Weygandt, Kieso, Kimmel, Trenholm, KinnearAccounting Principles, Third Canadian Edition
BRIEF EXERCISE 9-1
The cost of the land is $61,000 ($50,000 + $5,000 + $2,500 +
$3,500). The installation of the fence should be debited to Land
Improvements account.
BRIEF EXERCISE 9-2
The cost of the truck is $43,000 (cash price $41,750 + painting
and lettering $750 + installation of trailer hitch $500). The
expenditures for the insurance and the motor vehicle licence
are recurring and only benefit the current period. They should
be expensed and not added to the cost of the truck.
BRIEF EXERCISE 9-3
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
O
C
C
O
C
O
O
C
C
O
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BRIEF EXERCISE 9-4
Jan. 1
Land
[$400,000 x ($127,500 ÷ $425,000)] .... 120,000
Building
[$400,000 x ($255,000 ÷ $425,000)] .... 240,000
Equipment
[$400,000 x ($42,500 ÷ $425,000)] ...... 40,000
Cash ................................................
Mortgage Payable ($400,000 - $100,000)
100,000
300,000
BRIEF EXERCISE 9-5
Amortizable cost is $40,000 ($43,000 - $3,000). With a 4-year
useful life, annual amortization is $10,000 ($40,000  4). Under
the straight-line method, amortization is the same each year.
Thus, amortization expense is (a) $10,000 for each year of the
truck’s life and (b) $40,000 in total over the truck’s life.
BRIEF EXERCISE 9-6
The declining-balance rate is 50% (25% x 2) and this rate is
applied to net book value at the beginning of the year.
Amortization expense for each year is as follows:
(a)
Calculation
End of Year
NBV (Beg.
Amort.
Amort.
Accum. Net Book
Year of Year
X
Rate = Expense
Amort.
Value
$43,000
2008
$43,000
50%
$21,500
$21,500
21,500
2009
21,500
50%
10,750
32,250
10,750
2010
10,750
50%
5,375
37,625
5,375
2011
5,375
50%
2,375¹
40,000
3,000
¹Limited to the amount to reduce the net book value to the
residual value of $3,000
(b) Total amortization over the truck’s useful life is $40,000.
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BRIEF EXERCISE 9-7
Amortizable cost per unit:
($33,000 - $500)  325,000 km. = $0.10/km.
Annual amortization expense:
2007:
125,000 x $0.10 = $12,500
2008:
105,000 x $0.10 = $10,500
BRIEF EXERCISE 9-8
(a) Amortization expense for each year:
Calculation
Amortizable
Amort.
Year
Cost*
X
Rate =
Amort.
Expense
2008
2009
2010
2011
2012
$ 7,500
10,000
10,000
10,000
2,500
$40,000
40,000
40,000
40,000
40,000
25% x 9/12
25%
25%
25%
25% x 3/12
End of Year
Accum. Net Book
Amort.
Value
$43,000
$ 7,500
35,500
17,500
25,500
27,500
15,500
37,500
5,500
40,000
3,000
*Amortizable cost = $43,000 - $3,000
(b) Total amortization expense over the truck’s useful life is
$40,000. (See accumulated amortization at end of 2012
above)
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BRIEF EXERCISE 9-9
The double declining-balance rate is 50% (25% x 2) and this rate
is applied to net book value at the beginning of the year.
Amortization expense for each year is as follows:
(a)
Double Declining-Balance
Calculation
NBV (Beg.
Amort.
Year of Year
X
Rate =
Amort.
Expense
2008
2009
2010
2011
2012
$16,125
13,438
6,719
3,359
359¹
$43,000
26,875
13,437
6,718
3,359
50% x 9/12
50%
50%
50%
50%
End of Year
Accum. Net Book
Amort.
Value
$43,000
$16,125
26,875
29,563
13,437
36,282
6,718
39,641
3,359
40,000
3,000
¹ Limited to the amount to bring net book value to the residual
value of $3,000
(b) Total amortization expense over the truck’s useful life is
$40,000. (See accumulated amortization at end of 2012
above)
BRIEF EXERCISE 9-10
Loss on Impairment ...................................
Accumulated Amortization—Machinery
Calculation:
Net Book Value ($90,000 - $54,000) ...
Less: Market Value ............................
Impairment loss ..................................
16,000
16,000
$36,000
20,000
$16,000
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BRIEF EXERCISE 9-11
Amortization expense from 2005 to 2007:
[($60,000 - $4,000) ÷ 7 years = $8,000]
2005
2006
2007
Total
$ 8,000
8,000
8,000
$24,000
Net book value, Jan. 1, 2008 ($60,000 - $24,000) ........... $36,000
Add: Equipment up-grade .............................................
9,000
Less: Revised residual value ........................................
(3,000)
Remaining amortizable cost ...........................................
42,000
Remaining useful life (9 years - 3 years) ....................... ÷ 6 years
Revised annual amortization expense 2008 .................. $ 7,000
BRIEF EXERCISE 9-12
(a)
Accumulated Amortization—
Delivery Equipment ....................................
Delivery Equipment ...............................
41,000
(b) Accumulated Amortization—
Delivery Equipment ....................................
Loss on Disposal........................................
Delivery Equipment ...............................
38,000
3,000
41,000
Cost of delivery equipment ...................................
Less: Accumulated amortization ..........................
Net book value at date of disposal ........................
Proceeds from sale ................................................
Loss on disposal ....................................................
41,000
$41,000
38,000
3,000
0
$ 3,000
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BRIEF EXERCISE 9-13
(a) Sept. 30
Amortization Expense
[($72,500 - $2,500) ÷ 5 x 9/12] ......... 10,500
Accumulated Amortization
—Office Equipment ..................
10,500
(b) Sept. 30
Cash ................................................
8,250
Accumulated Amortization—Office
Equipment¹ ..................................... 66,500
Gain on Disposal ......................
2,250
Office Equipment ......................
72,500
¹[($72,500 - $2,500) ÷ 60 months x 57 months] = $66,500
Cost of office equipment
$72,500
Less accumulated amortization
66,500
Net book value at date of disposal
6,000
Proceeds from sale
08, 8,250
Gain on disposal
$ 2,250
(c) Sept. 30
Cash ................................................
4,500
Accumulated Amortization—Office
Equipment ....................................... 66,500
Loss on Disposal ............................
1,500
Office Equipment ......................
72,500
Cost of office equipment
$72,500
Less accumulated amortization
66,500
Net book value at date of disposal 6,000
Proceeds from sale
4,500
Loss on disposal
$ 1,500
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BRIEF EXERCISE 9-17
(a)
(b)
(c)
(d)
(e)
(f)
(g)
I
PPE
NR
NA (current asset)
I
PPE
NA (current asset)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
NA (income statement)
I
I
NA (current liability)
PPE
PPE
NR
EXERCISE 9-1
(a)
Under the cost principle, the acquisition cost of a property,
plant, and equipment includes all expenditures necessary
to acquire the asset and make it ready for its intended use.
This includes not only the cost of acquisition, but any
freight, installation, testing, and similar costs to get the
asset ready for use. For example, the cost of factory
machinery includes the purchase price, freight costs paid
by the purchaser, insurance costs during transit, and
installation costs. Costs such as these benefit the life of
the factory machinery and not just the current period.
Consequently, they should be capitalized and amortized
over the machinery’s useful life.
Cost is measured by the cash paid in a cash transaction, or
by the cash equivalent price paid when noncash assets are
used in payment. The cash equivalent price is equal to the
fair market value of the asset given up. If that value is not
clearly determinable, the fair market value of the asset
received is used instead.
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(b) 1. Delivery Equipment (or Vehicles)
2. Prepaid Insurance
3. Land
4. Land ($6,600 - $1,700 = $4,900)
5. Plant
6. Plant
7. Plant
8. Land improvements
9. Factory machinery
10. Factory machinery
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EXERCISE 9-2
(a)
Appraised
Value
Land
Building
Land Improvements
$366,000
192,000
42,000
$600,000
% of
Total
61%
32%
7%
Cost Allocated
$353,800
185,600
40,600
$580,000*
*Total cost $75,000 (cash) + $500,000 (mortgage) + $5,000
(legal fees) = $580,000
(b) Land .........................................................
Land Improvements ................................
Building ....................................................
Cash ($75,000 + $5,000) ..........................
Mortgage Payable ...............................
(c)
353,800
40,600
185,600
80,000
500,000
Amortizable cost for the building is $165,600 ($185,600 –
$20,000). With a 40-year useful life, annual amortization
expense is $4,140 ($165,600  40).
Amortizable cost for the land improvements is $40,600.
With a ten year useful life, annual amortization expense is
$4,060 ($40,600  10).
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EXERCISE 9-3
(a)
(1) Straight-line
Calculation
Amortizable
Amort.
Year
Cost*
X
Rate =
Amort.
Expense
2007
2008
2009
2010
2011
$28,500
28,500
28,500
28,500
28,500
$142,500
142,500
142,500
142,500
142,500
20%
20%
20%
20%
20%
End of Year
Accum. Net Book
Amort.
Value
$164,500
$28,500
136,000
57,000
107,500
85,500
79,000
114,000
50,500
142,500
22,000
* $164,500 - $22,000 = $142,500
(2) Double Declining-Balance
Calculation
NBV (Beg.
Amort.
Year of Year
X
Rate =
Amort.
Expense
2007
2008
2009
2010
2011
$65,800
39,480
23,688
13,532¹
0
$164,500
98,700
59,220
35,532
22,000
40%
40%
40%
40%
40%
End of Year
Accum. Net Book
Amort.
Value
$164,500
$65,800
98,700
105,280
59,220
128,968
35,532
142,500
22,000
142,500
22,000
¹ Limited to the amount to bring net book value to the residual
value of $22,000
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EXERCISE 9-3 (Continued)
(a) (Continued)
(3)
Units-of-Activity
Year
Calculation
Units of
Amort.
Activity X Cost/Unit* =
2007
2008
2009
2010
2011
78,000
76,000
72,000
74,000
75,000
$0.38
0.38
0.38
0.38
0.38
Amort.
Expense
$29,640
28,880
27,360
28,120
28,500
End of Year
Accum. Net Book
Amort.
Value
$164,500
$29,640
134,860
58,520
105,980
85,880
78,620
114,000
50,500
142,500
22,000
*Amortizable cost per unit is $0.38 per kilometre:
[($164,500 – $22,000)  375,000 = $0.38]
(b) I recommend it use the units-of-activity method as it
results in the best matching of expense with revenue.
EXERCISE 9-5
Jan. 10
Apr. 8
Sep. 2
Nov. 1
Dec. 31
Building ...................................... 70,000
Cash.......................................
70,000
Repairs Expense ....................... 25,000
Cash.......................................
25,000
Equipment.................................. 22,500
Cash.......................................
22,500
Repairs Expense .......................
Cash.......................................
1,000
Loss on Impairment .................. 120,000
Accumulated Amortization—
Equipment .............................
1,000
120,000
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[($500,000 - $150,000) - $230,000]
EXERCISE 9-8
Jan. 2 Delivery Truck (New)
($6,500 + $33,000)*.............................. 39,500
Accumulated Amortization ................ 22,500
Loss on sale ....................................... 1,000
Delivery truck (Old) ........................
Cash ................................................
30,000
33,000
*Fair value of old truck $6,500 + cash $33,000
Mar. 31 Amortization Expense ........................
Accumulated Amortization
—Machinery ...................................
($62,000 ÷ 10 years x 3/12)
1,550
1,550
31 Accumulated Amortization
—Machinery [($62,000 ÷ 10 years) x
(9 years + 3 months)] ......................... 57,350
Loss on Disposal................................ 4,650
Machinery .......................................
Sept 1 Amortization Expense ........................
Accumulated Amortization............
—Office Equipment........................
($5,490 ÷ 3 years x 8/12)
62,000
1,220
1 Cash ....................................................
800
Accumulated Amortization
—Office Equipment ............................ 4,880
($5,490 ÷ 3 years x 2 years + 8 months)
Gain on Disposal ..........................
Office Equipment ...........................
1,220
190
5,490
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EXERCISE 9-9
(a)
(1)
(2)
Straight-line method: ($16,000 - $1,000) ÷ 4 years
= $3,750 per year or $7,500 for 2006 and 2007.
Double declining-balance method
DDB Rate: ¼ x 2 = 50%
2006: $16,000 x 50% = $8,000
2007: $16,000 - $8,000 = $8,000 x 50% = $4,000
Total amortization expense for 2006 and 2007 = $12,000
(b) (1)
Straight-line method
Proceeds - Net book value = Gain (loss)
[$5,000 - ($16,000 - $7,500)] = ($3,500)
(2)
Double declining-balance method
Proceeds - Net book value = Gain (loss)
[$5,000 - ($16,000 - $12,000) = $1,000
(c) The amount of the loss using the straight-line method is
$3,500. The amount of the gain using the double-decliningbalance method is $1,000. The amounts are not the same
because of the difference in the amortization expense
calculation on a year to year basis which impacts the net
book value of the asset which in turn impacts the gain or
loss on disposal.
If you consider, however, the total impact on net income
over the two year period the amounts are identical. Using
the straight-line method total amortization is $7,500 and
loss on disposal is $3,500 resulting in an $11,000 decrease
in net income over the two year period. Using the doubledeclining-balance method total amortization is $12,000 and
gain on disposal is $1,000. Overall effect on net income
using both methods over the two year period is an $11,000
decrease.
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Weygandt, Kieso, Kimmel, Trenholm, KinnearAccounting Principles, Third Canadian Edition
PROBLEM 9-3A
(a)
Cost:
Cash price
Delivery costs
Installation and testing
Total cost
$180,000
1,000
3,200
$184,200
The one-year insurance policy is not included as it is an
operating expenditure, benefiting only the current period.
(b)
1.
STRAIGHT-LINE AMORTIZATION
Calculation
Amortizable
Amort.
Year
Cost
X
Rate =
2006
2007
2008
2009
2010
2011
$172,700*
172,700
172,700
172,700
172,700
172,700
20%** x 8/12
20%
20%
20%
20%
20% x 4/12
End of Year
Amort.
Accum. Net Book
Expense
Amort.
Value
$184,200
$23,027 $ 23,027
161,173
34,540
57,567
126,633
34,540
92,107
92,093
34,540
126,647
57,553
34,540
161,187
23,013
11,513
172,700
11,500
* Amortizable cost = $184,200 - $11,500 = $172,700
** 1 ÷ 5 years = 20%
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PROBLEM 9-3A (Continued)
(b) (Continued)
2.
DOUBLE DECLINING-BALANCE AMORTIZATION
Year
Calculation
NBV Beg.
Amort.
of Year
X
Rate =
2006
2007
2008
2009
2010
2011
$184,200
135,080
81,048
48,269
29,177
17,506
40%* x 8/12
40%
40%
40%
40%
40%
End of Year
Amort.
Accum. Net Book
Expense
Amort.
Value
$184,200
$49,120
$49,120
135,080
54,032
103,152
81,048
32,419
135,571
48,629
19,452
155,023
29,177
11,671
166,694
17,506
6,006** 172,700
11,500
* 1 ÷ 5 years = 20% x 2 = 40%
**Use the amount that makes net book value equal to residual
value
3.
UNITS-OF-ACTIVITY AMORTIZATION
Year
2006
2007
2008
2009
2010
2011
Calculation
Units of
Amort.
Activity X Cost/Unit* =
8,500
12,000
11,500
10,500
9,500
3,000
$3.14*
3.14
3.14
3.14
3.14
3.14
End of Year
Amort.
Accum. Net Book
Expense
Amort.
Value
$184,200
$26,690 $ 26,690
157,510
37,680
64,370
119,830
36,110
100,480
83,720
32,970
133,450
50,750
29,830
163,280
20,920
9,420
172,700
11,500
*Amortizable cost per unit:
($184,200 - $11,500) ÷ 55,000 units = $3.14
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PROBLEM 9-3A (Continued)
(c)
Double declining-balance amortization provides the
highest amount of amortization expense for 2006, thus
resulting in the lowest net income that year. Over the life
of the asset, all three methods result in the same total
amortization expense (equal to the amortizable cost).
(d) All three methods will result in the same cash flow in
2006 and over the life of the asset. Recording
amortization expense does not affect cash flow. There is
no Cash account involved in the entry to record
amortization
(Dr.
Amortization
Expense;
Cr.
Accumulated Amortization). It is only an allocation of the
capital cost to expense over an asset’s useful life.
(e)
Factors that should influence management’s choice of
the amortization method to use include the revenue
pattern of a specific asset, the productivity of the asset,
as well as the usage of the asset on a year over year
basis. If an asset generates revenue consistently over
time, then the straight-line method is most appropriate.
If an asset is more productive in its earlier years then
the declining-balance method is most appropriate. If
usage of an asset can be easily measured and usage is
very different year over year then the units-of-activity
method is the most appropriate.
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PROBLEM 9-4A
Feb. 12 Building ...................................... 120,000
Cash.......................................
Mar.
6 Maintenance Expense ...............
Cash......................................
120,000
7,500
7,500
Apr. 10 Furniture and Fixtures .............. 25,000
Cash.......................................
25,000
May 17 Machinery .................................. 35,000
Cash.......................................
8,000
June 28 Maintenance Expense ...............
Cash.......................................
5,000
5,000
July 20 Repairs Expense ....................... 10,000
Cash.......................................
Aug.
5 Training Expense ......................
Cash.......................................
1,600
1,600
Sep. 18 Machinery .................................. 80,000
Cash.......................................
Nov.
6 Prepaid Insurance .....................
Cash.......................................
10,000
80,000
4,600
Dec. 31 Loss on Impairment .................. 70,000
Accumulated Amortization—
Equipment .............................
[($400,000 - $150,000) - $180,000]
4,600
70,000
Dec. 31 No journal entry required. Once a permanent
impairment has been recorded, the value of an
asset is not adjusted for any recovery in value.
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PROBLEM 9-6A
(a)
Calculation
Amortizable
Amort.
Year
Cost
X
Rate =
Amort.
Expense
2004
2005
2006
2007
$20,000
40,000
40,000
40,000
$200,000*
200,000
200,000
200,000
20%** x 6/12
20%
20%
20%
End of Year
Accum. Net Book
Amort.
Value
$220,000
20,000
200,000
60,000
160,000
100,000
120,000
140,000
80,000
* Amortizable cost = $220,000 - $20,000 = $200,000
** 1 ÷ 5 years = 20%
(b) Jan.
(c)
9 Equipment.................................. 33,000
Cash.......................................
Nov. 18 Maintenance Expense ...............
Cash......................................
1,500
Dec. 15 Repair Expense .........................
Cash.......................................
2,400
33,000
1,500
Net book value, December 31, 2007 ......................
Add: Addition ..........................................................
Less: Revised residual value .................................
Revised amortizable cost .......................................
Remaining useful life (9 - 3½ years) .......................
Revised annual amortization expense ..................
2,400
$80,000
33,000
113,000
25,000
88,000
5½ years
$16,000
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Weygandt, Kieso, Kimmel, Trenholm, KinnearAccounting Principles, Third Canadian Edition
PROBLEM 9-6A (Continued)
(d)
Net book value before overhaul: Dec. 31, 2007
Add: Cost of overhaul
Net book value after overhaul
Less: Annual amortization after overhaul:
2008
$16,000
2009
16,000
2010
16,000
2011
16,000
2012
16,000
2013 ($16,000 x 6/12)
8,000
Net book value at end of useful life: June 30, 2013
Accumulated amortization:
Before overhaul: Dec. 31, 2007
Amortization from Jan 1, 2008 to
June 30, 2013 (see above)
At end of useful life: June 30, 2013
Check:
Original cost of asset
Cost of overhaul
Less: accumulated amortization June 30, 2013
Net book value June 30, 2013
$80,000
33,000
113,000
88,000
$25,000
$140,000
88,000
$228,000
$220,000
33,000
253,000
228,000
$ 25,000
Note: Net book value June 30, 2013 = revised estimated residual
value of $25,000.
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Weygandt, Kieso, Kimmel, Trenholm, KinnearAccounting Principles, Third Canadian Edition
PROBLEM 9-8A
(a)
2006
Mar. 11 Office Equipment....................... 85,000
Accounts Payable .................
(b) Dec. 31 Amortization Expense ............... 17,500
Accumulated Amortization
—Office Equipment ..............
[($85,000 - $1,000) ÷ 4 years] x 10/12 months
2007
Dec. 31 Amortization Expense ............... 21,000
Accumulated Amortization
—Office Equipment ..............
($85,000 - $1,000) ÷ 4 years
2008
Nov. 22 Amortization Expense ............... 19,250
Accumulated Amortization
—Office Equipment ..............
[($85,000 - $1,000) ÷ 4 years] x 11/12
85,000
17,500
21,000
19,250
(c)
(1)
(2)
Nov. 22 Accumulated Amortization
—Office Equipment¹ .................. 57,750
Loss on Disposal....................... 27,250
Office Equipment ..................
¹ $17,500 + $21,000 + $19,250 = $57,750
Nov. 22
Cash ........................................... 35,000
Accumulated Amortization—
Office Equipment....................... 57,750
Gain on Disposal ..................
Office Equipment ..................
85,000
7,750
85,000
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PROBLEM 9-8A (Continued)
(c) (Continued)
(3)
(4)
Nov. 22 Cash ........................................... 20,000
Accumulated Amortization—
Office Equipment....................... 57,750
Loss on Disposal....................... 7,250
Office Equipment ..................
85,000
Nov. 22 Office Equipment
($25,000 + $78,000) .................... 103,000
Accumulated Amortization
—Office Equipment ................... 57,750
Loss on Disposal
($85,000 - $57,750) - $25,000 ..... 2,250
Cash ($113,000 - $35,000).....
Office Equipment ..................
78,000
85,000
PROBLEM 9-10A
1.
2.
3.
4.
5.
Research Expense ..................................... 60,000
Patent .....................................................
60,000
Patent .......................................................... 21,000
Legal Fees Expense ..............................
21,000
Patent .......................................................... 38,000
Legal Fees Expense ..............................
38,000
Patent .......................................................... 50,000
Royalty Revenue ....................................
50,000
Amortization Expense ................................ 16,550
Accumulated Amortization—Patent .....
16,550
{[($35,000 + $21,000 + $38,000) ÷ 5 years] - $2,250}
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6.
Loss on Impairment ...................................
Accumulated Amortization—Patent .....
[($94,000 - $18,800) - $70,000]
5,200
5,200
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PROBLEM 9-11A
(a)
Jan.
Jan. June
July
2 Trademark ................................ 0.27,000
Cash.....................................
27,000
Research Expense .................. 210,000
Cash.....................................
210,000
1 Patent (Development Costs) ...
Cash.....................................
50,000
Sept. 1 Advertising Expense ...............
Cash.....................................
60,000
Oct.
50,000
60,000
1 Copyright #2 ............................ 180,000
Cash.....................................
180,000
Dec. 31 Impairment Loss ..................... 40,000
Goodwill ($125,000 - $85,000)
40,000
(b) Dec. 31 Amortization Expense .............
1,250
Accumulated Amortization—
Patent .................................
[($50,000 ÷ 20) x 6/12] = $1,250]
1,250
31 Amortization Expense ............. 12,600
Accumulated Amortization—
Copyright.............................
12,600
[($36,000 x 1/10) + ($180,000 x 1/5 x 3/12)]
Note: Amortization is not recorded on trademark because
it has an expected indefinite useful life.
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PROBLEM 9-11A (Continued)
(c)
GHANI CORPORATION
Balance Sheet (Partial)
December 31, 2008
Assets
Intangible assets
Patents .................................................
$ 50,000
Less: Accumulated amortization .......
1,250
$ 48,750
(1)
Copyrights ........................................
$216,000
Less: Accumulated amortization .......
37,800
178,200
(2)
Trademark ................................................................
81,000
Goodwill ......................................................................
85,000
Total intangible assets .............................................. $392,950
(1)
(2)
Copyright: Cost $36,000 + $180,000 = $216,000
Copyright: Amortization $25,200 + $12,600 = $37,800
Trademark: $54,000 + $27,000 = $81,000
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