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Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Solutions Manual 9-1 Chapter 9
Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
CHAPTER 9
Long-Lived Assets
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief Exercises
Exercises
Problems Set A
Problems Set B
1. Apply the cost principle to property, plant, and equipment.
1, 2, 3, 4 1, 2, 3, 4 1, 2, 11 1, 3, 4, 6 1, 3, 4, 6
2. Explain and calculate amortization.
5, 6, 7, 8 5, 6, 7, 8, 9
2, 3, 4, 11 2, 3, 7, 8, 9, 12
2, 3, 7, 8, 9, 12
3. Revise periodic amortization.
9, 10, 11 10, 11 5, 6, 7 4, 5, 6, 9 4, 5, 6, 9
4. Account for the disposal of property, plant, and equipment.
12, 13 12, 13, 14 8, 9 7, 8, 9 7, 8, 9
5. Calculate and record amortization of natural resources.
14, 15 15 10 12 12
6. Identify the basic accounting issues for intangible assets.
16, 17, 18, 19
16 11, 12 10, 11 10, 11
7. Illustrate the reporting and analysis of long-lived assets.
20, 21 17, 18, 19 13, 14 9, 11, 12, 13
9, 11, 12, 13
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Solutions Manual 9-2 Chapter 9
Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
ASSIGNMENT CHARACTERISTICS TABLE
Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A Record property transactions.
Simple 20-30
2A Calculate partial period amortization.
Moderate 20-30
3A Determine cost; calculate and compare amortization under different methods.
Moderate 30-40
4A Account for operating and capital expenditures and asset impairments.
Moderate 20-30
5A Record impairment and calculate revised amortization.
Moderate 20-30
6A Record operating and capital expenditures and calculate revised amortization.
Moderate 25-35
7A Calculate and compare amortization and gain or loss on disposal under straight-line and units-of-activity methods.
Moderate 30-40
8A Record acquisition, amortization, and disposal of equipment.
Moderate 30-40
9A Record property, plant, and equipment transactions; prepare partial financial statements.
Complex 40-50
10A Correct errors in recording intangible asset transactions.
Complex 25-35
11A Record intangible asset transactions; prepare partial balance sheet.
Moderate 30-40
12A Record equipment and natural resource transactions; prepare partial financial statements.
Moderate 30-40
13A Calculate ratios and comment.
Moderate 15-25
1B Record property transactions.
Simple 20-30
2B Calculate partial period amortization.
Moderate 20-30
3B Determine cost; calculate and compare amortization under different methods.
Moderate 30-40
4B Account for operating and capital expenditures and asset impairments.
Moderate 20-30
5B Record impairment and calculate revised amortization.
Moderate 20-30
6B Record operating and capital expenditures and calculate revised amortization.
Moderate 25-35
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Solutions Manual 9-3 Chapter 9
Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Problem Number
Description
Difficulty Level
Time Allotted (min.)
7B Calculate and compare amortization and gain or loss on disposal under straight-line and double declining-balance methods.
Moderate 30-40
8B Record acquisition, amortization, and disposal of equipment.
Moderate 30-40
9B Record property, plant, and equipment transactions; prepare partial financial statements.
Complex 40-50
10B Correct errors in recording intangible asset transactions.
Complex 25-35
11B Record intangible asset transactions; prepare partial balance sheet.
Moderate 30-40
12B Record equipment and natural resource transactions; prepare partial financial statements.
Moderate 30-40
13B Calculate ratios and comment.
Moderate 15-25
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Solutions Manual 9-4 Chapter 9
Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation
1. Apply the cost principle to property, plant, and equipment.
BE9-3 Q9-1
Q9-2
Q9-3
Q9-4
BE9-1
BE9-2
BE9-4
E9-1
E9-2
E9-11
P9-1A
P9-3A
P9-4A
P9-6A
P9-1B
P9-3B
P9-4B
P9-6B
2. Explain and calculate amortization.
Q9-6
Q9-5
Q9-7
Q9-8
BE9-5
BE9-6 BE9-7
BE9-8
BE9-9
E9-2
E9-3
E9-4
E9-11
P9-2A
P9-3A
P9-7A
P9-8A
P9-9A
P9-12A
P9-2B
P9-3B
P9-7B
P9-8B
P9-9B
P9-12B
3. Revise periodic amortization.
Q9-9, Q9-10, Q9-11
BE9-10
BE9-11
E9-5
E9-6
E9-7
P9-4A
P9-5A
P9-6A
P9-9A
P9-4B
P9-5B
P9-6B
P9-9B
4. Account for the disposal of property, plant, and equipment.
Q9-12 Q9-13
BE9-12
BE9-13
BE9-14
E9-8
E9-9
P9-7A
P9-8A
P9-9A
P9-7B
P9-8B
P9-9B
5. Calculate and record amortization of natural resources.
Q9-14, Q9-15 BE9-15
E9-10
P9-12A
P9-12B
6. Identify the basic accounting issues for intangible assets.
Q9-16, Q9-17, Q9-18, Q9-19
BE9-16 E9-11
E9-12
P9-10A
P9-11A
P9-10B
P9-11B
7. Illustrate the reporting and analysis of long-lived assets.
Q9-20, BE9-17
Q9-21
BE9-18
BE9-19
E9-13
P9-9A
P9-11A
P9-12A
P9-9B
P9-11B
P9-12B
E9-14
P9-13A
P9-13B
Broadening Your Perspective
Continuing Cookie Chronicle
BYP9-1 BYP9-2
BYP9-3
BYP9-4 BYP9-5
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Solutions Manual 9-5 Chapter 9
Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
ANSWERS TO QUESTIONS 1. For long-lived assets, the cost principle means that cost consists of all
expenditures necessary to acquire the asset and make it ready for its intended use. These costs are capitalized rather than expensed, because they will provide benefits over future periods.
2. All three amounts will be debited to the land account. The cost to
purchase the land and building as well as the cost to remove the building is recorded in the land account. These costs are incurred to prepare the land for its intended use. Since the old building is destroyed none of the purchase cost is allocated to Buildings. As well, the costs to grade the land are incurred to prepare the land for its intended use. Land will be debited for $505,000 ($430,000 + $45,000 + $30,000).
3. The cost principle has survived because it provides information that is
objective and verifiable, whereas market values are subjective and changeable. In addition, if a company is not planning on selling the asset the market value of the asset is not relevant.
4. The purchase cost must be split between the land and building because
the building is amortized and the land is not. In addition, the cost of each item will be necessary if the land, or the building, is later sold to determine any gain or loss on disposal.
5. The purpose of amortization is to allocate the cost of a long-lived,
amortizable asset over its useful life in a systematic way. Amortization expense is matched to the revenues it has helped generate.
A common misunderstanding about amortization is that amortization
attempts to measure an asset’s market value or real value. There is no attempt to measure the change in a long-lived asset’s real value because long-lived assets are not held for resale. Another common misunderstanding is that accumulated amortization results in the accumulation of cash to purchase or replace the long-lived asset. Accumulated amortization represents the total cost of the asset that has been allocated to expense so far—it does not represent a cash fund.
6. (a) Residual value is the expected cash value of the asset at the end of
its useful life. It is sometimes called salvage value or trade-in value. Residual value is not amortized, since this is the amount expected to be recovered at the end of an asset’s useful life.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Solutions Manual 9-6 Chapter 9
Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
QUESTIONS (Continued)
Question 6 (Continued)
(b) Residual value is subtracted from cost to determine the amortizable
cost of the asset. Residual value limits the total value of amortization that can be taken for all three methods of amortization. Amortization will stop when the asset’s book value equals its expected residual value.
In the straight-line and the units-of-activity methods of calculating
amortization, residual value is used in calculating the amortizable cost per year or the amortizable cost per unit. Residual value is not used in determining the amount that the declining-balance amortization rate is applied to. Under all three methods net book value should never be reduced below residual value. In other words, amortization stops when the asset’s net book value is equal to its expected residual value.
7. Net book value is cost less accumulated amortization of an asset. Cost is
the same under each method of amortization. In the early years, net book value will be less under the declining-balance method than under the straight-line method. The units-of-activity method is unpredictable. In all three methods, net book value at the end of the asset’s useful life, will be equal to the asset’s residual value.
The amortization expense is constant under the straight-line method,
varies according to production under the units-of-activity method and declines over time with the declining-balance method. In the early years amortization expense will be higher under the declining-balance method than the straight-line method. The units-of-activity method is unpredictable.
Consequently, assuming no other changes, net income is constant under
the straight-line method, varies according to production under the units-of-activity method, and increases over time with the declining-balance method. In the early years, net income will be higher under the straight-line method than the declining-balance method. It is unpredictable under the units-of-activity method. All three methods will result in the same total amortization expense over the asset’s useful life.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Solutions Manual 9-7 Chapter 9
Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
QUESTIONS (Continued) 8. Ralph’s plan will not work. For accounting purposes, a company should
choose the amortization method that best matches expenses to revenues. For tax purposes income tax regulations require a company to use the single declining-balance method. Amortization is calculated on a class basis and a specified rate is specifically identified for specific types of classes of assets.
9. Operating expenditures are ordinary repairs made to maintain the operating
efficiency and expected productive life of the asset. Because they are recurring expenditures and normally benefit only the current period, they are expensed when incurred. Capital expenditures are additions and improvements made to increase efficiency, productivity, or expected useful life of the asset. Because they benefit future periods, capital expenditures are debited to the asset account affected.
10. A permanent decline in the market value of a long lived asset is called an
impairment loss. It occurs when the market value of a long-lived asset falls far below its book value and is not expected to recover, and the company does not expect to recover the net book value from future cash flows. It could occur when a machine has become obsolete or the market for a product made by a machine becomes obsolete.
11. A revision of amortization is made in current and future years but not
retroactively. Amortization is based on the best available information at the time the estimate was made. Continual restatement of prior periods would adversely affect the reader's confidence in the financial statements; thus, prior periods should not be restated if amortization is revised.
12. In a sale of property, plant or equipment, the net book value of the asset is
compared to the proceeds received from the sale. If the proceeds of the sale exceed the net book value of the asset, a gain on disposal occurs. If the proceeds of the sale are less than the net book value of the asset sold, a loss on disposal occurs.
In an exchange a new asset is received in an exchange for the old asset
given up. If cash is part of the exchange and the amount is considered significant it is considered a monetary exchange. The gain or loss is calculated by comparing the fair value of the asset given up to its net book value. The trade-in allowance on the asset given up is not relevant. If the cash involved in the exchange is not significant—or if there is no cash— then the exchange is considered a nonmonetary exchange. The gain or loss is still calculated the same way unless the fair values of the assets cannot be determined. In that case no gain or loss is recorded.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Solutions Manual 9-8 Chapter 9
Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
QUESTIONS (Continued) 13. The asset and related accumulated amortization should continue to be
reported on the balance sheet, without further amortization or adjustment, until the asset is retired. Reporting the asset and related accumulated amortization on the balance sheet informs the reader of the financial statements that the asset is still being used by the company. However, once an asset is fully amortized, no additional amortization should be taken on this asset, even if it is still being used. In no situation can the accumulated amortization exceed the cost of the asset.
14. (a) The amortizable cost of a natural resource includes cost less residual
value. In calculating the amortization expense for natural resources, the amortizable cost is expressed on a per unit basis, divided by the total production or activity anticipated. The amortizable cost per unit is then multiplied by the actual production output or activity sold for the period.
(b) Amortization is initially recorded as a current asset, inventory,
because it is part of the cost of extracting the natural resource. The amortization becomes part of the cost of goods sold when the inventory is sold.
15. The amortization of natural resources is recorded as inventory and not as
an expense because the resource extracted is expected to be sold. Until the resource is sold, it has a future benefit and all the costs of obtaining this resource are recorded as an asset, inventory. The cost is later expensed, as cost of goods sold, when the extracted resource is sold.
16. Intangible assets are rights, privileges and competitive advantages that
result from ownership of long-lived assets. They have a future benefit in that they contribute to future revenue, however, they lack physical existence or substance.
17. Flin Company should amortize the patent over its 20 year legal life or its
useful life, whichever is shorter. Flin Company must consider when its patent is likely to become ineffective at contributing to revenue and if this will occur before the end of its legal life.
18. Goodwill is the value of many favourable attributes that are intertwined in
a business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill can only be sold if the entire business is sold.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
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QUESTIONS (Continued) 19. Research and development costs present several accounting problems. It
is sometimes difficult to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefits. As a result, all research and some development costs are recorded as an expense. Only certain development costs with reasonably assured future benefits can be capitalized. This is intended to maintain the objectivity and reliability of the financial statements.
20. Property, plant, and equipment and natural resources are often combined
and reported in the balance sheet as “property, plant, and equipment” or “capital assets”. Goodwill must be disclosed separately. Other intangibles can be grouped under “intangible assets”. Amortization expense for the period should also be disclosed either on the income statement or in the notes to the financial statements. When impairment losses have occurred they should be shown on a separate line on the income statement with the details disclosed in a note.
The notes to financial statements should disclose the balance of the major
classes of amortizable assets and the amortization method(s) and rates used. The book value of each major class of unamortized assets should also be disclosed. Companies should also disclose their impairment policy in the notes to the financial statements.
21. The asset turnover and return on asset ratios show how effectively the
company uses its long-lived assets. The asset turnover shows the amount of sales produced for each dollar invested in assets. It is calculated by dividing net sales by average total assets. The return on assets measures overall profitability. It is calculated by dividing net income by average total assets.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9-1
The cost of the land is $61,000 ($50,000 + $5,000 + $2,500 +
$3,500). The installation of the fence should be debited to Land
Improvements account.
BRIEF EXERCISE 9-2
The cost of the truck is $43,000 (cash price $41,750 + painting
and lettering $750 + installation of trailer hitch $500). The
expenditures for the insurance and the motor vehicle licence
are recurring and only benefit the current period. They should
be expensed and not added to the cost of the truck.
BRIEF EXERCISE 9-3
(a) O
(b) C
(c) C
(d) O
(e) C
(f) O
(g) O
(h) C
(i) C
(j) O
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Solutions Manual 9-11 Chapter 9
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BRIEF EXERCISE 9-4
Jan. 1 Land
[$400,000 x ($127,500 ÷ $425,000)] .... 120,000
Building
[$400,000 x ($255,000 ÷ $425,000)] .... 240,000
Equipment
[$400,000 x ($42,500 ÷ $425,000)] ...... 40,000
Cash ................................................ 100,000
Mortgage Payable ($400,000 - $100,000) 300,000
BRIEF EXERCISE 9-5
Amortizable cost is $40,000 ($43,000 - $3,000). With a 4-year
useful life, annual amortization is $10,000 ($40,000 4). Under
the straight-line method, amortization is the same each year.
Thus, amortization expense is (a) $10,000 for each year of the
truck’s life and (b) $40,000 in total over the truck’s life.
BRIEF EXERCISE 9-6
The declining-balance rate is 50% (25% x 2) and this rate is
applied to net book value at the beginning of the year.
Amortization expense for each year is as follows:
(a)
Calculation End of Year
NBV (Beg. Amort. Amort. Accum. Net Book
Year of Year X Rate = Expense Amort. Value
$43,000
2008 $43,000 50% $21,500 $21,500 21,500
2009 21,500 50% 10,750 32,250 10,750
2010 10,750 50% 5,375 37,625 5,375
2011 5,375 50% 2,375¹ 40,000 3,000
¹Limited to the amount to reduce the net book value to the
residual value of $3,000
(b) Total amortization over the truck’s useful life is $40,000.
Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition
Solutions Manual 9-12 Chapter 9
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BRIEF EXERCISE 9-7
Amortizable cost per unit:
($33,000 - $500) 325,000 km. = $0.10/km.
Annual amortization expense:
2007: 125,000 x $0.10 = $12,500
2008: 105,000 x $0.10 = $10,500
BRIEF EXERCISE 9-8
(a) Amortization expense for each year:
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost* X Rate = Expense Amort. Value
$43,000
2008 $40,000 25% x 9/12 $ 7,500 $ 7,500 35,500
2009 40,000 25% 10,000 17,500 25,500
2010 40,000 25% 10,000 27,500 15,500
2011 40,000 25% 10,000 37,500 5,500
2012 40,000 25% x 3/12 2,500 40,000 3,000
*Amortizable cost = $43,000 - $3,000
(b) Total amortization expense over the truck’s useful life is
$40,000. (See accumulated amortization at end of 2012
above)
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BRIEF EXERCISE 9-9
The double declining-balance rate is 50% (25% x 2) and this rate
is applied to net book value at the beginning of the year.
Amortization expense for each year is as follows:
(a)
Double Declining-Balance
Calculation End of Year
NBV (Beg. Amort. Amort. Accum. Net Book
Year of Year X Rate = Expense Amort. Value
$43,000
2008 $43,000 50% x 9/12 $16,125 $16,125 26,875
2009 26,875 50% 13,438 29,563 13,437
2010 13,437 50% 6,719 36,282 6,718
2011 6,718 50% 3,359 39,641 3,359
2012 3,359 50% 359¹ 40,000 3,000
¹ Limited to the amount to bring net book value to the residual
value of $3,000
(b) Total amortization expense over the truck’s useful life is
$40,000. (See accumulated amortization at end of 2012
above)
BRIEF EXERCISE 9-10
Loss on Impairment ................................... 16,000
Accumulated Amortization—Machinery 16,000
Calculation:
Net Book Value ($90,000 - $54,000) ... $36,000
Less: Market Value ............................ 20,000
Impairment loss .................................. $16,000
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BRIEF EXERCISE 9-11
Amortization expense from 2005 to 2007:
[($60,000 - $4,000) ÷ 7 years = $8,000]
2005 $ 8,000
2006 8,000
2007 8,000
Total $24,000
Net book value, Jan. 1, 2008 ($60,000 - $24,000)........... $36,000
Add: Equipment up-grade ............................................. 9,000
Less: Revised residual value ........................................ (3,000)
Remaining amortizable cost ........................................... 42,000
Remaining useful life (9 years - 3 years) ....................... ÷ 6 years
Revised annual amortization expense 2008 .................. $ 7,000
BRIEF EXERCISE 9-12
(a) Accumulated Amortization—
Delivery Equipment .................................... 41,000
Delivery Equipment ............................... 41,000
(b) Accumulated Amortization—
Delivery Equipment .................................... 38,000
Loss on Disposal........................................ 3,000
Delivery Equipment ............................... 41,000
Cost of delivery equipment ................................... $41,000
Less: Accumulated amortization .......................... 38,000
Net book value at date of disposal ........................ 3,000
Proceeds from sale ................................................ 0
Loss on disposal .................................................... $ 3,000
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BRIEF EXERCISE 9-13
(a) Sept. 30 Amortization Expense
[($72,500 - $2,500) ÷ 5 x 9/12] ......... 10,500
Accumulated Amortization
—Office Equipment .................. 10,500
(b) Sept. 30 Cash ................................................ 8,250
Accumulated Amortization—Office
Equipment¹ ..................................... 66,500
Gain on Disposal ...................... 2,250
Office Equipment ...................... 72,500
¹[($72,500 - $2,500) ÷ 60 months x 57 months] = $66,500
Cost of office equipment $72,500
Less accumulated amortization 66,500
Net book value at date of disposal 6,000
Proceeds from sale 08, 8,250
Gain on disposal $ 2,250
(c) Sept. 30 Cash ................................................ 4,500
Accumulated Amortization—Office
Equipment ....................................... 66,500
Loss on Disposal ............................ 1,500
Office Equipment ...................... 72,500
Cost of office equipment $72,500
Less accumulated amortization 66,500
Net book value at date of disposal 6,000
Proceeds from sale 4,500
Loss on disposal $ 1,500
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BRIEF EXERCISE 9-14
Jan. 7 Machinery (new) ............................ 76,000*
Accumulated Amortization
—Machinery ................................... 78,000
Loss on Disposal ........................... 3,000**
Machinery (old) ......................... 95,000
Cash ($80,000 - $18,000)........... 62,000
*Consideration paid cash plus market value of old asset:
($62,000 + $14,000 = $76,000)
**Loss is the book value less the fair market value:
($95,000 - $78,000 - $14,000 = $3,000)
BRIEF EXERCISE 9-15
(a) Amortizable cost
= $7,000,000 - $500,000
= $6,500,000
Amortizable cost per unit
= $6,500,000 ÷ 28,000,000 tonnes
= $0.2321 per tonne
Amortization cost for ore extracted in Year 1:
$0.2321 per tonne x 6,000,000 tonnes = $1,392,600
Aug. 31 Inventory .................................. 1,392,600
Accumulated Amortization . 1,392,600
Amortization to be included in cost of goods sold:
$0.2321 per tonne x 5,000,000 tonnes = $1,160,500
Amortization to be included in inventory:
$0.2321 per tonne x 1,000,000 tonnes = $232,100
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BRIEF EXERCISE 9-15 (Continued)
(b)
CUONO MINING CO.
Balance Sheet (Partial)
August 31, 2008
Assets
Current assets
Inventory .................................................. $232,100*
Property, plant, and equipment
Ore mine ................................................... $7,000,000
Less: Accumulated amortization ........... 1,392,600 5,607,400
* Check ($1,392,600 - $1,160,500 = $232,100)
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BRIEF EXERCISE 9-16
(a) 2008
Jan. 2 Patents .................................... 180,000
Cash .................................... 180,000
(b) Dec. 31 Amortization Expense
($180,000 10) ........................ 18,000
Accumulated Amortization—
Patents ............................... 18,000
(c) 2009
Jan. 5 Patents .................................... 9,000
Cash .................................... 9,000
(d) Original cost of patent: .................................. $180,000
Less: accumulated amortization ................... (18,000)
Plus: Legal costs to defend ........................... 9,000
Remaining cost to be amortized ................... 171,000
Remaining useful life (10 years - 1 year) ...... ÷ 9 years
Revised annual amortization expense 2009 . $ 19,000
BRIEF EXERCISE 9-17
(a) I
(b) PPE
(c) NR
(d) NA (current asset)
(e) I
(f) PPE
(g) NA (current asset)
(h) NA (income statement)
(i) I
(j) I
(k) NA (current liability)
(l) PPE
(m) PPE
(n) NR
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BRIEF EXERCISE 9-18
CANADIAN TIRE CORPORATION, LIMITED
Balance Sheet (Partial)
December 31, 2005
(in millions)
Property, plant, and equipment
Land .............................................................. $ 700.5
Buildings ......................................................... $2,094.4
Less: Accumulated amortization .................. 704.4 1,390.0
Fixtures and equipment ................................. $528.4
Less: Accumulated amortization .................. 347.5 180.9
Leasehold improvements ............................... $265.6
Less: Accumulated amortization .................. 91.3 174.3
Other property, plant, and equipment ......................... 298.2
Total property, plant, and equipment 2,743.9
Intangible assets
Goodwill ...................................................................... $46.2
Marks Work Wearhouse store brands and banners . 50.4
Marks Work Wearhouse franchise agreements .......... 2.0
Total intangible assets 98.6
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BRIEF EXERCISE 9-19
($ in millions)
Return on assets
$283
[($2,785 + $2,661) ÷ 2]
= 10.39%
Asset turnover
$3,294
[($2,785 + $2,661) ÷ 2]
= 1.21 times
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SOLUTIONS TO EXERCISES
EXERCISE 9-1
(a) Under the cost principle, the acquisition cost of a property,
plant, and equipment includes all expenditures necessary
to acquire the asset and make it ready for its intended use.
This includes not only the cost of acquisition, but any
freight, installation, testing, and similar costs to get the
asset ready for use. For example, the cost of factory
machinery includes the purchase price, freight costs paid
by the purchaser, insurance costs during transit, and
installation costs. Costs such as these benefit the life of
the factory machinery and not just the current period.
Consequently, they should be capitalized and amortized
over the machinery’s useful life.
Cost is measured by the cash paid in a cash transaction,
or by the cash equivalent price paid when noncash assets
are used in payment. The cash equivalent price is equal to
the fair market value of the asset given up. If that value is
not clearly determinable, the fair market value of the asset
received is used instead.
(b) 1. Delivery Equipment (or Vehicles)
2. Prepaid Insurance
3. Land
4. Land ($6,600 - $1,700 = $4,900)
5. Plant
6. Plant
7. Plant
8. Land improvements
9. Factory machinery
10. Factory machinery
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EXERCISE 9-2
(a)
Appraised
Value
% of Total
Cost Allocated
Land $366,000 61% $353,800
Building 192,000 32% 185,600
Land Improvements 42,000 7% 40,600
$600,000 $580,000*
*Total cost $75,000 (cash) + $500,000 (mortgage) + $5,000
(legal fees) = $580,000
(b) Land ......................................................... 353,800
Land Improvements ................................ 40,600
Building .................................................... 185,600
Cash ($75,000 + $5,000) .......................... 80,000
Mortgage Payable ............................... 500,000
(c) Amortizable cost for the building is $165,600 ($185,600 –
$20,000). With a 40-year useful life, annual amortization
expense is $4,140 ($165,600 40).
Amortizable cost for the land improvements is $40,600.
With a ten year useful life, annual amortization expense is
$4,060 ($40,600 10).
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EXERCISE 9-3
(a)
(1) Straight-line
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost* X Rate = Expense Amort. Value
$164,500
2007 $142,500 20% $28,500 $28,500 136,000
2008 142,500 20% 28,500 57,000 107,500
2009 142,500 20% 28,500 85,500 79,000
2010 142,500 20% 28,500 114,000 50,500
2011 142,500 20% 28,500 142,500 22,000
* $164,500 - $22,000 = $142,500
(2) Double Declining-Balance
Calculation End of Year
NBV (Beg. Amort. Amort. Accum. Net Book
Year of Year X Rate = Expense Amort. Value
$164,500
2007 $164,500 40% $65,800 $65,800 98,700
2008 98,700 40% 39,480 105,280 59,220
2009 59,220 40% 23,688 128,968 35,532
2010 35,532 40% 13,532¹ 142,500 22,000
2011 22,000 40% 0 142,500 22,000
¹ Limited to the amount to bring net book value to the residual
value of $22,000
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EXERCISE 9-3 (Continued)
(a) (Continued)
(3) Units-of-Activity
Calculation End of Year
Units of Amort. Amort. Accum. Net Book
Year Activity X Cost/Unit* = Expense Amort. Value
$164,500
2007 78,000 $0.38 $29,640 $29,640 134,860
2008 76,000 0.38 28,880 58,520 105,980
2009 72,000 0.38 27,360 85,880 78,620
2010 74,000 0.38 28,120 114,000 50,500
2011 75,000 0.38 28,500 142,500 22,000
*Amortizable cost per unit is $0.38 per kilometre:
[($164,500 – $22,000) 375,000 = $0.38]
(b) I recommend it use the units-of-activity method as it
results in the best matching of expense with revenue.
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EXERCISE 9-4
(a)
(1) Straight-line
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost* X Rate = Expense Amort. Value
$86,000
2007 $78,000 25% $4,875** $4,875 81,125
2008 78,000 25% 19,500 24,375 61,625
2009 78,000 25% 19,500 43,875 42,125
2010 78,000 25% 19,500 63,375 22,625
2011 78,000 25% 14,625*** 78,000 8,000
*$86,000 - $8,000 = $78,000
**$19,500 x 3/12 = $4,875
***$19,500 x 9/12 = $14,625
(2) Double Declining-Balance
Calculation End of Year
NBV (Beg. Amort. Amort. Accum. Net Book
Year of Year X Rate = Expense Amort. Value
$86,000
2007 $86,000 50% $10,750* $10,750 75,250
2008 75,250 50% 37,625 48,375 37,625
2009 37,625 50% 18,813 67,188 18,812
2010 18,812 50% 9,406 76,594 9,406
2011 9,406 50% 1,406** 78,000 8,000
*$86,000 x 50% x 3/12 = $10,750
**Limited to the amount to bring net book value to the residual
value of $8,000
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EXERCISE 9-4 (Continued)
(a) (Continued)
(3) Units-of-Activity
Calculation End of Year
Units of Amort. Amort. Accum. Net Book
Year Activity X Cost/Unit* = Expense Amort. Value
$86,000
2007 500 $7.80 $3,900 $3,900 82,100
2008 2,800 7.80 21,840 25,740 60,260
2009 2,900 7.80 22,620 48,360 37,640
2010 2,600 7.80 20,280 68,640 17,360
2011 1,300 7.80 9,360** 78,000 8,000
*Amortizable cost per unit is $7.80/hour
[($86,000 – $8,000) 10,000 = $7.80]
**Limited to the amount to bring net book value to the residual
value of $8,000.
(b) Over the life of the asset, amortization expense will be the
same for all three methods.
(c) Cash flow is the same under all three methods.
Amortization is an allocation of the cost of a long-lived
asset and not a cash expenditure.
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EXERCISE 9-5
Jan. 10 Building ...................................... 70,000
Cash ....................................... 70,000
Apr. 8 Repairs Expense ....................... 25,000
Cash ....................................... 25,000
Sep. 2 Equipment.................................. 22,500
Cash ....................................... 22,500
Nov. 1 Repairs Expense ....................... 1,000
Cash ....................................... 1,000
Dec. 31 Loss on Impairment .................. 120,000
Accumulated Amortization—
Equipment ............................. 120,000
[($500,000 - $150,000) - $230,000]
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EXERCISE 9-6
(a) Current amortization
Building: ($800,000 – $40,000) ÷ 20 yrs
= $38,000 per year
Equipment: ($120,000 – $5,000) ÷ 5 yrs
= $23,000 per year
(b) Current ages
Building January 1998 to January 2008: 10 years
Equipment January 2006 to January 2008: 2 years
January 1, 2008 Building Equipment
Cost ....................................................... $800,000 $120,000
Accumulated Amortization:
Building (10 x $38,000) ...................... 380,000
Equipment (2 x $23,000) .................... 46,000
Net book value ...................................... $420,000 $ 74,000
(c) Type of Asset
Building
Equipment
Net book value, 1/1/08
Less: Residual value
Revised amortizable cost
Divide by revised remaining
useful life, in years
Revised annual
amortization expense
$420,000
62,000
$358,000
(25 - 10)
÷ 15 yrs
$23,867
$74,000
3,600
$70,400
(4 - 2)
÷ 2 yrs
$35,200
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EXERCISE 9-7
(a) 2007
June 30 Amortization Expense ............... 6,500
Accumulated Amortization
—Equipment ......................... 6,500
[($30,000 - $4,000) ÷ 4 years]
(b) July 1 Equipment ($5,000 + $500) ....... 5,500
Cash ....................................... 5,500
(c) 2008
June 30 Amortization Expense ............... 5,200
Accumulated Amortization
—Equipment ......................... 5,200
Net book value, July 1, 2007 ($30,000 - $6,500) ..... $23,500
Add: New part .......................................................... 5,500
29,000
Less: Revised residual value ................................ 3,000
Remaining amortizable cost ................................... $26,000
Remaining useful life (6 - 1) .................................... ÷ 5 years
Revised annual amortization expense ................... $ 5,200
(d) Cost ($30,000 + $5,500) .......................................... $35,500
Accumulated Amortization ($6,500 + $5,200) ....... 11,700
Net book value June 30, 2008 ............................... $23,800
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EXERCISE 9-8
Jan. 2 Delivery Truck (New)
($6,500 + $33,000)* ............................. 39,500
Accumulated Amortization ................ 22,500
Loss on sale ....................................... 1,000
Delivery truck (Old) ........................ 30,000
Cash ................................................ 33,000
*Fair value of old truck $6,500 + cash $33,000
Mar. 31 Amortization Expense ........................ 1,550
Accumulated Amortization
—Machinery ................................... 1,550
($62,000 ÷ 10 years x 3/12)
31 Accumulated Amortization
—Machinery [($62,000 ÷ 10 years) x
(9 years + 3 months)] ......................... 57,350
Loss on Disposal ................................ 4,650
Machinery ....................................... 62,000
Sept 1 Amortization Expense ........................ 1,220
Accumulated Amortization ............
—Office Equipment ....................... 1,220
($5,490 ÷ 3 years x 8/12)
1 Cash .................................................... 800
Accumulated Amortization
—Office Equipment ............................ 4,880
($5,490 ÷ 3 years x 2 years + 8 months)
Gain on Disposal .......................... 190
Office Equipment ........................... 5,490
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EXERCISE 9-9
(a) (1) Straight-line method: ($16,000 - $1,000) ÷ 4 years
= $3,750 per year or $7,500 for 2006 and 2007.
(2) Double declining-balance method
DDB Rate: ¼ x 2 = 50%
2006: $16,000 x 50% = $8,000
2007: $16,000 - $8,000 = $8,000 x 50% = $4,000
Total amortization expense for 2006 and 2007 = $12,000
(b) (1) Straight-line method
Proceeds - Net book value = Gain (loss)
[$5,000 - ($16,000 - $7,500)] = ($3,500)
(2) Double declining-balance method
Proceeds - Net book value = Gain (loss)
[$5,000 - ($16,000 - $12,000) = $1,000
(c) The amount of the loss using the straight-line method is
$3,500. The amount of the gain using the double-declining-
balance method is $1,000. The amounts are not the same
because of the difference in the amortization expense
calculation on a year to year basis which impacts the net
book value of the asset which in turn impacts the gain or
loss on disposal.
If you consider, however, the total impact on net income
over the two year period the amounts are identical. Using
the straight-line method total amortization is $7,500 and
loss on disposal is $3,500 resulting in an $11,000 decrease
in net income over the two year period. Using the double-
declining-balance method total amortization is $12,000 and
gain on disposal is $1,000. Overall effect on net income
using both methods over the two year period is an $11,000
decrease.
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EXERCISE 9-10
(a) The units-of-activity method is recommended for
amortizing natural resources because it results in the best
matching of expense to revenues. It requires that an
estimate can be made of the total number of units that are
available to be extracted from the resource.
(b) Dec. 31 Inventory ($0.5375 x 100,000) ... 53,750
Accumulated Amortization—Mine 53,750
Amortizable cost $520,000 - $90,000 = $430,000
Amortizable cost per unit:
$430,000 ÷ 800,000 t = $0.5375 per tonne
(c)
PHILLIPS INC.
Income Statement (Partial)
Year Ended December 31, 2008
Cost of goods sold: (will include this amount plus other costs)
($0.5375 x 75,000 t) ..................................... $40,313
PHILLIPS INC.
Balance Sheet (Partial)
December 31, 2008
Assets
Current assets
Inventory ($53,750 - $40,313) .................................. $ 13,437*
Property, plant, and equipment
Ore mine ..................................................... $520,000
Less: Accumulated amortization .............. 53,750 466,250
*Check: 25,000** t unsold x $0.5375 = $13,437
**100,000 t extracted – 75,000 t sold = 25,000 t in inventory
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EXERCISE 9-11
1. Amortization is the process of allocating the cost of a long-
lived asset to expense over the asset’s useful life. Because
the value of land generally does not decline with time and
usage, its usefulness and revenue producing ability does
not decline. In addition, the useful life of land is indefinite.
Therefore it would be incorrect for the student to amortize
the land. This is a violation of the matching principle.
2. Goodwill is an intangible asset with an indefinite life.
According to generally accepted accounting principles,
goodwill is not amortized but reviewed annually for
impairment. If a permanent decline in value has occurred
the goodwill is written down and an impairment loss is
recorded on the income statement. Therefore, the
amortization entry should be reversed and no decline in
value recorded until an impairment in value occurs.
Recording amortization is a violation of the matching
principle.
3. This is a violation of the cost principle. Because current
market values are subjective and not reliable, they are not
used to increase the recorded value of an asset after
acquisition. The appropriate accounting treatment is to
leave the building on the books at its zero book value.
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EXERCISE 9-12
(a)
Jan. 2 Patents ............................................. 45,000
Cash ............................................. 45,000
April 1 Trademark ........................................ 325,000
Cash ............................................. 325,000
July 1 Franchise ......................................... 250,000
Cash ............................................. 250,000
Sept. 1 Research Expense .......................... 185,000
Cash ............................................. 185,000
(b)
Dec. 31 Loss on Impairment—Goodwill ...... 85,000
Goodwill ...................................... 85,000
31 Amortization Expense .................... 117,500
Accumulated Amortization—Patents
[($450,000 ÷ 5) + (45,000 ÷ 3)] ..... 105,000
Accumulated Amortization—
Franchise [($250,000 ÷ 10) x 6/12] 12,500
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EXERCISE 9-13 (a) Account Financial Statement Section
Accumulated Amortization
– Building
Balance Sheet Property, Plant, and
Equipment
Accumulated Amortization
– Finite-Life Intangible
Assets
Balance Sheet Intangibles
Accumulated Amortization
– Machinery and Equipment
Balance Sheet Property, Plant, and
Equipment
Accumulated Amortization
– Other Property, Plant, and
Equipment
Balance Sheet Property, Plant, and
Equipment
Accumulated Amortization
– Satellites
Balance Sheet Property, Plant, and
Equipment
Accumulated Amortization
– Telecommunications
Assets
Balance Sheet Property, Plant, and
Equipment
Amortization Expense Income Statement Operating Expenses
Buildings Balance Sheet Property, Plant, and
Equipment
Cash and Cash Equivalents Balance Sheet Current Assets
Common Shares Balance Sheet Shareholders’ Equity
Finite-Life Intangible Assets Balance Sheet Intangibles
Goodwill Balance Sheet Intangibles
Indefinite-Life Intangible
Assets
Balance Sheet Intangibles
Land Balance Sheet Property, Plant, and
Equipment
Machinery and Equipment Balance Sheet Property, Plant, and
Equipment
Other Long-term Assets Balance Sheet Long-Term Assets
Other Property, Plant, and
Equipment
Balance Sheet Property, Plant, and
Equipment
Plant under Construction Balance Sheet Property, Plant, and
Equipment
Satellites Balance Sheet Property, Plant, and
Equipment
Telecommunications
Assets
Balance Sheet Property, Plant, and
Equipment
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EXERCISE 9-13 (Continued)
(b)
BCE Inc.
Balance Sheet (Partial)
December 31, 2005
(in millions)
Property, plant, and equipment
Land ............................................................................. $ 94
Buildings ...................................................... $3,157
Less: Accumulated amortization ................ 1,340 1,817
Plant under construction ............................ 1,852
Machinery and equipment ........................... $6,273
Less: Accumulated amortization ................ 3,685 2,588
Telecommunications assets ....................... $36,334
Less: Accumulated amortization ................ 24,144 12,190
Satellites ....................................................... $1,552
Less: Accumulated amortization ............... 404 1,148
Other Property, plant, and equipment ........ $200
Less: Accumulated amortization ............... 66 134
Total Property, plant, and equipment ................... 19,823
Intangible assets
Finite-life intangible assets ........................ $3,813
Less: Accumulated amortization ............... 1,574 2,239
Goodwill ...................................................................... 7,887
Indefinite-life intangible assets ................................. 3,031
Total intangible assets .......................................... 13,157
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EXERCISE 9-14 (a) (in thousands) December 31, 2005 January 1, 2005 Asset turnover
$206,674 [($308,226 + $300,152) ÷ 2]
= 0.68 times
$211,476 [($300,152 + $242,755) ÷ 2]
= 0.78 times
Return on assets
$8,097 [($308,226 + $300,152) ÷ 2]
= 2.7%
$14,426 [($300,152 + $242,755) ÷ 2]
= 5.3%
(b) Sleeman’s asset turnover has decreased over the 2 years.
Net Revenues have decreased from $211,476 to $206,674
even though total assets have increased from $300,152 to
$308,226. Sleeman is operating less efficiently in the year
ended December 31, 2005 as compared to the year ended
January 1, 2005. Return on assets has decreased
significantly from 5.3% to 2.7%. The slight increase in total
assets from $300,152 to $308,336 has not generated an
increase in net income. In fact, net income has fallen from
$14,426 to $8,097.
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SOLUTIONS TO PROBLEMS
PROBLEM 9-1A
(a) Feb. 7 Land ........................................... 275,000
Cash ....................................... 75,000
Note Payable ......................... 200,000
9 Land ........................................... 5,500
Cash ...................................... 5,500
15 Land ........................................... 15,000
Cash ....................................... 15,000
17 Cash ........................................... 4,000
Land ....................................... 4,000
Mar. 2 Building ...................................... 18,000
Cash ....................................... 18,000
July 5 Building ...................................... 650,000
Cash ....................................... 170,000
Note Payable ......................... 480,000
31 Building ...................................... 6,500
Cash ....................................... 6,500
Aug. 22 Land Improvements .................. 12,000
Cash ....................................... 12,000
Sept. 1 Prepaid Insurance ..................... 2,500
Cash ....................................... 2,500
Dec. 31 Interest Expense ....................... 17,500
Cash ....................................... 17,500
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PROBLEM 9-1A (Continued)
(b)
Land
Date Explanation Ref. Debit Credit Balance
2008 Feb. 7 275,000 275,000 9 5,500 280,500 15 15,000 295,500 17 4,000 291,500
Building
Date Explanation Ref. Debit Credit Balance
2008 Mar. 2 18,000 18,000 July 5 650,000 668,000 31 6,500 674,500
Land Improvements
Date Explanation Ref. Debit Credit Balance
2008 Aug. 22 12,000 12,000
The cost of land that will appear on Weisman’s December 31,
2008 balance sheet will be $291,500. The cost of building that
will appear on Weisman’s December 31, 2008 balance sheet will
be $674,500. The cost of land improvements that will appear on
Weisman’s December 31, 2008 balance sheet will be $12,000.
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PROBLEM 9-2A
(a)
Accumulated
Amortization
Year Calculation Dec. 31
MACHINE 1 – Straight-line Amortization
2006 ($44,940* ÷ 7) x 10/12 = $5,350 $ 5,350
2007 $44,940 ÷ 7 = $6,420 11,770
2008 $44,940 ÷ 7 = $6,420 18,190
*$48,940 - $4,000 = $44,940
MACHINE 2 – Declining-balance Amortiation
2007 $84,000 x 20%* x 4/12 = $5,600 $ 5,600
2008 ($84,000 - $5,600) x 20% = $15,680 21,280
*1/10 years = 10% x 2 = 20%
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PROBLEM 9-2A (Continued)
(b)
Accumulated
Amortization
Year Calculation Dec. 31
MACHINE 1
2006 ($44,940* ÷ 7) x 1/2 = $3,210 $ 3,210
2007 $44,940 ÷ 7 = $6,420 9,630
2008 $44,940 ÷ 7 = $6,420 16,050
*$48,940 - $4,000 = $44,940
MACHINE 2
2007 $84,000 x 20%* x 1/2 = $8,400 $ 8,400
2008 (84,000 - $8,400) x 20% = $15,120 23,520
*1/10 years = 10% x 2 = 20%
(c) It really doesn’t matter which policy Tarcher chooses in
terms of recording amortization in the year of acquisition,
as long as it follows the policy consistently. The same total
amortization will be recorded whether amortization is
recorded monthly, or semi-annually. Amortization is an
estimate only, in any case.
(d) The choice of the method to prorate amortization in the
period of acquisition will not affect amortization expense if
the units-of-activity method is used. Under this method,
amortization is a function of the units produced not the
time the machine is owned.
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PROBLEM 9-3A
(a) Cost:
Cash price $180,000
Delivery costs 1,000
Installation and testing 3,200
Total cost $184,200
The one-year insurance policy is not included as it is an
operating expenditure, benefiting only the current period.
(b)
1. STRAIGHT-LINE AMORTIZATION
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate = Expense Amort. Value
$184,200
2006 $172,700* 20%** x 8/12 $23,027 $ 23,027 161,173
2007 172,700 20% 34,540 57,567 126,633
2008 172,700 20% 34,540 92,107 92,093
2009 172,700 20% 34,540 126,647 57,553
2010 172,700 20% 34,540 161,187 23,013
2011 172,700 20% x 4/12 11,513 172,700 11,500
* Amortizable cost = $184,200 - $11,500 = $172,700
** 1 ÷ 5 years = 20%
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PROBLEM 9-3A (Continued)
(b) (Continued)
2. DOUBLE DECLINING-BALANCE AMORTIZATION
Calculation End of Year
NBV Beg. Amort. Amort. Accum. Net Book
Year of Year X Rate = Expense Amort. Value
$184,200
2006 $184,200 40%* x 8/12 $49,120 $49,120 135,080
2007 135,080 40% 54,032 103,152 81,048
2008 81,048 40% 32,419 135,571 48,629
2009 48,269 40% 19,452 155,023 29,177
2010 29,177 40% 11,671 166,694 17,506
2011 17,506 40% 6,006** 172,700 11,500
* 1 ÷ 5 years = 20% x 2 = 40%
**Use the amount that makes net book value equal to residual
value
3. UNITS-OF-ACTIVITY AMORTIZATION
Calculation End of Year
Units of Amort. Amort. Accum. Net Book
Year Activity X Cost/Unit* = Expense Amort. Value
$184,200
2006 8,500 $3.14* $26,690 $ 26,690 157,510
2007 12,000 3.14 37,680 64,370 119,830
2008 11,500 3.14 36,110 100,480 83,720
2009 10,500 3.14 32,970 133,450 50,750
2010 9,500 3.14 29,830 163,280 20,920
2011 3,000 3.14 9,420 172,700 11,500
*Amortizable cost per unit:
($184,200 - $11,500) ÷ 55,000 units = $3.14
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PROBLEM 9-3A (Continued)
(c) Double declining-balance amortization provides the
highest amount of amortization expense for 2006, thus
resulting in the lowest net income that year. Over the life
of the asset, all three methods result in the same total
amortization expense (equal to the amortizable cost).
(d) All three methods will result in the same cash flow in
2006 and over the life of the asset. Recording
amortization expense does not affect cash flow. There is
no Cash account involved in the entry to record
amortization (Dr. Amortization Expense; Cr.
Accumulated Amortization). It is only an allocation of the
capital cost to expense over an asset’s useful life.
(e) Factors that should influence management’s choice of
the amortization method to use include the revenue
pattern of a specific asset, the productivity of the asset,
as well as the usage of the asset on a year over year
basis. If an asset generates revenue consistently over
time, then the straight-line method is most appropriate.
If an asset is more productive in its earlier years then
the declining-balance method is most appropriate. If
usage of an asset can be easily measured and usage is
very different year over year then the units-of-activity
method is the most appropriate.
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PROBLEM 9-4A
Feb. 12 Building ...................................... 120,000
Cash ....................................... 120,000
Mar. 6 Maintenance Expense ............... 7,500
Cash ...................................... 7,500
Apr. 10 Furniture and Fixtures .............. 25,000
Cash ....................................... 25,000
May 17 Machinery .................................. 35,000
Cash ....................................... 8,000
June 28 Maintenance Expense ............... 5,000
Cash ....................................... 5,000
July 20 Repairs Expense ....................... 10,000
Cash ....................................... 10,000
Aug. 5 Training Expense ...................... 1,600
Cash ....................................... 1,600
Sep. 18 Machinery .................................. 80,000
Cash ....................................... 80,000
Nov. 6 Prepaid Insurance ..................... 4,600
Cash ....................................... 4,600
Dec. 31 Loss on Impairment .................. 70,000
Accumulated Amortization—
Equipment ............................. 70,000
[($400,000 - $150,000) - $180,000]
Dec. 31 No journal entry required. Once a permanent
impairment has been recorded, the value of an
asset is not adjusted for any recovery in value.
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PROBLEM 9-5A
(a)
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate = Expense Amort. Value
$650,000
2004 $620,000* 12.5% $77,500 $ 77,500 572,500
2005 620,000 12.5% 77,500 155,000 495,000
2006 620,000 12.5% 77,500 232,500 417,500
2007 620,000 12.5% 77,500 310,000 340,000
* Amortizable cost = $650,000 - $30,000 = $620,000
** 1 ÷ 8 years = 12.5%
(b) Dec. 31 Loss on Impairment 220,000
Accumulated Amortization—
Equipment ............................ 220,000
[($650,000 - $310,000) - $120,000]
(c)
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate = Expense Amort. Value
$530,000¹ $120,000
2008 $90,0002 50%3 $45,000 575,000 75,000
2009 90,000 50% 45,000 620,000 30,000
¹Accumulated Amortization = $310,000 end of year before Loss
on impairment + $220,000 Loss on Impairment 2Amortizable cost = $120,000 - $30,000 = $90,000 31 ÷ 2 years remaining = 50%
(d) Accumulated amortization at the end of this equipment’s
useful life will be $620,000. Net book value at the end of this
equipment’s useful life will be the amount of residual value
which is $30,000.
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PROBLEM 9-6A
(a)
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate = Expense Amort. Value
$220,000
2004 $200,000* 20%** x 6/12 $20,000 20,000 200,000
2005 200,000 20% 40,000 60,000 160,000
2006 200,000 20% 40,000 100,000 120,000
2007 200,000 20% 40,000 140,000 80,000
* Amortizable cost = $220,000 - $20,000 = $200,000
** 1 ÷ 5 years = 20%
(b) Jan. 9 Equipment.................................. 33,000
Cash ....................................... 33,000
Nov. 18 Maintenance Expense ............... 1,500
Cash ...................................... 1,500
Dec. 15 Repair Expense ......................... 2,400
Cash ....................................... 2,400
(c) Net book value, December 31, 2007 ...................... $80,000
Add: Addition ........................................................... 33,000
113,000
Less: Revised residual value ................................. 25,000
Revised amortizable cost ....................................... 88,000
Remaining useful life (9 - 3½ years) ....................... 5½ years
Revised annual amortization expense .................. $16,000
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PROBLEM 9-6A (Continued)
(d)
Net book value before overhaul: Dec. 31, 2007 $80,000
Add: Cost of overhaul 33,000
Net book value after overhaul 113,000
Less: Annual amortization after overhaul:
2008 $16,000
2009 16,000
2010 16,000
2011 16,000
2012 16,000
2013 ($16,000 x 6/12) 8,000 88,000
Net book value at end of useful life: June 30, 2013 $25,000 Accumulated amortization: Before overhaul: Dec. 31, 2007 $140,000 Amortization from Jan 1, 2008 to June 30, 2013 (see above) 88,000 At end of useful life: June 30, 2013 $228,000 Check: Original cost of asset $220,000 Cost of overhaul 33,000 253,000 Less: accumulated amortization June 30, 2013 228,000 Net book value June 30, 2013 $ 25,000 Note: Net book value June 30, 2013 = revised estimated residual value of $25,000.
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PROBLEM 9-7A
(a)
1. STRAIGHT-LINE AMORTIZATION
Calculation End of Year
Annual Net
Amortizable Amort. Amort. Accum. Book
Year Cost X Rate (1/3) = Expense Amort. Value
$170,000
2007 $144,000* 1/3 $48,000 $48,000 122,000
2008 144,000 1/3 48,000 96,000 74,000
2009 144,000 1/3 48,000 144,000 26,000
*$170,000 - $26,000 = $144,000
2. UNITS-OF-ACTIVITY AMORTIZATION
Calculation End of Year
Annual Net
Units of Amort. Amort. Accum. Book
Year Activity X Cost/Unit1 = Expense Amort. Value
$170,000
2007 155,000 $0.36 $55,800 $55,800 114,200
2008 135,000 0.36 48,600 104,400 65,600
2009 110,000 0.36 39,600 144,000 26,000
1 Amortizable cost per unit:
($170,000 - $26,000) ÷ 400,000 km = $0.36 per kilometre
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PROBLEM 9-7A (Continued)
(b) 1. (a) Straight (b) Units-
-Line of-Activity
Cost ............................................... $170,000 $170,000
Accumulated amortization. .......... 96,000 104,400
Book value .................................... 74,000 65,600
Cash proceeds ............................. 60,000 60,000
Loss on disposal .......................... $ 14,000 $ 5,600
2.
Amortization expense .................. $ 96,000 $104,400
Add: Loss on disposal ................ 14,000 5,600
Net expense .................................. $110,000 $110,000
In total the effect on net earnings is the same under both
methods. This is because the method of amortization
selected only affects the timing of the expense recognition.
In total over the life of the asset the expense recognized is
the same.
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PROBLEM 9-8A
(a) 2006
Mar. 11 Office Equipment ...................... 85,000
Accounts Payable ................. 85,000
(b) Dec. 31 Amortization Expense ............... 17,500
Accumulated Amortization
—Office Equipment .............. 17,500
[($85,000 - $1,000) ÷ 4 years] x 10/12 months
2007
Dec. 31 Amortization Expense ............... 21,000
Accumulated Amortization
—Office Equipment .............. 21,000
($85,000 - $1,000) ÷ 4 years
2008
Nov. 22 Amortization Expense ............... 19,250
Accumulated Amortization
—Office Equipment .............. 19,250
[($85,000 - $1,000) ÷ 4 years] x 11/12
(c)
(1) Nov. 22 Accumulated Amortization
—Office Equipment¹ .................. 57,750
Loss on Disposal ...................... 27,250
Office Equipment .................. 85,000
¹ $17,500 + $21,000 + $19,250 = $57,750
(2) Nov. 22 Cash ........................................... 35,000
Accumulated Amortization—
Office Equipment ...................... 57,750
Gain on Disposal .................. 7,750
Office Equipment .................. 85,000
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PROBLEM 9-8A (Continued)
(c) (Continued)
(3) Nov. 22 Cash ........................................... 20,000
Accumulated Amortization—
Office Equipment ...................... 57,750
Loss on Disposal ...................... 7,250
Office Equipment .................. 85,000
(4) Nov. 22 Office Equipment
($25,000 + $78,000) .................... 103,000
Accumulated Amortization
—Office Equipment ................... 57,750
Loss on Disposal
($85,000 - $57,750) - $25,000 ..... 2,250
Cash ($113,000 - $35,000) .... 78,000
Office Equipment .................. 85,000
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PROBLEM 9-9A
(a) 2004
Oct. 6 Land .................................................... 280,000
Building ............................................... 225,000
Machinery ........................................... 45,000
Cash ................................................ 100,000
Mortgage Payable ($550,000 - $100,000) 450,000
2005
Sep. 30 Amortization Expense ........................ 10,125
Accumulated Amortization—Building 5,625
Accumulated Amortization—Machinery 4,500
Building $225,000 ÷ 40 = $5,625
Machinery $45,000 ÷ 10 = $4,500
2006
Sep. 30 Amortization Expense ........................ 10,125
Accumulated Amortization—Building 5,625
Accumulated Amortization—Machinery 4,500
2007
Sep. 30 Amortization Expense ........................ 17,625
Accumulated Amortization—Building 5,625
Accumulated Amortization—Machinery 12,000
Machinery
Net book value, ($45,000 - $4,500 - $4,500) ................... $36,000
Remaining useful life (5 - 2) ............................................ ÷ 3 years
Revised annual amortization expense ........................... $12,000
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PROBLEM 9-9A (Continued)
(a) (Continued)
2008
June 28 Amortization Expense ........................ 9,000
Accumulated Amortization—Machinery 9,000
($12,000 x 9/12 months = $9,000)
28 Machinery* .......................................... 60,000
Accumulated Amortization
—Machinery** ..................................... 30,000
Gain on Disposal*** ....................... 3,000
Machinery ....................................... 45,000
Cash ($65,000 - $23,000) ............... 42,000
* $42,000 + $18,000 = $60,000
** $4,500 + $4,500 + $12,000 + $9,000 = $30,000
*** $18,000 - ($45,000 - $30,000) = $3,000
Sep. 30 Amortization Expense ........................ 8,625
Accumulated Amortization—Building* 5,625
Accumulated Amortization—Machinery** 3,000
* $225,000 ÷ 40 = $5,625
** ($60,000 ÷ 5) x 3/12 months = $3,000
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PROBLEM 9-9A (Continued)
(b)
Menda Investments.
Balance Sheet (Partial)
September 30, 2008
Property, plant, and equipment
Land ............................................................................. $280,000
Buildings ..................................................... $225,000
Less: Accumulated amortization* ............. 22,500 202,500
Machinery .................................................... $60,000
Less: Accumulated amortization ............... 3,000 57,000
Total property, plant, and equipment ................... $539,500
* $5,625 x 4 years = $22,500
(c) The income statement for September 30, 2008 will include:
Amortization expense ($5,625 + $9,000 + $3,000): $17,625
Gain on disposal: $3,000
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PROBLEM 9-10A
1. Research Expense ..................................... 60,000
Patent ..................................................... 60,000
2. Patent .......................................................... 21,000
Legal Fees Expense .............................. 21,000
3. Patent .......................................................... 38,000
Legal Fees Expense .............................. 38,000
4. Patent .......................................................... 50,000
Royalty Revenue .................................... 50,000
5. Amortization Expense ................................ 16,550
Accumulated Amortization—Patent ..... 16,550
{[($35,000 + $21,000 + $38,000) ÷ 5 years] - $2,250}
6. Loss on Impairment ................................... 5,200
Accumulated Amortization—Patent ..... 5,200
[($94,000 - $18,800) - $70,000]
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PROBLEM 9-11A
(a) Jan. 2 Trademark ................................ 0.27,000
Cash ..................................... 27,000
Jan. - Research Expense .................. 210,000
June Cash ..................................... 210,000
July 1 Patent (Development Costs) ... 50,000
Cash ..................................... 50,000
Sept. 1 Advertising Expense ............... 60,000
Cash ..................................... 60,000
Oct. 1 Copyright #2 ............................ 180,000
Cash ..................................... 180,000
Dec. 31 Impairment Loss ..................... 40,000
Goodwill ($125,000 - $85,000) 40,000
(b) Dec. 31 Amortization Expense ............. 1,250
Accumulated Amortization—
Patent ................................. 1,250
[($50,000 ÷ 20) x 6/12] = $1,250]
31 Amortization Expense ............. 12,600
Accumulated Amortization—
Copyright ............................. 12,600
[($36,000 x 1/10) + ($180,000 x 1/5 x 3/12)]
Note: Amortization is not recorded on trademark because
it has an expected indefinite useful life.
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PROBLEM 9-11A (Continued)
(c)
GHANI CORPORATION
Balance Sheet (Partial)
December 31, 2008
Assets
Intangible assets
Patents ................................................. $ 50,000
Less: Accumulated amortization ....... 1,250 $ 48,750
Copyrights (1) ........................................ $216,000
Less: Accumulated amortization ....... 37,800 178,200
Trademark (2) ................................................................ 81,000
Goodwill ...................................................................... 85,000
Total intangible assets .............................................. $392,950
(1) Copyright: Cost $36,000 + $180,000 = $216,000
Copyright: Amortization $25,200 + $12,600 = $37,800 (2) Trademark: $54,000 + $27,000 = $81,000
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PROBLEM 9-12A
(a) 2007
June 7 Timber Land ........................ 50,000,000
Cash ................................ 10,000,000
Mortgage Payable .......... 40,000,000
26 Weighing Equipment ............. 199,900
Cash ................................... 199,900
Dec. 31 Inventory ................................ 5,280,000
Accumulated Amortization
—Timber Land .................. 5,280,000
($50,000,000 - $2,000,000) ÷ 1,000,000
= $48/t x 110,000 t = $5,280,000
31 Cost of Goods Sold ............... 4,800,000
Inventory ($48/t x 100,000 t) 4,800,000
31 Amortization Expense ........... 12,850
Accumulated Amortization
—Weighing Equipment..... 12,850
($199,900 - $20,000) ÷ 7 =
$25,700 x 6/12 mos. = $12,850
31 Interest Expense
($40,000,000 x 7% x 7/12) ...... 1,633,333
Cash ................................... 1,633,333
31 Mortgage Payable .................. 8,000,000
Cash ................................... 8,000,000
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PROBLEM 9-12A (Continued)
(a) (Continued)
2008
Dec. 31 Inventory
($48/t x 230,000 t) .................. 11,040,000
Accumulated Amortization
—Timber Land .................. 11,040,000
31 Cost of Goods Sold
($48/t x 230,000 t) .................. 11,040,000
Inventory ........................... 11,040,000
31 Amortization Expense ........... 25,700
Accumulated Amortization
—Weighing Equipment..... 25,700
31 Interest Expense
($32,000,000 x 7%) ................. 2,240,000
Cash ................................... 2,240,000
31 Mortgage Payable .................. 8,000,000
Cash ................................... 8,000,000
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PROBLEM 9-12A (Continued)
(b)
CYPRESS TIMBER COMPANY
(Partial) Balance Sheet
December 31, 2008
Current Assets
Inventory1 ............................................ $ 480,000
Property, plant, and equipment
Timber tract ......................................... $50,000,000
Less: Accumulated amortization2 ...... 16,320,000 $33,680,000
Weighing equipment .......................... 199,900
Less: Accumulated amortization3 ...... 38,550 161,350
Total property, plant, and equipment ............... $33,841,350
1 10,000 tonnes x $48/t 2$5,280,000 + $11,040,000 = $16,320,000 3$12,850 (2007) + $25,700 (2008) = $38,550
As well, the Income Statement for the year ended December 31,
2008, will include cost of goods sold of $11,040,000,
amortization expense of $25,700 and interest expense of
$2,240,000.
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PROBLEM 9-13A
(a)
St. Amand Company St. Helene Company
Asset
turnover
$4,375,000
[($3,780,000 + $4,290,000) ÷ 2]
= 1.08 to 1
$2,775,000
[($2,540,000 + $2,175,000) ÷ 2]
= 1.18 to 1
Return
on
assets
$350,000
[($3,780,000 + $4,290,000) ÷ 2]
= 8.67%
$300,000
[($2,540,000 + $2,175,000) ÷ 2]
= 12.73%
(b) St. Helene Company is more efficient in using its assets to
generate sales–its assets turnover of 1.18 times is higher
than 1.08 for St. Amand Company. It is also much more
efficient in using assets to produce income–with a return
on assets of 12.73% compared to 8.67% for St. Amand
Company.
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PROBLEM 9-1B
(a) Jan. 22 Land ........................................... 220,000
Cash ....................................... 55,000
Note Payable ......................... 165,000
24 Land ........................................... 4,500
Cash ...................................... 4,500
31 Land ........................................... 25,000
Cash ....................................... 25,000
Feb. 13 Land ........................................... 8,000
Cash ....................................... 8,000
28 Cash ........................................... 7,500
Land ....................................... 7,500
Mar. 14 Building ...................................... 34,000
Cash ....................................... 34,000
31 Building ...................................... 15,000
Cash ....................................... 15,000
Apr. 22 Building ...................................... 17,000
Cash ....................................... 17,000
June 15 Building ...................................... 300,000
Cash ....................................... 75,000
Note Payable ......................... 225,000
Sept. 14 Building ...................................... 300,000
Cash ....................................... 100,000
Note Payable ......................... 200,000
30 Building ...................................... 6,700
Cash ....................................... 6,700
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PROBLEM 9-1B (Continued)
(a) (Continued)
Oct. 12 Land Improvements .................. 42,000
Cash ....................................... 22,000
20 Land Improvements .................. 8,000
Cash ....................................... 8,000
Dec. 31 Interest Expense ....................... 7,800
Cash ....................................... 7,800
(b)
Land
Date Explanation Ref. Debit Credit Balance
2008 Jan. 22 220,000 220,000 24 4,500 224,500 31 25,000 249,500 Feb. 13 8,000 257,500 28 7,500 250,000
Building
Date Explanation Ref. Debit Credit Balance
2008 Mar. 14 34,000 34,000 31 15,000 49,000 Apr. 22 17,000 66,000 June 15 300,000 366,000 Sept.14 300,000 666,000 30 6,700 672,700
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PROBLEM 9-1B (Continued)
(b) (Continued)
Land Improvements
Date Explanation Ref. Debit Credit Balance
2008 Oct. 12 42,000 42,000 20 8,000 50,000
The cost of land that will appear on Kadlec’s December 31, 2008
balance sheet will be $250,000. The cost of the building that will
appear on Kadlec’s December 31, 2008 balance sheet will be
$672,700. The cost of land improvements that will appear on
Kadlec’s December 31, 2008 balance sheet will be $50,000.
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PROBLEM 9-2B
(a)
Accumulated
Amortization
Year Calculation Dec. 31
MACHINE 1
2005 $92,000* x 10%** x 9/12 = $6,900 $ 6,900
2006 $92,000 x 10% = $9,200 16,100
2007 $92,000 x 10% = $9,200 25,300
2008 $92,000 x 10% = $9,200 34,500
*$96,000 - $4,000 = $92,000
**1/10 years = 10%
MACHINE 2
2007 $60,000 x 12.5%* x 3/12 = $1,875 $1,875
2008 $58,125 x 12.5% = $7,266 9,141
*1/8 years = 12.5%
(b)
Accumulated
Amortization
Year Calculation Dec. 31
MACHINE 1
2005 $92,000* x 10%** x 6/12 = $4,600 $ 4,600
2006 $92,000 x 10% = $9,200 13,800
2007 $92,000 x 10% = $9,200 23,000
2008 $92,000 x 10% = $9,200 32,200
*$96,000 - $4,000 = $92,000
**1/10 years = 10%
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PROBLEM 9-2B (Continued)
(b) (Continued)
MACHINE 2
2007 $60,000 x 12.5%* x 6/12 = $3,750 $ 3,750
2008 $56,250 x 12.5% = $7,031 10,781
*1/8 years = 12.5%
(c) Flakeboard should not consider recording amortization to
the nearest day. The amount is an estimate only. The
additional cost of recording it to the nearest day is not
warranted. It implies an accuracy that does not exist.
(d) It really doesn’t matter which policy Flakeboard chooses in
terms of recording amortization in the year of acquisition,
as long as it follows the policy consistently. The same total
amortization will be recorded whether amortization is
recorded monthly, or semi-annually. Amortization is an
estimate only, in any case.
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PROBLEM 9-3B
(a) Invoice price $102,000
Delivery cost 5,200
Installation and testing 4,300
Cost of the machine $111,500
The $975 insurance policy is an annual operating
expenditure and not included in the cost of the asst.
(b) 1. STRAIGHT-LINE AMORTIZATION
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate = Expense Amort. Value
$111,500
2006 $105,000* 25%* x 3/12*** $ 6,563 $ 6,563 104,937
2007 105,000 25% 26,250 32,813 78,687
2008 105,000 25% 26,250 59,063 52,437
2009 105,000 25% 26,250 85,313 26,187
2010 105,000 25% x 9/12 19,687 105,000 6,500
* $111,500 - $6,500 = $105,000
** 1/4 years = 25%
*** Machine was ready for use on October 1, 2006
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PROBLEM 9-3B (Continued)
(b) (Continued)
2. DOUBLE DECLINING-BALANCE AMORTIZATION
Calculation End of Year
NBV (Beg. Amort. Amort. Accum. Net Book
Year of Year X Rate = Expense Amort. Value
$111,500
2006 $111,500 50%* x 3/12 $13,938 $13,938 97,562
2007 97,562 50% 48,781 62,719 48,781
2008 48,781 50% 24,391 87,110 24,390
2009 24,390 50% 12,195 99,305 12,195
2010 12,195 50% 5,695*** 105,000 6,500
* 1/4 years = 25% x 2 = 50%
** Limited to the amount that brings residual value to $6,500
3. UNITS-OF-ACTIVITY
Calculation End of Year
Units of Amort. Amort. Accum. Net Book
Year Activity X Cost/Unit* = Expense Amort. Value
$111,500
2006 2,000 $3.50* $ 7,000 $ 7,000 104,500
2007 9,150 3.50 32,025 39,025 72,475
2008 7,650 3.50 26,775 65,800 45,700
2009 6,700 3.50 23,450 89,250 22,250
2010 4,500 3.50 15,750 105,000 6,500
* Amortizable cost per unit is $3.50 per unit
[($111,500 – $6,500) 30,000 = $3.50]
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PROBLEM 9-3B (Continued)
(c) Straight-line amortization provides the lowest amount of
amortization expense for 2006 which results in the highest
amount of net income. Over the life of the asset, all three
methods result in the same total amortization expense
(equal to the amortizable cost) and therefore the same
amount of net income.
(d) All three methods will result in the same cash flow in 2006
and over the life of the asset. Recording amortization
expense does not affect cash flow. There is no Cash
account involved in the entry to record amortization (Dr.
Amortization Expense; Cr. Accumulated Amortization). It is
only an allocation of the capital cost to expense over an
asset’s useful life.
(e) Factors that should influence management’s choice of the
amortization method to use include the revenue pattern of
a specific asset, the productivity of the asset, as well as
the usage of the asset on a year over year basis. If an asset
generates revenue consistently over time, then the
straight-line method is most appropriate. If an asset is
more productive in its earlier years then the declining-
balance method is most appropriate. If usage of an asset
can be easily measured and usage is very different year
over year then the units-of-activity method is the most
appropriate.
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PROBLEM 9-4B
Feb. 2 Maintenance Expense ............... 2,000
Cash ....................................... 2,000
Mar. 16 Maintenance Expense ............... 4,500
Cash ...................................... 4,500
Apr. 14 Building ...................................... 57,000
Cash ....................................... 57,000
May 7 Land Improvements .................. 4,600
Cash ....................................... 4,600
Note: Assuming the flowers and shrubs will last
for longer than one year.
June 16 Repairs Expense ....................... 5,900
Cash ....................................... 5,900
July 18 Vehicles ..................................... 15,000
Cash ....................................... 15,000
Aug. 8 Training Expense ...................... 5,500
Cash ....................................... 5,500
Sep. 20 Machinery .................................. 20,000
Cash ....................................... 20,000
Oct. 26 Repairs Expense ....................... 1,600
Cash ....................................... 1,600
1. Dec. 31 No journal entry required. Once a permanent
impairment has been recorded, the value of an asset
is not adjusted for any recovery in value.
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PROBLEM 9-4B (Continued)
2. Dec. 31 Loss on Impairment .................. 40,000
Accumulated Amortization—
Equipment ............................ 40,000
[($300,000 - $125,000) - $135,000]
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PROBLEM 9-5B
(a)
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate** = Expense Amort. Value
$600,000
2004 $550,000* 10% $55,000 $ 55,000 545,000
2005 550,000 10% 55,000 110,000 490,000
2006 550,000 10% 55,000 165,000 435,000
2007 550,000 10% 55,000 220,000 380,000
* Amortizable cost = $600,000 - $50,000 = $550,000
** 1 ÷ 10 years = 10%
(b) Dec. 31 Loss on Impairment 180,000
Accumulated Amortization—
Equipment ............................ 180,000
[($600,000 - $220,000) - $200,000]
(c)
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate = Expense Amort. Value
$400,000¹ $200,000
2008 $150,0002 50%3 $75,000 475,000 125,000
2009 150,000 50% 75,000 550,000 50,000
¹Accumulated Amortization = $220,000 end of year before Loss
on impairment + $180,000 Loss on Impairment 2Amortizable cost = $200,000 - $50,000 = $150,000 31 ÷ 2 years remaining = 50%
(d) Accumulated amortization at the end of this equipment’s
useful life will be $550,000. Net book value at the end of
this equipment’s useful life will be the amount of residual
value which is $50,000.
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PROBLEM 9-6B
(a)
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate = Expense Amort. Value
$125,000
2003 $115,000* 20% x 6/12 $11,500 11,500 113,500
2004 115,000 20% 23,000 34,500 90,500
2005 115,000 20% 23,000 57,500 67,500
2006 115,000 20% 23,000 80,500 44,500
2007 115,000 20% 23,000 103,500 21,500
* Amortizable cost = $125,000 - $10,000 = $115,000
** 1 ÷ 5 years = 20%
(b) Jan. 7 Equipment.................................. 15,000
Cash ....................................... 15,000
July 27 Maintenance Expense ............... 1,000
Cash ...................................... 1,000
Sept. 19 Repair Expense ......................... 2,500
Cash ....................................... 2,500
(c) Net book value, December 31, 2007 ...................... $21,500
Add: Addition ........................................................... 15,000
36,500
Less: Revised residual value ................................ 12,000
Revised amortizable cost ....................................... 24,500
Remaining useful life (7 – 4½ years) ...................... 2½ years
Revised annual amortization expense .................. $9,800
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PROBLEM 9-6B (Continued)
(d)
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate = Expense Amort. Value
$103,500 $36,500¹
2008 $24,500* 40%** $ 9,800 113,300 26,700
2009 24,500 40% 9,800 123,100 16,900
2010 24,500 40% x 6/12 4,900 128,000 12,000
*Amortizable cost (revised) = $36,500 - $12,000 = $24,500
**1 ÷ 2.5 years remaining = 40%
¹Net book value before overhaul + cost of overhaul = $21,500 +
$15,000
Conclusion: Total accumulated amortization at the end of the
asset’s useful life will be $128,000.
Check: Original cost of asset $125,000 Cost of overhaul 15,000 240,000 Less: accumulated amortization June 30, 2010 128,000 Net book value June 30, 2010 $ 12,000 Note: Net book value June 30, 2010 = revised estimated residual value of $12,000.
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PROBLEM 9-7B
(a) (1) STRAIGHT-LINE AMORTIZATION
Calculation End of Year
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate = Expense Amort. Value
$61,000
2006 $56,000* 25%** $14,000 $14,000 47,000
2007 56,000 25% 14,000 28,000 33,000
2008 56,000 25% 14,000 42,000 19,000
2009 56,000 25% 14,000 56,000 5,000 * $61,000 - $5,000 = $56,000 ** ¼ years = 25% (2) DOUBLE DECLINING-BALANCE AMORTIZATION
Calculation End of Year
NBV (Beg. Amort. Amort. Accum. Net Book
Year of Year X Rate = Expense Amort. Value
$61,000
2006 $61,000 50%* $30,500 $30,500 30,500
2007 30,500 50% 15,250 45,750 15,250
2008 15,250 50% 7,625 53,375 7,625
2009 7,625 50% **2,625 56,000 5,000
* ¼ years = 25% x 2 ** Amount that makes Net Book Value equal to residual
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PROBLEM 9-7B (Continued) (b) 1.
(b)
(a) Declining-
Straight-Line Balance
Cost ................................................. $61,000 $61,000 Accumulated amortization. ............ 42,000 53,375 Net book value ................................ 19,000 7,625 Cash proceeds ............................... 10,000 10,000 (Gain) loss on disposal .................. $ 9,000 $(2,375) 2. Amortization expense .................... $42,000 $53,375 (Gain) Loss on disposal ................. 9,000 (2,375) Net expense .................................... $51,000 $51,000
In total the effect on net income is the same under
both methods. This is because the method of
amortization selected only affects the timing of the
expense recognition. In total over the life of the asset,
the expense recognized is the same.
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PROBLEM 9-8B
(a) 2006
Feb. 4 Delivery Equipment ................... 65,000
Accounts Payable ................. 65,000
(b) Dec. 31 Amortization Expense ............... 11,000
Accumulated Amortization
—Delivery Equipment ........... 11,000
($65,000 - $5,000) x 1/5 years x 11/12 months = $11,000
2007
Dec. 31 Amortization Expense ............... 12,000
Accumulated Amortization
—Delivery Equipment ........... 12,000
($65,000 - $5,000) x 1/5 years = $12,000
2008
Oct. 25 Amortization Expense ............... 10,000
Accumulated Amortization
—Delivery Equipment ........... 10,000
($65,000 - $5,000) x 1/5 years x 10/12 months = $10,000
(c)
1. Oct. 25 Accumulated Amortization
—Delivery Equipment ............... 33,000
Loss on Disposal ...................... 32,000
Delivery Equipment .............. 65,000
Accumulated Amortization:
($65,000 - $5,000) x 33/60 months = $33,000
Or add annual amortization expense in above journal
entries: ($11,000 + $12,000 + $10,000 = $33,000)
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PROBLEM 9-8B (Continued)
(c) (Continued)
2. Oct. 25 Cash ........................................... 30,000
Loss on Disposal ...................... 2,000
Accumulated Amortization
—Delivery Equipment ............... 33,000
Delivery Equipment .............. 65,000
3. Oct. 25 Cash ........................................... 40,000
Accumulated Amortization
—Delivery Equipment ............... 33,000
Gain on Disposal .................. 8,000
Delivery Equipment .............. 65,000
4. Oct. 25 Delivery Equipment
($28,000 + $55,000) .................... 83,000
Accumulated Amortization
—Delivery Equipment ............... 33,000
Loss on Disposal
($28,000 - $32,000) ..................... 4,000
Cash ($87,000 - $32,000) ...... 55,000
Delivery Equipment .............. 65,000
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PROBLEM 9-9B
(a) 2004
July 3 Land ............................................... 410,000
Building ......................................... 300,000
Machinery ...................................... 40,000
Cash .......................................... 100,000
Mortgage Payable
($750,000 - $100,000) ................ 650,000
2005
June 30 Amortization Expense .................. 12,500
Accumulated Amortization—Building 7,500
Accumulated Amortization—Machinery 5,000
Building $300,000 ÷ 40 = $7,500
Machinery $40,000 ÷ 8 = $5,000
2006
June 30 Amortization Expense .................. 12,500
Accumulated Amortization—Building 7,500
Accumulated Amortization—Machinery 5,000
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PROBLEM 9-9B (Continued)
(a) (Continued)
2007
June 30 Amortization Expense .................. 17,500
Accumulated Amortization—Building 7,500
Accumulated Amortization—Machinery 10,000
Machinery
Net book value ($40,000 - $10,000) ................................ $ 30,000
Remaining useful life (5 - 2) ............................................ ÷ 3 years
Revised annual amortization expense ........................... $ 10,000
Dec. 28 Amortization Expense .................. 5,000
Accumulated Amortization—Machinery 5,000
($10,000 x 6/12 months)
28 Machinery* ..................................... 62,000
Accumulated Amortization
—Machinery** ................................ 25,000
Gain on Disposal*** .................. 7,000
Machinery .................................. 40,000
Cash ($65,000 - $25,000) .......... 40,000
* $40,000 + $22,000 = $62,000
** $5,000 + $5,000 + $10,000 + $5,000 = $25,000
*** $22,000 - ($40,000 - $25,000) = $7,000
2008
June 30 Amortization Expense .................. 13,700
Accumulated Amortization—Building 7,500
Accumulated Amortization—Machinery 6,200
Machinery ($62,000 ÷ 5) x 6/12 months = $6,200
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PROBLEM 9-9B (Continued)
(b)
Ledesma Investments.
Balance Sheet (Partial)
June 30, 2008
Property, plant, and equipment
Land ............................................................................. $410,000
Buildings .................................................... $300,000
Less: Accumulated amortization* ............ 30,000 270,000
Machinery ................................................... $62,000
Less: Accumulated amortization .............. 6,200 55,800
Total property, plant, and equipment ................... $735,800
*$7,500 + $7,500 + $7,500 + $7,500 = $30,000
(c) The income statement for June 30, 2008 will include:
Amortization expense ($5,000 + $7,500 + $6,200) $18,700
Gain on disposal 7,000
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PROBLEM 9-10B
1. Research Expense ($120,000 x 55%) ........ 66,000
Patents ................................................... 66,000
Accumulated Amortization—Patents ........ 4,400
Amortization Expense ........................... 4,400
$66,000 ÷ 15 years = $4,400
2. Trademark ................................................... 25,000
Loss on Impairment–Trademark
($125,000 - $100,000) ............................ 25,000
Loss on impairment should not be recorded until there is a
permanent impairment in value of the trademark. In this
case, Riley is attempting to defend its right and their
lawyers indicate they expect Riley to win which indicates
that there is not a permanent impairment in value of the
trademark.
3. Accumulated Amortization–
Goodwill [($250,000 ÷ 40) x 6/12] .............. 3,125
Amortization expense ............................ 3,125
Note: Goodwill is not amortized.
4. Charitable Donations Expense .................. 6,000
Goodwill ................................................. 6,000
5. Gain on License Market Value................... 30,000
License ................................................... 30,000
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PROBLEM 9-11B
(a) Jan. 2 Patent #1 .................................... 22,400
Cash ....................................... 22,400
June 30 Research Expense .................... 220,000
Cash ....................................... 220,000
30 Patent #2 (Development Costs) 60,000
Cash ....................................... 60,000
Sept. 1 Advertising Expense ................. 35,000
Cash ....................................... 35,000
Oct. 1 Copyright #2 .............................. 80,500
Cash ....................................... 80,500
Dec. 31 Impairment Loss ....................... 60,000
Goodwill ($210,000 - $150,000) 60,000
(b) Dec. 31 Amortization Expense ............... 9,800
Accumulated Amortization—Patent #1 9,800
[($70,000 x 1/10) + ($22,400 x 1/8)]
31 Amortization Expense ............... 7,675
Accumulated Amortization—
Copyright #1 .......................... 4,800
Accumulated Amortization—
Copyright #2 .......................... 2,875
[($48,000 x 1/10) + ($80,500 x 1/7 x 3/12)]
31 Amortization Expense ............... 1,500 Accumulated Amortization—Patent #2 1,500 [($60,000 ÷ 20 years) x 6/12 = $1,500)
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PROBLEM 9-11B (Continued)
(c)
IP COMPANY
(Partial) Balance Sheet
December 31, 2008
Assets
Intangible assets
Patents(1) ............................................... $152,400
Less: Accumulated amortization* ...... 25,300 $127,100
Copyrights(2) ......................................... 128,500
Less: Accumulated amortization** ..... 36,475 92,025
Goodwill ............................................... 150,000
Total intangible assets ........................ $369,125
(1) Cost: Patent #1 ($70,000 + $22,400) + Patent #2 $60,000 =
$152,400
* Amortization: Patent #1 ($14,000 + $7,000 + $2,800) + Patent
#2 ($1,500) = $25,300
(2) Cost: Copyright #1 ($48,000) + Copyright #2 ($80,500) =
$128,500
** Amortization: Copyright #1 ($28,800 + $4,800) + Copyright
#2 ($2,875) = $36,475
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PROBLEM 9-12B
(a) 2007
Mar. 31 Mine ($2,600,000 + $260,000) . 2,860,000
Cash .................................. 2,860,000
Apr. 6 No entry required
Dec. 31 Inventory ................................. 570,000
Accumulated Amortization
—Mine ............................... 570,000
($2,860,000 - $200,000) ÷ 560,000 t = $4.75/t x 120,000 t
= $570,000
31 Cost of Goods Sold ................ 475,000
Inventory ($4.75/t x 100,000 t) 475,000
31 Amortization Expense ............ 60,000
Accumulated Amortization
—Equipment .................... 60,000
($500,000 - $20,000) ÷ 8 years = $60,000. Note that
equipment is amortized for the full year, because it has
been in use for the full year (at another site earlier in the
year).
2008
Dec. 31 Inventory ($4.75/t x 110,000 t)522,500
Accumulated Amortization
—Mine ............................... 522,500
31 Cost of Goods Sold
($4.75/t x 110,000 t) .............. 522,500
Inventory .......................... 522,500
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PROBLEM 9-12B (Continued)
(a)Continued
Dec. 31 Amortization Expense .......... 60,000
Accumulated Amortization
—Equipment .................... 60,000
(b)
YOUNT MINING COMPANY
(Partial) Balance Sheet
December 31, 2008
Current Assets
Inventory .............................................. $ 95,000
Property, plant, and equipment
Mine ...................................................... $2,860,000
Less: Accumulated amortization* ...... 1,092,500 1,767,500
Equipment ............................................ $500,000
Less: Accumulated amortization** ..... 375,000 125,000
* $570,000 + $522,500 = $1,092,500
** $15,000 (2002) + $60,000 (2003) + $60,000 (2004) + $60,000
(2005) + $60,000 (2006) + $60,000 (2007) + $60,000 (2008) =
$375,000
As well, the Income Statement for the year ended December 31,
2008, will include cost of goods sold of $522,500 and
amortization expense of $60,000.
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PROBLEM 9-13B
(a)
Andruski Company Brar Company
Asset
turnover
$1,950,000
[($2,250,000 + $2,800,000) ÷ 2]
= 0.77 to 1
$2,300,000
[($2,465,000 + $3,295,000) ÷2]
= 0.8 to 1
Return
on
assets
$295,000
[($2,250,000 + $2,800,000) ÷ 2]
= 11.68%
$310,000
[($2,465,000 + $3,295,000) ÷2]
= 10.76%
(b) Brar Company is a little more efficient in using its assets to
generate sales–its assets turnover of 0.8 times is higher
than 0.77 times for Andruski Company. Andruski is more
efficient in using assets to produce income–with a return
on assets of 11.68% compared to 10.76% for Brar
Company.
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CONTINUING COOKIE CHRONICLE
(a) Purchase price ........................................................ $34,500
Painting .................................................................... 2,500
Shelving ................................................................... 1,500
Cost of van ............................................................... $38,500
(b) Straight-line amortization
Amortizable Amort. Amort. Accum. Net Book
Year Cost X Rate = Expense Amort. Value
$38,500
2008 $32,000* 20% x 4/12 $ 2,133 $ 2,133 36,367
2009 32,000 20% 6,400 8,533 29,967
2010 32,000 20% 6,400 14,933 23,567
* ($38,500 - $6,500 = $32,000)
Single declining-balance amortization
NBV (Beg. Amort. Amort. Accum. Net Book
Year of Year X Rate = Expense Amort. Value
$38,500
2008 $38,500 20%* x 4/12 $ 2,567 $ 2,567 35,933
2009 35,933 20% 7,187 9,754 28,746
2010 28,746 20% 5,749 15,503 22,997
Units-of-activity amortization
Units of Amort. Amort. Accum. Net Book
Year Activity X Cost/Unit = Expense Amort. Value
$38,500
2008 15,000 $0.16* $ 2,400 $ 2,400 36,100
2009 45,000 0.16 7,200 9,600 28,900
2010 50,000 0.16 8,000 17,600 20,900
*$32,000 ÷ 200,000 = $0.16 per km
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CONTINUING COOKIE CHRONICLE (Continued)
(c) Impact on Cookie Creation's balance sheet and income
statement in 2008:
Single
Declining- Units-of-
Straight-Line Balance Activity
Cost of asset $38,500 $38,500 $38,500
Accumulated amortization 2,133 2,567 2,400
Net book value $36,367 $35,933 $36,100
Amortization expense $2,133 $2,567 $2,400
The single-declining method of amortization will result in
the lowest amount of net income reported, the lowest
amount of owner's equity reported and the lowest net book
value of the asset reported.
The straight-line method of amortization will result in the
greatest amount of net income reported, the greatest
amount of owner's equity reported and the greatest net
book value of the asset reported.
(d) Over the van’s 5-year useful life the total amortization will
be $32,000 under each of the methods. The impact will
affect the timing of the amortization expense recognized
each year only.
(e) The units-of-activity method may provide Natalie with a
more accurate assessment of usage of the van in relation
to the amount of revenue earned. As long as Natalie is
willing to track the number of kilometres driven over the
course of the year, then this would be the method
recommended.
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BYP 9-1 FINANCIAL REPORTING PROBLEM
(a) (1) $409,970,000
(2) $216,376,000
(3) $193,594,000
See Note 3 to the financial statements.
(b) $50,837,000 was the amount of net additions of capital
assets during 2006. (See the Consolidated Statements
of Cash Flows)
(c) Building on leased land, furniture, fixtures, equipment,
automotive and leasehold improvements are amortized
using the straight-line basis. The building is amortized
on the declining-balance method. (See Note 2)
The amount of amortization expense reported in the
statement of operations for fiscal 2006 was $41,343,000.
(d) The expected useful life for calculating amortization on
the “furniture, fixtures, equipment. and automotive” was
3 to 5 years. (See Note 2)
(e) Intangible assets comprise Goodwill, Trademarks and
Tradenames and Non-competition agreements. The
company did not report any impairment loss in 2006.
(See note 4)
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BYP 9-2 INTERPRETING FINANCIAL STATEMENTS
(a) The $110 million investment in the new plant should be
treated as a capital expenditure. It will result in the
creation of an asset that will have a long life and the
cost will be matched with the revenue it generates
through annual amortization charges.
(b) Maple Leaf Foods could use the straight-line, declining-
balance or the units-of-activity method to amortize its
plant and equipment associated with its Saskatoon
plant. The straight-line method is simple to use and if
the assets are used at a consistent level will match
costs with revenue. Declining-balance is appropriate in
cases where the benefits are greater in the early years
of an asset’s life. The units-of-activity method would be
the most appropriate in this case as the levels of
production can be easily measured (production capacity
or number of hogs processed per week) and the levels
of production can change from one week to the next.
The units-of-activity method will provide the best
matching of costs with revenue.
(c) Yes. My recommendation would still be the units-of-
activity method. Amortization expense would increase
as a result of the double shift because the number of
units being processed has increased.
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BYP 9-3 COLLABORATIVE LEARNING ACTIVITY
All of the material supplementing the collaborative learning
activity, including a suggested solution, can be found in the
Collaborative Learning section of the Instructor Resources site
accompanying this textbook.
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BYP 9-4 COMMUNICATION ACTIVITY
Memorandum
To: Jason Long, Owner
From: Ken Bond, Controller
Re: Loss on Impairment of Long-Lived Assets
Long-lived assets are recorded at cost. In our company’s case
those assets include trucks, garages and equipment. The cost
of these assets is amortized over their useful lives, matching
costs of amortization to the revenue these assets have helped
us generate. The difference between the cost of an asset and its
accumulated amortization is what we refer to as net book value.
In some circumstances the net book value of a long-lived asset
may not be recoverable. If this happens and the market value
also permanently falls far below the assets’ net book value an
impairment has occurred. An impairment may occur because an
asset has become obsolete. In our company, an impairment
could arise when equipment we have purchased to repair and
maintain a truck can no longer perform the necessary service
on a truck because of technological change.
The impairment loss is equal to the amount by which the book
value of the asset is greater than market value.
The journal entry to record an impairment loss is:
Dr. Loss on impairment
Cr. Accumulated amortization
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BYP 9-4 (Continued)
When an impairment loss is recorded the cost of the long lived
asset does not change. The amount of accumulated
amortization increases by the amount of the impairment loss. The net book value of the asset then decreases to reflect the
market value of the asset.
When an impairment loss is recorded net income is decreased
and in turn the value of the long lived asset recorded on our
company’s balance sheet also decreases.
In future years the annual amortization expense will need to be
revised. Future annual amortization expense will be based on
the revised net book value (which is equal to the market value
after the impairment loss is recorded), the revised residual
value, and the revised remaining useful life of the asset.
It is possible the residual value and the remaining useful life
may not be changed. In that case future annual amortization
expense will be less than it has been in previous years as a
result of the loss. If the residual value and the remaining useful
life change then the future amortization expense may be greater
or lower than the previous amortization expense.
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BYP 9-5 ETHICS CASE
(a) The stakeholders in this situation are:
President of Finney Container Company
Controller of Finney Container Company
The owners of Finney Container Company
Potential investors in Finney Container Company
Creditors and others with a financial interest in the
company
(b) The intentional misstatement of the life of an asset or the
amount of the residual value is unethical, whatever the
reason. There is nothing unethical about changing the
estimate either of the life of an asset or of an asset's
residual value if the change is an attempt to better match
cost and revenues, and is a better allocation of the asset's
amortizable cost over the asset's useful life. In this case, it
appears from the controller's reaction that the revisions in
the life and residual value are intended only to improve net
income. This is unethical.
The fact that the competition uses a longer life on its
equipment is not necessarily relevant. The competition's
maintenance and repair policies and activities may be
different. The competition may use its equipment fewer
hours a year (e.g., one shift rather than two shifts daily)
than Finney Container Company.
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BYP 9-5 (Continued)
(c) Net income in the year of change is increased $320,000
($560,000 - $240,000), because amortization expense is
decreased $320,000, by implementing the president's
proposed changes.
Old Estimate
Asset cost ............................................................... $3,000,000
Estimated residual ................................................. 200,000
Amortizable cost .................................................... 2,800,000
Estimated useful life .............................................. ÷ 5 years
Amortization per year............................................ $ 560,000
Revised Estimate
Asset cost ............................................................... $3,000,000
Estimated residual ................................................. 200,000
Amortizable cost .................................................... 2,800,000
Amortization taken to date ($560,000 x 2 years) .. 1,120,000
Remaining cost to be amortized ........................... 1,680,000
Remaining useful life (9 years - 2 years) .............. ÷ 7 years
Amortization per year............................................. $ 240,000
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