Financial Accounting Canadian 5th Edition Harrison Solutions Manual 1

Financial Accounting Canadian 5th Edition Harrison
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Chapter 7
Property, Plant, and Equipment, and

Intangible Assets
Short Exercises
(5 min.) S 7-1
1. Property and Equipment, at Cost

Millions
Aircraft………………………………………………… $ 2,392
Package handling and ground support
equipment………………………………………… 12,229
Computer and electronic equipment……………. 28,159
Vehicles………………………………………………. 581
Facilities and other…………………………………. 1,432
Total cost………………………………………….. 44,793
Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual
474 Copyright © 2015 Pearson Canada Inc.
Less: Accumulated (14,900)
depreciation………………….
Net property and equipment…………………… $29,893
Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 475

Copyright © 2015 Pearson Canada Inc.
(continued) S 7-1
2. Cost = $44,793 million

Carrying amount = $29,893 million
Carrying amount is less than cost because accumulated

depreciation is subtracted from cost to compute carrying
amount.

(5 min.) S 7-2
The related costs (real estate commission, back property
tax, removal of a building, legal fees, and survey fees) are
included as part of the cost of the land because the buyer of
the land must incur these costs to get the land ready for its
intended use.
After the land is ready for use, the related costs (listed
above) would be expensed.

(10 min.) S 7-3
Land ($140,000  0.50) ............................ 70,000

Building ($140,000  0.40) ...................... 56,000
Equipment ($140,000  0.10) .................. 14,000
Note Payable ........................................ 140,000
Market
Value
Land .......................... $ 75,000
Building ..................... 60,000
Equipment ................ 15,000
Total .......................... $150,000

(10-15 min.) S 7-4
Income Statement
Revenues CORRECT
Expenses UNDERSTATED
Net income OVERSTATED
Balance Sheet
Current assets CORRECT Total liabilities CORRECT
Property, Plant, OVERSTATED Shareholders’ equity OVERSTATED
and Equipment
Total liabilities
Total assets OVERSTATED and shareholders’
equity OVERSTATED

(10 min.) S 7-5
1. First-year depreciation:
(a) Straight-line ($25,000,000 – $5,000,000) /

5 years......................................................... $4,000,000
(b) Units-of-production [($25,000,000 – $5,000,000) /

5,000,000 kilometres]  750,000
kilometres..................................................... $3,000,000
(c) Double-Diminishing-balance
($25,000,000 / 5 years)  2........................... $10,000,000
2. Carrying amount:
Double-
Straight- Units-of- Diminishing
Line Production Balance
Cost .............................. $25,000,000 $25,000,000 $25,000,000
Less Accumulated
Depreciation ........... (4,000,000) (3,000,000) (10,000,000)
Carrying amount ......... $21,000,000 $22,000,000 $15,000,000

(10 min.) S 7-6
Fifth-year amortization:
(a) Straight-line ($25,000,000 – $5,000,000) /
5 years…… $4,000,000
(b) Units-of-production [($25,000,000 –

$5,000,000) / 5,000,000 kilometres] 
500,000 kilometres………….. $2,000,000
(c) Double-diminishing-balance:
Year 1 ($25,000,000  2/5) = $10,000,000
Year 2 ($25,000,000 – $10,000,000)  2/5 = $6,000,000
Year 3 ($25,000,000 – $10,000,000 – $6,000,000)  2/5 =

$3,600,000
Year 4 ($25,000,000 – $10,000,000 – $6,000,000 –

3,600,000)  5,000,000 = $400,000
Year 5 No depreciation: asset is fully

amortized

(5-10 min.) S 7-7
First-year depreciation (for a partial year):
a. Straight-line (€40,000,000 – €5,000,000) / 7 years

 3/12 ................................................................ € 1,250,000
b. Units-of-production (€40,000,000 – €5,000,000)/

5,000,000 km  500,000 km ............................ € 3,500,000
c. Double-diminishing-balance (€40,000,000  2/7

 3/12)............................................................... € 2,857,143
Straight-line depreciation produces the highest net income

(lowest depreciation). Units-of-production depreciation
produces the lowest net income (highest depreciation).

(10 min.) S 7-8
Depreciation Expense — Concession Stand ....... 12,000
Accumulated Depreciation — Concession
Stand .................................................................... 12,000
Depreciation for years 1–4:
$60,000 / 10 years = $6,000 per year
$6,000  4 years = $24,000 for years 1–4
Asset’s remaining
depreciable ÷ (New) Estimated = (New) Annual
carrying amount useful life remaining depreciation
$60,000 – $24,000 ÷ 3 years = $12,000 per

year
$36,000

(10 min.) S 7-9
Req. 1
Straight-line depreciation ($45,000 – $5,000)/5 = $8,000

annually
Carrying value of van at December 31, 2014 is

$45,000 – $8,000 – $8,000 – $8,000 – $8,000 = $13,000
Req. 2
Cash .................................................... 15,000

Asset account – van .......................... 45,000
Accumulated depreciation ................ 32,000
Gain on sale of van ............................ 2,000

(5-10 min.) S 7-10
Patents and goodwill are both long-lived assets. A patent
provides the exclusive right to make use of an invention or
process for a specific period of time, usually 20 years.
Goodwill is the excess of cost of purchasing another
company over the sum of the fair value of its net asset. A
patent has a finite life that may be measured; goodwill has
an indefinite life.
A patent is amortized over its useful life. Amortization is

usually computed on a straight-line basis. The amortization
is recorded as follows:
DR CR
Amortization expense.......................... XX
Accumulated amortization.............. XX
The cost of the patent, less the accumulated amortization is

the carrying amount of this intangible asset.
The value of goodwill does not change, unless it is

impaired. Impairment results when the recoverable amount
for the goodwill is less than the carrying amount. IFRS
requires that companies review the value of their goodwill
annually and write down the value of the goodwill if it is
less than the carrying amount. The write-down is recorded
as follows:
DR CR
Impairment of goodwill......................... XX
Goodwill............................................. XX
The carrying amount of goodwill is the cost, less any
recorded impairment.

(10-15 min.) S 7-11
Req. 1
(Millions)
The purchase price was $ 200.0

The fair value of the net assets is $ 180.3
The goodwill would be $ 19.7
Req. 2
Canadian Tire would have reviewed the goodwill value

annually. If the goodwill value is still $19.7 million, there will
have been no amortization or expense recorded. The asset
value of goodwill will continue to be $19.7 million.

(10-15 min.) S 7-12
Req. 1
Jaguar Automobiles Ltd.

Income Statement
For the Year Ended December 31, 2014
Revenues:
Sales revenue ...................................... $6,500,000
Expenses:
Cost of goods sold ............................. $3,200,000
Research expense .............................. 500,000
Amortization of patent ($1,200,000 / 3) 400,000
Selling expenses ................................. 300,000
Total expenses .................................... 4,400,000
Net income............................................... $2,100,000

(5 min.) S 7-13
Rising Yeast Co.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from investing activities: (Millions)
Purchase of other companies ................................ $(17)
Capital expenditures ............................................... (2)
Proceeds from sale of operations ......................... 25
Net cash provided by investing activities. $ 6

(5 min.) S 7-14
(Dollar amounts in millions)
Return on = Net ÷ Average total

assets income assets
15% = $18 ÷ $120

(5 min.) S 7-15
2013 Return on = Net income ÷ Average total assets

assets
17.7% = $42,500 ÷ $240,000
2014 Return on = Net income ÷ Average total assets

assets
18.0% = $45,000 ÷ $250,000

Exercises
(5-10 min.) E 7-16

Land: $150,000 + $100,000 + $5,000 + $3,000 + $25,000 =
$283,000
Land improvements: $100,000 + $10,500 + $18,000 =

$128,500
Building: $70,000 + $3,750,000 = $3,820,000

(10-15 min.) E 7-17
Allocation of cost to individual machines:
Cost of
Appraised Percentage of Total Total Each
Machine Value Appraised Value Cost Asset
1 $ 27,000 $27,000 / $108,000 = 0.250 $100,000  0.250 = $25,000
2 45,000 45,000 / 108,000 = 0.417 100,000  0.417 = 41,700
3 36,000 36,000 / 108,000 = 0.333 100,000  0.333 = 33,300
Totals $108,000 1.000 $100,000
Sale price of machine no. 2 ................... $45,000

Cost ......................................................... 41,700
Gain on sale of machine ........................ $ 3,300
(5-10 min.) E 7-18

Capital expenditures: All costs incurred to bring the asset
to its intended use are included in the cost of the asset.
(c) Purchase price, (a) sales tax, (b) transportation and

insurance, (d) installation, (e) training of personnel,
(f) reinforcement to platform, (h) major overhaul,
(j) lubrication before machine is placed in service
Note: (h) would also be a capital expenditure when
completed after a period of operation.
Immediate expenses:
(g) Income tax, (i) ordinary recurring repairs, (k) periodic
lubrication
A capital expenditure increases an asset’s capacity or
extends its useful life. An immediate expense maintains the
asset or restores it to working order.

(15 min.) E 7-19
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
1 a. Land………………………………………… 200,00
. … 0
Cash………………………………………. 200,00
.. 0
b Building [$2,250 + $20,000 + $700,000 +

.
($29,000  9/12)] 744,00
0
Note 700,00
Payable……………………………… 0
Cash [$2,250 + $20,000 + ($29,000  9/12)] 44,000
c. Depreciation 6,840
Expense……………………...
Accumulated Depreciation
($744,000 – $60,000) / 25  6,840
3/12………..
2. BALANCE SHEET
Property, Plant, and Equipment:
Land ..................................................... $200,000
Building ............................................... $744,000
Less Accumulated depreciation ....... (6,840)
Building, net........................................ 737,160
3. INCOME STATEMENT
Expense:
Depreciation expense ........................ $ 6,840

(15-20 min.) E 7-20
Double-
Units-of- Diminishing
Year Straight-Line Production Balance
1 $ 9,000 $ 7,200 $ 19,980
2 9,000 10,800 6,673
3 9,000 9,000 347
$ 27,000 $27,000 $27,000
_____
Computations:
Straight-line: ($30,000 – $3,000) ÷ 3 = $9,000 per year.
Units-of-production: ($30,000 – $3,000) ÷ 150,000 kilometres =

$0.18 per kilometre;
YR1 40,000  $0.18 = $7,200
2 60,000  $0.18 = $10,800
3 50,000  $0.18 = $9,000
Double-diminishing-balance — Twice the straight-line rate:

1/3  2 = 2/3 = 66.6%
YR
1 $30,000  0.666 = $19,980
2 ($30,000 – $19,980)  0.667 = $6,673
3 ($30,000 – $19,980 – $6,673) = $3,347 – $3,000 (residual
value) = $347
The units-of production method tracks the useful life cost of

the van most closely.

(15 min.) E 7-21
INCOME STATEMENT
Expenses:
Depreciation expense — building [($50,000 +
$100,000 + $50,000) – $50,000] / 25 ....................... $ 6,000
Depreciation expense — equipment and store

fixtures ($50,000  2/5) ............................................ 20,000
Supplies expense
($10,000 – $2,000) .................................................... 8,000
BALANCE SHEET
Current assets:
Supplies ....................................................................... $ 2,000

Building ($50,000 + $100,000 + $50,000). $200,000
Less accumulated depreciation .............. (6,000) $194,000
Equipment and store fixtures .................. $ 50,000

Less accumulated depreciation .............. (20,000) 30,000
STATEMENT OF CASH FLOWS

Cash flows from investing activities:
Purchase of building ($50,000 + $50,000) .......... $(100,000)
Purchase of equipment and store fixtures ........ (50,000)
Net Cash used for investing activities $ 150,000

(5-10 min.) E 7-22
Profit margin for the year ended January 31, 2014:
Net earnings $ 2,010 = 4.12%

Net sales $48,815
Req. 2
Asset turnover for the year ended January 31, 2014:
Net sales $48,815 = 1.45

Average total assets $33,699
Req. 3
Return on assets for the year ended January 31, 2014:
Net earnings $ 2,010 = 5.96% or (4.12% x 1.45 =

5.97%)*
_____
*difference due to rounding

(10-15 min.) E 7-23
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Year 11 Depreciation Expense…………………… 55,833
Accumulated Depreciation — Building 55,833
Year 12 Depreciation Expense…………………… 55,833*

Accumulated Depreciation — Building 55,833
_____
*Computation:
Depreciable cost: $900,000 – $100,000 = $800,000

Depreciation through year 10:
$800,000 ÷ 30 = $26,667  10 = $266,670
Asset’s remaining depreciable carrying amount:
$900,000 – $266,670 – $75,000 = $558,330
New estimated useful life remaining: 10 years
New annual depreciation: $558,330 ÷ 10 = $55,833

(15-20 min.) E 7-24
Journal
2014 Depreciation for 6 months:
June 30 Depreciation Expense ........................1,800a
Accumulated Depreciation —
Fixtures ............................................ 1,800
Sale of fixtures:
30 Cash .....................................................5,000
Store Fixtures ($6,000 + $1,800) ........7,800
Loss on Sale of Fixtures ....................2,200b
Fixtures ............................................ 15,000
_____
a2013 depreciation: $15,000  2/5 = $6,000
2014 depreciation: ($15,000 – $6,000)  2/5  6/12 = $1,800
bLoss is computed as follows:

Sale price of old fixtures ............................. $ 5,000
Carrying amount of old fixtures:
Cost ........................................................... $15,000
Less: Accumulated depreciation ............ (7,800) 7,200
Loss on sale.................................................. $ 2,200

(10-15 min.) E 7-25
Cost of old truck………………………………… $280,000
Less Accumulated depreciation:
($280,000 – $40,000)  130 + 180 + 180 + 90

(139,200)
1,000
_______
Carrying amount of old truck……………………… $140,800
Journal Entry:
Cost of tractor-trailer rig 280,000

Accumulated depreciation 139,200
Loss on derecognition 140,800

(10-15 min.) E 7-26
Goodwill has increased by 8.9 thousand. This indicates that
the company has purchased the assets of another entity
during the year. It would be important to know how much
was paid for the purchase and how the purchase was
financed. Will your investment benefit through increased
value and/or dividends from profits of the new acquisition?
This information will be found by analysis of the Goodwill
notes to the financial statements.
Further it will be important to ascertain that On the Edge

assesses the value of goodwill on a regular basis to
determine whether the carrying amount is more than the fair
value of the goodwill. The note re Intangible assets should
disclose that an assessment was made and that the
appropriate action was taken, i.e., that no write-down was
required or that a write-down was taken to reflect the value
of the impairment. As an investor, this will confirm that the
value of goodwill is not overstated.
The carrying value of intangible assets decreased by $6.0

thousand. It will be important to ascertain through the notes
the description of the intangible assets (i.e., patents,
trademarks or licences), how they relate to the business,
and what amortization was recorded. As an investor, you
will want to know if new intangible assets have been
acquired. This information will be disclosed through the
Intangible Assets notes to the financial statements.

(10-15 min.) E 7-27
Journal
Part1(a)Purchase of patent:
Patents………………………………... 600,000
Cash………………………………… 600,000
Amortization for one year: Use

(b) straight-line method to allocate
cost over useful life.
Amortization Expense — Patents
($600,000 ÷ 6)………………………… 100,000
Accumulated 100,000
Amortization…………………………..
Part2 Amortization for year 3:

Amortization Expense — Patents... 200,000*
Accumulated 200,000
Amortization…………………………..
_____
*Asset remaining carrying amount:
$600,000 – ($100,000  2) = $400,000
New estimated useful life remaining: 2 years
New annual depreciation: $400,000 ÷ 2 = $200,000

(15-20 min.) E 7-28
Req. 1
Goodwill is defined as “Purchase Price in Excess of Net

Assets of Businesses Acquired.”
Req. 2
a. $6.2 million is the amount of cash that Research in

Motion Limited paid to acquire (purchase) other
companies.
b. $4.5 million must be the carrying amount of goodwill

arising from the purchase of these companies.
Req. 3
There must have been no impairment of goodwill during the

year.

(5-10 min.) E 7-29
Req. 1
Cost of goodwill purchased:
Purchase price paid for My Space......... $18,000,000

Fair value of My Space’s net assets:
Fair value of My Space’s assets ........ $ 25,000,000
Less: My Space’s liabilities ................ (24,000,000)
Fair value of My Space’s net assets 1,000,000
Cost of goodwill ...................................... $17,000,000
Req. 2
Journal
Assets (Cash, Receivables,
Inventories, Property, Plant, and 25,000,000
Equipment) .....................................
Goodwill ......................................... 17,000,000
Liabilities ................................... 24,000,000
Cash ........................................... 18,000,000
Purchased My Space Ltd.
Req. 3
Google will determine whether the My Space’s goodwill that

Google has purchased has increased or decreased in value.
If the goodwill’s value has increased, there is nothing to
record. But if the goodwill’s fair value has decreased, that is
if the value is impaired, Google will record a loss on
goodwill and write down the carrying amount of the
goodwill.
(10-15 min.) E 7-30
1. Depreciation appears on the statement of cash flows as
“Noncash items.” Depreciation is an expense that
decreased net income, but it did not decrease cash. To
measure cash flow from operations, depreciation is
added back to net income.
2. During 2014, the retailer:

a. Paid $233.6 million to purchase property, plant, and
equipment. Record this cash payment as “[Investment
in] Property, plant, and equipment assets.”
b. Paid $0.6 million to acquire other investments.
c. Received cash of $17.0 million from the derecognition
(sale) of assets.

(10 min.) E 7-31
a. Sale of building
(or derecognition of assets) ...................... $600,000
b. Insurance proceeds from fire

(or derecognition of assets) ...................... 120,000
c. Renovation of stores
(or property) ................................................ (400,000)
d. Purchase of store fixtures

(or equipment) ............................................ (60,000)

(5-10 min.) E 7-32
Profit margin for the year ended January 31, 2014:
Net earnings $ 1,116 = 1.36%

Net sales $82,189
Req. 2
Asset turnover for the year ended January 31, 2014:
Net sales $82,189 = 3.5

Req. 3
Return on assets for the year ended January 31, 2014:
Net earnings $ 1,116 = 4.75% or (1.36% x 3.5 =

4.76%) *
_____
*difference due to rounding

(10-15 min.) E 7-33
Let ? = Number of hours of usage
Units-of-
Cost – Residual value Number of
production = 
Useful life, in hours hours of use
depreciation
$100,000 + $2,000 –
$10,304 = $10,000  ?
50,000
$10,304 = $1.84  ?
$10,304
? =
$1.84
= 5,600 hours
Alternate solution setup:
Depreciation Cost – Residual value

=
per hour Useful life, in hours
$10,000 + $2,000 – $10,000
= = $1.84
50,000
UOP Depreciation Number of
= 
Depreciation per hour hours of use
$10,304 = $1.84  ?
$10,304
? =
$1.84
= 5,600 hours

(15-20 min.) E 7-34
(Amounts in millions)
Land buildings and equipment

Beg. bal. 575.1 Cost of prop.
Purchases 74.2 and equip. sold X = 105.2
End. bal. 544.1
Accumulated Depreciation
Accum. amort. of Beg. bal. 209.4
prop. and
X = 52.4 equip. sold X Depreciation exp. 38.1
End. bal. 195.1
Carrying amount of property and equipment sold:

Cost.............................................................. $105.2
Accumulated depreciation ........................ (52.4)
Carrying amount sold ................................ 52.8
 Loss on sale ............................................. (32.6)
Sale price of property and equipment ...... $ 20.2

(15-20 min.) E 7-35
Net income under straight-line depreciation……... $21,000
Difference in depreciation for fiscal 2014 (year 4 of 5):

Straight line depreciation, as
reported.............................................................$1,000
DDB depreciation for year 4 (see below) ....... 432
Decrease in depreciation expense ................. 568
Income Tax rate ................................................(0.25)
Increase in income tax .................................... 142
Net income Rindy can expect for fiscal 2014

if the company uses DDB depreciation ...................
$21,426*
*$21,000 + $568 – $142 = $21,426
Cost of furniture, fixtures, equipment, and

automotive assets ($1,000  5 years) ................. $5,000
DDB depreciation by year:

Year DDB depreciation
1 $5,000  2/5 .............................................. $2,000
2 ($5,000 – $2,000)  2/5 ............................. 1,200
3 ($5,000 – $2,000 – $1,200)  2/5 .............. 720
4 ($5,000 – $2,000 – $1,200 – $720)  2/5 .. 432

(15-25 min.) E 7-36
Year
2014 2015 2016 2017
New Zealand $
1. Total current assets No effect
2. Equipment, net $150,000 u* $100,000 u** $50,000 u Correct
3. Net income $150,000 u* $50,000 o $50,000 o $50,000o
4. Owners’ equity $150,000 u $100,000 u $50,000 u Correct
_____
u = Understated
o = Overstated
* Cost ($200,000) – Depreciation expense ($50,000)

= $150,000
** Cost ($200,000) – Two years’ depreciation ($100,000)
= $100,000

Quiz
Q7-37 c
Q7-38 a
Q7-39 c
Q7-40 b
Q7-41 b
Q7-42 c
Q7-43 d
Q7-44 b
Q7-45 d
Q7-46 b
Q7-47 b
Q7-48 c
Q7-49 c
Q7-50 a
Q7-51 d

Problems
Group A
(20-30 min.) P 7-52A
Req. 1
LAND WARE- OFFICE
ITEM LAND IMPROVEMENTS HOUSE BUILDING FURNITURE
(a) $280,000 $70,000
(b) 8,100
(c) $31,600
(d) 1,000
(e) 7,500
(f) 3,400
(g) $1,500
(h) 24,500
(i) 920,000
(j) 50,200
(k) 9,700
(l) 8,200*
(m) 57,600
(n) 234,300
(o) 3,000 51,000 6,000
(p) $115,700
(q) 2,300
Totals $296,600 $103,800 $1,241,000 $126,200 $118,000
Computations:
(a) Land: $320,000 / $400,000  $350,000 = $280,000
Office building: $80,000 / $400,000  $350,000 = $70,000
(n) Land improvements: $60,000  0.05 = $3,000
Warehouse: $60,000  0.85 = $51,000
Office building: $60,000  0.10 = $6,000
_____
*Some accountants would debit this cost to the Land account.

(continued) P 7-52A
Req. 2
Journal
2014
Dec. 31 Depreciation Expense — Land
Improvements ($103,800 / 20  4/12) ........ 1,730
Land Improvements ............................... 1,730
31 Depreciation Expense — Warehouse

($1,241,000 / 40  4/12) .............................. 10,342
Warehouse.............................................. 10,342
31 Depreciation Expense — Office

Building ($126,200 / 40  4/12) .................. 1,052
Office Building ....................................... 1,052
31 Depreciation Expense —
Furniture ($118,000 / 8  4/12)................... 4,917
Furniture ................................................... 4,917
_____
*$1,593 ($95,600 / 20  4/12) if $8,200 (“l” in Req. 1) is debited
to Land.

(continued) P 7-52A
Req. 3
This problem shows how to determine the cost of property,

plant, and equipment. It also demonstrates the computation
of depreciation for property, plant, and equipment. Because
virtually all businesses use property, plant, and equipment, a
manager needs to understand how those assets’ costs and
depreciation amounts are determined. Depreciation affects
net income. Managers need to understand the meaning,
components, and computation of net income because often
their performance is measured by how much net income the
business earns. This problem covers all these concepts with
specific examples.

(15 min.) P7-53A
Req. 1
Journal
Equipment............................................................ 100,000
Cash.................................................................. 100,000
Depreciation Expense — Buildings……………. 17,500

Accumulated Depreciation — Buildings…… 17,500
($400,000 – $50,000) / 20 = $17,500
Depreciation Expense — Security Equipment 78,000

Accumulated Depreciation — Equipment..... 78,000
[($600,000 – $260,000)  2/10] + ($100,000 
2/10  6/12) = $78,000
Req. 2
BALANCE SHEET
Land................................................................................... $ 150,000
Buildings........................................................................... 400,000
Less: Accumulated Depreciation ($87,500 + $17,500).. (105,000)
Equipment ($600,000 + $100,000)……………………..…. 700,000
Less: Accumulated Depreciation ($260,000 + $78,000) (338,000)
Total Property, Plant, and Equipment, net $807,000

(25-35 min.) P 7-54A
Journal
2014
Jan. 2 Cash 70,000
Accumulated Amortization —
Motor Carrier Equipment (old) ...... 67,000
Motor Carrier Equipment (old) ........... 130,000
Gain on sale of Motor carrier
equipment........................................ 7,000
Jan. 2 Motor Carrier Equipment (new) 176,000
Cash 176,000
July 3 Depreciation Expense — Building

[($650,000 – $250,000) / 40  6/12] 5,000
Building ........................................... 5,000
3 Cash ......................................................... 100,000

Note Receivable ...................................... 400,000
Building ($145,000 + 5,000) ............ 150,000
Building ............................................... 650,000
Oct. 29 Land [$150,000/($150,000 + $300,000) 

$420,000].............................................. 140,000
Building [$300,000/($150,000 +
$300,000)  $420,000].......................... 280,000
Cash ..................................................... 420,000

(continued) P 7-54A
Journal
2014
Dec. 31 Depreciation Expense —
Motor Carrier Equipment
($176,000  1/6  2) .................................. 58,667
Motor Carrier Equipment ................ 58,667

Building [$280,000 — (10% 
$280,000)]/40  2/12) ............................ 1,050
Buildings ...................................... 1,050

(10-15 min.) P 7-55A
Depreciation is the process of allocating property, plant,
and equipment’s cost to expense over the period the asset
is used. Of less importance is the need to account for the
decline in the asset’s usefulness.
The decreasing annual amounts indicate that the
company is using an accelerated depreciation method,
which allocates more asset cost to expense during the early
years of asset use than during the later years. This pattern
is not related to changes in the value of the asset, because
depreciation is not a process of asset valuation. Even
though the property values may be increasing, it is still
necessary to record depreciation in order to allocate the
cost of the building over its useful life.

(30-40 min.) P 7-56A
Req. 1
B.W. Soffer Inc.

Straight-Line Depreciation Schedule
Depreciation for the Year
1 2 3 4
ASSET Depreciation Depreciable Depreciation ACCUMULATED ASSET CARRYING
DATE COST RATE  COST = EXPENSE DEPRECIATION AMOUNT
03-01-2013 $240,000 $240,000
31-12-2013 1/5 $220,000 $44,000 $ 44,000 196,000
31-12-2014 1/5 220,000 44,000 88,000 152,000
31-12-2015 1/5 220,000 44,000 132,000 108,000
31-12-2016 1/5 220,000 44,000 176,000 64,000
31-12-2017 1/5 220,000 44,000 220,000 20,000
Asset cost: $224,000 + $6,200 + $6,700 + $3,100 = $240,000
Depreciation for the year: ($240,000 – $20,000) / 5 years = $44,000

(continued) P 7-56A
Req. 1
B.W. Soffer Inc.

Units-of-Production Depreciation Schedule
1 2 3 4
ASSET DEPRECIATION NUMBER OF DEPRECIATION ACCUMULATED ASSET CARRYING
DATE COST PER DOCUMENT  DOCUMENTS = EXPENSE DEPRECIATION AMOUNT
03-01-2013 $240,000 $240,000
31-12-2013 $1.10 50,000 $55,000 $ 55,000 185,000
31-12-2014 1.10 45,000 49,500 104,500 135,500
31-12-2015 1.10 40,000 44,000 148,500 91,500
31-12-2016 1.10 35,000 38,500 187,000 53,000
31-12-2017 1.10 30,000 33,000 220,000 20,000
Total books 200,000
Depreciation per document: ($224,000 + $6,200 + $6,700 + $3,100 – $20,000) / 200,000

units = $1.10

(continued) P 7-56A
Req. 1
B.W. Soffer Inc.

Double-Diminishing-Balance Depreciation Schedule
1 2 3 4
ASSET DEPRECIABLE DEPRECIATION ACCUMULATED ASSET CARRYING
DATE COST DDB RATE  COST = EXPENSE DEPRECIATION AMOUNT
03-01-2013 $240,000 $240,000
31-12-2013 0.40 $240,000 $96,000 $ 96,000 144,000
31-12-2014 0.40 144,000 57,600 153,600 86,400
31-12-2015 0.40 86,400 34,560 188,160 51,840
31-12-2016 0.40 51,840 20,736 208,896 31,104
31-12-2017 31,104 11,104 220,000 20,000
DDB rate = (1/5 years  2) = 2/5 = 0.4

(continued) P 7-56A
Req. 2
The depreciation method that maximizes reported income in

the first year of the computer’s life is the straight-line
method, which produces the lowest depreciation for that
year ($44,000). The straight-line method allocates the cost
of the asset evenly over its estimated useful life.
The units-of-production method would allocate the cost
of the asset to each of the documents produced. This
method would match expense to the actual use of the asset.
The double-diminishing balance method would allocate
most of the cost of the asset to the beginning of its useful
life when the computer would be at its most useful and
competitive stage. If the estimated life is less than
anticipated due to a more efficient computer being
developed, this would be the most appropriate depreciation
method. This method would minimize income as it
produces the highest depreciation for the year ($96,000).

(20-25 min.) P 7-57A
Req. 1
(Thousands)
Cost of property, plant, and equipment $68,406
Less: Accumulated depreciation ......... (26,909)
Carrying amount .................................. $41,497
Req. 2
Evidences of Property, Plant, and Equipment purchases:

1. Property, Plant, and Equipment increased on the balance
sheet.
2. Long-term Investments decreased on the balance sheet.
3. Statement of Cash Flows reports “Additions to Property,
Plant, and Equipment.”
4. Statement of Cash Flows reports “Reduction of long-term
investments.”
Req. 3
Property, Plant, and Equipment Accumulated Depreciation

03/31/13 Bal. 61,225 03/31/13
Bal. 22,725
Purchased Sold during Depen.
During 2014 7,781 2014 600* during 2014 4,184
03/31/14 Bal. 68,406 03/31/14 Bal. 26,909

_____
*Determined by deduction, since
there was no gain or loss on the sale.

(continued) P 7-57A
Long-term Investments
03/31/13 Bal. 147,165 Deductions 38,863
during 2014
03/31/14 Bal. 108,302
Req. 4
Depreciation is added back to net income because it is a

non-cash expense. This expense decreased net income but
did not decrease cash. Therefore, adding depreciation back
to net income helps to compute cash flow from operating
activities.

(30-40 min.) P 7-58A
Part 1
Req. 1
The term used in Canadian financial reporting for Cost in

Excess of Net Assets of Purchased Businesses is Goodwill.
Req. 2
Journal
(Millions)
Assets................................................ 4.1
Goodwill………………………….…… 1.2
Cash………………………………… 5.3
Req. 3
There is nothing to record for an increase in the value of

goodwill. Goodwill value is not increased over its value at
the time of the acquisition.
The entry to record the decrease in the value of goodwill is

as follows:
Journal
Loss on Goodwill………………. 800,000
Goodwill……………………… 800,000
The value of goodwill is reviewed annually. If any

impairment of value is identified, the goodwill must be
decreased to the current value.
(continued) P 7-58A
Part 2
Req. 1
Patent 2,600,000
Cash 2,600,000
Cost of sales 8,350,000
Cash 8,350,000
Accounts receivable 15,000,000
Sales revenue 15,000,000
Amortization expense – patent 650,000
(2,600,000/4) from Req. 3
Accumulated amortization – 650,000
patent
Income tax expense (from Req.2)
Req. 2
Ford
Income Statement – Integrated System
For Year 1
Sales revenue $ 15,000,000

Amortization expense 650,000
Cost of goods sold 8,350,000 9,000,000
Income before tax 6,000,000
Income tax expense (38%) 2,280,000
Net Income $ 3,720,000
The integrated system operations were profitable. Net income of

$3,720,000 is 24.8%.
Req. 3
The patent value of $2,600,000 should be recorded as an
intangible asset as Ford has the exclusive right to use it in
production for 4 years. Since the expected useful life of the
patent is 4 years, it should be amortized on a straight-line basis
over 4 years.
(30-40 min.) P 7-59A
Req. 1
To determine the gain or loss on the sale of equipment,

compare the cash received to the asset’s carrying amount,
as follows:
(All amounts in millions)
Cash received from sale of $0.3
asset……………….
Carrying amount of asset sold:
Cost……………………………………………… $0.8
..
Less: Accumulated (0.4) 0.4
depreciation…………….
Loss on ($0.1)
sale………………………………………...
Req. 2
Balance sheet at December 31, 2014:

Property, plant, and equipment ($4.8 + $1.4 – $0.8) ..... $ 5.4
Less: Accumulated depreciation ($3.4 + $1.7 – $0.4) .... (4.7)
Property, plant, and equipment net (carrying amount) . $ 0.7

(continued) P 7-59A
Req. 3
Statement of cash flows for 2014:

Cash flows from operating activities:
Net income ($26.5 – $21.3) ........................................... $ 5.2
Reconciliation of net income to
net cash provided by operations:
Depreciation .......................................................... 1.7

Purchases of property, plant, and equipment................. (1.4)
Sales of property, plant, and equipment.......................... 0.3

(20-30 min.) P7-60A
Req. 1
Jan. 29, 2014 Jan. 30, 2013
Net income $ 2,920 $ 2,488

÷ Net revenue ÷ $67,390 ÷ $65,357
= Profit
margin = 4.33% = 3.81%
Req. 2
Jan. 29, 2014 Jan. 30, 2013
Sales (net
revenue) $67,390 $65,357
÷ Average total ÷ ÷
assets $44,119 $44,320
=
= Asset turnover 1.53 = 1.47

(continued) P7-60A
Req. 3
Jan. 29, 2014 Jan. 30, 2013
Net income $ 2,920 $ 2,488

÷ Average total ÷ ÷
assets $44,119 $44,320
= Return on assets 6.62% 5.61%
Req. 4
All of the following contributed to the increase in ROA
during the most recent year:
 Sales increased, increasing net income, profit margin,

and asset turnover.
 Assets decreased, increasing the asset turnover.

Problems
Group B
(20-25 min.) P 7-61B
Req. 1
LAND GARAGE/ WARE-
ITEM LAND IMPROVEMENTS SHOWROOMS HOUSE EQUIPMENT
(a) $135,000 $45,000
(b) $26,000
(c) 25,000
(d) 1,200
(e) $21,300
(f) 3,550
(g) $ 45,000
(h) 200
(i) 3,700
(j) 322,000
(k) 3,300 49,500 2,200
(l) 5,350*
(m) 234,000
(n) 8,900
(o) 17,450
(p) 3,300
(q) $ 8,000
(r) 80,000
Totals $143,450 $86,000 $654,000 $68,500 $88,000
Computations:
(a) Land: $150,000 / $200,000  $180,000 = $135,000
Warehouse: $50,000 / $200,000  $180,000 = $45,000
(k) Land improvements: $55,000  0.06 = $ 3,300
Garage/showroom: $55,000  0.90 = $49,500
Warehouse: $55,000  0.04 = $ 2,200
_____
*Some might decide to debit this cost to the Land account.

(continued) P 7-61B
Req. 2
Journal
Dec. 31 Depreciation Expense — Land
Improvements ($86,000 / 10  9/12) ... 6,450*
Land Improvements ........................ 6,450
31 Depreciation Expense — Garage/

Showroom ($654,000 / 40  9/12) 12,263
Garage Showroom .......................... 12,263
31 Depreciation Expense — Warehouse

($68,500 / 40  9/12) .............................. 1,284
Warehouse ....................................... 1,284
Equipment ($88,000 / 8  9/12) ......... 8,250
Equipment ........................................ 8,250
_____
*$6,049 ($80,650 / 10  9/12) if $5,350 (“l” in Req. 1) is
debited to Land.

(continued) P 7-61B
Req. 3
The issues in this problem were as follows:

 Allocating costs to the appropriate asset
 Determining the total cost of each asset
 Calculating the depreciation for each asset based on
corporate policy
 Ensuring that depreciation expensed reflects the
partial year the asset was in use.
It is important to value assets appropriately in order to
report the correct value of assets on the Balance Sheet. The
rate of depreciation will affect net income, which is the
measure of corporate performance. It is also important to
classify these costs as assets in order to ensure assets are
not understated and income understated. This decision
would affect assets and income over the 40 (buildings) 10
(land improvements) and 8 (equipment) years of
amortization.

(15 min.) P 7-62B
Req. 1
Journal
Security Equipment ............................................ 80,000
Cash ................................................................. 80,000
Depreciation Expense — Buildings ................... 12,000

Accumulated Depreciation — Buildings ....... 12,000
($310,000 – $70,000) / 20 = $12,000
Depreciation Expense — Security Equipment 67,500

Accumulated Depreciation — Security 67,500
Equipment ........................................................
[($620,000 – $370,000)  2/8] + ($80,000 
2/8  3/12) = $67,500
Req. 2
BALANCE SHEET
Property, plant, and equipment:
Land .................................................................................. $200,000
Buildings .......................................................................... 310,000
Less: Accumulated Depreciation ($40,000 + $12,000).... (52,000)
Equipment ($620,000 + $80,000) ..................................... 700,000
Less: Accumulated Depreciation ($370,000 + $67,500) (437,500)
Total Property, plant, and equipment, net $720,500

(25 min.) P 7-63B
Journal
2014
Jan. 4 Communication Equipment (new) ..... 118,000
Cash 118,000
Cash 18,000
Communication Equipment (old) 85,000
Communication Equipment (old) .. 96,000
Gain on sale of Communication
equipment (old)........................... 7,000
June 30 Depreciation Expense — Building

[($495,000 – $95,000) / 40  6/12] ... 5,000
Accumulated Amortization —
Building ........................................... 5,000
June 30 Cash...................................................... 50,000

Note Receivable .................................. 250,000
Building ($255,000 + $5,000)...... 260,000
Building ........................................... 495,000
Gain on Sale of Building ................ 65,000
Nov. 4 Communication Equipment

($75,000 / $100,000  $80,000)... 60,000
Televideo Equipment
($25,000 / $100,000  $80,000) .... 20,000
Cash ................................................. 80,000

(continued) P 7-63B
Journal
Communication Equipment
($118,000  2/5) ................................... 47,200
Communication Equipment ..... 47,200
Communication Equipment
($60,000  2/5  2/12) 4,000
Depreciation Expense —
Televideo Equipment
($20,000  2/5  2/12)..................... 1,333
2/12)
Communication Equipment ......... 4,000
Televideo Equipment .................... 1,333

(10-15 min.) P 7-64B
Depreciation is the process of allocating property, plant,
and equipment costs to expense over the period the asset
is used. Depreciation accounts for the decline in the asset’s
usefulness.
Depreciation does not mean that the business sets aside

cash to replace assets as they wear out. Accounting for
depreciation has nothing to do with setting aside such a
fund. The period over which an asset’s cost is depreciating
depends on a number of factors, including physical
deterioration of the asset and obsolescence. For
computers, obsolescence may be the more important factor
as the association replaces used machines with new
models. In this case the association should depreciate
computers over a shorter life than the period of their
physical usefulness.

(30-40 min.) P 7-65B
Req. 1
Yuki Sporting Goods Ltd.

Straight-Line Depreciation Schedule
1 2 3 4
ASSET DEPRECIATION DEPRECIABLE DEPRECIATION ACCUMULATED ASSET CARRYING
DATE COST RATE  COST = EXPENSE DEPRECIATION AMOUNT
02-01-2014 $70,000 $ 70,000
31-12-2014 1/6 $ 54,000 $ 9,000 $ 9,000 61,000
31-12-2015 1/6 54,000 9,000 18,000 52,000
31-12-2016 1/6 54,000 9,000 27,000 43,000
31-12-2017 1/6 54,000 9,000 36,000 34,000
31-12-2018 1/6 54,000 9,000 45,000 25,000
31-12-2019 1/6 54,000 9,000 54,000 16,000
Asset cost: $63,000 + $2,200 + $4,000 + $800 = $70,000

Depreciation for the year: ($70,000 – $16,000) / 6 years = $9,000

(continued) P 7-65B
Req. 1

Units-of-Production Depreciation Schedule
1 2 3 4
ASSET DEPRECIATION NUMBER OF DEPRECIATION ACCUMULATED ASSET CARRYING
DATE COST PER PIECE  PIECES = EXPENSE DEPRECIATION VALUE
02-01-2014 $70,000 $ 70,000
31-12-2014 $0.54 18,000 $ 9,720 $ 9,720 60,280
31-12-2015 0.54 18,000 9,720 19,440 50,560
31-12-2016 0.54 18,000 9,720 29,160 40,840
31-12-2017 0.54 18,000 9,720 38,880 31,120
31-12-2018 0.54 14,000 7,560 46,440 23,560
31-12-2019 0.54 14,000 7,560 54,000 16,000
Total documents 100,000
Depreciation per document: ($70,000 – $16,000) / 100,000 pieces = $0.54

(continued) P 7-65B
Req. 1

Double-Diminishing-Balance Depreciation Schedule
1 2 3 4
ASSET DEPRECIABLE DEPRECIATION ACCUMULATED ASSET CARRYING
DATE COST DDB RATE  COST = EXPENSE DEPRECIATION AMOUNT
02-01-2014 $70,000 $70,000
31-12-2014 2/6* $70,000 $23,333 $23,333 46,667
31-12-2015 2/6 46,667 15,556 38,889 31,111
31-12-2016 2/6 31,111 10,370 49,259 20,741
31-12-2017 2/6 4,741** 54,000 16,000
31-12-2018 – 54,000 16,000
31-12-2019 – 54,000 16,000
*DDB rate = (1/6 years  2) = 2/6
**Depreciation for 2017: $20,741 – $16,000 = $4,741

(continued) P 7-65B
Req. 2
The depreciation method that maximizes reported income in

the first year of the computer’s life is the straight-line
method, which produces the lowest depreciation for that
year ($9,000). This method will meet the objective of
maximizing income for reporting to the banker.

(20-25 min.) P 7-66B
Req. 1
(Thousands)
Cost of premises and equipment ........ $5,941
Less: Accumulated depreciation ......... (3,810)
Carry amount of premises and equipment $2,131
Req. 2
Evidences of premises and equipment:

1. Premises and equipment increased on the balance sheet.
2. Statement of cash flows reports “Acquisitions of
premises and equipment.”
3. Statement of cash flows reports “cash used in
acquisitions,” which would suggest increase in goodwill.
Req. 3
Premises and Equipment Accumulated Depreciation

11/01/13 Bal. 5,246 Accum. dep’n. 11/01/13 Bal. 3,428
Purchased Sold of assets Dep’n. during
during during sold during 2014
2014 747 2014 52* 2014 52* 434
10/31/13 Bal. 5,941 10/31/14 Bal. 3,810
_____
*Determined by deduction.
Carrying amount of disposed assets was 0 (cost 52 thousand less
accumulated depreciation of 52 thousand)

(continued) P 7-66B
Req. 4
CC’s accounting policies state that goodwill is evaluated

annually for impairment. If there is no reduction in the
goodwill value, no amortization is charged to income.

(30-40 min.) P 7-67B
Part 1
Req. 1
Carrying amount of assets (intangibles) — the net amount

of the cost of assets and the amortization recorded since
the time of their purchase.
Fair value of assets — the current value of the assets or the

price an asset could be sold for.
Goodwill — the excess of the cost of purchasing another

company over the fair value of the net assets purchased
(assets minus liabilities).
The purchase price would be based on the fair value of

assets less the fair value of the liabilities acquired.
Req. 2
Journal
Long-term assets ............................. 49,000
Goodwill ............................................ 5,500
Liabilities ...................................... 4,500
Cash .............................................. 50,000

(continued) P 7-67B
Part 2
1. If the useful life of the copyright is 500,000 sales of the

recording, that means that each sale would have a cost of
$4 just for the copyright. Since many iPod downloads
sell for $1.00, this cost would be too high. At an
estimated sale of 500,000 recordings, the purchase price
should be no higher than $500,000. Perhaps Joshua
could negotiate the rights to any sale over 500,000 should
the recording become a super hit.
2. The purchase of the copyright would be recorded as
follows:
DR CR
Copyright............................. 500,000
Cash.................................. 500,000
3. The amortization of the copyright after 300,000 copies

sold would be as follows:
DR CR
Amortization expense....................... 300,000
Accumulated amortization........... 300,000

(30-40 min.) P 7-68B
Req. 1
To determine the gain or loss on the sale of property, plant,

and equipment compare the cash received to the asset’s
carrying amount, as follows:
(All amounts in billions)
Cash received from sale of asset ...................... $0.2
Carrying value of asset sold:
Cost .................................................................. $0.29
Less: Accumulated depreciation .................. (0.29) (0.0)
Gain on sale ........................................................ $0.2
Req. 2
Balance sheet at December 31, 2014:

Property, plant, and equipment assets ($16.4 + 1.8 –
0.29) $17.91
Less: Accumulated depreciation ($9.1 + 1.84 – 0.29) (10.65)
Property, plant, and equipment net (carrying amount) $7.26
Req. 3
Statement of cash flows for 2014:

Cash flows from operating activities:
Net income ($11.6 – 9.89) ............................................. $ 1.71
Reconciliation of net income to
net cash provided by operations:
Depreciation .......................................................... 1.84
3.55
Purchases of property, plant, and equipment ............. $ (1.8)
Sales of property, plant, and equipment ...................... 0.2
(20-30 min.) P7-69B
Req. 1
Jan. 31, 2014 Jan. 31, 2013
Net income $ 1,114 $ 991

÷ Net revenue ÷ $18,391 ÷ $17,178
= Profit
margin = 6.06% = 5.77%
Req. 2
Jan. 31, 2014 Jan. 31, 2013
Sales $18,391 $17,178
÷ Average total
assets ÷ $13,362 ÷ $12,262
= Asset turnover = 1.38 = 1.40

(continued) P7-68B
Req. 3
Jan. 31, 2014 Jan. 31, 2013
Net income $ 1,114 $ 991

÷ Average total ÷
assets $13,362 ÷ $12,262
= Return on assets = 8.34% = 8.08%
Req. 4
The following contributed to the increase in ROA during the
most recent year.
 Sales increased, increasing net income and profit

margin.
 Assets increased, decreasing the asset turnover.

Decision Cases
(30-45 min.) Case 1
Req. 1
La Petite France Bakery and Burgers Ahoy Inc.

Income Statements
For the Year Ended December 31
La Petite France
Burgers Ahoy Inc.
Bakery Ltd. (DDB)
ACCOUNT TITLE (SL)
Sales revenue ....................... $350,000 $350,000
Cost of goods sold .............. 94,000 94,000

Gross profit .......................... 256,000 256,000
Operating expenses............. $50,000 $50,000

Depreciation expense
La Petite France Bakery
(SL):
($175,000 – $10,000 / 10). 16,500
Burgers Ahoy Inc. (DDB):
($175,000  1/10  2) ..... 35,000*
Total expenses ..................... 66,500 85,000
Income before tax ................ 189,500 171,000
Income tax expense (25%) 47,375 42,750
Net income ........................... $142,125 $ 128,250
*($175,000 × .20) = $35,000

(continued) Case 1
Req. 2
INVESTMENT NEWSLETTER
TO: Our clients
FROM: Student Name
RE: Selecting the shares of La Petite France Bakery

or Burgers Ahoy for a long-term investment
In picking a stock we suggest you consider the following

factors:
La Petite France Bakery and Burgers Ahoy are basically
identical companies. The two companies started operations
at the same time and engaged in essentially the same
transactions. Their main difference lies in the accounting
methods that they use.
1. La Petite France Bakery’s income statement reports net

income of $142,125 compared to $128,250 for Burgers
Ahoy. On the surface La Petite France Bakery appears to
be more profitable. This difference is illusory, however,
because La Petite France Bakery uses the straight-line
method to account for depreciation of its equipment.

(continued) Case 1
This method results in the highest possible reported

income.
2. Burgers Ahoy reports lower net income than La Petite

France Bakery. Since Burgers Ahoy uses the double-
diminishing-balance method for depreciation it results in
lower net income. More importantly, it results in the
lowest amount of income tax and thereby provides cash
that Burgers Ahoy can invest in new projects.
Over the long run, we favour Burgers Ahoy because the

company will have more cash to invest. That should
result in higher real profits even if the profits do not show
up on the income statement.

(20-30 min.) Case 2
1. A manager might debit an expense account for the cost

of property, plant, and equipment for two reasons: (1) A
higher expense results in lower net income and less tax
to pay, and (2) to understate reported asset and income
amounts.
2. A manager might debit the cost of an expense to the

property, plant, and equipment account in order to
overstate reported asset and income amounts. This
would indicate a better performance than was actually
achieved.
3. We support the recording and reporting of intangible

assets at cost because the business paid a price for
intangibles like any other asset. The argument for
recording intangibles at $1 or $0 is consistent with the
perspective of a lender, who might reason that, in the
liquidation of a business, most of its intangibles are
worthless. However, accounting serves other users
besides lenders. Also, someone who evaluates a
company and believes its intangibles are worthless can

(continued) Case 2
simply subtract the intangibles’ cost from total assets

and from total owners’ equity to compute revised totals
for analytical purposes. But the reverse is not true. If
intangibles were not reported on the balance sheet, a
user of the statements who believes the intangibles have
value could not add the unknown amount to compute
revised total assets and total owner equity.

Ethical Issue
Req. 1
Mary wants to allocate as little of the purchase price as

possible to the building because a lower expense results in
a higher net income which investors and creditors favour.
The cost of the land is not depreciated.
Req. 2
Vitner’s Ltd.’s allocation was unethical. Allocating 60% to

the building (versus the more realistic figure of 80%)
understates depreciation expense and overstates net
income.
Creditors and lenders will be basing their investment

decisions on inaccurate financial information.

Focus on Financials
(30-40 min.) Telus
Req. 1
Note 1-(j) to the financial statements reports that Telus uses the
straight-line depreciation method for their property, plant, and
equipment.
Req. 2
(Millions)
Proceeds on derecognition of property, plant, and $ 4
equipment
Note 15 indicates the cost of property, plant, and equipment
sold was $264 million.
Req. 3
(Millions)
2011 2010
Payment for property, plant, and
equipment …………………………. $1,847 $1,721
Telus has invested in property, plant, and equipment in both 2011

and 2010. This indicates that Telus has the cash to invest and is
building for the company’s future. This is very positive for Telus.

(continued) Telus
Req. 4
At year-end
2011 2010
Accumulated
Proportion of
Property, = depreciation = $ 20,347 $19,269
Property, $28,311* $27,100*
Plant, and
Plant, and
Equipment
Equipment at
used up
cost
= 71.9% = 71.1%
used up used up
*Assets not in service are not included
CONCLUSION: Property, Plant, and Equipment were older

in 2011. However, the company continues to invest in new
property, plant, and equipment. It appears that management
reviews its property, plant, and equipment on a regular
basis and disposes of older, obsolete, and unused
equipment.

Focus on Analysis
(30-40 min.) Telus
Req. 1
(Millions)
Depreciation expense………………………….…… $ 1,331
Accumulated depreciation………………………… 20,347
Amortization expense………………………….…… 479
Accumulated amortization………………………… 2,486
Accumulated depreciation and amortization exceeds

depreciation and amortization expense because the
expense is for only the current year. Accumulated
depreciation and amortization is the sum of the
amortization amounts for all years the company has used
its property and equipment.

(continued) Telus
Req. 2
Telus adds depreciation and amortization back to net

income in the computation of net cash from operating
activities because this expense was subtracted in arriving
at net income. But depreciation and amortization expense
did not decrease cash. Adding depreciation and
amortization back to net income offsets its earlier
subtraction and helps to compute cash flow from
operations.
Req. 3
Telus’s balance sheet reports goodwill of $3,661 million.
Telus does not amortize goodwill but will test goodwill for
impairment of value and will write-down the value of
goodwill that has been impaired.
In 2011, Telus did record an impairment on goodwill.
Telus reports intangible assets of $6,153 million on the

balance sheet.
Note 16 – Schedule of Intangible Assets and Goodwill

describes intangible assets subject to amortization as
subscriber base, customer contracts and relationships,
software, access to rights-of-way. Intangible assets with
indefinite lives include spectrum licences and acquired
brand.
In 2011, Telus charged amortization of $479 million

related to intangible assets.
Group Project
Answers will vary with the situation chosen by students.


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Property, Plant, and Equipment, and

1. Property and Equipment, at Cost

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 475

2. Cost = $44,793 million

Carrying amount is less than cost because accumulated

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 477

Land ($140,000  0.50) ............................ 70,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 479

(a) Straight-line ($25,000,000 – $5,000,000) /

(b) Units-of-production [($25,000,000 – $5,000,000) /

Cost .............................. $25,000,000 $25,000,000 $25,000,000

Carrying amount ......... $21,000,000 $22,000,000 $15,000,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

(b) Units-of-production [($25,000,000 –

Year 1 ($25,000,000  2/5) = $10,000,000

Year 2 ($25,000,000 – $10,000,000)  2/5 = $6,000,000

Year 3 ($25,000,000 – $10,000,000 – $6,000,000)  2/5 =

Year 4 ($25,000,000 – $10,000,000 – $6,000,000 –

Year 5 No depreciation: asset is fully

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 481

a. Straight-line (€40,000,000 – €5,000,000) / 7 years

b. Units-of-production (€40,000,000 – €5,000,000)/

c. Double-diminishing-balance (€40,000,000  2/7

Straight-line depreciation produces the highest net income

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

Depreciation for years 1–4:

$60,000 / 10 years = $6,000 per year

$6,000  4 years = $24,000 for years 1–4

$60,000 – $24,000 ÷ 3 years = $12,000 per

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 483

Straight-line depreciation ($45,000 – $5,000)/5 = $8,000

Carrying value of van at December 31, 2014 is

Cash .................................................... 15,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

A patent is amortized over its useful life. Amortization is

The cost of the patent, less the accumulated amortization is

The value of goodwill does not change, unless it is

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 485

The purchase price was $ 200.0

Canadian Tire would have reviewed the goodwill value

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

Jaguar Automobiles Ltd.

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 487

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

(Dollar amounts in millions)

Return on = Net ÷ Average total

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 489

2013 Return on = Net income ÷ Average total assets

2014 Return on = Net income ÷ Average total assets

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

(5-10 min.) E 7-16

Land improvements: $100,000 + $10,500 + $18,000 =

Building: $70,000 + $3,750,000 = $3,820,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 491

Sale price of machine no. 2 ................... $45,000

(5-10 min.) E 7-18

(c) Purchase price, (a) sales tax, (b) transportation and

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual

b Building [$2,250 + $20,000 + $700,000 +

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 493