ASSIGNMENT CHARACTERISTICS TABLE

CHAPTER 9 Long-Lived Assets ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises Problems Set A Problems Set B 1. Apply the cost principle to property, plant, and equipment. 1, 2, 3, 4 1, 2, 3, 4 1, 2, 11 1, 3, 4, 6 1, 3, 4, 6 2. Explain and calculate amortization. 5, 6, 7, 8 5, 6, 7, 8, 9 2, 3, 4, 11 2, 3, 7, 8, 9, 12 2, 3, 7, 8, 9, 12 3. Revise periodic amortization. 9, 10, 11 10, 11 5, 6, 7 4, 5, 6, 9 4, 5, 6, 9 4. Account for the disposal of property, plant, and equipment. 5. Calculate and record amortization of natural resources. 12, 13 12, 13, 14 8, 9 7, 8, 9 7, 8, 9 14, 15 15 10 12 12 6. Identify the basic accounting issues for intangible assets. 16, 17, 18, 19 16 11, 12 10, 11 10, 11 7. Illustrate the reporting and analysis of long-lived assets. 20, 21 17, 18, 19 13, 14 9, 11, 12, 13 9, 11, 12, 13 Solutions Manual 9-1 Chapter 9

ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) 1A Record property transactions. Simple 20-30 2A Calculate partial period amortization. Moderate 20-30 3A 4A Determine cost; calculate and compare amortization under different methods. Account for operating and capital expenditures and asset impairments. Moderate 30-40 Moderate 20-30 5A Record impairment and calculate revised amortization. Moderate 20-30 6A 7A Record operating and capital expenditures and calculate revised amortization. Calculate and compare amortization and gain or loss on disposal under straight-line and units-of-activity methods. Moderate 25-35 Moderate 30-40 8A Record acquisition, amortization, and disposal of equipment. Moderate 30-40 9A Record property, plant, and equipment transactions; prepare partial financial statements. Complex 40-50 10A Correct errors in recording intangible asset transactions. Complex 25-35 11A 12A Record intangible asset transactions; prepare partial balance sheet. Record equipment and natural resource transactions; prepare partial financial statements. Moderate 30-40 Moderate 30-40 13A Calculate ratios and comment. Moderate 15-25 1B Record property transactions. Simple 20-30 2B Calculate partial period amortization. Moderate 20-30 3B 4B Determine cost; calculate and compare amortization under different methods. Account for operating and capital expenditures and asset impairments. Moderate 30-40 Moderate 20-30 5B Record impairment and calculate revised amortization. Moderate 20-30 6B Record operating and capital expenditures and calculate revised amortization. Moderate 25-35 Solutions Manual 9-2 Chapter 9

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number Description Difficulty Level Time Allotted (min.) 7B Calculate and compare amortization and gain or loss on disposal under straight-line and double declining-balance methods. Moderate 30-40 8B Record acquisition, amortization, and disposal of equipment. Moderate 30-40 9B Record property, plant, and equipment transactions; prepare partial financial statements. Complex 40-50 10B Correct errors in recording intangible asset transactions. Complex 25-35 11B 12B Record intangible asset transactions; prepare partial balance sheet. Record equipment and natural resource transactions; prepare partial financial statements. Moderate 30-40 Moderate 30-40 13B Calculate ratios and comment. Moderate 15-25 Solutions Manual 9-3 Chapter 9

BLOOM S TAXONOMY TABLE Correlation Chart between Bloom's Taxonomy, Study Objectives and End-of- Chapter Exercises and Problems Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation BE9-3 Q9-1 Q9-2 Q9-3 Q9-4 1. Apply the cost principle to property, plant, and equipment. 2. Explain and calculate amortization. 3. Revise periodic amortization. 4. Account for the disposal of property, plant, and equipment. 5. Calculate and record amortization of natural resources. 6. Identify the basic accounting issues for intangible assets. 7. Illustrate the reporting and analysis of long-lived assets. Broadening Your Perspective Q9-6 Q9-5 Q9-7 Q9-8 Q9-9, Q9-10, Q9-11 BE9-1 BE9-2 BE9-4 E9-1 E9-2 E9-11 P9-1A BE9-5 BE9-6 BE9-7 BE9-8 BE9-9 E9-2 E9-3 E9-4 E9-11 P9-2A P9-3A BE9-10 BE9-11 E9-5 E9-6 E9-7 P9-4A P9-5A Q9-12 Q9-13 BE9-12 BE9-13 BE9-14 E9-8 E9-9 P9-7A Q9-14, Q9-15 BE9-15 E9-10 P9-12A P9-12B Q9-20, BE9-17 Q9-16, Q9-17, Q9-18, Q9-19 BE9-16 E9-11 E9-12 P9-10A Q9-21 BE9-18 BE9-19 E9-13 P9-9A P9-3A P9-4A P9-6A P9-1B P9-3B P9-4B P9-6B P9-7A P9-8A P9-9A P9-12A P9-2B P9-3B P9-7B P9-8B P9-9B P9-12B P9-6A P9-9A P9-4B P9-5B P9-6B P9-9B P9-8A P9-9A P9-7B P9-8B P9-9B Continuing Cookie Chronicle BYP9-1 BYP9-2 BYP9-3 P9-11A P9-10B P9-11B P9-11A E9-14 P9-12A P9-13A P9-9B P9-13B P9-11B P9-12B BYP9-4 BYP9-5 Solutions Manual 9-4 Chapter 9

ANSWERS TO QUESTIONS 1. For long-lived assets, the cost principle means that cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use. These costs are capitalized rather than expensed, because they will provide benefits over future periods. 2. All three amounts will be debited to the land account. The cost to purchase the land and building as well as the cost to remove the building is recorded in the land account. These costs are incurred to prepare the land for its intended use. Since the old building is destroyed none of the purchase cost is allocated to Buildings. As well, the costs to grade the land are incurred to prepare the land for its intended use. Land will be debited for $505,000 ($430,000 + $45,000 + $30,000). 3. The cost principle has survived because it provides information that is objective and verifiable, whereas market values are subjective and changeable. In addition, if a company is not planning on selling the asset the market value of the asset is not relevant. 4. The purchase cost must be split between the land and building because the building is amortized and the land is not. In addition, the cost of each item will be necessary if the land, or the building, is later sold to determine any gain or loss on disposal. 5. The purpose of amortization is to allocate the cost of a long-lived, amortizable asset over its useful life in a systematic way. Amortization expense is matched to the revenues it has helped generate. A common misunderstanding about amortization is that amortization attempts to measure an asset s market value or real value. There is no attempt to measure the change in a long-lived asset s real value because long-lived assets are not held for resale. Another common misunderstanding is that accumulated amortization results in the accumulation of cash to purchase or replace the long-lived asset. Accumulated amortization represents the total cost of the asset that has been allocated to expense so far it does not represent a cash fund. 6. (a) Residual value is the expected cash value of the asset at the end of its useful life. It is sometimes called salvage value or trade-in value. Residual value is not amortized, since this is the amount expected to be recovered at the end of an asset s useful life. Solutions Manual 9-5 Chapter 9

QUESTIONS (Continued) Question 6 (Continued) (b) Residual value is subtracted from cost to determine the amortizable cost of the asset. Residual value limits the total value of amortization that can be taken for all three methods of amortization. Amortization will stop when the asset s book value equals its expected residual value. In the straight-line and the units-of-activity methods of calculating amortization, residual value is used in calculating the amortizable cost per year or the amortizable cost per unit. Residual value is not used in determining the amount that the declining-balance amortization rate is applied to. Under all three methods net book value should never be reduced below residual value. In other words, amortization stops when the asset s net book value is equal to its expected residual value. 7. Net book value is cost less accumulated amortization of an asset. Cost is the same under each method of amortization. In the early years, net book value will be less under the declining-balance method than under the straight-line method. The units-of-activity method is unpredictable. In all three methods, net book value at the end of the asset s useful life, will be equal to the asset s residual value. The amortization expense is constant under the straight-line method, varies according to production under the units-of-activity method and declines over time with the declining-balance method. In the early years amortization expense will be higher under the declining-balance method than the straight-line method. The units-of-activity method is unpredictable. Consequently, assuming no other changes, net income is constant under the straight-line method, varies according to production under the units-ofactivity method, and increases over time with the declining-balance method. In the early years, net income will be higher under the straightline method than the declining-balance method. It is unpredictable under the units-of-activity method. All three methods will result in the same total amortization expense over the asset s useful life. Solutions Manual 9-6 Chapter 9

QUESTIONS (Continued) 8. Ralph s plan will not work. For accounting purposes, a company should choose the amortization method that best matches expenses to revenues. For tax purposes income tax regulations require a company to use the single declining-balance method. Amortization is calculated on a class basis and a specified rate is specifically identified for specific types of classes of assets. 9. Operating expenditures are ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. Because they are recurring expenditures and normally benefit only the current period, they are expensed when incurred. Capital expenditures are additions and improvements made to increase efficiency, productivity, or expected useful life of the asset. Because they benefit future periods, capital expenditures are debited to the asset account affected. 10. A permanent decline in the market value of a long lived asset is called an impairment loss. It occurs when the market value of a long-lived asset falls far below its book value and is not expected to recover, and the company does not expect to recover the net book value from future cash flows. It could occur when a machine has become obsolete or the market for a product made by a machine becomes obsolete. 11. A revision of amortization is made in current and future years but not retroactively. Amortization is based on the best available information at the time the estimate was made. Continual restatement of prior periods would adversely affect the reader's confidence in the financial statements; thus, prior periods should not be restated if amortization is revised. 12. In a sale of property, plant or equipment, the net book value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the net book value of the asset, a gain on disposal occurs. If the proceeds of the sale are less than the net book value of the asset sold, a loss on disposal occurs. In an exchange a new asset is received in an exchange for the old asset given up. If cash is part of the exchange and the amount is considered significant it is considered a monetary exchange. The gain or loss is calculated by comparing the fair value of the asset given up to its net book value. The trade-in allowance on the asset given up is not relevant. If the cash involved in the exchange is not significant or if there is no cash then the exchange is considered a nonmonetary exchange. The gain or loss is still calculated the same way unless the fair values of the assets cannot be determined. In that case no gain or loss is recorded. Solutions Manual 9-7 Chapter 9

QUESTIONS (Continued) 13. The asset and related accumulated amortization should continue to be reported on the balance sheet, without further amortization or adjustment, until the asset is retired. Reporting the asset and related accumulated amortization on the balance sheet informs the reader of the financial statements that the asset is still being used by the company. However, once an asset is fully amortized, no additional amortization should be taken on this asset, even if it is still being used. In no situation can the accumulated amortization exceed the cost of the asset. 14. (a) The amortizable cost of a natural resource includes cost less residual value. In calculating the amortization expense for natural resources, the amortizable cost is expressed on a per unit basis, divided by the total production or activity anticipated. The amortizable cost per unit is then multiplied by the actual production output or activity sold for the period. (b) Amortization is initially recorded as a current asset, inventory, because it is part of the cost of extracting the natural resource. The amortization becomes part of the cost of goods sold when the inventory is sold. 15. The amortization of natural resources is recorded as inventory and not as an expense because the resource extracted is expected to be sold. Until the resource is sold, it has a future benefit and all the costs of obtaining this resource are recorded as an asset, inventory. The cost is later expensed, as cost of goods sold, when the extracted resource is sold. 16. Intangible assets are rights, privileges and competitive advantages that result from ownership of long-lived assets. They have a future benefit in that they contribute to future revenue, however, they lack physical existence or substance. 17. Flin Company should amortize the patent over its 20 year legal life or its useful life, whichever is shorter. Flin Company must consider when its patent is likely to become ineffective at contributing to revenue and if this will occur before the end of its legal life. 18. Goodwill is the value of many favourable attributes that are intertwined in a 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. Solutions Manual 9-8 Chapter 9

QUESTIONS (Continued) 19. Research and development costs present several accounting problems. It is sometimes difficult to assign the costs to specific projects, and there are uncertainties in identifying the extent and timing of future benefits. As a result, all research and some development costs are recorded as an expense. Only certain development costs with reasonably assured future benefits can be capitalized. This is intended to maintain the objectivity and reliability of the financial statements. 20. Property, plant, and equipment and natural resources are often combined and reported in the balance sheet as property, plant, and equipment or capital assets. Goodwill must be disclosed separately. Other intangibles can be grouped under intangible assets. Amortization expense for the period should also be disclosed either on the income statement or in the notes to the financial statements. When impairment losses have occurred they should be shown on a separate line on the income statement with the details disclosed in a note. The notes to financial statements should disclose the balance of the major classes of amortizable assets and the amortization method(s) and rates used. The book value of each major class of unamortized assets should also be disclosed. Companies should also disclose their impairment policy in the notes to the financial statements. 21. The asset turnover and return on asset ratios show how effectively the company uses its long-lived assets. The asset turnover shows the amount of sales produced for each dollar invested in assets. It is calculated by dividing net sales by average total assets. The return on assets measures overall profitability. It is calculated by dividing net income by average total assets. Solutions Manual 9-9 Chapter 9

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1 The cost of the land is $61,000 ($50,000 + $5,000 + $2,500 + $3,500). The installation of the fence should be debited to Land Improvements account. BRIEF EXERCISE 9-2 The cost of the truck is $43,000 (cash price $41,750 + painting and lettering $750 + installation of trailer hitch $500). The expenditures for the insurance and the motor vehicle licence are recurring and only benefit the current period. They should be expensed and not added to the cost of the truck. BRIEF EXERCISE 9-3 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) O C C O C O O C C O Solutions Manual 9-10 Chapter 9

BRIEF EXERCISE 9-4 Jan. 1 Land [$400,000 x ($127,500 $425,000)]... 120,000 Building [$400,000 x ($255,000 $425,000)]... 240,000 Equipment [$400,000 x ($42,500 $425,000)]... 40,000 Cash... 100,000 Mortgage Payable ($400,000 - $100,000) 300,000 BRIEF EXERCISE 9-5 Amortizable cost is $40,000 ($43,000 - $3,000). With a 4-year useful life, annual amortization is $10,000 ($40,000 4). Under the straight-line method, amortization is the same each year. Thus, amortization expense is (a) $10,000 for each year of the truck s life and (b) $40,000 in total over the truck s life. BRIEF EXERCISE 9-6 The declining-balance rate is 50% (25% x 2) and this rate is applied to net book value at the beginning of the year. Amortization expense for each year is as follows: (a) Calculation End of Year NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $43,000 2008 $43,000 50% $21,500 $21,500 21,500 2009 21,500 50% 10,750 32,250 10,750 2010 10,750 50% 5,375 37,625 5,375 2011 5,375 50% 2,375¹ 40,000 3,000 ¹Limited to the amount to reduce the net book value to the residual value of $3,000 (b) Total amortization over the truck s useful life is $40,000. Solutions Manual 9-11 Chapter 9

BRIEF EXERCISE 9-7 Amortizable cost per unit: ($33,000 - $500) 325,000 km. = $0.10/km. Annual amortization expense: 2007: 125,000 x $0.10 = $12,500 2008: 105,000 x $0.10 = $10,500 BRIEF EXERCISE 9-8 (a) Amortization expense for each year: Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost* X Rate = Expense Amort. Value $43,000 2008 $40,000 25% x 9/12 $ 7,500 $ 7,500 35,500 2009 40,000 25% 10,000 17,500 25,500 2010 40,000 25% 10,000 27,500 15,500 2011 40,000 25% 10,000 37,500 5,500 2012 40,000 25% x 3/12 2,500 40,000 3,000 *Amortizable cost = $43,000 - $3,000 (b) Total amortization expense over the truck s useful life is $40,000. (See accumulated amortization at end of 2012 above) Solutions Manual 9-12 Chapter 9

BRIEF EXERCISE 9-9 The double declining-balance rate is 50% (25% x 2) and this rate is applied to net book value at the beginning of the year. Amortization expense for each year is as follows: (a) Double Declining-Balance Calculation End of Year NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $43,000 2008 $43,000 50% x 9/12 $16,125 $16,125 26,875 2009 26,875 50% 13,438 29,563 13,437 2010 13,437 50% 6,719 36,282 6,718 2011 6,718 50% 3,359 39,641 3,359 2012 3,359 50% 359¹ 40,000 3,000 ¹ Limited to the amount to bring net book value to the residual value of $3,000 (b) Total amortization expense over the truck s useful life is $40,000. (See accumulated amortization at end of 2012 above) BRIEF EXERCISE 9-10 Loss on Impairment... 16,000 Accumulated Amortization Machinery 16,000 Calculation: Net Book Value ($90,000 - $54,000)... $36,000 Less: Market Value... 20,000 Impairment loss... $16,000 Solutions Manual 9-13 Chapter 9

BRIEF EXERCISE 9-11 Amortization expense from 2005 to 2007: [($60,000 - $4,000) 7 years = $8,000] 2005 $ 8,000 2006 8,000 2007 8,000 Total $24,000 Net book value, Jan. 1, 2008 ($60,000 - $24,000)... $36,000 Add: Equipment up-grade... 9,000 Less: Revised residual value... (3,000) Remaining amortizable cost... 42,000 Remaining useful life (9 years - 3 years)... 6 years Revised annual amortization expense 2008... $ 7,000 BRIEF EXERCISE 9-12 (a) Accumulated Amortization Delivery Equipment... 41,000 Delivery Equipment... 41,000 (b) Accumulated Amortization Delivery Equipment... 38,000 Loss on Disposal... 3,000 Delivery Equipment... 41,000 Cost of delivery equipment... $41,000 Less: Accumulated amortization... 38,000 Net book value at date of disposal... 3,000 Proceeds from sale... 0 Loss on disposal... $ 3,000 Solutions Manual 9-14 Chapter 9

BRIEF EXERCISE 9-13 (a) Sept. 30 Amortization Expense [($72,500 - $2,500) 5 x 9/12]... 10,500 Accumulated Amortization Office Equipment... 10,500 (b) Sept. 30 Cash... 8,250 Accumulated Amortization Office Equipment¹... 66,500 Gain on Disposal... 2,250 Office Equipment... 72,500 ¹[($72,500 - $2,500) 60 months x 57 months] = $66,500 Cost of office equipment $72,500 Less accumulated amortization 66,500 Net book value at date of disposal 6,000 Proceeds from sale 08, 8,250 Gain on disposal $ 2,250 (c) Sept. 30 Cash... 4,500 Accumulated Amortization Office Equipment... 66,500 Loss on Disposal... 1,500 Office Equipment... 72,500 Cost of office equipment $72,500 Less accumulated amortization 66,500 Net book value at date of disposal 6,000 Proceeds from sale 4,500 Loss on disposal $ 1,500 Solutions Manual 9-15 Chapter 9

BRIEF EXERCISE 9-14 Jan. 7 Machinery (new)... 76,000* Accumulated Amortization Machinery... 78,000 Loss on Disposal... 3,000** Machinery (old)... 95,000 Cash ($80,000 - $18,000)... 62,000 *Consideration paid cash plus market value of old asset: ($62,000 + $14,000 = $76,000) **Loss is the book value less the fair market value: ($95,000 - $78,000 - $14,000 = $3,000) BRIEF EXERCISE 9-15 (a) Amortizable cost = $7,000,000 - $500,000 = $6,500,000 Amortizable cost per unit = $6,500,000 28,000,000 tonnes = $0.2321 per tonne Amortization cost for ore extracted in Year 1: $0.2321 per tonne x 6,000,000 tonnes = $1,392,600 Aug. 31 Inventory... 1,392,600 Accumulated Amortization. 1,392,600 Amortization to be included in cost of goods sold: $0.2321 per tonne x 5,000,000 tonnes = $1,160,500 Amortization to be included in inventory: $0.2321 per tonne x 1,000,000 tonnes = $232,100 Solutions Manual 9-16 Chapter 9

BRIEF EXERCISE 9-15 (Continued) (b) CUONO MINING CO. Balance Sheet (Partial) August 31, 2008 Assets Current assets Inventory... $232,100* Property, plant, and equipment Ore mine... $7,000,000 Less: Accumulated amortization... 1,392,600 5,607,400 * Check ($1,392,600 - $1,160,500 = $232,100) Solutions Manual 9-17 Chapter 9

BRIEF EXERCISE 9-16 (a) 2008 Jan. 2 Patents... 180,000 Cash... 180,000 (b) Dec. 31 Amortization Expense ($180,000 10)... 18,000 Accumulated Amortization Patents... 18,000 (c) 2009 Jan. 5 Patents... 9,000 Cash... 9,000 (d) Original cost of patent:... $180,000 Less: accumulated amortization... (18,000) Plus: Legal costs to defend... 9,000 Remaining cost to be amortized... 171,000 Remaining useful life (10 years - 1 year)... 9 years Revised annual amortization expense 2009. $ 19,000 BRIEF EXERCISE 9-17 (a) I (b) PPE (c) NR (d) NA (current asset) (e) I (f) PPE (g) NA (current asset) (h) NA (income statement) (i) I (j) I (k) NA (current liability) (l) PPE (m) PPE (n) NR Solutions Manual 9-18 Chapter 9

BRIEF EXERCISE 9-18 CANADIAN TIRE CORPORATION, LIMITED Balance Sheet (Partial) December 31, 2005 (in millions) Property, plant, and equipment Land... $ 700.5 Buildings... $2,094.4 Less: Accumulated amortization... 704.4 1,390.0 Fixtures and equipment... $528.4 Less: Accumulated amortization... 347.5 180.9 Leasehold improvements... $265.6 Less: Accumulated amortization... 91.3 174.3 Other property, plant, and equipment... 298.2 Total property, plant, and equipment 2,743.9 Intangible assets Goodwill... $46.2 Marks Work Wearhouse store brands and banners. 50.4 Marks Work Wearhouse franchise agreements... 2.0 Total intangible assets 98.6 Solutions Manual 9-19 Chapter 9

BRIEF EXERCISE 9-19 ($ in millions) Return on assets $283 [($2,785 + $2,661) 2] = 10.39% Asset turnover $3,294 [($2,785 + $2,661) 2] = 1.21 times Solutions Manual 9-20 Chapter 9

EXERCISE 9-1 SOLUTIONS TO EXERCISES (a) Under the cost principle, the acquisition cost of a property, plant, and equipment includes all expenditures necessary to acquire the asset and make it ready for its intended use. This includes not only the cost of acquisition, but any freight, installation, testing, and similar costs to get the asset ready for use. For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. Costs such as these benefit the life of the factory machinery and not just the current period. Consequently, they should be capitalized and amortized over the machinery s useful life. Cost is measured by the cash paid in a cash transaction, or by the cash equivalent price paid when noncash assets are used in payment. The cash equivalent price is equal to the fair market value of the asset given up. If that value is not clearly determinable, the fair market value of the asset received is used instead. (b) 1. Delivery Equipment (or Vehicles) 2. Prepaid Insurance 3. Land 4. Land ($6,600 - $1,700 = $4,900) 5. Plant 6. Plant 7. Plant 8. Land improvements 9. Factory machinery 10. Factory machinery Solutions Manual 9-21 Chapter 9

EXERCISE 9-2 (a) Appraised Value % of Total Cost Allocated Land $366,000 61% $353,800 Building 192,000 32% 185,600 Land Improvements 42,000 7% 40,600 $600,000 $580,000* *Total cost $75,000 (cash) + $500,000 (mortgage) + $5,000 (legal fees) = $580,000 (b) Land... 353,800 Land Improvements... 40,600 Building... 185,600 Cash ($75,000 + $5,000)... 80,000 Mortgage Payable... 500,000 (c) Amortizable cost for the building is $165,600 ($185,600 $20,000). With a 40-year useful life, annual amortization expense is $4,140 ($165,600 40). Amortizable cost for the land improvements is $40,600. With a ten year useful life, annual amortization expense is $4,060 ($40,600 10). Solutions Manual 9-22 Chapter 9

EXERCISE 9-3 (a) (1) Straight-line Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost* X Rate = Expense Amort. Value $164,500 2007 $142,500 20% $28,500 $28,500 136,000 2008 142,500 20% 28,500 57,000 107,500 2009 142,500 20% 28,500 85,500 79,000 2010 142,500 20% 28,500 114,000 50,500 2011 142,500 20% 28,500 142,500 22,000 * $164,500 - $22,000 = $142,500 (2) Double Declining-Balance Calculation End of Year NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $164,500 2007 $164,500 40% $65,800 $65,800 98,700 2008 98,700 40% 39,480 105,280 59,220 2009 59,220 40% 23,688 128,968 35,532 2010 35,532 40% 13,532¹ 142,500 22,000 2011 22,000 40% 0 142,500 22,000 ¹ Limited to the amount to bring net book value to the residual value of $22,000 Solutions Manual 9-23 Chapter 9

EXERCISE 9-3 (Continued) (a) (Continued) (3) Units-of-Activity Calculation End of Year Units of Amort. Amort. Accum. Net Book Year Activity X Cost/Unit* = Expense Amort. Value $164,500 2007 78,000 $0.38 $29,640 $29,640 134,860 2008 76,000 0.38 28,880 58,520 105,980 2009 72,000 0.38 27,360 85,880 78,620 2010 74,000 0.38 28,120 114,000 50,500 2011 75,000 0.38 28,500 142,500 22,000 *Amortizable cost per unit is $0.38 per kilometre: [($164,500 $22,000) 375,000 = $0.38] (b) I recommend it use the units-of-activity method as it results in the best matching of expense with revenue. Solutions Manual 9-24 Chapter 9

EXERCISE 9-4 (a) (1) Straight-line Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost* X Rate = Expense Amort. Value $86,000 2007 $78,000 25% $4,875** $4,875 81,125 2008 78,000 25% 19,500 24,375 61,625 2009 78,000 25% 19,500 43,875 42,125 2010 78,000 25% 19,500 63,375 22,625 2011 78,000 25% 14,625*** 78,000 8,000 *$86,000 - $8,000 = $78,000 **$19,500 x 3/12 = $4,875 ***$19,500 x 9/12 = $14,625 (2) Double Declining-Balance Calculation End of Year NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $86,000 2007 $86,000 50% $10,750* $10,750 75,250 2008 75,250 50% 37,625 48,375 37,625 2009 37,625 50% 18,813 67,188 18,812 2010 18,812 50% 9,406 76,594 9,406 2011 9,406 50% 1,406** 78,000 8,000 *$86,000 x 50% x 3/12 = $10,750 **Limited to the amount to bring net book value to the residual value of $8,000 Solutions Manual 9-25 Chapter 9

EXERCISE 9-4 (Continued) (a) (Continued) (3) Units-of-Activity Calculation End of Year Units of Amort. Amort. Accum. Net Book Year Activity X Cost/Unit* = Expense Amort. Value $86,000 2007 500 $7.80 $3,900 $3,900 82,100 2008 2,800 7.80 21,840 25,740 60,260 2009 2,900 7.80 22,620 48,360 37,640 2010 2,600 7.80 20,280 68,640 17,360 2011 1,300 7.80 9,360** 78,000 8,000 *Amortizable cost per unit is $7.80/hour [($86,000 $8,000) 10,000 = $7.80] **Limited to the amount to bring net book value to the residual value of $8,000. (b) Over the life of the asset, amortization expense will be the same for all three methods. (c) Cash flow is the same under all three methods. Amortization is an allocation of the cost of a long-lived asset and not a cash expenditure. Solutions Manual 9-26 Chapter 9

EXERCISE 9-5 Jan. 10 Building... 70,000 Cash... 70,000 Apr. 8 Repairs Expense... 25,000 Cash... 25,000 Sep. 2 Equipment... 22,500 Cash... 22,500 Nov. 1 Repairs Expense... 1,000 Cash... 1,000 Dec. 31 Loss on Impairment... 120,000 Accumulated Amortization Equipment... 120,000 [($500,000 - $150,000) - $230,000] Solutions Manual 9-27 Chapter 9

EXERCISE 9-6 (a) Current amortization Building: ($800,000 $40,000) 20 yrs = $38,000 per year Equipment: ($120,000 $5,000) 5 yrs = $23,000 per year (b) Current ages Building January 1998 to January 2008: 10 years Equipment January 2006 to January 2008: 2 years January 1, 2008 Building Equipment Cost... $800,000 $120,000 Accumulated Amortization: Building (10 x $38,000)... 380,000 Equipment (2 x $23,000)... 46,000 Net book value... $420,000 $ 74,000 (c) Type of Asset Building Equipment Net book value, 1/1/08 Less: Residual value Revised amortizable cost $420,000 62,000 $358,000 $74,000 3,600 $70,400 Divide by revised remaining useful life, in years Revised annual amortization expense (25-10) 15 yrs $23,867 (4-2) 2 yrs $35,200 Solutions Manual 9-28 Chapter 9

EXERCISE 9-7 (a) 2007 June 30 Amortization Expense... 6,500 Accumulated Amortization Equipment... 6,500 [($30,000 - $4,000) 4 years] (b) July 1 Equipment ($5,000 + $500)... 5,500 Cash... 5,500 (c) 2008 June 30 Amortization Expense... 5,200 Accumulated Amortization Equipment... 5,200 Net book value, July 1, 2007 ($30,000 - $6,500)... $23,500 Add: New part... 5,500 29,000 Less: Revised residual value... 3,000 Remaining amortizable cost... $26,000 Remaining useful life (6-1)... 5 years Revised annual amortization expense... $ 5,200 (d) Cost ($30,000 + $5,500)... $35,500 Accumulated Amortization ($6,500 + $5,200)... 11,700 Net book value June 30, 2008... $23,800 Solutions Manual 9-29 Chapter 9

EXERCISE 9-8 Jan. 2 Delivery Truck (New) ($6,500 + $33,000)*... 39,500 Accumulated Amortization... 22,500 Loss on sale... 1,000 Delivery truck (Old)... 30,000 Cash... 33,000 *Fair value of old truck $6,500 + cash $33,000 Mar. 31 Amortization Expense... 1,550 Accumulated Amortization Machinery... 1,550 ($62,000 10 years x 3/12) 31 Accumulated Amortization Machinery [($62,000 10 years) x (9 years + 3 months)]... 57,350 Loss on Disposal... 4,650 Machinery... 62,000 Sept 1 Amortization Expense... 1,220 Accumulated Amortization... Office Equipment... 1,220 ($5,490 3 years x 8/12) 1 Cash... 800 Accumulated Amortization Office Equipment... 4,880 ($5,490 3 years x 2 years + 8 months) Gain on Disposal... 190 Office Equipment... 5,490 Solutions Manual 9-30 Chapter 9

EXERCISE 9-9 (a) (1) Straight-line method: ($16,000 - $1,000) 4 years = $3,750 per year or $7,500 for 2006 and 2007. (2) Double declining-balance method DDB Rate: ¼ x 2 = 50% 2006: $16,000 x 50% = $8,000 2007: $16,000 - $8,000 = $8,000 x 50% = $4,000 Total amortization expense for 2006 and 2007 = $12,000 (b) (1) Straight-line method Proceeds - Net book value = Gain (loss) [$5,000 - ($16,000 - $7,500)] = ($3,500) (2) Double declining-balance method Proceeds - Net book value = Gain (loss) [$5,000 - ($16,000 - $12,000) = $1,000 (c) The amount of the loss using the straight-line method is $3,500. The amount of the gain using the double-decliningbalance method is $1,000. The amounts are not the same because of the difference in the amortization expense calculation on a year to year basis which impacts the net book value of the asset which in turn impacts the gain or loss on disposal. If you consider, however, the total impact on net income over the two year period the amounts are identical. Using the straight-line method total amortization is $7,500 and loss on disposal is $3,500 resulting in an $11,000 decrease in net income over the two year period. Using the doubledeclining-balance method total amortization is $12,000 and gain on disposal is $1,000. Overall effect on net income using both methods over the two year period is an $11,000 decrease. Solutions Manual 9-31 Chapter 9

EXERCISE 9-10 (a) The units-of-activity method is recommended for amortizing natural resources because it results in the best matching of expense to revenues. It requires that an estimate can be made of the total number of units that are available to be extracted from the resource. (b) Dec. 31 Inventory ($0.5375 x 100,000)... 53,750 Accumulated Amortization Mine 53,750 Amortizable cost $520,000 - $90,000 = $430,000 Amortizable cost per unit: $430,000 800,000 t = $0.5375 per tonne (c) PHILLIPS INC. Income Statement (Partial) Year Ended December 31, 2008 Cost of goods sold: (will include this amount plus other costs) ($0.5375 x 75,000 t)... $40,313 PHILLIPS INC. Balance Sheet (Partial) December 31, 2008 Assets Current assets Inventory ($53,750 - $40,313)... $ 13,437* Property, plant, and equipment Ore mine... $520,000 Less: Accumulated amortization... 53,750 466,250 *Check: 25,000** t unsold x $0.5375 = $13,437 **100,000 t extracted 75,000 t sold = 25,000 t in inventory Solutions Manual 9-32 Chapter 9

EXERCISE 9-11 1. Amortization is the process of allocating the cost of a longlived 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 revenue producing ability does not decline. In addition, the useful life of land is indefinite. Therefore it would be incorrect for the student to amortize the land. This is a violation of the matching principle. 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 permanent decline in value has occurred the 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 until an impairment in value occurs. Recording amortization is a violation of the matching principle. 3. This is a violation of the cost principle. Because current market values are subjective and not reliable, they are not used to increase the recorded value of an asset after acquisition. The appropriate accounting treatment is to leave the building on the books at its zero book value. Solutions Manual 9-33 Chapter 9

EXERCISE 9-12 (a) Jan. 2 Patents... 45,000 Cash... 45,000 April 1 Trademark... 325,000 Cash... 325,000 July 1 Franchise... 250,000 Cash... 250,000 Sept. 1 Research Expense... 185,000 Cash... 185,000 (b) Dec. 31 Loss on Impairment Goodwill... 85,000 Goodwill... 85,000 31 Amortization Expense... 117,500 Accumulated Amortization Patents [($450,000 5) + (45,000 3)]... 105,000 Accumulated Amortization Franchise [($250,000 10) x 6/12] 12,500 Solutions Manual 9-34 Chapter 9

EXERCISE 9-13 (a) Account Financial Statement Section Accumulated Amortization Building Balance Sheet Property, Plant, and Equipment Accumulated Amortization Finite-Life Intangible Assets Balance Sheet Intangibles Accumulated Amortization Machinery and Equipment Accumulated Amortization Other Property, Plant, and Equipment Accumulated Amortization Satellites Accumulated Amortization Telecommunications Assets Balance Sheet Balance Sheet Balance Sheet Balance Sheet Property, Plant, and Equipment Property, Plant, and Equipment Property, Plant, and Equipment Property, Plant, and Equipment Amortization Expense Income Statement Operating Expenses Buildings Balance Sheet Property, Plant, and Equipment Cash and Cash Equivalents Balance Sheet Current Assets Common Shares Balance Sheet Shareholders Equity Finite-Life Intangible Assets Balance Sheet Intangibles Goodwill Balance Sheet Intangibles Indefinite-Life Intangible Balance Sheet Intangibles Assets Land Balance Sheet Property, Plant, and Equipment Machinery and Equipment Balance Sheet Property, Plant, and Equipment Other Long-term Assets Balance Sheet Long-Term Assets Other Property, Plant, and Equipment Balance Sheet Property, Plant, and Equipment Plant under Construction Balance Sheet Property, Plant, and Equipment Satellites Balance Sheet Property, Plant, and Equipment Telecommunications Assets Balance Sheet Property, Plant, and Equipment Solutions Manual 9-35 Chapter 9

EXERCISE 9-13 (Continued) (b) BCE Inc. Balance Sheet (Partial) December 31, 2005 (in millions) Property, plant, and equipment Land... $ 94 Buildings... $3,157 Less: Accumulated amortization... 1,340 1,817 Plant under construction... 1,852 Machinery and equipment... $6,273 Less: Accumulated amortization... 3,685 2,588 Telecommunications assets... $36,334 Less: Accumulated amortization... 24,144 12,190 Satellites... $1,552 Less: Accumulated amortization... 404 1,148 Other Property, plant, and equipment... $200 Less: Accumulated amortization... 66 134 Total Property, plant, and equipment... 19,823 Intangible assets Finite-life intangible assets... $3,813 Less: Accumulated amortization... 1,574 2,239 Goodwill... 7,887 Indefinite-life intangible assets... 3,031 Total intangible assets... 13,157 Solutions Manual 9-36 Chapter 9

EXERCISE 9-14 (a) (in thousands) December 31, 2005 January 1, 2005 Asset turnover Return on assets $206,674 [($308,226 + $300,152) 2] = 0.68 times $8,097 [($308,226 + $300,152) 2] = 2.7% $211,476 [($300,152 + $242,755) 2] = 0.78 times $14,426 [($300,152 + $242,755) 2] = 5.3% (b) Sleeman s asset turnover has decreased over the 2 years. Net Revenues have decreased from $211,476 to $206,674 even though total assets have increased from $300,152 to $308,226. Sleeman is operating less efficiently in the year ended December 31, 2005 as compared to the year ended January 1, 2005. Return on assets has decreased significantly from 5.3% to 2.7%. The slight increase in total assets from $300,152 to $308,336 has not generated an increase in net income. In fact, net income has fallen from $14,426 to $8,097. Solutions Manual 9-37 Chapter 9

SOLUTIONS TO PROBLEMS PROBLEM 9-1A (a) Feb. 7 Land... 275,000 Cash... 75,000 Note Payable... 200,000 9 Land... 5,500 Cash... 5,500 15 Land... 15,000 Cash... 15,000 17 Cash... 4,000 Land... 4,000 Mar. 2 Building... 18,000 Cash... 18,000 July 5 Building... 650,000 Cash... 170,000 Note Payable... 480,000 31 Building... 6,500 Cash... 6,500 Aug. 22 Land Improvements... 12,000 Cash... 12,000 Sept. 1 Prepaid Insurance... 2,500 Cash... 2,500 Dec. 31 Interest Expense... 17,500 Cash... 17,500 Solutions Manual 9-38 Chapter 9

PROBLEM 9-1A (Continued) (b) Land Date Explanation Ref. Debit Credit Balance 2008 Feb. 7 275,000 275,000 9 5,500 280,500 15 15,000 295,500 17 4,000 291,500 Building Date Explanation Ref. Debit Credit Balance 2008 Mar. 2 18,000 18,000 July 5 650,000 668,000 31 6,500 674,500 Land Improvements Date Explanation Ref. Debit Credit Balance 2008 Aug. 22 12,000 12,000 The cost of land that will appear on Weisman s December 31, 2008 balance sheet will be $291,500. The cost of building that will appear on Weisman s December 31, 2008 balance sheet will be $674,500. The cost of land improvements that will appear on Weisman s December 31, 2008 balance sheet will be $12,000. Solutions Manual 9-39 Chapter 9

PROBLEM 9-2A (a) Accumulated Amortization Year Calculation Dec. 31 MACHINE 1 Straight-line Amortization 2006 ($44,940* 7) x 10/12 = $5,350 $ 5,350 2007 $44,940 7 = $6,420 11,770 2008 $44,940 7 = $6,420 18,190 *$48,940 - $4,000 = $44,940 MACHINE 2 Declining-balance Amortiation 2007 $84,000 x 20%* x 4/12 = $5,600 $ 5,600 2008 ($84,000 - $5,600) x 20% = $15,680 21,280 *1/10 years = 10% x 2 = 20% Solutions Manual 9-40 Chapter 9

PROBLEM 9-2A (Continued) (b) Accumulated Amortization Year Calculation Dec. 31 MACHINE 1 2006 ($44,940* 7) x 1/2 = $3,210 $ 3,210 2007 $44,940 7 = $6,420 9,630 2008 $44,940 7 = $6,420 16,050 *$48,940 - $4,000 = $44,940 MACHINE 2 2007 $84,000 x 20%* x 1/2 = $8,400 $ 8,400 2008 (84,000 - $8,400) x 20% = $15,120 23,520 *1/10 years = 10% x 2 = 20% (c) It really doesn t matter which policy Tarcher chooses in terms of recording amortization in the year of acquisition, as long as it follows the policy consistently. The same total amortization will be recorded whether amortization is recorded monthly, or semi-annually. Amortization is an estimate only, in any case. (d) The choice of the method to prorate amortization in the period of acquisition will not affect amortization expense if the units-of-activity method is used. Under this method, amortization is a function of the units produced not the time the machine is owned. Solutions Manual 9-41 Chapter 9

PROBLEM 9-3A (a) Cost: Cash price $180,000 Delivery costs 1,000 Installation and testing 3,200 Total cost $184,200 (b) The one-year insurance policy is not included as it is an operating expenditure, benefiting only the current period. 1. STRAIGHT-LINE AMORTIZATION Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $184,200 2006 $172,700* 20%** x 8/12 $23,027 $ 23,027 161,173 2007 172,700 20% 34,540 57,567 126,633 2008 172,700 20% 34,540 92,107 92,093 2009 172,700 20% 34,540 126,647 57,553 2010 172,700 20% 34,540 161,187 23,013 2011 172,700 20% x 4/12 11,513 172,700 11,500 * Amortizable cost = $184,200 - $11,500 = $172,700 ** 1 5 years = 20% Solutions Manual 9-42 Chapter 9

PROBLEM 9-3A (Continued) (b) (Continued) 2. DOUBLE DECLINING-BALANCE AMORTIZATION Calculation End of Year NBV Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $184,200 2006 $184,200 40%* x 8/12 $49,120 $49,120 135,080 2007 135,080 40% 54,032 103,152 81,048 2008 81,048 40% 32,419 135,571 48,629 2009 48,269 40% 19,452 155,023 29,177 2010 29,177 40% 11,671 166,694 17,506 2011 17,506 40% 6,006** 172,700 11,500 * 1 5 years = 20% x 2 = 40% **Use the amount that makes net book value equal to residual value 3. UNITS-OF-ACTIVITY AMORTIZATION Calculation End of Year Units of Amort. Amort. Accum. Net Book Year Activity X Cost/Unit* = Expense Amort. Value $184,200 2006 8,500 $3.14* $26,690 $ 26,690 157,510 2007 12,000 3.14 37,680 64,370 119,830 2008 11,500 3.14 36,110 100,480 83,720 2009 10,500 3.14 32,970 133,450 50,750 2010 9,500 3.14 29,830 163,280 20,920 2011 3,000 3.14 9,420 172,700 11,500 *Amortizable cost per unit: ($184,200 - $11,500) 55,000 units = $3.14 Solutions Manual 9-43 Chapter 9

PROBLEM 9-3A (Continued) (c) Double declining-balance amortization provides the highest amount of amortization expense for 2006, thus resulting in the lowest net income that year. Over the life of the asset, all three methods result in the same total amortization expense (equal to the amortizable cost). (d) All three methods will result in the same cash flow in 2006 and over the life of the asset. Recording amortization expense does not affect cash flow. There is no Cash account involved in the entry to record amortization (Dr. Amortization Expense; Cr. Accumulated Amortization). It is only an allocation of the capital cost to expense over an asset s useful life. (e) Factors that should influence management s choice of the amortization method to use include the revenue pattern of a specific asset, the productivity of the asset, as well as the usage of the asset on a year over year basis. If an asset generates revenue consistently over time, then the straight-line method is most appropriate. If an asset is more productive in its earlier years then the declining-balance method is most appropriate. If usage of an asset can be easily measured and usage is very different year over year then the units-of-activity method is the most appropriate. Solutions Manual 9-44 Chapter 9

PROBLEM 9-4A Feb. 12 Building... 120,000 Cash... 120,000 Mar. 6 Maintenance Expense... 7,500 Cash... 7,500 Apr. 10 Furniture and Fixtures... 25,000 Cash... 25,000 May 17 Machinery... 35,000 Cash... 8,000 June 28 Maintenance Expense... 5,000 Cash... 5,000 July 20 Repairs Expense... 10,000 Cash... 10,000 Aug. 5 Training Expense... 1,600 Cash... 1,600 Sep. 18 Machinery... 80,000 Cash... 80,000 Nov. 6 Prepaid Insurance... 4,600 Cash... 4,600 Dec. 31 Loss on Impairment... 70,000 Accumulated Amortization Equipment... 70,000 [($400,000 - $150,000) - $180,000] Dec. 31 No journal entry required. Once a permanent impairment has been recorded, the value of an asset is not adjusted for any recovery in value. Solutions Manual 9-45 Chapter 9

PROBLEM 9-5A (a) Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $650,000 2004 $620,000* 12.5% $77,500 $ 77,500 572,500 2005 620,000 12.5% 77,500 155,000 495,000 2006 620,000 12.5% 77,500 232,500 417,500 2007 620,000 12.5% 77,500 310,000 340,000 * Amortizable cost = $650,000 - $30,000 = $620,000 ** 1 8 years = 12.5% (b) Dec. 31 Loss on Impairment 220,000 Accumulated Amortization Equipment... 220,000 [($650,000 - $310,000) - $120,000] (c) Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $530,000¹ $120,000 2008 $90,000 2 50% 3 $45,000 575,000 75,000 2009 90,000 50% 45,000 620,000 30,000 ¹Accumulated Amortization = $310,000 end of year before Loss on impairment + $220,000 Loss on Impairment 2 Amortizable cost = $120,000 - $30,000 = $90,000 3 1 2 years remaining = 50% (d) Accumulated amortization at the end of this equipment s useful life will be $620,000. Net book value at the end of this equipment s useful life will be the amount of residual value which is $30,000. Solutions Manual 9-46 Chapter 9

PROBLEM 9-6A (a) Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $220,000 2004 $200,000* 20%** x 6/12 $20,000 20,000 200,000 2005 200,000 20% 40,000 60,000 160,000 2006 200,000 20% 40,000 100,000 120,000 2007 200,000 20% 40,000 140,000 80,000 * Amortizable cost = $220,000 - $20,000 = $200,000 ** 1 5 years = 20% (b) Jan. 9 Equipment... 33,000 Cash... 33,000 Nov. 18 Maintenance Expense... 1,500 Cash... 1,500 Dec. 15 Repair Expense... 2,400 Cash... 2,400 (c) Net book value, December 31, 2007... $80,000 Add: Addition... 33,000 113,000 Less: Revised residual value... 25,000 Revised amortizable cost... 88,000 Remaining useful life (9-3½ years)... 5½ years Revised annual amortization expense... $16,000 Solutions Manual 9-47 Chapter 9

PROBLEM 9-6A (Continued) (d) Net book value before overhaul: Dec. 31, 2007 $80,000 Add: Cost of overhaul 33,000 Net book value after overhaul 113,000 Less: Annual amortization after overhaul: 2008 $16,000 2009 16,000 2010 16,000 2011 16,000 2012 16,000 2013 ($16,000 x 6/12) 8,000 88,000 Net book value at end of useful life: June 30, 2013 $25,000 Accumulated amortization: Before overhaul: Dec. 31, 2007 $140,000 Amortization from Jan 1, 2008 to June 30, 2013 (see above) 88,000 At end of useful life: June 30, 2013 $228,000 Check: Original cost of asset $220,000 Cost of overhaul 33,000 253,000 Less: accumulated amortization June 30, 2013 228,000 Net book value June 30, 2013 $ 25,000 Note: Net book value June 30, 2013 = revised estimated residual value of $25,000. Solutions Manual 9-48 Chapter 9

PROBLEM 9-7A (a) 1. STRAIGHT-LINE AMORTIZATION Calculation End of Year Annual Net Amortizable Amort. Amort. Accum. Book Year Cost X Rate (1/3) = Expense Amort. Value $170,000 2007 $144,000* 1/3 $48,000 $48,000 122,000 2008 144,000 1/3 48,000 96,000 74,000 2009 144,000 1/3 48,000 144,000 26,000 *$170,000 - $26,000 = $144,000 2. UNITS-OF-ACTIVITY AMORTIZATION Calculation End of Year Annual Net Units of Amort. Amort. Accum. Book Year Activity X Cost/Unit 1 = Expense Amort. Value $170,000 2007 155,000 $0.36 $55,800 $55,800 114,200 2008 135,000 0.36 48,600 104,400 65,600 2009 110,000 0.36 39,600 144,000 26,000 1 Amortizable cost per unit: ($170,000 - $26,000) 400,000 km = $0.36 per kilometre Solutions Manual 9-49 Chapter 9

PROBLEM 9-7A (Continued) (b) 1. (a) Straight (b) Units- -Line of-activity Cost... $170,000 $170,000 Accumulated amortization.... 96,000 104,400 Book value... 74,000 65,600 Cash proceeds... 60,000 60,000 Loss on disposal... $ 14,000 $ 5,600 2. Amortization expense... $ 96,000 $104,400 Add: Loss on disposal... 14,000 5,600 Net expense... $110,000 $110,000 In total the effect on net earnings is the same under both methods. This is because the method of amortization selected only affects the timing of the expense recognition. In total over the life of the asset the expense recognized is the same. Solutions Manual 9-50 Chapter 9

PROBLEM 9-8A (a) 2006 Mar. 11 Office Equipment... 85,000 Accounts Payable... 85,000 (b) Dec. 31 Amortization Expense... 17,500 Accumulated Amortization Office Equipment... 17,500 [($85,000 - $1,000) 4 years] x 10/12 months (c) 2007 Dec. 31 Amortization Expense... 21,000 Accumulated Amortization Office Equipment... 21,000 ($85,000 - $1,000) 4 years 2008 Nov. 22 Amortization Expense... 19,250 Accumulated Amortization Office Equipment... 19,250 [($85,000 - $1,000) 4 years] x 11/12 (1) Nov. 22 Accumulated Amortization Office Equipment¹... 57,750 Loss on Disposal... 27,250 Office Equipment... 85,000 ¹ $17,500 + $21,000 + $19,250 = $57,750 (2) Nov. 22 Cash... 35,000 Accumulated Amortization Office Equipment... 57,750 Gain on Disposal... 7,750 Office Equipment... 85,000 Solutions Manual 9-51 Chapter 9

PROBLEM 9-8A (Continued) (c) (Continued) (3) Nov. 22 Cash... 20,000 Accumulated Amortization Office Equipment... 57,750 Loss on Disposal... 7,250 Office Equipment... 85,000 (4) Nov. 22 Office Equipment ($25,000 + $78,000)... 103,000 Accumulated Amortization Office Equipment... 57,750 Loss on Disposal ($85,000 - $57,750) - $25,000... 2,250 Cash ($113,000 - $35,000)... 78,000 Office Equipment... 85,000 Solutions Manual 9-52 Chapter 9

PROBLEM 9-9A (a) 2004 Oct. 6 Land... 280,000 Building... 225,000 Machinery... 45,000 Cash... 100,000 Mortgage Payable ($550,000 - $100,000) 450,000 2005 Sep. 30 Amortization Expense... 10,125 Accumulated Amortization Building 5,625 Accumulated Amortization Machinery 4,500 Building $225,000 40 = $5,625 Machinery $45,000 10 = $4,500 2006 Sep. 30 Amortization Expense... 10,125 Accumulated Amortization Building 5,625 Accumulated Amortization Machinery 4,500 2007 Sep. 30 Amortization Expense... 17,625 Accumulated Amortization Building 5,625 Accumulated Amortization Machinery 12,000 Machinery Net book value, ($45,000 - $4,500 - $4,500)... $36,000 Remaining useful life (5-2)... 3 years Revised annual amortization expense... $12,000 Solutions Manual 9-53 Chapter 9

PROBLEM 9-9A (Continued) (a) (Continued) 2008 June 28 Amortization Expense... 9,000 Accumulated Amortization Machinery 9,000 ($12,000 x 9/12 months = $9,000) 28 Machinery*... 60,000 Accumulated Amortization Machinery**... 30,000 Gain on Disposal***... 3,000 Machinery... 45,000 Cash ($65,000 - $23,000)... 42,000 * $42,000 + $18,000 = $60,000 ** $4,500 + $4,500 + $12,000 + $9,000 = $30,000 *** $18,000 - ($45,000 - $30,000) = $3,000 Sep. 30 Amortization Expense... 8,625 Accumulated Amortization Building* 5,625 Accumulated Amortization Machinery** 3,000 * $225,000 40 = $5,625 ** ($60,000 5) x 3/12 months = $3,000 Solutions Manual 9-54 Chapter 9

PROBLEM 9-9A (Continued) (b) Menda Investments. Balance Sheet (Partial) September 30, 2008 Property, plant, and equipment Land... $280,000 Buildings... $225,000 Less: Accumulated amortization*... 22,500 202,500 Machinery... $60,000 Less: Accumulated amortization... 3,000 57,000 Total property, plant, and equipment... $539,500 * $5,625 x 4 years = $22,500 (c) The income statement for September 30, 2008 will include: Amortization expense ($5,625 + $9,000 + $3,000): $17,625 Gain on disposal: $3,000 Solutions Manual 9-55 Chapter 9

PROBLEM 9-10A 1. Research Expense... 60,000 Patent... 60,000 2. Patent... 21,000 Legal Fees Expense... 21,000 3. Patent... 38,000 Legal Fees Expense... 38,000 4. Patent... 50,000 Royalty Revenue... 50,000 5. Amortization Expense... 16,550 Accumulated Amortization Patent... 16,550 {[($35,000 + $21,000 + $38,000) 5 years] - $2,250} 6. Loss on Impairment... 5,200 Accumulated Amortization Patent... 5,200 [($94,000 - $18,800) - $70,000] Solutions Manual 9-56 Chapter 9

PROBLEM 9-11A (a) Jan. 2 Trademark... 0.27,000 Cash... 27,000 Jan. - Research Expense... 210,000 June Cash... 210,000 July 1 Patent (Development Costs)... 50,000 Cash... 50,000 Sept. 1 Advertising Expense... 60,000 Cash... 60,000 Oct. 1 Copyright #2... 180,000 Cash... 180,000 Dec. 31 Impairment Loss... 40,000 Goodwill ($125,000 - $85,000) 40,000 (b) Dec. 31 Amortization Expense... 1,250 Accumulated Amortization Patent... 1,250 [($50,000 20) x 6/12] = $1,250] 31 Amortization Expense... 12,600 Accumulated Amortization Copyright... 12,600 [($36,000 x 1/10) + ($180,000 x 1/5 x 3/12)] Note: Amortization is not recorded on trademark because it has an expected indefinite useful life. Solutions Manual 9-57 Chapter 9

PROBLEM 9-11A (Continued) (c) GHANI CORPORATION Balance Sheet (Partial) December 31, 2008 Assets Intangible assets Patents... $ 50,000 Less: Accumulated amortization... 1,250 $ 48,750 Copyrights (1)... $216,000 Less: Accumulated amortization... 37,800 178,200 Trademark (2)... 81,000 Goodwill... 85,000 Total intangible assets... $392,950 (1) (2) Copyright: Cost $36,000 + $180,000 = $216,000 Copyright: Amortization $25,200 + $12,600 = $37,800 Trademark: $54,000 + $27,000 = $81,000 Solutions Manual 9-58 Chapter 9

PROBLEM 9-12A (a) 2007 June 7 Timber Land... 50,000,000 Cash... 10,000,000 Mortgage Payable... 40,000,000 26 Weighing Equipment... 199,900 Cash... 199,900 Dec. 31 Inventory... 5,280,000 Accumulated Amortization Timber Land... 5,280,000 ($50,000,000 - $2,000,000) 1,000,000 = $48/t x 110,000 t = $5,280,000 31 Cost of Goods Sold... 4,800,000 Inventory ($48/t x 100,000 t) 4,800,000 31 Amortization Expense... 12,850 Accumulated Amortization Weighing Equipment... 12,850 ($199,900 - $20,000) 7 = $25,700 x 6/12 mos. = $12,850 31 Interest Expense ($40,000,000 x 7% x 7/12)... 1,633,333 Cash... 1,633,333 31 Mortgage Payable... 8,000,000 Cash... 8,000,000 Solutions Manual 9-59 Chapter 9

PROBLEM 9-12A (Continued) (a) (Continued) 2008 Dec. 31 Inventory ($48/t x 230,000 t)... 11,040,000 Accumulated Amortization Timber Land... 11,040,000 31 Cost of Goods Sold ($48/t x 230,000 t)... 11,040,000 Inventory... 11,040,000 31 Amortization Expense... 25,700 Accumulated Amortization Weighing Equipment... 25,700 31 Interest Expense ($32,000,000 x 7%)... 2,240,000 Cash... 2,240,000 31 Mortgage Payable... 8,000,000 Cash... 8,000,000 Solutions Manual 9-60 Chapter 9

PROBLEM 9-12A (Continued) (b) CYPRESS TIMBER COMPANY (Partial) Balance Sheet December 31, 2008 Current Assets Inventory 1... $ 480,000 Property, plant, and equipment Timber tract... $50,000,000 Less: Accumulated amortization 2... 16,320,000 $33,680,000 Weighing equipment... 199,900 Less: Accumulated amortization 3... 38,550 161,350 Total property, plant, and equipment... $33,841,350 1 10,000 tonnes x $48/t 2 $5,280,000 + $11,040,000 = $16,320,000 3 $12,850 (2007) + $25,700 (2008) = $38,550 As well, the Income Statement for the year ended December 31, 2008, will include cost of goods sold of $11,040,000, amortization expense of $25,700 and interest expense of $2,240,000. Solutions Manual 9-61 Chapter 9

PROBLEM 9-13A (a) St. Amand Company St. Helene Company Asset turnover $4,375,000 [($3,780,000 + $4,290,000) 2] $2,775,000 [($2,540,000 + $2,175,000) 2] Return on assets = 1.08 to 1 $350,000 [($3,780,000 + $4,290,000) 2] = 8.67% = 1.18 to 1 $300,000 [($2,540,000 + $2,175,000) 2] = 12.73% (b) St. Helene Company is more efficient in using its assets to generate sales its assets turnover of 1.18 times is higher than 1.08 for St. Amand Company. It is also much more efficient in using assets to produce income with a return on assets of 12.73% compared to 8.67% for St. Amand Company. Solutions Manual 9-62 Chapter 9

PROBLEM 9-1B (a) Jan. 22 Land... 220,000 Cash... 55,000 Note Payable... 165,000 24 Land... 4,500 Cash... 4,500 31 Land... 25,000 Cash... 25,000 Feb. 13 Land... 8,000 Cash... 8,000 28 Cash... 7,500 Land... 7,500 Mar. 14 Building... 34,000 Cash... 34,000 31 Building... 15,000 Cash... 15,000 Apr. 22 Building... 17,000 Cash... 17,000 June 15 Building... 300,000 Cash... 75,000 Note Payable... 225,000 Sept. 14 Building... 300,000 Cash... 100,000 Note Payable... 200,000 30 Building... 6,700 Cash... 6,700 Solutions Manual 9-63 Chapter 9

PROBLEM 9-1B (Continued) (a) (Continued) Oct. 12 Land Improvements... 42,000 Cash... 22,000 (b) 20 Land Improvements... 8,000 Cash... 8,000 Dec. 31 Interest Expense... 7,800 Cash... 7,800 Land Date Explanation Ref. Debit Credit Balance 2008 Jan. 22 220,000 220,000 24 4,500 224,500 31 25,000 249,500 Feb. 13 8,000 257,500 28 7,500 250,000 Building Date Explanation Ref. Debit Credit Balance 2008 Mar. 14 34,000 34,000 31 15,000 49,000 Apr. 22 17,000 66,000 June 15 300,000 366,000 Sept.14 300,000 666,000 30 6,700 672,700 Solutions Manual 9-64 Chapter 9

PROBLEM 9-1B (Continued) (b) (Continued) Land Improvements Date Explanation Ref. Debit Credit Balance 2008 Oct. 12 42,000 42,000 20 8,000 50,000 The cost of land that will appear on Kadlec s December 31, 2008 balance sheet will be $250,000. The cost of the building that will appear on Kadlec s December 31, 2008 balance sheet will be $672,700. The cost of land improvements that will appear on Kadlec s December 31, 2008 balance sheet will be $50,000. Solutions Manual 9-65 Chapter 9

PROBLEM 9-2B (a) Accumulated Amortization Year Calculation Dec. 31 MACHINE 1 2005 $92,000* x 10%** x 9/12 = $6,900 $ 6,900 2006 $92,000 x 10% = $9,200 16,100 2007 $92,000 x 10% = $9,200 25,300 2008 $92,000 x 10% = $9,200 34,500 *$96,000 - $4,000 = $92,000 **1/10 years = 10% MACHINE 2 2007 $60,000 x 12.5%* x 3/12 = $1,875 $1,875 2008 $58,125 x 12.5% = $7,266 9,141 *1/8 years = 12.5% (b) Accumulated Amortization Year Calculation Dec. 31 MACHINE 1 2005 $92,000* x 10%** x 6/12 = $4,600 $ 4,600 2006 $92,000 x 10% = $9,200 13,800 2007 $92,000 x 10% = $9,200 23,000 2008 $92,000 x 10% = $9,200 32,200 *$96,000 - $4,000 = $92,000 **1/10 years = 10% Solutions Manual 9-66 Chapter 9

PROBLEM 9-2B (Continued) (b) (Continued) MACHINE 2 2007 $60,000 x 12.5%* x 6/12 = $3,750 $ 3,750 2008 $56,250 x 12.5% = $7,031 10,781 *1/8 years = 12.5% (c) Flakeboard should not consider recording amortization to the nearest day. The amount is an estimate only. The additional cost of recording it to the nearest day is not warranted. It implies an accuracy that does not exist. (d) It really doesn t matter which policy Flakeboard chooses in terms of recording amortization in the year of acquisition, as long as it follows the policy consistently. The same total amortization will be recorded whether amortization is recorded monthly, or semi-annually. Amortization is an estimate only, in any case. Solutions Manual 9-67 Chapter 9

PROBLEM 9-3B (a) Invoice price $102,000 Delivery cost 5,200 Installation and testing 4,300 Cost of the machine $111,500 The $975 insurance policy is an annual operating expenditure and not included in the cost of the asst. (b) 1. STRAIGHT-LINE AMORTIZATION Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $111,500 2006 $105,000* 25%* x 3/12*** $ 6,563 $ 6,563 104,937 2007 105,000 25% 26,250 32,813 78,687 2008 105,000 25% 26,250 59,063 52,437 2009 105,000 25% 26,250 85,313 26,187 2010 105,000 25% x 9/12 19,687 105,000 6,500 * $111,500 - $6,500 = $105,000 ** 1/4 years = 25% *** Machine was ready for use on October 1, 2006 Solutions Manual 9-68 Chapter 9

PROBLEM 9-3B (Continued) (b) (Continued) 2. DOUBLE DECLINING-BALANCE AMORTIZATION Calculation End of Year NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $111,500 2006 $111,500 50%* x 3/12 $13,938 $13,938 97,562 2007 97,562 50% 48,781 62,719 48,781 2008 48,781 50% 24,391 87,110 24,390 2009 24,390 50% 12,195 99,305 12,195 2010 12,195 50% 5,695*** 105,000 6,500 * 1/4 years = 25% x 2 = 50% ** Limited to the amount that brings residual value to $6,500 3. UNITS-OF-ACTIVITY Calculation End of Year Units of Amort. Amort. Accum. Net Book Year Activity X Cost/Unit* = Expense Amort. Value $111,500 2006 2,000 $3.50* $ 7,000 $ 7,000 104,500 2007 9,150 3.50 32,025 39,025 72,475 2008 7,650 3.50 26,775 65,800 45,700 2009 6,700 3.50 23,450 89,250 22,250 2010 4,500 3.50 15,750 105,000 6,500 * Amortizable cost per unit is $3.50 per unit [($111,500 $6,500) 30,000 = $3.50] Solutions Manual 9-69 Chapter 9

PROBLEM 9-3B (Continued) (c) Straight-line amortization provides the lowest amount of amortization expense for 2006 which results in the highest amount of net income. Over the life of the asset, all three methods result in the same total amortization expense (equal to the amortizable cost) and therefore the same amount of net income. (d) All three methods will result in the same cash flow in 2006 and over the life of the asset. Recording amortization expense does not affect cash flow. There is no Cash account involved in the entry to record amortization (Dr. Amortization Expense; Cr. Accumulated Amortization). It is only an allocation of the capital cost to expense over an asset s useful life. (e) Factors that should influence management s choice of the amortization method to use include the revenue pattern of a specific asset, the productivity of the asset, as well as the usage of the asset on a year over year basis. If an asset generates revenue consistently over time, then the straight-line method is most appropriate. If an asset is more productive in its earlier years then the decliningbalance method is most appropriate. If usage of an asset can be easily measured and usage is very different year over year then the units-of-activity method is the most appropriate. Solutions Manual 9-70 Chapter 9

PROBLEM 9-4B Feb. 2 Maintenance Expense... 2,000 Cash... 2,000 Mar. 16 Maintenance Expense... 4,500 Cash... 4,500 Apr. 14 Building... 57,000 Cash... 57,000 May 7 Land Improvements... 4,600 Cash... 4,600 Note: Assuming the flowers and shrubs will last for longer than one year. June 16 Repairs Expense... 5,900 Cash... 5,900 July 18 Vehicles... 15,000 Cash... 15,000 Aug. 8 Training Expense... 5,500 Cash... 5,500 Sep. 20 Machinery... 20,000 Cash... 20,000 Oct. 26 Repairs Expense... 1,600 Cash... 1,600 1. Dec. 31 No journal entry required. Once a permanent impairment has been recorded, the value of an asset is not adjusted for any recovery in value. Solutions Manual 9-71 Chapter 9

PROBLEM 9-4B (Continued) 2. Dec. 31 Loss on Impairment... 40,000 Accumulated Amortization Equipment... 40,000 [($300,000 - $125,000) - $135,000] Solutions Manual 9-72 Chapter 9

PROBLEM 9-5B (a) Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate** = Expense Amort. Value $600,000 2004 $550,000* 10% $55,000 $ 55,000 545,000 2005 550,000 10% 55,000 110,000 490,000 2006 550,000 10% 55,000 165,000 435,000 2007 550,000 10% 55,000 220,000 380,000 * Amortizable cost = $600,000 - $50,000 = $550,000 ** 1 10 years = 10% (b) Dec. 31 Loss on Impairment 180,000 Accumulated Amortization Equipment... 180,000 [($600,000 - $220,000) - $200,000] (c) Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $400,000¹ $200,000 2008 $150,000 2 50% 3 $75,000 475,000 125,000 2009 150,000 50% 75,000 550,000 50,000 ¹Accumulated Amortization = $220,000 end of year before Loss on impairment + $180,000 Loss on Impairment 2 Amortizable cost = $200,000 - $50,000 = $150,000 3 1 2 years remaining = 50% (d) Accumulated amortization at the end of this equipment s useful life will be $550,000. Net book value at the end of this equipment s useful life will be the amount of residual value which is $50,000. Solutions Manual 9-73 Chapter 9

PROBLEM 9-6B (a) Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $125,000 2003 $115,000* 20% x 6/12 $11,500 11,500 113,500 2004 115,000 20% 23,000 34,500 90,500 2005 115,000 20% 23,000 57,500 67,500 2006 115,000 20% 23,000 80,500 44,500 2007 115,000 20% 23,000 103,500 21,500 * Amortizable cost = $125,000 - $10,000 = $115,000 ** 1 5 years = 20% (b) Jan. 7 Equipment... 15,000 Cash... 15,000 July 27 Maintenance Expense... 1,000 Cash... 1,000 Sept. 19 Repair Expense... 2,500 Cash... 2,500 (c) Net book value, December 31, 2007... $21,500 Add: Addition... 15,000 36,500 Less: Revised residual value... 12,000 Revised amortizable cost... 24,500 Remaining useful life (7 4½ years)... 2½ years Revised annual amortization expense... $9,800 Solutions Manual 9-74 Chapter 9

PROBLEM 9-6B (Continued) (d) Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $103,500 $36,500¹ 2008 $24,500* 40%** $ 9,800 113,300 26,700 2009 24,500 40% 9,800 123,100 16,900 2010 24,500 40% x 6/12 4,900 128,000 12,000 *Amortizable cost (revised) = $36,500 - $12,000 = $24,500 **1 2.5 years remaining = 40% ¹Net book value before overhaul + cost of overhaul = $21,500 + $15,000 Conclusion: Total accumulated amortization at the end of the asset s useful life will be $128,000. Check: Original cost of asset $125,000 Cost of overhaul 15,000 240,000 Less: accumulated amortization June 30, 2010 128,000 Net book value June 30, 2010 $ 12,000 Note: Net book value June 30, 2010 = revised estimated residual value of $12,000. Solutions Manual 9-75 Chapter 9

PROBLEM 9-7B (a) (1) STRAIGHT-LINE AMORTIZATION Calculation End of Year Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $61,000 2006 $56,000* 25%** $14,000 $14,000 47,000 2007 56,000 25% 14,000 28,000 33,000 2008 56,000 25% 14,000 42,000 19,000 2009 56,000 25% 14,000 56,000 5,000 * $61,000 - $5,000 = $56,000 ** ¼ years = 25% (2) DOUBLE DECLINING-BALANCE AMORTIZATION Calculation End of Year NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $61,000 2006 $61,000 50%* $30,500 $30,500 30,500 2007 30,500 50% 15,250 45,750 15,250 2008 15,250 50% 7,625 53,375 7,625 2009 7,625 50% **2,625 56,000 5,000 * ¼ years = 25% x 2 ** Amount that makes Net Book Value equal to residual Solutions Manual 9-76 Chapter 9

PROBLEM 9-7B (Continued) (b) 1. (a) Straight-Line (b) Declining- Balance Cost... $61,000 $61,000 Accumulated amortization.... 42,000 53,375 Net book value... 19,000 7,625 Cash proceeds... 10,000 10,000 (Gain) loss on disposal... $ 9,000 $(2,375) 2. Amortization expense... $42,000 $53,375 (Gain) Loss on disposal... 9,000 (2,375) Net expense... $51,000 $51,000 In total the effect on net income is the same under both methods. This is because the method of amortization selected only affects the timing of the expense recognition. In total over the life of the asset, the expense recognized is the same. Solutions Manual 9-77 Chapter 9

PROBLEM 9-8B (a) 2006 Feb. 4 Delivery Equipment... 65,000 Accounts Payable... 65,000 (b) Dec. 31 Amortization Expense... 11,000 Accumulated Amortization Delivery Equipment... 11,000 ($65,000 - $5,000) x 1/5 years x 11/12 months = $11,000 (c) 2007 Dec. 31 Amortization Expense... 12,000 Accumulated Amortization Delivery Equipment... 12,000 ($65,000 - $5,000) x 1/5 years = $12,000 2008 Oct. 25 Amortization Expense... 10,000 Accumulated Amortization Delivery Equipment... 10,000 ($65,000 - $5,000) x 1/5 years x 10/12 months = $10,000 1. Oct. 25 Accumulated Amortization Delivery Equipment... 33,000 Loss on Disposal... 32,000 Delivery Equipment... 65,000 Accumulated Amortization: ($65,000 - $5,000) x 33/60 months = $33,000 Or add annual amortization expense in above journal entries: ($11,000 + $12,000 + $10,000 = $33,000) Solutions Manual 9-78 Chapter 9

PROBLEM 9-8B (Continued) (c) (Continued) 2. Oct. 25 Cash... 30,000 Loss on Disposal... 2,000 Accumulated Amortization Delivery Equipment... 33,000 Delivery Equipment... 65,000 3. Oct. 25 Cash... 40,000 Accumulated Amortization Delivery Equipment... 33,000 Gain on Disposal... 8,000 Delivery Equipment... 65,000 4. Oct. 25 Delivery Equipment ($28,000 + $55,000)... 83,000 Accumulated Amortization Delivery Equipment... 33,000 Loss on Disposal ($28,000 - $32,000)... 4,000 Cash ($87,000 - $32,000)... 55,000 Delivery Equipment... 65,000 Solutions Manual 9-79 Chapter 9

PROBLEM 9-9B (a) 2004 July 3 Land... 410,000 Building... 300,000 Machinery... 40,000 Cash... 100,000 Mortgage Payable ($750,000 - $100,000)... 650,000 2005 June 30 Amortization Expense... 12,500 Accumulated Amortization Building 7,500 Accumulated Amortization Machinery 5,000 Building $300,000 40 = $7,500 Machinery $40,000 8 = $5,000 2006 June 30 Amortization Expense... 12,500 Accumulated Amortization Building 7,500 Accumulated Amortization Machinery 5,000 Solutions Manual 9-80 Chapter 9

PROBLEM 9-9B (Continued) (a) (Continued) 2007 June 30 Amortization Expense... 17,500 Accumulated Amortization Building 7,500 Accumulated Amortization Machinery 10,000 Machinery Net book value ($40,000 - $10,000)... $ 30,000 Remaining useful life (5-2)... 3 years Revised annual amortization expense... $ 10,000 Dec. 28 Amortization Expense... 5,000 Accumulated Amortization Machinery 5,000 ($10,000 x 6/12 months) 28 Machinery*... 62,000 Accumulated Amortization Machinery**... 25,000 Gain on Disposal***... 7,000 Machinery... 40,000 Cash ($65,000 - $25,000)... 40,000 * $40,000 + $22,000 = $62,000 ** $5,000 + $5,000 + $10,000 + $5,000 = $25,000 *** $22,000 - ($40,000 - $25,000) = $7,000 2008 June 30 Amortization Expense... 13,700 Accumulated Amortization Building 7,500 Accumulated Amortization Machinery 6,200 Machinery ($62,000 5) x 6/12 months = $6,200 Solutions Manual 9-81 Chapter 9

PROBLEM 9-9B (Continued) (b) Ledesma Investments. Balance Sheet (Partial) June 30, 2008 Property, plant, and equipment Land... $410,000 Buildings... $300,000 Less: Accumulated amortization*... 30,000 270,000 Machinery... $62,000 Less: Accumulated amortization... 6,200 55,800 Total property, plant, and equipment... $735,800 *$7,500 + $7,500 + $7,500 + $7,500 = $30,000 (c) The income statement for June 30, 2008 will include: Amortization expense ($5,000 + $7,500 + $6,200) $18,700 Gain on disposal 7,000 Solutions Manual 9-82 Chapter 9

PROBLEM 9-10B 1. Research Expense ($120,000 x 55%)... 66,000 Patents... 66,000 Accumulated Amortization Patents... 4,400 Amortization Expense... 4,400 $66,000 15 years = $4,400 2. Trademark... 25,000 Loss on Impairment Trademark ($125,000 - $100,000)... 25,000 Loss on impairment should not be recorded until there is a permanent impairment in value of the trademark. In this case, Riley is attempting to defend its right and their lawyers indicate they expect Riley to win which indicates that there is not a permanent impairment in value of the trademark. 3. Accumulated Amortization Goodwill [($250,000 40) x 6/12]... 3,125 Amortization expense... 3,125 Note: Goodwill is not amortized. 4. Charitable Donations Expense... 6,000 Goodwill... 6,000 5. Gain on License Market Value... 30,000 License... 30,000 Solutions Manual 9-83 Chapter 9

PROBLEM 9-11B (a) Jan. 2 Patent #1... 22,400 Cash... 22,400 June 30 Research Expense... 220,000 Cash... 220,000 30 Patent #2 (Development Costs) 60,000 Cash... 60,000 Sept. 1 Advertising Expense... 35,000 Cash... 35,000 Oct. 1 Copyright #2... 80,500 Cash... 80,500 Dec. 31 Impairment Loss... 60,000 Goodwill ($210,000 - $150,000) 60,000 (b) Dec. 31 Amortization Expense... 9,800 Accumulated Amortization Patent #1 9,800 [($70,000 x 1/10) + ($22,400 x 1/8)] 31 Amortization Expense... 7,675 Accumulated Amortization Copyright #1... 4,800 Accumulated Amortization Copyright #2... 2,875 [($48,000 x 1/10) + ($80,500 x 1/7 x 3/12)] 31 Amortization Expense... 1,500 Accumulated Amortization Patent #2 1,500 [($60,000 20 years) x 6/12 = $1,500) Solutions Manual 9-84 Chapter 9

PROBLEM 9-11B (Continued) (c) IP COMPANY (Partial) Balance Sheet December 31, 2008 Assets Intangible assets Patents (1)... $152,400 Less: Accumulated amortization *... 25,300 $127,100 Copyrights (2)... 128,500 Less: Accumulated amortization **... 36,475 92,025 Goodwill... 150,000 Total intangible assets... $369,125 (1) Cost: Patent #1 ($70,000 + $22,400) + Patent #2 $60,000 = $152,400 * Amortization: Patent #1 ($14,000 + $7,000 + $2,800) + Patent #2 ($1,500) = $25,300 (2) Cost: Copyright #1 ($48,000) + Copyright #2 ($80,500) = $128,500 ** Amortization: Copyright #1 ($28,800 + $4,800) + Copyright #2 ($2,875) = $36,475 Solutions Manual 9-85 Chapter 9

PROBLEM 9-12B (a) 2007 Mar. 31 Mine ($2,600,000 + $260,000). 2,860,000 Cash... 2,860,000 Apr. 6 No entry required Dec. 31 Inventory... 570,000 Accumulated Amortization Mine... 570,000 ($2,860,000 - $200,000) 560,000 t = $4.75/t x 120,000 t = $570,000 31 Cost of Goods Sold... 475,000 Inventory ($4.75/t x 100,000 t) 475,000 31 Amortization Expense... 60,000 Accumulated Amortization Equipment... 60,000 ($500,000 - $20,000) 8 years = $60,000. Note that equipment is amortized for the full year, because it has been in use for the full year (at another site earlier in the year). 2008 Dec. 31 Inventory ($4.75/t x 110,000 t)522,500 Accumulated Amortization Mine... 522,500 31 Cost of Goods Sold ($4.75/t x 110,000 t)... 522,500 Inventory... 522,500 Solutions Manual 9-86 Chapter 9

PROBLEM 9-12B (Continued) (a)continued Dec. 31 Amortization Expense... 60,000 Accumulated Amortization Equipment... 60,000 (b) YOUNT MINING COMPANY (Partial) Balance Sheet December 31, 2008 Current Assets Inventory... $ 95,000 Property, plant, and equipment Mine... $2,860,000 Less: Accumulated amortization *... 1,092,500 1,767,500 Equipment... $500,000 Less: Accumulated amortization **... 375,000 125,000 * $570,000 + $522,500 = $1,092,500 ** $15,000 (2002) + $60,000 (2003) + $60,000 (2004) + $60,000 (2005) + $60,000 (2006) + $60,000 (2007) + $60,000 (2008) = $375,000 As well, the Income Statement for the year ended December 31, 2008, will include cost of goods sold of $522,500 and amortization expense of $60,000. Solutions Manual 9-87 Chapter 9

PROBLEM 9-13B (a) Andruski Company Brar Company Asset turnover $1,950,000 $2,300,000 [($2,250,000 + $2,800,000) 2] [($2,465,000 + $3,295,000) 2] = 0.77 to 1 = 0.8 to 1 Return on assets $295,000 $310,000 [($2,250,000 + $2,800,000) 2] [($2,465,000 + $3,295,000) 2] = 11.68% = 10.76% (b) Brar Company is a little more efficient in using its assets to generate sales its assets turnover of 0.8 times is higher than 0.77 times for Andruski Company. Andruski is more efficient in using assets to produce income with a return on assets of 11.68% compared to 10.76% for Brar Company. Solutions Manual 9-88 Chapter 9

CONTINUING COOKIE CHRONICLE (a) Purchase price... $34,500 Painting... 2,500 Shelving... 1,500 Cost of van... $38,500 (b) Straight-line amortization Amortizable Amort. Amort. Accum. Net Book Year Cost X Rate = Expense Amort. Value $38,500 2008 $32,000* 20% x 4/12 $ 2,133 $ 2,133 36,367 2009 32,000 20% 6,400 8,533 29,967 2010 32,000 20% 6,400 14,933 23,567 * ($38,500 - $6,500 = $32,000) Single declining-balance amortization NBV (Beg. Amort. Amort. Accum. Net Book Year of Year X Rate = Expense Amort. Value $38,500 2008 $38,500 20%* x 4/12 $ 2,567 $ 2,567 35,933 2009 35,933 20% 7,187 9,754 28,746 2010 28,746 20% 5,749 15,503 22,997 Units-of-activity amortization Units of Amort. Amort. Accum. Net Book Year Activity X Cost/Unit = Expense Amort. Value $38,500 2008 15,000 $0.16* $ 2,400 $ 2,400 36,100 2009 45,000 0.16 7,200 9,600 28,900 2010 50,000 0.16 8,000 17,600 20,900 *$32,000 200,000 = $0.16 per km Solutions Manual 9-89 Chapter 9

CONTINUING COOKIE CHRONICLE (Continued) (c) Impact on Cookie Creation's balance sheet and income statement in 2008: Single Declining- Units-of- Straight-Line Balance Activity Cost of asset $38,500 $38,500 $38,500 Accumulated amortization 2,133 2,567 2,400 Net book value $36,367 $35,933 $36,100 Amortization expense $2,133 $2,567 $2,400 The single-declining method of amortization will result in the lowest amount of net income reported, the lowest amount of owner's equity reported and the lowest net book value of the asset reported. The straight-line method of amortization will result in the greatest amount of net income reported, the greatest amount of owner's equity reported and the greatest net book value of the asset reported. (d) Over the van s 5-year useful life the total amortization will be $32,000 under each of the methods. The impact will affect the timing of the amortization expense recognized each year only. (e) The units-of-activity method may provide Natalie with a more accurate assessment of usage of the van in relation to the amount of revenue earned. As long as Natalie is willing to track the number of kilometres driven over the course of the year, then this would be the method recommended. Solutions Manual 9-90 Chapter 9

BYP 9-1 FINANCIAL REPORTING PROBLEM (a) (1) $409,970,000 (2) $216,376,000 (3) $193,594,000 See Note 3 to the financial statements. (b) $50,837,000 was the amount of net additions of capital assets during 2006. (See the Consolidated Statements of Cash Flows) (c) Building on leased land, furniture, fixtures, equipment, automotive and leasehold improvements are amortized using the straight-line basis. The building is amortized on the declining-balance method. (See Note 2) The amount of amortization expense reported in the statement of operations for fiscal 2006 was $41,343,000. (d) The expected useful life for calculating amortization on the furniture, fixtures, equipment. and automotive was 3 to 5 years. (See Note 2) (e) Intangible assets comprise Goodwill, Trademarks and Tradenames and Non-competition agreements. The company did not report any impairment loss in 2006. (See note 4) Solutions Manual 9-91 Chapter 9

BYP 9-2 INTERPRETING FINANCIAL STATEMENTS (a) The $110 million investment in the new plant should be treated as a capital expenditure. It will result in the creation of an asset that will have a long life and the cost will be matched with the revenue it generates through annual amortization charges. (b) Maple Leaf Foods could use the straight-line, decliningbalance or the units-of-activity method to amortize its plant and equipment associated with its Saskatoon plant. The straight-line method is simple to use and if the assets are used at a consistent level will match costs with revenue. Declining-balance is appropriate in cases where the benefits are greater in the early years of an asset s life. The units-of-activity method would be the most appropriate in this case as the levels of production can be easily measured (production capacity or number of hogs processed per week) and the levels of production can change from one week to the next. The units-of-activity method will provide the best matching of costs with revenue. (c) Yes. My recommendation would still be the units-ofactivity method. Amortization expense would increase as a result of the double shift because the number of units being processed has increased. Solutions Manual 9-92 Chapter 9

BYP 9-3 COLLABORATIVE LEARNING ACTIVITY All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook. Solutions Manual 9-93 Chapter 9

BYP 9-4 COMMUNICATION ACTIVITY Memorandum To: From: Re: Jason Long, Owner Ken Bond, Controller Loss on Impairment of Long-Lived Assets Long-lived assets are recorded at cost. In our company s case those assets include trucks, garages and equipment. The cost of these assets is amortized over their useful lives, matching costs of amortization to the revenue these assets have helped us generate. The difference between the cost of an asset and its accumulated amortization is what we refer to as net book value. In some circumstances the net book value of a long-lived asset may not be recoverable. If this happens and the market value also permanently falls far below the assets net book value an impairment has occurred. An impairment may occur because an asset has become obsolete. In our company, an impairment could arise when equipment we have purchased to repair and maintain a truck can no longer perform the necessary service on a truck because of technological change. The impairment loss is equal to the amount by which the book value of the asset is greater than market value. The journal entry to record an impairment loss is: Dr. Loss on impairment Cr. Accumulated amortization Solutions Manual 9-94 Chapter 9

BYP 9-4 (Continued) When an impairment loss is recorded the cost of the long lived asset does not change. The amount of accumulated amortization increases by the amount of the impairment loss. The net book value of the asset then decreases to reflect the market value of the asset. When an impairment loss is recorded net income is decreased and in turn the value of the long lived asset recorded on our company s balance sheet also decreases. In future years the annual amortization expense will need to be revised. Future annual amortization expense will be based on the revised net book value (which is equal to the market value after the impairment loss is recorded), the revised residual value, and the revised remaining useful life of the asset. It is possible the residual value and the remaining useful life may not be changed. In that case future annual amortization expense will be less than it has been in previous years as a result of the loss. If the residual value and the remaining useful life change then the future amortization expense may be greater or lower than the previous amortization expense. Solutions Manual 9-95 Chapter 9

BYP 9-5 ETHICS CASE (a) The stakeholders in this situation are: President of Finney Container Company Controller of Finney Container Company The owners of Finney Container Company Potential investors in Finney Container Company Creditors and others with a financial interest in the company (b) The intentional misstatement of the life of an asset or the amount of the residual value is unethical, whatever the reason. There is nothing unethical about changing the estimate either of the life of an asset or of an asset's residual value if the change is an attempt to better match cost and revenues, and is a better allocation of the asset's amortizable cost over the asset's useful life. In this case, it appears from the controller's reaction that the revisions in the life and residual value are intended only to improve net income. This is unethical. The fact that the competition uses a longer life on its equipment is not necessarily relevant. The competition's maintenance and repair policies and activities may be different. The competition may use its equipment fewer hours a year (e.g., one shift rather than two shifts daily) than Finney Container Company. Solutions Manual 9-96 Chapter 9

BYP 9-5 (Continued) (c) Net income in the year of change is increased $320,000 ($560,000 - $240,000), because amortization expense is decreased $320,000, by implementing the president's proposed changes. Old Estimate Asset cost... $3,000,000 Estimated residual... 200,000 Amortizable cost... 2,800,000 Estimated useful life... 5 years Amortization per year... $ 560,000 Revised Estimate Asset cost... $3,000,000 Estimated residual... 200,000 Amortizable cost... 2,800,000 Amortization taken to date ($560,000 x 2 years).. 1,120,000 Remaining cost to be amortized... 1,680,000 Remaining useful life (9 years - 2 years)... 7 years Amortization per year... $ 240,000 Solutions Manual 9-97 Chapter 9

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