Accounting Principles, Third Canadian Editionmskatzbusinessandmore.weebly.com/.../chap9solution.pdf · Solutions Manual 9-2 Chapter 9 ... The cost principle has survived because it

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition

Solutions Manual 9-1 Chapter 9

Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

CHAPTER 9

Long-Lived Assets

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief Exercises

Exercises

Problems Set A

Problems Set B

1. Apply the cost principle to property, plant, and equipment.

1, 2, 3, 4 1, 2, 3, 4 1, 2, 11 1, 3, 4, 6 1, 3, 4, 6

2. Explain and calculate amortization.

5, 6, 7, 8 5, 6, 7, 8, 9

2, 3, 4, 11 2, 3, 7, 8, 9, 12

2, 3, 7, 8, 9, 12

3. Revise periodic amortization.

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

4. Account for the disposal of property, plant, and equipment.

12, 13 12, 13, 14 8, 9 7, 8, 9 7, 8, 9

5. Calculate and record amortization of natural resources.

14, 15 15 10 12 12

6. Identify the basic accounting issues for intangible assets.

16, 17, 18, 19

16 11, 12 10, 11 10, 11

7. Illustrate the reporting and analysis of long-lived assets.

20, 21 17, 18, 19 13, 14 9, 11, 12, 13

9, 11, 12, 13




ASSIGNMENT CHARACTERISTICS TABLE

Problem Number

Description

Difficulty Level

Time Allotted (min.)

1A Record property transactions.

Simple 20-30

2A Calculate partial period amortization.

Moderate 20-30

3A Determine cost; calculate and compare amortization under different methods.

Moderate 30-40

4A Account for operating and capital expenditures and asset impairments.

Moderate 20-30

5A Record impairment and calculate revised amortization.

Moderate 20-30

6A Record operating and capital expenditures and calculate revised amortization.

Moderate 25-35

7A Calculate and compare amortization and gain or loss on disposal under straight-line and units-of-activity methods.

Moderate 30-40

8A Record acquisition, amortization, and disposal of equipment.

Moderate 30-40

9A Record property, plant, and equipment transactions; prepare partial financial statements.

Complex 40-50

10A Correct errors in recording intangible asset transactions.

Complex 25-35

11A Record intangible asset transactions; prepare partial balance sheet.

Moderate 30-40

12A Record equipment and natural resource transactions; prepare partial financial statements.

Moderate 30-40

13A Calculate ratios and comment.

Moderate 15-25

1B Record property transactions.

Simple 20-30

2B Calculate partial period amortization.

Moderate 20-30

3B Determine cost; calculate and compare amortization under different methods.

Moderate 30-40

4B Account for operating and capital expenditures and asset impairments.

Moderate 20-30

5B Record impairment and calculate revised amortization.

Moderate 20-30

6B Record operating and capital expenditures and calculate revised amortization.

Moderate 25-35




ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Number

Description

Difficulty Level

Time Allotted (min.)

7B Calculate and compare amortization and gain or loss on disposal under straight-line and double declining-balance methods.

Moderate 30-40

8B Record acquisition, amortization, and disposal of equipment.

Moderate 30-40

9B Record property, plant, and equipment transactions; prepare partial financial statements.

Complex 40-50

10B Correct errors in recording intangible asset transactions.

Complex 25-35

11B Record intangible asset transactions; prepare partial balance sheet.

Moderate 30-40

12B Record equipment and natural resource transactions; prepare partial financial statements.

Moderate 30-40

13B Calculate ratios and comment.

Moderate 15-25




BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems

Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

1. Apply the cost principle to property, plant, and equipment.

BE9-3 Q9-1

Q9-2

Q9-3

Q9-4

BE9-1

BE9-2

BE9-4

E9-1

E9-2

E9-11

P9-1A

P9-3A

P9-4A

P9-6A

P9-1B

P9-3B

P9-4B

P9-6B

2. Explain and calculate amortization.

Q9-6

Q9-5

Q9-7

Q9-8

BE9-5

BE9-6 BE9-7

BE9-8

BE9-9

E9-2

E9-3

E9-4

E9-11

P9-2A

P9-3A

P9-7A

P9-8A

P9-9A

P9-12A

P9-2B

P9-3B

P9-7B

P9-8B

P9-9B

P9-12B

3. Revise periodic amortization.

Q9-9, Q9-10, Q9-11

BE9-10

BE9-11

E9-5

E9-6

E9-7

P9-4A

P9-5A

P9-6A

P9-9A

P9-4B

P9-5B

P9-6B

P9-9B

4. Account for the disposal of property, plant, and equipment.

Q9-12 Q9-13

BE9-12

BE9-13

BE9-14

E9-8

E9-9

P9-7A

P9-8A

P9-9A

P9-7B

P9-8B

P9-9B

5. Calculate and record amortization of natural resources.

Q9-14, Q9-15 BE9-15

E9-10

P9-12A

P9-12B

6. Identify the basic accounting issues for intangible assets.

Q9-16, Q9-17, Q9-18, Q9-19

BE9-16 E9-11

E9-12

P9-10A

P9-11A

P9-10B

P9-11B

7. Illustrate the reporting and analysis of long-lived assets.

Q9-20, BE9-17

Q9-21

BE9-18

BE9-19

E9-13

P9-9A

P9-11A

P9-12A

P9-9B

P9-11B

P9-12B

E9-14

P9-13A

P9-13B

Broadening Your Perspective

Continuing Cookie Chronicle

BYP9-1 BYP9-2

BYP9-3

BYP9-4 BYP9-5




ANSWERS TO QUESTIONS 1. For long-lived assets, the cost principle means that cost consists of all

expenditures necessary to acquire the asset and make it ready for its intended use. These costs are capitalized rather than expensed, because they will provide benefits over future periods.

2. All three amounts will be debited to the land account. The cost to

purchase the land and building as well as the cost to remove the building is recorded in the land account. These costs are incurred to prepare the land for its intended use. Since the old building is destroyed none of the purchase cost is allocated to Buildings. As well, the costs to grade the land are incurred to prepare the land for its intended use. Land will be debited for $505,000 ($430,000 + $45,000 + $30,000).

3. The cost principle has survived because it provides information that is

objective and verifiable, whereas market values are subjective and changeable. In addition, if a company is not planning on selling the asset the market value of the asset is not relevant.

4. The purchase cost must be split between the land and building because

the building is amortized and the land is not. In addition, the cost of each item will be necessary if the land, or the building, is later sold to determine any gain or loss on disposal.

5. The purpose of amortization is to allocate the cost of a long-lived,

amortizable asset over its useful life in a systematic way. Amortization expense is matched to the revenues it has helped generate.

A common misunderstanding about amortization is that amortization

attempts to measure an asset’s market value or real value. There is no attempt to measure the change in a long-lived asset’s real value because long-lived assets are not held for resale. Another common misunderstanding is that accumulated amortization results in the accumulation of cash to purchase or replace the long-lived asset. Accumulated amortization represents the total cost of the asset that has been allocated to expense so far—it does not represent a cash fund.

6. (a) Residual value is the expected cash value of the asset at the end of

its useful life. It is sometimes called salvage value or trade-in value. Residual value is not amortized, since this is the amount expected to be recovered at the end of an asset’s useful life.




QUESTIONS (Continued)

Question 6 (Continued)

(b) Residual value is subtracted from cost to determine the amortizable

cost of the asset. Residual value limits the total value of amortization that can be taken for all three methods of amortization. Amortization will stop when the asset’s book value equals its expected residual value.

In the straight-line and the units-of-activity methods of calculating

amortization, residual value is used in calculating the amortizable cost per year or the amortizable cost per unit. Residual value is not used in determining the amount that the declining-balance amortization rate is applied to. Under all three methods net book value should never be reduced below residual value. In other words, amortization stops when the asset’s net book value is equal to its expected residual value.

7. Net book value is cost less accumulated amortization of an asset. Cost is

the same under each method of amortization. In the early years, net book value will be less under the declining-balance method than under the straight-line method. The units-of-activity method is unpredictable. In all three methods, net book value at the end of the asset’s useful life, will be equal to the asset’s residual value.

The amortization expense is constant under the straight-line method,

varies according to production under the units-of-activity method and declines over time with the declining-balance method. In the early years amortization expense will be higher under the declining-balance method than the straight-line method. The units-of-activity method is unpredictable.

Consequently, assuming no other changes, net income is constant under

the straight-line method, varies according to production under the units-of-activity method, and increases over time with the declining-balance method. In the early years, net income will be higher under the straight-line method than the declining-balance method. It is unpredictable under the units-of-activity method. All three methods will result in the same total amortization expense over the asset’s useful life.




QUESTIONS (Continued) 8. Ralph’s plan will not work. For accounting purposes, a company should

choose the amortization method that best matches expenses to revenues. For tax purposes income tax regulations require a company to use the single declining-balance method. Amortization is calculated on a class basis and a specified rate is specifically identified for specific types of classes of assets.

9. Operating expenditures are ordinary repairs made to maintain the operating

efficiency and expected productive life of the asset. Because they are recurring expenditures and normally benefit only the current period, they are expensed when incurred. Capital expenditures are additions and improvements made to increase efficiency, productivity, or expected useful life of the asset. Because they benefit future periods, capital expenditures are debited to the asset account affected.

10. A permanent decline in the market value of a long lived asset is called an

impairment loss. It occurs when the market value of a long-lived asset falls far below its book value and is not expected to recover, and the company does not expect to recover the net book value from future cash flows. It could occur when a machine has become obsolete or the market for a product made by a machine becomes obsolete.

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

retroactively. Amortization is based on the best available information at the time the estimate was made. Continual restatement of prior periods would adversely affect the reader's confidence in the financial statements; thus, prior periods should not be restated if amortization is revised.

12. In a sale of property, plant or equipment, the net book value of the asset is

compared to the proceeds received from the sale. If the proceeds of the sale exceed the net book value of the asset, a gain on disposal occurs. If the proceeds of the sale are less than the net book value of the asset sold, a loss on disposal occurs.

In an exchange a new asset is received in an exchange for the old asset

given up. If cash is part of the exchange and the amount is considered significant it is considered a monetary exchange. The gain or loss is calculated by comparing the fair value of the asset given up to its net book value. The trade-in allowance on the asset given up is not relevant. If the cash involved in the exchange is not significant—or if there is no cash— then the exchange is considered a nonmonetary exchange. The gain or loss is still calculated the same way unless the fair values of the assets cannot be determined. In that case no gain or loss is recorded.




QUESTIONS (Continued) 13. The asset and related accumulated amortization should continue to be

reported on the balance sheet, without further amortization or adjustment, until the asset is retired. Reporting the asset and related accumulated amortization on the balance sheet informs the reader of the financial statements that the asset is still being used by the company. However, once an asset is fully amortized, no additional amortization should be taken on this asset, even if it is still being used. In no situation can the accumulated amortization exceed the cost of the asset.

14. (a) The amortizable cost of a natural resource includes cost less residual

value. In calculating the amortization expense for natural resources, the amortizable cost is expressed on a per unit basis, divided by the total production or activity anticipated. The amortizable cost per unit is then multiplied by the actual production output or activity sold for the period.

(b) Amortization is initially recorded as a current asset, inventory,

because it is part of the cost of extracting the natural resource. The amortization becomes part of the cost of goods sold when the inventory is sold.

15. The amortization of natural resources is recorded as inventory and not as

an expense because the resource extracted is expected to be sold. Until the resource is sold, it has a future benefit and all the costs of obtaining this resource are recorded as an asset, inventory. The cost is later expensed, as cost of goods sold, when the extracted resource is sold.

16. Intangible assets are rights, privileges and competitive advantages that

result from ownership of long-lived assets. They have a future benefit in that they contribute to future revenue, however, they lack physical existence or substance.

17. Flin Company should amortize the patent over its 20 year legal life or its

useful life, whichever is shorter. Flin Company must consider when its patent is likely to become ineffective at contributing to revenue and if this will occur before the end of its legal life.

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

a business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill can only be sold if the entire business is sold.




QUESTIONS (Continued) 19. Research and development costs present several accounting problems. It

is sometimes difficult to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefits. As a result, all research and some development costs are recorded as an expense. Only certain development costs with reasonably assured future benefits can be capitalized. This is intended to maintain the objectivity and reliability of the financial statements.

20. Property, plant, and equipment and natural resources are often combined

and reported in the balance sheet as “property, plant, and equipment” or “capital assets”. Goodwill must be disclosed separately. Other intangibles can be grouped under “intangible assets”. Amortization expense for the period should also be disclosed either on the income statement or in the notes to the financial statements. When impairment losses have occurred they should be shown on a separate line on the income statement with the details disclosed in a note.

The notes to financial statements should disclose the balance of the major

classes of amortizable assets and the amortization method(s) and rates used. The book value of each major class of unamortized assets should also be disclosed. Companies should also disclose their impairment policy in the notes to the financial statements.

21. The asset turnover and return on asset ratios show how effectively the

company uses its long-lived assets. The asset turnover shows the amount of sales produced for each dollar invested in assets. It is calculated by dividing net sales by average total assets. The return on assets measures overall profitability. It is calculated by dividing net income by average total assets.




SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9-1

The cost of the land is $61,000 ($50,000 + $5,000 + $2,500 +

$3,500). The installation of the fence should be debited to Land

Improvements account.

BRIEF EXERCISE 9-2

The cost of the truck is $43,000 (cash price $41,750 + painting

and lettering $750 + installation of trailer hitch $500). The

expenditures for the insurance and the motor vehicle licence

are recurring and only benefit the current period. They should

be expensed and not added to the cost of the truck.

BRIEF EXERCISE 9-3

(a) O

(b) C

(c) C

(d) O

(e) C

(f) O

(g) O

(h) C

(i) C

(j) O




BRIEF EXERCISE 9-4

Jan. 1 Land

[$400,000 x ($127,500 ÷ $425,000)] .... 120,000

Building

[$400,000 x ($255,000 ÷ $425,000)] .... 240,000

Equipment

[$400,000 x ($42,500 ÷ $425,000)] ...... 40,000

Cash ................................................ 100,000

Mortgage Payable ($400,000 - $100,000) 300,000

BRIEF EXERCISE 9-5

Amortizable cost is $40,000 ($43,000 - $3,000). With a 4-year

useful life, annual amortization is $10,000 ($40,000 4). Under

the straight-line method, amortization is the same each year.

Thus, amortization expense is (a) $10,000 for each year of the

truck’s life and (b) $40,000 in total over the truck’s life.

BRIEF EXERCISE 9-6

The declining-balance rate is 50% (25% x 2) and this rate is

applied to net book value at the beginning of the year.

Amortization expense for each year is as follows:

(a)

Calculation End of Year

NBV (Beg. Amort. Amort. Accum. Net Book

Year of Year X Rate = Expense Amort. Value

$43,000

2008 $43,000 50% $21,500 $21,500 21,500

2009 21,500 50% 10,750 32,250 10,750

2010 10,750 50% 5,375 37,625 5,375

2011 5,375 50% 2,375¹ 40,000 3,000

¹Limited to the amount to reduce the net book value to the

residual value of $3,000

(b) Total amortization over the truck’s useful life is $40,000.




BRIEF EXERCISE 9-7

Amortizable cost per unit:

($33,000 - $500) 325,000 km. = $0.10/km.

Annual amortization expense:

2007: 125,000 x $0.10 = $12,500

2008: 105,000 x $0.10 = $10,500

BRIEF EXERCISE 9-8

(a) Amortization expense for each year:


Amortizable Amort. Amort. Accum. Net Book

Year Cost* X Rate = Expense Amort. Value

$43,000

2008 $40,000 25% x 9/12 $ 7,500 $ 7,500 35,500

2009 40,000 25% 10,000 17,500 25,500

2010 40,000 25% 10,000 27,500 15,500

2011 40,000 25% 10,000 37,500 5,500

2012 40,000 25% x 3/12 2,500 40,000 3,000

*Amortizable cost = $43,000 - $3,000

(b) Total amortization expense over the truck’s useful life is

$40,000. (See accumulated amortization at end of 2012

above)




BRIEF EXERCISE 9-9

The double declining-balance rate is 50% (25% x 2) and this rate

is applied to net book value at the beginning of the year.

Amortization expense for each year is as follows:

(a)

Double Declining-Balance




$43,000

2008 $43,000 50% x 9/12 $16,125 $16,125 26,875

2009 26,875 50% 13,438 29,563 13,437

2010 13,437 50% 6,719 36,282 6,718

2011 6,718 50% 3,359 39,641 3,359

2012 3,359 50% 359¹ 40,000 3,000

¹ Limited to the amount to bring net book value to the residual

value of $3,000

(b) Total amortization expense over the truck’s useful life is

$40,000. (See accumulated amortization at end of 2012

above)

BRIEF EXERCISE 9-10

Loss on Impairment ................................... 16,000

Accumulated Amortization—Machinery 16,000

Calculation:

Net Book Value ($90,000 - $54,000) ... $36,000

Less: Market Value ............................ 20,000

Impairment loss .................................. $16,000




BRIEF EXERCISE 9-11

Amortization expense from 2005 to 2007:

[($60,000 - $4,000) ÷ 7 years = $8,000]

2005 $ 8,000

2006 8,000

2007 8,000

Total $24,000

Net book value, Jan. 1, 2008 ($60,000 - $24,000)........... $36,000

Add: Equipment up-grade ............................................. 9,000

Less: Revised residual value ........................................ (3,000)

Remaining amortizable cost ........................................... 42,000

Remaining useful life (9 years - 3 years) ....................... ÷ 6 years

Revised annual amortization expense 2008 .................. $ 7,000

BRIEF EXERCISE 9-12

(a) Accumulated Amortization—

Delivery Equipment .................................... 41,000

Delivery Equipment ............................... 41,000

(b) Accumulated Amortization—

Delivery Equipment .................................... 38,000

Loss on Disposal........................................ 3,000

Delivery Equipment ............................... 41,000

Cost of delivery equipment ................................... $41,000

Less: Accumulated amortization .......................... 38,000

Net book value at date of disposal ........................ 3,000

Proceeds from sale ................................................ 0

Loss on disposal .................................................... $ 3,000




BRIEF EXERCISE 9-13

(a) Sept. 30 Amortization Expense

[($72,500 - $2,500) ÷ 5 x 9/12] ......... 10,500

Accumulated Amortization

—Office Equipment .................. 10,500

(b) Sept. 30 Cash ................................................ 8,250

Accumulated Amortization—Office

Equipment¹ ..................................... 66,500

Gain on Disposal ...................... 2,250

Office Equipment ...................... 72,500

¹[($72,500 - $2,500) ÷ 60 months x 57 months] = $66,500

Cost of office equipment $72,500

Less accumulated amortization 66,500

Net book value at date of disposal 6,000

Proceeds from sale 08, 8,250

Gain on disposal $ 2,250

(c) Sept. 30 Cash ................................................ 4,500

Accumulated Amortization—Office

Equipment ....................................... 66,500

Loss on Disposal ............................ 1,500


Cost of office equipment $72,500

Less accumulated amortization 66,500

Net book value at date of disposal 6,000

Proceeds from sale 4,500

Loss on disposal $ 1,500




BRIEF EXERCISE 9-14

Jan. 7 Machinery (new) ............................ 76,000*


—Machinery ................................... 78,000

Loss on Disposal ........................... 3,000**

Machinery (old) ......................... 95,000

Cash ($80,000 - $18,000)........... 62,000

*Consideration paid cash plus market value of old asset:

($62,000 + $14,000 = $76,000)

**Loss is the book value less the fair market value:

($95,000 - $78,000 - $14,000 = $3,000)

BRIEF EXERCISE 9-15

(a) Amortizable cost

= $7,000,000 - $500,000

= $6,500,000

Amortizable cost per unit

= $6,500,000 ÷ 28,000,000 tonnes

= $0.2321 per tonne

Amortization cost for ore extracted in Year 1:

$0.2321 per tonne x 6,000,000 tonnes = $1,392,600

Aug. 31 Inventory .................................. 1,392,600

Accumulated Amortization . 1,392,600

Amortization to be included in cost of goods sold:

$0.2321 per tonne x 5,000,000 tonnes = $1,160,500

Amortization to be included in inventory:

$0.2321 per tonne x 1,000,000 tonnes = $232,100




BRIEF EXERCISE 9-15 (Continued)

(b)

CUONO MINING CO.

Balance Sheet (Partial)

August 31, 2008

Assets

Current assets

Inventory .................................................. $232,100*

Property, plant, and equipment

Ore mine ................................................... $7,000,000

Less: Accumulated amortization ........... 1,392,600 5,607,400

* Check ($1,392,600 - $1,160,500 = $232,100)




BRIEF EXERCISE 9-16

(a) 2008

Jan. 2 Patents .................................... 180,000

Cash .................................... 180,000

(b) Dec. 31 Amortization Expense

($180,000 10) ........................ 18,000

Accumulated Amortization—

Patents ............................... 18,000

(c) 2009

Jan. 5 Patents .................................... 9,000

Cash .................................... 9,000

(d) Original cost of patent: .................................. $180,000

Less: accumulated amortization ................... (18,000)

Plus: Legal costs to defend ........................... 9,000

Remaining cost to be amortized ................... 171,000

Remaining useful life (10 years - 1 year) ...... ÷ 9 years

Revised annual amortization expense 2009 . $ 19,000

BRIEF EXERCISE 9-17

(a) I

(b) PPE

(c) NR

(d) NA (current asset)

(e) I

(f) PPE

(g) NA (current asset)

(h) NA (income statement)

(i) I

(j) I

(k) NA (current liability)

(l) PPE

(m) PPE

(n) NR




BRIEF EXERCISE 9-18

CANADIAN TIRE CORPORATION, LIMITED


December 31, 2005

(in millions)


Land .............................................................. $ 700.5

Buildings ......................................................... $2,094.4

Less: Accumulated amortization .................. 704.4 1,390.0

Fixtures and equipment ................................. $528.4

Less: Accumulated amortization .................. 347.5 180.9

Leasehold improvements ............................... $265.6

Less: Accumulated amortization .................. 91.3 174.3

Other property, plant, and equipment ......................... 298.2

Total property, plant, and equipment 2,743.9

Intangible assets

Goodwill ...................................................................... $46.2

Marks Work Wearhouse store brands and banners . 50.4

Marks Work Wearhouse franchise agreements .......... 2.0

Total intangible assets 98.6




BRIEF EXERCISE 9-19

($ in millions)

Return on assets

$283

[($2,785 + $2,661) ÷ 2]

= 10.39%

Asset turnover

$3,294

[($2,785 + $2,661) ÷ 2]

= 1.21 times




SOLUTIONS TO EXERCISES

EXERCISE 9-1

(a) Under the cost principle, the acquisition cost of a property,

plant, and equipment includes all expenditures necessary

to acquire the asset and make it ready for its intended use.

This includes not only the cost of acquisition, but any

freight, installation, testing, and similar costs to get the

asset ready for use. For example, the cost of factory

machinery includes the purchase price, freight costs paid

by the purchaser, insurance costs during transit, and

installation costs. Costs such as these benefit the life of

the factory machinery and not just the current period.

Consequently, they should be capitalized and amortized

over the machinery’s useful life.

Cost is measured by the cash paid in a cash transaction,

or by the cash equivalent price paid when noncash assets

are used in payment. The cash equivalent price is equal to

the fair market value of the asset given up. If that value is

not clearly determinable, the fair market value of the asset

received is used instead.

(b) 1. Delivery Equipment (or Vehicles)

2. Prepaid Insurance

3. Land

4. Land ($6,600 - $1,700 = $4,900)

5. Plant

6. Plant

7. Plant

8. Land improvements

9. Factory machinery

10. Factory machinery




EXERCISE 9-2

(a)

Appraised

Value

% of Total

Cost Allocated

Land $366,000 61% $353,800

Building 192,000 32% 185,600

Land Improvements 42,000 7% 40,600

$600,000 $580,000*

*Total cost $75,000 (cash) + $500,000 (mortgage) + $5,000

(legal fees) = $580,000

(b) Land ......................................................... 353,800

Land Improvements ................................ 40,600

Building .................................................... 185,600

Cash ($75,000 + $5,000) .......................... 80,000

Mortgage Payable ............................... 500,000

(c) Amortizable cost for the building is $165,600 ($185,600 –

$20,000). With a 40-year useful life, annual amortization

expense is $4,140 ($165,600 40).

Amortizable cost for the land improvements is $40,600.

With a ten year useful life, annual amortization expense is

$4,060 ($40,600 10).




EXERCISE 9-3

(a)

(1) Straight-line




$164,500

2007 $142,500 20% $28,500 $28,500 136,000

2008 142,500 20% 28,500 57,000 107,500

2009 142,500 20% 28,500 85,500 79,000

2010 142,500 20% 28,500 114,000 50,500

2011 142,500 20% 28,500 142,500 22,000

* $164,500 - $22,000 = $142,500

(2) Double Declining-Balance




$164,500

2007 $164,500 40% $65,800 $65,800 98,700

2008 98,700 40% 39,480 105,280 59,220

2009 59,220 40% 23,688 128,968 35,532

2010 35,532 40% 13,532¹ 142,500 22,000

2011 22,000 40% 0 142,500 22,000

¹ Limited to the amount to bring net book value to the residual

value of $22,000




EXERCISE 9-3 (Continued)

(a) (Continued)

(3) Units-of-Activity


Units of Amort. Amort. Accum. Net Book

Year Activity X Cost/Unit* = Expense Amort. Value

$164,500

2007 78,000 $0.38 $29,640 $29,640 134,860

2008 76,000 0.38 28,880 58,520 105,980

2009 72,000 0.38 27,360 85,880 78,620

2010 74,000 0.38 28,120 114,000 50,500

2011 75,000 0.38 28,500 142,500 22,000

*Amortizable cost per unit is $0.38 per kilometre:

[($164,500 – $22,000) 375,000 = $0.38]

(b) I recommend it use the units-of-activity method as it

results in the best matching of expense with revenue.




EXERCISE 9-4

(a)

(1) Straight-line




$86,000

2007 $78,000 25% $4,875** $4,875 81,125

2008 78,000 25% 19,500 24,375 61,625

2009 78,000 25% 19,500 43,875 42,125

2010 78,000 25% 19,500 63,375 22,625

2011 78,000 25% 14,625*** 78,000 8,000

*$86,000 - $8,000 = $78,000

**$19,500 x 3/12 = $4,875

***$19,500 x 9/12 = $14,625

(2) Double Declining-Balance




$86,000

2007 $86,000 50% $10,750* $10,750 75,250

2008 75,250 50% 37,625 48,375 37,625

2009 37,625 50% 18,813 67,188 18,812

2010 18,812 50% 9,406 76,594 9,406

2011 9,406 50% 1,406** 78,000 8,000

*$86,000 x 50% x 3/12 = $10,750

**Limited to the amount to bring net book value to the residual

value of $8,000





(a) (Continued)

(3) Units-of-Activity




$86,000

2007 500 $7.80 $3,900 $3,900 82,100

2008 2,800 7.80 21,840 25,740 60,260

2009 2,900 7.80 22,620 48,360 37,640

2010 2,600 7.80 20,280 68,640 17,360

2011 1,300 7.80 9,360** 78,000 8,000

*Amortizable cost per unit is $7.80/hour

[($86,000 – $8,000) 10,000 = $7.80]

**Limited to the amount to bring net book value to the residual

value of $8,000.

(b) Over the life of the asset, amortization expense will be the

same for all three methods.

(c) Cash flow is the same under all three methods.

Amortization is an allocation of the cost of a long-lived

asset and not a cash expenditure.




EXERCISE 9-5

Jan. 10 Building ...................................... 70,000

Cash ....................................... 70,000

Apr. 8 Repairs Expense ....................... 25,000

Cash ....................................... 25,000

Sep. 2 Equipment.................................. 22,500

Cash ....................................... 22,500

Nov. 1 Repairs Expense ....................... 1,000

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

Dec. 31 Loss on Impairment .................. 120,000


Equipment ............................. 120,000

[($500,000 - $150,000) - $230,000]




EXERCISE 9-6

(a) Current amortization

Building: ($800,000 – $40,000) ÷ 20 yrs

= $38,000 per year

Equipment: ($120,000 – $5,000) ÷ 5 yrs

= $23,000 per year

(b) Current ages

Building January 1998 to January 2008: 10 years

Equipment January 2006 to January 2008: 2 years

January 1, 2008 Building Equipment

Cost ....................................................... $800,000 $120,000

Accumulated Amortization:

Building (10 x $38,000) ...................... 380,000

Equipment (2 x $23,000) .................... 46,000

Net book value ...................................... $420,000 $ 74,000

(c) Type of Asset

Building

Equipment

Net book value, 1/1/08

Less: Residual value

Revised amortizable cost

Divide by revised remaining

useful life, in years

Revised annual

amortization expense

$420,000

62,000

$358,000

(25 - 10)

÷ 15 yrs

$23,867

$74,000

3,600

$70,400

(4 - 2)

÷ 2 yrs

$35,200




EXERCISE 9-7

(a) 2007

June 30 Amortization Expense ............... 6,500


—Equipment ......................... 6,500

[($30,000 - $4,000) ÷ 4 years]

(b) July 1 Equipment ($5,000 + $500) ....... 5,500

Cash ....................................... 5,500

(c) 2008

June 30 Amortization Expense ............... 5,200


—Equipment ......................... 5,200

Net book value, July 1, 2007 ($30,000 - $6,500) ..... $23,500

Add: New part .......................................................... 5,500

29,000

Less: Revised residual value ................................ 3,000

Remaining amortizable cost ................................... $26,000

Remaining useful life (6 - 1) .................................... ÷ 5 years

Revised annual amortization expense ................... $ 5,200

(d) Cost ($30,000 + $5,500) .......................................... $35,500

Accumulated Amortization ($6,500 + $5,200) ....... 11,700

Net book value June 30, 2008 ............................... $23,800




EXERCISE 9-8

Jan. 2 Delivery Truck (New)

($6,500 + $33,000)* ............................. 39,500

Accumulated Amortization ................ 22,500

Loss on sale ....................................... 1,000

Delivery truck (Old) ........................ 30,000

Cash ................................................ 33,000

*Fair value of old truck $6,500 + cash $33,000

Mar. 31 Amortization Expense ........................ 1,550


—Machinery ................................... 1,550

($62,000 ÷ 10 years x 3/12)

31 Accumulated Amortization

—Machinery [($62,000 ÷ 10 years) x

(9 years + 3 months)] ......................... 57,350

Loss on Disposal ................................ 4,650

Machinery ....................................... 62,000

Sept 1 Amortization Expense ........................ 1,220

Accumulated Amortization ............

—Office Equipment ....................... 1,220

($5,490 ÷ 3 years x 8/12)

1 Cash .................................................... 800


—Office Equipment ............................ 4,880

($5,490 ÷ 3 years x 2 years + 8 months)

Gain on Disposal .......................... 190

Office Equipment ........................... 5,490




EXERCISE 9-9

(a) (1) Straight-line method: ($16,000 - $1,000) ÷ 4 years

= $3,750 per year or $7,500 for 2006 and 2007.

(2) Double declining-balance method

DDB Rate: ¼ x 2 = 50%

2006: $16,000 x 50% = $8,000

2007: $16,000 - $8,000 = $8,000 x 50% = $4,000

Total amortization expense for 2006 and 2007 = $12,000

(b) (1) Straight-line method

Proceeds - Net book value = Gain (loss)

[$5,000 - ($16,000 - $7,500)] = ($3,500)

(2) Double declining-balance method

Proceeds - Net book value = Gain (loss)

[$5,000 - ($16,000 - $12,000) = $1,000

(c) The amount of the loss using the straight-line method is

$3,500. The amount of the gain using the double-declining-

balance method is $1,000. The amounts are not the same

because of the difference in the amortization expense

calculation on a year to year basis which impacts the net

book value of the asset which in turn impacts the gain or

loss on disposal.

If you consider, however, the total impact on net income

over the two year period the amounts are identical. Using

the straight-line method total amortization is $7,500 and

loss on disposal is $3,500 resulting in an $11,000 decrease

in net income over the two year period. Using the double-

declining-balance method total amortization is $12,000 and

gain on disposal is $1,000. Overall effect on net income

using both methods over the two year period is an $11,000

decrease.




EXERCISE 9-10

(a) The units-of-activity method is recommended for

amortizing natural resources because it results in the best

matching of expense to revenues. It requires that an

estimate can be made of the total number of units that are

available to be extracted from the resource.

(b) Dec. 31 Inventory ($0.5375 x 100,000) ... 53,750

Accumulated Amortization—Mine 53,750

Amortizable cost $520,000 - $90,000 = $430,000

Amortizable cost per unit:

$430,000 ÷ 800,000 t = $0.5375 per tonne

(c)

PHILLIPS INC.

Income Statement (Partial)

Year Ended December 31, 2008

Cost of goods sold: (will include this amount plus other costs)

($0.5375 x 75,000 t) ..................................... $40,313

PHILLIPS INC.


December 31, 2008

Assets

Current assets

Inventory ($53,750 - $40,313) .................................. $ 13,437*


Ore mine ..................................................... $520,000

Less: Accumulated amortization .............. 53,750 466,250

*Check: 25,000** t unsold x $0.5375 = $13,437

**100,000 t extracted – 75,000 t sold = 25,000 t in inventory




EXERCISE 9-11

1. Amortization is the process of allocating the cost of a long-

lived asset to expense over the asset’s useful life. Because

the value of land generally does not decline with time and

usage, its usefulness and revenue producing ability does

not decline. In addition, the useful life of land is indefinite.

Therefore it would be incorrect for the student to amortize

the land. This is a violation of the matching principle.

2. Goodwill is an intangible asset with an indefinite life.

According to generally accepted accounting principles,

goodwill is not amortized but reviewed annually for

impairment. If a permanent decline in value has occurred

the goodwill is written down and an impairment loss is

recorded on the income statement. Therefore, the

amortization entry should be reversed and no decline in

value recorded until an impairment in value occurs.

Recording amortization is a violation of the matching

principle.

3. This is a violation of the cost principle. Because current

market values are subjective and not reliable, they are not

used to increase the recorded value of an asset after

acquisition. The appropriate accounting treatment is to

leave the building on the books at its zero book value.




EXERCISE 9-12

(a)

Jan. 2 Patents ............................................. 45,000

Cash ............................................. 45,000

April 1 Trademark ........................................ 325,000

Cash ............................................. 325,000

July 1 Franchise ......................................... 250,000

Cash ............................................. 250,000

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

Cash ............................................. 185,000

(b)

Dec. 31 Loss on Impairment—Goodwill ...... 85,000

Goodwill ...................................... 85,000

31 Amortization Expense .................... 117,500

Accumulated Amortization—Patents

[($450,000 ÷ 5) + (45,000 ÷ 3)] ..... 105,000


Franchise [($250,000 ÷ 10) x 6/12] 12,500




EXERCISE 9-13 (a) Account Financial Statement Section


– Building

Balance Sheet Property, Plant, and

Equipment


– Finite-Life Intangible

Assets

Balance Sheet Intangibles


– Machinery and Equipment


Equipment


– Other Property, Plant, and

Equipment


Equipment


– Satellites


Equipment


– Telecommunications

Assets


Equipment

Amortization Expense Income Statement Operating Expenses

Buildings Balance Sheet Property, Plant, and

Equipment

Cash and Cash Equivalents Balance Sheet Current Assets

Common Shares Balance Sheet Shareholders’ Equity

Finite-Life Intangible Assets Balance Sheet Intangibles

Goodwill Balance Sheet Intangibles

Indefinite-Life Intangible

Assets

Balance Sheet Intangibles

Land Balance Sheet Property, Plant, and

Equipment

Machinery and Equipment Balance Sheet Property, Plant, and

Equipment

Other Long-term Assets Balance Sheet Long-Term Assets

Other Property, Plant, and

Equipment


Equipment

Plant under Construction Balance Sheet Property, Plant, and

Equipment

Satellites Balance Sheet Property, Plant, and

Equipment

Telecommunications

Assets


Equipment





(b)

BCE Inc.


December 31, 2005

(in millions)


Land ............................................................................. $ 94

Buildings ...................................................... $3,157

Less: Accumulated amortization ................ 1,340 1,817

Plant under construction ............................ 1,852

Machinery and equipment ........................... $6,273


Telecommunications assets ....................... $36,334


Satellites ....................................................... $1,552

Less: Accumulated amortization ............... 404 1,148

Other Property, plant, and equipment ........ $200

Less: Accumulated amortization ............... 66 134

Total Property, plant, and equipment ................... 19,823

Intangible assets

Finite-life intangible assets ........................ $3,813

Less: Accumulated amortization ............... 1,574 2,239

Goodwill ...................................................................... 7,887

Indefinite-life intangible assets ................................. 3,031

Total intangible assets .......................................... 13,157




EXERCISE 9-14 (a) (in thousands) December 31, 2005 January 1, 2005 Asset turnover

$206,674 [($308,226 + $300,152) ÷ 2]

= 0.68 times

$211,476 [($300,152 + $242,755) ÷ 2]

= 0.78 times

Return on assets

$8,097 [($308,226 + $300,152) ÷ 2]

= 2.7%

$14,426 [($300,152 + $242,755) ÷ 2]

= 5.3%

(b) Sleeman’s asset turnover has decreased over the 2 years.

Net Revenues have decreased from $211,476 to $206,674

even though total assets have increased from $300,152 to

$308,226. Sleeman is operating less efficiently in the year

ended December 31, 2005 as compared to the year ended

January 1, 2005. Return on assets has decreased

significantly from 5.3% to 2.7%. The slight increase in total

assets from $300,152 to $308,336 has not generated an

increase in net income. In fact, net income has fallen from

$14,426 to $8,097.




SOLUTIONS TO PROBLEMS

PROBLEM 9-1A

(a) Feb. 7 Land ........................................... 275,000

Cash ....................................... 75,000

Note Payable ......................... 200,000

9 Land ........................................... 5,500

Cash ...................................... 5,500

15 Land ........................................... 15,000

Cash ....................................... 15,000

17 Cash ........................................... 4,000

Land ....................................... 4,000

Mar. 2 Building ...................................... 18,000

Cash ....................................... 18,000

July 5 Building ...................................... 650,000

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

Note Payable ......................... 480,000

31 Building ...................................... 6,500

Cash ....................................... 6,500

Aug. 22 Land Improvements .................. 12,000

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

Sept. 1 Prepaid Insurance ..................... 2,500

Cash ....................................... 2,500

Dec. 31 Interest Expense ....................... 17,500

Cash ....................................... 17,500




PROBLEM 9-1A (Continued)

(b)

Land

Date Explanation Ref. Debit Credit Balance

2008 Feb. 7 275,000 275,000 9 5,500 280,500 15 15,000 295,500 17 4,000 291,500

Building


2008 Mar. 2 18,000 18,000 July 5 650,000 668,000 31 6,500 674,500

Land Improvements


2008 Aug. 22 12,000 12,000

The cost of land that will appear on Weisman’s December 31,

2008 balance sheet will be $291,500. The cost of building that

will appear on Weisman’s December 31, 2008 balance sheet will

be $674,500. The cost of land improvements that will appear on

Weisman’s December 31, 2008 balance sheet will be $12,000.




PROBLEM 9-2A

(a)

Accumulated

Amortization

Year Calculation Dec. 31

MACHINE 1 – Straight-line Amortization

2006 ($44,940* ÷ 7) x 10/12 = $5,350 $ 5,350

2007 $44,940 ÷ 7 = $6,420 11,770

2008 $44,940 ÷ 7 = $6,420 18,190

*$48,940 - $4,000 = $44,940

MACHINE 2 – Declining-balance Amortiation

2007 $84,000 x 20%* x 4/12 = $5,600 $ 5,600

2008 ($84,000 - $5,600) x 20% = $15,680 21,280

*1/10 years = 10% x 2 = 20%





(b)

Accumulated

Amortization


MACHINE 1

2006 ($44,940* ÷ 7) x 1/2 = $3,210 $ 3,210

2007 $44,940 ÷ 7 = $6,420 9,630

2008 $44,940 ÷ 7 = $6,420 16,050

*$48,940 - $4,000 = $44,940

MACHINE 2

2007 $84,000 x 20%* x 1/2 = $8,400 $ 8,400

2008 (84,000 - $8,400) x 20% = $15,120 23,520

*1/10 years = 10% x 2 = 20%

(c) It really doesn’t matter which policy Tarcher chooses in

terms of recording amortization in the year of acquisition,

as long as it follows the policy consistently. The same total

amortization will be recorded whether amortization is

recorded monthly, or semi-annually. Amortization is an

estimate only, in any case.

(d) The choice of the method to prorate amortization in the

period of acquisition will not affect amortization expense if

the units-of-activity method is used. Under this method,

amortization is a function of the units produced not the

time the machine is owned.




PROBLEM 9-3A

(a) Cost:

Cash price $180,000

Delivery costs 1,000

Installation and testing 3,200

Total cost $184,200

The one-year insurance policy is not included as it is an

operating expenditure, benefiting only the current period.

(b)

1. STRAIGHT-LINE AMORTIZATION



Year Cost X Rate = Expense Amort. Value

$184,200

2006 $172,700* 20%** x 8/12 $23,027 $ 23,027 161,173

2007 172,700 20% 34,540 57,567 126,633

2008 172,700 20% 34,540 92,107 92,093

2009 172,700 20% 34,540 126,647 57,553

2010 172,700 20% 34,540 161,187 23,013

2011 172,700 20% x 4/12 11,513 172,700 11,500

* Amortizable cost = $184,200 - $11,500 = $172,700

** 1 ÷ 5 years = 20%





(b) (Continued)

2. DOUBLE DECLINING-BALANCE AMORTIZATION


NBV Beg. Amort. Amort. Accum. Net Book


$184,200

2006 $184,200 40%* x 8/12 $49,120 $49,120 135,080

2007 135,080 40% 54,032 103,152 81,048

2008 81,048 40% 32,419 135,571 48,629

2009 48,269 40% 19,452 155,023 29,177

2010 29,177 40% 11,671 166,694 17,506

2011 17,506 40% 6,006** 172,700 11,500

* 1 ÷ 5 years = 20% x 2 = 40%

**Use the amount that makes net book value equal to residual

value

3. UNITS-OF-ACTIVITY AMORTIZATION




$184,200

2006 8,500 $3.14* $26,690 $ 26,690 157,510

2007 12,000 3.14 37,680 64,370 119,830

2008 11,500 3.14 36,110 100,480 83,720

2009 10,500 3.14 32,970 133,450 50,750

2010 9,500 3.14 29,830 163,280 20,920

2011 3,000 3.14 9,420 172,700 11,500

*Amortizable cost per unit:

($184,200 - $11,500) ÷ 55,000 units = $3.14





(c) Double declining-balance amortization provides the

highest amount of amortization expense for 2006, thus

resulting in the lowest net income that year. Over the life

of the asset, all three methods result in the same total

amortization expense (equal to the amortizable cost).

(d) All three methods will result in the same cash flow in

2006 and over the life of the asset. Recording

amortization expense does not affect cash flow. There is

no Cash account involved in the entry to record

amortization (Dr. Amortization Expense; Cr.

Accumulated Amortization). It is only an allocation of the

capital cost to expense over an asset’s useful life.

(e) Factors that should influence management’s choice of

the amortization method to use include the revenue

pattern of a specific asset, the productivity of the asset,

as well as the usage of the asset on a year over year

basis. If an asset generates revenue consistently over

time, then the straight-line method is most appropriate.

If an asset is more productive in its earlier years then

the declining-balance method is most appropriate. If

usage of an asset can be easily measured and usage is

very different year over year then the units-of-activity

method is the most appropriate.




PROBLEM 9-4A

Feb. 12 Building ...................................... 120,000

Cash ....................................... 120,000

Mar. 6 Maintenance Expense ............... 7,500

Cash ...................................... 7,500

Apr. 10 Furniture and Fixtures .............. 25,000

Cash ....................................... 25,000

May 17 Machinery .................................. 35,000

Cash ....................................... 8,000

June 28 Maintenance Expense ............... 5,000

Cash ....................................... 5,000

July 20 Repairs Expense ....................... 10,000

Cash ....................................... 10,000

Aug. 5 Training Expense ...................... 1,600

Cash ....................................... 1,600

Sep. 18 Machinery .................................. 80,000

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

Nov. 6 Prepaid Insurance ..................... 4,600

Cash ....................................... 4,600

Dec. 31 Loss on Impairment .................. 70,000


Equipment ............................. 70,000

[($400,000 - $150,000) - $180,000]

Dec. 31 No journal entry required. Once a permanent

impairment has been recorded, the value of an

asset is not adjusted for any recovery in value.




PROBLEM 9-5A

(a)




$650,000

2004 $620,000* 12.5% $77,500 $ 77,500 572,500

2005 620,000 12.5% 77,500 155,000 495,000

2006 620,000 12.5% 77,500 232,500 417,500

2007 620,000 12.5% 77,500 310,000 340,000


** 1 ÷ 8 years = 12.5%

(b) Dec. 31 Loss on Impairment 220,000


Equipment ............................ 220,000

[($650,000 - $310,000) - $120,000]

(c)




$530,000¹ $120,000

2008 $90,0002 50%3 $45,000 575,000 75,000

2009 90,000 50% 45,000 620,000 30,000

¹Accumulated Amortization = $310,000 end of year before Loss

on impairment + $220,000 Loss on Impairment 2Amortizable cost = $120,000 - $30,000 = $90,000 31 ÷ 2 years remaining = 50%

(d) Accumulated amortization at the end of this equipment’s

useful life will be $620,000. Net book value at the end of this

equipment’s useful life will be the amount of residual value

which is $30,000.




PROBLEM 9-6A

(a)




$220,000

2004 $200,000* 20%** x 6/12 $20,000 20,000 200,000

2005 200,000 20% 40,000 60,000 160,000

2006 200,000 20% 40,000 100,000 120,000

2007 200,000 20% 40,000 140,000 80,000


** 1 ÷ 5 years = 20%

(b) Jan. 9 Equipment.................................. 33,000

Cash ....................................... 33,000

Nov. 18 Maintenance Expense ............... 1,500

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

Dec. 15 Repair Expense ......................... 2,400

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

(c) Net book value, December 31, 2007 ...................... $80,000

Add: Addition ........................................................... 33,000

113,000

Less: Revised residual value ................................. 25,000

Revised amortizable cost ....................................... 88,000

Remaining useful life (9 - 3½ years) ....................... 5½ years

Revised annual amortization expense .................. $16,000





(d)

Net book value before overhaul: Dec. 31, 2007 $80,000

Add: Cost of overhaul 33,000

Net book value after overhaul 113,000

Less: Annual amortization after overhaul:

2008 $16,000

2009 16,000

2010 16,000

2011 16,000

2012 16,000

2013 ($16,000 x 6/12) 8,000 88,000

Net book value at end of useful life: June 30, 2013 $25,000 Accumulated amortization: Before overhaul: Dec. 31, 2007 $140,000 Amortization from Jan 1, 2008 to June 30, 2013 (see above) 88,000 At end of useful life: June 30, 2013 $228,000 Check: Original cost of asset $220,000 Cost of overhaul 33,000 253,000 Less: accumulated amortization June 30, 2013 228,000 Net book value June 30, 2013 $ 25,000 Note: Net book value June 30, 2013 = revised estimated residual value of $25,000.




PROBLEM 9-7A

(a)

1. STRAIGHT-LINE AMORTIZATION


Annual Net

Amortizable Amort. Amort. Accum. Book

Year Cost X Rate (1/3) = Expense Amort. Value

$170,000

2007 $144,000* 1/3 $48,000 $48,000 122,000

2008 144,000 1/3 48,000 96,000 74,000

2009 144,000 1/3 48,000 144,000 26,000

*$170,000 - $26,000 = $144,000

2. UNITS-OF-ACTIVITY AMORTIZATION


Annual Net

Units of Amort. Amort. Accum. Book

Year Activity X Cost/Unit1 = Expense Amort. Value

$170,000

2007 155,000 $0.36 $55,800 $55,800 114,200

2008 135,000 0.36 48,600 104,400 65,600

2009 110,000 0.36 39,600 144,000 26,000

1 Amortizable cost per unit:

($170,000 - $26,000) ÷ 400,000 km = $0.36 per kilometre





(b) 1. (a) Straight (b) Units-

-Line of-Activity

Cost ............................................... $170,000 $170,000

Accumulated amortization. .......... 96,000 104,400

Book value .................................... 74,000 65,600

Cash proceeds ............................. 60,000 60,000

Loss on disposal .......................... $ 14,000 $ 5,600

2.

Amortization expense .................. $ 96,000 $104,400

Add: Loss on disposal ................ 14,000 5,600

Net expense .................................. $110,000 $110,000

In total the effect on net earnings is the same under both

methods. This is because the method of amortization

selected only affects the timing of the expense recognition.

In total over the life of the asset the expense recognized is

the same.




PROBLEM 9-8A

(a) 2006

Mar. 11 Office Equipment ...................... 85,000

Accounts Payable ................. 85,000

(b) Dec. 31 Amortization Expense ............... 17,500


—Office Equipment .............. 17,500

[($85,000 - $1,000) ÷ 4 years] x 10/12 months

2007

Dec. 31 Amortization Expense ............... 21,000



($85,000 - $1,000) ÷ 4 years

2008

Nov. 22 Amortization Expense ............... 19,250



[($85,000 - $1,000) ÷ 4 years] x 11/12

(c)

(1) Nov. 22 Accumulated Amortization

—Office Equipment¹ .................. 57,750

Loss on Disposal ...................... 27,250

Office Equipment .................. 85,000

¹ $17,500 + $21,000 + $19,250 = $57,750

(2) Nov. 22 Cash ........................................... 35,000



Gain on Disposal .................. 7,750






(c) (Continued)

(3) Nov. 22 Cash ........................................... 20,000



Loss on Disposal ...................... 7,250


(4) Nov. 22 Office Equipment

($25,000 + $78,000) .................... 103,000


—Office Equipment ................... 57,750

Loss on Disposal

($85,000 - $57,750) - $25,000 ..... 2,250

Cash ($113,000 - $35,000) .... 78,000





PROBLEM 9-9A

(a) 2004

Oct. 6 Land .................................................... 280,000

Building ............................................... 225,000

Machinery ........................................... 45,000

Cash ................................................ 100,000

Mortgage Payable ($550,000 - $100,000) 450,000

2005

Sep. 30 Amortization Expense ........................ 10,125

Accumulated Amortization—Building 5,625


Building $225,000 ÷ 40 = $5,625

Machinery $45,000 ÷ 10 = $4,500

2006




2007




Machinery

Net book value, ($45,000 - $4,500 - $4,500) ................... $36,000

Remaining useful life (5 - 2) ............................................ ÷ 3 years

Revised annual amortization expense ........................... $12,000





(a) (Continued)

2008

June 28 Amortization Expense ........................ 9,000


($12,000 x 9/12 months = $9,000)

28 Machinery* .......................................... 60,000


—Machinery** ..................................... 30,000

Gain on Disposal*** ....................... 3,000

Machinery ....................................... 45,000

Cash ($65,000 - $23,000) ............... 42,000

* $42,000 + $18,000 = $60,000

** $4,500 + $4,500 + $12,000 + $9,000 = $30,000

*** $18,000 - ($45,000 - $30,000) = $3,000


Accumulated Amortization—Building* 5,625

Accumulated Amortization—Machinery** 3,000

* $225,000 ÷ 40 = $5,625

** ($60,000 ÷ 5) x 3/12 months = $3,000





(b)

Menda Investments.


September 30, 2008


Land ............................................................................. $280,000

Buildings ..................................................... $225,000

Less: Accumulated amortization* ............. 22,500 202,500

Machinery .................................................... $60,000

Less: Accumulated amortization ............... 3,000 57,000

Total property, plant, and equipment ................... $539,500

* $5,625 x 4 years = $22,500

(c) The income statement for September 30, 2008 will include:

Amortization expense ($5,625 + $9,000 + $3,000): $17,625

Gain on disposal: $3,000




PROBLEM 9-10A

1. Research Expense ..................................... 60,000

Patent ..................................................... 60,000

2. Patent .......................................................... 21,000

Legal Fees Expense .............................. 21,000

3. Patent .......................................................... 38,000

Legal Fees Expense .............................. 38,000

4. Patent .......................................................... 50,000

Royalty Revenue .................................... 50,000

5. Amortization Expense ................................ 16,550

Accumulated Amortization—Patent ..... 16,550

{[($35,000 + $21,000 + $38,000) ÷ 5 years] - $2,250}

6. Loss on Impairment ................................... 5,200

Accumulated Amortization—Patent ..... 5,200

[($94,000 - $18,800) - $70,000]




PROBLEM 9-11A

(a) Jan. 2 Trademark ................................ 0.27,000

Cash ..................................... 27,000

Jan. - Research Expense .................. 210,000

June Cash ..................................... 210,000

July 1 Patent (Development Costs) ... 50,000

Cash ..................................... 50,000

Sept. 1 Advertising Expense ............... 60,000

Cash ..................................... 60,000

Oct. 1 Copyright #2 ............................ 180,000

Cash ..................................... 180,000

Dec. 31 Impairment Loss ..................... 40,000

Goodwill ($125,000 - $85,000) 40,000

(b) Dec. 31 Amortization Expense ............. 1,250


Patent ................................. 1,250

[($50,000 ÷ 20) x 6/12] = $1,250]

31 Amortization Expense ............. 12,600


Copyright ............................. 12,600

[($36,000 x 1/10) + ($180,000 x 1/5 x 3/12)]

Note: Amortization is not recorded on trademark because

it has an expected indefinite useful life.





(c)

GHANI CORPORATION


December 31, 2008

Assets

Intangible assets

Patents ................................................. $ 50,000

Less: Accumulated amortization ....... 1,250 $ 48,750

Copyrights (1) ........................................ $216,000

Less: Accumulated amortization ....... 37,800 178,200

Trademark (2) ................................................................ 81,000

Goodwill ...................................................................... 85,000

Total intangible assets .............................................. $392,950

(1) Copyright: Cost $36,000 + $180,000 = $216,000

Copyright: Amortization $25,200 + $12,600 = $37,800 (2) Trademark: $54,000 + $27,000 = $81,000




PROBLEM 9-12A

(a) 2007

June 7 Timber Land ........................ 50,000,000

Cash ................................ 10,000,000

Mortgage Payable .......... 40,000,000

26 Weighing Equipment ............. 199,900

Cash ................................... 199,900

Dec. 31 Inventory ................................ 5,280,000


—Timber Land .................. 5,280,000

($50,000,000 - $2,000,000) ÷ 1,000,000

= $48/t x 110,000 t = $5,280,000

31 Cost of Goods Sold ............... 4,800,000

Inventory ($48/t x 100,000 t) 4,800,000

31 Amortization Expense ........... 12,850


—Weighing Equipment..... 12,850

($199,900 - $20,000) ÷ 7 =

$25,700 x 6/12 mos. = $12,850

31 Interest Expense

($40,000,000 x 7% x 7/12) ...... 1,633,333

Cash ................................... 1,633,333

31 Mortgage Payable .................. 8,000,000

Cash ................................... 8,000,000





(a) (Continued)

2008

Dec. 31 Inventory

($48/t x 230,000 t) .................. 11,040,000


—Timber Land .................. 11,040,000

31 Cost of Goods Sold

($48/t x 230,000 t) .................. 11,040,000

Inventory ........................... 11,040,000

31 Amortization Expense ........... 25,700


—Weighing Equipment..... 25,700

31 Interest Expense

($32,000,000 x 7%) ................. 2,240,000

Cash ................................... 2,240,000

31 Mortgage Payable .................. 8,000,000

Cash ................................... 8,000,000





(b)

CYPRESS TIMBER COMPANY

(Partial) Balance Sheet

December 31, 2008

Current Assets

Inventory1 ............................................ $ 480,000


Timber tract ......................................... $50,000,000

Less: Accumulated amortization2 ...... 16,320,000 $33,680,000

Weighing equipment .......................... 199,900

Less: Accumulated amortization3 ...... 38,550 161,350

Total property, plant, and equipment ............... $33,841,350

1 10,000 tonnes x $48/t 2$5,280,000 + $11,040,000 = $16,320,000 3$12,850 (2007) + $25,700 (2008) = $38,550

As well, the Income Statement for the year ended December 31,

2008, will include cost of goods sold of $11,040,000,

amortization expense of $25,700 and interest expense of

$2,240,000.




PROBLEM 9-13A

(a)

St. Amand Company St. Helene Company

Asset

turnover

$4,375,000

[($3,780,000 + $4,290,000) ÷ 2]

= 1.08 to 1

$2,775,000

[($2,540,000 + $2,175,000) ÷ 2]

= 1.18 to 1

Return

on

assets

$350,000

[($3,780,000 + $4,290,000) ÷ 2]

= 8.67%

$300,000

[($2,540,000 + $2,175,000) ÷ 2]

= 12.73%

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

generate sales–its assets turnover of 1.18 times is higher

than 1.08 for St. Amand Company. It is also much more

efficient in using assets to produce income–with a return

on assets of 12.73% compared to 8.67% for St. Amand

Company.




PROBLEM 9-1B

(a) Jan. 22 Land ........................................... 220,000

Cash ....................................... 55,000

Note Payable ......................... 165,000

24 Land ........................................... 4,500

Cash ...................................... 4,500

31 Land ........................................... 25,000

Cash ....................................... 25,000

Feb. 13 Land ........................................... 8,000

Cash ....................................... 8,000

28 Cash ........................................... 7,500

Land ....................................... 7,500

Mar. 14 Building ...................................... 34,000

Cash ....................................... 34,000

31 Building ...................................... 15,000

Cash ....................................... 15,000

Apr. 22 Building ...................................... 17,000

Cash ....................................... 17,000

June 15 Building ...................................... 300,000

Cash ....................................... 75,000

Note Payable ......................... 225,000

Sept. 14 Building ...................................... 300,000

Cash ....................................... 100,000

Note Payable ......................... 200,000

30 Building ...................................... 6,700

Cash ....................................... 6,700




PROBLEM 9-1B (Continued)

(a) (Continued)

Oct. 12 Land Improvements .................. 42,000

Cash ....................................... 22,000

20 Land Improvements .................. 8,000

Cash ....................................... 8,000

Dec. 31 Interest Expense ....................... 7,800

Cash ....................................... 7,800

(b)

Land


2008 Jan. 22 220,000 220,000 24 4,500 224,500 31 25,000 249,500 Feb. 13 8,000 257,500 28 7,500 250,000

Building


2008 Mar. 14 34,000 34,000 31 15,000 49,000 Apr. 22 17,000 66,000 June 15 300,000 366,000 Sept.14 300,000 666,000 30 6,700 672,700





(b) (Continued)

Land Improvements


2008 Oct. 12 42,000 42,000 20 8,000 50,000

The cost of land that will appear on Kadlec’s December 31, 2008

balance sheet will be $250,000. The cost of the building that will

appear on Kadlec’s December 31, 2008 balance sheet will be

$672,700. The cost of land improvements that will appear on

Kadlec’s December 31, 2008 balance sheet will be $50,000.




PROBLEM 9-2B

(a)

Accumulated

Amortization


MACHINE 1

2005 $92,000* x 10%** x 9/12 = $6,900 $ 6,900

2006 $92,000 x 10% = $9,200 16,100

2007 $92,000 x 10% = $9,200 25,300

2008 $92,000 x 10% = $9,200 34,500

*$96,000 - $4,000 = $92,000

**1/10 years = 10%

MACHINE 2

2007 $60,000 x 12.5%* x 3/12 = $1,875 $1,875

2008 $58,125 x 12.5% = $7,266 9,141

*1/8 years = 12.5%

(b)

Accumulated

Amortization


MACHINE 1

2005 $92,000* x 10%** x 6/12 = $4,600 $ 4,600

2006 $92,000 x 10% = $9,200 13,800

2007 $92,000 x 10% = $9,200 23,000

2008 $92,000 x 10% = $9,200 32,200

*$96,000 - $4,000 = $92,000

**1/10 years = 10%





(b) (Continued)

MACHINE 2

2007 $60,000 x 12.5%* x 6/12 = $3,750 $ 3,750

2008 $56,250 x 12.5% = $7,031 10,781

*1/8 years = 12.5%

(c) Flakeboard should not consider recording amortization to

the nearest day. The amount is an estimate only. The

additional cost of recording it to the nearest day is not

warranted. It implies an accuracy that does not exist.

(d) It really doesn’t matter which policy Flakeboard chooses in

terms of recording amortization in the year of acquisition,

as long as it follows the policy consistently. The same total

amortization will be recorded whether amortization is

recorded monthly, or semi-annually. Amortization is an

estimate only, in any case.




PROBLEM 9-3B

(a) Invoice price $102,000

Delivery cost 5,200

Installation and testing 4,300

Cost of the machine $111,500

The $975 insurance policy is an annual operating

expenditure and not included in the cost of the asst.

(b) 1. STRAIGHT-LINE AMORTIZATION




$111,500

2006 $105,000* 25%* x 3/12*** $ 6,563 $ 6,563 104,937

2007 105,000 25% 26,250 32,813 78,687

2008 105,000 25% 26,250 59,063 52,437

2009 105,000 25% 26,250 85,313 26,187

2010 105,000 25% x 9/12 19,687 105,000 6,500

* $111,500 - $6,500 = $105,000

** 1/4 years = 25%

*** Machine was ready for use on October 1, 2006





(b) (Continued)

2. DOUBLE DECLINING-BALANCE AMORTIZATION




$111,500

2006 $111,500 50%* x 3/12 $13,938 $13,938 97,562

2007 97,562 50% 48,781 62,719 48,781

2008 48,781 50% 24,391 87,110 24,390

2009 24,390 50% 12,195 99,305 12,195

2010 12,195 50% 5,695*** 105,000 6,500

* 1/4 years = 25% x 2 = 50%

** Limited to the amount that brings residual value to $6,500

3. UNITS-OF-ACTIVITY




$111,500

2006 2,000 $3.50* $ 7,000 $ 7,000 104,500

2007 9,150 3.50 32,025 39,025 72,475

2008 7,650 3.50 26,775 65,800 45,700

2009 6,700 3.50 23,450 89,250 22,250

2010 4,500 3.50 15,750 105,000 6,500

* Amortizable cost per unit is $3.50 per unit

[($111,500 – $6,500) 30,000 = $3.50]





(c) Straight-line amortization provides the lowest amount of

amortization expense for 2006 which results in the highest

amount of net income. Over the life of the asset, all three

methods result in the same total amortization expense

(equal to the amortizable cost) and therefore the same

amount of net income.

(d) All three methods will result in the same cash flow in 2006

and over the life of the asset. Recording amortization

expense does not affect cash flow. There is no Cash

account involved in the entry to record amortization (Dr.

Amortization Expense; Cr. Accumulated Amortization). It is

only an allocation of the capital cost to expense over an

asset’s useful life.

(e) Factors that should influence management’s choice of the

amortization method to use include the revenue pattern of

a specific asset, the productivity of the asset, as well as

the usage of the asset on a year over year basis. If an asset

generates revenue consistently over time, then the

straight-line method is most appropriate. If an asset is

more productive in its earlier years then the declining-

balance method is most appropriate. If usage of an asset

can be easily measured and usage is very different year

over year then the units-of-activity method is the most

appropriate.




PROBLEM 9-4B

Feb. 2 Maintenance Expense ............... 2,000

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

Mar. 16 Maintenance Expense ............... 4,500

Cash ...................................... 4,500

Apr. 14 Building ...................................... 57,000

Cash ....................................... 57,000

May 7 Land Improvements .................. 4,600

Cash ....................................... 4,600

Note: Assuming the flowers and shrubs will last

for longer than one year.

June 16 Repairs Expense ....................... 5,900

Cash ....................................... 5,900

July 18 Vehicles ..................................... 15,000

Cash ....................................... 15,000

Aug. 8 Training Expense ...................... 5,500

Cash ....................................... 5,500

Sep. 20 Machinery .................................. 20,000

Cash ....................................... 20,000

Oct. 26 Repairs Expense ....................... 1,600

Cash ....................................... 1,600

1. Dec. 31 No journal entry required. Once a permanent

impairment has been recorded, the value of an asset

is not adjusted for any recovery in value.





2. Dec. 31 Loss on Impairment .................. 40,000


Equipment ............................ 40,000

[($300,000 - $125,000) - $135,000]




PROBLEM 9-5B

(a)



Year Cost X Rate** = Expense Amort. Value

$600,000

2004 $550,000* 10% $55,000 $ 55,000 545,000

2005 550,000 10% 55,000 110,000 490,000

2006 550,000 10% 55,000 165,000 435,000

2007 550,000 10% 55,000 220,000 380,000


** 1 ÷ 10 years = 10%

(b) Dec. 31 Loss on Impairment 180,000


Equipment ............................ 180,000

[($600,000 - $220,000) - $200,000]

(c)




$400,000¹ $200,000

2008 $150,0002 50%3 $75,000 475,000 125,000

2009 150,000 50% 75,000 550,000 50,000

¹Accumulated Amortization = $220,000 end of year before Loss

on impairment + $180,000 Loss on Impairment 2Amortizable cost = $200,000 - $50,000 = $150,000 31 ÷ 2 years remaining = 50%

(d) Accumulated amortization at the end of this equipment’s

useful life will be $550,000. Net book value at the end of

this equipment’s useful life will be the amount of residual

value which is $50,000.




PROBLEM 9-6B

(a)




$125,000

2003 $115,000* 20% x 6/12 $11,500 11,500 113,500

2004 115,000 20% 23,000 34,500 90,500

2005 115,000 20% 23,000 57,500 67,500

2006 115,000 20% 23,000 80,500 44,500

2007 115,000 20% 23,000 103,500 21,500


** 1 ÷ 5 years = 20%

(b) Jan. 7 Equipment.................................. 15,000

Cash ....................................... 15,000

July 27 Maintenance Expense ............... 1,000

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

Sept. 19 Repair Expense ......................... 2,500

Cash ....................................... 2,500

(c) Net book value, December 31, 2007 ...................... $21,500

Add: Addition ........................................................... 15,000

36,500

Less: Revised residual value ................................ 12,000

Revised amortizable cost ....................................... 24,500

Remaining useful life (7 – 4½ years) ...................... 2½ years

Revised annual amortization expense .................. $9,800





(d)




$103,500 $36,500¹

2008 $24,500* 40%** $ 9,800 113,300 26,700

2009 24,500 40% 9,800 123,100 16,900

2010 24,500 40% x 6/12 4,900 128,000 12,000

*Amortizable cost (revised) = $36,500 - $12,000 = $24,500

**1 ÷ 2.5 years remaining = 40%

¹Net book value before overhaul + cost of overhaul = $21,500 +

$15,000

Conclusion: Total accumulated amortization at the end of the

asset’s useful life will be $128,000.

Check: Original cost of asset $125,000 Cost of overhaul 15,000 240,000 Less: accumulated amortization June 30, 2010 128,000 Net book value June 30, 2010 $ 12,000 Note: Net book value June 30, 2010 = revised estimated residual value of $12,000.




PROBLEM 9-7B

(a) (1) STRAIGHT-LINE AMORTIZATION




$61,000

2006 $56,000* 25%** $14,000 $14,000 47,000

2007 56,000 25% 14,000 28,000 33,000

2008 56,000 25% 14,000 42,000 19,000

2009 56,000 25% 14,000 56,000 5,000 * $61,000 - $5,000 = $56,000 ** ¼ years = 25% (2) DOUBLE DECLINING-BALANCE AMORTIZATION




$61,000

2006 $61,000 50%* $30,500 $30,500 30,500

2007 30,500 50% 15,250 45,750 15,250

2008 15,250 50% 7,625 53,375 7,625

2009 7,625 50% **2,625 56,000 5,000

* ¼ years = 25% x 2 ** Amount that makes Net Book Value equal to residual




PROBLEM 9-7B (Continued) (b) 1.

(b)

(a) Declining-

Straight-Line Balance

Cost ................................................. $61,000 $61,000 Accumulated amortization. ............ 42,000 53,375 Net book value ................................ 19,000 7,625 Cash proceeds ............................... 10,000 10,000 (Gain) loss on disposal .................. $ 9,000 $(2,375) 2. Amortization expense .................... $42,000 $53,375 (Gain) Loss on disposal ................. 9,000 (2,375) Net expense .................................... $51,000 $51,000

In total the effect on net income is the same under

both methods. This is because the method of

amortization selected only affects the timing of the

expense recognition. In total over the life of the asset,

the expense recognized is the same.




PROBLEM 9-8B

(a) 2006

Feb. 4 Delivery Equipment ................... 65,000

Accounts Payable ................. 65,000



—Delivery Equipment ........... 11,000

($65,000 - $5,000) x 1/5 years x 11/12 months = $11,000

2007

Dec. 31 Amortization Expense ............... 12,000



($65,000 - $5,000) x 1/5 years = $12,000

2008

Oct. 25 Amortization Expense ............... 10,000



($65,000 - $5,000) x 1/5 years x 10/12 months = $10,000

(c)

1. Oct. 25 Accumulated Amortization

—Delivery Equipment ............... 33,000

Loss on Disposal ...................... 32,000

Delivery Equipment .............. 65,000

Accumulated Amortization:

($65,000 - $5,000) x 33/60 months = $33,000

Or add annual amortization expense in above journal

entries: ($11,000 + $12,000 + $10,000 = $33,000)





(c) (Continued)

2. Oct. 25 Cash ........................................... 30,000

Loss on Disposal ...................... 2,000




3. Oct. 25 Cash ........................................... 40,000



Gain on Disposal .................. 8,000


4. Oct. 25 Delivery Equipment

($28,000 + $55,000) .................... 83,000



Loss on Disposal

($28,000 - $32,000) ..................... 4,000

Cash ($87,000 - $32,000) ...... 55,000





PROBLEM 9-9B

(a) 2004

July 3 Land ............................................... 410,000

Building ......................................... 300,000

Machinery ...................................... 40,000

Cash .......................................... 100,000

Mortgage Payable

($750,000 - $100,000) ................ 650,000

2005

June 30 Amortization Expense .................. 12,500



Building $300,000 ÷ 40 = $7,500

Machinery $40,000 ÷ 8 = $5,000

2006








(a) (Continued)

2007




Machinery

Net book value ($40,000 - $10,000) ................................ $ 30,000

Remaining useful life (5 - 2) ............................................ ÷ 3 years

Revised annual amortization expense ........................... $ 10,000

Dec. 28 Amortization Expense .................. 5,000


($10,000 x 6/12 months)

28 Machinery* ..................................... 62,000


—Machinery** ................................ 25,000

Gain on Disposal*** .................. 7,000

Machinery .................................. 40,000

Cash ($65,000 - $25,000) .......... 40,000

* $40,000 + $22,000 = $62,000

** $5,000 + $5,000 + $10,000 + $5,000 = $25,000

*** $22,000 - ($40,000 - $25,000) = $7,000

2008




Machinery ($62,000 ÷ 5) x 6/12 months = $6,200





(b)

Ledesma Investments.


June 30, 2008


Land ............................................................................. $410,000

Buildings .................................................... $300,000

Less: Accumulated amortization* ............ 30,000 270,000

Machinery ................................................... $62,000

Less: Accumulated amortization .............. 6,200 55,800

Total property, plant, and equipment ................... $735,800

*$7,500 + $7,500 + $7,500 + $7,500 = $30,000

(c) The income statement for June 30, 2008 will include:

Amortization expense ($5,000 + $7,500 + $6,200) $18,700

Gain on disposal 7,000




PROBLEM 9-10B

1. Research Expense ($120,000 x 55%) ........ 66,000

Patents ................................................... 66,000

Accumulated Amortization—Patents ........ 4,400

Amortization Expense ........................... 4,400

$66,000 ÷ 15 years = $4,400

2. Trademark ................................................... 25,000

Loss on Impairment–Trademark

($125,000 - $100,000) ............................ 25,000

Loss on impairment should not be recorded until there is a

permanent impairment in value of the trademark. In this

case, Riley is attempting to defend its right and their

lawyers indicate they expect Riley to win which indicates

that there is not a permanent impairment in value of the

trademark.

3. Accumulated Amortization–

Goodwill [($250,000 ÷ 40) x 6/12] .............. 3,125

Amortization expense ............................ 3,125

Note: Goodwill is not amortized.

4. Charitable Donations Expense .................. 6,000

Goodwill ................................................. 6,000

5. Gain on License Market Value................... 30,000

License ................................................... 30,000




PROBLEM 9-11B

(a) Jan. 2 Patent #1 .................................... 22,400

Cash ....................................... 22,400

June 30 Research Expense .................... 220,000

Cash ....................................... 220,000

30 Patent #2 (Development Costs) 60,000

Cash ....................................... 60,000

Sept. 1 Advertising Expense ................. 35,000

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

Oct. 1 Copyright #2 .............................. 80,500

Cash ....................................... 80,500

Dec. 31 Impairment Loss ....................... 60,000

Goodwill ($210,000 - $150,000) 60,000


Accumulated Amortization—Patent #1 9,800

[($70,000 x 1/10) + ($22,400 x 1/8)]

31 Amortization Expense ............... 7,675


Copyright #1 .......................... 4,800


Copyright #2 .......................... 2,875

[($48,000 x 1/10) + ($80,500 x 1/7 x 3/12)]

31 Amortization Expense ............... 1,500 Accumulated Amortization—Patent #2 1,500 [($60,000 ÷ 20 years) x 6/12 = $1,500)





(c)

IP COMPANY


December 31, 2008

Assets

Intangible assets

Patents(1) ............................................... $152,400

Less: Accumulated amortization* ...... 25,300 $127,100

Copyrights(2) ......................................... 128,500

Less: Accumulated amortization** ..... 36,475 92,025

Goodwill ............................................... 150,000

Total intangible assets ........................ $369,125

(1) Cost: Patent #1 ($70,000 + $22,400) + Patent #2 $60,000 =

$152,400

* Amortization: Patent #1 ($14,000 + $7,000 + $2,800) + Patent

#2 ($1,500) = $25,300

(2) Cost: Copyright #1 ($48,000) + Copyright #2 ($80,500) =

$128,500

** Amortization: Copyright #1 ($28,800 + $4,800) + Copyright

#2 ($2,875) = $36,475




PROBLEM 9-12B

(a) 2007

Mar. 31 Mine ($2,600,000 + $260,000) . 2,860,000

Cash .................................. 2,860,000

Apr. 6 No entry required

Dec. 31 Inventory ................................. 570,000


—Mine ............................... 570,000

($2,860,000 - $200,000) ÷ 560,000 t = $4.75/t x 120,000 t

= $570,000

31 Cost of Goods Sold ................ 475,000

Inventory ($4.75/t x 100,000 t) 475,000

31 Amortization Expense ............ 60,000


—Equipment .................... 60,000

($500,000 - $20,000) ÷ 8 years = $60,000. Note that

equipment is amortized for the full year, because it has

been in use for the full year (at another site earlier in the

year).

2008

Dec. 31 Inventory ($4.75/t x 110,000 t)522,500


—Mine ............................... 522,500

31 Cost of Goods Sold

($4.75/t x 110,000 t) .............. 522,500

Inventory .......................... 522,500





(a)Continued

Dec. 31 Amortization Expense .......... 60,000


—Equipment .................... 60,000

(b)

YOUNT MINING COMPANY


December 31, 2008

Current Assets

Inventory .............................................. $ 95,000


Mine ...................................................... $2,860,000

Less: Accumulated amortization* ...... 1,092,500 1,767,500

Equipment ............................................ $500,000

Less: Accumulated amortization** ..... 375,000 125,000

* $570,000 + $522,500 = $1,092,500

** $15,000 (2002) + $60,000 (2003) + $60,000 (2004) + $60,000

(2005) + $60,000 (2006) + $60,000 (2007) + $60,000 (2008) =

$375,000

As well, the Income Statement for the year ended December 31,

2008, will include cost of goods sold of $522,500 and

amortization expense of $60,000.




PROBLEM 9-13B

(a)

Andruski Company Brar Company

Asset

turnover

$1,950,000

[($2,250,000 + $2,800,000) ÷ 2]

= 0.77 to 1

$2,300,000

[($2,465,000 + $3,295,000) ÷2]

= 0.8 to 1

Return

on

assets

$295,000

[($2,250,000 + $2,800,000) ÷ 2]

= 11.68%

$310,000

[($2,465,000 + $3,295,000) ÷2]

= 10.76%

(b) Brar Company is a little more efficient in using its assets to

generate sales–its assets turnover of 0.8 times is higher

than 0.77 times for Andruski Company. Andruski is more

efficient in using assets to produce income–with a return

on assets of 11.68% compared to 10.76% for Brar

Company.




CONTINUING COOKIE CHRONICLE

(a) Purchase price ........................................................ $34,500

Painting .................................................................... 2,500

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

Cost of van ............................................................... $38,500

(b) Straight-line amortization



$38,500

2008 $32,000* 20% x 4/12 $ 2,133 $ 2,133 36,367

2009 32,000 20% 6,400 8,533 29,967

2010 32,000 20% 6,400 14,933 23,567

* ($38,500 - $6,500 = $32,000)

Single declining-balance amortization



$38,500

2008 $38,500 20%* x 4/12 $ 2,567 $ 2,567 35,933

2009 35,933 20% 7,187 9,754 28,746

2010 28,746 20% 5,749 15,503 22,997

Units-of-activity amortization


Year Activity X Cost/Unit = Expense Amort. Value

$38,500

2008 15,000 $0.16* $ 2,400 $ 2,400 36,100

2009 45,000 0.16 7,200 9,600 28,900

2010 50,000 0.16 8,000 17,600 20,900

*$32,000 ÷ 200,000 = $0.16 per km




CONTINUING COOKIE CHRONICLE (Continued)

(c) Impact on Cookie Creation's balance sheet and income

statement in 2008:

Single

Declining- Units-of-

Straight-Line Balance Activity

Cost of asset $38,500 $38,500 $38,500

Accumulated amortization 2,133 2,567 2,400

Net book value $36,367 $35,933 $36,100

Amortization expense $2,133 $2,567 $2,400

The single-declining method of amortization will result in

the lowest amount of net income reported, the lowest

amount of owner's equity reported and the lowest net book

value of the asset reported.

The straight-line method of amortization will result in the

greatest amount of net income reported, the greatest

amount of owner's equity reported and the greatest net

book value of the asset reported.

(d) Over the van’s 5-year useful life the total amortization will

be $32,000 under each of the methods. The impact will

affect the timing of the amortization expense recognized

each year only.

(e) The units-of-activity method may provide Natalie with a

more accurate assessment of usage of the van in relation

to the amount of revenue earned. As long as Natalie is

willing to track the number of kilometres driven over the

course of the year, then this would be the method

recommended.




BYP 9-1 FINANCIAL REPORTING PROBLEM

(a) (1) $409,970,000

(2) $216,376,000

(3) $193,594,000

See Note 3 to the financial statements.

(b) $50,837,000 was the amount of net additions of capital

assets during 2006. (See the Consolidated Statements

of Cash Flows)

(c) Building on leased land, furniture, fixtures, equipment,

automotive and leasehold improvements are amortized

using the straight-line basis. The building is amortized

on the declining-balance method. (See Note 2)

The amount of amortization expense reported in the

statement of operations for fiscal 2006 was $41,343,000.

(d) The expected useful life for calculating amortization on

the “furniture, fixtures, equipment. and automotive” was

3 to 5 years. (See Note 2)

(e) Intangible assets comprise Goodwill, Trademarks and

Tradenames and Non-competition agreements. The

company did not report any impairment loss in 2006.

(See note 4)




BYP 9-2 INTERPRETING FINANCIAL STATEMENTS

(a) The $110 million investment in the new plant should be

treated as a capital expenditure. It will result in the

creation of an asset that will have a long life and the

cost will be matched with the revenue it generates

through annual amortization charges.

(b) Maple Leaf Foods could use the straight-line, declining-

balance or the units-of-activity method to amortize its

plant and equipment associated with its Saskatoon

plant. The straight-line method is simple to use and if

the assets are used at a consistent level will match

costs with revenue. Declining-balance is appropriate in

cases where the benefits are greater in the early years

of an asset’s life. The units-of-activity method would be

the most appropriate in this case as the levels of

production can be easily measured (production capacity

or number of hogs processed per week) and the levels

of production can change from one week to the next.

The units-of-activity method will provide the best

matching of costs with revenue.

(c) Yes. My recommendation would still be the units-of-

activity method. Amortization expense would increase

as a result of the double shift because the number of

units being processed has increased.




BYP 9-3 COLLABORATIVE LEARNING ACTIVITY

All of the material supplementing the collaborative learning

activity, including a suggested solution, can be found in the

Collaborative Learning section of the Instructor Resources site

accompanying this textbook.




BYP 9-4 COMMUNICATION ACTIVITY

Memorandum

To: Jason Long, Owner

From: Ken Bond, Controller

Re: Loss on Impairment of Long-Lived Assets

Long-lived assets are recorded at cost. In our company’s case

those assets include trucks, garages and equipment. The cost

of these assets is amortized over their useful lives, matching

costs of amortization to the revenue these assets have helped

us generate. The difference between the cost of an asset and its

accumulated amortization is what we refer to as net book value.

In some circumstances the net book value of a long-lived asset

may not be recoverable. If this happens and the market value

also permanently falls far below the assets’ net book value an

impairment has occurred. An impairment may occur because an

asset has become obsolete. In our company, an impairment

could arise when equipment we have purchased to repair and

maintain a truck can no longer perform the necessary service

on a truck because of technological change.

The impairment loss is equal to the amount by which the book

value of the asset is greater than market value.

The journal entry to record an impairment loss is:

Dr. Loss on impairment

Cr. Accumulated amortization




BYP 9-4 (Continued)

When an impairment loss is recorded the cost of the long lived

asset does not change. The amount of accumulated

amortization increases by the amount of the impairment loss. The net book value of the asset then decreases to reflect the

market value of the asset.

When an impairment loss is recorded net income is decreased

and in turn the value of the long lived asset recorded on our

company’s balance sheet also decreases.

In future years the annual amortization expense will need to be

revised. Future annual amortization expense will be based on

the revised net book value (which is equal to the market value

after the impairment loss is recorded), the revised residual

value, and the revised remaining useful life of the asset.

It is possible the residual value and the remaining useful life

may not be changed. In that case future annual amortization

expense will be less than it has been in previous years as a

result of the loss. If the residual value and the remaining useful

life change then the future amortization expense may be greater

or lower than the previous amortization expense.




BYP 9-5 ETHICS CASE

(a) The stakeholders in this situation are:

President of Finney Container Company

Controller of Finney Container Company

The owners of Finney Container Company

Potential investors in Finney Container Company

Creditors and others with a financial interest in the

company

(b) The intentional misstatement of the life of an asset or the

amount of the residual value is unethical, whatever the

reason. There is nothing unethical about changing the

estimate either of the life of an asset or of an asset's

residual value if the change is an attempt to better match

cost and revenues, and is a better allocation of the asset's

amortizable cost over the asset's useful life. In this case, it

appears from the controller's reaction that the revisions in

the life and residual value are intended only to improve net

income. This is unethical.

The fact that the competition uses a longer life on its

equipment is not necessarily relevant. The competition's

maintenance and repair policies and activities may be

different. The competition may use its equipment fewer

hours a year (e.g., one shift rather than two shifts daily)

than Finney Container Company.




BYP 9-5 (Continued)

(c) Net income in the year of change is increased $320,000

($560,000 - $240,000), because amortization expense is

decreased $320,000, by implementing the president's

proposed changes.

Old Estimate

Asset cost ............................................................... $3,000,000

Estimated residual ................................................. 200,000

Amortizable cost .................................................... 2,800,000

Estimated useful life .............................................. ÷ 5 years

Amortization per year............................................ $ 560,000

Revised Estimate

Asset cost ............................................................... $3,000,000

Estimated residual ................................................. 200,000

Amortizable cost .................................................... 2,800,000

Amortization taken to date ($560,000 x 2 years) .. 1,120,000

Remaining cost to be amortized ........................... 1,680,000

Remaining useful life (9 years - 2 years) .............. ÷ 7 years

Amortization per year............................................. $ 240,000




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