Problem 8-34A Accounting for Depletion

Accounting for Long-Term Operational Assets

Problem 8-34A Accounting for Depletion

Flannery Company engages in the exploration and development of many types of natural resources. In the last two years, the company has engaged in the following activities:

Jan. 1, Year 1 Purchased for $1,500,000 a silver mine estimated to contain 100,000 tons of silver ore.

July 1, Year 1 Purchased for $1,700,000 cash a tract of land containing timber estimated to yield 1,000,000 board feet of lumber. At the time of purchase, the land had an appraised value of $100,000.

Feb. 1, Year 2 Purchased for $2,700,000 a gold mine estimated to yield 50,000 tons of gold-veined ore.

Sept. 1, Year 2 Purchased oil reserves for $1,300,000. The reserves were estimated to contain 270,000 barrels of oil, of which 10,000 would be unprofitable to pump.

Required:

a. Prepare the journal entries to account for the following:
(1) The Year 1 purchases.
(2) Depletion on the Year 1 purchases, assuming that 14,000 tons of silver were mined and 500,000 board feet of lumber were cut.
(3) The Year 2 purchases.
(4) Depletion on the four natural resource assets, assuming that 20,000 tons of silver ore, 300,000 board feet of lumber, 4,000 tons of gold ore, and 50,000 barrels of oil were extracted.

b. Prepare the portion of the December 31, Year 2, balance sheet that reports natural resources.

c. Assume that in Year 3 the estimates changed to reflect only 20,000 tons of gold ore remaining. Prepare the depletion journal entry in Year 3 to account for the extraction of 10,000 tons of gold ore.

Problem 8-35A Accounting for Intangible Assets

Mitre Company acquired Midwest Transportation Co. for $1,400,000. The fair market values of the assets acquired were as follows. No liabilities were assumed.

Equipment $510,000

Land $150,000

Building $520,000

Franchise (10-year life) $40,000

Required:

a. Calculate the amount of goodwill acquired.
b. Prepare the journal entry to record the amortization of the franchise fee at the end of Year 1.

Problem 8-36A Accounting for Goodwill

Rossie Equipment Manufacturing Co. acquired the assets of Alba Inc., a competitor, in Year 1. It recorded goodwill of $70,000 at acquisition. Because of defective machinery Alba had produced prior to the acquisition, it has been determined that all of the acquired goodwill has been permanently impaired.

Required:
Prepare the journal entry to record the permanent impairment of the goodwill.