Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
CHAPTER 9
Reporting and Analysing Long-Lived Assets
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
Exercises
1A, 2A,
B
Problems
1.
Describe how the cost
principle applies to
property, plant and
equipment.
1, 2, 3, 4, 5 1, 2
2.
Explain the concept of
amortization.
6
3.
Calculate periodic
amortization using the
straight-line method,
and contrast its expense pattern with
those of other methods.
7, 8, 9, 10
3
3, *11, *12 3A, *11A,
*12A
3B, 11B,
*12B
4.
Describe the procedure
for revising periodic
amortization.
11, 12
4, 5
4, 5
4A, 5A
4B, 5B
5.
Explain how to account
for the disposal of
property, plant and
equipment.
13, 14
6, 7
6
3A, 4A,
6A, *12A
3B, 6B,
*12B
6.
Identify the basic issues 15, 16, 17
related to reporting intangible assets.
8
7, 8
2A, 7A, 8A 2B, 7B, 8B
7.
Indicate how long-lived
assets are reported on
the balance sheet.
9, 10
9
3A, 8A
3B, 8B
8.
Describe the methods
20, 21, 22
for evaluating the use of
assets.
11
10
9A, 10A
9B, 10B
18, 19
1, 2, 7
A
Problems
1B, 2B
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Study Objectives
*9. Calculate periodic
amortization using the
declining-balance
method and the unitsof-activity method.
Financial Accounting, Second Canadian Edition
Questions
Brief
Exercises
Exercises
*23
*12, *13
*11, *12
A
Problems
B
Problems
*11A, *12A *11B, *12B
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ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
Simple
20-30
1A
Determine acquisition cost.
2A
Classify expenditures.
Moderate
15-20
3A
Record property, plant and equipment transactions;
prepare partial balance sheet.
Moderate
40-50
4A
Revise amortization; calculate gain or loss on disposal.
Moderate
30-40
5A
Classify operating and capital expenditures.
Moderate
10-15
6A
Record disposal of equipment.
Simple
15-20
7A
Correct errors in recording and amortizing intangible
assets.
Moderate
30-40
8A
Record intangible asset transactions; prepare intangible assets section.
Moderate
30-40
9A
Calculate and evaluate ratios.
Moderate
30-40
10A
Evaluate ratios.
Moderate
20-30
*11A
Calculate amortization under straight-line and declining balance methods.
Moderate
30-40
*12A
Calculate amortization under straight-line and unitsof- activity methods; calculate total expense over life
of asset.
Moderate
30-40
Simple
20-30
1B
Determine acquisition cost.
2B
Classify expenditures.
Moderate
15-20
3B
Record property, plant and equipment transactions;
prepare partial balance sheet.
Moderate
40-50
4B
Revise amortization.
Moderate
30-40
5B
Classify operating and capital expenditures.
Moderate
10-15
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Problem
Number
6B
Financial Accounting, Second Canadian Edition
Description
Record disposal of equipment.
Difficulty
Level
Simple
Time
Allotted (min.)
15-20
7B
Correct errors in recording and amortizing intangible
assets.
Moderate
30-40
8B
Record intangible asset transactions; prepare intangible assets section.
Moderate
30-40
9B
Calculate and evaluate ratios.
Moderate
30-40
10B
Evaluate ratios.
Moderate
20-30
*11B
Calculate amortization under straight-line and declining balance methods.
Moderate
30-40
*12B
Calculate amortization under straight-line and declining balance methods; calculate total expense over life
of asset.
Moderate
30-40
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ANSWERS TO QUESTIONS
1.
For long-lived assets, the cost principle states that long-lived assets are recorded at cost,
which consists of all expenditures necessary to acquire the asset and make it ready for its intended use. The matching principle requires that the cost of a long-lived asset be amortized
to expense over the asset’s useful life.
2.
The cost principle has persisted because it provides information that is objective and verifiable. Market values are subjective. It is a situation where reliability takes precedence over relevance.
3.
(a)
(b)
4.
An impairment loss is recognized when the value of a long-lived asset is written down to
market value. The impairment loss is only recognized when there has been a permanent decline in value, which is assessed using specific recoverability tests. Once an impairment loss
has been recognized the book value of the asset is not subsequently adjusted for any recovery in value.
5.
The primary advantages of leasing are (1) reduced risk of obsolescence, (2) low down payment, (3) shared tax advantages, (4) reduced recorded assets and liabilities, and (5) asset financing that might not otherwise be available.
6.
You should explain to the president that amortization is a process of allocating the cost of a
long-lived asset to expense over its service (useful) life in a rational and systematic manner.
Recognition of amortization is not intended to result in the accumulation of cash for replacement of the asset.
7.
(a) Useful life is expressed in years under the straight-line and declining-balance methods
and in units of activity under the units-of-activity method.
(b) The pattern of periodic amortization expense over useful life is constant under the
straight-line method, accelerated in the early years of declining-balance method and
variable under the units-of-activity method.
8.
The effects of the three methods on annual amortization expense are: Straight-line—
constant amount–-expense is constant and effect on net earnings is smooth. Units-ofactivity—varying amounts–-the expense increases with an increase in the level of activity
and net earnings decrease. Declining-balance—decreasing amounts–-the expense declines
over time and net earnings increase. In the early years of an asset’s life, declining-balance
and units-of-activity generally lead to higher amortization and lower net earnings than the
straight-line method. Over the total life of the asset, total amortization will be the same regardless of the amortization method chosen.
In a cash transaction, cost is equal to the cash paid.
In a noncash transaction, cost is equal to the cash equivalent price, which is the fair
market value of the asset given up, if determinable. If not, the fair market value of the
asset received is used.
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Questions (Continued)
9.
Since Morgan uses the straight-line amortization method, its amortization expense will be
lower in the early years of an asset’s useful life as compared to using an accelerated method. Fairchild’s amortization expense in the early years of an asset’s useful life will be higher
as compared to the straight-line method. Morgan’s net earnings will be higher than
Fairchild’s in the first few years of the asset’s useful life. These differences will impact the
amortization expense, accumulated amortization and net earnings of the companies making
comparison of their results and financial position difficult. In reality, the choice of amortization method results in an artificial, timing difference only and should be ignored, if possible,
in comparing financial positions.
10. Yes, income tax regulations allow a company to use a different amortization method on the
tax return than is used in preparing financial statements. Tax regulations require the taxpayer
to use the single-declining-balance method, regardless of which method is used in preparing
financial statements. Lucille Corporation’s motivation for using the straight line method for financial reporting is to ensure that the amortization method selected provides the best matching of revenue to expense.
11. Operating expenditures are ordinary repairs made to maintain the operating efficiency and
expected productive life of the asset. Capital expenditures are additions and improvements
made to increase efficiency, productivity, or expected useful life of the asset. Operating expenditures are recognized as expenses when incurred; capital expenditures are generally
debited to the asset account affected.
12. A revision of amortization is made in current and future years but not retroactively. The rationale is that continual restatement of prior periods for what is merely a change in estimate
would adversely affect the reader’s confidence in the financial statements.
13. In a sale of long-lived assets, the book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the book value of the asset, a gain
on disposal occurs. If the proceeds of the sale are less than the book value of the asset sold,
a loss on disposal occurs.
14. The machine 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 company is still using the asset. Once an asset is fully amortized, even if it is still being used, no additional amortization should be taken on this asset. In
no situation can the amortization on the asset exceed the cost of the asset.
15. The student is not correct. Only intangible assets with limited lives such as patents and copyrights are amortized. Intangibles with unlimited lives such as trademarks are not amortized
but their book value is assessed annually for impairment and a loss recognized if a decline in
value has occurred.
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Questions (Continued)
16.
Goodwill is the value of many favourable attributes that are intertwined in the business enterprise. Goodwill can be identified only with the business as a whole and, unlike other assets, cannot be sold separately. Goodwill can only be sold if the entire business is sold.
17. Research and development costs present several accounting problems. It is sometimes difficult to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefits. As a result, the CICA requires that research costs are always recorded as an expense and development costs are usually recorded as an expense. If
future benefits are identifiable for development costs, then these development costs can be
capitalized.
18. Long-lived assets should be reported on the balance sheet at cost less accumulated amortization. The statement of earnings includes amortization expense and any gain or loss on
disposal of long-lived assets. The cash flow statement will include any cash paid to purchase
long-lived assets and any cash received on their disposal.
19. The notes to financial statements should disclose the balance of the major classes of assets
and the amortization method(s) and rates used.
20. (a)
(b)
Grocery stores usually have a high asset turnover and a low profit margin.
Car dealerships normally have a low asset turnover and a high profit margin.
21. ($ in U.S. millions)
Return on assets:
$132
= 25.3%
$521
22.
Asset turnover:
$572
= 1.10 times
$521
The return on assets ratio measures the return being generated by each dollar invested in
the business (net earnings ÷ average total assets). The return on assets can also be calculated by multiplying the profit margin by the asset turnover ratio. The profit margin
measures how effective the business is at generating earnings from its sales and the asset
turnover measures how well the company can generate sales from a given level of assets.
Together, the two ratios can be combined to measure how effective a company is at generating earnings from a given level of assets (return on assets). Therefore if a company wants
to improve its return on assets, it can do so by either by increasing the margin it generates
from each dollar of sales (profit margin) or by increasing the volume of goods that is sells
(asset turnover).
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Questions (Continued)
*23. Straight-line and units-of-activity measures apply the amortization criteria to the original cost
of the assets over a fixed period (in years or in units), which must be reduced by salvage
value to get an accurate representation of the amortizable cost of the assets to the company. Because the declining-balance method applies the amortization criteria, not to the original cost, but to a declining book value, the original cost is used instead of the amortizable
cost. Applying a fixed percentage rate to a declining balance will always result in an ending,
residual amount. Salvage value is considered in the declining-balance method in that the
asset is never amortized below its salvage value, so in effect, this residual amount is adjusted to equal salvage value.
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9-1
All of the expenditures should be included in the cost of the land. Therefore, the cost of the land is
$56,000 ($50,000 + $2,500 + $3,500).
BRIEF EXERCISE 9-2
The cost of the truck is $18,400 (cash price $18,000 + painting and lettering $400). The expenditures for insurance and motor vehicle licence should be expensed, not added to the cost of the
truck.
BRIEF EXERCISE 9-3
Amortizable cost of $40,000 ($42,000 – $2,000). 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 is $10,000 for both the first and second years.
BRIEF EXERCISE 9-4
Book value, Jan. 1, 2004 ($32,000 - $15,000) ......................................................
Less: Salvage value .............................................................................................
Amortizable cost ...................................................................................................
Remaining useful life ............................................................................................
Revised annual amortization ($15,000 ÷ 2) ..........................................................
$17,000
2,000
15,000
2 years
$ 7,500
BRIEF EXERCISE 9-5
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
O
C
C
O
C
O
O
C
C
O
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BRIEF EXERCISE 9-6
(a)
(b)
Accumulated Amortization—Delivery Equipment .....................
Delivery Equipment ..............................................................
41,000
Accumulated Amortization—Delivery Equipment .....................
Loss on Disposal ......................................................................
Delivery Equipment ..............................................................
38,000
3,000
Cost of delivery equipment
Less: Accumulated amortization
Book value at date of disposal
Proceeds from sale
Loss on disposal
41,000
41,000
$41,000
38,000
3,000
0
$ 3,000
BRIEF EXERCISE 9-7
(a)
(b)
Amortization Expense ($14,000 X 9/12) ...................................
Accumulated Amortization—Office Equipment ...................
10,500
Cash .........................................................................................
Accumulated Amortization—Office Equipment .........................
Gain on Disposal .............................................................
Office Equipment .............................................................
21,000
52,500
Cost of office equipment
Less: Accumulated amortization
Book value at date of disposal
Proceeds from sale
Gain on disposal
*$42,000 + $10,500 = $52,500
10,500
1,500
72,000
$72,000
52,500*
19,500
21,000
$ 1,500
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BRIEF EXERCISE 9-8
Goodwill is an intangible asset with an indefinite useful life. Intangible assets with indefinite useful
lives are not amortized but their value must be reviewed annually and an impairment loss recorded
if the asset’s market value permanently falls below its book value. If the decline in value of Descartes Systems Group’s goodwill is assessed as being permanent, the goodwill should be reported
at $17.6 million and an impairment loss of $86.7 ($104.3 – $17.6) million recorded on the company’s statement of earnings.
BRIEF EXERCISE 9-9
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
PPE
NA
I
I
NA
NA
PPE
NA
I
PPE
PPE
I
PPE
I
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BRIEF EXERCISE 9-10
CANADIAN TIRE CORPORATION, LIMITED
Balance Sheet (Partial)
December 28, 2002
(in millions)
Property, plant and equipment
Land .....................................................................
Buildings ...............................................................
Less: Accumulated amortization—buildings .........
Computer software ...............................................
Less: Accumulated amortization, computer
software ..............................................
Fixtures and equipment ........................................
Less: Accumulated amortization—
fixtures and equipment ........................
Assets under capital lease....................................
Less: Accumulated amortization –
assets under capital lease ..................
Leasehold improvements .....................................
Less: Accumulated amortization –
leasehold improvements .....................
Less: Assets held for disposal ($87.5 – $37.3) .....
Total property, plant and equipment ..............
Goodwill ......................................................................
$ 613.9
$1,806.3
558.8
$172.4
1,247.5
116.9
$392.9
55.5
270.5
$23.5
122.4
7.2
$179.2
16.3
57.2
122.0
2,177.6
(50.2)
2,127.4
32.8
BRIEF EXERCISE 9-11
($ in millions)
Return on assets
$111.5
= 2.5%
($4,275.7  $4,534.2)  2
Asset turnover
$7,383.8
= 1.7 times
($4,275.7  $4,534.2)  2
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*BRIEF EXERCISE 9-12
The declining-balance rate is 25% (1/4 X 1) and this rate is applied to book value at the beginning of the year. The calculations are:
Book Value
Year 1
Year 2
$42,000
($42,000 – $10,500)
X
Rate
=
Amortization
25%
25%
$10,500
$7,875
*BRIEF EXERCISE 9-13
The amortizable cost per unit is 20 cents per km. calculated as follows:
Amortizable cost ($34,500 – $500) ÷ 125,000 = $0.272
2003
2004
50,000 km X $0.272 = $13,600 amortization expense
40,000 km X $0.272 = $10,880 amortization expense
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SOLUTIONS TO EXERCISES
EXERCISE 9-1
(a)
Under the cost principle, the acquisition cost for property, plant and equipment includes all
expenditures necessary to acquire the asset and make it ready for its intended 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.
(b)
1.
2.
3.
4.
Delivery Truck
Delivery Truck
Licence Expense
Maintenance Expense
5.
6.
7.
8.
Prepaid Insurance
Land
Land Improvements
Property Tax Expense
EXERCISE 9-2
(a)
(b)
Cost of land
Cash paid ................................................................................
Net cost of removing warehouse ($6,600 – $1,700) ...............
Legal fee .................................................................................
Total ................................................................................
$100,000
4,900
1,300
$106,200
The architect’s fee ($7,800) should be debited to the building account. The cost of the
driveways and parking lot ($14,000) should be debited to Land Improvements.
EXERCISE 9-3
2004 amortization = $14,000 X 9/12 = $10,500
2005 amortization = $14,000
 $96,000 - $12,000 
Straight - line method : 
 = $14,000 per year
6


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EXERCISE 9-4
(a)
Type of Asset
Book value, January 1, 2004
Less: Salvage value
Amortizable cost
Building
$458,0001
62,000
$396,000
153
24
$ 26,400
$ 35,200
Revised remaining useful life in years
Revised annual amortization
Equipment
$74,0002
3,600
$70,400
1 $800,000
- $342,000 = $458,000
- $46,000 = $74,000
3 25 - 10 = 15
44 - 2 = 2
2 $120,000
(b)
Dec. 31
Amortization Expense—Building ..........................
Accumulated Amortization—Building ...........
26,400
Amortization Expense—Equipment .....................
Accumulated Amortization—Equipment .......
35,200
26,400
35,200
EXERCISE 9-5
MEMO
To:
From:
Date:
Client
Financial Advisor
Today
The change in the amortization policy will increase the period in cases where the contracted exhibition period is greater than two years. This will have the effect of spreading the cost over a
longer period and in the short term increasing net earnings. It will be more difficult to compare the
current year’s results with previous years’ because of the change in estimated useful life. In evaluating Alliance’s performance you would want to make an adjustment for this change in estimated life. If the contracted exhibition period is a good measure of the useful life of the broadcast
rights and the revenue potential is consistent over this period, then the policy is reasonable.
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EXERCISE 9-6
Jan.
1
June 30
Dec. 31
31
Accumulated Amortization—Machinery .........................
Machinery ..............................................................
62,000
Amortization Expense ...................................................
Accum. Amortization—Computer ..........................
($33,000 X 1/3 X 6/12)
5,500
Cash ..............................................................................
Accumulated Amortization—Computer .........................
($33,000 X 2/3 = $22,000; $22,000 + $5,500)
Loss on Disposal [$5,000 - ($33,000 - $27,500)] ..........
Computer ......................................................
5,000
27,500
Amortization Expense ...................................................
Accumulated Amortization—Truck ........................
[($27,000 - $3,000) X 1/5]
4,800
Cash ..............................................................................
Accumulated Amortization—Truck ................................
[($27,000 - $3,000) X 4/5]
Gain on Disposal ...........................................
Truck .............................................................
9,000
19,200
62,000
5,500
500
33,000
4,800
1,200
27,000
EXERCISE 9-7
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.
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 statement of earnings. Therefore the amortization entry should be
reversed and no decline in value recorded until am impairment in value occurs.
4. 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.
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5. EXERCISE 9-8
(a)
Jan.
April
July
2
1
1
Sept.
1
30
Patents .......................................................................
Cash .......................................................................
450,000
Goodwill .......................................................................
Cash .......................................................................
360,000
Franchise .......................................................................
Cash .......................................................................
250,000
Research Expense .........................................................
Cash .......................................................................
185,000
Development Expense....................................................
Cash .......................................................................
50,000
450,000
360,000
250,000
185,000
50,000
(b)
Dec. 31
Amortization Expense–Patents
($450,000 ÷ 5) ........................................................
Amortization Expense–Franchise
[($250,000 ÷ 10) X 6/12] .........................................
Patents ...................................................................
Franchise ................................................................
90,000
12,500
90,000
12,500
Ending balances, December 31, 2004:
Patent
Goodwill
Franchise
= $360,000 ($450,000 - $90,000)
= $360,000
= $237,500 ($250,000 - $12,500)
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EXERCISE 9-9
(a)
Account
Financial Statement
Section
Accumulated Amortization –
Buildings
Balance Sheet
Property, Plant and
Equipment
Accumulated Amortization –
Finite-Life Intangible Assets
Balance Sheet
Intangibles
Accumulated Amortization –
Machinery and Equipment
Balance Sheet
Property, Plant and
Equipment
Accumulated Amortization
– Other Property, Plant and Equipment
Balance Sheet
Property, Plant and
Equipment
Accumulated Amortization –
Telecommunication Assets
Balance Sheet
Property, Plant and
Equipment
Amortization Expense
Statement of Earnings
Operating Expenses
Buildings
Balance Sheet
Property, Plant and
Equipment
Cash and Cash Equivalents
Balance Sheet
Current Assets
Cash Paid for Capital Expenditures
Cash Flow Statement
Investing Activities
Common Shares
Balance Sheet
Shareholders’ Equity
Finite-Life Intangible Assets
Balance Sheet
Intangibles
Goodwill
Balance Sheet
Intangibles
Impairment Charge
Statement of Earnings
Other Expenses
Indefinite Life – Intangible Assets
Balance Sheet
Intangibles
Land
Balance Sheet
Property, Plant and
Equipment
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Chapter 9
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Financial Accounting, Second Canadian Edition
EXERCISE 9-9
(a) (Continued)
Account
Financial Statement
Section
Machinery and Equipment
Balance Sheet
Property, Plant and
Equipment
Other Long-term Assets
Balance Sheet
Long-term Assets
Other Property, Plant and Equipment
Balance Sheet
Property, Plant and
Equipment
Plant Under Construction
Balance Sheet
Property, Plant and
Equipment
Telecommunications Assets
Balance Sheet
Property, Plant and
Equipment
(b)
BCE Inc.
Balance Sheet (Partial)
December 31, 2002
(in millions)
Property, plant and equipment
Land ........................................................................................
Buildings ...................................................................................
Less: Accumulated amortization ...............................................
Plant under construction ...........................................................
Machinery and equipment ........................................................
Less: Accumulated amortization ...............................................
Telecommunications assets .....................................................
Less: Accumulated amortization ...............................................
Other property, plant and equipment ........................................
Less: Accumulated amortization ...............................................
Total property, plant and equipment
Intangible assets
Finite-life intangible assets .......................................................
Less: Accumulated amortization ...............................................
Goodwill ....................................................................................
Indefinite-life intangible assets .................................................
Total intangible assets .....................................................
$
$2,585
1,307
$6,144
3,253
$34,573
21,848
$357
139
$3,021
1,335
99
1,278
1,743
2,891
12,725
218
18,954
1,686
10,103
900
12,689
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Chapter 9
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EXERCISE 9-10
(a) ($ in millions)
1.
Return on assets
$195.9
= 4.6%
($4,312.6  $4,254.3)  2
2.
Asset turnover
$9,926.5
= 2.3 times
($4,312.6  $4,254.3)  2
3.
(b)
Profit margin
$195.9
$9,926.5
= 2.0%
Profit Margin X Asset Turnover = Return on Assets
= 2.0% X 2.3 times = 4.6%
(c)
Asset turnover and profit margin vary considerably across industries. Therefore, when you
have a diverse group of businesses from several industry types combined into one company, such as in Empire Company, the ability to compare these ratios to other businesses
becomes very difficult. Empire Company would almost need to calculate ratios for each of
the separate industry segments to allow for a meaningful analysis.
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Chapter 9
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EXERCISE 9-11
(a)
Year
2004
2005
(1)
Straight-Line
$12,833
12,833
Units-of-Activity
$13,090
11,550
Double
Declining-Balance
$29,667
19,775
Straight-Line Method
$89,000 - $12,000 = $12,833 per year
6 years
2004 and 2005 amortization expense = $12,833
(2)
Units-of-Activity Method
$89,000 - $12,000 = $7.70 per hour
10,000 hours
2004 amortization expense = 1,700 hours X $7.70 = $13,090
2005 amortization expense = 1,500 hours X $7.70 = $11,550
(3)
Declining-Balance Method
The declining-balance rate is 1/6 X 2 = 33⅓%
2004 amortization expense = $89,000 X 33⅓% = $29,667
Book value January 1, 2005 = $89,000 – $29,667 = $59,333
2005 amortization expense = $59,333 X 33⅓% = $19,775
(b)
Straight line method results in the highest net earnings in 2004 and units-of-activity results
in the highest net earnings in 2005.
(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.
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Chapter 9
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*EXERCISE 9-12
(a)
(1)
Straight-line method
$10,000  $3,000
 $1,750 each year
4
(2)
Double-declining balance method
DDB Rate: ¼ x 2 = 50%
Year 1: $10,000 x 50% = $5,000
Year 2: $10,000 - $5,000 = $5,000 x 50% = $2,500
Year 3: $5,000 - $2,500 x 50% = $1,250
Year 1
Year 2
Year 3
Year 4**
Total
Straight-Line
Amortization
Net Book
Expense
Value
$1,750
$8,250
1,750
6,500
1,750
4,750
1,750
3,000
$7,000
Double-Declining Balance
Amortization
Net Book
Expense
Value
$5,000
$5,000
2,000
3,000
0*
3,000
0
3,000
$7,000
* Do not amortize below salvage value.
** Not required. Included for information only.
(b)
(1)
Straight-line method
Proceeds - book value = Gain (loss)
$2,500 - $4,750 = ($2,250)
(2)
Double-declining balance method
Proceeds - book value = Gain (loss)
$2,500 - $3,000 = ($500)
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Chapter 9
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*EXERCISE 9-12 (Continued)
(c)
(1)
Straight-line method
Amortization expense: $1,750 + $1,750 + $1,750 + Loss: $2,250 = $7,500
(2)
Double-declining balance method
Amortization expense: $5,000 + $2,000 + $0 + Loss: $500 = $7,500
Note: There is no difference in the total expense over the life of the asset.
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Chapter 9
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Financial Accounting, Second Canadian Edition
SOLUTIONS TO PROBLEMS
PROBLEM 9-1A
Item
Land
1.
2.
3.
4.
5.
6.
7.
8.
9.
$250,000
4,900
27,000
7,000
10.
(12,700)
$276,200
Building Land Improvements
Other Accounts
$ 20,000
30,000
700,000
$34,000
$15,000 Property Tax
Expense
$750,000
$34,000
$15,000
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Chapter 9
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Financial Accounting, Second Canadian Edition
PROBLEM 9-2A
Date
January 10
Expenditure
Land was purchased for $65,000.
Account Title
Land
January 15
Land was surveyed at a cost of $3,000.
Land
February 1
An existing building on the land was razed at a
cost of $5,500 to provide room for the new structure.
Land
February 10
Security fence was built around the land for
$2,500.
Land
Improvements
February 23
$10,500 was paid to an architectural firm for plans
for the new building.
Building
March 15
$3,500 was spent to remove the trees and level the Land
land in preparation for construction of the new
building.
March 17
Building permit acquired for $1,000.
Building
April 10
Paid $5,000 in legal and application costs for a patent on the newly developed product that will be
sold by Cohlmeyer.
Patent
May 1
$460,000 was spent to construct the building.
Building
May 15
$4,000 was spent on landscaping.
May 20
Parking lot constructed for $8,000.
May 25
Company’s domain name, <www.cohlmeyer.ca>,
was registered for $150.
Land
Improvements
Land
Improvements
Miscellaneous
Expense
May 28
Paid $4,000 to lawyer for organizing cost for the
new company.
Organization Cost
Expense
June 1
The building was occupied and the business commenced.
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Chapter 9
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Financial Accounting, Second Canadian Edition
PROBLEM 9-3A
(a) April 1
May
1
1
Land ........................................................ 2,630,000
Cash .................................................
630,000
Note Payable ....................................
2,000,000
Amortization Expense ..............................
Accumulated Amortization
—Equipment ($750,000 X 1/10 X 4/12)
25,000
Cash.........................................................
Accumulated Amortization—Equipment
($750,000 X 4/10 + $25,000) ...................
Loss on Disposal ......................................
Equipment ...................................
350,000
Cost
Accum. amort.—equipment
[($750,000 X 1/10) X 4 + $25,000)]
Book value
Cash proceeds
Loss on disposal
25,000
325,000
75,000
750,000
$750,000
325,000
425,000
350,000
$(75,000)
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Chapter 9
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Financial Accounting, Second Canadian Edition
PROBLEM 9-3A (Continued)
(a) (Continued)
June 1
Cash......................................................... 1,800,000
Land ..................................................
300,000
Gain on Disposal ...............................
1,500,000
July
Equipment ................................................ 1,000,000
Cash ..................................................
Note Payable .....................................
1
Dec. 31
31
Amortization Expense ..............................
Accumulated Amortization
—Equipment ($470,000 X 1/10) ........
47,000
Accumulated Amortization—Equipment ...
Equipment ...................................
470,000
Cost
Accum. amort.—equipment
($470,000 X 1/10 X 10)
Gain (loss) on disposal
250,000
750,000
47,000
470,000
$470,000
470,000
$
0
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Chapter 9
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PROBLEM 9-3A (Continued)
(b) Dec. 31
31
Amortization Expense ............................
Accumulated Amortization
—Buildings ($28,500,000 X 1/40) ....
712,500
712,500
Amortization Expense ............................ 4,728,000
Accumulated Amortization
—Equipment....................................
4,728,000
($46,780,000* X 1/10)
[($1,000,000 X 1/10) X 6/12]
$4,678,000
50,000
$4,728,000
*$48,000,000 - $750,000 - $470,000 = $46,780,000
31
Interest Expense ....................................
Interest Payable...............................
($2,000,000 X 8% X 9/12)
($750,000 X 8% X 6/12)
(c)
150,000
150,000
$120,000
30,000
$150,000
YOUNT CORPORATION
Balance Sheet (Partial)
December 31, 2005
Property, plant and equipment*
Land ......................................................
Buildings ................................................
Less: Accumulated amortization
—buildings .............................................
Equipment .............................................
Less: Accumulated amortization
—equipment ..........................................
Total property, plant and equipment .
$ 6,330,000
$28,500,000
11,400,000
$47,780,000
17,100,000
39,005,000
8,775,000
$32,205,000
*See T accounts on the following page.
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Chapter 9
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Financial Accounting, Second Canadian Edition
PROBLEM 9-3A (Continued)
(c) (Continued)
Land
Dec. 31, 2004
April 1, 2005
4,000,000
2,630,000
Dec. 31, 2005
Bal. 6,330,000
June 1, 2005
300,000
Buildings
Dec. 31, 2004
28,500,000
Dec. 31, 2005
Bal. 28,500,000
Equipment
Dec. 31, 2004
July 1, 2005
48,000,000
1,000,000
Dec. 31, 2005
Bal. 47,780,000
May 1, 2005
Dec. 31, 2005
750,000
470,000
Accumulated Amortization—Buildings
Dec. 31, 2004
Dec. 31, 2005
10,687,500
712,500
Dec. 31, 2005
Bal. 11,400,000
Accumulated Amortization—Equipment
May 1, 2005
Dec. 31, 2005
325,000
470,000
Dec. 31, 2004
May 1, 2005
Dec. 31, 2005
Dec. 31, 2005
35,000,000
25,000
47,000
4,728,000
Dec. 31, 2005
Bal. 39,005,000
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Chapter 9
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Financial Accounting, Second Canadian Edition
PROBLEM 9-4A
(a)
Cost
Original building
(b)
Book
Value
$69,375
Amortization expense for current year
Total building $69,375 + $29,125 = $98,500 ÷ 15 = $6,567
(c)
Cost
Total building
1
(d)
Accum.
Amortiz.
$185,000 $115,625
Accum.
Amortiz.
$214,125 $148,4601
Book
Value
$65,665
$115,625 + ($6,567 x 5) = $148,460
Proceeds
Book value
Loss on disposal
$50,000
65,665
$15,665
Journal entry (optional)
Cash.......................................................
Accumulated Amortization–Building .......
Loss on Disposal ....................................
Building ..............................................
50,000
148,460
15,665
214,125
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Chapter 9
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Financial Accounting, Second Canadian Edition
PROBLEM 9-5A
Account Debited
Explanation
1.
Equipment
2.
Repairs and Maintenance Does not make the equipment more producExpense
tive. Likely benefits only the current period
3.
Equipment
4.
Repairs and Maintenance Does not make the equipment more producExpense
tive
5.
Training Expense
6.
Repairs and Maintenance Does not make the equipment more producExpense
tive. Painting is a recurring expense
Improvement or betterment expenditure, which
makes the equipment more productive
Improvement or betterment expenditure, which
makes the equipment more productive
Does not increase the productivity of the
equipment–and current accounting policies do
not recognize the cost of human capital
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Financial Accounting, Second Canadian Edition
PROBLEM 9-6A
(a) Accumulated Amortization—Office Furniture .............
Loss on Disposal .......................................................
Office Furniture ..................................................
48,000
32,000
(b) Cash ..........................................................................
Accumulated Amortization—Office Furniture .............
Loss on Disposal ($32,000 - $30,000) .......................
Office Furniture ..................................................
30,000
48,000
2,000
(c) Cash ..........................................................................
Accumulated Amortization—Office Furniture .............
Gain on Disposal ($35,000 - $32,000) ................
Office Furniture ..................................................
35,000
48,000
80,000
80,000
3,000
80,000
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Financial Accounting, Second Canadian Edition
PROBLEM 9-7A
1.
2.
Research Expense ......................................
Patents ................................................
153,000
Patents .....................................................
Amortization Expense ..........................
[$10,750 - ($62,000 X 1/20)]
7,650
7,650
Because goodwill has an indefinite life it is not amortized. Instead goodwill
should be review annually for any impairment in value. Therefore any amortization expense recorded must be reversed.
Goodwill ....................................................
Amortization Expense..........................
3.
153,000
760
760
The right should be recorded as an intangible asset with a definite-life since it
will provide a benefit for three years.
Taxi Right (intangible asset) ......................
Vehicle ................................................
25,000
25,000
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Chapter 9
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Financial Accounting, Second Canadian Edition
PROBLEM 9-8A
(a) Jan. 2 Patent #1 ......................................
Cash ........................................
22,500
22,500
July 1 Research Expense ....................... 220,000
Cash ........................................
1 Patent #2 (Development Costs) ....
Cash ........................................
220,000
60,000
60,000
Sept. 1 Advertising Expense ..................... 110,000
Cash ........................................
110,000
Oct. 1 Copyright ...................................... 160,000
Cash ........................................
160,000
Dec. 31 Impairment Loss
($210,000 – $150,000)...........
Goodwill ...................................
(b) Dec. 31 Amortization Expense ...................
Patent #1 .................................
[($70,000 X 1/10) + ($22,500 X 1/9)]
60,000
60,000
9,500
9,500
31 Amortization Expense ...................
5,600
Copyright..................................
[($48,000 X 1/10) + ($160,000 X 1/50 X 3/12)]
5,600
31 Amortization Expense ...................
1,500
Patent #2 .................................
[($60,000 ÷ 20 years) x 6/12 = $1,500)
1,500
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Chapter 9
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PROBLEM 9-8A (Continued)
(c)
Intangible Assets
Patents ($152,500 cost less $18,000 amort.) (1)
Copyright ($208,000 cost less $24,800 amort.) (2)
Goodwill................................................
Total Intangible Assets
$134,500
183,200
150,000
$467,700
(1)
Cost-Patent #1 ($70,000 + $22,500) + Patent #2 $60,000 = $152,500
Amortization-Patent #1 ($7,000 + $9,500) + Patent #2 $1,500 = $18,000
(2)
Cost-Copyright $48,000 + $160,000 = $208,000
Amortization-Copyright $19,200 + $5,600 = $24,800
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Chapter 9
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PROBLEM 9-9A
(a)
($ in thousands)
Profit margin
Sleeman Breweries ............ Big Rock Brewery
$12,321
$157,053
= 7.8%
$1,218
$24,909
= 4.9%
Return on assets
$12,321
($220,081  $197,642) 2
= 5.9%
$1,218
($33,061  $31,346)  2
= 3.8%
Asset turnover
$157,053
($220,081  $197,642) 2
= 0.75 times
$24,909
($33,061  $31,346) 2
= 0.77 times
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PROBLEM 9-9A (Continued)
(b) Based on profit margin we can see that Sleeman is slightly more profitable
than Big Rock. However, both retailers have profit margins below the industry
average of 9.2%, which indicates that both Sleeman and Big Rock are less
profitable than the average brewery.
The return on assets ratio indicates that Sleeman is generating a better return
then Big Rock based on the amount of assets invested in the business. However, again, based on the industry average of 7.4% both companies are generating a lower return on their assets than most other companies in the industry.
The asset turnover ratio measures how efficiently a company uses its assets
to generate sales. It shows the dollars of sales generated by each dollar invested in assets. Sleeman’s asset turnover ratio (0.75) was slightly lower than
Big Rock’s (0.77) in 2002. Therefore, it could be concluded that Big Rock was
more efficient than Sleeman during 2002 in utilizing assets to generate sales.
Both companies are slightly lower than the industry average of 0.8 times.
The ability to compare the two companies is complicated by the fact that
Sleeman Breweries is far larger than Big Rock Brewery. Its size, and resulting
economies of scale, may account for part of Sleeman’s better profitability.
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PROBLEM 9-10A
(a)
As evidenced by the high profit margin compared to the lower asset turnover (when compared to other companies in the industry), the company is
focusing its efforts on maximizing profits versus having a high volume of
sales. The company could be maximizing profits by either charging a
higher selling price for its products, by focusing on cost control or some
combination of both.
(b)
The company’s strategy appears to be to sell a lower number of high-end
computers with strong profit margins. It appears to be willing to accept a
lower volume of sales (as evidenced by the lower asset turnover ratio) to
achieve this sales objective. Given the company’s high return on asset ratio, this strategy appears to be very successful.
Note to instructors: Students may be interested to learn that the company information produced here was taken from Microsoft Corporation.
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*PROBLEM 9-11A
(a)
STRAIGHT-LINE AMORTIZATION
Calculation
Amortizable
Year
Cost
X
Annual
Amortization
Amortization Accumulated Book
Rate
= Expense
Amortization Value
2005 $231,000a
2006 231,000
2007 231,000
2008 231,000
2009 231,000
a
b
End of Year
20%b
20%
20%
20%
20%
$46,200
46,200
46,200
46,200
46,200
$ 46,200 $196,800
92,400 150,600
138,600 104,400
184,800
58,200
231,000
12,000
$243,000 – $12,000 = $231,000
1/5 = 20%
SINGLE-DECLINING-BALANCE AMORTIZATION
Calculation
Book Value
Beginning
Year
of Year
X
2005
2006
2007
2008
2009
c
d
$243,000
194,400
155,520
124,416
99,533
End of Year
Annual
Amortization
Amortization Accumulated Book
Rate
= Expense
Amortization Value
20%c
20%
20%
20%
20%
$48,600
38,880
31,104
24,883
87,533d
$ 48,600 $194,400
87,480 155,520
118,584 124,416
143,467
99,533
231,000
12,000
1/5 = 20%
Adjusted so ending book value will equal salvage value ($231,000 - $143,467
= $87,533)
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*PROBLEM 9-11A (Continued)
(b) Straight-line amortization provides the lower amount for 2005 amortization expense and, therefore, the higher 2005 earnings. Over the five-year period,
both methods result in the same total amortization expense ($231,000) and,
therefore, the same total earnings.
Note to instructors: You might wish to point out to students that although the
single-declining-balance method is the most often used method, it does result
in large amounts of amortization at the end of the asset’s useful life in order to
adjust to salvage value. Often, this is not done in practice. Instead, the asset
continues to be amortized as long as it is in use.
(c) Amortization is a noncash expense. Therefore cash flow would be the same
regardless of the method chosen.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
*PROBLEM 9-12A
(a)
1.
STRAIGHT-LINE AMORTIZATION
Calculation
Amortizable
Years
Cost
X
1
2
3
End of Year
Amortization
Rate (1/3)
$72,000*
,,72,000
,,20,000
1/3
1/3
1/3
Annual
Amortization Accumulated Book
Expense
Amortization Value
$ 24,000
24,000
24,000
$ 24,000
48,000
72,000
$56,000
32,000
8,000
*$80,000 - $8,000 = $72,000
2.
UNITS-OF-ACTIVITY AMORTIZATION
Calculation
Units of Activity
Year
X
1
2
3
120,000
100,000
80,000
End of Year
Annual
Amortization
Amortization Accumulated Book
1
Cost/Unit
= Expense
Amortization Value
$0.24
0.24
0.24
$28,800
24,000
19,200
$28,800
52,800
72,000
$51,200
27,200
8,000
1
Amortizable cost per unit = ($80,000 - $8,000) ÷ 300,000 km = $0.24 per
kilometre.
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Financial Accounting, Second Canadian Edition
*PROBLEM 9-12A (Continued)
(b)
1.
Cost ....................................................
Accum. amort. ....................................
Book value..........................................
Cash proceeds ...................................
Gain (loss) on disposal .......................
(i) Straight
Line
$80,000
48,000
32,000
25,000
$ (7,000)
(ii) Units-of
-Activity
$80,000
52,800
27,200
25,000
$ (2,200)
2.
Amortization expense .........................
Add: Loss on disposal .......................
Net expense .......................................
$48,000
7,000
$55,000
$52,800
2,200
$55,000
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.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 9-1B
Item
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Land
Building
Land Improvements Other Accounts
$260,000
$7,200
19,000
$23,000
$2,000 Insurance expense
12,000
38,000
5,800 Property Tax
Expense
600,000
(5,000)
$274,000
$661,000
$19,200
$7,800
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 9-2B
Expenditure
Account Title
1.
Architect fees.
1.
Building
2.
Cost to demolish an old building that is on a
piece of land intended for a new building.
Land: it is a cost of getting the land
ready for its intended use.
3.
Lawyer’s fees associated with a successful patent application.
Patent
4.
Lawyer’s fees associated with an unsuccessful
patent application.
5.
Cost of a grease and oil change on the company’s truck
Operating Expense: if the application
was unsuccessful, then there is no asset.
Repairs and Maintenance Expense
6.
Cost of installing a new roof on the company’s
building.
7.
Cost of painting the president’s
office.
8.
Cost of CD’s and toner for the office computer.
Operating Expense
9.
Payment to a celebrity for endorsement of a
product. The celebrity’s endorsement is featured in television advertisements, which have
been airing for the past three months and will
continue to be televised for another six months
after year-end.
Operating Expense. Some companies
would allocate the cost according to
the number of times that the advertisements are to be aired. A current
asset, such as prepaid advertising,
would be established for those costs
related to future advertisements. However, in the real world, all such costs
are generally charged to advertising
expense.
10.
Cost of new tires for the company delivery van. Operating Expense. Depending on the
vehicle usage during a year, an argument could be made for capitalizing
this expenditure. Again, in the real
world, this expenditure is usually
charged to expenses.
Building (it would be rare to find a
separate capital asset set up for a
“roof” account as distinct from the
building).
Operating Expense
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Chapter 9
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 9-2B (Continued)
Expenditure
Account Title
11.
Cost to rebuild the engine on the company delivery van.
The benefit should extend beyond one
year; therefore, the amount would be
capitalized as part of the cost of the
delivery van.
12.
Cost to pave the company parking lot.
Land Improvements
13.
Cost of painting the corporate logo on the
sides of the company delivery van.
Delivery Van
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Chapter 9
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 9-3B
(a) April 1
May
1
1
Land ........................................................ 2,200,000
Cash .................................................
200,000
Note Payable ....................................
2,000,000
Amortization Expense ..............................
Accumulated Amortization
—Equipment ($600,000 X 1/10 X 4/12)
Cash.........................................................
Accumulated Amortization—Equipment ...
Loss on Disposal ......................................
Equipment ...................................
Cost
Accum. amort.—equipment
[($600,000 X 1/10) X 2 + $20,000)]
Book value
Cash proceeds
Loss on disposal
20,000
20,000
450,000
140,000
10,000
600,000
$600,000
140,000
460,000
450,000
$ (10,000)
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Chapter 9
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 9-3B (Continued)
(a) (Continued)
June 1
Cash......................................................... 1,800,000
Land ..................................................
500,000
Gain on Disposal ...............................
1,300,000
July
Equipment ................................................ 1,200,000
Cash ..................................................
200,000
Note Payable .....................................
1,000,000
1
Dec. 31
31
Amortization Expense ..............................
Accumulated Amortization
—Equipment ($500,000 X 1/10) ........
50,000
Accumulated Amortization—Equipment ...
Cash.........................................................
Equipment ...................................
Gain on disposal ..........................
500,000
4,000
Cost
Accum. amort.—equipment
($500,000 X 1/10 X 10)
Book value
Cash proceeds
Gain (loss) on disposal
50,000
500,000
4,000
$500,000
500,000
0
4,000
$ 4,000
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Financial Accounting, Second Canadian Edition
PROBLEM 9-3B (Continued)
(b) Dec. 31
31
Amortization Expense ............................
Accumulated Amortization
—Buildings ($26,500,000 X 1/40) ....
662,500
662,500
Amortization Expense ............................ 3,950,000
Accumulated Amortization—Equipment
3,950,000
($38,900,000* X 1/10)
[($1,200,000 X 1/10) X 6/12]
$3,890,000
60,000
$3,950,000
*$40,000,000 - $600,000 - $500,000 = $38,900,000
31
Interest Expense ....................................
Interest Payable ..............................
($2,000,000 X 6% X 9/12)
($1,000,000 X 6% X 6/12)
(c)
120,000
120,000
$ 90,000
30,000
$120,000
HAMSMITH CORPORATION
Balance Sheet (Partial)
December 31, 2005
Property, plant and equipment*
Land .......................................................
Buildings ................................................. $26,500,000
Less: Accumulated amortization
—buildings .............................................. 13,912,500
Equipment .............................................. $40,100,000
Less: Accumulated amortization .............
—equipment ........................................... 11,380,000
Total property, plant and equipment ..
$ 4,700,000
12,587,500
28,720,000
$46,007,500
*See T accounts on the following page.
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Financial Accounting, Second Canadian Edition
PROBLEM 9-3B (Continued)
Land
Dec. 31, 2004
April 1, 2005
3,000,000
2,200,000
Dec. 31, 2005
Bal. 4,700,000
June 1, 2005
500,000
Buildings
Dec. 31, 2004
26,500,000
Dec. 31, 2005
Bal. 26,500,000
Equipment
Dec. 31, 2004
July 1, 2005
40,000,000
1,200,000
Dec. 31, 2005
Bal. 40,100,000
May 1, 2005
Dec. 31, 2005
600,000
500,000
Accumulated Amortization—Buildings
Dec. 31, 2004
Dec. 31, 2005
13,250,000
662,500
Dec. 31, 2005
Bal. 13,912,500
Accumulated Amortization—Equipment
May 1, 2005
Dec. 31, 2005
140,000
500,000
Dec. 31, 2004
May 1, 2005
Dec. 31, 2005
Dec. 31, 2005
8,000,000
20,000
50,000
3,950,000
Dec. 31, 2005
Bal. 11,380,000
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Chapter 9
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 9-4B
(a)
Year
2002
2003
2004
2005
2006
2007
Amortization Expense
($40,000 - $4,000) ÷ 5 = $7,200
($40,000 - $4,000) ÷ 5 = $7,200
($40,000 - $14,400 = $25,600 - $2,500) ÷ 4 = $5,775
($40,000 - $14,400 = $25,600 - $2,500) ÷ 4 = $5,775
($40,000 - $14,400 = $25,600 - $2,500) ÷ 4 = $5,775
($40,000 - $14,400 = $25,600 - $2,500) ÷ 4 = $5,775
Accumulated
Amortization
$ 7,200
14,400
20,175
25,950
31,725
37,500
(b) If Harrington Corporation had not revised the equipment’s remaining useful life
and salvage value, the total amortization expense and accumulated amortization at December 31, 2006 would have been $36,000. The book value would
have been $4,000.
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Chapter 9
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 9-5B
Account Debited
Explanation
1.
Equipment
Cost to prepare the equipment for use.
2.
Land improvements
Non-permanent land expenditure.
3.
Building
Improvement or betterment expenditure, which
makes the factory office more productive.
4.
Repair expense
Does not benefit future periods.
If the loss was considered to be significant, it
would be recorded separately as a loss due to
labour dispute, rather than as repair expense.
5.
Equipment
Cost to prepare the equipment for use.
6.
Repair expense
Does not benefit future periods.
If the damage was covered by insurance, a receivable (from the insurance company) account would be debited.
If the loss was considered to be significant, it
would be recorded separately as a loss due to
damages, rather than as repair expense.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 9-6B
(a)
(b)
(c)
Loss on Disposal ....................................
Accumulated Amortization—Equipment .
Equipment ..................................
30,000
20,000
Cost ....................................................
Accum. amort.—Equipment ................
Book value..........................................
Cash proceeds ...................................
Loss on disposal .................................
$50,000
20,000
30,000
0
$30,000
Cash ......................................................
Accumulated Amortization—Equipment .
Equipment ..................................
Gain on Disposal ........................
37,000
20,000
Cost ....................................................
Accum. amort.—Equipment ................
Book value..........................................
Cash proceeds ...................................
Gain on disposal .................................
$50,000
20,000
30,000
37,000
$ 7,000
Cash ......................................................
Accumulated Amortization—Equipment .
Loss on Disposal ....................................
Equipment ..................................
28,000
20,000
2,000
Cost ....................................................
Accum. amort.—Equipment ................
Book value..........................................
Cash proceeds ...................................
Loss on Disposal ................................
$50,000
20,000
30,000
28,000
$ 2,000
50,000
50,000
7,000
50,000
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Financial Accounting, Second Canadian Edition
PROBLEM 9-7B
1.
2.
Research Expense ......................................
Patents ................................................
120,000
Patents ......................................................
Amortization Expense ..........................
[$7,870 - ($37,400 X 1/20)]
6,000
120,000
6,000
Because goodwill has an indefinite life it is not amortized. Instead goodwill
should be review annually for any impairment in value. Therefore any
amortization expense recorded must be reversed.
Goodwill ....................................................
Amortization Expense..........................
3.
600
600
The donations should be recorded as an expense.
Donations Expense ...................................
Goodwill ..............................................
5,000
5,000
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Financial Accounting, Second Canadian Edition
PROBLEM 9-8B
(a)
Jan.2
27,000
27,000
Jan.June
Research Expense ..................................... 210,000
Cash .....................................................
July 1
Patent #2 (Development Costs) .................
Cash .....................................................
50,000
Advertising Expense...................................
Cash .....................................................
60,000
Sept.1
Oct. 1
Dec. 1
(b)
Patent #1....................................................
Cash .....................................................
Dec. 31
31
31
210,000
50,000
60,000
Copyright .................................................... 180,000
Cash .....................................................
Impairment Loss .........................................
Goodwill................................................
40,000
Amortization Expense ................................
Patent #1 ..............................................
[($60,000 X 1/10) + ($27,000 X 1/9)]
9,000
Amortization Expense ................................
Patent #2 ..............................................
[($50,000 ÷ 20) x 6/12] = $1,250]
1,250
Amortization Expense ................................
Copyright ..............................................
[($36,000 X 1/10) + ($180,000 X
1/50 X 3/12)]
4,500
180,000
40,000
9,000
1,250
4,500
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Financial Accounting, Second Canadian Edition
PROBLEM 9-8B (Continued)
(c)
Intangible assets
Patents ($137,000 cost less $16,250 amortization)(1) ......
Copyrights ($216,000 cost less $29,700 amortization)(2) .
Goodwill ..........................................................................
Total intangible assets............................................
(1)
Patents-Cost ($60,000 + $27,000) + $50,000 = $137,000
Patents-Amortization ($6,000 + $9,000) + $1,250 = $16,250
(2)
Copyright-Cost $36,000 + $180,000 = $216,000
Copyright-Amortization $25,200 + $4,500 = $29,700
$120,750
186,300
85,000
$392,050
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 9-9B
(a)
($ in U.S. millions)
1. Profit Margin
Green Mountain ...................... Starbucks
$6
$100
= 6.0%
$215.1
$3,288.9
= 6.5%
2. Return on Assets
$6
= 13.5%
($54.7  $34.5)  2
$215.1
= 10.4%
($2,292.7  $1,851.0) 2
3. Asset Turnover
$100
= 2.2 times
($54.7  $34.5)  2
$3,288.9
= 1.6 times
($2,292.7  $1,851.0)
(b) Based on profit margin we can see that Starbucks is slightly more profitable
than Green Mountain. Green Mountain’s profit margin at 6% is lower then the
average company in the industry (6.4%). However, this could be due to the
fact that Green Mountain is smaller in size than the other companies and may
be at a competitive disadvantage.
The return on assets ratio indicates that Green Mountain is generating a better
return than Starbucks based on the amount of assets invested in the business.
However, based on the industry average of 9.6% both companies are generating a higher return on their assets than most other companies in the industry.
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Financial Accounting, Second Canadian Edition
PROBLEM 9-9B (Continued)
(b) (Continued)
The asset turnover measures how efficiently a company uses its assets to
generate sales. It shows the dollars of sales generated by each dollar invested
in assets. Green Mountain’s asset turnover ratio (2.2) was significantly higher
than Starbucks’ (1.6) in 2002. Therefore, it could be concluded that, in 2002,
Green Mountain was more efficient than Starbucks in utilizing assets to generate sales. Both companies are higher than the industry average of 1.5
times.
Overall, it appears that Green Mountain is focusing its sales strategy on generating volume whereas Starbucks seems to be more focused on profitability.
The ability to compare the two companies is complicated by the fact that Starbucks is significantly larger than Green Mountain Coffee. However, this fact
doesn’t appear to have impeded Green Mountain’s efficiency.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 9-10B
(a)
It is the company’s low volume that appears to be causing its return on assets to be lower than that of other companies in the industry. Based on the
profit margin ratio, 6% compared to 6.5%, we can see that the company appears to be as profitable as most others in the industry. However, as evidenced by the difference in the asset turnover ratio, other companies in the
industry appear to be better able to generate sales based on a given level of
investment in assets.
(b)
The company might be able to improve its return on asset ratio in one of two
ways:
1. By improving its profit margin. This could be done by increasing the
selling price of its menu items or by reducing expenses. However, the
restaurant would have to be careful to not price itself out of the market
or sacrifice quality of food or service by undertaking this strategy.
2. By improving its asset turnover. This would be accomplished by increasing the volume of customers using the restaurant. To increase
volume, the restaurant could change it hours of operations, offer a
wider menu choice or target its marketing efforts to under represented
groups in its customer base.
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Financial Accounting, Second Canadian Edition
*PROBLEM 9-11B
(a)
STRAIGHT-LINE AMORTIZATION
Calculation
Amortizable
Years
Cost
X
2004
2005
2006
2007
End of Year
Annual
Amortization
Amortization Accumulated Book
Rate (1/4) = Expense
Amortization Value
$160,000*
0,160,000
0,160,000
,,,160,000
25%
25%
25%
25%
$40,000
40,000
40,000
40,000
$ 40,000 $130,000
80,000
90,000
120,000
50,000
160,000
10,000
*$170,000 - $10,000 = $160,000
DOUBLE-DECLINING-BALANCE AMORTIZATION
Calculation
Book Value
Beginning
Years
of Year
X
2004
2005
2006
2007
$170,000
85,000
42,500
21,250
End of Year
Annual
Amortization
Amortization Accumulated Book
Rate
= Expense
Amortization Value
50%*
………,,50%
,,,,,,,,,,,,,50%
,,,,,,,,,,,,,50%
$85,000
42,500
21,250
11,250**
$ 85,000
127,500
148,750
160,000
$85,000
42,500
21,250
10,000
* 1/4 X 2 = 50%
**Adjusted so ending book value will equal salvage value.
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Financial Accounting, Second Canadian Edition
*PROBLEM 9-11B (Continued)
(b)
Straight-line amortization provides the lower amount for 2004 amortization
expense ($40,000) and, therefore, the higher 2004 earnings. Over the fouryear period, both methods result in the same total amortization expense
($160,000) and, therefore, the same total earnings.
(c)
Amortization is a non-cash expense. Therefore cash flow would be the same
regardless of the method chosen.
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Financial Accounting, Second Canadian Edition
*PROBLEM 9-12B
(a)
Straight-Line
Amortization
Book
Years Expense
Value
1
2
3
4
Total
$ 5,000
5,000
5,000
5,000
$20,000
1.
$16,000
11,000
6,000
1,000
Declining-Balance
Amortization
Book
Expense
Value
$ 5,250
3,938
2,953
7,859
$20,000
STRAIGHT-LINE AMORTIZATION
Calculation
Amortizable
Years
Cost
X
1
2
3
4
$15,750
11,812
8,859
1,000
$20,000*
,,20,000
,,20,000
,,20,000
End of Year
Amortization
Rate (1/4)
25%
25%
25%
25%
Annual
Amortization Accumulated Book
Expense
Amortization Value
$ 5,000
5,000
5,000
5,000
$ 5,000
10,000
15,000
20,000
$16,000
11,000
6,000
1,000
*$21,000 - $1,000 = $20,000
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Financial Accounting, Second Canadian Edition
*PROBLEM 9-12B (Continued)
(a) (Continued)
2.
SINGLE-DECLINING-BALANCE AMORTIZATION
Calculation
Book Value
Beginning
Year
of Year
X
1
2
3
4
$21,000
15,750
11,812
8,859
End of Year
Annual
Amortization
Amortization Accumulated Book
Rate
= Expense
Amortization Value
25%
25%
25%
25%
$5,250
3,938
2,953
7,859*
$ 5,250
9,188
12,141
20,000
$15,750
11,812
8,859
1,000
* Adjusted so ending book value will equal salvage value.
(b)
1.
(i) Straight
Line
Cost ....................................................
$21,000
Accum. amort. ....................................
15,000
Book value..........................................
6,000
Cash proceeds ...................................
7,500
Gain (loss) on disposal .......................
$ 1,500
(ii) Declining
Balance
$21,000
12,141
8,859
7,500
$ (1,359)
2.
Amortization expense .........................
Add: Loss on disposal .......................
Less: Gain on disposal .......................
Net expense .......................................
$15,000
(1,500)
$13,500
$12,141
1,359
000000
$13,500
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.
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Financial Accounting, Second Canadian Edition
BYP 9-1 FINANCIAL REPORTING PROBLEM
(Answers in millions)
(a)
At December 28, 2002 the total cost of fixed assets was $7,857; book value was $5,587.
(b)
Amortization is calculated principally on the straight-line basis over the estimated useful
lives of the assets. Buildings are amortized over a period from 20 to 40 years and its
equipment and fixtures over a period of 3 to 10 years. It amortizes its leasehold improvements over the lesser of the asset’s applicable useful life and the lease term plus
one renewal period to a maximum of 10 years.
(c)
Amortization (depreciation) expense: 2002, $354; 2001, $315.
Accumulated amortization (depreciation): 2002, $2,270; 2001, $1,967.
(d)
The purchases of fixed assets were: 2002, $1,079; 2001, $1,108.
(e)
Loblaw’s primarily engages in operating leases. In 2002 the company has capital leases
at a cost of $83 (per note 7) and annual payments under operating leases of $1,002
(note 15). Because operating leases are accounted for as a rental, the leased assets
(and related liabilities) are not reported on the balance sheet. Loblaw’s asset turnover ratio and return on assets will both be higher because of the operating lease agreements.
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Financial Accounting, Second Canadian Edition
BYP 9-2 COMPARATIVE ANALYSIS PROBLEM
(a)
Loblaw........................................ Sobeys
1.
Profit Margin
2.
Return on Assets
$728
$23,082
= 3.2%
$728
= 6.9%
($11,110  $10,025)  2
3.
$179.0
= 5.9%
($3,192.5  $2,875.2)  2
Asset Turnover
$23,082
= 2.2 times
($11,110  $10,025)  2
(b)
$179.0
$10,414.5
= 1.7%
$10,414.5
= 3.4 times
($3,192.5  $2,875.2)  2
Based on profit margin we can see that Loblaw is more profitable than Sobeys. However,
both retailers have profit margins above the industry average of 1.3%, which indicates that
both Sobeys and Loblaw are more profitable than the average grocery retailer.
The return on assets ratio indicates that Sobeys is generating a slightly worse return than
Loblaw based on the amount of assets invested in the business. However, again, based on
the industry average of 3.0% both companies are generating a better return on their assets
than most other retailers in the industry.
The asset turnover measures how efficiently a company uses its assets to generate sales. It
shows the dollars of sales generated by each dollar invested in assets. Sobeys’ asset turnover (3.4) was 35% higher than Loblaw’s (2.2). Therefore, it could be concluded that Sobeys was more efficient than Loblaw in utilizing assets to generate sales. Loblaw is a little
under the industry average of 2.4 times but this could be attributed to the rapid growth the
company has been undergoing in the past several years.
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Financial Accounting, Second Canadian Edition
BYP 9-3 RESEARCH CASE
(a)
Goodwill is calculated by taking the net (after taking debt into consideration) enterprise
value of a business less the value of its hard assets including tangible assets, working
capital and financial assets less the value of identifiable intangible assets. Goodwill is referred to as a residual amount because its value is based on the excess of the purchase
price after all the other purchased components have been accounted for.
(b)
Goodwill is to be carried on the financial statements, with exceptions, at its fair value. Provided the adjustment is made in the first fiscal year starting after January 1, 2002, initial
write-down (impairment) of goodwill to fair value will not go through the income statement,
nor will it impact earnings per share. Subsequent write-downs will impact earnings per
share directly.
(c)
The discounted cash flow model is the most frequently used valuation technique for determining the fair market value of goodwill.
(d)
Specialists should give independent opinions in the following area:
• in reviewing, developing or assisting in the development of the procedures and documentation to be maintained by management for the valuation itself and in the questioning/inquiry process to determine if it is necessary to look more carefully at the
value of the goodwill;
• where there is, or are reasons to believe there may be, a material impairment in the
value of the recorded goodwill;
• where management, auditors, audit committee or boards want a second opinion on
a controversial matter or where an error may result in the release of materially misleading financial information;
• where specialized skills or greater appearance of independence is required or simply out of an abundance of caution; and
• where there is a likelihood of third-party review or litigation.
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Financial Accounting, Second Canadian Edition
BYP 9-4 INTERPRETING FINANCIAL STATEMENTS
(a)
Maple Leaf could use the straight-line, declining balance or the units of activity method
to amortize the property, plant and equipment associated with its Burlington 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 assets life. The units-of-activity method would be the
most appropriate in this case as the levels of production vary widely. The units of activity
method will provide the best matching of costs with revenue.
(b)
The labour dispute related costs should be treated as an operating expenditure. They do
not have a future benefit and cannot be capitalized. They would be reported on the
statement of earnings separately, as an unusual item. These are not extraordinary
items.
(c)
The $40 million investment should be treated as a capital expenditure. They 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.
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Financial Accounting, Second Canadian Edition
BYP 9-5 INTERPRETING FINANCIAL STATEMENTS
(a)
To calculate the fair market value of its goodwill Vivendi used current fair market values
when such values were readily available. In situations where the fair values were not readily determinable the company used discounted cash flow analysis to calculate a reasonable approximation of fair market value.
(b)
Vivendi’s recording of goodwill is slightly different that accounting practices in Canada in
that Vivendi records an impairment for goodwill for eventual declines in the value of goodwill whereas in Canada, the decline has to be assessed as permanent before being recorded in the financial statements.
(c)
This write-down will cause Vivendi’s current earnings to be lower but should not impact future earnings unless further write-downs are required.
(d)
The goodwill write-down will cause total assets and total shareholders’ equity to be
lower.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 9-6 FINANCIAL ANALYSIS ON THE WEB
Due to the frequency of change with regard to information available on the world wide web, the
Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found online in the Instructor Resources section of our
home page <www.wiley.com/canada/kimmel>.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 9-7 COLLABORATIVE LEARNING ACTIVITY
(a)
Ty Corporation—Straight-line method
Annual amortization
Building [($320,000 - $20,000) X 1/30] ...........................................
Equipment [($110,000 - $10,000) X 1/5] .........................................
Total annual amortization ...............................................................
$10,000
20,000
$30,000
Total accumulated amortization ($30,000 X 3) ..........................................
$90,000
Hamline Corporation – Double Declining-Balance
Building:
Calculation
Year
Book Value
Beginning
of Year
2002
2003
2004
$320,000
298,560
278,556
X
End of Year
Amortization
Rate*
=
6.7%
6.7%
6.7%
Annual
Amortization
Expense
$21,440
20,004
18,663
Accumulated
Amortization
$ 21,440
41,444
60,107
Book
Value
$298,560
278,556
259,893
*Rate: 1/30 X 2 = 6.7%
Equipment:
Calculation
Year
Book Value
Beginning
of Year
2003
2004
2005
$110,000
66,000
39,600
X
End of Year
Amortization
Rate
40%
40%
40%
=
Annual
Amortization
Expense
$44,000
26,400
15,840
Accumulated
Amortization
$ 44,000
70,400
86,240
Book
Value
$66,000
39,600
23,760
*Rate: 1/5 X 2 = 40%
Total Accumulated Amortization = $60,107 + $86,240 = $146,347
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Financial Accounting, Second Canadian Edition
BYP 9-7 (Continued)
(b)
Year
Ty
Corporation
Net Earnings
2002
0$184,000
2003 …… 188,400
2004
0 190,000
Total net
earnings
$562,400
(c)
Hamline
Corporation
Net Earnings
As Adjusted
Calculations for Hamline Corporation
$ 203,440
192,404
189,503
$168,000 + $65,440 - $30,000 = $203,440
$176,000 + $46,404 - $30,000 = $192,404
$185,000 + $34,503 - $30,000 = $189,503
$585,347
As shown above, when the two companies use the same amortization method, Hamline is
more profitable than Ty. Based on the above analysis, Ms. Tucci should invest in Hamline
Corporation because it is more profitable.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 9-8 COMMUNICATION ACTIVITY
(a)
Memorandum
To:
From:
Date:
Re:
President, CICA
President, Research Inc.
Today
R&D Accounting Standards
We would like to provide the following comments for your consideration as you review the current
accounting standards for research and development costs. Our company is in favour of capitalizing all research and development costs.

Some relatively small companies may spend less on R&D because they must expense these
costs. Requiring companies to expense R&D costs instead of allowing them to be capitalized
leaves Canadian companies such as ours at a competitive disadvantage as compared to
non-Canadian companies. Canadian companies may be more reluctant to invest millions of
dollars on research and development since the costs would negatively impact their financial
statements in the short-run.

R&D is an important part of our base of knowledge assets. Without capitalizing them, we are
understating our balance sheet and future potential because we are not presenting to the users of financial statements the intrinsic value of our company, much of which is tied to successful research and development.
We believe expensing R&D costs to be an excessive application of the conservatism concept.
The conservatism concept dictates that when reasonable doubt exists, a company should
choose the option that has the least favourable effect on earnings. Expensing R&D costs is an
example of applying the conservatism concept without regard for reality.
We hope these comments assist you in your revision of this standard. We would be pleased to
elaborate further on any of the above points at your convenience.
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Financial Accounting, Second Canadian Edition
BYP9-8 (Continued)
(b)
Memorandum
To:
From:
Date:
Re:
President, Research, Inc.
CICA Accounting Standards Board
Today
R&D Accounting Standards
We would like to thank you for your recent letter highlighting your concerns regarding the CICA’s
policy with regards to the accounting treatment for research and development costs. In response
we provide the following comments for your consideration as you review the current accounting
standards for research and development costs.
In response to your concerns that companies may spend less on R&D given the requirements to
expense most of these costs, it is the boards position that the vast majority of companies realize
that for continued growth and stability, R&D expenditures must be a high priority regardless of
how they are recorded for accounting purposes.
In making the decision to require that research and development costs be expensed the Accounting Standards Board carefully reviewed the definition of an asset as presented in Section
1000 of the CICA Handbook. The definition of an asset requires that there be future benefit before any recognition can occur. The Board’s decision to expense research costs was based on
the fact that the tangible future benefits of R&D costs may not be realized for several years, if
ever. Conversely, the purchase of a long-lived asset (i.e., equipment, building) will provide benefits immediately as well as in future years.
It is the board’s position that the tangible future benefits of research are too uncertain to justify
capitalization. The board considers it paramount that in today’s economic environment conservatism be maintained in order to protect the interest of all users of financial statements.
We would like to thank you for your comments.
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Financial Accounting, Second Canadian Edition
BYP 9-9 ETHICS CASE
(a)
(a)
The stakeholders in this situation are:
Benny Benson, president of Imporia Container Ltd.
John Straight, controller.
The shareholders of Imporia Container Ltd.
Potential investors in Imporia Container Ltd.
The intentional misstatement of the life of an asset or the amount of the salvage value is
unethical for whatever the reason. There is nothing per se unethical about changing the
estimate either of the life of an asset or of an asset’s salvage 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 salvage value are intended only to improve earnings
which would be 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 Imporia Container Ltd.
(c)
Earnings before income taxes in the year of change is increased $240,000 by implementing the president’s proposed changes.
Old Estimates
Asset cost
Estimated salvage
Amortizable cost
Amortization per year (1/5)
$2,700,000
300,000
2,400,000
$ 480,000
Revised Estimates
Asset cost
Estimated salvage
Amortizable cost
Amortization taken to date ($480,000 X 2)
Remaining useful life in years
Amortization per year
$2,700,000
300,000
2,400,000
960,000
1,440,000
6 years
$ 240,000
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