financial accounting tools for business decision making 6e solution manual chapter 9

a The cost principle requires that property, plant, and equipment be recorded at cost, which consists of the purchase price, less any discounts or rebates and any other expenditures nece

CHAPTER 9 Reporting and Analyzing Long-Lived Assets

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives Questions

Brief Exercises Exercises

A Problems

B Problems BYP

2B, 3B, 4B 5B, 6B, 7B, 8B

1, 4

5 Illustrate how

long-lived assets are

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Difficulty Level

Time Allotted (min.)

7A Record and determine effect of depreciation method

over life of asset

Moderate 35-45

8A Record property, plant and equipment transactions;

prepare partial statement of financial position

Moderate 10-15

9A Identify intangible assets and goodwill Moderate 20-30

10A Record intangible asset transactions; prepare partial

statement of financial position

Moderate 30-40

11A Calculate and evaluate ratios Moderate 30-40

4B Calculate and compare depreciation under different

methods

Moderate 40-50

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem

Difficulty Level

Time Allotted (min.)

5B Calculate depreciation; discuss revision of estimate Moderate 15-20

6B Record acquisition, depreciation, and disposal of

equipment

Simple 15-20

7B Record and determine effect of depreciation method

over life of asset

Moderate 35-45

8B Record property, plant and equipment transactions;

prepare partial statement of financial position

Moderate 10-15

9B Identify intangible assets and goodwill Moderate 20-30

10B Record intangible asset transactions; prepare partial

statement of financial position

Moderate 30-40

11B Calculate and evaluate ratios Moderate 30-40

12B Calculate and evaluate ratios Moderate 30-40

ANSWERS TO QUESTIONS

1 (a) The cost principle requires that property, plant, and equipment be recorded 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 (b) 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

2 Two examples of operating expenditures include routine maintenance and painting of equipment 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

Two examples of capital expenditures include the shipping cost of equipment to its location of use and testing it to ensure it is ready for its intended use 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)

3 Land improvements are structural additions made to the land such as parking lots and fences 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

4 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 The asset account involved would be Assets under Finance Leases and the related liability account would be Finance Lease Liability

Answers to Questions (Continued)

5

(1) Depreciation Expense

(2) Profit

(3) Accumulated Depreciation

(4) Carrying Amount (a) Early years

Straight-line Same each year Constant charge

(depreciation expense) to profit

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 profit 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 profit 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

All three result

in the same total depreciation expense

All three result

in the same total impact on profit

All three result

in the same total

accumulated depreciation

All three result in the same ending carrying amount

6 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 its useful life Residual value is subtracted from the cost when using the other

Answers to Questions (Continued)

7 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 a result for that six month period (the company could not have produced units before it purchased the asset) and therefore does not need to be adjusted for the half year ownership period

8 (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

(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

9 (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 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

Answers to Questions (Continued)

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 sale of property, plant, and equipment, the carrying amount of the asset is compared to the proceeds received from the sale If the proceeds of the sale 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

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

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

Answers to Questions (Continued)

15 (a) 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 Extending the amortization period beyond the useful life would result in a misallocation of the cost of the intangible asset to accounting periods beyond those when the asset was in use and contributed to producing revenue

(b) If the 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 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

17 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

18 (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

Answers to Questions (Continued)

19 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 must also be disclosed

For companies using ASPE, the disclosure requirements are substantially reduced because the revaluation model cannot be used

20 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

21 (a) 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

(b) Railway companies normally have a low asset turnover because they are so capital intensive To compensate for this, companies such as these need to have

a high profit margin which is typical in an industry that is hard to enter due to high capital barriers

22 The return on assets ratio measures the return being generated by each dollar invested

in the business (profit ÷ 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 profit 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 profit 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)

Answers to Questions (Continued)

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 $61,000 (cash price of $50,000 + legal fees of $2,500 + removal of old building $5,000 + cleaning and grading costs of $3,500) The fence would be included in the cost of land improvements

BRIEF EXERCISE 9-2

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

(b) Total depreciation over the truck’s life will be $20,000 per year × 4 years = $80,000

BRIEF EXERCISE 9-5

Depreciation expense for 2015 = $20,000 × 8/12 = $13,333

Depreciation expense for 2016 = $20,000

BRIEF EXERCISE 9-6

(a) Depreciation rate = 1 ÷ 4 = 25%

January 1 Depreciation December 31

Carrying amount Rate expense Carrying amount

2015 Depreciation expense = $86,000 × 25% = $21,500

2016 Depreciation expense = ($86,000 – $21,500) × 25% = $16,125

2017 Depreciation expense = ($86,000 – $21,500 – $16,125) × 25% = $12,094

2018 Depreciation expense = ($86,000 – $21,500 – $16,125 – $12,094) × 25% = $9,070

(amount calculated of $9,070 is adjusted to $30,281 so that the carrying amount will

equal the residual value)

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

final year of depreciating an asset in order to equate 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 large amount of depreciation expense in Year 4

This can occur when the diminishing-balance method is used to depreciate an asset with a

short life Because of this effect, the 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 = $21,500 + $16,125 + $12,094 + $30,281 = $80,000

BRIEF EXERCISE 9-7

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

Carrying amount Rate months expense

2015 $86,000 25% 8 $14,333

2016 ($86,000 – $14,333) 25% 12 17,917

= $71,667

BRIEF EXERCISE 9-8

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

Less: Accumulated depreciation 77,000*

Carrying amount at date of disposal 67,000

* Depreciation Jan 1, 2013 – Dec 31, 2014 ($144,000 – $4,000) ÷ 5 = $28,000 × 2 years $56,000 Depreciation Jan 1, 2015 – Sept 30, 2015

BRIEF EXERCISE 9-11

(a) Accumulated Depreciation—Equipment 42,000

Equipment 42,000 (b) Accumulated Depreciation—Equipment 40,000

Cash 10,000 (b) The trademarks do not need to be amortized as these normally have an indefinite life

Property, plant, and equipment

Land $ 744.2

Buildings $2,683.7

Less: Accumulated depreciation 1,102.9 1,580.8

Fixtures and equipment $880.4

Less: Accumulated depreciation 591.4 289.0

Other property and equipment $1,153.7

Less: Accumulated depreciation 424.2 729.5

Total property, plant, and equipment $3,343.5 Intangible assets

Finite-life intangible assets $932.6

Less: Accumulated amortization 604.6 $328.0

Indefinite-life intangible assets 385.0

Total intangible assets 713.0 Goodwill 376.9 Total long-lived assets $4,433.4

BRIEF EXERCISE 9-16

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

(2) Pepsi has a better asset turnover ratio

(b) Based on the two ratios given, I would expect Coke to have a better profit margin

Profit margin × Asset turnover = Return on assets

Coke: Profit margin × 0.6 = 10.9%; Solving for profit margin = 18.2%

Pepsi: Profit margin × 0.9 = 8.4%; Solving for profit margin = 9.3%

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

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

= $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, 2015 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 machinery’s useful life

(d) Depreciation expense in 2015 would be $5,888 ($78,500 ÷ 10 × 9/12)

(2) Diminishing balance rate = 1 ÷ 4 = 25% × 2 = 50%

January 1 Depreciation December 31

Carrying amount Rate expense Carrying amount

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 profit will be experienced as well The choice of depreciation

method will have no impact on cash flow

$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, 2014

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

Carrying amount, December 31, 2014

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

2015 depreciation expense for Machine 1 will be lower and the depreciation expense for Machine 2 will be higher than for 2014 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

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

Depreciation Expense

Carrying Amount

(2) Double diminishing-balance method

Proceeds – carrying amount = Gain (loss)

$1,225 – $625 = $600

(c) (1) Straight-line method

Depreciation expense: $3,375 + Loss: $400 = $3,775

(2) Double-diminishing balance method

Depreciation expense: $4,375 – Gain: $600 = $3,775

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

EXERCISE 9-7

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

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 Therefore it would be incorrect for the student to depreciate the land

2 Goodwill is an intangible asset with an indefinite life According to generally accepted accounting principles, goodwill is not amortized but reviewed annually for impairment If

a decline in value has occurred, goodwill is written down and an impairment loss is recorded on the income statement Therefore, the amortization entry should be reversed and no decline in value recorded unless an impairment in value occurs

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 not appropriate, especially since depreciation is being calculated 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

Cash 75,000

1 Trademarks 35,000

Cash 35,000 (b)

Dec 31 Amortization Expense 20,000

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

31 Amortization Expense 75,000

Accumulated Amortization—Franchises 75,000 [($540,000 ÷ 6) × 10/12 = $75,000]

No amortization recorded on the trademark purchased Sept 1

EXERCISE 9-10

(a)

Jan 2 Patents 40,000

Cash 40,000 April 1 Goodwill 300,000

Cash 300,000 July 1 Franchises 250,000

Cash 250,000 Sept 1 Research Expenses 150,000

31 Given that recoverable amount exceeded carrying amount for intangible assets,

no impairment loss is recognized

Patents $40,000

Less: Accumulated amortization 8,000 $ 32,000 Franchise 250,000 Development costs 50,000 Total intangible assets 332,000

Goodwill 270,000

EXERCISE 9-11

Accumulated depreciation— Statement of Financial Property, plant, and

Accumulated depreciation— Statement of Financial Property, plant, and

Accumulated depreciation— Statement of Financial Property, plant, and

Accumulated depreciation— Statement of Financial Intangible assets

Fixtures and equipment Statement of Financial Property, plant, and

Leasehold improvements Statement of Financial Property, plant, an

Reversal of impairment loss Income Statement Operating expenses

Property, plant, and equipment

Land $ 5,860 Buildings $53,149

Less: Accumulated depreciation 22,467 30,682 Fixtures and equipment $166,756

Less: Accumulated depreciation 85,936 80,820 Leasehold improvements $189,730

Less: Accumulated depreciation 101,961 87,769

Intangible assets

Software $28,916

Less: Accumulated amortization 10,191 18,725 Trademarks 499 Total intangible assets 19,224 Goodwill 42,426

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

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

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

SOLUTIONS TO PROBLEMS

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)

4 Repair and maintenance

5 Equipment Cost to prepare the equipment for use

6 Repair and maintenance

7 Repair and maintenance

9 Vehicles The future operating costs will be substantially reduced

10 Repair and maintenance Light bulbs are expected to be replaced frequently

PROBLEM 9-1A

(a)

Feb 7 Land 550,000

Cash 150,000 Mortgage Payable 400,000

Note: There is no intention of using the old building so the purchase price really

relates to only the land

PROBLEM 9-2A (Continued)

The building and land improvements would be depreciated once the asset is available for use In the case of the building, it appears that its construction is completed on July 2 and the land improvements are available for use on August 29 If depreciation is calculated to the nearest month, then the building would be depreciated effective July 1 and the land improvements September 1

Depreciable Depreciation Depreciation Accumulated Carrying

PROBLEM 9-3A (Continued)

(b) (Continued)

(2)

DOUBLE DIMINISHING–BALANCE DEPRECIATION

Opening Carrying Depreciation Depreciation Accumulated Carrying

Profit is lower in the earlier years of the machine’s useful life if the double balance method is used

diminishing-(c) Yes, the cost to recycle the machine at the end of its useful life would need to be estimated The cost to recycle would be added to the cost of the machine and allocated over its useful life, increasing the annual depreciation charge

(a) (1)

STRAIGHT-LINE DEPRECIATION

Depreciable Depreciation Depreciation Accumulated Carrying

DOUBLE DIMINISHING–BALANCE DEPRECIATION

Opening Carrying Depreciation Depreciation Accumulated Carrying

Adjusted so that carrying amount would equal residual value of $2,000 ($9,531 × 50%

× 3/12 = $1,191; $9,531 – $2,000 = $7,531) at the end of the useful life

PROBLEM 9-4A

PROBLEM 9-4A (Continued)

(a) (Continued)

(3)

UNITS-OF-PRODUCTION DEPRECIATION

Units-of- Depreciation Depreciation Accumulated Carrying Year Production × Cost/Unit 1 = Expense Depreciation Amount

(c) Depreciation is a non-cash expense so the cash flows are not affected

(d) I would recommend the units-of-production method as it best reflects the pattern of the economic benefits produced by the equipment given the variability of usage each year

(b) You would expect the depreciation expense to increase in 2015 after the

change in useful life because the undepreciated cost will be expensed over a shorter period of time

(c) The change in the useful life should only affect current and future periods The

rationale is that the original estimate was based on information known at the time the asset was purchased and the revision is based on new information and should only affect future periods In addition, if prior periods were regularly restated, users would have less confidence in the financial statements

(d) If the company had not revised the remaining useful life, the total depreciation

expense over the equipment’s life would be the depreciable cost of $62,000 The accumulated depreciation at the end of the equipment’s useful life would be $62,000 and the carrying amount would be $3,000

(e) The total depreciation expense would not change after the useful life has been

revised There would be no changes to the accumulated depreciation or the carrying amount at the end of the equipment’s useful life The undepreciated cost of the equipment has not changed; only the length of time over which it will be depreciated has been revised

PROBLEM 9-5A

PROBLEM 9-6A (Continued)

Carrying amount 73,632

Loss on disposal $(13,632)

(2) Sept 30 Cash 80,000

Accumulated Depreciation—Equipment 56,368 Gain on Disposal 6,368 Equipment 130,000 Cash proceeds $80,000

2016

Nov 30 Depreciation Expense 18,333

Accumulated Depreciation—Equipment 18,333 ($20,000 × 11/12 = $18,333)

30 Cash 18,000

Accumulated Depreciation—Equipment ($16,667 + $18,333) 35,000

Loss on Disposal 17,000

Equipment 70,000 (2) Single diminishing-balance

Depreciation Rate = 1 ÷ 3 years = 33% (note textbook convention to round rates to two decimal spots 0.33 or 33%)

2015

Mar 1 Equipment 70,000

Cash 70,000 Dec 31 Depreciation Expense 19,250

Accumulated Depreciation—Equipment 19,250 ($70,000 × 33% × 10/12 = $19,250)

PROBLEM 9-7A

PROBLEM 9-7A (Continued)

(a) (Continued)

2016

Nov 30 Depreciation Expense 15,352

Accumulated Depreciation—Equipment 15,352 [($70,000 – $19,250) × 33% × 11/12 = $15,352]

2016

Nov 30 Depreciation Expense 28,000

Accumulated Depreciation—Equipment 28,000 (5,600 × $5 = $28,000)

30 Cash 18,000

Accumulated Depreciation—Equipment ($24,500 + $28,000) 52,500

Gain on Disposal 500 Equipment 70,000