LO 11.1You are an accounting student at your local university. Your brother has recently managed to save $5,000, and he would like to invest some of this money in the stock market, so he’s researching various global corporations that are listed on the stock exchange. He is reviewing a company that has “Goodwill” as an item on the balance sheet. He is quite perplexed about what this means, so he asks you for help, knowing that you are taking accounting classes. How would you explain the concept of goodwill to him by comparing it to other types of resources the company has available?
LO 11.2Speedy delivery service recently hired a new accountant who discovered that the prior accountant had erroneously capitalized routine repair and maintenance costs on delivery trucks. The costs were added to the overall trucks’ book values and depreciated over time. How should Speedy have recorded routine maintenance and repair costs? What effect did the error have on Speedy’s balance sheet and income statement?
LO 11.3Speedy Delivery has a very lazy accountant. When originally setting up the delivery trucks into the accounting system, the accountant did not want to calculate the expected salvage value for each vehicle. He left salvage value at $0 even though this is not the case. Explain what leaving the salvage value at $0 would do for depreciation. Discuss the differences, if any, between straight-line, double-declining, and units-of-production methods.
LO 11.4Malone Industries has been in business for five years and has been very successful. In the past year, it expanded operations by buying Hot Metal Manufacturing for a price greater than the value of the net assets purchased. In the past year, the customer base has expanded much more than expected, and the company’s owners want to increase the goodwill account. Your CPA firm has been hired to help Malone prepare year-end financial statements, and your boss has asked you to talk to Malone’s managers about goodwill and whether an adjustment can be made to the goodwill account. How do you respond to the owners and managers?
LO 11.5Your family started a new manufacturing business making outdoor benches for use in parks and outdoor venues two years ago. The business has been very successful, and sales are soaring. Because of this success, your family realizes that the equipment purchased to start the business will not last as long as expected because the company has needed to run twenty-four-hour production shifts for most of the past year. There has been a lot of wear and tear on the equipment. The original useful lives and salvage values are not as accurate as your family had hoped. Your aunt, who is the production manager for the family business, has approached you because she is concerned about this issue, and she knows you have had an accounting class. What advice do you have for her? How should the company readjust given the realities of the last few years?