Tutorial Chpater 10-11 Part B

BUSI2001 - Intermediate Accounting I
Tutorial Chapters 10 and 11

PARTB- Depreciation, impairment and revaluation model
Multiple Choice Questions
1. You have the following information from the books of Zico Inc. as of December 31, 2010:
Building $120,000
Accumulated depreciation 24,000
AOCI- revaluation surplus on building 10,000
Zico Inc. uses the revaluation model and revaluates its assets every 3 years. On December 31,
2011, the FV of the building is $80,000. Annual depreciation on the building is $12,000. The
company uses the gross carrying amount method of asset revaluation.
How should the revaluation surplus/loss on December 31, 2011 be recognized in the books of
Zico Inc.?
a) Debit OCI $10,000, debit Revaluation loss (I/S) $6,000
b) Debit OCI $4,000
c) Debit Revaluation loss (I/S) 16,000
d) Debit revaluation loss (I/S) $4,000
Use the following information to answer questions 2 and 3
Berry Inc. is a public company that has acquired a piece of equipment on January 1, 2014 for
$450,000 cash. The useful life is estimated to 10 years and the residual value is 50,000. Berry
Inc. uses the straight-line method to depreciate all its long-term assets. On December 31,
2016, Berry has recorded a $2,000 impairment loss on this equipment. On December 31, 2017,
the fair value less costs to sell of this equipment was $289,000 and the present value of the
future cash flows expected from using it was $290,700.
2. What was the recoverable amount of the piece of equipment on December 31, 2016?
a) $328,000
b) $330,000
c) $332,000
d) $368,000
1
3. Determine the maximum impairment gain that can be taken on December 31, 2017.
a) $2,414
b) $2,000
c) $1,714
d) $700
Use the following information to answer questions 4 and 5:
On October 5, 2015, Insta Ltd., a public company, has ordered a new piece equipment from Ronald
Inc. The equipment was received on February 20th. Its fair value is $450,000. Insta issued a note
payable in 4 years, that had a present value of $356,000. The equipment was installed on March 2nd
(installation cost $8,000) and testing was completed by March 10th (Testing fees amounted to
$10,000). Insta has not started using the equipment until April 15th.
4. At what amount should the piece of equipment be recorded in the books of Insta Ltd:
a) $468,000
b) $450,000
c) $374,000
d) $356,000
5. At what date should Insta start depreciating the equipment:

a) February 20th, the date the equipment was received
b) March 2nd, the date the equipment was installed
c) March 10th, the date the equipment was tested
d) April 15th, the date at which the equipment was put for use
Use the following data to answer questions 6 and 7:
On January 1, 2002 Soby Ltd. acquired a machine for $450,000 cash. The estimated
useful life of the machine is 8 years and the residual value is $18,000. The machine is
expected to produce 108,000 units during its useful life. Sixteen-thousand (16,000) units
were produced in 2002.
6. Assuming Soby Ltd. uses the units-of-production method, depreciation expense for
2002 is:
a) $66,667
b) $64,000
c) $54,000
d) $51,234
2
7. Assuming Soby Ltd. uses the diminishing balance method at 25%, the net book
value of the machine on January 1, 2004 will be:
a) $253,125
b) $243,000
c) $189,844
d) $182,250
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Problem 1
Shih-Shan Corp acquired a property on September 15, 20x7 for $235,000 paying $2,000 in transfer
taxes and a $1,500 real estate fee. Based on the provincial assessment information, 75% of the
property’s value was related to the building and 25% to the land. It is estimated that the building
with proper maintenance, will last 35 years, at which time it will be torn down. Shih-Shan,
however, expects to use it for 10 years only as it is not expected to suit the company’s purposes
after that. The company estimates the residual value of the property to be $95,000 with $40,000 of
this amount being for the land.
Assuming a December 31 year-end, identify all of the following:
a. The building’s cost

b. The building depreciable amount
c. The building’s useful life
d. Depreciation expense for 20x7, assuming the straight-line method
e. Depreciation expense for 20x7 and 20x8 assuming the diminishing balance method at
20%
f. The building’s carrying amount at December 31, 20x8, assuming the diminishing
balance method at 20%.
Problem 2
On December 31, 20x5, Harwale Corporation had the following property, plant and equipment
on its balance sheet:
Cost Accumulated Net carrying

depreciation value
Buildings $900,000 $300,000 $600,000
Equipment 450,000 180,000 270,000
Harwale uses the revaluation model for its buildings and equipment and applies revaluations using
the gross carrying amount method. The AOCI revaluation surplus account has a balance of
$60,000 for the buildings and $0 for the equipment. The equipment revaluation resulted in a charge
to income of $20,000 in the year ended December 31, 20x2- the last time the company revalued its
assets.
On December 20x5, an independent appraiser assessed the fair value of the buildings to be
$700,000 and the fair value of the equipment to be $300,000.
Required-
Prepare the journal entries at December 31, 20x5 to reflect the revaluation of the building and
equipment.
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Problem 3
4

Problem 4
On January 1, 2009 you acquired a machine for a list price of $400,000, cash. You also paid $4,000
for the machine shipping, and $8,000 for its installation. A two-year insurance policy on the
machine was purchased for $4,000. The machine’s useful life and residual value were estimated to
be 20 years and $18,000, respectively. On January 2, 2013 you received some information that
made you decide to review the machine’s total useful life to 16 years and its residual value to
$20,000.
Required:
1) Determine the machine’s acquisition cost.

2) Determine the depreciation expense for the year ended December 31, 2012 based on the
diminishing balance method at 10%.
3) Determine and record the depreciation expense for the year ended December 31, 2009 based
on the straight-line method of depreciation.
4) Determine the revised depreciation expense for the year ended December 31, 2013, assuming
the company is using the straight-line method of depreciation.
Problem 5
Pho Inc. is a Canadian company that applies IFRS. On January 1, 2010, Pho Inc. acquire a piece of
machine for $72,000. Pho decided to use the straight-line method to depreciate the machine.
Estimated useful life is 10 years and the residual value is $2,000. On January 1, 2014, the company
management receives some information indicating that the machine may have lost in value
compared to its book value. They collect the following information about the machine:
• Value-in-use: $40,000
• Fair value: $38,000
• Costs to sell: $500
In January 2015, the management decides to collect the same information and found that:
• Value-in-use: $41,000
• Fair value: $38,000
• Costs to sell: $1,000
Required
1) Calculate and record the impairment loss on the machine in January 2014.
2) Calculate and record impairment loss/gain on the machine in January 2015.
From the textbook:
Brief exercises: 10-18 (chapter 10); 11-3, 11-4, 11-6, 11-11, 11-12, 11-13, 11-14, 11-15
Exercises: 10-25 questions a and b only, 10-26 questions a to f only (chapter 10); 11-25 questions a
and b only; 11-2; 11-9, 11-17, 11-19, 11-20; 11-23; 11-26
Note 1: What the textbook calls the ‘rational entity impairment model’ refers to the IFRS
impairment test. The ‘cost recovery model’ refers to the ASPE impairment test.
,Note 2: What the textbook calls the ‘asset adjustment method’ refers to the gross method.
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Solutions
Multiple choice questions
1- b:
December 31, 2011: carrying value of the asset = $120,000 -24,000 -12,000 = $84,000
FV = $80,000, so a revaluation loss of $4,000 must be recorded. Given that the OCI-
Revaluation surplus account has a positive balance of $10,000; the total loss should be debited to
the OCI account. The journal entry is:

OCI- revaluation surplus 4,000
Buildings $40,000
2a:
On December 31, 2016, the impairment loss of $2,000 was determined by comparing the NBV
of the asset to its recoverable amount. Because there was an impairment loss, the recoverable
amount was lower than the NBV by $2,000.
NBV on December 31, 2016= $450,000 – ($40,000 x 3 years) = $330,000
Recoverable amount = NBV – impairment loss = $330,000 – $2,000 = $328,000
After recording the impairment loss, the carrying value of the equipment becomes $328,000.
This amount less residual value will be depreciated over the equipment’s remaining
useful life.
3c:
NBV on Dec 31, 2017 with impairment: $328,000 –( (328,000-50,000)/ (10- 3)) = $288,286
Recoverable amount in 2017 = $290,700, so there is impairment gain of $290,700 – 288,286 =
$2,414
The maximum impairment that can be reversed = NBV of asset without impairment – NBV with
impairment
NBV on Dec 31, 2017 without impairment: $330,000 - $40,000 = $290,000
Maximum impairment gain that can be recorded = $290,000 - $288,286 = $1,714
4-c: equipment cost = $356,000PV of the note payable + $8,000installation + 10,000testing

= $374,000
5-c: under IFRS, the depreciation of the equipment should start at the date it is available for use, i.e.
after it tested = March 10th
6-b. ($450,000-18,000/108,000units)*16,000 units = $64,000
7-a. $450,000 * (1-0.25)2 = $253,125
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7

Problem 2
Building:
NBV On December 31, 20x5 = $600,000; FV= $700,000; so there is a revaluation gain of
$100,000.
Given that the previous revaluation resulted in gain as well (credited to OCI), the 20x5 revaluation
gain will be added to the OCI balance.
Journal entry:
Accumulated depreciation $300,000

OCI-revaluation surplus 100,000
Buildings 200,000
Equipment:
NBV on December 31, 20x5 = $270,000; FV = $300,000; so there is a revaluation gain of $30,000
Given that the previous revaluation resulted in a loss of $20,000; the gain of 20x3 will be recorded
by reversing the previous loss first, then any remainder is credited to the OCI account.
Journal entry:
Revaluation Gain- I/S 20,000
Revaluation gain-OCI 10,000
Equipment 150,000
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Problem 3
a) Land
Dec 31, 20x4 Revaluation surplus (OCI)- Land $200,000
Land $200,000
Dec 31, 20x6 Land 500,000

Revaluation surplus (OCI)- Land 500,000
Buildings
Dec 31, 20x3 Depreciation expense 224,000
$5,600,000/25

Revaluation surplus (OCI)-building 300,000
Revaluation loss (I/S) 252,000
Buildings 1,000,000

$4,600,000/23


Buildings 100,000
Revaluation gain (I/S) 252,000
Revaluation surplus (OCI) 48,000
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Problem 4
1) Acquisition cost: $400,000 +4,000+8,000 = 412,000

2) Depreciation expense in 2012
NBV2012 = 412,000 x (1-0.1)3 = $300,348
Depreciation expense = 300,348 x 10% = $30,035
3) Annual depreciation = $412,000-18,000/20 = $19,700
Depreciation expense $19,700

4) NBV2013 = $412,000 – ($19,700 x 4 years) = 412,000 – 78,800 = $333,200

Revised depreciation expense = $333,200-20,000/16-4 = $26,100
Problem 5
1-NBV machine on Jan 2014

72,000 – (72,000-2,000/10 years *4 years) = 72,000-28,000=44,000 1 mark
Recoverable amount = $40,000
Impairment loss =$44,000- 40,000 = 4,000 1 mark
Journal entry:
Impairment loss $4,000
Accumulated depreciation and impairment $4,000 1 mark
2-RA = $41,000
NBV asset with impairment: $40,000- ($40,000 – 2,000)/10-4 = 33,667 2 marks
NBV without impairment = $72,000 - (72,000-2,000/10 years *5 years) = 37,000 2 marks
Difference = 37,000 – 33,667 = $3,333. 1 mark
Impairment gain = $3,333
Journal entry:
Accumulated depreciation and impairment $3,333
Impairment gain or loss $3,333
1 mark
BRIEF EXERCISE 10-18
(a)
Accumulated Depreciation – Buildings ....................................................... 110,000

Buildings ........................................................................................... 110,000
The Buildings account is now $400,000 - $110,000 = $290,000.
5

Buildings ($330,000 – $290,000) .................................................................
40,000
Revaluation Surplus (OCI)................................................................ 40,000
(b)
Before Proportional after

revaluation revaluation
Buildings $400,000 x 330/290 $455,172
Accumulated depreciation 110,000 x 330/290 125,172
Carrying amount $290,000 x 330/290 $330,000
Buildings ......................................................................................................
55,172
Accumulated Depreciation - Buildings .............................................
15,172
BRIEF EXERCISE 11-3
Original Cost = $30,000 + $200 + $100 + $500 + $400 = $31,200
$31,200 – $6,000
(a) X 6/12 = $1,260
10
$31,200 – $0 X 6/12 = $1,300

(b)
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Under ASPE, depreciation expense is the larger of (a) original cost less salvage value over the
asset’s total expected life ($1,300), and (b) original cost less residual value over the asset’s useful
life to the entity ($1,260 calculated in part (a) above).
BRIEF EXERCISE 11-4
$100,000 – $25,000 X 10/12= $7,813

(a)
8
$100,000 – $0
(b) X 10/12 = $8,333
10
Under ASPE, depreciation expense is the larger of the original cost less salvage value over the
asset’s total expected life ($8,333), and the original cost less residual value over the asset’s useful
life to the entity ($7,813 calculated in part (a) above).
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BRIEF EXERCISE 11-6
* Rate on declining balance = (100% ÷ 8) X 2 = 25%
(a) $60,000 X 25%* = $15,000

January 1 to December 31, 2017
(b) 2017 Depreciation expense = 3/12 X $15,000 = $3,750
2018 depreciation expense is either:

($60,000 X 25% X 9/12) + ($45,000 X 25% X 3/12) = $14,063
Or:
Carrying amount, Dec. 31/17 ($60,000 - $3,750) = $56,250
2018 depreciation: $56,250 X 25% = $14,063
(c) If the benefits of the asset are expected to flow to the entity evenly over time, and if the decline
in usefulness of the asset is expected to be constant from period to period, there is greater
justification for using the straight-line method. If the greatest benefits of the asset are expected
to be yielded in the early years, the declining-balance method better reflects the pattern of use.
Recoverability test:
Undiscounted future net cash flows ($500,000) < Carrying amount ($540,000); therefore,
the asset is impaired.
Journal entry:
Loss on Impairment ..........................................................................
140,000
Accumulated Impairment Losses -
Machinery .......................................................................... 140,000
($540,000 – $400,000)
Note: The asset is not written down to the undiscounted future net cash flows but rather to its fair
market value.
(a) No entry. Under the cost recovery impairment model (ASPE), the subsequent recovery of an
impairment loss is not restored for property, plant, and equipment held for use.
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(b) Under the rational entity impairment model (IFRS), an impairment loss is reversed if there is
a change in the estimates used to calculate recoverable amount. However, the reversal
amount is limited. The specific asset cannot be increased in value to more than what its book
value would have been, net of depreciation, if the original impairment loss had never been
recognized.
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(a)
Under IFRS, the recoverable amount is the higher of (1) the asset’s value in use and (2) its fair
value less costs to sell. In this case, even though the asset was scrapped on January 1, 2018, its
value in use as of November 30, 2017 was $800,000. The recoverable amount of $800,000 is lower
than the carrying amount of $1,000,000; therefore the asset is impaired as of the date of the
financial statements.
Note: The scrapping of the asset should be disclosed as a subsequent event if material.
(b)
Under ASPE, the recoverable amount is the undiscounted net future cash flows from use and
eventual disposal. The recoverable amount of $1,100,000 is higher than the carrying amount of
$1,000,000; therefore the asset is not impaired as of the date of the financial statements.
Note: The scrapping of the asset should be disclosed as a post–balance sheet subsequent event if
material.
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(a)
At December 31, 2017:
The recoverable amount is $425,000 (the higher of the asset’s (1) value in use of $425,000 and (2)
fair value less costs to sell of $400,000).
Impairment loss:
Carrying amount ............................................................ $500,000
Less: Recoverable amount ............................................ 425,000
Impairment loss .............................................................. $ 75,000

75,000
Accumulated Impairment Losses
Land ..................................................................................... 75,000
($500,000 – $425,000)
(b)
At December 31, 2018:
Accumulated Impairment Losses –

Land ...................................................................................................
75,000
Recovery of Loss from
Impairment ......................................................................... 75,000
($500,000 – $425,000)
Reversal of the impairment loss is limited to the amount required to increase the asset’s carrying
amount to what it would have been if the impairment loss had not been recorded. In this case the
original cost of the land is $500,000 and accumulated impairment losses recorded to date is
$75,000. Since the current recoverable amount of $550,000 (higher of value in use of $550,000 and
fair value less costs to sell of $480,000) is higher than the original cost of the land, recovery of
impairment losses is limited to $75,000.
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(a)
Under ASPE, because the buildings and equipment are specialized and cannot generate cash flows
on their own, they are combined into an asset group with the land. The carrying amount of the asset
group is $60,000. The cost recovery model applies a recoverability test to determine if there is
impairment. The asset group’s carrying amount of $60,000 is compared to undiscounted net future
cash flows of $70,000. Since the asset group’s carrying amount can be recovered (i.e. the asset
group’s undiscounted net future cash flows are greater than the asset group’s carrying amount),
there is no impairment, and no impairment loss is recorded.
(b)
Under the IFRS rational entity model, the cash generating unit’s (CGU’s) carrying amount of
$60,000 is compared to recoverable amount of $45,000 (the higher of the CGU’s value in use of
$45,000 and fair value less costs to sell of $35,000).
Carrying amount of CGU……… $60,000

Less: Recoverable amount…... 45,000
Impairment loss………………… $15,000
The impairment loss is then allocated to the individual assets in the CGU, but no individual asset
can be reduced to below the highest of (1) its value in use, (2) its fair value less costs to sell, or (3)
zero. In this case, the land is not impaired (recoverable amount is greater than carrying amount),
thus the $15,000 loss is allocated to the buildings and equipment.
Carrying Loss
Allocation: Amount Proportion Allocation
Buildings $30,000 30/40 $ 11,250
Equipment 10,000 10/40 3,750
$40,000 $15,000
(b) (continued)
The journal entry to record the impairment is:

15,000
Accumulated Impairment Losses–
Buildings ................................................................................ 11,250
Accumulated Impairment Losses–
Equipment .............................................................................. 3,750
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SOLUTIONS TO EXERCISES
EXERCISE 10-25
(a)
Asset Adjustment Method (Gross Method)
Accumulated Depreciation – Buildings ........................................................ 50,000

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
Equipment ($90,000–$80,000) .....................................................................

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)
Depreciation Expense ...................................................................................
13,750
Accumulated Depreciation – Buildings ............................................ 13,750
($275,000 ÷ 20)

11,250
Accumulated Depreciation – Equipment .......................................... 11,250
($90,000 ÷ 8)
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EXERCISE 10-26
(a)
December 31, 2017
11,500
Accumulated Depreciation – Buildings ............................................
11,500
($230,000 ÷ 20)
(b)
December 31, 2018
11,500
11,500
(c)
December 31, 2019
11,500
11,500
Accumulated Depreciation – Buildings ....................................................... 34,500

Buildings ........................................................................................... 34,500
The Buildings account is now $230,000 - $34,500 = $195,500, and the related Accumulated
Buildings ($205,000 – $195,500) .................................................................

9,500
(d)
Effective January 1, 2020, the depreciation rate is adjusted to reflect the change in the depreciable
amount. The $205,000 January 1, 2020 carrying amount is now allocated over the remaining 17 (20
– 3) years. The new rate, therefore, is $12,059 ($205,000 ÷ 17) per year.
December 31, 2020

12,059
12,059
(e)
December 31, 2021
12,059
($205,000 ÷ (20 – 3))
(f)
December 31, 2022
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12,059
Using the asset adjustment method, remember that the Accumulated Depreciation account was
reduced to $0 at the end of 2019. Its balance three years later on December 31, 2022 therefore is
$36,177 ($12,059 x 3), and the Buildings account under this method is still at the December 31,
2019 revaluation amount of $205,000.
EXERCISE 11-25
(a) Situation 1
(1) December 31, 2017

Depreciation Expense ....................................................................................
18,000
Accumulated Depreciation – Equipment ...........................................
18,000
($100,000 – $10,000) ÷ 5 years
The equipment is reported on the statement of financial position at a carrying amount of $82,000
($100,000 less accumulated depreciation of $18,000).
(2) December 31, 2018

18,000
18,000
($100,000 – $10,000) ÷ 5 years
(3) March 31, 2019

4,500
4,500
($100,000 – $10,000) ÷ 5 years X 3/12
Cash 62,000
Accumulated Depreciation – Equipment 40,500
*Gain on Disposal of Equipment ....................................................... 2,500
Equipment ..........................................................................................100,000
*Per IAS 16, the gain or loss on disposal (the difference between the carrying
amount and the proceeds on disposal) is reported on the income statement. Any
amount remaining in the Revaluation Surplus account would be transferred
directly to retained earnings.
(b) Situation 2
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(1) December 31, 2017

18,000
Accumulated Depreciation – Equipment ..........................................
18,000
($100,000 – $10,000) ÷ 5 years
Accumulated Depreciation – Equipment ......................................................

18,000
Equipment ......................................................................................... 18,000
Equipment 7,000
Revaluation Surplus (OCI) ................................................................ 7,000
(gross amount of $89,000 less accumulated depreciation of $0).
Note: This is a two step process. First, depreciation is recorded for the period according to normal
depreciation principles. Second, the asset revaluation is recorded. Using the elimination method,
accumulated depreciation is eliminated against the asset account just prior to revaluation of the
asset to fair value.
(2) December 31, 2018

19,500
19,500
($89,000 – $11,000) ÷ 4 years
(3) March 31, 2019

Depreciation Expense 4,875
Accumulated Depreciation - Equipment............................................................
4,875
($89,000 – $11,000) ÷ 4 years X 3/12
Cash ...........................................................................................................
62,000
Accumulated Depreciation – Equipment ............................................................ 24,375
Loss on Disposal of Equipment* ........................................................................
2,625
Equipment....................................................................................................
89,000
*Per IAS 16, the gain or loss on disposal (the difference between the carrying
amount and the proceeds on disposal) is reported on the income statement. The
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remaining balance in the Revaluation Surplus account is now transferred directly to
Retained Earnings:
Debit: AOCI 7,000

Credit: Retained Earnings 7,000
EXERCISE 11-2
(a) Total cost of property = $220,000 + $3,000 + $1,500

= $224,500
Cost of the building = $224,500 X 75% = $168,375
(b) Depreciable amount = Cost – Residual Value

= $168,375 – $115,000 = $53,375
(c) Useful life is limited to 10 years. This is the number of

years the building will contribute economic benefits to the
company.
(d) Depreciation expense 2017 (straight-line)

= ($168,375 – $115,000) / 10 X 3.5 months/12 = $1,557
(e) Depreciation expense 2017 (double-declining)

= $168,375 X 20%* X 3.5 months/12 = $9,822
Depreciation expense 2018 = ($168,375 – $9,822) X 20%*

= $31,711
* Rate = (1 ÷ 10) X 2 = 20%
(f) Carrying amount = $168,375 – $9,822 – $31,711 = $126,842
(g) 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 over the asset’s useful life.
Under ASPE, depreciation expense 2017 (straight-line)

= ($168,375 - $0) / 20 X 3.5 months/12 = $2,455
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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.
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(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.
18

EXERCISE 11-17
(a) 1989-1998: ($1,800,000 – $400,000) ÷ 40 = $35,000/yr.
(b) 1999-2016:
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 – $980,000*) $820,000
Remaining useful life 2 years
Annual depreciation $410,000
Addition:
Carrying amount: ($750,000 – $360,000**) $390,000
*$35,000 X 28 years = $980,000

**$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
19

(b) 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
2016 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 $76,667/yr. for 28 years would have amounted to $2,146,676 in accumulated
depreciation at end of 2016, whereas the financial statements at end of 2016 reported
accumulated depreciation of $1,540,000. Also, the investor would have invested based on
the information that the building would be useful for another 12 years (until 2028), 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 balance
sheet 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.
(c) For 1989 – 1998 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 1999 – 2016:

Building ($1,800,000 – $216,000) ÷ 44 = $36,000/yr.
Revised annual depreciation

Building:
Carrying amount: ($1,800,000 –$1,008,000*) $792,000
*$36,000 X 28 years = $1,008,000
20

EXERCISE 11-19
(a) December 31, 2017

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
Carrying amount 500,000
Fair value 230,000
(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).
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
Carrying amount 500,000
Fair value* 276,506
*Fair value = PV of annuity ($45,000, n = 10 years, i = 10%) = $45,000 X 6.14457 =

$276,506
Using Excel:
Payments = Pmt $45,000
Interest rate = Rate 10%
21

Periods = Nper 10
Future value = FV 0
Type 0
Present value = $276,506
December 31, 2018

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.
22

EXERCISE 11-20
(a)
When the recoverable amount of an individual asset cannot be determined, the asset is identified
with a cash-generating unit (CGU), and the CGU’s cash flows are tested for impairment. An
individual asset is identified with a CGU, only when it does not generate cash inflows that are
largely independent of cash flows from other assets or groups of assets, or when its fair value less
selling costs is not considered representative of its value in use. The allocation of assets to CGU’s
often involves professional judgement.
The recoverable amount of a CGU, like the recoverable amount of an individual asset, is the higher
of its value in use and fair value less costs of disposal (or fair value less costs to sell). Because the
recoverable amount is compared with the CGU's carrying amount to determine if there is an
impairment loss, it is reasonable to include the same assets in both measures.
Therefore the carrying amount of a CGU includes the carrying amount of only those assets that are
used to generate the relevant stream of cash flows. These assets can be assets that are directly
involved in the CGU, or assets that can be allocated to the CGU on a reasonable and consistent
basis. Where liabilities are needed to calculate the recoverable amount, they are also deducted in
determining the carrying amount of the CGU.
The road system's fair value less costs of disposal is almost negligible; certainly far less than its
value in use. Because its recoverable amount cannot be determined independently, the road system
is assigned to the smallest identifiable group of assets that generates independent cash inflows.
23

(a) Machinery:
The asset’s recoverable amount is $4,500,000 (the higher of its value in use (i.e. discounted
future net cash flows) ($4,500,000) and its fair value less costs to sell ($3,800,000).
The impairment test indicates that impairment has not occurred since the carrying amount
does not exceed the recoverable amount.
Therefore, there is no impairment loss to record on the machinery.
Mine in the Development Phase:
The asset’s recoverable amount is $9,350,000 (the higher of its value in use (i.e. discounted
future net cash flows) ($9,000,000) and its fair value less costs to sell ($9,350,000).
The impairment test indicates that impairment has occurred since the carrying amount
exceeds the recoverable amount. The impairment loss is calculated as follows:
Carrying amount 9,500,000

Recoverable amount 9,350,000
June 30, 2017

150,000
Accumulated Impairment Losses—Mine ....................... Equipment
150,000
24

EXERCISE 11-23
(a) Cost Recovery Impairment Model
Assuming that the equipment meets the criteria to be classified as held for sale (such as having
an active program to locate a buyer), the following entry would be recorded:
(1) Loss on Impairment .......................................................................................

1,850,000
Accumulated Impairment Losses—
Equipment ......................................................................................
1,850,000
Cost $10,000,000
Accumulated depreciation 2,000,000
Carrying amount 8,000,000
Less: Fair value (6,200,000)
Plus: Costs of disposal 50,000
Impairment loss $1,850,000
Held for sale assets are valued at fair value less costs to sell.
(2) No entry necessary. Depreciation is not taken on assets held for sale.
(3) Accumulated Impairment Losses—Equipment .............................................

300,000
Recovery of Loss from Impairment ....................................................
300,000
Fair value $6,500,000

Less: Costs of disposal 50,000 6,450,000
Carrying amount* 6,150,000
Recovery of loss from impairment $300,000
*($10,000,000 – $2,000,000 – $1,850,000)
25

(4) The equipment would be shown in a separate section of the statement of financial position
as a non-current asset held for sale. It would be shown at the lower of its carrying amount
and fair value less costs to sell. ASPE allows these assets to be reclassified as current only
if they are sold before the financial statements are completed and the proceeds to be
received qualify as a current asset. Since the equipment was not sold by December 31,
2018, the asset is classified as non-current.
(b) Rational Entity Impairment Model
(1) Same as E11-23 (a).
(2) No entry necessary. Depreciation is not taken on assets held for sale.
(3) Accumulated Impairment Losses—Equipment .............................................

300,000
Recovery of Loss from Impairment ....................................................
300,000
Fair value $6,500,000

Less: Costs of disposal 50,000 6,450,000
Carrying amount* 6,150,000
Recovery of impairment loss $ 300,000
*($10,000,000 – $2,000,000 – $1,850,000)
(4) The equipment would be shown in a separate section of the statement of financial position as
a current asset held for sale. It would be shown at the lower of its carrying amount and its
fair value less costs to sell.
26

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BUSI2001 - Intermediate Accounting I

Tutorial Chapters 10 and 11

Multiple Choice Questions

Use the following information to answer questions 2 and 3

Use the following information to answer questions 4 and 5:

5. At what date should Insta start depreciating the equipment:

Use the following data to answer questions 6 and 7:

a. The building’s cost

Cost Accumulated Net carrying

1) Determine the machine’s acquisition cost.

From the textbook:

Multiple choice questions

Accumulated depreciation 36,000

4-c: equipment cost = $356,000PV of the note payable + $8,000installation + 10,000testing

6-b. ($450,000-18,000/108,000units)*16,000 units = $64,000

7-a. $450,000 * (1-0.25)2 = $253,125

Accumulated depreciation $300,000

Dec 31, 20x6 Land 500,000

Accumulated depreciation 448,000

Dec 31, 20x5 Depreciation expense 200,000

Dec 31, 20x6 Depreciation expense 200,000

Accumulated depreciation 400,000

1) Acquisition cost: $400,000 +4,000+8,000 = 412,000

3) Annual depreciation = $412,000-18,000/20 = $19,700

Depreciation expense $19,700

4) NBV2013 = $412,000 – ($19,700 x 4 years) = 412,000 – 78,800 = $333,200

1-NBV machine on Jan 2014

BRIEF EXERCISE 10-18

Accumulated Depreciation – Buildings ....................................................... 110,000

Before Proportional after

BRIEF EXERCISE 11-3

Original Cost = $30,000 + $200 + $100 + $500 + $400 = $31,200

$31,200 – $0 X 6/12 = $1,300

BRIEF EXERCISE 11-4

$100,000 – $25,000 X 10/12= $7,813

BRIEF EXERCISE 11-6

* Rate on declining balance = (100% ÷ 8) X 2 = 25%

(a) $60,000 X 25%* = $15,000

(b) 2017 Depreciation expense = 3/12 X $15,000 = $3,750

2018 depreciation expense is either:

2018 depreciation: $56,250 X 25% = $14,063

BRIEF EXERCISE 11-11

BRIEF EXERCISE 11-12

Loss on Impairment ..........................................................................

Accumulated Impairment Losses –

Carrying amount of CGU……… $60,000

The journal entry to record the impairment is:

Loss on Impairment ..........................................................................

Asset Adjustment Method (Gross Method)

Accumulated Depreciation – Buildings ........................................................ 50,000

Revaluation Gain or Loss .............................................................................

Accumulated Depreciation – Equipment ...................................................... 40,000

Equipment ($90,000–$80,000) .....................................................................

Depreciation Expense ...................................................................................

Accumulated Depreciation – Buildings ....................................................... 34,500

Buildings ($205,000 – $195,500) .................................................................

December 31, 2020

(1) December 31, 2017