CHAPTER 10
Capital Assets
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises Exercises
1. Distinguish between tangible and intangible
capital assets.
Problems Set A
Problems Set B
amortization.
11
2. Demonstrate the application of the cost principle 2, 3, 4, 5, 6 2, 3, 4 1, 2, 7 1, 9 1, 2, 3, 9 7, 8
to property, plant, and equipment specifically, and to
capital assets in general.
3. Explain the concept of, and be able to calculate,
4. Calculate periodic
different methods.
12
amortization using
9, 10 5, 6, 7 3, 4, 7, 9, 11, 2, 3, 6, 7, 8, 12
2, 3, 6, 8, 12
5. Describe and demonstrate the procedure for
revising periodic
amortization.
8. Calculate the periodic amortization of natural
resources.
11 8 5, 6, 7 4, 6 4, 6 12 9 7 5, 6, 9 5, 6, 9 13, 14 10,
6. Distinguish between operating and capital
expenditures, and prepare the entries for these
expenditures.
11 8, 9 7, 8, 12 7, 8, 12 15, 16 12 10
7. Explain and demonstrate how to account for the
disposal of property, plant, and equipment.
9. Contrast the accounting for
accounting for tangible assets.
intangible assets with the
17, 18, 19, 20
10. Illustrate how capital assets are reported on the
balance sheet.
11. Demonstrate how to assess the profitability of
total assets.
21 14 13 11, 12 9, 11, 12 22 15 14 13 13
10-1
13 11, 12 9, 10, 11 9, 10, 11
ASSIGNMENT
CHARACTERISTICS
TABLE
Problem
Number Description
Difficulty Level
Time
Allotted (min.)
1A Determine acquisition costs of land and buildings. Simple 20-30
2A
Calculate amortization under different methods.
Simple
30-40
3A
Calculate amortization under different methods, and consider
effects.
Moderate
30-40
4A
Calculate revisions to amortization expense.
Moderate
25-35
5A
Account for various operating and capital expenditures.
Simple
15-25
6A
Record operating and capital expenditures. Calculate revision
to amortization expense.
Moderate
25-35
7A
Calculate amortization under straight-line and declining-balance
methods. Calculate gain or loss on disposal and total expense
over life of asset and comment.
Moderate
30-40
8A
Journalize alternatives related to disposals of capital assets.
Moderate
30-40
9A
Classify operating and capital expenditures.
Simple
15-25
10A
Prepare entries to correct for errors made in recording and
amortizing intangible assets.
Moderate
30-40
11A
Record transactions related to acquisition and amortization
of intangibles. Prepare capital assets section of balance
sheet.
Moderate
30-40
12A
Journalize a series of equipment transactions related to purchase,
sales, retirement, and amortization. Prepare capital assets section
of balance sheet.
Moderate
40-50
13A
Calculate and comment on asset turnover and return on asset
ratios.
Moderate
15-25
1B
Record acquisition costs of land and building.
Simple
20-30
2B
Record capital asset acquisition. Calculate amortization
under different methods.
Simple
30-40
3B
Determine acquisition cost. Calculate amortization under
different methods, and consider effects.
Moderate
30-40
4B
Calculate revisions to amortization expense.
Moderate
25-35
5B
Account for various operating and capital expenditures.
Simple
15-25
6B
Record operating and capital expenditures. Calculate revision
to amortization expense.
Moderate
25-35
7B
Calculate gain or loss on disposal and total expense over life of
asset and comment.
Moderate
30-40
8B
Journalize alternatives related to disposals of capital assets.
Moderate
30-40
10-2
Problem
Number Description
Difficulty Level
Time
Allotted (min.)
9B
Classify operating and capital expenditures. Prepare capital
assets section of balance sheet.
Simple
20-30
10B
Prepare entries to correct for errors made in recording and
amortizing intangible assets.
Moderate
30-40
11B
Record transactions related to acquisition and amortization
of intangibles. Prepare the capital assets section of balance
sheet.
Moderate
30-40
12B
Journalize a series of equipment transactions related to purchase,
sales, retirement, and amortization. Prepare capital assets section
of balance sheet.
Moderate
40-50
13B
Calculate and comment on asset turnover and return on asset
ratios.
Moderate
15-25
10-3
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom's Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
Study Objective
1. Distinguish between
tangible and intangible
capital assets.
Knowledg
e
Comprehensio
n
BE10-1
Q10-1
Q10-2
Q10-3
Q10-4
Q10-5
2. Demonstrate the
application of the cost
principle to property,
plant, and equipment
specifically, and to
capital assets in
general.
3. Explain the concept of,
and be able to
calculate,
amortization.
4. Calculate periodic
amortization
using
different methods.
Q10-7
Application
Analysis
Synthesis
E10-1
Q10-6
BE102
BE103
BE104
E10-2
E10-7
P10-1
A
P10-9
A
P10-2
B
P10-9
B
P10-1B
P10-3B
BE105
BE106
BE107
E10-3
P10-2
A
P10-6
A
P10-8
A
P10-
E10-9
P10-3A
P10-7A
P10-3B
Q10-8
Q10-9
Q10-10
Evaluatio
n
5. Describe and
demonstrate the
procedure for
revising periodic
amortization.
E10-4
E10-7
E10-11
E10-12
12A
P102B
P10-6
B
P10-8
B
P10-12
B
Q10-11
BE108
E10-5
E10-7
P10-4
A
P10-6
A
P10-4
B
P10-6
B
E10-6
6. Distinguish between
operating and
capital
expenditures, and
prepare the entries
for these
expenditures.
BE10-9
Q10-12
E10-7
P10-5
A
P10-6
A
P10-9
A
P10-5
B
P10-6
B
P10-9
B
7. Explain and
demonstrate how to
account for the
disposal of property,
plant, and equipment.
Q10-13
Q10-14
BE10
-10
BE10
-11
E108
P10-8
A
P1012A
P108B
P10-12
B
E10-9
P10-7A
P10-7B
8. Calculate the periodic
amortization
of
natural resources.
Q10-15
Q10-16
BE10-12
E10-10
9. Contrast the
accounting for
intangible assets with
the accounting for
tangible assets
Q10-17
Q10-18
Q10-19
Q10-20
BE10
-13
E1011
E10-12
P10-9
A
P1011A
P109B
P10-10A
P10-10B
P10-11B
E10-6
Analysis
Synthesis
10-4
Study Objective
10. Illustrate how capital
assets are reported on
the balance sheet.
11. Demonstrate how to
assess the profitability of
total assets.
Knowledg
e
Q10-21
Comprehensio
n
Application
BE10
-14
E1013
P10-11
A
Q10-22
BE10-15
P1012A
P109B
P1-12
B
P10-11B
E10-14
P10-13A
P10-13B
Evaluatio
n
Cumulative
Coverage
Broadening Your
Perspective
BYP10-1
BYP10-2
BYP10-3
BYP10-4
BYP10-5
BYP10-6
10-5
ANSWERS TO QUESTIONS
1. Tangible and intangible capital assets both are long-lived assets that are
used by a business to produce revenue. The difference between them
is that tangible capital assets have physical substance but intangible
assets do not.
2. For capital assets, the cost principle means that cost consists of all
expenditures necessary to acquire the asset and make it ready for its
intended use. It also means that the assets are carried at cost, and not
at market (unless fair market value is lower than cost).
3. (a) In a cash transaction, cost is equal to the cash paid. (b) In a noncash
transaction, cost is equal to the cash equivalent price paid—which is
the fair market value of the asset given up or, if this is not clearly
determinable, the fair market value of the asset received.
4. The cost principle has survived because it provides information that is
objective and verifiable.
5. The purchase cost must be split between the land and building because
the building is amortized and the land is not. In addition, the cost of
each item will be necessary if the land, or the building, is later sold to
determine any gain or loss on disposal.
6. The cost is allocated between the building and equipment based on the
relative proportion each is of the appraised value.
Building $350,000 ÷ $750,000 X $500,000 = $233,333
Equipment$400,000 ÷ $750,000 X $500,000 = $266,667
7. Amortization is a process of allocating the cost of a capital asset to
expense over its service (useful) life in a rational and systematic
manner. There is no cash involved in the entry to record amortization
(Dr. Amortization Expense; Cr. Accumulated Amortization).
Recognition of amortization is not intended to result in the
accumulation of cash for replacement of the asset.
10-6
Questions Chapter 10 (Continued)
8. (a) Residual value is the expected cash value of the asset at the end of
its useful life. It is sometimes called salvage value.
(b) Residual value is used in determining amortizable cost in each of
the amortization methods except the declining-balance method.
9. (a) Useful life is expressed in years under the straight-line and
declining-balance methods and in units-of-activity under the units
of-activity method.
(b) The pattern of periodic amortization expense is constant under the
straight-line method, decreases under the declining-balance
method, and is variable depending on production levels under the
units-of-activity method.
10. Balance sheet: Net book value is cost less accumulated amortization of
a capital asset. Cost is the same under each method of amortization.
The accumulated amortization is affected as follows: Straight-line—
constant amount each period; units-of-activity—varying amount
depending on production levels each period; declining-balance—
decreasing amount each period. Consequently, the net book value will
decline on the balance sheet as the asset ages. It will decline faster
under the declining-balance method than the straight-line method in
the early years and slower in the later years. The units-of-activity
method is unpredictable. All three methods will result in the same net
book value at the end of the asset’s useful life.
Income statement: The amortization expense is constant under the
straight-line method, varies according to production under the units-of
activity method and declines over time with the declining-balance
method. Consequently, net income is constant under the straight-line
method, varies according to production under the units-of-activity
method, and increases over time with the declining-balance method.
11. A revision of amortization is made in current and future years but not
retroactively. Amortization is based on the information available at the
time. It is an estimate. Continual restatement of prior periods would
adversely affect the reader's confidence in the financial statements.
10-7
Questions Chapter 10 (Continued)
12. Operating expenditures are ordinary repairs made to maintain the
operating efficiency and expected productive life of the asset. Because
they are recurring expenditures and normally benefit only the current
period, they are expensed when incurred. Capital expenditures are
additions and improvements made to increase efficiency, productivity,
or expected useful life of the asset. Because they benefit future
periods, capital expenditures are debited to the capital asset affected.
13. In a sale of capital assets, the net book value of the asset is compared
to the proceeds received from the sale. If the proceeds of the sale
exceed the net book value of the asset, a gain on disposal occurs. If
the proceeds of the sale are less than the net book value of the asset
sold, a loss on disposal occurs.
14. The capital asset and related accumulated amortization should
continue to be reported on the balance sheet, without further
amortization or adjustment, until the asset is retired. Reporting the
asset and related accumulated amortization on the balance sheet
informs the reader of the financial statements that the asset is still
being used by the company. However, once an asset is fully amortized,
no additional amortization should be taken on this asset, even if it is
still being used. In no situation can the amortization on the capital
asset exceed the cost of the asset.
15. Restoration costs, which are incurred at the end of a capital asset’s
useful life, affect the amortizable cost of a natural resource. These
costs relate to the life of the natural resource, and not just to the
ending period in which they are incurred. They are amortized over the
life of the asset to properly match them with the resulting revenue.
16. The amortizable cost of a natural resource includes cost less residual
value plus any estimated removal and site restoration costs. In
calculating the amortization expense for natural resources, the
amortizable cost is expressed on a per unit basis, divided by the total
production or activity anticipated. The amortizable cost per unit is then
multiplied by the actual production output or activity sold for the
period.
Questions Chapter 10 (Continued)
17. The intern is not correct. The cost of an intangible asset should be 10-8
amortized over the shorter of that asset's useful life (the period of time
when operations are benefited by use of the asset) or its legal life. If
the intangible asset has an indefinite useful life, it is not amortized. It is
tested frequently for impairment, however.
18. The favourable attributes which could result in goodwill include
exceptional management, desirable location, good customer relations,
skilled employees, high quality products, fair pricing policies, and
harmonious relations with labour unions.
19. Goodwill is the value of many favourable attributes that are intertwined
in the business enterprise. Goodwill can be identified only with the
business as a whole and, unlike other assets, cannot be sold
separately. Goodwill can only be sold if the entire business is sold.
20. Research and development costs present several accounting problems.
It is sometimes difficult to assign the costs to specific projects, and
there are uncertainties in identifying the extent and timing of future
benefits. As a result, the CICA requires that all research and some
development costs be recorded as an expense. Only certain
development costs with reasonably assured future benefits can be
capitalized. This is intended to maintain the objectivity and reliability
of the financial statements.
21. The notes to financial statements should disclose the balance of the
major classes of amortizable assets and the amortization method(s)
and rates used. The balance of the major classes of unamortized
assets should also be disclosed, in addition to any impairment
information.
22. Salter Street Film’s asset turnover is calculated as
follows:
Net sales

Average total assets
$48,766,938 $78,811,768
0.62 times 10-9
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 10-1
(a)I
(b)PPE
(c)PPE
(d)NA (current
asset) (e)I
(f) PPE
(g)NA (current
asset) (h)NR
(i) NA
(inventory) (j) I
(k)I
(l) NA
(investment) (m)
NR
(n)NR
(o)NR
(p)I
BRIEF EXERCISE 10-2
All of the expenditures should be included in the cost of the land. The cost
of the land is $63,000 ($54,000 + $3,000 + $2,500 + $3,500).
BRIEF EXERCISE 10-3
The cost of the truck is $25,400 (cash price $25,000 + painting and lettering
$400). The expenditures for the insurance and the motor vehicle licence are
recurring and only benefit the current period. They should be expensed and
not be added to the cost of the truck.
BRIEF EXERCISE 10-4
Jan. 1 Land ($280,000 X $100,000 ÷ $300,000)................ 93,333 Building
($280,000 X $200,000 ÷ $300,000)........... 186,667
Cash..................................................................... 80,000 Mortgage
Payable......................................... 200,000
10-10
BRIEF EXERCISE 10-5
Amortizable cost is $30,000 ($32,000 – $2,000). With a 4-year useful life,
annual amortization is $7,500 ($30,000  4). Under the straight-line method,
amortization is the same each year. Thus, amortization expense is $7,500
for both the first and second years.
BRIEF EXERCISE 10-6
The declining-balance rate is 50% (25% X 2) and this rate is applied to net
book value at the beginning of the year. The calculations are:
Net Book Value
Year
1
Year
2
$32,000
16,000*
X
Rate
50%
50%
* $32,000 – $16,000 = $16,000
BRIEF EXERCISE 10-7
Amortizable cost = ($36,500 – $500)  100,000 = $0.36
Year 1 30,000 kms. X $0.36 = $10,800
Year 2 20,000 kms. X $0.36 = $7,200
BRIEF EXERCISE 10-8
=
Amortizatio
n
$16,000
8,000
Net book value, 1/1/2002 ($32,000 – $12,000).................................. $ 20,000
Less: Residual value........................................................................ 0 2,000
Amortizable
cost...............................................................................
18,000
Remaining useful life........................................................................ ÷ 2 years
Revised annual amortization expense............................................. $ 9,000
Note: Previously, amortization expense was $6,000 [($32,000 - $2,000)  5].
2000: $ 6,000
2001: 6,000
2002: 9,000
2003: 9,000
Total $30,000
BRIEF EXERCISE 10-9
10-10
(a)O
(b)C
(c)C
(d)O
(e)C
(a) Aug. 2
Accumulated
Amortization
(f) O (g)O (h)C (i) C (j)
O
BRIEF EXERCISE
—Delivery Equipment..................................... 41,000
Delivery Equipment................................. 41,000
(b) Aug. 2 Accumulated Amortization
—Delivery Equipment..................................... 39,000
Loss on Disposal............................................ 2,000
Delivery Equipment................................. 41,000
Cost of delivery equipment $41,000
Less: Accumulated amortization 39,000
Net book value at date of disposal 2,000
Proceeds from sale 000,00 00 0
Loss on disposal $ 2,000
BRIEF EXERCISE 10-11
(a) Sept. 30 Amortization Expense......................................... 6,000
Accumulated Amortization
—Office Equipment...................................... 6,000
(b) Sept. 30 Cash..................................................................... 26,000
Accumulated Amortization
—Office Equipment ($42,000 + $6,000).............. 48,000
Gain on Disposal.......................................... 2,000 Office
Equipment.......................................... 72,000
Cost of office equipment $72,000
Less accumulated amortization 048,000 ($42,000 + $6,000) Net
book value at date of disposal 24,000
Proceeds from sale 026,000
Gain on disposal $ 2,000
BRIEF EXERCISE 10-12
(a) Amortizable cost
= $7,000,000 – $500,000 + $1,000,000
= $7,500,000
Amortizable cost per unit
= $7,500,000 ÷ 28,000,000 tonnes
= $0.2679 per tonne
Restoration portion
= $1,000,000 ÷ 28,000,000 tonnes
= $0.0357
Amortization expense Year 1
$0.2679 X 6,000,000 tonnes = $1,607,400
Restoration portion Year 1
$0.0357 X 6,000,000 tonnes = $214,200
Aug. 31 Amortization Expense ............................ 1,607,400 Accumulated
Amortization................ 1,393,200 Liability for Restoration Costs..........
214,200
(b) CUONO MINING CO.
(Partial) Balance Sheet
August 31, 2003
Assets
Capital assets
Ore mine.................................................................. $7,000,000 Less:
Accumulated amortization.......................... 1,393,200 $5,606,800
Liabilities
Long-term liabilities
Liability for restoration costs................................. $ 214,200
BRIEF EXERCISE 10-13
(a) Jan. 2 Patents...................................................... 160,000
Cash................................................... 160,000
(b) Dec. 31 Amortization Expense ($160,000 10).... 16,000
Patents............................................... 16,000
(c) SURKIS COMPANY
(Partial) Balance Sheet
December 31, 2002
Assets
Capital assets
Patents (net of $16,000 accumulated
amortization)................
.............................................................................................$144,000
BRIEF EXERCISE 10-14
JOKER COMPANY
(Partial) Balance Sheet
December 31, 2002
Assets
Capital assets
Buildings.................................................................... $800,000 Less:
Accumulated amortization............................. 650,000 0$ $150,000
Coal mine................................................................... $200,000 Less:
Accumulated amortization............................. 0108,000 092,000
Goodwill..................................................................... 410,000 Total capital
assets............................................ $652,000
BRIEF EXERCISE 10-15
Asset turnover = $11,635.4  [($3,963.9 + $5,188.8)  2] = 2.54
times Return on assets = $1,127.1  [($3,963.9 + $5,188.8)  2] =
24.6%
SOLUTIONS TO EXERCISES
EXERCISE 10-1
(a) Dear :
The following information is provided in response to your question
on the application of the cost principle to capital assets.
 Under the cost principle, the acquisition cost of a capital asset
includes all expenditures necessary to acquire the asset and
make it ready for its intended use. This includes not only the
cost of acquisition, but any freight, installation, testing, and
similar costs to get the asset ready for use. For example, the
cost of factory machinery includes the purchase price, freight
costs paid by the purchaser, insurance costs during transit,
and installation costs. Costs such as these benefit the life of
the factory machinery and not just the current period.
Consequently, they should be capitalized and amortized over
the machinery’s useful life.
 Cost is measured by the cash paid in a cash transaction, or by
the cash equivalent price paid when noncash assets are used
in payment. The cash equivalent price is equal to the fair
market value of the asset given up. If that value is not clearly
determinable, the fair market value of the asset received is
used instead.
If you require any further information please contact
me. Sincerely,
(b) 1. Delivery Equipment (or Vehicles) 5. Factory Machinery 2.
Licence Expense 6. Prepaid Insurance 3. Land Improvements
7. Factory Machinery 4. Land
EXERCISE 10-2
(a) Cost of Land
Cash paid.............................................................................. $90,000
Net cost of removing warehouse ($6,600 – $1,700)........... 4,900
Legal fee................................................................................ 1,100
Total............................................................................... $96,000
(b) The architect's fee ($7,800) should be debited to the Building
account. The cost of the driveways and parking lot ($14,000) should
be debited to Land Improvements.
EXERCISE 10-3
(a) Amortizable cost per unit is $1.20 per kilometre [($128,000 – $8,000)
 100,000].
(b)
Calculation
Ye
ar
Units
of
X
Amortizati
on
20
02
20
03
20
04
20
05
Activi
ty
Cost/Unit
Expe
28,000
30,000
25,000
17,000
$1.20
01.20
01.20
01.20
$33,
036,
030,
020,
EXERCISE 10-4
(a)
Units-of Activity
Double
Year Straight-Line
Declining-Balance
2002 $12,833 $13,090 $29,667 2003 12,833 11,550 19,775
(1) Straight-line method:
$89,000 - $12,000 = $12,833 per year
6 years
2002 and 2003 amortization expense = $12,833
(2) Units-of-activity method:
$89,000 - $12,000 = $7.70 per hour
10,000 hours
2002 amortization expense = 1,700 hours X $7.70 =
$13,090 2003 amortization expense = 1,500 hours X $7.70
= $11,550
(3) Declining-balance method:
The declining-balance rate is 1/6 X 2 = 33 %⅓
2002 amortization expense = $89,000 X 33 % = $29,667 ⅓
Net book value January 1, 2003 = $89,000 – $29,667 =
$59,333 2003 amortization expense = $59,333 X 33 % =
$19,775 ⅓
(b) Straight line method
(c) Cash flow is the same under all three methods. Amortization is an
allocation of the cost of a capital asset and not a cash expenditure.
EXERCISE 10-5
(a) Old amortization rates used – Not required
Building: ($800,000 – $40,000) ÷ 40 yrs = $19,000 per year
Warehouse: ($100,000 – $5,000) ÷ 25 yrs = $3,800 per
year Current ages (years amortized)
Building: $114,000 ÷ $19,000 per year = 6 years
(equals the period from 1/1/96 to 1/1/02)
Warehouse: $9,500 ÷ $3,800 per year = 2.5 years
(equals the period from 1/7/99 to 1/1/02)
Type of Asset
Building
Warehouse
Net book value, 1/1/02
Less: Residual value
Revised amortizable cost
Divide by revised remaining useful
life, in years
Revised annual amortization
expense
$686,000
007
070,0
00
616,0
00
$90,500
03,600
86,900
0
(20 – 2.5)
÷ 17.5 yrs
(45 – 6)
÷ 39 yrs
0$4,966
$15,795
(b) Dec. 31 Amortization Expense...................................... 15,795
Accumulated Amortization—Building..... 15,795
31Amortization Expense............................................. 4,966
Accumulated Amortization—Warehouse 4,966
EXERCISE 10-6
MEMO
To: Client
From: Financial Advisor
Date: Today
The change in the amortization policy will increase the amortization
period in cases where the contracted exhibition period is greater than
two years. This will have the effect of spreading the cost over a longer
period and, in the short–term, increasing net income. It will be more
difficult to compare the current year’s results with previous years’
because of the change in estimated useful life. In evaluating Alliance’s
performance, you would want to make an adjustment for this change in
estimated life. If the contracted exhibition period is a good measure of
the useful life of the broadcast rights and the revenue potential is
consistent over this period, then the policy is reasonable.
EXERCISE 10-7
(a) July 1/01 Equipment............................................... 25,000
Cash................................................... 25,000
(b) June 30/02 Amortization Expense............................ 5,625
Accumulated Amortization
–Equipment....................................... 5,625
[($25,000 - $2,500) ÷ 4 years]
(c) July 1/02 Equipment............................................... 5,500
Cash......................................................... 5,500
(d) June 30/03 Amortization Expense............................ 4,969
Accumulated Amortization
–Equipment....................................... 4,969
Net book value, July 1, 2002 ($25,000 - $5,625).......... $19,375 Add:
New part............................................................... 5,500 24,875
Less:
Residual
value...................................................
5,000
Amortizable
cost...........................................................
19,875
Remaining useful life (5 – 1)........................................ 4 years Revised
annual amortization expense........................ $ 4,969
EXERCISE 10-8
Jan. 1 Accumulated Amortization—Machinery............ 62,000
Machinery..................................................... 62,000
June 30 Amortization Expense......................................... 833 Accumulated
Amortization—Computer..... 833 ($5,000 ÷ 3 years X 6/12 mos.)
30 Cash..................................................................... 500
Accumulated Amortization—Computer............. 4,166
($5,000 ÷ 3 years x 2.5 years)
Loss on Disposal [$500 – ($5,000 – $4,166)]...... 334
Computer..................................................... 5,000
Dec. 31 Amortization Expense......................................... 4,500 Accumulated
Amortization—Truck............. 4,500 [($30,000 – $3,000) ÷ 6 years]
31 Loss on Disposal [$0 – ($30,000 - $22,500)]...... 7,500
Accumulated Amortization—Truck.................... 22,500
[($30,000 – $3,000) ÷ 6 years x 5 years]
Delivery Truck.............................................. 30,000
EXERCISE 10-9
(a) (1) Straight-line method
($10,000 - $1,000) ÷ 4 years = $2,250 per year
(2) Double-declining-balance method
DDB Rate: ¼ x 2 = 50%
Year 1: $10,000 x 50% = $5,000
Year 2: $10,000 - $5,000 = $5,000 x 50% = $2,500
Year 3: $5,000 - $2,500 = $2,500 x 50% = $1,250
Year 4: $2,500 - $1,250 = $1,250 x 50% = $625 but amount limited to $250
by salvage value
Straight-Line Double Declining Balance
Amortization Net Book
Amortization Net Book
Value
Expense
Value
Expense
Year 1 $2,250 $7,750 $5,000 $5,000 Year 2 2,250 5,500 2,500 2,500
Year 3 2,250 3,250 1,250 1,250 Year 4 2,250 1,000 250* 1,000 Total
$9,000 $9,000
* Do not amortize below salvage value.
(b) (1) Straight-line method
Proceeds - Net book value = Gain (loss)
$1,500 - $3,250 = ($1,750)
(2) Double declining-balance method
Proceeds - Net book value = Gain (loss)
$1,500 - $1,250 = $250
EXERCISE 10-9 (Continued)
Straight-Line
(2)
(c)
Double
Declining Balance
(1)
Year 1 Amortization expense $2,250 $5,000 Year 2
Amortization expense 2,250 2,500 Year 3 Amortization
expense 2,250 1,250 Year 3 Loss (gain) 1,750 ( 250)
Total expense over 3 year period $8,500 $8,500
The total expense over the three year period is the same under
each method, $8,500. The gain or loss simply adjusts for over
amortization, or under amortization. The $8,500 total cost equals
the original cost of $10,000 less proceeds from sale of $1,500.
EXERCISE 10-10
(a) Dec. 31 Amortization Expense ($0.675 x 100,000 t)...... 67,500
Accumulated Amortization—Mine............ 48,750 Liability for
Restoration............................. 18,750 ($150,000 ÷ 800,000 t x 100,000 t)
Amortizable cost $480,000 + $150,000 – $90,000 = $540,000 Units
estimated 800,000 tonnes (t)
Amortizable cost per unit $540,000 ÷ 800,000 t = $0.675 per tonne
Portion applicable to
restoration $150,000 ÷ 800,000 t x 100,000 t = $18,750
Portion applicable to mine $480,000 - $90,000) ÷ 800,000 t x 100,000 t
= $48,750
(b) $54,000 of this amount (80,000 X $0.675) is expensed (as part of the cost
of goods sold). The remaining $13,500 (20,000 X $0.675) is included in
the ending inventory. The costs pertaining to the unsold tonnes are
reported in current assets as part of inventory.
EXERCISE 10-11
Dec. 31 Amortization Expense...................................... 30,000 Trademark
($150,000 ÷ 5).......................... 30,000
31 Amortization Expense...................................... 6,000 Patents ($45,000
÷ 5 x 8/12)...................... 6,000
EXERCISE 10-12
(a)
Jan. 1 Patents............................................................... 420,000
Cash........................................................... 420,000
April 1 Goodwill............................................................. 360,000
Cash........................................................... 360,000
Note: This would be part of the entry to record the
purchase of another company.
July 1 Franchise........................................................... 450,000
Cash........................................................... 450,000
Sept. 1 Research Expense............................................ 185,000
Cash........................................................... 185,000
30 Development Expense...................................... 50,000
Cash........................................................... 50,000
(b)
Dec. 31 Amortization Expense ($60,000 + $22,500)..... 82,500 Patents
($420,000 ÷ 7)............................... 60,000 Franchise [($450,000
÷ 10) X 1/2]............. 22,500
Note: Because goodwill has an indefinite life, it is not amortized. Rather,
it is tested annually for impairment.
EXERCISE 10-13
(a)
Account
Statement
Classification
Accumulated
amortization— leasehold
improvements
Balance sheet
Capital assets (PPE
contra
account)
Accumulated
amortization— equipment
Balance sheet
Capital assets (PPE
contra
account)
Accumulated amortization—
hockey franchise and rights
to players
Balance sheet
Capital assets
(intangible contra
account)
Amortization expense
Income
stateme
nt
Operating expenses
Equipment
Balance sheet
Capital assets (PPE)
Investments
Balance sheet
Long-term investments
Hockey franchise and rights
to players
Balance sheet
Capital assets
(intangible)
Leasehold improvements
Balance sheet
Capital assets (PPE)
PPE—property, plant, and equipment
(b) NORTHWEST SPORTS ENTERPRISES
(Partial) Balance Sheet
June 30, 2000
Assets
Capital assets
Leasehold improvements.......................... $1,124,248
Less: Accumulated amortization.............. 230,697 $ 893,551
Equipment.................................................. $1,081,364
Less: Accumulated amortization.............. 860,074 221,290
Hockey franchise and rights to players.... $7,528,235
Less: Accumulated amortization.............. 1,693,850 5,834,385 Total
capital assets.................................... $6,949,226
EXERCISE 10-14
(a)
Asset turnover
ratio
000
= 0.40
=
$525,710, times
$208,569,
500
Returnon assetsratio
000
0,500
=
$525,71
= 4.42%
$23,219,
(b) IMAX’s asset turnover of 0.40 times, and its return on assets of
4.42%, are slightly below the industry averages of 0.5 times and
5.7%. This indicates that the company is not on par with the
industry in terms of its management of capital assets.
SOLUTIONS TO PROBLEMS
PROBLEM 10-1A
Item Land Building Other Accounts
01. 02. 03. 04.
05. 06. 07. 08.
09. 10. 11.
$145,000
(2,500)
2,000
$161,500
13,000
4,000
20,000
10,000
600,000
0000 000
$630,000
5,000
3,000
Land
0015,000 ,00 Improvement
$23,000
s Land
Improvement
s
Property Tax
Expense
PROBLEM 10-2A
(a)
Year
Calculation
Accumulat
ed
Amortizati
on
12/31
MACHINE 1
$9,000
$90,000 X 10% =
$9,000
1999 2000 2001 2002
2000 2001 2002
2001 2002
$90,000* X 10%** =
$9,000
$90,000 X 10% =
$9,000
$90,000 X 10% =
*$96,000 - $6,000 =
$90,000
** 1/10 years = 10%
24,000) = $11,250
* $66,000 - $6,000 =
$60,000
$09,000 018,000
027,000 036,000
MACHINE 2
$60,000 X 25%* =
$15,000
$45,000 X 25% =
$11,250
$33,750 X 25% = $
8,438
$15,000 026,250
034,688
MACHINE 3
* 1/8 years = 12.5% x
2 = 25%
1,000 X ($60,000* ÷
24,000) = $ 2,500
4,500 X ($60,000 ÷
PROBLEM 10-2A (Continued)
$ 2,500 13,750
(b)
(1)
(2)
(3)
Ye
ar
Calculation
Amortizati
on
Expense
20
MACHINE 2
$11,250
00
$60,000 X 25% X 9/12 =
$12,188
20
$11,250 $48,750* X 25% =
$ 9,140
01
$12,188
20
$36,562 x 25% = $9,140
02
* $60,000 - $11,250 =
$48,750 ** $48,750 $12,188 = $36,562
PROBLEM 10-3A
(a) STRAIGHT-LINE AMORTIZATION
Calculation
Ye
ar
Amortiza
ble Cost
20
02
20
03
20
04
$90,000*
090,000
090,000
X
Amortizati
on Rate
End of Y
=
33⅓%**
33⅓%
33⅓%
Amortizati
on
Expense
Accumulat
ed
Amortizati
on
Net
Book
Value
$30,000
030,000
030,000
$30,000
060,000
090,000
$70,0
004
0,00
010,
000
* $100,000 - $10,000 = $90,000
** 1/3 years = 33⅓%
DOUBLE DECLINING-BALANCE AMORTIZATION
Calculation
Ye
ar
Net Book
Value
Beginni
ng of
Year
20
02
20
03
20
04
$100,000
0033,333
11,110
X
Amortizati
on Rate
66⅔%*
66⅔%
66⅔%
End of Y
=
Amortizati
on
Expense
Accumulat
ed
Amortizati
on
Net
Book
Value
$66,667
022,223
01,110**
$66,667
088,890
090,000
$33,3
331
1,11
0
10,000
* 1/3 years = 33 % x 2 = 66 % ⅓ ⅔
** Adjusted so ending net book value will equal residual value.
(b) Straight-line amortization provides the lower amount for 2002
amortization expense ($30,000) and, therefore, the higher 2002
income. Over the three-year period, both methods result in the same
total amortization expense ($90,000) and, therefore, the same total
income.
(c) Both methods will result in the same cash flow from operations in
2002 and over the three-year period. Recording amortization
expense does not affect cash flow. It is only an allocation of the
capital cost to expense over its useful life.
PROBLEM 10-4A
Year
Expense
d
Amortization Accumulate Amortization
2000 $7,200* $ 7,200
2001 7,200 14,400
2002 5,400** 19,800
2003 5,400 25,200
2004 5,400 30,600
2005 6,900*** 37,500
Years 2000 and 2001:
* $40,000 – $4,000 = $7,200
5 years
Years 2002, 2003, and 2004:
** $40,000 – $14,400 – $4,000 = $5,400
6 – 2 years
Year 2005:
***$40,000 – $30,600 - $2,500 = $6,900
1 year
Proof: Accumulated amortization equals $37,500. Net book value is
equal to $40,000 – $37,500 = $2,500 which is equal to the
estimated residual value of $2,500.
PROBLEM 10-5A
Account Debited Explanation
1. Equipment Cost to prepare the equipment for use. 2. Land
improvements Non-permanent land expenditure.
3. Building Improvement or betterment expenditure, which makes the
factory office more
productive.
4. Repair expense Does not benefit future periods.
If the loss was considered to be significant,
it would be recorded separately as a loss
due to labour dispute, rather than as repair
expense.
5. Equipment Cost to prepare the equipment for use. 6. Repair
expense Does not benefit future periods.
If the damage was covered by insurance, a
receivable (from the insurance company)
account would be debited.
If the loss was considered to be significant,
it would be recorded separately as a loss
due to damages, rather than as repair
expense.
PROBLEM 10-6A
(a)
Jan. 7 Equipment.................................................... 14,000
Cash................................................... 14,000
Feb. 7 Repair Expense........................................... 1,000
Cash................................................... 1,000
Mar. 19 Repair Expense........................................... 2,500
Cash.................................................. 2,500
(b)
(1) Years 1 and 2:
($100,000 – $10,000) ÷ 5 = $18,000
(2) Years 3 – 7:
Net book value, Jan. 7, Year 3 ($100,000 - $18,000 - $18,000) $64,000
Add: Addition......................................................................... 14,000
78,000
Less: Revised residual value................................................. 12,000
Revised amortizable cost........................................................ 66,000
Remaining useful life (7 – 2 years).......................................... 5 years
Revised annual amortization expense.................................... $13,200
(3) $13,200 [as per calculation in part (2) above]
PROBLEM 10-7A
(a)
(1) Straight-Line (2) Declining-Balance
Amortization Net Book Amortization Net Book Years
Expense Value Expense Value 1 $ 5,000 $16,000 $ 5,250 $15,750 2
5,000 11,000 3,938 11,812 3 5,000 6,000 2,953 8,859 4 5,000 1,000
2,215 6,644 Total $20,000 $14,356
(1) STRAIGHT-LINE AMORTIZATION
Calculation End of Year Net
Amortizable Amortization Amortization Accumulated Book Year Cost X
Rate = Expense Amortization Value 1 $20,000* 25%** $ 5,000 $ 5,000
$16,000 2 20,000 25% 5,000 10,000 11,000 3 20,000 25% 5,000 15,000
6,000 4 20,000 25% 5,000 20,000 1,000
* $21,000 - $1,000 = $20,000
** ¼ years = 25%
(2) SINGLE DECLINING-BALANCE AMORTIZATION
Calculation End of Year
Net Book Value
Net
Beginning Amortization Amortization Accumulated Book Year of Year
X Rate = Expense Amortization Value 1 $21,000 25%* $5,250 $ 5,250
$15,750 2 15,750 25% 3,938 9,188 11,812 3 11,812 25% 2,953 12,141
8,859 4 8,859 25% 7,859** 20,000 1,000
* ¼ years = 25%
** Adjusted so ending net book value will equal salvage value.
PROBLEM 10-7A (Continued)
(b) 1. (i) Straight (ii) Declining Line Balance
Cost..................................................... $21,000 $21,000 Accum.
amortization..........................
15,000
12,141
Net
book
value...................................
6,000
8,859
Cash
proceeds................................... 7,000 7,000 Gain (loss) on
disposal...................... $ 1,000 ($ 1,859)
2.
Amortization expense........................ $15,000 $12,141 Add:
Loss on disposal...................... 1,859 Less: Gain on
disposal......................
1,000
000
000
Net
expense........................................ $14,000 $14,000
In total the effect on net income is the same under both
methods. This is because the method of amortization selected
only affects the timing of the expense recognition. In total over
the life of the asset, the expense recognized is the same.
PROBLEM 10-8A
(a) June 30 Accumulated Amortization
—Delivery Equipment..................................... 24,000
Loss on Disposal............................................ 21,000
Delivery Equipment................................ 45,000
Accumulated Amortization ($45,000 - $5,000) X 3/5 years = $24,000
(b) June 30 Cash................................................................. 25,000
Accumulated Amortization
—Delivery Equipment..................................... 24,000
Gain on Disposal.................................... 4,000 Delivery
Equipment................................ 45,000
(c) June 30 Cash................................................................. 18,000
Accumulated Amortization
—Delivery Equipment..................................... 24,000
Loss on Disposal.................................... 3,000
Delivery Equipment................................ 45,000
PROBLEM 10­9A
Expenditure Account Title Architect fees
Building
the company’s building
Cost to demolish an old building
that is on a piece of land
intended for a new building
Lawyer’s fees associated with
a successful patent application
Lawyer’s fees associated with
an unsuccessful patent
application
Cost of painting the
president’s office
Cost of CD’s and toner for the
office computer and printer
Land: it is a cost of getting the
land ready for its intended use
Patent
Cost of a grease and oil change
on the company’s truck
Cost of installing a new roof on
Legal Fees Expense (Operating
Expense): if the application
was unsuccessful, then there
is no asset
building)
Repairs and Maintenance Expense Repairs and Maintenance Expense
(Operating Expense)
Building (it would be rare to find a
separate capital asset set up for a
“roof” account as distinct from the
Expenditure Account Title
Payment to a celebrity for
endorsement of a
product
Cost of four new tires for the
company delivery van
Cost to rebuild the engine on the
company delivery van
Cost to pave the company
parking lot
Office Supplies Expense
(Operating Expense)
Expense): Some companies would
allocate the cost according to the
number of times that the
advertisements are to be aired. A
current asset, such as prepaid
advertising, would be
established for those costs
related to future advertisements.
However, in the real world, all
such costs are generally
charged to advertising expense
Repairs and Maintenance Expense
(Operating Expense): Depending
on the vehicle usage during a year,
an
argument could be made for
capitalizing this expenditure.
Again, in the real world, this
expenditure is usually charged to
expenses
Delivery Van: The benefit should
extend beyond one year; therefore,
the amount would be capitalized
as part of the cost of the delivery
van
Land Improvements
Cost of painting the corporate
logo on the sides of the company
Repairs and Maintenance Expense
delivery van
(Operating Expense): Does not
Advertising Expense (Operating
make the delivery van any more
productive. This is also likely a
recurring expense
PROBLEM 10-10A
1. Research Expense.............................................................. 72,000 Patents
($120,000 X 60%)........................................... 72,000 To correct
patent cost.
Patents ($120,000 ÷ 20 years)............................................ 6,000
Amortization Expense..................................................... 6,000 To reverse
recorded amortization expense.
Amortization Expense........................................................ 2,400 Patents
[($120,000 - $72,000) ÷ 20 years]....................... 2,400 To record correct
amortization expense.
2. Gain on Patent Appreciation.............................................. 94,400
Patents......................................................................... 94,400 To correct
overvaluation of patent.
Patents ($139,400 ÷ 20 years)............................................ 6,970
Amortization Expense..................................................... 6,970 To reverse
recorded amortization expense.
Amortization Expense........................................................ 2,250 Patents
($45,000 ÷ 20 years)........................................... 2,250 To record correct
amortization expense.
3. Amortization Expense........................................................ 1,500
Goodwill....................................................................... 1,500 To reverse
recorded amortization expense.
Note: Goodwill is not amortized.
4. Charitable Donations Expense.......................................... 5,000
Goodwill....................................................................... 5,000
PROBLEM 10-11A
(a) Jan. 2 Patent #1............................................................ 12,000
Cash........................................................... 12,000
June 30 Patent #2............................................................ 125,000
Cash........................................................... 125,000
Sept. 1 Advertising Expense........................................ 80,000
Cash........................................................... 80,000
Oct. 1 Copyright #2...................................................... 120,000
Cash........................................................... 120,000
(b) Dec. 31 Amortization Expense..................................... 8,333 Patent
#1.................................................... 8,333
($70,000 ÷ 10 years) + ($12,000 ÷ 9 years)
31 Amortization Expense..................................... 3,125 Patent
#2.................................................... 3,125
($125,000 ÷ 20 years X 6/12 mos.)
31 Amortization Expense...................................... 4,800 Copyright
#1.............................................. 4,800 ($48,000 ÷ 10 years)
31 Amortization Expense...................................... 5,000 Copyright
#2.............................................. 5,000 ($120,000 ÷ 6 years X
3/12 mos.)
PROBLEM 10-11A (Continued)
(c) TAR COMPANY
(Partial) Balance Sheet
December 31, 2002
Assets
Capital assets
Patents (net of $18,458 amortization) (1)........................... $188,542
Copyrights (net of $29,000 amortization) (2)..................... 139,000
Total capital assets............................................................ $327,542
(1) Patent cost = $70,000 + $12,000 + $125,000 = $207,000
Patent amortization = $7,000 + $8,333 + $3,125 =
$18,458
(2) Copyright cost = $48,000 + $120,000 = $168,000
Copyright amortization = $19,200 + $4,800 + $5,000 = $29,000
PROBLEM 10-12A
(a) April 1 Land........................................................... 2,630,000
Cash................................................... 2,630,000
May 1 Amortization Expense.............................. 19,000 Accumulated
Amortization—Equipment 19,000 ($570,000 ÷ 10 years X 4/12 mos.)
1 Cash........................................................... 350,000
Accumulated Amortization—Equipment. 247,000
Gain on Disposal............................... 27,000
Equipment......................................... 570,000
Cost $570,000
Accumulated amortization
[($570,000 ÷ 10 years
X 4 years) + $19,000] 247,000
Net book value 323,000
Cash proceeds 0 350,000
Gain on disposal $ 27,000
June 1 Cash........................................................... 1,800,000
Land................................................... 200,000
Gain on Disposal............................... 1,600,000
July 1 Equipment................................................. 2,000,000
Cash................................................... 2,000,000
Dec. 31 Amortization Expense.............................. 50,000 Accumulated
Amortization—Equipment 50,000 ($500,000 ÷ 10 years)
PROBLEM 10-12A (Continued)
(a) (Continued)
Dec. 31 Accumulated Amortization—Equipment. 500,000
Equipment..................................... 500,000
Cost $500,000
Accumulated amortization
($500,000 ÷ 10 years X 10 years) 500,000
Gain (loss) on disposal $ 0
(b) Dec. 31 Amortization Expense......................... 950,000 Accumulated
Amortization—Buildings 950,000 ($28,500,000 X 1/30)
31 Amortization Expense......................... 4,793,000
Accumulated Amortization—Equipment 4,793,000
$46,930,000 ÷ 10 years $4,693,000
$2,000,000 ÷ 10 years X 6/12 mos., 100,000
$4,793,000
a
$48,000,000 – $570,000 – $500,000 = $46,930,000
PROBLEM 10-12A (Continued)
(c)
DUFOUR COMPANY
(Partial) Balance Sheet
December 31, 2003
Capital assets*
Land................................................................ $06,430,000
Buildings......................................................... $28,500,000
Less: Accumulated amortization
—buildings..................................................... 13,050,000 15,450,000
Equipment...................................................... $48,930,000
Less: Accumulated amortization
—equipment................................................... 9,115,000 39,815,000 Total
capital assets............................ $61,695,000
*See T accounts which follow (not required).
PROBLEM 10-12A (Continued) Land
Jan. 1 Bal. 4,000,000 Apr. 1
2,630,000
June 1 200,000
Dec. 31 Bal. 6,430,000
Buildings
Jan. 1 Bal. 28,500,000 Dec.
31Bal. 28,500,000
Equipment
May 01 570,000 Dec. 31 500,000
Jan. 1 Bal. 48,000,000 July 1
2,000,000
Dec. 31 Bal. 48,930,000
Accumulated Amortization—Buildings
Jan. 1 Bal. 12,100,000
Dec. 31 AJE 950,000
Dec. 31 Bal. 13,050,000
Accumulated Amortization—Equipment
AJE 4,793,000
May 01 247,000 Dec. 31 500,000
Jan. 1 Bal. 5,000,000 May 1
19,000 Dec. 31 50,000 Dec. 31
Dec. 31 Bal. 9,115,000
PROBLEM 10-13A
(a)
Andrew Company
Michael Company
Asset turnover
$1,400,000
$2,500,000
= 0.56 times
$1,300,000
$2,000,000
= 0.65 times
Return on assets
$700,000
$2,500,000
= 28%
$1,000,000
$2,000,000
= 50%
(b) Michael Company is more efficient in using its assets to generate
sales–its assets turnover of 0.65 times is higher than 0.56 times for
Andrew Company. It is also more efficient in using assets to
produce income–with a return on assets of 50% compared to 28%
for Andrew Company.
PROBLEM 10-1B
1. Land ($145,000 X $100,000 ÷ $150,000).................... 96,667 Building
($145,000 X $50,000 ÷ $150,000)................ 48,333 Land and
Building.............................................. 145,000
2. Land Improvements................................................... 4,000 Land and
Buildings............................................ 4,000
3. Land ($2,000 X $100,000 ÷ $150,000)........................ 1,333 Building ($2,000
X $50,000 ÷ $150,000).................... 667 Land and
Building.............................................. 2,000
4. Property Tax Expense............................................... 5,000 Land and
Building.............................................. 5,000
5. Land Improvements................................................... 10,000 Land and
Buildings............................................ 10,000
6. Repair Expense.......................................................... 3,000 Land and
Buildings................................................ 3,000
PROBLEM 10-2B
(a) 2000
Dec. 2 Equipment................................................. 45,000 Accounts
Payable............................. 45,000
2Equipment.......................................................... 800
Cash................................................... 800
31 Accounts Payable..................................... 45,000
Cash................................................... 45,000
31 Equipment................................................. 3,100
Cash................................................... 3,100
Total cost of equipment:
Invoice cost....................................... $45,000
Shipping............................................ 800
Testing............................................... 3,100
Total................................................... $48,900
(b)
1. Straight-line
2001
Dec. 31 Amortization Expense.............................. 8,180 Accumulated
Amortization............... 8,180 ($48,900 - $8,000) ÷ 5 years =
$8,180
2002
Dec. 31 Amortization Expense.............................. 8,180 Accumulated
Amortization............... 8,180 ($48,900 - $8,000) ÷ 5 years =
$8,180
PROBLEM 10-2B (Continued)
(b)
2. Units-of-activity
2001
Dec. 31 Amortization Expense.............................. 6,000 Accumulated
Amortization............... 6,000 ($48,900 - $8,000) ÷ 200,000 units = $0.20
per unit
$0.20 per unit X 30,000 units = $6,000
2002
Dec. 31 Amortization Expense.............................. 9,600 Accumulated
Amortization............... 9,600 ($48,900 - $8,000) ÷ 200,000 units = $0.20
per unit
$0.20 per unit X 48,000 units = $9,600
3. Double declining-balance
2001
Dec. 31 Amortization Expense.............................. 19,560 Accumulated
Amortization............... 19,560 Rate 1/5 X 2 = 40%
$48,900 X 40% = $19,560
2002
Dec. 31 Amortization Expense.............................. 11,736 Accumulated
Amortization............... 11,736 ($48,900 - $19,560) X 40% =
$11,736
PROBLEM 10-3B
(a) Cost:
Cash price $35,000
Shipping costs 175
Insurance during shipping 75
Installation and testing 50
Total cost $35,300
Oil and lubricants are not included as they are operating expenses,
benefiting only the current period.
(b)
1. STRAIGHT-LINE AMORTIZATION
Calculation
Ye
ar
Amortiza
ble Cost
20
02
20
03
20
$30,300*
30,300
30,300
30,300
X
Amortizati
on Rate
25%**
25%
25%
25%
End of Y
=
Amortizati
on
Expense
Accumulat
ed
Amortizati
on
Net
Book
Value
$7,575
07,575
07,575
7,575
$ 7,575
015,150
022,725
30,300
$27,7
252
0,15
012,
575
04
20
05
5,000
* Amortizable cost = $35,300 - $5,000 = $30,300
** 1 ÷ 4 years = 25%
PROBLEM 10-3B (Continued)
(b) (Continued)
2. DOUBLE DECLINING-BALANCE AMORTIZATION
Calculation
Ye
ar
Net Book
Value
Beginni
ng of
Year
20
02
20
03
20
04
20
05
$35,300
017,650
008,825
5,000
X
Amortizati
on Rate
50%**
50%
50%
50%
End of Y
=
Amortizati
on
Expense
Accumulat
ed
Amortizati
on
Net
Book
Value
$17,650
8,825
4,43,825**
0**
$17,650
026,475
030,300
30,3000
$17,6
50
8,8
25
5,000
5,000
* 1 ÷ 4 years = 25% x 2 = 50%
** Adjusted so ending net book value will equal residual value
3. UNITS-OF-ACTIVITY AMORTIZATION
Calculation
Ye
ar
Units-of
Activity
20
02
20
03
20
04
20
05
6,500
7,500
6,000
5,000
X
End of Ye
Amortizable
Cost per Unit
=
Amortizati
on
Expense
Accumulat
ed
Amortizati
on
Net
Book
Value
$1.212*
$1.212
$1.212
$1.212
$7,878
09,090
7,272
6,060
$ 7,878
016,968
024,240
30,300
$27,4
22
18,33
2
11,06
0
5,000
* Amortizable cost per unit: $30,300 ÷ 25,000 units = $1.212
(c) Straight-line amortization provides the lowest amount of amortization
expense for 2002. The declining-balance method provides the
lowest amount for 2005. Over the four-year period, all three methods
result in the same total amortization expense (equal to the
amortizable cost).
PROBLEM 10-3B (Continued)
(d) The declining-balance method produces the lowest net income in
2002 (highest amortization expense). The straight-line method
produces the lowest net income in 2005.
(e) All three methods will result in the same cash flow from operations in
2002, 2005, and in total over the four-year period. Amortization does
not affect cash flow. There is no Cash account involved in the entry
to record amortization (Dr. Amortization Expense; Cr. Accumulated
Amortization). Amortization simply allocates the cost of the capital
asset over the periods it benefits. It does not provide, nor use, cash.
Year Amortization
PROBLEM 10­4B
Expense
(a)
Amortization
Accumulated
2000 ($50,000 - $2,000) ÷ 6 years = $8,000 $ 8,000 2001 ($50,000 $2,000) ÷ 6 years = $8,000 16,000 2002 ($50,000 - $16,000 - $1,400) ÷ 3
years = $10,867 26,867 2003 ($50,000 - $16,000 - $1,400) ÷ 3 years =
$10,867 37,734 2004 ($50,000 - $16,000 - $1,400) ÷ 3 years = $10,866
48,600
(b) The net book value at the end of the asset’s useful life is $1,400
($50,000 - $48,600). This is equal to its estimated salvage value,
which is what it should be.
PROBLEM 10-5B
Account Debited Explanation
1. Equipment Improvement or betterment expenditure, which makes the
equipment more
productive
productive. Likely benefits only the
2. Repairs and Maintenance Expense current period
Does not make the equipment more
3. Equipment Improvement or betterment expenditure, which makes the
equipment more
productive
Does not make the equipment
4. Repairs and Maintenance
more productive
Expense
5. Training Expense Does not increase the productivity of the
equipment–and current accounting
policies
do not recognize the cost of human capital
6. Repairs and Maintenance
Expense
Does not make the equipment more
productive. Painting is a recurring
expense
PROBLEM 10­6B
(a)
Jan. 18 Repair Expense........................................................ 1,500
Cash................................................................. 1,500
Mar. 5 Repair Expense........................................................ 2,400
Cash................................................................ 2,400
Dec. 31 Equipment................................................................. 35,000
Cash................................................................. 35,000
(b)
(1) Years 1, 2, and 3
($112,000 – $12,000) ÷ 5 years = $20,000
(2) Year 4
$20,000 (same as Year 3, since addition to Equipment occurred
at year-end)
(3) Year 5
Total amortizable cost:
Net book value
[$112,000 – ($20,000 x 4 years)] $ 32,000
Add: Additional cost 35,000
67,000
Less: Revised residual value 5,000
Revised amortizable cost 62,000
Divide by remaining useful life
(9 – 4) ÷ 5 years
Amortization expense $ 12,400
PROBLEM 10­7B
(a)
Double
Straight Units-of- Declining-Line Activity Balance
Proceeds $ 4,400 $4,400 $4,400 Less: Net book value 6,000 6,000
2,250 Gain (loss) on disposal ($1,600) ($1,600) $2,150
(b) There really is no “best” method in this situation. All three methods
allocate cost in varying ways over the three year period. The
declining-balance method had a gain on disposal, but that just
offsets the additional amortization expense this method charged in
the early years. The straight-line and units-of-activity methods end
up, coincidentally, at the same position at the end of year three. The
units-of-activity method likely provided the best matching of the cost
of the equipment with the revenue it produced through production.
(c) Double Straight- Units-of- Declining
Line Activity Balance
Amortization expense $12,000 $12,000 $15,750 Add: Loss (gain)
on disposal 1,600 1,600 (2,150) Total effect on net income $13,600
$13,600 $13,600
(d) The results in part (c) show that the total charge to incomes over the
life of the assets is the same regardless of the method of
amortization chosen. Amortization allocates the cost over the time
periods the asset is in use–the total charge, including the gain or
loss on disposal is the same. The total cost is equal to the original
cost less the proceeds on disposal. In this case, $18,000 - $4,400 =
$13,600.
PROBLEM 10-8B
(a) July 1 Amortization Expense..................................... 7,400 Accumulated
Amortization.............................. 7,400 ($75,000 - $1,000) ÷ 5
years
= $14,800 x 6/12 mos. = $7,400
1 Accumulated Amortization
—Office Furniture ($14,800 x 4.5 years)................ 66,600
Loss on Disposal............................................. 8,400
Office Furniture.......................................... 75,000
(b) July 1 Amortization Expense..................................... 7,400 Accumulated
Amortization.............................. 7,400 ($75,000 - $1,000) ÷ 5
years
= $14,800 x 6/12 mos. = $7,400
1 Cash.................................................................. 1,000
Accumulated Amortization
— Office Furniture ($14,800 x 4.5 years)........ 66,600
Loss on Disposal............................................. 7,400
Office Furniture.......................................... 75,000
[The loss on disposal equals amortization for the remaining six
months of the original useful life, which makes sense as the only thing
that changed was the useful life.]
(c) July 1 Amortization Expense..................................... 7,400 Accumulated
Amortization.............................. 7,400 ($75,000 - $1,000) ÷ 5
years
= $14,800 x 6/12 mos. = $7,400
1 Cash .....................................................................8,000
Accumulated Amortization
—Office Furniture ($14,800 x 4.5 years)......... 66,600
Loss on Disposal............................................. 400
Office Furniture.......................................... 75,000
PROBLEM 10-8B (Continued)
(d) July 1 Amortization Expense..................................... 7,400 Accumulated
Amortization.............................. 7,400 ($75,000 - $1,000) ÷ 5
years
= $14,800 x 6/12 mos. = $7,400
1 Cash .....................................................................8,500
Accumulated Amortization
—Office Furniture ($14,800 x 4.5 years)......... 66,600
Gain on Disposal........................................ 100 Office
Furniture.......................................... 75,000
PROBLEM 10­9B
(a)
Date
Expenditure
Account Title
Jan. 10
Land was purchased for $65,000.
Land
Jan. 15
Land was surveyed at a cost of $3,000.
Land
Feb. 1
An existing building on the land was
removed at a cost of $5,500 to
provide room for the new structure.
Land
Feb. 10
Security fence was built around the
land for $2,500.
Land
Improvements
Feb. 23
An architectural firm was paid
$15,000 for plans for the new
building.
Building
Mar. 15
To remove the trees and level the land
in preparation for construction of the
new building, $3,500 was spent.
Building
Mar. 17
A building permit acquired for $1,000.
Building
Apr. 10
Legal and application costs of
$5,000 were paid for a patent on the
newly developed product that will
be sold by Cohlmeyer.
Patent
May 1
An amount of $460,000 was spent
to construct the building.
Building
May 15
An amount of $4,000 was spent
on landscaping.
Land
Improvements
May 20
A parking lot constructed for $8,000.
Land
Improvements
May 25
Company’s domain name,
<www.cohlmeyer.com>, was
registered for $150.
Registration
Fee Expense
May 28
A lawyer was paid $4,000 for
organizing the new company.
Legal Expense
May 31
The building was occupied and
the business commenced.
No entry
required
PROBLEM 10-9B (Continued)
(b)
COHLMEYER COMPANY
Balance Sheet (Partial)
May 31, 2003
Assets
Capital assets
Land ($65,000 + $3,000 + $5,500).............................. $ 73,500
Land improvements ($2,500 + $4,000 + $8,000)....... 14,500
Building ($15,000 + $3,500 + $1,000 + $460,000)...... 479,500
Patent.......................................................................... 5,000
Total capital assets............................................. $572,500
Note: No amortization is required because operations did not
commence until May 31.
PROBLEM 10-10B
1. Research Expense.............................................................. 50,000
Patent........................................................................... 50,000
2. Patent................................................................................... 20,000 Legal Fees
Expense.................................................... 20,000
3. Patent................................................................................... 40,000 Legal Fees
Expense.................................................... 40,000
4. Patent................................................................................... 50,000
Patent Fee Revenue....................................................
50,000
5. Amortization Expense........................................................ 12,000
Patent........................................................................... 12,000 [($25,000 +
$20,000 + $40,000) ÷ 5 years] - $5,000 = $12,000
PROBLEM 10-11B
(a) 2002 2003 Development costs (capitalized)
Production of product master $ 400,000
Estimated revenue................. 8,000,000
Amortization per $ of revenue...... $0.05
Amortization
2002 no revenue...................................................... $ 0 2002 $800,000 X
$0.05............................................. $ 40,000
Research costs
Designing and planning...................................... 500,000
Code development............................................... 600,000
Testing.............................................................. 160,000
Production costs........................................ 100,000
Total..........................................................................$1,260,000 $140,000
(b) The $3,000,000 offer will not be recognized and will likely not be
disclosed in the financial statements. It cannot be recognized in the
financial statements because it is only an offer at year-end. The
market value of intangible assets is not recognized or disclosed in
the financial statements unless the carrying value of the related
assets indicates a permanent impairment in the value of the assets.
In this case, the $3,000,000 is well in excess of the carrying value of
the assets.
PROBLEM 10-12B
(a) April 1 Land........................................................... 2,200,000
Cash................................................... 2,200,000
May 1 Amortization Expense.............................. 20,000 Accumulated
Amortization—Equipment 20,000
($600,000 ÷ 10 years X 4/12 mos. = $20,000)
1 Cash........................................................... 360,000
Accumulated Amortization—Equipment. 260,000
Gain on Disposal............................... 20,000
Equipment......................................... 600,000
Cost $600,000
Accumulated amortization
[$600,000 ÷ 10 years
X 4 years) + $20,000] 0260,000
Net book value 340,000
Proceeds 0360,000
Gain on disposal $ 20,000
June 1 Cash........................................................... 1,800,000
Land................................................... 500,000
Gain on Disposal............................... 1,300,000
July 1 Equipment................................................. 1,400,000
Cash................................................... 1,400,000
Dec. 31 Amortization Expense.............................. 50,000 Accumulated
Amortization—Equipment 50,000 ($500,000 ÷ 10 years = $50,000)
PROBLEM 10-12B (Continued)
(a) (Continued)
Dec. 31 Accumulated Amortization—Equipment. 500,000
Equipment......................................... 500,000
Cost $500,000
Accumulated amortization
($500,000 ÷ 10 years
X 10 years) 500,000
Gain (loss) on disposal $ 0
(b) Dec. 31 Amortization Expense.............................. 662,500 Accumulated
Amortization—Buildings 662,500 ($26,500,000 ÷ 40 years = $662,500)
31 Amortization Expense.............................. 3,960,000
Accumulated Amortization—Equipment 3,960,000
($38,900,000a ÷ 10 years) $3,890,000
($1,400,000 ÷ 10 years X 6/12 mos.) , 70,000
Total accumulated amortization $3,960,000
a
$40,000,000 – $600,000 – $500,000 = $38,900,000
PROBLEM 10-12B (Continued)
(c)
BOWMAN COMPANY
(Partial) Balance Sheet
December 31, 2003
Capital assets*
Land............................................................... $04,700,000
Buildings....................................................... $26,500,000
Less: Accumulated amortization
—buildings.............................................. 12,762,500 13,737,500
Equipment..................................................... $40,300,000
Less: Accumulated amortization
—equipment............................................ 8,270,000 0 32,030,000
Total capital assets................................. $50,467,500
*See T accounts which follow (not required).
PROBLEM 10-12B (Continued) Land
Jan. 1 Bal. 3,000,000 Apr. 1
2,200,000
June 1 500,000
Dec. 31 Bal. 4,700,000
Buildings
Jan. 1 Bal. 26,500,000 Jan. 1
Bal. 26,500,000
Equipment
May 01 600,000 Dec. 31 500,000
Jan. 1 Bal. 40,000,000 July 1
1,400,000
Dec. 31 Bal. 40,300,000
Accumulated Amortization—Buildings
Jan. 1 Bal. 12,100,000
Dec. 31 AJE 662,500
Dec. 31 Bal. 12,762,500
Accumulated Amortization—Equipment
AJE 3,960,000
May 1 260,000 Dec. 31 500,000
Jan. 1 Bal. 5,000,000 May 1
20,000 Dec. 31 50,000 Dec. 31
Dec. 31 Bal. 8,270,000
PROBLEM 10-13B
(a)
St. Amand Company
St. Helene Company
Asset turnover
$1,600,000
$2,000,000
= 0.80 times
$1,350,000
$800,000
= 1.69 times
Return on assets
$400,000
$2,000,000
= 20%
$600,000
$800,000
= 75%
(b) St. Helene Company is more efficient in using its assets to generate
sales–its assets turnover of 1.69 times is higher than 0.80 for St.
Amand Company. It is also much more efficient in using assets to
produce income–with a return on assets of 75% compared to 20%
for At. Amand Company.
CUMULATIVE COVERAGE–CHAPTERS 3 TO 10
(a)
1. July 31 Interest Expense.................................................. 15
Accounts Receivable.......................................... 75
Cash.............................................................. 90
2. 31 Bad Debt Expense............................................... 500
Allowance for Doubtful Accounts
($2,500 - $2,000)............................................ 500
3. 31 Interest Receivable.............................................. 467 Interest
Revenue
($10,000 X 8% X 7/12 months)..................... 467
4. 31 Cost of Goods Sold............................................. 1,000
Merchandise Inventory ($57,000 - $58,000) 1,000
5. 31 Operating Expenses............................................ 2,000 Prepaid
Expenses........................................ 2,000
6. 31 Amortization Expense
($3,600 + $2,560 + $3,750)................................... 9,910
Accumulated
Amortization–Building..........
Accumulated
Amortization–Equipment......
Patent............................................................ 3,750
3,600
2,560
Calculations:
Building ($105,000 - $15,000) ÷ 25 years = $3,600
Equipment ($25,000 - $12,200) X 20% (1 ÷ 5 years) =
$2,560 Patent ($63,750 + $11,250) ÷ 20 years = $3,750
CUMULATIVE COVERAGE (Continued)
(a) (Continued)
7. July 31 Interest Expense.................................................. 1,010
Interest Payable
($121,190 X 10% X 1/12 mos.)...................... 1,010
8. 31 Operating Expenses............................................ 1,400 Accounts
Payable......................................... 1,400
CUMULATIVE COVERAGE (Continued)
(b) This format not required but is presented to show calculations.
Acct.
No.
Account
Unadjusted Trial
Balance
Adjustments
Adjusted Trial Balance
Dr.
101
Cash
105
Petty Cash
112
Accounts Receivable
113
Allowance for
Doubtful Accounts
115
Notes Receivable
118
Interest Receivable
120
Merchandise Inventory
Cr.
Dr
18,000
Cr.
(1) 90
200
Dr.
17,910
200
25,000
(1) 75
2,000
25,075
(2) 500
10,000
2,500
10,000
(3) 467
467
58,000
(4)
1,000
57,000
(5)
2,000
14,000
133
Prepaid Expenses
16,000
140
Land
50,000
50,000
145
Building
105,000
105,000
146
Accumulated
Amortization – Building
Cr.
10,800
(6)
3,600
25,000
14,400
151
Equipment
25,000
152
Accumulated Amort.
– Equipment
177
Patent
201
Accounts Payable
230
Interest Payable
275
Mortgage Payable
121,190
121,190
301
LeBrun, Capital
119,937
119,937
306
LeBrun, Drawings
401
Sales
505
Cost of Goods Sold
612
Bad Debt Expense
645
Operating Expenses
12,200
(6)
2,560
63,750
(6)
3,750
81,000
15,000
14,760
60,000
(8)
1,400
82,400
(7)
1,010
1,010
15,000
750,000
600,000
100,000
750,000
(4) 1,000
601,000
(2) 500
500
(5) 2,000
(8) 1,400
103,400
711
Amortization Expense
820
Interest Revenue
905
Interest Expense
Total
(6) 9,910
9,910
(3) 467
11,177
1,097,127
(1) 15
(7) 1,010
1,097,127
16,377
467
12,202
16,377
1,106,664
CUMULATIVE COVERAGE (Continued)
(c)
LEBRUN COMPANY
Income Statement
For the Year Ended July 31, 2003
Sales revenues
Sales................................................................ $750,000 Cost of
goods sold.......................................... 601,000 Gross
profit............................................................. 149,000 Operating and other
expenses
Operating expenses........................................ $103,400
Amortization expense..................................... 9,910 Bad
debt expense........................................... 500
Total expenses............................................ 0 0 113,810 Income
from operations......................................... 35,190 Other revenue and
gains
Interest revenue.............................................. $ 467
Other expenses and losses
Interest expense ............................................. 12,202 11,735 Net
income.............................................................. $ 23,455
LEBRUN COMPANY
Statement of Owner’s Equity
For the Year Ended July 31, 2003
LeBrun, Capital, August 1....................................................... $119,937
Add: Net income..................................................................... 23,455
143,392
Less: Drawings....................................................................... 15,000
LeBrun, Capital, July 31......................................................... $128,392
1,106,664
CUMULATIVE COVERAGE
(Continued) (c) (Continued)
LEBRUN COMPANY
Balance Sheet
July 31,
2003 Assets
Current assets
Cash ($17,910 + $200).................................................. $ 18,110 Accounts
receivable..................................................... $25,075 Less: Allowance for
doubtful accounts...................... 2,500 22,575 Notes
receivable........................................................... 10,000 Interest
receivable........................................................ 467 Merchandise
inventory................................................. 57,000 Prepaid
expenses......................................................... 14,000 Total current
assets.................................................. 122,152
Capital assets
Land.............................................................................. $50,000
Building..................................................... $105,000
Less: Accumulated amortization............. (14,400) 90,600
Equipment................................................. $25,000
Less: Accumulated amortization............. (14,760) 10,240 Patent (net of
$15,000 accumulated amortization) 60,000 210,840
Total assets......................................................................... $332,992
CUMULATIVE COVERAGE (Continued)
(c) (Continued)
LEBRUN COMPANY
Balance Sheet (Continued)
July 31, 2003
Liabilities and Owner’s Equity
Current liabilities
Accounts payable............................................................... $ 82,400
Interest payable.................................................................. 1,010 Current
portion of mortgage payable............................... 1,596 Total current
liabilities................................................... 85,006
Long-term liabilities
Mortgage payable, less current portion.......................... 119,594 Total
liabilities............................................................................ 204,600
Owner’s equity
LeBrun, Capital................................................................... 128,392 Total
liabilities and owner’s equity........................................... $332,992
BYP 10-1 FINANCIAL REPORTING PROBLEM
(a) (1) $3,013,000
(2) $1,245,000
(3) $1,768,000
See Note 6 to the financial statements.
(b) $727,000 in capital assets were purchased in 2000 (see the
Consolidated Statements of Cash Flows).
(c) $766,000 was received from the disposal of capital assets in 2000.
The net book value of these assets was $646,000, calculated as
follows:
Net book value of capital assets at end of 1999...................
$2,308,000
Add: Capital assets purchased during 2000......................... 727,000
Less: Depreciation of capital assets for 2000....................... (621,000
Balance without any disposals.............................................. 2,414,000
Account balance at end of 2000.............................................
1,768,000
Net book value of disposals during 2000.............................. $ 646,000
(d) Depreciation is calculated using the straight-line basis (see Note 2).
In 2000, it also includes a charge for decline in value of corporate
store leasehold improvements, equipment, furniture, fixtures and
other (see Note 6).
(e) The expected useful life for calculating depreciation on the
equipment, furniture, and fixtures was 7 years.
(f) The primary source of goodwill was the acquisition of Diedrich
Coffee, Inc. (see Note 3). Goodwill is only created when another
company is purchased.
BYP 10­2 INTERPRETING FINANCIAL STATEMENTS
(a) Maple Leaf Foods could use the straight-line, declining-balance or
the units-of-activity method to amortize its capital assets associated
with its Burlington plant. The straight-line method is simple to use
and if the assets are used at a consistent level will match costs with
revenue. Declining-balance is appropriate in cases where the
benefits are greater in the early years of an assets life. The
units-of-activity method would be the most appropriate in this case
as the levels of production vary widely. The units-of-activity method
will provide the best match of costs with revenue.
(b) The labour dispute related costs should be treated as an operating
expenditure. They do not have a future benefit and cannot be
capitalized. They would be reported on the income statement
separately, as an unusual item. These are not extraordinary items.
(c) The $40 million investment should be treated as a capital
expenditure. They will result in the creation of an asset that will have
a long life and the cost will be matched with the revenue it generates
through annual amortization charges.
BYP 10-3 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on
the world wide web, the Accounting on the Web cases are updated as
required. Their suggested solutions are also updated whenever
necessary, and can be found on-line in the Instructor Resources section
of our home page <www.wiley.com/canada/weygandt2>.