LESSON 9
Suggested solutions
Question 1 (15 marks)
Computer solution
a. (2 marks)
The proper entry to record the purchase is:
Machinery ....................................................................................
Note payable — machinery ...................................................
Cash .......................................................................................
54,500
34,500
20,000
b. (7 marks)
i) The annual payment is €9,571.
ii) The total interest component is €13,353.
iii) Formula in cell D10:
=PMT(D8,D9,–D7)
Formula in cell C16:
=IF(B16>0,E15*$D$8,0)
c. (4 marks)
The data can be read off the worksheet for the first year’s payment.
Interest expense ...........................................................................
Note payable — machinery .........................................................
Cash .......................................................................................
4,140
5,431
Deprecation expense ....................................................................
Accumulated depreciation — machine .................................
7,357
9,571
7,357
Depreciation is: (€54,500 – €3,000) ÷ 7 = €7,357
d. (2 marks)
As in (c), the information can be read off the worksheet.
Interest expense ...........................................................................
Note payable — machinery .........................................................
Cash .......................................................................................
1,941
7,630
Depreciation expense ..................................................................
Accumulated depreciation — machine .................................
7,357
Financial Accounting: Assets
Suggested solutions 9  1
9,571
7,357
Question 2 (30 marks)
Multiple choice (1 mark each)
a. 3)
The machine is not depreciated during its testing period because no benefits are being
received during this period.
b. 4)
Property, plant and equipment assets should include assets held for use in operations and
would exclude assets held for future use or assets not yet received.
c. 4)
By deducting the discounts from the invoice price, the net cost, which is consistent with
the historical cost convention, is recorded.
d. 2)
Assets should be recorded at the fair value of consideration given up, which, in this case,
is current market value of the shares.
e. 2)
Under the deferral method of recording government assistance, the amount of the
government assistance is set up as deferred income and is recognized in income on the
same basis as the depreciation on the related non-current asset.
f. 1)
The apportionment should be based on some sort of fair value, which can be estimated
using a variety of valuation approaches.
g. 1)
By capitalizing the interest costs, the interest costs are depreciated over the period in
which revenues are earned from using the asset rather than during the period of
construction when no revenues are being earned.
h. 1)
All costs of getting the asset ready for its intended use are capitalized. Once an asset is
substantially complete, no more costs should be capitalized because the amount of future
benefits is unlikely to increase since the asset is already substantially complete.
i. 2)
Although the costs are expected to bring future benefit, the costs are no longer permitted
to be capitalized and depreciated over the remaining useful life of the asset.
Financial Accounting: Assets
Suggested solutions 9  2
j. 3)
Normally these assets would be recorded at carrying value of the asset given up. But,
when the fair value of the asset acquired is less than book value of the asset given up, fair
value should be used.
k. 2)
The replacement of tiles should be expensed because this work does not enhance the
future benefits over and above what was previously expected. The cost of the overhaul
should be capitalized because it provides future benefits.
l. 4)
Ordinary repairs do not provide future benefits and are therefore not capital expenditures.
m. 2)
Assets by definition must provide benefits beyond the current period.
n. 3)
Goodwill is only recorded when a purchaser acquires another company, or group of
assets, and pays more than the fair value of those identifiable net assets.
o. 3)
Assets should be recorded at fair value of consideration given up (at 10,000  €14 in this
case) if this amount is reliable.
p. 2)
An investment in the ordinary shares of another company is classified as an investment.
q. 4)
Under the alternative treatment to measure non-current assets subsequent to their original
recognition, the non-current asset would be remeasured to fair value, with increases
credited to an equity account (Revaluation surplus) and decreases to the equity account, if
one exists for the asset, otherwise to expense.
r. 3)
The cash inflow is €30,000 as per the debit to cash. It is an investing activity because it
involves property, plant and equipment.
Financial Accounting: Assets
Suggested solutions 9  3
(2 marks each)
s. 1)
€2,000  7.7217 (present value of 10-period annuity at 5% per period)
t. 4)
(€40,000 + €20,000 + €5,000 + €8,000 + €4,000) – €65,000)
u. 1)
/120  €110,000; 30/120  €110,000; 66/120  €110,000
24
v. 3)
€92,000 – (€180,000  2.5  5)
w. 3)
€140,000 – €50,000 (Given that the cash component is significant, it is reasonable to
assume that the transaction has commercial substance. Therefore, the acquired office
building is recorded at the fair value of the asset given up less the cash received.)
x. 2)
(€40,000 – [€80,000 + €10,000]  30%)  6.14457 + (€80,000 + €10,000)
Question 3 (16 marks)
a. (4 marks)
The following costs should be capitalized to land or building as follows:
Cost of land
Cash paid for land
Mortgage assumed
Cost to remove old building
Sale of fixtures
Design fees
Material & supplies
Paid to subcontractors
Wages & employee benefits
Interest on construction loan
Allocation of office overhead
Profit margin for Timberlay
Cost of building
€ 260,000
50,000
50,000
(10,000)
€
4,000
250,000
100,000
130,000
10,000
0
0
€ 494,000
€ 350,000
Land .............................................................................................
Building .......................................................................................
Cash .......................................................................................
Mortgage payable ..................................................................
Financial Accounting: Assets
350,000
494,000
794,000
50,000
Suggested solutions 9  4
b. (4 marks)
All costs capitalized as follows:
Estimated
value
Conveyor
TMS
Total
€ 60,000
110,000
€ 170,000
Percentage of
estimated value
Purchase price
assigned
35%
65%
100%
€ 57,750
107,250
€ 165,000
Conveyor......................................................................................
TMS .............................................................................................
Note payable ..........................................................................
57,750
107,250
165,000
c. (2 marks)
All costs should be expensed.
Trademark ....................................................................................
Cash .......................................................................................
7,000
7,000
d. (2 marks)
Expenditure should be treated as an expense.
Research and development expense ............................................
Cash .......................................................................................
40,000
40,000
e. (4 marks)
The exchange transaction should be capitalized at the book value of the asset given up as
it can be assumed that the transaction lacks commercial substance.
Crane — new (50,000 – 20,000) ................................................
Accumulated depreciation ...........................................................
Crane — old ..........................................................................
30,000
20,000
50,000
Question 4 (12 marks)
a. (8 marks)
i. Lacks commercial substance (4 marks)
The new asset is recorded using the book value of the asset given up.
Plant (new) (€400,000 – €250,000 – €50,000) ............................
Accumulated depreciation ...........................................................
Cash .............................................................................................
Plant (old) ..............................................................................
Financial Accounting: Assets
100,000
250,000
50,000
400,000
Suggested solutions 9  5
ii. Has commercial substance (3 marks)
Plant (new) (€600,000 – €50,000) ...............................................
Accumulated depreciation ...........................................................
Cash .............................................................................................
Plant (old) ..............................................................................
Gain on exchange of plants....................................................
550,000
250,000
50,000
400,000
450,000
b. (4 marks)
The cash consideration represents 13% (75,000/600,000) of the fair market value of the
transaction. Therefore, it is reasonable to assume the transaction possesses commercial
substance; accordingly, the new asset is recorded using the fair market value of the asset
given up.
Plant (new) (€600,000 – €75,000) ...............................................
Accumulated depreciation ..........................................................
Cash .............................................................................................
Plant (old) ..............................................................................
Gain on exchange of plants ...................................................
525,000
250,000
75,000
400,000
450,000
Question 5 (12 marks)
(11/2 marks each)
a.
Expense
Organization Costs.......................................................................
Cash .......................................................................................
15,000
15,000
b.
Expense 100% of costs incurred
Research Expense ........................................................................
Cash .......................................................................................
40,000
40,000
c.
Capitalize the development & patent costs
Development Costs, Robo Skateboarder .....................................
Patent, Robo Skateboarder ..........................................................
Cash .......................................................................................
60,000
6,000
66,000
d.
Expense — this is a selling cost
Advertising expense.....................................................................
Cash .......................................................................................
Financial Accounting: Assets
30,000
30,000
Suggested solutions 9  6
e.
Capitalize
Patent, bubble formula .................................................................
Cash .......................................................................................
16,000
16,000
f.
Capitalize initial payment, expense annual payment
Franchise fee, Edutoy Stores .......................................................
Edutoy franchise expenses ...........................................................
Cash .......................................................................................
50,000
7,000
57,000
g.
No entry as referring to internally generated goodwill
h.
Expense — this is a reward for employee performance
Salary expense .............................................................................
Cash .......................................................................................
10,000
10,000
Question 6 (15 marks)
(3 marks each)
a.
Building ....................................................................................... 1,800,000
Cash .......................................................................................
1,800,000
Reason for treatment: Add to cost of the building, which has a life that is longer than
one year.
b.
Ground maintenance expense ......................................................
Cash .......................................................................................
27,900
27,900
Reason for treatment: The €27,000 expenditure was incurred as part of regular
maintenance of the grounds and as such should be included as an expense in the period
incurred. The €900 spent on a piece of equipment is treated as an expense, instead of
being capitalized, because it falls below the materiality threshold of €1,000.
c.
Equipment — MRI scanner .........................................................
Training expense..........................................................................
Cash .......................................................................................
405,000
3,000
408,000
Reason for treatment: The installation costs are included in the cost of the asset because
these costs had to be incurred to get the asset up and running. The training costs are not
part of the cost to get the asset up and running rather they are employee training costs
which should be expensed in the period incurred.
Financial Accounting: Assets
Suggested solutions 9  7
d.
Accumulated depreciation: Equipment — CT scanner ..............
Cash .......................................................................................
60,000
60,000
Reason for treatment: The expenditure is capitalized because it is a betterment, which
extends the life of the asset beyond its original estimate.
e.
Repair and maintenance expense .................................................
Cash .......................................................................................
7,000
7,000
Reason for treatment: Painting is a regular maintenance activity that should be expensed
in the period incurred.
100
Financial Accounting: Assets
Suggested solutions 9  8