Question 1 - In 2011, internal auditors discovered that PKE Displays, Inc. had debited an expense account for the $350,000 cost of a machine purchased on January 1, 2008. The machine's life was expected to be five years with no residual value. Straight-line depreciation is used by PKE.
Required:
1. Prepare the appropriate correcting entry assuming the error was discovered in 2011 before the adjusting and closing entries. (Ignore income taxes)
2. Assume the error was discovered in 2013 after the 2012 financial statements are issued. Prepare the appropriate correcting entry.
Question 2 - General Optic Corporation operates a manufacturing plant in Arizona. Due to a significant decline in demand for the product manufactured at the Arizona site, an impairment test is deemed appropriate. Management has acquired the following information for the assets at the plant:
|
Cost
|
$32,500,000
|
|
Accumulated depreciation
|
14,200,000
|
|
General's estimate of the total cash flows to be generated by selling the products manufactured at ist Arizona plant, not discontinued to present value
|
15,000,000
|
The fair value of the Arizona plant is estimated to be $11,000,000.
Required:
1. Determine the amount of impairment loss, if any.
2. If a loss is indicated, where would it appear in Generals Optic's multiple-step income statement?
3. If a loss is indicated, prapre the entry to record the loss.
4. Repeat the requirement 1 assuming that the estimated undiscounted sum of future cash flows is $12,0000,000 instead of $15,000,000.
5. Repeat requirement 1 assuming that the estimated undiscontinued sum of future cash flows is $19,000,000 instead of $15,000,000.
Question 3 - Howarth manufacturing Company purchased a lathe on June 30, 2007, at a cost of $80,000. The residual value of the lathe was estimated to be $5,000 at the end of a five-year life. The lathe was sold on March 31, 2011, for $17,000.
Howarth uses the stright-line depreciation method for all its plant and equipment. Partial-year depreciation is calculated based on the number of months the asset is in service.
Required: Prepare the journal entry to record the sale.