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Financial Accounting Canadian 5th Edition Harrison

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Chapter 7 Property, Plant, and Equipment, and Intangible Assets

Short Exercises (5 min.) S 7-1 1. Property and Equipment, at Cost Millions Aircraft………………………………………………… $ 2,392 Package handling and ground support equipment………………………………………… 12,229 Computer and electronic equipment……………. 28,159 Vehicles………………………………………………. 581 Facilities and other…………………………………. 1,432 Total cost………………………………………….. 44,793

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 475 Copyright © 2015 Pearson Canada Inc. Less: Accumulated depreciation…………………. (14,900) Net property and equipment…………………… $29,893

2. Cost = $44,793 million Carrying amount = $29,893 million

Carrying amount is less than cost because accumulated depreciation is subtracted from cost to compute carrying amount.

The related costs (real estate commission, back property tax, removal of a building, legal fees, and survey fees) are included as part of the cost of the land because the buyer of the land must incur these costs to get the land ready for its intended use.

After the land is ready for use, the related costs (listed above) would be expensed.

S 7-2

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 478 Copyright © 2015 Pearson Canada Inc. (10 min.) S 7-3 Land ($140,000  0.50) ............................ 70,000 Building ($140,000  0.40) ...................... 56,000 Equipment ($140,000  0.10) .................. 14,000 Note Payable........................................ 140,000 Market Value Land .......................... $ 75,000 Building..................... 60,000 Equipment ................ 15,000 Total .......................... $150,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 479 Copyright © 2015 Pearson Canada Inc. (10-15 min.) S 7-4 Income Statement Revenues CORRECT Expenses UNDERSTATED Net income OVERSTATED Balance Sheet Current assets CORRECT Total liabilities CORRECT Property, Plant, and Equipment OVERSTATED Shareholders’ equity OVERSTATED Total liabilities Total assets OVERSTATED and shareholders’ equity OVERSTATED

1. First-year

2. Carrying amount:

depreciation: (a) Straight-line ($25,000,000 – $5,000,000) / 5 years......................................................... $4,000,000 (b) Units-of-production [($25,000,000 – $5,000,000) / 5,000,000 kilometres]  750,000 kilometres..................................................... $3,000,000 (c) Double-Diminishing-balance ($25,000,000 / 5 years)  2........................... $10,000,000

StraightLine Units-ofProduction DoubleDiminishing Balance Cost.............................. $25,000,000 $25,000,000 $25,000,000 Less Accumulated Depreciation ........... (4,000,000) (3,000,000) (10,000,000) Carrying amount......... $21,000,000 $22,000,000 $15,000,000

Fifth-year amortization:

(a) Straight-line ($25,000,000 – $5,000,000) / 5 years…… $4,000,000

(b) Units-of-production [($25,000,000 –$5,000,000) / 5,000,000 kilometres]  500,000 kilometres………….. $2,000,000

Year 1 ($25,000,000  2/5) = $10,000,000

Year 2 ($25,000,000 – $10,000,000)  2/5 = $6,000,000

Year 3 ($25,000,000 – $10,000,000 – $6,000,000)  2/5 = $3,600,000

Year 4 ($25,000,000 – $10,000,000 – $6,000,000 –3,600,000) 5,000,000 = $400,000

Year 5 No depreciation: asset is fully amortized

First-year

Straight-line depreciation produces the highest net income (lowest depreciation). Units-of-production depreciation produces the lowest net income (highest depreciation).

a. Straight-line (€40,000,000 – €5,000,000) / 7 years  3/12................................................................ € 1,250,000 b. Units-of-production (€40,000,000 – €5,000,000)/ 5,000,000 km  500,000 km ............................ € 3,500,000 c. Double-diminishing-balance (€40,000,000  2/7  3/12)............................................................... € 2,857,143

depreciation (for a partial year):

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 483 Copyright © 2015 Pearson Canada Inc. (10 min.) S 7-8 Depreciation Expense — Concession Stand ....... 12,000 Accumulated Depreciation — Concession Stand.................................................................... 12,000 Depreciation for years 1–4: $60,000 / 10 years = $6,000 per year $6,000  4 years = $24,000 for years 1–4 Asset’s remaining depreciable ÷ (New) Estimated = (New) Annual carrying amount useful life remaining depreciation $60,000 – $24,000 ÷ 3 years = $12,000 per year $36,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 484 Copyright © 2015 Pearson Canada Inc. (10 min.) S 7-9 Req. 1 Straight-line depreciation ($45,000 – $5,000)/5 = $8,000 annually Carrying value of van at December 31, 2014 is $45,000 – $8,000 – $8,000 – $8,000 – $8,000 = $13,000 Req. 2 Cash .................................................... 15,000 Asset account – van .......................... 45,000 Accumulated depreciation................ 32,000 Gain on sale of van............................ 2,000

Patents and goodwill are both long-lived assets. A patent provides the exclusive right to make use of an invention or process for a specific period of time, usually 20 years. Goodwill is the excess of cost of purchasing another company over the sum of the fair value of its net asset. A patent has a finite life that may be measured; goodwill has an indefinite life.

A patent is amortized over its useful life. Amortization is usually computed on a straight-line basis. The amortization is

The cost of the patent, less the accumulated amortization is the carrying amount of this intangible asset.

The value of goodwill does not change, unless it is impaired. Impairment results when the recoverable amount for the goodwill is less than the carrying amount. IFRS requires that companies review the value of their goodwill annually and write down the value of the goodwill if it is less than the carrying amount. The write-down is recorded as follows:

Impairment of goodwill.........................

The carrying amount of goodwill is the cost, less any recorded impairment.

recorded as follows: DR CR Amortization expense.......................... XX Accumulated amortization.............. XX

DR CR

XX Goodwill............................................. XX

200.0 The fair value of the net assets is

The purchase price was

180.3 The goodwill would be

Canadian Tire would have reviewed the goodwill value annually. If the goodwill value is still $19.7 million, there will have been no amortization or expense recorded. The asset value of goodwill will continue to be $19.7 million.

(Millions)

Req.

19.7

1 Jaguar Automobiles Ltd. Income Statement For the Year Ended December 31, 2014 Revenues: Sales revenue...................................... $6,500,000 Expenses: Cost of goods sold ............................. $3,200,000 Research expense .............................. 500,000 Amortization of patent ($1,200,000 / 3) 400,000 Selling expenses................................. 300,000 Total expenses.................................... 4,400,000 Net income............................................... $2,100,000

Req.

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 488 Copyright © 2015 Pearson Canada Inc. (5 min.) S 7-13 Rising Yeast Co. Statement of Cash Flows For the Year Ended December 31, 2014 Cash flows from investing activities: (Millions) Purchase of other companies................................ $(17) Capital expenditures............................................... (2) Proceeds from sale of operations......................... 25 Net cash provided by investing activities. $ 6

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 489 Copyright © 2015 Pearson Canada Inc. (5 min.) S 7-14 (Dollar amounts in millions) Return on assets = Net income ÷ Average total assets 15% = $18 ÷ $120

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 490 Copyright © 2015 Pearson Canada Inc. (5 min.) S 7-15 2013 Return on assets = Net income ÷ Average total assets 17.7% = $42,500 ÷ $240,000 2014 Return on assets = Net income ÷ Average total assets 18.0% = $45,000 ÷ $250,000

Exercises

Land: $150,000 + $100,000 + $5,000 + $3,000 + $25,000 = $283,000

Land improvements: $100,000 + $10,500 + $18,000 = $128,500

Building:$70,000 + $3,750,000 = $3,820,000

(5-10 min.) E 7-16

Allocation of cost to individual machines:

Capital expenditures: All costs incurred to bring the asset to its intended use are included in the cost of the asset.

(f) reinforcement to platform, (h) major overhaul,

(j) lubrication before machine is placed in service

Note: (h) would also be a capital expenditure when completed after a period of operation.

Immediate expenses:

(g) Income tax, (i) ordinary recurring repairs, (k) periodic lubrication

A capital expenditure increases an asset’s capacity or extends its useful life. An immediate expense maintains the asset or restores it to working order.

Machine Appraised Value Percentage of Total Appraised Value Total Cost Cost of Each Asset 1 $ 27,000 $27,000 / $108,000 = 0.250 $100,000  0.250 = $25,000 2 45,000 45,000 / 108,000 = 0.417 100,000  0.417 = 41,700 3 36,000 36,000 / 108,000 = 0.333 100,000  0.333 = 33,300 Totals $108,000 1.000 $100,000 Sale price of machine

$45,000 Cost ......................................................... 41,700 Gain on sale of machine........................ $ 3,300 (5-10 min.) E 7-18

no. 2...................

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 493 Copyright © 2015 Pearson Canada Inc. (15 min.) E 7-19 Journal ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT 1 . a. Land………………………………………… … 200,00 0 Cash………………………………………. .. 200,00 0 b . Building [$2,250 + $20,000 + $700,000 + ($29,000  9/12)] 744,00 0 Note Payable……………………………… 700,00 0 Cash [$2,250 + $20,000 + ($29,000  9/12)] 44,000 c. Depreciation Expense……………………... 6,840 Accumulated Depreciation ($744,000 – $60,000) / 25  3/12……….. 6,840

Property, Plant, and Equipment: Land..................................................... $200,000 Building............................................... $744,000 Less Accumulated depreciation....... (6,840) Building, net........................................ 737,160

2. BALANCE SHEET

Expense: Depreciation expense........................ $ 6,840

3. INCOME STATEMENT

Computations:

The units-of production method tracks the useful life cost of the van most closely.

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 494 Copyright © 2015 Pearson Canada Inc. (15-20 min.) E 7-20 Year Straight-Line Units-ofProduction DoubleDiminishing Balance 1 $ 9,000 $ 7,200 $ 19,980 2 9,000 10,800 6,673 3 9,000 9,000 347 $ 27,000 $27,000 $27,000

Straight-line: ($30,000

$3,000) ÷

per year. Units-of-production:

$3,000) ÷ 150,000

kilometre; YR1 40,000  $0.18 = $7,200 2 60,000  $0.18 = $10,800 3 50,000  $0.18 = $9,000 Double-diminishing-balance — Twice the straight-line rate: 1/3  2 = 2/3 = 66.6% YR 1 $30,000  0.666 = $19,980 2 ($30,000 – $19,980)  0.667 = $6,673 3 ($30,000 – $19,980 – $6,673) = $3,347 – $3,000 (residual value) = $347

–

3 = $9,000

($30,000 –

kilometres = $0.18 per

STATEMENT

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 495 Copyright © 2015 Pearson Canada Inc. (15 min.) E 7-21 INCOME STATEMENT Expenses: Depreciation expense — building [($50,000 + $100,000 + $50,000) – $50,000] / 25 ....................... $ 6,000 Depreciation expense — equipment and store fixtures ($50,000  2/5)............................................ 20,000 Supplies expense ($10,000 – $2,000).................................................... 8,000 BALANCE SHEET Current assets: Supplies....................................................................... $ 2,000 Property, Plant, and Equipment: Building ($50,000 + $100,000 + $50,000). $200,000 Less accumulated depreciation .............. (6,000) $194,000 Equipment and store fixtures .................. $ 50,000 Less accumulated depreciation .............. (20,000) 30,000

OF CASH FLOWS Cash flows from investing activities: Purchase of building ($50,000 + $50,000).......... $(100,000) Purchase of equipment and store fixtures........ (50,000) Net Cash used for investing activities $ 150,000

Profit margin for the year ended January 31, 2014:

Return on assets for the year ended January 31, 2014:

earnings $ 2,010 = 5.96% or (4.12% x 1.45 = 5.97%)*

*difference due to rounding

Net

Asset

Net

Average

earnings $ 2,010 = 4.12%

sales $48,815 Req. 2

turnover for the year ended January 31, 2014:

sales $48,815 = 1.45

total assets $33,699

Req. 3

Net

Average

total assets $33,699 _____

Depreciable cost: $900,000 – $100,000 = $800,000

Depreciation through year 10: $800,000 ÷ 30 = $26,667  10 = $266,670

Asset’s remaining depreciable carrying amount: $900,000 – $266,670 – $75,000 = $558,330

New estimated useful life remaining: 10 years

New annual depreciation: $558,330 ÷ 10 = $55,833

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 497 Copyright © 2015 Pearson Canada Inc. (10-15 min.) E 7-23 Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Year 11 Depreciation Expense…………………… 55,833 Accumulated Depreciation — Building 55,833 Year 12 Depreciation Expense…………………… 55,833* Accumulated Depreciation — Building 55,833 _____

*Computation:

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 498 Copyright © 2015 Pearson Canada Inc. (15-20 min.) E 7-24 Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT 2014 Depreciation for 6 months: June 30 Depreciation Expense ........................1,800a Accumulated Depreciation — Fixtures............................................ 1,800 Sale of fixtures: 30 Cash .....................................................5,000 Accumulated Depreciation — Store Fixtures ($6,000 + $1,800) ........7,800 Loss on Sale of Fixtures ....................2,200b Fixtures............................................ 15,000 _____ a2013 depreciation: $15,000  2/5 = $6,000 2014 depreciation: ($15,000 – $6,000)  2/5  6/12 = $1,800 bLoss is computed as follows: Sale price of old fixtures ............................. $ 5,000 Carrying amount of old fixtures: Cost ........................................................... $15,000 Less: Accumulated depreciation............ (7,800) 7,200 Loss on sale.................................................. $ 2,200

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 499 Copyright © 2015 Pearson Canada Inc. (10-15 min.) E 7-25 Cost of old truck………………………………… $280,000 Less Accumulated depreciation: ($280,000 – $40,000)  130 + 180 + 180 + 90 (139,200) 1,000 _______ Carrying amount of old truck……………………… $140,800 Journal Entry: Cost of tractor-trailer rig 280,000 Accumulated depreciation 139,200 Loss on derecognition 140,800

Goodwill has increased by 8.9 thousand. This indicates that the company has purchased the assets of another entity during the year. It would be important to know how much was paid for the purchase and how the purchase was financed. Will your investment benefit through increased value and/or dividends from profits of the new acquisition? This information will be found by analysis of the Goodwill notes to the financial statements.

Further it will be important to ascertain that On the Edge assesses the value of goodwill on a regular basis to determine whether the carrying amount is more than the fair value of the goodwill. The note re Intangible assets should disclose that an assessment was made and that the appropriate action was taken, i.e., that no write-down was required or that a write-down was taken to reflect the value of the impairment. As an investor, this will confirm that the value of goodwill is not overstated.

The carrying value of intangible assets decreased by $6.0 thousand. It will be important to ascertain through the notes the description of the intangible assets (i.e., patents, trademarks or licences), how they relate to the business, and what amortization was recorded. As an investor, you will want to know if new intangible assets have been acquired. This information will be disclosed through the Intangible Assets notes to the financial statements.

for one year: Use straight-line method to allocate cost over useful life.

*Asset remaining carrying amount: $600,000 – ($100,000  2) = $400,000

New estimated useful life remaining: 2 years

New annual depreciation: $400,000 ÷ 2 = $200,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 501 Copyright © 2015 Pearson Canada Inc. (10-15 min.) E 7-27 Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Part1(a)Purchase of patent: Patents………………………………... 600,000 Cash………………………………… 600,000 (b) Amortization

Amortization Expense — Patents ($600,000 ÷ 6)………………………… 100,000 Accumulated Amortization………………………….. 100,000 Part2 Amortization for year 3: Amortization Expense — Patents... 200,000* Accumulated Amortization………………………….. 200,000 _____

Req. 1

Goodwill is defined as “Purchase Price in Excess of Net Assets of Businesses Acquired.”

Req. 2

a. $6.2 million is the amount of cash that Research in Motion Limited paid to acquire (purchase) other companies.

b. $4.5 million must be the carrying amount of goodwill arising from the purchase of these companies.

Req. 3

There must have been no impairment of goodwill during the year.

Req.

Req. 3

Google will determine whether the My Space’s goodwill that Google has purchased has increased or decreased in value. If the goodwill’s value has increased, there is nothing to record. But if the goodwill’s fair value has decreased, that is if the value is impaired, Google will record a loss on goodwill and write down the carrying amount of the goodwill.

of goodwill purchased: Purchase price paid for My Space......... $18,000,000 Fair value of My Space’s net assets: Fair value of My Space’s assets........ $ 25,000,000 Less: My Space’s liabilities................ (24,000,000) Fair value of My Space’s net assets 1,000,000 Cost of goodwill...................................... $17,000,000 Req. 2 Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Assets (Cash, Receivables, Inventories, Property, Plant, and Equipment)..................................... 25,000,000 Goodwill ......................................... 17,000,000 Liabilities ................................... 24,000,000 Cash........................................... 18,000,000 Purchased My Space Ltd.

Cost

1. Depreciation appears on the statement of cash flows as “Noncash items.” Depreciation is an expense that decreased net income, but it did not decrease cash. To measure cash flow from operations, depreciation is added back to net income.

2. During 2014, the retailer:

a. Paid $233.6 million to purchase property, plant, and equipment. Record this cash payment as “[Investment in] Property, plant, and equipment assets.”

b. Paid $0.6 million to acquire other investments.

c. Received cash of $17.0 million from the derecognition (sale) of assets.

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 505 Copyright © 2015 Pearson Canada Inc. (10 min.) E 7-31 a. Sale of building (or derecognition of assets)...................... $600,000 b. Insurance proceeds from fire (or derecognition of assets)...................... 120,000 c. Renovation of stores (or property)................................................ (400,000) d. Purchase of store fixtures (or equipment)............................................ (60,000)

Profit margin for the year ended January 31, 2014:

Net earnings $ 1,116 = 1.36%

Net sales $82,189

Req. 2

Asset turnover for the year ended January 31, 2014:

Net sales $82,189 = 3.5

Average total assets $23,505

Req. 3

Return on assets for the year ended January 31, 2014:

Net earnings $ 1,116 = 4.75% or (1.36% x 3.5 = 4.76%) *

Average total assets $23,505

*difference due to rounding

? = Number of hours of usage Units-ofproduction = Cost – Residual value Useful life, in hours  Number of hours of use depreciation $10,304 = $100,000 + $2,000 –$10,000  ? 50,000 $10,304 = $1.84  ? ? = $10,304 $1.84 = 5,600 hours Alternate solution setup: Depreciation = Cost – Residual value per hour Useful life, in hours = $10,000 + $2,000 – $10,000 = $1.84 50,000 UOP = Depreciation  Number of Depreciation per hour hours of use $10,304 = $1.84  ? ? = $10,304 $1.84 = 5,600 hours

Let

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 508 Copyright © 2015 Pearson Canada Inc. (15-20 min.) E 7-34 (Amounts in millions) Land buildings and equipment Beg. bal. 575.1 Cost of prop. Purchases 74.2 and equip. sold X = 105.2 End. bal. 544.1 Accumulated Depreciation Accum. amort. of prop. and Beg. bal. 209.4 X = 52.4 equip. sold X Depreciation exp. 38.1 End. bal. 195.1 Carrying amount of property and equipment sold: Cost.............................................................. $105.2 Accumulated depreciation ........................ (52.4) Carrying amount sold ................................ 52.8 Loss on sale............................................. (32.6) Sale price of property and equipment...... $ 20.2

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 509 Copyright © 2015 Pearson Canada Inc. (15-20 min.) E 7-35 Net income under straight-line depreciation……... $21,000 Difference in depreciation for fiscal 2014 (year 4 of 5): Straight line depreciation, as reported.............................................................$1,000 DDB depreciation for year 4 (see below)....... 432 Decrease in depreciation expense................. 568 Income Tax rate................................................(0.25) Increase in income tax .................................... 142 Net income Rindy can expect for fiscal 2014 if the company uses DDB depreciation ................... $21,426* *$21,000 + $568 – $142 = $21,426 Cost of furniture, fixtures, equipment, and automotive assets ($1,000  5 years)................. $5,000 DDB depreciation by year: Year DDB depreciation 1 $5,000  2/5.............................................. $2,000 2 ($5,000 – $2,000)  2/5 ............................. 1,200 3 ($5,000 – $2,000 – $1,200)  2/5 .............. 720 4 ($5,000 – $2,000 – $1,200 – $720)  2/5 .. 432

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 510 Copyright © 2015 Pearson Canada Inc. (15-25 min.) E 7-36 Year 2014 2015 2016 2017 New Zealand $ 1. Total current assets No effect 2. Equipment, net $150,000 u* $100,000 u** $50,000 u Correct 3. Net income $150,000 u* $50,000 o $50,000 o$50,000o 4. Owners’ equity $150,000 u $100,000 u $50,000 u Correct u = Understated o = Overstated

($200,000) – Depreciation expense ($50,000)

$150,000 ** Cost (

) – Two years’ depreciation ($100,000)

$100,000

*Cost

$200,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 511 Copyright © 2015 Pearson Canada Inc. Quiz Q7-37 c Q7-38 a Q7-39 c Q7-40 b Q7-41 b Q7-42 c Q7-43 d Q7-44 b Q7-45 d Q7-46 b Q7-47 b Q7-48 c Q7-49 c Q7-50 a Q7-51 d

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 512 Copyright © 2015 Pearson Canada Inc. Problems Group A (20-30 min.) P 7-52A Req. 1 ITEM LAND LAND IMPROVEMENTS WAREHOUSE OFFICE BUILDING FURNITURE (a) $280,000 $70,000 (b) 8,100 (c) $31,600 (d) 1,000 (e) 7,500 (f) 3,400 (g) $1,500 (h) 24,500 (i) 920,000 (j) 50,200 (k) 9,700 (l) 8,200* (m) 57,600 (n) 234,300 (o) 3,000 51,000 6,000 (p) $115,700 (q) 2,300 Totals $296,600 $103,800 $1,241,000 $126,200 $118,000

(a) Land: $320,000 / $400,000  $350,000 = $280,000 Office building: $80,000 / $400,000  $350,000 = $70,000 (n) Land improvements: $60,000  0.05 = $3,000 Warehouse: $60,000  0.85 = $51,000 Office building: $60,000  0.10 = $6,000 _____

Computations:

*Some accountants would debit this cost to the Land account.

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 513 Copyright © 2015 Pearson Canada Inc. (continued) P 7-52A Req. 2 Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT 2014 Dec. 31 Depreciation Expense — Land Improvements ($103,800 / 20  4/12)........ 1,730 Accumulated Depreciation — Land Improvements............................... 1,730 31 Depreciation Expense — Warehouse ($1,241,000 / 40  4/12).............................. 10,342 Accumulated Depreciation — Warehouse.............................................. 10,342 31 Depreciation Expense Office Building ($126,200 / 40  4/12).................. 1,052 Accumulated Depreciation — Office Building ....................................... 1,052 31 Depreciation Expense — Furniture ($118,000 / 8  4/12)................... 4,917 Accumulated Depreciation — Furniture................................................... 4,917 _____ *$1,593 ($95,600 / 20  4/12) if $8,200 (“l” in Req. 1) is debited to Land.

Req. 3

This problem shows how to determine the cost of property, plant, and equipment. It also demonstrates the computation of depreciation for property, plant, and equipment. Because virtually all businesses use property, plant, and equipment, a manager needs to understand how those assets’ costs and depreciation amounts are determined. Depreciation affects net income. Managers need to understand the meaning, components, and computation of net income because often their performance is measured by how much net income the business earns. This problem covers all these concepts with specific examples.

7-52A

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 515 Copyright © 2015 Pearson Canada Inc. (15 min.) P7-53A Req. 1 Journal ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Equipment............................................................ 100,000 Cash.................................................................. 100,000 Depreciation Expense — Buildings……………. 17,500 Accumulated Depreciation — Buildings…… 17,500 ($400,000 – $50,000) / 20 = $17,500 Depreciation Expense — Security Equipment 78,000 Accumulated Depreciation — Equipment..... 78,000 [($600,000 – $260,000)  2/10] + ($100,000  2/10  6/12) = $78,000 Req. 2 BALANCE SHEET Property, Plant, and Equipment: Land................................................................................... $ 150,000 Buildings........................................................................... 400,000 Less: Accumulated Depreciation ($87,500 + $17,500).. (105,000) Equipment ($600,000 + $100,000)……………………..…. 700,000 Less: Accumulated Depreciation ($260,000 + $78,000) (338,000) Total Property, Plant, and Equipment, net $807,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 516 Copyright © 2015 Pearson Canada Inc. (25-35 min.) P 7-54A Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT 2014 Jan. 2 Cash 70,000 Accumulated Amortization — Motor Carrier Equipment (old) ...... 67,000 Motor Carrier Equipment (old)........... 130,000 Gain on sale of Motor carrier equipment........................................ 7,000 Jan. 2 Motor Carrier Equipment (new) 176,000 Cash 176,000 July 3 Depreciation Expense — Building [($650,000 – $250,000) / 40  6/12] 5,000 Accumulated Depreciation — Building........................................... 5,000 3 Cash......................................................... 100,000 Note Receivable...................................... 400,000 Accumulated Depreciation — Building ($145,000 + 5,000)............ 150,000 Building ............................................... 650,000 Oct. 29 Land [$150,000/($150,000 + $300,000)  $420,000].............................................. 140,000 Building [$300,000/($150,000 + $300,000)  $420,000].......................... 280,000 Cash..................................................... 420,000

Financial Accounting Fifth Canadian Edition Instructor’s Solutions Manual 517 Copyright © 2015 Pearson Canada Inc. (continued) P 7-54A Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT 2014 Dec. 31 Depreciation Expense — Motor Carrier Equipment ($176,000  1/6  2).................................. 58,667 Accumulated Depreciation — Motor Carrier Equipment................ 58,667 Dec. 31 Depreciation Expense — Building [$280,000 — (10%  $280,000)]/40  2/12) ............................ 1,050 Accumulated Depreciation — Buildings ...................................... 1,050

Depreciation is the process of allocating property, plant, and equipment’s cost to expense over the period the asset is used. Of less importance is the need to account for the decline in the asset’s usefulness.

The decreasing annual amounts indicate that the company is using an accelerated depreciation method, which allocates more asset cost to expense during the early years of asset use than during the later years. This pattern is not related to changes in the value of the asset, because depreciation is not a process of asset valuation. Even though the property values may be increasing, it is still necessary to record depreciation in order to allocate the cost of the building over its useful life.