Chapter 10 Solutions

Chapter 10
Property, Plant, and Equipment; and Goodwill and

Intangible Assets
Questions
1. The cost of all assets, including property, plant, and equipment, is the purchase
price, net of all discounts, plus sales taxes (but not GST or HST), purchase
commissions, and all other necessary amounts paid to acquire the asset and ready it
for its intended use. The cost of repairing the asset after it is placed in service is
debited to expense, not to the asset account.
2. The cost of removing the old building is debited to Land. The total cost of the land is
$1,115,000.
3. Under the relative-fair-value method, the cost of an individual asset acquired in a
lump-sum (or basket) purchase is based on the ratio of that asset’s market value to
the total market value of the combined assets. The ratio for each asset is multiplied
by the total purchase price to compute the cost of each asset.
4. A betterment is an expenditure that increases the capacity or efficiency or the useful
life of a tangible capital asset. Accordingly, it is debited to the asset account. A
repair merely maintains the asset in good working order. A repair is debited to an
expense account.
5. Amortization is a process of allocating the cost of a capital asset to expense over the
useful life of the asset. Amortization is not a process of valuation based on appraised
value. Amortization is not a fund of cash set aside to replace a fully amortized asset.
Establishing such a cash fund is a decision entirely separate from amortization
accounting.
6. Amortization expense applies to: Buildings, Machinery and Equipment, Furniture
and Fixtures; Natural Resources (Minerals); Intangibles.
7. $ of Annual $ of Annual $ of Annual
Amortization Amortization Amortization
Time Time Time

Double-
Units-of-Production Declining-Balance Straight-Line
Copyright © 2017 Pearson Canada Inc.

Horngren’s Accounting, 10Ce Chapter 10 Instructor’s Solutions Manual
8. Accelerated amortization allocates most of the cost of a capital asset to the early
years of an asset’s life and lesser amounts towards the end. The double-declining-
balance method results in the most amortization in the first year of an asset’s life.
(This fact may be seen in the solution to question 7, above.)
9. The units-of-production method is most appropriate for amortizing the school buses.
Under this method, amortization arises only when the assets are used. When
business is slow, Orillia Schoolbus Co. records less amortization than when business
peaks. This pattern is consistent with the matching principle.
10. The major causes of amortization are physical wear and tear from operation and the
elements, and obsolescence. Obsolescence seems more relevant to Shania Data
Centre’s computers. Changing technology causes Shania to replace the computers
before they are physically worn out.
11. Estimated residual value is not considered in computing amortization except for the
final year of an asset’s life by the double-declining-balance method.
12. Capital cost allowance is the term Canada Revenue Agency (CRA) uses to describe
amortization for tax purposes. The CRA specifies the maximum capital cost
allowance rate a taxpayer may use. Different classes of assets have different capital
cost allowance rates.
13. Since companies use capital cost allowance rates to compute amortization for
income tax purposes, accounting amortization does not have any effect on the
calculation of income taxes due. However, as a tax-deductible expense, capital cost
allowance decreases income taxes due. Accounting amortization does not affect cash
provided by operations because it is a noncash expense.
14. Amortization for less than a full year may be computed by multiplying an annual
amount by the appropriate fraction of the year for the straight-line and double-
declining-balance methods. The units-of-production method uses the units
consumed during the period, whether it’s a full year or a partial year. A policy for
amortization for less than a full month may be as follows: Record a full month’s
amortization if the asset is purchased on or before the fifteenth day of the month,
and record no amortization for the month if purchased after the fifteenth.
15. Amortization before the change in estimate: ($25,000 – $1,000)/6 × 2 = $8,000.
Remaining amortizable book value: $25,000 – $1,000 – $8,000 = $16,000. New
annual amortization: $16,000/7 = $2,286.
16. A company must record amortization up to the date of sale before accounting for the
sale of a property, plant, and equipment asset.
17. A company experiences a gain or loss on the exchange of one property, plant, and
equipment asset for another property, plant, and equipment asset when the
transaction has commercial substance. If the company receiving the new asset
experiences a significant change in the risk, timing, or amount of the future cash
flows from the asset exchange, there is commercial substance. In this case, fair
market value will be used to record the new asset, and a gain or loss will be
recognized on the old asset. Section 3831 of the CPA Canada Handbook underlies
this treatment.
Copyright © 2017 Pearson Canada Inc. 10-773

18. Amortization, also called depletion, expense applies to natural resources.

Amortization is computed by the units-of-production method.
19. Intangible assets differ from most other assets in that intangibles have no physical
form. However, they are assets because they give their owner special rights to
current and expected future benefits. Amortization expense applies to intangibles
except for goodwill, which is not amortized. Goodwill value is assessed annually. If
the assessed value is impaired, the intangible asset goodwill must be written down to
reflect the impairment. The writedown is accounted for as a loss in the year the
impairment is assessed.
20. The cost of patents and other intangibles is often expensed over a shorter period than
the full legal life of the asset because changing technology renders them obsolete.
21. The excess of acquisition cost over the market value of the other company’s net
assets is called goodwill. Goodwill is an intangible asset. Goodwill is not amortized.
The value of goodwill must be assessed annually and, if impaired, the goodwill
value must be written down in the year of the assessment.
22. Woodstock Industrial Products Inc. does not report on its balance sheet goodwill
that the company had created by being successful. No company does under ASPE.
This goodwill would be recorded only by another company that purchased
Woodstock and would be the excess of the acquisition cost over the market value of
Woodstock’s net assets.
23. Under IFRS, amortization is used only for intangible assets. The term “depreciation”
is used for tangible, long-lived assets.
24. Many users are interested in knowing the useful life of a building or a piece of
equipment because of the implications on cash flow for a company. As the asset gets
older, it will most likely have to be replaced, which will affect a company`s cash
flow. By amortizing significant components separately, users will have a better
picture of future replacement costs.
10-774 Copyright © 2017 Pearson Canada Inc.

Starters
(5 min.) S 10-1
The other costs (property tax in arrears, transfer taxes, removal of a building, and survey
fee) 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.
In the future, after the land is ready for use, if similar costs (listed above) were incurred,
they would be treated as expenses and would not be included as part of the cost of the land.
(5 min.) S 10-2
$97,500 + $400,000 + $150,000 = $650,000
Land ($97,500/$650,000) × $550,000 = $82,500
Building ($390,000/$650,000) × $550,000 = $330,000
Equipment = ($162,500/$650,000) × $550,000 = $137,500

(10 min.) S 10-3
Current
Market
Value Percent of Total
Land ........................ $240,000 $240,000 / $765,000 = 31.37%
Building................... 350,000 $350,000 / $765,000 = 45.75
Equipment ............... 175,000 $175,000 / $765,000 = 22.88
Total ........................ $765,000 100.00%
Land = $680,000 × 0.3137 = $213,316

Building = $680,000 × 0.4575 = $311,100
Equipment = $680,000 × 0.2288 = $155,584
General Journal
POST.
DATE ACCOUNT TITLES AND EXPLANATIONS REF. DEBIT CREDIT
Apr. 30 Land 213,316
Building 311,100
Equipment 155,584
Note Payable 680,000
To record purchase of land and building, and
allocate costs appropriately.

(10-15 min.) S 10-4

Net income would be overstated by $600,000. These sample journal entries show that the
expense should have been higher.
General Journal
POST.
Incorrect entry:
Airplane (or Equipment) 600,000
Cash 600,000
Correct entry:
Repair Expense 600,000
Cash 600,000
(10 min.) S 10-5

a. Amortization Expense declines over the life of the asset—double-declining-balance
b. Book value declines over the life of the asset—all methods
c. Amortization expense fluctuates with use—units-of-production
d. Amortization expense is the same each period—straight-line
e. This method best fits an asset that amortizes because of physical use—units-of-
production
f. This method best fits an asset that generates revenue evenly each period—straight-line
g. This method is the most common—straight-line
h. This method records the most amortization over the life of the asset—all methods
record the same amount of amortization

(10-15 min.) S 10-6

Req. 1
First-year amortization:
a. Straight-line ($50,000,000 – $4,000,000) / 5 years ................................. $ 9,200,000
b. Units-of-production [($50,000,000 – $4,000,000) /
6,000,000 miles]750,000 miles .............................. $ 5,750,000
c. Double-declining-balance ($50,000,00040%) .................................... $20,000,000
Req. 2
Book value: Straight-Line
Cost .......................................................................................................... $50,000,000
Less: Accumulated amortization ............................................................ (9,200,000)
Book value ............................................................................................... $40,800,000
(10 min.) S 10-7

Second-year amortization:
a. Straight-line ($50,000,000 - $4,000,000) / 5 years.................................. $9,200,000
b. Units-of-production [($50,000,000 – $4,000,000) / 6,000,000 miles] 
500,000 miles ...................................... $3,833,333
c. Double-declining-balance:
Year 1 $50,000,00040% = $20,000,000
Year 2 ($50,000,000 - $20,000,000)40% ..................................... $12,000,000

(10 min.) S 10-8

1.
($50,000,00025%)½ = $6,250,000
2.
It is necessary for the Government of Canada to regulate the amount of amortization
because different amortization methods can be used by managers of a company to
manipulate reported net taxable income so that the company pays less income tax. By
setting a fair rate for everyone to use, businesses are all treated the same way.
(5-10 min.) S 10-9

First-year amortization (for a partial year):
Straight-line
($40,000,000 - $4,000,000) / 6 years ...................................................... $6,000,000
9/12$6,000,000 ................................................................................... $4,500,000
(10 min.) S 10-10

General Journal
POST.
Dec. 31 Amortization Expense—Hot Dog Stand 18,000
Accumulated Amortization—Hot Dog Stand 18,000
To record Year 5 amortization.
Amortization 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 (New) Estimated useful life (New) Annual

÷ =
amortizable book value remaining amortization
$60,000 – $24,000 ÷ 2 years = $18,000 per year
$36,000

(10 min.) S 10-11

2013–2015: ($250,000 - $25,000)/15 years = $15,000/year; 3 × $15,000 = $45,000
2016: (($250,000 - $45,000) - $25,000)/9 years = $20,000
(5 min.) S 10-12
1. The asset’s accumulated amortization is $100,000, the cost of the asset. Its carrying
value is zero.
2. If an asset cost $100,000 and its residual value is $10,000, its accumulated amortization
if it is fully amortized is $90,000 ($100,000 – $10,000).
(5-10 min.) S 10-13

General Journal
DATE POST.
2019 ACCOUNT TITLES AND EXPLANATIONS REF. DEBIT CREDIT
Dec. 31 Cash 31,000
Accumulated Amortization 36,000
Truck 65,000
Gain on Sale of Truck 2,000
To record sale of truck.
(5 min.) S 10-14
General Journal
DATE POST.
Jan. 15 Milling Equipment (new) 4,200
Accumulated Amortization (old) 2,000
Loss on Exchange of Assets 500
Milling Equipment (old) 4,000
Cash 2,700
Traded in an old milling machine for new one.

(5-10 min.) S 10-15

From a sales standpoint, 2017 was better because sales were higher. But from an income
standpoint, 2016 was the better year. In 2016, merchandising operations—Quik Trip’s main
business—generated $65 thousand of income before taxes. In 2017, merchandising
produced only $49 thousand of income before taxes. Part of the company’s income in 2017
came from selling store facilities. A business cannot hope to continue on this path very
long. This example illustrates why investors and creditors are interested in the sources of a
company’s profits, not just the final amount of net income.
(5-10 min.) S 10-16

1.
The units-of-production amortization method is used to compute amortization expense.
2.
General Journal
DATE POST.
Billions
Dec. 31 Amortization Expense—Oil and Gas Reserves 6.0
Accumulated Amortization—Oil and Gas Reserves 6.0
To record 2017 depletion = ($18 / 2.4)0.8

(10 min.) S 10-17

1.
Purchase price paid for The Thrifty Dime ...................................................... $800,000
Market value of The Thrifty Dime’s assets ............................... $1,200,000
Less: The Thrifty Dime’s liabilities ............................................... (600,000)
Market value of The Thrifty Dime’s net assets .............................................. 600,000
Goodwill purchased by Media Watch............................................................ $200,000
2.
General Journal
POST.
Mar. 22 Assets 1,200,000
Goodwill 200,000
Liabilities 600,000
Cash 800,000
To record purchase of The Thrifty Dime.
(10-15 min.) S 10-18
General Journal
DATE POST.
Dec. 31 Amortization Expense – Patent 4,500
Patent 4.500
To record amortization expense in the first
year. $45,000 ÷ 5 × 6 ÷ 12 = $4,500

(10-15 min.) S 10-19

Innotech Applications
Income Statement
For the Year Ended December 31, 2017
Revenues:
Sales revenue $3,400,000
Expenses:
Research expense $1,300,000
Selling expenses 800,000
Cost of goods sold 400,000
Amortization - patent 200,000
Total expenses 2,700,000
Net income $ 700,000
Amortization of patent: $1,000,000 ÷ 5 = $200,000
(5 min.) S 10-20
Many users are interested in knowing the useful life of a building or a piece of equipment
because of the implications on cash flow for a company. As the asset gets older, it will have
to be replaced, which will affect a company’s cash flow. By amortizing significant
components separately, users will have a better picture of future replacement costs.
(5 min.) S 10-21
This situation illustrates the difference in accounting for internally generated intangible
assets and purchased intangible assets for companies reporting under IFRS. The only costs
capitalized as part of an internally generated patent are the costs associated with getting
patent approval, mainly legal costs. However, the acquiring company is purchasing the
patent at fair value and would record the transaction at that amount.

Exercises
(5-10 min.) E 10-1

Land: $350,000 (cash) + $3,000 (property tax in arrears) + $1,500 (legal fee) + $20,500
(cost for levelling the land) = $375,000.
Land improvements: $30,000 (fence) + $8,500 (sign) + $11,500 (special lighting) =
$50,000.
Building: $1,200,000 (construction cost)
Note that the $2,000 of damage to the fence is expensed, not capitalized.
Allocation of cost to individual trucks: (10-15 min.) E 10-2

Appraised
Truck Value Proportion Allocated Cost
1 $24,000 $24,000 / $66,000 = 0.36 $60,000 × 0.36 = $21,600
2 22,000 22,000 / 66,000 = 0.34 60,000 × 0.34 = 20,400
3 20,000 20,000 / 66,000 = 0.30 60,000 × 0.30 = 18,000
Totals $66,000 1.00 $60,000
General Journal
POST.
ACCOUNT TITLES AND EXPLANATIONS REF. DEBIT CREDIT
Feb. 1 Truck 1 21,600
Truck 2 20,400
Truck 3 18,000
Cash 21,000
Note Payable 39,000
To record purchase of used trucks.

(5-10 min.) E 10-3

Cost or Repair or Other
Betterment Expense
(a) Purchase price Cost
(b) Sales tax paid on the purchase price Cost
(c) Transportation and insurance while Cost
the machine is in transport from seller to
buyer
(d) Installation Cost
(e) Training of personnel for initial Cost
operation of the machine
(f) Special reinforcement to the machine Cost
platform
(g) Income tax paid on income earned Expense
from the sale of products manufactured
by the machine
(h) Major overhaul to extend useful life Betterment
by three years
(i) Ordinary recurring repairs to keep the Repair
machine in good working order
(j) Lubrication before the machine is Cost
placed in service
(k) Periodic lubrication after the machine Repair
is placed in service
(l) GST on the purchase price Receivable
(5-10 min.) E 10-4
1. Equipment is understated by $150,000
2. Net income is understated by $150,000

(10-15 min.) E 10-5

Murray Demolition
Straight-Line Amortization Schedule
Amortization for the Year
ASSET AMORTIZATION AMORTIZATION AMORTIZATION ACCUMULATED ASSET BOOK
DATE COST RATE × COST = EXPENSE AMORTIZATION VALUE
Jan. 1, 2017 $140,000 $140,000
Dec. 31, 2017 1/4 $80,000 $20,000 $20,000 120,000
Dec. 31, 2018 1/4 80,000 20,000 40,000 100,000
Dec. 31, 2019 1/4 80,000 20,000 60,000 80,000
Dec. 31, 2020 1/4 80,000 20,000 80,000 60,000
Murray Demolition
Units-of-Production Amortization Schedule
ASSET AMORTIZATION NUMBER AMORTIZATION ACCUMULATED ASSET BOOK
DATE COST PER KM × OF KMS = EXPENSE AMORTIZATION VALUE
Jan. 1, 2017 $140,000 $140,000
Dec. 31, 2017 0.40 60,000 $24,000 $24,000 116,000
Dec. 31, 2018 0.40 50,000 20,000 44,000 96,000
Dec. 31, 2019 0.40 50,000 20,000 64,000 76,000
Dec. 31, 2020 0.40 40,000 16,000 80,000 60,000
Total Hours 200,000
($140,000 – 60,000) = 0.40/km

200,000

(continued) E 10-5
Murray Demolition
Double-Declining-Balance Amortization Schedule
ASSET DDB AMORTIZATION AMORTIZATION ACCUMULATED ASSET BOOK
Jan. 1, 2017 $140,000 50%* $140,000
Dec. 31, 2017 50% $140,000 $70,000 $70,000 70,000
Dec. 31, 2018 50% 70,000 10,000** 80,000 60,000
Dec. 31, 2019 60,000
Dec. 31, 2020 60,000
* The straight line rate is ¼ or 25%. The DDB rate is therefore 50%.
** There is no amortization taken after the book value is the same as the salvage value. In this case,
only $10,000 of amortization expense is recorded in 2018 because any more would cause the book
value to fall below $60,000.
Either the straight-line or UOP method give a realistic match of amortization expense
against the related revenues. Given that they business has always used the straight-line
method, there is no compelling reason to change at this time.

Req. 1 (15-20 min.) E 10-6

Amortization Expense per Year
Straight- Units-of- Double-Declining

Year Line Production Balance
2017 $150,000 $157,500 $306,667
2018 150,000 148,500 102,222
2019 150,000 144,000 41,111
$450,000 $450,000 $450,000
Computations:
Straight-line: ($460,000 – $10,000) ÷ 3 = $150,000 per year.
Units-of-production: ($460,000 – $10,000) ÷ 2,000,000 parts = $0.225 per part
2017 = 700,000 × $0.225 = $157,500
2018 = 660,000 × $0.225 = $148,500
2019 = 650,000 × $0.225 = $146,250, but max is $144,000, since machine reached its
2,000,000-part useful life after 640,000 parts in 2019.
Double-declining balance: 2017: $460,000 × (1/3 × 2) = $306,667
2018: ($460,000 – $306,667) × (1/3 × 2) = $102,222
2019: ($460,000 – $306,667 – $102,222 – $10,000 residual value)
= $41,111
Req. 2
The highest second year net income would occur when there is the least amortization
expense. Thus, from the 2018 amounts calculated and displayed above, the DDB method
will have the highest net income. The higher net income results from the choice of
amortization method and not from any efficiencies related to the machinery.
Req. 3
The units-of-production method tracks the wear on the machine most closely. A greater
amortization expense will result as the machine is used more.
Req. 4
Year Straight-Line Double-Declining Balance

2017 –– $306,667
2018 $71,666
2019 71,667
$143,333 + $306,667 = $450,000
$460,000 – $306,667 – $10,000 = $143,333 = $71,666

2 years 2

(5 min.) E 10-7
ASSET AMORTIZABLE AMORTIZATION AMORTIZATION ACCUMULATED BOOK
DATE
COST COST RATE EXPENSE AMORTIZATION VALUE
$20,000
Jan. 1, 2015 $20,000
20,000 $20,000
Dec. 31, 2015 0.4 $8,000 $8,000 12,000
20,000 12,000
Dec. 1, 2016 0.4 4,800 12,800 7,200
20,000 7,200
Dec. 1, 2017 0.4 2,880 15,680 4,320
20,000 4,320
Dec. 1, 2018 0.4 1,728 17,408 2,592
20,000
Dec. 1, 2019 592 18,000 2,000
(5 min.) E 10-8
Req. 1
Accounting—Straight-line
5% of $625,000 = $31,250 residual value straight-line amortization
(625,000 – 31,250)/5 = 118,750 each year
Tax—CCA
2016: 625,000 × 20% × ½ = 62,500
2017: (625,000 – 62,500) × 20% = 112,500
Straight-line CCA
2016 $118,750 $62,500
2017 118,750 112,500
Req. 2
The federal government must regulate the amount of amortization a company can deduct for
income-tax purposes to prevent companies from deducting 100% amortization to minimize
taxable income and, therefore, income taxes.

(10-15 min.) E 10-9

General Journal
POST.
Year 20 Amortization Expense—Building* 15,000
Accumulated Amortization––Building 15,000
To record year 20 amortization of the
building.
Year 21 Amortization Expense—Building 25,000*

To record year 21 amortization of the
building.
* Computations:
Year 20:
($800,000 – $50,000)  50 = 15,000
Year 21:
Amortizable cost: $800,000 – $50,000 = $750,000
Amortization through year 20: ($750,000 ÷ 50) × 20 = $300,000
Asset’s remaining amortizable book value: $800,000 – $300,000 = $500,000
New estimated useful life remaining: 20 years
New annual amortization: $500,000 ÷ 20 = $25,000

(10-15 min.) E 10-10

General Journal
DATE POST.
Dec. 31 Amortization Expense—Store Fixtures 13,000*
Accumulated Amortization––Store Fixtures 13,000
To record 2013 amortization of fixtures.
2017 Amortization for 9 months:

Sep. 30 Amortization Expense—Store Fixtures 7,800**
To record amortization until the date of sale of
the fixtures to bring account balances up to
date.
30 Cash 19,150
Loss on Sale of Store Fixtures 25,050***
Store Fixtures 65,000
To record the sale of the store fixtures.
* 2016 amortization: $65,000 × 2/10 = $13,000

** 2017 amortization: ($65,000 – $13,000) × 2/10 × 9/12 = $7,800
Total accumulated amortization to remove at sale: $13,000 + $7,800 = 20,800
*** Loss is computed as follows:

Sale price of old store fixtures $19,150
Book value of old fixtures:
Cost $65,000
Less Accumulated amortization 20,800 44,200
Loss on sale ($25,050)

(10-15 min.) E 10-11
General Journal
POST
DATE ACCOUNT TITLES AND EXPLANATIONS REF DEBIT CREDIT
2016
Jan. 1 Bulldozer 64,000
Cash 64,000
May 1 Furniture 15,000

Cash 15,000
Dec. 31 Amortization Expense 6,400

Accum. Amortization-Bulldozer 6,400
31 Amortization Expense 800

Accum. Amortization-Furniture 800
2017
Jun. 30 Amortization Expense 600
Accum. Amortization-Furniture 600
30 Cash 11,000
Accumulated Amortization-Furniture 1,800
Loss on Sale of Furniture 2,200
Furniture 15,000
Dec.31 Amortization Expense 5,973

Accum. Amortization-Bulldozer 5,973
Bulldozer
2016 = $64,000 × 2/20 = $6,400
2017 = ($64,000-$4,267) × 2/20 = $5,973
Furniture
2016 = ($15,000 -$3,000) ÷ 10 = $1,200 × 8/12 = $800
2017 partial year = $1,200 × 6 ÷ 12 = $600

(10-15 min.) E 10-12

This transaction has commercial substance.
Cost of new truck = $500,000
There was a $123,000 gain on the exchange of assets, calculated as:
Cost of old truck $585,000

Accumulated amortization:
($585,000 – 150,000 + 195,000 + 235,000 + 100,000 ] (238,000)

× [
$60,000) 1,500,000
Net book value of old truck $347,000
Cost of new truck (fair market value) $510,000

– Net book value of old truck (347,000)
– Cash paid for new truck (40,000)
= Gain on exchange of trucks $123,000
General Journal
POST.
Aug. 15 New Truck 510,000
Accumulated Amortization—old truck 238,000
Gain on exchange of trucks 123,000
Cash 40,000
Old Truck 585,000
To record the trade in of the old truck as part
payment for the purchase of a new truck.

(10-15 min.) E 10-13
General Journal
DATE POST
Purchase of mineral rights:
Jan. 1 Mineral Asset 900,000
Cash 900,000
To record purchase of mineral rights (1).
Jan. 1 Mineral Asset ($1,000 + $5,000) 6,000

Cash 6,000
To record payment of $1,000 and $5,000 fees (2).
Jan. 1 Mineral Asset 75,000

Cash 75,000
To record payment of other costs (2).
Dec. 31 Amortization Expense—Mineral Asset 212,550

Accumulated Amortization––Mineral Asset 212,550
To record 2017 amortization (3).
$900,000 + 1,000 + 5,000 + 75,000 = $981,000
$981,000 ÷ 300,000 = $3.27 per tonne
65,000 tonnes × $3.27 = $212,550

(10-15 min.) E 10-14

Reqs. 1, 2, 3
General Journal
POST.
Year 1 Patents 525,000
Cash 525,000
To record purchase of patent.
Amortization Expense––Patents 52,500

Patents 52,500
To record amortization ($525,000 ÷ 10).
Year 3 Amortization Expense––Patents 420,000*

Patents 420,000
Tor record year 3 amortization.
* Asset remaining book value: $525,000 – ($52,500 × 2) = $420,000

New estimated useful life remaining: 1 year
New amortization in year 3: $420,000
(10-15 min.) E 10-15
Req. 1
The value assigned would be based on the assessed market value of the net tangible assets.
Req. 2
Goodwill is $27 million – ($45 million – $30 million) = $12 million.
Req. 3
Goodwill will not be written off (amortized). If an annual review of goodwill value
determines that the value of goodwill is impaired, the goodwill value will be reduced to the
impaired value through a one-time charge to a loss on the value of goodwill.

(10-15 min.) E 10-16

Req. 1
Purchase price paid for acquisitions $91,000

Market value of assets acquired $84,500
Less: acquired liabilities (16,400)
Market value of acquired net assets 68,100
Goodwill purchased by Niall’s Foods $22,900
Req. 2
General Journal
POST.
2016 ACCOUNT TITLE REF. DEBIT CREDIT
Dec. 31 Cash 3,400
Accounts receivable 8,400
Equipment 72,000
Intangibles 700
Goodwill 22,900
Long-term debt 16,400
Cash 91,000
To record acquisitions.
Req. 3
General Journal
POST.
2017 ACCOUNT TITLE REF. DEBIT CREDIT
Dec 31 Loss Due to Goodwill Impairment 3,435
Goodwill 3,435
To record impairment ($22,900 × 0.15).

(10-15 min.) E 10-17

Req. 1
Cost of goodwill purchased:

Purchase price paid for Raytheon Electronics Inc. $2,000,000
Market value of Raytheon Electronics Inc.’s net assets:
Market value of Raytheon Electronics Inc.’s assets $3,100,000
Less: Raytheon Electronics Inc.’s liabilities 1,800,000
Market value of Raytheon Electronics Inc.’s net assets 1,300,000
Cost of goodwill $ 700,000
Req. 2
General Journal
POST.
Dec. 31 Assets 3,100,000
Goodwill 700,000
Liabilities 1,800,000
Note Payable 2,000,000
Purchased Raytheon Electronics.
Req. 3
Camden will not record any goodwill impairment loss for 2017. Under ASPE and IFRS,
goodwill is not amortized.
Req. 4
General Journal
POST.
Dec. 31 Goodwill Impairment Loss 280,000*
Goodwill 280,000
To write down goodwill value as of year end
2018.
*Goodwill impairment loss is $700,000 × 0.40 = $280,000

(10-15 min.) E 10-18

Req. 1
Banner Printer Components
Monitor:
Annual amortization = $1,800 ÷ 4 = $450
Base Unit:
Cost per copy = ($75,000 - $5,000) ÷ 200,000 = $0.35
2017 copies = 17,000 × $0.35 = $5,950
CPU:
Annual amortization = ($4,700 – $200) ÷ 3 = $1,500
Printer Trays:
Annual amortization = ($15,000 - $2,000) ÷ 10 = $1,300
2017 Amortization for Banner Printer = $450 + $5,950 + $1,500 + $1,300 = $9,200
(10-15 min.) E 10-19

Req. 1
Individual stores are considered to be CGUs.
Req. 2
Prior to the adoption of IFRS, stores were grouped together by primary market area in order
to assess impairment.

(20-25 min.) E 10-20
Req. 1
Computer
Straight-line:
$1,000 ÷ 4 = $250 amortization for Year 1
For one month, amortization = $250 × 1/12 = $20.83 or $21
DDB:
For 4 years, the DDB rate = 2 × 25% = 50%
50% × $1,000 = $500 amortization for Year 1
For one month, amortization = $500 × 1/12 = $41.66 or $42
Office furniture
Straight-line:
$5,000 ÷ 5 = $1,000 amortization for Year 1
For one month, amortization = $1,000 × 1/12 = $83.33 or $83
DDB:
For 5 years, the DDB rate = 2 × 20% = 40%
40% × $5,000 = $2,000 amortization for Year 1
For one month, amortization = $2,000 × 1/12 = $166.67 or $167
Req. 2
The double-declining balance method results in the highest expense as it is double the
straight line rate.

(continued) E 10-20
Req. 3
Lee Management Consulting has chosen to use the DDB method which results in a higher
amortization expense in the early years of the asset. This was likely chosen to reflect the
true ‘wear and tear’ and loss of value of the assets which is greater in the early years of use.
Req. 4
General Journal
POST.
Jul. 31 Amortization Expense—Equipment 42
Amortization Expense—Furniture 167
Accumulated Amortization—Equipment 42
Accumulated Amortization—Furniture 167
To record amortization of furniture and
equipment.
Req. 5
If the furniture were amortized over 6 years starting in December, the journal entry would
be as follows:
- Book value at December 1 for the furniture is $5,000 – ($167×5 )=$4,165
- Recalculate the amortization based on 6 years. DDB rate = 2/6 or .3333
- Amortization expense = $4,165 × 0.333 = $1,388.19 for the next year.
- Monthly amount is $1,388.19 × 1/12 = $115.68 so round to $116 per month
General Journal
POST.
Dec. 30 Amortization Expense—Equipment 42
Amortization Expense—Furniture 116
Accumulated Amortization—Equipment 42
Accumulated Amortization—Furniture 116
To record amortization of furniture and
equipment.

Challenge Exercise
(20-30 min.) E 10-21
Req. 1
(all amounts are in thousands)
Total Accumulated Amortization

*Disposals 118 78,173 2016 Balance
8,552 Amortization
86,607 2017 balance
* Total accumulated amortization of assets disposed of during 2017 is $118 ($78,173 + $8,552 –
$86,607)
Req. 2
Total Assets
2016 balance 197,452 1,942 Disposals**
Purchases 27,681
2017 balance 223,191
**Cost price of assets sold during 2017 is $1,942 ($197,452 + $27,681 – $223,191)
Req. 3
General Journal
POST.
Cash 1,880,000
Accumulated amortization 118,000
Assets (disposed) 1,942,000
Gain on disposal 56,000
To record the disposal of PPE during the
year.

Beyond the Numbers (20-30 min.) BN 10-1

1. Julian Lyon, if he were dishonest, might debit the cost of an expense to
Property, Plant, and Equipment, an asset account, in order to overstate
reported income and asset amounts.
2. We support the recording and reporting of intangible assets at cost, in

accordance with ASPE because the business paid a price for intangibles
like any other asset. The argument for recording intangibles at $1 or $0
is consistent with a lender’s perspective, who might reason that, in the
liquidation of a business, most of its intangibles are worthless.
However, accounting serves other users besides lenders. Also, someone
who evaluates a business and believes its intangibles are worthless can
simply subtract the intangibles’ cost from total assets and from total
owner’s equity to compute revised totals for analytical purposes. But the
reverse is not true. If intangibles were not reported on the balance sheet,
a user of the statements who believes the intangibles to have value
could not add the unknown amount to compute revised total assets and
total owner’s equity.
3. Jasmine Singh, if she were dishonest, might debit an expense account

for the cost of property, plant, and equipment to understate reported
income and asset amounts, thus reducing taxes payable in the current
year. If she were honest, however, she might do this because the
amounts are immaterial.
Instructional Note: Student responses will probably not be this complete.

Ethical Issue
Req. 1
The taxpayer wants to allocate as much of the purchase price as possible to the building
because tax law allows a capital cost allowance deduction from taxable income for
amortization expense on amortizable assets. The greater the allocation to the building, the
greater the capital cost allowance deduction and the lower the tax payments. The cost of
land is not amortized and therefore there is no tax deduction allowed.
Req. 2
The owner of Canam Group Developers’ allocation was unethical. Allocating 85 percent to
the building (versus the more realistic figure of 75 percent) overstates tax deductions for
capital cost allowance and saves taxes unlawfully. The nation’s taxpayers—you and I—are
robbed by this dishonest accounting.
(in thousands) Allocation Realistic Allocation

Land 1,200 2,000
Building 6,800 6,000
CCA @ 4% 272 240

Problems
Group A
(10-15 min.) P 10-1A

Amortization is a process of allocating a capital asset’s cost to expense over the period the
asset is used. Amortization procedures are designed to match this expense against revenue
over the asset’s useful life. The primary purpose of amortization accounting is to measure
income. Of less importance is the need to account for the decline in the asset’s usefulness.
Accounting for amortization has nothing to do with setting aside cash or funds to replace
assets as they wear out or become fully amortized. Establishing a fund to replace assets is a
business decision entirely separate from amortization accounting.
A number of factors are considered in determining the period over which an asset’s cost
will be amortized. The factors considered in determining an asset’s useful life are:
 physical deterioration resulting from wear and tear
 obsolescence—when another asset can perform more effectively and/or efficiently.
In determining the useful life of computers, obsolescence is the primary factor. Computers
will be obsolete and require replacement long before 10 years.

(30-40 min.) P 10-2A

Req. 1 (amortization schedules) Paige Construction
Paige Construction
Jan. 5, 2017 $228,700 $228,700
Dec. 31, 2017 1/4 $186,700 $46,675 $46,675 182,025
Dec. 31, 2018 1/4 186,700 46,675 93,350 135,350
Dec. 31, 2019 1/4 186,700 46,675 140,025 88,675
Dec. 31, 2020 1/4 186,700 46,675 186,700 42,000
Asset cost: $200,000 + $12,500 + $4,800 + $11,400 = $228,700

Amortization cost: $228,700 - $42,000 = $186,700
Amortization for the year: ($228,700 – $42,000)/4 years = $46,675

(continued) P 10-2A
Paige Construction
DATE COST PER HOUR × OF HOURS = EXPENSE AMORTIZATION VALUE
Jan. 5, 2017 $228,700 $228,700
Dec. 31, 2017 19.8617 2,400 $47,668 $47,668 181,032
Dec. 31, 2018 19.8617 2,400 47,668 95,336 133,364
Dec. 31, 2019 19.8617 2,400 47,668 143,004 85,696
Dec. 31, 2020 19.8617 2,200 43,696 186,700 42,000
Total Hours 9,400
Amortization per hour: ($228,700 – $42,000)/9,400 hours = $19.8617
Instructor note: Due to rounding, student answers may be different.

(continued) P 10-2A
Paige Construction
Jan. 5, 2017 $228,700 50%* $228,700
Dec. 31, 2017 50% $228,700 $114,350 $114,350 114,350
Dec. 31, 2018 50% 114,350 57,175 171,525 57,175
Dec. 31, 2019 50% 15,175** 186,700 42,000
Dec. 31, 2020 — 186,700 42,000
* DDB rate: (1/4 years × 2) = 2/4 = 50%

** Amortization for 2019: $57,175 – $42,000 = $15,175
Req. 2 (amortization for financial statements)
The amortization method that maximizes reported income in the first years of the crane’s life is the straight-line method, which
produces the lowest amortization for those years ($46,675 per year).

(20-25 min.) P 10-3A

Req. 1
LAND OFFICE STORAGE

ITEM LAND FURNITURE
IMPROVEMENTS BUILDING BUILDING
$934,375
(a) $215,625
6,000
(b)
6,000
(c)
4,500
(d)
$70,000
(e)
(f) $ 1,000
(g) 40,000
14,000
(h)
(i) 150,000
(j) 700,000
(k) 550,000
31,500
(l)
12,500
(m)
(n) 90,000 10,000
(o) $125,000
(p) 2,000
$950,875 $128,000 $1,381,000 $375,625 $127,000
TOTALS
Computations: (a) Land: $1,300,000 / $1,600,000 × $1,150,000 = $934,375

Storage building: $300,000 / $1,600,000 × $1,150,000 = $215,625
(n) Office building: $100,000 × 0.90 = $90,000
Storage building: $100,000 × 0.10 = $10,000
Students may set these up as T-accounts with debit balances and arrive at the same answer.

Req. 2 (continued) P 10-3A

General Journal
POST.
Dec. 31 Amortization Expense––Land Improvements 5,333
Accumulated Amortization––
Land Improvements 5,333
To record amortization ($128,000/20 × 10/12).
31 Amortization Expense––Office Building 28,771

Accumulated Amortization––Office Building 28,771
To record amortization ($1,381,000/40 × 10/12).
31 Amortization Expense––Storage Building 7,826

Accumulated Amortization––Storage Building 7,826
31 Amortization Expense––Furniture 17,639

Accumulated Amortization––Furniture 17,639

(25-35 min.) P 10-4A

General Journal
DATE POST.
Feb. 2 Communication Equipment (new) 196,000
Accumulated Amortization––Communication
Equipment (old) 176,000
Gain on Exchange of Assets 10,000
Communication Equipment (old) 202,000
Cash 160,000
Record exchange of communication equipment:
Old - $202,000 - $26,000 = $176,000
Cash-$196,000(new)-$36,000(trade)=$160,000
Jul. 19 Amortization Expense––Building 18,667

To bring building amortization up to date prior to
sale. [($1,050,000 – $90,000)/30 × 7/12]
19 Cash 150,000
Note Receivable 1,300,000
Building 1,050,000
Gain on Sale of Building* 1,158,667
To record sale of building.
Accumulated Amortization = $740,000+$18,667
Oct. 21 Communication Equipment 136,000

Video Equipment 64,000
Cash 200,000
To record purchase of used equipment:
Communication =
$170,000/$250,000×$200,000 = $136,000
Video = $80,000/$250,000×$200,000 = $64,000
Dec. 31 Amortization Expense––Communication

Equipment 59,889
Accumulated Amortization––Communication
Equipment 59,889
To record amortization of equipment purchased
in February ($196,000 000 × 2/6 × 11/12).
* ($150,000 + $1,300,000 + $758,667 – $1,050,000)

(continued) P 10-4A
General Journal
DATE POST.
Dec. 31 Amortization Expense––Communication
Equipment 7,556
Amortization Expense––Video Equipment 3,556
Accumulated Amortization––
Communication Equipment 7,556
Accumulated Amortization––Video
Equipment 3,556
To record amortization for assets purchased
in October.
Communication: =$136,000 × 2/6 × 2/12 =
$7,556
Video = $64,000 × 2/6 × 2/12 = $3,556
31 Amortization Expense––Buildings 700,000

Accumulated Amortization––Buildings 700,000
To record amortization based on a change in
the useful life*.
* Amortization in previous years: [$15,000,000 – (30% × $15,000,000)]/30 × 10 = $3,500,000
Remaining asset book value to be amortized:
$15,000,000 – $4,500,000 – $3,500,000 = $7,000,000
Amortization: $7,000,000 ÷ 10 = $700,000

(20-30 min.) P 10-5A

General Journal
DATE POST.
Mar. 3 Forklift 8,000
Cash 8,000
To record purchase of used forklift.
5 Forklift 1,500
Cash 1,500
To record engine overhaul.
7 Forklift 1,000
Cash 1,000
To record modification needed for its intended
use.
Nov. 3 Forklift Repair Expense 550

Cash 550
To record repair expense.
Dec. 31 Amortization Expense––Forklift* 5,833

Accumulated Amortization––Forklift 5,833
To record amortization ($8,000 + $1,500 +
$1,000) × 2/3 × 10/12 = $5,833)
*The following calculation would also be correct:
($8,000 + $1,500 + $1,000) × 0.6667 × 10/12 = $5,834

(continued) P 10-5A
General Journal
DATE POST.
Feb. 13 Forklift Repair Expense 400
Cash 400
To record repair expense.
Jul. 10 Amortization Expense––Forklift* 1,556

To record amortization ($8,000 + $1,500 +
$1,000 – $5,833) × 2/3 × 6/12 = $1,556).
10 Forklift (new) 18,000

Loss on exchange of Assets 111
Forklift (old) 10,500
Cash 15,000
To record exchange.
Accumulated amortization = $5,833 + $1,556
= $7,389
Old forklift = $8,000 + $1,500 + $1,000 =
$10,500
Cash = $18,000 – $3,000 = $15,000
Dec. 31 Amortization Expense––Forklift 3,600

To record amortization ($18,000 × 2/5 ×
6/12).
*The following calculation would also be correct:
($8,000 + $1,500 + $1,000 – $5,833) × 0.6667 × 6/12 = $1,556

Req. 1 (30-40 min.) P 10-6A

General Journal
DATE POST.
Jul. 2 Land 330,000
Buildings 220,000
Equipment 110,000
Cash 660,000
To record purchase of assets including the
related legal costs.*
Sep. 2 Delivery Truck 36,000

Cash 36,000
To record purchase of a delivery truck.
3 Delivery Truck 3,000

Cash 3,000
To capitalize the cost of painting the truck.
Dec. 31 Amortization Expense––Buildings 12,500

To record amortization on the building
[($220,000 – $20,000)/8] × 6/12.
31 Amortization Expense––Equipment 18,000

Accumulated Amortization––Equipment 18,000
To record amortization on the equipment
[($110,000 – $2,000)/3] × 6/12.
31 Amortization Expense––Delivery Truck 2,500

Accumulated Amortization––Delivery Truck 2,500
To record amortization on the truck ($36,000 +
$3,000 – $4,000) × (20,000/ 280,000).
2017
May 4 Repairs and Maintenance Expense 1,200
Equipment 9,800
Cash 11,000
To record work done on the equipment.
Nov. 25 Amortization Expense––Delivery Truck 15,000

To update amortization on truck before the
sale. ($36,000 +$3,000 – $4,000) × (140,000 –
20,000)/280,000
* $640,000 + $20,000 = $660,000
Land = ($660,000 × ($360,000/$720,000) = $330,000
Buildings = ($660,000 × ($240,000/$720,000) = $220,000
Equipment = $660,000 × ($120,000/$720,000) = $110,000

Req. 1 (continued) P 10-6A

General Journal
DATE POST.
Nov. 25 Cash 23,600
Gain on Sale of Truck 2,100
Delivery Truck 39,000
To record sale of delivery truck.
Accum. Amortization = $2,500 + $15,000
Dec. 31 Amortization Expense––Building 25,000

To record amortization of the building.
($220,000 – $20,000)/8

To record amortization of the equipment.
[($110,000 – $2,000)/3] × 4/12 = $12,000
[($110,000 – $18,000 – $12,000 + $9,800
– $3,000)/5] × 8/12 = $11,573; $12,000 + $11,573
= $23,573
Req. 2 Pride Parts Co.

Pride Parts Co.
Balance Sheet
December 31, 2017
Property, plant, and equipment:
Equipment $ 119,800*
Less: Accumulated amortization 41,573** $ 78,227
Buildings 220,000
Less: Accumulated amortization 37,500*** 182,500
Land 330,000
Total property, plant, and equipment $590,727
* ($110,000 + $9,800)
** ($18,000 + $23,573)
*** ($12,500 + $25,000)

(oil properties and amortization) (20-30 min.) P 10-7A

Req. 1
The entries to record the company’s cost of the oil property (oil lease) are:
General Journal
POST.
Oil Properties 15,000,000
Cash 15,000,000
To record cost of lease.
Oil Properties 550,000

Cash 550,000
To capitalize cost of geological tests.

Cash 170,000
To capitalize surface preparation.

To capitalize building costs.
The entry for one year’s amortization and sale of oil are:
General Journal
POST.
Amortization Expense—Oil 994,975
Accumulated Amortization––Oil Properties 994,975
To record amortization.[($15,000,000 + $550,000 +
$170,000 + $120,000)/1,990,000] × 125,000
Accounts Receivable (125,000 × $75) 9,375,000

Sales Revenue 9,375,000
To record sale of oil.
Req. 2
Partial Balance Sheet information:
Oil properties $ 15,840,000

Less: Accumulated amortization 994,975
Net oil properties $ 14,845,025

Part 1 (goodwill) P 10-8A

Req. 1
The entry to record the acquisition of the other company is:
General Journal
POST.
Apr. 3 Assets (Cash, Receivables, Inventory, (PPE, etc.) 1,800,000
Goodwill 360,000
Liabilities 540,000
Cash 1,620,000
To record purchase of other company.
* Cost, $1,620,000 – Net assets acquired ($1,800,000 – $540,000) = Goodwill, $360,000.
Req. 2
The company will not amortize goodwill. It will record goodwill on the balance sheet at
$360,000. The company will assess the value of goodwill annually. If the value of goodwill
is impaired (less than the recorded value), the goodwill will be written down to the assessed
value. The writedown will be accounted for as a loss in the year of the writedown.

Part 2 (Patent) (continued) P 10-8A

Req. 1
General Journal
POST.
Jan. 1 Patent 1,650,000
Cash 1,650,000
To record the purchase of patent and the cost
of the related lawsuit ($1,400,000 +
$250,000).
Dec. 31 Amortization Expense––Patent 206,250

Patent 206,250
To amortize the patent after one year
($1,650,000/8).
Req. 2
Patent $ 1,443,750

Problems
Group B
(10-15 min.) P 10-1B

Amortization is a process of allocating a property, plant, and equipment asset’s cost to
expense over the period the asset is used. Amortization procedures are designed to match
this expense against revenue over the asset’s useful life. The primary purpose of
amortization accounting is to measure income. 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
amortization method, which allocates more asset cost to expense during the early years of
asset use than during the latter years. Amortization is not a process of valuation.
Amortization is not recorded based on the assets’ market value. Even though property
values are increasing, the cost of the assets must be expensed over their useful lives. It is
also important to note that assets are recorded at cost, not market value.

(30-40 min.) P 10-2B

Req. 1 (amortization schedules) Priestly Corp.
Priestly Corp.
Jan. 5, 2017 $496,000 $496,000
Dec. 31, 2017 ¼ $486,000 $121,500 $ 121,500 374,500
Dec. 31, 2018 ¼ 486,000 121,500 243,000 253,000
Dec. 31, 2019 ¼ 486,000 121,500 364,500 131,500
Dec. 31, 2020 ¼ 486,000 121,500* 486,000 10,000
Asset cost: $438,000 + $2,200 + $600 + $35,200 + $20,000 = $496,000

Amortization for the year: ($496,000 – $10,000) / 4 years = $121,500

(continued) P 10-2B
Priestly Corp.
DATE COST PER UNIT × OF UNITS = EXPENSE AMORTIZATION VALUE
Jan. 5, 2017 $496,000 $496,000
Dec. 31, 2017 $1.7357 85,000 $147,536 $147,536 348,464
Dec. 31, 2018 1.7357 75,000 130,179 277,715 218,285
Dec. 31, 2019 1.7357 65,000 112,821 390,536 105,464
Dec. 31, 2020 1.7357 55,000 95,464* 486,000 10,000
Total Units 280,000
* Rounded to balance
Amortization per unit: ($496,000 – $10,000) / 280,000 = $1.7357

(continued) P 10-2B
Priestly Corp.
Jan. 5, 2017 $496,000 $496,000
Dec. 31, 2017 0.50 $496,000 $248,000 $248,000 248,000
Dec. 31, 2018 0.50 248,000 124,000 372,000 124,000
Dec. 31, 2019 0.50 124,000 62,000 434,000 62,000
Dec. 31, 2020 0.50 52,000* 486,000 10,000
* To reduce balance to $10,000 at end of year, need to amortize 52,000 in the last year ($486,000 – $434,000)
DDB rate: [(1/4 years) × 2] = 0.50
Req. 2 (amortization for financial statements)
The amortization method that maximizes reported income in the first years of the equipment’s life is the straight-line method, which
produces the lowest amortization in the first year ($121,500 per year).

(20-30 min.) P 10-3B
Req. 1
LAND OFFICE GARAGE

ITEM LAND FURNITURE
IMPROVEMENTS BUILDING BUILDING
$360,000
(a) $40,000
8,000
(b)
$25,000
(c)
2,000
(d)
4,800
(e)
4,000
(f)
(g) $ 2,000
(h) 75,000
(i) 850,000
(j) 650,000
(k) 30,000
15,000*
(l)
48,500
(m)
14,500
(n)
(o) 95,000 5,000
(p) $160,000
(q) 2,500
$374,800 $107,000 $1,672,000 $75,000 $162,500
TOTALS
Computations: (a) Land: $450,000 / $500,000 × $400,000 = $360,000

Garage building: $50,000 / $500,000 × $400,000 = $40,000
(o) Office building: $100,000 × 0.95 = $95,000
Garage building: $100,000 × 0.05 = $5,000
*Some accountants would debit this cost to the Land account.

Req. 2 (continued) P 10-3B

General Journal
DATE POST.
Dec. 31 Amortization Expense––Land Improvements* 3,567
Accumulated Amortization––Land
Improvements 3,567
31 Amortization Expense––Office Building 23,886

Accumulated Amortization––Office Building 23,886
To record amortization (1,672,000/35 × 6/12).
31 Amortization Expense––Garage Building 1,071

Accumulated Amortization––Garage Building 1,071
31 Amortization Expense––Furniture 16,250

Accumulated Amortization––Furniture 16,250
* $3,067 ($92,000/15 × 6/12) if $15,000 (l in Requirement 1) is debited to Land.

(25-35 min.) P 10-4B

General Journal
DATE POST.
Feb. 6 Motor Carrier Equipment––New 330,000
Accumulated Amortization––Motor Carrier
Equipment (old) 194,000
Gain on Exchange of Assets 34,000
Motor Carrier Equipment (old) 280,000
Cash 210,000
To record trade-in of old equipment against
the purchase of new equipment.
Old equip. = $280,000 - $86,000
Cash = $330,000 - $120,000
Jun. 3 Amortization Expense––Building 11,458

To record amortization to the date of sale.
[($1,250,000 – $150,000)/40 × 5/12]
3 Cash 300,000
Note Receivable 1,000,000
Building 1,250,000
Gain on Sale of Building 638,958
To record sale of building.
Gain = $300,000 + $1,000,000 + $588,958 –
$1,250,000
Accum. Amort = $577,500 + $11,458
Sep. 25 Land 316,000

Building 474,000
Cash 790,000
To record purchase of land and building.
Land = $250,000/($250,000 + $375,000) ×
$790,000
Building = $375,000/($250,000 + $375,000) ×
$790,000

(continued) P 10-4B
General Journal
DATE POST.
Amortization Expense––Motor Carrier
Dec. 31 Equipment 151,250
Accumulated Amortization––Motor Carrier
Equipment 151,250
To record amortization in first
year.($330,000/4 × 2) × 11/12
31 Amortization Expense––Buildings 2,370

To record amortization in first year.
[$474,000 – (0.30 × $474,000)]/35 × 3/12
31 Amortization Expense––Buildings 72,800*

To record amortization on buildings acquired
in previous years with new estimated useful
life*.
* Computation of amortization expense—buildings:

Amortization in previous years: [$3,900,000 – (0.30 × $3,900,000)]/30 × 10 = $910,000
Remaining asset book value to be amortized: $3,900,000 – $1,170,000 – $910,000 = $1,820,000
New estimated useful life remaining: 35 years total, minus 10 years used up, equals 25 years
remaining
New annual amortization: $1,820,000/25 = $72,800

(20-30 min.) P 10-5B

General Journal
DATE POST.
Jan. 5 Limousines 40,000
Cash 40,000
To record purchase of a used limousine.
6 Limousines 4,000
Cash 4,000
To capitalize cost of an engine overhaul.
9 Repair Expense 1,500

Cash 1,500
To expense cost of repairs to the limousine.
Jun. 15 Repair Expense 600

Cash 600
To record cost of an engine tune-up.
Dec. 31 Amortization Expense––Limousines 17,600

Accumulated Amortization––Limousines 17,600
To record amortization.
[($40,000 + $4,000) × 0.4*]
* DDB rate is 1/5 × 2 = 0.4

(continued) P 10-5B
General Journal
DATE POST.
Mar. 9 Amortization Expense––Limousines 1,760
To update amortization prior to trade-in.
[($44,000 – $17,600) × 0.4] × 2/12
9 Limousines (new) 75,000

Gain on Exchange of assets 360
Limousines 44,000
Cash 50,000
To record trade-in of old limousine as partial
payment for a new one.
Accum Amort = $17,600 + $1,760
Old Limo = $40,000 + $4,000)
Cash = $75,000 - $25,000
Aug. 9 Repair Expense 2,500

Cash 2,500
To record cost of repair.
Dec. 31 Amortization Expense––Limousines 15,625

($75,000 × 0.25 × 10/12)

Req. 1 (30-40 min.) P 10-6B

General Journal
DATE POST.
Apr. 1 Land* 562,500
Buildings 900,000
Equipment 787,500
Cash 2,250,000
To record purchase of assets.
May 1 Mobile Unit 245,000

Cash 245,000
To record purchase of a truck.
3 Mobile Unit 10,000

Cash 10,000
To capitalize the cost to paint the truck.
Jun. 30 Amortization Expense––Buildings 6,500

[($900,000 – $120,000)/30] × 3/12

[($787,500 – $80,000)/5] × 3/12
30 Amortization Expense––Mobile Unit 12,500

Accumulated Amortization––Mobile Unit 12,500
To record amortization. ($245,000 + $10,000
– $55,000) × (12,500/200,000)
Dec. 30 Maintenance Expense 1,500

Equipment 24,000
Cash 25,500
To record maintenance on the equipment.
2018
Jun. 1 Amortization Expense––Mobile Unit 69,500
To record amortization. ($245,000 + $10,000
– $55,000) × [(82,000 – 12,500)/200,000]
* Land = ($2,175,000 + $75,000) × ($600,000/$2,400,000)
Building = ($2,175,000 + $75,000) × ($960,000/$2,400,000)
Equipment = ($2,175,000 + $75,000) × ($840,000/$2,400,000)
Cash = $2,175,000 + $75,000

Req. 1 (continued) P 10-6B

General Journal
DATE POST.
Jun. 1 Cash 200,000
Gain on Sale of Mobile Unit 27,000
Mobile Unit 255,000
To record sale of the truck.
Accum Amort = $12,500 + $69,500 = $82,000
Jun. 30 Amortization Expense––Building 26,000

Tor record amortization.($900,000 –
$120,000)/30

[($787,500 – $80,000)/5] × 6/12 = $70,750
($787,500 + $24,000 – $90,000 – $35,375
– $70,750)/6] × 6/12 = $51,281
$70,750 + $51,281 = $122,031
Req. 2
Megatron Inc.
Balance Sheet
June 30, 2018
Property, plant and equipment:
Equipment $811,500*
Less: Accumulated amortization 157,406** $ 654,094
Buildings 900,000
Less: Accumulated amortization 32,500*** 867,500
Land 562,500
Property, plant and equipment, net $2,084,094
* ($787,500 + $24,000)
** ($35,375 + $122,031)
*** ($6,500 + $26,000)

(Kitkan Inc.) (20-30 min.) P 10-7B
Req. 1
The entries to record the company’s cost of bauxite are:
General Journal
POST.
Bauxite Mine Lease 4,400,000
Cash 4,400,000
To record cost of the mine lease.
Bauxite Mine Lease 30,000

Cash 30,000
To capitalize cost of removal of old buildings
to make the site ready to use.

Cash 130,000
To capitalize cost of preparing the surface.

To capitalize the cost of the asset retirement
obligation.
The entry for one year’s amortization and sale of bauxite are:
General Journal
POST.
Amortization Expense—Bauxite Mine Lease 434,750
Accumulated Amortization––Bauxite Mine
Lease 434,750
To record amortization. [($4,400,000 +
$30,000 +$130,000 + $140,000)/400,000] ×
37,000
Accounts Receivable 1,480,000

Sales Revenue 1,480,000
To record the sale of bauxite ($37,000 × $40).

(continued) P 10-7B
Req. 2
Bauxite Mine Lease $ 4,700,000

Less: Accumulated amortization 434,750
Net bauxite mine lease $ 4,265,250
(The company could add details of the site restoration costs in a note to the financial
statements.)

(10-15 min) P 10-8B

Part 1 (goodwill)
Req. 1
The entry to record the acquisition of the other company is:
General Journal
POST.
Mar. 31 Assets (Cash, Receivables, Inventory, PPE, etc.) 4,400,000
Goodwill 300,000
Liabilities 2,200,000
Cash 2,500,000
To record acquisition of the other company.
* Cost, $2,500,000 – Net assets acquired ($4,400,000 – $2,200,000) = Goodwill, $300,000.
Req. 2
The Roasted Bean Ltd. should not amortize goodwill at year end or in the future. It should be
recorded on the balance sheet at $300,000. The Roasted Bean Ltd. should assess the value of
goodwill annually. If the goodwill value is impaired, the goodwill should be written down to
reflect the impairment. The writedown amount would be accounted for as a loss in the year of
the writedown.

Part 2 (franchise licence) (continued) P 10-8B
Req. 1
The entries to record the acquisition of the franchise licence are:
General Journal
POST.
Jan. 1 Franchise Licence 250,000
Cash 250,000
To record the purchase of the franchise
licence.
1 Franchise Licence 8,000

Cash 8,000
To capitalize the legal fees related to the
purchase of the licence.
The entry for one year’s amortization is:
General Journal
POST.
Dec. 31 Amortization Expense––Franchise Licence 25,800
Franchise Licence 25,800
($250,000 + $8,000)/10
Req. 2
Franchise Licence $ 232,200

Challenge Problems
(15-20 min.) P 10-1C

1. Amortization should match the cost of a capital asset against the
revenue generated by that asset, taking into account the decline in the
income-producing potential of the asset. The planes will decline in
income-producing potential each year, probably at a declining rate. As a
result, their revenue-generating ability will decline over time.
Accelerated amortization will result in a more accurate matching of

expenses to revenues by charging higher costs in the asset’s early life.
Straight-line amortization presumes that the revenue stream and related
costs are constant each year. The method chosen will have no impact on
income taxes paid because prescribed capital cost allowance (CCA)
rates are used for income-tax purposes,
Accelerated amortization, as the accountants have suggested, will be

more appropriate, but if the students make a good case for straight-line,
they should be given some credit.
2. Only those repairs that increase the efficiency of a property, plant, and
equipment asset or extend its life should be capitalized. Repairs that are
made to keep the asset in operation should be expensed, since it is
assumed that their contribution has a short life (i.e., less than a year).
The decision about capitalizing or expensing betterments/repairs should
be determined by their expected period of contribution or life.
The student should point out to Mr. Linden that it is appropriate to

expense immaterial items whether they are betterments or repairs. Also
point out that expensing repairs will reduce net income and thus, reduce
income taxes.

(15-20 min.) P 10-2C

Solve for original cost:
$75,000 = 0.60x
x = $125,000
Calculate the rate used:

1/8 × 2 = 2/8, or 25%
ACE Industries
Double-Declining-Balance Amortization Schedule (reconstructed)
DATE ASSET DDB AMORTIZATION AMORTIZATION ACCUMULATED ASSET

COST RATE X COST = EXPENSE AMORTIZATION BOOK
VALUE
Purchase $125,000 $125,000
Year 1 0.25 $125,000 $31,250 $31,250 93,750
Year 2 0.25 $93,750 23,438 54,688 70,312
Year 3 0.25 70,312 17,578 72,266 52,734
Year 4 0.25 52,734 13,184 85,439 39,561
If the balance in the accumulated amortization account was $75,000, then the answer is
more than 3 years but less than 4 years.
While this has not been covered in the textbook, students could continue the calculation:
$75,000 – $72,266 = $2,734
$2,734 ÷ $13,184 = 0.207 (or 20.7% of 12 months which equals 2.48 months)
This rounds to 3 years and 2 months.

(15-20 min.) P 10-3C

Costs of mine development would be calculated as
$80,000,000  100,000 metric tonnes = $800 per metric tonne
This amount would be charged against the nickel production in the form of
amortization. In addition, the text describes future removal and site
restoration costs. The student should estimate these costs (note that no
guidelines for estimating the amount have been provided) and indicate that
the amount estimated should be shown as an accrued liability on the balance
sheet. The student should state that, if these costs cannot be reasonably
determined, a contingent liability should be disclosed in the notes to the
financial statements.

Decision Problem
(30-45 min.) Decision Problem

Req. 1
Zastre Associates and Chen Co.
Income Statement
For the Year Ended December 31, 2017
ZASTRE ASSOCIATES CHEN CO.
ACCOUNT TITLE (FIFO and SL) (Weighted-average and DDB)
Sales revenue $560,000 $560,000
Cost of goods sold 262,000* 277,692*
Gross margin 298,000 282,308
Operating expenses $110,000 $110,000
Amortization expense
Zastre (SL):
($400,000 – $40,000)/5 72,000
Chen (DDB):
($400,000 × 1/5 × 2) 160,000
Total expenses 182,000 270,000
Net income $116,000 $ 12,308
* Cost of goods sold:
Units COGS
Zastre Associates 12,000 × $7 = $ 84,000
(FIFO): 5,000 × 9 = 45,000
10,000 × 10 = 100,000
3,000 × 11 = 33,000
30,000 $262,000
Chen Co.
(weighted average): Unit cost = 361,000 = $9.256
39,000
Cost of Goods Sold = $9.256 x 30,000
= $277,692

Req. 2 (continued) Decision Problem
INVESTMENT NEWSLETTER
TO: Our clients
FROM: (Student Name)
SUBJECT: Selecting Zastre Associates or Chen Co.
for a long-term investment
In choosing an investment, we suggest you consider the following factors:
Zastre Associates and Chen Co. are basically identical companies. The two
companies started operations at the same time and are engaged in essentially
the same transactions. Their main difference lies in the accounting methods
that they use.
1. Zastre income statement reports net income of $116,000 compared with
$12,308 for Chen. On the surface, Zastre appears to be more profitable.
This difference is illusory, however, because Zastre uses the FIFO
method to account for inventories and the straight-line method to
account for amortization of its capital assets. These methods result in
the highest possible reported income.
2. Chen Co. reports lower net income than Zastre because Chen uses the
weighted-average method for inventories and the double-declining-
balance method for amortization. These methods result in lower
reported net income.
3. It is likely that both companies will use maximum CCA for income tax
purposes and, both companies will therefore have the same taxable
income and tax payable.
4. Over the long haul, the companies would be equally good investments.

Financial Statement Cases
(30-40 min.) Financial Statement Case 1
Req. 1
Amortization methods used for financial statements:
From Note 4 (Significant Accounting Policies).

Property, Plant, and Equipment:
Straight-line method:
Furniture, fixtures and equipment: 5–10 years
Computer equipment: 3–5 years
Equipment under finance leases: 3–5 years
Leasehold improvements: over the lease term and probable renewal periods to a maximum
of 10 years.
Req. 2
Note 8 (Property, plant and equipment) shows total depreciation for 2014 amounted to
$16,358,000.
Req. 3
Intangible assets are explained in Note 9.

The types of intangible assets in 2014 are computer application software and internal
development costs.
Req. 4
From Note 4 (Significant Accounting Policies), it states that “Events or changes in

circumstances which may indicate impairment include a significant change in the
Company’s operations, a significant decline in performance, or a change in market
conditions which adversely affects the Company.”
This subsection goes on to explain that impairment of long-lived assets occurs when the fair
value of the asset falls below the asset’s carrying value, or value in the accounting records.
If an asset’s value is assessed and it is determined that the asset’s value is impaired, then the
asset is written down to its fair value and the amount of the writedown is an expense for the
period. For example., if Indigo paid a certain amount to purchase another company and the
value of the purchased company declined below that amount, then those assets would be
impaired and would be written down to their fair value.

Financial Statement Case 2

Req. 1
Amortization method used for financial statements:

From Note 1(j)—Summary of significant accounting policies, the straight-line
amortization method is used, with the following amortization periods:
Network assets
Outside plant 17–40 years
Inside plant 4–16 years
Wireless site equipment 6.5–10 years
Balance of depreciable PPE 3–40 years
Req. 2
2013:
Depreciation expense: $1,380,000,000
Amortization expense: $423,000,000
2012:
Depreciation expense: $1,422,000,000
Amortization expense: $443,000,000
Req. 3
There was $502,000,000 spend on additions to network assets which includes

$24,000,000 for asset retirement obligations.
Req. 4
Note 17 includes the following intangible assets:
Subscriber base
Customer contracts, related customer relationships and leasehold interests
Software
Access to right-of-way and other
Assets under construction
Spectrum licences
Acquired brand

(20-25 min.) IFRS Mini-Case
Asset Air Canada (IFRS treatment) Textbook (ASPE treatment)

Property Cost model with components Cost model. Amortize.
depreciated separately
Equipment Cost model with components Cost model with no requirement to
depreciated separately identify components in such detail
Depreciated to estimated residual Straight line method of amortization
value using straight-line method over useful life
over useful service life
Aircraft and flight Components include: Same as Air Canada/IFRS
equipment Airframe & Engine over 20–25
years with 10-20% residual value
Cabin equipment & Modifications
over the term of the lease
Spare engines and parts:
Depreciate over remaining useful
life of the planes to which they
relate (with 10–20% residual
values)
Major maintenance Includes “complex inspections and Treatment depends on the nature of
servicing”. the maintenance. If it extends the
Capitalized and amortized over the useful life of the aircraft then
expected life between major capitalize over the new useful life of
maintenance events the asset. Otherwise, it is treated as
an operating expense.

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Chapter 10

Property, Plant, and Equipment; and Goodwill and

Time Time Time

Copyright © 2017 Pearson Canada Inc.

Copyright © 2017 Pearson Canada Inc. 10-773

18. Amortization, also called depletion, expense applies to natural resources.

10-774 Copyright © 2017 Pearson Canada Inc.

Land ($97,500/$650,000) × $550,000 = $82,500

Building ($390,000/$650,000) × $550,000 = $330,000

Equipment = ($162,500/$650,000) × $550,000 = $137,500

Land = $680,000 × 0.3137 = $213,316

Copyright © 2017 Pearson Canada Inc. 10-775

(10-15 min.) S 10-4

(10 min.) S 10-5

10-776 Copyright © 2017 Pearson Canada Inc.

(10-15 min.) S 10-6

(10 min.) S 10-7

Copyright © 2017 Pearson Canada Inc. 10-777

(10 min.) S 10-8

(5-10 min.) S 10-9

(10 min.) S 10-10

Amortization for years 1-4:

Asset’s remaining (New) Estimated useful life (New) Annual

10-778 Copyright © 2017 Pearson Canada Inc.

(10 min.) S 10-11

2016: (($250,000 - $45,000) - $25,000)/9 years = $20,000

(5-10 min.) S 10-13

Copyright © 2017 Pearson Canada Inc. 10-779

(5-10 min.) S 10-15

(5-10 min.) S 10-16

10-780 Copyright © 2017 Pearson Canada Inc.

(10 min.) S 10-17

(10-15 min.) S 10-18

Copyright © 2017 Pearson Canada Inc. 10-781

(10-15 min.) S 10-19

Amortization of patent: $1,000,000 ÷ 5 = $200,000

10-782 Copyright © 2017 Pearson Canada Inc.

(5-10 min.) E 10-1

Allocation of cost to individual trucks: (10-15 min.) E 10-2

Copyright © 2017 Pearson Canada Inc. 10-783

(5-10 min.) E 10-3

(5-10 min.) E 10-4

1. Equipment is understated by $150,000

2. Net income is understated by $150,000

10-784 Copyright © 2017 Pearson Canada Inc.

(10-15 min.) E 10-5

($140,000 – 60,000) = 0.40/km

Copyright © 2017 Pearson Canada Inc. 10-785

10-786 Copyright © 2017 Pearson Canada Inc.

Req. 1 (15-20 min.) E 10-6

Straight- Units-of- Double-Declining

Year Straight-Line Double-Declining Balance

$460,000 – $306,667 – $10,000 = $143,333 = $71,666

Copyright © 2017 Pearson Canada Inc. 10-787

10-788 Copyright © 2017 Pearson Canada Inc.

(10-15 min.) E 10-9

Year 21 Amortization Expense—Building 25,000*

Copyright © 2017 Pearson Canada Inc. 10-789

(10-15 min.) E 10-10

2017 Amortization for 9 months:

* 2016 amortization: $65,000 × 2/10 = $13,000

Total accumulated amortization to remove at sale: $13,000 + $7,800 = 20,800

*** Loss is computed as follows: