BUSI 353

SOLUTION ASSIGNMENT #6
Solution 1.

Requirement 1

Ledger Account Debit Credit

January 31
Land 110,000
Building 420,000
Common Shares (Plug) 530,000

No dates indicated
Research Expense 82,000
Development Expense 35,000
Deferred Development 75,000
Cash 192,000

November 30
Depreciation Expense – Burnaby Building (420,000 x 6% x 10/12) 21,000
Accumulated depreciation – Burnaby Building 21,000

Land – Vancouver 110,000

Building – Vancouver (420,000-21,000=399,000 carrying value of Burnaby Building) 399,000
Accumulated Depreciation – Burnaby Building 21,000
Land – Burnaby 110,000
Building – Burnaby 420,000

December 31
Depreciation Expense – Vancouver Building (399,000 x 6% x 1/12) 1,995
Accumulated Depreciation – Vancouver Building 1,995
 Requirement 2

An entity determines whether an exchange transaction has commercial substance by considering the
extent to which its future cash flows are expected to change as a result of the transaction. An
exchange transaction has commercial substance if:

(a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from
the configuration of the cash flows of the asset transferred; or
(b) the entity-specific value of the portion of the entity's operations affected by the transaction
changes as a result of the exchange; and
(c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.

For the purpose of determining whether an exchange transaction has commercial substance, the entity-
specific value of the portion of the entity's operations affected by the transaction shall reflect post-tax
cash flows.

Requirement 3

Burnaby Land FV = 145,000

CBL Burnaby Building FV = ?? Other Party
Cash = 85,000

Vancouver Land FV = 106,000

Vancouver Building FV = 480,000

Ledger Account Debit Credit

November 30
Land – Vancouver 106,000
Building – Vancouver 480,000
Accumulated Depreciation – Burnaby Building 21,000
Land – Burnaby 110,000
Building – Burnaby 420,000
Cash 85,000
Loss on sale of land and building (Plug) 8,000
Solution 2

Requirement 1
Net book value at the end of 2018:
Plant facility: $3,668,500 ($4,600,000 – (($4,600,000 – $460,000) × 4.5/20);
($4,600 000 – $931,500)
Equipment: $1,913,300 ($3,875,000 – (($3,875,000 – $387,500) × 4.5/8);
($3,875,000 – $1,961,700; rounded)

Requirement 2
+ An impairment loss should be recognized when the carrying amount of a long-lived asset (tangible
capital asset) is (i) not recoverable and (ii) exceeds its fair value.
+ The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of
the undiscounted cash flows expected to result from its use and eventual disposition. This assessment is
based on the carrying amount of the asset at the date it is tested for recoverability, whether it is in use or
under development.

Requirement 3

The carrying amount of the plant and equipment is: $5,581,800 [=3,668.5k+1,913.3k]

The sum of the undiscounted cash flows expected to result from the use of the plant and equipment and their
eventual disposition is $4,095,000. [=(200k)+621k+621k+621k+621k+1,811k)]

Since $5,581,800 > $4,095,000, the carrying amount is not recoverable. This implies that future cash flows
associated with the plant and equipment will not be able to offset future depreciation expense associated with
the plant and equipment.

Requirement 4

Impairment loss for the asset group would be: $2,132,720 (=5,581,800-3,449,080)

Allocation of Adjusted
Net book impairment carrying
Asset value Proportion loss value

Plant 3,668.5 65.7% 1,401.20 2,267.3

Equipment 1,913.3 34.3% 731.52 1,181.78
$ 5,581.8 100.0% $2,132.72 $3,449.08

Accumulated depreciation, equipment ................... 1,961,700

Accumulated depreciation, plant facility ................. 931,500
Impairment loss on PPE ........................................ 2,132,720
Equipment ($3,875,000 – $1,181,780)............ 2,693,220
Plant facility ($4,600,000 – $2,267,300).......... 2,332,700

Requirement 5

No, an impairment loss cannot be reversed under ASPE.

Solution 3

Requirement 1

Cash-Generating Unit (CGU).

Requirement 2

“Recoverable amount” under IFRS is defined as the higher of:

i. Fair value less cost to sell (“FVLCTS”)
ii. Value in use (“VIU”)

In this situation:
i. FVLCTS: 3,449,080 – (2% x 3,449,080) – 144,000 = $3,236,098
ii. VIU: $3,194,676 = (200,000)/1.07^0 + 621,000/1.07^1 + 621,000/1.07^2 + 621,000/1.07^3 +
621,000/1.07^4 + 1,811,000/1.07^5

Therefore, recoverable amount would be $3,240,098 since it is the higher of the two.

Requirement 3

If “value in use” is $3,300,000, then this becomes the recoverable amount since it is the higher of the two.
Therefore, the amount of the write down would be $2,281,800 (=5,581,800 – 3,300,000)

Allocation of Adjusted
Net book impairment carrying
Asset value Proportion loss value

Plant 3,668.5 65.7% 1,499.143 2,169.357

Equipment 1,913.3 34.3% 782.657 1,130.643
$ 5,581.8 100.0% $2,281.800 $3,300.000

DR Impairment loss on PPE 2,281,800 {part of profit/loss, not OCI}

CR Accumulated depreciation, plant facility 1,499,143 {balance sheet}
CR Accumulated depreciation, equipment 782,657

{Notice that this entry is different than the solution for Question #2, Requirement #4}

Requirement 4

Yes, under IFRS, an impairment loss on property, plant and equipment can be reversed. This is a significant
difference from ASPE.

Solutions 4

ANSWERS TO THE CASE QUESTIONS CAN BE OBTAINED BY READING THE CASE. IF YOU HAVE ANY
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