Reporting and Analyzing Long-Lived Assets

CHAPTER 9
REPORTING AND ANALYZING LONG-LIVED ASSETS

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF
DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB
True-False Statements
1. 1 E K F AN 15. 2 M C F AN 29. 4 M K F AN
2. 1 M C F AN 16. 2 E K F AN 30. 4 E K F AN
3. 1 E C F AN 17. 2 M C F AN 31. 4 E K F AN
4. 1 E C F AN 18. 2 M C F AN 32. 4 E K F AN
5. 1 M C F AN 19. 2 M C F AN 33. 4 M K F AN
6. 1 E C F AN 20. 2 M C F AN 34. 4 M K F AN
7. 1 E C F AN 21. 2 H K F AN 35. 4 M K F AN
8. 1 H C F AN 22. 2 M K F AN 36. 4 M K F AN
9. 2 E C F AN 23. 2 E C F AN 37. 5 M K F AN
10. 2 E C F AN 24. 3 E K F AN 38. 5 E C F AN
11. 2 E C F AN 25. 3 E C F AN 39. 6 M K F AN
12. 2 E C F AN 26. 3 M C F AN 40. 6 M K F AN
13. 2 E C F AN 27. 3 E C F AN 41. 6 M C F AN
14. 2 E C F AN 28. 3 E C F AN
LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge
CPA: F = Financial Reporting P = Professional and Ethical Behaviour C = Communication
AACSB: AN = Analytic E = Ethics
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
9 - 2 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(CONT’D)
LO Bloom’ CP AACS L LO Bloom’ CP AACS L LO Bloom’ CP
Item LO Item Item AACSB
D s A B O D s A B O D s A
Multiple Choice Questions
42. 1 M C F AN 78. 2 E K F AN 114. 3 E C F AN
43. 1 E AP F AN 79. 2 E AP F AN 115. 3 M AP F AN
44. 1 E K F AN 80. 2 M AP F AN 116. 3 H AP F AN
45. 1 M C F AN 81. 2 H AP F AN 117. 3 H AP F AN
46. 1 E C F AN 82. 2 E K F AN 118. 4 E C F AN
47. 1 E C F AN 83. 2 M C F AN 119. 4 E C F AN
48. 1 E C F AN 84. 2 M AP F AN 120. 4 E C F AN
49. 1 E C F AN 85. 2 M AP F AN 121. 4 E C F AN
50. 1 M C F AN 86. 2 H AP F AN 122. 4 E C F AN
51. 1 M AP F AN 87. 2 H AP F AN 123. 4 E AP F AN
52. 1 M C F AN 88. 2 H AP F AN 124. 4 M K F AN
53. 1 H AP F AN 89. 2 H AP F AN 125. 4 E K F AN
54. 1 M AP F AN 90. 2 H AP F AN 126. 4 H K F AN
55. 1 E C F AN 91. 2 H AP F AN 127. 4 E K F AN
56. 1 E K F AN 92. 2 H AP F AN 128. 4 M C F AN
57. 1 M C F AN 93. 2 M AP F AN 129. 4 E K F AN
58. 1 E AP F AN 94. 2 M AP F AN 130. 4 E K F AN
59. 1 M K F AN 95. 2 H AP F AN 131. 4 M K F AN
60. 1 M K F AN 96. 2 M C F AN 132. 4 E K F AN
61. 1 M C F AN 97. 2 E C F AN 133. 4 M K F AN
62. 2 E C F AN 98. 2 E AP F AN 134. 4 M C F AN
63. 2 E K F AN 99. 2 M AP F AN 135. 4 H C F AN
64. 2 M C F AN 100. 2 M K F AN 136. 5 E K F AN
65. 2 M K F AN 101. 2 M C F AN 137. 5 M C F AN
66. 2 E K F AN 102. 2 E K F AN 138. 5 M K F AN
67. 2 E C F AN 103. 2 E K F AN 139. 5 E K F AN
68. 2 E K F AN 104. 2 M K F AN 140. 5 M K F AN
69. 2 M C F AN 105. 2 E AP F AN 141. 5 E AP F AN
70. 2 E K F AN 106. 2 H C F AN 142. 5 E K F AN
71. 2 E C F AN 107. 3 E C F AN 143. 5 E C F AN
72. 2 M K F AN 108. 3 E C F AN 144. 6 M AP F AN
73. 2 E AP F AN 109. 3 H AP F AN 145. 6 M AP F AN
74. 2 M AP F AN 110. 3 E AP F AN 146. 6 M AP F AN
75. 2 M AP F AN 111. 3 E AP F AN 147. 6 H C F AN
76. 2 H AP F AN 112. 3 E C F AN 148. 6 M C F AN
77. 2 E AP F AN 113. 3 E C F AN 149. 6 M K F AN

Reporting and Analyzing Long-Lived Assets 9-3

(CONT’D)
LO Bloom’ CP AACS LO Bloom’ CP AACS L LO Bloom’
Item LO Item LO Item CPA AACSB
D s A B D s A B O D s
Exercises
150 F AN AP F AN F AN
1 E AP 165. 2 H 180. 3 E AP
.
151 F AN F AN F AN
1 E K 166. 2 E AP 181. 3 M AP
.
152 F AN F AN F AN
1 E K 167. 2 M AP 182. 4 E AP
.
153 F AN F AN AP F AN
1 E AP 168. 2 H AP 183. 4 H
.
154 F AN F AN F AN
1 M C 169. 2 E AP 184. 4 E AP
.
155 F AN F AN F AN
1 E C 170. 2 H AP 185. 4 E AP
.
156 AP F AN F AN F AN
1,2 H 171. 2 H AP 186. 4 M C
.
157 F AN F AN F AN
1,2 E AP 172. 2,3 H AP 187. 4 H AP
.
158 F AN F AN F AN
2 M AP 173. 2,3 H AP 188. 5 E K
.
159 F AN AP F AN F AN
2 E AP 174. 2,3 M 189. 5 E AP
.
160 F AN 2,3, F AN F AN
2 E AP 175. E AP 190. 6 E AP
. 5
161 F AN F AN F AN
2 E AP 176. 2,4 E K 191. 6 H AP
.
2 E AP 177. 3 M AP 192. 6 M
.
2 E AP 178. 3 E AP 193. 6 H
.
164 F AN F AN
2 E AP 179. 3 E AP
.
Matching
194 E K F AN C F AN
1,2 195. 2–4,6 M,H
.
Short-Answer Essay
196 F AN F AN F AN
1 E C 200. 2 M C 204. 4 E C
.
197 F AN F AN F,P, AN,E
1 E C 201. 2 M C 205. 4 H C C
.
198 F AN F AN F AN
2 H C 202. 2 M C 206. 5 H K
.
199 F AN F,C AN F AN
2 E C 203. 3 M C 207. 6 M C
.
CPA Questions
208 1- F AN F AN AN
H AN 210. 2 M C 212. 6 H AN F
. 4
209 F AN F AN
2 M C 211. 4 M C
.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 7. TF 46. MC 52. MC 58. MC 152. Ex 194. Ma
2. TF 8. TF 47. MC 53. MC 59. MC 153. Ex 196. SAE
3. TF 42. MC 48. MC 54. MC 60. MC 154. Ex 197. SAE
4. TF 43. MC 49. MC 55. MC 61. MC 155. Ex 208. CP
5. TF 44. MC 50. MC 56. MC 150. Ex 156. Ex
6. TF 45. MC 51. MC 57. MC 151. Ex 157. Ex
9. TF 22. TF 73. MC 86. MC 99. MC 161. Ex 174. Ex
10. TF 23. TF 74. MC 87. MC 100. MC 162. Ex 175. Ex
11. TF 62. MC 75. MC 88. MC 101. MC 163. Ex 176. Ex
12. TF 63. MC 76. MC 89. MC 102. MC 164. Ex 194. Ma
13. TF 64. MC 77. MC 90. MC 103. MC 165. Ex 195. Ma
17. TF 68. MC 81. MC 94. MC 156. Ex 169. Ex 201. SAE
19. TF 70. MC 83. MC 96. MC 158. Ex 171. Ex 208. CP
20. TF 71. MC 84. MC 97. MC 159. Ex 172. Ex 209. CP
21. TF 72. MC 85. MC 98. MC 160. Ex 173. Ex 210. CP
24. TF 28. TF 110. MC 114. MC 172. Ex 177. Ex 181. Ex
25. TF 107. MC 111. MC 115. MC 173. Ex 178. Ex 195. Ma
27. TF 109. MC 113. MC 117. MC 175. Ex 180. Ex 208. CP
29. TF 35. TF 122. MC 128. MC 134. MC 185. Ex 208. CP
30. TF 36. TF 123. MC 129. MC 135. MC 186. Ex 211. CP
31. TF 118. MC 124. MC 130. MC 176. Ex 187. Ex
32. TF 119. MC 125. MC 131. MC 182. Ex 195. Ma
33. TF 120. MC 126. MC 132. MC 183. Ex 204. SAE
34. TF 121. MC 127. MC 133. MC 184. Ex 205. SAE
37. TF 136. MC 138. MC 140. MC 142. MC 175. Ex 189. Ex
39. TF 144. MC 147. MC 190. Ex 193. Ex 212. CP
40. TF 145. MC 148. MC 191. Ex 195. Ma
41. TF 146. MC 149. MC 192. Ex 207. SAE
Note: TF = True/False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA
CHAPTER LEARNING OBJECTIVES
1. Determine the cost of property, plant, and equipment. The cost of land, land improvements, buildings,
and equipment includes all expenditures that are necessary to acquire these assets and make them ready
for their intended use. After acquisition, costs incurred that benefit future periods (capital expenditures) are
also included in the cost of the asset whereas costs that benefit only the current period (operating
expenditures) are expensed. When applicable, cost also includes asset retirement costs.
If a company leases an asset, it may be accounted for as an operating lease or a finance lease. An
operating lease results in rent expense on the income statement. A finance lease results in recording the
leased asset as if it were purchased with a corresponding liability for the future lease payments to be
made. This gives rise to depreciation on the asset and interest on the liability for the payments being
recorded in the future. Under IFRS, most leases with a term greater than 12 months are to be accounted
for as finance leases commencing in 2019. Under ASPE, the criteria for determining whether a leased
asset is operating or not is covered in intermediate accounting courses.
2. Explain and calculate depreciation for plant and equipment. Depreciation is the process of allocating
the cost of a long-lived asset over the asset’s useful (service) life in a systematic way. There are three
commonly used depreciation methods: straight-line, diminishing-balance, and units-of-production.
Annual
Depreciation
Method Pattern Calculation
Straight-line Constant amount (Cost – residual value) ÷ estimated
useful life (in years)
Diminishing-balance Diminishing Carrying amount at beginning of year
amount × depreciation rate (straight-line rate ×
multiplier)
Units-of-production Varying amount
(Cost – residual value) ÷ estimated
total units of activity × actual activity
during the year
Other accounting issues related to depreciation include (1) identifying significant components of a long-
lived asset for which different depreciation methods or rates may be appropriate; (2) capital cost allowance
(CCA) used for income tax purposes; (3) testing long-lived assets for impairment; (4) accounting for
property, plant, and equipment using the cost or revaluation model; and (5) circumstances under which a
revision of depreciation is required.
3. Account for the derecognition of property, plant, and equipment. The procedure for accounting for
the disposal of property, plant, and equipment through sale or retirement is:
Step 1: Update unrecorded depreciation for any partial period.
Step 2: Calculate the carrying amount.
Step 3: Calculate any gain (proceeds less carrying amount). If the carrying amount is greater than
proceeds then there is a loss on disposal.
Step 4: Derecognize (remove) the asset and accumulated depreciation accounts related to the sold or
retired asset. Record the proceeds received and the gain or loss (if any).
4. Identify the basic accounting issues for intangible assets and goodwill. Intangible assets (which we
have assumed are accounted for under the cost model) are initially reported at cost, which includes all
expenditures that are necessary to prepare the asset for its intended use. An intangible asset with a finite
life is amortized over the shorter of its useful life or legal life, usually on a straight-line basis. Like property,
plant, and equipment, intangible assets with finite lives are tested for impairment only if indicators of
impairment are present. Intangible assets with indefinite lives are not amortized and must be tested for
impairment annually under IFRS but only when indicators (events and circumstances) of impairment are
present under ASPE. Impairment losses can be reversed under IFRS but not under ASPE.
Goodwill, which is the difference between the price paid for a business and the fair value of the identifiable
assets less liabilities of the business, is not considered an intangible asset because it is not separately
“identifiable.” Only purchased, not internally generated goodwill can be recorded. Goodwill has an
indefinite life and is not amortized. Impairment tests for goodwill are similar to those for intangibles with
indefinite lives. Goodwill impairment losses are never reversed.
5. Illustrate how long-lived assets are reported in the financial statements. In the statement of financial
position, land, land improvements, buildings, and equipment are usually combined and shown under the
heading “Property, Plant, and Equipment.” Intangible assets with finite and indefinite lives are sometimes
combined under the heading “Intangible Assets” or are listed separately. Goodwill must be presented
separately.
Either on the statement of financial position or in the notes to the financial statements, the cost of the
major classes of long-lived assets is presented. The depreciation and amortization methods and rates
must also be described in the notes to the statements. The accumulated depreciation and amortization of
depreciable/amortizable assets and carrying amount by major classes is also disclosed, including a
reconciliation of the carrying amount at the beginning and end of each period for companies reporting
under IFRS. The company’s impairment policy and any impairment losses should be described and
reported. The company must disclose whether it is using the cost or revaluation model.
Depreciation expense, any gain or loss on disposal, and any impairment losses are reported as operating
expenses in the income statement. In the statement of cash flows, any cash flows from the purchase or
sale of long-lived assets are reported as investing activities.
6. Describe the methods for evaluating the use of assets. The use of assets may be analyzed using the
return on assets and asset turnover ratios. Return on assets (net income ÷ average total assets) indicates
how well assets are used to generate net income. Return on assets can be determined by multiplying two
ratios: asset turnover (net sales ÷ average total assets), which indicates how efficiently assets are used to
generate revenue, and profit margin (net income ÷ net sales), which measures the net income made on
each sale.
TRUE-FALSE STATEMENTS
1. All property, plant, and equipment must be depreciated for accounting purposes.
2. When purchasing land, the costs for clearing, draining, filling, and grading should be charged to a Land
Improvements account.
3. When purchasing a delivery truck, the cost of painting the company logo on the side should be debited to
the Vehicles account.
4. Land improvements are generally debited to the Land account.
5. If land is purchased with a building on it that is to be demolished, proceeds from any salvaged materials are
reported in the Other Revenues and Expenses section of the income statement.
6. Under an operating lease, both the leased asset and the related lease obligation are shown on the
statement of financial position.
7. Under a finance lease, both the leased asset and the related lease obligation are shown on the statement of
financial position.
8. Leasehold improvements are depreciated over the remaining life of the lease or the useful life of the
improvements, whichever is longer.
9. Recording depreciation on equipment affects both the statement of financial position and the income
statement.
10. The depreciable amount of property, plant, and equipment is its original cost minus the depreciation for the
current year.
11. The Accumulated Depreciation account represents a cash fund available to replace property, plant, and
equipment.
12. In calculating depreciation, cost, useful life, and residual value are all based on estimates.
13. Carrying amount is used in determining the amount that the diminishing-balance rate is applied to.
14. Using the units-of-production method of depreciation for equipment will generally result in more
depreciation expense being recorded over the life of the asset than if the straight-line method had been used.
15. Using the diminishing-balance method results in higher expense in the early years, and therefore lower net
income.
16. Canada Revenue Agency requires a company to use the same depreciation method on its income tax
return that is used in preparing financial statements.
17. Under IFRS, companies must account for their property, plant, and equipment using the revaluation model,
where depreciable assets are re-valued upward to their fair values.
18. The carrying amount of an asset is the original cost less anticipated residual value.
19. When an impairment loss is recorded for a depreciable asset, the offsetting credit is recorded in
accumulated depreciation.
20. An item of property, plant, and equipment is considered to be impaired if its carrying amount exceeds its
recoverable amount.
21. When a company has a piece of property, plant, or equipment which has different components that
depreciate at different rates, the total cost should be allocated to each component and each component should
be depreciated separately.
22. A change in the estimated residual value of property, plant, and equipment requires a restatement of prior
years' depreciation.
23. When a change in estimate is made, there is no correction of previously recorded depreciation expense.
24. Normally, businesses only dispose of property, plant, and equipment by either sale or exchange.
25. If the proceeds from the sale of equipment exceed its carrying amount, a gain on disposal is reported.
26. When an asset is retired, a gain or loss must be recorded.
27. A tangible asset must be fully depreciated before it can be removed from the books.
28. A loss on disposal results if the cash proceeds received from the asset sale are less than the asset's
carrying amount.
29. Intangible assets involve rights, privileges, and/or competitive advantages that result from ownership of
identifiable assets that do not possess physical substance.
30. The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.
31. If an acquired franchise or licence is for an indefinite time period, then the cost of the asset should not be
amortized.
32. An intangible asset must be identifiable.
33. If a trademark is developed internally, it cannot be recognized as an intangible asset on the statement of
financial position.
34. When an entire business is purchased, goodwill is the excess of the purchase price over the carrying
amount of the net identifiable assets acquired.
35. All research costs should be capitalized when incurred.
36. Impairment losses on goodwill are never reversed.
37. If a building is sold at a gain, the gain on disposal should be reported in the non-operating section of the
income statement.
38. The cash flows from the purchase and sale of long-lived assets are reported in the operating activities
section of the cash flow statement.
39. The asset turnover ratio is calculated as net sales divided by ending total assets.
40. Profit margin can be determined by multiplying the asset turnover by the return on assets.
41. The asset turnover indicates how efficiently a company uses its assets.
Reporting and Analyzing Long-Lived Assets 9 - 11
ANSWERS TO TRUE-FALSE STATEMENTS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 7. T 13. T 19. T 25. T 31. T 37. F
2. F 8. F 14. F 20. T 26. F 32. T 38. F
3. T 9. T 15. T 21. T 27. F 33. T 39. F
4. F 10. F 16. F 22. F 28. T 34. F 40. F
5. F 11. F 17. F 23. T 29. T 35. F 41. T
6. F 12. F 18. F 24. F 30. T 36. T
MULTIPLE CHOICE QUESTIONS
42. Asset retirement costs are

(a) added to the cost of a depreciable asset.
(b) treated as a separate asset.
(c) deducted from the cost of a depreciation asset.
(d) have no effect on a depreciable asset.
43. A company purchased land for $120,000 cash; $7,000 was spent to demolish an old building on the land
before construction of a new building could start; and $1,500 was received for material salvaged from the old
building. The cost of the land would be recorded at
(a) $120,000.
(b) $125,500.
(c) $127,000.
(d) $128,500.
Solution: $120,000 + $7,000 – $1,500 = $125,500
44. Which of the following should not be classified as property, plant and equipment?
(a) building used as a factory
(b) land used in ordinary business operations
(c) a truck held for resale by an automobile dealership
(d) land improvements, such as parking lots and fences
45. A characteristic of property, plant, and equipment is that it is

(a) intangible.
(b) used in the operations of a business.
(c) held for sale in the ordinary course of the business.
(d) not currently used in the business but held for future use.
46. Which one of the following items is not considered to be a part of the cost of a truck purchased for business
use?
(a) insurance during transit
(b) motor vehicle licence
(c) freight charges incurred when acquiring the truck
(d) cost of lettering on the side of the truck
47. Which of the following would not be included in the Equipment account?
(a) installation costs
(b) freight costs
(c) cost of trial runs
(d) electricity used by the machine
48. Which of the following assets does not decline in service potential over the course of its useful life?
(a) office equipment
(b) furnishings
(c) land
(d) computers
49. The cost of land does not include

(a) closing costs.
(b) annual property taxes.
(c) removal costs of an old building.
(d) title fees.
50. The Land account would include all of the following costs except
(a) drainage costs.
(b) the cost of building a parking lot.
(c) title fees.
(d) the cost of tearing down a building.
51. Harmon Medical Ltd. purchases land for $290,500 cash. The title and legal fees totalled $1,500. The clinic
has the land graded for $25,000. What amount does Harmon Medical record as the cost for the land?
(a) $290,500
(b) $292,000
(c) $315,500
(d) $317,000
Solution: $290,500 + 1,500 + $25,000 = $317,000
52. Which of the following is not true for an operating expenditure?

(a) It is recorded with a debit to a statement of financial position account.
(b) It benefits the current period only.
(c) It is incurred to maintain an asset in its normal operating condition.
(d) It often recurs.
53. Angus Corp. acquires land for $105,000 cash. Additional costs are as follows:
Removal of shed....................................... $ 500
Filling and grading..................................... 3,200
Residual value of lumber from shed.......... 150
Paving of parking lot.................................. 16,000
Closing costs............................................. 1,350
Angus will record the cost of the land as
(a) $105,000.
(b) $109,400.
(c) $109,900.
(d) $126,200.
Solution: $105,000 + $500 + $3,200 – $150 + $1,350 = $109,900
54. Mercy General Hospital installs a new parking lot. The paving cost $25,000 and the lights to illuminate the
new parking lot cost $13,000. Which of the following statements is true with respect to these expenditures?
(a) $25,000 should be debited to Land.
(b) $13,000 should be debited to Lighting Expense.
(c) $38,000 should be debited to Land.
(d) $38,000 should be debited to Land Improvements.
55. Land improvements should be depreciated over the useful life of the
(a) land.
(b) buildings on the land.
(c) land or land improvements, whichever is longer.
(d) land improvements.
56. The expected costs to retire an asset are called

(a) off-balance sheet financing.
(b) expected retirement costs.
(c) disposal costs.
(d) asset retirement costs.
57. Aye Corp. purchases a remote-site building for computer operations. The building will be suitable for
operations after some necessary expenditures. The wiring must be replaced to handle the computer
specifications. The roof is leaking and must be replaced. All rooms must be repainted and re-carpeted and
there will also be some updating of the plumbing needed. Which of the following statements is true?
(a) The cost of the building will include the repainting and re-carpeting costs.
(b) The cost of the building will include the cost of replacing the roof.
(c) The cost of the building is the purchase price of the building, while the additional expenditures are all
capitalized as Building Improvements.
(d) The wiring replacement will be part of the computer costs, not the building cost.
58. Enmerick Corporation purchases a new delivery truck for $45,000. The company logo is painted on the
side of the truck for $1,500. The motor vehicle licence is $175. Annual insurance is $1,500. At what amount
does Enmerick record the cost of the new truck?
(a) $45,000
(b) $45,175
(c) $46,500
(d) $46,675
Solution: $45,000 + $1,500 = $46,500
59. Which of the following is not an advantage of an operating lease?

(a) reduced risk of obsolescence
(b) 100 percent financing
(c) income tax advantages
(d) accelerated depreciation
60. Interest incurred on the construction of a building can be included in the cost of the building
(a) during the construction period of a building.
(b) for as long as the interest is payable.
(c) if the building is financed by a mortgage.
(d) under no circumstances.
61. Which of the following is included in the cost of constructing a building?

(a) cost of paving a parking lot
(b) cost of grading the land on which the building is to be constructed
(c) interest incurred during construction
(d) cost of removing the demolished building that existed on the land when it was purchased
62. Assuming there are no impairment losses, the balance in the Accumulated Depreciation account
represents the
(a) cash fund to be used to replace assets.
(b) amount to be deducted from the cost of the asset to arrive at its fair value.
(c) amount charged to depreciation expense in the current period.
(d) amount charged to depreciation expense since the acquisition of the asset.
63. Which of the following is not an acceptable method of depreciation?

(a) straight-line
(b) increasing-balance
(c) diminishing-balance
(d) units-of-production
64. The carrying amount of property, plant, and equipment

(a) is always equal to its fair value.
(b) is always greater than its fair value.
(c) is always less than its fair value.
(d) may be different than its fair value.
65. Which statement is correct regarding the use of the cost model and the revaluation model?
(a) The cost model is not allowed under IFRS.
(b) The revaluation model is the only model allowed under IFRS.
(c) The cost model is the only model allowed under ASPE.
(d) Either the cost model or the revaluation model can be under ASPE.
66. Depreciation is a process of

(a) determining the asset’s fair value.
(b) asset valuation.
(c) cost allocation.
(d) determining the asset’s residual value.
67. The cost of a depreciable long-lived asset is expensed

(a) when it is paid for.
(b) as the asset benefits the company.
(c) in the period in which it is acquired.
(d) in the period in which it is disposed of.
68. The carrying amount of an asset is equal to the

(a) asset's fair value less its original cost.
(b) asset’s cost less residual value less accumulated depreciation.
(c) asset’s cost less residual value.
(d) asset's cost less accumulated depreciation.
69. Which of the following is not a consideration when calculating depreciation?

(a) the method of payment for the asset
(b) the cost of the asset

(c) the useful life of the asset
(d) the residual value of the asset
70. The difference between a depreciable asset’s cost and its residual value is called
(a) the annual depreciation.
(b) accumulated depreciation.
(c) the depreciable amount.
(d) the revaluation amount.
71. In calculating depreciation, residual value is

(a) the fair value of the asset on the date of acquisition.
(b) subtracted from accumulated depreciation to determine the asset's depreciable cost.
(c) an estimate of the asset's value at the end of its useful life.
(d) ignored in all the depreciation methods.
72. When estimating the useful life of an asset, accountants do not consider
(a) the cost to replace the asset at the end of its useful life.
(b) vulnerability to obsolescence.
(c) expected repairs and maintenance.
(d) the intended use of the asset.
73. Equipment was purchased for $20,000. It is estimated that the equipment will have a $3,000 residual value
at the end of its 5-year useful life. Using the straight-line method, annual depreciation expense will be
(a) $3,400.
(b) $4,000.
(c) $4,600.
(d) $5,000.
Solution: ($20,000 – $3,000) / 5 years = $3,400
74. Equipment was purchased for $25,000. Freight charges amounted to $700 and there was a cost of $3,000
for building a foundation and installing the equipment. It is estimated that the equipment will have a $1,600
residual value at the end of its 5-year useful life. Using the straight-line method, annual depreciation expense
will be
(a) $4,540.
(b) $4,680.
(c) $5,420.
(d) $5,740.
Solution: ($25,000 +$700 +$3,000 – $1,600) / 5 years= $5,420
75. Equipment with a cost of $160,000, an estimated residual value of $10,000, and an estimated life of 4
years, was purchased on April 1, 2018. If the straight-line method is used, the depreciation expense for
calendar 2018 is
(a) $40,000.
(b) $37,500.
(c) $30,000.
(d) $28,125.
Solution: ($160,000 – $10,000) / 48 months = $3,125/month; $3,125 x 9 months = $28,125
76. A truck was purchased for $40,000 and it was estimated to have a $4,000 residual value. Using the
straight-line method, monthly depreciation expense of $600 was recorded. Therefore, the annual depreciation
rate expressed as a percentage is
(a) 2%.
(b) 17%.
(c) 18%.
(d) 20%.
Solution: $600 x 12 months = $7,200/year; ($40,000 – $4,000) / $7,200 = 5 years; 1/5 = 20%
77. A company purchased factory equipment on May 1, 2018 for $30,000. It is estimated that the equipment
will have a $4,200 residual value at the end of its 8-year useful life. Using straight-line depreciation, the
depreciation expense for the years ended December 31, 2018 and 2019 is
(a) $2,500 in 2018 and $3,750 in 2019.
(b) $3,225 in 2018 and $3,225 in 2019.
(c) $2,150 in 2018 and $3,225 in 2019.
(d) none of the above
Solution: ($30,000 – $4,200) / 96 months = $268.75/month; 2018: $268.75 x 8 months = $2,150 and 2019:
$268.75 x 12 = $3,225
78. The diminishing-balance method of depreciation produces a(n)

(a) decreasing depreciation expense each period.
(b) increasing depreciation expense each period.
(c) diminishing percentage rate each period.
(d) constant amount of depreciation expense each period.
Use the following information for questions 79–81.
On January 1, 2018, Anvil Corp. purchased equipment for $60,000. It was expected to last 5 years, after which
it will be sold for $5,000. It is expected to be used for a total of 10,000 machine hours, and was used for 750
hours during the year ended December 31, 2018.
79. The depreciation expense for 2018 using the straight-line method will be
(a) $4,125.
(b) $11,000.
(c) $12,000.
(d) $12,250.
Solution: ($60,000 – $5,000) / 5 years = $11,000
80. The depreciation expense for 2018 using the units-of-production method will be
(a) $4,125.
(b) $11,000.
(c) $4,500.
(d) $12,250.
Solution: ($60,000 – $5,000) / 10,000 mhrs. = $5.5/mhr. X 750 mhrs. = $4,125
81. The depreciation expense for 2018 using the double diminishing-balance method will be
(a) $11,000.
(b) $12,250.
(c) $12,000.
(d) $24,000.
Solution: 1/5 years x 2 = 40%; $60,000 x.40 = $24,000
82. Management should select the depreciation method that

(a) is easiest to apply.
(b) best measures the asset's fair value each period over its useful life.
(c) best reflects the pattern in which the asset's future economic benefits are to be consumed.
(d) is required by the government.
83. The depreciation method that applies a constant percentage to the carrying amount at the beginning of the
period in calculating depreciation is called
(a) straight-line.
(b) units-of-production.
(c) diminishing-balance.
(d) component depreciation.
84. On October 1, 2018, Ming Wo Ltd. places a new asset into service. The cost of the asset is $16,000 with
an estimated 5-year life and $4,000 residual value. If Ming Wo uses straight-line depreciation, the depreciation
expense for the year ended January 31, 2019 is
(a) $ 600.
(b) $ 800.
(c) $1,067.
(d) $2,400.
Solution: ($16,000 – $4,000) / 60 months = $200/mth; $200 x 4 months = $800
85. On July 1, 2018, a machine with a useful life of five years and a residual value of $4,000 was purchased for
$20,000. Under straight-line depreciation, what is the depreciation expense for calendar 2019?
(a) $4,000
(b) $3,556
(c) $3,200
(d) $1,600
Solution: ($20,000 – $4,000) / 5 years = $3,200
86. Equipment was purchased on January 1 for $39,000 with an estimated residual value of $3,000. The
current year's Depreciation Expense is $4,000, calculated on the straight-line basis, and the balance of the
Accumulated Depreciation account at the end of the year is $12,000. The remaining useful life of the
equipment is
(a) 3 years.
(b) 5 years.
(c) 6 years.
(d) 9 years.
Solution: ($39,000 – $3,000 – $12,000) / $4,000 = 6 years
87. Beynon Corp. purchased office equipment for $20,000, with an estimated residual value of $4,000 at the
end of its 8-year useful life. Assuming the double diminishing-balance method is used, the constant percentage
to be applied against the carrying amount each year is

(a) 10%.
(b) 12.5%.
(c) 25%.
(d) not determinable.
Solution: 1/8 years x 2 = 25%
88. Jemima Ltd. purchased factory equipment for $200,000, and estimated that the equipment will have a
$20,000 residual value at the end of its estimated 5-year useful life. If Jemima uses the double diminishing-
balance method of depreciation, the depreciation expense for the second year after purchase would be
(a) $43,200.
(b) $48,000.
(c) $72,000.
(d) $80,000.
Solution: 1/5 years x 2 = 40%: [$200,000 – ($200,000 x.40)] x.40 = $48,000
89. Tran Inc. purchased equipment for $48,000, and estimated that the equipment will have a $4,000 residual
value at the end of its 8-year useful life. Using the double diminishing-balance method, the depreciation
expense for the third year would be
(a) $9,000.
(b) $6,750.
(c) $6,188.
(d) $5,500.
Solution: 1/8 years x 2 = 25%: Yr 1: ($48,000 x.25) = $12,000; Yr 2: ($48,000 – $12,000) x.25 = $9,000; Yr 3:
($48,000 – $12,000 – $9,000) x.25 = $6,750
90. On January 1, 2018, a machine with a useful life of five years and a residual value of $2,500 was
purchased for $25,000. Using the double diminishing-balance method, the depreciation expense for the year
ending December 31, 2019 would be
(a) $10,000.
(b) $ 9,000.
(c) $ 6,000.
(d) $ 5,400.
Solution: 1/5 years x 2 = 40%: Yr 1: ($25,000 x.40) = $10,000; Yr 2: ($25,000 – $10,000) x.40 = $6,000
91. On April 1, 2018, a machine was purchased for $33,600. It was estimated that it would have a $3,200
residual value at the end of its 5-year useful life. It was also estimated that the machine would be used for a
total of 80,000 hours over the 5 years. If the actual number of machine hours used in 2018 was 12,000 hours
and the company uses the units-of-production method of depreciation, the depreciation expense for 2018
would be
(a) $5,040.
(b) $4,560.
(c) $3,780.
(d) $3,420.
Solution: ($33,600 – $3,200) / 80,000 hrs = $0.38/hr; $0.38 x 12,000 = $4,560
92. A machine that cost $72,000 has an estimated residual value of $6,000 and an estimated useful life of 5
years or 30,000 hours. Using the units-of-production method, the depreciation expense for the second year,
during which the machine was used 5,000 hours, would be
(a) $14,400.
(b) $13,200.
(c) $12,000.
(d) $11,000.
Solution: ($72,000 – $6,000) / 30,000 hrs = $2.2/hr; $2.2 x 5,000 = $11,000
93. Equipment that cost of $180,000 has an estimated residual value of $15,000 and an estimated useful life of
4 years or 25,000 hours. Using the units-of-production method, the depreciation expense for the first year,
during which the machine was used 3,300 hours, would be
(a) $45,000.
(b) $41,500.
(c) $23,760.
(d) $21,780.
Solution: ($180,000 – $15,000) / 25,000 hrs = $6.6/hr; $6.6 x 3,300 = $21,780
94. On April 1, 2018, Check Mate Ltd. places a new asset into service. The cost of the asset is $40,000 with an
estimated 8-year life and $2,500 residual value. Assuming that Check Mate uses the double diminishing-
balance method of depreciation, what is the carrying amount of the asset at December 31, 2018?
(a) $32,500
(b) $30,625
(c) $38,125
(d) $35,000
Solution: 1/8 years x 2 = 25%: Yr 1: ($40,000 x.25) = 10,000 x 9/12 = $7,500; Carrying amount = $40,000 –
$7,500 = $32,500
95. Cordo Ltd. uses the units-of-production depreciation method. A new asset is purchased for $30,000 that
will produce an estimated 90,000 units over its useful life. Estimated residual value is $3,000. What is the
depreciable cost per unit?
(a) $3.30
(b) $3.00
(c) $0.33
(d) $0.30
Solution: ($30,000 – $3,000) / 90,000 = $0.30/unit
96. Units-of-production is an appropriate depreciation method to use when

(a) it is impossible to determine the productivity of the asset.
(b) the asset's use will be constant over its useful life.
(c) the company is a manufacturing company.
(d) the asset's use varies significantly from one period to another.
97. The calculation of depreciation using the diminishing-balance method

(a) ignores residual value in determining the amount to which a constant rate is applied.
(b) multiplies a constant percentage times the previous year's depreciation expense.
(c) yields an increasing depreciation expense each period.
(d) multiplies a diminishing percentage times a constant carrying amount.
On January 1, 2017, Flowers Unlimited purchased a new delivery van. The van cost $35,000 with an estimated
life of 5 years and $5,000 residual value. Double diminishing-balance depreciation will be used.
98. What is the depreciation expense for calendar 2017?

(a) $ 3,000
(b) $ 6,000
(c) $12,000
(d) $14,000
Solution: 1/5 years x 2 = 40%: Yr 1: ($35,000 x.40) = $14,000
99. What is the balance in the Accumulated Depreciation account at the end of 2018?
(a) $22,400
(b) $19,200
(c) $12,600
(d) $10,800
Solution: 1/5 years x 2 = 40%: Yr 1: ($35,000 x.40) = $14,000; Yr 2: ($35,000 – $14,000) x.40 = $8,400;
$14,000 + $8,400 = $22,400
100. With regard to depreciation and income taxes, which of the following statements is not true?
(a) When calculating taxable income, the taxpayer must choose the method that best reflects the pattern in
which the asset’s future economic benefits are consumed.
(b) When calculating taxable income, the taxpayer must use the rate set by Canada Revenue Agency.
(c) When calculating taxable income, the taxpayer must use the diminishing-balance method for most assets.
(d) When calculating taxable income, the amount of depreciation calculated for income tax purposes must be
deducted, rather than the amount of depreciation calculated for financial reporting purposes.
101. Which of the following statements is not true?

(a) CCA will be the same whether a company uses the straight-line, diminishing-balance, or units-of-production
method.
(b) Cash flow will be affected by the use of different depreciation methods.
(c) Over the life of the asset, total depreciation expense will be the same whether a company uses the straight-
line, diminishing-balance, or units-of-production method.
(d) The diminishing-balance depreciation method will result in lower net income compared to the straight-line
depreciation method in the early years.
102. A change in the estimated useful life of equipment requires

(a) a retroactive change in the amount of depreciation recognized in previous years.
(b) that no change be made to depreciation calculations, so that depreciation expense amounts are
comparable over the life of the asset.
(c) that the amount of depreciation expense be changed in the current and future years.
(d) that net income for the current year be increased.
103. Mandeep Ltd. has decided to change the estimate of the useful life of an asset that has been in service
for two years. Which of the following statements describes the proper way to revise a useful life estimate?
(a) Revisions in useful life are permitted if approved by Canada Revenue Agency.
(b) Both the current and future years will be affected by the revision.
(c) Retroactive changes must be made to correct previously recorded depreciation.
(d) Only future years will be affected by the revision.
104. Which of the following statements is incorrect?

(a) Under the revaluation model, the carrying amount of property, plant and equipment is adjusted to reflect its
fair value.
(b) With the revaluation model, revaluation gains are recorded in Other Comprehensive Income.
(c) Companies can choose to use the cost model or the revaluation model for property, plant and equipment.
(d) Reversals of revaluation gains or write-ups are prohibited.
105. Anali Corporation has determined that its drilling equipment is impaired. The cost of the equipment is
$210,000. Accumulated depreciation recorded to date is $140,000. Anali has determined, that based on
market data, the recoverable amount will be $45,000. Determine the amount of the impairment loss that Anali
will be required to record.
(a) $25,000
(b) $70,000
(c) $45,000
(d) $210,000
Solution: Carrying Amount: ($210,000 – $140,000) = $70,000 greater than net recoverable of $45,000;
therefore, impairment for the difference of $25,000
106. When an impairment loss is recorded what is the effect (if any) on Depreciation?
(a) no effect
(b) credit Accumulated Depreciation
(c) debit Accumulated Depreciation
(d) credit Depreciation Expense
107. When an asset is sold, a gain is reported that is equal to the amount that the
(a) proceeds received exceed the carrying amount of the asset sold.
(b) proceeds received exceed the original cost of the asset sold.
(c) carrying amount exceeds the proceeds received for the asset sold.
(d) proceeds received exceed the depreciable cost of the asset sold.
108. The carrying amount of an asset is the difference between the

(a) replacement cost of the asset and its original cost.
(b) 2 cost of the asset and the amount of depreciation expense for the year.
(c) cost of the asset and the accumulated depreciation to date.
(d) proceeds received from the sale of the asset and its original cost.
109. On December 31, 2018, Cee Corp. sells an asset that originally cost $300,000 for $75,000. The company
recognized a loss on disposal of $25,000. What was the balance of the accumulated depreciation account after
the current year’s depreciation of $15,000 was recorded?
(a) $ 25,000 gain
(b) $ 25,000 loss
(c) $125,000 gain
(d) $125,000 loss
Solution: $300,000 – $75,000 – $25,000 = $200,000.
110. A truck costing $15,000 and on which $14,000 of accumulated depreciation has been recorded was
discarded as having no value. The entry to record this event would include a
(a) gain of $1,000.
(b) loss of $1,000.
(c) credit to Accumulated Depreciation for $14,000.
(d) credit to Equipment for $1,000.
Solution: Carrying Amount: ($15,000 – $14,000) = $1,000 loss as no offsetting proceeds
111. A truck costing $14,000 and on which $12,000 of accumulated depreciation has been recorded was
disposed of for $3,000 cash. The entry to record this event would include a
(a) loss on disposal of $1,000.
(b) gain on disposal of $1,000.
(c) credit to the Truck account for $3,000.
(d) credit to Accumulated Depreciation for $12,000.
Solution: Carrying Amount: ($14,000 – $12,000) = $2,000 less than proceeds of $3,000; therefore, a gain for
the difference of $1,000
112. If disposal of an asset occurs during the year, depreciation is

(a) not recorded for the year.
(b) recorded for the whole year.
(c) recorded for the fraction of the year to the date of the disposal.
(d) not recorded if the asset is scrapped.
113. If an asset is fully depreciated and retired for proceeds equal to its residual value
(a) a gain on disposal will be recorded.
(b) depreciation must continue to be taken as though the asset were still on the books.
(c) a loss on disposal will be recorded.
(d) no gain or loss on disposal will be recorded.
114. If the carrying amount of an asset equals its selling price at the date of sale, then
(a) a gain on disposal is recorded.
(b) no gain or loss on disposal is recorded.
(c) the asset is fully depreciated.
(d) a loss on disposal is recorded.
115. A truck costing $32,000 was destroyed when its engine caught fire. At the date of the fire, the
accumulated depreciation on the truck was $16,000. An insurance cheque for $37,000 was received based on
the replacement cost of the truck. The entry to record the insurance proceeds and the disposition of the truck
will include a
(a) gain on disposal of $5,000.
(b) credit to the Truck account for $16,000.
(c) credit to the Accumulated Depreciation account for $16,000.
(d) gain on disposal of $21,000.
Solution: Carrying Amount: ($32,000 – $16,000) = $16,000 less than proceeds of $37,000; therefore, a gain for
the difference of $21,000
116. On July 1, 2018, Happy Hound Kennels Inc. sells equipment for $20,000. The equipment originally cost
$80,000, had an estimated 5-year life and an expected residual value of $10,000. The Accumulated
Depreciation account had a balance of $49,000 on January 1, 2018, using the straight-line method. The gain or
loss on disposal is
(a) $4,000 gain.
(b) $4,000 loss.
(c) $11,000 loss.
(d) $11,000 gain.
Solution: Depreciation Jan 1 – July 1 = ($80,000 – $10,000) / 60 months x 6 months = $7,000; Carrying
Amount: ($80,000 – $49,000 – $7,000) = $24,000 greater than proceeds of $20,000 therefore a loss for the
difference of $4,000
117. An asset with a cost of $45,000 was sold for $9,500 and resulted in a gain of $2,000. How much was
accumulated depreciation at the time of sale?
(a) $39,500
(b) $45,000
(c) $37,500
(d) $35,500
Solution: $45,000 + $2,000 – $9,500 = $37,500
118. Intangible assets are the rights and privileges that result from ownership of assets that
(a) must be generated internally.
(b) benefit only the current period.
(c) have physical substance.
(d) do not have physical substance.
119. An intangible asset should

(a) not be amortized if it has an finite life.
(b) not be amortized if it has an indefinite life.
(c) be amortized over its legal or useful life, whichever is longer.
(d) be amortized over 5 years or less.
120. The cost of successfully defending a patent in an infringement suit should be

(a) charged to Legal Expenses.
(b) deducted from the carrying amount of the patent.
(c) added to the cost of the patent.
(d) recognized as a loss in the current period.
121. An asset that cannot be sold separately in the market place is

(a) a patent.
(b) goodwill.
(c) a copyright.
(d) a trade name.
122. Goodwill can be recorded

(a) when customers keep returning because they are satisfied with the company's products.
(b) when the company acquires a good location for its business.
(c) when the company has exceptional management.
(d) only when there is a purchase of an entire business.
123. On October 1, 2018, Benji Corporation purchased a copyright for $100,000. It is estimated that the
copyright will have a useful life of 8 years with no residual value. The amount of amortization expense
recognized for the calendar year 2018 would be
(a) $0.
(b) $3,125.
(c) $1,042.
(d) $100,000.
Solution: $100,000 / 8 years x 3/12 months = $3,125
124. Which of the following combinations reflects intangible assets with a finite life?
(a) copyrights and patents
(b) copyrights and trademarks
(c) trademarks and brands
(d) brands and trade names
125. Which of the following is not considered to be an intangible asset?

(a) a copyright
(b) an oil well
(c) a franchise
(d) a patent
126. Which of the following statements concerning research and development costs is not true?
(a) All research costs should be expensed as incurred.
(b) Development costs with probable future benefits should be capitalized.
(c) All development costs should be capitalized.
(d) Development costs associated with successful commercial research would be amortized over the useful life
of the product or process developed.
127. The cost allocation of an intangible asset is referred to as

(a) amortization.
(b) impairment.
(c) depreciation.
(d) depletion.
128. The cost of a finite intangible asset is

(a) not amortized, but the asset is tested periodically for impairment.
(b) amortized and tested periodically for impairment.
(c) neither amortized or tested periodically for impairment.
(d) amortized, but not tested periodically for impairment.
129. A patent
(a) has a legal life of 20 years.
(b) is not amortized.
(c) can be renewed indefinitely.
(d) is rarely subject to litigation because it is an exclusive right.
130. If a company incurs legal costs in unsuccessfully defending its patent, these costs would be debited to
(a) Legal Expense.

(b) Intangible Loss account.
(c) Patent account.
(d) Other Comprehensive Income.
131. Copyrights are granted by the Canadian Intellectual Property Office

(a) for the life of the creator or 50 years, whichever is longer.
(b) for the life of the creator plus 50 years.
(c) for the life of the creator or 50 years, whichever is shorter.
(d) for 50 years.
132. Goodwill
(a) can be recorded when generated internally.
(b) can be subdivided and sold in parts.
(c) can only be identified with the business as a whole.
(d) need not be tested annually for impairment.
133. Goodwill
(a) is always expensed upon purchase.
(b) can be sold by itself to another company.
(c) can be purchased and charged directly to shareholders’ equity.
(d) is the excess of cost paid to acquire a business over the fair value of the net identifiable assets of the
business.
134. In recording the acquisition cost of an entire business

(a) goodwill is recorded as the excess of cost over the fair value of identifiable net assets.
(b) assets are recorded at the seller's carrying amounts.
(c) goodwill, if it exists, is never recorded.
(d) goodwill is recorded as the excess of cost over the carrying amount of identifiable net assets.
135. Research costs

(a) are classified as intangible assets.
(b) must be expensed when incurred.
(c) should be included in the cost of the asset they relate to.
(d) are capitalized and then amortized over their estimated useful life.
136. A loss on disposal of an asset is reported in the financial statements

(a) in the operating section of the income statement.
(b) in the non-operating section of the income statement.
(c) as part of Other Comprehensive Income.
(d) as part of Cost of Goods Sold.
137. Depreciation expense and impairment losses are presented in

(a) the operating section of the income statement.
(b) the operating section and non-operating section of the income statement, respectively.
(c) the non-operating section of the income statement.
(d) the non-operating section and operating section of the income statement, respectively.
138. Which of the following statements concerning financial statement presentation is false?
(a) Goodwill is reported separately from intangible assets.
(b) Companies must disclose their policy for testing impairments in the notes to their statements.
(c) Companies reporting under ASPE must include a reconciliation of the changes during the year in the
carrying amount for each class of long-lived asset in the notes to their statements.
(d) Companies reporting under IFRS must disclose whether they are using the cost or revaluation model for
each class of long-lived asset in the notes to their statements.
139. Which of the following statements concerning financial statement presentation is false?
(a) Intangibles may be reported separately.
(b) The balances of major classes of assets should be disclosed in the notes.
(c) The balances of the accumulated depreciation of major classes of assets should be disclosed in the notes.
(d) The balances of all individual assets, as they appear in the subsidiary ledger, should be disclosed in the
notes.
140. Intangible assets

(a) must be reported under the heading Property, Plant, and Equipment.
(b) are not reported on the statement of financial position because they lack physical substance.
(c) should be reported as Current Assets on the statement of financial position.
(d) should be reported separately from Property, Plant, and Equipment.
141. Boulder Corp. has the following assets:

Buildings and Equipment (net)................................ $12,500,000
Trade Receivables.................................................. 1,600,000
Inventory................................................................. 2,300,000
Land........................................................................ 1,500,000
The total amount reported under Property, Plant, and Equipment would be
(a) $14,000,000.
(b) $16,300,000.
(c) $20,500,000.
(d) $17,900,000.
Solution: $12,500,000 + $1,500,000 = $14,000,000
142. Property, plant, and equipment are ordinarily presented on the statement of financial position
(a) at fair values.
(b) at replacement cost.
(c) at cost less accumulated depreciation.
(d) in a separate section along with investments.
143. On the statement of cash flows, cash flows from the purchase and sale of long-lived assets are shown in
which section?
(a) Operating activities
(b) Investing activities
(c) Financing activities
(d) They are not reported on the statement of cash flows.
During 2018, Richlieu Corporation reported:

Net sales.............................................. $30,000,000
Net income........................................... 1,500,000
Depreciation expense........................... 400,000
Beginning total assets........................... $12,000,000
Ending total assets............................... 20,000,000
Property, plant, and equipment............. 8,000,000
Accumulated depreciation.................... 2,000,000
144. Richlieu’s return on assets is

(a) 7.5%.
(b) 7.9%.
(c) 9.4%.
(d) 12.5%.
Solution: $1,500,000 / ($12,000,000 + $20,000,000) / 2 = 9.4%
145. Richlieu’s profit margin is

(a) 3.7%.
(b) 5.0%.
(c) 6.3%.
(d) 8.0%.
Solution: $1,500,000 / $30,000,000 = 5%
146. Richlieu’s asset turnover ratio is

(a) 2.5 times.
(b) 1.9 times.
(c) 1.5 times.
(d) 1.3 times.
Solution: $30,000,000 /($12,000,000 + $20,000,000) / 2 = 1.9 times
147. If the return on assets is positive, an increase in total assets will result in
(a) an increase in the return on assets.
(b) a decrease in the return on assets.
(c) no change in the return on assets.
(d) the effect cannot be determined.
148. If a company wants to increase its return on assets, it should not

(a) increase the profit margin.
(b) increase the asset turnover.
(c) decrease average total assets.
(d) increase average total assets.
149. The asset turnover ratio is calculated by

(a) multiplying net sales by average total assets.
(b) dividing net sales by average total assets.
(c) dividing net income by average total assets.
(d) dividing average total assets by net sales.
ANSWERS TO MULTIPLE CHOICE QUESTIONS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
42. a 58. c 74. c 90. c 106. b 122. d 138. c
43. b 59. d 75. d 91. b 107. a 123. b 139. d
44. c 60. a 76. d 92. d 108. c 124. a 140. d
45. b 61. c 77. c 93. d 109. b 125. b 141. a
46. b 62. d 78. a 94. a 110. b 126. c 142. c
47. d 63. b 79. b 95. d 111. b 127. a 143. b
48. c 64. d 80. a 96. d 112. c 128. b 144. c
49. b 65. c 81. d 97. a 113. d 129. a 145. b
50. b 66. c 82. c 98. d 114. b 130. a 146. b
51. d 67. b 83. c 99. a 115. d 131. b 147. b
52. a 68. d 84. b 100. a 116. b 132. c 148. d
53. c 69. a 85. c 101. b 117. c 133. d 149. b
54. d 70. c 86. c 102. c 118. d 134. a
55. d 71. c 87. c 103. b 119. b 135. b
56. d 72. a 88. b 104. d 120. c 136. a
57. b 73. a 89. b 105. a 121. b 137. a
EXERCISES
Ex. 150
Millenium Corporation purchased land adjacent to its plant to improve access for trucks making deliveries.
Expenditures/receipts incurred in developing the land were as follows:
Purchase price............................................................ $45,000
Title search and other fees.......................................... 4,000
Demolition of an old building on the property............... 6,000
Grading....................................................................... 1,100
Proceeds received from selling scrap.......................... 1,500
Laying and paving driveway........................................ 22,000
Lighting........................................................................ 6,800
Signs........................................................................... 600
Instructions
Calculate the amount to be debited to the Land account.
Solution 150 (5 min.)

Purchase price................................................................... $45,000
Title search and other fees................................................. 4,000
Demolition of an old building on the property...................... 6,000
Grading.............................................................................. 1,100
Proceeds from selling scrap............................................... (1,500)
Land acquisition cost.......................................................... $54,600
Ex. 151
Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI),
buildings (B), equipment (E) or none of these (X).
_____ 1. Parking lots
_____ 2. Electricity used by a machine
_____ 3. Sewage system cost
_____ 4. Interest on building construction loan
_____ 5. Cost of trial runs for machinery
_____ 6. Drainage costs
_____ 7. Cost to install a machine
_____ 8. Fencing
_____ 9. Unpaid (past) property taxes paid on purchase
_____ 10. Cost of tearing down a building when property is purchased with an old building on
it

1. LI
2. X
3. L
4. B
5. E
6. L
7. E
8. LI
9. L
10. L
Ex. 152
Indicate whether each of the following expenditures should be classified as land (L), land improvements (LI),
buildings (B), equipment (E) or none of these (X).
_____ 1. Computer installation cost
_____ 2. Driveway cost
_____ 3. Architect’s fee
_____ 4. Surveying costs
_____ 5. Grading costs
_____ 6. Cost of lighting for parking lot
_____ 7. Insurance and freight on computer purchased
_____ 8. Material and labour costs incurred to construct factory
_____ 9. Cost of tearing down a warehouse on land just purchased
_____ 10. Utility cost during first year

1. E
2. LI
3. B
4. L
5. L
6. LI
7. E
8. B
9. L
10. X
Ex. 153
For each entry below, prepare any correcting entry necessary. If the entry is correct, then state "No entry
required."
(a) The $100 cost of repairing a printer was charged to Equipment. The repair is not expected to increase the
operating efficiency of the printer.
(b) The $6,500 cost of a major engine overhaul was debited to Repair Expense. The overhaul is expected to
increase the operating efficiency of the vehicle.
(c) The $4,000 closing costs associated with the acquisition of land were debited to Legal Expense.
(d) A $150 charge for transportation expenses on new equipment purchased was debited to Transportation
Expense.

(a) Repair and Maintenance Expense................................................. 100
Equipment............................................................................... 100
(b) Vehicles......................................................................................... 6,500

Repair Expense...................................................................... 6,500
(c) Land.............................................................................................. 4,000

Legal Expense........................................................................ 4,000
(d) Equipment..................................................................................... 150

Transportation Expense.......................................................... 150
Ex. 154
The McReynolds Corporation was organized on January 1. During the first year of operations, the following
expenditures and receipts were recorded in random order in the general ledger account, Land.
Expenditures
1. Cost of real estate purchased as a plant site (land and building)..................... $ 130,000
2. Cost of demolishing building to make land suitable for construction of a new
building............................................................................................................ 9,000
3. Architect's fees for new building plans............................................................. 12,000
4. Excavation costs for new building.................................................................... 27,000
5. Cost of filling and grading the land................................................................... 2,500
6. Insurance and taxes during construction of building......................................... 3,000
7. Interest paid during the year, of which $52,000 pertains to the
construction period........................................................................................... 68,000
8. Full payment to building contractor.................................................................. 750,000
9. Cost of parking lots and driveways................................................................... 32,000
10. Property taxes paid for the current year on the land......................................... 5,000
Total.......................................................................................................... $1,038,500
Receipts
11. Proceeds from salvage of demolished building................................................ 3,500
Total.......................................................................................................... $3,500
Instructions
Analyze the foregoing transactions using the following tabular arrangement. Insert the number of each
transaction in the Item space and insert the amounts in the appropriate columns.
Land
Item Land Improvements Building Other Account Title

Land
Item Land Improvements Building Other Account Title
1. $130,000
2. 9,000
3. $ 12,000
4. 27,000
5. 2,500
6. 3,000
7. 52,000 $16,000 Interest Expense
8. 750,000
9. $32,000
10. 5,000 Property Tax Expense
11. (3,500) _______ ________ _______
Totals $138,000 $32,000 $844,000 $21,000
Ex. 155
Absentia Inc. purchased a machine on January 1, 2018. Besides the purchase cost, the following additional
costs were incurred:
(a) increase in annual insurance premium to include new machine
(b) transportation and insurance costs while the machinery was in transit from the seller
(c) personnel training costs for initial operation of the machinery
(d) installation costs necessary to secure the machinery to the building flooring
(e) lubrication of the machinery gearing before the machinery was placed into service
(f) lubrication of the machinery gearing after the machinery was placed into service
(g) annual city business licence
Instructions
Indicate whether the items (a) through (g) are capital or operating expenditures using the codes:
C = Capital, O = Operating.

(a) Operating
(b) Capital
(c) Operating
(d) Capital
(e) Capital
(f) Operating
(g) Operating
Ex. 156
Montgomery Enterprises purchased a delivery truck January 1, 2014 for $50,000. The truck was expected to
have a useful life of 10 years and a residual value of $10,000. On January 1, 2018 the accumulated
depreciation balance on the truck was $16,000 and the 2018 depreciation is calculated as $4,000.
During 2018 Montgomery had the following transactions related to the truck:
1. Oil and filter change $800
2. Engine overhaul $7,500 which will extend the useful life of the truck by 3 years. The residual value has
been revised to $12,500.

3. Insurance $2,500
4. Licence plate renewal $175
Instructions
(a) Calculate the carrying amount of the truck on December 31, 2018.
(b) Calculate the depreciation expense for 2019 using the straight-line method of depreciation.
Solution 156
(a)
Truck cost January 1, 2014 $50,000
Engine overhaul (capital expenditures) 7,500
Less: Accumulated depreciation—Truck ($16,000 + $4,000) 20,000
Carrying Amount, December 31, 2018 $37,500
(b) The revised annual deprecation (not illustrated in text but steps discussed) will be
Carrying amount (original cost – accumulated deprec. + capital expenditures) – Revised residual amount
Remaining estimated useful life
$37,500 – $12,500
————––––—— = $3,125
(3+5) years
Ex. 157
Watmore Ltd. purchased, for cash, factory equipment with an invoice price of $80,000. Other costs incurred
were freight costs, $1,600; installation, wiring and foundation, $13,500; material and labour costs in testing
equipment, $500; oil lubricants and supplies to be used while operating the equipment, $750; fire insurance
policy covering equipment, $1,400. The equipment is estimated to have a $10,000 residual value at the end of
its 8-year useful service life.
Instructions
(a) Calculate the cost of the equipment.
(b) Record the purchase of the equipment.
(c) Calculate the annual depreciation expense, assuming the straight-line method of depreciation is used.

(a) Invoice cost.................................................................................... $80,000
Freight costs.................................................................................. 1,600
Installation, wiring and foundation.................................................. 13,500
Material and labour costs in testing................................................ 500
Cost............................................................................................... $95,600
(b) Equipment..................................................................................... 95,600

Cash....................................................................................... 95,600
(c) The annual depreciation expense would be $10,700 ($95,600 – $10,000) ÷ 8 years = $10,700
Ex. 158
A machine was acquired on January 1, 2018, at a cost of $80,000. The machine was originally estimated to
have a residual value of $5,000 and an estimated life of 5 years. The machine is expected to produce a total of
100,000 components during its life, as follows: 15,000 in 2018, 20,000 in 2019, 20,000 in 2020, 30,000 in
2021, and 15,000 in 2022.
Instructions
(a) Calculate the amount of depreciation to be charged each year, using each of the following methods:
1. Straight-line method
2. Units-of-production
3. Double diminishing-balance
(b) Which method results in the highest depreciation expense during the first two years? Over all five years?
Solution 158
(a) 1. Straight-line
Depreciatio Accumulate
Asset Depreciation Depreciable Carrying
n d
Depreciatio
Date Cost Rate Cost Expense Amount
n
Jan. 1, 2018 $80,000 $80,000
Dec. 31, 2018 20% $75,000 $15,000 $15,000 65,000
Dec. 31, 2019 20% 75,000 15,000 30,000 50,000
Dec. 31, 2020 20% 75,000 15,000 45,000 35,000
Dec. 31, 2021 20% 75,000 15,000 60,000 20,000
Dec. 31, 2022 20% 75,000 15,000 75,000 5,000
Straight-line rate: 1 ÷ 5 = 20%

Annual depreciation: ($80,000 – $5,000) ÷ 5 years =
$15,000
(a) 2. Units-of-production
Depreciatio Accumulate
Asset Depreciation Number Of Carrying
n d
Per Component Depreciatio
Date Cost Expense Amount
Component s n
Jan. 1, $80,00
$80,000
2018 0
Dec. 31,
$0.75 15,000 $11,250 $11,250 68,750
2018
Dec. 31,
0.75 20,000 15,000 26,250 53,750
2019
Dec. 31,
0.75 20,000 15,000 41,250 38,750
2020
Dec. 31,
0.75 30,000 22,500 63,750 16,250
2021
Dec. 31,
0.75 15,000 11,250 75,000 5,000
2022
100,000
Depreciation per component: ($80,000 – $5,000) ÷ 100,000 units =

$0.75
(a) 3. Double diminishing-balance

Asset Depreciatio Asset Depreciatio Accumulate Carrying
n Carrying n d
Depreciatio
Date Cost Rate Amount Expense Amount
n
Jan. 1, $80,00
$80,000
2018 0
Dec. 31,
40% $80,000 $32,000 $32,000 48,000
2018
Dec. 31,
40% 48,000 19,200 51,200 28,800
2019
Dec. 31,
40% 28,800 11,520 62,720 17,280
2020
Dec. 31,
40% 17,280 6,912 69,632 10,368
2021
Dec. 31,
40% 10,368 *5,368 75,000 5,000
2022
DDB rate: 1 ÷ 5 = 20% x 2 = 40%

* Amount required to reduce carrying amount to residual value.
(b) The double diminishing-balance results in the highest depreciation in the first two years.
Over the five year life of the asset, all of the methods result in the same amount of depreciation expense
as the asset is depreciated to the residual value.
Ex. 159
Certossi Service Ltd. uses straight-line depreciation. The company's fiscal year end is December 31. The
following transactions and events occurred during their first three years of operations:
2017 Jul 1 Purchased equipment for $32,000 cash, with shipping costs of $2,000.
Nov 3 Incurred ordinary repairs on the computer of $360.
Dec 31 Recorded 2017 depreciation on the basis of a four-year life and estimated residual value of
$200.
2018 Dec 31 Recorded 2018 depreciation.
2019 Jan 1 Paid $1,600 for a major upgrade of the equipment. This expenditure is expected to increase
the operating efficiency and capacity of the equipment.
Instructions
Prepare journal entries to record the above events. (Show calculations.)

2017 Jul 1 Equipment................................................................. 34000
Cash ($32,000 + $2,000).................................... 34,000
Nov 3 Repairs and Maintenance Expense........................... 360

Cash................................................................... 360
Dec 31 Depreciation Expense............................................... 4,225

Accumulated Depreciation—Equipment............. 4,225
[($34,000 – $200)/4  6/12]
2018 Dec 31 Depreciation Expense............................................... 8,450

Accumulated Depreciation—Equipment............. 8,450
($34,000 – $200)/4
2019 Jan 1 Equipment................................................................. 1,600

Cash................................................................... 1,600
Ex. 160
Ratched Limited purchased a new computer system for $80,000. It is estimated that the computer will have an
$8,000 residual value at the end of its 5-year useful service life. The double diminishing-balance method of
depreciation will be used.
Instructions
Prepare a depreciation schedule that shows the annual depreciation expense on the computer for its 5-year
life.

Diminishing-balance rate = 1 ÷ 5 = 20% x 2 = 40%
Carrying Amount Annual

Beginning Depreciation Depreciation Accumulated Carrying Amount
Year of Year  Rate = Expense Depreciation End of Year
1 $80,000  40% $32,000 $32,000 $48,000
2 48,000  40% 19,200 51,200 28,800
3 28,800  40% 11,520 62,720 17,280
4 17,280  40% 6,912 69,632 10,368
5 10,368  40% 2,368* 72,000 8,000
*Adjusted to $2,368 because ending carrying amount should not be less than expected residual value.
Ex. 161
Chevrette Corporation purchased equipment on January 1, 2017 for $87,000. It is estimated that the
equipment will have a $7,000 residual value at the end of its 8-year useful life. It is also estimated that the
equipment will produce 160,000 units over its 8-year life.
Instructions
(a) Using straight-line depreciation, calculate the depreciation expense for the year ended December 31,
2017.
(b) Now assume Chevrette uses the units-of-production depreciation. If 16,000 units of product are produced
in 2017 and 24,000 units are produced in 2018, what is the carrying amount of the equipment at
December 31, 2018?
(c) Now assume Chevrette uses double diminishing-balance depreciation. What is the balance of the
Accumulated Depreciation—Equipment account at December 31, 2019? Round amounts to the nearest
dollar.

C = Cost
RV = Residual value
C – RV $87,000 – $7,000
(a) Straight-line method: ——–––— = ——————–—— = $10,000 per year.
Useful life 8
C – RV $87,000 – $7,000
(b) Units-of-production method: —–––––––—— = —————–——— = $.50 per unit
Total estimated 160,000 units
Units of activity
2017 16,000 units  $0.50 = $ 8,000
2018 24,000 units  $0.50 = 12,000
Accumulated depreciation = $20,000
Cost of asset $87,000

Less: Accumulated depreciation 20,000
Carrying amount at December 31, 2018 $67,000
(c) Double diminishing-balance method. Rate is 1 ÷ 8 = 12.5% x 2 = 25%

Carrying Amount
Beginning Diminishing Depreciation Accumulated Carrying Amount
of Year  Balance Rate = Expense Depreciation End of Year
2017 $87,000 25% $21,750 $21,750 $65,250
2018 65,250 25% 16,313 38,063 48,937
2019 48,937 25% 12,234 50,297 36,703
Ex. 162
Equipment acquired on October 1, 2018, at a cost of $750,000, has an estimated useful life of 10 years. The
residual value is estimated to be $80,000.
Instructions
Calculate the depreciation expense for the first two years using the
(a) straight-line method.
(b) double diminishing-balance method.

(a) Straight-line method
$750,000 – $80,000
Year 1 —————————  3/12 = $16,750
10 years
Year 2 $67,000
(b) Double diminishing-balance method

Rate is 1 ÷ 10 = 10% x 2 = 20%
Year 1 $750,000  20%  3/12 = $37,500
Year 2 ($750,000 – $37,500)  20% = $142,500
Ex. 163
Craving for Crepes, a popular Crepe and Waffle restaurant, has a thriving delivery business. The business has
a fleet of three delivery vans. Before the adjusting entry for this year's depreciation expense, the details of
each van are as follows:
Accumulated Kilometres
Estimated Depreciation Operated
Van Cost Residual value Life in Kilometres Beg. of the Year During Year
1 $32,000 $5,000 150,000 $7,800 22,000
2 28,000 2,500 160,000 6,000 40,000
3 17,000 1,900 170,000 4,550 36,000
Instructions
(a) Calculate the depreciation rates per kilometre for each van.
(b) Calculate the depreciation expense for each van for the current year.
(c) Prepare one compound journal entry to record the annual depreciation expense for the fleet.

$32,000 – $5,000
(a) Van 1 ———————— = $0.18 per km
150,000 km
$28,000 – $2,500
Van 2 ———————— = $0.16 per km
160,000 km
$17,000 – $1,900
Van 3 ———————— = $0.09 per km
170,000 km
(b) Van 1 22,000 km  $0.18 = $3,960

Van 2 40,000 km  $0.16 = $6,400
Van 3 36,000 km  $0.09 = $3,240
(c) Depreciation Expense.................................................................... 13,600

Accumulated Depreciation—Vehicles 1.................................. 3,960
Ex. 164
Caring Clinic purchased a new surgical laser for $88,000. The estimated residual value is $4,000. The laser
has a useful life of six years and the clinic expects to use it 10,000 hours. It was used 1,700 hours in year 1;
2,300 hours in year 2; 2,500 hours in year 3; 1,500 hours in year 4; 1,600 hours in year 5; 400 hours in year 6.
Instructions
(a) Calculate the annual depreciation for each of the six years under each of the following methods:
1. straight-line.
2. units-of-production.
(b) If you were the administrator of the clinic, which method would you deem as more appropriate? Justify
your answer.
(c) Which method would result in the lower reported net income for the first two years? Which method would
result in the lower total reported net income over the six-year period?

$88,000 – $4,000
(a) 1. Straight-line method: ———————— = $14,000 per year
6 years
$88,000 – $4,000
2. Units-of-production method: ——––—————— = $8.40/hour
10,000 hours
Year 1 1,700  $8.40 = $ 14,280

2 2,300  8.40 = 19,320
3 2,500  8.40 = 21,000

4 1,500  8.40 = 12,600
5 1,600  8.40 = 13,440
6 400  8.40 = 3,360
Straight-Line Units-of-Production
Year 1 $14,000 $14,280
Year 2 14,000 19,320
Year 3 14,000 21,000
Year 4 14,000 12,600
Year 5 14,000 13,440
Year 6 14,000 3,360
Total $84,000 $84,000
(b) The units-of-production method would be more appropriate, given the variable usage expected of the
laser during its useful life.
(c) The units-of-production method provides the higher depreciation expense for the first two years, and
therefore the lower net income. Over the six-year period, both methods result in the same total
depreciation expense ($84,000) and, therefore, the same total net income.
Ex. 165
On Jan 1, 2016, Holloway Inc. purchased equipment for $840,000, and, at Dec 31, 2016, recorded straight-line
depreciation based on a twenty-year life with $20,000 residual value. Holloway tests its property, plant and
equipment annually for impairment and at Dec 31, 2017, determined that the recoverable amount of this
equipment was $722,000.
Instructions
(a) Determine the carrying amount of the equipment at December 31, 2017 assuming that depreciation has
already been recorded for the year.
(b) Determine the impairment loss (if any) and record the appropriate journal (if any) entry at December 31,
2017.
(c) Calculate the 2018 annual depreciation expense subsequent to the impairment loss and record the
appropriate journal entry.
Solution 165
(a) Carrying amount at December 31, 2017 (before impairment loss):
$840,000 – $20,000
————————— = $41,000 annual depreciation expense
20 years
Equipment has been depreciated for 2 years: $41,000  2 = $82,000
Carrying amount at December 31, 2017: $840,000 – $82,000 = $758,000
(b) Impairment Loss
$758,000 – $722,000= $36,000
Dec 31/17 Impairment Loss............................................................ 36,000

Accumulated Depreciation—Equipment............... 36,000
(c) Carrying amount at December 31, 2017 (after impairment loss):
$722,000 – $20,000
————————— = $39,000 annual 2018 depreciation expense
18 years
Dec 31/18 Depreciation Expense.................................................... 39,000

Accumulated Depreciation—Equipment............... 39,000
Ex. 166
Northwest Airlines purchased an aircraft on January 1, 2018, at a cost of $35,000,000. The estimated useful
life of the aircraft is 25 years, with an estimated residual value of $5,000,000.
Instructions
Calculate the accumulated depreciation and carrying amount at December 31, 2020 using the straight-line
method and the double diminishing-balance method.

Straight-Line
Depreciable Depreciation Annual Accumulated
Year Amount  Rate = Depreciation Depreciation Carrying Amount
2018 $30,000,000 4% $1,200,000 $1,200,000 $33,800,000
2019 30,000,000 4% 1,200,000 2,400,000 32,600,000
2020 30,000,000 4% 1,200,000 3,600,000 31,400,000
Double Diminishing-Balance (rate is 1/25 = 4% x 2 = 8%)

Carrying Amount Depreciation Annual Accumulated
Year Beginning Year  Rate = Depreciation Depreciation Carrying Amount
2018 $35,000,000 8% $2,800,000 $2,800,000 $32,200,000
2019 32,200,000 8% 2,576,000 5,376,000 29,624,000
2020 29,624,000 8% 2,369,920 7,745,920 27,254,080
Ex. 167
Zen Fitness Inc. purchased a machine on April 1, 2018 for $120,000. The machine is expected to have an
estimated residual value of $5,000 at the end of its 5-year life. Although Zen has a policy of using straight-line
depreciation for machinery, the company accountant neglected to follow policy and depreciated it in 2018 using
the double diminishing-balance method. Income before income tax for the year ended December 31, 2018 was
$73,000 as the result of depreciating the machine incorrectly.
Instructions
Using the method of depreciation that company policy requires, prepare the correcting entry and determine the
correct net income. Ignore income tax. (Show calculations.)

Depreciation recorded ($120,000 – 0)  40% (1 ÷5 = 20% x 2) x 9/12. $36,000
Correct depreciation ($120,000 – $5,000)/5 x 9/12............................... 17,250
Overstatement of depreciation.............................................................. $18,750
Accumulated Depreciation—Equipment............................................... 18,750

Depreciation Expense................................................................. 18,750
Correct income (before income tax):

Net income as reported........................................................................ $73,000

Add: overstatement of depreciation expense........................................ 18,750
Correct Net income............................................................................... $91,750
Ex. 168
On January 1, 2017, Wanders Corporation purchased and installed a telephone system at a cost of $55,000.
The equipment was expected to last five years with no residual value. On January 1, 2018 more telephone
equipment was purchased for $7,500 to augment the existing system. The new equipment is expected to have
a useful life of six years. Through an error, the new equipment was debited to Telephone Expense. Wanders
Corporation uses straight-line depreciation.
Instructions
Prepare a schedule showing the effects of the error in dollars on Telephone Expense, Depreciation Expense,
and Net Income for each year and in total beginning in 2018 through the useful life of the new equipment. Use
the following format:
Telephone Expense Depreciation Expense Net income

Overstated Overstated Overstated
Year (Understated) (Understated) (Understated)
———————————————————————————————————————————
2018
2019
2020
2021
2022
2023

Telephone Expense Depreciation Expense Net income
Overstated Overstated Overstated
Year (Understated) (Understated) (Understated)
———————————————————————————————————————————
2018 $7,500 $(1,250)* $(6,250)
2019 (1,250) 1,250
2020 (1,250) 1,250
2021 (1,250) 1,250
2022 (1,250) 1,250
2023 (1,250) 1,250
Total $7,500 $(7,500) -0-
* $7,500  6 = $1,250
Ex. 169
On July 1, 2018, Ashtanga Inc. purchased a used piece of equipment for $65,000. The company spent another
$28,000 overhauling it and getting it ready for use, and $2,000 testing it. Ashtanga estimated the useful life to
be 6 years, and the residual value $5,000. The company uses straight-line depreciation for all its equipment.
Instructions
(a) Prepare the journal entries to record the purchase (assume payments were made in cash) and
depreciation expense for 2018 and 2019.
(b) How much will the accumulated depreciation be on June 30, 2024?

(a) Purchase
Equipment..................................................................................... 65,000
Cash....................................................................................... 65,000
Equipment..................................................................................... 28,000
Cash....................................................................................... 28,000
Equipment..................................................................................... 2,000
Cash....................................................................................... 2,000
(Note these entries could be combined.)
Depreciation 2018
Depreciation Expense................................................................. 7,500
Accumulated Depreciation—Equipment............................... 7,500
($95,000 – $5,000)/6 × 6/12 = $7,500
Depreciation 2019
Depreciation Expense.................................................................... 15,000
Accumulated Depreciation—Equipment.................................. 15,000
($95,000 – $5,000)/6 = $15,000
(b) On June 30, 2024, at the end of the asset’s useful life, the asset will be fully depreciated; therefore, the
accumulated depreciation will be $90,000, the full depreciable amount.
Ex. 170
Arnprior Packing (ANP) tests its property, plant and equipment annually for impairment. On Jan 1, 2018, ANP
purchased equipment for $650,000, and, at Dec 31, 2018, recorded straight-line depreciation based on a ten-
year life with no residual value. However, at Dec 31, 2018, ANP also determined that the recoverable amount
of this equipment was $540,000.
Instructions
(a) What is the formula to determine an impairment loss?
(b) Calculate the equipment’s carrying amount at Dec 31, 2018
(c) Calculate the amount of the impairment loss Arnprior Packing will be required to record at Dec 31, 2018.

(a) The formula to determine the value of an impairment loss is:
Carrying Amount - Recoverable = Impairment

(Cost- Acc. Dep.) Amount Loss
(b) Carrying amount at Dec 31, 2018
$650,000 – $0
—————— = $65,000 annual depreciation expense
10 years
Carrying amount at Dec 31, 2018: $650,000 – $65,000 = $585,000
(c) Impairment Loss $585,000 – $540,000= $45,000
Ex. 171
At the beginning of 2019, Annakin Corp. reviewed the expected useful life and residual value of their main
packaging machine. This machine had cost $850,000 on Jan 1, 2009, had been expected to last for 25 years,
with $75,000 residual value (straight-line depreciation). Now, ten years later, Annakin is revising the expected
life to a total of 30 years (that is, 20 years remaining) with a $50,000 residual value.
Instructions
(a) Calculate the machine’s carrying amount at Dec 31, 2018.
(b) As a result of this revision, will the depreciation expense for 2019 and subsequent years be higher or
lower? Explain. (You do not have do show any detailed calculations.)
(c) With this revision, will Annakin have to revise previous years’ depreciation expense? Why or why not?

(a) Annual depreciation:
$850,000 – $75,000
—————––––— = $31,000
25 years
Carrying amount at Dec 31, 2018: $850,000 – (10 x $31,000) = $540,000
(b) The depreciation expense will be lower, since we are reducing the residual value (increases depreciable
amount) and increasing the expected remaining life from the original ten years left to fifteen.
Optional (not illustrated in text): the revised annual deprecation will be:
$540,000 – $50,000
————––––—— = $24,500
20 years
(c) No, this is considered a change in estimate, and reported in current and future years only (prospectively).
The rationale is that the original calculation for depreciation was based on the best information available at
the time (Jan 2009). Now, ten years later, new information has become available that was not available
before, thus the change should only affect current and future periods.
Ex. 172
Solve for the missing items, assuming straight-line depreciation is used:
Machine A Machine B Machine C

Cost $150,000 $60,000 (i)
Residual value $15,000 (e) $10,000
Useful life 20 years (f) 40 years
Depreciation rate (a) 20% (j)
Annual depreciation amount (b) $12,000 $6,000
Number of years owned 12 3.5 (k)
Accumulated depreciation at disposal date (c) (g) (l)
Proceeds of disposal $42,000 (h) $220,000
Gain (loss) on disposal (d) $2,000 $18,000

Machine A Machine B Machine C
Cost $150,000 $60,000 $(i) 250,000

Residual value $15,000 (e) 0 $10,000
Useful life 20 years (f) 5 years 40 years
Depreciation rate (a) 5% 20% (j) 2.5%
Annual depreciation amount (b) $6,750 $12,000 $6,000
Number of years owned 12 3.5 (k) 8
Accumulated depreciation at disposal date (c) $81,000 (g) $42,000 (l) $48,000
Proceeds of disposal $42,000 (h) $20,000 $220,000
Gain (loss) on disposal (d) $(27,000) $2,000 $18,000
Ex. 173
Hertford Manufacturing Inc. sold two machines in 2018. The following information pertains to the two
machines:
Purchase Useful Residual Depreciation Sale
Machine Cost Date Life Value Method Date Sold Price
#1 $76,000
5 yrs. $6,000Straight-line Jun 30/18 $28,000
#2 $60,000
8 yrs. $3,000Double diminishing- Dec 31/18 $45,000
balance
Instructions
(a) Calculate the depreciation on each machine to the date of disposal.
(b) Prepare the journal entries to record 2018 depreciation and the sale of each machine.

(a) Machine #1
Annual Accumulated
Year Depreciable Amount Depreciation Rate= Depreciation Depreciation
2015 $70,000 20% (1 ÷ 5) $ 7,000* $ 7,000
2016 70,000 20% 14,000 21,000
2017 70,000 20% 14,000 35,000
2018 70,000 20% 7,000* 42,000
*Half a year only.
Machine #2
Carrying Amount Annual Accumulated
Year Beginning of Year  DDB Rate Depreciation Depreciation
2017 $60,000 25% $7,500* $7,500
2018 52,500 25% 13,125 20,625
DDB rate: 1 ÷ 8 = 12.5% x 2 = 25%

*Half a year only.
(b) Machine #1
Cash.............................................................................................. 28,000
Loss on Disposal........................................................................... 6,000*
Accumulated Depreciation—Equipment........................................ 42,000
Equipment............................................................................... 76,000
*$76,000 – $42,000 = $34,000; $28,000 – $34,000 = ($6,000) loss.
Machine #2
Cash.............................................................................................. 45,000
Accumulated Depreciation—Equipment........................................ 20,625
Equipment............................................................................... 60,000
Gain on Disposal..................................................................... **5,625
**$60,000 – $20,625 = $39,375; $45,000 – $39,375 = $5,625 gain.
Ex. 174
Paulson Corporation purchased equipment on January 1, 2016 for $168,000. It is estimated that the equipment
will have a $14,000 residual value at the end of its 8-year useful life. It is also estimated that the equipment will
produce 110,000 units over its 8-year life. On December 31, 2018, Paulson sells the equipment for $85,000.
Paulson produced 20,000 units in 2016, 24,000 units in 2017 and 22,000 units in 2018.
Instructions
(a) Determine the carrying amount of the equipment at December 31, 2018 using the units-of-production
method of depreciation.
(b) Prepare the appropriate journal entry for the sale of the equipment.
Solution 174
(a) Units-of-production method:
Cost – Residual Value $168,000 – $14,000
—————–——— = $1.40 per unit
Total estimated 110,000 units
Units of activity
2016 20,000 units  $1.40 = $ 28,000
2017 24,000 units  $1.40 = 33,600
2018 22,000 units x $1.40 = 30,800
Accumulated depreciation = $92,400
Cost of asset $168,000

Less: Accumulated depreciation - Equipment 92,400
Carrying amount at December 31, 2018 $75,600
(b)
Dec 31/18 Cash .................................................................................. 85,000
Accumulated Depreciation—Equipment............................. 92,400
Equipment................................................................. 168,000
Gain on disposal ($85,000 – $75,600)...................... 9,400
Ex. 175
Coquitlam Corporation, a publicly-traded company, purchased a piece of equipment on January 1, 2017, for
$275,000. It has an estimated useful life of eight years and a $25,000 residual value. Coquitlam uses straight-
line depreciation and has a December 31 year end. At December 31, 2018, the equipment had a recoverable
value of $200,000.
Instructions
(a) Calculate the equipment’s carrying amount at December 31, 2018.

(b) Calculate the amount of the impairment loss at Dec 31, 2018.
(c) Where should the impairment loss be reported in the financial statements?

(a) Calculate the carrying amount at December 31, 2018:
$275,000 – $25,000
————————— = $31,250 annual depreciation expense
8 years
Equipment has been depreciated for 2 years: $31,250  2 = $62,500
(b) Impairment Loss: $212,500 – $200,000= $12,500
(c) The impairment loss is reported in the operating section of the income statement.
Ex. 176
For each item listed below, enter a code letter in the blank space to indicate the usual allocation terminology
for the item. Use the following codes for your answer:
A—Amortized D—Depreciated N—Neither
______ 1. Copyrights ______ 6. Licences
______ 2. Land ______ 7. Equipment
______ 3. Buildings ______ 8. Franchises
______ 4. Patents ______ 9. Goodwill
______ 5. Trademarks ______10. Land Improvements

1. A
2. N
3. D
4. A
5. N
6. N
7. D
8. N
9. N
10. D
Ex. 177
(a) Alpha Corporation purchased equipment in 2011 for $120,000 and estimated a $12,000 residual value at
the end of the equipment's 10-year useful life. At December 31, 2017, there was $75,600 in the
Accumulated Depreciation account for this equipment using straight-line depreciation. On March 31, 2018,
the equipment was sold for $28,000.
Prepare the appropriate journal entries to remove the equipment from the books of Alpha Corporation on
March 31, 2018.
(b) On July 31, 2018, Beta Corporation sold a delivery truck for $10,000. The truck originally cost $38,000 on
January 1, 2010. It was estimated that the truck would have a useful life of 12 years with a residual value
of $2,000. The straight-line method was used.
Prepare the appropriate journal entry to record the sale of the delivery truck. Assume depreciation is up-to-
date.
(c) Gamma Corporation sold office equipment that had a carrying amount of $3,500 for $5,200. The office
equipment originally cost $12,000. It is now estimated that it would cost $16,000 to replace this equipment.
Instructions
Prepare the appropriate journal entry to record the sale of the office equipment. Assume depreciation is up-to-
date.

(a) Depreciation Expense.................................................................... 2,700
($120,000 – 12,000)/10 × 3/12 = $2,700)
Cash.............................................................................................. 28,000
Loss on Disposal........................................................................... 13,700
Accumulated Depreciation—Equipment ($75,600 + $2,700)......... 78,300
Equipment............................................................................... 120,000
(b) Cash.............................................................................................. 10,000

Accumulated Depreciation—Vehicles............................................ 25,500
Loss on Disposal........................................................................... 2,500
Vehicles.................................................................................. 38,000
Accumulated depreciation to July 31, 2018:

$38,000 – $2,000
———————— = $3,000 annual depreciation expense
12 years
8 ½ years have been depreciated, therefore total depreciation would be 8.5 x 3,000 = $25,500.
(c) Cash.............................................................................................. 5,200

Accumulated Depreciation—Equipment ($12,000 – $3,500)......... 8,500
Office Equipment.................................................................... 12,000
Gain on Disposal..................................................................... 1,700
Ex. 178
Prepare the journal entries to record the following transactions for Bermuda Inc., which has a calendar year
end and uses straight-line depreciation.
(a) On June 30, 2018, the company sold office equipment for $22,000. The office equipment originally cost
$34,000 and had accumulated depreciation to the date of disposal of $15,000.
(b) On September 30, 2018, the company sold delivery equipment for $15,500. The equipment was
purchased on January 1, 2016, for $30,000 and was estimated to have a $2,000 residual value at the end
of its 8-year life. Depreciation on the delivery equipment has been recorded through December 31, 2017.

(a) June 30, 2018
Cash.......................................................................................... 22,000
Accumulated Depreciation—Equipment.................................... 15,000
Equipment...................................................................... 34,000
Gain on Disposal ($34,000 – $22,000 – $15,000).......... 3,000
(b) Sept 30, 2018

Depreciation Expense................................................................ 2,625
Accumulated Depreciation—Equipment............................ 2,625
($30,000 – $2,000)/8  9/12 = $2,625)
Cash.......................................................................................... 15,500
Accumulated Depreciation—Equipment ($7,000 + $2,625)....... 9,625
Loss on Disposal ($30,000 – $15,500 – $9,625)....................... 4,875
Equipment......................................................................... 30,000
Ex. 179
(a) A machine that cost $21,000, with accumulated depreciation of $13,000, was sold for $5,400. Calculate
the gain or loss on disposal.
(b) Instead, assume that the machine was retired (no proceeds). Calculate the gain or loss on disposal.
(c) Instead, assume that the machine was sold for $9,500. Calculate the gain or loss on disposal.

(a) $2,600 loss ($21,000 – $13,000 = $8,000 carrying amount; $5,400 – $8,000 = $2,600 loss)
(b) $8,000 loss ($21,000 – $13,000 = $8,000 carrying amount, all loss)
(c) $1,500 gain ($21,000 – $13,000 = $8,000 carrying amount; $9,500 – $8,000 = $1,500 gain)
Ex. 180
Presented below are selected transactions for Cameron Inc. for 2018:
Jan 1 Retired a machine that was purchased on January 1, 2010. The machine cost $350,000, and had
been estimated to have a useful life of 8 years with no residual value.
Jun 30 Sold another machine for $90,000 that was purchased on January 1, 2015. The machine cost
$125,000, and had a useful life of 10 years with no residual value.
Sep 30 Retired a business automobile (no proceeds) that was purchased on September 30, 2012. The car
cost $30,600 and was depreciated on a 6-year useful life with a residual value of $3,600.
Instructions
Record all entries required as a result of the above transactions. Cameron Inc. uses straight-line depreciation
and has recorded depreciation through December 31, 2017.

Jan 1 Accumulated Depreciation—Equipment............................. 350,000
Equipment................................................................... 350,000
(note: machine is at the end of its service life; therefore, fully depreciated)
Jun 30 Depreciation Expense........................................................ 6,250

Accumulated Depreciation—Equipment...................... 6,250

($125,000 ÷ 10) = $12,500 annually  6/12 = $6,250)
Cash................................................................................... 90,000
Accumulated Depreciation—Equipment ($12,500  3.5 yrs) 43,750
Equipment................................................................... 125,000
Gain on Disposal ($90,000 – $81,250)........................ 8,750
Sep 30 Depreciation Expense ($30,600 – $3,600)/6) = $4,500 x 9/12 3,375

Accumulated Depreciation—Vehicles.......................... 3,375
Accumulated Depreciation—Vehicles ($4,500  6)............ 27,000

Loss on Disposal................................................................ 3,600
Vehicles....................................................................... 30,600
Ex. 181
Birmingham Limited sold the following two assets in 2018:
Furniture Equipment
Cost $143,500 $162,000
Purchase date July 1, 2013 January 1, 2015
Useful life 8 years 5 years
Residual value $5,000 $33,000
Depreciation method Straight-line Straight-line
Date sold September 30, 2018 August 1, 2018
Selling price $30,000 $75,000
Instructions
Record all entries required to update depreciation and record the sales of the two assets in 2018. Birmingham
has a December 31 year end.

Aug 1 Depreciation Expense........................................................ 15,050
Accumulated Depreciation—Equipment...................... 15,050
($162,000 – $33,000)/5  7/12 = $15,050
Cash................................................................................... 75,000
Accumulated Depreciation—Equipment**.......................... 92,450
Equipment................................................................... 162,000
Gain on Disposal ($162,000 – $75,000 – **$92,450)... 5,450
**(($162,000 – $33,000)/5  3)+ $15,050 = $92,450
Sep 30 Depreciation Expense........................................................ 12,985

Accumulated Depreciation—Furniture......................... 12,985
($143,500 – $5,000)/8  9/12 = $12,985
Cash................................................................................... 30,000
Accumulated Depreciation—Furniture*............................... 90,891
Loss on Disposal ($143,500 – $30,000 – *$90,891)........... 22,609
*($143,500 – $5,000)/8  5.25 years = 90,891
Furniture...................................................................... 143,500
Ex. 182
(a) On January 1, 2018, Delta Corp. purchased a patent for $1,500,000. The patent's legal life is 20 years but
the company estimates that its useful life will only be 5 years from the date of acquisition. As an addition to
the patent account shortly after acquisition, Delta paid legal costs of $180,000 in successfully defending
the patent in an infringement suit. Any legal costs to be capitalized will be amortized effective the date of
acquisition of the patent, January 1. Prepare the entry to amortize the patent at year end, December 31,
2018.
(b) On January 1, 2018, Epsilon Ltd. purchased a franchise from the Wing Food Company for $500,000. The
franchise is for an indefinite time period and gives Epsilon the exclusive rights to sell Wing products in a
particular territory. Record the acquisition of the franchise and any necessary adjusting entry at year end,
December 31, 2018. Epsilon follows ASPE.
(c) In 2018, Kappa Corporation incurred research costs of $350,000 to develop a new product. Record this
event.

(a) December 31, 2018
Amortization Expense.................................................................... 336,000
Accumulated Amortization—Patents....................................... 336,000
(To record patent amortization)
($1,500,000 + $180,000) /5 years = $336,000
(b) January 1, 2018

Franchise....................................................................................... 500,000
Cash....................................................................................... 500,000
(To record acquisition of Wing Food franchise)
December 31, 2018—no entry.

The franchise has an indefinite life, therefore is not amortized. However, if there are indicators of
impairment, then the franchise should be tested for impairment and written down if necessary.
(c) 2018
Research Expense........................................................................ 350,000
Cash....................................................................................... 350,000
(To record research expense for the current year)
Ex. 183
On January 1, 2016, Paint Palette Inc. paid $122,000 to obtain a patent. The cost of the patent registration was
$2,500. The patent has a legal life of 20 years and a useful life of 15 years. On December 31, 2017
management determined that the recoverable amount of the patent is $100,000. On January 1, 2018, Paint
Palette incurred a cost of $15,000 related to an unsuccessful patent infringement lawsuit.
Instructions
(a) Record the purchase of the patent.
(b) Record amortization expense for the year ended December 31, 2017.
(c) Determine if there is an impairment loss on the patent and if so, record the December 31, 2017 journal
entry.
(d) Record the legal costs incurred on February 1, 2018.
Solution 183
(a) January 1, 2016
Patent............................................................................................ 124,500
Cash....................................................................................... 124,500
(To record patent purchase and registration: $122,000 + $2,500)
(b) December 31, 2017

Amortization Expense.................................................................... 8,300
(To record patent amortization)
($124,500) /15 years
(c) Carrying amount at December 31, 2017:
Patent has been depreciated for 2 years: $8,300  2 = $16,600
Impairment Loss: $107,900 – $100,000= $7,900
December 31, 2017

Impairment Loss............................................................................ 7,900
(d)
February 1, 2018
Legal Expense............................................................................... 15,000
Cash....................................................................................... 15,000
(To record legal costs for unsuccessful patent infringement lawsuit)
Ex. 184
(a) A patent acquired for $2,250,000 at the beginning of the current year expires in 10 years and is expected
to have economic value for 5 years. Present the adjusting entry to amortize the patent for the current year.
(b) A renewable trade name purchased for $225,000 was recorded in the accounts at the beginning of the
current fiscal year. Determine the minimum amount to be amortized for the current fiscal year.

(a) Amortization Expense ($2,250,000/5)............................................ 450,000
(b) Zero. Trade names normally have indefinite lives and are not amortized.
Ex. 185
For each of the following unrelated transactions, (a) determine the amount of the amortization for the current
year, and (b) present the adjusting entries required to record amortization at year end.
1. Costs of $37,000 were incurred on January 1 to obtain a patent. Shortly thereafter, $35,000 was spent in
legal costs to successfully defend the patent against competitors. The patent has an estimated legal life of
12 years.
2. A company purchased a renewable trademark for $80,000.

1. (a) Legal costs to successfully defend a patent are capitalized.
($37,000 + $35,000)  12 years = $6,000)
(b) Amortization Expense............................................................. 6,000

Accumulated Amortization—Patents................................ 6,000
2. (a) Trademarks have an indefinite life and are not amortized.

(b) No entry required.
Ex. 186
During the current year, Graydon Inc. incurred several expenditures. Briefly explain whether the expenditures
listed below should be recorded as an operating expense or as an intangible asset. If you view the expenditure
as an intangible asset, indicate the number of years over which the asset should be amortized. Explain your
answer.
(a) Spent $82,500 in legal costs in a patent defence suit. The patent defence was unsuccessful.
(b) Purchased a trademark from another company. The trademark can be renewed indefinitely, and Mastiff
expects the trademark to contribute to revenue indefinitely.
(c) Acquired a patent for $5,600,000. The company selling the patent has spent $1,625,000 on its research
and development. The patent has a remaining life of 12 years.
(d) Graydon is spending considerable time and money in developing a different patent for another product. So
far, $3,600,000 has been spent this year on research and development. Graydon is hopeful it will obtain
this patent in the next few years, but has not been successful as yet.

(a) Operating Expense. Only successful patent defence costs can be capitalized.
(b) Intangible Asset. Trademarks are renewable. Since the trademark has an indefinite life, it is not amortized.
(c) Intangible Asset. The patent cost of $5,600,000 should be amortized over its remaining useful life of 12
years because this is a shorter period of time than the patent’s legal life. The amount the selling company
spent is irrelevant for Graydon.
(d) Operating Expense. All research costs must be expensed. Development costs must also be expensed,
unless they satisfy strict criteria.
Ex. 187
Nova Futures Inc. is a company that creates new products through research and development and has a
December 31 fiscal year. In fiscal 2017, Nova Futures spent $452,000 researching a new process. The
research was completed in fiscal 2018 at an additional cost of $80,000; as well, $5,000 was spent obtaining
the patent. Then further costs related to the patented process of $180,000 were incurred to create a
marketable product. The product was completed and ready for market half-way through the fiscal year. The
new product was advertised heavily in 2018 at a cost of $90,000. Soon after the launch of the new product,
$60,000 was spent defending the patent. The defence was successful. The product is expected to have a life
cycle of 5 years.
Instructions
Explain how the expenditures above should be presented in the financial statements for 2017 and 2018.
Support your answer with calculations.

2017
$452,000 research costs shown as an expense on the income statement.
2018
Patent – shown as an intangible asset on the statement of financial position:

Cost ($5,000 + $180,000 + $60,000)............................................. $245,000
Amortization $245,000 ÷ 5 years x 1/2 year .................................. 24,500
Net amount shown on the statement of financial position.............. $220,500
Research – $80,000 research costs shown as an expense on the income statement.
Advertising – $90,000 shown as an expense on the income statement.
Ex. 188
Indicate in the blank spaces below, the section of the statement of financial position where the following items
are reported. Use the following code to identify your answers:
PPE Property, plant, and equipment
I Intangible assets
O Other asset
E Expense
_____ 1. Goodwill _____ 6. Research Costs

_____ 2. Land Improvements _____ 7. Land
_____ 3. Buildings _____ 8. Franchises
_____ 4. Accumulated Depreciation _____ 9. Accumulated Amortization
_____ 5. Trademarks _____ 10. Equipment

1. O Goodwill
2. PPE Land Improvements
3. PPE Buildings
4. PPE Accumulated Depreciation
5. I Trademarks
6. E Research Costs
7. PPE Land
8. I Franchises
9. I Accumulated Amortization
10. PPE Equipment
Ex. 189
Presented below is information related to tangible and intangible assets at year end, December 31, 2018, for
Round Mound Corporation:
Buildings......................................................................$ 1,200,000
Goodwill...................................................................... 160,000
Patents........................................................................ 392,000
Land............................................................................ 1,500,000
Accumulated Depreciation—Buildings......................... 600,000
Accumulated Amortization—Patents........................... 196,000
Instructions
Prepare a partial statement of financial position for Round Mound Corporation that shows how the above items
would be presented.

ROUND MOUND CORPORATION
Statement of Financial Position (Partial)
December 31, 2018
Property, plant, and equipment

Land................................................................................. $1,500,000
Buildings.......................................................................... $1,200,000
Less: Accumulated depreciation—Buildings.................... _ 600,000 600,000
.................................................................................... 2,100,000
Intangible assets
Patents............................................................................. $392,000
Less: Accumulated amortization—Patents....................... 196,000 196,000
Goodwill.................................................................................. 160,000
Ex. 190
The following information is available from recent annual reports of Hanson Corp. and Jasper Corp.:
(in millions)
Competitor A Competitor B
Net income $ 550 $ 1,645
Sales 19,500 23,500
Average total assets 13,000 8,500
Instructions
(a) Based on this information, calculate the following ratios for each company to one decimal:
1. Profit margin.
2. Asset turnover.
3. Return on assets.
(b) What conclusion concerning the management of assets can be drawn from these data?

(a) Hanson Jasper_
1. Profit margin $550 ÷ $19,500 $1,645 ÷ $23,500
= 2.8% = 7.0%
2. Asset turnover ratio $19,500 ÷ $13,000 $23,500 ÷ $8,500

= 1.5 times = 2.8 times
3. Return on assets $550 ÷ $13,000 $1,645 ÷ $8,500

= 4.2% = 19.4%
(b) All of Jasper’s numbers are better than those of Hanson. Jasper is using its assets much more efficiently.
It is generating close to the same amount of sales with only two-thirds the assets. Jasper’s return on
assets is more than four and a half times that of Hanson. It also has two and a half times the profit margin.
Ex. 191
Calculate the missing amounts in the table.
Acme Corp. Barker Limited Connors Inc.

Sales $8,500,000 (d) (g)
Operating income 950,000 $280,000 (h)
Average total assets (a) (e) $600,000
Profit margin (b) 7% 4%
Asset turnover (c) (f) 3 times
Return on assets 20% 14% (i)
Acme Corp. Barker Limited Connors Inc.

Sales $ 8,500,000 (d) $4,000,000 (g) $1,800,000
Operating income 950,000 280,000 (h) 72,000
Average total assets (a) 4,750,000 (e) 2,000,000 600,000
Profit margin (b) 11.2% 7.0% 4.0%
Asset turnover (c) 1.8 times (f) 2.0 times 3 times
Return on assets 20.0%% 14% (i) 12.0%
Acme
(a) $950,000 ÷ 20% = $4,750,000
(b) $950,000 ÷ $8,500,000 = 11.2%
(c) $8,500,000 ÷ $4,750,000 = 1.8 times
Barker
(d) $280,000 ÷ 7% = $4,000,000
(e) $280,000 ÷ 14% = $2,000,000
(f) $4,000,000 ÷ $2,000,000 = 2.0 times
Connors
(g) $600,000 x 3 = $1,800,000
(h) $1,800,000 x 4% = $72,000
(i) $72,000 ÷ $600,000 = 12.0%
Ex. 192
After its first year of operations, Thompson Industries reported the following in its 2018 financial statements (in
thousands):
2018 2017
Net sales $125,650 $83,750
Net income 10,975 5,550
Total assets 150,510 69,800
Instructions
(a) Calculate Thompson’s return on assets, asset turnover and profit margin.
(b) What are two ways Thompson could increase its return on assets?
Solution 192
(a) 2018 2017
1. Profit margin $10,975 $5,550
$125,650 $83,750
= 8.7% = 6.6%
2. Asset turnover ratio $125,650_ $83,750 ($150,510+69,800)/2

($69,800+$0)/2
= 1.1 times = 2.4 times
3. Return on assets $10,975 $5,550

($150,510+69,800)/2 ($69,800+$0)/2
= 10.0% = 15.9%
(b) If a company wants to increase its return on assets, it can do so either by increasing the margin it
generates from each dollar of goods that it sells (profit margin), or by trying to increase the volume of
goods or services that it sells (asset turnover).
Ex. 193
Assuming that the ratios are initially positive, complete the following table to show the effect of the transactions
on the ratios (I - increase; D - decrease; NE - no effect; X - can't determine). Assume all other items are
unchanged.
Profit Return on Asset

Margin Assets Turnover
1. Increase in net sales
2. Increase in average total assets
3. Decrease in profit margin due to decrease in net Leave
income Blank
4. Decrease in net income
5. Decrease in asset turnover due to decrease in net Leave
sales Blank

Profit Return on Asset
Margin Assets Turnover
1. Increase in net sales D X I
2. Increase in average total assets X D D
3. Decrease in profit margin due to decrease in net Leave
D NE
income Blank
4. Decrease in net income D D NE
5. Decrease in asset turnover due to decrease in net Leave
I X
sales Blank
MATCHING QUESTIONS SET 1
194. Match the items below by entering the appropriate code letter in the space provided.
A. Property, plant, and equipment F. Units-of-production method

B. Depreciation G. Diminishing-balance method
C. Carrying amount H. CCA or Capital Cost Allowance
D. Residual value I. Operating expenditures
E. Straight-line method J. Capital expenditures
_____ 1. Small expenditures which primarily benefit the current period.
_____ 2. Cost less accumulated depreciation.
_____ 3. An accelerated depreciation method used for financial statement purposes.
_____ 4. Tangible resources that are used in operations and are not intended for resale.
_____ 5. Results in an equal amount of depreciation each period.
_____ 6. Expected cash value of the asset at the end of its useful life.
_____ 7. Process of allocating the cost of equipment over its service life.
_____ 8. Material expenditures that increase an asset's operating efficiency, productive capacity, or useful
life.
_____ 9. The Canada Revenue Agency term for depreciation for income tax purposes.
_____ 10. Method used if a vehicle is depreciated based on the kilometres driven.
ANSWERS TO MATCHING SET 1

1. I
2. C
3. G
4. A
5. E
6. D
7. B
8. J
9. H
10. F
MATCHING QUESTIONS SET 2
195. Match the items below by entering the appropriate code letter in the space provided.
A. Development costs F. Return on assets

B. Loss on disposal G. Goodwill
C. Licences H. Impairment loss
D. Revaluation model I. Intangible asset
E. Asset turnover J. Research
______ 1. The amount by which the carrying amount of an asset exceeds its recoverable amount.
______ 2. Arise from the application of research to a plan or design for a new or improved product or
process.
______ 3. Examples are franchises and trademarks.
______ 4. Under IFRS, alternative to the cost model.
______ 5. Can be identified only with a business as a whole.
______ 6. Operating rights to use property granted by a government agency.
______ 7. When the carrying amount of an asset is greater than the proceeds received from its sale.
______ 8. Original planned investigation done to gain new knowledge and understanding.
______ 9. Calculated as net income divided by average total assets.
______10. Indicates how efficiently a company uses its total assets to generate sales.
ANSWERS TO MATCHING SET 2

1. H
2. A
3. I
4. D
5. G
6. C
7. B
8. J
9. F
10. E
SHORT-ANSWER ESSAY QUESTIONS
S-A E 196
Distinguish between a capital expenditure and an operating expenditure for cash outlays subsequent to
acquisition of an asset. Give an example of each type. Explain how each type is recorded.
Solution 196
An expenditure is classified as a capital expenditure if it increases (rather than maintains) the efficiency,
productive capacity, or expected useful life of the asset, and therefore benefits more than one accounting
period. Capital expenditures are usually large amounts that occur infrequently during the life of the asset.
Overhauling a truck engine is an example. The cost is debited to the asset account.
An expenditure is classified as an operating expenditure if it maintains the operating efficiency and expected
productive life of the asset and primarily benefits the current accounting period only. Operating expenditures
are usually for small amounts that occur frequently throughout the life of the asset and are often called
ordinary repairs. An example is replacing the tires on a truck or repainting a building. The cost is debited to an
expense account.
S-A E 197
In general, how does one determine whether or not an expenditure should be included in the acquisition cost of
property, plant, and equipment?
Solution 197
The acquisition cost of property, plant, and equipment would include all expenditures deemed reasonable and
necessary to prepare the asset for its intended purpose (use) and place.
S-A E 198
Comment on the validity of the following statements. “As an asset loses its ability to provide services, cash
needs to be set aside to replace it. Depreciation accomplishes this goal.”
Solution 198
This comment is not valid. Depreciation is the process of allocating to expense the cost of property, plant, and
equipment over its useful (service) life in a systematic manner. Consider the journal entry to record
depreciation: Debit Depreciation Expense and credit Accumulated Depreciation. There is no cash included in
this journal entry so recognizing depreciation for an asset does not result in the accumulation of cash for
replacement of the asset. The balance in Accumulated Depreciation represents the total amount of the asset’s
cost that has been charged to expense to date; it is not a cash fund.
S-A E 199
Depreciation is generally calculated using one of three different methods: straight-line, units-of-production or
diminishing-balance. Assuming no corrections or revisions to estimates, compare the three depreciation
methods distinguishing the annual and cumulative impact (e.g. over a 3-year period) each would have on:
(a) cash
(b) the income statement
(c) the statement of financial position
Solution 199
(a) As depreciation does not involve cash, there is no effect on an annual or cumulative basis. Depreciation is
a non-cash item. The entry to record depreciation is:
Depreciation Expense XXX

Accumulated Depreciation XXX
(b) As the application of each method is different, so too will the annual depreciation expense and impact on
the income statement. Straight-line depreciation expense will be the same each year, while the units-of-
production depreciation expense will vary in accordance to use. The diminishing-balance (accelerated)
method will result in higher depreciation expense in early years and lower in the assets latter years. On a
cumulative basis, however, all three depreciation methods will result in the same total amount of
depreciation and total impact on net income.
(c) The accumulated depreciation reported on the statement of financial position will increase each year in
accordance to the annual depreciation expense reported on the income statement which will be different
as discussed in part (b). The total amount of accumulated depreciation will be the same on a cumulative
basis under all three methods.
S-A E 200
This year, Meadows Manufacturing Ltd. decided the useful life of one of their heavy machines should be
extended to 15 years from the 10 years originally estimated when they purchased it six years ago. The
machine is still operating well, and management sees no reason why it can’t be useful for the extra five years.
The President, when instructing you (the Controller) to change the estimated useful life, says “I guess we’ll
have to go back and correct the depreciation on the past six years’ income statements to reflect this new
estimate. Ah well, with computer programs, I’m sure you’ll find the math quite easy.”
Instructions
Is the President correct in saying that the previous six income statements will have to be corrected? If not,
explain your reasoning.
Solution 200
The President is correct in that the depreciation for this machine will have to be revised. However, since this
change is the result of new information (and not the correction of an earlier error), this will be treated as a
change in estimate. Changes in estimate are accounted for prospectively, that is, in the current and future
periods only. Thus, it will not be necessary to go back and “correct” the previous years’ figures.
S-A E 201
What is a “significant component?” How does it affect calculation of depreciation?
Solution 201
If a property, plant and equipment item has individual components for which different depreciation methods are
appropriate, then the cost must be split between the components, and each component depreciated
separately. For instance, a building will consist of the roof, walls, heating/cooling system, plumbing system,
flooring, etc. If these components should be depreciated differently (e.g., over different lengths of time or with
different methods) then they must be set up in separate accounts and depreciated separately. However, any
components that can be depreciated by the same method and have similar useful lives can be grouped
together.
S-A E 202
What is the difference between accounting depreciation and capital cost allowance?
Solution 202
Capital Cost Allowance (CCA) is the income tax “version” of depreciation. Accounting depreciation is not an
expense for income tax purposes. Instead, all taxpayers are required to use the CCA rules for income tax
purposes, regardless of the method of depreciation used for financial statements.
S-A E 203
Tackle-it Unlimited (TU) is a company specializing in the restoration of old homes. To showcase its work, TU
purchased an old Victorian home in downtown Azilda for $125,000. A new heating and air-conditioning system
was installed for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom
cabinets were added, and the floors and trim were refurbished to their original condition, all of which cost
$75,000.
The project was such a success, that TU decided to purchase another large home, this time in nearby Hanmer.
A realtor offered to purchase the home in Azilda for $175,000. He plans to lease it as luxury short-term
apartments for visiting dignitaries. TU decided that a modest return was all that was required, and so they
agreed to sell. Only afterward did they learn that they had a $10,000 loss on the sale. The president of the
company, Dale Velletta, does not believe that a loss is possible. "We sold that house for more than we paid for
it," she said. "I know we put some money in it, but didn’t we take depreciation on it for three years? How in the
world can we have a loss?"
Instructions
Write a short memo to Ms. Velletta explaining how it would be possible to have a loss. Do not try to use
specific numbers.
Solution 203
MEMO
DATE: today
TO: Ms. Dale Velletta, President
FROM:Martha King, Accountant
RE: Loss on Azilda showcase house
I understand that you are concerned about the loss on the Azilda showcase house. You have
said that a loss is not possible, since we sold the house for more than we paid for it.
Ordinarily, it would not be possible for any asset to generate a loss when it is sold for more than
the original purchase price. Accounting rules allow for writing down impaired assets, and
depreciation also reduces the cost basis. In our case, however, we had added enough costs
that it was almost like we purchased the house twice. Thus, we had a carrying amount of
$185,000 at the time of the sale, even though we had taken three years' depreciation.
To prevent the problem in the future, however, you could have the Accounting Department
calculate the carrying amount before you negotiate a sales contract. That way, you'll know the
effect of the transaction on our net income—though you should remember that carrying amount
is not a substitute for fair value; we'll still have to rely on real estate agents for that.
Let me know if you have further questions.
(signature)
S-A E 204
Given the below independent situations identify which depreciation method, if any, best reflects the pattern in
which the asset’s future economic benefits are expected to be consumed. Provide an explanation for any items
where depreciation or amortization is not applicable.
(a) Alfin Industries purchased a patent from another company that is expected to expire in 10 years. The
patent has an estimated useful life of 8 years.
(b) Carmichael & Sons purchased a building and a parcel of land for $750,000. The building has an estimated
useful life of 20 years.
(c) Commander Inc. purchased Captains Ltd. resulting in goodwill of $450,000.
(d) Bags & Lifts purchased computer equipment with an estimated useful life of 3 years. The equipment is
expected to be heavily used in the initial years of service.
(e) Honeycomb Inc. purchased machinery equipment for $250,000. The equipment has an estimated useful
life of 5 years and an estimated output total of 175,000 units - 25,000 will be produced in the first year;
30,000 in the second year and 35,000 in the third year; 40,000 in the fourth year and 45,000 in the fifth
year. Honeycomb earns $6/unit produced.
(f) LLB registered a trademark with the Canadian Intellectual Property Office 14 years ago. The company
intends on renewing the trademark next year.
Solution 204
(a) The patent is an intangible asset with a finite life. Intangible assets are typically amortized on a straight-
line basis. As the patent has a finite life its amortizable cost should be allocated over the shorter of the
estimated useful life and the legal life. The shorter would be the useful life of 8 years.
(b) The building should be amortized on a straight-line basis over the estimated useful life of 20 years. Land is
not depreciated because its usefulness and revenue-producing ability generally remain intact as long as
the land is owned.
(c) Goodwill has an indefinite life so it is not amortized but tested annually for impairment.
(d) Given that the computer equipment is expected to be heavily used in the initial years of services, the
diminishing-balance method would be most appropriate.
(e) While the useful life of the machinery has been expressed in both years and volume of output, the units-of-
production method is the best match for Honeycomb as revenue (the economic benefit) is based on units
produced and production can be measured.
(f) The trademark has an indefinite life so it is not amortized but tested annually for impairment.
S-A E 205
Physician Reference Service (PRS) provides services to physicians including research assistance, diagnosis
coding, and medical practice software, including an advanced medical record cross-referencing system. PRS
is aggressive in monitoring other firms' offerings and ensuring that its services are comparable to their
competition.
Because of its need to stay abreast of new product offerings, PRS spends a lot of money sending
professionals to trade shows. In addition, PRS has agreements with several clients whereby the client requests
a presentation of a competitor's services. A PRS employee poses as an employee of the client's office and
attends the presentation, obtaining as much data and sample information as possible. The cost of the travel
and attending presentations is charged to Product Development and expensed during the current year.
In April of this year, PRS began selling a software product substitute before the competitor's software was
released. The competitor, Compu-Med, sued for copyright infringement and won the case. PRS had to
withdraw its product from the market and pay $1.5 million in damages. PRS immediately negotiated an
agreement with Compu-Med to sell Compu-Med's product (since it was prohibited from offering its own version
for five years). This agreement cost an additional $1.3 million, but it allowed PRS to continue to offer a full line
of services.
PRS' accountant, Tina Bianco, initially recorded the cash payments as "Loss from Lawsuit" and "Product
Development," respectively. However, H. J. Franz, the controller, instructed Tina to create an intangible asset
named "Goodwill" and charge both costs to this account. "We're protected from another lawsuit as long as this
agreement is in effect," he says. "It's about as close to goodwill as we'll ever get from our competitors, and
besides, there is no point in amortizing this cost.”
Instructions
(a) What are the ethical issues here?
(b) What should Tina do?
Solution 205
(a) The following are some of the ethical issues:
 whether PRS should continue to obtain its information by the deceptive methods it has been using
 whether PRS makes a practice of developing software based on observations made at competitor’s
presentations
 whether the attempt to hide the losses from the lawsuit and software agreement is indicative of the
state of the accounting system at PRS
(b) Tina should explain to her boss that goodwill arises only when a business is purchased. The second
payment for $1.3 million could be viewed as part of the lawsuit costs (they would not have been paid if the
lawsuit was won) and should also be expensed. On the other hand one could view that payment as the
purchase of a licence but further information would have to be obtained with regard to the exact nature of
this arrangement including its duration. She cannot allow her integrity to be compromised by mis-recording
these economic events. She could also point out that Mr. Franz's attempt to delay recognition of the losses
will undoubtedly be discovered by the auditors. All the records will then likely be subjected to much more
scrutiny than would otherwise be the case.
S-A E 206
Under International Financial Reporting Standards (IFRS), what are the requirements regarding presentation of
long-lived assets?
Solution 206
Normally, long-lived (non-current) assets are presented under such headings as Property, Plant and
Equipment, Intangible Assets, and Goodwill. Note Goodwill must be presented separately as it is not
considered to be an intangible asset. IFRS has extensive requirements regarding presentation.
Either on the statement of financial position or in the notes, IFRS also requires disclosure of:
1. whether the entity is using the cost or revaluation model
2. cost and accumulated depreciation/amortization of each major asset class
3. reconciliation of the carrying amounts of major asset classes at the beginning and end of the period. Thus
they must show additions, disposals, and depreciation/amortization
4. if the revaluation model is being used, any increases or decreases from revaluations must be disclosed
5. the policy on testing long-lived assets for impairment. If there is any impairment loss recorded, a
reconciliation of the impaired asset(s) must also be disclosed including any reversals of impairment losses
incurred in the current year
On the income statement, depreciation/amortization expense, gains/losses from disposal, and impairment
losses are all to be presented in the operating section.
S-A E 207
Jill Jinnah, the CEO of ProfitMax Inc., has just come back from a luncheon meeting at the Chamber of
Commerce. She has come to talk to you, ProfitMax's Chief Accountant, about some of the items discussed at
the luncheon. Jill tells you that there was a lot of talk about improving a company's performance with respect to
its use of long-lived assets (property, plant, and equipment and intangibles). Some people seemed to think that
asset turnover was the key while others thought return on assets was more important. One person commented
that it was all just accounting numbers and that different depreciation or amortization methods and estimates
could change it all anyway. She would like you to clarify these points for her.
Instructions
Prepare, in point form, the points you would make to clarify these items for Jill.
Solution 207
 Asset turnover and return on assets are both useful in evaluating the use of long-lived assets.
 Return on assets is an overall measure of profitability. It is calculated as profit divided by average total
assets.
 Asset turnover shows how efficiently a company is at generating sales with a given amount of assets. It is
calculated as net sales divided by average total assets.
 The key difference is that asset turnover considers only sales, while return on assets considers
profitability.
 Both ratios are useful.
 Depreciation and amortization policies and methods will affect both ratios because it will impact the
average total assets. If depreciation or amortization is taken at a higher rate, net assets will be lower and
the ratios will improve. For return on assets, the net income will also decrease if depreciation or
amortization is taken at a higher rate.
OBJECTIVE FORMAT QUESTIONS
208. GTC Inc. purchased two new assets on January 1, 2016, the beginning of its fiscal year: a forklift
(purchase price, $16,600; residual value, $1,600) and a sorting machine (purchase price, $60,000; residual
value, $0). When determining the annual depreciation for these assets, GTC’s accountant assumed that the
forklift and sorter had useful lives of 6 years and 10 years, respectively, and used these estimates to record
depreciation each year. Unfortunately, the forklift should have had a useful life of 10 years, while the sorter
should have had a useful life of 6 years. A full year of depreciation was recorded for both the forklift and sorter
in 2016, 2017, and 2018 before the error was discovered.
Instructions
Select all of the statements that are correct.
(a) The depreciation expense for the 2018 fiscal year for the forklift was understated by $1,000.
(b) The depreciation expense for the 2018 fiscal year for the sorter was understated by $4,000.
(c) Income before tax for the 2018 fiscal year was overstated by $3,000.
(d) The depreciation expense for the fiscal years 2016, 2017 and 2018 for the forklift should be $1,500 in each
year.
(e) The carrying amount for the sorting machine at December 31, 2018 should be $40,000.
(f) The asset turnover ratio was overstated for the 2018 fiscal year.
(g) The return on assets ratio for the 2018 fiscal year was understated.
Solution 208
(b), (c), and (d) are correct.
(a) The depreciation expense for the forklift has been overstated by $1,000 for fiscal year 2018. Depreciation
was recorded as $2,500 each year (($16,600-$1,600) ÷ 6 years = $2,500) but should have been recorded
as $1,500 each year (($16,600-$1,600) ÷ 10 years = $1,500).
(e) The carrying amount for the sorting machine at the end of fiscal year 2018 should be $30,000 ($60,000 ÷ 6
years = $10,000 x 3 years= $30,000 accumulated depreciation; carrying amount = $60,000 - $30,000 =
$30,000).
(f) The asset turnover ratio is understated. The numerator in this ratio is net sales and this is unaffected by
the fact that depreciation was understated for the 2018 fiscal year. The denominator is the average total
assets. Because depreciation expense has been understated (see calculations below) in each of the past
three years, this denominator will be overstated. Consequently, the turnover ratio will be understated.
Original Correct
Depreciation Depreciation
Forklift $2,500 $1,500
Sorter 6,000 10,000
Total $8,500 $11,500
(g) The effect on the return on assets ratio cannot be determined. The numerator in this ratio is net income
and this will be overstated in 2018 because the depreciation expense is understated. The amount of the
overstatement to income before taxes is $3,000 per year as given in item (c). The denominator in this ratio
is average total assets and this amount will be overstated because lower amounts of accumulated
depreciation have been recorded over the three-year period. Cumulatively, the amount of the
overstatement of the carrying amount of assets is $9,000 ($3,000 x 3 years). Both the numerator and
denominator of this ratio have been overstated. Without knowing the net income and the total asset
amounts, it is not possible to conclude that these overstatements to both the numerator and denominator
will increase or decrease the overall value of this ratio. This is particularly the case because the numerator
was overstated by one year’s effect of the error while the denominator was overstated by the effect of
three years of the error.
209. Determine if the company is using: (1) the straight-line method of depreciation, (2) diminishing-balance
method of depreciation, (3) the units-of-production method of depreciation or (4) it cannot be determined from
the information given.
(a) Urban Corporation deducts the residual value of its depreciable assets from the asset’s cost in order to
calculate the depreciable amount.
(b) In 2018, Leader Industries Ltd. recorded $5,450 in depreciation for its assembly equipment. In 2019,
Leader recorded $5,140 in depreciation for the same equipment. Production volumes have remained
equal each year.
(c) Uphill Ltd. reported the following depreciation schedule for its new office equipment:
Year Units of Depreciation Accumulated Carrying
Production Expense Depreciation Amount
2018 5,000 $3,000 $3,000 $27,000
2019 10,000 5,000 8,000 22,000
2020 12,500 5,000 13,000 17,000
2021 11,000 5,000 18,000 12,000
(d) In determining the annual deprecation on its processing equipment, Skyward Corp. estimated the total
units the machine will be able to process over its useful life.
(e) Airways Inc. depreciates its aircraft based on the number of flight hours each plane can fly over its useful
life.
(f) Country Villas Inc. uses a depreciation rate of 20% per year.
(g) When using this method, no pro-ration is used in determining depreciation expense in the partial years of
acquisition or disposal.
Solution 209
(a) 4. Cannot Be Determined. The company could be using either straight-line depreciation or units-of-
production depreciation as both of these methods deduct residual value from cost in order to arrive at the
depreciable amount when calculating depreciation.
(b) 2. Diminishing-Balance Method. In this case, the company is likely using the diminishing-balance
method as the depreciation expense is declining each year. If the company was using straight-line
depreciation, the yearly amounts would be equal. If the company was using units-of-production method,
and the units of production were stable, the depreciation would also be equal each year.
(c) 1. Straight-Line Method. The company is using the straight-line method as the depreciation is equal each
year (except for year 1 where they only claimed a portion of the depreciation, as the asset was acquired
mid-year). They are not using the units-of-production method, as the depreciation is equal each year, while
production volumes have varied.
(d) 3. Units-of-Production. In this case, the company is likely using the units-of-production method using the
total units the machine will produce as the allocation base for depreciation.
(e) 3. Units-of-Production. The company is likely using the units-of-production method (or more
appropriately, in this case, the units-of-activity method). They are using the total flight hours each plane
can fly as the allocation base for depreciation.
(f) 4. Cannot Be Determined. It depends on whether the percentage is being applied to a declining balance
or to the original cost less residual value. If it is the former, the company would be using the diminishing-
balance method. Whereas if it is the latter, the company would be using the straight-line method.
(g) 3. Units-of-Production. Under the units-of-production method, depreciation expense is calculated based
on the amount of units produced, which is automatically pro-rated to the amount of time the asset is
available for use.
210. Select all of the following statements that are correct.

(a) Estimated production expected over an asset’s useful life can be used as the denominator in the formula
for straight-line depreciation.
(b) If a company uses the diminishing-balance method of depreciation instead of the straight-line method, the
company will report higher amounts of net income over the useful life of the asset depreciated, if all other
items on the income statement remain unchanged during those years.
(c) The formula for depreciation using the diminishing-balance method is represented as: (cost – accumulated
depreciation) x depreciation rate
(d) If revenues and other expenses remain equal, a company will experience diminishing net income if the
company use the units-of-production method of depreciation.
(e) A company will often use straight-line depreciation so that the company’s accounting policies are
consistent with depreciation required under the provisions of the Income Tax Act.
(f) When assets are comprised of components that have different useful lives and straight-line depreciation is
used, an average useful life is often used as the denominator for calculating depreciation expense.
(g) An impairment loss is recorded as a credit to the accumulated depreciation account of the asset that is
impaired.
(h) If there are indicators that an asset’s value may be impaired due to obsolescence or declining demand for
the products produced by the asset, a company must record an impairment loss on its financial
statements.
Solution 210
Answers (b), (c), and (g) are correct.
(a) The formula for straight-line depreciation uses the asset’s useful life as the denominator. The formula is:
(Cost −Residual Value)

Depreciation Expense=
Useful Life
(d) The depreciation expense claimed under the units-of-production method will vary based on the number of
units produced each year. If a company produces more units each year, then net income will decline. If the
company produces varying numbers of units each year, depreciation expense will increase or decrease
accordingly.
(e) For income tax purposes, the Canadian Revenue Agency requires that companies use capital cost
allowance (CCA), which is usually a diminishing-balance method of depreciation with a 50% rate in the
year of the asset’s purchase.
(f) If assets are made up of components that have different useful lives, the cost of each component should
be determined and separate calculations of depreciation should be made for each component.
(h) Under ASPE, if there are indicators that an asset’s value may be impaired due to obsolescence or
declining demand for the products produced by the asset, a company must first perform an impairment
test by determining the asset’s recoverable amount. If the carrying amount exceeds an asset’s recoverable
amount, then the company should record an impairment loss on its financial statements.
211. Determine whether the following that should be included or excluded when determining the cost of
intangible assets on a company’s statement of financial position:
(a) Legal fees incurred successfully defending a patent in a patent infringement case
(b) Development costs for a new software application that is expected to be on the market in six months
(c) Salaries paid to research staff who are researching new product ideas
(d) Wages to an employee to develop a logo and brand for the company
(e) Fee paid an external company to develop a trademark
(f) The excess of the amount paid to purchase the net identifiable assets over the underlying fair value of
those net identifiable assets
Solution 211
(a) Included. Legal fees incurred successfully defending a patent are expected to have a future benefit and
are; therefore, recorded as an intangible asset under the account Patents.
(b) Included. In this case, the development costs appear to relate to a product that is feasible, has a
completion date, and is intended to be sold by the company. Therefore, it is expected that these costs will
have a future economic benefit to the company. In this case, the costs will be capitalized as an intangible
asset under the account Development Costs.
(c) Not included. In accounting, research costs are distinguished from development costs. Research costs
are not considered to be assets because the existence of future benefits cannot yet be determined.
Therefore, these costs are expensed in the accounting period they are incurred.
(d) Not included. In this case, the trademark is internally developed. Therefore, these costs are not recorded
as an intangible asset because they are difficult to distinguish from the cost of developing the business as
a whole.
(e) Included. Since the cost of the trademark was paid to an external company, it is easily distinguished from
other costs incurred by the company and because the cost is expected to benefit future periods, it should
be capitalized as an intangible asset under the account Trademarks.
(f) Included. This is considered goodwill. Goodwill will be recorded as an asset on the statement of financial
position under the account Goodwill. It is not amortized because its useful life is considered indefinite but
goodwill must be assessed annually to determine if the carrying amount of the goodwill has been impaired,
in which case the carrying amount would be reduced accordingly.
212. The following data is provided for Crystal Homes Ltd. for the years 2017, 2018 and 2019:
CRYSTAL HOMES LTD.

Select Financial Data
2017 2018 2019
Net Sales $4,500,000 $5,200,000 $5,800,000
Net Income $785,000 $875,000 $1,127,000
Total Assets $7,200,000 $7,750,000 $7,750,000
Instructions
Select all of the statements that are correct.
(a) The asset turnover ratio for 2018 is 0.70 and for 2019 is 0.75.
(b) The profit margin for 2018 is 16.8% and for 2019 is 19.4%.
(c) Crystal Homes’ return on assets for 2018 is 11.7% and for 2019 is 14.5%.
(d) The sales generating ability of the company’s assets has declined since 2018.
(e) Crystal Homes’ return on assets ratio was higher in 2019 because both its asset turnover and profit margin
improved in 2019.
(f) The average return on assets ratio for this industry is 9%. Considering this, Crystal Homes’ return on
assets is very good.
(g) In 2020, Crystal Homes’ is expecting to invest in new assets and by the end of the year; total assets
should be $500,000 higher at the end of that year compared to the end of 2019. The company also
expects to increase sales and net income by 20% over 2019. If these results materialize, the company’s
return on assets will increase by 2.4% over 2019.
(h) In 2020, Crystal Homes is expecting to invest $750,000 in new assets and by the end of the year; total
assets should be $750,000 higher at the end of that year compared to the end of 2019. The company also
expects to increase sales by 15% and net income by 10%. If these results occur, the company’s profit
margin will increase over 2019.
Solution 212
(a), (b), (c), (e), (f), and (g) are correct while (d), and (h) are incorrect.
The following chart shows the correct calculations for each year.
Crystal Homes Ltd. (dollar amounts in thousands)

2017 2018 2019 2020 (Part g) 2020 (Part h)
Net Sales $4,500 $5,200 $5,800 $6,960.0 $6,670.0
Net Income $785 $875 $1,127 $1,352.4 $1,239.7
Total Assets $7,200 $7,750 $7,750 $8,250.0 $8,500.0
Ratios:
Asset Turnover 0.70 0.75 0.87 0.82
Profit Margin 17.44% 16.83% 19.43% 19.43% 18.59%
ROA 11.71% 14.54% 16.91% 15.26%
Formulas:
($7,200 + ($7,750 + ($7,750 + ($7,750 +
Average total $7,750) / 2) = $7,750) / 2) = $8,250) / 2) = $8,500) / 2) =
assets $7,475 $7,750 $8,000 $8,125
Asset Turnover $5,200/$7,475 $5,800/$7,750 $6,960/$8,000 $6,670/$8,125
Profit Margin $785/$4,500 $875/$5,200 $1,127/$5,800 $1,352.4/$6,960 $1,239.7/$6,670

ROA $875 / $7,475 $1,127/$7,750 $1,352.4/$8,000 $1,239.7/$8,125
(d) The asset turnover ratio demonstrates a company’s ability to generate sales with their assets. From 2018
to 2019, the asset turnover has improved by 0.05.
(h) The profit margin in 2020, in this scenario, will be 18.59%, which is a reduction of 0.84% over 2019.
LEGAL NOTICE
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.
The data contained in these files are protected by copyright. This manual is furnished under licence
and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval system,
modified, made available on a network, used to create derivative works, or transmitted in any form or
by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the
prior written permission of John Wiley & Sons Canada, Ltd.

Reporting and Analyzing Long-Lived Assets

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CHAPTER 9

REPORTING AND ANALYZING LONG-LIVED ASSETS

LOD: E = Easy M = Medium H = Hard

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF

LOD: E = Easy M = Medium H = Hard

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF

LOD: E = Easy M = Medium H = Hard

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True/False MC = Multiple Choice Ma = Matching

CHAPTER LEARNING OBJECTIVES

4. Land improvements are generally debited to the Land account.

26. When an asset is retired, a gain or loss must be recorded.

32. An intangible asset must be identifiable.

35. All research costs should be capitalized when incurred.

36. Impairment losses on goodwill are never reversed.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

42. Asset retirement costs are

45. A characteristic of property, plant, and equipment is that it is

49. The cost of land does not include

52. Which of the following is not true for an operating expenditure?

56. The expected costs to retire an asset are called

59. Which of the following is not an advantage of an operating lease?

61. Which of the following is included in the cost of constructing a building?

63. Which of the following is not an acceptable method of depreciation?

64. The carrying amount of property, plant, and equipment

66. Depreciation is a process of

67. The cost of a depreciable long-lived asset is expensed

68. The carrying amount of an asset is equal to the

69. Which of the following is not a consideration when calculating depreciation?

(b) the cost of the asset

71. In calculating depreciation, residual value is

78. The diminishing-balance method of depreciation produces a(n)

Use the following information for questions 79–81.

82. Management should select the depreciation method that

to be applied against the carrying amount each year is

96. Units-of-production is an appropriate depreciation method to use when

97. The calculation of depreciation using the diminishing-balance method

Use the following information for questions 98–99.

98. What is the depreciation expense for calendar 2017?

101. Which of the following statements is not true?

102. A change in the estimated useful life of equipment requires

104. Which of the following statements is incorrect?

108. The carrying amount of an asset is the difference between the

112. If disposal of an asset occurs during the year, depreciation is

119. An intangible asset should

120. The cost of successfully defending a patent in an infringement suit should be

121. An asset that cannot be sold separately in the market place is

122. Goodwill can be recorded

125. Which of the following is not considered to be an intangible asset?

127. The cost allocation of an intangible asset is referred to as

128. The cost of a finite intangible asset is

(a) Legal Expense.

131. Copyrights are granted by the Canadian Intellectual Property Office

134. In recording the acquisition cost of an entire business

135. Research costs

136. A loss on disposal of an asset is reported in the financial statements

137. Depreciation expense and impairment losses are presented in

140. Intangible assets

141. Boulder Corp. has the following assets:

Use the following information for questions 144–146.

During 2018, Richlieu Corporation reported:

144. Richlieu’s return on assets is