10.9 Exercises
Chapter 10
Exercise 10.1
Machado Inc. purchased a new robotic drill for its assembly line operation. The total cost of the asset was $125,000, including shipping, installation, and testing. The asset is expected to have a useful life of five years and a residual value of $10,000. The total service life, expressed in hours of operation, is 10,000 hours. The total output the machine is expected to produce over its life is 1,000,000 units.
The asset was purchased on January 1, 2020, and it is now December 31, 2021. In 2021, the asset was used for 2,150 hours and it produced 207,000 units.
Required:
Calculate the 2021 depreciation charge using the following methods:
- Straight-line
- Activity, based on units of input
- Activity, based on units of production
- Double declining balance
Exercise 10.2
Cortazar Ltd. purchased a used delivery van for $10,000 on June 23, 2020. The van is expected to last for three years and have a residual value of $1,000. The company’s year- end is December 31, and it follows the policy of charging depreciation in partial periods to the nearest whole month of use.
Required:
Calculate the annual depreciation charge and ending carrying value of the asset for each of the following fiscal years using the straight-line method:
- December 31, 2020
- December 31, 2021
- December 31, 2022
- December 31, 2023
Exercise 10.3
Equipment purchased for $39,000 by Escarpit Inc. on January 1, 2018 was originally estimated to have a five-year useful life with a residual value of $4,000. Depreciation has been recorded for the last three years based on these factors. In 2021, the asset’s condition was reviewed, and it was determined that the total useful life will likely be seven years and the residual value $5,000. The company uses straight-line depreciation.
Required:
- Prepare the journal entry to correct the prior years’ depreciation.
- Prepare the journal entry to record the 2021 depreciation.
Exercise 10.4
Michaux Ltd. purchased an office building on January 1, 2006, for $450,000. At that time, it was estimated that the building would last for 30 years and would have a residual value of $90,000. Early in 2012, a significant modification was made to the roof of the building at a cost of $30,000. This modification could not be identified as a separate component, but it was believed that it would add an additional ten years to the useful life. As well, it was estimated the residual value would be reduced to $50,000 at the end of the revised useful life. In 2020, due to a collapse in the local property market, the residual value was revised to nil. The useful life, however, was expected to remain as estimated in 2012. The company uses the straight-line method of depreciation.
Required:
- Calculate the annual depreciation that was charged from 2006 to 2011.
- Calculate the annual depreciation that was charged from 2012 to 2019.
- Calculate the annual depreciation that will be charged from 2020 onwards.
Exercise 10.5
In December 2020, the management of Bombal Inc. reviewed its property, plant, and equipment and determined that one machine showed evidence of impairment. The following information pertains to this machine:
| Cost | $325,000 |
|---|---|
| Accumulated depreciation to date | $175,000 |
| Estimated future cash flows, undiscounted | $140,000 |
| Present value of estimated future cash flows | $110,000 |
| Fair value | $125,000 |
| Costs of disposal | $9,000 |
Bombal Inc. intends to continue using the asset for the next three years, with no expected residual value at the end of that period. Bombal uses straight-line depreciation.
Required:
- Determine if the asset is impaired under IAS 36.
- If impairment is indicated in part (a), prepare the necessary journal entry at December 31, 2020, to record the impairment.
- Prepare the journal entry to record depreciation for 2021.
- After recording the depreciation for 2021, management reassesses the asset and determines that the fair value is now $120,000, the undiscounted future cash flows are $110,000, and the present value of the estimated future cash flows is $90,000. There was no change to the costs of disposal. Prepare the journal entry, if any, to record the reversal of impairment.
Exercise 10.6
Repeat the requirements of the previous question, assuming the company reports under ASPE 3063.
Exercise 10.7
Reyes Technologies Ltd. has defined its computer repair division as a cash-generating unit under IFRS. The company reported the following carrying amounts for this division at December 31, 2020:
| Computers | $55,000 |
|---|---|
| Furniture | $27,000 |
| Equipment | $13,000 |
The computer repair division is being assessed for impairment. At December 31, 2020, the division’s value in use is $80,000.
Required:
- Determine if the computer repair division is impaired, assuming that none of the individual assets has a determinable recoverable amount.
- Prepare the journal to record the impairment from part (a), if any.
- Determine if the computer repair division is impaired, assuming that the computers have a fair value less cost to sell of $60,000, but that none of the other assets have a determinable recoverable amount.
- Repeat part (c) assuming that the computers’ fair value less cost to sell is $50,000.
Exercise 10.8
Landolfi Inc. owns a property that has a carrying value on December 31, 2021, of $520,000 (cost $950,000, accumulated depreciation $430,000).
Required:
For each of the following independent situations, prepare the journal entry to record the transaction. Assume that at no time prior to the transaction did the asset qualify as a held for sale asset. All transactions occur on December 31, 2021.
- The property was sold to Paz Inc. for $450,000.
- The local government expropriated the property to provide land for an expansion of the rapid rail transit line. Compensation of $750,000 was paid to Landolfi Inc.
- Due to a toxic mould problem, the property was deemed unsafe for use and was abandoned. Management does not believe there is any possibility of selling the property or recovering any amount from it.
- Landolfi Inc. donated the property to the local government for use as a future school site. At the time of the donation, the fair value of the property was $600,000.
Exercise 10.9
Schulz Ltd. purchased a machine in 2017 for $65,000. In late 2020, the company made a plan to dispose of the machine. At that time, the accumulated depreciation was $25,000 and the estimated fair value was $35,000. Estimated selling costs were $1,000. Assume that the asset qualifies as a held for sale asset at December 31, 2020.
Required:
- Prepare the journal entry required at December 31, 2020.
- On March 3, 2021, the asset is sold for $37,000. Prepare the journal entry to record the sale.
- Repeat parts (a) and (b) assuming that the estimated fair value on December 31, 2020, was $45,000 instead of $35,000.
Exercise 10.10
Guelph Corp follows ASPE. Guelph owns equipment that cost $654,600 and has accumulated depreciation of $245,900. The undiscounted future net cash flows from the use of the asset are expected to be $355,000. The fair value of the equipment is $395,600.
Required:
Using the cost recovery impairment model, prepare the necessary journal entry, if any, to record the impairment loss.
Exercise 10.11
The following information relates to equipment owned by Hanover Corp at December 31, Y4:
| Cost | $11,500,000 |
| Accumulated depreciation | 3,500,000 |
| Undiscounted future cash flows | 7,695,000 |
| Discounted future cash flows (value in use) | 6,350,000 |
| Fair value | 6,200,000 |
| Costs to dispose/sell | 89,500 |
At the end of Y4, the equipment has a remaining useful life of four years.
Hanover depreciates equipment using the straight-line method.
Required:
- Hanover follows ASPE:
- Prepare the journal entry at December 31, Y4, to record asset impairment.
- Prepare the journal entry to record depreciation expense at the end of Y5.
- On December 31, Y5, the fair value of the equipment is $6,500,000. Prepare the journal entry, if any, to record the increase in fair value.
- Hanover follows IFRS – repeat the requirements in part 1.
Exercise 10.12
The following information relates to equipment owned by Goderich Corp at December 31, Y4:
| Cost | $529,600 |
| Accumulated depreciation | 224,200 |
| Undiscounted future cash flows | 295,300 |
| Discounted future cash flows (value in use) | 296,500 |
| Fair value | 245,600 |
| Costs to dispose/sell | - |
At the end of Y4, the equipment has a remaining useful life of five years.
Goderich depreciates equipment using the straight-line method.
Required:
- Goderich follows ASPE:
- Prepare the journal entry at December 31, Y4, to record asset impairment.
- Prepare the journal entry to record depreciation expense at the end of Y5.
- On December 31, Y5, the fair value of the equipment is $305,100. Prepare the journal entry, if any to record the increase in fair value.
- Goderich follows IFRS – repeat the requirements in part 1.
Exercise 10.13
On April 1, Y8, Noble Corporation purchased equipment for $256,000.
The equipment has an estimated useful life of 10 years with a residual value of $16,000.
It’s also estimated that the equipment will produce 125,000 units.
In Y8, the equipment produced 9,680 units and 11,400 units in Y9.
Required:
Determine the amounts of depreciation expense for Y8 and Y9 using:
- Straight-line method
- Units-of-production method
- Double-declining balance method
Exercise 10.14
Patio Furniture Corp purchased some manufactuing equipment on January 1, Y3 for $345,700.
The equipment is expected to last 8 years and have a residual value of $34,700. It is also expected
that the equipment will produce 31,100 units during those 8 years.
During Y3, the equipment produced 3,890 units and in Y4 produced 3,560 units.
Required:
Calculate depreciation expense and accumulated depreciation for Y3 and Y4 using:
- Straight-line method
- Units-of-production method
