CHAPTER 11

EXERCISE 11.5

a.
Methods of Depreciation
Date Accum.
Descri Purcha- Depr. 2024
-ption sed Cost Residual Life Method to 2023 Depr.
A 12/02/22 142,500 16,000 10 DDB 39,900 20,520
B 08/15/21 79,000 21,000 5 SL 29,000 11,600
C 07/21/20 75,400 23,500 8 DDB 47,567 4,333

(1) Machine A—Testing alternate methods:

Straight Line Method for 2022 $ 6,325

Straight Line Method for 2023 12,650
Total Straight Line $18,975

Determine the double-declining-balance rate:

100% / 10 years = 10% X 2 = 20%

Double Declining Balance for 2022

= ($142,500 X 20% X .5) $14,250
Double Declining Balance for 2023
= ($142,500 - $14,250) X 20% 25,650

Total Double Declining Balance $39,900

(2) 2024 depreciation = ($142,500 – $39,900) X 20% = $20,520

(3) and (4) Machine B—Calculation of the cost and depreciation

• Asset has been depreciated for 2 1/2 years using the
straight line method.
• Annual depreciation is then equal to $29,000 divided by
2.5 or $11,600.
• $11,600 times 5 plus the residual value is equal to the
cost
• Cost is $79,000
EXERCISE 11.5 (CONTINUED)

a. (continued)

(5) Machine C—Using the double-declining balance method of

depreciation
2020’s depreciation is $ 9,425 ($75,400 X 25%2 X .5)
2021’s depreciation is 16,494
2022’s depreciation is 12,370
2023’s depreciation is 9,278
$47,567

2
NOTE: To determine the double-declining-balance rate:
100% / 8 years = 12.5% X 2 = 25%

(6) Using DDB, 2024 Depreciation is $4,3331

1
to reduce to $23,500 residual value [($75,400 – $47,567) -
$23,500 = $27,833 – $23,500 = $4,333].

NOTE: $27,833 x .25 = $6,958. This amount of depreciation would

reduce the carrying amount lower than the residual value.
Therefore depreciation must be limited to $4,333.

b. In deciding whether to select the straight-line method or

double declining method of depreciation, Jared Industries
Ltd. should consider the pattern of depreciation which best
reflects the benefits provided by the machines. More
specifically, the straight-line method is appropriate where all
accounting periods will benefit equally from the use of the
machinery and therefore the straight-line method will achieve
the best matching of costs to benefits received. If however,
the machinery is expected to contribute greater benefits in
the earlier years and where more costly repairs are required
as the equipment gets older for example, then the declining-
balance method would be more appropriate.
EXERCISE 11.8

a. Straight-line method depreciation for each of Years 2020

through 2022 =

$387,000 – $39,000
= $29,000
12

100%
b. Double-Declining Balance method X 2 = 16.67%
12
depreciation rate.

$387,000 X 16.67% = $64,513 deprec. 2020

($387,000 – $64,513) X 16.67% = $53,759 deprec. 2021
($387,000 – $64,513 – $53,759) X 16.67% = $44,797 deprec. 2022

c. Equipment – Input Device .................. 55,000

Equipment – Processor ...................... 132,000
Equipment – Output Device ............... 200,000
Cash ........................................... 387,000

d. Depreciation for 2020:

Input device ($55,000 - $5,000) / 5 = $10,000

Processor ($132,000 - $12,000) 10 = $12,000
Output device $200,000 X 16.67%1 = $33,340
Depreciation for 2020 $55,340
1
The output device is expected to provide the greatest benefits in
the early years, therefore the double declining balance method
would be an appropriate method because the depreciation
charges are also higher in the early years.
EXERCISE 11.8 (CONTINUED)

e. For the straight-line method under ASPE, depreciation

expense is the higher of two amounts: (1) cost less salvage
value over the life of the asset, and (2) cost less residual value
of the asset’s useful life.

(1) ($387,000 – $32,000) / 14 = $25,357

(2) ($387,000 – $39,000) / 12 = $29,000

In this case, since (2) is the higher of the two amounts, the
straight-line depreciation is the same under both ASPE and
IFRS.

With respect to the components, under ASPE, the practice

has been not to recognize asset components to the same
extent as under IFRS. Consequently, the depreciation
expense would not be calculated for the 3 components.
EXERCISE 11.9

a. Examination of the depreciation schedule under declining

balance indicates there is a residual value, as the
depreciation amount in the fourth year is truncated to an
amount less than the continuation of the series of the first
three years. When there is any residual value and the
amount is unknown (as is the case here), the cost would
have to be determined by looking at the data for the double-
declining balance method.

100%
= 20%; 20% X 2 = 40%
5

Cost X 40% = $30,000

$30,000  .40 = $75,000 Cost of asset

b. $75,000 cost [from a.] – $60,000 total depreciation

= $15,000 residual value.

c. The lower charge to income for Year 1 will be yielded by the

straight-line method, and this will yield the higher net
income.

d. The higher charge to income for Year 4 will be yielded by the

straight-line method.

e. The method that produces the higher carrying amount at the

end of Year 3 would be the method that yields the lower
accumulated depreciation at the end of Year 3 which is the
straight-line method.

Calculations:
St.-line = $75,000 – ($12,000 + $12,000 + $12,000) = $39,000
carrying amount, end of Year 3.
D.D.B. = $75,000 – ($30,000 + $18,000 + $10,800) = $16,200
carrying amount, end of Year 3.
EXERCISE 11.9 (CONTINUED)

f. Since CCA must be used for tax purposes, neither the

straight-line, nor the double-declining balance method will
impact cash flows in any of the years. Net income must be
converted to taxable income by removing the accounting
depreciation and substituting capital cost allowance.

NOTE: Irrespective of the depreciation method used,

depreciation does not affect cash flows. Rather,
depreciation expense is simply an allocation of the usage of
an asset over time but it does not reflect actual cash outlays.

g. The double-declining balance method in this case: The

method that will yield the higher gain (or lower loss) if the
asset is sold at the end of Year 3 is the method which will
yield the lower carrying amount [see part e.] at the end of
Year 3.

h. For the straight-line method under ASPE, depreciation

expense is the higher of two amounts: (1) cost less salvage
value over the life of the asset, and (2) cost less residual
value of the asset’s useful life.

(1) ($75,000 - $0) / 6 = $12,500

(2) ($75,000 – $15,000) / 5 = $12,000

Since (1) is the higher depreciation amount, annual

depreciation expense under ASPE would be $12,500. Parts
c. through g. would result in the same answers for ASPE and
IFRS.
EXERCISE 11.11
a.
Depreciation taken (DDB): $60,000 X 40% ...................... $24,000
Correct depreciation (SL): ($60,000 – $5,000) / 5 years . 11,000
Overstatement of depreciation ........................................ $13,000

The correcting entry needed is as follows:

Accumulated Depreciation–Machinery 13,000
Depreciation Expense ................. 13,000
Calculation of corrected net income:
Net income as reported ................................................... $53,000
Add: Overstatement of depreciation expense ............... 13,000
Corrected net income ...................................................... $66,000

b. Under ASPE, depreciation expense is the higher of : (1) cost

less salvage value over the life of the asset, and (2) cost less
residual value of the asset’s useful life.
(1) ($60,000 – $3,000) / 6 = $9,500
(2) ($60,000 - $5,000) / 5 = $11,000
Since (2) is the higher depreciation amount, annual
depreciation expense under ASPE would be $11,000 (the same
as for IFRS). The correcting journal entry and calculation of
corrected net income would be the same as well.
c. A potential investor would want to base their investment
decision on relevant and faithfully representative information.
If the error was not detected and corrected by Gibbs, net
income in 2020 would be understated, and total assets at end
of 2020 would be understated. The financial statements would
be less relevant (they would have less predictive value), and
the financial statements would not be as faithfully
representative (they would not be free from error). As well,
comparability of the financial statements with financial
statements of previous periods, would be compromised. A
potential investor might forego investing in Gibbs, based on
this understated amount of net income and total assets.
EXERCISE 11.16

a. No correcting entry is necessary because changes in

estimate are handled in the current and prospective periods.

b. Original annual charge: ($56,000 – $4,000) ÷ 8 = $6,500

Revised annual charge:
Carrying amount as of 1/1/2020 [$56,000 – ($6,500 X 5)] =
= $23,500
Remaining useful life = 5 years (10 years – 5 years)
Revised residual value = $4,500
($23,500 – $4,500)  5 = $3,800

Depreciation Expense ................................ 3,800

Accumulated Depreciation—
Machinery ..................................... 3,800

c. Under ASPE, depreciation expense is the higher of : (1) cost

less salvage value over the life of the asset, and (2) cost less
residual value of the asset’s useful life.
(1) ($56,000 – $0) / 8.5 = $6,588
(2) ($56,000 - $4,000) / 8 = $6,500

Since (1) is the higher depreciation amount, annual

depreciation expense under ASPE would be $6,588.

Carrying amount as of 1/1/2020 is $23,060 [$56,000 –

($6,588 x 5)] = $23,060.
Remaining useful life = 6 years (11 years – 5 years)
In 2020, depreciation expense is re-computed as per the
formula above:
(1) ($23,060 - $100)/6 = $3,827
(2) ($23,060 - $4,500)/5 = $3,712

Therefore, depreciation expense is $3,827.

EXERCISE 11.16 (CONTINUED)

c. (continued)

Depreciation Expense ................................ 3,827

Accumulated Depreciation—
Machinery ..................................... 3,827

d. Revised annual charge:

Old depreciation rate = (100% ÷ 8) X 2 = 25%
Carrying amount as of 1/1/2020 =
= [$56,000 X (1 – 25%)5] = $13,289
Remaining useful life = 5 years
Revised depreciation rate = (100% ÷ 5) X 2 = 40%
$13,289 X 40% = $5,316

Depreciation Expense ................................ 5,316

Accumulated Depreciation—
Machinery ..................................... 5,316
EXERCISE 11.17

a. 1992-2001: ($1,800,000 – $400,000)  40 = $35,000/yr.

b. 2002-2019:
Building ($1,800,000 – $400,000)  40 = $35,000/yr.
Addition ($750,000 – $150,000)  30 = 20,000/yr.
$55,000/yr.

c. No entry required because changes in estimate are handled in

the current and prospective periods.

d. Revised annual depreciation

Building:
Carrying amount: ($1,800,000 – $980,0001) $820,000
Remaining useful life 2 years
Annual depreciation $410,000

Addition:
Carrying amount: ($750,000 – $360,0002) $390,000
Remaining useful life 2 years
Annual depreciation $195,000

1
$35,000 X 28 years = $980,000
2
$20,000 X 18 years = $360,000

Note: 30 years total useful life; 28 years have lapsed so the

unamortized balance is charged off over the two years of
remaining expected useful life. Despite the amount, this is
treated prospectively.

Annual depreciation expense:

Building ($410,000 + $195,000) = $605,000
EXERCISE 11.17 (CONTINUED)

e. The original useful life estimate would have been

management’s best estimate based on the information that
was available. However, an investor who purchased shares
in Lincoln in 2019 would have based his or her investment
decision on financial statements that show annual building
depreciation expense of $55,000/yr., when annual building
depreciation expense would have been $76,667/yr.
[($1,800,000 - $400,000)  30 + ($750,000 - $150,000)  20]
based on an original useful life of 30 years. Annual building
depreciation expense of $46,667 for the first 10 years and
$76,667 for 18 years would have amounted to $1,864,676 in
accumulated depreciation at end of 2019, whereas the
financial statements at end of 2019 reported accumulated
depreciation of $1,340,000. Also, the investor would have
invested based on the information that the building would
be useful for another 12 years (until 2031), although Lincoln
will likely need to invest in a new building within 2 years, if
the company intends to occupy a building within the same
district. The investor should also be concerned that the
building should be tested for impairment, since the value of
the building on the SFP is likely overstated (it is based on
an original useful life of 40 years), and there are now only 2
years of useful life remaining. Review of asset useful life at
least at each year end helps to ensure that financial
statements are prepared based on the most relevant
information available.
EXERCISE 11.17 (CONTINUED)

f. For 1992 – 2001 was computed as the higher of:

(1) ($1,800,000 - $216,000) / 44 = $36,000/yr.
(2) ($1,800,000 - $400,000) / 40 = $35,000/yr.

Therefore, depreciation expense was $36,000/yr.

For 2002 – 2019:

Building ($1,800,000 – $216,000)  44 = $36,000/yr.

Revised annual depreciation

Building:
Carrying amount: ($1,800,000 –$1,008,0001) $792,000
Remaining useful life 2 years
Annual depreciation $396,000

1
$36,000 X 28 years = $1,008,000
EXERCISE 11.18

a. $2,800,000  40 = $70,000

b. Loss on Disposal of Buildings ............ 95,000

Accumulated Depreciation—Buildings
($190,000 X 20/40) .............................. 95,000
Buildings ...................................... 190,000
To record disposal of old roof

Buildings1 .............................................. 370,000

Cash ............................................. 370,000
To record installation of new roof

1
Componentized asset would be capitalized separately from
the building if it had a different pattern of expected benefits
or a different useful life. In this example, it is assumed, in
the absence of additional information that the remaining
useful life of the roof is the same as the building’s remaining
useful life, and that straight-line deprecation is appropriate.

The most appropriate entry (and as required under IFRS), as

shown is to remove the old roof and record a loss on
disposal. If the original cost is not known it would have to
be estimated.

An alternative that exists under Canadian ASPE would be to

debit Accumulated Depreciation – Buildings on the theory
that the replacement extends the useful life of the building.
The entry in this case would be as follows:

Accumulated Depreciation—Buildings 370,000

Cash ............................................. 370,000

As indicated, this approach does not seem as appropriate

as the first approach and does not provide for asset
componentization.
EXERCISE 11.18 (CONTINUED)

c. No entry necessary.

d. (Assume the cost of old roof is removed)

Building ($2,800,000 – $190,000 + $370,000) $2,980,000
Accumulated Depreciation ($70,000 X 20 –
$95,000) 1,305,000
1,675,000
Remaining useful life 25 years
Depreciation—2020 ($1,675,000  25) $ 67,000

OR

(Assume the cost of new roof is debited to

accumulated depreciation - buildings)
Carrying amount of building prior to the
replacement of roof
$2,800,000 – ($70,000 X 20) = $1,400,000
Cost of new roof 370,000
$1,770,000
Remaining useful life 25 years
Depreciation—2020 ($1,770,000  25) $ 70,800
EXERCISE 11.19

a. December 31, 2020

Loss on Impairment................................ 270,000
Accumulated Impairment
Losses—Equipment ................... 270,000

The recoverability test indicates that impairment has

occurred since the carrying amount ($500,000) exceeds the
undiscounted future net cash flows ($300,000). The
impairment loss is then calculated as follows:

Cost $900,000
Accumulated depreciation 400,000
Carrying amount 500,000
Fair value 230,000
Loss on impairment $270,000

b. It may be reported in the other expenses and losses section

or it may be highlighted as an unusual item in a separate
section, as part of income from continuing operations.

c. No entry necessary. Under the Cost Recovery Impairment

Model, recovery of any impairment loss is not permitted for
assets held for use or to be disposed of other than by sale.

d. No entry necessary. The recoverability test indicates that

impairment has not occurred since the carrying amount
($500,000) is less than the undiscounted future net cash
flows ($510,000).

e. The recoverability test indicates that impairment has

occurred since the carrying amount ($500,000) exceeds the
undiscounted future net cash flows of $450,000 ($45,000 X
10 years).
EXERCISE 11.19 (CONTINUED)

e. (continued)

Since fair value is not available (no active market for the
equipment), present value of the future net cash flows is
used to calculate the impairment loss:

Cost $900,000
Accumulated depreciation 400,000
Carrying amount 500,000
Fair value1 276,506
Loss on impairment $223,494

1
Fair value Using tables = PV of annuity ($45,000, n = 10
years, i = 10%) = $45,000 X 6.14457 = $276,506

Using a financial calculator:

PV ? Yields $ 276,505.52
I 10%
N 10
PMT $0
FV $(45,000)
Type 0
EXERCISE 11.19 (CONTINUED)

e. (continued)

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $276,505.52

December 31, 2020

Loss on Impairment................................ 223,494
Accumulated Impairment
Losses—Equipment ................... 223,494

f. The Cost Recovery Impairment Model uses undiscounted

future net cash flows in its recoverability test because the
recoverability test assesses recoverability of cost. The
asset’s original cost is compared to undiscounted future net
cash flows generated from use of the asset in future periods.
EXERCISE 11.21

a.

Under IFRS, the recoverable amount of the cash-generating unit

(CGU) is the higher of (1) value in use and (2) fair value less costs
to sell. The recoverable amount of the CGU is $108,000, which is
lower than the carrying amount of the CGU ($120,000), therefore
the CGU is impaired. The impairment loss is $12,000 ($120,000 -
$108,000).

The impairment loss is allocated to the individual assets in the

unit, but no individual asset is reduced to below the highest of (1)
its value in use, (2) its fair value less costs to sell, or (3) zero.

Allocation of impairment loss to assets in cash-generating unit

(CGU):
Carrying
Amount Carrying
(before Loss Amount (after
impairment) Proportion Allocation impairment)
Land $25,000 25/120 $2,500 $22,500
Building 50,000 50/120 5,000 45,000
Equipment 30,000 30/120 3,000 27,000
Vehicles 15,000 15/120 1,500 13,500
$120,000 $12,000 $108,000

The journal entry to recognize the impairment loss is:

Loss on Impairment.................................... 12,000
Land.................................................... 2,500
Accumulated Impairment Losses—
Buildings ....................................... 5,000
Accumulated Impairment Losses—
Equipment .................................... 3,000
Accumulated Impairment Losses—
Vehicles ........................................ 1,500
EXERCISE 11.21 (CONTINUED)

b.

Since the recoverable amount of the building is determined to be

$46,000, the building cannot be reduced to below $46,000 (note
that from part a., a true proportionate allocation would result in
building carrying amount of less than $46,000).

Allocation of impairment loss to assets in cash-generating unit

(CGU):
Carrying Carrying
Amount Amount
(before Loss (after
impairment) Proportion Allocation impairment)
1 2
Land $25,000 25/70 $2,857 $22,143
Buildings 50,000 4,000 46,000
Equipment 30,000 30/70 3,429 26,571
Vehicles 15,000 15/70 1,714 13,286
$120,000 $12,000 $108,000
1
Allocation base = $25,000 + $30,000 + $15,000 = $70,000
2
Loss on impairment to allocate = $12,000 total – $4,000 allocated
to buildings = $8,000; $8,000 loss on impairment to allocate X
25/70 = $2,857 allocated to land

The journal entry to recognize the impairment loss is:

Loss on Impairment..................................... 12,000
Land..................................................... 2,857
Accumulated Impairment Losses—
Buildings....................................... 4,000
Accumulated Impairment Losses—
Equipment .................................... 3,429
Accumulated Impairment Losses—
Vehicles ........................................ 1,714
EXERCISE 11.21 (CONTINUED)
c.

Under ASPE, the asset group is impaired if its undiscounted

future net cash flows are less than its carrying amount. The
undiscounted future net cash flows are $144,000, which is higher
than the asset group’s carrying amount of $120,000. Therefore the
asset group is not impaired and no entry is necessary.
EXERCISE 11.22

a. Cost Recovery Impairment Model

(1) December 31, 2020

Loss on Impairment.......................... 1,800,000
Accumulated Impairment
Losses—Equipment 1,800,000
Equipment ................................

The recoverability test indicates that impairment has

occurred since the carrying amount exceeds the
undiscounted future net cash flows. The loss on
impairment is calculated as follows:

Cost $10,000,000
Accumulated depreciation 2,000,000
Carrying amount 8,000,000
Fair value 6,200,000
Loss on impairment $1,800,000

(2) December 31, 2021

Depreciation Expense ....................... 1,550,000
Accumulated Depreciation—
Equipment ........................... 1,550,000

New carrying amount $6,200,000

Useful life 4 years
Depreciation per year $1,550,000

(3) No entry permitted. Under the Cost Recovery Impairment

Model, recovery of any impairment loss is not permitted for
assets held for use or to be disposed of other than by sale.
EXERCISE 11.22 (CONTINUED)

b. Rational Entity Impairment Model

(1) The asset’s recoverable amount is $6,350,000 (the higher of

its value in use (i.e. discounted future net cash flows)
($6,350,000) and its fair value less costs to sell ($6,150,000).

The impairment test indicates that impairment has occurred

since the carrying amount exceeds the recoverable amount.
The impairment loss is calculated as follows:

Cost $10,000,000
Accumulated depreciation 2,000,000
Carrying amount 8,000,000
Recoverable amount 6,350,000
Loss on impairment $1,650,000

December 31, 2020

Loss on Impairment.......................... 1,650,000
Accumulated Impairment
Losses—Equipment ............. 1,650,000

(2) December 31, 2021

Depreciation Expense ....................... 1,587,500
Accumulated Depreciation—
Equipment ............................ 1,587,500

New carrying amount $6,350,000

Useful life 4 years
Depreciation per year $1,587,500

(3) Under IAS 36, an impairment loss may be reversed, however

the specific asset cannot be increased in value to more than
what its carrying amount would have been, net of
depreciation, if the original impairment loss had never been
recognized.
EXERCISE 11.22 (CONTINUED)

b. (continued)

December 31, 2020 pre-impairment loss

carrying amount ....................................................... $8,000,000
2021 depreciation based on pre-impairment carrying
amount ($8,000,000 ÷ 4 years) ................................ 2,000,000
December 31, 2021 pre-impairment carrying amount $6,000,000

The December 31, 2021 carrying amount would have been

$6,000,000 if the impairment had not occurred; this is the
maximum carrying amount which can be reflected for the
equipment in the December 31, 2021 SFP.

Actual December 31, 2020 carrying amount ................ $6,350,000

Actual 2021 depreciation (from impairment) a. ........... 1,587,500
Actual December 31, 2021 carrying amount ................ 4,762,500
December 31, 2021 pre-impairment carrying amount . 6,000,000
Recovery of previously recognized impairment b. ...... $1,237,500

Thus, the net effect on the 2021 net income (loss) is a net
decrease of $350,000 [= a. – b.]. The asset cannot be
restored to its December 31, 2020 carrying amount of
$6,350,000 as this exceeds the carrying amount that would
have existed at December 31, 2021 had the impairment in
2020 never been recognized.

December 31, 2021

Accumulated Impairment Losses—
Equipment....................................... 1,237,500
Recovery of Loss from
Impairment ............................. 1,237,500
EXERCISE 11.22 (CONTINUED)

c. The Cost Recovery Impairment Model compares the asset

carrying amount with its undiscounted future net cash flows
to determine if the asset is impaired. This recoverability test
does not take into account the time value of money and
delays recording of an impairment loss until impairment
conditions are very bad. As a result, the financial statements
may not be as relevant or faithfully representative. The Cost
Recovery Impairment Model also does not allow for later
recovery of any impairment losses, which is not neutral.

The Rational Entity Impairment Model better reflects the

economic conditions underlying the asset’s usefulness to
the entity by considering the asset’s value in use (a
discounted value) as well as its fair value less costs to sell,
and by capturing both the declines and recoveries in value
of the asset. Therefore, the Rational Entity Impairment
Model is preferred.
EXERCISE 11.26

a. Situation 1
Depreciation Expense1 ................................ 2,700
Accumulated Depreciation—
Equipment........................................ 2,700
1
($120,000 – $12,000) ÷ 10 X 3/12 = $2,700
To record depreciation on equipment
Cash ............................................................. 28,000
Loss on Disposal of Equipment ................. 13,700
Accumulated Depreciation—Equipment
($75,600 + $2,700) ........................................ 78,300
Equipment ........................................... 120,000
To record disposal of equipment

Situation 2
Depreciation Expense2 ................................ 1,750
Accumulated Depreciation—
Machinery......................................... 1,750
2
($38,000 – $2,000) ÷ 12 X 7/12 = $1,750
To record depreciation on machinery
Cash ............................................................. 10,000
Loss on Disposal of Machinery .................. 2,250
Accumulated Depreciation—Machinery
($24,0003 + $1,750) ....................................... 25,750
Machinery............................................ 38,000
3
Accumulated depreciation to December
31, 2019 is ($38,000 – $2,000) ÷ 12 X 8 yrs
= $24,000
To record disposal of machinery
EXERCISE 11.26 (CONTINUED)

a. (continued)

Situation 3
Cash ............................................................. 5,200
Accumulated Depreciation— Equipment ... 8,500
Equipment ........................................... 12,000
Gain on Disposal of Equipment 1,700

b. The treatment for the above journal entries would be the

same under both ASPE and IFRS.
 PROBLEM 11.4

(Note to instructor: All depreciation for the year is entered on December

31, therefore, none is entered at the time of disposal.)

a. January 15
Accumulated Depreciation—Machinery1 6,720
Cash 600
Loss on Disposal of Machinery 2,280
Machinery 9,600
1 2
($9,600 X 10% x 7 )
2
(Accumulated Depreciation ½ yr. + 6 yrs. + ½ yr. = 7 yrs.)

February 27
Machinery 12,500
3
Accumulated Depreciation—Machinery 11,240
Cash 9,000
Machinery ($5,500 + $8,200) 13,700
Gain on Disposal of Machinery 1,040
3 4 5
($5,500 + $5,740 )
(Accumulated Depreciation: 4Machine #12—10 yrs.; $5,500
5
Machine #27— 6 yrs. + ½ yr. + ½ yr.; $8,200 X 10% X 7 = $5,740)

April 7
Machinery 940
Cash 940

April 12
Repairs and Maintenance Expense 720
Cash 720

July 22
Cash 3,100
Accumulated Depreciation—Machinery6 7,440
Gain on Disposal of Machinery 540
Machinery 10,000
PROBLEM 11.4 (CONTINUED)

a. (continued)
6
Accumulated Depreciation
No. 25: (1/2 + 7 + 1/2)/10 X $4,000 = $3,200
No. 26: (1/2 + 7 + 1/2)/10 X $3,200 = 2,560
No. 41: (1/2 + 5 + 1/2)/10 X $2,800 = 1,680
$7,440

b. Depreciation for the year:

On machinery in use all year:
Balance of Machinery Acc. 1/1/20 $172,300
Deduct:
Machine No. 12, fully depreciated $ 5,500
Machine No. 38, scrapped 9,600
Machine No. 27, traded in 8,200
Machine No. 25, 26, 41 sold 10,000 (33,300)
In use all year $139,000

Depreciation expense = $139,000 X 10% $13,900

On machinery in use part of year:

Machine No. 38, scrapped $ 9,600
Machine No. 27, traded in 8,200
Machine No. 25, 26, 41 sold 10,000
Machine No. 81, purchased 12,500
Elec. Control equip. purchased 940
Used part of year $41,240

Depreciation expense = $41,240 X 10% X 1/2 2,062

Total depreciation expense $15,962

December 31
Depreciation Expense 15,962
Accumulated Depreciation—Machinery 15,962
PROBLEM 11.4 (CONTINUED)

c. Gains on the disposition of equipment are not necessarily always

favourable. Investors desire increases in income; however the
sources should be from day-to-day operations, not unusual
income or ordinary gains (if considered part of “normal”
operations). Moreover, the disposition of equipment earlier than
originally planned (causing a gain on disposal) could signal that
the entity is scaling back operations. Finally, Comco could be
selling equipment for the purposes of securing additional sources
of cash (i.e. in the case of addressing a “cash crunch” situation).
 PROBLEM 11.6

a. Depreciation Expense1 4,210

Accumulated Depreciation—Asset A 4,210
1
($46,000 – $3,900) ÷ 10
To record depreciation on Asset A

Accumulated Depreciation—Asset A 25,260

($21,050 + $4,210)
Loss on Disposal of Assets 4,240
Asset A ($46,000 – $16,500) 29,500
To record disposal of Asset A

Depreciation Expense2 10,080

Accumulated Depreciation—Asset B 10,080
2
([$58,000 – $4,450]  17,000 X 3,200)
To record depreciation on Asset B

Depreciation Expense3 4,800

Accumulated Depreciation—Asset C 4,800
3
([$68,000 – $12,000 – $8,000]  10)
To record depreciation on Asset C

Asset E 31,000
Retained Earnings 31,000
To record cost of Asset E

Depreciation Expense4 6,200

Accumulated Depreciation—Asset E 6,200
4
($31,000 – $0) X 20%
To record depreciation on Asset E

Depreciation Expense5 9,344

Accumulated Depreciation—Asset D 9,344
5
($73,000 – $26,280) x 20%
To record depreciation on Asset D
PROBLEM 11.6 (CONTINUED)

b. Given that the bookkeeper failed to properly record the

disposition of A to reflect the removal of the accumulated
depreciation and the cost of the asset along with the loss on
disposal, management should be concerned. The bookkeeper
does not appear to have the requisite knowledge to properly
record dispositions. Similarly, with respect to the asset acquired
in 2019, the bookkeeper expensed the asset despite its cost of
$31,000. This error will need to reported on the statement of
retained earnings (ASPE) or the statement of changes in equity
(IFRS) and will be source of embarrassment for the company. It
appears that the bookkeeper should undergo some additional
training to upgrade his/her skills or management should seek to
replace him/her.
 PROBLEM 11.7
a.
Per Company Books As Adjusted
Retained Acc. Dep. - Retained Net Income
Acc. Dep. - Trucks dr.
Trucks dr. Earnings Trucks dr. Earnings Overstated
Trucks dr. (cr.)
(cr.) dr. (cr.) (cr.) dr. (cr.) (Understated)
(cr.)

1/1/17 Balance $ 94,000 $(30,200) $94,000 $(30,200)

7/1/17 Purchase Truck #5 15,000 34,000

1
Trade Truck #3 (30,000) 9,000 $ 2,000 $ 2,000

2
12/31/17 Depreciation ________ (20,300) $20,300 _______ (19,200) 19,200 (1,100)
12/31/17 Balances 109,000 (50,500) $20,300 98,000 (40,400) $21,200 $ 900

3
1/1/18 Sale of Truck #1 (3,500) (18,000) 14,400 $ 100 $ 100

4
12/31/18 Depreciation ________ (21,100) $21,100 _______ (16,000) 16,000 (5,100)
12/31/18 Balances 105,500 (71,600) $21,100 80,000 (42,000) $16,100 $(5,000)

7/1/19 Purchase of Truck #6 36,000 36,000

5
7/1/19 Disposal of Truck #4 (2,500) $ (700) (24,000) 14,400 $ 6,400 $ 7,100

6
12/31/19 Depreciation ________ (24,450) 24,450 _______ (15,000) 15,000 (9,450)

12/31/19 Balances 139,000 (96,050) $23,750 92,000 (42,600) $21,400 $ (2,350)

7
12/31/20 Depreciation ________ (27,800) $27,800 _______ (14,000) $14,000 $(13,800)
17
12/31/20 Balances $139,000 $(123,850) $27,800 $92,000 $(56,600) $14,000 $(13,800)
17
Total understatement
of income $92,950 $72,700 $(20,250)
PROBLEM 11.7 (CONTINUED)

a. (continued)
1
Implied fair value of Truck #3
($34,000 – $15,000) = $19,000
Carrying amount of Truck #3
[$30,000 – ($30,000/5 X 1 ½ yrs.)]
= $30,000 – $9,000 = 21,000
Loss on trade $ 2,000

2
Truck #1: $18,000/5 = $3,600
Truck #2: $22,000/5 = 4,400
Truck #3: $30,000/5 X ½ = 3,000
Truck #4: $24,000/5 = 4,800
Truck #5: $34,000/5 X ½ = 3,400
Total $19,200

3
Carrying amount of Truck #1
[$18,000 – ($18,000/5 X 4 yrs.)]
= $18,000 – $14,400 = $3,600
Cash received on sale = 3,500
Loss on disposal $ 100

4
Truck #2: $22,000/5 = $4,400
Truck #4: $24,000/5 = 4,800
Truck #5: $34,000/5 = 6,800
Total $16,000

5
Carrying amount of Truck #4
[$24,000 – ($24,000/5 X 3 yrs.)]
= $24,000 – $14,400 = $9,600
Cash received ($700 + $2,500) = 3,200
Loss on disposal $6,400
PROBLEM 11.7 (CONTINUED)

a. (continued)
6
Truck #2: $22,000/5 X 1/2 = $ 2,200
Truck #4: $24,000/5 X 1/2 = 2,400
Truck #5: $34,000/5 = 6,800
Truck #6: $36,000/5 X 1/2 = 3,600
Total $15,000

7
Truck #2: (fully depr.) = $ 0
Truck #5: $34,000/5 = 6,800
Truck #6: $36,000/5 = 7,200
Total $14,000

b. Compound journal entry Dec. 31, 2020:

Accumulated Depreciation - Vehicles 67,250
Vehicles 47,000
Retained Earnings 6,450
Depreciation Expense 13,800
($27,800 – $14,000)

Summary of Adjustments:

Per As Adjustment
Books Adjusted Dr. or (Cr.)
Vehicles $139,000 $92,000 $(47,000)
Accum. Depreciation $123,850 $56,600 $ 67,250
Prior Years’ Income
Retained Earnings, 2017 $ 20,300 $21,200 $ 900
Retained Earnings, 2018 21,100 16,100 (5,000)
Retained Earnings, 2019 23,750 21,400 (2,350)
Totals $ 65,150 $58,700 $ (6,450)
Depr. Expense, 2020 $ 27,800 $14,000 $(13,800)
PROBLEM 11.7 (CONTINUED)

c. Based on the errors noted, the auditor would likely recommend

retraining the bookkeeper. Moreoever, they would be concerned
that errors not detected in the year in which they occurred, if
material, would require a restatement of the financial statements
when discovered and reported in future years. Restatements are
not viewed favourably by users of financial statements and thus
should be avoided as much as possible.