CHAPTER 9
REPORTING AND ANALYZING LONG-LIVED ASSETS
SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF
DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB
True-False Statements
1.
1 E
K
F
AN
15. 2 M
C
F
AN
29. 4 M
K
F
AN
2.
1 M
C
F
AN
16. 2 E
K
F
AN
30. 4 E
K
F
AN
3.
1 E
C
F
AN
17. 2 M
C
F
AN
31. 4 E
K
F
AN
4.
1 E
C
F
AN
18. 2 M
C
F
AN
32. 4 E
K
F
AN
5.
1 M
C
F
AN
19. 2 M
C
F
AN
33. 4 M
K
F
AN
F
AN
F
AN
F
AN
6.
1 E
C
20. 2 M
C
34. 4 M
K
7.
1 E
C
F
AN
21. 2 H
K
F
AN
35. 4 M
K
F
AN
8.
1 H
C
F
AN
22. 2 M
K
F
AN
36. 4 M
K
F
AN
9.
2 E
C
F
AN
23. 2 E
C
F
AN
37. 5 M
K
F
AN
10. 2 E
C
F
AN
24. 3 E
K
F
AN
38. 5 E
C
F
AN
11. 2 E
C
F
AN
25. 3 E
C
F
AN
39. 6 M
K
F
AN
12. 2 E
C
F
AN
26. 3 M
C
F
AN
40. 6 M
K
F
AN
13. 2 E
C
F
AN
27. 3 E
C
F
AN
41. 6 M
C
F
AN
14. 2 E
C
F
AN
28. 3 E
C
F
AN
LOD:
E = Easy
M = Medium
H = Hard
Bloom’s: AN = Analysis
AP = Application
C = Comprehension
K = Knowledge
CPA:
F = Financial Reporting
P = Professional and Ethical Behaviour
C = Communication
AACSB: AN = Analytic
E = Ethics
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9-2
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF
DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
(CONT’D)
Item LO LOD Bloom’s CPAAACSB Item LO LOD Bloom’s CPAAACSB Item LO LOD Bloom’s CPAAACSB
Multiple Choice Questions
42. 1 M
C
F
AN
78. 2 E
K
F
AN 114. 3 E
C
F
AN
43. 1 E
AP
F
AN
79. 2 E
AP
F
AN 115. 3 M
AP
F
AN
44. 1 E
K
F
AN
80. 2 M
AP
F
AN 116. 3 H
AP
F
AN
45. 1 M
C
F
AN
81. 2 H
AP
F
AN 117. 3 H
AP
F
AN
F
AN
F
AN 118. 4 E
F
AN
46. 1 E
C
82. 2 E
K
C
F
AN
F
AN
F
AN
47. 1 E
C
83. 2 M
C
119. 4 E
C
F
AN
F
AN 120. 4 E
F
AN
48. 1 E
C
84. 2 M
AP
C
F
AN
F
AN 121. 4 E
F
AN
49. 1 E
C
85. 2 M
AP
C
F
AN
F
AN 122. 4 E
F
AN
50. 1 M
C
86. 2 H
AP
C
51. 1 M
AP
F
AN
87. 2 H
AP
F
AN 123. 4 E
AP
F
AN
52. 1 M
C
F
AN
88. 2 H
AP
F
AN 124. 4 M
K
F
AN
53. 1 H
AP
F
AN
89. 2 H
AP
F
AN 125. 4 E
K
F
AN
54. 1 M
AP
F
AN
90. 2 H
AP
F
AN 126. 4 H
K
F
AN
55. 1 E
C
F
AN
91. 2 H
AP
F
AN 127. 4 E
K
F
AN
56. 1 E
K
F
AN
92. 2 H
AP
F
AN 128. 4 M
C
F
AN
57. 1 M
C
F
AN
93. 2 M
AP
F
AN 129. 4 E
K
F
AN
58. 1 E
AP
F
AN
94. 2 M
AP
F
AN 130. 4 E
K
F
AN
59. 1 M
K
F
AN
95. 2 H
AP
F
AN 131. 4 M
K
F
AN
60. 1 M
K
F
AN
96. 2 M
C
F
AN 132. 4 E
K
F
AN
61. 1 M
C
F
AN
97. 2 E
C
F
AN 133. 4 M
K
F
AN
62. 2 E
C
F
AN
98. 2 E
AP
F
AN 134. 4 M
C
F
AN
63. 2 E
K
F
AN
99. 2 M
AP
F
AN 135. 4 H
C
F
AN
64. 2 M
C
F
AN 100. 2 M
K
F
AN 136. 5 E
K
F
AN
65. 2 M
K
F
AN 101. 2 M
C
F
AN 137. 5 M
C
F
AN
66. 2 E
K
F
AN 102. 2 E
K
F
AN 138. 5 M
K
F
AN
67. 2 E
C
F
AN 103. 2 E
K
F
AN 139. 5 E
K
F
AN
68. 2 E
K
F
AN 104. 2 M
K
F
AN 140. 5 M
K
F
AN
69. 2 M
C
F
AN 105. 2 E
AP
F
AN 141. 5 E
AP
F
AN
70. 2 E
K
F
AN 106. 2 H
C
F
AN 142. 5 E
K
F
AN
71. 2 E
C
F
AN 107. 3 E
C
F
AN 143. 5 E
C
F
AN
72. 2 M
K
F
AN 108. 3 E
C
F
AN 144. 6 M
AP
F
AN
73. 2 E
AP
F
AN 109. 3 H
AP
F
AN 145. 6 M
AP
F
AN
74. 2 M
AP
F
AN 110. 3 E
AP
F
AN 146. 6 M
AP
F
AN
75. 2 M
AP
F
AN 111. 3 E
AP
F
AN 147. 6 H
C
F
AN
76. 2 H
AP
F
AN 112. 3 E
C
F
AN 148. 6 M
C
F
AN
77. 2 E
AP
F
AN 113. 3 E
C
F
AN 149. 6 M
K
F
AN
LOD:
E = Easy
M = Medium
H = Hard
Bloom’s: AN = Analysis
AP = Application
C = Comprehension
K = Knowledge
CPA:
F = Financial Reporting
P = Professional and Ethical Behaviour
C = Communication
AACSB: AN = Analytic
E = Ethics
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9-3
SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF
DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
(CONT’D)
Item LO LOD Bloom’s CPAAACSB Item LO LOD Bloom’s CPAAACSB Item LO LOD Bloom’s CPA AACSB
Exercises
150. 1 E
AP
F
AN
165. 2
H
AP
F
AN 180. 3 E
AP
F
AN
151. 1 E
K
F
AN
166. 2
E
AP
F
AN 181. 3 M
AP
F
AN
152. 1 E
K
F
AN
167. 2
M
AP
F
AN 182. 4 E
AP
F
AN
153. 1 E
AP
F
AN
168. 2
H
AP
F
AN 183. 4 H
AP
F
AN
F
AN
F
AN 184. 4 E
F
AN
154. 1 M
C
169. 2
E
AP
AP
F
AN
F
AN
F
AN
155. 1 E
C
170. 2
H
AP
185. 4 E
AP
AP
F
AN
F
AN 186. 4 M
F
AN
156. 1,2 H
171. 2
H
AP
C
F
AN
F
AN 187. 4 H
F
AN
157. 1,2 E
AP
172. 2,3 H
AP
AP
F
AN
F
AN 188. 5 E
F
AN
158. 2 M
AP
173. 2,3 H
AP
K
159. 2 E
AP
F
AN
174. 2,3 M
AP
F
AN 189. 5 E
AP
F
AN
160. 2 E
AP
F
AN
175. 2,3,5 E
AP
F
AN 190. 6 E
AP
F
AN
161. 2 E
AP
F
AN
176. 2,4 E
K
F
AN 191. 6 H
AP
F
AN
162. 2 E
AP
F
AN
177. 3
M
AP
F
AN 192. 6 M
AP
F
AN
163. 2 E
AP
F
AN
178. 3
E
AP
F
AN 193. 6 H
AP
F
AN
164. 2 E
AP
F
AN
179. 3
E
AP
F
AN
Matching
2–4,6
194. 1,2 E
K
F
AN
195.
M,H
C
F
AN
Short-Answer Essay
196. 1 E
C
F
AN
200. 2
M
C
F
AN 204. 4 E
C
F
AN
F,P,C AN,E
197. 1 E
C
F
AN
201. 2
M
C
F
AN 205. 4 H
C
198. 2 H
C
F
AN
202. 2
M
C
F
AN 206. 5 H
K
F
AN
199. 2 E
C
F
AN
203. 3
M
C
F,C AN 207. 6 M
C
F
AN
CPA Questions
208. 1-4 H
AN
F
AN
210. 2
M
C
F
AN 212. 6 H
AN
F
AN
209. 2 M
C
F
AN
211. 4
M
C
F
AN
LOD:
E = Easy
M = Medium
H = Hard
Bloom’s: AN = Analysis
AP = Application
C = Comprehension
K = Knowledge
CPA:
F = Financial Reporting
P = Professional and Ethical Behaviour
C = Communication
AACSB: AN = Analytic
E = Ethics
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
9-4
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item Type Item
Note:
Type
Item
1.
2.
3.
4.
5.
6.
TF
TF
TF
TF
TF
TF
7.
8.
42.
43.
44.
45.
TF
TF
MC
MC
MC
MC
46.
47.
48.
49.
50.
51.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
TF
TF
TF
TF
TF
TF
TF
TF
TF
TF
TF
TF
TF
22.
23.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
TF
TF
MC
MC
MC
MC
MC
MC
MC
MC
MC
MC
MC
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
24.
25.
26.
27.
TF
TF
TF
TF
28.
107.
108.
109.
TF
MC
MC
MC
110.
111.
112.
113.
29.
30.
31.
32.
33.
34.
TF
TF
TF
TF
TF
TF
35.
36.
118.
119.
120.
121.
TF
TF
MC
MC
MC
MC
122.
123.
124.
125.
126.
127.
37.
38.
TF
TF
136.
137.
MC
MC
138.
139.
39.
40.
41.
TF
TF
TF
144.
145.
146.
MC
MC
MC
147.
148.
149.
TF = True/False
Ex = Exercise
Type Item Type Item
Learning Objective 1
MC
52.
MC
58.
MC
53.
MC
59.
MC
54.
MC
60.
MC
55.
MC
61.
MC
56.
MC 150.
MC
57.
MC 151.
Learning Objective 2
MC
86.
MC
99.
MC
87.
MC 100.
MC
88.
MC 101.
MC
89.
MC 102.
MC
90.
MC 103.
MC
91.
MC 104.
MC
92.
MC 105.
MC
93.
MC 106.
MC
94.
MC 156.
MC
95.
MC 157.
MC
96.
MC 158.
MC
97.
MC 159.
MC
98.
MC 160.
Learning Objective 3
MC
114.
MC 172.
MC
115.
MC 173.
MC
116.
MC 174.
MC
117.
MC 175.
Learning Objective 4
MC
128.
MC 134.
MC
129.
MC 135.
MC
130.
MC 176.
MC
131.
MC 182.
MC
132.
MC 183.
MC
133.
MC 184.
Learning Objective 5
MC 140.
MC 142.
MC 141.
MC 143.
Learning Objective 6
MC 190.
Ex 193.
MC 191.
Ex 195.
MC 192.
Ex 207.
MC = Multiple Choice
SAE = Short-Answer Essay
Type
Item
Type Item Type
MC
MC
MC
MC
Ex
Ex
152.
153.
154.
155.
156.
157.
Ex
Ex
Ex
Ex
Ex
Ex
194.
196.
197.
208.
Ma
SAE
SAE
CP
MC
MC
MC
MC
MC
MC
MC
MC
Ex
Ex
Ex
Ex
Ex
161.
162.
163.
164.
165.
166.
167.
168.
169.
170.
171.
172.
173.
Ex
Ex
Ex
Ex
Ex
Ex
Ex
Ex
Ex
Ex
Ex
Ex
Ex
174.
175.
176.
194.
195.
198.
199.
200.
201.
202.
208.
209.
210.
Ex
Ex
Ex
Ma
Ma
SAE
SAE
SAE
SAE
SAE
CP
CP
CP
Ex
Ex
Ex
Ex
177.
178.
179.
180.
Ex
Ex
Ex
Ex
181.
195.
203.
208.
Ex
Ma
SAE
CP
MC
MC
Ex
Ex
Ex
Ex
185.
186.
187.
195.
204.
205.
MC
MC
175.
188.
Ex
Ex
Ex 212.
Ma
SAE
CP
Ex 208.
Ex 211.
Ex
Ma
SAE
SAE
189.
206.
CP
CP
Ex
SAE
Ma = Matching
CP = CPA
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9-5
CHAPTER LEARNING OBJECTIVES
1.
Determine the cost of property, plant, and equipment. The cost of land, land
improvements, buildings, and equipment includes all expenditures that are necessary to
acquire these assets and make them ready for their intended use. After acquisition, costs
incurred that benefit future periods (capital expenditures) are also included in the cost of the
asset whereas costs that benefit only the current period (operating expenditures) are
expensed. When applicable, cost also includes asset retirement costs.
If a company leases an asset, it may be accounted for as an operating lease or a finance
lease. An operating lease results in rent expense on the income statement. A finance lease
results in recording the leased asset as if it were purchased with a corresponding liability for
the future lease payments to be made. This gives rise to depreciation on the asset and
interest on the liability for the payments being recorded in the future. Under IFRS, most
leases with a term greater than 12 months are to be accounted for as finance leases
commencing in 2019. Under ASPE, the criteria for determining whether a leased asset is
operating or not is covered in intermediate accounting courses.
2.
Explain and calculate depreciation for plant and equipment. Depreciation is the
process of allocating the cost of a long-lived asset over the asset’s useful (service) life in a
systematic way. There are three commonly used depreciation methods: straight-line,
diminishing-balance, and units-of-production.
Annual
Depreciation
Method
Pattern
Calculation
Straight-line
Constant amount
(Cost – residual value) ÷ estimated
useful life (in years)
Diminishing-balance
Diminishing
amount
Carrying amount at beginning of year
× depreciation rate (straight-line rate ×
multiplier)
(Cost – residual value) ÷ estimated
total units of activity × actual activity
during the year
Other accounting issues related to depreciation include (1) identifying significant
components of a long-lived asset for which different depreciation methods or rates may be
appropriate; (2) capital cost allowance (CCA) used for income tax purposes; (3) testing
long-lived assets for impairment; (4) accounting for property, plant, and equipment using
the cost or revaluation model; and (5) circumstances under which a revision of depreciation
is required.
Units-of-production
3.
Varying amount
Account for the derecognition of property, plant, and equipment. The procedure for
accounting for the disposal of property, plant, and equipment through sale or retirement is:
Step 1: Update unrecorded depreciation for any partial period.
Step 2: Calculate the carrying amount.
Step 3: Calculate any gain (proceeds less carrying amount). If the carrying amount is
greater than proceeds then there is a loss on disposal.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9-6
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Step 4: Derecognize (remove) the asset and accumulated depreciation accounts related to
the sold or retired asset. Record the proceeds received and the gain or loss (if any).
4.
Identify the basic accounting issues for intangible assets and goodwill. Intangible
assets (which we have assumed are accounted for under the cost model) are initially
reported at cost, which includes all expenditures that are necessary to prepare the asset for
its intended use. An intangible asset with a finite life is amortized over the shorter of its
useful life or legal life, usually on a straight-line basis. Like property, plant, and equipment,
intangible assets with finite lives are tested for impairment only if indicators of impairment
are present. Intangible assets with indefinite lives are not amortized and must be tested for
impairment annually under IFRS but only when indicators (events and circumstances) of
impairment are present under ASPE. Impairment losses can be reversed under IFRS but
not under ASPE.
Goodwill, which is the difference between the price paid for a business and the fair value of
the identifiable assets less liabilities of the business, is not considered an intangible asset
because it is not separately “identifiable.” Only purchased, not internally generated goodwill
can be recorded. Goodwill has an indefinite life and is not amortized. Impairment tests for
goodwill are similar to those for intangibles with indefinite lives. Goodwill impairment losses
are never reversed.
5.
Illustrate how long-lived assets are reported in the financial statements. In the
statement of financial position, land, land improvements, buildings, and equipment are
usually combined and shown under the heading “Property, Plant, and Equipment.”
Intangible assets with finite and indefinite lives are sometimes combined under the heading
“Intangible Assets” or are listed separately. Goodwill must be presented separately.
Either on the statement of financial position or in the notes to the financial statements, the
cost of the major classes of long-lived assets is presented. The depreciation and
amortization methods and rates must also be described in the notes to the statements. The
accumulated depreciation and amortization of depreciable/amortizable assets and carrying
amount by major classes is also disclosed, including a reconciliation of the carrying amount
at the beginning and end of each period for companies reporting under IFRS. The
company’s impairment policy and any impairment losses should be described and reported.
The company must disclose whether it is using the cost or revaluation model.
Depreciation expense, any gain or loss on disposal, and any impairment losses are
reported as operating expenses in the income statement. In the statement of cash flows,
any cash flows from the purchase or sale of long-lived assets are reported as investing
activities.
6.
Describe the methods for evaluating the use of assets. The use of assets may be
analyzed using the return on assets and asset turnover ratios. Return on assets (net
income ÷ average total assets) indicates how well assets are used to generate net income.
Return on assets can be determined by multiplying two ratios: asset turnover (net sales ÷
average total assets), which indicates how efficiently assets are used to generate revenue,
and profit margin (net income ÷ net sales), which measures the net income made on each
sale.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9-7
TRUE-FALSE STATEMENTS
1. All property, plant, and equipment must be depreciated for accounting purposes.
2. When purchasing land, the costs for clearing, draining, filling, and grading should be charged
to a Land Improvements account.
3. When purchasing a delivery truck, the cost of painting the company logo on the side should
be debited to the Vehicles account.
4. Land improvements are generally debited to the Land account.
5. If land is purchased with a building on it that is to be demolished, proceeds from any salvaged
materials are reported in the Other Revenues and Expenses section of the income statement.
6. Under an operating lease, both the leased asset and the related lease obligation are shown
on the statement of financial position.
7. Under a finance lease, both the leased asset and the related lease obligation are shown on
the statement of financial position.
8. Leasehold improvements are depreciated over the remaining life of the lease or the useful life
of the improvements, whichever is longer.
9. Recording depreciation on equipment affects both the statement of financial position and the
income statement.
10. The depreciable amount of property, plant, and equipment is its original cost minus the
depreciation for the current year.
11. The Accumulated Depreciation account represents a cash fund available to replace
property, plant, and equipment.
12. In calculating depreciation, cost, useful life, and residual value are all based on estimates.
13. Carrying amount is used in determining the amount that the diminishing-balance rate is
applied to.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9-8
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
14. Using the units-of-production method of depreciation for equipment will generally result in
more depreciation expense being recorded over the life of the asset than if the straight-line
method had been used.
15. Using the diminishing-balance method results in higher expense in the early years, and
therefore lower net income.
16. Canada Revenue Agency requires a company to use the same depreciation method on its
income tax return that is used in preparing financial statements.
17. Under IFRS, companies must account for their property, plant, and equipment using the
revaluation model, where depreciable assets are re-valued upward to their fair values.
18. The carrying amount of an asset is the original cost less anticipated residual value.
19. When an impairment loss is recorded for a depreciable asset, the offsetting credit is
recorded in accumulated depreciation.
20. An item of property, plant, and equipment is considered to be impaired if its carrying amount
exceeds its recoverable amount.
21. When a company has a piece of property, plant, or equipment which has different
components that depreciate at different rates, the total cost should be allocated to each
component and each component should be depreciated separately.
22. A change in the estimated residual value of property, plant, and equipment requires a
restatement of prior years' depreciation.
23. When a change in estimate is made, there is no correction of previously recorded
depreciation expense.
24. Normally, businesses only dispose of property, plant, and equipment by either sale or
exchange.
25. If the proceeds from the sale of equipment exceed its carrying amount, a gain on disposal is
reported.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9-9
26. When an asset is retired, a gain or loss must be recorded.
27. A tangible asset must be fully depreciated before it can be removed from the books.
28. A loss on disposal results if the cash proceeds received from the asset sale are less than
the asset's carrying amount.
29. Intangible assets involve rights, privileges, and/or competitive advantages that result from
ownership of identifiable assets that do not possess physical substance.
30. The cost of a patent should be amortized over its legal life or useful life, whichever is
shorter.
31. If an acquired franchise or licence is for an indefinite time period, then the cost of the asset
should not be amortized.
32. An intangible asset must be identifiable.
33. If a trademark is developed internally, it cannot be recognized as an intangible asset on the
statement of financial position.
34. When an entire business is purchased, goodwill is the excess of the purchase price over the
carrying amount of the net identifiable assets acquired.
35. All research costs should be capitalized when incurred.
36. Impairment losses on goodwill are never reversed.
37. If a building is sold at a gain, the gain on disposal should be reported in the non-operating
section of the income statement.
38. The cash flows from the purchase and sale of long-lived assets are reported in the operating
activities section of the cash flow statement.
39. The asset turnover ratio is calculated as net sales divided by ending total assets.
40. Profit margin can be determined by multiplying the asset turnover by the return on assets.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 10
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
41. The asset turnover indicates how efficiently a company uses its assets.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 11
ANSWERS TO TRUE-FALSE STATEMENTS
Item
1.
2.
3.
4.
5.
6.
Ans.
F
F
T
F
F
F
Item
7.
8.
9.
10.
11.
12.
Ans.
T
F
T
F
F
F
Item
13.
14.
15.
16.
17.
18.
Ans.
T
F
T
F
F
F
Item
19.
20.
21.
22.
23.
24.
Ans.
T
T
T
F
T
F
Item
25.
26.
27.
28.
29.
30.
Ans.
T
F
F
T
T
T
Item
31.
32.
33.
34.
35.
36.
Ans.
T
T
T
F
F
T
Item
37.
38.
39.
40.
41.
Ans.
F
F
F
F
T
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 12
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
MULTIPLE CHOICE QUESTIONS
42. Asset retirement costs are
(a) added to the cost of a depreciable asset.
(b) treated as a separate asset.
(c) deducted from the cost of a depreciation asset.
(d) have no effect on a depreciable asset.
43. A company purchased land for $120,000 cash; $7,000 was spent to demolish an old
building on the land before construction of a new building could start; and $1,500 was received
for material salvaged from the old building. The cost of the land would be recorded at
(a) $120,000.
(b) $125,500.
(c) $127,000.
(d) $128,500.
Solution: $120,000 + $7,000 – $1,500 = $125,500
44. Which of the following should not be classified as property, plant and equipment?
(a) building used as a factory
(b) land used in ordinary business operations
(c) a truck held for resale by an automobile dealership
(d) land improvements, such as parking lots and fences
45. A characteristic of property, plant, and equipment is that it is
(a) intangible.
(b) used in the operations of a business.
(c) held for sale in the ordinary course of the business.
(d) not currently used in the business but held for future use.
46. Which one of the following items is not considered to be a part of the cost of a truck
purchased for business use?
(a) insurance during transit
(b) motor vehicle licence
(c) freight charges incurred when acquiring the truck
(d) cost of lettering on the side of the truck
47. Which of the following would not be included in the Equipment account?
(a) installation costs
(b) freight costs
(c) cost of trial runs
(d) electricity used by the machine
48. Which of the following assets does not decline in service potential over the course of its
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 13
useful life?
(a) office equipment
(b) furnishings
(c) land
(d) computers
49. The cost of land does not include
(a) closing costs.
(b) annual property taxes.
(c) removal costs of an old building.
(d) title fees.
50. The Land account would include all of the following costs except
(a) drainage costs.
(b) the cost of building a parking lot.
(c) title fees.
(d) the cost of tearing down a building.
51. Harmon Medical Ltd. purchases land for $290,500 cash. The title and legal fees totalled
$1,500. The clinic has the land graded for $25,000. What amount does Harmon Medical record
as the cost for the land?
(a) $290,500
(b) $292,000
(c) $315,500
(d) $317,000
Solution: $290,500 + 1,500 + $25,000 = $317,000
52. Which of the following is not true for an operating expenditure?
(a) It is recorded with a debit to a statement of financial position account.
(b) It benefits the current period only.
(c) It is incurred to maintain an asset in its normal operating condition.
(d) It often recurs.
53. Angus Corp. acquires land for $105,000 cash. Additional costs are as follows:
Removal of shed ......................................
$ 500
Filling and grading ....................................
3,200
Residual value of lumber from shed .........
150
Paving of parking lot .................................
16,000
Closing costs............................................
1,350
Angus will record the cost of the land as
(a) $105,000.
(b) $109,400.
(c) $109,900.
(d) $126,200.
Solution: $105,000 + $500 + $3,200 – $150 + $1,350 = $109,900
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 14
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
54. Mercy General Hospital installs a new parking lot. The paving cost $25,000 and the lights to
illuminate the new parking lot cost $13,000. Which of the following statements is true with
respect to these expenditures?
(a) $25,000 should be debited to Land.
(b) $13,000 should be debited to Lighting Expense.
(c) $38,000 should be debited to Land.
(d) $38,000 should be debited to Land Improvements.
55. Land improvements should be depreciated over the useful life of the
(a) land.
(b) buildings on the land.
(c) land or land improvements, whichever is longer.
(d) land improvements.
56. The expected costs to retire an asset are called
(a) off-balance sheet financing.
(b) expected retirement costs.
(c) disposal costs.
(d) asset retirement costs.
57. Aye Corp. purchases a remote-site building for computer operations. The building will be
suitable for operations after some necessary expenditures. The wiring must be replaced to
handle the computer specifications. The roof is leaking and must be replaced. All rooms must
be repainted and re-carpeted and there will also be some updating of the plumbing needed.
Which of the following statements is true?
(a) The cost of the building will include the repainting and re-carpeting costs.
(b) The cost of the building will include the cost of replacing the roof.
(c) The cost of the building is the purchase price of the building, while the additional
expenditures are all capitalized as Building Improvements.
(d) The wiring replacement will be part of the computer costs, not the building cost.
58. Enmerick Corporation purchases a new delivery truck for $45,000. The company logo is
painted on the side of the truck for $1,500. The motor vehicle licence is $175. Annual insurance
is $1,500. At what amount does Enmerick record the cost of the new truck?
(a) $45,000
(b) $45,175
(c) $46,500
(d) $46,675
Solution: $45,000 + $1,500 = $46,500
59. Which of the following is not an advantage of an operating lease?
(a) reduced risk of obsolescence
(b) 100 percent financing
(c) income tax advantages
(d) accelerated depreciation
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 15
60. Interest incurred on the construction of a building can be included in the cost of the building
(a) during the construction period of a building.
(b) for as long as the interest is payable.
(c) if the building is financed by a mortgage.
(d) under no circumstances.
61. Which of the following is included in the cost of constructing a building?
(a) cost of paving a parking lot
(b) cost of grading the land on which the building is to be constructed
(c) interest incurred during construction
(d) cost of removing the demolished building that existed on the land when it was purchased
62. Assuming there are no impairment losses, the balance in the Accumulated Depreciation
account represents the
(a) cash fund to be used to replace assets.
(b) amount to be deducted from the cost of the asset to arrive at its fair value.
(c) amount charged to depreciation expense in the current period.
(d) amount charged to depreciation expense since the acquisition of the asset.
63. Which of the following is not an acceptable method of depreciation?
(a) straight-line
(b) increasing-balance
(c) diminishing-balance
(d) units-of-production
64. The carrying amount of property, plant, and equipment
(a) is always equal to its fair value.
(b) is always greater than its fair value.
(c) is always less than its fair value.
(d) may be different than its fair value.
65. Which statement is correct regarding the use of the cost model and the revaluation model?
(a) The cost model is not allowed under IFRS.
(b) The revaluation model is the only model allowed under IFRS.
(c) The cost model is the only model allowed under ASPE.
(d) Either the cost model or the revaluation model can be under ASPE.
66. Depreciation is a process of
(a) determining the asset’s fair value.
(b) asset valuation.
(c) cost allocation.
(d) determining the asset’s residual value.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 16
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
67. The cost of a depreciable long-lived asset is expensed
(a) when it is paid for.
(b) as the asset benefits the company.
(c) in the period in which it is acquired.
(d) in the period in which it is disposed of.
68. The carrying amount of an asset is equal to the
(a) asset's fair value less its original cost.
(b) asset’s cost less residual value less accumulated depreciation.
(c) asset’s cost less residual value.
(d) asset's cost less accumulated depreciation.
69. Which of the following is not a consideration when calculating depreciation?
(a) the method of payment for the asset
(b) the cost of the asset
(c) the useful life of the asset
(d) the residual value of the asset
70. The difference between a depreciable asset’s cost and its residual value is called
(a) the annual depreciation.
(b) accumulated depreciation.
(c) the depreciable amount.
(d) the revaluation amount.
71. In calculating depreciation, residual value is
(a) the fair value of the asset on the date of acquisition.
(b) subtracted from accumulated depreciation to determine the asset's depreciable cost.
(c) an estimate of the asset's value at the end of its useful life.
(d) ignored in all the depreciation methods.
72. When estimating the useful life of an asset, accountants do not consider
(a) the cost to replace the asset at the end of its useful life.
(b) vulnerability to obsolescence.
(c) expected repairs and maintenance.
(d) the intended use of the asset.
73. Equipment was purchased for $20,000. It is estimated that the equipment will have a $3,000
residual value at the end of its 5-year useful life. Using the straight-line method, annual
depreciation expense will be
(a) $3,400.
(b) $4,000.
(c) $4,600.
(d) $5,000.
Solution: ($20,000 – $3,000) / 5 years = $3,400
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 17
74. Equipment was purchased for $25,000. Freight charges amounted to $700 and there was a
cost of $3,000 for building a foundation and installing the equipment. It is estimated that the
equipment will have a $1,600 residual value at the end of its 5-year useful life. Using the
straight-line method, annual depreciation expense will be
(a) $4,540.
(b) $4,680.
(c) $5,420.
(d) $5,740.
Solution: ($25,000 +$700 +$3,000 – $1,600) / 5 years= $5,420
75. Equipment with a cost of $160,000, an estimated residual value of $10,000, and an
estimated life of 4 years, was purchased on April 1, 2018. If the straight-line method is used, the
depreciation expense for calendar 2018 is
(a) $40,000.
(b) $37,500.
(c) $30,000.
(d) $28,125.
Solution: ($160,000 – $10,000) / 48 months = $3,125/month; $3,125 x 9 months = $28,125
76. A truck was purchased for $40,000 and it was estimated to have a $4,000 residual value.
Using the straight-line method, monthly depreciation expense of $600 was recorded. Therefore,
the annual depreciation rate expressed as a percentage is
(a) 2%.
(b) 17%.
(c) 18%.
(d) 20%.
Solution: $600 x 12 months = $7,200/year; ($40,000 – $4,000) / $7,200 = 5 years; 1/5 = 20%
77. A company purchased factory equipment on May 1, 2018 for $30,000. It is estimated that
the equipment will have a $4,200 residual value at the end of its 8-year useful life. Using
straight-line depreciation, the depreciation expense for the years ended December 31, 2018 and
2019 is
(a) $2,500 in 2018 and $3,750 in 2019.
(b) $3,225 in 2018 and $3,225 in 2019.
(c) $2,150 in 2018 and $3,225 in 2019.
(d) none of the above
Solution: ($30,000 – $4,200) / 96 months = $268.75/month; 2018: $268.75 x 8 months = $2,150
and 2019: $268.75 x 12 = $3,225
78. The diminishing-balance method of depreciation produces a(n)
(a) decreasing depreciation expense each period.
(b) increasing depreciation expense each period.
(c) diminishing percentage rate each period.
(d) constant amount of depreciation expense each period.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 18
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Use the following information for questions 79–81.
On January 1, 2018, Anvil Corp. purchased equipment for $60,000. It was expected to last 5
years, after which it will be sold for $5,000. It is expected to be used for a total of 10,000
machine hours, and was used for 750 hours during the year ended December 31, 2018.
79. The depreciation expense for 2018 using the straight-line method will be
(a) $4,125.
(b) $11,000.
(c) $12,000.
(d) $12,250.
Solution: ($60,000 – $5,000) / 5 years = $11,000
80. The depreciation expense for 2018 using the units-of-production method will be
(a) $4,125.
(b) $11,000.
(c) $4,500.
(d) $12,250.
Solution: ($60,000 – $5,000) / 10,000 mhrs. = $5.5/mhr. X 750 mhrs. = $4,125
81. The depreciation expense for 2018 using the double diminishing-balance method will be
(a) $11,000.
(b) $12,250.
(c) $12,000.
(d) $24,000.
Solution: 1/5 years x 2 = 40%; $60,000 x.40 = $24,000
82. Management should select the depreciation method that
(a) is easiest to apply.
(b) best measures the asset's fair value each period over its useful life.
(c) best reflects the pattern in which the asset's future economic benefits are to be consumed.
(d) is required by the government.
83. The depreciation method that applies a constant percentage to the carrying amount at the
beginning of the period in calculating depreciation is called
(a) straight-line.
(b) units-of-production.
(c) diminishing-balance.
(d) component depreciation.
84. On October 1, 2018, Ming Wo Ltd. places a new asset into service. The cost of the asset is
$16,000 with an estimated 5-year life and $4,000 residual value. If Ming Wo uses straight-line
depreciation, the depreciation expense for the year ended January 31, 2019 is
(a) $ 600.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 19
(b) $ 800.
(c) $1,067.
(d) $2,400.
Solution: ($16,000 – $4,000) / 60 months = $200/mth; $200 x 4 months = $800
85. On July 1, 2018, a machine with a useful life of five years and a residual value of $4,000
was purchased for $20,000. Under straight-line depreciation, what is the depreciation expense
for calendar 2019?
(a) $4,000
(b) $3,556
(c) $3,200
(d) $1,600
Solution: ($20,000 – $4,000) / 5 years = $3,200
86. Equipment was purchased on January 1 for $39,000 with an estimated residual value of
$3,000. The current year's Depreciation Expense is $4,000, calculated on the straight-line basis,
and the balance of the Accumulated Depreciation account at the end of the year is $12,000. The
remaining useful life of the equipment is
(a) 3 years.
(b) 5 years.
(c) 6 years.
(d) 9 years.
Solution: ($39,000 – $3,000 – $12,000) / $4,000 = 6 years
87. Beynon Corp. purchased office equipment for $20,000, with an estimated residual value of
$4,000 at the end of its 8-year useful life. Assuming the double diminishing-balance method is
used, the constant percentage to be applied against the carrying amount each year is
(a) 10%.
(b) 12.5%.
(c) 25%.
(d) not determinable.
Solution: 1/8 years x 2 = 25%
88. Jemima Ltd. purchased factory equipment for $200,000, and estimated that the equipment
will have a $20,000 residual value at the end of its estimated 5-year useful life. If Jemima uses
the double diminishing-balance method of depreciation, the depreciation expense for the
second year after purchase would be
(a) $43,200.
(b) $48,000.
(c) $72,000.
(d) $80,000.
Solution: 1/5 years x 2 = 40%: [$200,000 – ($200,000 x.40)] x.40 = $48,000
89. Tran Inc. purchased equipment for $48,000, and estimated that the equipment will have a
$4,000 residual value at the end of its 8-year useful life. Using the double diminishing-balance
method, the depreciation expense for the third year would be
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 20
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(a) $9,000.
(b) $6,750.
(c) $6,188.
(d) $5,500.
Solution: 1/8 years x 2 = 25%: Yr 1: ($48,000 x.25) = $12,000; Yr 2: ($48,000 – $12,000) x.25 =
$9,000; Yr 3: ($48,000 – $12,000 – $9,000) x.25 = $6,750
90. On January 1, 2018, a machine with a useful life of five years and a residual value of $2,500
was purchased for $25,000. Using the double diminishing-balance method, the depreciation
expense for the year ending December 31, 2019 would be
(a) $10,000.
(b) $ 9,000.
(c) $ 6,000.
(d) $ 5,400.
Solution: 1/5 years x 2 = 40%: Yr 1: ($25,000 x.40) = $10,000; Yr 2: ($25,000 – $10,000) x.40 =
$6,000
91. On April 1, 2018, a machine was purchased for $33,600. It was estimated that it would have
a $3,200 residual value at the end of its 5-year useful life. It was also estimated that the
machine would be used for a total of 80,000 hours over the 5 years. If the actual number of
machine hours used in 2018 was 12,000 hours and the company uses the units-of-production
method of depreciation, the depreciation expense for 2018 would be
(a) $5,040.
(b) $4,560.
(c) $3,780.
(d) $3,420.
Solution: ($33,600 – $3,200) / 80,000 hrs = $0.38/hr; $0.38 x 12,000 = $4,560
92. A machine that cost $72,000 has an estimated residual value of $6,000 and an estimated
useful life of 5 years or 30,000 hours. Using the units-of-production method, the depreciation
expense for the second year, during which the machine was used 5,000 hours, would be
(a) $14,400.
(b) $13,200.
(c) $12,000.
(d) $11,000.
Solution: ($72,000 – $6,000) / 30,000 hrs = $2.2/hr; $2.2 x 5,000 = $11,000
93. Equipment that cost of $180,000 has an estimated residual value of $15,000 and an
estimated useful life of 4 years or 25,000 hours. Using the units-of-production method, the
depreciation expense for the first year, during which the machine was used 3,300 hours, would
be
(a) $45,000.
(b) $41,500.
(c) $23,760.
(d) $21,780.
Solution: ($180,000 – $15,000) / 25,000 hrs = $6.6/hr; $6.6 x 3,300 = $21,780
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 21
94. On April 1, 2018, Check Mate Ltd. places a new asset into service. The cost of the asset is
$40,000 with an estimated 8-year life and $2,500 residual value. Assuming that Check Mate
uses the double diminishing-balance method of depreciation, what is the carrying amount of the
asset at December 31, 2018?
(a) $32,500
(b) $30,625
(c) $38,125
(d) $35,000
Solution: 1/8 years x 2 = 25%: Yr 1: ($40,000 x.25) = 10,000 x 9/12 = $7,500; Carrying amount
= $40,000 – $7,500 = $32,500
95. Cordo Ltd. uses the units-of-production depreciation method. A new asset is purchased for
$30,000 that will produce an estimated 90,000 units over its useful life. Estimated residual value
is $3,000. What is the depreciable cost per unit?
(a) $3.30
(b) $3.00
(c) $0.33
(d) $0.30
Solution: ($30,000 – $3,000) / 90,000 = $0.30/unit
96. Units-of-production is an appropriate depreciation method to use when
(a) it is impossible to determine the productivity of the asset.
(b) the asset's use will be constant over its useful life.
(c) the company is a manufacturing company.
(d) the asset's use varies significantly from one period to another.
97. The calculation of depreciation using the diminishing-balance method
(a) ignores residual value in determining the amount to which a constant rate is applied.
(b) multiplies a constant percentage times the previous year's depreciation expense.
(c) yields an increasing depreciation expense each period.
(d) multiplies a diminishing percentage times a constant carrying amount.
Use the following information for questions 98–99.
On January 1, 2017, Flowers Unlimited purchased a new delivery van. The van cost $35,000
with an estimated life of 5 years and $5,000 residual value. Double diminishing-balance
depreciation will be used.
98. What is the depreciation expense for calendar 2017?
(a) $ 3,000
(b) $ 6,000
(c) $12,000
(d) $14,000
Solution: 1/5 years x 2 = 40%: Yr 1: ($35,000 x.40) = $14,000
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 22
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
99. What is the balance in the Accumulated Depreciation account at the end of 2018?
(a) $22,400
(b) $19,200
(c) $12,600
(d) $10,800
Solution: 1/5 years x 2 = 40%: Yr 1: ($35,000 x.40) = $14,000; Yr 2: ($35,000 – $14,000) x.40 =
$8,400; $14,000 + $8,400 = $22,400
100. With regard to depreciation and income taxes, which of the following statements is not
true?
(a) When calculating taxable income, the taxpayer must choose the method that best reflects
the pattern in which the asset’s future economic benefits are consumed.
(b) When calculating taxable income, the taxpayer must use the rate set by Canada Revenue
Agency.
(c) When calculating taxable income, the taxpayer must use the diminishing-balance method for
most assets.
(d) When calculating taxable income, the amount of depreciation calculated for income tax
purposes must be deducted, rather than the amount of depreciation calculated for financial
reporting purposes.
101. Which of the following statements is not true?
(a) CCA will be the same whether a company uses the straight-line, diminishing-balance, or
units-of-production method.
(b) Cash flow will be affected by the use of different depreciation methods.
(c) Over the life of the asset, total depreciation expense will be the same whether a company
uses the straight-line, diminishing-balance, or units-of-production method.
(d) The diminishing-balance depreciation method will result in lower net income compared to the
straight-line depreciation method in the early years.
102. A change in the estimated useful life of equipment requires
(a) a retroactive change in the amount of depreciation recognized in previous years.
(b) that no change be made to depreciation calculations, so that depreciation expense amounts
are comparable over the life of the asset.
(c) that the amount of depreciation expense be changed in the current and future years.
(d) that net income for the current year be increased.
103. Mandeep Ltd. has decided to change the estimate of the useful life of an asset that has
been in service for two years. Which of the following statements describes the proper way to
revise a useful life estimate?
(a) Revisions in useful life are permitted if approved by Canada Revenue Agency.
(b) Both the current and future years will be affected by the revision.
(c) Retroactive changes must be made to correct previously recorded depreciation.
(d) Only future years will be affected by the revision.
104. Which of the following statements is incorrect?
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 23
(a) Under the revaluation model, the carrying amount of property, plant and equipment is
adjusted to reflect its fair value.
(b) With the revaluation model, revaluation gains are recorded in Other Comprehensive Income.
(c) Companies can choose to use the cost model or the revaluation model for property, plant
and equipment.
(d) Reversals of revaluation gains or write-ups are prohibited.
105. Anali Corporation has determined that its drilling equipment is impaired. The cost of the
equipment is $210,000. Accumulated depreciation recorded to date is $140,000. Anali has
determined, that based on market data, the recoverable amount will be $45,000. Determine the
amount of the impairment loss that Anali will be required to record.
(a) $25,000
(b) $70,000
(c) $45,000
(d) $210,000
Solution: Carrying Amount: ($210,000 – $140,000) = $70,000 greater than net recoverable of
$45,000; therefore, impairment for the difference of $25,000
106. When an impairment loss is recorded what is the effect (if any) on Depreciation?
(a) no effect
(b) credit Accumulated Depreciation
(c) debit Accumulated Depreciation
(d) credit Depreciation Expense
107. When an asset is sold, a gain is reported that is equal to the amount that the
(a) proceeds received exceed the carrying amount of the asset sold.
(b) proceeds received exceed the original cost of the asset sold.
(c) carrying amount exceeds the proceeds received for the asset sold.
(d) proceeds received exceed the depreciable cost of the asset sold.
108. The carrying amount of an asset is the difference between the
(a) replacement cost of the asset and its original cost.
(b) 2 cost of the asset and the amount of depreciation expense for the year.
(c) cost of the asset and the accumulated depreciation to date.
(d) proceeds received from the sale of the asset and its original cost.
109. On December 31, 2018, Cee Corp. sells an asset that originally cost $300,000 for $75,000.
The company recognized a loss on disposal of $25,000. What was the balance of the
accumulated depreciation account after the current year’s depreciation of $15,000 was
recorded?
(a) $ 25,000 gain
(b) $ 25,000 loss
(c) $125,000 gain
(d) $125,000 loss
Solution: $300,000 – $75,000 – $25,000 = $200,000.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 24
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
110. A truck costing $15,000 and on which $14,000 of accumulated depreciation has been
recorded was discarded as having no value. The entry to record this event would include a
(a) gain of $1,000.
(b) loss of $1,000.
(c) credit to Accumulated Depreciation for $14,000.
(d) credit to Equipment for $1,000.
Solution: Carrying Amount: ($15,000 – $14,000) = $1,000 loss as no offsetting proceeds
111. A truck costing $14,000 and on which $12,000 of accumulated depreciation has been
recorded was disposed of for $3,000 cash. The entry to record this event would include a
(a) loss on disposal of $1,000.
(b) gain on disposal of $1,000.
(c) credit to the Truck account for $3,000.
(d) credit to Accumulated Depreciation for $12,000.
Solution: Carrying Amount: ($14,000 – $12,000) = $2,000 less than proceeds of $3,000;
therefore, a gain for the difference of $1,000
112. If disposal of an asset occurs during the year, depreciation is
(a) not recorded for the year.
(b) recorded for the whole year.
(c) recorded for the fraction of the year to the date of the disposal.
(d) not recorded if the asset is scrapped.
113. If an asset is fully depreciated and retired for proceeds equal to its residual value
(a) a gain on disposal will be recorded.
(b) depreciation must continue to be taken as though the asset were still on the books.
(c) a loss on disposal will be recorded.
(d) no gain or loss on disposal will be recorded.
114. If the carrying amount of an asset equals its selling price at the date of sale, then
(a) a gain on disposal is recorded.
(b) no gain or loss on disposal is recorded.
(c) the asset is fully depreciated.
(d) a loss on disposal is recorded.
115. A truck costing $32,000 was destroyed when its engine caught fire. At the date of the fire,
the accumulated depreciation on the truck was $16,000. An insurance cheque for $37,000 was
received based on the replacement cost of the truck. The entry to record the insurance
proceeds and the disposition of the truck will include a
(a) gain on disposal of $5,000.
(b) credit to the Truck account for $16,000.
(c) credit to the Accumulated Depreciation account for $16,000.
(d) gain on disposal of $21,000.
Solution: Carrying Amount: ($32,000 – $16,000) = $16,000 less than proceeds of $37,000;
therefore, a gain for the difference of $21,000
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 25
116. On July 1, 2018, Happy Hound Kennels Inc. sells equipment for $20,000. The equipment
originally cost $80,000, had an estimated 5-year life and an expected residual value of $10,000.
The Accumulated Depreciation account had a balance of $49,000 on January 1, 2018, using the
straight-line method. The gain or loss on disposal is
(a) $4,000 gain.
(b) $4,000 loss.
(c) $11,000 loss.
(d) $11,000 gain.
Solution: Depreciation Jan 1 – July 1 = ($80,000 – $10,000) / 60 months x 6 months = $7,000;
Carrying Amount: ($80,000 – $49,000 – $7,000) = $24,000 greater than proceeds of $20,000
therefore a loss for the difference of $4,000
117. An asset with a cost of $45,000 was sold for $9,500 and resulted in a gain of $2,000. How
much was accumulated depreciation at the time of sale?
(a) $39,500
(b) $45,000
(c) $37,500
(d) $35,500
Solution: $45,000 + $2,000 – $9,500 = $37,500
118. Intangible assets are the rights and privileges that result from ownership of assets that
(a) must be generated internally.
(b) benefit only the current period.
(c) have physical substance.
(d) do not have physical substance.
119. An intangible asset should
(a) not be amortized if it has an finite life.
(b) not be amortized if it has an indefinite life.
(c) be amortized over its legal or useful life, whichever is longer.
(d) be amortized over 5 years or less.
120. The cost of successfully defending a patent in an infringement suit should be
(a) charged to Legal Expenses.
(b) deducted from the carrying amount of the patent.
(c) added to the cost of the patent.
(d) recognized as a loss in the current period.
121. An asset that cannot be sold separately in the market place is
(a) a patent.
(b) goodwill.
(c) a copyright.
(d) a trade name.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 26
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
122. Goodwill can be recorded
(a) when customers keep returning because they are satisfied with the company's products.
(b) when the company acquires a good location for its business.
(c) when the company has exceptional management.
(d) only when there is a purchase of an entire business.
123. On October 1, 2018, Benji Corporation purchased a copyright for $100,000. It is estimated
that the copyright will have a useful life of 8 years with no residual value. The amount of
amortization expense recognized for the calendar year 2018 would be
(a) $0.
(b) $3,125.
(c) $1,042.
(d) $100,000.
Solution: $100,000 / 8 years x 3/12 months = $3,125
124. Which of the following combinations reflects intangible assets with a finite life?
(a) copyrights and patents
(b) copyrights and trademarks
(c) trademarks and brands
(d) brands and trade names
125. Which of the following is not considered to be an intangible asset?
(a) a copyright
(b) an oil well
(c) a franchise
(d) a patent
126. Which of the following statements concerning research and development costs is not true?
(a) All research costs should be expensed as incurred.
(b) Development costs with probable future benefits should be capitalized.
(c) All development costs should be capitalized.
(d) Development costs associated with successful commercial research would be amortized
over the useful life of the product or process developed.
127. The cost allocation of an intangible asset is referred to as
(a) amortization.
(b) impairment.
(c) depreciation.
(d) depletion.
128. The cost of a finite intangible asset is
(a) not amortized, but the asset is tested periodically for impairment.
(b) amortized and tested periodically for impairment.
(c) neither amortized or tested periodically for impairment.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 27
(d) amortized, but not tested periodically for impairment.
129. A patent
(a) has a legal life of 20 years.
(b) is not amortized.
(c) can be renewed indefinitely.
(d) is rarely subject to litigation because it is an exclusive right.
130. If a company incurs legal costs in unsuccessfully defending its patent, these costs would
be debited to
(a) Legal Expense.
(b) Intangible Loss account.
(c) Patent account.
(d) Other Comprehensive Income.
131. Copyrights are granted by the Canadian Intellectual Property Office
(a) for the life of the creator or 50 years, whichever is longer.
(b) for the life of the creator plus 50 years.
(c) for the life of the creator or 50 years, whichever is shorter.
(d) for 50 years.
132. Goodwill
(a) can be recorded when generated internally.
(b) can be subdivided and sold in parts.
(c) can only be identified with the business as a whole.
(d) need not be tested annually for impairment.
133. Goodwill
(a) is always expensed upon purchase.
(b) can be sold by itself to another company.
(c) can be purchased and charged directly to shareholders’ equity.
(d) is the excess of cost paid to acquire a business over the fair value of the net identifiable
assets of the business.
134. In recording the acquisition cost of an entire business
(a) goodwill is recorded as the excess of cost over the fair value of identifiable net assets.
(b) assets are recorded at the seller's carrying amounts.
(c) goodwill, if it exists, is never recorded.
(d) goodwill is recorded as the excess of cost over the carrying amount of identifiable net
assets.
135. Research costs
(a) are classified as intangible assets.
(b) must be expensed when incurred.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 28
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(c) should be included in the cost of the asset they relate to.
(d) are capitalized and then amortized over their estimated useful life.
136. A loss on disposal of an asset is reported in the financial statements
(a) in the operating section of the income statement.
(b) in the non-operating section of the income statement.
(c) as part of Other Comprehensive Income.
(d) as part of Cost of Goods Sold.
137. Depreciation expense and impairment losses are presented in
(a) the operating section of the income statement.
(b) the operating section and non-operating section of the income statement, respectively.
(c) the non-operating section of the income statement.
(d) the non-operating section and operating section of the income statement, respectively.
138. Which of the following statements concerning financial statement presentation is false?
(a) Goodwill is reported separately from intangible assets.
(b) Companies must disclose their policy for testing impairments in the notes to their
statements.
(c) Companies reporting under ASPE must include a reconciliation of the changes during the
year in the carrying amount for each class of long-lived asset in the notes to their statements.
(d) Companies reporting under IFRS must disclose whether they are using the cost or
revaluation model for each class of long-lived asset in the notes to their statements.
139. Which of the following statements concerning financial statement presentation is false?
(a) Intangibles may be reported separately.
(b) The balances of major classes of assets should be disclosed in the notes.
(c) The balances of the accumulated depreciation of major classes of assets should be
disclosed in the notes.
(d) The balances of all individual assets, as they appear in the subsidiary ledger, should be
disclosed in the notes.
140. Intangible assets
(a) must be reported under the heading Property, Plant, and Equipment.
(b) are not reported on the statement of financial position because they lack physical substance.
(c) should be reported as Current Assets on the statement of financial position.
(d) should be reported separately from Property, Plant, and Equipment.
141. Boulder Corp. has the following assets:
Buildings and Equipment (net) ............................... $12,500,000
Trade Receivables .................................................
1,600,000
Inventory ................................................................
2,300,000
Land .......................................................................
1,500,000
The total amount reported under Property, Plant, and Equipment would be
(a) $14,000,000.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 29
(b) $16,300,000.
(c) $20,500,000.
(d) $17,900,000.
Solution: $12,500,000 + $1,500,000 = $14,000,000
142. Property, plant, and equipment are ordinarily presented on the statement of financial
position
(a) at fair values.
(b) at replacement cost.
(c) at cost less accumulated depreciation.
(d) in a separate section along with investments.
143. On the statement of cash flows, cash flows from the purchase and sale of long-lived assets
are shown in which section?
(a) Operating activities
(b) Investing activities
(c) Financing activities
(d) They are not reported on the statement of cash flows.
Use the following information for questions 144–146.
During 2018, Richlieu Corporation reported:
Net sales .............................................. $30,000,000
Net income ...........................................
1,500,000
Depreciation expense ..........................
400,000
Beginning total assets .......................... $12,000,000
Ending total assets ...............................
20,000,000
Property, plant, and equipment ............
8,000,000
Accumulated depreciation ....................
2,000,000
144. Richlieu’s return on assets is
(a) 7.5%.
(b) 7.9%.
(c) 9.4%.
(d) 12.5%.
Solution: $1,500,000 / ($12,000,000 + $20,000,000) / 2 = 9.4%
145. Richlieu’s profit margin is
(a) 3.7%.
(b) 5.0%.
(c) 6.3%.
(d) 8.0%.
Solution: $1,500,000 / $30,000,000 = 5%
146. Richlieu’s asset turnover ratio is
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 30
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(a) 2.5 times.
(b) 1.9 times.
(c) 1.5 times.
(d) 1.3 times.
Solution: $30,000,000 /($12,000,000 + $20,000,000) / 2 = 1.9 times
147. If the return on assets is positive, an increase in total assets will result in
(a) an increase in the return on assets.
(b) a decrease in the return on assets.
(c) no change in the return on assets.
(d) the effect cannot be determined.
148. If a company wants to increase its return on assets, it should not
(a) increase the profit margin.
(b) increase the asset turnover.
(c) decrease average total assets.
(d) increase average total assets.
149. The asset turnover ratio is calculated by
(a) multiplying net sales by average total assets.
(b) dividing net sales by average total assets.
(c) dividing net income by average total assets.
(d) dividing average total assets by net sales.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 31
ANSWERS TO MULTIPLE CHOICE QUESTIONS
Item
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
Ans.
a
b
c
b
b
d
c
b
b
d
a
c
d
d
d
b
Item
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
Ans.
c
d
a
c
d
b
d
c
c
b
d
a
c
c
a
a
Item
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
Ans.
c
d
d
c
a
b
a
d
c
c
b
c
c
c
b
b
Item Ans. Item
90.
c
106.
91.
b
107.
92.
d
108.
93.
d
109.
94.
a
110.
95.
d
111.
96.
d
112.
97.
a
113.
98.
d
114.
99.
a
115.
100.
a
116.
101.
b
117.
102.
c
118.
103.
b
119.
104.
d
120.
105.
a
121.
Ans.
b
a
c
b
b
b
c
d
b
d
b
c
d
b
c
b
Item
122.
123.
124.
125.
126.
127.
128.
129.
130.
131.
132.
133.
134.
135.
136.
137.
Ans.
d
b
a
b
c
a
b
a
a
b
c
d
a
b
a
a
Item
138.
139.
140.
141.
142.
143.
144.
145.
146.
147.
148.
149.
Ans.
c
d
d
a
c
b
c
b
b
b
d
b
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 32
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
EXERCISES
Ex. 150
Millenium Corporation purchased land adjacent to its plant to improve access for trucks making
deliveries. Expenditures/receipts incurred in developing the land were as follows:
Purchase price ...........................................................
$45,000
Title search and other fees .........................................
4,000
Demolition of an old building on the property..............
6,000
Grading ......................................................................
1,100
Proceeds received from selling scrap .........................
1,500
Laying and paving driveway .......................................
22,000
Lighting ......................................................................
6,800
Signs ..........................................................................
600
Instructions
Calculate the amount to be debited to the Land account.
Solution 150 (5 min.)
Purchase price ..................................................................
Title search and other fees ................................................
Demolition of an old building on the property ....................
Grading .............................................................................
Proceeds from selling scrap ..............................................
Land acquisition cost.........................................................
$45,000
4,000
6,000
1,100
(1,500)
$54,600
Ex. 151
Indicate whether each of the following expenditures should be classified as land (L), land
improvements (LI), buildings (B), equipment (E) or none of these (X).
_____ 1. Parking lots
_____ 2. Electricity used by a machine
_____ 3. Sewage system cost
_____ 4. Interest on building construction loan
_____ 5. Cost of trial runs for machinery
_____ 6. Drainage costs
_____ 7. Cost to install a machine
_____ 8. Fencing
_____ 9. Unpaid (past) property taxes paid on purchase
_____ 10. Cost of tearing down a building when property is purchased with an old building on
it
Solution 151 (5 min.)
1. LI
2.
X
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
3.
L
4.
B
5.
E
6.
L
7.
E
8.
LI
9.
L
9 - 33
10. L
Ex. 152
Indicate whether each of the following expenditures should be classified as land (L), land
improvements (LI), buildings (B), equipment (E) or none of these (X).
_____ 1. Computer installation cost
_____ 2. Driveway cost
_____ 3. Architect’s fee
_____ 4. Surveying costs
_____ 5. Grading costs
_____ 6. Cost of lighting for parking lot
_____ 7. Insurance and freight on computer purchased
_____ 8. Material and labour costs incurred to construct factory
_____ 9. Cost of tearing down a warehouse on land just purchased
_____ 10. Utility cost during first year
Solution 152 (5 min.)
1. E
2.
LI
3.
B
4.
L
5.
L
6.
LI
7.
E
8.
B
9.
L
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 34
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
10. X
Ex. 153
For each entry below, prepare any correcting entry necessary. If the entry is correct, then state
"No entry required."
(a) The $100 cost of repairing a printer was charged to Equipment. The repair is not expected
to increase the operating efficiency of the printer.
(b) The $6,500 cost of a major engine overhaul was debited to Repair Expense. The overhaul
is expected to increase the operating efficiency of the vehicle.
(c) The $4,000 closing costs associated with the acquisition of land were debited to Legal
Expense.
(d) A $150 charge for transportation expenses on new equipment purchased was debited to
Transportation Expense.
Solution 153 (10 min.)
(a) Repair and Maintenance Expense ................................................
Equipment ..............................................................................
100
100
(b) Vehicles ........................................................................................
Repair Expense ......................................................................
6,500
(c) Land ..............................................................................................
Legal Expense .......................................................................
4,000
(d) Equipment .....................................................................................
Transportation Expense .........................................................
150
6,500
4,000
150
Ex. 154
The McReynolds Corporation was organized on January 1. During the first year of operations,
the following expenditures and receipts were recorded in random order in the general ledger
account, Land.
Expenditures
1. Cost of real estate purchased as a plant site (land and building) ..................... $ 130,000
2. Cost of demolishing building to make land suitable for construction of a new
building ...........................................................................................................
9,000
3. Architect's fees for new building plans .............................................................
12,000
4. Excavation costs for new building ...................................................................
27,000
5. Cost of filling and grading the land ..................................................................
2,500
6. Insurance and taxes during construction of building ........................................
3,000
7. Interest paid during the year, of which $52,000 pertains to the
construction period ..........................................................................................
68,000
8. Full payment to building contractor ..................................................................
750,000
9. Cost of parking lots and driveways ..................................................................
32,000
10. Property taxes paid for the current year on the land ........................................
5,000
Total ......................................................................................................... $1,038,500
Receipts
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
11. Proceeds from salvage of demolished building ...............................................
Total .........................................................................................................
9 - 35
3,500
$3,500
Instructions
Analyze the foregoing transactions using the following tabular arrangement. Insert the number
of each transaction in the Item space and insert the amounts in the appropriate columns.
Land
Item
Land
Improvements Building
Other
Account Title
Solution 154 (15 min.)
Item
Land
1. $130,000
2.
9,000
3.
4.
5.
2,500
6.
7.
8.
9.
10.
Expense
11.
(3,500)
Totals $138,000
Land
Improvements
Building
Other
Account Title
$ 12,000
27,000
3,000
52,000
750,000
$16,000
Interest Expense
$32,000
5,000
_______
$32,000
________
$844,000
Property Tax
_______
$21,000
Ex. 155
Absentia Inc. purchased a machine on January 1, 2018. Besides the purchase cost, the
following additional costs were incurred:
(a) increase in annual insurance premium to include new machine
(b) transportation and insurance costs while the machinery was in transit from the seller
(c) personnel training costs for initial operation of the machinery
(d) installation costs necessary to secure the machinery to the building flooring
(e) lubrication of the machinery gearing before the machinery was placed into service
(f) lubrication of the machinery gearing after the machinery was placed into service
(g) annual city business licence
Instructions
Indicate whether the items (a) through (g) are capital or operating expenditures using the codes:
C = Capital, O = Operating.
Solution 155 (5 min.)
(a) Operating
(b) Capital
(c) Operating
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 36
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(d) Capital
(e) Capital
(f) Operating
(g) Operating
Ex. 156
Montgomery Enterprises purchased a delivery truck January 1, 2014 for $50,000. The truck was
expected to have a useful life of 10 years and a residual value of $10,000. On January 1, 2018
the accumulated depreciation balance on the truck was $16,000 and the 2018 depreciation is
calculated as $4,000.
During 2018 Montgomery had the following transactions related to the truck:
1. Oil and filter change $800
2. Engine overhaul $7,500 which will extend the useful life of the truck by 3 years. The
residual value has been revised to $12,500.
3. Insurance $2,500
4. Licence plate renewal $175
Instructions
(a) Calculate the carrying amount of the truck on December 31, 2018.
(b) Calculate the depreciation expense for 2019 using the straight-line method of depreciation.
Solution 156
(a)
Truck cost January 1, 2014
Engine overhaul (capital expenditures)
Less: Accumulated depreciation—Truck ($16,000 + $4,000)
Carrying Amount, December 31, 2018
$50,000
7,500
20,000
$37,500
(b) The revised annual deprecation (not illustrated in text but steps discussed) will be
Carrying amount (original cost – accumulated deprec. + capital expenditures) – Revised residual amount
Remaining estimated useful life
$37,500 – $12,500
————––––——
(3+5) years
= $3,125
Ex. 157
Watmore Ltd. purchased, for cash, factory equipment with an invoice price of $80,000. Other
costs incurred were freight costs, $1,600; installation, wiring and foundation, $13,500; material
and labour costs in testing equipment, $500; oil lubricants and supplies to be used while
operating the equipment, $750; fire insurance policy covering equipment, $1,400. The
equipment is estimated to have a $10,000 residual value at the end of its 8-year useful service
life.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 37
Instructions
(a) Calculate the cost of the equipment.
(b) Record the purchase of the equipment.
(c) Calculate the annual depreciation expense, assuming the straight-line method of
depreciation is used.
Solution 157 (10 min.)
(a) Invoice cost ...................................................................................
Freight costs .................................................................................
Installation, wiring and foundation .................................................
Material and labour costs in testing ...............................................
Cost ..............................................................................................
(b) Equipment .....................................................................................
Cash.......................................................................................
$80,000
1,600
13,500
500
$95,600
95,600
95,600
(c) The annual depreciation expense would be $10,700 ($95,600 – $10,000) ÷ 8 years =
$10,700
Ex. 158
A machine was acquired on January 1, 2018, at a cost of $80,000. The machine was originally
estimated to have a residual value of $5,000 and an estimated life of 5 years. The machine is
expected to produce a total of 100,000 components during its life, as follows: 15,000 in 2018,
20,000 in 2019, 20,000 in 2020, 30,000 in 2021, and 15,000 in 2022.
Instructions
(a) Calculate the amount of depreciation to be charged each year, using each of the following
methods:
1. Straight-line method
2. Units-of-production
3. Double diminishing-balance
(b) Which method results in the highest depreciation expense during the first two years? Over
all five years?
Solution 158
(a) 1. Straight-line
Asset
Date
Cost
Jan. 1, 2018
$80,000
Dec. 31, 2018
Dec. 31, 2019
Dec. 31, 2020
Dec. 31, 2021
Dec. 31, 2022
Depreciation
Rate
Depreciable
Cost
20%
20%
20%
20%
20%
$75,000
75,000
75,000
75,000
75,000
Depreciation Accumulated Carrying
Expense
Depreciation Amount
$80,000
$15,000
$15,000
65,000
15,000
30,000
50,000
15,000
45,000
35,000
15,000
60,000
20,000
15,000
75,000
5,000
Straight-line rate: 1 ÷ 5 = 20%
Annual depreciation: ($80,000 – $5,000) ÷ 5 years = $15,000
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 38
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(a) 2. Units-of-production
Asset
Date
Cost
Jan. 1, 2018 $80,000
Dec. 31, 2018
Dec. 31, 2019
Dec. 31, 2020
Dec. 31, 2021
Dec. 31, 2022
Depreciation
Per Component
Number Of
Components
$0.75
0.75
0.75
0.75
0.75
15,000
20,000
20,000
30,000
15,000
100,000
Depreciation Accumulated Carrying
Expense
Depreciation Amount
$80,000
$11,250
$11,250
68,750
15,000
26,250
53,750
15,000
41,250
38,750
22,500
63,750
16,250
11,250
75,000
5,000
Depreciation per component: ($80,000 – $5,000) ÷ 100,000 units = $0.75
(a) 3. Double diminishing-balance
Asset
Depreciation
Date
Cost
Rate
Jan. 1, 2018 $80,000
Dec. 31, 2018
40%
Dec. 31, 2019
40%
Dec. 31, 2020
40%
Dec. 31, 2021
40%
Dec. 31, 2022
40%
Asset Carrying Depreciation Accumulated Carrying
Amount
Expense
Depreciation Amount
$80,000
$80,000
$32,000
$32,000
48,000
48,000
19,200
51,200
28,800
28,800
11,520
62,720
17,280
17,280
6,912
69,632
10,368
10,368
*5,368
75,000
5,000
DDB rate: 1 ÷ 5 = 20% x 2 = 40%
* Amount required to reduce carrying amount to residual value.
(b) The double diminishing-balance results in the highest depreciation in the first two years.
Over the five year life of the asset, all of the methods result in the same amount of
depreciation expense as the asset is depreciated to the residual value.
Ex. 159
Certossi Service Ltd. uses straight-line depreciation. The company's fiscal year end is
December 31. The following transactions and events occurred during their first three years of
operations:
2017 Jul
1 Purchased equipment for $32,000 cash, with shipping costs of $2,000.
Nov 3 Incurred ordinary repairs on the computer of $360.
Dec 31 Recorded 2017 depreciation on the basis of a four-year life and estimated
residual value of $200.
2018 Dec 31 Recorded 2018 depreciation.
2019 Jan
1 Paid $1,600 for a major upgrade of the equipment. This expenditure is
expected to increase the operating efficiency and capacity of the equipment.
Instructions
Prepare journal entries to record the above events. (Show calculations.)
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
Solution 159 (15 min.)
2017 Jul 1
Equipment ................................................................
Cash ($32,000 + $2,000) ...................................
Nov 3
Dec 31
2018 Dec 31
2019 Jan
1
9 - 39
34000
34,000
Repairs and Maintenance Expense ..........................
Cash ..................................................................
360
Depreciation Expense ...............................................
Accumulated Depreciation—Equipment .............
[($34,000 – $200)/4  6/12]
4,225
Depreciation Expense ...............................................
Accumulated Depreciation—Equipment .............
($34,000 – $200)/4
8,450
Equipment ................................................................
Cash ..................................................................
1,600
360
4,225
8,450
1,600
Ex. 160
Ratched Limited purchased a new computer system for $80,000. It is estimated that the
computer will have an $8,000 residual value at the end of its 5-year useful service life. The
double diminishing-balance method of depreciation will be used.
Instructions
Prepare a depreciation schedule that shows the annual depreciation expense on the computer
for its 5-year life.
Solution 160 (10 min.)
Diminishing-balance rate = 1 ÷ 5 = 20% x 2 = 40%
Carrying Amount
Beginning
Depreciation
Amount
Year
of Year

Rate
=
1
$80,000

40%
2
48,000

40%
3
28,800

40%
4
17,280

40%
5
10,368

40%
Annual
Depreciation
Accumulated
Expense
$32,000
19,200
11,520
6,912
2,368*
Depreciation
$32,000
51,200
62,720
69,632
72,000
Carrying
End of Year
$48,000
28,800
17,280
10,368
8,000
*Adjusted to $2,368 because ending carrying amount should not be less than expected residual
value.
Ex. 161
Chevrette Corporation purchased equipment on January 1, 2017 for $87,000. It is estimated
that the equipment will have a $7,000 residual value at the end of its 8-year useful life. It is also
estimated that the equipment will produce 160,000 units over its 8-year life.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 40
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Instructions
(a) Using straight-line depreciation, calculate the depreciation expense for the year ended
December 31, 2017.
(b) Now assume Chevrette uses the units-of-production depreciation. If 16,000 units of product
are produced in 2017 and 24,000 units are produced in 2018, what is the carrying amount
of the equipment at December 31, 2018?
(c) Now assume Chevrette uses double diminishing-balance depreciation. What is the balance
of the Accumulated Depreciation—Equipment account at December 31, 2019? Round
amounts to the nearest dollar.
Solution 161 (15 min.)
C = Cost
RV = Residual value
(a) Straight-line method:
C – RV
——–––— =
Useful life
$87,000 – $7,000
——————–——
8
C – RV
$87,000 – $7,000
(b) Units-of-production method: —–––––––—— = —————–———
Total estimated
160,000 units
Units of activity
2017 16,000 units  $0.50 = $ 8,000
2018 24,000 units  $0.50 =
12,000
Accumulated depreciation
= $20,000
Cost of asset
Less: Accumulated depreciation
Carrying amount at December 31, 2018
= $10,000 per year.
= $.50 per unit
$87,000
20,000
$67,000
(c) Double diminishing-balance method. Rate is 1 ÷ 8 = 12.5% x 2 = 25%
Carrying Amount
Beginning
Diminishing
Depreciation
Accumulated
Amount
of Year
 Balance Rate
=
Expense
Depreciation
Year
2017
$87,000
25%
$21,750
$21,750
2018
65,250
25%
16,313
38,063
2019
48,937
25%
12,234
50,297
Carrying
End of
$65,250
48,937
36,703
Ex. 162
Equipment acquired on October 1, 2018, at a cost of $750,000, has an estimated useful life of
10 years. The residual value is estimated to be $80,000.
Instructions
Calculate the depreciation expense for the first two years using the
(a) straight-line method.
(b) double diminishing-balance method.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 41
Solution 162 (10 min.)
(a) Straight-line method
Year 1
Year 2
$750,000 – $80,000
—————————  3/12 = $16,750
10 years
$67,000
(b) Double diminishing-balance method
Rate is 1 ÷ 10 = 10% x 2 = 20%
Year 1
$750,000  20%  3/12
= $37,500
Year 2
($750,000 – $37,500)  20% = $142,500
Ex. 163
Craving for Crepes, a popular Crepe and Waffle restaurant, has a thriving delivery business.
The business has a fleet of three delivery vans. Before the adjusting entry for this year's
depreciation expense, the details of each van are as follows:
Accumulated
Kilometres
Estimated
Depreciation
Operated
Van
Cost
Residual value Life in Kilometres
Beg. of the Year
During Year
1
$32,000
$5,000
150,000
$7,800
22,000
2
28,000
2,500
160,000
6,000
40,000
3
17,000
1,900
170,000
4,550
36,000
Instructions
(a) Calculate the depreciation rates per kilometre for each van.
(b) Calculate the depreciation expense for each van for the current year.
(c) Prepare one compound journal entry to record the annual depreciation expense for the
fleet.
Solution 163 (10 min.)
$32,000 – $5,000
(a) Van 1
———————— = $0.18 per km
150,000 km
(b)
Van 2
$28,000 – $2,500
———————— = $0.16 per km
160,000 km
Van 3
$17,000 – $1,900
———————— = $0.09 per km
170,000 km
Van 1
Van 2
Van 3
22,000 km  $0.18 = $3,960
40,000 km  $0.16 = $6,400
36,000 km  $0.09 = $3,240
(c) Depreciation Expense ...................................................................
Accumulated Depreciation—Vehicles 1 ..................................
13,600
3,960
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
9 - 42
Accumulated Depreciation—Vehicles 2 ..................................
Accumulated Depreciation—Vehicles 3 ..................................
6,400
3,240
Ex. 164
Caring Clinic purchased a new surgical laser for $88,000. The estimated residual value is
$4,000. The laser has a useful life of six years and the clinic expects to use it 10,000 hours. It
was used 1,700 hours in year 1; 2,300 hours in year 2; 2,500 hours in year 3; 1,500 hours in
year 4; 1,600 hours in year 5; 400 hours in year 6.
Instructions
(a) Calculate the annual depreciation for each of the six years under each of the following
methods:
1. straight-line.
2. units-of-production.
(b) If you were the administrator of the clinic, which method would you deem as more
appropriate? Justify your answer.
(c) Which method would result in the lower reported net income for the first two years? Which
method would result in the lower total reported net income over the six-year period?
Solution 164 (20 min.)
$88,000 – $4,000
Straight-line method: ———————— = $14,000 per year
6 years
(a) 1.
$88,000 – $4,000
Units-of-production method: ——––—————— = $8.40/hour
10,000 hours
2.
Year
1
2
3
4
5
6
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Total
1,700
2,300
2,500
1,500
1,600
400






$8.40
8.40
8.40
8.40
8.40
8.40
Straight-Line
$14,000
14,000
14,000
14,000
14,000
14,000
$84,000
= $ 14,280
=
19,320
=
21,000
=
12,600
=
13,440
=
3,360
Units-of-Production
$14,280
19,320
21,000
12,600
13,440
3,360
$84,000
(b)
The units-of-production method would be more appropriate, given the variable usage
expected of the laser during its useful life.
(c)
The units-of-production method provides the higher depreciation expense for the first
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 43
two years, and therefore the lower net income. Over the six-year period, both methods
result in the same total depreciation expense ($84,000) and, therefore, the same total
net income.
Ex. 165
On Jan 1, 2016, Holloway Inc. purchased equipment for $840,000, and, at Dec 31, 2016,
recorded straight-line depreciation based on a twenty-year life with $20,000 residual value.
Holloway tests its property, plant and equipment annually for impairment and at Dec 31, 2017,
determined that the recoverable amount of this equipment was $722,000.
Instructions
(a) Determine the carrying amount of the equipment at December 31, 2017 assuming that
depreciation has already been recorded for the year.
(b) Determine the impairment loss (if any) and record the appropriate journal (if any) entry at
December 31, 2017.
(c) Calculate the 2018 annual depreciation expense subsequent to the impairment loss and
record the appropriate journal entry.
Solution 165
(a) Carrying amount at December 31, 2017 (before impairment loss):
$840,000 – $20,000
—————————
20 years
= $41,000 annual depreciation expense
Equipment has been depreciated for 2 years: $41,000  2 = $82,000
Carrying amount at December 31, 2017: $840,000 – $82,000 = $758,000
(b) Impairment Loss
$758,000 – $722,000= $36,000
Dec 31/17
Impairment Loss............................................................
Accumulated Depreciation—Equipment ...............
36,000
36,000
(c) Carrying amount at December 31, 2017 (after impairment loss):
$722,000 – $20,000
—————————
18 years
Dec 31/18
= $39,000 annual 2018 depreciation expense
Depreciation Expense ...................................................
Accumulated Depreciation—Equipment ...............
39,000
39,000
Ex. 166
Northwest Airlines purchased an aircraft on January 1, 2018, at a cost of $35,000,000. The
estimated useful life of the aircraft is 25 years, with an estimated residual value of $5,000,000.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 44
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Instructions
Calculate the accumulated depreciation and carrying amount at December 31, 2020 using the
straight-line method and the double diminishing-balance method.
Solution 166 (20 min.)
Straight-Line
Depreciable
Depreciation
Year
Amount 
Rate
=
Amount
2018
$30,000,000 4%
2019
30,000,000 4%
2020
30,000,000 4%
Annual
Depreciation
Accumulated
Depreciation
$1,200,000
1,200,000
1,200,000
Carrying
$1,200,000 $33,800,000
2,400,000 32,600,000
3,600,000 31,400,000
Double Diminishing-Balance (rate is 1/25 = 4% x 2 = 8%)
Carrying Amount Depreciation
Annual
Accumulated
Year
Beginning Year 
Rate
= Depreciation
Depreciation
Carrying
Amount
2018
$35,000,000 8%
$2,800,000
$2,800,000 $32,200,000
2019
32,200,000 8%
2,576,000
5,376,000 29,624,000
2020
29,624,000 8%
2,369,920
7,745,920 27,254,080
Ex. 167
Zen Fitness Inc. purchased a machine on April 1, 2018 for $120,000. The machine is expected
to have an estimated residual value of $5,000 at the end of its 5-year life. Although Zen has a
policy of using straight-line depreciation for machinery, the company accountant neglected to
follow policy and depreciated it in 2018 using the double diminishing-balance method. Income
before income tax for the year ended December 31, 2018 was $73,000 as the result of
depreciating the machine incorrectly.
Instructions
Using the method of depreciation that company policy requires, prepare the correcting entry and
determine the correct net income. Ignore income tax. (Show calculations.)
Solution 167 (15 min.)
Depreciation recorded ($120,000 – 0)  40% (1 ÷5 = 20% x 2) x 9/12 .
Correct depreciation ($120,000 – $5,000)/5 x 9/12 ..............................
Overstatement of depreciation .............................................................
Accumulated Depreciation—Equipment ...............................................
Depreciation Expense .................................................................
Correct income (before income tax):
Net income as reported ........................................................................
Add: overstatement of depreciation expense .......................................
Correct Net income ..............................................................................
$36,000
17,250
$18,750
18,750
18,750
$73,000
18,750
$91,750
Ex. 168
On January 1, 2017, Wanders Corporation purchased and installed a telephone system at a
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 45
cost of $55,000. The equipment was expected to last five years with no residual value. On
January 1, 2018 more telephone equipment was purchased for $7,500 to augment the existing
system. The new equipment is expected to have a useful life of six years. Through an error, the
new equipment was debited to Telephone Expense. Wanders Corporation uses straight-line
depreciation.
Instructions
Prepare a schedule showing the effects of the error in dollars on Telephone Expense,
Depreciation Expense, and Net Income for each year and in total beginning in 2018 through the
useful life of the new equipment. Use the following format:
Telephone Expense
Depreciation Expense
Net income
Overstated
Overstated
Overstated
Year
(Understated)
(Understated)
(Understated)
——————————————————————————————————————————
—
2018
2019
2020
2021
2022
2023
Solution 168 (20 min.)
Telephone Expense
Depreciation Expense
Net income
Overstated
Overstated
Overstated
Year
(Understated)
(Understated)
(Understated)
——————————————————————————————————————————
—
2018
$7,500
$(1,250)*
$(6,250)
2019
(1,250)
1,250
2020
(1,250)
1,250
2021
(1,250)
1,250
2022
(1,250)
1,250
2023
(1,250)
1,250
Total
$7,500
$(7,500)
-0* $7,500  6 = $1,250
Ex. 169
On July 1, 2018, Ashtanga Inc. purchased a used piece of equipment for $65,000. The
company spent another $28,000 overhauling it and getting it ready for use, and $2,000 testing it.
Ashtanga estimated the useful life to be 6 years, and the residual value $5,000. The company
uses straight-line depreciation for all its equipment.
Instructions
(a) Prepare the journal entries to record the purchase (assume payments were made in cash)
and depreciation expense for 2018 and 2019.
(b) How much will the accumulated depreciation be on June 30, 2024?
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 46
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Solution 169 (15 min.)
(a) Purchase
Equipment .....................................................................................
Cash.......................................................................................
Equipment .....................................................................................
Cash.......................................................................................
Equipment .....................................................................................
Cash.......................................................................................
65,000
65,000
28,000
28,000
2,000
2,000
(Note these entries could be combined.)
Depreciation 2018
Depreciation Expense ................................................................
Accumulated Depreciation—Equipment ..............................
($95,000 – $5,000)/6 × 6/12 = $7,500
Depreciation 2019
Depreciation Expense ...................................................................
Accumulated Depreciation—Equipment .................................
($95,000 – $5,000)/6 = $15,000
7,500
7,500
15,000
15,000
(b) On June 30, 2024, at the end of the asset’s useful life, the asset will be fully depreciated;
therefore, the accumulated depreciation will be $90,000, the full depreciable amount.
Ex. 170
Arnprior Packing (ANP) tests its property, plant and equipment annually for impairment. On Jan
1, 2018, ANP purchased equipment for $650,000, and, at Dec 31, 2018, recorded straight-line
depreciation based on a ten-year life with no residual value. However, at Dec 31, 2018, ANP
also determined that the recoverable amount of this equipment was $540,000.
Instructions
(a) What is the formula to determine an impairment loss?
(b) Calculate the equipment’s carrying amount at Dec 31, 2018
(c) Calculate the amount of the impairment loss Arnprior Packing will be required to record at
Dec 31, 2018.
Solution 170 (15 min.)
(a) The formula to determine the value of an impairment loss is:
Carrying Amount
(Cost- Acc. Dep.)
- Recoverable
Amount
=
Impairment
Loss
(b) Carrying amount at Dec 31, 2018
$650,000 – $0
——————
10 years
= $65,000 annual depreciation expense
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 47
Carrying amount at Dec 31, 2018: $650,000 – $65,000 = $585,000
(c) Impairment Loss $585,000 – $540,000= $45,000
Ex. 171
At the beginning of 2019, Annakin Corp. reviewed the expected useful life and residual value of
their main packaging machine. This machine had cost $850,000 on Jan 1, 2009, had been
expected to last for 25 years, with $75,000 residual value (straight-line depreciation). Now, ten
years later, Annakin is revising the expected life to a total of 30 years (that is, 20 years
remaining) with a $50,000 residual value.
Instructions
(a) Calculate the machine’s carrying amount at Dec 31, 2018.
(b) As a result of this revision, will the depreciation expense for 2019 and subsequent years be
higher or lower? Explain. (You do not have do show any detailed calculations.)
(c) With this revision, will Annakin have to revise previous years’ depreciation expense? Why
or why not?
Solution 171 (15 min.)
(a) Annual depreciation:
$850,000 – $75,000
—————––––—
25 years
= $31,000
Carrying amount at Dec 31, 2018: $850,000 – (10 x $31,000) = $540,000
(b) The depreciation expense will be lower, since we are reducing the residual value (increases
depreciable amount) and increasing the expected remaining life from the original ten years
left to fifteen.
Optional (not illustrated in text): the revised annual deprecation will be:
$540,000 – $50,000
————––––——
20 years
= $24,500
(c) No, this is considered a change in estimate, and reported in current and future years only
(prospectively). The rationale is that the original calculation for depreciation was based on
the best information available at the time (Jan 2009). Now, ten years later, new information
has become available that was not available before, thus the change should only affect
current and future periods.
Ex. 172
Solve for the missing items, assuming straight-line depreciation is used:
Cost
Machine A
$150,000
Machine B
$60,000
Machine C
(i)
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 48
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Residual value
Useful life
Depreciation rate
Annual depreciation amount
Number of years owned
Accumulated depreciation at disposal date
Proceeds of disposal
Gain (loss) on disposal
$15,000
20 years
(a)
(b)
12
(c)
$42,000
(d)
(e)
(f)
20%
$12,000
3.5
(g)
(h)
$2,000
$10,000
40 years
(j)
$6,000
(k)
(l)
$220,000
$18,000
Machine A
$150,000
$15,000
20 years
(a) 5%
(b) $6,750
12
(c) $81,000
$42,000
(d) $(27,000)
Machine B
$60,000
(e) 0
(f) 5 years
20%
$12,000
3.5
(g) $42,000
(h) $20,000
$2,000
Machine C
$(i) 250,000
$10,000
40 years
(j) 2.5%
$6,000
(k) 8
(l) $48,000
$220,000
$18,000
Solution 172 (15 min.)
Cost
Residual value
Useful life
Depreciation rate
Annual depreciation amount
Number of years owned
Accumulated depreciation at disposal date
Proceeds of disposal
Gain (loss) on disposal
Ex. 173
Hertford Manufacturing Inc. sold two machines in 2018. The following information pertains to the
two machines:
Purchase Useful Residual
Depreciation
Sale
Machine
Cost
Date
Life
Value
Method
Date Sold
Price
#1
$76,000 Jul 1/15
5 yrs.
$6,000
Straight-line
Jun
30/18
$28,000
#2
$60,000 Jul 1/17
8 yrs.
$3,000
Double diminishing- Dec
31/18
$45,000
balance
Instructions
(a) Calculate the depreciation on each machine to the date of disposal.
(b) Prepare the journal entries to record 2018 depreciation and the sale of each machine.
Solution 173 (20 min.)
(a) Machine #1
Annual
Year
Depreciable Amount
2015
$70,000
2016
70,000
2017
70,000
2018
70,000
*Half a year only.
Machine #2
Carrying Amount
Depreciation Rate =
20% (1 ÷ 5)
20%
20%
20%
Accumulated
Depreciation
$ 7,000*
14,000
14,000
7,000*
Annual
Depreciation
$ 7,000
21,000
35,000
42,000
Accumulated
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
Year
2017
2018
Beginning of Year 
$60,000
52,500
DDB Rate
25%
25%
Depreciation
$7,500*
13,125
9 - 49
Depreciation
$7,500
20,625
DDB rate: 1 ÷ 8 = 12.5% x 2 = 25%
*Half a year only.
(b) Machine #1
Depreciation Expense ...................................................................
Accumulated Depreciation—Equipment .................................
Cash .............................................................................................
Loss on Disposal ...........................................................................
Accumulated Depreciation—Equipment ........................................
Equipment ..............................................................................
*$76,000 – $42,000 = $34,000; $28,000 – $34,000 = ($6,000) loss.
Machine #2
Depreciation Expense ...................................................................
Accumulated Depreciation—Equipment .................................
Cash .............................................................................................
Accumulated Depreciation—Equipment ........................................
Equipment ..............................................................................
Gain on Disposal ....................................................................
**$60,000 – $20,625 = $39,375; $45,000 – $39,375 = $5,625 gain.
7,000
7,000
28,000
6,000*
42,000
76,000
13,125
13,125
45,000
20,625
60,000
**5,625
Ex. 174
Paulson Corporation purchased equipment on January 1, 2016 for $168,000. It is estimated that
the equipment will have a $14,000 residual value at the end of its 8-year useful life. It is also
estimated that the equipment will produce 110,000 units over its 8-year life. On December 31,
2018, Paulson sells the equipment for $85,000. Paulson produced 20,000 units in 2016, 24,000
units in 2017 and 22,000 units in 2018.
Instructions
(a) Determine the carrying amount of the equipment at December 31, 2018 using the units-ofproduction method of depreciation.
(b) Prepare the appropriate journal entry for the sale of the equipment.
Solution 174
(a) Units-of-production method:
Cost – Residual Value $168,000 – $14,000
—————–———
= $1.40 per unit
Total estimated
110,000 units
Units of activity
2016 20,000 units  $1.40
2017 24,000 units  $1.40
2018 22,000 units x $1.40
= $ 28,000
=
33,600
=
30,800
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 50
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Accumulated depreciation
= $92,400
Cost of asset
$168,000
Less: Accumulated depreciation - Equipment 92,400
Carrying amount at December 31, 2018 $75,600
(b)
Dec 31/18 Cash .................................................................................
Accumulated Depreciation—Equipment .............................
Equipment ................................................................
Gain on disposal ($85,000 – $75,600) ......................
85,000
92,400
168,000
9,400
Ex. 175
Coquitlam Corporation, a publicly-traded company, purchased a piece of equipment on January
1, 2017, for $275,000. It has an estimated useful life of eight years and a $25,000 residual
value. Coquitlam uses straight-line depreciation and has a December 31 year end. At December
31, 2018, the equipment had a recoverable value of $200,000.
Instructions
(a) Calculate the equipment’s carrying amount at December 31, 2018.
(b) Calculate the amount of the impairment loss at Dec 31, 2018.
(c) Where should the impairment loss be reported in the financial statements?
Solution 175 (10 min.)
(a) Calculate the carrying amount at December 31, 2018:
$275,000 – $25,000
—————————
8 years
= $31,250 annual depreciation expense
Equipment has been depreciated for 2 years: $31,250  2 = $62,500
Carrying amount at December 31, 2018: $275,000 – $62,500 = $212,500
(b) Impairment Loss: $212,500 – $200,000= $12,500
(c) The impairment loss is reported in the operating section of the income statement.
Ex. 176
For each item listed below, enter a code letter in the blank space to indicate the usual allocation
terminology for the item. Use the following codes for your answer:
A—Amortized
D—Depreciated
N—Neither
____ 1. Copyrights
_____ 6. Licences
____ 2. Land
_____ 7. Equipment
____ 3. Buildings
_____ 8. Franchises
____ 4. Patents
_____ 9. Goodwill
____ 5. Trademarks
_____ 10. Land Improvements
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 51
Solution 176 (10 min.)
1. A
2.
N
3.
D
4.
A
5.
N
6.
N
7.
D
8.
N
9.
N
10. D
Ex. 177
(a) Alpha Corporation purchased equipment in 2011 for $120,000 and estimated a $12,000
residual value at the end of the equipment's 10-year useful life. At December 31, 2017,
there was $75,600 in the Accumulated Depreciation account for this equipment using
straight-line depreciation. On March 31, 2018, the equipment was sold for $28,000.
Prepare the appropriate journal entries to remove the equipment from the books of Alpha
Corporation on March 31, 2018.
(b) On July 31, 2018, Beta Corporation sold a delivery truck for $10,000. The truck originally
cost $38,000 on January 1, 2010. It was estimated that the truck would have a useful life of
12 years with a residual value of $2,000. The straight-line method was used.
Prepare the appropriate journal entry to record the sale of the delivery truck. Assume
depreciation is up-to-date.
(c) Gamma Corporation sold office equipment that had a carrying amount of $3,500 for $5,200.
The office equipment originally cost $12,000. It is now estimated that it would cost $16,000
to replace this equipment.
Instructions
Prepare the appropriate journal entry to record the sale of the office equipment. Assume
depreciation is up-to-date.
Solution 177 (15 min.)
(a) Depreciation Expense ...................................................................
Accumulated Depreciation—Equipment .................................
($120,000 – 12,000)/10 × 3/12 = $2,700)
Cash .............................................................................................
Loss on Disposal ...........................................................................
2,700
2,700
28,000
13,700
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 52
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Accumulated Depreciation—Equipment ($75,600 + $2,700) .........
Equipment ..............................................................................
78,300
(b) Cash .............................................................................................
Accumulated Depreciation—Vehicles............................................
Loss on Disposal ...........................................................................
Vehicles .................................................................................
10,000
25,500
2,500
120,000
38,000
Accumulated depreciation to July 31, 2018:
$38,000 – $2,000
———————— = $3,000 annual depreciation expense
12 years
8 ½ years have been depreciated, therefore total depreciation would be 8.5 x 3,000 =
$25,500.
(c) Cash .............................................................................................
Accumulated Depreciation—Equipment ($12,000 – $3,500) .........
Office Equipment ....................................................................
Gain on Disposal ....................................................................
5,200
8,500
12,000
1,700
Ex. 178
Prepare the journal entries to record the following transactions for Bermuda Inc., which has a
calendar year end and uses straight-line depreciation.
(a) On June 30, 2018, the company sold office equipment for $22,000. The office equipment
originally cost $34,000 and had accumulated depreciation to the date of disposal of
$15,000.
(b) On September 30, 2018, the company sold delivery equipment for $15,500. The equipment
was purchased on January 1, 2016, for $30,000 and was estimated to have a $2,000
residual value at the end of its 8-year life. Depreciation on the delivery equipment has been
recorded through December 31, 2017.
Solution 178 (15 min.)
(a)
June 30, 2018
Cash .........................................................................................
Accumulated Depreciation—Equipment ...................................
Equipment.....................................................................
Gain on Disposal ($34,000 – $22,000 – $15,000) .........
(b)
Sept 30, 2018
Depreciation Expense ..............................................................
Accumulated Depreciation—Equipment ...........................
($30,000 – $2,000)/8  9/12 = $2,625)
Cash .........................................................................................
Accumulated Depreciation—Equipment ($7,000 + $2,625) ......
Loss on Disposal ($30,000 – $15,500 – $9,625).......................
Equipment .......................................................................
22,000
15,000
34,000
3,000
2,625
2,625
15,500
9,625
4,875
30,000
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 53
Ex. 179
(a) A machine that cost $21,000, with accumulated depreciation of $13,000, was sold for
$5,400. Calculate the gain or loss on disposal.
(b) Instead, assume that the machine was retired (no proceeds). Calculate the gain or loss on
disposal.
(c) Instead, assume that the machine was sold for $9,500. Calculate the gain or loss on
disposal.
Solution 179 (10 min.)
(a) $2,600 loss ($21,000 – $13,000 = $8,000 carrying amount; $5,400 – $8,000 = $2,600 loss)
(b) $8,000 loss ($21,000 – $13,000 = $8,000 carrying amount, all loss)
(c) $1,500 gain ($21,000 – $13,000 = $8,000 carrying amount; $9,500 – $8,000 = $1,500 gain)
Ex. 180
Presented below are selected transactions for Cameron Inc. for 2018:
Jan 1
Retired a machine that was purchased on January 1, 2010. The machine cost
$350,000, and had been estimated to have a useful life of 8 years with no residual
value.
Jun 30
Sold another machine for $90,000 that was purchased on January 1, 2015. The
machine cost $125,000, and had a useful life of 10 years with no residual value.
Sep 30
Retired a business automobile (no proceeds) that was purchased on September 30,
2012. The car cost $30,600 and was depreciated on a 6-year useful life with a
residual value of $3,600.
Instructions
Record all entries required as a result of the above transactions. Cameron Inc. uses straight-line
depreciation and has recorded depreciation through December 31, 2017.
Solution 180 (15 min.)
Jan 1
Accumulated Depreciation—Equipment .............................
350,000
Equipment...................................................................
350,000
(note: machine is at the end of its service life; therefore, fully depreciated)
Jun 30
Sep 30
Depreciation Expense ........................................................
Accumulated Depreciation—Equipment ......................
($125,000 ÷ 10) = $12,500 annually  6/12 = $6,250)
6,250
Cash ..................................................................................
Accumulated Depreciation—Equipment ($12,500  3.5 yrs)
Equipment...................................................................
Gain on Disposal ($90,000 – $81,250) ........................
90,000
43,750
Depreciation Expense ($30,600 – $3,600)/6) = $4,500 x 9/12
Accumulated Depreciation—Vehicles .........................
6,250
125,000
8,750
3,375
3,375
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 54
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
Accumulated Depreciation—Vehicles ($4,500  6) ............
Loss on Disposal ...............................................................
Vehicles ......................................................................
27,000
3,600
30,600
Ex. 181
Birmingham Limited sold the following two assets in 2018:
Cost
Purchase date
Useful life
Residual value
Depreciation method
Date sold
Selling price
Furniture
$143,500
July 1, 2013
8 years
$5,000
Straight-line
September 30, 2018
$30,000
Equipment
$162,000
January 1, 2015
5 years
$33,000
Straight-line
August 1, 2018
$75,000
Instructions
Record all entries required to update depreciation and record the sales of the two assets in
2018. Birmingham has a December 31 year end.
Solution 181 (20 min.)
Aug 1
Depreciation Expense ........................................................
Accumulated Depreciation—Equipment ......................
($162,000 – $33,000)/5  7/12 = $15,050
Sep 30
15,050
15,050
Cash ..................................................................................
Accumulated Depreciation—Equipment** ..........................
Equipment...................................................................
Gain on Disposal ($162,000 – $75,000 – **$92,450) ..
**(($162,000 – $33,000)/5  3)+ $15,050 = $92,450
75,000
92,450
Depreciation Expense ........................................................
Accumulated Depreciation—Furniture .........................
($143,500 – $5,000)/8  9/12 = $12,985
12,985
Cash ..................................................................................
Accumulated Depreciation—Furniture*...............................
Loss on Disposal ($143,500 – $30,000 – *$90,891) ...........
*($143,500 – $5,000)/8  5.25 years = 90,891
Furniture .....................................................................
30,000
90,891
22,609
162,000
5,450
12,985
143,500
Ex. 182
(a) On January 1, 2018, Delta Corp. purchased a patent for $1,500,000. The patent's legal life
is 20 years but the company estimates that its useful life will only be 5 years from the date
of acquisition. As an addition to the patent account shortly after acquisition, Delta paid legal
costs of $180,000 in successfully defending the patent in an infringement suit. Any legal
costs to be capitalized will be amortized effective the date of acquisition of the patent,
January 1. Prepare the entry to amortize the patent at year end, December 31, 2018.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 55
(b) On January 1, 2018, Epsilon Ltd. purchased a franchise from the Wing Food Company for
$500,000. The franchise is for an indefinite time period and gives Epsilon the exclusive
rights to sell Wing products in a particular territory. Record the acquisition of the franchise
and any necessary adjusting entry at year end, December 31, 2018. Epsilon follows ASPE.
(c) In 2018, Kappa Corporation incurred research costs of $350,000 to develop a new product.
Record this event.
Solution 182 (15 min.)
(a) December 31, 2018
Amortization Expense ...................................................................
Accumulated Amortization—Patents ......................................
(To record patent amortization)
($1,500,000 + $180,000) /5 years = $336,000
(b) January 1, 2018
Franchise ......................................................................................
Cash.......................................................................................
(To record acquisition of Wing Food franchise)
336,000
336,000
500,000
500,000
December 31, 2018—no entry.
The franchise has an indefinite life, therefore is not amortized. However, if there are
indicators of impairment, then the franchise should be tested for impairment and written
down if necessary.
(c) 2018
Research Expense ........................................................................
Cash.......................................................................................
(To record research expense for the current year)
350,000
350,000
Ex. 183
On January 1, 2016, Paint Palette Inc. paid $122,000 to obtain a patent. The cost of the patent
registration was $2,500. The patent has a legal life of 20 years and a useful life of 15 years. On
December 31, 2017 management determined that the recoverable amount of the patent is
$100,000. On January 1, 2018, Paint Palette incurred a cost of $15,000 related to an
unsuccessful patent infringement lawsuit.
Instructions
(a) Record the purchase of the patent.
(b) Record amortization expense for the year ended December 31, 2017.
(c) Determine if there is an impairment loss on the patent and if so, record the December 31,
2017 journal entry.
(d) Record the legal costs incurred on February 1, 2018.
Solution 183
(a) January 1, 2016
Patent ...........................................................................................
124,500
Cash.......................................................................................
(To record patent purchase and registration: $122,000 + $2,500)
124,500
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 56
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(b) December 31, 2017
Amortization Expense ...................................................................
Accumulated Amortization—Patents ......................................
(To record patent amortization)
($124,500) /15 years
8,300
8,300
(c) Carrying amount at December 31, 2017:
Patent has been depreciated for 2 years: $8,300  2 = $16,600
Carrying amount at December 31, 2017: $124,500 – $16,600 = $107,900
Impairment Loss: $107,900 – $100,000= $7,900
December 31, 2017
Impairment Loss............................................................................
Accumulated Amortization—Patents ......................................
7,900
7,900
(d)
February 1, 2018
Legal Expense ..............................................................................
15,000
Cash.......................................................................................
(To record legal costs for unsuccessful patent infringement lawsuit)
15,000
Ex. 184
(a) A patent acquired for $2,250,000 at the beginning of the current year expires in 10 years
and is expected to have economic value for 5 years. Present the adjusting entry to amortize
the patent for the current year.
(b) A renewable trade name purchased for $225,000 was recorded in the accounts at the
beginning of the current fiscal year. Determine the minimum amount to be amortized for the
current fiscal year.
Solution 184 (10 min.)
(a) Amortization Expense ($2,250,000/5) ...........................................
Accumulated Amortization—Patents ......................................
450,000
450,000
(b) Zero. Trade names normally have indefinite lives and are not amortized.
Ex. 185
For each of the following unrelated transactions, (a) determine the amount of the amortization
for the current year, and (b) present the adjusting entries required to record amortization at year
end.
1. Costs of $37,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $35,000
was spent in legal costs to successfully defend the patent against competitors. The patent
has an estimated legal life of 12 years.
2. A company purchased a renewable trademark for $80,000.
Solution 185 (10 min.)
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
1.
(a) Legal costs to successfully defend a patent are capitalized.
($37,000 + $35,000)  12 years = $6,000)
(b) Amortization Expense ............................................................
Accumulated Amortization—Patents................................
2.
9 - 57
6,000
6,000
(a) Trademarks have an indefinite life and are not amortized.
(b) No entry required.
Ex. 186
During the current year, Graydon Inc. incurred several expenditures. Briefly explain whether the
expenditures listed below should be recorded as an operating expense or as an intangible
asset. If you view the expenditure as an intangible asset, indicate the number of years over
which the asset should be amortized. Explain your answer.
(a) Spent $82,500 in legal costs in a patent defence suit. The patent defence was
unsuccessful.
(b) Purchased a trademark from another company. The trademark can be renewed indefinitely,
and Mastiff expects the trademark to contribute to revenue indefinitely.
(c) Acquired a patent for $5,600,000. The company selling the patent has spent $1,625,000 on
its research and development. The patent has a remaining life of 12 years.
(d) Graydon is spending considerable time and money in developing a different patent for
another product. So far, $3,600,000 has been spent this year on research and
development. Graydon is hopeful it will obtain this patent in the next few years, but has not
been successful as yet.
Solution 186 (10 min.)
(a) Operating Expense. Only successful patent defence costs can be capitalized.
(b) Intangible Asset. Trademarks are renewable. Since the trademark has an indefinite life, it is
not amortized.
(c) Intangible Asset. The patent cost of $5,600,000 should be amortized over its remaining
useful life of 12 years because this is a shorter period of time than the patent’s legal life.
The amount the selling company spent is irrelevant for Graydon.
(d) Operating Expense. All research costs must be expensed. Development costs must also be
expensed, unless they satisfy strict criteria.
Ex. 187
Nova Futures Inc. is a company that creates new products through research and development
and has a December 31 fiscal year. In fiscal 2017, Nova Futures spent $452,000 researching a
new process. The research was completed in fiscal 2018 at an additional cost of $80,000; as
well, $5,000 was spent obtaining the patent. Then further costs related to the patented process
of $180,000 were incurred to create a marketable product. The product was completed and
ready for market half-way through the fiscal year. The new product was advertised heavily in
2018 at a cost of $90,000. Soon after the launch of the new product, $60,000 was spent
defending the patent. The defence was successful. The product is expected to have a life cycle
of 5 years.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
9 - 58
Instructions
Explain how the expenditures above should be presented in the financial statements for 2017
and 2018. Support your answer with calculations.
Solution 187 (10 min.)
2017
$452,000 research costs shown as an expense on the income statement.
2018
Patent – shown as an intangible asset on the statement of financial position:
Cost ($5,000 + $180,000 + $60,000) ............................................. $245,000
Amortization $245,000 ÷ 5 years x 1/2 year .................................
24,500
Net amount shown on the statement of financial position .............. $220,500
Research – $80,000 research costs shown as an expense on the income statement.
Advertising – $90,000 shown as an expense on the income statement.
Ex. 188
Indicate in the blank spaces below, the section of the statement of financial position where the
following items are reported. Use the following code to identify your answers:
PPE
Property, plant, and equipment
I
Intangible assets
O
Other asset
E
Expense
____
____
____
____
____
1.
2.
3.
4.
5.
Goodwill
Land Improvements
Buildings
Accumulated Depreciation
Trademarks
___ 6.
___ 7.
___ 8.
___ 9.
___ 10.
Research Costs
Land
Franchises
Accumulated Amortization
Equipment
Solution 188 (5 min.)
1. O
Goodwill
2. PPE
Land Improvements
3. PPE
Buildings
4. PPE
Accumulated Depreciation
5.
I
Trademarks
6.
E
Research Costs
7. PPE
Land
8.
Franchises
I
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9.
I
10. PPE
9 - 59
Accumulated Amortization
Equipment
Ex. 189
Presented below is information related to tangible and intangible assets at year end, December
31, 2018, for Round Mound Corporation:
Buildings .................................................................... $ 1,200,000
Goodwill .....................................................................
160,000
Patents.......................................................................
392,000
Land ........................................................................... 1,500,000
Accumulated Depreciation—Buildings........................
600,000
Accumulated Amortization—Patents ..........................
196,000
Instructions
Prepare a partial statement of financial position for Round Mound Corporation that shows how
the above items would be presented.
Solution 189 (10 min.)
ROUND MOUND CORPORATION
Statement of Financial Position (Partial)
December 31, 2018
Property, plant, and equipment
Land ................................................................................
Buildings .........................................................................
Less: Accumulated depreciation—Buildings ....................
...................................................................................
Intangible assets
Patents............................................................................
Less: Accumulated amortization—Patents ......................
Goodwill .................................................................................
$1,500,000
$1,200,000
_ 600,000
$392,000
196,000
600,000
2,100,000
196,000
160,000
Ex. 190
The following information is available from recent annual reports of Hanson Corp. and Jasper
Corp.:
(in millions)
Competitor A
Competitor B
Net income
$ 550
$ 1,645
Sales
19,500
23,500
Average total assets
13,000
8,500
Instructions
(a) Based on this information, calculate the following ratios for each company to one decimal:
1. Profit margin.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 60
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
2. Asset turnover.
3. Return on assets.
(b) What conclusion concerning the management of assets can be drawn from these data?
Solution 190 (15 min.)
(a)
1. Profit margin
Hanson
$550 ÷ $19,500
= 2.8%
Jasper_
$1,645 ÷ $23,500
= 7.0%
2. Asset turnover ratio
$19,500 ÷ $13,000
= 1.5 times
$23,500 ÷ $8,500
= 2.8 times
3. Return on assets
$550 ÷ $13,000
= 4.2%
$1,645 ÷ $8,500
= 19.4%
(b) All of Jasper’s numbers are better than those of Hanson. Jasper is using its assets much
more efficiently. It is generating close to the same amount of sales with only two-thirds the
assets. Jasper’s return on assets is more than four and a half times that of Hanson. It also
has two and a half times the profit margin.
Ex. 191
Calculate the missing amounts in the table.
Sales
Operating income
Average total assets
Profit margin
Asset turnover
Return on assets
Acme Corp.
$8,500,000
950,000
(a)
(b)
(c)
20%
Barker Limited
(d)
$280,000
(e)
7%
(f)
14%
Connors Inc.
(g)
(h)
$600,000
4%
3 times
(i)
Solution 191 (20 min.)
Sales
Operating income
Average total assets
Profit margin
Asset turnover
Return on assets
Acme Corp.
$ 8,500,000
950,000
(a) 4,750,000
(b) 11.2%
(c) 1.8 times
20.0%%
Barker Limited
(d) $4,000,000
280,000
(e) 2,000,000
7.0%
(f) 2.0 times
14%
Connors Inc.
(g) $1,800,000
(h) 72,000
600,000
4.0%
3 times
(i) 12.0%
Acme
(a) $950,000 ÷ 20% = $4,750,000
(b) $950,000 ÷ $8,500,000 = 11.2%
(c) $8,500,000 ÷ $4,750,000 = 1.8 times
Barker
(d) $280,000 ÷ 7% = $4,000,000
(e) $280,000 ÷ 14% = $2,000,000
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 61
(f) $4,000,000 ÷ $2,000,000 = 2.0 times
Connors
(g) $600,000 x 3 = $1,800,000
(h) $1,800,000 x 4% = $72,000
(i) $72,000 ÷ $600,000 = 12.0%
Ex. 192
After its first year of operations, Thompson Industries reported the following in its 2018 financial
statements (in thousands):
Net sales
Net income
Total assets
2018
$125,650
10,975
150,510
2017
$83,750
5,550
69,800
Instructions
(a) Calculate Thompson’s return on assets, asset turnover and profit margin.
(b) What are two ways Thompson could increase its return on assets?
Solution 192
(a)
1. Profit margin
2018
$10,975
$125,650
= 8.7%
2017
$5,550
$83,750
= 6.6%
2.
Asset turnover ratio
$125,650_
($150,510+69,800)/2
= 1.1 times
$83,750
($69,800+$0)/2
= 2.4 times
3.
Return on assets
$10,975
($150,510+69,800)/2
= 10.0%
$5,550
($69,800+$0)/2
= 15.9%
(b) If a company wants to increase its return on assets, it can do so either by increasing the
margin it generates from each dollar of goods that it sells (profit margin), or by trying to
increase the volume of goods or services that it sells (asset turnover).
Ex. 193
Assuming that the ratios are initially positive, complete the following table to show the effect of
the transactions on the ratios (I - increase; D - decrease; NE - no effect; X - can't determine).
Assume all other items are unchanged.
Profit
Margin
1. Increase in net sales
2. Increase in average total assets
3. Decrease in profit margin due to decrease in net
Return on
Assets
Asset
Turnover
Leave
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 62
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
income
4. Decrease in net income
5. Decrease in asset turnover due to decrease in net
sales
Blank
Leave
Blank
Solution 193 (20 min.)
1. Increase in net sales
2. Increase in average total assets
3. Decrease in profit margin due to decrease in net
income
4. Decrease in net income
5. Decrease in asset turnover due to decrease in net
sales
Profit
Margin
D
X
Leave
Blank
D
Return on
Assets
X
D
Asset
Turnover
I
D
D
NE
D
I
X
NE
Leave
Blank
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 63
MATCHING QUESTIONS SET 1
194. Match the items below by entering the appropriate code letter in the space provided.
A.
B.
C.
D.
E.
Property, plant, and equipment
Depreciation
Carrying amount
Residual value
Straight-line method
F.
G.
H.
I.
J.
Units-of-production method
Diminishing-balance method
CCA or Capital Cost Allowance
Operating expenditures
Capital expenditures
____
1. Small expenditures which primarily benefit the current period.
____
2. Cost less accumulated depreciation.
____
3. An accelerated depreciation method used for financial statement purposes.
____
4. Tangible resources that are used in operations and are not intended for resale.
____
5. Results in an equal amount of depreciation each period.
____
6. Expected cash value of the asset at the end of its useful life.
____
7. Process of allocating the cost of equipment over its service life.
____
8. Material expenditures that increase an asset's operating efficiency, productive
capacity, or useful life.
____
9. The Canada Revenue Agency term for depreciation for income tax purposes.
____ 10. Method used if a vehicle is depreciated based on the kilometres driven.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 64
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
ANSWERS TO MATCHING SET 1
1.
I
2.
C
3.
G
4.
A
5.
E
6.
D
7.
B
8.
J
9.
H
10. F
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 65
MATCHING QUESTIONS SET 2
195. Match the items below by entering the appropriate code letter in the space provided.
A.
B.
C.
D.
E.
Development costs
Loss on disposal
Licences
Revaluation model
Asset turnover
F.
G.
H.
I.
J.
Return on assets
Goodwill
Impairment loss
Intangible asset
Research
____
1. The amount by which the carrying amount of an asset exceeds its recoverable
amount.
____
2. Arise from the application of research to a plan or design for a new or improved
product or process.
____
3. Examples are franchises and trademarks.
____
4. Under IFRS, alternative to the cost model.
____
5. Can be identified only with a business as a whole.
____
6. Operating rights to use property granted by a government agency.
____
7. When the carrying amount of an asset is greater than the proceeds received from its
sale.
____
8. Original planned investigation done to gain new knowledge and understanding.
____
9. Calculated as net income divided by average total assets.
____ 10. Indicates how efficiently a company uses its total assets to generate sales.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 66
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
ANSWERS TO MATCHING SET 2
1.
H
2.
A
3.
I
4.
D
5.
G
6.
C
7.
B
8.
J
9.
F
10. E
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 67
SHORT-ANSWER ESSAY QUESTIONS
S-A E 196
Distinguish between a capital expenditure and an operating expenditure for cash outlays
subsequent to acquisition of an asset. Give an example of each type. Explain how each type is
recorded.
Solution 196
An expenditure is classified as a capital expenditure if it increases (rather than maintains) the
efficiency, productive capacity, or expected useful life of the asset, and therefore benefits more
than one accounting period. Capital expenditures are usually large amounts that occur
infrequently during the life of the asset. Overhauling a truck engine is an example. The cost is
debited to the asset account.
An expenditure is classified as an operating expenditure if it maintains the operating efficiency
and expected productive life of the asset and primarily benefits the current accounting period
only. Operating expenditures are usually for small amounts that occur frequently throughout the
life of the asset and are often called ordinary repairs. An example is replacing the tires on a
truck or repainting a building. The cost is debited to an expense account.
S-A E 197
In general, how does one determine whether or not an expenditure should be included in the
acquisition cost of property, plant, and equipment?
Solution 197
The acquisition cost of property, plant, and equipment would include all expenditures deemed
reasonable and necessary to prepare the asset for its intended purpose (use) and place.
S-A E 198
Comment on the validity of the following statements. “As an asset loses its ability to provide
services, cash needs to be set aside to replace it. Depreciation accomplishes this goal.”
Solution 198
This comment is not valid. Depreciation is the process of allocating to expense the cost of
property, plant, and equipment over its useful (service) life in a systematic manner. Consider the
journal entry to record depreciation: Debit Depreciation Expense and credit Accumulated
Depreciation. There is no cash included in this journal entry so recognizing depreciation for an
asset does not result in the accumulation of cash for replacement of the asset. The balance in
Accumulated Depreciation represents the total amount of the asset’s cost that has been
charged to expense to date; it is not a cash fund.
S-A E 199
Depreciation is generally calculated using one of three different methods: straight-line, units-ofproduction or diminishing-balance. Assuming no corrections or revisions to estimates, compare
the three depreciation methods distinguishing the annual and cumulative impact (e.g. over a 3year period) each would have on:
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 68
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
(a) cash
(b) the income statement
(c) the statement of financial position
Solution 199
(a) As depreciation does not involve cash, there is no effect on an annual or cumulative basis.
Depreciation is a non-cash item. The entry to record depreciation is:
Depreciation Expense
Accumulated Depreciation
XXX
XXX
(b) As the application of each method is different, so too will the annual depreciation expense
and impact on the income statement. Straight-line depreciation expense will be the same
each year, while the units-of-production depreciation expense will vary in accordance to
use. The diminishing-balance (accelerated) method will result in higher depreciation
expense in early years and lower in the assets latter years. On a cumulative basis,
however, all three depreciation methods will result in the same total amount of depreciation
and total impact on net income.
(c) The accumulated depreciation reported on the statement of financial position will increase
each year in accordance to the annual depreciation expense reported on the income
statement which will be different as discussed in part (b). The total amount of accumulated
depreciation will be the same on a cumulative basis under all three methods.
S-A E 200
This year, Meadows Manufacturing Ltd. decided the useful life of one of their heavy machines
should be extended to 15 years from the 10 years originally estimated when they purchased it
six years ago. The machine is still operating well, and management sees no reason why it can’t
be useful for the extra five years. The President, when instructing you (the Controller) to change
the estimated useful life, says “I guess we’ll have to go back and correct the depreciation on the
past six years’ income statements to reflect this new estimate. Ah well, with computer programs,
I’m sure you’ll find the math quite easy.”
Instructions
Is the President correct in saying that the previous six income statements will have to be
corrected? If not, explain your reasoning.
Solution 200
The President is correct in that the depreciation for this machine will have to be revised.
However, since this change is the result of new information (and not the correction of an earlier
error), this will be treated as a change in estimate. Changes in estimate are accounted for
prospectively, that is, in the current and future periods only. Thus, it will not be necessary to go
back and “correct” the previous years’ figures.
S-A E 201
What is a “significant component?” How does it affect calculation of depreciation?
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 69
Solution 201
If a property, plant and equipment item has individual components for which different
depreciation methods are appropriate, then the cost must be split between the components, and
each component depreciated separately. For instance, a building will consist of the roof, walls,
heating/cooling system, plumbing system, flooring, etc. If these components should be
depreciated differently (e.g., over different lengths of time or with different methods) then they
must be set up in separate accounts and depreciated separately. However, any components
that can be depreciated by the same method and have similar useful lives can be grouped
together.
S-A E 202
What is the difference between accounting depreciation and capital cost allowance?
Solution 202
Capital Cost Allowance (CCA) is the income tax “version” of depreciation. Accounting
depreciation is not an expense for income tax purposes. Instead, all taxpayers are required to
use the CCA rules for income tax purposes, regardless of the method of depreciation used for
financial statements.
S-A E 203
Tackle-it Unlimited (TU) is a company specializing in the restoration of old homes. To showcase
its work, TU purchased an old Victorian home in downtown Azilda for $125,000. A new heating
and air-conditioning system was installed for $30,000. The house was completely rewired and
re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were
refurbished to their original condition, all of which cost $75,000.
The project was such a success, that TU decided to purchase another large home, this time in
nearby Hanmer. A realtor offered to purchase the home in Azilda for $175,000. He plans to
lease it as luxury short-term apartments for visiting dignitaries. TU decided that a modest return
was all that was required, and so they agreed to sell. Only afterward did they learn that they had
a $10,000 loss on the sale. The president of the company, Dale Velletta, does not believe that a
loss is possible. "We sold that house for more than we paid for it," she said. "I know we put
some money in it, but didn’t we take depreciation on it for three years? How in the world can we
have a loss?"
Instructions
Write a short memo to Ms. Velletta explaining how it would be possible to have a loss. Do not
try to use specific numbers.
Solution 203
MEMO
DATE: today
TO:
Ms. Dale Velletta, President
FROM: Martha King, Accountant
RE:
Loss on Azilda showcase house
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 70
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
I understand that you are concerned about the loss on the Azilda showcase
house. You have said that a loss is not possible, since we sold the house for
more than we paid for it.
Ordinarily, it would not be possible for any asset to generate a loss when it is
sold for more than the original purchase price. Accounting rules allow for writing
down impaired assets, and depreciation also reduces the cost basis. In our case,
however, we had added enough costs that it was almost like we purchased the
house twice. Thus, we had a carrying amount of $185,000 at the time of the sale,
even though we had taken three years' depreciation.
To prevent the problem in the future, however, you could have the Accounting
Department calculate the carrying amount before you negotiate a sales contract.
That way, you'll know the effect of the transaction on our net income—though
you should remember that carrying amount is not a substitute for fair value; we'll
still have to rely on real estate agents for that.
Let me know if you have further questions.
(signature)
S-A E 204
Given the below independent situations identify which depreciation method, if any, best reflects
the pattern in which the asset’s future economic benefits are expected to be consumed. Provide
an explanation for any items where depreciation or amortization is not applicable.
(a) Alfin Industries purchased a patent from another company that is expected to expire in 10
years. The patent has an estimated useful life of 8 years.
(b) Carmichael & Sons purchased a building and a parcel of land for $750,000. The building
has an estimated useful life of 20 years.
(c) Commander Inc. purchased Captains Ltd. resulting in goodwill of $450,000.
(d) Bags & Lifts purchased computer equipment with an estimated useful life of 3 years. The
equipment is expected to be heavily used in the initial years of service.
(e) Honeycomb Inc. purchased machinery equipment for $250,000. The equipment has an
estimated useful life of 5 years and an estimated output total of 175,000 units - 25,000 will
be produced in the first year; 30,000 in the second year and 35,000 in the third year; 40,000
in the fourth year and 45,000 in the fifth year. Honeycomb earns $6/unit produced.
(f) LLB registered a trademark with the Canadian Intellectual Property Office 14 years ago.
The company intends on renewing the trademark next year.
Solution 204
(a) The patent is an intangible asset with a finite life. Intangible assets are typically amortized
on a straight-line basis. As the patent has a finite life its amortizable cost should be
allocated over the shorter of the estimated useful life and the legal life. The shorter would
be the useful life of 8 years.
(b) The building should be amortized on a straight-line basis over the estimated useful life of 20
years. Land is not depreciated because its usefulness and revenue-producing ability
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 71
generally remain intact as long as the land is owned.
(c) Goodwill has an indefinite life so it is not amortized but tested annually for impairment.
(d) Given that the computer equipment is expected to be heavily used in the initial years of
services, the diminishing-balance method would be most appropriate.
(e) While the useful life of the machinery has been expressed in both years and volume of
output, the units-of-production method is the best match for Honeycomb as revenue (the
economic benefit) is based on units produced and production can be measured.
(f) The trademark has an indefinite life so it is not amortized but tested annually for
impairment.
S-A E 205
Physician Reference Service (PRS) provides services to physicians including research
assistance, diagnosis coding, and medical practice software, including an advanced medical
record cross-referencing system. PRS is aggressive in monitoring other firms' offerings and
ensuring that its services are comparable to their competition.
Because of its need to stay abreast of new product offerings, PRS spends a lot of money
sending professionals to trade shows. In addition, PRS has agreements with several clients
whereby the client requests a presentation of a competitor's services. A PRS employee poses
as an employee of the client's office and attends the presentation, obtaining as much data and
sample information as possible. The cost of the travel and attending presentations is charged to
Product Development and expensed during the current year.
In April of this year, PRS began selling a software product substitute before the competitor's
software was released. The competitor, Compu-Med, sued for copyright infringement and won
the case. PRS had to withdraw its product from the market and pay $1.5 million in damages.
PRS immediately negotiated an agreement with Compu-Med to sell Compu-Med's product
(since it was prohibited from offering its own version for five years). This agreement cost an
additional $1.3 million, but it allowed PRS to continue to offer a full line of services.
PRS' accountant, Tina Bianco, initially recorded the cash payments as "Loss from Lawsuit" and
"Product Development," respectively. However, H. J. Franz, the controller, instructed Tina to
create an intangible asset named "Goodwill" and charge both costs to this account. "We're
protected from another lawsuit as long as this agreement is in effect," he says. "It's about as
close to goodwill as we'll ever get from our competitors, and besides, there is no point in
amortizing this cost.”
Instructions
(a) What are the ethical issues here?
(b) What should Tina do?
Solution 205
(a) The following are some of the ethical issues:
 whether PRS should continue to obtain its information by the deceptive methods it has
been using
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 72


Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
whether PRS makes a practice of developing software based on observations made at
competitor’s presentations
whether the attempt to hide the losses from the lawsuit and software agreement is
indicative of the state of the accounting system at PRS
(b) Tina should explain to her boss that goodwill arises only when a business is purchased.
The second payment for $1.3 million could be viewed as part of the lawsuit costs (they
would not have been paid if the lawsuit was won) and should also be expensed. On the
other hand one could view that payment as the purchase of a licence but further information
would have to be obtained with regard to the exact nature of this arrangement including its
duration. She cannot allow her integrity to be compromised by mis-recording these
economic events. She could also point out that Mr. Franz's attempt to delay recognition of
the losses will undoubtedly be discovered by the auditors. All the records will then likely be
subjected to much more scrutiny than would otherwise be the case.
S-A E 206
Under International Financial Reporting Standards (IFRS), what are the requirements regarding
presentation of long-lived assets?
Solution 206
Normally, long-lived (non-current) assets are presented under such headings as Property, Plant
and Equipment, Intangible Assets, and Goodwill. Note Goodwill must be presented separately
as it is not considered to be an intangible asset. IFRS has extensive requirements regarding
presentation.
Either on the statement of financial position or in the notes, IFRS also requires disclosure of:
1. whether the entity is using the cost or revaluation model
2. cost and accumulated depreciation/amortization of each major asset class
3. reconciliation of the carrying amounts of major asset classes at the beginning and end of
the period. Thus they must show additions, disposals, and depreciation/amortization
4. if the revaluation model is being used, any increases or decreases from revaluations must
be disclosed
5. the policy on testing long-lived assets for impairment. If there is any impairment loss
recorded, a reconciliation of the impaired asset(s) must also be disclosed including any
reversals of impairment losses incurred in the current year
On the income statement, depreciation/amortization expense, gains/losses from disposal, and
impairment losses are all to be presented in the operating section.
S-A E 207
Jill Jinnah, the CEO of ProfitMax Inc., has just come back from a luncheon meeting at the
Chamber of Commerce. She has come to talk to you, ProfitMax's Chief Accountant, about some
of the items discussed at the luncheon. Jill tells you that there was a lot of talk about improving
a company's performance with respect to its use of long-lived assets (property, plant, and
equipment and intangibles). Some people seemed to think that asset turnover was the key while
others thought return on assets was more important. One person commented that it was all just
accounting numbers and that different depreciation or amortization methods and estimates
could change it all anyway. She would like you to clarify these points for her.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 73
Instructions
Prepare, in point form, the points you would make to clarify these items for Jill.
Solution 207
 Asset turnover and return on assets are both useful in evaluating the use of long-lived
assets.
 Return on assets is an overall measure of profitability. It is calculated as profit divided by
average total assets.
 Asset turnover shows how efficiently a company is at generating sales with a given amount
of assets. It is calculated as net sales divided by average total assets.
 The key difference is that asset turnover considers only sales, while return on assets
considers profitability.
 Both ratios are useful.
 Depreciation and amortization policies and methods will affect both ratios because it will
impact the average total assets. If depreciation or amortization is taken at a higher rate, net
assets will be lower and the ratios will improve. For return on assets, the net income will
also decrease if depreciation or amortization is taken at a higher rate.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 74
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
OBJECTIVE FORMAT QUESTIONS
208. GTC Inc. purchased two new assets on January 1, 2016, the beginning of its fiscal year: a
forklift (purchase price, $16,600; residual value, $1,600) and a sorting machine (purchase price,
$60,000; residual value, $0). When determining the annual depreciation for these assets, GTC’s
accountant assumed that the forklift and sorter had useful lives of 6 years and 10 years,
respectively, and used these estimates to record depreciation each year. Unfortunately, the
forklift should have had a useful life of 10 years, while the sorter should have had a useful life of
6 years. A full year of depreciation was recorded for both the forklift and sorter in 2016, 2017,
and 2018 before the error was discovered.
Instructions
Select all of the statements that are correct.
(a) The depreciation expense for the 2018 fiscal year for the forklift was understated by $1,000.
(b) The depreciation expense for the 2018 fiscal year for the sorter was understated by $4,000.
(c) Income before tax for the 2018 fiscal year was overstated by $3,000.
(d) The depreciation expense for the fiscal years 2016, 2017 and 2018 for the forklift should be
$1,500 in each year.
(e) The carrying amount for the sorting machine at December 31, 2018 should be $40,000.
(f) The asset turnover ratio was overstated for the 2018 fiscal year.
(g) The return on assets ratio for the 2018 fiscal year was understated.
Solution 208
(b), (c), and (d) are correct.
(a) The depreciation expense for the forklift has been overstated by $1,000 for fiscal year
2018. Depreciation was recorded as $2,500 each year (($16,600-$1,600) ÷ 6 years =
$2,500) but should have been recorded as $1,500 each year (($16,600-$1,600) ÷ 10 years
= $1,500).
(e) The carrying amount for the sorting machine at the end of fiscal year 2018 should be
$30,000 ($60,000 ÷ 6 years = $10,000 x 3 years= $30,000 accumulated depreciation;
carrying amount = $60,000 - $30,000 = $30,000).
(f) The asset turnover ratio is understated. The numerator in this ratio is net sales and this is
unaffected by the fact that depreciation was understated for the 2018 fiscal year. The
denominator is the average total assets. Because depreciation expense has been
understated (see calculations below) in each of the past three years, this denominator will
be overstated. Consequently, the turnover ratio will be understated.
Original
Correct
Depreciation
Depreciation
Forklift
$2,500
$1,500
Sorter
6,000
10,000
Total
$8,500
$11,500
(g) The effect on the return on assets ratio cannot be determined. The numerator in this ratio is
net income and this will be overstated in 2018 because the depreciation expense is
understated. The amount of the overstatement to income before taxes is $3,000 per year as
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
9 - 75
given in item (c). The denominator in this ratio is average total assets and this amount will
be overstated because lower amounts of accumulated depreciation have been recorded
over the three-year period. Cumulatively, the amount of the overstatement of the carrying
amount of assets is $9,000 ($3,000 x 3 years). Both the numerator and denominator of this
ratio have been overstated. Without knowing the net income and the total asset amounts, it
is not possible to conclude that these overstatements to both the numerator and
denominator will increase or decrease the overall value of this ratio. This is particularly the
case because the numerator was overstated by one year’s effect of the error while the
denominator was overstated by the effect of three years of the error.
209. Determine if the company is using: (1) the straight-line method of depreciation, (2)
diminishing-balance method of depreciation, (3) the units-of-production method of depreciation
or (4) it cannot be determined from the information given.
(a) Urban Corporation deducts the residual value of its depreciable assets from the asset’s cost
in order to calculate the depreciable amount.
(b) In 2018, Leader Industries Ltd. recorded $5,450 in depreciation for its assembly equipment.
In 2019, Leader recorded $5,140 in depreciation for the same equipment. Production
volumes have remained equal each year.
(c) Uphill Ltd. reported the following depreciation schedule for its new office equipment:
Year
Units of
Depreciation
Accumulated
Carrying
Production
Expense
Depreciation
Amount
2018
5,000
$3,000
$3,000
$27,000
2019
10,000
5,000
8,000
22,000
2020
12,500
5,000
13,000
17,000
2021
11,000
5,000
18,000
12,000
(d) In determining the annual deprecation on its processing equipment, Skyward Corp.
estimated the total units the machine will be able to process over its useful life.
(e) Airways Inc. depreciates its aircraft based on the number of flight hours each plane can fly
over its useful life.
(f) Country Villas Inc. uses a depreciation rate of 20% per year.
(g) When using this method, no pro-ration is used in determining depreciation expense in the
partial years of acquisition or disposal.
Solution 209
(a) 4. Cannot Be Determined. The company could be using either straight-line depreciation or
units-of-production depreciation as both of these methods deduct residual value from cost
in order to arrive at the depreciable amount when calculating depreciation.
(b) 2. Diminishing-Balance Method. In this case, the company is likely using the diminishingbalance method as the depreciation expense is declining each year. If the company was
using straight-line depreciation, the yearly amounts would be equal. If the company was
using units-of-production method, and the units of production were stable, the depreciation
would also be equal each year.
(c) 1. Straight-Line Method. The company is using the straight-line method as the
depreciation is equal each year (except for year 1 where they only claimed a portion of the
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 76
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
depreciation, as the asset was acquired mid-year). They are not using the units-ofproduction method, as the depreciation is equal each year, while production volumes have
varied.
(d) 3. Units-of-Production. In this case, the company is likely using the units-of-production
method using the total units the machine will produce as the allocation base for
depreciation.
(e) 3. Units-of-Production. The company is likely using the units-of-production method (or
more appropriately, in this case, the units-of-activity method). They are using the total flight
hours each plane can fly as the allocation base for depreciation.
(f) 4. Cannot Be Determined. It depends on whether the percentage is being applied to a
declining balance or to the original cost less residual value. If it is the former, the company
would be using the diminishing-balance method. Whereas if it is the latter, the company
would be using the straight-line method.
(g) 3. Units-of-Production. Under the units-of-production method, depreciation expense is
calculated based on the amount of units produced, which is automatically pro-rated to the
amount of time the asset is available for use.
210. Select all of the following statements that are correct.
(a) Estimated production expected over an asset’s useful life can be used as the denominator
in the formula for straight-line depreciation.
(b) If a company uses the diminishing-balance method of depreciation instead of the straightline method, the company will report higher amounts of net income over the useful life of
the asset depreciated, if all other items on the income statement remain unchanged during
those years.
(c) The formula for depreciation using the diminishing-balance method is represented as: (cost
– accumulated depreciation) x depreciation rate
(d) If revenues and other expenses remain equal, a company will experience diminishing net
income if the company use the units-of-production method of depreciation.
(e) A company will often use straight-line depreciation so that the company’s accounting
policies are consistent with depreciation required under the provisions of the Income Tax
Act.
(f) When assets are comprised of components that have different useful lives and straight-line
depreciation is used, an average useful life is often used as the denominator for calculating
depreciation expense.
(g) An impairment loss is recorded as a credit to the accumulated depreciation account of the
asset that is impaired.
(h) If there are indicators that an asset’s value may be impaired due to obsolescence or
declining demand for the products produced by the asset, a company must record an
impairment loss on its financial statements.
Solution 210
Answers (b), (c), and (g) are correct.
(a) The formula for straight-line depreciation uses the asset’s useful life as the denominator.
The formula is:
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 =
9 - 77
(𝐶𝑜𝑠𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒)
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
(d) The depreciation expense claimed under the units-of-production method will vary based on
the number of units produced each year. If a company produces more units each year, then
net income will decline. If the company produces varying numbers of units each year,
depreciation expense will increase or decrease accordingly.
(e) For income tax purposes, the Canadian Revenue Agency requires that companies use
capital cost allowance (CCA), which is usually a diminishing-balance method of
depreciation with a 50% rate in the year of the asset’s purchase.
(f) If assets are made up of components that have different useful lives, the cost of each
component should be determined and separate calculations of depreciation should be
made for each component.
(h) Under ASPE, if there are indicators that an asset’s value may be impaired due to
obsolescence or declining demand for the products produced by the asset, a company
must first perform an impairment test by determining the asset’s recoverable amount. If the
carrying amount exceeds an asset’s recoverable amount, then the company should record
an impairment loss on its financial statements.
211. Determine whether the following that should be included or excluded when determining the
cost of intangible assets on a company’s statement of financial position:
(a) Legal fees incurred successfully defending a patent in a patent infringement case
(b) Development costs for a new software application that is expected to be on the market in
six months
(c) Salaries paid to research staff who are researching new product ideas
(d) Wages to an employee to develop a logo and brand for the company
(e) Fee paid an external company to develop a trademark
(f) The excess of the amount paid to purchase the net identifiable assets over the underlying
fair value of those net identifiable assets
Solution 211
(a) Included. Legal fees incurred successfully defending a patent are expected to have a
future benefit and are; therefore, recorded as an intangible asset under the account
Patents.
(b) Included. In this case, the development costs appear to relate to a product that is feasible,
has a completion date, and is intended to be sold by the company. Therefore, it is expected
that these costs will have a future economic benefit to the company. In this case, the costs
will be capitalized as an intangible asset under the account Development Costs.
(c) Not included. In accounting, research costs are distinguished from development costs.
Research costs are not considered to be assets because the existence of future benefits
cannot yet be determined. Therefore, these costs are expensed in the accounting period
they are incurred.
(d) Not included. In this case, the trademark is internally developed. Therefore, these costs
are not recorded as an intangible asset because they are difficult to distinguish from the
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 78
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
cost of developing the business as a whole.
(e) Included. Since the cost of the trademark was paid to an external company, it is easily
distinguished from other costs incurred by the company and because the cost is expected
to benefit future periods, it should be capitalized as an intangible asset under the account
Trademarks.
(f) Included. This is considered goodwill. Goodwill will be recorded as an asset on the
statement of financial position under the account Goodwill. It is not amortized because its
useful life is considered indefinite but goodwill must be assessed annually to determine if
the carrying amount of the goodwill has been impaired, in which case the carrying amount
would be reduced accordingly.
212. The following data is provided for Crystal Homes Ltd. for the years 2017, 2018 and 2019:
Net Sales
Net Income
Total Assets
2017
$4,500,000
$785,000
$7,200,000
CRYSTAL HOMES LTD.
Select Financial Data
2018
2019
$5,200,000
$5,800,000
$875,000
$1,127,000
$7,750,000
$7,750,000
Instructions
Select all of the statements that are correct.
(a) The asset turnover ratio for 2018 is 0.70 and for 2019 is 0.75.
(b) The profit margin for 2018 is 16.8% and for 2019 is 19.4%.
(c) Crystal Homes’ return on assets for 2018 is 11.7% and for 2019 is 14.5%.
(d) The sales generating ability of the company’s assets has declined since 2018.
(e) Crystal Homes’ return on assets ratio was higher in 2019 because both its asset turnover
and profit margin improved in 2019.
(f) The average return on assets ratio for this industry is 9%. Considering this, Crystal Homes’
return on assets is very good.
(g) In 2020, Crystal Homes’ is expecting to invest in new assets and by the end of the year;
total assets should be $500,000 higher at the end of that year compared to the end of 2019.
The company also expects to increase sales and net income by 20% over 2019. If these
results materialize, the company’s return on assets will increase by 2.4% over 2019.
(h) In 2020, Crystal Homes is expecting to invest $750,000 in new assets and by the end of the
year; total assets should be $750,000 higher at the end of that year compared to the end of
2019. The company also expects to increase sales by 15% and net income by 10%. If
these results occur, the company’s profit margin will increase over 2019.
Solution 212
(a), (b), (c), (e), (f), and (g) are correct while (d), and (h) are incorrect.
The following chart shows the correct calculations for each year.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Reporting and Analyzing Long-Lived Assets
Net Sales
Net Income
Total Assets
Ratios:
Asset Turnover
Profit Margin
ROA
Crystal Homes Ltd. (dollar amounts in thousands)
2017
2018
2019
2020 (Part g)
$4,500
$5,200
$5,800
$6,960.0
$785
$875
$1,127
$1,352.4
$7,200
$7,750
$7,750
$8,250.0
17.44%
9 - 79
2020 (Part h)
$6,670.0
$1,239.7
$8,500.0
0.70
16.83%
11.71%
0.75
19.43%
14.54%
0.87
19.43%
16.91%
0.82
18.59%
15.26%
($7,200 +
$7,750) / 2) =
$7,475
($7,750 +
$7,750) / 2) =
$7,750
($7,750 +
$8,250) / 2) =
$8,000
($7,750 +
$8,500) / 2) =
$8,125
$5,200/$7,475
$5,800/$7,750
$6,960/$8,000
$6,670/$8,125
$875/$5,200
$875 / $7,475
$1,127/$5,800 $1,352.4/$6,960 $1,239.7/$6,670
$1,127/$7,750 $1,352.4/$8,000 $1,239.7/$8,125
Formulas:
Average total
assets
Asset Turnover
Profit Margin
ROA
$785/$4,500
(d) The asset turnover ratio demonstrates a company’s ability to generate sales with their
assets. From 2018 to 2019, the asset turnover has improved by 0.05.
(h) The profit margin in 2020, in this scenario, will be 18.59%, which is a reduction of 0.84%
over 2019.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 80
Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition
LEGAL NOTICE
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished
under licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning, or otherwise without the prior written permission of John Wiley &
Sons Canada, Ltd.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited