Module 9: Property, plant and equipment (PPE) and intangible assets

Module 9: Property, plant and equipment (PPE) and intangible assets Overview In this module, you learn about the valuation of property, plant and equipment (PPE) and intangible assets, and the cost components involved. You also learn about various ways in which PPE and intangible assets may be acquired, as well as accounting for their acquisition, disposal and retirement. Test your knowledge Begin your work on this module with a set of test-your-knowledge questions designed to help you gauge the depth of study required. Topic outline and learning objectives 9.1 Definition and valuation of PPE and intangible assets Define PPE and intangible assets, and explain how they are valued. (Level 1) 9.2 Determining the cost of PPE Determine the cost of PPE, including expenditures subsequent to acquisition. (Levels 1 and 2) 9.3 Intangible assets Describe and account for the different types of intangible assets. (Level 1) 9.4 Disposal of PPE Describe and account for the disposal and retirement of PPE. (Level 1) 9.5 Goodwill Describe and account for goodwill. (Level 1) 9.6 Disclosure and cash flow reporting Describe the disclosure requirements for PPE and intangible assets. (Level 1) 9.7 Revaluation of PPE and intangible assets Apply the revaluation model of accounting for PPE and intangible assets. (Level 2) Module summary Print this module CICA Handbook Accounting, Part II Accounting Standards for Private Enterprises, sections 1582 Business Combinations, 3061 Property, Plant and Equipment, 3064 Goodwill and Intangible Assets, 3110 Asset Retirement Obligations, and 3850 Interest Capitalized Disclosure Considerations, govern many aspects of the initial and subsequent valuation of PPE and intangible assets. The valuation and or reporting of certain PPE and intangible assets under ASPE differs from IFRS in the following key areas: ASPE refers to PPE as capital assets. ASPE allocates negative goodwill on a pro-rata basis to other non-monetary assets whereas under IFRS negative goodwill is recognized immediately in income. ASPE permits the enterprise to choose whether to capitalize or expense qualifying development FA2 - Module 9 Page 1 of 31

costs for internally developed intangible assets. Goodwill and other intangibles not subject to amortization need not be tested for impairment if: the entities assets and liabilities have not changed significantly since the last fair value determination; the fair value of the reporting unit exceeded the carrying amount by a substantial margin at the most recent valuation; or the likelihood of the current fair value determination being less than the current book value of the reporting unit is remote. Impairment testing is only done at the reporting unit level, negating the need to allocate fair values to individual assets. Under ASPE, most PPE and intangible assets are valued at historical cost. Under IFRS, most PPE and intangible assets can be revalued to fair value. ASPE requires that a liability be recognized for legal obligations with respect to asset retirement obligations (ARO) (referred to as decommissioning costs in IFRS), whereas IFRS requires that a liability be recgonized for both legal and contructive obligations. ASPE permits the capitalization of interest but does not give specific guidance. IFRS requires that interest be captilized in certain situations. FA2 - Module 9 Page 2 of 31

Test your knowledge Module 9 These questions from the FA2 textbook address some of the core issues for this module. You may find it useful to go through them before you attempt the module to help you assess the areas that you need to focus on. Question 1 Q9-1, Q9-2, Q9-3, Q9-4, Q9-5, Q9-6, Q9-8, Q9-10, Q9-17, and Q9-19 on page 485 of the text Solution FA2 - Module 9 Page 3 of 31

Test your knowledge 9 Question 1 solutions Q9-1 a) Vines in a winery would be classified as a biological asset. b) Apartment building for rent would be classified as investment property. c) Manufacturing facility would be classified as property, plant and equipment. d) Dairy cows on a farm would be classified as a biological asset. e) Patent would be classified as an intangible asset. Q9-2 A company might prefer to use fair value instead of historical cost if fair value were higher than historical cost and the assets were pledged as collateral with lenders. Fair value would be a more relevant attribute for financial statement users (the lender) in these circumstances. Other situations may also exist where users would rather know fair values. Fair value is allowed as an option using the revaluation model for property, plant and equipment and intangible assets where there is an active market. Fair value less costs to sell is used for biological assets. Fair value is allowed as an option using the fair value model for investment property. Valuing PPE and intangible assets at fair value is not allowed under accounting standards for private enterprises. Q9-3 Possible components for an airplane are aircraft frame, engine, galley, seats, landing gear, navigation system, major inspection or overhaul. To be classified as a separate component the component would need to be signficant and have a different pattern or method of depreciation. Q9-4 These would be an involuntary safety cost. These costs must be capitalized as part of property, plant and equipment. The logic is that if the new sprinkling system was not installed the building would not comply with the safety code and would be shut down. Therefore, these costs are recognized as an asset because without them the building would not be able to provide a future benefit. Q9-5 When several capital assets are purchased for a single lump sum, the cost of each asset usually must be separately recorded for accounting purposes. The assets may be subject to different depreciation rates or may not be subject to depreciation (for example, land). In addition, accounting requires separate identification of different assets in the accounts. The apportionment of the single lump-sum purchase price should be based on the relative market value of each individual item acquired (the proportional method) or, in the absence of values for each asset, the incremental method, which assigns the unallocated residual to the asset that cannot be valued. Q9-6 Subsequent costs are capitalized when either the useful life is increased, or the productivity of the operational asset is enhanced, such that the asset will provide greater benefits beyond the current year. Q9-8 When capital assets are constructed for a company s own use, the capitalized cost should be the sum of all costs incident to the construction efforts. This would include material costs, labour costs, and appropriate overhead costs directly related to the construction effort. a. For normal company overhead, there is a disagreement about the appropriate allocation. Some allocate as usual. Some companies do not allocate normal overhead to selfconstructed assets. Others allocate a proportionate part: overhead that would have been applied to displaced production, if any. b. Excess costs of construction (exceeding the prospective cost of acquiring the asset from an outsider) should be expensed in the period that the self-constructed asset is completed or when the loss is measurable. c. Interest on construction loans must be capitalized since this would be a qualifying asset that takes a substantial time to complete. This would include loans taken out specifically for construction as well as a portion of general borrowings. Q9-10 A liability must be recorded when the company is legally required to incur costs at the end of an asset's useful life or has a constructive obligation that is a business practice of incurring a cost. To measure the FA2 - Module 9 Page 4 of 31

liability, the company must estimate the cost of future restoration or decommissioning cost, measured at the current cost, and then discount the amount using a pre-tax interest rate that reflects the risks related to the liability. The offsetting debit is to the related asset account, which then is depreciated over the life of the asset. Q9-17 The carrying amount of the old part is derecognized and the remaining $2,000 amount would be a loss in the income statement. Q9-19 Conceptually, goodwill is the expected value of future above-normal financial performance; it may be classified as internally generated or as purchased goodwill. Only the latter is recognized under GAAP in the financial statements. It arises when shares in a company are purchased and the price paid is greater than the sum of the market values of all of the identifiable net assets (tangible and intangible) acquired. The excess paid is recorded as goodwill. FA2 - Module 9 Page 5 of 31

9.1 Definition and valuation of PPE and intangible assets Learning objective Define PPE and intangible assets, and explain how they are valued. (Level 1) Required reading LEVEL 1 Chapter 9, pages 445-447 up to "Recognition of Property, Plant, and Equipment " (Level 1) Current assets such as inventory and receivables typically arise from the day-to-day running of the business. PPE and intangible assets, commonly referred to as fixed assets; non-current assets; long-term assets; longlived assets; or capital assets, however, comprise the assets that embody the infrastructure necessary to run the business and can be broadly categorized as being either tangible or intangible in nature. The assigned reading in the text lists some of the more common categories of PPE and intangible assets. Natural resources such as mineral deposits, oil and gas deposits, and standing timber could be included in this category as well. These types of PPE and intangible assets are often referred to as wasting assets because they are subject to exhaustion through extraction. The Fair Value Model in the assigned readings refers to the revaluation option available under IFRS. A more complete description of the necessary accounting for revaluations will be provided in Topic 9.7. FA2 - Module 9 Page 6 of 31

9.2 Determining the cost of PPE Learning objective Determine the cost of PPE, including expenditures subsequent to acquisition. (Levels 1 and 2) Required reading LEVEL 1 Initial valuation Chapter 9, pages 447-459 up to "Intangible Assets" (Level 1) Chapter 9, Appendix 2, pages 483-484 (Level 2) IAS 16 p6 states that the cost of PPE is the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs. Carefully review Exhibit 9-1 in the text; it details some of the more common costs included in various asset categories. Expenditures subsequent to acquisition Generally speaking, expenditures related to PPE subsequent to its acquisition should be expensed if the expenditure results in the maintenance of a given level of service (operating expenditure) capitalized if the expenditure provides future benefits (capital expenditure) In practice, the definition of capital expenditure is modified by the principle of materiality. When the expenditure is relatively small, or the future benefit is insignificant or difficult to measure, a capital expenditure will be reclassified as an operating expense. The dollar amount limit adopted will vary from business to business, since amounts that would be significant to one business entity may be insignificant to another. Income tax rules tend to influence current accounting practice. All things being equal, the optimum strategy to maximize wealth is to defer income tax. Deferral of income tax can be achieved through the adoption of an accounting policy to expense capital expenditures. This strategy is well recognized; consequently, there are specific income tax regulations that deal with it. These issues will be covered in greater detail in other courses, specifically TX1 and TX2, in the CGA program of studies. FA2 - Module 9 Page 7 of 31

9.3 Intangible assets Learning objective Describe and account for the different types of intangible assets. (Level 1) Required reading LEVEL 1 Chapter 9, pages 459-465 up to "Derecognition of Long-Lived Assets" (Level 1) The assigned reading lists several examples of intangibles. A brief description follows of some of the more common items. Specific intangibles A patent is an exclusive right that enables the patent owner to use, manufacture, sell, and control the invention without interference and infringement by others. Patents are granted for a maximum of 20 years (its legal life). The cost of the patent should be amortized over the shorter of the legal and remaining useful life. A copyright is an exclusive right to reproduce, publish, sell, and control a literary product or artistic work. The right is normally for the lifetime of the author plus 50 years. Many copyrights have a much shorter economic life; their costs should be amortized over the shorter period. Often these costs are nominal and are written off in the period of expenditure. A trademark is a name, symbol, or other device that provides a distinctive identity for a product. Trademarks are registered with the federal government for a period of 15 years and are renewable as long as the trademark is being used. All expenditures incurred in the acquisition, protection, expansion, and registration of a trademark should be capitalized. A trademark should be amortized over the best estimate of its useful life. If the trademark's life is considered indefinite, then it is not amortized, rather it is tested for impairment on a regular basis. Intangibles are generally reported at their net book value; an accumulated amortization account is not normally used. FA2 - Module 9 Page 8 of 31

9.4 Disposal of PPE Learning objective Describe and account for the disposal and retirement of PPE. (Level 1) Required reading LEVEL 1 Chapter 9, pages 465-467 up to "Goodwill" (Level 1) IAS 16 governs the disposal of PPE. As the assigned reading indicates, depreciation is brought up-to-date, the consideration received is recorded, the asset and accumulated amortization account (if applicable) are removed from the books, and the difference, if any, is recorded as a gain or loss on disposal. FA2 - Module 9 Page 9 of 31

9.5 Goodwill Learning objective Describe and account for goodwill. (Level 1) Required reading LEVEL 1 Chapter 9, pages 467-470 up to "Long-Lived Assets on the Cash Flow Statement" (Level 1) Goodwill represents the value attributed to a firm's ability to earn profits in excess of the norm (for that industry or business sector). Goodwill arises from such factors as customer acceptance, efficiency of operations, reputation for dependability, quality of products, location, employees, and financial standing. From an accounting standpoint, goodwill is only recognized in the accounts and reported when actually paid for in an arm's-length acquisition of a business entity. The assigned reading expands on the notion of goodwill and provides an example of how it is valued at acquisition. Goodwill is normally reported separately on the statement of financial position. FA2 - Module 9 Page 10 of 31

9.6 Disclosure and cash flow reporting Learning objective Describe the disclosure requirements for PPE and intangible assets. (Level 1) Required reading Chapter 9, pages 470-480 (Level 1) LEVEL 1 The assigned reading summarizes the disclosure requirements pertaining to PPE and intangible assets. FA2 - Module 9 Page 11 of 31

9.7 Revaluation of PPE and intangible assets Learning objective Apply the revaluation model of accounting for PPE and intangible assets. (Level 2) Required reading LEVEL 2 Chapter 9, Appendix 1, pages 481-482 (Level 2) While IFRS permits companies to revalue PPE and intangible assets, few companies avail themselves of this option. For example, a sample of 200 companies in the European Union conducted by the Institute of Chartered Accountants of England and Wales in 2007 indicated the following: None of the companies elected to revalue plant or equipment. No companies used the revaluation model for intangible assets. Of 199 companies that owned their own real estate, only 8 used the revaluation model. Of 81 companies that held investment properties, only 23 used the revaluation model. 1 There are many reasons for this, including these concerns: It is a costly model to implement and maintain, as objective evidence of value must be obtained on an ongoing basis. Writing up property to fair value decreases income in subsequent periods due to increased depreciation charges. The assigned reading deals specifically with the revaluation option for investment properties. Other items of PPE and most intangibles are eligible for revaluation as well. However, the accounting treatment for these items is slightly different from investment properties: The assets are depreciated and/or tested for impairment in the normal course. Revaluations are accomplished by using either the elimination method or proportional method. The elimination method resets the value of accumulated depreciation to zero, whereas the proportional method restates both the gross carrying value of the asset and the accumulated depreciation account on a proportional basis. This aspect is discussed briefly in the assigned reading for Topic 10.8. Cumulative gains flow through other comprehensive income (OCI) to a revaluation surplus equity account, whereas cumulative losses flow through net income. This means that either there will be a collective gain that will appear as a revaluation surplus on the statement of financial position, or there will be a collective loss that will appear on this statement as a reduction in retained earnings. IAS 16 paragraphs 39 and 40 set out these rules as follows: 39 If an asset s carrying amount is increased as a result of a revaluation, the increase shall be recognized in other comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the extent that FA2 - Module 9 Page 12 of 31

it reverses a revaluation decrease of the same asset previously recognized in profit or loss. 40 If an asset s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. The decrease recognized in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus. (In your text, Exhibit 10A-3 on page 541 uses a decision tree to show how revaluation changes are applied.) Depreciation on the revalued asset is adjusted to reflect the new information (revised book value and if applicable revised estimated residual value and estimated useful life). As this change is required due to new information, it is accounted for prospectively. 1 Source: Page 13, EU Implementation of IFRS and the Fair Value Directive, Executive Summary, Institute of Chartered Accountants of England and Wales, 2007. FA2 - Module 9 Page 13 of 31

Module 9 summary Property, plant and equipment (PPE) and intangible assets In this module, PPE and intangible assets are defined and their classification described. Principles for the valuation of PPE and intangible assets and the cost components that are included are addressed. Various ways in which PPE and intangible assets may be acquired, and how to account for the acquisitions, are explained. The module also covers accounting for the acquisition, disposal and retirement of PPE and intangible assets. 9.1 Define PPE and intangible assets, and explain how they are valued. PPE have physical substance they can be touched. They are long-lived, and are used in generating income; for example, machinery, equipment, and buildings. Intangible assets are long-lived and used in generating income, but do not have physical substance; for example, patents and copyrights. 9.2 Determine the cost of PPE, including expenditures subsequent to acquisition. Acquisition cost is the cash price or cash-equivalent price. Cash-equivalent price is normally the fair value of the consideration given up. If a bundle of assets is acquired for one lump-sum price, the total cost is allocated to the individual assets based on the relative value of each of the assets. Assets acquired with government assistance must be accounted for using the income approach. Either the net or deferral method may be used. Expenditures for replacements or renewals (betterments) that substantially increases future economic benefits should be capitalized. Expenditures for maintenance or repairs should be expensed. 9.3 Describe and account for the different types of intangible assets. Intangible properties are initially recorded at cost and then amortized over their estimated useful lives. If the intangible asset's useful life is indefinite, then it is not amortized, rather it is regularly tested for impairment. 9.4 Describe and account for the disposal and retirement of PPE. On disposal or retirement, the net book value of the asset is removed from the books. The difference between the sales proceeds and the net book value is recorded in income as a gain or a loss. FA2 - Module 9 Page 14 of 31

9.5 Describe and account for goodwill. Goodwill represents value attributed to a firm's ability to earn profits in excess of the norm (for that industry or business sector). Goodwill arises from such factors as customer acceptance, efficiency of operations, reputation for dependability, quality of products, location, employees, and financial standing. Goodwill is only recorded when purchased as part of a business acquisition or business combination. Goodwill is disclosed separately on the statement of financial position. 9.6 Describe the disclosure requirements for PPE and intangible assets. Disclosure requirements for PPE and intangible assets include the measurement bases the depreciation method used the useful lives or the depreciation rates used the gross carrying amount and the accumulated depreciation at the beginning and end of the period a reconciliation of the change in the beginning and ending balances 9.7 Apply the revaluation model of accounting for PPE and intangible assets. IFRS permits companies to periodically revalue their PPE and intangible assets to reflect their fair value. The revaluation amount is subsequently used for depreciation purposes. Depending on the circumstances, the gain or loss from revaluation flows through either other comprehensive income or profit and loss. Few companies elect to revalue their PPE. FA2 - Module 9 Page 15 of 31

Module 9 self-test Question 1 Multiple choice a. Which statement indicates why inventory is not considered to be PPE? 1. It is physical in nature. 2. It is acquired for resale and not for use in the normal course of business. 3. It represents the ownership of legal rights that generate future economic benefits. 4. It sometimes has a relatively long but limited life. b. Which item would not be considered to be PPE? 1. Land used for the parking lot of the main factory 2. The administrative office building that is remote from the factory 3. Vehicles used in the delivery of products to the customer 4. Self-constructed assets not yet completed c. Which is the most appropriate value to apply to PPE acquired through the issue of new shares of a publicly traded corporation? 1. The market value of the shares 2. The price at which the asset would be sold to other buyers 3. The equivalent book value of the existing shares 4. At some price to be agreed upon between the seller and the buyer d. Which of the following costs would not be capitalized as part of the cost of PPE? 1. In transit insurance costs 2. The amount of discount allowed for early payment 3. Installation costs 4. Shipping charges to be paid by the buyer e. What is the best description of an asset that does not have a physical substance? 1. Its value is not readily determinable. 2. It is an intangible asset. 3. The records of the acquisition of the asset have been lost. 4. The costs are toward researching a new product that proved unsuccessful. f. Interest expense can be capitalized under which of the following circumstances? 1. When money is borrowed to put a deposit on a new piece of equipment 2. When interest is equivalent to what would otherwise be paid when internal funds are used to provide the monies needed to build a new factory 3. When the interest is on funds borrowed in order to commence the building of a self-constructed asset, up to the time of completion of the asset 4. When the interest is on an interest-bearing note that is given to the supplier in FA2 - Module 9 Page 16 of 31

exchange for the asset g. What is the correct value at which to record the self-constructed asset described in the following records? The asset took six months to complete. Borrowed $100,000 at 10% at the beginning of construction Paid initial deposit of the total cost of $420,000 $80,000 Paid factory supervisor to monitor the progress. He spent 10% of his time on this function and gets paid $40,000 per year. Delivery charges on needed construction supplies $ 5,600 Liability insurance paid specifically for the construction $ 4,000 Fire and theft insurance was covered by the existing policy, which cost $11,000 per year. The new asset is considered to represent about 5% of the value of the existing assets. Special opening ceremony for the new asset $ 3,500 1. $430,600 2. $434,600 3. $438,100 4. $442,100 h. Organic Ltd. paid $800,000 for 100% of the shares of Garden Inc. The book value of net assets of Garden Inc. was $648,000 and included inventory with a market value $20,000 below book value, land with a market value $100,000 above book value, and other assets valued at $30,000 above book value. A long-term liability on the books at $120,000 had a market value of $115,000. What is the value of purchased goodwill in this transaction? 1. $(3,000) 2. $27,000 3. $37,000 4. $97,000 i. A newly formed IT company is looking at leasing some office space to set up their operation. The ideal location will cost $3,000 per month for a four-year lease, but several renovations have to be made at the new company's expense in order to make it suitable. Those renovations include putting in some internal walls (cost $8,200), laying new floor covering (cost $6,200), and adding more air conditioning capacity (cost $12,000). How should these costs be accounted for? 1. They should be debited at $26,400 to a leasehold improvements account. 2. $26,400 should be debited to retained earnings immediately. 3. $14,400 should be added to rent expense. 4. The total cost should be included in organizational expenses. Solution Question 2 FA2 - Module 9 Page 17 of 31

A9-6, page 493 The instructions in Requirement 2 should read as follows: Record depreciation at the end of 20X4. None of the assets is expected to have a residual value except the fixtures (residual value is $500). Estimated useful lives: fixtures, 5 years; and machinery, 10 years. Give a separate entry for each asset. Solution Question 3 A9-24, page 501 Solution Question 4 A9-5, pages 492-493 Solution Question 5 A9-4, page 492 Note: For part d, assume that harmonized sales tax is a refundable tax. Omit part f. Solution Question 6 A9-9, page 495 Solution Question 7 A9-13, page 497 Solution Question 8 A9-27, page 502 Solution Question 9 FA2 - Module 9 Page 18 of 31

A9-30, page 503 Solution Question 10 A9-21, page 500 Solution Question 11 A9-28, pages 502-503 Solution FA2 - Module 9 Page 19 of 31

Self-test 9 Question 1 Solution a. 2) PPE is not purchased for resale but for use in the normal course of business. b. 4) Until a self-constructed asset is completed, it is not considered PPE. PPE is used in the normal course of business. c. 1) This is the most objective measure of fair value. d. 2) Assets should be recorded at cost, which in this case does not include the cash discount allowed. The asset value should be recorded at the net value of the invoice after deducting cash discounts. e. 2) An asset that has no physical substance is an intangible asset. f. 3) Interest costs are generally not capitalized, but for self-constructed assets where money is specifically borrowed during construction for the purpose of continuing the construction, the interest is capitalized, but only up to the point of completion of the asset. g. 2) The basic cost of the contract of $420,000 plus six months of interest on the borrowed monies ($5,000) plus the other costs specifically incurred for this contract ($5,600 and $4,000). The fire and theft would be paid whether or not the construction was taking place, and that also applies to the supervisor s contribution. h. 3) The difference between the book value of assets and the total market value is $115,000 ( 20,000 + 100,000 + 30,000 + 5,000). The excess over book value that was paid was $152,000. Of that, $115,000 is accounted for by asset fair values so the rest must be goodwill ($152,000 115,000). i. 1) Since these costs provide future benefits, they should be capitalized and amortized over the estimated remaining useful lives, which will be the shorter of the asset life or lease term. FA2 - Module 9 Page 20 of 31

Self-test 9 Question 2 solution (A9-6) Requirement 1 a. Machinery [($45,000 98%) + $400 + $1,100] 45,600 Interest expense ($45,000 2%) 900 Cash 46,500 The $200 allocation of salary of factory superintendent was not capitalized because there was no additional cost involved the salary would have been paid notwithstanding the installation. The $200 may be included in this entry as a debit to expense. Freight paid by the vendor is not a separate cost to the company because it is implicitly included in the price of the machine. Moving the wall is included as a cost of installation. b. Machinery 700 Cash 700 The counter should be set up separately in the subsidiary records and depreciated over its (shorter) useful life. c. Fixtures 4,109 Cash 1,500 Note payable (net) 2,609 Note, FV = 3,000, n = 1, I = 15, CMPT PV, PV = 2,609 $2,609 Cash 1,500 Cost of fixtures $4,109 d. General factory overhead (expense) 850 Cash(or liability) 850 The salary of the operator of an inoperative machine is not a proper cost of the machine. e. Machinery (new motor) 1,250 Accumulated depreciation (10% $900) 90 Loss on asset exchange 160 Machinery (old motor) 900 Cash 600 Exchange of similar assets with no commercial substance; valuation at book value ($810 + $600) but $1,250 maximum value so ends up at market. Requirement 2 Depreciation expense, fixtures 722 Accumulated depreciation fixtures 722 FA2 - Module 9 Page 21 of 31

To record full year of depreciation on fixtures ($4,109 $500) 1/5 = $722. Depreciation expense, machinery 4,660 Accumulated depreciation, machinery. 4,660 To record full year of depreciation on machinery. Machinery, $45,600 1/10 = $4,560; machinery, $700 1/7 = $100; (counter), $4,560 + $100 = $4,660. No depreciation was recognized on the new motor because it was added after 20X4 year end. FA2 - Module 9 Page 22 of 31

Self-test 9 Question 3 solution (A9-24) Requirement 1 (a) Loss on computer equipment 7,140 Accumulated depreciation, computer equipment 28,560 Computer equipment 35,700 ($35,700.8) = $28,560 (b) Automotive equipment 22,320 Accumulated depreciation, automotive equipment * 30,480 Automotive equipment 50,800 Cash 2,000 * $50,800.6 = $30,480 Exchange of similar assets, no commercial substance assumed. Value at book value. (c) Cash 45,000 Accumulated depreciation, machinery 17,000 Machinery 57,000 Gain on sale of machinery 5,000 Routine maintenance would have been expensed. Special base would have been capitalized; assumed to be part of machinery account. Other assumptions are acceptable. Dep n: (($50,000 $10,000) 3/8) + ($7,000 2/7) (d) Cash 86,500 Trademark (net) 12,000 Gain on sale of trademark 74,500 (e) Cash 30,000 Common shares 40,000 Note receivable (net) 205,010 Land 180,000 Gain on sale of land 95,010 Common shares valued at $2 per share is reasonable as this is within the range of share values. Note receivable valued at PV: ($50,000 (P/A, 7%, 5)) = $205,010 The resulting value of total consideration, $275,010, is reasonable as this is within the range of the appraised values for land. Requirement 2 a. No disclosure on CFS b. Outflow of $2,000 for capital asset purchase c. Inflow of $45,000 from sale of machinery d. Inflow of $86,500 from sale of trademark e. Inflow of $30,000 from sale of land FA2 - Module 9 Page 23 of 31

Self-test 9 Question 4 solution (A9-5) Requirement 1 Purchase cost $1,250,600 Repair and renovation 192,000 Installation of cable 24,000 Signage 19,600 Balance in building account $1,486,200 Requirement 2 Purchase cost $372,000 Demolition of old building 58,000 Legal fees 22,000 Title insurance 13,600 Salvage proceeds* ( 12,000) Balance in land account $453,600 *Salvage proceeds are offset against the purchase costs since it is assumed the amounts relate to proceeds from selling any items produced while bringing asset to the location. Case A: Land improvements (or other separate accounts) could be used for the driveway work ($24,000 + $8,400) and the fence ($32,000). The $8,000 deposit with the utility company is an asset (prepaid). Case B: The routine maintenance ($5,000) is expensed. FA2 - Module 9 Page 24 of 31

Self-test 9 Question 5 solution (A9-4) a. Maintenance expense 26,700 Cash 26,700 Regular maintenance that does not extend the life or improve utility is expensed. b. Repairs expense 34,900 Cash 34,900 Painting is regular maintenance. c. Roof (new) 66,200 Loss 2,000 Roof (old) 2,000 Cash 66,200 Wiring 43,800 Cash 43,800 These journal entries assume the wiring and the roof are treated as separate components. The new roof extends the life of the building and is capitalized. The wiring was an involuntary safety cost and must be capitalized. d. Machinery 50,500 HST paid 7,070 Cash 57,570 The machine is recorded at its price paid, not its reported higher FMV. HST is refundable and is not part of the cost of the machine. e. Machinery 2,700 Cash 2,700 The cost of the machine includes costs to ship and install it. FA2 - Module 9 Page 25 of 31

Self-test 9 Question 6 solution (A9-9) Requirement 1 The only costs that should be capitalized are costs incurred specifically for construction of the building. Interest can be included if the interest is incurred on financing that is specific to the construction. General interest cost should not be capitalized. Similarly, indirect costs can be capitalized, but only if they relate specifically to the construction project. General factory overhead should be allocated to self-constructed facilities if it qualifies. Requirement 2 The direct and indirect costs, totaling $2,480,000, can be capitalized. Overhead of $30,000 must be reviewed to see if it qualifies for capitalization. Depreciation will commence when the building is complete and ready for use. However, the building is only 70% complete and still requires an estimated $1,000,000 in additional cost to complete. That would make the finished cost equal to $3,480,000 (or $3,510,000), which is higher than the bid of $3,200,000 from the construction company. The capitalized cost of the building should not be higher than its fair value. The fact that incurred costs are higher than the contract bid does not necessarily mean that the total estimated cost is higher than the building's fair value. Even if the construction company's bid had been accepted, the actual cost (with inevitable contract changes) may have been appreciably higher than the $3.2 million bid. Amethyst must evaluate the building's value. If the fair value is less than the amount capitalized, then a loss must be recorded for the excess of cost over fair value. FA2 - Module 9 Page 26 of 31

Self-test 9 Question 7 solution (A9-13) Updated October 26, 2011 Requirement 1 Transmission tower 2,100,000 Cash, etc. 2,100,000 Transmission tower 100,511 Obligation for future site restoration cost 100,511 FV = 180,000; I = 6; n = 10; CMPT PV; PV = 100,511 Requirement 2 20X6: Depreciation expense transmission tower ($2,200,511 10) 220,051 Accumulated depreciation transmission tower 220,051 Interest expense ($100,511 6%) 6,031 Obligation for future site restoration cost 6,031 20X7: Depreciation expense transmission tower ($2,200,511 10) 220,051 Accumulated depreciation transmission tower 220,051 Interest expense [($100,511 + $6,031) 6%] 6,393 Obligation for future site restoration cost 6,393 FA2 - Module 9 Page 27 of 31

Self-test 9 Question 8 solution (A9-27) Requirement 1 Goodwill purchased: Actual purchase price $267,000 Less: fair value of the identifiable net assets ($54,000 + $90,000 + $285,000 + $40,000 + $21,000 $37,000 $200,000) 253,000 Goodwill purchased $ 14,000 Requirement 2 Acquisition entry: Accounts receivable 54,000 Inventory 90,000 Property, plant and equipment 285,000 Land 40,000 Franchise 21,000 Goodwill 14,000 Current liabilities 37,000 Bonds payable 200,000 Cash 267,000 FA2 - Module 9 Page 28 of 31

Self-test 9 Question 9 solution (A9-30) Requirement 1 Record the purchase of each smokestack scrubber in 20X5 and 20X6 Pollution equipment 300,000 Cash 300,000 Cash 100,000 Government loan, forgivable 100,000 Taxes payable 60,000 Deferred government assistance 60,000 $300,000.20 Requirement 2 Depreciation expense ($300,000/20) 2 30,000 Accumulated depreciation 30,000 Deferred government assistance ($60,000/20) 2 6,000 Depreciation expense 6,000 Requirement 3 Government loan, forgivable 200,000 Cash 90,000 Pollution equipment (or, Deferred government assistance) 110,000 FA2 - Module 9 Page 29 of 31

Self-test 9 Question 10 solution (A9-21) 2 January Trademark 16,000 Cash 16,000 31 January Promotion expense (or Advertising) 4,000 Cash 4,000 1 February Trademark (or separate Logo account) 8,000 Cash 8,000 An argument could be made to expense the cost. Presumably the business would register the logo to prevent unauthorized used by other companies. 1 May Investment in patent, long-term 20,400 Cash 20,400 1 October Prepaid license 18,000 Cash 18,000 1 November Goodwill 72,000 Cash 72,000 Other assets would also be part of this entry; only goodwill was requested. 31 December December Legal fees expense 10,000 Loss on writedown of patent 20,400 Cash 10,000 Patent 20,400 Recognition of the loss assumes that the patent is, in fact, worthless; further investigation should be done to support this contention. FA2 - Module 9 Page 30 of 31

Self-test 9 Question 11 solution (A9-28) Requirement 1 The buildings and land can be classified as investment property since they are held either for rent or for capital appreciation. They could use the fair value model in IAS 40 or the cost model in IAS 16. The company would prefer the fair value model if assets are expected to appreciate in the year. Requirement 2 If the cost model were chosen, increases in value prior to sale would not be recognized. The assets would be tested for impairment if an event or circumstance indicated impairment, for example, downturn in real estate market. If the fair value model were chosen, the land and buidling would be recorded at fair value at the initial purchase and each reporting date thereafter. The $250,000 increase in land and the $50,000 decrease in buildings would be recognized in net income in the period. FA2 - Module 9 Page 31 of 31