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1. (100 points) Oak Island, Inc. reported the following related to its December 31, 2014 balance sheet: Land, acquired January 1, 2013 Buildings, acquired January 1, 2013 Equipment, acquired January 1, 2013 Trucks, acquired March 1, 2013 $200,000 100,000 700,000 90,000 Buildings are depreciated using a 40 year life, the straight-line method, and no residual value. Equipment is depreciated using a 7 year life, the sum-of-the-years'-digits method, with a residual value of 10% of the equipment's initial cost. Trucks are depreciated using a 5 year life, the double-declining balance method, and a residual value of 20% of the trucks initial cost. Early in 2015, Oak Island, Inc. purchased a parcel of land with a building for $200,000. The closing statement indicated the land value was $130,000 and the building value was $70,000. In addition, to acquire the land, Oak Island paid a $17,000 commission to a real estate agent. Shortly after acquisition, the building was demolished at a cost of $21,000. Oak Island, Inc. plans to use this parcel of land to park equipment. On April 1, 2015, Oak Island began construction of a new building on land that it has owned since 2013. Architectural plans were formalized on April 1, when the architect was paid $25,000. Excavation work began during the first week in April with payments made to the contractor as follows: Date of Payment May 31, 2015 October 31, 2015 January 30, 2016 Amount of Payment $ 60,000 100,000 150,000 Construction was completed on January 31, 2016 and the building was first occupied on that same day. Oak Island, Inc. had no new borrowings directly associated with the new building but had the following debt outstanding: 10%, 5-year note payable of $250,000, dated January 1, 2013, with interest payable annually on January 1. 5%, 10-year bond issue of $1,000,000 sold at par on July 1, 2012, with interest payable annually on July 1. At December 31, 2015, after recording depreciation, management became concerned that, due to changes in technology, the equipment may be impaired. Estimated future cash flows associated with the equipment are $240,000 and its estimated fair value is $205,000. On February 1, 2016, Oak Island, Inc. exchanged its used trucks (original cost, $90,000) plus cash of $38,000 for two new trucks. The used trucks had a combined fair market value of $60,000 at the time of the transaction. The exchange lacks commercial substance. On November 30, 2016, Oak Island, Inc. purchased land with an existing building for $540,000 by making a $200,000 down payment and signing a $340,000 note payable which carries interest at the rate of 10%, payable each November 30. The seller reported that the land and building had book values of $20,000 and $330,000, respectively, prior to the sale. An independent appraisal reported that the fair value of the land and building was $112,000 and $448,000, respectively, at the time of sale. At the point of acquisition, the estimated remaining useful life of the building was 30 years. Immediately after acquisition, the roof on the building was replaced at a cost of $40,000. The cost of the old roof is not known. Oak Island estimates that the replacement of the roof will increase the useful life of the building by 10 years. Requirements: (a) Compute the book value for each of the above mentioned assets at December 31, 2015 and 2016. (b) Compute the income statement effects for 2015 and 2016 for each of the above mentioned transactions. **Round all computations to the nearest whole dollar. 2. (50 points) On January 1, 2015, Lagina Company purchased Blankenship, Inc. by paying $2,300,000. At December 31, 2014, the balance sheet of Blankenship, Inc. was as follows: Cash Inventory Land Buildings (net) Equipment (net) Franchise (net) Patent (net) Total assets $ 150,000 40,000 700,000 200,000 750,000 100,000 10,000 $ 1,950,000 Accounts payable Notes payable Common Stock Retained Earnings Total liabilities and equity $ 30,000 400,000 1,500,000 20,000 $ 1,950,000 All fair values are equal to their book values with the following exceptions: Land - fair value of $800,000 Buildings - fair value of $300,000 Equipment - fair value of $700,000 Franchise - fair value of $200,000 Patent - fair value of $400,000 The franchise expires on December 31, 2017 and the patents have a remaining legal life of 6 years with an estimated useful life of 4 years. On July 1, 2015, Lagina paid $20,000 to successfully defend its patent. During 2015, Lagina incurred $800,000 of experimental and development costs to develop a new drilling methodology. In 2016, legal fees and other costs associated with registration of the related patent totaled $18,000. A patent for this technology was granted on March 31, 2016. The patent has a legal and estimated useful life of 7 years. Due to a change in the local regulatory climate, at the end of 2015, after recording amortization, Lagina determined it was necessary to assess impairment on the franchise. At December 31, expected future cash flows are $150,000 and estimated fair value is $130,000. On April 1, 2016, Lagina sold the patent acquired in 2015 in exchange for $300,000 cash. At the end of 2015, Lagina determined that there was no goodwill impairment. As part of year-end testing in 2016, Lagina collected the following information (as of December 31): Book value of net assets (including goodwill) Estimated net future cash flows Fair value of net assets (including goodwill) Fair value of net assets (excluding goodwill) $550,000 $800,000 $525,000 $475,000 Requirements: (a) Compute the book value for each of the above mentioned intangible assets at December 31, 2015 and 2016. (b) Compute the income statement effects for 2015 and 2016 for each of the above mentioned transactions. **Round all computations to the nearest whole dollar. Exam #3 Answer Book Name ___________________________ Problem #1 Note: You may not need to use all titles provided below All computations should be shown on the two pages that follow 2015 Book Value Item 2016 Book Value Land $ $ Buildings $ $ Equipment $ $ Trucks $ $ 2015 Income Statement Effect Item 2016 Income Statement Effect Depreciation Expense - Land $ $ Depreciation Expense - Buildings $ $ Depreciation Expense - Equipment $ $ Depreciation Expense - Trucks $ $ Impairment Loss $ $ Interest Expense $ $ Repairs and Maintenance Expense $ $ 1 Computations - 2015 Item Land Book Value Income Statement Effect Buildings Equipment Trucks Interest 2 Computations - 2016 Item Land Book Value Income Statement Effect Buildings Equipment Trucks Interest 3 Problem #2 Note: You may not need to use all titles provided below All computations should be shown on the two pages that follow 2015 Book Value Item 2016 Book Value Franchise $ $ Patent $ $ Goodwill $ $ 2015 Income Statement Effect Item 2016 Income Statement Effect Amortization Expense - Franchise $ $ Amortization Expense - Patent $ $ Amortization Expense - Goodwill $ $ Impairment Loss - Franchise $ $ Impairment Loss - Goodwill $ $ Research and Development Expense $ $ Legal Fees Expense $ $ Gain on Sale $ $ Loss on Sale $ $ 4 Computations - 2015 Item Franchise Book Value Income Statement Effect Patents Goodwill 5 Computations - 2016 Item Franchise Book Value Income Statement Effect Patents Goodwill 6