Chapter 9

Solutions

Exercise 9.1

The following costs should be capitalized with respect to this equipment:

Equipment Costs
Cash price paid, net of $1,600 discount, excluding $3,900 of recoverable tax $ 78,400
Freight cost to ship equipment to factory 3,300
Direct employee wages to install equipment 5,600
External specialist technician needed to complete final installation 5,600
External specialist technician needed to complete final installation 4,100
Materials consumed in the testing process 2,200
Direct employee wages to test equipment 1,300
Legal fees to draft the equipment purchase contract 2,400
Government grant received on purchase of the equipment (8,000)
______________
Total cost capitalized 89,300
______________

The recoverable tax should be disclosed as an amount receivable on the balance sheet.

The repair costs, costs of training employees, overhead costs, and insurance cost would all be expensed as regular operating expenses on the income statement.

An alternative treatment for the government grant would be to defer it as an unearned revenue liability and then amortize it on the same basis as the equipment depreciation.

Exercise 9.2

The following costs would be capitalized with respect to the mine:

Direct material

Direct labour

Interest (3,000,000 × 8% × 9 ÷ 12)

Less interest on excess funds

Present value of restoration costs (FV=100,000, I=10, N=10)

Total cost capitalized

$2,200,000

1,600,000

180,000

(30,000)

38,554

3,988,554

Exercise 9.3

With a lump sum purchase, the cost of each asset should be determined based on the relative fair value of that component. The total fair value of the asset bundle is $250,000. Therefore, the allocation of the purchase price would be as follows:

Specialized lathe (30,000 ÷ 250,000) × 220,000 = 26,400
Robotic assembly machine (90,000 ÷ 250,000) × 220,000 = 79,200
Laser guided cutting machine (110,000 ÷ 250,000) × 220,000 = 96,800
Delivery truck (20,000 ÷ 250,000) × 220,000 = 17,600
_______________
Total 220,000
_______________

Exercise 9.4

  1. Prabhu
    General Journal. New equipment 19,000 under debit. Accumulated depreciation - old equip 10,000 under debit. Old equipment 25,000 under credit. Cash 2,000 under credit. Gain on disposal of equipment 2,000 under credit.
    Zhang
    General journal. New equipment 17,000 under debit. Accumulated depreciation - old equip 8,000 under debit. Old equipment 21,000 under credit. Cash 2,000 under debit. Gain on disposal of equipment 6,000 under credit.
  2. Prabhu
    General journal. New equipment 17,000 under debit. Accumulated depreciation - old equip 10,000 under debit. Old equipment 25,000 under credit. Cash 2,000 under credit.
    Zhang
    General journal. New equipment 11,000 under debit. Accumulated depreciation - old equip 8,000 under debit. Old equipment 21,000 under credit. Cash 2,000 under debit.
  3. Prabhu
    General journal. New equipment 19,000 under debit. Accumulated depreciation - old equip 5,000 under debit. Old equipment 25,000 under credit. Cash 2,000 under credit. Loss on disposal of equipment 3,000 under debit.
    NOTE: Loss must be recorded, as the asset acquired cannot be recorded at an amount greater than its fair value.
    Zhang
    General journal. New equipment 11,000 under debit. Accumulated depreciation - old equip 8,000 under debit. Old equipment 21,000 under credit. Cash 2,000 under debit.

Exercise 9.5

Transaction 1:

IFRS requires assets acquired in exchange for the company’s shares to be reported at the fair value of the asset acquired. The list price is not relevant, as the salesman has already indicated that this can be negotiated downward. If the $80,000 negotiated price is considered a reliable representation of the fair value of the asset, this amount should be used:
General journal. Computer 80,000 under debit. Common shares 80,000 under credit.If the $80,000 price is not considered a reliable fair value, then the fair value of the shares given up ($78,750) should be used, as the shares are actively traded.

Transaction 2:

The asset acquired by issuing a non-interest bearing note needs to be reported at its fair value. As the interest rate of zero is not reasonable, based on market conditions, the payments for the asset need to be adjusted to their present value to properly reflect the current fair value of the asset.
General Journal. Office furniture 46,284 under debit. Note payable 41,284 under credit. Cash 5,000 under credit.
The note payable amount represents the present value of a $45,000 payment due in one year, discounted at 9%.

Exercise 9.6

  1. Deferral Method
    General journal. Office condo 625,000 under debit. Deferred grant 90,000 under credit. Cash 535,000 under credit.
  2. Offset Method
    General Journal. Office condo 535,000 under debit. Cash 535,000 under credit.
  3. The deferral method will result in annual depreciation expense of $625,000 ÷ 30 years = $20,833, with an offsetting annual grant income amount recognized = $90,000 ÷ 30 years = $ 3,000 per year.The offset method will result in an annual depreciation expense of $535,000 ÷ 30 years = $17,833 with no grant income being recognized.The net difference in net income between the two methods is zero.

Exercise 9.7

General journal. Date: December 31, 2019. Depreciation expense 44,444 under debit. Accumulated depreciation 44,444 under credit. Accumulated depreciation 44,444 under debit. building 44,444 under credit. Building 94,444 under debit. Revaluation surplus (OCI) (1,250,000 -(1,200,000 - 44,444)) 94,444 under credit.NOTE: Depreciation expense = $1,200,000 ÷ 27 years remaining = $44,444

General Journal. Date December 31,2020. Depreciation expense 48,077 under debit. Accumulated depreciation 48,077 under credit. Accumulated depreciation 48,077 under debit. Building 48,077 under credit. Revaluation surplus (OCI) 201,923 under debit. Building (1,000,000 - (1,250,000 - 48,077)) 201,923 under credit

NOTE: Depreciation expense = $1,250,000 ÷ 26 years = $48,077
General Journal. Date: December 31, 2021. Depreciation expense 40,000 under debit. Accumulated depreciation 40,000 under credit. Accumulated depreciation 40,000 under debit. Building 40,000 under credit. Building 190,000 under debit. Revaluation surplue (OCI) (1,150,000 - (1,000,000 - 40,000)) 190,000 under credit.NOTE: Depreciation expense = $1,000,000 ÷ 25 years = $40,000

Exercise 9.8

General Journal. Date: December 31, 2020 Loss in value of investment property 50,000 under debit Invesment property 50,000 under credit. Date: December 31, 2021 Investment property 175,000 under debit Gain in value of investment property 175,000 under credit.

Exercise 9.9

General Journal. Repairs and maintenance 32,000 under debit. Cash 32,000 under credit. Accumulated depreciation - building 16,302 under debit, Building 108,696 under credit, Loss on disposal 92,394 under debit.The replacement of the boiler should be treated as the disposal of a separate component. The original cost of the old boiler can be estimated as follows:

$125,000 ÷ (1 + 0.15) = 108,696

The old boiler would have been depreciated as part of the building as follows:

108,696 ÷ 40 years = 2,717 per year
2,717 × 6 years (2014–2019) = 16,302

(NOTE: per company policy, no depreciation is taken in the year of disposal)

The purchase of the new boiler should be treated as a separate component:
General journal. Boiler 125,000 under debit. Cash 125,000 under credit. Repairs and maintenance 15,000 under debit. Cash 15,000 under credit. Building 87,000 under debit. Cash 87,000 under cash.This cannot be identified as a separate component, but it does extend the useful life of the asset, so capitalization is warranted.
General Journal. Repairs and maintenance 5,000 under debit. Cash 5,000 under credit. Depreciation expense 15,332 under debit. Accumulated depreciation - building 15,332 under credit.Original depreciation: $800,000 ÷ 40 years = $20,000 per year

Up to the end of 2019 = $120,000 (6 years)

Based on the journal entries above, revised depreciation is calculated as follows:

(800,000 − 120,000 −1 08,696 + 16,302 + 87,000) ÷ (40 − 6 + 10 = 44 years) = 15,332

General journal. Depreciation expense 2,841 under debit. Accumulated depreciation - boiler 2,841 under credit. (125,000 / 44)NOTE: the boiler has been depreciated over the same useful life as the building (44 years). As this is a separate component, a different useful life could be determined by management and used instead. Per company policy a full year of depreciation is taken in the year of acquisition.

Exercise 9.10

Vehicle (new) 3,040
Accumulated Depreciation 20,100
Vehicle (old) 22,700
Cash 440
Fair value 3,450
Carrying value (cost - accumulated depreciation) 2,600
Potential gain 850
However, since the transaction lacks commercial substance, no gain can be reported
Value of new vechicle = carrying value of assets given up:
Carrying value (cost - accumulated depreciation) 2,600
Cash 440
Value of new vehicle 3,040

Exercise 9.11

Equipment (new) 6,910
Accumulated Depreciation 2,120
Loss on trade of machinery 3,670
Equipment (old) 9,000
Cash 3,700
Fair value of equipment traded 3,210
Carrying value (cost - accumulated depreciation) 6,880
Loss (since FV < CV) 3,670
Value of new equipment = fair value of assets given up:
Fair value of equipment 3,210
Cash 3,700
Value of new vehicle 6,910

Exercise 9.12

1. Has commercial substance

Kitchener
Equipment (new) 28,000
Accumulated Depreciation 31,250
Equipment (old) 50,100
Cash 3,000
Gain on trade of equipment 6,150
FV of assets given up: Gain or loss:
Equipment 25,000 FV of equipment given up 25,000
Cash 3,000 CV of equipment given up 18,850
value of new equipment 28,000 GAIN (FV > CV) 6,150

Waterloo
Cash 3,000
Equipment (new) 25,000
Accumulated Depreciation 21,990
Loss on trade of equipment 5,060
Equipment (old) 55,050
FV of assets given up: Gain or loss:
Equipment 28,000 FV of equipment given up 28,000
Cash -3,000 CV of equipment given up 33,060
value of new equipment 25,000 LOSS (FV < CV) 5,060

2. Does not have commercial substance

Kitchener
Equipment (new) 21,850
Accumulated Depreciation 31,250
Equipment (old) 50,100
Cash 3,000
CV of assets given up: Gain or loss:
Equipment 18,850 FV of equipment given up 25,000
Cash 3,000 CV of equipment given up 18,850
value of new equipment 21,850 GAIN (FV > CV) 6,150
Cannot record a gain - no commercial substance

Waterloo
Cash 3,000
Equipment (new) 25,000
Accumulated Depreciation 21,990
Loss on trade of equipment 5,060
Equipment (old) 55,050
CV of assets given up: Gain or loss:
Equipment 33,060 FV of equipment given up 28,000
Cash -3,000 CV of equipment given up 33,060
value of new equipment 30,060 LOSS (FV < CV) 5,060
**NOTE - the FV cannot exceed the FV of the asset ($25,000)

Exercise 9.13

December 31, Y3 Investment Property 360,000
Gain in Value of Investment Property 360,000
($7,060,000 - $6,700,000)
December 31, Y4 Loss in Value of Investment Property 110,000
Investment Property 110,000
($6,950,000 - 7,060,000)
December 31, Y5 Investment Property 306,000
Gain in Value of Investment Property 306,000
($7,256,000 - $6,950,000)
remember, no depreciation is recorded when the fair value model is used.

Exercise 9.14

1. Revaluation

Dec 31, Y4 Accumulated Depreciation - Buildings 89,600
Buildings 89,600
reverse/close accumulated depreciation to the asset account.
Dec 31, Y4 Revaluation Loss 47,300
Buildings 47,300
revalue to the appraised value ($300,000 CV to $275,000 revaluation value)
Dec 31, Y4 Accumulated Depreciation - Equipment 54,900
Equipment 54,900
reverse/close accumulated depreciation to the asset account.
Dec 31, Y4 Equipment 9,500
Revaluation Surplus - OCI 9,500
revalue to the appraised value ($80,000 to $90,000 revaluation value)
Remember, can only have a credit in revaluation surplus, revaluation gain is NOT recorded

2. Depreciation Expense

Dec 31, Y5 Depreciation Expense - Building 12,800
Accumulated Depreciation - Buildings 12,800
25 years remain (at beginning of Y5 = $320,000 / 25 years)
Dec 31, Y5 Depreciation Expense - Equipment 8,000
Accumulated Depreciation - Equipment 8,000
10 years remain (at the beginning of Y5 = $80,000 / 10 years)

Exercise 9.15

Jan 1, Y3 Equipment 200,000
Cash 200,000
record purchase of equipment
Dec 31, Y3 Depreciation Expense - Equipment 10,000
Accumulated Depreciation - Equipment 10,000
annual straight-line depreciation = $200,000 / 20 years
Dec 31, Y4 Depreciation Expense - Equipment 10,000
Accumulated Depreciation - Equipment 10,000
annual straight-line depreciation = $200,000 / 20 years
Dec 31, Y5 Depreciation Expense - Equipment 10,000
Accumulated Depreciation - Equipment 10,000
annual straight-line depreciation = $200,000 / 20 years
Dec 31, Y5 Accumulated Depreciation - Equipment 30,000
Equipment 30,000
reverse/close accumulated depreciation to the asset
Dec 31, Y5 Equipment 16,000
Revaluation Surplus - OCI 16,000
revalue as needed ($186,000 - 170,000 carrying value)
Carrying value = 200,000 Original cost
30,000 Accumulated Depreciation
170,000
Dec 31, Y6 Depreciation Expense - Equipment 10,941
Accumulated Depreciation - Equipment 10,941
annual straight-line depreciation = $186,000 / 17 years
17 years = 20 years originally - 3 years of depreciation recorded = 17 years remaining
Dec 31, Y7 Depreciation Expense - Equipment 10,941
Accumulated Depreciation - Equipment 10,941
annual straight-line depreciation = $186,000 / 17 years
17 years = 20 years originally - 3 years of depreciation recorded = 17 years remaining
Dec 31, Y8 Depreciation Expense - Equipment 10,941
Accumulated Depreciation - Equipment 10,941
annual straight-line depreciation = $186,000 / 17 years
17 years = 20 years originally - 3 years of depreciation recorded = 17 years remaining
Dec 31, Y8 Accumulated Depreciation - Equipment 32,824
Equipment 32,824
reverse/close accumulated depreciation to the asset
Dec 31, Y8 Revaluation Surplus - OCI 16,000
Revaluation Loss 5,676
Equipment 21,676
revalue as needed ($131,500 - 153,176 carrying value)
Carrying value = 186,000 Revised cost
32,824 Accumulated Depreciation
153,176

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