10-1

CHAPTER 10 Capital Assets

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief Exercises

Exercises

Problems Set A

Problems Set B

1. Distinguish between tangible and intangible capital assets.

1 1

2. Demonstrate the application of the cost principle to property, plant, and equipment specifically, and to capital assets in general.

2, 3, 4, 5, 6 2, 3, 4 1, 2, 7 1, 9 1, 2, 3, 9

3. Explain the concept of, and be able to calculate, amortization.

7, 8

4. Calculate periodic amortization using different methods.

9, 10 5, 6, 7 3, 4, 7, 9, 11, 12

2, 3, 6, 7, 8, 12

2, 3, 6, 8, 12

5. Describe and demonstrate the procedure for revising periodic amortization.

11 8 5, 6, 7 4, 6 4, 6

6. Distinguish between operating and capital expenditures, and prepare the entries for these expenditures.

12 9 7 5, 6, 9 5, 6, 9

7. Explain and demonstrate how to account for the disposal of property, plant, and equipment.

13, 14 10, 11 8, 9 7, 8, 12 7, 8, 12

8. Calculate the periodic amortization of natural resources.

15, 16 12 10

9. Contrast the accounting for intangible assets with the accounting for tangible assets.

17, 18, 19, 20

13 11, 12 9, 10, 11 9, 10, 11

10. Illustrate how capital assets are reported on the balance sheet.

21 14 13 11, 12 9, 11, 12

11. Demonstrate how to assess the profitability of total assets.

22 15 14 13 13

10-2

ASSIGNMENT CHARACTERISTICS TABLE

Problem Number

Description

Difficulty Level

Time Allotted (min.)

1A Determine acquisition costs of land and buildings.

Simple 20-30

2A Calculate amortization under different methods.

Simple 30-40

3A Calculate amortization under different methods, and consider effects.

Moderate 30-40

4A Calculate revisions to amortization expense.

Moderate 25-35

5A Account for various operating and capital expenditures.

Simple 15-25

6A Record operating and capital expenditures. Calculate revision to amortization expense.

Moderate 25-35

7A Calculate amortization under straight-line and declining-balance methods. Calculate gain or loss on disposal and total expense over life of asset and comment.

Moderate 30-40

8A Journalize alternatives related to disposals of capital assets.

Moderate 30-40

9A Classify operating and capital expenditures.

Simple 15-25

10A Prepare entries to correct for errors made in recording and amortizing intangible assets.

Moderate 30-40

11A Record transactions related to acquisition and amortization of intangibles. Prepare capital assets section of balance sheet.

Moderate 30-40

12A Journalize a series of equipment transactions related to purchase, sales, retirement, and amortization. Prepare capital assets section of balance sheet.

Moderate 40-50

13A Calculate and comment on asset turnover and return on asset ratios.

Moderate 15-25

1B Record acquisition costs of land and building.

Simple 20-30

2B Record capital asset acquisition. Calculate amortization under different methods.

Simple 30-40

3B Determine acquisition cost. Calculate amortization under different methods, and consider effects.

Moderate 30-40

4B Calculate revisions to amortization expense.

Moderate 25-35

5B Account for various operating and capital expenditures.

Simple 15-25

6B Record operating and capital expenditures. Calculate revision to amortization expense.

Moderate 25-35

7B Calculate gain or loss on disposal and total expense over life of asset and comment.

Moderate 30-40

10-3

Problem Number

Description

Difficulty Level

Time Allotted (min.)

8B Journalize alternatives related to disposals of capital assets.

Moderate 30-40

9B Classify operating and capital expenditures. Prepare capital assets section of balance sheet.

Simple 20-30

10B Prepare entries to correct for errors made in recording and amortizing intangible assets.

Moderate 30-40

11B Record transactions related to acquisition and amortization of intangibles. Prepare the capital assets section of balance sheet.

Moderate 30-40

12B Journalize a series of equipment transactions related to purchase, sales, retirement, and amortization. Prepare capital assets section of balance sheet.

Moderate 40-50

13B Calculate and comment on asset turnover and return on asset ratios. Moderate 15-25

10-4

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. Distinguish between

tangible and intangible capital assets.

BE10-1 Q10-1

2. Demonstrate the application of the cost principle to property, plant, and equipment specifically, and to capital assets in general.

Q10-2 Q10-3 Q10-4 Q10-5

Q10-6 BE10-2 BE10-3 BE10-4 E10-2

E10-7 P10-1A P10-9A P10-2B P10-9B

P10-1B P10-3B

E10-1

3. Explain the concept of, and be able to calculate, amortization.

Q10-7 Q10-8

4. Calculate periodic amortization using different methods.

Q10-9 Q10-10

BE10-5 BE10-6 BE10-7 E10-3 E10-4 E10-7 E10-11 E10-12

P10-2A P10-6A P10-8A P10-12A P10-2B P10-6B P10-8B P10-12B

E10-9 P10-3A P10-7A P10-3B

5. Describe and demonstrate the procedure for revising periodic amortization.

Q10-11 BE10-8 E10-5 E10-7 P10-4A

P10-6A P10-4B P10-6B

E10-6

6. Distinguish between operating and capital expenditures, and prepare the entries for these expenditures.

BE10-9 Q10-12 E10-7 P10-5A P10-6A P10-9A

P10-5B P10-6B P10-9B

7. Explain and demonstrate how to account for the disposal of property, plant, and equipment.

Q10-13 Q10-14 BE10-10 BE10-11 E10-8

P10-8A P10-12A P10-8B P10-12B

E10-9 P10-7A P10-7B

8. Calculate the periodic amortization of natural resources.

Q10-15 Q10-16

BE10-12 E10-10

9. Contrast the accounting for intangible assets with the accounting for tangible assets

Q10-17 Q10-18 Q10-19 Q10-20

BE10-13 E10-11 E10-12

P10-9A P10-11A P10-9B

P10-10A P10-10B P10-11B

E10-6

10-5

Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 10. Illustrate how capital

assets are reported on the balance sheet.

Q10-21 BE10-14 E10-13 P10-11A

P10-12A P10-9B P1-12B

P10-11B

11. Demonstrate how to assess the profitability of total assets.

Q10-22 BE10-15

E10-14 P10-13A P10-13B

Broadening Your Perspective

Cumulative Coverage

BYP10-1 BYP10-2 BYP10-3 BYP10-4

BYP10-5 BYP10-6

10-6

ANSWERS TO QUESTIONS 1. Tangible and intangible capital assets both are long-lived assets that

are used by a business to produce revenue. The difference between them is that tangible capital assets have physical substance but intangible assets do not.

2. For capital assets, the cost principle means that cost consists of all

expenditures necessary to acquire the asset and make it ready for its intended use. It also means that the assets are carried at cost, and not at market (unless fair market value is lower than cost).

3. (a) In a cash transaction, cost is equal to the cash paid.

(b) In a noncash transaction, cost is equal to the cash equivalent price paid—which is the fair market value of the asset given up or, if this is not clearly determinable, the fair market value of the asset received.

4. The cost principle has survived because it provides information that

is objective and verifiable. 5. 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.

6. The cost is allocated between the building and equipment based on

the relative proportion each is of the appraised value.

Building $350,000 ÷ $750,000 X $500,000 = $233,333 Equipment $400,000 ÷ $750,000 X $500,000 = $266,667

7. Amortization is a process of allocating the cost of a capital asset to

expense over its service (useful) life in a rational and systematic manner. There is no cash involved in the entry to record amortization (Dr. Amortization Expense; Cr. Accumulated Amortization). Recognition of amortization is not intended to result in the accumulation of cash for replacement of the asset.

10-7

Questions Chapter 10 (Continued) 8. (a) Residual value is the expected cash value of the asset at the end of

its useful life. It is sometimes called salvage value. (b) Residual value is used in determining amortizable cost in each of

the amortization methods except the declining-balance method. 9. (a) Useful life is expressed in years under the straight-line and

declining-balance methods and in units-of-activity under the units-of-activity method.

(b) The pattern of periodic amortization expense is constant under the straight-line method, decreases under the declining-balance method, and is variable depending on production levels under the units-of-activity method.

10. Balance sheet: Net book value is cost less accumulated amortization

of a capital asset. Cost is the same under each method of amortization. The accumulated amortization is affected as follows: Straight-line—constant amount each period; units-of-activity—varying amount depending on production levels each period; declining-balance—decreasing amount each period. Consequently, the net book value will decline on the balance sheet as the asset ages. It will decline faster under the declining-balance method than the straight-line method in the early years and slower in the later years. The units-of-activity method is unpredictable. All three methods will result in the same net book value at the end of the asset’s useful life.

Income statement: 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. Consequently, 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.

11. A revision of amortization is made in current and future years but not

retroactively. Amortization is based on the information available at the time. It is an estimate. Continual restatement of prior periods would adversely affect the reader's confidence in the financial statements.

10-8

Questions Chapter 10 (Continued) 12. 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 capital asset affected.

13. In a sale of capital assets, 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.

14. The capital 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 amortization on the capital asset exceed the cost of the asset.

15. Restoration costs, which are incurred at the end of a capital asset’s

useful life, affect the amortizable cost of a natural resource. These costs relate to the life of the natural resource, and not just to the ending period in which they are incurred. They are amortized over the life of the asset to properly match them with the resulting revenue.

16. The amortizable cost of a natural resource includes cost less residual

value plus any estimated removal and site restoration costs. 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.

10-9

Questions Chapter 10 (Continued) 17. The intern is not correct. The cost of an intangible asset should be

amortized over the shorter of that asset's useful life (the period of time when operations are benefited by use of the asset) or its legal life. If the intangible asset has an indefinite useful life, it is not amortized. It is tested frequently for impairment, however.

18. The favourable attributes which could result in goodwill include

exceptional management, desirable location, good customer relations, skilled employees, high quality products, fair pricing policies, and harmonious relations with labour unions.

19. Goodwill is the value of many favourable attributes that are intertwined

in the 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.

20. 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, the CICA requires that all research and some development costs be 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.

21. 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 balance of the major classes of unamortized assets should also be disclosed, in addition to any impairment information.

22. Salter Street Film’s asset turnover is calculated as follows:

stime 0.62768,811,78$938,766,48$

assets total AveragesalesNet

==

10-10

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-1 (a) I (b) PPE (c) PPE (d) NA (current asset) (e) I (f) PPE (g) NA (current asset) (h) NR

(i) NA (inventory) (j) I (k) I (l) NA (investment) (m) NR (n) NR (o) NR (p) I

BRIEF EXERCISE 10-2 All of the expenditures should be included in the cost of the land. The cost of the land is $63,000 ($54,000 + $3,000 + $2,500 + $3,500). BRIEF EXERCISE 10-3 The cost of the truck is $25,400 (cash price $25,000 + painting and lettering $400). The expenditures for the insurance and the motor vehicle licence are recurring and only benefit the current period. They should be expensed and not be added to the cost of the truck. BRIEF EXERCISE 10-4 Jan. 1 Land ($280,000 X $100,000 ÷ $300,000)............. 93,333 Building ($280,000 X $200,000 ÷ $300,000)....... 186,667 Cash .............................................................. 80,000 Mortgage Payable ........................................ 200,000

10-11

BRIEF EXERCISE 10-5 Amortizable cost is $30,000 ($32,000 – $2,000). With a 4-year useful life, annual amortization is $7,500 ($30,000 ÷ 4). Under the straight-line method, amortization is the same each year. Thus, amortization expense is $7,500 for both the first and second years. BRIEF EXERCISE 10-6 The declining-balance rate is 50% (25% X 2) and this rate is applied to net book value at the beginning of the year. The calculations are:

Net Book Value

X

Rate

=

Amortization

Year 1 Year 2

$32,000 16,000*

50% 50%

$16,000

8,000

* $32,000 – $16,000 = $16,000 BRIEF EXERCISE 10-7 Amortizable cost = ($36,500 – $500) ÷ 100,000 = $0.36 Year 1 30,000 kms. X $0.36 = $10,800 Year 2 20,000 kms. X $0.36 = $7,200

10-12

BRIEF EXERCISE 10-8 Net book value, 1/1/2002 ($32,000 – $12,000)................................. $ 20,000 Less: Residual value ....................................................................... 0 2,000 Amortizable cost............................................................................... 18,000 Remaining useful life........................................................................ ÷ 2 years Revised annual amortization expense............................................ $ 9,000 Note: Previously, amortization expense was $6,000 [($32,000 - $2,000) ÷ 5]. 2000: $ 6,000 2001: 6,000 2002: 9,000 2003: 9,000 Total $30,000 BRIEF EXERCISE 10-9 (a) O (b) C (c) C (d) O (e) C

(f) O (g) O (h) C (i) C (j) O

BRIEF EXERCISE 10-10 (a) Aug. 2 Accumulated Amortization —Delivery Equipment.................................... 41,000

Delivery Equipment ................................ 41,000 (b) Aug. 2 Accumulated Amortization —Delivery Equipment.................................... 39,000

Loss on Disposal ........................................... 2,000 Delivery Equipment ................................ 41,000

Cost of delivery equipment $41,000 Less: Accumulated amortization 39,000 Net book value at date of disposal 2,000 Proceeds from sale 000,00 00 0 Loss on disposal $ 2,000

10-13

BRIEF EXERCISE 10-11 (a) Sept. 30 Amortization Expense........................................ 6,000

Accumulated Amortization —Office Equipment ..................................... 6,000

(b) Sept. 30 Cash..................................................................... 26,000

Accumulated Amortization —Office Equipment ($42,000 + $6,000)............. 48,000 Gain on Disposal ......................................... 2,000

Office Equipment ......................................... 72,000 Cost of office equipment $72,000 Less accumulated amortization 048,000 ($42,000 + $6,000) Net book value at date of disposal 24,000 Proceeds from sale 026,000 Gain on disposal $ 2,000

10-14

BRIEF EXERCISE 10-12 (a) Amortizable cost = $7,000,000 – $500,000 + $1,000,000 = $7,500,000 Amortizable cost per unit = $7,500,000 ÷ 28,000,000 tonnes = $0.2679 per tonne Restoration portion = $1,000,000 ÷ 28,000,000 tonnes = $0.0357 Amortization expense Year 1 $0.2679 X 6,000,000 tonnes = $1,607,400 Restoration portion Year 1 $0.0357 X 6,000,000 tonnes = $214,200

Aug. 31 Amortization Expense ............................ 1,607,400 Accumulated Amortization ............... 1,393,200 Liability for Restoration Costs ......... 214,200

(b) CUONO MINING CO. (Partial) Balance Sheet August 31, 2003 Assets Capital assets Ore mine ................................................................. $7,000,000

Less: Accumulated amortization......................... 1,393,200 $5,606,800 Liabilities Long-term liabilities Liability for restoration costs ............................... $ 214,200

10-15

BRIEF EXERCISE 10-13 (a) Jan. 2 Patents..................................................... 160,000 Cash.................................................. 160,000 (b) Dec. 31 Amortization Expense ($160,000 ÷10)... 16,000

Patents.............................................. 16,000 (c) SURKIS COMPANY (Partial) Balance Sheet

December 31, 2002

Assets Capital assets

Patents (net of $16,000 accumulated amortization) .............. $144,000 BRIEF EXERCISE 10-14 JOKER COMPANY (Partial) Balance Sheet December 31, 2002 Assets

Capital assets Buildings.................................................................... $800,000 Less: Accumulated amortization............................ 650,000 0$$150,000 Coal mine................................................................... $200,000 Less: Accumulated amortization............................ 0108,000 092,000 Goodwill ..................................................................... 410,000

Total capital assets ........................................... $652,000 BRIEF EXERCISE 10-15 Asset turnover = $11,635.4 ÷ [($3,963.9 + $5,188.8) ÷ 2] = 2.54 times Return on assets = $1,127.1 ÷ [($3,963.9 + $5,188.8) ÷ 2] = 24.6%

10-16

SOLUTIONS TO EXERCISES EXERCISE 10-1 (a) Dear :

The following information is provided in response to your question on the application of the cost principle to capital assets.

• Under the cost principle, the acquisition cost of a capital asset

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.

If you require any further information please contact me.

Sincerely,

(b) 1. Delivery Equipment (or Vehicles) 5. Factory Machinery

2. Licence Expense 6. Prepaid Insurance 3. Land Improvements 7. Factory Machinery 4. Land

10-17

EXERCISE 10-2 (a) Cost of Land

Cash paid ............................................................................. $90,000 Net cost of removing warehouse ($6,600 – $1,700) ......... 4,900 Legal fee............................................................................... 1,100

Total .............................................................................. $96,000 (b) The architect's fee ($7,800) should be debited to the Building

account. The cost of the driveways and parking lot ($14,000) should be debited to Land Improvements.

EXERCISE 10-3 (a) Amortizable cost per unit is $1.20 per kilometre [($128,000 – $8,000)

÷ 100,000]. (b)

Calculation

End of Year

Year

Units of Activity

X

Amortization

Cost/Unit

=

Amortization

Expense

Accumulated Amortization

Net

Book Value

2002 2003 2004 2005

28,000 30,000 25,000 17,000

$1.20 01.20 01.20 01.20

$33,600 036,000 030,000 020,400

$033,600 0069,600 0099,600 0120,000

$94,400

58,400 28,400

8,000

10-18

EXERCISE 10-4 (a)

Year Straight-Line Units-of-Activity

Double Declining-Balance

2002 $12,833 $13,090 $29,667 2003 12,833 11,550 19,775

(1) Straight-line method: $89,000 - $12,000 = $12,833 per year 6 years 2002 and 2003 amortization expense = $12,833

(2) Units-of-activity method: $89,000 - $12,000 = $7.70 per hour 10,000 hours 2002 amortization expense = 1,700 hours X $7.70 = $13,090 2003 amortization expense = 1,500 hours X $7.70 = $11,550

(3) Declining-balance method: The declining-balance rate is 1/6 X 2 = 33⅓%

2002 amortization expense = $89,000 X 33⅓% = $29,667 Net book value January 1, 2003 = $89,000 – $29,667 = $59,333 2003 amortization expense = $59,333 X 33⅓% = $19,775

(b) Straight line method (c) Cash flow is the same under all three methods. Amortization is an

allocation of the cost of a capital asset and not a cash expenditure.

10-19

EXERCISE 10-5 (a) Old amortization rates used – Not required

Building: ($800,000 – $40,000) ÷ 40 yrs = $19,000 per year Warehouse: ($100,000 – $5,000) ÷ 25 yrs = $3,800 per year Current ages (years amortized) Building: $114,000 ÷ $19,000 per year = 6 years (equals the period from 1/1/96 to 1/1/02) Warehouse: $9,500 ÷ $3,800 per year = 2.5 years

(equals the period from 1/7/99 to 1/1/02)

Type of Asset

Building

Warehouse

Net book value, 1/1/02 Less: Residual value Revised amortizable cost Divide by revised remaining useful life, in years Revised annual amortization expense

$686,000

0070 70,000 616,000

(45 – 6) ÷ 39 yrs

$15,795

$90,500 0 3,600 86,900

0 (20 – 2.5) ÷ 17.5 yrs

0$4,966

(b) Dec. 31 Amortization Expense ..................................... 15,795

Accumulated Amortization—Building .... 15,795 31 Amortization Expense ..................................... 4,966

Accumulated Amortization—Warehouse 4,966

10-20

EXERCISE 10-6 MEMO To: Client From: Financial Advisor Date: Today The change in the amortization policy will increase the amortization period in cases where the contracted exhibition period is greater than two years. This will have the effect of spreading the cost over a longer period and, in the short–term, increasing net income. It will be more difficult to compare the current year’s results with previous years’ because of the change in estimated useful life. In evaluating Alliance’s performance, you would want to make an adjustment for this change in estimated life. If the contracted exhibition period is a good measure of the useful life of the broadcast rights and the revenue potential is consistent over this period, then the policy is reasonable.

10-21

EXERCISE 10-7 (a) July 1/01 Equipment .............................................. 25,000 Cash.................................................. 25,000 (b) June 30/02 Amortization Expense........................... 5,625 Accumulated Amortization –Equipment ...................................... 5,625 [($25,000 - $2,500) ÷ 4 years] (c) July 1/02 Equipment .............................................. 5,500 Cash.................................................. 5,500 (d) June 30/03 Amortization Expense........................... 4,969 Accumulated Amortization –Equipment ...................................... 4,969 Net book value, July 1, 2002 ($25,000 - $5,625) ........ $19,375 Add: New part .............................................................. 5,500 24,875 Less: Residual value.................................................. 5,000 Amortizable cost.......................................................... 19,875 Remaining useful life (5 – 1) ....................................... 4 years Revised annual amortization expense ...................... $ 4,969

10-22

EXERCISE 10-8 Jan. 1 Accumulated Amortization—Machinery .......... 62,000

Machinery.................................................... 62,000 June 30 Amortization Expense........................................ 833

Accumulated Amortization—Computer.... 833 ($5,000 ÷ 3 years X 6/12 mos.)

30 Cash .................................................................... 500

Accumulated Amortization—Computer ........... 4,166 ($5,000 ÷ 3 years x 2.5 years) Loss on Disposal [$500 – ($5,000 – $4,166)].... 334 Computer..................................................... 5,000

Dec. 31 Amortization Expense........................................ 4,500

Accumulated Amortization—Truck........... 4,500 [($30,000 – $3,000) ÷ 6 years]

31 Loss on Disposal [$0 – ($30,000 - $22,500)]..... 7,500

Accumulated Amortization—Truck .................. 22,500 [($30,000 – $3,000) ÷ 6 years x 5 years] Delivery Truck............................................. 30,000

10-23

EXERCISE 10-9 (a) (1) Straight-line method ($10,000 - $1,000) ÷ 4 years = $2,250 per year (2) Double-declining-balance method DDB Rate: ¼ x 2 = 50% Year 1: $10,000 x 50% = $5,000 Year 2: $10,000 - $5,000 = $5,000 x 50% = $2,500 Year 3: $5,000 - $2,500 = $2,500 x 50% = $1,250 Year 4: $2,500 - $1,250 = $1,250 x 50% = $625 but amount limited to $250 by salvage value Straight-Line Double Declining Balance Amortization

Expense Net Book

Value Amortization

Expense Net Book

Value Year 1 $2,250 $7,750 $5,000 $5,000 Year 2 2,250 5,500 2,500 2,500 Year 3 2,250 3,250 1,250 1,250 Year 4 2,250 1,000 250* 1,000 Total $9,000 $9,000

* Do not amortize below salvage value.

(b) (1) Straight-line method Proceeds - Net book value = Gain (loss) $1,500 - $3,250 = ($1,750) (2) Double declining-balance method Proceeds - Net book value = Gain (loss) $1,500 - $1,250 = $250

10-24

EXERCISE 10-9 (Continued) (c)

(1)

Straight-Line

(2) Double

Declining-Balance

Year 1 Amortization expense $2,250 $5,000 Year 2 Amortization expense 2,250 2,500 Year 3 Amortization expense 2,250 1,250 Year 3 Loss (gain) 1,750 ( 250) Total expense over 3 year period $8,500 $8,500

The total expense over the three year period is the same under each method, $8,500. The gain or loss simply adjusts for over amortization, or under amortization. The $8,500 total cost equals the original cost of $10,000 less proceeds from sale of $1,500.

10-25

EXERCISE 10-10 (a) Dec. 31 Amortization Expense ($0.675 x 100,000 t)..... 67,500

Accumulated Amortization—Mine ........... 48,750 Liability for Restoration ............................ 18,750 ($150,000 ÷ 800,000 t x 100,000 t)

Amortizable cost $480,000 + $150,000 – $90,000 = $540,000 Units estimated 800,000 tonnes (t)

Amortizable cost per unit $540,000 ÷ 800,000 t = $0.675 per tonne Portion applicable to

restoration $150,000 ÷ 800,000 t x 100,000 t = $18,750

Portion applicable to mine $480,000 - $90,000) ÷ 800,000 t x 100,000 t = $48,750

(b) $54,000 of this amount (80,000 X $0.675) is expensed (as part of the cost of goods sold). The remaining $13,500 (20,000 X $0.675) is included in the ending inventory. The costs pertaining to the unsold tonnes are reported in current assets as part of inventory.

EXERCISE 10-11 Dec. 31 Amortization Expense...................................... 30,000

Trademark ($150,000 ÷ 5)......................... 30,000

31 Amortization Expense...................................... 6,000 Patents ($45,000 ÷ 5 x 8/12) ..................... 6,000

10-26

EXERCISE 10-12 (a) Jan. 1 Patents .............................................................. 420,000

Cash........................................................... 420,000 April 1 Goodwill ............................................................ 360,000

Cash........................................................... 360,000 Note: This would be part of the entry to record the purchase of another company. July 1 Franchise .......................................................... 450,000

Cash........................................................... 450,000 Sept. 1 Research Expense ........................................... 185,000

Cash........................................................... 185,000 30 Development Expense..................................... 50,000

Cash........................................................... 50,000 (b) Dec. 31 Amortization Expense ($60,000 + $22,500) .... 82,500

Patents ($420,000 ÷ 7) .............................. 60,000 Franchise [($450,000 ÷ 10) X 1/2] ............ 22,500

Note: Because goodwill has an indefinite life, it is not amortized. Rather, it is tested annually for impairment.

10-27

EXERCISE 10-13 (a) Account Statement Classification Accumulated amortization— leasehold improvements

Balance sheet Capital assets (PPE contra account)

Accumulated amortization— equipment

Balance sheet Capital assets (PPE contra account)

Accumulated amortization— hockey franchise and rights to players

Balance sheet Capital assets (intangible contra account)

Amortization expense Income statement

Operating expenses

Equipment Balance sheet Capital assets (PPE) Investments Balance sheet Long-term investments Hockey franchise and rights to players

Balance sheet Capital assets (intangible)

Leasehold improvements Balance sheet Capital assets (PPE) PPE—property, plant, and equipment (b) NORTHWEST SPORTS ENTERPRISES (Partial) Balance Sheet June 30, 2000 Assets Capital assets

Leasehold improvements ......................... $1,124,248 Less: Accumulated amortization ............. 230,697 $ 893,551

Equipment .................................................. $1,081,364 Less: Accumulated amortization ............. 860,074 221,290

Hockey franchise and rights to players .. $7,528,235 Less: Accumulated amortization ............. 1,693,850 5,834,385

Total capital assets ................................... $6,949,226

10-28

EXERCISE 10-14 (a) (b) IMAX’s asset turnover of 0.40 times, and its return on assets of

4.42%, are slightly below the industry averages of 0.5 times and 5.7%. This indicates that the company is not on par with the industry in terms of its management of capital assets.

times 0.40=00$525,710,500$208,569,0 =

ratio turnoverAsset

4.42% =00$525,710,50$23,219,00 =

ratio assets on Return

10-29

SOLUTIONS TO PROBLEMS

PROBLEM 10-1A

Item

Land

Building

Other Accounts

01. 02. 03. 04. 05. 06. 07. 08. 09. 10. 11.

$145,000 2,000

13,000

4,000

(2,500) $161,500

20,000

10,000 600,000

0000 000 $630,000

5,000

3,000 0015,000

,00 $23,000

Property Tax Expense Land Improvements Land Improvements

10-30

PROBLEM 10-2A

(a)

Year

Calculation

Accumulated Amortization

12/31

1999 2000 2001 2002

2000 2001 2002

MACHINE 1

$90,000* X 10%** = $9,000 $90,000 X 10% = $9,000 $90,000 X 10% = $9,000 $90,000 X 10% = $9,000

*$96,000 - $6,000 = $90,000 ** 1/10 years = 10%

MACHINE 2

$60,000 X 25%* = $15,000 $45,000 X 25% = $11,250 $33,750 X 25% = $ 8,438 * 1/8 years = 12.5% x 2 = 25%

$09,000 018,000 027,000 036,000

$15,000 026,250 034,688

2001 2002

MACHINE 3

1,000 X ($60,000* ÷ 24,000) = $ 2,500 4,500 X ($60,000 ÷ 24,000) = $11,250 * $66,000 - $6,000 = $60,000

$ 2,500 13,750

10-31

PROBLEM 10-2A (Continued) (b)

Year

Calculation

Amortization

Expense (1) (2) (3)

2000

2001

2002

MACHINE 2

$60,000 X 25% X 9/12 = $11,250 $48,750* X 25% = $12,188 $36,562 x 25% = $9,140 * $60,000 - $11,250 = $48,750 ** $48,750 - $12,188 = $36,562

$11,250

$12,188

$ 9,140

10-32

PROBLEM 10-3A

(a) STRAIGHT-LINE AMORTIZATION

Calculation

End of Year

Year Amortizable

Cost

X

Amortization

Rate

=

Amortization

Expense

Accumulated Amortization

Net

Book Value

2002 2003 2004

$90,000* 090,000 090,000

33⅓%** 33⅓% 33⅓%

$30,000 030,000 030,000

$30,000 060,000 090,000

$70,000

40,000 10,000

* $100,000 - $10,000 = $90,000 ** 1/3 years = 33⅓%

DOUBLE DECLINING-BALANCE AMORTIZATION

Calculation

End of Year

Year

Net Book

Value Beginning

of Year

X

Amortization Rate

=

Amortization Expense

Accumulated Amortization

Net Book Value

2002 2003 2004

$100,000 0033,333

11,110

66⅔%* 66⅔% 66⅔%

$66,667 022,223 01,110**

$66,667 088,890 090,000

$33,333

11,110 10,000

* 1/3 years = 33⅓% x 2 = 66⅔% ** Adjusted so ending net book value will equal residual value. (b) Straight-line amortization provides the lower amount for 2002

amortization expense ($30,000) and, therefore, the higher 2002 income. Over the three-year period, both methods result in the same total amortization expense ($90,000) and, therefore, the same total income.

(c) Both methods will result in the same cash flow from operations in

2002 and over the three-year period. Recording amortization expense does not affect cash flow. It is only an allocation of the capital cost to expense over its useful life.

10-33

PROBLEM 10-4A

Year

Amortization Expense

Accumulated Amortization

2000

$7,200*

$ 7,200

2001 7,200 14,400 2002 5,400** 19,800 2003 5,400 25,200 2004 5,400 30,600 2005 6,900*** 37,500

Years 2000 and 2001: * $40,000 – $4,000 = $7,200 5 years Years 2002, 2003, and 2004: ** $40,000 – $14,400 – $4,000 = $5,400 6 – 2 years Year 2005: ***$40,000 – $30,600 - $2,500 = $6,900 1 year Proof: Accumulated amortization equals $37,500. Net book value is

equal to $40,000 – $37,500 = $2,500 which is equal to the estimated residual value of $2,500.

10-34

PROBLEM 10-5A

Account Debited

Explanation

1.

Equipment Cost to prepare the equipment for use.

2.

Land improvements Non-permanent land expenditure.

3.

Building Improvement or betterment expenditure, which makes the factory office more productive.

4.

Repair expense Does not benefit future periods. If the loss was considered to be significant, it would be recorded separately as a loss due to labour dispute, rather than as repair expense.

5.

Equipment Cost to prepare the equipment for use.

6.

Repair expense Does not benefit future periods. If the damage was covered by insurance, a receivable (from the insurance company) account would be debited. If the loss was considered to be significant, it would be recorded separately as a loss due to damages, rather than as repair expense.

10-35

PROBLEM 10-6A

(a) Jan. 7 Equipment................................................... 14,000

Cash................................................... 14,000 Feb. 7 Repair Expense .......................................... 1,000

Cash................................................... 1,000 Mar. 19 Repair Expense .......................................... 2,500

Cash................................................... 2,500 (b) (1) Years 1 and 2: ($100,000 – $10,000) ÷ 5 = $18,000 (2) Years 3 – 7:

Net book value, Jan. 7, Year 3 ($100,000 - $18,000 - $18,000) $64,000 Add: Addition ........................................................................ 14,000 78,000 Less: Revised residual value ................................................ 12,000 Revised amortizable cost ....................................................... 66,000 Remaining useful life (7 – 2 years)......................................... 5 years Revised annual amortization expense .................................. $13,200 (3) $13,200 [as per calculation in part (2) above]

10-36

PROBLEM 10-7A

(a) (1) Straight-Line (2) Declining-Balance Amortization Net Book Amortization Net Book Years Expense Value Expense Value 1 $ 5,000 $16,000 $ 5,250 $15,750 2 5,000 11,000 3,938 11,812 3 5,000 6,000 2,953 8,859 4 5,000 1,000 2,215 6,644 Total $20,000 $14,356 (1) STRAIGHT-LINE AMORTIZATION Calculation End of Year

Net Amortizable Amortization Amortization Accumulated Book Year Cost X Rate = Expense Amortization Value 1 $20,000* 25%** $ 5,000 $ 5,000 $16,000 2 20,000 25% 5,000 10,000 11,000 3 20,000 25% 5,000 15,000 6,000 4 20,000 25% 5,000 20,000 1,000 * $21,000 - $1,000 = $20,000 ** ¼ years = 25% (2) SINGLE DECLINING-BALANCE AMORTIZATION Calculation End of Year Net Book Value Net Beginning Amortization Amortization Accumulated Book Year of Year X Rate = Expense Amortization Value 1 $21,000 25%* $5,250 $ 5,250 $15,750 2 15,750 25% 3,938 9,188 11,812 3 11,812 25% 2,953 12,141 8,859 4 8,859 25% 7,859** 20,000 1,000 * ¼ years = 25% ** Adjusted so ending net book value will equal salvage value.

10-37

PROBLEM 10-7A (Continued) (b) 1. (i) Straight (ii) Declining Line Balance Cost.................................................... $21,000 $21,000 Accum. amortization. ....................... 15,000 12,141 Net book value .................................. 6,000 8,859 Cash proceeds .................................. 7,000 7,000 Gain (loss) on disposal .................... $ 1,000 ($ 1,859) 2. Amortization expense ...................... $15,000 $12,141 Add: Loss on disposal .................... 1,859 Less: Gain on disposal .................... 1,000 000 000 Net expense....................................... $14,000 $14,000

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.

10-38

PROBLEM 10-8A

(a) June 30 Accumulated Amortization —Delivery Equipment.................................... 24,000

Loss on Disposal ........................................... 21,000 Delivery Equipment ............................... 45,000

Accumulated Amortization ($45,000 - $5,000) X 3/5 years = $24,000 (b) June 30 Cash................................................................ 25,000

Accumulated Amortization —Delivery Equipment.................................... 24,000

Gain on Disposal ................................... 4,000 Delivery Equipment ............................... 45,000

(c) June 30 Cash................................................................ 18,000

Accumulated Amortization —Delivery Equipment.................................... 24,000 Loss on Disposal................................... 3,000

Delivery Equipment ............................... 45,000

Expenditure Architect fees Cost to demolish an old bthat is on a piece of land intended for a new buildin Lawyer’s fees associated successful patent applica Lawyer’s fees associated unsuccessful patent appli

Cost of a grease and oil con the company’s truck Cost of installing a new rothe company’s building

Cost of painting the presidoffice Cost of CD’s and toner foroffice computer and printe

PROBLEM 10-9A

10-39

Account Title Building

uilding

g

Land: it is a cost of getting the land ready for its intended use

with a tion

Patent

with an cation

Legal Fees Expense (Operating Expense): if the application was unsuccessful, then there is no asset

hange Repairs and Maintenance Expense

of on Building (it would be rare to find a separate capital asset set up for a “roof” account as distinct from the building)

ent’s Repairs and Maintenance Expense (Operating Expense)

the r

Office Supplies Expense (Operating Expense)

10-40

Expenditure Account Title Payment to a celebrity for endorsement of a product

Advertising Expense (Operating Expense): Some companies would allocate the cost according to the number of times that the advertisements are to be aired. A current asset, such as prepaid advertising, would be established for those costs related to future advertisements. However, in the real world, all such costs are generally charged to advertising expense

Cost of four new tires for the company delivery van

Repairs and Maintenance Expense (Operating Expense): Depending on the vehicle usage during a year, an argument could be made for capitalizing this expenditure. Again, in the real world, this expenditure is usually charged to expenses

Cost to rebuild the engine on the company delivery van

Delivery Van: The benefit should extend beyond one year; therefore, the amount would be capitalized as part of the cost of the delivery van

Cost to pave the company parking lot

Land Improvements

Cost of painting the corporate logo on the sides of the company delivery van

Repairs and Maintenance Expense (Operating Expense): Does not make the delivery van any more productive. This is also likely a recurring expense

10-41

PROBLEM 10-10A

1. Research Expense ............................................................. 72,000

Patents ($120,000 X 60%) .......................................... 72,000 To correct patent cost. Patents ($120,000 ÷ 20 years) ........................................... 6,000 Amortization Expense................................................ 6,000 To reverse recorded amortization expense. Amortization Expense ....................................................... 2,400 Patents [($120,000 - $72,000) ÷ 20 years] ................. 2,400 To record correct amortization expense. 2. Gain on Patent Appreciation............................................. 94,400

Patents ........................................................................ 94,400 To correct overvaluation of patent.

Patents ($139,400 ÷ 20 years) ........................................... 6,970 Amortization Expense................................................ 6,970 To reverse recorded amortization expense. Amortization Expense ....................................................... 2,250 Patents ($45,000 ÷ 20 years)...................................... 2,250 To record correct amortization expense. 3. Amortization Expense ....................................................... 1,500

Goodwill ...................................................................... 1,500 To reverse recorded amortization expense. Note: Goodwill is not amortized. 4. Charitable Donations Expense ......................................... 5,000

Goodwill ...................................................................... 5,000

10-42

PROBLEM 10-11A

(a) Jan. 2 Patent #1 ........................................................... 12,000

Cash........................................................... 12,000

June 30 Patent #2 ........................................................... 125,000 Cash........................................................... 125,000

Sept. 1 Advertising Expense........................................ 80,000

Cash........................................................... 80,000

Oct. 1 Copyright #2 ..................................................... 120,000 Cash........................................................... 120,000

(b) Dec. 31 Amortization Expense ..................................... 8,333

Patent #1 ................................................... 8,333 ($70,000 ÷ 10 years) + ($12,000 ÷ 9 years)

31 Amortization Expense ..................................... 3,125 Patent #2 ................................................... 3,125 ($125,000 ÷ 20 years X 6/12 mos.)

31 Amortization Expense ..................................... 4,800 Copyright #1 ............................................. 4,800 ($48,000 ÷ 10 years) 31 Amortization Expense ..................................... 5,000 Copyright #2 ............................................. 5,000 ($120,000 ÷ 6 years X 3/12 mos.)

10-43

PROBLEM 10-11A (Continued) (c) TAR COMPANY (Partial) Balance Sheet December 31, 2002 Assets Capital assets

Patents (net of $18,458 amortization) (1) .......................... $188,542 Copyrights (net of $29,000 amortization) (2) .................... 139,000

Total capital assets ........................................................... $327,542

(1) Patent cost = $70,000 + $12,000 + $125,000 = $207,000 Patent amortization = $7,000 + $8,333 + $3,125 = $18,458 (2) Copyright cost = $48,000 + $120,000 = $168,000

Copyright amortization = $19,200 + $4,800 + $5,000 = $29,000

10-44

PROBLEM 10-12A

(a) April 1 Land .......................................................... 2,630,000

Cash................................................... 2,630,000

May 1 Amortization Expense ............................. 19,000 Accumulated Amortization—Equipment 19,000 ($570,000 ÷ 10 years X 4/12 mos.)

1 Cash .......................................................... 350,000 Accumulated Amortization—Equipment 247,000 Gain on Disposal .............................. 27,000 Equipment......................................... 570,000

Cost $570,000

Accumulated amortization [($570,000 ÷ 10 years

X 4 years) + $19,000] 247,000 Net book value 323,000 Cash proceeds 0 350,000 Gain on disposal $ 27,000

June 1 Cash .......................................................... 1,800,000 Land................................................... 200,000 Gain on Disposal .............................. 1,600,000

July 1 Equipment................................................. 2,000,000

Cash................................................... 2,000,000

Dec. 31 Amortization Expense ............................. 50,000

Accumulated Amortization—Equipment 50,000 ($500,000 ÷ 10 years)

10-45

PROBLEM 10-12A (Continued) (a) (Continued)

Dec. 31 Accumulated Amortization—Equipment 500,000 Equipment.................................... 500,000 Cost $500,000 Accumulated amortization ($500,000 ÷ 10 years X 10 years) 500,000 Gain (loss) on disposal $ 0

(b) Dec. 31 Amortization Expense ........................ 950,000

Accumulated Amortization—Buildings 950,000 ($28,500,000 X 1/30)

31 Amortization Expense ........................ 4,793,000 Accumulated Amortization—Equipment 4,793,000

$46,930,000 ÷ 10 years $4,693,000 $2,000,000 ÷ 10 years X 6/12 mos., 100,000 $4,793,000

a$48,000,000 – $570,000 – $500,000 = $46,930,000

10-46

PROBLEM 10-12A (Continued) (c)

DUFOUR COMPANY (Partial) Balance Sheet December 31, 2003

Capital assets* Land................................................................ $06,430,000 Buildings........................................................ $28,500,000 Less: Accumulated amortization —buildings..................................................... 13,050,000 15,450,000 Equipment...................................................... $48,930,000 Less: Accumulated amortization —equipment .................................................. 9,115,000 39,815,000

Total capital assets ........................... $61,695,000

*See T accounts which follow (not required).

10-47

PROBLEM 10-12A (Continued)

Land Jan. 1 Bal. 4,000,000 Apr. 1 2,630,000

June 1 200,000

Dec. 31 Bal. 6,430,000

Buildings Jan. 1 Bal. 28,500,000

Dec. 31Bal. 28,500,000

Equipment Jan. 1 Bal. 48,000,000 July 1 2,000,000

May 01 570,000 Dec. 31 500,000

Dec. 31 Bal. 48,930,000

Accumulated Amortization—Buildings

Jan. 1 Bal. 12,100,000 Dec. 31 AJE 950,000

Dec. 31 Bal. 13,050,000

Accumulated Amortization—Equipment May 01 247,000 Dec. 31 500,000

Jan. 1 Bal. 5,000,000 May 1 19,000 Dec. 31 50,000 Dec. 31 AJE 4,793,000

Dec. 31 Bal. 9,115,000

10-48

PROBLEM 10-13A

(a)

Andrew Company Michael Company Asset turnover

Return on assets

(b) Michael Company is more efficient in using its assets to generate

sales–its assets turnover of 0.65 times is higher than 0.56 times for Andrew Company. It is also more efficient in using assets to produce income–with a return on assets of 50% compared to 28% for Andrew Company.

50%=$2,000,000$1,000,000

times 0.65=$2,000,000$1,300,000

28%=$2,500,000$700,000

times 0.56=$2,500,000$1,400,000

10-49

PROBLEM 10-1B

1. Land ($145,000 X $100,000 ÷ $150,000) ................... 96,667 Building ($145,000 X $50,000 ÷ $150,000) ............... 48,333 Land and Building.............................................. 145,000 2. Land Improvements .................................................. 4,000 Land and Buildings............................................ 4,000 3. Land ($2,000 X $100,000 ÷ $150,000) ....................... 1,333 Building ($2,000 X $50,000 ÷ $150,000) ................... 667 Land and Building.............................................. 2,000 4. Property Tax Expense............................................... 5,000 Land and Building.............................................. 5,000 5. Land Improvements .................................................. 10,000 Land and Buildings............................................ 10,000 6. Repair Expense ......................................................... 3,000 Land and Buildings............................................ 3,000

10-50

PROBLEM 10-2B

(a) 2000 Dec. 2 Equipment................................................. 45,000

Accounts Payable ............................ 45,000

2 Equipment................................................. 800 Cash................................................... 800 31 Accounts Payable .................................... 45,000 Cash................................................... 45,000 31 Equipment................................................. 3,100 Cash................................................... 3,100 Total cost of equipment: Invoice cost....................................... $45,000 Shipping ............................................ 800 Testing............................................... 3,100 Total................................................... $48,900 (b) 1. Straight-line 2001 Dec. 31 Amortization Expense ............................. 8,180 Accumulated Amortization.............. 8,180 ($48,900 - $8,000) ÷ 5 years = $8,180 2002 Dec. 31 Amortization Expense ............................. 8,180 Accumulated Amortization.............. 8,180 ($48,900 - $8,000) ÷ 5 years = $8,180

10-51

PROBLEM 10-2B (Continued) (b) 2. Units-of-activity 2001 Dec. 31 Amortization Expense ............................. 6,000 Accumulated Amortization.............. 6,000 ($48,900 - $8,000) ÷ 200,000 units = $0.20 per unit $0.20 per unit X 30,000 units = $6,000 2002 Dec. 31 Amortization Expense ............................. 9,600 Accumulated Amortization.............. 9,600 ($48,900 - $8,000) ÷ 200,000 units = $0.20 per unit $0.20 per unit X 48,000 units = $9,600 3. Double declining-balance 2001 Dec. 31 Amortization Expense ............................. 19,560 Accumulated Amortization.............. 19,560 Rate 1/5 X 2 = 40% $48,900 X 40% = $19,560 2002 Dec. 31 Amortization Expense ............................. 11,736 Accumulated Amortization.............. 11,736 ($48,900 - $19,560) X 40% = $11,736

10-52

PROBLEM 10-3B

(a) Cost: Cash price $35,000 Shipping costs 175 Insurance during shipping 75 Installation and testing 50 Total cost $35,300 Oil and lubricants are not included as they are operating expenses, benefiting only the current period. (b) 1. STRAIGHT-LINE AMORTIZATION

Calculation

End of Year

Year Amortizable

Cost

X

Amortization

Rate

=

Amortization

Expense

Accumulated Amortization

Net

Book Value

2002 2003 2004 2005

$30,300* 30,300 30,300 30,300

25%**

25% 25% 25%

$7,575 07,575 07,575 7,575

$ 7,575 015,150 022,725 30,300

$27,725

20,150 12,575

5,000 * Amortizable cost = $35,300 - $5,000 = $30,300 ** 1 ÷ 4 years = 25%

10-53

PROBLEM 10-3B (Continued) (b) (Continued) 2. DOUBLE DECLINING-BALANCE AMORTIZATION

Calculation

End of Year

Year

Net Book

Value Beginning

of Year

X

Amortization Rate

=

Amortization Expense

Accumulated Amortization

Net Book Value

2002 2003 2004 2005

$35,300 017,650 008,825 5,000

50%**

50% 50% 50%

$17,650

8,825 4,43,825** 0**

$17,650 026,475 030,300

30,3000

$17,650

8,825 5,000 5,000

* 1 ÷ 4 years = 25% x 2 = 50% ** Adjusted so ending net book value will equal residual value 3. UNITS-OF-ACTIVITY AMORTIZATION

Calculation

End of Year

Year

Units-of-Activity

X

Amortizable Cost per Unit

=

Amortization

Expense

Accumulated Amortization

Net

Book Value

2002 2003 2004 2005

6,500 7,500 6,000 5,000

$1.212* $1.212 $1.212 $1.212

$7,878 09,090

7,272 6,060

$ 7,878

016,968 024,240

30,300

$27,422

18,332 11,060

5,000

* Amortizable cost per unit: $30,300 ÷ 25,000 units = $1.212 (c) Straight-line amortization provides the lowest amount of

amortization expense for 2002. The declining-balance method provides the lowest amount for 2005. Over the four-year period, all three methods result in the same total amortization expense (equal to the amortizable cost).

10-54

PROBLEM 10-3B (Continued) (d) The declining-balance method produces the lowest net income in

2002 (highest amortization expense). The straight-line method produces the lowest net income in 2005.

(e) All three methods will result in the same cash flow from operations

in 2002, 2005, and in total over the four-year period. Amortization does not affect cash flow. There is no Cash account involved in the entry to record amortization (Dr. Amortization Expense; Cr. Accumulated Amortization). Amortization simply allocates the cost of the capital asset over the periods it benefits. It does not provide, nor use, cash.

(a)

Year Amortization Ex

2000 ($50,000 - $2,00

2001

($50,000 - $2,00

2002

($50,000 - $16,0

2003

($50,000 - $16,0

2004

($50,000 - $16,0

(b) The net book value at t

($50,000 - $48,600). Thiswhich is what it should be

PROBLEM 10-4B

10-55

pense Accumulated Amortization

0) ÷ 6 years = $8,000

$ 8,000

0) ÷ 6 years = $8,000

16,000

00 - $1,400) ÷ 3 years = $10,867

26,867

00 - $1,400) ÷ 3 years = $10,867

37,734

00 - $1,400) ÷ 3 years = $10,866

48,600

he end of the asset’s useful life is $1,400 is equal to its estimated salvage value, .

10-56

PROBLEM 10-5B

Account Debited

Explanation

1.

Equipment Improvement or betterment expenditure, which makes the equipment more productive

2.

Repairs and Maintenance Expense

Does not make the equipment more productive. Likely benefits only the current period

3.

Equipment Improvement or betterment expenditure, which makes the equipment more productive

4.

Repairs and Maintenance Expense

Does not make the equipment more productive

5.

Training Expense Does not increase the productivity of the equipment–and current accounting policies do not recognize the cost of human capital

6.

Repairs and Maintenance Expense

Does not make the equipment more productive. Painting is a recurring expense

(a) Jan. 18 Repair Expense .....

Cash.............. Mar. 5 Repair Expense .....

Cash.............. Dec. 31 Equipment..............

Cash.............. (b) (1) Years 1, 2, and 3 ($112,000 – $12,000) (2) Year 4

$20,000 (same as Yeat year-end)

(3) Year 5

Total amortizable co Net book value [$112,000 – ($20,00 Add: Additional cost Less: Revised residu Revised amortizable Divide by remaining (9 – 4) Amortization expens

PROBLEM 10-6B

10-57

................................................... 1,500

................................................... 1,500

................................................... 2,400

................................................... 2,400

................................................... 35,000

................................................... 35,000

÷ 5 years = $20,000

ar 3, since addition to Equipment occurred

st:

0 x 4 years)] $ 32,000 35,000

67,000 al value 5,000

cost 62,000 useful life

÷ 5 years e $ 12,400

(a) Proceeds Less: Net book value Gain (loss) on disposal (b) There really is no “best”

allocate cost in varyingdeclining-balance methooffsets the additional amthe early years. The straup, coincidentally, at the units-of-activity method lof the equipment with the

(c) Amortization expense Add: Loss (gain) on disp Total effect on net incom (d) The results in part (c) sho

life of the assets is amortization chosen. Amperiods the asset is in uloss on disposal is the scost less the proceeds o$13,600.

PROBLEM 10-7B

10-58

Double Straight Units-of- Declining-

-Line Activity Balance $ 4,400 $4,400 $4,400 6,000 6,000 2,250

($1,600) ($1,600) $2,150

method in this situation. All three methods ways over the three year period. The d had a gain on disposal, but that just ortization expense this method charged in ight-line and units-of-activity methods end same position at the end of year three. The ikely provided the best matching of the cost revenue it produced through production.

Double Straight- Units-of- Declining-

Line Activity Balance $12,000 $12,000 $15,750

osal 1,600 1,600 (2,150) e $13,600 $13,600 $13,600

w that the total charge to incomes over the the same regardless of the method of ortization allocates the cost over the time se–the total charge, including the gain or ame. The total cost is equal to the original n disposal. In this case, $18,000 - $4,400 =

10-59

PROBLEM 10-8B

(a) July 1 Amortization Expense .................................... 7,400 Accumulated Amortization....................... 7,400 ($75,000 - $1,000) ÷ 5 years = $14,800 x 6/12 mos. = $7,400 1 Accumulated Amortization —Office Furniture ($14,800 x 4.5 years) ....... 66,600

Loss on Disposal ............................................ 8,400 Office Furniture ......................................... 75,000

(b) July 1 Amortization Expense .................................... 7,400 Accumulated Amortization....................... 7,400 ($75,000 - $1,000) ÷ 5 years = $14,800 x 6/12 mos. = $7,400 1 Cash................................................................. 1,000

Accumulated Amortization — Office Furniture ($14,800 x 4.5 years) ....... 66,600

Loss on Disposal ............................................ 7,400 Office Furniture ......................................... 75,000

[The loss on disposal equals amortization for the remaining six months of the original useful life, which makes sense as the only thing that changed was the useful life.]

(c) July 1 Amortization Expense .................................... 7,400 Accumulated Amortization....................... 7,400 ($75,000 - $1,000) ÷ 5 years = $14,800 x 6/12 mos. = $7,400 1 Cash................................................................. 8,000

Accumulated Amortization —Office Furniture ($14,800 x 4.5 years) ....... 66,600 Loss on Disposal ............................................ 400

Office Furniture ......................................... 75,000

10-60

PROBLEM 10-8B (Continued) (d) July 1 Amortization Expense .................................... 7,400 Accumulated Amortization....................... 7,400 ($75,000 - $1,000) ÷ 5 years = $14,800 x 6/12 mos. = $7,400 1 Cash................................................................. 8,500

Accumulated Amortization —Office Furniture ($14,800 x 4.5 years) ....... 66,600 Gain on Disposal....................................... 100

Office Furniture ......................................... 75,000

(a) Date Expenditure

Jan. 10 Land was purcJan. 15 Land was survFeb. 1 An existing bu

removed at a croom for the n

Feb. 10 Security fencefor $2,500.

Feb. 23 An architecturfor plans for th

Mar. 15 To remove thepreparation fobuilding, $3,50

Mar. 17 A building perApr. 10 Legal and app

were paid for adeveloped proCohlmeyer.

May 1 An amount of construct the b

May 15 An amount of landscaping.

May 20 A parking lot c

May 25 Company’s do<www.cohlmefor $150.

May 28 A lawyer was pthe new comp

May 31 The building wbusiness com

PROBLEM 10-9B

10-61

Account Title hased for $65,000. Land eyed at a cost of $3,000. Land ilding on the land was ost of $5,500 to provide ew structure.

Land

was built around the land Land Improvements

al firm was paid $15,000 e new building.

Building

trees and level the land in r construction of the new 0 was spent.

Building

mit acquired for $1,000. Building lication costs of $5,000 patent on the newly duct that will be sold by

Patent

$460,000 was spent to uilding.

Building

$4,000 was spent on Land Improvements

onstructed for $8,000. Land Improvements

main name, yer.com>, was registered

Registration Fee Expense

aid $4,000 for organizing any.

Legal Expense

as occupied and the menced.

No entry required

10-62

PROBLEM 10-9B (Continued) (b)

COHLMEYER COMPANY Balance Sheet (Partial)

May 31, 2003

Assets

Capital assets Land ($65,000 + $3,000 + $5,500) ............................. $ 73,500 Land improvements ($2,500 + $4,000 + $8,000)...... 14,500 Building ($15,000 + $3,500 + $1,000 + $460,000) .... 479,500 Patent ......................................................................... 5,000 Total capital assets ........................................... $572,500 Note: No amortization is required because operations did not

commence until May 31.

10-63

PROBLEM 10-10B

1. Research Expense ............................................................. 50,000

Patent .......................................................................... 50,000 2. Patent .................................................................................. 20,000

Legal Fees Expense ................................................... 20,000

3. Patent .................................................................................. 40,000

Legal Fees Expense ................................................... 40,000 4. Patent .................................................................................. 50,000 Patent Fee Revenue ................................................... 50,000

5. Amortization Expense ....................................................... 12,000

Patent .......................................................................... 12,000 [($25,000 + $20,000 + $40,000) ÷ 5 years] - $5,000 = $12,000

10-64

PROBLEM 10-11B

(a) 2002 2003 Development costs (capitalized) Production of product master $ 400,000 Estimated revenue ................ 8,000,000 Amortization per $ of revenue ..... $0.05 Amortization 2002 no revenue..................................................... $ 0 2002 $800,000 X $0.05............................................ $ 40,000 Research costs Designing and planning................................. 500,000 Code development ......................................... 600,000 Testing............................................................. 160,000 Production costs.................................................... 100,000 Total ........................................................................ $1,260,000 $140,000

(b) The $3,000,000 offer will not be recognized and will likely not be disclosed in the financial statements. It cannot be recognized in the financial statements because it is only an offer at year-end. The market value of intangible assets is not recognized or disclosed in the financial statements unless the carrying value of the related assets indicates a permanent impairment in the value of the assets. In this case, the $3,000,000 is well in excess of the carrying value of the assets.

10-65

PROBLEM 10-12B

(a) April 1 Land .......................................................... 2,200,000

Cash................................................... 2,200,000

May 1 Amortization Expense ............................. 20,000 Accumulated Amortization—Equipment 20,000 ($600,000 ÷ 10 years X 4/12 mos. = $20,000)

1 Cash .......................................................... 360,000 Accumulated Amortization—Equipment 260,000 Gain on Disposal .............................. 20,000 Equipment......................................... 600,000

Cost $600,000 Accumulated amortization [$600,000 ÷ 10 years X 4 years) + $20,000] 0260,000 Net book value 340,000 Proceeds 0360,000 Gain on disposal $ 20,000

June 1 Cash .......................................................... 1,800,000

Land................................................... 500,000 Gain on Disposal .............................. 1,300,000

July 1 Equipment................................................. 1,400,000

Cash................................................... 1,400,000

Dec. 31 Amortization Expense ............................. 50,000

Accumulated Amortization—Equipment 50,000 ($500,000 ÷ 10 years = $50,000)

10-66

PROBLEM 10-12B (Continued) (a) (Continued)

Dec. 31 Accumulated Amortization—Equipment 500,000 Equipment......................................... 500,000 Cost $500,000 Accumulated amortization ($500,000 ÷ 10 years X 10 years) 500,000 Gain (loss) on disposal $ 0

(b) Dec. 31 Amortization Expense ............................. 662,500

Accumulated Amortization—Buildings 662,500 ($26,500,000 ÷ 40 years = $662,500)

31 Amortization Expense ............................. 3,960,000 Accumulated Amortization—Equipment 3,960,000

($38,900,000a ÷ 10 years) $3,890,000 ($1,400,000 ÷ 10 years X 6/12 mos.) , 70,000 Total accumulated amortization $3,960,000

a$40,000,000 – $600,000 – $500,000 = $38,900,000

10-67

PROBLEM 10-12B (Continued)

(c) BOWMAN COMPANY (Partial) Balance Sheet December 31, 2003

Capital assets* Land.............................................................. $04,700,000 Buildings...................................................... $26,500,000 Less: Accumulated amortization —buildings............................................. 12,762,500 13,737,500 Equipment.................................................... $40,300,000 Less: Accumulated amortization —equipment........................................... 8,270,000 0 32,030,000

Total capital assets ............................... $50,467,500

*See T accounts which follow (not required).

10-68

PROBLEM 10-12B (Continued)

Land Jan. 1 Bal. 3,000,000 Apr. 1 2,200,000

June 1 500,000

Dec. 31 Bal. 4,700,000

Buildings Jan. 1 Bal. 26,500,000

Jan. 1 Bal. 26,500,000

Equipment Jan. 1 Bal. 40,000,000 July 1 1,400,000

May 01 600,000 Dec. 31 500,000

Dec. 31 Bal. 40,300,000

Accumulated Amortization—Buildings

Jan. 1 Bal. 12,100,000 Dec. 31 AJE 662,500

Dec. 31 Bal. 12,762,500

Accumulated Amortization—Equipment May 1 260,000 Dec. 31 500,000

Jan. 1 Bal. 5,000,000 May 1 20,000 Dec. 31 50,000 Dec. 31 AJE 3,960,000

Dec. 31 Bal. 8,270,000

10-69

PROBLEM 10-13B

(a)

St. Amand Company St. Helene Company Asset turnover

Return on assets

(b) St. Helene Company is more efficient in using its assets to generate

sales–its assets turnover of 1.69 times is higher than 0.80 for St. Amand Company. It is also much more efficient in using assets to produce income–with a return on assets of 75% compared to 20% for At. Amand Company.

75%=$800,000$600,000

times 1.69=$800,000

$1,350,000

20%=$2,000,000$400,000

times 0.80=$2,000,000$1,600,000

10-70

CUMULATIVE COVERAGE–CHAPTERS 3 TO 10

(a)

1. July 31 Interest Expense................................................. 15 Accounts Receivable ......................................... 75 Cash.............................................................. 90

2. 31 Bad Debt Expense .............................................. 500 Allowance for Doubtful Accounts ($2,500 - $2,000) ........................................... 500 3. 31 Interest Receivable............................................. 467 Interest Revenue ($10,000 X 8% X 7/12 months) .................... 467 4. 31 Cost of Goods Sold ............................................ 1,000 Merchandise Inventory ($57,000 - $58,000) 1,000 5. 31 Operating Expenses........................................... 2,000 Prepaid Expenses........................................ 2,000 6. 31 Amortization Expense ($3,600 + $2,560 + $3,750) .................................. 9,910 Accumulated Amortization–Building......... 3,600 Accumulated Amortization–Equipment..... 2,560 Patent............................................................ 3,750 Calculations: Building ($105,000 - $15,000) ÷ 25 years = $3,600 Equipment ($25,000 - $12,200) X 20% (1 ÷ 5 years) = $2,560 Patent ($63,750 + $11,250) ÷ 20 years = $3,750

10-71

CUMULATIVE COVERAGE (Continued) (a) (Continued) 7. July 31 Interest Expense................................................. 1,010 Interest Payable ($121,190 X 10% X 1/12 mos.) ..................... 1,010 8. 31 Operating Expenses........................................... 1,400 Accounts Payable........................................ 1,400

10-72

CUMULATIVE COVERAGE (Continued) (b) This format not required but is presented to show calculations.

Unadjusted Trial Balance

Adjustments

Adjusted Trial Balance

Acct. No.

Account Dr. Cr. Dr Cr. Dr. Cr. 101 Cash 18,000 (1) 90 17,910 105 Petty Cash 200 200 112 Accounts Receivable 25,000 (1) 75 25,075 113 Allowance for Doubtful

Accounts 2,000 (2) 500 2,500 115 Notes Receivable 10,000 10,000 118 Interest Receivable (3) 467 467 120 Merchandise Inventory 58,000 (4) 1,000 57,000 133 Prepaid Expenses 16,000 (5) 2,000 14,000 140 Land 50,000 50,000 145 Building 105,000 105,000 146 Accumulated

Amortization – Building 10,800 (6) 3,600 14,400 151 Equipment 25,000 25,000 152 Accumulated Amort. –

Equipment 12,200 (6) 2,560 14,760 177 Patent 63,750 (6) 3,750 60,000 201 Accounts Payable 81,000 (8) 1,400 82,400 230 Interest Payable (7) 1,010 1,010 275 Mortgage Payable 121,190 121,190 301 LeBrun, Capital 119,937 119,937 306 LeBrun, Drawings 15,000 15,000 401 Sales 750,000 750,000 505 Cost of Goods Sold 600,000 (4) 1,000 601,000 612 Bad Debt Expense (2) 500 500 645 Operating Expenses 100,000

(5) 2,000 (8) 1,400 103,400

711 Amortization Expense (6) 9,910 9,910 820 Interest Revenue (3) 467 467 905 Interest Expense 11,177

(1) 15 (7) 1,010 12,202

Total 1,097,127 1,097,127 16,377 16,377 1,106,664 1,106,664

10-73

CUMULATIVE COVERAGE (Continued) (c)

LEBRUN COMPANY Income Statement

For the Year Ended July 31, 2003

Sales revenues Sales................................................................ $750,000

Cost of goods sold......................................... 601,000 Gross profit ............................................................ 149,000 Operating and other expenses Operating expenses....................................... $103,400 Amortization expense.................................... 9,910 Bad debt expense .......................................... 500

Total expenses .......................................... 0 0 113,810 Income from operations........................................ 35,190 Other revenue and gains Interest revenue............................................. $ 467 Other expenses and losses Interest expense ............................................ 12,202 11,735 Net income ............................................................. $ 23,455

LEBRUN COMPANY Statement of Owner’s Equity

For the Year Ended July 31, 2003

LeBrun, Capital, August 1..................................................... $119,937 Add: Net income .................................................................... 23,455 143,392 Less: Drawings ...................................................................... 15,000 LeBrun, Capital, July 31 ........................................................ $128,392

10-74

CUMULATIVE COVERAGE (Continued) (c) (Continued)

LEBRUN COMPANY Balance Sheet July 31, 2003

Assets Current assets Cash ($17,910 + $200) ................................................. $ 18,110 Accounts receivable.................................................... $25,075 Less: Allowance for doubtful accounts..................... 2,500 22,575 Notes receivable .......................................................... 10,000 Interest receivable ....................................................... 467 Merchandise inventory................................................ 57,000 Prepaid expenses ........................................................ 14,000 Total current assets............................................... 122,152 Capital assets Land ............................................................................. $50,000 Building .................................................... $105,000 Less: Accumulated amortization ........... (14,400) 90,600 Equipment ................................................ $25,000 Less: Accumulated amortization ........... (14,760) 10,240 Patent (net of $15,000 accumulated amortization) 60,000 210,840 Total assets........................................................................ $332,992

10-75

CUMULATIVE COVERAGE (Continued) (c) (Continued)

LEBRUN COMPANY Balance Sheet (Continued)

July 31, 2003 Liabilities and Owner’s Equity Current liabilities Accounts payable .............................................................. $ 82,400 Interest payable ................................................................. 1,010 Current portion of mortgage payable .............................. 1,596 Total current liabilities................................................. 85,006 Long-term liabilities Mortgage payable, less current portion ......................... 119,594 Total liabilities........................................................................... 204,600 Owner’s equity LeBrun, Capital .................................................................. 128,392 Total liabilities and owner’s equity ......................................... $332,992

10-76

BYP 10-1 FINANCIAL REPORTING PROBLEM (a) (1) $3,013,000

(2) $1,245,000 (3) $1,768,000

See Note 6 to the financial statements. (b) $727,000 in capital assets were purchased in 2000 (see the

Consolidated Statements of Cash Flows). (c) $766,000 was received from the disposal of capital assets in 2000.

The net book value of these assets was $646,000, calculated as follows:

Net book value of capital assets at end of 1999 .................. $2,308,000 Add: Capital assets purchased during 2000 ........................ 727,000 Less: Depreciation of capital assets for 2000...................... (621,000) Balance without any disposals ............................................. 2,414,000 Account balance at end of 2000............................................ 1,768,000 Net book value of disposals during 2000 ............................. $ 646,000

(d) Depreciation is calculated using the straight-line basis (see Note 2).

In 2000, it also includes a charge for decline in value of corporate store leasehold improvements, equipment, furniture, fixtures and other (see Note 6).

(e) The expected useful life for calculating depreciation on the

equipment, furniture, and fixtures was 7 years. (f) The primary source of goodwill was the acquisition of Diedrich

Coffee, Inc. (see Note 3). Goodwill is only created when another company is purchased.

(a) Maple

the unwith iand ifrevenbenefactivilevelsprovid

(b) The la

expencapitasepar

(c) The

expena longthrou

S

BYP 10-2 INTERPRETING FINANCIAL STATEMENT

10-77

Leaf Foods could use the straight-line, declining-balance or its-of-activity method to amortize its capital assets associated

ts Burlington plant. The straight-line method is simple to use the assets are used at a consistent level will match costs with ue. Declining-balance is appropriate in cases where the its are greater in the early years of an assets life. The units-of-ty method would be the most appropriate in this case as the of production vary widely. The units-of-activity method will e the best match of costs with revenue.

bour dispute related costs should be treated as an operating diture. They do not have a future benefit and cannot be lized. They would be reported on the income statement ately, as an unusual item. These are not extraordinary items.

$40 million investment should be treated as a capital diture. They will result in the creation of an asset that will have life and the cost will be matched with the revenue it generates

gh annual amortization charges.

10-78

BYP 10-3 ACCOUNTING ON THE WEB

Due to the frequency of change with regard to information available on the world wide web, the Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found on-line in the Instructor Resources section of our home page <www.wiley.com/canada/weygandt2>.

10-79

BYP 10-4 COLLABORATIVE LEARNING ACTIVITY

(a)

Lévesque Company—Straight-Line Method Annual amortization

Building [($320,000 – $20,000) ÷ 50 years]........................ $ 6,000 Equipment [($110,000 – $10,000) ÷ 10 years].................... 0 10,000 Total annual amortization................................................... $16,000

Total accumulated amortization ($16,000 X 3 years) ............... $48,000

Ferris Company—Double Declining-Balance Method

Year

Asset

Calculation

Annual Amortization

Accumulated Amortization

2000

2001

2002

Building Equipment Building Equipment Building Equipment

$320,000 X 4%* $110,000 X 20%** $307,200 X 4% $88,000 X 20% $294,912 X 4% $70,400 X 20%

$12,800 22,000

012,288

0 17,600

011,796 0 14,080

$34,800

29,888

025,876 $90,564

* 1 ÷ 50 years = 2% x 2 = 4% ** 1 ÷ 10 years = 10% x 2 = 20%

10-80

BYP 10-4 (Continued) (b)

Year

Lévesque Company

Net Income

Ferris Company

Net Income As

Adjusted

Calculations for Ferris Company

2000 2001 2002

$084,000 0088,400 0090,000

$086,800 89,888 0094,876

$68,000 + $34,800 – $16,000 = $86,800 $76,000 + $29,888 – $16,000 = $89,888 $85,000 + $25,876 – $16,000 = $94,876

Total net income

$262,400

$271,564

(c) Based on the above analysis, Mr. Yajchuk should buy Ferris Company. It is more profitable than Lévesque Company.

10-81

BYP 10-5 COMMUNICATION ACTIVITY

Memorandum

To: From: President, Research Inc. Date: Today Re: R&D Accounting Standards We would like to provide the following comments for your consideration as you review the current accounting standards for research and development costs. Our company is in favour of capitalizing all research and development costs. Some relatively small companies may spend less on R&D because they must expense these costs. However, the vast majority of companies realize that for continued growth and stability, R&D expenditures are a high priority regardless of how they are recorded for accounting purposes. Requiring companies to expense R&D costs instead of allowing them to be capitalized leaves Canadian companies such as ours at a competitive disadvantage as compared to non-Canadian companies. Canadian companies may be more reluctant to invest millions of dollars on research and development since the costs would negatively impact their financial statements in the short-run.

The tangible future benefits of R&D costs may not be realized for several years, if ever. Conversely, the purchase of a long-lived asset (i.e., equipment, building) will provide benefits immediately as well as in future years. Nonetheless, R&D is an important part of our base of knowledge assets. Without capitalizing them, we are understating our balance sheet and future potential. We believe expensing R&D costs to be an excessive application of the conservatism concept. The conservatism concept dictates that when reasonable doubt exists, a company should choose the option that has the least favourable effect on net income. Expensing R&D costs is an example of applying the conservatism concept without regard for reality.

10-82

BYP 10-5 (Continued) We hope these comments assist you in your revision of this standard. We would be pleased to elaborate further on any of the above points at your convenience. Note to instructor: This memo is written from the viewpoint of a research company. The same issues would be raised in a memo defending the standard but the emphasis would differ.

10-83

BYP 10-6 ETHICS CASE

(a) The stakeholders in this situation are:

President of Finney Container Company. Controller of Finney Container Company. The shareholders 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.

10-84

BYP 10-6 (Continued) (c) Net income in the year of change is increased $240,000 ($480,000 -

$240,000), because amortization expense is decreased $240,000, by implementing the president's proposed changes.

Old Estimate Asset cost...................................................................... Estimated residual........................................................ Amortizable cost........................................................... Estimated useful life..................................................... Amortization per year..................................................

$2,700,000 00,300,000 02,400,000 ÷ 5 years $ 480,000

Revised Estimate

Asset cost...................................................................... Estimated residual........................................................ Amortizable cost........................................................... Amortization taken to date ($480,000 X 2 years)........ Remaining cost to be amortized ................................. Remaining useful life (8 – 2) ........................................ Amortization per year...................................................

$2,700,000 300,000 2,400,000

960,000 1,440,000

÷ 6 years $ 240,000