CHAPTER 9

Long-Lived assets

Summary of Questions by STUDY Objectives
and Bloom’s Taxonomy

Note: AN = Analysis AP = Application C = Comprehension

Summary of Questions by level of difficulty (LOD)

Note: E = Easy M = Medium H=Hard

CHAPTER STUDY OBJECTIVES

1. Determine the cost of property, plant, and equipment. The cost of property, plant, and equipment includes all costs that are necessary to acquire the asset and make it ready for its intended use. All costs that benefit future periods (that is, capital expenditures) are included in the cost of the asset. When applicable, cost also includes asset retirement costs. When multiple assets are purchased in one transaction, or when an asset has significant components, the cost is allocated to each individual asset or component using their relative fair values.

2. Explain and calculate depreciation. After acquisition, assets are accounted for using the cost model or the revaluation model. Depreciation is recorded and assets are carried at cost less accumulated depreciation. Depreciation is the allocation of the cost of a long-lived asset to expense over its useful life (its service life) in a rational and systematic way. Depreciation is not a process of valuation and it does not result in an accumulation of cash. There are three commonly used depreciation methods:

Each method results in the same amount of depreciation over the asset’s useful life. Depreciation expense for income tax purposes is called capital cost allowance (CCA). The single diminishing-balance method is required and depreciation rates are prescribed.

3. Explain the factors that cause changes in periodic depreciation and calculate revisions. A revision to depreciation will be required if there are (a) capital expenditures during the asset’s useful life, (b) impairments in the asset’s fair value, (c) changes in the asset’s fair value when using the revaluation model, and/or (d) changes in the appropriate depreciation method, estimated useful life, or residual value. An impairment loss must be recorded if the recoverable amount is less than the carrying amount. Only under IFRS can impairment losses be reversed in future periods if the recoverable amount increases. Revisions of periodic depreciation are made in present and future periods, not retroactively. The new annual depreciation is determined by using the depreciable amount (carrying amount less the revised residual value), and the remaining useful life, at the time of the revision.

4. Account for the disposal of property, plant, and equipment. The accounting for the disposal of a piece of property, plant, or equipment through retirement or sale is as follows:

(a) Update any unrecorded depreciation for partial periods since depreciation was last recorded.

(b) Calculate the carrying amount (cost – accumulated depreciation).

(c) Calculate any gain (proceeds > carrying amount) or loss (proceeds < carrying amount) on disposal.

(d) Remove the asset and accumulated depreciation accounts at the date of disposal. Record the proceeds received and the gain or loss, if any.

An exchange of assets is recorded as the purchase of a new asset and the sale of an old asset. The new asset is recorded at the fair value of the asset given up plus any cash paid (or less any cash received). The fair value of the asset given up is compared with its carrying amount to calculate the gain or loss. If the fair value of the new asset or the asset given up cannot be determined, the new long-lived asset is recorded at the carrying amount of the old asset that was given up, plus any cash paid (or less any cash received).

5. Calculate and record depreciation of natural resources. The units-of-production method of depreciation is generally used for natural resources. The depreciable amount per unit is calculated by dividing the total depreciable amount by the number of units estimated to be in the resource. The depreciable amount per unit is multiplied by the number of units that have been extracted to determine the annual depreciation. The depreciation and any other costs to extract the resource are recorded as inventory until the resource is sold. At that time, the costs are transferred to cost of resource sold on the income statement. Revisions to depreciation will be required for capital expenditures during the asset’s useful life, for impairments, and for changes in the total estimated units of the resource.

6. Identify the basic accounting issues for intangible assets and goodwill. The accounting for tangible and intangible assets is much the same. Intangible assets are reported at cost, which includes all expenditures necessary to prepare the asset for its intended use. An intangible asset with a finite life is amortized over the shorter of its useful life or legal life, usually on a straight-line basis. The extent of the annual impairment tests depends on whether IFRS or ASPE is followed and if the intangible had a finite or indefinite life. Intangible assets with indefinite lives and goodwill are not amortized and are tested at least annually for impairment. Impairment losses on goodwill are never reversed under both IFRS and ASPE. Impairment losses on intangible assets are never reversed under ASPE.

7. Illustrate the reporting and analysis of long-lived assets. It is common for property, plant, and equipment, and natural resources to be combined in financial statements under the heading “property, plant, and equipment.” Intangible assets with finite and indefinite lives are sometimes combined under the heading “intangible assets” or are listed separately. Goodwill must be presented separately. Either on the balance sheet or in the notes, the cost of the major classes of long-lived assets is presented. Accumulated depreciation (if the asset is depreciable) and carrying amount must be disclosed either in the balance sheet or in the notes. The depreciation and amortization methods and rates, as well as the annual depreciation expense, must also be indicated. The company’s impairment policy and any impairment losses should be described and reported. Under IFRS, companies must include a reconciliation of the carrying amount at the beginning and end of the period for each class of long-lived assets and whether the cost or revaluation model is used.

The asset turnover ratio (net sales ÷ average total assets) is one measure that is used by companies to show how efficiently they are using their assets to generate sales revenue. A second ratio, return on assets (profit ÷ average total assets), calculates how profitable the company is in terms of using its assets to generate profit.

Exercises

Exercise 1

Rust Company was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order in the account, Land.

Debits

1. Cost of real estate purchased as a plant site (land and building). $ 320,000

2. Legal fees paid at the time of the purchase of the real estate. 6,500

3. Cost of demolishing building to make land suitable for construction of a new

building. 12,000

4. Architect's fees on building plans. 14,000

5. Excavation costs for new building. 24,000

6. Cost of filling and grading the land. 5,000

7. Insurance and taxes during construction of building. 6,000

8. Cost of repairs to building under construction caused by a small fire. 14,000

9. Interest paid during the year, of which $52,000 pertains to the construction

period. 64,000

10. Full payment to building contractor. 760,000

11. Cost of parking lots and driveways. 36,000

12. Property taxes paid for the current year on the land. 4,000

Total Debits $1,265,500

Credits

13. Insurance proceeds for fire damage. $10,000

14. Proceeds from residual of demolished building. 3,500

Total Credits $13,500

Instructions

Analyze the above transactions using the following columns below. Insert the number of each transaction in the Item space and insert the amounts in the appropriate columns.

Land

Item Land Improvements Building Other Account Title

Exercise 2

Identify the following expenditures as capital expenditures or operating expenditures.

1. Replacement of worn out gears on factory machinery

2. Construction of a new wing on an office building

3. Painting the exterior of a building

4. Oil change on a company truck

5. Replacing a network server’s hard drive, this increases data storage capacity by ten times. No extension of useful life expected

6. Overhaul of a truck motor. One year extension in useful life is expected

7. Purchased a wastebasket, with an expected useful life of five years, at a cost of $10

8. Painting and lettering of a used truck upon acquisition of the truck

Exercise 3

Below are selected entries for Econi Co.

1. The $60 cost of repairing a printer was charged to Computer Equipment.

2. The $5,000 cost of a major engine overhaul was debited to Repair Expense. The overhaul is expected to increase the operating efficiency of the truck.

3. The $6,000 closing costs associated with the acquisition of land were debited to Legal Expense.

4. A $600 charge for transportation costs on new equipment purchased was debited to Delivery Expense.

5. Freight cost incurred bringing a new piece of machinery to the plant site was charged to Machinery

Instructions

For each entry below make a correcting entry if necessary. If the entry given is correct, then state "No entry required."

Exercise 4

Below are transactions for Oriel Company.

1. Purchased land for $900,000.

2. Paid $20,000 to demolish building located on land.

3. Paid $3,000 for building permit.

4. Paid $2,000 for architect fees.

5. Paid $3,000 for excavation costs.

6. Paid interest of $22,000 during construction of new building.

7. Paid $960,000 to complete the building.

8. Paid $30,000 to pave the parking lot.

9. Paid $4,000 for underground sprinkler.

10. Ordered new equipment, paid $30,000.

11. Paid $1,500 to install and test new equipment.

12. Paid $250 to insure equipment for one year.

13. Paid $2,500 to paint office walls in the new building.

14. Paid $2,000 to repair equipment.

15. Purchased a truck for $25,000.

16. Paid $250 for truck license.

17. Paid $60 for oil change on new truck.

18. Paid $15,000 for fences around the new building.

19. Purchased 2 cash registers for $1,100 each.

20. Paid $2,200 for annual yard maintenance.

Instructions

a. Determine if each item should be capitalized (C) or expensed (E).

b. Determine the balance in the land account and the building account.

Exercise 5

Kabale Company purchased factory equipment with an invoice price of $92,000. Other costs incurred were freight costs, $2,500; installation of wiring and foundation, $2,200; material and labour costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; one-year fire insurance policy covering equipment, $1,400. The equipment is estimated to have an $8,000 residual value at the end of its 5-year useful service life.

Instructions

a. Calculate the acquisition cost of the equipment. Identify each element of cost clearly.

b. If the double diminishing-balance method of depreciation was used, the constant percentage applied to a diminishing carrying amount would be __________.

Exercise 6

Kelso Word Processing Service uses the straight-line method of depreciation. The company's fiscal year end is December 31. The following transactions and events occurred during the first three years.

2013 Jul 1 Purchased a new computer system from the Computer Centre for $37,000 cash and shipping costs of $250.

Nov 3 Incurred ordinary repairs on computer of $3,280.

Dec 31 Recorded 2013 depreciation on the basis of an estimated five-year life and residual value of $1,250.

2014 Dec 31 Recorded 2014 depreciation.

2015 Jan 1 Paid $9,800 for a major upgrade of the computer. This expenditure is expected to increase the operating efficiency and capacity of the computer.

Instructions

Prepare the necessary entries. (Show calculations.)

Exercise 7

On March 31, 2014 Delhon Industries purchased a new plant for $2,500,000 cash. Before completing the purchase, Delhon had obtained valuations to determine the relative value of the different components purchased.

The valuation indicated that the fair value of the land, if purchased separately, would be $375,000, the building’s value is $1,900,000, the manufacturing equipment $192,500, and the office and computer equipment $55,000. In addition to the land, building and equipment, the purchase price includes inventory with a net realizable value of $27,500.

The anticipated life of the building is 25 years, the manufacturing equipment 10 years, and the office and computer equipment 5 years, with no residual value for any of them. Delhon has a December 31 year end.

Instructions

a. Record the purchase on March 31, 2014.

b. Record the depreciation expense for 2014 using the straight-line method assuming the company chooses to prorate depreciation based on the number of months the asset has been in use.

Exercise 8

On May 5, 2014, Knottinghill Company purchased a property for $400,000 cash. The property included the following long-lived assets:

Appraised Value

Land $120,000

Building 200,000

Equipment 100,000

Paved area 20,000

Outdoor Lighting 10,000

$450,000

Instructions

a. Give the journal entry to allocate the purchase price between the above assets. Round all amounts to the nearest dollar, if necessary.

b. Prepare a compound journal entry to record depreciation of the long-lived assets on December 31, 2014, assuming the following additional details:

Useful Life in Years Residual Value

Building 30 $20,000

Equipment 5 10,000

Paved area 4 -0-

Outdoor Lighting 10 -0-

Prorate depreciation based on the number of months the asset has been in use.

Exercise 9

Lussier Company purchased a new computer for $175,000. It is estimated that the computer will have a $15,000 residual value at the end of its 5-year useful service life. The double diminishing-balance method of depreciation will be used.

Instructions

Prepare a depreciation schedule which shows the annual depreciation expense on the computer for its 5-year life.

Exercise 10

Equipment acquired on October 1, 2014, at a cost of $540,000 has an estimated useful life of 10 years. The residual value is estimated to be $55,000 at the end of the equipment's useful life. The company has a December 31 year end.

Instructions

Calculate the depreciation expense for December 31, 2014 and 2015 using:

a. the straight-line method.

b. the double diminishing-balance method.

Exercise 11

On October 1, 2014, Welch Auto Rentals purchases a new automobile for $30,000 to add to its fleet of rental cars. The automobiles are rented out on a short-term basis with rental fees calculated based on distance driven by the customer. Welch’s policy is to sell and replace a car after the earlier of 3 years, or 75,000 kilometers. The average selling price of the used cars is $8,000. This particular car was driven 8,000 km in 2014, 39,000 in 2015 and 21,000 in 2016.

Instructions

a. Calculate 2014 and 2015 depreciation expense under each of the following methods:

(i) Straight-line

(ii) Diminishing-balance using a 40% rate.

(iii) Units-of-production

b. Which method will best match the estimated pattern in which the asset’s economic benefits are expected to be consumed? Explain.

Exercise 12

Tolbert Company purchased equipment on January 1, 2014 for $96,000. It is estimated that the equipment will have a $5,000 residual value at the end of its 8-year useful life. It is also estimated that the equipment will produce 100,000 units over its 8-year life.

Instructions

Answer the following independent questions.

a. Calculate the amount of depreciation expense for the year ended December 31, 2014, using the straight-line method of depreciation.

b. If 16,000 units of product are produced in 2014 and 36,000 units are produced in 2015, what is the carrying amount of the equipment at December 31, 2015 using the units-of-production depreciation method?

c. If the company uses the double diminishing-balance method of depreciation, what will be the balance of the Accumulated Depreciation—Equipment account at December 31, 2016?

Exercise 13

The Hang-Out, a popular pizza restaurant, has a thriving delivery business. The Hang-Out has a fleet of three delivery automobiles. Prior to making the entry for this year's depreciation expense, the subsidiary ledger for the fleet is as follows:

Accumulated

Estimated Life Depreciation Kilometres Operated

Car Cost Residual Value in Kilometres Beg. of the Year During Year

1 $18,000 $3,000 50,000 $2,100 20,000

2 15,000 2,400 60,000 1,890 22,000

3 20,000 2,500 70,000 2,000 19,000

Instructions

a. Determine the depreciation rates per kilometre for each car.

b. Determine the depreciation expense for each car for the current year.

c. Make one compound journal entry to record the annual depreciation expense for the fleet.

Exercise 14

The Bartallas Clinic purchased a new surgical laser for $75,000. The estimated residual value is $7,500. The laser has a useful life of four years and the clinic expects to use it 10,000 hours. It was used 1,600 hours in year 1; 2,100 hours in year 2; 3,400 hours in year 3; 2,900 hours in year 4.

Instructions

a. Calculate the annual depreciation for each of the four years under each of the following methods:

i. straight-line

ii. units-of-production

b. If you were the administrator of the clinic, which method would you deem as most appropriate? Justify your answer.

c. Which method would result in the lowest reported profit in the first year? Which method would result in the lowest total reported profit over the four-year period?

d. Which method would result in the lowest cash flow in Year 1? Over the life of the asset?

Exercise 15

Prairie Airlines purchased a 747 aircraft on January 1, 2013, at a cost of $30,000,000. The estimated useful life of the aircraft is 20 years, with an estimated residual value of $4,000,000. On January 1, 2015 the airline revises the total estimated useful life to 15 years with a revised residual value of $3,000,000.

Instructions

a. Calculate the depreciation and carrying amount at December 31, 2014 using the straight-line method and the double diminishing-balance method.

b. Assuming the straight-line method is used, calculate the depreciation expense for the year ended December 31, 2015.

Exercise 16

Winningham Company sold the following two machines in 2014:

Machine A Machine B

Cost $92,000 $43,000

Purchase date July 1, 2010 Jan. 1, 2011

Useful life 8 years 8 years

Residual value $4,000 $3,000

Depreciation method Straight-line Double diminishing-balance

Date sold July 1, 2014 Aug. 1, 2014

Sales price $37,000 $12,000

Instructions

Journalize all entries required to update depreciation and record the sales of the two assets in 2014. The company has recorded depreciation on the machine to December 31, 2013.

Exercise 17

Allteak Paper Products sold two machines in 2014. The following information pertains to the two machines:

Purchase Useful Residual Depreciation Sales

Machine Cost Date Life Value Method Date Sold Price

#1 $86,000 7/1/10 5 yrs. $6,000 Straight-line 7/1/14 $20,000

#2 $50,000 7/1/13 5 yrs. $5,000 Double diminishing- 12/31/14 $32,000

balance

Instructions

a. Calculate the accumulated depreciation on each machine at the date of disposal.

b. Prepare the journal entries in 2014 to record 2014 depreciation and the sale of each machine.

Exercise 18

Mendelsohn Company purchased a machine on January 1, 2013, at a cost of $48,000. The machine is expected to have an estimated residual value of $3,000 at the end of its 5-year life. The company’s new accountant has used the double diminishing-balance method to depreciate the machine at December 31, 2013. However, the company has a policy of using the straight-line method to depreciate equipment. Profit for the year ended December 31, 2013 was $55,000 as the result of depreciating the machine incorrectly.

Instructions

Using the method of depreciation which the company normally follows, prepare the correcting entry and determine the corrected profit. (Show calculations.)

Exercise 19

Equipment was acquired on January 1, 2012, at a cost of $90,000. The equipment was originally estimated to have a residual value of $5,000 and an estimated life of 10 years. Depreciation has been recorded through December 31, 2013, using the straight-line method. On January 1, 2014, the estimated residual value was revised to $6,000 and the useful life was revised to a total of 8 years.

Instructions

Determine the depreciation expense for 2014.

Exercise 20

On January 1, 2013, Katsumi Company purchased and installed a telephone system at a cost of $20,000. The equipment was expected to last five years with a residual value of $3,000. On January 1, 2014 more telephone equipment was purchased to tie-in with the current system for $8,000. The new equipment is expected to have a useful life of four years. Through an error, the new equipment was debited to Telephone Expense. Katsumi Company uses the straight-line method of depreciation.

Instructions

Prepare a schedule showing the effects of the error on Telephone Expense, Depreciation Expense, and profit for each year and in total beginning in 2014 through the useful life of the new equipment.

Telephone Expense Depreciation Expense Profit

Overstated Overstated Overstated

Year (Understated) (Understated) (Understated)

———————————————————————————————————————————

2014

2015

2016

2017

Exercise 21

Harrison Rentals purchased an apartment building in 2006. At the time, the building was expected to have a useful life of 25 years with a residual value of $100,000, during which time it was projected to generate annual rentals of $30,000 (adjusted for inflation). The building’s original cost was $500,000.

At January 1, 2014 the accumulated depreciation balance on this building was $128,000, and 2014 depreciation has been calculated as $16,000. Harrison has a December 31 year end.

During January 2014, Harrison had the following events and transactions related to the building. All transactions are for cash.

1. Painted all the walls in the common areas at a cost of $8,000.

2. Replaced the electrical wiring in three suites due to safety concerns at a cost of $4,500.

3. Replaced all of the linoleum flooring in the suites with hardwood, installed in-suite laundry facilities in each unit, and made other improvements at total cost of $120,000. As a result, the annual rental revenue has been doubled.

4. Completed structural repairs to the building at a cost of $100,000. As a result of this work the building life is expected to be 10 years longer than the original estimate. The residual value estimate has been revised to $134,000.

Instructions

a. Calculate the carrying amount of the building on December 31, 2014. Provide explanations for any increases to building cost.

b. Record the 2015 depreciation expense using the straight line basis, assuming that the increased rental rates go into effect January 1, 2015.

Exercise 22

At January 1, 2014, Benner Auto Repairs owned the following assets:

Prior to recording depreciation expense for 2014, Benner undertook a review of the assets’ remaining life and value and determined that the following changes are warranted based on currently available information:

Building: No changes

Automotive: No changes

Computers: Obsolete

Furniture: Remaining life will be 10 years with $5,000 residual value.

Instructions

Calculate 2014 depreciation on each of these assets, taking the new information into account.

Exercise 23

1. Lui Company purchased equipment in 2007 for $80,000 and estimated an $8,000 residual value at the end of the equipment's 10-year useful life. At December 31, 2013, there was $50,400 in the Accumulated Depreciation account for this equipment using the straight-line method of depreciation. On March 31, 2014, the equipment was sold for $21,000.

Prepare the appropriate journal entries to remove the equipment from the books of Lui Company on March 31, 2014.

2. Gagne Company sold a delivery truck for $11,000. The delivery truck originally cost $25,000 in 2010 and $6,000 was spent on a major overhaul in 2013 (charged to Delivery Truck account). Accumulated Depreciation on the delivery truck to the date of disposal was $20,000.

Prepare the appropriate journal entry to record the disposition of the delivery truck.

3. Crenshaw Company sold office equipment that had a carrying amount of $4,500 for $6,000. The office equipment originally cost $15,000 and it is estimated that it would cost $19,000 to replace the office equipment.

Prepare the appropriate journal entry to record the disposition of the office equipment.

Exercise 24

Zedel Delivery Services has a December 31, 2014 year end. On January 1, 2014, Zedel has a delivery van with a cost of $35,000 and accumulated depreciation of $12,000. The van was expected to have a residual value of $5,000 and a useful life of 5 years. Zedel uses straight-line depreciation. Zedel plans to replace its delivery van on April 1, 2014, and is considering two alternatives.

1. Zedel has been offered $14,000 for the old van. If Zedel accepts this offer, Zedel would then purchase a replacement for $50,000 cash.

2. Trade the old van for a new one. The dealer will allow a $22,000 trade-in allowance on the old van, and Zedel will have to pay additional cash of $28,000.

Instructions

a. Record the updated depreciation on the old van to April 1, 2014.

b. Record the disposal of the van under each of the two alternatives.

c. Which alternative do you recommend and why?

Exercise 25

Presented below are selected transactions for Mohamad Company for 2014.

Jan 1 Received $3,000 scrap value on retirement of machinery that was purchased on January 1, 2003. The machine cost $80,000 on that date, and had an estimated useful life of 10 years with no residual value.

Apl 30 Sold a printing machine for $50,000 that was purchased on January 1, 2011. The printer cost $90,000, and had an estimated useful life of 5 years with no residual value.

Dec 31 Discarded a business automobile that was purchased on September 1, 2009. The car cost $20,000 and was depreciated on an 8-year useful life with a residual value of $800.

Instructions

Journalize all entries required as a result of the above transactions. Mohamad Company uses the straight-line method of depreciation and has recorded depreciation to December 31, 2013.

Exercise 26

On January 1, 2014, Noone Industries invests $2,000,000 in land that includes a stand of timber and the rights to cut the timber. The property is expected to yield 50,000 cubic metres of timber. After the amount of lumber permitted by law has been cut, Noone expects to be able to sell the land for $400,000 less $150,000 that must be spent on reforestation. Noone invests a further $300,000 in equipment which is expected to last for the same number of units as the property yields, with no residual value.

Instructions

a. Using the units-of-production method, calculate depreciation for 2014 on both the timber investment and for the equipment, assuming that 12,000 cubic metres are sawn in the year.

b. Explain why the units-of-production method is considered the most appropriate method for depreciation of natural resources.

Exercise 27

Johansan Mining Company purchased a mine for $80 million which is estimated to have 250,000 tonnes of ore and a residual value of $10 million. In the first year 50,000 tonnes of ore are extracted and sold. In the second year 150,000 tonnes of ore are extracted but only 125,000 tonnes are sold.

Instructions

a. Prepare the journal entry to record depreciation expense for the first year and the second year.

b. What amount and in what account are the tonnes of ore not sold reported?

Exercise 28

McGuinness Mining Company purchased land containing an estimated 15 million tonnes of ore at a cost of $5,400,000. The land without the ore is estimated to be worth $600,000. The company expects to operate the mine for 10 years. Buildings costing $800,000 are erected on the site and are expected to last for 25 years. Equipment costing $1,000,000 with an estimated life of 12 years is installed. The buildings and the equipment possess no residual value after the mine is closed. During the first year of operations, the mining company mined and sold 2 million tonnes of ore.

Instructions

a. Calculate the depreciation cost per tonne of the mine.

b. Calculate the depreciation expense for the first year on the mine.

c. Calculate the appropriate first year's depreciation expense for the buildings.

d. Calculate the appropriate first year's depreciation expense for the equipment.

Exercise 29

Below are several transactions for McLaughlin Inc.

1. Timber rights were purchased on a tract of land for $600,000. The timber is estimated at 2,800 cubic metres. During the current year, 180 cubic metres of timber were cut and sold.

2. A company purchased another company on July 1 and recorded goodwill of $400,000.

3. Costs of $18,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $9,000 was spent in legal costs to successfully defend the patent against competitors. The patent has a legal life of 20 years and an estimated 9-year useful life.

4. The company acquired a trademark for the cost of $25,000. The trademark has 20 years until it expires and then it can be renewed for another 20 years for the cost of $25.

Instructions

For each of the unrelated transactions, determine the amount of the depreciation expense for the current year and present the adjusting entries required to record each expense at year end.

Exercise 30

During the current year, Lui Company incurred several expenditures.

1. Spent $50,000 in legal costs in a patent defence suit. The patent was unsuccessfully defended.

2. Purchased a trademark from another company. The trademark can be renewed indefinitely. Lui Company expected the trademark to contribute to revenue indefinitely.

3. Lui Company acquires a patent for $2,000,000. The company selling the patent has spent $1,000,000 on the research and development of it. The patent has a remaining legal life of 15 years and an estimated 5-year useful life.

4. Lui Company is spending considerable time and money in developing a different patent for another product. So far $3,000,000 has been spent this year on research. Lui Company is very confident it will obtain this patent in the next few years.

Instructions

Briefly explain whether the expenditures listed above should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate whether the asset should be amortized or not, and if so, the number of years over which it should be amortized. Explain your answer.

Exercise 31

1. A company purchased a patent on January 1, 2014, for $2,500,000. The patent's legal life is 20 years but the company estimates that the patent's useful life will only be 5 years from the date of acquisition. On June 30, 2014, the company paid legal costs of $162,000 in successfully defending the patent in an infringement suit. Prepare the journal entry to amortize the patent at year end on December 31, 2014.

2. Walker Company purchased a franchise from the Tasty Food Company for $400,000 on January 1, 2014. The franchise is for an indefinite time period and gives Walker Company the exclusive rights to sell Tasty Wings in a particular territory. Prepare the journal entry to record the acquisition of the franchise and any necessary adjusting entry at year end on December 31, 2014.

3. Chernomyrdin Company incurred research costs of $200,000 and successful development costs of $500,000 in 2014 in developing a new product that the company was able to patent. The company expects the product to be useful for 10 years. Prepare the necessary journal entries during 2014 to record these events and any adjustments at year end on December 31, 2014.

Exercise 32

During 2014, Blackmud Research had the following transactions for cash. This is Blackmud’s first year of operations.

Mar 1 Registered a new patent, with a legal life of 20 years, at a cost of $30,000.

Jun 30 Incurred research costs of $68,000.

Aug 1 Incurred development costs of $50,000 related to a product that meets the standards required for capitalization of costs. The costs are expected to provide commercial benefits for 5 years.

Aug 31 Purchased a trademark with an indefinite life for $102,000.

Nov 1 Purchased software copyright for $300,000. The copyright has a remaining legal life of 30 years, and the related software is expected to produce revenue for 6 years.

Instructions

a. Record the transactions.

b. Prepare the section of the December 31, 2014 balance sheet of Blackmud Research that reports intangible assets. Show calculations where applicable.

Exercise 33

The following information is available from the audited financial statements of Molson Coors Brewing Company and Big Rock Breweries Income Trust for their 2014 year ends.

Instructions

a. Calculate both companies’ asset turnover and return on assets.

b. Compare the companies’ effectiveness in using their assets to produce revenue and profit.

Exercise 34

Presented below is information related to long-lived assets at year end on December 31, 2014, for Jankowski Company:

Buildings $1,080,000

Goodwill 420,000

Patents 600,000

Coal Mine 390,000

Accumulated depreciation – buildings 670,000

Accumulated depreciation – coal mine 275,000

Accumulated amortization – patents 120,000

Instructions

Prepare a partial balance sheet for Jankowski Company that shows how the above listed items would be presented.

Exercise 35

Indicate in the blank spaces below, the appropriate group heading for financial reporting purposes. Use the following code to identify your answer:

PPE Property, Plant, and Equipment

NR Natural Resources

I Intangible Assets

O Other

N/A Not on the balance sheet

1. Goodwill 7. Timberlands

2. Land improvements 8. Franchises

3. Development costs for a patented product 9. Licences

4. Accumulated depreciation—buildings 10. Equipment

5. Trademarks 11. Depreciation expense

6. Research costs 12. Land

Exercise 36

Net sales were $1,500,000 and profit was $250,000 in the second year of operation for Tirekicker’s Used Car Company. Total assets in the first year were $800,000 and in the second year $1,200,000.

Instructions

a. Determine the asset turnover and the return on assets for Tirekicker’s Used Car Company.

b. What do these ratios show?