# 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 Robotic assembly machine (30,000 ÷ 250,000) × 220,000 = 26,400 (90,000 ÷ 250,000) × 220,000 = 79,200 (110,000 ÷ 250,000) × 220,000 = 96,800 (20,000 ÷ 250,000) × 220,000 = 17,600 _______________ 220,000 _______________

### Exercise 9.4

1. Prabhu

Zhang
2. Prabhu

Zhang
3. Prabhu

NOTE: Loss must be recorded, as the asset acquired cannot be recorded at an amount greater than its fair value.
Zhang

### 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:
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.

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
2. Offset Method
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

NOTE: Depreciation expense = \$1,200,000 ÷ 27 years remaining = \$44,444

NOTE: Depreciation expense = \$1,250,000 ÷ 26 years = \$48,077
NOTE: Depreciation expense = \$1,000,000 ÷ 25 years = \$40,000

### Exercise 9.9

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:
This cannot be identified as a separate component, but it does extend the useful life of the asset, so capitalization is warranted.
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

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