Tutorial Chapter 10-11 Part A

BUSI2001- INTERMEDIATE ACCOUNTING 1
TUTORIAL CHAPTERS 10 AND 11
PART A- Initial Acquisition of PPE
Multiple-choice questions
Use the following information to answer questions 1 and 2:
You have acquired a mine for $300M. You estimate its useful life to be 28 years with no residual
value. The cost of the retirement obligation of the mine is estimated to $25M at the end of the
mine’s useful life.
1- Determine the acquisition cost of the mine. Assume a discount rate of 6%.
a) $63,579,796
b) $300,000,000
c) $304,890,753
d) $306,760,879
e) $315,000,000
2- Determine the carrying value of the Asset retirement obligation at the beginning of year 11.
a) $4,890,753
b) $8,758,594
c) $9,284,110
d) $25,000,000
Use the following information to answer questions 3 and 4:
You have acquired a piece of equipment for $450,000. You paid $50,000 cash and issued a note
payable for the remainder. The note states that the principal is due in 5 years and annual interest
payments at 6% are required. Your incremental borrowing rate is 7%.
3-Calculate the equipment’s acquisition cost.
a) $335,194
b) $383,599
c) $433,599
d) $450,000
4- Determine the interest expense related to the note payable that you should record at the end
of year 3.
a) $27,493
b) $27,265
c) $24,000
d) $22,356
Problem 1
Required:
Calculate the total cost of the constructed asset (The construction was started and completed
during the same year).
Problem 2
On September 1, 2014, Reta Corporation purchased equipment for $30,000 by signing a two- year
note payable with a face value of $30,000 due on September 1, 2016. Reta’s Incremental
Borrowing Rate is 8%. The company has a December 31 year end.
Required:
(a) Calculate the cost of the equipment assuming the note is as follows:
1. An 8% interest-bearing note, with interest due each September 1.
2. A 2% interest-bearing note, with interest due each September 1.
3. A non-interest-bearing note.
(b) Record all journal entries from September 1, 2014, to September 1, 2016, for the three notes in
(a). Ignore depreciation of the equipment.
(Adapted from CGA-Canada adapted Examination.)
Problem 3
(Assume the indirect debts were outstanding from January 1 to December 31 in 20x4).
Problem 4
In early February 2014, Huey Corp. began construction of an addition to its head office building
that is expected to take 18 months to complete. The following 2014 expenditures relate to the
addition:
Feb. 1 Payment #1 to contractor $120,000
Mar. 1 Payment to architect 24,000
July 1 Payment #2 to contractor 60,000
Dec. 1 Payment #3 to contractor 180,000
Dec. 31 Asset carrying amount $384,000
On February 1, Huey issued a $100,000, three-year note payable at a rate of 12% to finance most of
the initial payment to the contractor. No other asset-specific debt was entered into. Details of other
interest-bearing debt during the period are provided in the table below:
Other debt instruments outstanding—2014 Principal amount

7%, 10-year bonds, issued June 15, 2008 $500,000
6%, 12-year bonds, issued May 1, 2014 $300,000
9%, 15-year bonds, issued May 1, 1999, matured May 1, 2014 $300,000
Required
What amount of interest should be capitalized?
Problem 5
On January 1, 2013, the Selfish Company has acquired a mine for $66,000,000. It also incurred
the following costs:
Exploration costs to find the coal $450,000

Development costs (roads, tunnels) $670,000
The mine site was ready for use on January 1, 2014. The company is required to decommission the
mine site once the coal extraction operations are over in 20 years (from January 1, 2014). The asset
retirement obligation is estimated to $14,000,000. Assume a capitalization rate of 6%.
Required:
1) Calculate the acquisition cost of the mine site and prepare the journal entry to record it.
2) Record the adjusting entry related to the ARO on December 2014
3) Assume that at the beginning of year 5, the company revises the estimate of the asset
retirement obligation to $18,000,000. Prepare the journal entry to record this change in
estimate.
4) Calculate the amount of interest expense that should be recorded at the end of year 5.
Problem 6
Ruby company purchased a piece of equipment with a list price of $60,000 on January 1st, 2006. The
following amounts were related to the equipment purchase:
1) Terms of the purchase were 2/10, net 30. Ruby Company paid for the purchase on January 8th.
2) Freight costs of $1,000 were paid.
3) A federal agency required that a pollution-control device be installed on the equipment at a cost
of $2,500.
4) During installation, the equipment was damaged and repair costs of $4,000 were incurred.
5) Architect’s fees of $6,000 were paid to redesign the workspace to accommodate the new
equipment.
6) Ruby Company purchased an insurance to cover possible damage to the asset. The three-year
policy cost $8,000.
Required
Determine the acquisition cost of this asset.
Problem 7
On December 31, 20x0, the Jobim Corporation purchased the rights to mine a site at a cost of
$65,000,000. Legislation requires Jobim to decommission the site once mining operations are over in
30 years.
The estimated cost to decommission the site will be $50,000,000. Assume an interest rate of 7%. Jobim
uses the straight-line method of depreciation.
Required
1) The present value of the asset retirement obligation is $6,568,356. Provide FV, PMT, I/Y and N that
were used to calculate this value.
2) Prepare all journal entries relating to the mine asset and its asset retirement obligation from January
December 31, 20x0 to December 31, 20x2.
3) On January 1, 20x9, the ARO is presented in the books of Jobim at $11,285,658. Explain how can
you calculate this amount (provide FV, PMT, I/Y, N).
4) At the end of the 30th year, the asset was actually retired for $41,000,000, paid for in cash. Prepare
the journal entry to record this transaction.
Problem 8
On January 1, 2010, you acquire a piece of equipment for $450,000. You pay $50,000 cash and issue a
note payable for the remainder. The note states that the principal will be paid in full in 6 years, with no
interest payments required. The market interest rate is 6%.
The asset’s useful life is estimated to be 10 years with no residual value, and you use the straight-line
method of depreciation.
Required
1) The present value of the note payable on January 1, 2010 is $281,984. Explain how this amount
was calculated (provide FV, N, I, PMT).
2) Record the journal entries from January 1, 2010 to December 31, 2011.
3) At what amount will the note payable presented in your books at the end of the 6th year?
Problem 9
You start the construction of a building on March 1st, 2012 and finish it on September 1st, 2014. The
accumulated cost on the self-constructed asset on December 31, 2012 is $450,000.
A one-year note payable was issued on April 1, 2012 to finance the construction. The principal is
$500,000 and market interest rate is 6%.
On January 2013, additional costs of $700,000 related to the construction of the asset were incurred.
Assume a December 31st accounting year-end.
Required
1) Determine the amount of interest capitalized on the self-constructed asset in 2012 (amount
already included in the $450,000 balance).
2) Determine the interest to be capitalized in 2013 and the ending balance of the “self- constructed
asset” on December 31, 2013.
Problem 10
Construction began on February 1, 2013 and was completed on March 31, 2014. The balance of the
self-constructed asset on December 31, 2013 was $150,667. The total direct costs incurred on the
construction during 2014 were $120,000. To finance the construction, the company issued a two-year
note payable of $70,000 on May 1, 2013. The interest rate is 10%.
1) Determine the amount of interest capitalized in 2013.

2) Determine the carrying value of the self-constructed asset on March 31, 2014.
Exercises from the textbook:
Brief exercises: 10-2, 10-4, 10-8, 10-23, 10-24, 10-25

Exercises: 10-1, 10-3, 10-4,10-5, 10-6, 10-7, 10-15, 10-23, 10-24, 10-25 (ignore part c about
proportionate model), 10-32
SOLUTIONS
MULTIPLE CHOICE:
1-c: Acquisition cost = price + PV of ARO
PV of ARO:
FV = 25,000,000
N= 28
I=6
PV = 4,890,753
Mine acquisition cost = $300,000,000 + 4,890,753 = 304,890,753
2-b:
Carrying value at the beginning of year 11 = PV of ARO at the time
PV of ARO:
FV = 25,000,000
N= 18 (beginning of year 11= 10 years have passed)
I=6
PV = 8,758,594
3-c:
Acquisition cost = cash paid + PV of future cash flows related to the note payable.
= 50,000 + 383,599*
=433,599
*PV of note payable:
FV = 400,000
N=5
PMT = 400,000 x 6% =24,000
I=7
Solve for PV = $383,599
4-b
Interest expense at the end of year 3 = PV of note at the time x 7% = $389,502* x 7% = $27,265
*PV of the note at the end of year 3 (before recording interest of year 3, so 2 years have passed
and 3 years remaining):
FV = 400,000
N=3
PMT = 400,000 x 6% =24,000
I=7
Solve for PV = $389,502
Problem 1
Total asset cost = $120,000 + 360,000 + 480,000+100,000 + 34,600 = $1,094,600.

Problem 2
(a) 1. $30,000 (when incremental rate = note rate, PV = FV)

2. $26,790 (PV of FV= $30,000; I= 8%, N =2; PMT = $600)
3. $25,720 (PV of FV= $30,000, I= 8; N =2)
(b) 8% interest-bearing note.
09/01/14 Equipment......................................................... 30,000

Notes Payable ....................................... 30,000
12/31/14 Interest Expense................................................ 800

Interest Payable..................................... 800
($30,000 X 8% X 4/12)
09/01/15 Interest Payable................................................. 800

Interest Expense................................................ 1,600
Cash ...................................................... 2,400
12/31/15 Interest Expense................................................ 800

Interest Payable..................................... 800
09/01/16 Interest Payable................................................. 800

Interest Expense................................................ 1,600
Notes Payable ................................................... 30,000
Cash ...................................................... 32,400
2% interest-bearing note.
09/01/14 Equipment [part (a)] ........................................ 26,790

Notes Payable ...................................... 26,790
12/31/14 Interest Expense............................................... 714*

Notes Payable ...................................... 514
Interest Payable.................................... 200**
*($26,790 X 8% X 4/12)
** ($30,000 X 2% X 4/12)
09/01/15 Interest Payable................................................ 200

Interest Expense............................................... 1,429**
Notes Payable ...................................... 1,029
Cash ($30,000 X 2%) .......................... 600
**($26,790 X 8% X 8/12)
12/31/15 Interest Expense............................................... 756

Notes Payable ...................................... 556
Interest Payable.................................... 200
($28,333 X 8% X 4/12) or $2,267 X 4/12
09/01/16 Interest Payable................................................ 200

Interest Expense............................................... 1,511**
Notes Payable
($30,000–$1,111*) ..................................... 28,889
Cash ..................................................... 30,600
* ($2,267 – $600 – $556)
** ($2,267 – $756)
Year 8% Interest Payment Balance

09/01/14 $26,790
09/01/15 $2,143 ($600) 28,333
09/01/16 2,267 (600) 30,000
Non-interest-bearing note.
09/01/14 Equipment [part (a)] ........................................ 25,720
Notes Payable ...................................... 25,720
12/31/14 Interest Expense............................................... 686*

Notes Payable ...................................... 686
*($25,720 X 8% X 4/12) or $2,058 X 4/12
Year 8% Interest Balance

09/01/14 $25,720
09/01/15 $2,058 27,778
09/01/16 2,222 30,000
09/01/15 Interest Expense............................................... 1,372**

Notes Payable ...................................... 1,372
**($25,720 X 8% X 8/12) or ($2,058 – $686)
12/31/15 Interest Expense............................................... 741

Notes Payable ...................................... 741
($27,778 X 8% X 4/12) or $2,222 X 4/12
09/01/16 Interest Expense............................................... 1,481*

Notes Payable .................................................. 30,000
Notes Payable ...................................... 1,481
Cash ..................................................... 30,000
* $2,222 – $741
Problem 3
Borrowing costs on direct debt should be capitalized: $100,000 x 6.5% x 8/12 = $4,333
Weighted investment in the project less weighted average direct debt:

$105,834 – ($100,000 x 8/12) = $105,834 - $66,667 = $39,167
This amount is assumed to be financed by indirect debt
Capitalization rate on indirect debt:

($10,000,000 x 7.5%) + ($15,000,000 x 5%)/ ($10,000,000 + 15,000,000)
= 6%
Interest on indirect debt to be capitalized: 6% x $39,167 = $2,350. Total
asset cost:
$30,000 + 50,000+75,000+40,000+60,000+45,000 + 4,333+2,350 =$306,683
Problem 4
Determine the expenditures on the qualifying asset:
Calculation of Weighted-Average Accumulated Expenditures

Expenditures
Capitalization Weighted-Average
Date Amount X Period = Accumulated
Expenditures
Feb. 1 $ 120,000 11/12 $110,000
Mar. 1 24,000 10/12 20,000
July 1 60,000 6/12 30,000
Dec. 1 180,000 1/12 15,000
$384,000 $175,000
Amount financed by direct debt = $100,000 x 11/12 = $91,667.

Related borrowing costs = $91,667 x 12% = $11,000.
Amount financed by indirect debt:

Total weighted-average accumulated expenditures $175,000
Less: financed by specific construction loan($100,000 x 11/12) 91,667
=Weighted-average accumulated expenditures financed by indirect
borrowings $ 83,333
Calculation of capitalization rate on indirect borrowings:

Principal Weighted debt
amount Weight outstanding Borrowing Cost
7% 10-year bonds, issued
June 15, 2008 $500,000 12/12 $500,000 $35,000
May 1, 2014 300,000 8/12 200,000 12,000
May 1, 1999, matured May 1,
2014 300,000 4/12 100,000 9,000
$800,000 $56,000
$56,000
Capitalization rate = = 7%
$800,000
Borrowing cost on indirect debt to be capitalized:

= $83,333 x 7% = $5,833.
Total interest to be capitalized = 5,833 + $11,000 = $16,833

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Eleventh Canadian Edition
Problem 5
1) Total cost = $66,000,000 + 450,000 +670,000 + 4,365,266* = $71,485,266

*PVof ARO: FV = 14,000,000; N = 20; I = 6; PV = 4,365,266
Journal entry:
Mine Asset $71,485,266
Cash or A/P
$67,120,000
ARO 4,365,266
2) Interest expense $261,916

ARO $261,916
($4,365,266 x 6% = $261,916 4)
3) PV of the ARO before the change in estimate

(beginning of year 5):
FV = 14,000,000
I=6
N = 16 (remaining years from beginning of year 5 to the end of
year 20) Solve for PV = 5,511,048
PV of ARO based on the new estimate:

FV = 18,000,000
I=6
N = 16
Solve for PV = 7,085,633
The difference between the two estimates should be added to the ARO liability and to
the cost of the mine site.
The difference is: 7,085,633 - 5,511,048 = $1,574,585
OR: you can calculate the PV of the increase in the ARO estimate as
follows: FV = 18,000,000 – 14,000,000 = 4,000,000

I=6
N = 16
Solve for PV = $1,574,585
Solutions Manual 10-16 Chapter 10
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Journal entry:
Mine Asset $1,574,585
ARO $1,574,585
4) After this journal entry, the ARO carrying value is $7,085,633
Interest expense that should be recorded at the end of year 5 is: $7,085,633 x 6% =
$425,138
Problem 6
All costs that are normal and necessary to make the asset ready for its intended use
should be included in the asset’s cost. Any costs incurred after the asset was ready for use
should be excluded from the asset’s cost.
Purchase price $60,000

Less Purchase discount ($60,000 x (1,200)
2%)
Add transportation costs 1,000
Add pollution-control device cost (this 2,500
is an involuntary acquisition so it
should be capitalized)
Architect’s fees to redesign the 6,000
workspace
Total 68,300
Journal entry to record the asset’s acquisition:
Equipment 68,300
Cash/Accounts payable 68,300
Item 4: the cost of repairing the asset cannot be included in its cost because this not a
normal and necessary cost to start using the asset. The journal entry is:
Repair expense $4,000

Cash $4,000
Item 6: this insurance policy covers possible damage to the asset after the asset is ready
for use (note that this is a 3-year policy). Assuming this insurance was purchased
to cover possible damage to the asset during its transportation to the company (so
before starting to use the asset), the insurance cost would have been included in
the equipment’s acquisition cost.
The journal entry is:

Prepaid insurance $8,000
Cash $8,000
Problem 7
1) FV= 50,000,000; N= 30, I=7 and PMT=0

PV = $6,568,356
2)
3) On January 1, 20x9, the ARO is presented in the books of Jobim at the present value of
the remaining cash flows which is calculated as follows:
FV= $50,000,000; I = 7; N = 30 years-8 expired years = 22 years
4) At the end of the 30th year, the ARO account balance is $50,000,000.
ARO 50,000,000
Cash 41,000,000
Gain on disposal of assets 9,000,000
Problem 8
1) FV = 400,000; N = 6, I =6, PMT =0.
2) Asset’s acquisition cost = $50,000 paid in cash + PV of the note

= $50,000 + 281,984
= $331,984
January 1, 2010
Equipment $331,984
Cash $50,000
Note payable 281,984
Dec 31, 2010
Depreciation expense $33,198

Accumulated depreciation $33,198
331,984/10 years = $33,198
Interest expense $16,919

Note payable $16,919
Calculation: $281,984 x 6% = $16,919
Dec 31, 2011

Depreciation expense $33,198
Accumulated depreciation $33198
$331,984/10 years = $33,198
Interest expense $17,934

Note payable $17,934
($281,984 + 16,919) x 6% = $298,903 x 6% = $17,934
3) At the end of year 6, the note payable will be presented at $400,000.

Problem 9
1) Interest on the note has run from April 1 to December 31, 2012 (the construction was
ongoing at that time). Interest of 9 months was capitalized.
Calculation: $500,000 x 6% x 9/12= $22,500
2) Interest capitalized in 2013 is for the period January 1, 2013 to April 1st, 2013
(maturity date of the note).
Calculation: $500,000 x 6% x 3/12= $7,500
Balance in the self-constructed asset account on December 31, 2013 is:

$450,000 + 700,000 + 7,500 = $1,157,500
Problem 10
1) Interest capitalized on the note in 2013 is from May 1st (date of note issuance) to
December 31, 2012. Total amount = $70,000 x 10% x 8/12= $4,667 (this amount is
included in the $150,667 on December 31, 2013).
2) Interest capitalized in 2014 is from January 1st, 2014 to March 31st, 2014 (end of the
construction): = $70,000 x 10% x 3/12 = $1,750
Total asset cost on March 31, 2014 = $150,667 + 120,000 + 1,750 = $272,417
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 10-2
(a)
Accounting standards require that the following two recognition criteria be satisfied when
recognizing an item of PP&E: (1) it is probable that the item’s associated future economic
benefits will flow to the entity, and (2) its cost can be measured reliably. Playtime’s new
piece of equipment will be used to produce a new toy which is expected to be very popular
and generate sales and cash flows, therefore criteria (1) is satisfied. The cost of the
equipment will be reliably measurable (based on purchase price), therefore criteria (2) is
satisfied. The new piece of equipment satisfies both recognition criteria, and should be
recognized and capitalized as an item of PP&E.
(b)
Under IFRS, the parts of PP&E with relatively significant costs are capitalized and
depreciated separately. Considering that each significant part is separable and may be
replaced, the injection unit, clamping unit, and electrical equipment should each be
capitalized as asset components and depreciated separately. Assuming that the cost of each
part in the group of other parts is not relatively significant, the group of other parts should
be capitalized and depreciated as one component.
(c)
Under ASPE, the costs of significant separable components are allocated to those parts
when practical, but in practice, this has not been done to the same extent as required under
IFRS. For example, under ASPE, Playtime may record the purchase of the equipment
without asset componentization, in which case, the total cost of the equipment would be
recorded in the Equipment account as one asset, and depreciation would be calculated
based on the useful life of the entire piece of equipment.

BRIEF EXERCISE 10-4
IFRS
Direct labour $73,000

Material purchased for building 82,500
Interest on loan to finance construction 2,300
Allocation of variable plant overhead based on
labour hours worked on building 29,000
Architectural drawings for building 7,500
Total cost of new building $194,300
Under IFRS, capitalization of construction costs stops when the item is in the location and
condition necessary for it to be used as management intended, even if it has not begun to
be used.
ASPE
Direct labour $79,000

Material purchased for building 82,500
Allocation of variable plant overhead based on
labour hours worked on building 29,000
Architectural drawings for building 7,500
Total cost of new building $198,000
Under ASPE, capitalization of construction costs stops when the asset is substantially
complete and ready for productive use, as predetermined by management. It is likely that
the amount of variable overhead costs allocated based on direct labour hours would also
be increased.
Note: For PP&E assets, only directly attributable costs are capitalized. The president's
salary is a fixed cost, thus the allocation is not directly traceable and not eligible
for capitalization.

BRIEF EXERCISE 10-8
Fair Value % of Total Recorded

Cost Amount
Land $ 95,000 95/455 $406,000 $ 84,769
Building 250,000 250/455 $406,000 223,077
Equipment 110,000 110/455 $406,000 98,154
$455,000 $406,000
BRIEF EXERCISE 10-21
(a) Revenue expenditure

(b) Revenue expenditure
(c) Capital expenditure
(d) Capital expenditure
(e) Capital expenditure
(f) Revenue expenditure
(g) Revenue expenditure

*BRIEF EXERCISE 10-24
Total weighted-average accumulated expenditures $1,950,000

Less: financed by specific construction loan 1,000,000
Weighted-average accumulated expenditures financed by general
borrowings $ 950,000
Capitalization rate calculation on general borrowings:

Principal Borrowing Cost
13%, 5-year note $2,000,000 $260,000
15%, 4-year note 3,500,000 525,000
$5,500,000 $785,000
$785,000
Capitalization rate = = 14.27%
$5,500,000

*BRIEF EXERCISE 10-25
Avoidable costs on asset-specific debt

($1,000,000 x 12% x 10/12) $100,000
Avoidable costs on general debt
($950,000 x 14.27%) 135,565
Total avoidable borrowing costs $235,565
The avoidable borrowing costs would be capitalized as part of the cost of the
building under IFRS.
Under ASPE, interest costs directly attributable to the construction of the building
would be capitalized if that is the accounting policy used by the entity. However,
the company could also choose an accounting policy whereby such costs are
expensed under ASPE.

SOLUTIONS TO EXERCISES
EXERCISE 10-1 (10-15 minutes)
(a) specific costs (b) componentization (separate

recognition)?
1. Head office boardroom - purchase price - boardroom table, executive
table and executive - delivery charges chairs
chairs - assembly costs (if - table probably has a much
applicable) longer useful life than the
chairs
2. A landfill site - purchase price, transfer - different parts of the landfill
taxes, surveying and legal site (used portions vs.
fees unused portions)
- costs of any work required - any buildings on the site
to prepare land and make it
suitable to accept refuse.
- decommissioning or
restoration costs associated
with the closure of the
facility
3. Escalator in shopping - purchase price - depending on how they are
mall - transportation charges powered, the motor element
- installation / assembly costs might be recognized
separately
4. Forklift vehicles in a - purchase price, including - depending on how they are
manufacturing plant delivery costs powered, the motor element
might be recognized
separately
5. Stand-alone training - purchase price of facility, - building, flight simulator,
facility for pilot equipment, and furniture desks, whiteboards,
training, including a and fixtures electronic instructional aids,
flight simulator, - installation / assembly costs land
classrooms equipped - delivery charges - all have different useful lives
with desks, - professional fees for design and rates of depreciation
whiteboards, and
electronic instructional
aids
6. Large passenger - purchase price - exterior shell of aircraft,
aircraft used in - extras / changes to interior interior seating, carpeting,
commercial flights design of aircraft and storage compartments,
- costs to imprint company engines, electrical systems
logo on plane - all have different useful lives
- registrations and rates of depreciation

EXERCISE 10-1 (CONTINUED)
(a) specific costs (b) componentization (separate

recognition)?
7. Medical office building - purchase price - land portion (when
- land transfer taxes on purchasing a building, land
purchase is generally also purchased
- surveying and legal fees as a lump sum purchase)
- architectural fees - building shell (including
- renovation and repair costs construction and design
and cost of permits costs)
- excavation and construction - building services systems
costs (e.g., elevators, HVAC,
plumbing system and
heating and air-conditioning
system, computer network
wiring)
- fixed equipment / fixtures
(e.g., roof, sterilizers,
casework, fume hoods, etc)
- all have different useful lives
and rates of depreciation
8. Computer equipment - purchase price - possibly separate the
- lease payout at end of term computer processing unit
if applicable (desktop tower, laptop) from
- installation / setup costs the peripherals (keyboards,
mouse, monitor, printer,
scanner)
- all have different useful lives
and rates of depreciation
(since generally on a refresh
of the equipment, only the
processing unit is replaced
and the peripherals remain)

EXERCISE 10-3
(a)
1. Land .................................................................... 92,000
Revenue -- Government Grants .................. 92,000
2. Land .................................................................... 407,000

Buildings – Structure .............................................. 887,000
Buildings – HVAC.................................................. 220,000
Buildings – Interior Coverings ............................... 116,000
Common Shares .......................................... 1,630,000
Under IFRS, the fair value of the asset(s) acquired should be used to measure
acquisition cost, and it is presumed that this value can be determined except in rare
cases.
3. Machinery ............................................................... 89,305

Inventory* ................................................... 32,325
Salaries and Wages Expense....................... 56,000
Supplies ....................................................... 980
*($23,000 + $625 + $8,700)
Note: For PP&E assets, only the directly attributable costs are capitalized. Since
fixed overhead is generally not directly attributable, but rather allocated on some
rational basis, the fixed overhead applied of $39,200 (70% x $56,000) is generally
expensed rather than capitalized. Any lost revenue attributed to the down time
during construction is not realized and should not be recorded.
(b) Had Producers follows ASPE, it would have the choice as

to whether or not it wishes to keep track of the major components of buildings, if it
was not practicable to do so. Under IFRS, when assets are purchased in exchange for
shares, the value of the assets must be used in the measurement of cost. ASPE is more
flexible, so the more reliable of the fair value of the assets received or the equity
instruments given up would be recorded as asset cost. Any lost revenue attributed to
the down time during construction is not realized and should not be recorded.

EXERCISE 10-4
(a)
Land Buildings Machinery Other

Legal fees for title search $ 520
Property tax arrears at property purchase date 4,500
Architect’s fees $ 2,800
Cash paid for land and old building 112,000
Removal of old building, net ($20,000 – $5,500) 14,500
Surveying before construction 370
Interest on short-term loans during construction 7,400
Excavation for basement before construction 19,000
Machinery purchased (2% discount) $63,700 $1,300 Finance Expense
Freight on machinery purchased 1,340
Exchange on foreign currency purchase of machinery 1,200
Storage charges due to delayed completion 2,180 Misc. Expense
New building construction costs 485,000
Assessment by city for drainage 1,600
Fence surrounding property 15,000 Land Improvement
Hauling charges for machinery 620 Misc. Expense
Installation of machinery 2,000
Customs duty for machinery purchase 5,400
Municipal grant _______ (8,000) ______ ______
$133,120 $506,570 $73,640 $19,100

EXERCISE 10-4
(b)
Under IFRS, borrowing costs are defined as “interest and other costs that an entity incurs in connection
with the borrowing of funds”, and borrowing costs incurred on qualifying assets must be capitalized.
ASPE is more restrictive and includes only interest costs in the definition of borrowing costs. Under
ASPE, interest costs may be capitalized or expensed, depending on the accounting policy used by the
entity.
(c)
Capitalization of borrowing costs related to a qualifying asset results in higher net income and total assets
in the period(s) of construction (since capitalization of borrowing costs results in lower interest expense
and finance expense in those period(s), and depreciation expense would not begin until the asset is
available for use). In the periods after construction is complete, and the asset is in the location and
condition necessary for use as management intended, net income would be lower than if borrowing costs
were initially expensed. This is because the capitalized interest (included in the asset account) would be
depreciated along with the construction cost of the related asset in those periods. A potential investor
who may analyze the company’s profitability, and compare the company’s net income to the net income
reported by competitor companies should consider the effect of capitalization of borrowing costs on the
subject company’s financial statements.
(d)
Errors are most easily made distinguishing between land and land improvements purchases. Land does
not depreciate but land improvements, because of their limited useful lives, must be depreciated. An error
charging a land improvement to land would cause an increase in income for the duration of the land
improvement’s useful life and an increase in assets as long as the land is owned. Similarly, if there is an
amount charged to building, rather than the land account it would cause an decrease in income each year
(relating to an overstatement of annual depreciation expense) and a decrease to assets as long as the land
is owned.

*EXERCISE 10-5
(a)
Hayes Industries Corp.
Acquisition of Assets 1 and 2
Use Appraised Values to break-out the lump-sum purchase

Lump-Sum
Description Appraisal % Cost
Machinery 90,000 90/120 100,000 75,000
Office Equipment 30,000 30/120 100,000 25,000
120,000
Machinery ................................................................. 75,000

Office Equipment ..................................................... 25,000
Cash .............................................................. 100,000
Acquisition of Asset 3
Use the cash price as a basis for recording the asset with a discount recorded on the note.
Machinery ................................................................ 35,000

Cash.............................................................. 10,000
Notes Payable............................................... 25,000
The difference between the $25,000 notes payable and the sum of the two instalment payments of
$15,000 each will be amortized to interest expense over the two years using the effective interest method.

(a) (continued)
The exchange lacks commercial substance and is considered non-monetary. Because the exchange lacks
commercial substance, the cost of the asset received is recorded at the carrying amount of the asset(s)
given up, which is adjusted for the inclusion of any cash or other monetary assets. No gain is triggered
on the exchange.
Truck (new)* ............................................................ 60,000

Accumulated Depreciation - Trucks ........................ 35,000
Cash................................................................ 10,000
Truck (old) ................................................... 85,000
* $85,000 – $35,000 + $10,000
Under IFRS, the fair value of the office equipment acquired should be used to measure its acquisition
cost.
Office Equipment .................................................... 900

Common Shares ........................................... 900

(a) (continued)
Construction of Building
Schedule of Weighted-Average Accumulated Expenditures
Current Year Weighted-Av.

Capitalization Accumulated
Date Amount Period Expenditures
February 1 $ 150,000 9/12 $112,500
February 1 120,000 9/12 90,000
June 1 360,000 5/12 150,000
September 1 480,000 2/12 80,000
November 1 100,000 0/12 0
$1,210,000 $432,500

Less: financed by specific construction loan 600,000
borrowings (cannot be less than zero) $0
Capitalization rate calculation on general borrowings:

Principal Borrowing Cost
8%, other general debt $200,000 $16,000
6%, loan payable 350,000 21,000
$550,000 $37,000
$37,000
Capitalization rate = = 6.73%
$550,000

*EXERCISE 10-5 (CONTINUED)
(a) (continued)
Avoidable costs on asset-specific debt

($432,500* x 12%) $51,900
Avoidable costs on general debt
($0 x 6.73%) 0
The asset-specific debt was $600,000, however, the avoidable interest cost is calculated by capping the
debt at weighted-average accumulated expenditures ($432,500 in this case). The weighted expenditures
are less than the amount of specific borrowing; the specific borrowing rate is used.
Borrowing costs to be capitalized = Total avoidable borrowing costs – investment income (resulting from
investment of idle funds) = $51,900 – $4,600 = $47,300
Land ................................................................................. 150,000

Buildings ($1,060,000* + $47,300) ................................. 1,107,300
Cash ...................................................................... 1,210,000
Interest Expense ................................................... 47,300
*($1,210,000 less $150,000 for land)
Note: Private entities that choose to apply ASPE have the choice of either capitalizing or expensing the
interest costs related to the acquisition, construction, or development of qualifying assets.
(b)
Under ASPE, interest costs directly attributable to the construction of the building would be capitalized
if that is the accounting policy used by the entity. However, the company could also choose an
accounting policy whereby such costs are expensed under ASPE.
(c)
A two-year, zero-interest-bearing instalment note with a face value of $30,000 was given in exchange
for machinery, Asset 3. The remaining outstanding liability on the purchase is $25,000 (total cash
equivalent purchase price of $35,000 less down payment of $10,000).
Using a financial calculator:

PV $ 25,000
I ?% Yields 13.066%
N 2
PMT $(15,000)
FV 0

Type 0
Using Excel =RATE(nper,pmt,pv,fv,type)

The variables are as given for the financial calculator above, nper is n and rate is i.
The effective interest rate is 13.066%. This rate should be used to amortize to interest expense over the
two year period.

EXERCISE 10-6
Capitalized cost of the equipment:
Invoice purchase price $100,000

Provincial sales tax, 7% (non-refundable) 7,000
Transportation cost 1,700
Net direct costs of adjusting the equipment so it will work as intended,
and professional fees associated with the acquisition and
installation
($300 + $200 – $400 + $11,000) 11,100
Total cost $119,800
The GST is excluded because it is recoverable. The $500 storage cost is not included in the cost of the
equipment since it was not a required cost to bring the equipment to the location and to make it
operational. The additional $3,000 labour and $2,000 material costs before the machine operated at full
capacity are inventory production costs incurred after the equipment was in a condition to operate as
management intended and they, along with the sales of $5,500, are excluded. Lastly, the borrowing costs
of $800 were not incurred to finance the acquisition, construction, or development of a qualifying asset—
one that requires a substantial period of time to get ready for its intended use.

EXERCISE 10-7
According to IAS 16, these costs can be capitalized:

Cost of the manufacturing plant 2,500,000
Initial delivery and handling costs 200,000
Cost of site preparation 600,000
Consultants’ fees 100,000
Estimated dismantling costs to be incurred after 7 years 300,000
$3,700,000
Interest charges paid on “deferred credit terms” to the supplier of the manufacturing plant (not a
qualifying asset under IAS 23 capitalization of borrowing costs) of $200,000 and operating losses before
commercial production amounting to $400,000 are not regarded as directly attributable costs and thus
cannot be capitalized. They should be expensed to the income statement in the period they are incurred.

EXERCISE 10-15
(a) Equipment ............................................................... 682,342

Notes Payable.............................................. 682,342
Using tables:
Present value of annuity @ 10% for 5 years
$180,000 X 3.79079 $682,342.20
Using a financial calculator:

PV ? Yields $682,341.62
I 10%
N 5
PMT $(180,000)
FV $0
Type 0
Using Excel: =PV(rate,nper,pmt,fv,type)

The variables are as given for the financial calculator above, nper is n and rate is i.
(b) Interest Expense ...................................................... 68,234*

Notes Payable ($180,000 – $68,234) ...................... 111,766
Cash............................................................. 180,000
*(10% X $682,342)
Note 10% Interest Reduction of

Year Payment Principal Balance
1/2/17 $682,342
12/31/17 $180,000 $68,234 $111,766 570,576
12/31/18 180,000 57,058 122,942 447,634
EXERCISE 10-15 (CONTINUED)
(c) Interest Expense ...................................................... 57,058

Notes Payable ($180,000 – $57,068) ...................... 122,942
Cash............................................................. 180,000
(d) Depreciation Expense ............................................. 85,293*

Accumulated Depreciation - Equipment .....
85,293
*($682,342 ÷ 8)

EXERCISE 10-23
(a) Fair value model
If the company chooses to measure the investment property under the fair value model it will have to
recognize in net income or loss, for each period, changes in fair value from year to year. Thus, the impact
on net income or loss for the various years would be summarized as follows:
Carrying
Value before
Cost adjustment Fair Value Net income
Year (millions) (millions) (millions) (loss)
2017 $50 $50 $50 $0
2018 50 60 10
2019 60 63 3
2020 63 58 (5)
December 31, 2018

Investment Property ............................................................ 10,000,000
Gain in Value of Investment Property..................... 10,000,000
December 31, 2019

Investment Property ............................................................ 3,000,000
Gain in Value of Investment Property..................... 3,000,000
December 31, 2020

Loss in Value of Investment Property ................................. 5,000,000
Investment Property ................................................ 5,000,000

(b) Cost model
If the company decided to measure the investment property under the cost model it would have to account
for it under IAS 16 using the cost model prescribed under that standard (which requires that the asset be
carried at its cost less accumulated depreciation and any accumulated impairment losses). According to
IAS 16, when investment property is measured under the cost model, the fluctuations in the fair value of
the investment property from year to year are not recorded and thus would have no effect on net income.
Instead, depreciation will be the only charge to net income or loss for each period (unless there is
impairment, which will also be a charge to the net income or loss for the year). In addition, the building
should be componentized into its major components if they have relative significant costs and/or differing
useful lives or depreciation patterns. However, in this question, not enough information is given to
separate the building into its component parts, thus only one buildings account has been used.
December 31, 2017 (and each December 31 through to 2020)

Depreciation Expense.......................................................... 2,000,000
Accumulated Depreciation – Buildings ..................
2,000,000
($50,000,000 – $10,000,000) ÷ 20)

EXERCISE 10-24
(a)
The cost model in IAS 16 requires the asset to be depreciated over its useful life using a method that
corresponds to how Nevine receives the economic benefits the asset offers. The annual straight-line
depreciation is calculated as follows:
The original acquisition cost would have been allocated as follows since Nevine is using the cost model
and thus must depreciate the shopping centre components:
Land 25% $2,700,000
Building 75% 8,100,000
100% $10,800,000
Shopping centre building annual depreciation:

= ($8,100,000 – $1,100,000) ÷ 35 years = $200,000 per year
Each May 31 the following entry is recorded to recognize depreciation:

Depreciation Expense.......................................................... 200,000
Accumulated Depreciation – Buildings ..................
200,000
The statement of financial position (partial) presentation would be:

May 31, 2017 May 31, 2018 May 31,2019
Land, at cost $2,700,000 $2,700,000 $2,700,000
Buildings, at cost less
accum. depr. $7,900,000 7,700,000 7,500,000
$10,600,000 $10,400,000 $10,200,000
Note that the fair value of the investment property must be disclosed in the financial statements, even if
the cost model is used.

(b)
Because cost allocation and depreciation are not issues under the fair value model, it is likely that Nevine
would not separate out the cost of the land from that of the building and its components as indicated in
cost model allocation of acquisition costs described in (a). Therefore, assume that the investment property
is in an account entitled Investment Property—Shopping Centre that is carried at $10.8 million as of June
2, 2016.
On May 31, 2017 the property is written down to its fair value at that date of $10,500,000. On May 31,
2018 and 2019, the asset account is adjusted to $10,300,000 and $11,000,000 respectively. Changes in
the fair values are recognized in income statement profit or loss and the property is reported on the
statement of financial position at its fair value at each statement of financial position date. The following
entries are made:
May 31, 2017

Loss in Value of Investment Property ................................. 300,000
Investment Property ................................................ 300,000
($10,800,000 – $10,500,000)
May 31, 2018

Loss in Value of Investment Property ................................. 200,000
Investment Property ................................................ 200,000
($10,500,000 – $10,300,000)
May 31, 2019

Investment Property ............................................................ 700,000
Gain in Value of Investment Property..................... 700,000
($11,000,000 – $10,300,000)

(b) (continued)
The cost of the investment property on June 2, 2016 is the acquisition cost of $10,800,000. If a statement
of financial position were prepared shortly after that date, for example on June 5, 2016, what amount
would be reported under the fair value model? Because fair value does not include transaction costs, the
fair value would exclude the legal ($300,000) and survey and transfer fees ($500,000) added into the cost
of the asset. Its fair value at that time is $10,000,000 and a loss of $10,800,000 – $10,000,000 = $800,000
would be recognized. At May 31, 2017 a gain of $10,500,000 – $10,000,000 = $500,000 would be
reported instead of a $300,000 loss.

EXERCISE 10-25
(a)
Asset Adjustment Method
Accumulated Depreciation – 50,000

Buildings
.................................................................................
Buildings ................................................................. 50,000
The Buildings account is now $350,000 - $50,000 = $300,000, and the related Accumulated
Depreciation account is zero.
Revaluation Gain or Loss ................................................... 25,000

Buildings ($300,000–$275,000).............................. 25,000
Accumulated Depreciation – Equipment ............................ 40,000

Equipment ............................................................... 40,000
The Equipment account is now $120,000 - $40,000 = $80,000, and the related Accumulated Depreciation
account is zero.
Equipment ($90,000–$80,000)............................................ 10,000

Revaluation Surplus (OCI) ...................................... 10,000
IAS 16 paragraphs 31-42 require that asset revaluation surpluses be prepared on an individual asset basis
(reference is made to the revaluation of asset items, not asset classes as a group). This is consistent with
the application of the LCNRV rule for inventory which must be applied on an item-by-item basis.
(b)
Accumulated Depreciation – Buildings .................. 13,750
($275,000 ÷ 20)

Accumulated Depreciation – Equipment ................ 11,250
($90,000 ÷ 8)

*EXERCISE 10-32
Step 1—Determine the expenditures on the qualifying asset.
Calculation of Weighted-Average Accumulated Expenditures

Expenditures
Capitalization Weighted-Average
Date Amount X Period = Accumulated
Expenditures
Feb. 1 $ 120,000 11/12 $110,000
Mar. 1 24,000 10/12 20,000
July 1 60,000 6/12 30,000
Dec. 1 180,000 1/12 15,000
$384,000 $175,000
Step 2—Determine the avoidable borrowing costs on the asset-specific debt.
Avoidable borrowing costs on asset-specific borrowing:

Asset-specific borrowing (weighted) = $100,000 x 11/12 = $91,667.
Related borrowing costs = $91,667 x 12% = $11,000.
Step 3—Determine the avoidable borrowing costs on the non-asset-specific debt.

Less: financed by specific construction loan
($100,000 x 11/12) 91,667
borrowings (cannot be less than zero) $ 83,333

Step 3 (continued)
Calculation of capitalization rate on general borrowings:
Principal Weighted debt
amount Weight outstanding Borrowing Cost
June 15, 2011 $500,000 12/12 $500,000 $35,000
May 1, 2017 300,000 8/12 200,000 12,000
May 1, 2002, matured May 1,
2017 300,000 4/12 100,000 9,000
$800,000 $56,000
$56,000
Capitalization rate = = 7%
$800,000
Avoidable borrowing costs on non-asset-specific debt
= $83,333 x 7% = $5,833.
Step 4—Determine the borrowing costs to capitalize by applying the capitalization rate to the
appropriate expenditures on the qualifying asset.
Avoidable borrowing costs on asset-specific debt $11,000

Avoidable borrowing costs on non-asset-specific debt 5,833
Total actual borrowing costs incurred during the year:

Construction note, $100,000 x 12% x 11/12 $11,000
10-year bond, $500,000 x 7% x 12/12 35,000
12-year bond, $300,000 x 6% x 8/12 12,000
15-year bond, $300,000 x 9% x 4/12 9,000
$67,000
The amount of the borrowing costs to capitalize is the lower of the avoidable and the actual, which is
$16,833.


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BUSI2001- INTERMEDIATE ACCOUNTING 1

TUTORIAL CHAPTERS 10 AND 11

PART A- Initial Acquisition of PPE

Use the following information to answer questions 1 and 2:

Use the following information to answer questions 3 and 4:

3-Calculate the equipment’s acquisition cost.

Other debt instruments outstanding—2014 Principal amount

What amount of interest should be capitalized?

Exploration costs to find the coal $450,000

Determine the acquisition cost of this asset.

1) Determine the amount of interest capitalized in 2013.

Exercises from the textbook:

Brief exercises: 10-2, 10-4, 10-8, 10-23, 10-24, 10-25

Total asset cost = $120,000 + 360,000 + 480,000+100,000 + 34,600 = $1,094,600.

(a) 1. $30,000 (when incremental rate = note rate, PV = FV)

(b) 8% interest-bearing note.

09/01/14 Equipment......................................................... 30,000

12/31/14 Interest Expense................................................ 800

09/01/15 Interest Payable................................................. 800

12/31/15 Interest Expense................................................ 800

09/01/16 Interest Payable................................................. 800

09/01/14 Equipment [part (a)] ........................................ 26,790

12/31/14 Interest Expense............................................... 714*

09/01/15 Interest Payable................................................ 200

12/31/15 Interest Expense............................................... 756

09/01/16 Interest Payable................................................ 200

Year 8% Interest Payment Balance

12/31/14 Interest Expense............................................... 686*

Year 8% Interest Balance

09/01/15 Interest Expense............................................... 1,372**

12/31/15 Interest Expense............................................... 741

09/01/16 Interest Expense............................................... 1,481*

Weighted investment in the project less weighted average direct debt:

Capitalization rate on indirect debt:

Interest on indirect debt to be capitalized: 6% x $39,167 = $2,350. Total

Determine the expenditures on the qualifying asset:

Calculation of Weighted-Average Accumulated Expenditures

Amount financed by direct debt = $100,000 x 11/12 = $91,667.

Amount financed by indirect debt:

Calculation of capitalization rate on indirect borrowings:

Borrowing cost on indirect debt to be capitalized:

Total interest to be capitalized = 5,833 + $11,000 = $16,833

1) Total cost = $66,000,000 + 450,000 +670,000 + 4,365,266* = $71,485,266

Mine Asset $71,485,266

2) Interest expense $261,916

3) PV of the ARO before the change in estimate

PV of ARO based on the new estimate:

follows: FV = 18,000,000 – 14,000,000 = 4,000,000

4) After this journal entry, the ARO carrying value is $7,085,633

Purchase price $60,000

Journal entry to record the asset’s acquisition:

Repair expense $4,000

The journal entry is:

1) FV= 50,000,000; N= 30, I=7 and PMT=0

1) FV = 400,000; N = 6, I =6, PMT =0.

2) Asset’s acquisition cost = $50,000 paid in cash + PV of the note

Dec 31, 2010

Depreciation expense $33,198

Interest expense $16,919