Financial Accounting: An Integrated Statements Approach, 2nd Edition

LightWave Communications, Inc., spent $100 million expanding its fiber optic communication

network between Chicago and Los Angeles during 2005. The fiber optic network was assumed

to have a 10-year life, with a $20 million salvage value, when it was put into service on January

1, 2006. The network is depreciated using the straight-line method. At the end of 2007, the ex-

pected traffic volume on the fiber optic network was only 60% of what was originally expected.

The reduced traffic volume caused the fair market value of the asset to be estimated at $45 mil-

lion on December 31, 2007. The loss is not expected to be recoverable.

a. Determine the book value of the network on December 31, 2007, prior to the impairment

adjustment.

b. Provide the journal entry to record the fixed asset impairment on December 31, 2007.

c. Provide the balance sheet disclosure for fixed assets on December 31, 2007.

Sunset Resorts, Inc., owns and manages resort properties. On January 15, 2007, one of its prop-

erties was found to be adjacent to a toxic chemical disposal site. As a result of the negative pub-

licity, this property’s bookings dropped 40% during 2007. On December 31, 2007, the accounts

of the company showed the following details regarding the impaired property:

Land $ 25,000,000

Buildings and improvements (net) 80,000,000

Equipment (net) 15,000,000

Total $120,000,000

Management decides that closing the resort is the only option. As a result, it is estimated

that the buildings and improvements will be written off completely. The land can be sold for

other uses for $17 million, while the equipment can be disposed of for $4 million, net of disposal

costs.

a. Journalize the entry to record the asset impairment on December 31, 2007.

b. Provide the note disclosure for the impairment.

Jen-King Company’s board of directors approved and communicated an employee severance

plan in response to a decline in demand for the company’s products. The plan called for the

elimination of 150 headquarters positions by providing a severance equal to 5% of the annual

salary multiplied by the number of years of service. The average annual salary of the eliminated

positions is $60,000. The average tenure of terminated employees is eight years. The plan was

communicated to employees on November 1, 2007. Actual termination notices will be distrib-

uted over the period between December 1, 2007, and April 1, 2008. On December 15, 2007, 40

employees received a lay-off notice and were terminated with severance.

a. Provide the journal entry for the restructuring charge on November 1, 2007.

b. Provide the entry for the severance payment on December 15, 2007, assuming that the ac-

tual tenure and salary of terminated employees were consistent with the overall average.

c. Provide the balance sheet and note disclosures on December 31, 2007.

Mango Juice Company has been suffering a downturn in its juice business due to adverse pub-

licity regarding the caffeine content of its drink products. As a result, the company has been re-

quired to restructure operations. The board of directors approved and communicated a plan on

July 1, 2006, calling for the following actions.

1. Close a juice plant on October 15, 2006. Closing, equipment relocation, and employee relo-
   cation costs are expected to be $500,000 during October.


2. Eliminate 280 plant positions. A severance will be paid to the terminated employees equal
   to 400% of their estimated monthly earnings payable in four quarterly installments on
   October 15, 2006; January 15, 2007; April 15, 2007; and July 15, 2007.

560 Chapter 12 Special Income and Investment Reporting Issues

EXERCISES

Exercise 12-1

Fixed asset impairment

Goal 1

a. $84,000,000

Exercise 12-2

Fixed asset impairment

Goal 1

Exercise 12-3

Restructuring charge

Goal 1

a. Restructuring charge,

$3,600,000

Exercise 12-4

Restructuring charge

Goal 1

a. Restructuring charge,

$3,039,200