financial accounting tools for business decision making solutions 7e chapter 09

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CHAPTER 9

REPORTING AND ANALYZING LONG-LIVED

ASSETS LEARNING OBJECTIVES

1 Determine the cost of property, plant, and equipment

2 Explain and calculate depreciation

3 Account for the derecognition of property, plant, and equipment

4 Identify the basic accounting issues for intangible assets and goodwill

5 Illustrate how long-lived assets are reported in the financial statements

6 Describe the methods for evaluating the use of assets

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

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Legend: The following abbreviations will appear throughout the solutions manual file

Time: Estimated time to prepare in minutes

AACSB Association to Advance Collegiate Schools of Business

Reflec Thinking Reflective Thinking

CPA CM CPA Canada Competency

cpa-e001 Ethics Professional and Ethical Behaviour

cpa-e002 PS and DM Problem-Solving and Decision-Making

cpa-e003 Comm Communication

cpa-e004 Self-Mgt Self-Management

cpa-e005 Team & Lead Teamwork and Leadership

cpa-t001 Reporting Financial Reporting

cpa-t002 Stat & Gov Strategy and Governance

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ANSWERS TO QUESTIONS

1 (a) Accounting standards require property, plant, and equipment to be

recorded initially at cost, which consists of the purchase price, less any discounts or rebates and any other expenditures necessary to acquire the asset and make it ready for its intended use at its intended location of use

(b) Operating expenditures are expensed in the period they are incurred

They help maintain an asset but do not add additional value, useful life, or economic benefits Capital expenditures are included as part

of the cost of the new equipment They are incurred to make an asset ready for use or to enhance its productivity or extend its life

(c) An asset retirement cost is an estimate of the cost of an obligation to

dismantle, remove, or restore a long-lived asset when it is retired

These costs are included in the cost of property, plant, and equipment and depreciated over the life of the asset

LO 1 BT: C Difficulty: M Time: 10 min AACSB: None CPA: cpa-t001 CM: Reporting

2 Land improvements are structural additions made to the land such as

parking lots and fences as they are depreciable assets Clearing and

grading the land are not land improvements but are part of the land cost as

they are required to get the land ready for its intended use They would

therefore be capitalized (recorded) in the Land account

LO 1 BT: C Difficulty: S Time: 3 min AACSB: None CPA: cpa-t001 CM: Reporting

3 An operating lease allows the lessee to account for the leasing transaction

as a rental and so the lease payments are recorded to Rent Expense, an

income statement account As a result, neither the asset nor the liability

related to the asset is recorded on the company’s books

For a finance lease, both the asset and the liability related to the leased

asset are recorded on the company’s books even though the asset is not

legally owned by the party leasing the asset

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Q 3 (continued)

The asset account involved would be Equipment under Finance Leases,

for example, and the related liability account would be Finance Lease

Liability

4

(1) Depreciation Expense

(2) Net Income

(3) Accumulated Depreciation

(4) Carrying Amount (a) Early years

Straight-line Same each year Constant charge

(depreciation expense) to income

Increases at a constant amount each year

Declines at a constant amount each year

Units-of-production

Varies with number of units produced

Impact on income will vary with the number

of units produced

Increases at a variable amount based on

number of units produced

Declines at a variable amount

Diminishing-balance

Decreases each year

Increasing income each year because depreciation expense is lower each year

Increases at a diminishing amount each year

Declines at a higher amount in the early years

diminishing-All three result

in the same total depreciation expense

All three result

in the same total impact on net income

All three result

in the same total

accumulated

All three result in the same ending carrying amount

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5 If the residual value was deducted for the diminishing balance method, the

carrying value would never reach the residual value Applying a fixed

percentage rate to a diminishing balance will always result in an

undepreciated balance because a portion of the depreciable amount will

always remain at the end of the period Residual value is considered in the

diminishing-balance method by ensuring that the asset is never

depreciated below its residual value In this way, we always make sure that

the undepreciated balance (carrying amount) is adjusted to equal residual

value at the end of the asset’s useful life Residual value is subtracted from

the cost when using the other methods because the resulting depreciable

cost is needed to determine the annual depreciation expense

6 The straight-line and diminishing-balance methods use annual

depreciation rates in their depreciation calculations Therefore, the result

must be adjusted for any period less than one year The units-of-production

method does not need to be adjusted for partial periods as this method

multiplies the depreciable amount per unit by the actual units produced in

the period This reflects how much the asset was used during the period

For example, if an asset was purchased July 1 and produced 10,000 units

for the period July through December, it can only produce units for that

six-month period (the company could not have produced units before it

purchased the asset) and therefore no adjustment for the half-year

ownership period is needed

7 (a) A company should choose the depreciation method it believes will

best reflect the pattern over which the asset’s future economic benefits are expected to be consumed The depreciation method must be revised if the expected pattern of consumption of the future economic benefits has changed

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Q7 (continued)

(b) Private companies using ASPE would not be allowed to use the

revaluation model and therefore must use the cost model Publicly traded companies, which must follow IFRS, can choose to use the cost model or the revaluation model Factors to consider when choosing the revaluation model over the cost model are whether fair values are more relevant than cost (such as in the real estate industry), whether reliable measures of fair value can be obtained, and whether the benefits from the revaluation model exceed the additional costs involved in determining the value of the assets each year

LO 2 BT: K Difficulty: M Time: 10 min AACSB: None CPA: cpa-t001 CM: Reporting

8 (a) Companies need to calculate an impairment loss when an asset

becomes obsolete or when a competitive market causes a decline in sales of products produced by that asset The impairment loss is the amount by which the carrying amount of the asset exceeds its recoverable amount The loss is recorded with a debit to Impairment Loss and a credit to the Accumulated Depreciation account of the asset or the asset itself if a contra account is not used

(b) Some companies attempt to record asset impairments in fiscal years

where the company is experiencing poor results and the additional charge for the impairment will not be noticed or will be received in a better light by the financial statement users Once the carrying amounts of the assets are reduced from the recording of the impairment loss, subsequent depreciation is correspondingly reduced Since management’s judgement is involved in arriving at the amount of impairment loss, the timing of the recording of the loss may

be the result of management’s objective to manipulate current and future years’ financial results This approach becomes problematic to the financial statement users who are looking to compare results over several fiscal years to properly identify and assess financial trends

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9 When recording depreciation every year, cash is not involved in the

transaction The purpose of recording depreciation is to allocate the cost

of the long-lived asset over the accounting periods the asset is used to

assist in producing revenue and earning income Although cash is paid

when the asset is purchased, when recording depreciation, no cash is set

aside for the purpose of replacing the asset at the end of the useful life

That is why the financial statements must disclose the cost and the

accumulated depreciation of the long-lived assets in order for the reader to

predict the future cash flows that will be involved when a retirement and

replacement of the asset takes place

10 Depreciation must be updated for the period that has elapsed since

depreciation was last recorded to the date of the sale because the

depreciation expense must properly reflect the total period over which the

asset’s economic benefits are used Updating depreciation also aids in

determining the correct amount of the gain or loss on disposition

11 In a disposal of property, plant, and equipment, the carrying amount of the

asset is compared to the proceeds received from the disposal If the

proceeds of the disposal exceed the carrying amount of the asset, a gain

on disposal occurs If the proceeds of the sale are less than the carrying

amount of the asset sold, a loss on disposal occurs The calculation is the

same for an asset that is retired if proceeds, such as a residual value, are

received Often there are no proceeds received when an asset is retired If

no proceeds are received, a gain will never occur

LO 3 BT: AP Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

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12 The machine and related accumulated depreciation should continue to be

reported on the statement of financial position without further depreciation

or adjustment until the asset is retired Reporting the asset and related

accumulated depreciation on the statement of financial position informs the

reader of the financial statements that the company is still using the asset

Once an asset is fully depreciated, even if it is still being used, no additional

depreciation should be taken on this asset In no situation can the

accumulated depreciation on the asset exceed the cost of the asset

13 Tangible and intangible assets have similar characteristics, in that they are

purchased for use in the operations and not for resale, have usefulness

beyond one fiscal year, and are depreciated or amortized, with the

exception of land and indefinite life intangible assets Tangible and

intangible assets are also similar in that their cost includes all of the

necessary outlays that are made to get the asset ready for its intended use

They differ in their physical substance in that intangible assets have no

physical substance

LO 2,4 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

14 Since finite intangible assets have limited usefulness to the business, each

period of benefit should be charged with the allocation of the amortizable

cost of the intangible asset used to generate revenue Indefinite life

intangible assets cannot have a systematic allocation of their amortizable

cost allocated against revenues as the period of benefit is indeterminable

Rather, these assets are tested for impairment more frequently to ensure

that their recoverable amount continues to exceed their carrying amount

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15 (a) The accountant’s argument is not valid The cost of intangible assets

with finite lives should be amortized over the shorter of that asset's useful life (the period of time when operations are benefited by use of the asset) or its legal life In many instances, reasonable estimates must be arrived at in order to record the necessary transactions and adjusting entries at the end of an accounting period Having an alternative to the estimate that is more certain does not make the information more relevant

(b) If useful life is shorter than legal life, amortizing the asset over its legal

life would be inappropriate because the amortization each year would

be too low and the asset would have a carrying amount shown on the statement of financial position after its useful life had passed

16 Goodwill and intangible assets have similar characteristics, in that they are

recorded at cost, purchased for use in the operations of the business and

not for resale, have usefulness beyond one fiscal year, and have no

physical substance They differ in that goodwill does not exist on its own,

is unidentifiable and cannot be separated from a business entity and so it

cannot be sold; nor is it based on contractual or legal rights Goodwill is not

amortized as it has an indefinite life and is only derecognized if the

business as a whole is resold Goodwill can also be reduced from

impairment

17 The legal fees should be added to the cost of the patent and amortized

over the patent’s remaining useful life as they prove the patent’s validity

and add to, or ensure the continuation of, the future economic benefits to

be generated by the patent

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18 Goodwill is the value of many favourable attributes that are intertwined in

the business enterprise Goodwill can be identified only with the business

as a whole and, unlike other assets, cannot be sold separately Goodwill

can only be sold if the entire business is sold

19 (a) Long-lived assets are normally reported on the statement of financial

position under the headings “property, plant, and equipment”,

“intangible assets”, and “goodwill.” The balances of the major classes

of assets should be disclosed, as well as the accumulated depreciation and accumulated amortization, either on the statement

of financial position or in the notes to the financial statements

(b) The income statement reports, in the operating expenses section,

depreciation expense, amortization expense, any gain or loss on disposal of property, plant, and equipment, and any impairment losses

(c) The statement of cash flows reports, in the investing activities section,

any cash paid to purchase long-lived assets and any cash received

on their disposal

20 The notes to the financial statements should disclose the balance of the

major classes of assets as well as the accumulated depreciation and

amortization for depreciable and amortizable assets if this information has

not been reported directly in the financial statements The depreciation and

amortization method(s) used and the useful lives or rates should also be

described Under IFRS, companies must disclose if they are using the cost

or revaluation model for each class of long-lived assets and include a

reconciliation of the carrying amount at the beginning and end of period for

each class of long-lived assets If the revaluation model is used, disclosure

of any increases and decreases from revaluation, as well as other

information, is required Information relating to any impairment recorded

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Q 20 (continued)

For companies using ASPE, the disclosure requirements are substantially

reduced because the revaluation model cannot be used

LO 5 BT: C Difficulty: C Time: 10 min AACSB: None CPA: cpa-t001 CM: Reporting

21 Gains and losses recorded on the disposal of property, plant, and

equipment are classified in the operating section of the income statement

because they are basically an adjustment to deprecation, which is

classified as an operating expense

22 (a) Accounting firms, like any professional services firm, do not need a

significant amount of long-lived assets to operate Consequently, the asset turnover will be high for accounting firms In addition, the profit margin will most likely be higher due to lower amounts of depreciation compared to other types of businesses like grocery stores

Furthermore, accounting firms attract clients due to the quality of their work and the relationships they develop with clients and unlike other companies are not as subject to pricing pressures in a competitive market that could reduce profit margins

(b) Grocery stores usually have a high asset turnover and a low profit

margin This is typical in industries that have high sales relative to assets and are in an industry where there are many competitors Food must have a high inventory turnover and store premises are often obtained using operating leases These factors result in reduced assets, compared to capital intensive industries (although a grocery store would most likely be more capital intensive than an accounting firm)

LO 6 BT: AN Difficulty: C Time: 10 min AACSB: Analytic CPA: cpa-t001, cpa-t005

CM: Reporting and Finance

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23 The return on assets ratio measures the return being generated by each

dollar invested in the business (net income ÷ average total assets) The

return on assets can also be calculated by multiplying the profit margin by

the asset turnover ratio The profit margin measures how effective the

business is at generating net income from its sales and the asset turnover

measures how well the company can generate sales from a given level of

assets Together, the two ratios can be combined to measure how effective

a company is at generating net income from a given level of assets (return

on assets) Therefore, if a company wants to improve its return on assets,

it can do so either by increasing the margin it generates from each dollar

of sales (profit margin) or by increasing the volume of goods that is sells

(asset turnover)

LO 6 BT: AN Difficulty: M Time: 10 min AACSB: Analytic CPA: cpa-t001, cpa-t005

Shaw’s return on assets deteriorated and the asset turnover ratio remained

the same in 2015 compared to 2014

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9-1

All of the expenditures, except the fence, should be included in the cost of the

land Therefore, the cost of the land is $490,000 (cash price of $450,000 + legal

fees of $8,500 + removal of old building $25,000 + clearing and grading costs of

$6,500) The fence would be included in the cost of land improvements

LO 1 BT: AP Difficulty: S Time: 3 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

The cost of the truck is $43,750 (invoice price $42,000 + installation of trailer hitch

$1,000 + painting and lettering $750) The expenditures for insurance and motor

vehicle licence are annual costs that do not benefit future periods and should be

expensed and not added to the cost of the truck

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(a) The depreciable amount is $72,000 ($80,000 – $8,000) With a 4-year useful

life, annual depreciation is $18,000 ($72,000 ÷ 4) Under the straight-line

method, depreciation expense is the same each year

(b) Total depreciation over the truck’s life will be $18,000 per year × 4 years = $72,000

Depreciation expense for 2018 = $18,000 × 8/12 = $12,000

Depreciation expense for 2019 = $18,000

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Solutions Manual 9-15 Chapter 9

(a) Depreciation rate = 1 ÷ 4 = 25% x 2 = 50%

January 1 Depreciation December 31

Carrying amount Rate expense Carrying amount

2018 Depreciation expense = $80,000 × 50% = $40,000

2019 Depreciation expense = ($80,000 – $40,000) × 50% = $20,000

2020 Depreciation expense = ($80,000 – $40,000 – $20,000) × 50% = $10,000

2021 Depreciation expense = ($80,000 – $40,000 – $20,000 – $10,000) × 50% =

$5,000 (amount calculated of $5,000 is adjusted to $2,000 so that the carrying

amount will equal the residual value)

As explained in the chapter, the double-diminishing-balance method can require

an adjustment in the final year of depreciating an asset in order for the carrying

amount to equal the residual value In the scenario illustrated in the question, the

company stopped depreciating the asset at the end of Year 4 This relatively short

life was chosen for the purposes of this comparative problem and resulted in a

very small amount of depreciation expense in Year 4 This can occur when the

double-diminishing-balance method is used to depreciate an asset with a short

life Because of this effect, the double-diminishing-balance method is often used

on assets with longer lives In situations like this in real life, a company would

revise the useful life of the asset if it anticipated continuing to use the asset

beyond Year 4

(b) Total depreciation expense = $40,000 + $20,000 + $10,000 + $2,000 = $72,000

LO 2 BT: AP Difficulty: M Time: 10 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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(A) (B) (C) [(A) × (B) × (C)] ÷12 (1 ÷ 4) # of Depreciation

Carrying amount Rate months expense

The depreciable amount per unit is $0.10 per km calculated as follows:

(Cost – Residual value) ÷ total km = ($33,000 – $500) ÷ 325,000 = $0.10

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Cost of equipment $144,000 Less: Accumulated depreciation 77,000*

Carrying amount at date of disposal 67,000 Loss on disposal $(25,000)

* Depreciation Jan 1, 2016 – Dec 31, 2017 ($144,000 – $4,000) ÷ 5 = $28,000 × 2 years $56,000 Depreciation Jan 1, 2018 – Sept 30, 2018

Accumulated depreciation $77,000

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Less: Accumulated amortization 27,000

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(a) (1) June 1 Trademarks 1,000

Cash 1,000 (2) Dec 1 Trademarks 10,000

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SAPUTO INC

Statement of Financial Position (Partial)

March 31, 2015 (in millions) Property, plant, and equipment

Land $ 66

Buildings $ 759

Less: Accumulated depreciation 218 541

Furniture, machinery, and equipment 2,339

Less: Accumulated depreciation 887 1,452

Total property, plant, and equipment $2,059 Intangible assets

Finite-life intangible assets 246

Less: Accumulated amortization 57 189

Indefinite-life intangible assets 318

Total intangible assets 507 Goodwill 2,125 Total long-lived assets $4,691

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(a) (1) Pepsi has a better return on assets ratio

(2) Pepsi has a better asset turnover ratio

(b) Profit margin × Asset turnover = Return on assets

Coke: Profit margin × 0.5 = 7.8%; Solving for profit margin = 15.6%

Pepsi: Profit margin × 0.9 = 8.8%; Solving for profit margin = 9.8%

Coke has the better profit margin

= 0.9 times

$2,360($2,593 + $2,0442 )

= 8.6%

$360($2,593 + $2,0442 )

= 15.5%

(b) The return on assets changed primarily due to a change in profit margin

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SOLUTIONS TO EXERCISES

EXERCISE 9-1

(a) Under the cost principle, the acquisition cost for property, plant, and

equipment includes all expenditures necessary to acquire the asset and

make it ready for its intended use For example, the cost of factory

equipment includes the purchase price, freight costs paid by the purchaser,

insurance costs during transit, and expenditures required in assembling,

installing, and testing the equipment

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EXERCISE 9-2

(a) Cost of equipment = $75,000 + $500 delivery + $200 insurance in transit

+ $2,800 testing and installation

= $78,500 The one-year insurance payment is for an annual expense and unlike the

insurance for the equipment in transit, was not incurred to get the asset

ready for use Training costs are also expensed as they were incurred to

get staff ready to use the machinery These costs were not incurred on the

machinery itself

(b) April 1, 2018 because that is the date when the asset was ready for use

(c) The company should use the straight-line method since the economic

benefits are expected to be consumed evenly over the equipment’s useful

life

(d) Depreciation expense in 2018 would be $5,888 ($78,500 ÷ 10 × 9/12)

LO 1,2 BT: AP Difficulty: M Time: 15 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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January 1 Depreciation December 31

Carrying amount Rate expense Carrying amount

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EXERCISE 9-3 (CONTINUED)

(3) Units of production: Depreciation expense per unit =

($172,000 – $16,000)

= $15.60 10,000 hours

Expense Per Unit

$15.60 15.60 15.60 15.60 15.60

Depreciation Expense

$ 23,400 34,320 35,880 32,760 29,640

$156,000

(b) All three methods result in the same amount depreciation expense over

the life of the asset and so the same income will be experienced as well The choice of depreciation method will have no impact on cash flow

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$760,000

20

Cost Less: Residual value Depreciable cost

Machine 2

$120,000 5,000

$115,000

5 Annual depreciation $760,000 ÷ 20 = $38,000 $115,000 ÷ 5 = $23,000 (b) Accumulated depreciation, December 31, 2017

Machine 1 ($38,000 × 10 years) $380,000 Machine 2 ($23,000 × 2 years) 46,000

Carrying amount, December 31, 2017

Machine 1 ($800,000 – $380,000) $420,000 Machine 2 ($120,000 – $46,000) 74,000 (c) If the company accepts Lindy’s proposed changes in useful life and

residual value, the 2018 depreciation expense for Machine 1 will be lower

and the depreciation expense for Machine 2 will be higher than for 2017

The depreciation expense for Machine 1 will be lower due to the estimated

longer useful life and higher residual value The depreciation expense for

Machine 2 will be higher due to the shorter estimated useful life and lower

residual value

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EXERCISE 9-5

(a) The amount paid for the equipment is $1,100

Jan 1 Equipment 1,100

Cash 1,100 (b) The amount of depreciation expense is $100

Dec 31 Depreciation Expense 100

Accumulated Depreciation—Equipment 100

(c) The amount of the gain on disposal is $50 and is derived from the

disposal entry that follows

Dec 31 Cash 450

Accumulated Depreciation—Equipment 40 Gain on Disposal 50 Equipment 440 (d) The amount of the impairment loss on the remaining equipment is $55

Dec 31 Impairment Loss 55

Accumulated Depreciation—Equipment 55

LO 2,3 BT: AN Difficulty: M Time: 15 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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Depreciation Expense

Carrying Amount Year 1 $4,000 $13,000 $8,500 $8,500

(2) Double diminishing-balance method

Proceeds – carrying amount = Gain

$5,800 – $2,125 = $3,675

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(c) (1) Straight-line method

Depreciation expense: $12,000 - Gain: $800 = $11,200 (2) Double-diminishing balance method

Depreciation expense: $14,875 – Gain: $3,675 = $11,200

Note: There is no difference in the total expense over the life of the asset

(d) Because of the nature of the asset in question, a boardroom table, it would

be most appropriate to use the straight-line method of depreciation There

is typically no change in the usefulness of the asset over the four-year life

and so an equal deprecation charge allows for the best matching of the

expense to the usefulness of the asset to the business over the four-year

period

LO 2,3 BT: AN Difficulty: M Time: 20 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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EXERCISE 9-7

(a)

Jan 1 Cash 18,000

Accumulated Depreciation—Vehicles ([$62,000 – $6,000] ÷ 4 × 3) 42,000 Loss on Disposal [$18,000 – ($62,000 – $42,000)] 2,000 Vehicles 62,000

Sept 1 Depreciation Expense ($10,980 ÷ 3 × 8/12) 2,440

Accumulated Depreciation—Equipment 2,440

1 Cash 500

Accumulated Depreciation—Equipment ($10,980 ÷ 3 × 2 = $7,320; $7,320 + $2,440) 9,760 Loss on Disposal [$500 – ($10,980 – $9,760)] 720 Equipment 10,980

Dec 30 Depreciation Expense ($150,000 ÷ 10) 15,000

Accumulated Depreciation—Equipment 15,000

30 Accumulated Depreciation—Equipment

[($150,000 ÷ 10) × 10] 150,000 Equipment 150,000

(b) The accounts that are affected by the error include:

Miscellaneous Revenue Overstated

Accumulated Depreciation—Vehicles Overstated

Depreciation Expense Overstated

Loss on Disposal Understated

LO 3 BT: AN Difficulty: C Time: 20 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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EXERCISE 9-8

1 Depreciation is the process of allocating the cost of a long-lived asset to

expense over the asset’s useful life Because the value of land generally

does not decline with time and usage, its usefulness and economic benefits

do not decline In addition, the useful life of land is indefinite so the

expected useful life is not determinable Therefore, it would be incorrect for

the student to depreciate the land

2 Trademarks are intangible assets with indefinite lives Under both ASPE

and IFRS, trademarks are not amortized but reviewed annually for

impairment If a decline in the trademarks’ recoverable amount has

occurred, the trademarks’ carrying amounts are reduced by recording an

impairment loss which appears on the income statement Therefore, the

amortization entry should be reversed and no reduction in carrying amount

recorded unless an impairment has occurred

3 International Financial Reporting Standards (IFRS) permit companies to

use the revaluation model for the subsequent measurement of property,

plant, and equipment To qualify for the revaluation model, the fair value of

the building must be reliably measurable, the revaluations must be carried

out on an ongoing basis, and the entire category of buildings must be

revalued to fair value Using the revaluation model for one building is

therefore not appropriate It is also unlikely that the revaluation model will

be relevant to all users of Chin’s financial statements This fair value

adjustment should be reversed and the building carried at cost, less

accumulated depreciation

LO 2,4 BT: AP Difficulty: C Time: 15 min AACSB: None CPA: cpa-t001 CM: Reporting

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EXERCISE 9-9

(a)

Jan 1 Copyrights 120,000

Cash 120,000 Mar 1 Franchises 540,000

Cash 40,000 Bank Loan Payable 500,000 Sept 1 Trademarks 75,000

Cash 75,000

1 Trademarks 35,000

Cash 35,000 (b)

Dec 31 Amortization Expense 20,000

Accumulated Amortization—Copyrights 20,000 ($120,000 ÷ 6 = $20,000)

31 Amortization Expense 50,000

Accumulated Amortization—Franchises 50,000 [($540,000 ÷ 9) × 10/12 = $50,000]

No amortization recorded on the trademark purchased Sept 1

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31 Given that recoverable amount exceeded carrying amount for

intangible assets, no impairment loss is recognized

31 Impairment Loss 30,000

Goodwill 30,000

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LO 4,5 BT: AP Difficulty: M Time: 20 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

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EXERCISE 9-11

(a)

Account Financial Statement Section

Accumulated amortization— Statement of Financial Intangible assets software Position

Accumulated depreciation— Statement of Financial Property, plant, and

Accumulated depreciation— Statement of Financial Property, plant, and fixtures and equipment Position equipment

Accumulated depreciation— Statement of Financial Property, plant, and leasehold improvements Position equipment

Amortization expense Income Statement Operating expenses Buildings Statement of Financial Property, plant, and

Depreciation expense Income Statement Operating expenses

Fixtures and equipment Statement of Financial Property, plant, and

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(a)

Account Financial Statement Section

Reversal of impairment loss Income Statement Operating expenses

Software Statement of Financial Intangible assets

Property, plant, and equipment

Less: Accumulated depreciation 83,299 56,889

Total property, plant, and equipment 152,349 Intangible assets

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EXERCISE 9-12

Company A: Costco (retail)

Company B: Suncor (oil and gas)

The company most likely operating in the retail industry is Company A (Costco)

because it has the higher asset turnover and lower profit margin It is reasonable

to expect retail companies like Costco to sell goods at a higher rate (volume) at a

lower profit margin than a company in the oil and gas industry

The oil and gas industry requires a higher investment in long-lived assets and can

be expected to have a lower asset turnover ratio and a higher profit margin

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(b) Profit Margin × Asset Turnover = Return on Assets

[(net income ÷ net sales) × (net sales ÷ average total assets)] = net income

÷ average total assets

= ($550 ÷ $14,000) × [$14,000 ÷ (($7,200 + $6,800) ÷ 2)]

= ($550 ÷ $14,000) × [$14,000 ÷ $7,000]

= 0.0392857 × 2.0 = 0.0785714

= 7.85714%

(c) Ajax’s ratios are better than the industry averages in every respect Ajax

can generate a higher return on assets through higher volume of sales or

greater efficiencies in using its asset base to generate those sales Overall

Ajax is performing better than its industry

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SOLUTIONS TO PROBLEMS

PROBLEM 9-1A

Account Debited Explanation

1 Equipment Makes the equipment more productive or efficient

2 Land improvements Non-permanent land expenditure

3 Buildings Capital expenditure, which makes the office more productive

If the air conditioning system had a significant cost and different useful life from the building an argument could be made to treat

it as a separate asset (component)

5 Equipment Cost to prepare the equipment for use

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PROBLEM 9-2A (CONTINUED)

Account Debited Explanation

9 Vehicles The future operating costs will be substantially reduced

10 Repair and

maintenance

expense

Light bulbs are replaced frequently

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