CHAPTER 9

REPORTING AND ANALYZING LONG-LIVED ASSETS

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting P = Professional and Ethical Behaviour C = Communication

AACSB: AN = Analytic E = Ethics

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting P = Professional and Ethical Behaviour C = Communication

AACSB: AN = Analytic E = Ethics

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting P = Professional and Ethical Behaviour C = Communication

AACSB: AN = Analytic E = Ethics

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True/False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA

CHAPTER LEARNING OBJECTIVES

1. Determine the cost of property, plant, and equipment. The cost of land, land improvements, buildings, equipment, and natural resources includes all expenditures that are necessary to acquire these assets and make them ready for their intended use. After acquisition, costs incurred that benefit future periods (capital expenditures) are also included in the cost of the asset, whereas costs that benefit only the current period (operating expenditures) are expensed. When applicable, cost also includes asset retirement costs. If a company leases an asset for more than one year, under IFRS, a company will capitalize a right-of-use asset and record a lease liability. The right-of-use asset will be depreciated, and interest expense will be recorded in relation to the lease liability. Under ASPE, such an asset may also be capitalized based on criteria covered in more advanced courses. If a lease is not capitalized under ASPE, it is known as an operating lease.

2. Explain and calculate depreciation.. Depreciation is the process of allocating the cost of a long-lived asset over the asset’s useful (service) life in a systematic way. There are three commonly used depreciation methods: straight-line, diminishing-balance, and units-of-production.

Other accounting issues related to depreciation include (1) identifying significant components of a long-lived asset for which different depreciation methods or rates may be appropriate; (2) capital cost allowance (CCA) used for income tax purposes; (3) testing long-lived assets for impairment; (4) accounting for property, plant, and equipment using the cost or revaluation model; and (5) circumstances under which a revision of depreciation is required. Similar to recording depreciation, depletion is recorded on natural resource assets, usually using the units-of-production method. Like property, plant and equipment, impairments can also arise on natural resources.

3. Account for derecognition of property, plant, and equipment. The procedure for accounting for the disposal of property, plant, and equipment through sale or retirement is:

Step 1: Update unrecorded depreciation for any partial period.

Step 2: Calculate the carrying amount.

Step 3: Calculate any gain (proceeds less carrying amount). If the carrying amount is greater than proceeds then there is a loss on disposal.

Step 4: Derecognize (remove) the asset and accumulated depreciation accounts related to the sold or retired asset. Record the proceeds received and the gain or loss (if any).

4. Identify the basic accounting issues for intangible assets and goodwill. Intangible assets (which we have assumed are accounted for under the cost model) are initially reported at cost, which includes all expenditures that are 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. Like property, plant, and equipment, intangible assets with finite lives are tested for impairment only if indicators of impairment are present. Intangible assets with indefinite lives are not amortized and must be tested for impairment annually under IFRS but only when indicators (events and circumstances) of impairment are present under ASPE. Impairment losses can be reversed under IFRS but not under ASPE.

Goodwill, which is the difference between the price paid for a business and the fair value of the identifiable assets less liabilities of the business, is not considered an intangible asset because it is not separately “identifiable.” Only purchased, not internally generated goodwill can be recorded. Goodwill has an indefinite life and is not amortized. Impairment tests for goodwill are similar to those for intangibles with indefinite lives. Goodwill impairment losses are never reversed.

5. Illustrate how non-current assets are reported in the financial statements. In the statement of financial position, land, land improvements, buildings, and equipment are usually combined and shown 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 statement of financial position or in the notes to the financial statements, the cost of the major classes of long-lived assets is presented. The depreciation and amortization methods and rates must also be described in the notes to the statements. The accumulated depreciation and amortization of depreciable/amortizable assets and carrying amount by major classes is also disclosed, including a reconciliation of the carrying amount at the beginning and end of each period for companies reporting under IFRS. The company’s impairment policy and any impairment losses should be described and reported. The company must disclose whether it is using the cost or revaluation model.

Depreciation and amortization expense, any gain or loss on disposal, and any impairment losses are reported as operating expenses in the statement of income. In the statement of cash flows, any cash flows from the purchase or sale of long-lived assets are reported as investing activities.

6. Describe the methods for evaluating the use of assets. The use of assets may be analyzed using the return on assets and asset turnover ratios. Return on assets (net income ÷ average total assets) indicates how well assets are used to generate net income. Return on assets can be determined by multiplying two ratios: asset turnover (net sales ÷ average total assets), which indicates how efficiently assets are used to generate revenue, and profit margin (net income ÷ net sales), which measures the net income made on each sale.

TRUE-FALSE STATEMENTS

1. All property, plant, and equipment must be depreciated for accounting purposes.

2. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land Improvements account.

3. When purchasing a delivery truck, the cost of painting the company logo on the side should be debited to the Vehicles account.

4. Land improvements are generally debited to the Land account.

5. If land is purchased with a building on it that is to be demolished, proceeds from any salvaged materials are reported in the Other Income and Expenses section of the statement of income.

6. Under an operating lease, both the leased asset and the related lease obligation are shown on the statement of financial position.

7. Under a capital lease, both the leased asset and the related lease obligation are shown on the statement of financial position.

8. Leasehold improvements are depreciated over the remaining life of the lease or the useful life of the improvements, whichever is longer.

9. Recording depreciation on equipment affects both the statement of financial position and the statement of income.

10. The depreciable amount of property, plant, and equipment is its original cost minus the depreciation for the current year.

11. The Accumulated Depreciation account represents a cash fund available to replace property, plant, and equipment.

12. In calculating depreciation, cost, useful life, and residual value are all based on estimates.

13. Carrying amount is used in determining the amount that the diminishing-balance rate is applied to.

14. Using the units-of-production method of depreciation for equipment will generally result in more depreciation expense being recorded over the life of the asset than if the straight-line method had been used.

15. Using the diminishing-balance method results in higher expense in the early years, resulting in lower net income.

16. Canada Revenue Agency requires a company to use the same depreciation method on its income tax return that is used in preparing financial statements.

17. Under IFRS, companies must account for their property, plant, and equipment using the revaluation model, where depreciable assets are re-valued upward to their fair values.

18. The carrying amount of an asset is the original cost less anticipated residual value.

19. When an impairment loss is recorded for a depreciable asset, the offsetting credit is recorded in accumulated depreciation.

20. An item of property, plant, and equipment is considered to be impaired if its carrying amount exceeds its recoverable amount.

21. When a company has a piece of property, plant, or equipment that has different components that depreciate at different rates, the total cost should be allocated to each component and each component should be depreciated separately.

22. A change in the estimated residual value of property, plant, and equipment requires a restatement of prior years' depreciation.

23. When a change in estimate is made, there is no correction of previously recorded depreciation expense.

24. Normally, businesses only dispose of property, plant, and equipment by either sale or exchange.

25. If the proceeds from the sale of equipment exceed its carrying amount, a gain on disposal is reported.

26. When an asset is retired, a gain or loss must be recorded.

27. A tangible asset must be fully depreciated before it can be removed from the books.

28. A loss on disposal results if the cash proceeds received from the asset sale are less than the asset's carrying amount.

29. Intangible assets involve rights, privileges, and/or competitive advantages that result from ownership of identifiable assets that do not possess physical substance.

30. The cost of a patent should be amortized over its legal life or useful life; whichever, is shorter.

31. If an acquired franchise or licence is for an indefinite time period, then the cost of the asset should not be amortized.

32. An intangible asset must be identifiable.

33. If a trademark is developed internally, it cannot be recognized as an intangible asset on the statement of financial position.

34. When an entire business is purchased, goodwill is the excess of the purchase price over the carrying amount of the net identifiable assets acquired.

35. All research costs should be capitalized when incurred.

36. Impairment losses on goodwill are never reversed.

37. If a building is sold at a gain, the gain on disposal should be reported in the non-operating section of the statement of income.

38. The cash flows from the purchase and sale of long-lived assets are reported in the operating activities section of the cash flow statement.

39. The asset turnover ratio is calculated as net sales divided by ending total assets.

40. Profit margin can be determined by multiplying the asset turnover by the return on assets.

41. The asset turnover indicates how efficiently a company uses its assets.

Answers to True-False Statements

MULTIPLE CHOICE QUESTIONS

42. Asset retirement costs are

(a) added to the cost of a depreciable asset.

(b) treated as a separate asset.

(c) deducted from the cost of a depreciation asset.

(d) have no effect on a depreciable asset.

43. A company purchased land for $120,000 cash; $7,000 was spent to demolish an old building on the land before construction of a new building could start; and $1,500 was received for material salvaged from the old building. The cost of the land would be recorded at

(a) $120,000.

(b) $125,500.

(c) $127,000.

(d) $128,500.

Ex. 156

Quadruple Corporation purchased land adjacent to its plant to improve access for trucks making deliveries. Expenditures/receipts incurred in developing the land were as follows:

Purchase price $90,000

Title search and other fees 8,000

Demolition of an old building on the property 12,000

Grading 2,200

Proceeds received from selling scrap 3,000

Laying and paving driveway 44,000

Lighting 13,600

Signs 1,200

Instructions

Calculate the amount to be debited to the Land account.

Ex. 157

Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E) or none of these (X).

_____ 1. Parking lots

_____ 2. Electricity used by a machine

_____ 3. Sewage system cost

_____ 4. Interest on building construction loan

_____ 5. Cost of trial runs for machinery

_____ 6. Drainage costs

_____ 7. Cost to install a machine

_____ 8. Fencing

_____ 9. Unpaid (past) property taxes paid on purchase

_____ 10. Cost of tearing down a building when property is purchased with an old building on it

Ex. 158

Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI), buildings (B), equipment (E) or none of these (X).

_____ 1. Computer installation cost

_____ 2. Driveway cost

_____ 3. Architect’s fee

_____ 4. Surveying costs

_____ 5. Grading costs

_____ 6. Cost of lighting for parking lot

_____ 7. Insurance and freight on computer purchased

_____ 8. Material and labour costs incurred to construct factory

_____ 9. Cost of tearing down a warehouse on land just purchased

_____ 10. Utility cost during first year

Ex. 159

For each entry below, prepare any correcting entry necessary. If the entry is correct, then state "No entry required."

(a) The $100 cost of repairing a printer was charged to Equipment. The repair is not expected to increase the operating efficiency of the printer.

(b) The $6,500 cost of a major engine overhaul was debited to Repair Expense. The overhaul is expected to increase the operating efficiency of the vehicle.

(c) The $4,000 closing costs associated with the acquisition of land were debited to Legal Expense.

(d) A $150 charge for transportation expenses on new equipment purchased was debited to Transportation Expense.

Ex. 160

The McReynolds Corporation was organized on January 1. During the first year of operations, the following expenditures and receipts were recorded in random order in the general ledger account, Land.

Expenditures

1. Cost of real estate purchased as a plant site (land and building) $ 130,000

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

building 9,000

3. Architect's fees for new building plans 12,000

4. Excavation costs for new building 27,000

5. Cost of filling and grading the land 2,500

6. Insurance and taxes during construction of building 3,000

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

construction period 68,000

8. Full payment to building contractor 750,000

9. Cost of parking lots and driveways 32,000

10. Property taxes paid for the current year on the land 5,000

Total $1,038,500

Receipts

11. Proceeds from salvage of demolished building 3,500

Total $3,500

Instructions

Analyze the foregoing transactions using the following tabular arrangement. 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

Ex. 161

Absentia Inc. purchased a machine on January 1, 2022. Besides the purchase cost, the following additional costs were incurred:

(a) increase in annual insurance premium to include new machine

(b) transportation and insurance costs while the machinery was in transit from the seller

(c) personnel training costs for initial operation of the machinery

(d) installation costs necessary to secure the machinery to the building flooring

(e) lubrication of the machinery gearing before the machinery was placed into service

(f) lubrication of the machinery gearing after the machinery was placed into service

(g) annual city business licence

Instructions

Indicate whether the items (a) through (g) are capital or operating expenditures using the codes:

C = Capital, O = Operating.

Ex. 163

Montgomery Enterprises purchased a delivery truck January 1, 2018 for $50,000. The truck was expected to have a useful life of 10 years and a residual value of $10,000. On January 1, 2022 the accumulated depreciation balance on the truck was $16,000 and the 2022 depreciation is calculated as $4,000.

During 2022 Montgomery had the following transactions related to the truck:

1. Oil and filter change $800
2. Engine overhaul $7,500 which will extend the useful life of the truck by 3 years. The residual value has been revised to $12,500.
3. Insurance $2,500
4. Licence plate renewal $175

Instructions

Calculate the carrying value of the truck on December 31, 2022.

Calculate the depreciation expense for 2023 using the straight-line method of depreciation.

Ex. 164

Watmore Ltd. purchased, for cash, factory equipment with an invoice price of $80,000. Other costs incurred were freight costs, $1,600; installation, wiring and foundation, $13,500; material and labour costs in testing equipment, $500; oil lubricants and supplies to be used while operating the equipment, $750; fire insurance policy covering equipment, $1,400. The equipment is estimated to have a $10,000 residual value at the end of its 8-year useful service life.

Instructions

(a) Calculate the cost of the equipment.

(b) Record the purchase of the equipment.

(c) Calculate the annual depreciation expense, assuming the straight-line method of depreciation is used.

Ex. 166

A machine was acquired on January 1, 2022, at a cost of $80,000. The machine was originally estimated to have a residual value of $5,000 and an estimated life of 5 years. The machine is expected to produce a total of 100,000 components during its life, as follows: 15,000 in 2022, 20,000 in 2023, 20,000 in 2024, 30,000 in 2025, and 15,000 in 2026.

Instructions

(a) Calculate the amount of depreciation to be charged each year, using each of the following methods:

1. Straight-line method

2. Units-of-production

3. Double diminishing-balance

(b) Which method results in the highest depreciation expense during the first two years? Over all five years?

Ex. 167

Quickdrop Service Ltd. uses straight-line depreciation. The company's fiscal year end is December 31. The following transactions and events occurred during their first three years of operations:

2021 Jul 1 Purchased equipment for $64,000 cash, with shipping costs of $4,000.

Nov 3 Incurred ordinary repairs on the computer of $720.

Dec 31 Recorded 2021 depreciation on the basis of a four-year life and estimated residual value of $400.

2022 Dec 31 Recorded 2022 depreciation.

2023 Jan 1 Paid $3,200 for a major upgrade of the equipment. This expenditure is expected to increase the operating efficiency and capacity of the equipment.

Instructions

Prepare journal entries to record the above events. (Show calculations.)

Ex. 168

Ratched Limited purchased a new computer system for $80,000. It is estimated that the computer will have an $8,000 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 that shows the annual depreciation expense on the computer for its 5-year life.

Ex. 169

Chevrette Corporation purchased equipment on January 1, 2021 for $87,000. It is estimated that the equipment will have a $7,000 residual value at the end of its 8-year useful life. It is also estimated that the equipment will produce 160,000 units over its 8-year life.

Instructions

(a) Using straight-line depreciation, calculate the depreciation expense for the year ended December 31, 2021.

(b) Now assume Chevrette uses the units-of-production depreciation. If 16,000 units of product are produced in 2021 and 24,000 units are produced in 2022, what is the carrying amount of the equipment at December 31, 2022?

(c) Now assume Chevrette uses double diminishing-balance depreciation. What is the balance of the Accumulated Depreciation—Equipment account at December 31, 2023? Round amounts to the nearest dollar.

Ex. 170

Equipment acquired on October 1, 2022, at a cost of $750,000, has an estimated useful life of 10 years. The residual value is estimated to be $80,000.

Instructions

Calculate the depreciation expense for the first two years using the

(a) straight-line method.

(b) double diminishing-balance method.

Ex. 171

Craving for Crepes, a popular Crepe and Waffle restaurant, has a thriving delivery business. The business has a fleet of three delivery vans. Before the adjusting entry for this year's depreciation expense, the details of each van are as follows:

Accumulated Kilometres

Estimated Depreciation Operated

Van Cost Residual value Life in Kilometres Beg. of the Year During Year

1 $32,000 $5,000 150,000 $7,800 22,000

2 28,000 2,500 160,000 6,000 40,000

3 17,000 1,900 170,000 4,550 36,000

Instructions

(a) Calculate the depreciation rates per kilometre for each van.

(b) Calculate the depreciation expense for each van for the current year.

(c) Prepare one compound journal entry to record the annual depreciation expense for the fleet.

Ex. 172

Caring Clinic purchased a new surgical laser for $88,000. The estimated residual value is $4,000. The laser has a useful life of six years and the clinic expects to use it 10,000 hours. It was used 1,700 hours in year 1; 2,300 hours in year 2; 2,500 hours in year 3; 1,500 hours in year 4; 1,600 hours in year 5; 400 hours in year 6.

Instructions

(a) Calculate the annual depreciation for each of the six years under each of the following methods:

1. straight-line.

2. units-of-production.

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

(c) Which method would result in the lower reported net income for the first two years? Which method would result in the lower total reported net income over the six-year period?

Ex. 173

On Jan 1, 2020, Holloway Inc. purchased equipment for $840,000, and, at Dec 31, 2020, recorded straight-line depreciation based on a twenty-year life with $20,000 residual value. Holloway tests its property, plant and equipment annually for impairment and at Dec 31, 2021, determined that the recoverable amount of this equipment was $722,000.

Instructions

1. Determine the carrying amount of the equipment at December 31, 2021 assuming that depreciation has already been recorded for the year.
2. Determine the impairment loss (if any) and record the appropriate journal (if any) entry at December 31, 2021.
3. Calculate the 2022 annual depreciation expense subsequent to the impairment loss and record the appropriate journal entry.

Ex. 174

Northwest Airlines purchased an aircraft on January 1, 2022, at a cost of $35,000,000. The estimated useful life of the aircraft is 25 years, with an estimated residual value of $5,000,000.

Instructions

Calculate the accumulated depreciation and carrying amount at December 31, 2024 using the straight-line method and the double diminishing-balance method.

Ex. 175

Zen Fitness Inc. purchased a machine on April 1, 2022 for $120,000. The machine is expected to have an estimated residual value of $5,000 at the end of its 5-year life. Although Zen has a policy of using straight-line depreciation for machinery, the company accountant neglected to follow policy and depreciated it in 2022 using the double diminishing-balance method. Income before income tax for the year ended December 31, 2022 was $73,000 as the result of depreciating the machine incorrectly.

Instructions

Using the method of depreciation that company policy requires, prepare the correcting entry and determine the correct net income. Ignore income tax. (Show calculations.)

Ex. 176

On January 1, 2021, Wanders Corporation purchased and installed a telephone system at a cost of $55,000. The equipment was expected to last five years with no residual value. On January 1, 2022 more telephone equipment was purchased for $7,500 to augment the existing system. The new equipment is expected to have a useful life of six years. Through an error, the new equipment was debited to Telephone Expense. Wanders Corporation uses straight-line depreciation and has a December 31, year end.

Instructions

Prepare a schedule showing the effects of the error in dollars on Telephone Expense, Depreciation Expense, and Net Income for each year and in total beginning in 2022 through the useful life of the new equipment. Use the following format:

Telephone Expense Depreciation Expense Net income

Overstated Overstated Overstated

Year (Understated) (Understated) (Understated)

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

2022

2023

2024

2025

2026

2027

Ex. 177

On July 1, 2022, Ashtanga Inc. purchased a used piece of equipment for $65,000. The company spent another $28,000 overhauling it and getting it ready for use, and $2,000 testing it. Ashtanga estimated the useful life to be 6 years, and the residual value $5,000. The company uses straight-line depreciation for all its equipment and has a December 31 year end.

Instructions

(a) Prepare the journal entries to record the purchase (assume payments were made in cash) and depreciation expense for 2022 and 2023.

(b) How much will the accumulated depreciation be on June 30, 2028?

Ex. 178

Arnprior Packing (ANP) tests its property, plant and equipment annually for impairment. On Jan 1, 2022, ANP purchased equipment for $650,000, and at Dec 31, 2022, recorded straight-line depreciation based on a ten-year life with no residual value. However, at Dec 31, 2022, ANP also determined that the recoverable amount of this equipment was $540,000.

Instructions

(a) What is the formula to determine an impairment loss?

(b) Calculate the equipment’s carrying amount at Dec 31, 2022

(c) Calculate the amount of the impairment loss Arnprior Packing will be required to record at Dec 31, 2022.

Ex. 179

At the beginning of 2023, Annakin Corp. reviewed the expected useful life and residual value of their main packaging machine. This machine had cost $850,000 on Jan 1, 2013, had been expected to last for 25 years, with $75,000 residual value (straight-line depreciation). Now, ten years later, Annakin is revising the expected life to a total of 30 years (that is, 20 years remaining) with a $50,000 residual value.

Instructions

(a) Calculate the machine’s carrying amount at Dec 31, 2022.

(b) As a result of this revision, will the depreciation expense for 2023 and subsequent years be higher or lower? Explain. (You do not have do show any detailed calculations.)

(c) With this revision, will Annakin have to revise previous years’ depreciation expense? Why or why not?

Ex. 180

Solve for the missing items, assuming straight-line depreciation is used:

Ex. 181

Hertford Manufacturing Inc. sold two machines in 2022. The following information pertains to the two machines:

Purchase Useful Residual Depreciation Sale

Machine Cost Date Life Value Method Date Sold Price

#1 $76,000 Jul 1/19 5 yrs. $6,000 Straight-line Jun 30/22 $28,000

#2 $60,000 Jul 1/21 8 yrs. $3,000 Double diminishing- Dec 31/22 $45,000

balance

Instructions

(a) Calculate the depreciation on each machine to the date of disposal.

(b) Prepare the journal entries to record 2022 depreciation and the sale of each machine.

Ex. 182

Paulson Corporation purchased equipment on January 1, 2020 for $168,000. It is estimated that the equipment will have a $14,000 residual value at the end of its 8-year useful life. It is also estimated that the equipment will produce 110,000 units over its 8-year life. On December 31, 2022, Paulson sells the equipment for $85,000. Paulson produced 20,000 units in 2020, 24,000 units in 2021 and 22,000 units in 2022.

Instructions

1. Determine the carrying amount of the equipment at December 31, 2022 using the units-of-production method of depreciation.
2. Prepare the appropriate journal entry for the sale of the equipment.

Ex. 183

Coquitlam Corporation, a publicly-traded company, purchased a piece of equipment on January 1, 2021, for $275,000. It has an estimated useful life of eight years and a $25,000 residual value. Coquitlam uses straight-line depreciation and has a December 31 year end. At December 31, 2022, the equipment had a recoverable value of $200,000.

Instructions

(a) Calculate the equipment’s carrying amount at December 31, 2022.

(b) Calculate the amount of the impairment loss at Dec 31, 2022.

(c) Where should the impairment loss be reported in the financial statements?

Ex. 184

For each item listed below, enter a code letter in the blank space to indicate the usual allocation terminology for the item. Use the following codes for your answer:

A—Amortized D—Depreciated N—Neither

1. Copyrights 6. Licences

2. Land 7. Equipment

3. Buildings 8. Franchises

4. Patents 9. Goodwill

5. Trademarks 10. Land Improvements

Ex. 185

(a) Alpha Corporation purchased equipment in 2015 for $120,000 and estimated a $12,000 residual value at the end of the equipment's 10-year useful life. At December 31, 2021, there was $75,600 in the Accumulated Depreciation account for this equipment using straight-line depreciation. On March 31, 2022, the equipment was sold for $28,000.

Prepare the appropriate journal entries to remove the equipment from the books of Alpha Corporation on March 31, 2022.

(b) On July 31, 2022, Beta Corporation sold a delivery truck for $10,000. The truck originally cost $38,000 on January 1, 2014. It was estimated that the truck would have a useful life of 12 years with a residual value of $2,000. The straight-line method was used.

Prepare the appropriate journal entry to record the sale of the delivery truck. Assume depreciation is up-to-date.

(c) Gamma Corporation sold office equipment that had a carrying amount of $3,500 for $5,200. The office equipment originally cost $12,000. It is now estimated that it would cost $16,000 to replace this equipment.

Instructions

Prepare the appropriate journal entry to record the sale of the office equipment. Assume depreciation is up-to-date.

Ex. 186

Prepare the journal entries to record the following transactions for Bermuda Inc., which has a calendar year end and uses straight-line depreciation.

(a) On June 30, 2022, the company sold office equipment for $22,000. The office equipment originally cost $34,000 and had accumulated depreciation to the date of disposal of $15,000.

(b) On September 30, 2022, the company sold delivery equipment for $15,500. The equipment was purchased on January 1, 2020, for $30,000 and was estimated to have a $2,000 residual value at the end of its 8-year life. Depreciation on the delivery equipment has been recorded through December 31, 2021.

Ex. 187

(a) A machine that cost $21,000, with accumulated depreciation of $13,000, was sold for $5,400. Calculate the gain or loss on disposal.

(b) Instead, assume that the machine was retired (no proceeds). Calculate the gain or loss on disposal.

(c) Instead, assume that the machine was sold for $9,500. Calculate the gain or loss on disposal.

Ex. 188

Presented below are selected transactions for Cameron Inc. for 2022:

Jan 1 Retired a machine that was purchased on January 1, 2014. The machine cost $350,000, and had been estimated to have a useful life of 8 years with no residual value.

Jun 30 Sold another machine for $90,000 that was purchased on January 1, 2019. The machine cost $125,000, and had a useful life of 10 years with no residual value.

Sep 30 Retired a business automobile (no proceeds) that was purchased on September 30, 2016. The car cost $30,600 and was depreciated on a 6-year useful life with a residual value of $3,600.

Instructions

Record all entries required as a result of the above transactions. Cameron Inc. uses straight-line depreciation and has recorded depreciation through December 31, 2021.

Ex. 189

Birmingham Limited sold the following two assets in 2022:

Furniture Equipment

Cost $143,500 $162,000

Purchase date July 1, 2017 January 1, 2019

Useful life 8 years 5 years

Residual value $5,000 $33,000

Depreciation method Straight-line Straight-line

Date sold September 30, 2022 August 1, 2022

Selling price $30,000 $75,000

Instructions

Record all entries required to update depreciation and record the sales of the two assets in 2022. Birmingham has a December 31 year end.

Ex. 192

(a) On January 1, 2022, Delta Corp. purchased a patent for $1,500,000. The patent's legal life is 20 years but the company estimates that its useful life will only be 5 years from the date of acquisition. As an addition to the patent account shortly after acquisition, Delta paid legal costs of $180,000 in successfully defending the patent in an infringement suit. Any legal costs to be capitalized will be amortized effective the date of acquisition of the patent, January 1. Prepare the entry to amortize the patent at year end, December 31, 2022.

(b) On January 1, 2022, Epsilon Ltd. purchased a franchise from the Wing Food Company for $500,000. The franchise is for an indefinite time period and gives Epsilon the exclusive rights to sell Wing products in a particular territory. Record the acquisition of the franchise and any necessary adjusting entry at year end, December 31, 2022. Epsilon follows ASPE.

(c) In 2022, Kappa Corporation incurred research costs of $350,000 to develop a new product. Record this event.

Ex. 193

On January 1, 2020, Paint Palette Inc. paid $122,000 to obtain a patent. The cost of the patent registration was $2,500. The patent has a legal life of 20 years and a useful life of 15 years. On December 31, 2021 management determined that the recoverable amount of the patent is $100,000. On January 1, 2022, Paint Palette incurred a cost of $15,000 related to an unsuccessful patent infringement lawsuit.

Instructions

(a) Record the purchase of the patent.

(b) Record amortization expense for the year ended December 31, 2021.

(c) Determine if there is an impairment loss on the patent and if so, record the December 31, 2021 journal entry.

(d) Record the legal costs incurred on February 1, 2022.

Ex. 194

(a) A patent acquired for $2,250,000 at the beginning of the current year expires in 10 years and is expected to have economic value for 5 years. Record the adjusting entry to amortize the patent for the current year.

(b) A renewable trade name purchased for $225,000 was recorded in the accounts at the beginning of the current fiscal year. Determine the minimum amount to be amortized for the current fiscal year.

Ex. 195

For each of the following unrelated transactions, (a) determine the amount of the amortization for the current year, and (b) present the adjusting entries required to record amortization at year end.

1. Costs of $37,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $35,000 was spent in legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of 12 years.

2. A company purchased a renewable trademark for $80,000.

Ex. 196

During the current year, Graydon Inc. incurred several expenditures. Briefly explain whether the expenditures listed below should be recorded as an operating expense or as an intangible asset. If you view the expenditure as an intangible asset, indicate the number of years over which the asset should be amortized. Explain your answer.

(a) Spent $82,500 in legal costs in a patent defence suit. The patent defence was unsuccessful.

(b) Purchased a trademark from another company. The trademark can be renewed indefinitely, and Graydon expects the trademark to contribute to revenue indefinitely.

(c) Acquired a patent for $5,600,000. The company selling the patent has spent $1,625,000 on its research and development. The patent has a remaining life of 12 years.

(d) Graydon is spending considerable time and money in developing a different patent for another product. So far, $3,600,000 has been spent this year on research and development. Graydon is hopeful it will obtain this patent in the next few years, but has not been successful as yet.

Ex. 197

Nova Futures Inc. is a company that creates new products through research and development and has a December 31 fiscal year. In fiscal 2021, Nova Futures spent $452,000 researching a new process. The research was completed in fiscal 2022 at an additional cost of $80,000; as well, $5,000 was spent obtaining the patent. Then further costs related to the patented process of $180,000 were incurred to create a marketable product. The product was completed and ready for market half-way through the fiscal year. The new product was advertised heavily in 2022 at a cost of $90,000. Soon after the launch of the new product, $60,000 was spent defending the patent. The defence was successful. The product is expected to have a life cycle of 5 years.

Instructions

Explain how the expenditures above should be presented in the financial statements for 2021 and 2022. Support your answer with calculations.

Ex. 198

Indicate in the blank spaces below, the section of the statement of financial position where the following items are reported. Use the following code to identify your answers:

PPE Property, plant, and equipment

I Intangible assets

O Other asset

E Expense

1. Goodwill 6. Research Costs

2. Land Improvements 7. Land

3. Buildings 8. Franchises

4. Accumulated Depreciation 9. Accumulated Amortization

5. Trademarks 10. Equipment

Ex. 199

Presented below is information related to tangible and intangible assets at year end, December 31, 2022, for Round Mound Corporation:

Buildings $ 1,200,000

Goodwill 160,000

Patents 392,000

Land 1,500,000

Accumulated Depreciation—Buildings 600,000

Accumulated Amortization—Patents 196,000

Instructions

Prepare a partial statement of financial position for Round Mound Corporation that shows how the above items would be presented.

Ex. 200

The following information is available from recent annual reports of Hanson Corp. and Jasper Corp.:

(in millions)

Competitor A Competitor B

Net income $ 550 $ 1,645

Sales 19,500 23,500

Average total assets 13,000 8,500

Instructions

(a) Based on this information, calculate the following ratios for each company to one decimal:

• 1. Profit margin.
  2. Asset turnover.
  3. Return on assets.

(b) What conclusion concerning the management of assets can be drawn from these data?

Ex. 201

Calculate the missing amounts in the table.

Ex. 202

After its first year of operations, Thompson Industries reported the following in its 2022 financial statements (in thousands):

2022 2021

Net sales $125,650 $83,750

Net income 10,975 5,550

Total assets 150,510 69,800

Instructions

1. Calculate Thompson’s return on assets, asset turnover and profit margin.
2. What are two ways Thompson could increase its return on assets?

Ex. 203

Assuming that the ratios are initially positive, complete the following table to show the effect of the transactions on the ratios (I - increase; D - decrease; NE - no effect; X - can't determine). Assume all other items are unchanged.