Intermediate Accounting Vol 1 Canadian 2nd Edition Lo Test Bank

Intermediate Accounting, Volume 1, 2e
Chapter 8 – Property, Plant, and Equipment
Chapter 8 Property, Plant and Equipment
Learning Objective 1
1) Which of the following is a NOT characteristic of property, plant and equipment (PPE)?
A) PPE are tangible items.
B) PPE benefit more than one year.
C) PPE are held for use in the ordinary course of business.
D) PPE have fixed and determinable future cash flows.
Answer: D
Diff: 2
Skill: Conceptual
Objective: 8.1 Evaluate whether a cost should be included in property, plant, and equipment, and how much should
be classified in each category of asset or expense.
2) Under IFRS, what is the acceptable treatment for borrowing costs on a self constructed property, plant
and equipment?
A) Capitalize costs that would have been avoided if the expenditure had not been made.
B) Capitalize costs of any internal debt incurred within the corporation.
C) Capitalize all indirectly attributable borrowing costs and expense the directly attributable costs.
D) A company can make a policy choice on the treatment of borrowing costs.
Answer: A
Diff: 2
Skill: Conceptual
3) Explain why earnings manipulation of property, plant and equipment can have long-lasting impact on
the financial statements.
Answer: The long-lived nature of PPE means that earnings manipulation can have long-lasting impact
on the statements and ratios. Capitalizing costs to PPE essentially defers the expense recognition from
today to several future periods over the asset's economic life. Such manipulation may not be readily
apparent in the statements and may only be revealed in later years as depreciation estimates are revised
or impairment tests reveal that the category is overstated.
For land, such deferral is infinite until the eventual disposal of the land.
Additionally, the subjective nature of the estimates involved further increases the potential for earnings
manipulation.
As such, there is high incentive to manage earnings using this asset category.
Diff: 2
Skill: Conceptual
8-1
Copyright © 2014 Pearson Canada Inc.
4) What is the IFRS treatment for replacements versus repairs?

A) Betterments are expensed because they do not extend the life of the asset.
B) Replacement of significant asset components are capitalized.
C) Repairs are capitalized because they do occur on a recurring basis.
D) A company can make a policy choice on the treatment of these expenditures.
Answer: B
Diff: 2
Skill: Conceptual
5) Under ASPE, what is the acceptable treatment for borrowing costs on a self constructed property, plant
and equipment?
A) Must capitalize costs that would have been avoided if the expenditure had not been made.
B) Must capitalize costs of any debt incurred for the inventory needs of the corporation.
C) Must expense the directly attributable borrowing costs on qualifying assets.
D) A company can make a policy choice on the treatment of borrowing costs.
Answer: D
Diff: 2
Skill: Conceptual
6) Which of the following is a concern on the initial recognition of property, plant and equipment?
A) Whether a gain or loss to be recorded in the income statement.
B) How much should be recorded on the balance sheet at the acquisition date.
C) What amount should be recorded on the balance sheet at the reporting date.
D) What expenditures should be capitalized on the balance sheet.
Answer: D
Diff: 2
Skill: Conceptual
7) Which question must be considered at the initial recognition of property, plant and equipment?
A) How the costs that have been capitalized should be categorized or classified in the balance sheet?
B) Whether the historical cost or fair value model should be used?
C) Whether the straight-line or double-declining balance method should be used?
D) How the property, plant and equipment should be tested for impairment?
Answer: A
Diff: 2
Skill: Conceptual
8-2
8) What costs should be capitalized to "land"?

A) Construction permits.
B) Engineering surveys.
C) Property transfer tax.
D) Interest during construction.
Answer: C
Diff: 2
Skill: Conceptual
9) Which of the following is NOT a characteristic of property, plant and equipment (PPE)?
A) PPE are held for sale in the ordinary course of business.
B) PPE are held for administrative purposes of the business.
C) PPE are held for use in the ordinary course of business.
D) PPE are held for rental to others by the business.
Answer: A
Diff: 3
Skill: Conceptual
10) What is the accounting treatment recommended under IFRS for interest capitalization for property,
plant and equipment (PPE)?
A) Capitalize cost of debt directly attributable to construction of the PPE.
B) Capitalize cost of internal funds directly attributable to construction of the PPE.
C) Expense cost of debt directly attributable to construction of the PPE.
D) IFRS does not provide any specific guidance for interest capitalization.
Answer: A
Diff: 2
Skill: Conceptual
11) Which of the following is NOT a characteristic of a property, plant and equipment (PPE)?
A) No physical substance
B) Identifiable
C) Non-monetary
D) Provides future cash flows
Answer: A
Diff: 3
Skill: Conceptual
8-3
12) On January 1, 2013, BigBen purchased a machine, incurring the expenditures listed below. The
machine had an estimated useful life of 10 years, and BigBen uses straight-line depreciation for its
equipment.
Invoice cost of machine $100,000

Shipping costs paid 15,000
Preparing concrete platform to support machine 10,000
Testing of machine prior to general use 30,000
What amount should be capitalized as the cost of the machinery for 2013?
A) $100,000
B) $110,000
C) $115,000
D) $155,000
Answer: D
Explanation: D) $100,000 + $15,000 + $10,000 + $30,000 = $155,000
Diff: 2
Skill: Computational
13) What costs should NOT be capitalized to "building"?

A) Construction permits
B) Engineering surveys
C) Property transfer tax
D) Interest during construction
Answer: C
Diff: 3
Skill: Conceptual
14) What costs should NOT be capitalized to "building"?

A) Demolition of old structures
B) Engineering surveys
C) Interest during construction
D) Construction permits
Answer: A
Diff: 3
Skill: Conceptual
8-4
15) What costs should NOT be capitalized to "equipment"?

A) Non-refundable sales tax
B) Refundable sales tax
C) Interest during construction of equipment
D) Transportation and delivery
Answer: B
Diff: 3
Skill: Conceptual

B) Equipment purchase cost
C) General training
D) Transportation and delivery
Answer: C
Diff: 2
Skill: Conceptual

B) Equipment purchase cost
C) Abnormal waste in testing
D) Equipment specific training
Answer: C
Diff: 2
Skill: Conceptual
18) How should $45,000 spent to obtain greater productive efficiency for a machine with a carrying value
of $80,000 be accounted for?
A) Capitalized, then depreciated during current and subsequent periods.
B) Expensed in the period in which the cost occurs.
C) Charged to accumulated depreciation with no change in the depreciation rate.
D) Charged to retained earnings.
Answer: A
Diff: 3
Skill: Conceptual
8-5
19) In December 2012, Ami, the owner of Elm, paid for a parcel of land along with a warehouse on behalf
of Elm, the registered owner of the property, for a total cost of $700,000. Ami also paid a real estate
commission of $35,000 and legal fees of $5,000 in connection with this purchase, plus $25,000 for the
demolition of the warehouse. Elm will reimburse Ami for these costs in January 2013 and will begin
construction of an office building on this land. Prior to the purchase, the land and warehouse were
appraised at $500,000 and $200,000, respectively. How much should be capitalized to the value of the
land in 2012?
A) $0
B) $505,000
C) $730,000
D) $765,000
Answer: D
Explanation: D) 700,000 + 35,000 + 5,000 + 25,000 = 765,000
Diff: 3
20) In December 2012, Ami, the owner of Elm, paid for a parcel of land along with a warehouse on behalf
of Elm, the registered owner of the property, for a total cost of $700,000. Ami also paid a real estate
commission of $35,000 and legal fees of $5,000 in connection with this purchase, plus $25,000 for the
demolition of the warehouse. Elm will reimburse Ami for these costs in January 2013 and will begin
construction of an office building on this land. Prior to the purchase, the land and warehouse were
appraised at $500,000 and $200,000, respectively. How much should be capitalized to the value of the
building in 2012?
A) $0
B) $35,000
C) $235,000
D) $270,000
Answer: A
Explanation: A) All capitalized to land
Diff: 2
8-6
21) On March 1, 2013, Pear Company (PC) had been renting its office building for several years and
decided to have a new office building constructed. On April 1, 2013, it acquired land with an abandoned
warehouse on it for $100,000. Other costs included:
Demolition of warehouse 20,000

Legal fees for purchase of land 2,400
Construction costs of new building 400,000
Proceeds from salvage of warehouse materials 4,000
Installation of wiring and plumbing fixtures 16,000
Architectural fees 24,000
How much will be capitalized to "land" in fiscal 2013?

A) $100,000
B) $102,400
C) $118,400
D) $124,000
Answer: C
Explanation: C) 100,000 + 20,000 - 4,000 + 2,400 = 118,400
Diff: 2
22) On March 1, 2013, Penguin Company (PC) had been renting its office building for several years and
decided to have a new office building constructed. On April 1, 2013, it acquired land with an abandoned
warehouse on it for $100,000. Other costs included:
Demolition of warehouse 20,000

How much will be capitalized to "building" in fiscal 2013?

A) $380,000
B) $400,000
C) $420,000
D) $440,000
Answer: D
Explanation: D) 400,000 + 16,000 + 24,000 = 440,000
Diff: 2
8-7
23) Explain what costs should be capitalized to property, plant and equipment. Include a discussion of
costs incurred for acquired assets, self constructed assets and repairs.
Answer:
• Enterprises should capitalize as PPE those expenditures for tangible, long-lived assets that give rise to
future benefits for the entity and for which the costs are reasonably measurable.
• Enterprises should capitalize all costs incurred for the acquisition or construction of PPE, including
materials, labour, overhead, borrowing costs, and future costs for demolition and site restoration.
Capitalization ends when the asset is ready for its intended use.
• Enterprises should capitalize replacements of PPE components but expense repairs.
Diff: 1
Skill: Conceptual
24) Explain why it is necessary to separate property, plant and equipment (PPE) items into separate
components.
Answer:
• In order to capitalize costs in PPE, it is necessary to define the unit of measurement—when are two or
more items separate assets and when are they merely components of a single asset?
• There are no clear-cut answers for all situations, and IFRS allows firms latitude to apply professional
judgment according to the circumstances.
• The issue is important to the extent that finer, more detailed classifications can accommodate more
specific estimates of useful lives and depreciation patterns.
• Therefore, related items with similar useful lives and usage patterns can be classified as a single asset;
otherwise, they should be classified as separate assets.
• To the extent that capitalizing costs into different types of assets affects future depreciation, a useful
way to categorize expenditures is according to their expected useful life and pattern of depreciation.
Diff: 2
Skill: Conceptual
25) Using the conceptual framework, explain why there is a difference between IFRS and ASPE in
accounting for interest capitalization for property, plant and equipment.
Answer: This variation in standards illustrates the significant differences in position that can be taken by
different standard-setting bodies.
The requirements and prohibitions against interest capitalization in IFRS and U.S. GAAP reflect a higher
priority for comparability among reporting entities.
The greater flexibility allowed by ASPE reflects a greater trust that enterprises will choose the policy that
best reflects their circumstances and that disclosure of interest capitalization policies will sufficiently
inform users – focus is on relevance/reliability/providing most decision-useful information.
Diff: 3
Skill: Conceptual
8-8
26) Daniel Manufacturing Limited (DML) purchased a large lathe. The invoice cost of the lathe was
$6,200,000 but DML was able to get the price reduced to $5,800,000. The seller provided terms whereby if
the entire amount was paid within 30 days a further discount of 3% was available. DML paid on the 25th
day. Transportation of the machine cost DML $70,000. Insurance while in transit was $30,000. To
encourage DML to purchase another machine, the manufacturer gave DML a $50,000 discount voucher
on its next purchase of a similar machine. Workers were paid $45,000 to install the machine. Start-up and
testing costs were $45,000. Unfortunately, during the installation, one of the workers accidentally
damaged the machine, and it cost $15,000 to repair the damage. Non-refundable sales taxes paid were
$700,000, however, later a sales tax rebate of $80,000 was received relating to this transaction. During
installation, part of the plant had to be shut down; lost profit from the shutdown was $100,000.
Required:
For each expenditure, identify whether it should be included in the cost of the lathe or expensed. Briefly
justify each of your responses.
Answer:
Diff: 1
8-9
27) Zach Co. Ltd. was incorporated on January 2, 2012, but was unable to begin their manufacturing
operations immediately. The new factory facilities became available for use on July 1, 2012. During the
start-up period, the company provisionally used a "Land and Factory Building" account to record the
following transactions, in chronological order:
Jan 31 Purchase of land and building $410,000

Feb 19 Cost of removing existing building 7,000
Proceeds from sale of scrap material from
Mar 15 demolition (1,500)
Mar 15 Partial payment on new construction 80,000
Mar 15 Legal fees paid (see note (i) below) 3,200
Apr 1 Second payment on new construction 80,000
Jun 3 Insurance premium (ii) 4,200
Jun 20 Special tax assessment (iii) 5,000
Jul 3 General expenses (iv) 38,000
Dec 31 Final payment on new construction 65,000
Dec 31 Asset write-up (v) 23,000
Subtotal 713,900
Dec 31 Less depreciation for 2012 (vi) (17,500)
Account Balance $696,400
Additional info
i. Legal fees of $3,200 covered the following:
Cost of incorporating the company $ 600

Examination of title covering purchase of land 1,100
Legal work in connection with construction contract 1,500
ii. Insurance covered the building for a one-year term beginning April 1, 2012.
iii. The special tax assessment covered repaving the street in front of the building.
iv. General expenses covered the following for the period January 2, 2012 to June 30, 2012.
President's salary $34,000

Plant superintendent covering supervision of new building 4,000
v. The board of directors increased the value of the building by $23,000, believing that such an increase
was justified to reflect the current market at the time the building was completed; Retained Earnings was
credited for this amount.
vi. Engineers estimate the useful life of the building to be 40 years. The company believes that the
declining balance method at a 5% rate is appropriate. The company's policy for new PPE is to depreciate
the assets according to the time available for use in the fiscal year, rounded to the closest month.
Required:
Prepare entries to reflect correct land, factory building, and accumulated depreciation accounts at
December 31, 2012. Round values to the nearest dollar, if necessary.
8-10
Answer:
Debit Credit
Dr. Building 231,550
Dr. Land 416,600
Dr. Land improvements 5,000
Dr. Organization costs 600
Dr. Prepaid insurance 1,050
Dr. Insurance expense 2,100
Dr. Salaries expense 34,000
Dr. Retained earnings 23,000
Cr. Depreciation expense (reversal) 17,500
Cr. Land and factory building 696,400
Dr. Depreciation expense 5,789

Cr. Accumulated depreciation 5,789
Diff: 2
28) Every three years a major component (part #45) in a machine must be replaced. By doing this regular
but expensive repair the machine can be used for 15 years. If Part #45 were not replaced, the machine
could be used only for a maximum of six years. When the machine was originally purchased for
$5,000,000 it was set up as one asset and depreciated over its estimated useful life of 15 years. Recently
this repair was completed at a cost of $700,000 for Part #45. The earlier Part #45 cost $550,000 when it was
installed three years ago. Neither the old nor the new Part #45 has any residual value.
Prepare the necessary journal entry to record the transaction. Provide a short justification for your chosen
treatment.
Answer:
Dr. Maintenance expense 700,000
Cr. Cash 700,000
This expenditure should be treated as an expense because this cost is anticipated and expected as the
asset is being depreciated.
Diff: 2
8-11
29) Every three years a major component (part #45) in a machine must be replaced. By doing this regular
but expensive repair the machine can be used for 15 years. If Part #45 were not replaced, the machine
could be used only for a maximum of six years. When the machine was originally purchased for
$5,000,000 it was set up as two components: the machine was depreciated over its estimated useful life of
15 years and Part #45 was recognized as a separate PPE asset and depreciated over three years.
Recently this repair was completed at a cost of $700,000 for Part #45. The earlier Part #45 cost $550,000
when it was installed three years ago. Neither the old nor the new Part #45 has any residual value.
Prepare the necessary journal entries to record the transaction. Provide a short justification for your
chosen treatment.
Answer: A new Part #45 may be capitalized and the older part removed from the accounts. This
expenditure would qualify as a replacement as it provides future benefits in terms of improved operation
of the machine.
To derecognize old part
Dr. Accumulated depreciation — Part #45 550,000

Cr. PPE — Part #45 550,000
To capitalize new part
Dr. PPE — Part #45 700,000

Cash 700,000
Diff: 2
30) An important piece of equipment requires major maintenance. Management has decided to upgrade
the machine, by installing a new component which will extend the useful life of the machine from the
three remaining years to five more years. The regular part could have been purchased for $75,000 but a
more reliable part cost $225,000. The replaced part was not set up as a separate asset when the machine
was purchased.
treatment.
Answer:
Dr. PPE – new part 150,000
Cr. Cash 225,000
Only the portion of the expenditure that increases the service potential of the PPE can be capitalized
because the first $75,000 is recurring maintenance.
Diff: 2
8-12
31) A large piece of earth-moving equipment was upgraded at a cost of $440,000 so that it could self-
unload. After the upgrade was completed, management estimated that this feature would save the
company $40,000 a year for the next six years.
treatment.
Answer:
Dr. PPE – unloader for earth mover (40,000 × 6) 240,000
Cr. Cash 440,000
The portion of the expenditure spent over and above the amount that provides future benefits in terms of
saving the company money should be expensed because the value of the asset cannot exceed the amount
of this future benefit.
Diff: 2
32) A truck has a new engine installed for $155,000 which will increase gas mileage by 25% and reduce
pollution. Originally, the truck and engine were not set up as separate assets. Management confidently
estimates that the cost of the engine is one-third of the overall cost of the truck. The truck's original cost
was $420,000 and it is 40% depreciated.
Prepare the necessary journal entries to record the transaction. Provide a short justification for your
chosen treatment.
Answer:
To derecognize old engine
Dr. Loss on engine disposal 84,000

Dr. Accumulated depreciation - truck (engine) 56,000
(140,000 × .4)
Cr. PPE - truck (engine) 420,000 × 1/3 140,000
To capitalize new engine cost
Dr. Truck engine 155,000

Cr. Cash 155,000
Diff: 2
8-13
33) A car rental company has a fleet of 32,000 cars. Every three months all the cars are given scheduled oil
changes, rotation, and replacement of small components. The cost per car is $210, ($70 in parts and $140
for the wages of the in-house mechanics), $6,720,000 in total. As well, for half of the cars a satellite radio
receiver was installed at a cost of $150 each (total $2,400,000). The gadget allows the car to receive satellite
radio. The company will provide this service free and promote it heavily to increase rentals. This
advertising campaign will cost $1,500,000. After the original free use of the satellite feature, the company
will charge later users a fee for the use of satellite radio.
Prepare the necessary journal entry to record the above transactions. Provide a short justification for your
chosen treatment.
Answer:
Dr. PPE — satellite radio 2,400,000
Dr. Maintenance expense 6,720,000
Dr. Advertising expense 1,500,000
Cr. Cash 10,620,000
The oil change and tire rotation are expensed because they are considered regular repairs and
maintenance.
The satellite receiver can be classified as an asset because it is expected to generate additional rentals of
the vehicle.
The advertising to promote the satellite feature should be expensed because it is a normal operating cost.
Diff: 2
8-14
34) Steep Mountain Ski Resort has been granted a 20-year permit to develop and operate a snow skiing
operation in a national park. After 20 years the site must be returned to its original condition. The roads
may remain, as they can be used for fire prevention purposes. In the spring and summer before the ski
hill opened, the following transactions and events occurred:
i. Installed three ski lifts for a total cost of $120,000,000.
ii. Built a ski chalet for $60,000,000.
iii. Removed trees and cleared the area for ski runs at a cost of $20,000,000.
iv. Received $8,000,000 for the trees that were removed for the ski runs.
v. Put in roads for a cost of $68,000,000.
vi. Paved an area at the base of the mountain for a parking lot at a cost of $11,000,000.
vii. Estimated that it would cost $36,000,000 to dismantle the ski lifts in 20 years but that these lifts could
be sold as scrap steel for $2,000,000. The chalet could be removed for $24,000,000. Reforesting the site
would cost $7,000,000. Removing the parking lot will cost $3,800,000.
Required:
a. Prepare journal entries to record transactions i. to vi.
b. Prepare a journal entry to record transaction vii. Assume all these costs will be set up in a single
account called "site restoration cost." Assume a 6% discount rate. Round to the nearest dollar.
c. Record all year-end journal entries for the above items for the first year of operations. The company
uses straight-line depreciation for all assets. Round to the nearest dollar.
8-15
Answer:
a. Journal entries for transactions i. to vi.
Dr. Ski lift 120,000,000

Cr. Cash 120,000,000
Dr. Ski chalet 60,000,000
Cr. Cash 60,000,000
Dr. Land improvement (site clearance: $20m - $8m) 12,000,000
Cr. Cash 12,000,000
Dr. Roads 68,000,000
Cr. Cash 68,000,000
Dr. Parking lot 11,000,000
Cr. Cash 11,000,000
b. Journal entry for transaction vii.
Dr. Site restoration cost 21,452,165

Cr. Obligation for future site restoration 21,452,165
Total cost to restore site at the end of 20 years = $36m – $2m + $24m + $7m + $3.8m = $68.8m
Present value of $68.8m due in 20 years at 6% = $68.8million / 1.0620 = 21,452,165
Note that it is also possible to treat the scrap metal value of the lifts as the residual value of the lifts rather
than as an offset to the site restoration costs:
c. Year-end journal entries for first year of operations:

Useful life of 20 years is used for the lifts, chalet, improvements, roads, parking lot and site restoration
Dr. Depreciation expense 6,000,000

Cr. Accumulated depreciation — ski lifts 6,000,000
Cr. Accumulated depreciation — ski chalet 3,000,000
Cr. Accumulated depreciation — land improvement 600,000
Cr. Accumulated depreciation — roads 3,400,000
Cr. Accumulated depreciation — parking lot 550,000
Dr. Depreciation expense (21,452,165 /20) 1,072,608
Cr. Accumulated depreciation — site restoration 1,072,608
Dr. Interest expense (21,452,165 × 6%) 1,287,130
Cr. Obligation for future site restoration 1,287,130
Diff: 3
8-16
35) Forest Company paid $38,000,000 for a warehouse and related assets from a company that was in
bankruptcy. The warehouse includes land, building, moving equipment, and heating /ventilation/air
conditioning (HVAC) system. An independent appraiser valued these items individually as follows:
Required:
Allocate the purchase price among the assets acquired.
Answer:
Diff: 1
8-17
36) Office Plus Company bought an office building for $9,000,000 so it could consolidate its entire senior
management staff in one location. An independent appraiser valued these items individually as follows:
Prior to completing the purchase, Office Plus' management decided that it will remove the computer
network system and replace it with fiber-optic cables and related technologies.
Required:
Answer: Since the company has no intention of using the existing computer network system, it will be
ignored in the price allocation process.
Diff: 2
8-18
37) Celtic Company bought three used machines located in Toronto for $20,000,000. The arrangement
with the seller is to move all the equipment to Celtic's factory in Edmonton. It is understood that some of
the equipment will be sold as scrap or disassembled and used as spare parts. A careful inventory of all
the equipment is shown below. Celtic's plans are to maximize the value of each item by using it in its
most beneficial manner.
Required:
Answer:
Diff: 2
8-19
38) Praguian Company built two similar buildings. Each building took one year to build and required
$30,000,000 in construction costs. The Company had limited internal financial resources, so it could fund
only Building A internally and financed Building B by borrowing the $30,000,000 evenly over the year
(i.e., zero at the beginning and increasing to $30 million by the end of the year). The interest rate on the
loan is 10%. Both projects were finished on December 31, 2012 and were ready for occupancy
immediately. The buildings are estimated to have a useful life of 20 years and no residual value. The
Company uses the straight-line method for depreciation.
Required:
a. How much interest cost can be capitalized on Building B?
b. What will be the annual depreciation expense for each of the two buildings?
c. ASPE allows interest capitalization while IFRS recommends capitalization of interest on construction-
specific loans. Ignoring the complexities of how to determine how much interest to capitalize, which
treatment of interest costs is conceptually more correct? Explain your conclusion.
d. Why can interest costs not continue to be capitalized after the self-construction period is completed?
Answer:
a. (30 million / 2) × 10%
= $1,500,000
b. Annual depreciation expense–Building A: $30,000,000 / 20 = $1,500,000
Annual depreciation expense–Building B: $31,500,000 / 20 = $1,575,000.
c. Conceptually, the treatment of interest costs by IFRS is more correct.
Interest cost is as much an essential cost of a self-constructed asset as the concrete and steel.
Without the financing, the construction would not have occurred. The benefit of the interest expenditure
on the debt used to finance the asset is realized over the period of time when the completed asset is used.
Therefore, this cost should be added to the cost of the self-constructed asset and expensed via an
increased depreciation expense.
Further, if the construction of the asset were outsourced, the contractor would have included its cost of
financing the project as part of the contracted price.
Expensing immediately results in poor matching of expense with the realization of the benefit of the
expenditure (which is the finished self-constructed asset).
d. Interest costs may be capitalized only during the construction period because once construction is
completed there is no logistical reason why the owner of the asset cannot start to generate revenues or
cost savings from the use of the asset. While under construction it is impossible to generate a benefit from
the asset, and this is the condition that permits capitalization. Once construction is completed there is no
impediment to delay the matching of expense to revenues as the item is available for use. Therefore, after
completion of the construction process, interest is a period cost, not a product cost.
Diff: 2
8-20
39) Coffee-Bean Company built two similar buildings. Each building took one year to build and required
$25 million in construction costs. Given the Company's limited internal financial resources, only Building
Hazel could be internally financed; Building Cinnamon was financed by a $20 million loan evenly over
the year (i.e., zero at the beginning and increasing to $20 million by the end of the year). The interest rate
on the loan is 8%.
Both projects were finished on December 31, 2013 and were ready for occupancy immediately. The Hazel
building will have an estimated useful life of 30 years while the Cinnamon building will have an expected
useful life of 40 years. Neither value will have a residual value. The Company uses the straight-line
method for depreciation.
Required:
a. How much interest cost can be capitalized on Building Cinnamon?
b. What will be the annual depreciation expense for each of the two buildings?
c. ASPE allows interest capitalization while IFRS recommends capitalization of interest on construction-
specific loans. Ignoring the complexities of how to determine how much interest to capitalize, which
treatment of interest costs is conceptually more correct? Explain your conclusion.
d. Why can interest costs not continue to be capitalized after the self-construction period is completed?
Answer:
a. (20 million / 2) × 8%
= $800,000
b. Annual depreciation expense–Building Hazel: $25,000,000 / 30 = $833,333
Annual depreciation expense–Building Cinnamon: $25,800,000 / 40 = $645,000.
c. Conceptually, the treatment of interest costs by IFRS is more correct.
Interest cost is as much an essential cost of a self-constructed asset as the concrete and steel.
Without the financing, the construction would not have occurred. The benefit of the interest expenditure
on the debt used to finance the asset is realized over the period of time when the completed asset is used.
Therefore, this cost should be added to the cost of the self-constructed asset and expensed via an
increased depreciation expense.
Further, if the construction of the asset were outsourced, the contractor would have included its cost of
financing the project as part of the contracted price.
Expensing immediately results in poor matching of expense with the realization of the benefit of the
expenditure (which is the finished self-constructed asset).
d. Interest costs may be capitalized only during the construction period because once construction is
completed there is no logistical reason why the owner of the asset cannot start to generate revenues or
cost savings from the use of the asset. While under construction it is impossible to generate a benefit from
the asset, and this is the condition that permits capitalization. Once construction is completed there is no
impediment to delay the matching of expense to revenues as the item is available for use. Therefore, after
completion of the construction process, interest is a period cost, not a product cost.
Diff: 3
8-21
40) Discuss how inappropriate capitalization of costs during the acquisition of PPE can manipulate
earnings.
Answer: The general principle is that companies should capitalize only those costs that are directly
attributable to the purchase/construction of the PPE. Professional judgment must be used to determine
whether a particular activity is directly connected to that purchase/construction.
Over capitalization of employee cost or borrowing costs are some examples where significant judgment is
required. Inappropriate capitalization of costs (which should have been expensed) would inflate current
year earnings while causing future years' annual depreciation expenses to be incorrectly higher.
Diff: 2
Skill: Conceptual
1) What is the meaning of "historical cost"?

A) The cost required to replace the productive capacity of an asset.
B) The value of an asset in an input market or output market on the date of measurement.
C) The value expected from the sale of an asset, net of any costs of disposal.
D) The actual cost of an asset at the time it was purchased.
Answer: D
Diff: 1
Skill: Conceptual
Objective: 8.2 Apply different depreciation methods, including the effect of changes in estimates on depreciation
calculations.
2) What issue does not relate to the subsequent measurement of property, plant and equipment?
A) Which model to use to record depreciation.
B) How impairment should be recorded.
C) How to classify the expenditure.
D) Whether to use the fair value model.
Answer: C
Diff: 2
Skill: Conceptual
calculations.
3) What is the meaning of "depreciable amount"?

A) The estimated amount that an entity would currently obtain from disposal of the asset, after deducting
disposal costs, for an asset of similar age and condition expected at the end of its useful life.
B) The total amount to be expensed through depreciation.
C) The systematic allocation of an asset's depreciable amount over its estimated useful life.
D) The estimated period of time over which an asset is expected to be available for use by an entity.
Answer: B
Diff: 2
Skill: Conceptual
calculations.
8-22
4) What is the meaning of "straight-line method"?

A) The systematic allocation of an asset's depreciable amount allocated in proportion to the productive
capacity used.
B) The systematic allocation of an asset's depreciable amount allocated evenly over the asset's estimated
useful life.
D) The systematic allocation of an asset's depreciable amount whereby a period's depreciation equals the
asset's net carrying amount multiplied by a fixed percentage.
Answer: B
Diff: 2
Skill: Conceptual
calculations.
5) Which factor will affect the estimated useful life of property, plant or equipment?
A) Legal life of the asset.
B) Technological obsolescence.
C) Residual value.
D) Salvage value.
Answer: B
Diff: 2
Skill: Conceptual
calculations.
6) What is the meaning of "residual value"?

Answer: A
Diff: 2
Skill: Conceptual
calculations.
7) What is the meaning of "useful life"?

Answer: D
Diff: 2
Skill: Conceptual
calculations.
8-23
8) What is the meaning of "depreciation"?

B) The total amount to be expensed.
Answer: C
Diff: 2
Skill: Conceptual
calculations.
9) What is the meaning of "declining balance method"?

capacity used.
useful life.
Answer: D
Diff: 2
Skill: Conceptual
calculations.
10) What is the meaning of "units-of-production method"?

capacity used.
useful life.
Answer: A
Diff: 2
Skill: Conceptual
calculations.
8-24
11) What is the meaning of "depreciation"?

capacity used.
useful life.
Answer: C
Diff: 3
Skill: Conceptual
calculations.
12) What factor will NOT affect the estimated useful life of property, plant or equipment?
A) Legal life of the asset.
B) Technological obsolescence.
C) Competitive pressures.
D) Productive capacity.
Answer: A
Diff: 2
Skill: Conceptual
calculations.
13) Hotel-R-Us owns a machine that it purchased on Jan 1, 2010 for $600,000. The machine had an
estimated useful life of 5 years and an estimated residual value of $100,000. The company uses the
declining balance method with a rate of 20%. The machine was sold on December 31, 2012 for $140,000.
What was the accumulated depreciation at December 31, 2012?
A) $292,800
B) $180,000
C) $150,000
D) $76,800
Answer: A
Explanation: A) 2010 depreciation = 600 × 20% = 120
2011 depreciation = (600 - 120) × 20% = 96
2012 depreciation = (600 - 120 - 96) × 20% = 76.8
Accumulated = 120,000 + 96,000 + 76,800 = 292,800
Diff: 3
calculations.
8-25
14) Seall-Test Ltd. owns a machine that it purchased on Jan 1, 2010 for $600,000. The machine had an
What was the depreciation expense for 2011?
A) $50,000
B) $60,000
C) $96,000
D) $120,000
Answer: C
Explanation: C) 2010 depreciation = 600 × 20% = 120
2011 depreciation = (600 - 120) × 20% = 96,000
Diff: 2
calculations.
15) What is the meaning of "replacement cost"?

Answer: A
Diff: 1
Skill: Conceptual
calculations.
16) What is the meaning of "entry value"?

Answer: A
Diff: 2
Skill: Conceptual
calculations.
17) What is the meaning of "current value"?

Answer: B
Diff: 2
Skill: Conceptual
calculations.
8-26
18) What is the meaning of "net realizable value"?

Answer: C
Diff: 1
Skill: Conceptual
calculations.
19) What is the meaning of "exit value"?

Answer: C
Diff: 2
Skill: Conceptual
calculations.
20) What is the meaning of "value in use"?

D) The discounted value of cash flows expected from using an asset for its intended purpose.
Answer: D
Diff: 1
Skill: Conceptual
calculations.
21) Ontario Ltd. owns a machine that it purchased on Jan 1, 2010 for $750,000. The machine had an
estimated useful life of 5 years and an estimated residual value of $50,000. The company uses straight-line
depreciation and records monthly depreciation. The machine was sold on December 31, 2013 for $200,000.
What was the annual depreciation expense?
A) $10,000
B) $140,000
C) $150,000
D) $560,000
Answer: B
Explanation: B) (750 - 50) / 5 year = 140,000 / year
Diff: 2
calculations.
8-27
22) Seneca Valley owns a machine that it purchased on Jan 1, 2010 for $600,000. The machine had an
A) $100,000
B) $120,000
C) $200,000
D) $240,000
Answer: D
Explanation: D) 600,000 × 40% = 240,000
Diff: 2
calculations.
23) Centennial owns a machine that it purchased on Jan 1, 2010 for $400,000. The machine had an
estimated useful life of 10 years with a production capacity for 80,000 units and was expected to have no
residual value. The company uses the units-of-production method to record depreciation. The machine
produced 15,000 units in 2010, 18,000 units in 2011 and 25,000 units in 2012. The machine was sold on
December 30, 2012 for $350,000. What was the accumulated depreciation at December 31, 2010?
A) $39,000
B) $40,000
C) $75,000
D) $90,000
Answer: C
Explanation: C) $400,000/80,000 = $5/unit
2010 = 5 × 15,000 units = 75,000 = Accumulated depreciation
Diff: 2
calculations.
24) Francisco owns a machine that it purchased on July 1, 2010 for $600,000. The machine had an
A) $30,729
B) $36,875
C) $73,750
D) $75,000
Answer: B
Explanation: B) (600,000 - 10,000) / 8 years × 6/12 = 36,875
Diff: 2
calculations.
8-28
25) Oregona Ltd. owns a machine that it purchased on Jan 1, 2010 for $750,000. The machine had an
What is the accumulated depreciation at December 31, 2013?
A) $600,000
B) $560,000
C) $150,000
D) $140,000
Answer: B
Explanation: B) 4 years × ((Cost – Residual value)/5)
4* ((750,000 - 50,000)/5) = 560,000
Diff: 3
calculations.
26) Scandsia Ltd. owns a machine that it purchased on Jan 1, 2010 for $750,000. The machine had an
What is the carrying value (net book value) at the date of sale?
A) $10,000
B) $150,000
C) $190,000
D) $560,000
Answer: C
Explanation: C) [Cost – (4 years × (Cost – Residual value)/5)]
[(750 – (4* (750-50)/5)]
750,000 – 560,000 = 190,000
Diff: 3
calculations.
27) Easter Corp. owns a machine that it purchased on Jan 1, 2010 for $600,000. The machine had an
What was the accumulated depreciation at December 31, 2011?
A) $100,000
B) $120,000
C) $180,000
D) $216,000
Answer: D
Explanation: D) 2010 depreciation = 600 × 20% = 120, 2011 depreciation = (600 - 120) × 20% = 96
Accumulated = 120,000 + 96,000 = 216,000
Diff: 2
calculations.
8-29
28) Base-Forward owns a machine that it purchased on Jan 1, 2010 for $600,000. The machine had an
A) $292,800
B) $76,800
C) $60,000
D) $50,000
Answer: B
Explanation: B) 2010 depreciation = 600 × 20% = 120
2011 depreciation = (600 - 120) × 20% = 96
2012 depreciation = (600 – 120 - 96) × 20% = 76,800
Diff: 3
calculations.
29) CeeMore owns a machine that it purchased on Jan 1, 2010 for $400,000. The machine had an estimated
useful life of 10 years and a production capacity of 80,000 units and was expected to have no residual
value. The company uses the units-of-production method to record depreciation. The machine produced
15,000 units in 2010, 18,000 units in 2011 and 25,000 units in 2012. The machine was sold on December 31,
2012 for $350,000. What was the accumulated depreciation at the end of 2011?
A) $75,000
B) $80,000
C) $90,000
D) $165,000
Answer: D
Explanation: D) $400,000/80,000 = $5/unit
2010 & 2011 = 5 × (15,000 + 18,000) = 165,000
Diff: 3
calculations.
8-30
30) Castle Rock owns a machine that it purchased on Jan 1, 2010 for $400,000. The machine had an
estimated useful life of 10 years with a production capacity for 80,000 units and was expected to have no
residual value. The company uses the units-of-production method to record depreciation. The machine
produced 15,000 units in 2010, 18,000 units in 2011 and 25,000 units in 2012. The machine was sold on
December 31, 2012 for $350,000. What was the depreciation expense for 2012?
A) $39,000
B) $40,000
C) $90,000
D) $125,000
Answer: D
Explanation: D) $400,000/80,000 = $5/unit
2012 = 5 × 25,000 = 125,000
Diff: 3
calculations.
31) Seneca Valley owns a machine that it purchased on Jan 1, 2010 for $600,000. The machine had an
double-declining balance method. The machine was sold on December 31, 2012 for $140,000. What is the
depreciation rate for 2010?
A) 10%
B) 20%
C) 40%
D) Any of the above can be used
Answer: B
Explanation: B) Straight-line rate = 1/10 = 10%; Double declining rate =
2 × straight line rate = 20%
OR 2/useful life 2/10 = 20%
Diff: 2
calculations.
32) Seally Corp. owns a machine that it purchased on Jan 1, 2010 for $600,000. The machine had an
A) $50,000
B) $60,000
C) $80,000
D) $96,000
Answer: D
Explanation: D) 2010 depreciation = 600 × 20% = 120
2011 depreciation = (600 - 120) × 20% = 96,000
Diff: 2
calculations.
8-31
33) Plastic Moulds purchased equipment on January 1, 2009 for $275,000. It was estimated that the
equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was
estimated at 5 years or 10,000 units of output. The company has a December 31 year end. Additional
information:
Year Units of Output

2009 2,100
2010 2,000
2011 1,700
2012 2,300
2013 1,900
Assuming the company uses the units-of-production depreciation method, what is the depreciation rate
per unit for 2009?
A) $25.00
B) $27.50
C) $57,750
D) $52,500
Answer: A
Explanation: A) ($275,000 - $25,000) / 10,000 = $25.00 per unit
Diff: 2
calculations.
8-32
34) Billu Limited purchased equipment on January 1, 2009 for $275,000. It was estimated that the
estimated at 5 years or 10,000 units of output. The company has a December 31 year end. Additional
information:

2009 2,100
2010 2,000
2011 1,700
2012 2,300
2013 1,900
Assuming the company uses the units-of-production depreciation method, calculate the depreciation
expense for 2012.
A) $25.00
B) $57,500
C) $63,250
D) $202,500
Answer: B
Explanation: B) ($275,000 - $25,000) / 10,000 = $25.00 per unit
2,300 units × 25.00 = 57,500
Diff: 2
calculations.
35) Ceila Manufacturing purchased equipment on January 1, 2012 for $275,000. It was estimated that the
estimated at 5 years or 10,000 units of output. The company has a December 31 year end. Assuming the
company uses the double-declining-balance depreciation method, what is the depreciation expense for
2012?
A) $50,000
B) $55,000
C) $100,000
D) $110,000
Answer: D
Explanation: D) 1/5 × 2 = 2/5 × 275,000 = $110,000
Diff: 2
calculations.
8-33
36) FeelGood Corp. purchased equipment on January 1, 2011 for $275,000. It was estimated that the
double-declining-balance depreciation method is used, what is the net book value (carrying value) of the
asset on December 31, 2012?
A) $66,000
B) $99,000
C) $110,000
D) $165,000
Answer: B
Explanation: B) DDB rate 2/5 = 40%
2011 deprec. 275,000 × 40% = 110,000
2012 deprec. (275,000 – 110,000) × 40% = 66,000
NBV @ 12/31/12 = 275,000 – 110,000 – 66,000 = 99,000
Diff: 3
calculations.
37) Historic Pieces Inc. purchased equipment on January 1, 2012 for $275,000. It was estimated that the
company uses straight-line depreciation, what is the depreciation expense for 2012?
A) $27,500
B) $50,000
C) $55,000
D) $60,000
Answer: B
Explanation: B) 2750000 - 25,000 = 250,000 / 5 years = $50,000
Diff: 2
calculations.
38) Bountiful Limited purchased equipment on January 1, 2009 for $275,000. It was estimated that the
company uses straight-line depreciation, what is the net book value of the asset on December 31, 2012?
A) $125,000
B) $75,000
C) $55,000
D) $50,000
Answer: B
Explanation: B) [(275,000 - 25,000)/5] × 4 years) = 200,000 acc. depr; NBV - 275,000 - 200,000 = 75,000
Diff: 3
calculations.
8-34
39) Fantasmic Moulds purchased equipment on January 1, 2009 for $275,000. It was estimated that the
estimated at 5 years or 10,000 units of output. The company has a December 31 year end.
Additional Information
2009 2,100
2010 2,000
2011 1,700
2012 2,300
2013 1,900
Assuming the company uses the units-of-production depreciation method, what is the depreciation
expense for 2009?
A) $25.00
B) $27.50
C) $52,500
D) $57,750
Answer: C
Explanation: C) (275,000 - 250,000) / 10,000 = $25.00 per unit
25 × 2,100 = 52,500
Diff: 2
calculations.
8-35
40) Fantasy Limited purchased equipment on January 1, 2009 for $275,000. The asset's useful life was
estimated at 5 years or 10,000 units of output, with no residual value. The company has a December 31
year end.
2009 2,100
2010 2,000
2011 1,700
2012 2,300
2013 1,900
Assuming the company uses the units-of-production depreciation method, what is the depreciation
expense for 2009?
A) $25.00
B) $27.50
C) $52,500
D) $57,750
Answer: D
Explanation: D) 275,000 / 10,000 = $27.50 per unit
27.50 × 2,100 = 57,750
Diff: 3
calculations.
8-36
41) AccountingPro purchased equipment on January 1, 2009 for $275,000. The asset's useful life was
estimated at 5 years or 10,000 units of output, with no residual value. The company has a December 31
year end.
2009 2,100
2010 2,000
2011 1,700
2012 2,300
2013 1,900
Assuming the company uses the units-of-production depreciation method, what is the depreciation rate
per unit for 2013?
A) $25.00
B) $27.50
C) $47,500
D) $52,250
Answer: B
Explanation: B) 275,000 / 10,000 = $27.50 per unit
Diff: 2
calculations.
8-37
42) Billu Limited purchased equipment on January 1, 2009 for $275,000. It was estimated that the
estimated at 5 years or 10,000 units of output. The company has a December 31 year end.
2009 2,100
2010 2,000
2011 1,700
2012 2,300
2013 1,900
Assuming the company uses the units-of-production depreciation method, calculate the accumulated
depreciation at the end of 2012.
A) $57,500
B) $63,250
C) $202,500
D) $222,750
Answer: C
Explanation: C) (275,000 - 25,000) = 250,000 / 10,000 = $25.00 per unit
(1,900 + 2,000 + 1,700 + 2,300) × $25.00 = $202,500
Diff: 3
calculations.
43) Ceila Manufacturing purchased equipment on January 1, 2011 for $275,000. It was estimated that the
company uses the double-declining-balance depreciation method, what is the depreciation expense for
2012?
A) $66,000
B) $99,000
C) $110,000
D) $165,000
Answer: A
Explanation: A) 1/5 × 2 = 2/5 × 275,000 = 110,000 (deprec for 2011)
(275 – 110) × 2/5 = 66,000
Diff: 2
calculations.
8-38
44) ReelGood Corp. purchased equipment on January 1, 2012 for $275,000. It was estimated that the
double-declining-balance depreciation method is used, what is the net book value (carrying value) of the
asset on December 31, 2012?
A) $66,000
B) $99,000
C) $110,000
D) $165,000
Answer: D
Explanation: D) 1/5 × 2 = 2/5 × 275,000 = 110,000 (deprec for 2012)
275,000 – 110,000 = 165,000
Diff: 3
calculations.
45) Welcome Corporation purchased equipment for $267,000. The equipment is estimated to have a
useful life of 10 years and a residual value of $27,000. Welcome uses straight-line depreciation and has a
December 31 year end. On January 1, 2012, the net book value of the equipment is $211,000. What is the
date of purchase of the equipment?
A) January 1, 2008
B) September 1, 2008
C) September 30, 2008
D) September 1, 2009
Answer: D
Explanation: D) 267,000 – 27,000 = 240,000 / 10 = 24,000 / 12 = 2,000 per month
267,000 – 211,000 = 56,000 / 2,000 = 28 months accumulated depreciation
Purchase date is September 1, 2009
Diff: 3
calculations.
46) What is the effect of overstating 2012 depreciation expense?

A) Accumulated depreciation will be understated for 2012.
B) Net income for 2012 will be overstated.
C) Ending retained earnings for 2012 will be understated.
D) Ending retained earnings for 2012 will be overstated.
Answer: C
Diff: 3
Skill: Conceptual
calculations.
8-39
47) Explain how the depreciation method should be selected for property, plant and equipment.
Answer:
• Enterprises should choose the depreciation method that best reflects the pattern of benefits consumed;
however, IFRS does not specify the methods that should be used.
• Common methods include straight-line, declining (diminishing) balance, and units-of-production.
• In addition to the depreciation method, enterprises need to estimate two other parameters: residual
value and useful life (or depreciation rate, in the case of the declining balance method).
Diff: 1
Skill: Conceptual
calculations.
48) Explain the accounting purpose of "depreciation." Does depreciation represent the decline in value of
an asset?
Answer: Depreciation is a systematic (yet arbitrary) process of cost allocation that apportions the cost of
PPE over its economic useful life.
The non-accounting use of the term "depreciation" refers to the decline in the value of assets. However,
the objective of accounting depreciation is not asset valuation, so the depreciated value of an asset need
not correspond to its current value.
In particular, some PPE can increase in value but such assets would still need to be depreciated.
Diff: 2
Skill: Conceptual
calculations.
49) At December 31, 2012, the following data were available for a building owned by Omega Company:
Building cost $700,000

Accumulated depreciation - building 525,000
Estimated residual value at end of the useful life 25,000
Estimated remaining useful life 15
A small room was built on the back of the building at a cost of $45,000. The room was completed on June
30, 2013 and was used as office space commencing July 2, 2013. The company uses straight-line
depreciation, and accounts for partial years using the number of months the asset is available for use.
Required:
How much is the impact of this expenditure on income before taxes for 2013?
Answer: The office should be depreciated for six months. (45,000 / 14.5 years × 6/12)
Income before taxes for 2013 would decrease by $1,552.
Diff: 1
calculations.
8-40
50) Listed below are several long-lived assets owned by X Corp. The company uses straight-line
depreciation. Assume in all cases that the asset's first and last years are full years, and that all
assumptions and estimates used to derive depreciation remain unchanged throughout the assets' useful
lives.
Required:
For each asset, calculate the depreciation expense for the last year of the assets' useful lives.
Show your calculations.
Answer:
Diff: 1
calculations.
8-41
51) On April 1, 2013, Omega Company paid $15,000 for office furniture. The furniture is expected to last
10 years with no residual value. Omega uses the double declining balance method of depreciation and
fractional-year depreciation based on the number of months.
Required:
What is the depreciation expense for the year ended December 31, 2013?
Answer: DDB rate is 2/10 = 20% Depre = 15,000 × 20% × 9/12 = $2,250
Diff: 1
calculations.
52) On January 1, 2012, Pheta Company purchased a machine for $114,000. It has an estimated four-year
life and a residual value of $45,000. The machine is expected to be used for a total of 4,600 hours over the
four years. During 2012, it was used for 1,900 hours.
Required:
How much is the depreciation expense for 2012 under the units-of-production method?
Answer:
Machine cost $114,000
Residual value 45,000
Depreciable amount 69,000
Estimated total hours ÷ 4,600 hours
Depreciation per hour $15/hour
Hours used in 2012 ×1,900 hours
Depreciation for 2012 $28,500
Diff: 1
calculations.
8-42
53) A machine was acquired on January 1, 2012 for $4,000,000. At that time it was estimated the machine
would last eight years and have a residual value of $560,000. Due to reduced levels of activity during
2014, management revised the estimate of useful life to 10 more years (i.e., the machine was to be
operational until December 31, 2023, 12 years in total) and its residual value would be $410,000. The
company has a December 31 year-end.
Required:
Case A: Prepare the journal entries to record depreciation for 2012 and 2014. The company uses straight-
line depreciation.
Case B: Same as Case A except the company uses the double-declining balance method. The rate used
will be 25% for the first two years and then 20% thereafter. Prepare the journal entries to record
depreciation for 2012 and 2014.
Answer:
Case A:
2012 Dec 31 Dr. Depreciation expense 430,000

(4,000,000 - 560,000) / 8

(4,000,000 - (430,000 × 2) - 410,000) /10
Case B:
2012 Dec 31 Dr. Depreciation expense 1,000,000

Cr. Accumulated depreciation 1,000,000
4,000,000 × 25%

(4,000,000 - 1,000,000 - 750,000) × 20%
OR 4,000,000 × 0.752 × 20%
Diff: 2
calculations.
8-43
54) A building costing $7,000,000 was purchased on January 1, 2011. Based on management's best
estimates, the useful life of the building was estimated to be 40 years, with no residual value. During 2017
it was discovered that the local government had plans to build a freeway where the building stands. This
project would require significant engineering and regulatory approval, so the site would be expropriated
by January 1, 2023. The government agreed to pay $320,000 compensation for the building. The company
has a December 31 year-end.
Required:
Case A: Prepare the journal entries to record depreciation for 2011 and 2017. The company uses straight-
line depreciation.
Case B: Same as Case A except the company uses the double-declining balance method. The rate will be
5% until 2017 and 2/6 or 33.33% thereafter. Prepare the journal entries to record depreciation for 2011 and
2017.
Answer:
Case A: Straight-line method with change during 2017

7,000,000 / 40

7,000,000 - (175,000 × 6) - 320,000) /6
Case B: Declining balance with change during 2017

7,000,000 × 5%

7,000,000 × 0.956 × 2/6
Diff: 2
calculations.
8-44
55) A large lathe was bought on January 1, 2013 for $15,000,000. It was expected to last for 12 years and
have a residual value of $300,000. The company uses straight-line depreciation. At the beginning of 2018,
the remaining useful life of the lathe was revised to be four more years (for nine years in total).
Management also felt that all equipment should now be depreciated using the declining balance method
at a 25% rate. The company has a December 31 year-end.
Required: Prepare the entries to record depreciation for 2013 and 2018.
Answer: Straight-line with shortened useful life and change to declining balance

(15,000,000 - 300,000) / 12

[(15,000,000 - (1,225,000 × 5)] × 25%
Diff: 2
calculations.
56) Discuss how a company can manipulate earnings through estimates used in depreciation.
Answer: A significant amount of judgment must be exercised in the estimates and choices to calculate
depreciation expense: depreciable amount, useful life, pattern of use/depreciation.
-The residual amount will affect the depreciable that is being depreciated and that amount is difficult to
forecast upfront.
-The useful life involves forecasts for the future that can be difficult to establish upfront. and can be
inherently biased.
-The depreciation method determines the actual expense for the year. A company could inappropriately
justify a change in the depreciation method as a "change in estimate" (versus change in policy).
A company could increase its estimate of residual value, decrease its estimated life or determine the
double declining method is more appropriate for matching revenues and expenses than the straight-line
method — such changes could be explained as a change in estimate to manipulate income. Having
management commit to a depreciation schedule that covers the asset's useful life reduces opportunities
for manipulation.
A policy on deprecation for partial year acquisitions can be another avenue for manipulation.Be wary of
companies that change this policy without justification.
It should also be noted that when PPE is used to produce inventory, the depreciation charge actually
flows though different line items in the income statement (CGS) and affects ratios differently.
Diff: 3
Skill: Conceptual
calculations.
8-45
1) When is property, plant, and equipment (PPE) NOT derecognized?

A) When PPE is sold.
B) When PPE is scrapped.
C) When PPE is idle.
D) When PPE is destroyed in a flood.
Answer: C
Diff: 2
Skill: Conceptual
Objective: 8.3 Apply the standards for derecognition of property, plant, and equipment and understand the meaning
of gains and losses arising from derecognition.
2) Which question arises at the time property, plant, and equipment is derecognized?
A) Should the transaction be recorded at fair value or book value?
B) When should the asset be removed from the balance sheet?
C) When should the impairment be recorded in the income statement?
D) Have the criteria for commercial substance been met?
Answer: B
Diff: 2
Skill: Conceptual
3) The following entry was recorded by Woodrow Inc.:
Cash 57,000
Accumulated depreciation 33,000
Loss on disposal of property, plant, and
equipment (PPE) 10,000
PPE 100,000
What is the effect on Woodrow's financial statements?

A) Current assets increased by $67,000.
B) Net assets increased by $57,000.
C) The carrying value of property, plant, and equipment (PPE) decreased by $67,000.
D) Retained earnings decreased by $57,000.
Answer: C
Explanation: C) 100,000 - 33,000 = 67,000
Diff: 2
8-46
4) The following entry was recorded by Williams Inc.:
Cash 57,000
Loss on disposal of property, plant, and 10,000
equipment (PPE)
PPE 100,000
What is the effect of this entry on the financial statements?

A) Current assets increased by $57,000.
B) Net assets increased by $10,000.
C) Income decreased by $33,000.
D) Long-term assets increased by $100,000.
Answer: A
Diff: 3
5) The following entry was recorded by Alex Corp.:
Cash 80,000
Loss on disposal of property, plant, and 20,000
equipment (PPE)
PPE 150,000
What is the effect of this entry on the financial statements?

A) Current assets decreased by $80,000.
B) Net assets decreased by $20,000.
C) Net PPE decreased by $130,000.
D) Income decreased by $30,000.
Answer: B
Explanation: B) 80,000 - (150,000 - 50,000)
Diff: 3
8-47
6) Ontario Ltd. purchased a machine on Jan 1, 2010 for $750,000. The machine had an estimated useful life
of 5 years and an estimated residual value of $50,000. The company uses straight-line depreciation and
records monthly depreciation. The machine was sold on December 31, 2013 for $200,000. What was the
gain/loss on disposal of the machine?
A) $10,000 loss.
B) $10,000 gain.
C) $50,000 loss.
D) $50,000 gain.
Answer: B
Explanation: B) Proceeds – NBV = Gain/loss
Proceeds – [Cost – (4 years × (Cost – Residual value)/5)]
200,000 – [(750 – (4* (750-50)/5)]
200,000 – [750 - 560]
200,000 – 190,000 = 10,000 gain
Diff: 2
7) Francisco purchased a machine on Jan 1, 2010 for $750,000. The machine had an estimated useful life of
5 years and an estimated residual value of $50,000. The company uses straight-line depreciation and
A) $10,000 gain.
B) $10,000 loss.
C) $50,000 gain.
D) $50,000 loss.
Answer: D
Explanation: D) Proceeds – (NBV) = Gain/loss
140,000 – [(750 – (4* (750-50)/5)]
140,000 – [750 - 560]
140,000 – 190,000 = 50,000 loss
Diff: 3
8-48
A) $70,000 loss.
B) $70,000 gain.
C) $73,000 loss.
D) $73,000 gain.
Answer: C
Explanation: C) Proceeds – (NBV) = Gain/loss
350,000 – [(600 – (3* (600-10)/10)]
350,000 – [600 - 177]
350,000 – 423,000 = 73,000 loss
Diff: 3
A) $104,000 loss.
B) $104,000 gain.
C) $110,000 gain.
D) $110,000 loss.
Answer: B
Explanation: B) Proceeds – (NBV) = Gain/loss
350,000 – [(600 – (6 × (600-10)/10)]
350,000 – [600 - 354]
350,000 – 246,000 = 104,000 gain
Diff: 2
8-49
10) A machine was purchased during 2013 for $3,750,000. At the time of purchase it was estimated that
the machine would have a useful life of ten years and a residual value of $750,000. During 2019 the
machine was sold for $1,850,000. The company uses straight-line depreciation, but does not record
depreciation expense in the year of acquisition or disposal.
Required:
a. Prepare the journal entry to record the derecognition of the asset in 2019.
b. Assume that rather than using the straight-line method, the company uses the declining balance
method of depreciation at a 20% rate. Prepare the journal entry to record the derecognition of the asset in
2019.
Answer:
a. Derecognition of the asset in 2019—straight-line depreciation.
Dr. Cash 1,850,000

Dr Accum Depreciation [(3,750,000 - 750,000) /10] × 5 1,500,000
Cr. PPE - machine 3,750,000
Dr. Loss on disposal 400,000
b. Derecognition of the asset in 2019—declining balance depreciation.
Dr. Cash 1,850,000

Dr. Accum depreciation 3,750,000 - [3,750,000 × (1-0.2)5] 2,521,200
Cr. PPE - machine 3,750,000
Cr. Gain on disposal 621,200
Diff: 2
11) Explain derecognition of property, plant or equipment.

Answer: When an item of PPE is sold, dismantled, or otherwise disposed of, the enterprise should
remove the item from the accounts along with the related accumulated depreciation, and recognize any
gain or loss through income.
Diff: 1
Skill: Conceptual
8-50
12) What does a "gain on disposal of property, plant and equipment" mean? Does a gain suggest good or
excellent management and a loss on disposal indicate poor management? Explain your conclusion.
Answer: A gain on disposal tells us that prior years' net income should have been higher as depreciation
expense was too high, so by the time of disposal the carrying value in the books was lower than the
proceeds of sale, creating a gain on disposal. A loss on disposal tells us that prior years' net incomes were
too high as depreciation expense was too low, so by the time of disposal the carrying value in the books
was higher than the proceeds of sale, creating a loss on disposal. What such gains and losses definitely do
NOT tell us is anything about the ability of management in the year the gain or loss was recorded.
Diff: 2
Skill: Conceptual
13) Will the method of depreciation affect the net cash outflow associated with the purchase and
subsequent sale of property, plant and equipment?
Answer: The net cash flows will be identical. Is this a coincidence? No, it is by design. The logic/nature of
the accrual process is such that the cumulative consequence of the income statement adjustments equals
the net cash outflow associated with the asset. It is the purpose and goal of the allocation process to
spread the consequences of transactions over multiple periods. The overall effect will be the net cash flow
of the complete transaction cycle. Estimates are required, especially as to the useful life and residual value
of the depreciable asset at the start of the depreciation allocation process. These estimates will cause the
carrying amount to over- or understate the asset value relative to its resale price, but the accounting gain
or loss upon disposal settles up this difference.
Diff: 2
Skill: Conceptual
8-51
1) What is a monetary item?

A) An asset that has a fixed or determinable cash flow.
B) Assets such as land and buildings.
C) An asset arising from contractual agreements on future cash flows.
D) An asset that does not have a fixed or determinable cash flow.
Answer: A
Diff: 2
Skill: Conceptual
Objective: 8.4 Analyze transactions with non-monetary consideration and apply the accounting standards for non-
monetary transactions.
2) Mathew Corp exchanged similar assets with Simone Company in a transaction with commercial
substance. Mathew gave up equipment that had a net book value of $47,000 (fair value $49,000) and
Simone exchanged equipment with a net book value of $36,000 (fair value $35,000). What is the correct
value at which Mathew should record the new equipment?
A) $35,000
B) $36,000
C) $47,000
D) $49,000
Answer: D
Explanation: D) Fair value of asset being given up
Diff: 2
3) Rene exchanged similar assets with Simone Company in a transaction with commercial substance.
Rene gave up equipment that had a net book value of $47,000 (fair value $49,000) and Simone exchanged
equipment with a net book value of $36,000 (fair value $35,000). What is the correct value at which
Simone should record the new equipment?
A) $35,000
B) $36,000
C) $47,000
D) $49,000
Answer: A
Explanation: A) Fair value of asset being given up
Diff: 2
8-52
4) Peter exchanged similar assets with Sunshine Company in a transaction WITHOUT commercial
substance. Peter gave up equipment that had a net book value of $47,000 (fair value $49,000) and
Sunshine exchanged equipment with a net book value of $36,000 (fair value $35,000). What is the correct
value at which Sunshine should record the new equipment?
A) $35,000
B) $36,000
C) $47,000
D) $49,000
Answer: B
Explanation: B) Carrying value of asset being given up
Diff: 3
5) Ronald exchanged similar assets with Silver Company in a transaction WITHOUT commercial
substance. Ronald gave up equipment that had a net book value of $47,000 (fair value $49,000) and Silver
exchanged equipment with a net book value of $36,000 (fair value $35,000). What is the correct value at
which Ronald should record the new equipment?
A) $35,000
B) $36,000
C) $47,000
D) $49,000
Answer: C
Explanation: C) Carrying value of asset being given up
Diff: 3
6) Gigantic Corp acquired a machine from Miko Company in exchange for 10,000 Gigantic common
shares, for which the quoted market price on the stock exchange was $20 per share. The machine was
estimated by Gigantic to have a fair market value of $225,000. (Assume that the market price of the shares
and the fair value of the machine are equally reliable.) The book value of the machine in Miko's records
was $190,000. At what amount should Gigantic record the machine?
A) $190,000
B) $200,000
C) $212,500
D) $225,000
Answer: B
Explanation: B) Fair value of shares
Diff: 3
8-53
7) On January 1, 2011, a machine was purchased for $12,000. The machine was estimated to have a 10 year
useful life and a residual value of $500. Straight-line depreciation is to be used. On January 1, 2013, the
machine was then exchanged for computer equipment with a fair value of $10,000. Assuming that the
exchange had commercial substance, how much would be recorded as a gain on disposal of the machine
on January 1, 2013?
A) $0
B) $300
C) $400
D) $500
Answer: B
Explanation: B) $10,000 - [$12,000 - ($12,000 - $500) / 10 × 2] = $300
Diff: 2
8) Explain how non-monetary transactions are accounted for.

Answer:
• Enterprises should generally account for exchanges involving non-monetary assets using the fair
values of those assets, except when the exchange does not have commercial substance or when fair values
are not reliably measurable.
• It is preferable to use the fair value of the asset given up in the exchange if both assets' fair values are
reliably measured.
• If the fair values of the assets exchanged are not reliably measurable, the reporting entity should use
the carrying value on its books.
Diff: 1
Skill: Conceptual
8-54
9) Polar Sky Railway (PSR), a transportation company, has substantial investments in property, plant and
equipment. In 2011, the company exchanged some of these assets with other companies. [Note: any
depreciation expense prior to the following transaction has already been properly recorded.] PSR traded
railway tracks running Vancouver-Calgary-Winnipeg to its competitor, High Land Railway, in exchange
for the Vancouver-Edmonton-Winnipeg route. PSR received $15 million from High Land because the
southern route was shorter. Aside from this $15 million differential, there are no other significant
differences in the amount, risk, and timing of future benefits from these two sets of tracks. The tracks,
originally laid down in the late 19th century, had a cost of $125 million, accumulated depreciation of $90
million, and a fair value of $100 million. The Vancouver-Edmonton-Winnipeg tracks were recorded on
High Land's books at a cost of $105 million and accumulated depreciation of $70 million.
Required:
Record the journal entry for the above transaction on PSR's books. State your reason(s) for the chosen
accounting method.
Answer: No commercial substance—use carrying values (no gains or losses)
Dr. Cash 15,000,000

Dr. Accumulated depreciation 90,000,000
Cr. Railroad track—old 125,000,000
Dr. Railroad tracks—new 20,000,000
Diff: 2
10) Polar Sky Railway (PSR), a transportation company, has substantial investments in property, plant,
and equipment. In 2011, the company exchanged some of these assets with other companies. [Note: any
depreciation expense prior to the following transaction has already been properly recorded.] PSR is
trying to expand its business in transportation beyond rail, so the company traded some railcars in return
for several trucks. On PSR's books, the railcars had a cost of $12 million, accumulated depreciation of $9
million, and fair value of $6 million. The trucks had a fair value of $5.9 million and were recorded on the
seller's books at a cost of $4 million and accumulated depreciation of $1 million. No cash was involved in
this exchange.
Required:
accounting method.
Answer: With commercial substance—use fair value

Cr. Railcars 12,000,000
Dr. Trucks [at fair value of railcars given up] 6,000,000
Cr. Gain on sale of railcars 3,000,000
Diff: 2
8-55
11) Polar Sky Railway (PSR), a transportation company, has substantial investments in property, plant,
and equipment. In 2011, the company exchanged some of these assets with other companies. [Note: any
depreciation expense prior to the following transaction has already been properly recorded.] PSR
transported some luxury automobiles from the port in Vancouver to Winnipeg "for free." The company
does not usually transport cars on this route, so a fair value was not determinable. However, there were
negligible incremental costs because doing this involved simply attaching a few extra railcars to an
existing train bound for Winnipeg. For doing this, PSR received two luxury cars, which the company
awarded to executives as perquisites (perks). These cars had a retail value totaling $450,000.
Required:
accounting method.
Answer: This transaction involves an exchange of services for goods (a barter transaction), which are
then given to employees. We separate the transaction into two parts: the exchange, and the employee
compensation.
Dr. Cars (inventory) 450,000

Cr. Transportation revenue 450,000
Dr. Compensation expense 450,000
Cr. Cars 450,000
Diff: 2
8-56
Comprehensive Learning Objectives
1) Growth Industries incurred the following costs in fiscal 2011:
Land and building

Land purchase $3,000,000
Dismantling of old building 50,000
Proceeds from selling parts of old building 10,000
Building materials, labour for construction of new building 2,000,000
Roof of new building 750,000
Heating and air conditioning system for new building 500,000
Directly attributable overhead during construction of new
building 100,000
General and administrative costs incurred during construction
of new building 80,000
Insurance during construction 10,000
Insurance after construction 5,000
Interest during construction period 20,000
Post-construction interest charges 20,000
Landscaping, parking lot and fencing 35,000
Machinery and equipment

Equipment purchase 1,500,000
Sales taxes 15,000
Delivery charges 25,000
Installation 10,000
Testing 20,000
Abnormal waste during testing 5,000
Additional information:
• Growth Industries estimates that future site restoration of $1 million will be required in 20 years at an
interest rate of 8%.
• While the equipment has a useful life of 10 years, the engine in the equipment will require replacement
in 3 years. The engine has a fair value of $150,000.
• The landscaping, parking lot and fences will need to be replaced every 4 years.
• The useful life of the building and roof will be 20 years. The heating and air conditioning system will
have a useful life of only 10 years.
Required:
a) Determine how much should be capitalized to property, plant and equipment.
b) Provide the journal entries required to record all of these transactions.
c) Provide all the adjusting journal entries required at year end for fiscal 2011.
d) Assume that the building is painted in fiscal 2012 at a cost of $45,000. Prepare the required journal
entry.
e) Assume that the engine for the machine requires replacing after 2 years at a cost of 125,000. Prepare the
required journal entries.
Round all values to the nearest dollar, if necessary.
8-57
Answer:
a) Determine how much should be capitalized to property, plant and equipment.
Land and building Capitalize to Do NOT PPE account to

PPE capitalize to use for journal
PPE entry
Land purchase $3,000,000 Land
Dismantling of old building 50,000 Land
Proceeds from selling parts of old (10,000) Land
building
3,040,000
Building materials, labour for 2,000,000 Bldg

construction of new building
Directly attributable overhead during 100,000 Bldg
construction of new building
Insurance during construction 10,000 Bldg
Interest during construction period 20,000 Bldg
2,130,000
Roof of new building 750,000 Roof

Heating and air conditioning system for 500,000 Heating
new building
General and administrative costs $80,000
incurred during construction of new
building
Insurance after construction 5,000
Post-construction interest charges 20,000
Landscaping, parking lot and fencing 35,000 Land
Improvements
Machinery and equipment
Equipment purchase 1,500,000
Sales taxes 15,000
Delivery charges 25,000
Installation 10,000
Testing 20,000
subtotal 1,570,000
(150,000) Engine
1,420,000 Machine
Abnormal waste during testing 5,000
8-58
b) Provide the journal entries required to record all of these transactions.
Dr. Land 3,040,000

Cr. Cash or A/P 3,040,000
Dr. Building 2,130,000

Dr. Roof 750,000
Dr. Heating and air conditioning system 500,000
Dr. Machine 1,420,000

Dr. Engine 150,000
Dr. Land improvements 35,000

Cr. Cash or A/P 35,000
Dr. General and administrative costs 80,000

Dr. Insurance expense or prepaid insurance 5,000
Dr. Interest expenses 20,000
Dr. Abnormal waste (operating expense) 5,000
Dr. PPE- site restoration 214,550

Cr. Obligation for site restoration 214,550
PV of 1 million @ 8% over 20 years 1,000,000 ∗ PF
factor of 0.21455) OR 1,000,000 /1.0820 = 215,548
c) Provide all the adjusting journal entries required at year-end for fiscal 2011.

Cr. A/D — Building — 2,130,000 /20 yrs 106,500
Cr. A/D — Roof — 750,000 /20 yrs 37,500
Cr. A/D — Heating and air cond. system —
500,000/10 years 50,000
Cr. A/D — Machine — 1,420,000/10 yrs 142,000
Cr. A/D — Engine — 150,000/3yrs 50,000
Cr. A/D — Land improvements — 35,000/4 yrs 8,750
Dr. Depreciation expense — site restoration 10,728

Cr. A/D — site restoration — 214,550/20 yrs 10,728
Dr. Interest expense 17,164

Cr. Obligation for site restoration — 214,550 × 8% 17,164
8-59
d) Assume that the building is painted in fiscal 2012 at a cost of $45,000. Prepare the required journal
entry.
Dr. Maintenance/ operating expense 45,000

Do not capitalize since it is not a major replacement/improvement, but regular maintenance.
e) Assume that the engine for the machine requires replacing after 2 years at a cost of 125,000. Prepare
the required journal entries.
Dr. A/D - engine - 50/yr × 2 yrs 100,000

Dr. Loss on replacement 50,000
Cr. Engine 150,000
Dr. Engine 125,000

Diff: 3
Objective: 8.1/ 8.2/ 8.3 Evaluate whether a cost should be included in property, plant, and equipment, and how much
should be classified in each category of asset or expense./Apply different depreciation methods, including the effect
of changes in estimates on depreciation calculations./Apply the standards for derecognition of property, plant, and
equipment and understand the meaning of gains and losses arising from derecognition.
8-60
2) Grape Company (GC) had been renting an office building for several years. On January 1, 2013, GC
decided to have a new office building constructed. On that date, it acquired land with an abandoned
warehouse on it for $350,000. Other costs included the following:
Demolition of warehouse $18,000

Title guarantee insurance for fiscal year 2013 2,100
Required:
a. Calculate at what amount GC should record the (i) land and (ii) building.
b. Assume that the building was completed and occupied on December 31, 2013. It has an estimated
useful life of 40 years, with residual value of $140,000. Calculate depreciation for 2014 using (i) the
straight-line method and (ii) the double declining balance method.
c. Assume that management decided to use straight-line depreciation for the building. By 2017 GC had
grown considerably and needed to relocate for more space; it sold the land and building to Macaw
Company on July 1, 2017 for $1,350,000. Assume depreciation expense has already been recorded for the
first six months of the year (Jan. 1, 2017 to June 30, 2017). Prepare all journal entries required relating to
the land and building accounts on July 1, 2017.
8-61
Answer:
b.
Straight-line depreciation:
Residual value 140,000
Depreciable amount $580,000
Estimated service life 40 years
Depreciation per year $ 14,500
Double declining balance depreciation:

Depreciation rate (2/40) 5%
Depreciation $ 36,000
c.
Dr. Cash 1,350,000
Dr. Accumulated depreciation (14,500 × 3.5 years) 50,750
Cr. Building 720,000
Cr. Land 365,300
Diff: 2
Objective: 8.1/ 8.2/ 8.3 Evaluate whether a cost should be included in property, plant, and equipment, and how much
should be classified in each category of asset or expense./Apply different depreciation methods, including the effect
of changes in estimates on depreciation calculations./Apply the standards for derecognition of property, plant, and
equipment and understand the meaning of gains and losses arising from derecognition.
8-62
3) In December 2013, Bea, the owner of Walnut Corp, paid for a parcel of land along with a warehouse on
behalf of Walnut, the registered owner of the property, for a total cost of $1,500,000. Bea also paid a real
estate commission of $40,000 and legal fees of $10,000 in connection with this purchase, plus $30,000 for
the demolition of the warehouse. Walnut will reimburse Bea for these costs in January 2014 and will
begin construction of an office building on this land. Prior to the purchase, the land and warehouse were
appraised at $900,000 and $600,000, respectively.
On December 31, 2013, Walnut Corp and Teak Corp. exchanged equipment. The exchange met the test for
commercial substance for accounting purposes. Details of the carrying values and fair values of the
equipment on the date of the exchange were as follows:
Walnut equipment Teak equipment

Cost $800,000 $915,000
Accumulated depreciation 400,000 490,000
Fair value 460,000 Not determinable
On October 1, 2013, Walnut purchased some land by signing a three-year non-interest-bearing note
payable for $500,000. Walnut pays interest at the rate of 12% on other loans and was pleased to get a non-
interest-bearing note payable on this deal.
Required:
Prepare the required journal entries for these transactions, as well as any related year-end adjustments.
Ignore income taxes. Round all values to the nearest dollar, if necessary.
Answer:
a. Dr. Land ((1,500,000 + 40,000 +10,000 + 30,000)) 1,580,000
Cr. Due to shareholder 1,580,000
b. Dr. PPE — new equipment [at fair value] 460,000

Dr. Accumulated depreciation 400,000
Cr. PPE — old equipment 800,000
Cr. Gain on sale of equipment 60,000
c. Dr. Land PV of 500,000 = 500,000 / 1.123 355,890

Cr. Note payable 355,890
Dr. Interest expense ($355,890 × 12% × 3/12) 10,677
Diff: 2
Objective: 8.1/ 8.2 / 8.4 Evaluate whether a cost should be included in property, plant, and equipment, and how
much should be classified in each category of asset or expense./Apply different depreciation methods, including the
effect of changes in estimates on depreciation calculations./Analyze transactions with non-monetary consideration
and apply the accounting standards for non-monetary transactions.
8-63
4) The following transactions occurred in fiscal 2012:

• Synthesize Inc. exchanged machinery with Energize Corp.
Synthesize's machinery Energize's machinery

Cost 500,000 620,000
Accumulated depreciation 200,000 500,000
Fair value 350,000 Not known
• Synthesize Inc. purchased equipment by signing a 5 year non-interest bearing note payable for
$200,000. The implicit rate of interest was 5%.
• Synthesize received a government grant of $10,000 to help purchase the equipment.
Required:
a) Assuming the machinery exchange has commercial substance, prepare the required journal entries for
the exchange for both Synthesize and Energize.
b) Assuming the machinery exchange does NOT have commercial substance, prepare the required
journal entries for the exchange for both Synthesize and Energize.
c) Prepare the required journal entry to record the purchase of the equipment purchased by the non-
interest bearing note.
d) Prepare the required journal entries to record the government grant using both the gross method and
the net method.
Answer:
a) Assuming the machinery exchange has commercial substance, prepare the required journal entries for
the exchange for both Synthesize and Energize.
For Synthesize
Dr. PPE — new at fair value 350,000
Dr. A/D — old PPE 200,000
Cr. PPE — Old 500,000
For Energize
Dr. PPE — new at fair value 350,000
Cr. PPE — Old 620,000
8-64
b) Assuming the machinery exchange does NOT have commercial substance, prepare the required
journal entries for the exchange for both Synthesize and Energize.
For Synthesize
Dr. PPE — new at book value 300,000
Cr. PPE — Old 500,000
For Energize
Dr. PPE — new at book value 120,000
Cr. PPE — Old 620,000
c) Prepare the required journal entry to record the purchase of the equipment purchased by the non-
interest bearing note.
Dr. Equipment 156,706

200,000 ∗ 0.78353 = 156,706 OR 200,000/1.055 = 156,705
d) Prepare the required journal entries to record the government grant using both the gross method and
the net meth
Gross Method
Dr. Cash or government grant receivable 10,000
Cr. Deferred income 10,000
Net method
Dr. Cash or government grant receivable 10,000
Cr. PPE - Equipment 10,000
Diff: 3
Objective: 8.1/ 8.2/ 8.4/ 9.4 Evaluate whether a cost should be included in property, plant, and equipment, and how
much should be classified in each category of asset or expense./Apply different depreciation methods, including the
effect of changes in estimates on depreciation calculations./Analyze transactions with non-monetary consideration
and apply the accounting standards for non-monetary transactions./Apply the standards for accounting for
government grants.
8-65
5) On March 31, 2013, a machine costing $3,000,000 was acquired. The company estimates that the asset
will have an estimated useful life of five years and a residual value of $450,000. On April 1, 2018, the asset
is sold for $550,000. The company uses straight-line depreciation. The company has a December 31 year-
end, and records partial depreciation in the year of acquisition or disposal based on the number of
months the asset is available for use in the year.
Required:
Prepare the entries to record depreciation expense for 2013 and 2014, and all entries required for 2018 as
they relate to this asset.
Answer:
(3,000,000 - 450,000) / 5 × 9/12

(3,000,000 -450,000) / 5
2018 Apr 1 Dr. Depreciation expense 127,500

(3,000,000 - 450,000) / 5 × 3/12
Dr. Cash 550,000

Dr. Accumulated depreciation (5 × 510,000) 2,550,000
Cr. Machine 3,000,000
Diff: 1
Objective: 8.2/ 8.3 Apply different depreciation methods, including the effect of changes in estimates on depreciation
calculations./Apply the standards for derecognition of property, plant, and equipment and understand the meaning
8-66
6) On March 31, 2013, a machine costing $3,000,000 was acquired. The company estimates that the asset
will have an estimated useful life of five years and a residual value of $450,000. On April 1, 2018, the asset
is sold for $550,000. The company uses the declining balance method at a rate of 40%. The company has a
December 31 year-end. The company records partial depreciation in the year of acquisition or disposal
based on the number of months the asset is available for use in the year.
Prepare the entries to record depreciation expense for 2013 and 2014, and all entries required for 2018 as
they relate to this asset.
Answer: Declining balance depreciation

3,000,000 × 40% × 9/12

(3,000,000 - 900,000) × 40%
2018 Apr 1 No depreciation

Machine would have been depreciated down
to residual value by 2015.
Dr. Cash 550,000

Cr. Machine 3,000,000
Diff: 1
8-67
7) Aye Corp acquired land and a building on June 1, 2013 for $13,000,000. An expert in real estate
appraisal estimates that the land is worth 40% of the total purchase price. The building is estimated to
have a useful life of 25 years and a residual value of $450,000. On September 1, 2023, Aye moved and sold
the property for $17,000,000. The buyer and seller agreed that 50% of the proceeds should be allocated to
land. Aye depreciates buildings using the straight-line method, and has a December 31 year-end. Aye
records partial depreciation in the year of acquisition or disposal based on the number of months the
asset is available for use in the year.
Prepare the entry to record the purchase on June 1, 2013, depreciation expense for 2013 and
2014, and all entries required to record the disposal of the property on September 1, 2023.
Answer:
2013 June 1 Dr. Land 13 mil × 40% 5,200,000
Dr. Building 7,800,000
Cr. Cash 13,000,000

(7,800,000 - 450,000) / 25 × 7/12

(7,800,000 - 450,000) / 25
2023 Sep 1 Dr. Depreciation expense 196,000

(7,800,000 - 450,000) / 25 × 8/12
Cash - 50% × 17 mil 8,500,000

Land 5,200,000
Gain on disposal of land 3,300,000
Dr. Cash — 50% × 17 mil 8,500,000

(9 × 294,000 + 171,500 + 196,000)
Cr. Building 7,800,000
Cr. Gain on disposal of building 3,713,500
Diff: 1
8-68

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Intermediate Accounting, Volume 1, 2e

Chapter 8 – Property, Plant, and Equipment

Chapter 8 Property, Plant and Equipment

4) What is the IFRS treatment for replacements versus repairs?

8) What costs should be capitalized to "land"?

Invoice cost of machine $100,000

13) What costs should NOT be capitalized to "building"?

14) What costs should NOT be capitalized to "building"?

15) What costs should NOT be capitalized to "equipment"?

16) What costs should NOT be capitalized to "equipment"?

17) What costs should NOT be capitalized to "equipment"?

Demolition of warehouse 20,000

How much will be capitalized to "land" in fiscal 2013?

Demolition of warehouse 20,000

How much will be capitalized to "building" in fiscal 2013?

Jan 31 Purchase of land and building $410,000

i. Legal fees of $3,200 covered the following:

Cost of incorporating the company $ 600

President's salary $34,000

Dr. Depreciation expense 5,789

To derecognize old part

Dr. Accumulated depreciation — Part #45 550,000

To capitalize new part

Dr. PPE — Part #45 700,000

Dr. Loss on engine disposal 84,000

To capitalize new engine cost

Dr. Truck engine 155,000

Dr. Ski lift 120,000,000

b. Journal entry for transaction vii.

Dr. Site restoration cost 21,452,165

c. Year-end journal entries for first year of operations:

Dr. Depreciation expense 6,000,000

1) What is the meaning of "historical cost"?

3) What is the meaning of "depreciable amount"?

4) What is the meaning of "straight-line method"?

6) What is the meaning of "residual value"?

7) What is the meaning of "useful life"?

8) What is the meaning of "depreciation"?

9) What is the meaning of "declining balance method"?

10) What is the meaning of "units-of-production method"?

11) What is the meaning of "depreciation"?

15) What is the meaning of "replacement cost"?

16) What is the meaning of "entry value"?

17) What is the meaning of "current value"?

18) What is the meaning of "net realizable value"?

19) What is the meaning of "exit value"?

20) What is the meaning of "value in use"?

Year Units of Output

Year Units of Output

46) What is the effect of overstating 2012 depreciation expense?

Building cost $700,000

2012 Dec 31 Dr. Depreciation expense 430,000

2014 Dec 31 Dr. Depreciation expense 273,000

2012 Dec 31 Dr. Depreciation expense 1,000,000

2014 Dec 31 Dr. Depreciation expense 450,000

2011 Dec 31 Dr. Depreciation expense 175,000

2017 Dec 31 Dr. Depreciation expense 938,333

Case B: Declining balance with change during 2017

2011 Dec 31 Dr. Depreciation expense 350,000

2017 Dec 31 Dr. Depreciation expense 1,715,214

2013 Dec 31 Dr. Depreciation expense 1,225,000

2018 Dec 31 Dr. Depreciation expense 2,218,750

1) When is property, plant, and equipment (PPE) NOT derecognized?

3) The following entry was recorded by Woodrow Inc.: