Financial Accounting Canadian 6th Edition Harrison Solutions Manual

Financial Accounting Canadian 6th
Edition Harrison Solutions Manual

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Chapter 6
Property, Plant, and Equipment, and

Intangible Assets
Short Exercises
(5 min.) S 6-1
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
Less: Accumulated (14,900)
depreciation………………….
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.
376 Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual

Copyright © 2018 Pearson Canada Inc.
(5 min.) S 6-2
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.
(10 min.) S 6-3
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 (75,000/150,000 = .50)
Building..................... 60,000 (60,000/150,000 = .40)
Equipment ................ 15,000 (15,000/150,000 = .10)
Total .......................... $150,000
Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual 377

(10-15 min.) S 6-4
Income Statement
Revenues CORRECT
Expenses UNDERSTATED
Net income OVERSTATED
Balance Sheet
Current assets CORRECT Total liabilities CORRECT
Property, Plant, OVERSTATED Shareholders’ equity OVERSTATED
and Equipment
Total liabilities
Total assets OVERSTATED and shareholders’
equity OVERSTATED

(10 min.) S 6-5
1. First-year 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
2. Carrying amount:
Double-
Straight- Units-of- Diminishing
Line Production 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

(10 min.) S 6-6
Fifth-year 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] 
500,000 kilometres………….. $2,000,000
(c) Double-diminishing-balance:
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

depreciated

(5-10 min.) S 6-7
First-year depreciation (for a partial year):
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
Straight-line depreciation produces the highest net income

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

(10 min.) S 6-8
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

(10 min.) S 6-9
Req. 1
Straight-line depreciation ($45,000 – $5,000)/5 = $8,000

annually
Carrying value of van at December 31, 2017 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

(5-10 min.) S 6-10
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 recorded as follows:
DR CR
Amortization expense.......................... XX
Accumulated amortization.............. XX
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:
DR CR
Impairment of goodwill......................... XX
Goodwill............................................. XX
The carrying amount of goodwill is the cost, less any

recorded impairment.

(10-15 min.) S 6-11
Req. 1 (Millions)
The purchase price was $ 200.0

The fair value of the net assets is $ 180.3
The goodwill would be $ 19.7
Req. 2
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.
(10-15 min.) S 6-12

Req. 1
Jaguar Automobiles Ltd.

Income Statement
For the Year Ended December 31, 2017
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

(5 min.) S 6-13
Rising Yeast Co.
Statement of Cash Flows
For the Year Ended December 31, 2017
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
(5 min.) S 6-14
(Dollar amounts in millions)
Return on = Net + ÷ Average total

assets income Int.exp assets
15% = $17 + $1 ÷ $120
The return on assets deteriorated. Possible reasons include

a decrease in sales, increase in expenses or an increase in
total assets.

(5 min.) S 6-15
2016 Return on = Net income + ÷ Average total

assets Int.exp assets
17.7% = $42,000 +500 ÷ $240,000
2017 Return on = Net income ÷ Average total

assets assets
18.0% = $44,500 +500 ÷ $250,000
Return on assets improved in 2017. Net income increased

slightly higher than the increase in total assets. It may be a
result of higher sales or lower expenses or both.
(5 min.) S 6-16
1. E
2. C
3. E
4. C
5. N
6. C
7. C
8. C
9. C
10. E

(5-10 min.) S 6-17
Req. 1
Cost of goodwill purchased:

Millions
Purchase price paid for Healthy Snacks, Inc. $5.8
Market value of Healthy Snacks’ net assets:
Market value of Healthy Snacks’ assets $ 7.0
Less: Healthy Snacks’ liabilities (6.0)
Market value of Healthy Snacks’ net assets 1.0
Cost of goodwill $4.8
Req. 2
In future years Crunchies, Inc. will determine whether its

goodwill has been impaired. If the goodwill’s value has not
been impaired, there is nothing to record. But if goodwill’s
value has been impaired, Crunchies, Inc. will record a loss
and write down the book value of the goodwill.
(5-10 min.) S 6-18
Asset Carrying Value in Fair Impaired? Amount

Amount Use Value (Y or N) of Loss
a. Equipment $180,000 $140,000 $100,000 Y $40,000
b. Trademark $320,000 $460,000 $375,000 N –
c. Land $52,000 $24,000 $21,000 Y $28,000
d. Factory $9 million $9 million $7 million N –

building

Exercises
(5-10 min.) E 6-19

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
(10-15 min.) E 6-20

Allocation of cost to individual machines:
Cost of
Appraised Percentage of Total Total Each
Machine Value Appraised Value Cost 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 no. 2 ................... $45,000

Cost ......................................................... 41,700
Gain on sale of machine ........................ $ 3,300

(5-10 min.) E 6-21
Capital expenditures: All costs incurred to bring the asset to
its intended use are included in the cost of the asset.
(c) Purchase price, (a) sales tax, (b) transportation and

insurance, (d) installation, (e) training of personnel,
(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.

(15 min.) E 6-22
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
1. a. Land………………………… 200,000
Cash………………………………………... 200,000
b. Building [$2,250 + $20,000 + $700,000 +

($29,000  9/12)] 744,000
Note Payable……………………………… 700,000
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
2. BALANCE SHEET
Property, Plant, and Equipment:
Land ..................................................... $200,000
Building ............................................... $744,000
Less Accumulated depreciation ....... (6,840)
Building, net........................................ 737,160
3. INCOME STATEMENT
Expense:
Depreciation expense ........................ $ 6,840

(15-20 min.) E 6-23
Double-
Units-of- Diminishing
Year Straight-Line Production 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
_____
Computations:
Straight-line: ($30,000 – $3,000) ÷ 3 = $9,000 per year.
Units-of-production: ($30,000 – $3,000) ÷ 150,000 kilometres =

$0.18 per 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
The units-of production method tracks the useful life cost of

the van most closely.

(continued) E 6-23
According to IFRS, management should choose a
depreciation method that reflects the pattern in which the
asset will be used. For example, if the asset generates
revenue evenly over time, the straight-line method should be
used. The units of production method is suited for those
assets that wear out of physical use while the diminishing
balance method is best for assets that generate greater
amounts of revenue earlier in their useful lives.

(15 min.) E 6-24
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

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
STATEMENT 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

(5-10 min.) E 6-25
1. Return on assets for the year ended January 31,
2017: 2016:
Net earnings $ 2,000 + $10 = 5.96% $1,773+$10 = 5.4%

Avg. total assets $33,699 $33,005
_____
2. The return on assets improved slightly. Net income

increased with only a slight increase in total assets.
(10-15 min.) E 6-26
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:
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

(15-20 min.) E 6-27
Journal
2017 Depreciation for 6 months:
June 30 Depreciation Expense ........................ 1,800a
Accumulated Depreciation —
Fixtures ........................................... 1,800
Sale of fixtures:
30 Cash ..................................................... 5,000
Store Fixtures ($6,000 + $1,800) ........ 7,800
Loss on Sale of Fixtures .................... 2,200b
Fixtures ........................................... 15,000
_____
a
2016 depreciation: $15,000  2/5 = $6,000
2017 depreciation: ($15,000 – $6,000)  2/5  6/12 = $1,800
b
Loss 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

(10-15 min.) E 6-28
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

(10-15 min.) E 6-29
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.

(10-15 min.) E 6-30
Journal
Part 1(a) Purchase of patent:
Patents………………………………... 600,000
Cash………………………………… 600,000
(b) Amortization for one year: Use

straight-line method to allocate
cost over useful life.
Amortization Expense — Patents
($600,000 ÷ 6)………………………… 100,000
Accumulated 100,000
Amortization…………………………..
Part 2 Amortization for year 3:

Amortization Expense — Patents... 200,000*
Accumulated 200,000
Amortization…………………………..
_____
*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

(15-20 min.) E 6-31
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 Blackberry 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.

(5-10 min.) E 6-32
Req. 1
Cost 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
Assets (Cash, Receivables,
Inventories, Property, Plant, and 25,000,000
Equipment) .....................................
Goodwill.......................................... 17,000,000
Liabilities ................................... 24,000,000
Cash ........................................... 18,000,000
Purchased My Space Ltd.
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.

(10-15 min.) E 6-33
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 2017, 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.
(10 min.) E 6-34

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)

(5-10 min.) E 6-35
1. Return on assets for the year ended January 31,

2017: 2016:
Net earnings $ 1,111+$5 = 4.75% $65+$5 = 0.3%

Average total assets $23,505 $23,126
_____
2. The return on assets improved greatly in 2017. Net income

increased significantly while total assets increased slightly.
(5-10 min.) E 6-36

(a) Major overhaul Capital Expenditure
(b) Periodic lubrication Immediate Expense
(c) Purchase price Capital Expenditure
(d) Training of personnel Capital Expenditure
(e) Reinforcement to platform Capital Expenditure
(f) Transportation and insurance Capital Expenditure
(g) Ordinary recurring repairs Immediate Expense
(h) Lubrication before machine is placed in Capital Expenditure
service
(i) Sales tax Capital Expenditure
(j) Installation Capital Expenditure
(k) Income tax Immediate Expense

(10-15 min.) E 6-37
Let ? = Number of hours of usage
Units-of-
Cost – Residual value Number of
production = 
Useful life, in hours hours of use
depreciation
$100,000 + $2,000 –
$10,304 = $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

(15-20 min.) E 6-38
(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. dep. of prop. Beg. bal. 209.4
And
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
The loss would be reported on the income statement as

Other gain (losses)

(15-20 min.) E 6-39
Net income under straight-line depreciation……... $21,000
Difference in depreciation for fiscal 2017 (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 2017

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
Management chooses the depreciation method that reflects

the pattern in which the asset will be used. For example, if
the asset generates revenue evenly over time, the straight-
line method should be used. The units of production method
is suited for those assets that wear out of physical use while
the diminishing balance method is best for assets that
generate greater amounts of revenue earlier in their useful
lives

(15-25 min.) E 6-40
Year
2017 2018 2019 2020
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
* Cost ($200,000) – Depreciation expense ($50,000)

= $150,000
** Cost ($200,000) – Two years’ depreciation ($100,000)
= $100,000

Problems
Group A
(20-30 min.) P 6-41A
Req. 1
LAND WARE- OFFICE
ITEM LAND IMPROVEMENTS HOUSE 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
Computations:
(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
_____
*Some accountants would debit this cost to the Land account.

(continued) P 6-41A
Req. 2
Journal
2017
Dec. 31 Depreciation Expense — Land
Improvements ($103,800 / 20  4/12) ........ 1,730
Land Improvements ................................ 1,730
31 Depreciation Expense — Warehouse

($1,241,000 / 40  4/12) ............................... 10,342
Warehouse ............................................... 10,342
31 Depreciation Expense — Office

Building ($126,200 / 40  4/12) ................... 1,052
Office Building ......................................... 1,052
31 Depreciation Expense —
Furniture ($118,000 / 8  4/12).................... 4,917
Furniture ..................................................... 4,917
_____
*$1,593 ($95,600 / 20  4/12) if $8,200 (“l” in Req. 1) is debited
to Land.

(continued) P 6-41A
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.

(15 min.) P6-42A
Req. 1
Journal
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
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

(25-35 min.) P 6-43A
Journal
2017
Jan. 2 Cash 70,000
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
Building ........................................... 5,000
3 Cash ......................................................... 100,000

Note Receivable ...................................... 400,000
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

(continued) P 6-43A
Journal
2017
Dec. 31 Depreciation Expense —
Motor Carrier Equipment
($176,000  1/6  2) .................................. 58,667
Motor Carrier Equipment................ 58,667

Building [$280,000 — (10% 
$280,000)]/40  2/12) ............................ 1,050
Buildings ...................................... 1,050
2. Management chooses the depreciation method that

reflects the pattern in which the asset will be used. For
example, if the asset generates revenue evenly over time, the
straight-line method should be used. The units of production
method is suited for those assets that wear out of physical
use while the diminishing balance method is best for assets
that generate greater amounts of revenue earlier in their
useful lives

(10-15 min.) P 6-44A
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.

(30-40 min.) P 6-45A
Req. 1
B.W. Soffer Inc.

Straight-Line Depreciation Schedule
Depreciation for the Year
1 2 3 4
ASSET Depreciation Depreciable Depreciation ACCUMULATED ASSET CARRYING
DATE COST RATE  COST = EXPENSE DEPRECIATION AMOUNT
03-01-2016 $240,000 $240,000
31-12-2016 1/5 $220,000 $44,000 $ 44,000 196,000
31-12-2017 1/5 220,000 44,000 88,000 152,000
31-12-2018 1/5 220,000 44,000 132,000 108,000
31-12-2019 1/5 220,000 44,000 176,000 64,000
31-12-2020 1/5 220,000 44,000 220,000 20,000
Asset cost: $224,000 + $6,200 + $6,700 + $3,100 = $240,000
Depreciation for the year: ($240,000 – $20,000) / 5 years = $44,000

(continued) P 6-45A
Req. 1
B.W. Soffer Inc.

Units-of-Production Depreciation Schedule
1 2 3 4
ASSET DEPRECIATION NUMBER OF DEPRECIATION ACCUMULATED ASSET CARRYING
DATE COST PER DOCUMENT  DOCUMENTS = EXPENSE DEPRECIATION AMOUNT
03-01-2016 $240,000 $240,000
31-12-2016 $1.10 50,000 $55,000 $ 55,000 185,000
31-12-2017 1.10 45,000 49,500 104,500 135,500
31-12-2018 1.10 40,000 44,000 148,500 91,500
31-12-2019 1.10 35,000 38,500 187,000 53,000
31-12-2020 1.10 30,000 33,000 220,000 20,000
Total books 200,000
Depreciation per document: ($224,000 + $6,200 + $6,700 + $3,100 – $20,000) / 200,000

units = $1.10

(continued) P 6-45A
Req. 1
B.W. Soffer Inc.

Double-Diminishing-Balance Depreciation Schedule
1 2 3 4
ASSET DEPRECIABLE DEPRECIATION ACCUMULATED ASSET CARRYING
DATE COST DDB RATE  COST = EXPENSE DEPRECIATION AMOUNT
03-01-2016 $240,000 $240,000
31-12-2016 0.40 $240,000 $96,000 $ 96,000 144,000
31-12-2017 0.40 144,000 57,600 153,600 86,400
31-12-2018 0.40 86,400 34,560 188,160 51,840
31-12-2019 0.40 51,840 20,736 208,896 31,104
31-12-2020 31,104 11,104 220,000 20,000
DDB rate = (1/5 years  2) = 2/5 = 0.4

(continued) P 6-45A
Req. 2
The depreciation method that maximizes reported income in

the first year of the computer’s life is the straight-line
method, which produces the lowest depreciation for that
year ($44,000). The straight-line method allocates the cost
of the asset evenly over its estimated useful life.
The units-of-production method would allocate the cost

of the asset to each of the documents produced. This
method would match expense to the actual use of the asset.
The double-diminishing balance method would allocate

most of the cost of the asset to the beginning of its useful
life when the computer would be at its most useful and
competitive stage. If the estimated life is less than
anticipated due to a more efficient computer being
developed, this would be the most appropriate depreciation
method. This method would minimize income as it
produces the highest depreciation for the year ($96,000).

(20-25 min.) P 6-46A
Req. 1
(Thousands)
Cost of property, plant, and equipment $68,406
Less: Accumulated depreciation ......... (26,909)
Carrying amount .................................. $41,497
Req. 2
Evidences of Property, Plant, and Equipment purchases:

1. Property, Plant, and Equipment increased on the balance
sheet.
2. Long-term Investments decreased on the balance sheet.
3. Statement of Cash Flows reports “Additions to Property,
Plant, and Equipment.”
4. Statement of Cash Flows reports “Reduction of long-term
investments.”
Req. 3
Property, Plant, and Equipment Accumulated Depreciation

03/31/16 Bal. 61,225 03/31/16
Bal. 22,725
Purchased Sold during Depen.
During 2017 7,781 2017 600* during 2017 4,184
03/31/17 Bal. 68,406 03/31/17 Bal. 26,909

_____
*Determined by deduction, since
there was no gain or loss on the sale.

(continued) P 6-46A
Long-term Investments
03/31/16 Bal. 147,165 Deductions 38,863
during 2017
03/31/17 Bal. 108,302
Req. 4
Depreciation is added back to net income because it is a

non-cash expense. This expense decreased net income but
did not decrease cash. Therefore, adding depreciation back
to net income helps to compute cash flow from operating
activities.

(30-40 min.) P 6-47A
Part 1
Req. 1
The term used in Canadian financial reporting for Cost in

Excess of Net Assets of Purchased Businesses is Goodwill.
Req. 2
Journal
(Millions)
Assets................................................ 4.1
Goodwill………………………….…… 1.2
Cash………………………………… 5.3
Req. 3
There is nothing to record for an increase in the value of

goodwill. Goodwill value is not increased over its value at
the time of the acquisition.
The entry to record the decrease in the value of goodwill is

as follows:
Journal
Loss on Goodwill………………. 800,000
Goodwill……………………… 800,000
The value of goodwill is reviewed annually. If any

impairment of value is identified, the goodwill must be
decreased to the current value.

(continued) P 6-47A
Part 2
Req. 1
Patent 2,600,000
Cash 2,600,000
Cost of sales 8,350,000
Cash 8,350,000
Accounts receivable 15,000,000
Sales revenue 15,000,000
Amortization expense – patent 650,000
(2,600,000/4) from Req. 3
Accumulated amortization – patent 650,000
Income tax expense (from Req.2)
Req. 2
Ford
Income Statement – Integrated System
For Year 1
Sales revenue $ 15,000,000
Amortization expense 650,000
Cost of goods sold 8,350,000 9,000,000
Income before tax 6,000,000
Income tax expense (38%) 2,280,000
Net Income $ 3,720,000
The integrated system operations were profitable. Net
income of $3,720,000 is 24.8%.
Req. 3
The patent value of $2,600,000 should be recorded as an
intangible asset as Ford has the exclusive right to use it in
production for 4 years. Since the expected useful life of the
patent is 4 years, it should be amortized on a straight-line
basis over 4 years.

(30-40 min.) P 6-48A
Req. 1
To determine the gain or loss on the sale of equipment,

compare the cash received to the asset’s carrying amount,
as follows:
(All amounts in millions)
Cash received from sale of asset……………. $0.3
Carrying amount of asset sold:
Cost…………………………………………….. $0.8
Less: Accumulated depreciation…………. (0.4) 0.4
Loss on sale……………………………………... ($0.1)
Req. 2
Balance sheet at December 31, 2017:

Property, plant, and equipment ($4.8 + $1.4 – $0.8) ..... $ 5.4
Less: Accumulated depreciation ($3.4 + $1.7 – $0.4) .... (4.7)
Property, plant, and equipment net (carrying amount) . $ 0.7
Req. 3
Statement of cash flows for 2017:

Cash flows from operating activities:
Net income ($26.5 – $21.3) ........................................... $ 5.2
Reconciliation of net income to
net cash provided by operations:
Depreciation .......................................................... 1.7

Purchases of property, plant, and equipment................. (1.4)
Sales of property, plant, and equipment.......................... 0.3

(20-30 min.) P6-49A
Req. 1
Jan. 29, 2017 Jan. 30, 2016
Net income $ 2,920 $ 2,488

÷ Average total ÷ ÷
assets $44,119 $44,320
= Return on assets 6.62% 5.61%
Req. 2
All of the following contributed to the increase in ROA
during the most recent year:
 Sales increased, increasing net income

 Assets decreased, reducing the denominator
(20-30 min.) P 6-50A

Req. 1
(amounts in millions)
Property & Equipment Accumulated Depreciation

12/31/15 Bal. 24,220 X = Cost of Accum. depr. = X 12/31/15 Bal. 15,210
Purchased assets sold of assets sold Depr. during
during 2016 2,820 in 2016 in 2016 2016 1,145
12/31/16 Bal. 26,430 12/31/16 Bal. 16,045
X = $610, cost of P & Eq. sold X = $310, accumulated depreciation on

P & Eq. sold

(continued) P 6-50A
Req. 2
Cost $610
– Acc. Depr. –310
= Carrying amount of assets $300
sold
Sales price $ 43
Carrying amt –300
= Loss on sale $(257)
There is a loss because the sales price (proceeds) is less than the
carrying amount.
Req. 3
Cash ............................................................................................ 43
Accumulated Depreciation – Prop. & Equipment ................... 310
Loss on the Sale of Prop. & Equipment .................................. 257
Property & Equipment .......................................................... 610
Assets decrease, liabilities unaffected, and shareholders’ equity
decreases; revenues unaffected, expenses (losses) increase, and
net income decreases.
The total carrying amount of $300 ($610− $310) is $257 more than the
sales price of $43. This is the same calculation as in Req. 2.
Req. 4
Property & Equipment, net
12/31/15 Bal. 9,010 300 Carrying amt, assets sold
Purchases 2,820 1,145 Depreciation
12/31/16 Bal. 10,385

Problems
Group B
(20-25 min.) P 6-51B
Req. 1
LAND GARAGE/ WARE-
ITEM LAND IMPROVEMENTS SHOWROOMS HOUSE EQUIPMENT
(a) $135,000 $45,000
(b) $26,000
(c) 25,000
(d) 1,200
(e) $21,300
(f) 3,550
(g) $ 45,000
(h) 200
(i) 3,700
(j) 322,000
(k) 3,300 49,500 2,200
(l) 5,350*
(m) 234,000
(n) 8,900
(o) 17,450
(p) 3,300
(q) $ 8,000
(r) 80,000
Totals $143,450 $86,000 $654,000 $68,500 $88,000
Computations:
(a) Land: $150,000 / $200,000  $180,000 = $135,000
Warehouse: $50,000 / $200,000  $180,000 = $45,000
(k) Land improvements: $55,000  0.06 = $ 3,300
Garage/showroom: $55,000  0.90 = $49,500
Warehouse: $55,000  0.04 = $ 2,200
_____
*Some might decide to debit this cost to the Land account.

(continued) P 6-51B
Req. 2
Journal
Dec. 31 Depreciation Expense — Land
Improvements ($86,000 / 10  9/12) ... 6,450*
Land Improvements ........................ 6,450
31 Depreciation Expense — Garage/

Showroom ($654,000 / 40  9/12) 12,263
Garage Showroom .......................... 12,263
31 Depreciation Expense — Warehouse

($68,500 / 40  9/12) .............................. 1,284
Warehouse ....................................... 1,284
Equipment ($88,000 / 8  9/12) ......... 8,250
Equipment ........................................ 8,250
_____
*$6,049 ($80,650 / 10  9/12) if $5,350 (“l” in Req. 1) is
debited to Land.

(continued) P 6-51B
Req. 3
The issues in this problem were as follows:

 Allocating costs to the appropriate asset
 Determining the total cost of each asset
 Calculating the depreciation for each asset based on
corporate policy
 Ensuring that depreciation expensed reflects the
partial year the asset was in use.
It is important to value assets appropriately in order to

report the correct value of assets on the Balance Sheet. The
rate of depreciation will affect net income, which is the
measure of corporate performance. It is also important to
classify these costs as assets in order to ensure assets are
not understated and income understated. This decision
would affect assets and income over the 40 (buildings) 10
(land improvements) and 8 (equipment) years of
amortization.

(15 min.) P 6-52B
Req. 1
Journal
Security Equipment ............................................ 80,000
Cash ................................................................. 80,000
Depreciation Expense — Buildings................... 12,000

Accumulated Depreciation — Buildings ....... 12,000
($310,000 – $70,000) / 20 = $12,000
Depreciation Expense — Security Equipment 67,500

Accumulated Depreciation — Security 67,500
Equipment........................................................
[($620,000 – $370,000)  2/8] + ($80,000 
2/8  3/12) = $67,500
Req. 2
BALANCE SHEET
Property, plant, and equipment:
Land ................................................................................... $200,000
Buildings ........................................................................... 310,000
Less: Accumulated Depreciation ($40,000 + $12,000) .... (52,000)
Equipment ($620,000 + $80,000) ..................................... 700,000
Less: Accumulated Depreciation ($370,000 + $67,500) (437,500)
Total Property, plant, and equipment, net $720,500

(25 min.) P 6-53B
Journal
2017
Jan. 4 Communication Equipment (new) .... 118,000
Cash 118,000
Cash 18,000
Communication Equipment (old) 85,000
Communication Equipment (old) . 96,000
Gain on sale of Communication
equipment (old) .......................... 7,000
June 30 Depreciation Expense — Building

[($495,000 – $95,000) / 40  6/12] .. 5,000
Building .......................................... 5,000
June 30 Cash ..................................................... 50,000

Note Receivable .................................. 250,000
Building ($255,000 + $5,000) ..... 260,000
Building .......................................... 495,000
Gain on Sale of Building ............... 65,000
Nov. 4 Communication Equipment

($75,000 / $100,000  $80,000)... 60,000
Televideo Equipment
($25,000 / $100,000  $80,000) ... 20,000
Cash ................................................ 80,000

(continued) P 6-53B
Journal
Communication Equipment
($118,000  2/5) .................................. 47,200
Communication Equipment ..... 47,200
Communication Equipment
($60,000  2/5  2/12) 4,000
Depreciation Expense —
Televideo Equipment
($20,000  2/5  2/12) .................... 1,333
Communication Equipment ......... 4,000
Televideo Equipment.................... 1,333
2. Management chooses the depreciation method that

reflects the pattern in which the asset will be used. For
example, if the asset generates revenue evenly over time,
the straight-line method should be used. The units of
production method is suited for those assets that wear out
of physical use while the diminishing balance method is
best for assets that generate greater amounts of revenue
earlier in their useful lives

(10-15 min.) P 6-54B
Depreciation is the process of allocating property, plant,
and equipment costs to expense over the period the asset
is used. Depreciation accounts for the decline in the asset’s
usefulness.
Depreciation does not mean that the business sets aside

cash to replace assets as they wear out. Accounting for
depreciation has nothing to do with setting aside such a
fund. The period over which an asset’s cost is depreciating
depends on a number of factors, including physical
deterioration of the asset and obsolescence. For
computers, obsolescence may be the more important factor
as the association replaces used machines with new
models. In this case the association should depreciate
computers over a shorter life than the period of their
physical usefulness.

(30-40 min.) P6-55B
Req. 1
Yuki Sporting Goods Ltd.

Straight-Line Depreciation Schedule
1 2 3 4
ASSET DEPRECIATION DEPRECIABLE DEPRECIATION ACCUMULATED ASSET CARRYING
DATE COST RATE  COST = EXPENSE DEPRECIATION AMOUNT
02-01-2015 $70,000 $ 70,000
31-12-2015 1/6 $ 54,000 $ 9,000 $ 9,000 61,000
31-12-2016 1/6 54,000 9,000 18,000 52,000
31-12-2017 1/6 54,000 9,000 27,000 43,000
31-12-2018 1/6 54,000 9,000 36,000 34,000
31-12-2019 1/6 54,000 9,000 45,000 25,000
31-12-2020 1/6 54,000 9,000 54,000 16,000
Asset cost: $63,000 + $2,200 + $4,000 + $800 = $70,000

Depreciation for the year: ($70,000 – $16,000) / 6 years = $9,000

(continued) P6-55B
Req. 1

Units-of-Production Depreciation Schedule
1 2 3 4
ASSET DEPRECIATION NUMBER OF DEPRECIATION ACCUMULATED ASSET CARRYING
DATE COST PER PIECE  PIECES = EXPENSE DEPRECIATION VALUE
02-01-2015 $70,000 $ 70,000
31-12-2015 $0.54 18,000 $ 9,720 $ 9,720 60,280
31-12-2016 0.54 18,000 9,720 19,440 50,560
31-12-2017 0.54 18,000 9,720 29,160 40,840
31-12-2018 0.54 18,000 9,720 38,880 31,120
31-12-2019 0.54 14,000 7,560 46,440 23,560
31-12-2020 0.54 14,000 7,560 54,000 16,000
Total documents 100,000
Depreciation per document: ($70,000 – $16,000) / 100,000 pieces = $0.54

(continued) P6-55B
Req. 1

Double-Diminishing-Balance Depreciation Schedule
1 2 3 4
ASSET DEPRECIABLE DEPRECIATION ACCUMULATED ASSET CARRYING
DATE COST DDB RATE  COST = EXPENSE DEPRECIATION AMOUNT
02-01-2015 $70,000 $70,000
31-12-2015 2/6* $70,000 $23,333 $23,333 46,667
31-12-2016 2/6 46,667 15,556 38,889 31,111
31-12-2017 2/6 31,111 10,370 49,259 20,741
31-12-2018 2/6 4,741** 54,000 16,000
31-12-2019 – 54,000 16,000
31-12-2020 – 54,000 16,000
*DDB rate = (1/6 years  2) = 2/6
**Depreciation for 2017: $20,741 – $16,000 = $4,741

(continued) P6-55B
Req. 2
The depreciation method that maximizes reported income in

the first year of the computer’s life is the straight-line
method, which produces the lowest depreciation for that
year ($9,000). This method will meet the objective of
maximizing income for reporting to the banker.

(20-25 min.) P6-56B
Req. 1
(Thousands)
Cost of premises and equipment......... $5,941
Less: Accumulated depreciation ......... (3,810)
Carry amount of premises and equipment $2,131
Req. 2
Evidences of premises and equipment:
1. Premises and equipment increased on the balance sheet.
2. Statement of cash flows reports “Acquisitions of
premises and equipment.”
3. Statement of cash flows reports “cash used in
acquisitions,” which would suggest increase in goodwill.
Req. 3
Premises and Equipment Accumulated Depreciation
11/01/16 Bal. 5,246 Accum. dep’n. 11/01/16 Bal. 3,428
Purchased Sold of assets Dep’n. during
during during sold during 2017
2017 747 2017 52* 2017 52* 434
10/31/16 Bal. 5,941 10/31/17 Bal. 3,810
_____
* Determined by deduction.
Carrying amount of disposed assets was 0 (cost 52 thousand less
accumulated depreciation of 52 thousand)
Req. 4
CC’s accounting policies state that goodwill is evaluated
annually for impairment. If there is no reduction in the
goodwill value, no amortization is charged to income.

(30-40 min.) P6-57B
Part 1
Req. 1
Carrying amount of assets (intangibles) — the net amount

of the cost of assets and the amortization recorded since
the time of their purchase.
Fair value of assets — the current value of the assets or the

price an asset could be sold for.
Goodwill — the excess of the cost of purchasing another

company over the fair value of the net assets purchased
(assets minus liabilities).
The purchase price would be based on the fair value of

assets less the fair value of the liabilities acquired.
Req. 2
Journal
Long-term assets ............................. 49,000
Goodwill ............................................ 5,500
Liabilities ...................................... 4,500
Cash .............................................. 50,000

(continued) P6-57B
Part 2
1. If the useful life of the copyright is 500,000 sales of the

recording, that means that each sale would have a cost of
$4 just for the copyright. Since many iPod downloads sell
for $1.00, this cost would be too high. At an estimated
sale of 500,000 recordings, the purchase price should be
no higher than $500,000. Perhaps Joshua could negotiate
the rights to any sale over 500,000 should the recording
become a super hit.
2. The purchase of the copyright would be recorded as

follows:
DR CR
Copyright............................. 500,000
Cash.................................. 500,000
3. The amortization of the copyright after 300,000 copies

sold would be as follows:
DR CR
Amortization expense....................... 300,000
Accumulated amortization........... 300,000

(30-40 min.) P6-58B
Req. 1
To determine the gain or loss on the sale of property, plant,

and equipment compare the cash received to the asset’s
carrying amount, as follows:
(All amounts in billions)
Cash received from sale of asset ...................... $0.2
Carrying value of asset sold:
Cost .................................................................. $0.29
Less: Accumulated depreciation .................. (0.29) (0.0)
Gain on sale ........................................................ $0.2
Req. 2
Balance sheet at December 31, 2017:

Property, plant, and equipment assets
($16.4 + 1.8 – 0.29) $17.91
Less: Accumulated depreciation ($9.1 + 1.84 – 0.29) (10.65)
Property, plant, and equipment net (carrying amount) $7.26
Req. 3
Statement of cash flows for 2017:

Cash flows from operating activities:
Net income ($11.6 – 9.89) ............................................. $ 1.71
Reconciliation of net income to
net cash provided by operations:
Depreciation .......................................................... 1.84
3.55
Purchases of property, plant, and equipment ............. $ (1.8)
Sales of property, plant, and equipment ...................... 0.2

(30-40 min.) P6-59B
Req. 1
Jan. 31, 2017 Jan. 31, 2016
Net income $ 1,114 $ 991

÷ Average total ÷
assets $13,362 ÷ $12,262
= Return on assets = 8.34% = 8.08%
Req. 2
The following contributed to the increase in ROA during the
most recent year.
 Sales increased, increasing net income

 While assets increased, net income increased at a
higher rate

(20-30 min.) P 6-60B
Req. 1
(Amounts in millions)
Property & Equipment Accumulated Depreciation

12/31/15 Bal. 21,350 X = Cost of Accum. depr. = X 12/31/15 Bal. 17,530
Purchased assets sold of assets sold Depr. during
during 2016 2,820 in 2016 in 2016 2016 1,145
12/31/16 Bal. 23,530 12/31/16 Bal. 18,395
X = $640, cost of P & Eq. sold X = $280, accumulated depreciation on

P & Eq. sold
Req. 2
Cost $640
- Acc. Depr. –280
= Carrying amount of assets $360
sold
Sales price $ 56
Carrying amt –360
= Loss on sale $(304)
There is a loss because the sales price (proceeds) is less than the
carrying amount.

(continued) P 6-60B
Req. 3
Cash ............................................................................................ 56
Accumulated Depreciation – Prop. & Equipment ................... 280
Loss on the Sale of Prop. & Equipment .................................. 304
Property & Equipment .......................................................... 640
Assets decrease, liabilities unaffected, and shareholders’ equity

decreases; revenues unaffected, expenses (losses) increase, and
net income decreases.
The total carrying amount of $360 ($640 − $280) is $304 more than
the sales price of $56. This is the same calculation as in Req. 2.
Req. 4
Property & Equipment, net

12/31/15 Bal. 3,820 360 Carrying amt, assets sold
Purchases 2,820 1,145 Depreciation
12/31/16 Bal. 5,135

Decision Cases
(30-45 min.) Case 1

Req. 1
La Petite France Bakery and Burgers Ahoy Inc.

Income Statements
For the Year Ended December 31
La Petite France
Burgers Ahoy Inc.
Bakery Ltd. (DDB)
ACCOUNT TITLE (SL)
Sales revenue ....................... $350,000 $350,000
Cost of goods sold ............... 94,000 94,000

Gross profit ........................... 256,000 256,000
Operating expenses ............. $50,000 $50,000

Depreciation expense
La Petite France Bakery
(SL):
($175,000 – $10,000 / 10). 16,500
Burgers Ahoy Inc. (DDB):
($175,000  1/10  2) ...... 35,000*
Total expenses ...................... 66,500 85,000
Income before tax ................. 189,500 171,000
Income tax expense (25%) 47,375 42,750
Net income ............................ $142,125 $ 128,250
*($175,000 × .20) = $35,000

(continued) Case 1
Req. 2
INVESTMENT NEWSLETTER
TO: Our clients
FROM: Student Name
RE: Selecting the shares of La Petite France Bakery

or Burgers Ahoy for a long-term investment
In picking a stock we suggest you consider the following

factors:
La Petite France Bakery and Burgers Ahoy are basically

identical companies. The two companies started operations
at the same time and engaged in essentially the same
transactions. Their main difference lies in the accounting
methods that they use.
1. La Petite France Bakery’s income statement reports net

income of $142,125 compared to $128,250 for Burgers
Ahoy. On the surface La Petite France Bakery appears to
be more profitable. This difference is illusory, however,
because La Petite France Bakery uses the straight-line
method to account for depreciation of its equipment.

(continued) Case 1
This method results in the highest possible reported
income.
2. Burgers Ahoy reports lower net income than La Petite

France Bakery. Since Burgers Ahoy uses the double-
diminishing-balance method for depreciation it results in
lower net income. More importantly, it results in the
lowest amount of income tax and thereby provides cash
that Burgers Ahoy can invest in new projects.
Over the long run, we favour Burgers Ahoy because the

company will have more cash to invest. That should
result in higher real profits even if the profits do not show
up on the income statement.

(20-30 min.) Case 2
1. A manager might debit an expense account for the cost
of property, plant, and equipment for two reasons: (1) A
higher expense results in lower net income and less tax
to pay, and (2) to understate reported asset and income
amounts.
2. A manager might debit the cost of an expense to the

property, plant, and equipment account in order to
overstate reported asset and income amounts. This
would indicate a better performance than was actually
achieved.
3. We support the recording and reporting of intangible

assets at cost because the business paid a price for
intangibles like any other asset. The argument for
recording intangibles at $1 or $0 is consistent with the
perspective of a lender, 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
company and believes its intangibles are worthless can
simply subtract the intangibles’ cost from total assets
and from total owners’ 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 have
value could not add the unknown amount to compute
revised total assets and total owner equity.

Ethical Issue
Req. 1
Mary wants to allocate as little of the purchase price as

possible to the building because a lower expense results in
a higher net income which investors and creditors favour.
The cost of the land is not depreciated.
Req. 2
Vitner’s Ltd.’s allocation was unethical. Allocating 60% to

the building (versus the more realistic figure of 80%)
understates depreciation expense and overstates net
income.
Creditors and lenders will be basing their investment

decisions on inaccurate financial information.

Focus on Financials
(30-40 min.) Canadian Tire

Req. 1
Note 3 to the financial statements reports that Canadian

Tire uses the declining balance depreciation method for
their building, fixtures and equipment.
Req. 2
(Millions)
Proceeds on derecognition of property, plant, and
equipment $ 21.3
Note 16 indicates the cost of buildings, fixtures, and

equipment sold was $40 million.
Req. 3
(Millions)
2014 2013
Payment for land, building and
fixtures and equipment ………. $330.8 $211.4
Canadian Tire has invested in property, plant, and equipment

in both 2014 and 2013. This indicates that Canadian Tire has
the cash to invest and is building for the company’s future.
This is very positive for Canadian Tire.

(continued) Canadian Tire
Req. 4
At year-end
2014 2013
Accumulated
Proportion of
Property, = depreciation = $ 2001.8 $1,842.3
Property, $3,929.6 $3,689.6
Plant, and
Plant, and
Equipment
Equipment at
used up
cost
= 50.9% = 49.9%
used up used up
CONCLUSION: Property, Plant, and Equipment were older

in 2014. However, the company continues to invest in new
property, plant, and equipment. It appears that management
reviews its property, plant, and equipment on a regular
basis and disposes of older, obsolete, and unused
equipment.

Focus on Analysis
(30-40 min.) Canadian Tire
Req. 1
(Millions)
Depreciation expense (2014)…………………………$ 279.2
Accumulated depreciation (2013)………………… 2,326.5
Amortization expense (2014)………………………… 93.1
Accumulated amortization (2013)………………… 698.7
Accumulated depreciation and amortization exceeds

depreciation and amortization expense because the
expense is for only the current year. Accumulated
depreciation and amortization is the sum of the
depreciation and amortization amounts for all years the
company has used its property and equipment.
Req. 2
Canadian Tire adds depreciation and amortization back to

net income in the computation of net cash from operating
activities because this expense was subtracted in arriving
at net income. But depreciation and amortization expense
did not decrease cash. Adding depreciation and
amortization back to net income offsets its earlier
subtraction and helps to compute cash flow from
operations.

(continued) Canadian Tire
Req. 3
Canadian Tire’s balance sheet reports goodwill of $436.6
million.
Canadian Tire does not amortize goodwill but will test

goodwill for impairment of value and will write-down the
value of goodwill that has been impaired.
In 2014, Canadian Tire did record an impairment on

goodwill (0.3 million).
Canadian Tire reports intangible assets of $1,251.7 million

on the balance sheet.
Note 14 – Schedule of Intangible Assets and Goodwill
describes intangible assets subject to amortization as
software and other intangibles. Intangible assets with
indefinite lives include goodwill, banners and trademarks,
franchise agreements and other intangibles.
In 2014, Canadian Tire charged amortization of $93.1 million

related to intangible assets.
Group Project
Answers will vary with the situation chosen by students.


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Financial Accounting Canadian 6th

Edition Harrison Solutions Manual

Property, Plant, and Equipment, and

2. Cost = $44,793 million

376 Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual

(10 min.) S 6-3

Land ($140,000  0.50) ............................ 70,000

Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual 377

378 Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual

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

(b) Units-of-production [($25,000,000 – $5,000,000) /

Cost .............................. $25,000,000 $25,000,000 $25,000,000

Carrying amount ......... $21,000,000 $22,000,000 $15,000,000

Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual 379

(b) Units-of-production [($25,000,000 –

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 =

Year 4 ($25,000,000 – $10,000,000 – $6,000,000 –

Year 5 No depreciation: asset is fully

380 Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual

a. Straight-line (€40,000,000 – €5,000,000)/7 years

b. Units-of-production (€40,000,000 – €5,000,000)/

c. Double-diminishing-balance (€40,000,000  2/7

Straight-line depreciation produces the highest net income

Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual 381

Depreciation for years 1–4:

$60,000 / 10 years = $6,000 per year

$6,000  4 years = $24,000 for years 1–4

$60,000 – $24,000 ÷ 3 years = $12,000 per

382 Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual

Straight-line depreciation ($45,000 – $5,000)/5 = $8,000

Carrying value of van at December 31, 2017 is

Cash ................................................... 15,000

Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual 383

A patent is amortized over its useful life. Amortization is

The cost of the patent, less the accumulated amortization is

The value of goodwill does not change, unless it is impaired.

The carrying amount of goodwill is the cost, less any

384 Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual

The purchase price was $ 200.0

Canadian Tire would have reviewed the goodwill value

(10-15 min.) S 6-12

Jaguar Automobiles Ltd.

Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual 385

Return on = Net + ÷ Average total

15% = $17 + $1 ÷ $120

The return on assets deteriorated. Possible reasons include

386 Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual

2016 Return on = Net income + ÷ Average total

2017 Return on = Net income ÷ Average total

Return on assets improved in 2017. Net income increased

Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual 387

Cost of goodwill purchased:

In future years Crunchies, Inc. will determine whether its

(5-10 min.) S 6-18

Asset Carrying Value in Fair Impaired? Amount

a. Equipment $180,000 $140,000 $100,000 Y $40,000

b. Trademark $320,000 $460,000 $375,000 N –

c. Land $52,000 $24,000 $21,000 Y $28,000

d. Factory $9 million $9 million $7 million N –

388 Financial Accounting Sixth Canadian Edition Instructor’s Solutions Manual

(5-10 min.) E 6-19

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