 Assets Liabilities and Stockholders' Equity Cash $100,000 Accounts payable $ 50,000 Land 70,000 Long-term notes payable 300,000 Building (net) 200,000 Total liabilities 350,000 Equipment 175,000 Common stock $200,000 (net) Copyright (net) 30,000 Retained earnings Total assets $575,000 Total liabilities and stockholders' equity 25,000 225,000 $575,000 Graf and Terrell agree that: (a) Land is undervalued by $20,000. (b) Equipment is overvalued by $25,000. All other assets and liabilities' book values approximate their market values. Terrell agrees to sell the gallery to Graf for $380,000. Prepare the entry to record the purchase of Terrell Galleries on Graf's books. Question 2: (6 points, 2 points each) Presented below is information related to equipment owned by Davis Company at December 31, 2010. Cost $6,750,000 Accumulated depreciation to date 750,000 Expected future net cash flows 5,250,000 Fair value 3,600,000 Assume that Davis 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 the asset at December 31, 2010. (b) Prepare the journal entry to record depreciation expense for 2011 (straight-line). (c) The fair value of the equipment at December 31, 2011, is $3,825,000. Prepare the journal entry (if any) necessary to record this increase in fair value