Accounting Principles 7th Canadian Edition Volume 2 Solution
ASSIGNMENT CLASSIFICATION TABLE
|Learning Objectives||Questions||BriefExercises||Exercises||ProblemsSet A||ProblemsSet B|
|1. Calculate the cost of property, plant, and equipment.||1, 2, 3, 4, 5||1, 2, 3, 4||1, 2, 3, 12||1, 2, 3, 4, 6||1, 2, 3, 4, 6|
|2. Apply depreciation methods to property, plant, and equipment.||6, 7, 8, 9,||5, 6, 7, 8, 9||2, 3, 4, 5, 12||2, 3, 6, 7, 8, 9||2, 3, 6, 7, 8, 9, 12|
|3. Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment.||9, 10, 11, 12, 13,||10, 11||6, 7, 8||4, 5, 6, 12||4, 5, 6|
|4. Demonstrate how to account for property, plant, and equipment disposals.||14, 15, 16, 17,||12, 13, 14||9, 10||6, 7, 8, 9||6, 7, 8, 9|
|5. Record natural resource transactions and calculate depletion.||18, 19, 20||15||11||12||12|
|6. Identify the basic accounting issues for intangible assets and goodwill.||21, 22||16||12, 13, 14||10, 11||10, 11|
|7. Illustrate the reporting and analysis of long-lived assets.||23, 24||17, 18, 19||15, 16||9, 11, 12, 13||9, 11, 12, 13|
ASSIGNMENT CHARACTERISTICS TABLE
|1A||Record property transactions.||Simple||20-30|
|2A||Allocate cost and calculate partial period depreciation.||Moderate||20-30|
|3A||Determine cost; calculate and compare depreciation under different methods.||Moderate||30-40|
|4A||Account for operating and capital expenditures and asset impairments.||Moderate||20-30|
|5A||Record impairment and calculate revised depreciation.||Moderate||20-30|
|6A||Record acquisition, depreciation, impairment and disposal of land and building.||Moderate||25-35|
|7A||Calculate and compare depreciation and gain or loss on disposal under three methods of depreciation.||Moderate||30-40|
|8A||Record acquisition, depreciation 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||15-20|
|11A||Record intangible asset transactions; prepare partial balance sheet.||Moderate||30-40|
|12A||Record natural resource transactions; prepare partial financial statements.||Moderate||25-30|
|13A||Calculate ratios and comment.||Moderate||15-25|
|1B||Record property transactions.||Simple||20-30|
|2B||Allocate cost and calculate partial period depreciation.||Moderate||20-30|
|3B||Determine cost; calculate and compare depreciation under different methods.||Moderate||30-40|
|4B||Account for operating and capital expenditures and asset impairments.||Moderate||20-30|
|5B||Record impairment and calculate revised depreciation.||Moderate||20-30|
|6B||Record acquisition, depreciation, impairment and disposal of land and buildings.||Moderate||25-35|
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
|7B||Calculate and compare depreciation and gain or loss on disposal under three methods of depreciation.||Moderate||30-40|
|8B||Record acquisition, depreciation and disposal of furniture.||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||15-20|
|11B||Record intangible asset transactions; prepare partial balance sheet.||Moderate||30-40|
|12B||Record equipment, note payable, and natural resource transactions; prepare partial financial statements.||Moderate||25-30|
|13B||Calculate ratios and comment.||Moderate||15-25|
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems
|1. Calculate the cost of property, plant, and equipment.||Q9-1Q9-2
|2. Apply depreciation methods to property, plant, and equipment.||Q9-7Q9-9
|3. Explain the factors that cause changes in periodic depreciation and calculate revised depreciation for property, plant, and equipment.||Q9-9Q9-12||Q9-10Q9-11
|4. Demonstrate how to account for property, plant, and equipment disposals.||Q9-16||Q9-14Q9-15
|5. Record natural resource transactions and calculate depletion.||Q9-18||Q9-19Q9-20||BE9-15E9-11
|6. Identify the basic accounting issues for intangible assets and goodwill.||Q9-21Q9-22
|7. Illustrate the reporting and analysis of long-lived assets.||Q9-23BE9-17
BLOOM’S TAXONOMY TABLE (Continued)
|Broadening Your Perspective||aBYP9-1 BYP9-2
ANSWERS TO QUESTIONS
- Three characteristics of property, plant, and equipment include: they (1) have a physical substance (a definite size and shape), (2) are used in the operations of the business, and (3) are not intended for sale to customers.
- Examples of land improvements are: a road, driveway, sidewalks or parking lot on the property, fencing and underground sprinkler systems.
- The invoice cost, the cost of the safety inspection, and the cost for the required logo painted on the vehicle are capitalized, as they are required costs to put the vehicle into use. The insurance costs benefit the business for the term of the policy and so the costs should be allocated to the period of benefit from the policy, typically by initially recording the payment as prepaid insurance and then reducing the prepayment, charging insurance expense as the policy expires.
- The purpose of depreciation is not to accumulate the cash needed to replace an asset. Rather, depreciation is a cost allocation method which records an expense in those accounting periods where the asset has been used and has contributed to the earning of revenues. This charge also reduces the carrying amount of the asset, but it does not involve any cash.
- The purchase cost must be split between the land and building because the building is depreciated and the land is not. In addition, the cost of each item will be needed to determine any gain or loss on disposal if either one is later sold.
- Residual value is the estimated amount that a company would obtain from disposing of a long-lived asset at the end of its useful life. Residual value is not depreciated, since the amount is expected to be recovered at the end of the asset’s useful life. Residual value is used in the formula for calculating periodic depreciation using the straight line and unit-of-production methods. Residual value is used in an indirect way in the diminishing balance method. Rather than using residual value to reduce the depreciable amount, as is done using the other two methods, the amount of the depreciation recorded is limited to the amount that will cause the carrying amount to equal the residual value of the asset.
- The three factors that affect the calculation of depreciation include: cost, useful life and residual value. The cost of a depreciable asset must include all necessary costs to get the asset ready for use. The useful life is the period of time an asset is expected to be available for use. This length may be measured as a function of time or number of units of production. The residual value is the estimated amount that a company would obtain from disposing of the asset at the end of its useful life.
- The amount of annual depreciation is different over the useful life of an asset depending on which of the three depreciation methods are being used. The straight-line method creates a constant amount of depreciation over the useful life. The diminishing-balance method is devised to charge a higher amount of depreciation in the earlier part of the useful life of the asset. Lastly, the unit-of-production method is less predictable in that it is based on the amount of use that is being made of the asset.
- A company should choose the depreciation method it believes will best reflect the pattern over which the asset’s future economic benefits are expected to be consumed. The depreciation method must be revised if the expected pattern of consumption of the future economic benefits has changed.
- 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 accounting 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. Once capitalized, these expenditures are depreciated over their benefiting period.
- Revision of the depreciation generally occurs when there is a change to any of the three factors that affect the calculation of depreciation: the asset’s cost, useful life, or residual value. Depreciation needs to be revised if there are capital expenditures, impairments in the asset’s recoverable amount, changes in the depreciation method, or changes in the estimated remaining useful life or residual value. The revisions are based on new information that will affect only current and future periods so there is no revision of depreciation previously recorded.
- Factors that may contribute to an impairment loss include: obsolescence of a piece of equipment, loss of a market for a product manufactured, bankruptcy of the supplier of replacement parts for equipment, or environmental concerns causing extra costs of disposal at the end of the useful life.
- Extending the total service life and consequently the estimated remaining useful life of a depreciable asset will reduce the amount of depreciation recorded in the remaining years of use. The carrying amount of the asset will become the new basis to which the business will apply the formula of the depreciation method. The residual value may also be revised.
- Depreciation must be updated from the last time depreciation entries were recorded to the date of the sale because the depreciation expense must properly reflect the total period over which the asset’s economic benefits are used. Updating depreciation also aids in determining the correct amount of the gain or loss on disposal.
- The asset and related accumulated depreciation should continue to be reported on the balance sheet, without further depreciation or adjustment, until the asset is retired. Reporting the asset and related accumulated depreciation 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 depreciated, no additional depreciation should be taken on this asset, even if it is still being used. In no situation can the accumulated depreciation exceed the cost of the asset.
- In a sale of property, plant, or equipment, the carrying amount of the asset is compared to the proceeds from the sale. If the proceeds of the sale exceed the carrying amount of the asset, a gain on disposal occurs. If the proceeds of the sale are less than the carrying amount of the asset sold, a loss on disposal occurs.
In an exchange, a new asset is received in an exchange for the old asset given up. The gain or loss is calculated by comparing the fair value of the asset given up to its carrying amount. The trade-in allowance on the asset given up is not relevant because it rarely reflects the fair value of the asset that is given up. Instead of using the trade-in allowance, the fair value of the asset given up is used to calculate the gain or loss on the asset being given up. A loss results if the carrying amount of the asset being given up is more than its fair value. A gain results if the carrying amount is less than its fair value.
- Carrying amount of an item of property, plant, or equipment is a sub-total amount representing the net amount of the cost less the accumulated depreciation. The amount is not a general ledger account and so is not used in journal entries used to record dispositions. Instead, the asset and accumulated depreciation accounts are used in the journal entry.
- Natural resources have two characteristics that make them different from other long-lived assets: (1) they are physically extracted in operations such as mining, cutting, or pumping; and (2) only an act of nature can replace them. Similar to property, plant, and equipment, natural resources are tangible long lived assets which are expected to last beyond one year and are therefore classified on the balance sheet as non-current. When natural resources are extracted, depletion is recorded, causing an increase in another asset, inventory, which is subsequently sold.
- The units-of-production method is a common and ideal method of recording the depletion of natural resources. There is a finite quantity of units of natural resource to be extracted. As extraction occurs, the conversion from one asset (natural resource) to another (inventory) can be measured in units and cost of the units can be fairly applied. Consequently, a more precise charge for depletion can be arrived at that corresponds to the asset created (inventory) when the natural resource is reduced.
- I disagree. The useful life of some intangible assets might be limited to the legal life of those assets and in that case, I would agree. I disagree with the limitation of the period of amortization to the legal life of intangibles. Some intangible assets have useful lives that are much shorter than their respective legal lives and so it is appropriate for the proper matching of expenses to revenues for the shorter length of benefiting periods to be used in the calculation of amortization. In some cases, the legal life could be without time limits. In that case it would not be possible to execute a calculation. Finally, in the case of goodwill, GAAP dictates that no depreciation can be recorded under any circumstances. Only impairment losses reduce the carrying amount of goodwill.
- The accounting for tangible and intangible assets is much the same. Tangible and intangible assets are reported at cost, which includes all expenditures necessary to prepare the asset for its intended use. Both tangible and intangible assets with finite lives are amortized over their useful life. In the case of long-lived tangible assets, the useful life or the physical life of the asset will be used as a limit of the length of time the assets will be depreciated. In the case of intangible life, there is no physical limitation in the usefulness of asset and the length of time the asset will be amortized is the shorter of its useful life or its legal life, usually on a straight-line basis. Due to their lack of substance, intangible assets are more likely to have indefinite useful lives and not need to be amortized, but only tested for impairment. This characteristic is the main difference between the accounting of tangible and intangible assets.
- 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 is only recorded on the purchase of a business if the purchaser pays a price that is greater than the fair value of the net assets of the business.
- Property, plant, and equipment and natural resources are often combined and reported in the balance sheet as “property, plant, and equipment” or “capital assets”. Intangible assets are listed separately after property, plant, and equipment. Goodwill must be disclosed separately. For assets that are depreciated or amortized, the balances of the accumulated depreciation and/or amortization must be disclosed in the balance sheet or in the notes to the financial statements.
Depreciation and amortization expense for the period must also be disclosed either on the income statement, elsewhere in the financial statements 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 depreciation or amortization methods and rates that are used. The carrying amount of each major class of long-lived assets should also be disclosed. Companies should also disclose their impairment policy in the notes to the financial statements.
- I disagree. Higher turnover of assets does not necessarily result in increased profits. A higher asset turnover just means that more revenue or sales are being generated for each dollar of assets. On the other hand, a higher return on assets means a proportionately higher profit has been generated for each dollar of assets.