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© 2017 McGraw-Hill Education. All rights reservedSolutions Manual to accompany Intermediate Accounting, Volume 1, 7th edition 9-1

Chapter 9: Long-lived Assets

Suggested TimeCase 9-1 Glowworm Inc.

9-2 Winery Incorporated9-3 Penguins in Paradise

Technical ReviewTR9-1 Lump-sum Purchase................................................ 10TR9-2 Capital versus Expense ........................................... 5TR9-3 Elements of Cost ..................................................... 10TR9-4 Self-constructed Asset............................................. 10TR9-5 Low-interest Loan…….. ......................................... 15TR9-6 Decommissioning Obligation ................................. 15TR9-7 Research and Development..................................... 10TR9-8 Website.................................................................... 10TR9-9 Goodwill.................................................................. 10TR9-10 Disposal of Long-lived Assets…….. ...................... 15

AssignmentA9-1 Valuation Model ..................................................... 10A9-2 Component Accounting .......................................... 15A9-3 Lump-sum Purchase (*W) ...................................... 10A9-4 Repairs and Other Expenditures ............................. 20A9-5 Acquisition Cost…….............................................. 15A9-6 Acquisition Cost...................................................... 25A9-7 Expenditure Classification ...................................... 15A9-8 Asset Acquisition (*W) .......................................... 40A9-9 Self-Constructed Asset ........................................... 10A9-10 Self-Constructed Asset............................................ 30A9-11 Donated Assets ....................................................... 15A9-12 Long-lived Asset Accounting ................................. 30A9-13 Decommissioning Obligation ................................. 15A9-14 Costs in Research and Development Phases (*W) . 15A9-15 Costs in Research and Development Phases........... 15A9-16 Costs in Research and Development Phases........... 20A9-17 Costs of Software Development ............................ 20A9-18 Intangible Assets ..................................................... 30A9-19 Website Development ............................................. 30A9-20 Intangible Assets (*W)............................................ 15A9-21 Goodwill.................................................................. 15A9-22 Goodwill ................................................................ 20A9-23 Disposal of Long-lived Assets ................................ 20A9-24 Disposals ................................................................. 20A9-25 Investment Property (Appendix)............................. 20

© 2017 McGraw-Hill Ryerson Ltd. All rights reserved.9-2 Solutions Manual to accompany Intermediate Accounting, Volume 1, 7th edition

A9-26 Investment Property (Appendix)............................. 30A9-27 Government Assistance (Appendix) ...................... 30A9-28 Government Assistance (Appendix) ..................... 25A9-29 Self-constructed Asset (ASPE) ............................... 15A9-30 Expenditure Classification (ASPE)......................... 15

*W The solution to this assignment is on the text website, Connect.The solution is marked WEB.


Cases

Case 9-1Glowworm Inc.

Overview

GI is a large, privately owned manufacturing firm that reports its financial results in accordance with ASPE (ASPE). There is currently a disagreement between Jessica Simpson, senior accountant at GI, and GI’s Chief Financial Officer (CFO). The dispute is in relation to whether employee bonuses will be paid for the 20x6 fiscal year-end. At GI, bonuses are paid when income before tax exceeds $1,000,000. The CFO made adjustments to Jessica’s draft financials that resulted in income before taxes of $925,000.

In analyzing the contentious issues, we must be mindful of a potential bias on the part of Jessica. She may be inclined to select policies that maximize earnings for purposes of a bonus. The needs of external users relying on GI’s financial statements to make resource allocation decisions must be kept in mind in analyzing these issues.

Issues

1. Depreciation2. Grant3. Asset retirement4. Restated net income

Analysis and Conclusions

1. Depreciation

Jessica reversed the journal entry that has been recorded to reflect depreciation expense on GI’s office building. Her reasoning is that the building has increased in value, based on a recent appraisal.

ASPE requires use of the historical cost model for long-lived assets. This means the asset is reported at its cost on the date of acquisition, plus any subsequent betterments/additions, less accumulated depreciation. The historical cost model is not meant to reflect the fair value of the asset. The depreciation method selected by GI must be applied on a consistent basis to allocate the cost of the asset to the period of use.It was not appropriate for Jessica to reverse the depreciation entry. The adjustment made by the CFO was correct: $200,000 in depreciation expense should be reported in the financial statements.


2. Grant

The grant received from the Federal Government to upgrade manufacturing equipment was reported as revenue by Jessica in the 20x6 financial statements. As discussed in the appendix to the chapter, ASPE provides the following guidance with respect to government assistance:

“Accounting standards require that government grants toward the acquisition of property, plant, and equipment in any form should be either:

1. Deducted from the related assets with any depreciation calculated on the net amount; or

2. Recorded as deferred income that is recognized over the life of the asset. The deferred income would be amortized to income on the same basis as the related depreciable assets are depreciated.”

Based on the above guidance, it is clear that the $50,000 grant should not have been reported as revenue in 20x6. Given users of the financial statements may find relevance in seeing the government assistance reported as a separate line item on the balance sheet, GI should select option 2 and report the unamortized portion of the grant as deferred income on the balance sheet. The amount that can be taken into income in 20x6 is 1/7 of $50,000: $7,143. This takes the grant into income on the same basis as the depreciation on the related assets (assuming a straight line method is used).

The special platform, which cost $13,000, was correctly capitalized with the equipment as all costs associated with readying an asset for use are to be reported as part of the asset’s cost. Using this principle, we can conclude that the $6,000 spent to remove and reinstall other equipment to make room for the new equipment was incorrectly expensed. The $6,000 should have been capitalized with the equipment and amortized over the 7 year useful life of the equipment. The income impact of the adjustment that should have been made to Jessica’s financial statements with respect to this new equipment can be summarized as follows:

Grant Revenue (reverse): ($50,000)Deferred revenue into income in 20X6: 7,143Reverse expense re: installation: 6,000Depreciation on $6,000: (857)Net change to income: ($37,714)

3. Asset retirement obligation

Jessica recorded a liability in the financial statements to reflect a promise made by GI to restore a piece of land in order to maintain the peace in the community and meet community bylaws. The restoration is planned for fiscal 20x17 and is estimated to cost $40,000. The issue is whether this liability needs to be recorded or not. Under ASPE, such obligations are only to be recorded if the result of a legal obligation. Constructive liabilities (based on past actions of the firm or promises made to the public) are not recorded in accordance with ASPE.


In this case, since GI was advised by a lawyer to clean up the land, it seems as though a legal obligation does exist in fiscal 20x6. Further clarification with the lawyer as to the basis of this advice is needed. Assuming that there is some legal liability, the following entry is needed:

Land improvement .......................................................................... 28,983Provision for site restoration ................................................ 28,983

$40,000 × (P/F, 4%, 11) = $40,000 × 0.64958= $28,983

This assumes a 4% interest rate. Other assumptions are valid. Interest of $1,040 and some asset amortization must be recorded.

4. Restated net income

Based on the analysis above, the net income before tax for the year ending Dec 31 20x6 should be:

$1,220,000 - $200,000 - $37,714 - $1,040 and amortization = $981,246, less amortization,

Although this is higher than the CFO’s calculation, it is still below the threshold for employee bonuses.


Case 9-2

Winery Incorporated

Overview

Winery Incorporated (WI) has recently incorporated. Their previous financial statements as a partnership used the cash basis of accounting and were prepared for tax purposes and management purposes only. They did not have a GAAP constraint. Taxes were paid by each partner, not by the partnership. Tax is now paid by the company. WI now has a bank that requires audited financial statements and has a covenant requiring a minimum current ratio. The bank will be interested in checking compliance with their covenant as well as cash flow prediction to see if there is adequate cash to make their interest and principal payments.

WI has a GAAP constraint which requires the accrual basis of accounting.

It must be determined what accounting standards WI will follow. They are considering using accounting standards for publically accountable enterprises to be comparable to their competitors. They are also considering the use of ASPE . Management will be sensitive to any impact on the current ratio due to the covenant.

It is important that standards are ethical and developed for the long-term since this is their first year-end as a corporation.

Issues1. Valuation basis for vines and grapes2. Valuation of winery license3. Valuation of inventory – wine4. Revenue recognition – wine5. Software and web site development costs6. Revenue recognition – annual fee7. Inventory valuation – spoiled wine8. Lawsuit9. Hedge10. Forgivable loan

Analysis

For each issue, the appropriate accounting policy using IFRS will be discussed then any difference if ASPE was selected.

1. Valuation basis for vines and grapes

Part A


The growing grapes would be considered biological assets since they are living plants. Once the grapes are harvested these would be considered inventory.

Vines would be classified as bearer plants and are not subject to fair value. Vines would be recorded at cost and depreciated as per any other fixed asset. If the life is indefinite, they would not be depreciated.

The value of the land would have to be separated from the value of the vines and grapes. The land could be valued from recent real estate transactions. The land would not be depreciated.

Biological assets are valued at fair value less any point of sale costs. These assets are not depreciated. Any gains or losses would be recognized in earnings. Fair value of the grapes would need to be determined each reporting date. The fair value can be obtained from the active market for the purchase or sale of grapes. Impairment testing would not be required since fair value is determined every reporting date.

When harvested the grapes would be transferred and reclassified as inventory at their fair value less point of sale costs.

Any changes in the fair value of the biological assets would impact earnings. Any increases would have a favourable effect but decreases would have a negative impact.

The vines and land would be classified as a non-current asset so there would be no impact on the current ratio. Impairment testing would be conducted annually.

Part B

If ASPE were selected, the grapes, in addition to the vines and land, would be valued using cost.

The assets would be tested for impairment if an event or circumstance indicated impairment e.g. frost may damage the vines and cause a reduction in value.

2. Valuation of winery license

Part A

The winery license would be classified as an intangible asset. Since the license does not have an expiry date it would be considered an intangible asset with an indefinite lifespan. Since there is no active market for these licenses the cost model would be used for the licenses. The licenses would not be amortized but tested for impairment.

The license would be classified as a non-current asset therefore there would be no impact on the current ratio.


Part B

The accounting would be identical in.

3. Valuation of inventory – wine

Part A

The grapes while growing would be classified as a biological asset. When harvested the grapes would be reclassified from biological assets to inventory at the fair value less point of sale costs. The grapes when crushed would then be transferred into wine inventory. The wine would be a manufactured inventory and would be classified as work in progress. The wine and grapes would be valued at lower of cost and net realizable value at each reporting date.

Wine would be classified as a current asset e.g. non premium wine which is expected to be sold within the year. The premium wine, with a two-year cycle, would also be classified as a current asset if this is the normal operating cycle. Costs would include any direct costs and a portion of general overhead. In addition, the premium wine which is aged for a period of time up until two years would be considered to be a qualifying asset where interest must be capitalized. Any specific borrowings and potentially a portion of the interest on general borrowings, loan from bank, would be added to the cost of the wine.

The inventory that is classified as current would have a positive impact on the current ratio.

Part B

The accounting standards for private enterprises would not classify the grapes as a biological asset. They would be valued at cost. Interest costs may be capitalized if they relate to specific borrowings not general borrowings. The loan is for general purposes therefore the interest costs would not be capitalized for the premium wine.

4. Revenue recognition – wine

Part A

Wine sold in the store or on the website would be recognized when the performance obligation is satisfied – when the wine is delivered. There is no cash collection risk since customers would pay at purchase with the exception of the LCBO. The LCBO is a government run organization and there would be no cash collection risk.


Part B

The accounting would be similar in accounting standards for private enterprises.

5. Software and web site development costs

Part A

The acquired software would be classified as an intangible asset with a definite lifespan. The software would be amortized over the period of its intended use by WI. Web site costs which are in the planning stage or just for operating would be expensed. The consulting fees depending on their nature may have a portion capitalized. The training costs would be expensed. Costs to develop the website e.g. graphics design and the web domain name would be capitalized. Any capitalized costs would be amortized over the period of intended use of the website. The amortization period for the software and web site is likely a short period since it is technology based.

The intangible assets would be classified as a non-current asset therefore would not have an impact on the current ratio.

Part B

The accounting would be identical in ASPE .

6. Revenue recognition – annual fee

Part A

The annual fee has several performance obligations, since the customer receives bottles of wine and a subscription to the magazine. The fee would need to be allocated to the two performance obligations based on relative fair value. The portion related to the wine would be recognized when the bottles of wine are delivered, since this is when the performance obligation is satisfied. The portion related to the subscription would be recognized when the subscription is delivered. Unearned revenue would increase for subscription revenue, lowering the current ratio.

Part B

The accounting would be similar in ASPE .


7. Inventory valuation – spoiled wine

Part AThe wine that is spoiled must be valued at its net realizable value. This will result in a write down. Based on initial samples it indicates the wine is spoiled and unless there is an alternative use for the wine, the value would be zero.

If the spoiled wine was classified as a current asset this would have a negative impact on the current ratio.

Part B

The accounting would be identical in ASPE .

8. Lawsuit

The lawsuit would be evaluated as a provision. The lawsuit was filed for $1 million but there is no evidence to support that it is probable WI will lose the lawsuit or the amount of the lawsuit. A legal opinion must be obtained. There should be note disclosure of the lawsuit. No amount needs to be recognized, unless the legal opinion is adverse. There is no impact on the current ratio.

Part BThe accounting would be identical in ASPE.

9. Hedge

WI must decide if they wish to elect hedge accounting for the hedge. If they do not elect hedge accounting the forward contract or hedge would be recognized in fair value through profit and loss. The contract would be valued to fair value every reporting date and any changes in the value would impact net income. If hedge accounting is elected, the cash flow hedge would impact other

comprehensive income. Adoption of hedge accounting is onerous and likely not justified. There is no impact on the current ratio.

Part BThe accounting would be identical in ASPE if hedge accounting is not elected. These standards do not have comprehensive income so there would not be the option of showing changes in value in other comprehensive income. The standards do not distinguish between a cash flow and a fair value hedge. If there is a critical match of key terms hedge accounting would be allowed. No impact would occur on the financial statements until the hedge was terminated.

10. Forgivable loan


The forgivable loan would be recognized when the criteria are met or expected to be met of hiring employees and a minimum purchase of fruit. Note disclosure would be required of the conditions. The $1 million cannot all be recognized in the current period. If the criteria are expected to be met $500,000 would be deferred revenue and recognized next year. The $500,000 relating to the current year could be either netted against salary expenses or the purchase costs of fruit or the amount could be recognized as other income. WI would not want to net the government assistance against the cost of the fruit since this would reduce the value of the inventory and have a negative impact on the current ratio.

Part B

The accounting would be identical in ASPE.


Case 9-3Penguins in Paradise

Overview

Many users will be relying on the financial statements of PIP. These various users are sometimes in conflict, and thus correct ethical decisions are crucial. Decisions cannot be made to help one group at the expense of another, or try to portray a particular “picture” to investors.

Most significantly, equity investors will be relying on the financial statements to calculate their participation payment. They will want accounting policies that maximize net income. In addition, they will want to ensure that PIP’s operations, particularly its costs, are being efficiently controlled.

The bank will also be relying on the financial statements to establish their share of revenue, and to ensure that the operations are under control. They will likely want to see statements that show positive cash flows.

The promoter will be relying on the financial statements in calculating his participation payment. Like all the other investors, he will want net income to be high in order to maximize his own income.

In setting the accounting policies, we will have to bear in mind that in this situation they will have a direct impact on PIP’s cash flows. Cash flows will be very important in the first stages of the life of the play, a period in which expenses will exceed revenues. Early recognition of expenses will decrease net income, and the participation payments which are based on operation profits.

Issues:

The issues are as follows:

1. Sale of reservation rights2. Sale of movie rights3. Government grant4. Bank loan5. Expenditure recognition

Sale of reservation rights

The timing of recognition of the fees earned from selling reservation rights must be determined. The amount relates to the future performance of the play, that being in 20x5. Therefore, there is a case for future recognition. Arguments favouring recognition in 20x4 include the fact that the performance obligation is satisfied when selling the reservation rights, and that the amount is non-refundable. In addition, the amount paid


cannot be applied against future ticket prices and no future services are to be rendered. Because the performance obligation has been met (rights to a reservation), the amount should be recognized in 20x4. A separate fee is paid for the actual performance.

Sale of movie rights

The payment received for the sale of the movie rights can be taken into earnings in the current year because there is no future performance obligation. At a minimum, the payment should be recognized and disclosed as an unusual item because it will not occur again.

Government grant

We must determine whether the government grant is attributable to income or capital. The treatment of this amount will affect the royalty payment. If the amount is taken into income immediately, the participation payments will increase. If the amount is offset against an asset that is depreciated, then the participation payments derived from the grant will be paid over time. If the grant is tied to hiring Canadians to perform in the play, then the amount should be credited against the related expense.

If the grant has to be spent on costumes and sets made in Canada, then the amount should be netted against the related assets. The grant should be recognized when it becomes payable, not when it is collected.

In order to decide how this amount should be recognized, we must determine what the 50% content rule pertains to—against what purchase should it be offset? We must also determine the length of time that the rules apply in case the amount has to be repaid at a later date.

Bank loan

We must determine how to record the payment to the bank that is based on the play’s success. The 5% interest that is payable as well as an accrual based on expected future revenue could be expensed. Alternatively, just the 5% interest amount could be expensed because the remaining balance that would have to be paid is uncertain and difficult to determine. The latter approach seems more reasonable. The commitment will have to be clearly disclosed.

Expenditure recognition

In general, the financial statements for the organization might look like one of the following:

1. All expenditures are expensed as incurred, and large initial deficits are recorded, followed by large profits if the play is a success

2. Many expenditures are capitalized as assets, and recognized as expenses in the same period as revenues.


Cash flow is better portrayed by alternative 1, and this alternative reflects the high risk of the project. Results of operations might be better reflected by alternative 2.

The situation should be reviewed to see if the requirements for internally developed intangibles apply, and, if so, if the stage play in rehearsal qualifies as something governed by contractual rights (ownership of the script and production rights). In any event, capitalization is dependent on the assessment of the likelihood that the play will have probable future economic benefit, and be profitable in the future. If the likelihood is not high, then alternative 1 will be followed; otherwise, #2 is appropriate.

Salaries and fees for rehearsal

The expenditure can be recognized in either the current year or future years. Arguments can be made for either treatment. There is no certainty of the play succeeding and there are uncertain future benefits therefore the amount should be expensed in the current period. On the other hand, the amounts do relate to production in future years, and create an asset which is future potential revenue.

Costumes and sets

The costumes and sets can be expensed either in 20x4 or in future periods. An argument is the amount should be expensed immediately because there is uncertainty about the play’s success. However, the costumes and sets do relate to production in future years. Capitalizing the amount and recording depreciation in future years is justifiable.

Miscellaneous costs

Costs of administration and promotion should be expensed as incurred because there is no separately identifiable intangible asset that is created as a result.

Promoter’s fees

A related issue is what amount, if any, should be accrued for the promoter’s fees. At present, the payment is too uncertain; thus, the amount should be accounted for in the year that an amount becomes payable.


Technical Review

Technical Review 9-1

To apportion the cost of $500,000:

Item Appraisal Value Proportion Apportioned CostLand $ 250,00042% $ 210,000Building 225,000 37.5% 187,500Equipment 75,000 12.5% 62,500Patent 50,0008% 40,000

$600,000 $500,000Allow for rounding.

To record purchase:

Land.............................................................. 210,000Building…………………………………….187,500Equipment .................................................... 62,500Office building ............................................. 40,000

Cash........................................................ 500,000


Oil and filter change on delivery vehicle

$120 Expense

Repair to delivery vehicle after accident

$3,500 Expense

Painting new delivery vehicle after purchase

$700 Likely planned and built into

price: capitalize

Re-painting building hallway $2,200 Expense

Planting summer flowers outside administrative building

$500 Expense



To apportion the cost of $5,000,000:

Item AmountInvoice price $ 5,000,000HST (value added tax) --Delivery 12,200Repair (unexpected; expense) --Initial servicing (expected; capital) 14,000

$5,026,200

Allocated: Tires: $100,000 x 6 = $600,000Body ($5,026,200 - $600,000) x 40% = $1,770,480Engine ($5,026,200 - $600,000) x 60% =$2,655,720

To record purchase:

Machine – component 1, tires ..................... 600,000Machine – component 2, body ....………….1,770,480Machine – component 3, engine .................2,655,720HST payable................................................. 750,000Repair expense ............................................. 5,000

Cash........................................................ 5,781,200



The costs that would be capitalized for the self-constructed asset are:

Material $300,000

Labour 600,000

Incremental overhead 120,000

Interest costs (qualifying asset)

100,000

Cost of building permits 20,000

$1,140,000

The general overhead would not be directly related to construction of the new building. The incidental revenues and expenses would be shown separately in earnings.


To record purchase:

Machine........................................................ 18,334Note payable........................................... 18,334

P = $10,000 (P/A, 6%, 2)

= $10,000 1.83339= $18,334



Requirement 1

Land improvements ......................................................................... 1,072,750Provision for site restoration ................................................ 1,072,750

$5,000,000 × (P/F, 8%, 20) = $5,000,000 × 0.21455 = $1,072,750

Requirement 2

20X2:

Depreciation expense – land ($1,072,750 / 20) .............................. 53,638Accumulated depreciation – land improvements ................. 53,638

Interest expense ($1,072,750 x 8%) ................................................. 85,820Provision for site restoration. ............................................... 85,820


Requirement 1

1. Engineering work to improve a product’s design so it can be manufactured on a cost-effective basis.

Development

2. Salaries of scientists searching for a way to apply new research outcomes.

Research

3. Testing prototype products for effectiveness

Development

4. Documenting the formulas associated with new research outcomes

Research

5. Supervisors in a research lab. Research

Requirement 2

Development expenditures are expensed, but must be capitalized and subsequently amortized if they meet the following criteria:

a) technical feasibility established.b) intent to complete and then produce and market the product/process.c) ability to use or sell the asset.d) probable future benefits established: future markets or internal usefulnesse) adequate resources exist to complete the project.f) identifiable costs.



Expenditure Amount Treatment

Depreciation of computer equipment, connection and utility cost

$35,000 Operating expense

Website maintenance and concept improvements

$22,000 Expense; Likely “annual improvements”

Graphics $12,000 Capitalize

Creation of content, expected to be valid for three years

$24,000 Capitalize



Requirement 1

Goodwill purchased:Actual purchase price .......................................................................$1,250,000Less: Estimated fair value of the identifiable net assets

($150,000 + $350,000 + $550,000 + $400,000 + $75,000 - $320,000) ........................................................................... 1,205,000

Goodwill purchased..........................................................................$ 45,000

Acquisition entry:Accounts receivable ...........................................................150,000Inventory .............................................................................350,000Property, plant & equipment ...............................................550,000Land……………………………………………………. 400,000Customer list .........................................................................75,000Goodwill................................................................................45,000

Liabilities.................................................................................... 320,000 Cash......................................................................................... 1,250,000


Equipment One

Cash………………………………………………………………. 125,000Accumulated depreciation................................................................ 440,000

Equipment ..........................................................................…….. 500,000Gain ............................................................................................ 65,000

Equipment Two

New scoop………………………………………………..………. 200,000Accumulated depreciation................................................................ 85,000Loss old scoop.................................................................................. 25,000

Old scoop.................................................................................... 110,000Cash............................................................................................ 200,000


Assignments

Assignment 9-1

Classification Valuation modelRental apartment buildings Investment property Fair value or costManufacturing facility PP&E Revaluation (by class) or

costVacant land held for eventual sale

Investment property Fair value or cost

Vines in a winery Biological but bearer plant so exempt

Cost

Agriculture quotas Intangible Revaluation (has an active market) or cost

Growing timber Biological Fair value (less cost to sell)

Customer lists Intangible Only on books as an asset if purchased as part of a business combination; cost or revaluation; revaluation only if active market no active market, so not revaluation.


Assignment 9-2

Requirement 1

Possible componentsAirplane aircraft frame, engine, cabin interior,

equipment Wind farm Land, bases, blades, bearings, generator,

tower, underground cable, major inspection, decommissioning costs

Manufacturing facility roof, shell building, wiring, heating system, elevator

Cruise ship engine, ship frame, galley, seats, major inspection

Hydro lines poles, wires, insulators, decommissioning costs

Other suggestions are valid.

Requirement 2

To record purchase:

Component #1 (25% of $170,000)............... 42,500Component #2 .............................................. 42,500Component #3 .............................................. 42,500Component #4 .............................................. 42,500

Cash........................................................ 170,000

Assignment 9-3 (WEB)

To apportion the cost of $950,000 ($900,000 + $50,000):

Item Appraisal Value Proportion Apportioned CostLand $ 220,00021.6% $ 205,200Equipment 360,000 35.3% 335,350Office building 440,00043.1% 409,450

$1,020,000 $950,000To record purchase:

Land.............................................................. 205,200Equipment .................................................... 335,350Office building ............................................. 409,450

Cash........................................................ 950,000


Assignment 9-4

(a) Maintenance expense ........................................................... 70,400 Cash ...................................................................... 70,400

Regular maintenance that does not extend the life or improve utility is expensed.

(b) Maintenance expense ........................................................... 88,000 Cash.................................................................................. 88,000 Painting is regular maintenance. The assumption is that the painting does not last for a long period of time and must be done on a routine basis.

(c) Roof (new) ........................................................................... 132,400 Accumulated depreciation, old roof……………………… 96,000 Loss……………………………………………………….. 4,000 Roof (old)………………………………………………. 100,000 Cash.................................................................................. 132,400

Wiring (new)........................................................................ 87,600

Accumulated depreciation, old wiring…………………… 40,000 Wiring (old)……………………………………………. 40,000

Cash.................................................................................. 87,600 The wiring was an involuntary safety cost and must be capitalized.

(d) Machinery ........................................................................... 161,000 HST paid ……………………………………………. 22,540

Cash ($161,000 x 1.14)................................................ 183,540 The machine is recorded at its price paid, not its reported higher FMV.HST is refundable and is not part of the cost of the machine.

(e) Machinery ............................................................................ 3,200 Cash.............................................................................. 3,200The cost of the machine includes costs to ship and install it.

(f) Machinery ............................................................................ 10,400Repairs expense ................................................................... 24,000 Cash.............................................................................. 34,400The cost of the tune-up would be considered a cost to service and could be capitalized. This is likely a separate component. The unexpected repairs would likely be expensed. This is a gray area: who establishes what is known versus unexpected?


Assignment 9-5

Requirement 1

Purchase cost.....................................................................................................$1,060,000Repair and renovation ....................................................................................... 105,000Building ............................................................................................................ 1,165,000Wiring ............................................................................................................... 16,000Signage.............................................................................................................. 13,000

Balance in building account........................................................................$1,194,000

Requirement 2

Land:Purchase cost..................................................................................................... $32,500Demolition of old building................................................................................ 31,000Legal fees .......................................................................................................... 9,000Title insurance................................................................................................... 5,600Salvage proceeds*.............................................................................................( 11,200)

Balance in land account .............................................................................. $66,900*Salvage proceeds are offset against the purchase costs since it is assumed the amounts relate to proceeds from selling any items produced while bringing asset to the location.

Land improvements:

Driveway work.................................................................................................. $27,500Landscaping ...................................................................................................... 4,200Fence ................................................................................................................. 14,000

Balance in land improvements.................................................................... $45,700

Requirement 3

Case A:The $2,500 deposit with the utility company is an asset (prepaid).

Case B:The routine maintenance ($2,500) is expensed.


Assignment 9-6

a) Machinery [($22,500 x 98%) + $200 + $550] less $900 assigned to engine. ............................................. 21,900

Machinery component – engine…………………………….. 900Interest expense ($22,500 x 2%) ............................................. 450

Cash..................................................................................... 23,250The $100 allocation of salary of factory superintendent was not capitalized because

there was no additional cost involved— the salary would have been paid notwithstanding the installation. The $100 may be included in this entry as a debit to expense. Freight paid by the vendor is not a separate cost to the company because it is implicitly included in the price of the machine. Moving the wall is included as a cost of installation.

b) Machinery component - counter.............................................. 350Cash..................................................................................... 350

The counter should be set up as a separate component and depreciated over its (shorter) useful life.

c) Fixtures .................................................................................... 2,054Cash..................................................................................... 750Note payable (net)............................................................... 1,304

Note, $1,500 x .86957 (P/F, 15%, 1)........................... $1,304Cash ......................................................................... 750Cost of fixtures ............................................................ $2,054

If the gross method is used, a discount of $196 would be recorded, and the note payable would be recorded at $1,500.

d) General factory overhead (expense) ........................................ 425Cash (or liability) ................................................................ 425

The salary of the operator of an inoperative machine is nota proper cost of the machine.

e) Machinery (new motor) ........................................................... 1,250Accumulated depreciation (10% x $900) ................................ 90Loss on asset exchange............................................................ 160

Machinery component - motor (old motor) ........................ 900Cash..................................................................................... 600

Exchange of similar assets likely lacks commercial substance; valuation at book value ($810 + $600) but $1,250 maximum value so ends up at market.


Assignment 9-7

Item Classificationa. Cost of an oil change on the company’s truck.

Repairs expense

b. Cost of major brake replacement – expected every two years

Equipment - capitalize as a component for brakes and depreciate over two year period

c. Lawyer’s fees associated with a successful patent application.

Patent

d. Lawyer’s fees associated with an unsuccessful patent application.

Legal expense

e. Cost development website usedexclusively to advertise new products

Expense since website strictly advertising

f. Cost of permits for building construction.

Building

g. Cost to demolish an old building that is on a piece of land where a new building will be constructed.

Land

h. Future costs to restore land used for mine at end useful life

Land improvements - decommissioning cost

i. Costs required to remove asbestos in building to bring up to new safety code

Building - capitalize involuntary safety costs

j. Cost to excavate land to make it flat for a building site.

Land

k. Cost of replacing tires in construction equipment expected to last two years

Tires - separate component for construction equipment

l. Cost of installing a new roof on the company’s building.

Building - separate component

m. Cost to add new functions to a software package unique to the company

Software (asset)

n. Routine maintenance of web site. Expense (maintenance, marketing, etc.)



Requirement 1a)

Analysis of Land Account

Balance at 1 January ........................................... $1,200,000

Land site number 101:Acquisition cost .................................................. $6,000,000Commission to real estate agent ......................... 360,000Clearing costs ..................................................... $60,000Less amount recovered ....................................... (32,000) 28,000

Total land site number 101 ............................ 6,388,000

Land site number 102:Land value .......................................................... 800,000Building value (demolished immediately) ......... 400,000Demolition cost................................................... 80,000

Total land site number 102 ............................ 1,280,000Balance at 31 December ..................................... $8,868,000

b)Analysis of Buildings Account

Balance at 1 January ........................................... $2,600,000Cost of new building constructed on land site number 102:

Construction costs............................................................ $600,000Excavation fees ................................................................ 24,000Architectural design fees.................................................. 32,000Building permit fee .......................................................... 8,000 664,000

Balance at 31 December ....................................................... $3,264,000

Site 103 is land “held for sale” therefore would not be included in property, plant and equipment or land. This land would be segregated on the statement of financial position. It is investment property. c )

Analysis of Leasehold Improvements Account

Balance at 1 January ...............................................................................$ 1,600,000Electrical work........................................................................................ 180,000Construction of extension to current work area ($300,000 x 1/2).......... 150,000Office space improvements .................................................................... 240,000Balance at 31 December ......................................................................... $2,170,000


d)Analysis of Machinery and Equipment Account

Balance at 1 January ............................................................. $3,200,000Cost of new machines acquired:

Invoice price..................................................................... $540,000Freight costs ..................................................................... 4,000Unloading charges ........................................................... 6,000 550,000

Balance at 31 December ....................................................... $3,750,000

Royalty payments are an operating expense.

Requirement 2

SCF Disclosure

Investing ActivitiesAcquisition of land1.............................................................................. ($7,668,000)Acquisition of buildings........................................................................ (664,000)Acquisition of leasehold improvements2.............................................. (570,000)Acquisition of machinery and equipment ............................................. (550,000)

Although not a capital asset, investing activities would also list the land investment of ($3,000,000)

1 $6,388,000 + $1,280,000. It’s unlikely separate disclosure of the two different pieces of land would be made.

2 $180,000 + $150,000 + $240,000


Assignment 9-9

The costs that should be capitalized in property, plant and equipment are:

Cost Land Ski lift ToolsInvoice price high speed quad chair lift

$ 1,500,000

Shipping costs for delivery

17,500

Landscape architect fees grading expansion hill

$6,000

Permit costs 4,000*Clearing trees/grading land for expansion

42,500

Installation concrete bases for chair lift

90,000

Helicopter rental to install towers for chair lift

80,000

Labour installation ski lift

250,000

Testing of chair lift 25,000

Interest costs loan for construction

60,000**

Purchase tools required for annual maintenance

$75,000

Total $52,500 $2,022,500 $75,000

Note: The cost to dismantle the old life, and its sale price are an element of the residual value of the old lift.Training costs ($7,500) are expensed as is general overhead ($30,000) and routine maintenance ($45,000).

*Assumption: permit related to land for expansion ski hills not installation ski lift** Assumption: ski lift is a qualifying asset and takes a substantial amount of time to complete.


Assignment 9-10

Requirement 1

Cost to be capitalized:Materials ........................................................................................................ $1,066,200 Subcontracted work (primarily electrical and plumbing) .............................. 345,900 Direct labour; plant workers assigned to construction tasks (3) .................... 455,800 Direct labour; construction workers hired specifically for this project ......... 123,600 Plant foreman used for construction supervision; salary and benefits........... 34,900 Direct labour; plant maintenance workers assigned to construction tasks .... 53,200 Engineering and architectural services ......................................................... 216,700 Overhead, direct plant labour (1) ($455,800 x $0.57) ................................... 259,806 Interest on construction loan (2) .................................................................... 75,900 Administration costs directly related to construction(4)................................ 57,000

$2,689,006

Commentary(1) Plant overhead is assumed to be incurred for construction activities as well.

No overhead is assumed for construction workers labour. The alternate assumption is acceptable.

(2) Interest on construction is capitalized since this would be a qualifying asset. If there were general borrowings a portion of the general borrowings would also be capitalized.

(3) Otherwise idle time assigned to construction is capitalizable as long as the workers were really working productively on the building during this time.

(4) Specific administration of the job is capitalizable, but an assignment of executive salaries is less likely to be appropriately included, as general administrative expense. Company policy should be established.

Requirement 2

If the outside bid had been $2,400,000, and the building actually built was identical to that quoted, then the maximum value capitalized should be $2,400,000, and a loss on construction of $289,006 would be recorded.

Requirement 3

Loan interest must be capitalized when the asset is a qualifying asset that takes time to build, ship, or prepare for use.


Assignment 9-11

Requirement 1a) Entry to record the donation (artwork):

Artwork (appraised value) ....................................................... 80,000Contributed capital—donated assets................................... 80,000

Entry to record the donation:Building (appraised value plus transfer costs)......................... 685,000

Deferred revenue—government assistance......................... 650,000Cash..................................................................................... 35,000

Some would argue that $650,000 is the maximum value at which the building can be recognized, as fair value. However, this solution assumes that fair value does not include transfer costs (or that city appraisals are not 100% of market value.) Marcus records donations at fair value. This is accounted for as government assistance. The deferred revenue is recognized over time.

b) Entry to record renovation of building:Building improvements (asset account) .................................. 250,000

Cash..................................................................................... 250,000The building improvement would be recognized as a separate component because useful lives are different.

c) Entries to record depreciation:Depreciation expense [($685,000 – $50,000) ÷ 20 years]....... 31,750

Accumulated depreciation .................................................. 31,750Deferred revenue – government assistance

[$650,000 ÷ 20 years] = $32,500; some will offset renos) 32,500Accumulated depreciation .................................................. 32,500

Depreciation expense, renovation cost ($250,000 ÷ 8 years).. 31,250Accumulated depreciation, building improvements ........... 31,250

The artwork is assumed to have an indefinite lifespan and would not be depreciated. It would be tested for impairment.

Requirement 2Operating activities:

Add back depreciation ............................................................. 63,000Less: non-cash revenue............................................................ (32,500)

Investing activitiesAcquisition of building ........................................................... (35,000)Building renovations................................................................ (250,000)

Requirement 3Some object to capitalization and depreciation because the shareholders did not have to invest any capital in the asset—it was provided ‘free’. In this case, artwork is not depreciated and the government assistance offsets building depreciation.


Assignment 9-12

(a) Cash........................................................................................ 250Loss on disposal of equipment............................................... 6,250Accumulated depreciation, equipment................................... 26,000 Equipment ...................................................................... 32,500

(b) Machinery ($37,850 x .98) + $1,250 ..................................... 38,343Building (or other wiring account) ........................................ 250Software ................................................................................. 1,500Interest expense ($37,850 x .02) ............................................ 757 Cash................................................................................ 40,850Note: company practices will likely dictate the exact accounts debited for wiring and software. They may be a separate component in the machinery account.

(c) Maintenance expense ............................................................. 11,000 Cash................................................................................ 11,000

(d) Machinery component - overhaul ......................................... 37,500 Cash................................................................................ 37,500

(e) Roof accumulated depreciation ($10,200 x .75).................... 7,650Loss on building improvement .............................................. 2,550 Building component - roof............................................. 10,200

Building component - roof..................................................... 22,400 Cash................................................................................ 22,400

(f) Machine #1............................................................................. 17,933Machine #2............................................................................. 8,967 Cash................................................................................ 26,900$26,900 x 20/30 and 10/30, respectively

(g) Land ................................................................................ 37,500Building .......................................................................... 200,000 Common shares ...................................................... 237,500Appraised values of assets are used to value the transaction.


(h) Research expense............................................................ 193,000Deferred development costs ........................................... 122,000 Cash ........................................................................ 315,000Developed projects are assumed to meet the capitalization criteria. If not, this is an expense.

Deferred development costs ........................................... 27,500 Cash ........................................................................ 27,500Legal fees; this may be debited to patents or trademarks, etc.

(i) Land improvement component – paving ........................ 80,050 Cash ........................................................................ 80,050


Assignment 9-13

Requirement 1

Transmission tower .......................................................................... 4,200,000Cash, etc. .............................................................................. 4,200,000

Transmission tower .......................................................................... 201,020Decommissioning cost obligation. ....................................... 201,020

$360,000 × (P/F, 6%, 10) = $360,000 × 0.55839 = $201,020

Requirement 2

20X6:

Depreciation expense – transmission tower ($4,401,020 / 10) ...... 440,102Accumulated depreciation – transmission tower. ................ 440,102

Interest expense ($201,020 x 6%) .................................................... 12,061 Decommissioning cost obligation. ...................................... 12,061

20X7:

Depreciation expense – transmission tower ($4,401,020 / 10) ...... 440,102Accumulated depreciation – transmission tower. ................ 440,102

Interest expense (($201,020 + $12,061) x 6%))............................... 12,785Decommissioning cost obligation. ....................................... 12,785



Requirement 1Research expenditures must be expensed as incurred. Development expenditures might also be expensed, but must be capitalized and subsequently amortized if they meet the following criteria:

a) technical feasibility established.b) intent to complete and then produce and market the product/process.c) ability to use or sell the asset.d) probable future benefits established: future markets or internal usefulnesse) adequate resources exist to complete the project.f) identifiable costs.

Requirement 2

Expenditure ClassificationTesting new plastic prior to use in commercial production

development

Redesign of prototype to improve performance

development

Testing electronic instrument components during their production

neither (quality control)

Study of the possible uses of a newly developed fuel

research

Start-up activities for the production of a newly developed jet

neither (production) but may be development if methods are being established

Construction of a prototype for a new jet model

development

Design of a new, more efficient wing for an existing airplane

neither (assumed routine) some may suggest development: depends on extent of redesign and past practice.

Portion of vice-president’s salary, related to the time spent managing the research lab

research (reasonable overhead)

Experimentation to establish the properties of a new plastic just discovered

research

Current period amortization taken on the company’s laboratory research facilities

research

Salary of lab technician working on clinical trials of new drug

development (testing and evaluation of product; may be research if assumed to be searching for an application)


Assignment 9-15

Requirement 1

The research costs previously expensed of $4,400,000 in prior periods are expensed. All research is expensed.

Development costs of $3,600,000 prior to 31 October 20x5 must also be expensed. Up to this point, the project lacked technical feasibility and market potential.

The development costs incurred after 31 October 20x5 of $2,400,000 can be capitalized since the project has technical feasibility and market potential.

The advertising costs of $1,600,000 must be expensed.

Requirement 2

If there was no potential interest in the product, the capitalization criteria would not be met. Development expenditures would all be expensed, in this case.


Assignment 9-16

Requirement 1

In the R&D area: Research costs are expensed. Development costs are capitalized and amortized if they meet specific

criteria; If the criteria are not met, development costs are expensed.

The criteria which must be met to defer development costs are:a) technical feasibility established.b) intent to complete and then produce and market the product/process.c) ability to use or sell the asset.d) probable future benefits established: future markets or internal usefulnesse) adequate resources exist to complete the project.f) identifiable costs.

Requirement 2

Assets are not established for research and many development projects because the future benefits are not probable. To qualify as an asset using the asset definition, probable future economic benefit must exist. For a research or development activity, this is the future revenue from sale of the product. However, if such revenue is not probable, then the asset fails the recognition criteria (probability) and must remain unrecognized. An expense results. This is supported by conservatism, which encourages a bias of understating assets in the presence of uncertainty. However, assets would be better portrayed if the costs were capitalized and amortized in future periods when there is revenue.

Requirement 3

Victor’s accounting policy, to expense all R&D costs to date, seems appropriate because there is no saleable product until Phase III testing is successfully completed. While a clearly defined product exists once testing starts, technological feasibility is essentially determined in Phase III.

The impact on Victor’s financial statements would be large losses, and deficits, recorded until Phase III is complete and revenue begins to flow.

Accordingly, the financial statements are of little use to investors in judging the success of the project and test results and other scientific data would be far more relevant. Financials statements can indicate cash flow and cash reserves, which have to be adequate to get through Phase III testing.


Assignment 9-17

Requirement 1

Cost Decision to capitalize Software asset

Conceptual design work $ 6,400 No

Evaluation and decision on alternative options

8,200 No

Evaluation and consideration software requirements for options

19,000 No

Final selection of option 4,600 No

The above costs would not be capitalized since they would be before the development stage started. The costs were in the research phase and must be expensed.

Software design work 100,000 Yes 100,000

Software coding 56,000 Yes 56,000

Testing of software 24,000 Yes 24,000

These costs would be in the development phase since specific work was being done on the software. Software is to be used in the business, capitalization criteria would be met therefore they would be capitalized.

Data conversion costs information from old system

16,600 Perhaps. ?

The treatment of this cost would depend if the work was completed in the development stage or when the asset was ready for use. If in the development stage then would be capitalized if after the asset


was ready for use would be expensed.

Staff training on new software

4,200 No

Allocation general and administrative costs

17,600 No

Ongoing software maintenance

9,000 No

These costs would not be capitalized since they are specifically not allowed.

$180,000 +?

Requirement 2

Software is typically an intangible asset.

Software costs are classified in property, plant and equipment if they are an integral part of an item in property, plant and equipment and needed for that item to function.


Assignment 9-18

Costs must be considered by category. In general, this asset would meet the criteria for capitalization of internally developed intangibles, in that the product is severable, it is under the control of the entity, future benefits can be established, and the costs are reliably determinable. The critical issue is when future benefits are deemed to be present to the extent that capitalization may begin. Costs incurred in initial stages of software development are expensed, but once the product is technically and financially feasible, costs are deferred and amortized over a reasonable period.

This company may designate its own milestones to establish technical and financial feasibility. They may begin capitalization after a working prototype is established. The latter is assumed in this solution.

In this situation, the primary questions that have to be answered are:

1. At what point in time was technical and financial feasibility established? This is the capitalization point for software costs. It may be the end of 20x6 (prototype), second quarter in 20x6, or another time designated and substantiated by management.

2. What costs were incurred before and after this point?3. Do marketing studies indicate a strong market for the product, enough to justify

capitalization? This question is really part of 1, but is critical in capitalization decisions and should be examined carefully. If markets are very risky because of alternative technology and competition, no costs can be capitalized. This solution assumes that market studies are positive. Projections must be prepared. Break even analysis would be useful.

Classifications are based on assumptions, which have to be clarified before final decisions can be made. Preliminary suggestions:

Design costs, $1,351,600. Expense; assumed prior to prototype. Engineering costs, $489,200. Expense; assumed prior to prototype. Software development costs, $397,500. Expense portion prior to prototype and

capitalize costs subsequent to prototype. Market research costs, $68,900. Likely done before criteria are met so part of

feasibility study, expense. Administration costs, $1,340,000. Expense. Interest on bank loans, $125,000. Expense portion prior to prototype and

capitalize costs subsequent to prototype. (borrowing costs can be capitalized on intangible assets.)

Legal costs to register patents and copyrights amounted to $164,400. Capitalize and amortize over life (economic or legal, whichever is shorter) of patent /copyright as long as future value is established.

Manufacturing equipment, $900,000. Capitalize. Amortize for units of prototype produced in 20x6; amortization to be expensed. Machine need not be amortized until production begins as long as technological obsolescence is not a large factor in its ongoing utility.


Assignment 9-19

Requirement 1

The company must satisfy certain criteria to defer internally developed intangibles, in that the product must be severable or caused by contractual or legal rights, it is under the control of the entity, future benefits can be established, and the costs are reliably determinable.

In relation to the expenses listed:

Manager salaries (half planning) $492,000 Expense – operating cost; planning of web site is expensed.

Rented space 104,000 Expense – operating cost

Software purchased 180,400 Capitalize and amortize (infrastructure of web site).

Consultant’s fees—graphics design 143,600 Capitalize and amortize (graphic of web site).

Computer equipment purchased; four-year life

129,600 Capitalize and amortize (infrastructure).

Operating costs—heat, power, etc. 84,200 Expense – operating cost

Travel and research costs re: travel packages

111,600 Capitalize and amortize (content is assumed to be useful beyond one period. Other assumptions are valid).

Preparation of content 126,200 Capitalize and amortize (content is assumed to be useful beyond one period. Other assumptions are valid).

Promotion of website to customers 162,600 Expense – operating cost

Requirement 2

If the website was only used for advertising and promotion of WTC all of the above costs must be expensed.



2 January Trademark .......................................................... 12,000Cash.............................................................. 12,000

31 January Promotion expense (or Advertising) .................. 5,500Cash.............................................................. 5,500

1 February Trademark (or separate Logo account) .............. 7,300Cash.............................................................. 7,300

1 May Investment in patent, long-term ......................... 20,200Cash.............................................................. 20,200

1 October Prepaid license.................................................... 12,000Cash.............................................................. 12,000

1 November Goodwill............................................................. 35,000Cash.............................................................. 35,000

Other assets would also be part of this entry; only goodwill was requested.

31 December Legal fees expense ............................................. 10,000Loss on write-down of patent............................. 20,200

Cash.............................................................. 10,000Investment in patent, long-term ................... 20,200

Recognition of the loss assumes that the patent is, in fact, worthless; further investigation should be done to support this contention.

Students may also record $3,000 of license expense, to reflect the passage of time.


Assignment 9-21

Requirement 1

Goodwill purchased:Actual purchase price .......................................................................$1,600,000Less: Estimated fair value of the identifiable net assets

($140,000 + $256,000 + $1,040,000 + $276,000 - $170,000) ........................................................................... 1,542,000


Requirement 2

Acquisition entry:Accounts receivable ........................................................................ 140,000Inventory .......................................................................................... 256,000Property, plant & equipment ............................................................ 1,040,000Patent................................................................................................ 276,000Goodwill........................................................................................... 58,000

Liabilities.................................................................................... 170,000Cash............................................................................................ 1,600,000


Assignment 9-22

Requirement 1

Goodwill purchased:Actual purchase price ....................................................................... $534,000Less: Estimated fair value of the identifiable net assets

($108,000 + $180,000 + $570,000 + $80,000 +$42,000 - $74,000 - $400,000)............................................. 506,000


Requirement 2

Acquisition entry:Accounts receivable ........................................................................ 108,000Inventory .......................................................................................... 180,000Property, plant & equipment ............................................................ 570,000Land.................................................................................................. 80,000Franchise .......................................................................................... 42,000Goodwill........................................................................................... 28,000

Current liabilities........................................................................ 74,000Bonds payable ............................................................................ 400,000Cash............................................................................................ 534,000


Assignment 9-23

Requirement 1

a) Depreciation expense, 20x6 ...................................................... 9,000Accumulated depreciation.................................................... 9,000

($192,000 - $12,000 = $180,000) / 10 years = $18,000; $18,000x 6/12 = $9,000

Cash........................................................................................... 72,000Accumulated depreciation* ...................................................... 99,000Loss on disposal of assets…………………………………… 21,000

Equipment ............................................................................ 192,000*($18,000 x 5 years = $90,000) + $9,000 = $99,000

b) Building - wing component ..................................................... 500,000Cash...................................................................................... 500,000

To record addition on building.

c) Depreciation expense ................................................................ 32,000Accumulated depreciation, building wing component......... 32,000

To record depreciation on wing added[($500,000 - $20,000) ÷ 15 years = $32,000]*

Depreciation expense ................................................................ 80,000Accumulated depreciation, building .................................... 80,000

To record depreciation on building [($1,700,000 – $100,000)÷ 20 years = $80,000].

Requirement 2

Statement of Financial Position, 20x6

Building............................................................................................$1,700,000Less: Accumulated depreciation ($80,000 x 9 years).............. 720,000$ 980,000

Building, wing component ............................................................... 500,000*Less: Accumulated depreciation ............................................... 32,000* 468,000

Total .............................................................................................. $1,448,000

* May be grouped with the building


Assignment 9-24

Requirement 1

(a) Loss on computer equipment ....................................... 9,520 Accumulated depreciation, computer equipment ....... 38,080 Computer equipment............................................ 47,600 ($47,600 x .8) = $38,080

(b) Automotive equipment................................................. 50,000 Accumulated depreciation, automotive equipment *... 50,800

Loss on exchange of equipment……………………. 4,800 Automotive equipment......................................... 101,600 Cash...................................................................... 4,000 * $101,600 x .5 = $50,800

Exchange of assets, with commercial substance assumed because the new truck has improved operating costs. Value at fair value. However, if assumption was made that the smaller truck did not change cash flows by being more efficient, then the book value of the truck given up could be used - $50,800. The new truck would be tested for impairment, and likely written down to fair value of $50,000. The end result is the same.

(c) Cash.............................................................................. 100,000 Accumulated depreciation, machinery......................... 37,500 Accumulated depreciation, base (3/5).......................... 6,300 Machinery ............................................................ 120,000

Machinery, base component……………………. 10,500 Gain on sale of machinery ................................... 13,300

Routine maintenance would have been expensed.Dep’n: (($120,000 - $20,000) x 3/8)

(d) Cash.............................................................................. 151,000 Trademark (net) ................................................... 24,000 Gain on sale of trademark .................................... 127,000


(e) Cash………………………………………………….. 60,000Investment in shares…… ……………………………. 80,000Note receivable (net)…………………………………. 410,020

Land ....................................................................…. 360,000 Gain on sale of land ................................................. 190,020

Investment in shares valued at $4 average; reasonable in the range of share valuesNote receivable valued at PV:($100,000 x (P/A, 7%, 5)) =

$100,000 x 4.10020 = $410,020

Resulting value of total consideration, $550,020, is reasonable in the range of appraised values for land.

Requirement 2

a. No disclosure on CFSb. Outflow of $4,000 for capital asset purchasec. Inflow of $100,000 from sale of machineryd. Inflow of $151,000 from sale of trademarke. Inflow of $60,000 from sale of land


Assignment 9-25

Requirement 1

The land and buildings would qualify as investment property. The land is held for capital appreciation and the buildings are used for rental property.

REC would have the option of using the fair value model or the cost model.

Requirement 2

Land:

If the cost model was used the land would stay at its historical cost. The additional acquisitions of $110,000 would add to the historical cost of the land.

If the fair value model was used, the initial carrying value would be $10,000 plus $110,000 = $120,000. This value would then be compared to the fair value at the end of the year of $220,000 and the increase of $100,000 would be shown in earnings.

Buildings:

If the cost model was used the buildings would be shown at their carrying amount (original cost less accumulated depreciation). The gain of $40,000 on sale would be shown in earnings.

The buildings would be depreciated.

The downturn in the market might be an indication of impairment and the buildings would be tested for impairment.

If the fair value model was used, the gain of $40,000 would be shown in earnings for the sale of the building (assuming that it was properly measured as fair value at the end of the prior year versus proceeds of $120,000.)

The fair value of the buildings held at the beginning of the year would be compared to the fair value at the end of the year. This value has decreased by $50,000, which is recognized in earnings.

Impairment testing would not need to be completed since it is automatically accounted for in the fair value measurement.

The buildings would not be depreciated.


Assignment 9-26

Requirement 1The land and buildings would qualify as investment property. The land and the buildings are used for rental property. The security system and manager providing maintenance would be considered ancillary services and a minor service component. RI would have the option of using the fair value model or the cost model.

Requirement 220x2 Building ........................................................................ 9,320,000

Cash...................................................................... 9,320,000 The cash paid, legal fees and sprinkler system would all be added to the value of the building.

Building ........................................................................ 135,000 Cash...................................................................... 135,000

It is assumed that the repairs and renovations were planned and factored into the building price.

20x3 Building ........................................................................ 545,000

Fair value increase (earnings) .............................. 545,000 The difference between $10,000,000 and $9,455,000 is a fair value increase recognized in net income.

20x4 Building ........................................................................ 1,500,000

Fair value increase (earnings) .............................. 1,500,000 The difference between $11,500,000 and $10,000,000 is a fair value increase recognized in net income.

20x5 Building ........................................................................ 5,000,000

Cash...................................................................... 5,000,000 The addition of the new wing would be added to the value of the building. The asset does not depreciate so components need not be in separate accounts.

Building ........................................................................ 1,500,000 Fair value increase (earnings) .............................. 1,500,000

The difference between $18,000,000 and $16,500,000 ($11,500,000 + $5,000,000) is a fair value increase recognized in earnings.


Assignment 9-27 (Appendix) Requirement 1

Loan to Purchase Long-lived asset

Cash........................................................................................... 1,200,000Loan payable ........................................................................ 1,200,000

The government assistance is recorded as a loan since the high risk of business failure would make it potentially repayable. If several years of profitable operation are experiences at that time it could be reclassified as a grant.

If students made the opposite assumption, then the credit is recorded to the long-lived asset or deferred revenue.

Salary Subsidy

Cash........................................................................................... 1,000,000Salary expense...................................................................... 500,000Deferred liability .................................................................. 500,000

If in the short term the company expects to operate at a minimum for the next two years they could record the government assistance for the portion related to the current year net against salary costs (or as other income). The portion related to next year would be deferred liability.

Requirement 2

Assuming that the solution in Requirement 1 treats the government assistance as a loan:

Depreciation expense: $1,750,000 ÷ 16 x 6/12............................ $54,688

If government assistance is recorded as a grant, depreciation is ($1,750,000 - $1,200,000) = $550,000; $550,000 ÷ 16 x 6/12 = $17,188.


Assignment 9-28 (Appendix)

Requirement 1

20x5 Pollution equipment ............................................................ 300,000and Cash ................................................................................ 300,00020x6

Cash..................................................................................... 100,000Government loan, forgivable.......................................... 100,000

Taxes payable...................................................................... 60,000Deferred government assistance..................................... 60,000

$300,000 x .20

Requirement 2

Depreciation expense ($300,000/20) x 2 ............................ 30,000Accumulated depreciation .............................................. 30,000

Deferred government assistance ($60,000/20) x 2 ............. 6,000Depreciation expense...................................................... 6,000

Requirement 3

Government loan, forgivable (total) ............................................... 200,000Cash (45%)................................................................................ 90,000Pollution equipment (or, Deferred government assistance)...... 110,000


Assignment 9-29

Capitalized Expensed

Material $640,000

Labour 1,100,000

Incremental overhead 240,000

General overhead 100,000

Interest costs on general loan *

200,000

Cost of building permits 40,000

Parking lot operation* (130,000)

Total $1,890,000 $300,000

The general overhead would not be directly related to construction of the new building.

The interest cost would not be capitalized, since it is a general loan.

*Treatment different under ASPE and IFRS


Assignment 9-30

Item Classificationa. Cost of an oil change on the company’s truck.

Repairs expense

b. Cost of major brake replacement - expected every two years

Equipment - not a separate component unless desired. *

c. Lawyer’s fees associated with a successful patent application.

Patent

d. Lawyer’s fees associated with an unsuccessful patent application.

Legal expense

e. Cost development website usedexclusively to advertise new products

Development costs can be expensed or capitalized if they meet criteria: management choice*Likely an expense in any event because criteria (future use/market) not met

f. Cost of building permits for building construction.

Building

g. Cost to demolish an old building that is on a piece of land where a new building will be constructed.

Land

h. Future costs to restore land used for mine at end useful life

Land improvements - decommissioning cost; only accrued if a legislative requirement (not if a constructive obligation)*

i. Costs required to remove asbestos in building to bring up to new safety code

Likely expense because no future benefits*

j. Cost to excavate land to make it flat for a building site.

Land

k. Cost of replacing tires in construction equipment expected to last two years

Equipment - not a separate component unless desired. *

l. Cost of installing a new roof on the company’s building.

Building - not a separate component unless desired. *

m. Cost to add new functions to a software package unique to the company

Software (asset)

n. Routine maintenance of web site. Expense (maintenance, marketing, etc.)

*Treatment different under ASPE and IFRS

chapter 9: long-lived assets - computer science ...boliver/ch9.pdfchapter 9: long-lived assets...

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