Friedlan4e SM Ch08

CHAPTER 8
Capital Assets
QUESTIONS
Q8-1.
(The list of assets isnt comprehensive. Students could identify other reasonable choices).
a.
A gas station has gas pumps, a cash register, reservoirs (for gas) and other fixtures, signs,
racks, and potentially a building and land.
b.
A university has student residences, various buildings with classrooms and offices for
faculty, desks and other furniture, library books, computers, land, trucks and equipment
for maintaining the grounds.
c.
A convenience store has a cash register, counters, display shelves for merchandise, signs,
and refrigeration units for dairy products and ice cream.
d.
A hotel has the hotel building, beds and furnishings for the rooms, carpeting, elevators,
office equipment, decorations and furnishings for the lobby, cleaning equipment.
e.
A dairy farm has pasture, fencing, a barn, tractors, storage buildings, milking machines,
tanks to store milk, a loader to handle manure and feed, a silo to store feed, cows.
f.
An electric utility has generating stations, office furniture and wiring, transmission wires,
computer equipment.
g.
A golf course has land, a clubhouse building, golf carts, lawnmowers, irrigation systems,
and other maintenance equipment.
Q8-2.
An intangible asset is an asset that doesnt have physical substance. Intangible assets differ from
tangible assets in that tangible assets can be touched and seen; they have physical substance.
Examples of intangible assets are patents, trademarks, taxi licences, copyrights, and franchises.
Tangible assets include buildings, furniture, machinery, and motor vehicles.
Q8-3.
In accounting, goodwill is the amount a purchaser of an entity pays for an entity over and above
the fair value of the purchased entitys identifiable assets and liabilities on the date the entity is
purchased. Goodwill can represent many things: reputation, earning power, synergies,
efficiencies, management, and other difficult to identify and measure intangible assets of a
company that the acquired company has built up by carrying on businessassets that are real
and valuable but that traditional accounting doesnt attempt to measure. It isnt possible to know
what goodwill is because its calculated as a residual. Goodwill could also represent
overpayment for an acquired entity. Conceptually, an entity doesnt have to be purchased for it to
have goodwill. However, under IFRS/ASPE an entity must be purchased if the goodwill is to
appear on the financial statements.
John Friedlan, Financial Accounting: A Critical Approach, 4th edition
Solutions Manual
Page 8-1
Copyright 2013 McGraw-Hill Ryerson Ltd.
Q8-4.
Capital assets are depreciated because they contribute to the earning of revenue over more than
one period and are used up in the process. Depreciation represents the using up of capital assets
over their useful lives. Capital assets are used up by the passage of time and obsolescence. To
properly measure income under accrual accounting, its necessary to allocate the cost of capital
assets to expense over time to match the cost of the assets to the revenues in the periods when the
asset contributed to earning revenues.
Q8-5.
Inventories are held for sale or to be included in the production of goods that will be sold while
capital assets are purchased for use in providing or producing goods and services to customers. A
company could have identical assets, some of which are inventory and some of which are capital
assets. For example, a truck dealer could have one truck that is used for parts delivery and is a
capital asset. The company could also have many identical trucks that are for sale and are
included in inventory. The difference is the purpose for which the asset is being held.
Q8-6.
Depreciation has no effect on an entitys cash flow. Its just the allocation of the cost of a capital
asset to expense over its useful life. Depreciation is added back to net income under the indirect
method of determining cash from operations because it has been deducted from revenues when
calculating net income. Since depreciation doesnt represent a cash flow, the amount is added
back to net income. The idea is that we are trying to adjust net income for non-cash items. Since
depreciation is a non-cash amount that was deducted when calculating net income, its
eliminated by adding it back when determining cash from operations.
Q8-7.
The stock price of a company isnt affected by the depreciation method used because the market
understands that different methods of depreciating capital have no economic impact on the
entity, its performance, or its cash flows. However, stock price is only one consideration in
assessing whether or not the depreciation method of the firm matters. The depreciation method
will affect net income and other financial statement measurements and, therefore, could affect
contracts and decisions that explicitly require the use of financial statement numbers, for
example, management bonuses, employee contract demands, compliance with covenants, etc.
Q8-8.
A capital asset (or asset group) is impaired (under IFRS) when the carrying amount of the assets
exceeds the recoverable amount of the assets. The recoverable amount is the greater of the fair
value less selling cost of the asset and the present value of the assets future cash flows (value in
use). If an asset is impaired its written down to the recoverable amount. Two examples of
impairment includes 1) change in property value due to neighbourhood conditions translating to
lower earning potential from future rentals. 2) A particular drug patent that has reduced earning
potential due to the release of a new drug that is more effective. Under ASPE an asset is
impaired if the carrying amount is greater than the undiscounted cash flow the asset is expected
to generate over its useful life.

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Q8-9.
When tax minimization is the main objective of financial reporting the selection of a depreciation
method is never an issue because the Canada Revenue Agency specifies its own method, called
Capital Cost Allowance (CCA), for calculating depreciation of capital assets for tax purposes.
No matter what method of depreciation is used for financial reporting purposes the method
prescribed by the Income Tax Act must be used for tax purposes. As a result, an entity can
pursue whatever objective it wants for financial reporting.
Q8-10.
The problem with knowledge assets is that their future benefits difficult to assess. Many
intangible assets develop over timefor example, brand names, trademarks, patents, human
resourcesand its difficult to know as the investments in these assets are being made whether
they will lead to resources that provide benefits to the entity. The problem is uncertainty. There
is a great deal of uncertainty about the future benefits of expenditures that may lead to intangible
assets so accounting takes a conservative approach and expenses these costs. Tangible assets are
less problematic because even for an asset that is being constructed, the entity knows that it will
have an asset that can be used (a building, machine, etc.). It isnt as clear with intangibles.
Q8-11.
The $32,000 initial cost of knocking down the wall should be considered part of the cost of
installing the new equipment and should be capitalized. The $44,000 cost of replacing the second
wall that was knocked down accidentally doesnt contribute to getting the new equipment ready
for use and shouldnt be included in the amount capitalized. Instead, the amount should be
expensed when incurred. The extra cost doesnt make the asset better or allow it to be used so it
shouldnt be capitalized.
Q8-12.
Repairs are expensed because they dont provide any future benefits to the entity. In other words,
they dont meet the definition of an asset. Or, repairs simply help the asset perform as intended.
Betterments are expenditures that provide additional future benefits to the entitythey extend
the life of the asset or make the asset more efficient or effective.
Q8-13.
First, its important to recognize that the price a buyer will pay for a capital asset isnt strictly a
managerial decision. The price is determined by market forces. A gain or loss on disposal of a
capital asset is the difference between the proceeds of sale and the carrying amount of the asset
(cost accumulated depreciation). The carrying amount at any time depends on the useful life,
residual value, and the depreciation method selected by management. If a shorter useful life and
a lower residual value are selected the depreciation expense will be higher each year, which
means that carrying amount will be lower. In sum, the choices that affect the carrying amount of
a capital asset affect the amount of gain or loss when the asset is sold, assuming the actual selling
price isnt affected by the amount of gain or loss.

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Q8-14.
A write-down of capital assets is an accrual concept and represents a decrease in the carrying
amount of the asset and a decrease in net income. It has no effect on cash flow. The journal entry
would debit write down or a loss (income statement), which will reduce net income and credit
accumulated depreciation; cash isnt involved. A write-down (off) could expense the full net
amount of an asset. As a result, what was previously classified as an asset is removed from the
balance sheet and expensed. The only transactions or events related to capital assets that have
any cash flow implications are the sale or purchase of an asset.
Q8-15
A writedown means that the carrying amount of a capital asset is reduced and an expense is
recorded for the amount of the writedown. A writedown is required when a capital asset becomes
impaired. The approach to determining whether a capital asset is impaired is different from
determining if inventory is impaired. Also, IFRS and ASPE approach determining impairment
and the amount of an impairment differently. The writedown of capital assets takes a longer-term
perspective while the write-down of inventory has a short-term focus.
Under IFRS a capital asset is impaired if its recoverable amount is less than its carrying amount.
The recoverable amount is the greater of fair value less cost to sell and value-in-use (present
value of the cash flows the asset will generate over its remaining life). The amount of the
writedown is the difference between the carrying amount and the recoverable amount.
Under ASPE a capital asset is impaired if the carrying amount is greater than the undiscounted
cash flows the asset will generate over its remaining life. If that condition is met and the fair
value less cost to sell of the asset is less than the carrying amount the capital asset is written
down. The amount of the writedown is the difference between the fair value less cost to sell and
the carrying amount.
Inventory is written down if its net realizable value on the balance sheet date is less than its
carrying amount. The amount of the writedown is the difference between the NRV and the
carrying amount.
Q8-16.
a.
The lawnmower is equipment that the lawn care company uses to provide its service to
customers.
b.
The Zamboni machine prepares the ice in the arena for a hockey game or other event. If
the ice is in poor condition, the quality of the hockey or skating will be poor and people
will be less likely to pay to see a game or pay to skate on the ice.
c.
The display cases in the jewellery store provide a place to show the stores jewellery to
potential customers.
d.
The waiting-room furniture provides a place for patients to wait until the doctor is ready
to see them. If there was no waiting room furniture, many patients might find another
doctorone who provided a more comfortable environment for waiting.

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e.
The warehouse is necessary to store the auto parts manufacturers inventory so that it can
be available for delivery to customers when ordered.
Q8-17.
Many decisions go into determining the amount of the depreciation expense. Managers must
choose the depreciation method and estimate the assets useful life and residual value. These
estimates must be made at the time the asset is acquired (although changes are allowed) and its
not possible with any certainty what the right estimates are. Different choices will result in
different depreciation expenses.
Q8-18.
Under the cost method a new calf wouldnt be reported on the balance sheet. The calf itself has
no cost associated with its acquisition so there is no basis for measuring it as an asset, although
costs are incurred as a result of birth. For example, there would be veterinarian costs, feed, and
other expenses up until the point when the calf has matured and ready to produce milk. These
costs could be capitalized.
Q8-19.
Accounting policies may not affect an entitys cash flows directly, but they can have secondary
cash flow implications. Different accounting policies will affect accounting measurements such
as net income and cash flows may be based on these measures. For example, cash flows
associated with bonuses, taxes, selling prices of businesses, and compliance with covenants may
be affected by an entitys accounting choices.
Q8-20.
a.
Historical cost is the amount that was paid to acquire the asset plus any costs incurred to
ready the asset for use. Historical cost is useful for income determinationallowing
users to see the costs that were incurred to earn the reported revenue. Historical cost is
also appropriate for tax purposes.
b.
Replacement cost is the amount that would have to be spent to replace a capital asset. The
replacement cost of a capital asset allows the user to relate the current cost of the inputs
of the business to current revenues for a better indication of the profitability of the
business. Replacement cost would also be helpful for predicting the future cash flows
needed to replace the capital assets. This amount would also be useful for insurance
purposes.
c.
Fair value is the amount that would be received from the sale of an asset between
knowledgeable and willing parties within an arms length transaction. The fair value
would be of interest to creditors who have the asset as collateral for a loan or if the
business was no longer a going concern.
d.
Value-in-use is the net present value of the cash flow an asset will generate over its life,
or the net present value of the cash flow that the asset would allow the entity to avoid

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paying. Value-in-use would be useful to investors who are trying to figure out the value
of an entity and predict future profitability.
Q8-21.
Only those intangibles that have been acquired in an arms-length transaction are recorded in the
accounts. Its likely that Company A built the trademark internally by investing in advertising
and promotion to build the name whereas Company B likely purchased its trademark in a
transaction with another entity.
Q8-22.
a.
The effect of using these conservative accounting policies on income is that income will
be lower than if less conservative estimates were made (because more depreciation will
be expensed in the early years). However, if the estimated useful lives are conservative
and assets tend to be used for longer than the estimated period, net income would be
higher in the years beyond the estimated life of the asset.
b.
Because the cost of an asset is expensed more quickly with conservative estimates, the
carrying amount of the asset will be lower when the asset is disposed of than if less
conservative estimates are used. As a result, the gains on disposal of the asset will be
larger (or the losses smaller) with more conservative accounting methods. This discussion
assumes that the proceeds from the sale of an asset are not affected by how the assets
carrying amount. A prospective buyer will consider the value of the asset without
consideration of the seller accounts for it, although the seller might consider the
accounting implications of the sale.
Q8-23.
Capital cost allowance (CCA) is the term used in the Income Tax Act for depreciation of assets
for tax purposes, which means for purposes of determining taxable income and the amount of tax
that must be paid. The purpose of depreciation for accounting purposes is matching and income
determination. The purpose of CCA is influenced by government policy, for example to
encourage investment by companies. The Income Tax Act is very specific about the method and
the rate that must be used for each type of asset. There is little judgement to be exercised. For
depreciation for accounting purposes, the managers must choose the accounting method,
estimate of useful life and residual value of assets. The managers exercise considerable
judgement. Because the Income Tax Act is very specific and because the purposes of
depreciation and CCA are different, its very common to see different CCA deductions and
depreciation expenses.
Q8-24.
a.
Amortization refers to the allocation of the cost (sometimes fair value) of intangible
assets to expense over their useful lives.
b.
Depreciation refers to the allocation of the cost (sometimes fair value) of tangible assets
to expense over their useful lives.

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c.
Depletion is the allocation of the cost of natural resource assets to expense as the
resources are extracted.
The term amortization is often used as the more general term for the allocation of cost (or fair
value) to expense of any capital asset. In the text the term depreciation is used in the more
general sense.
Q8-25.
Yes, its possible for an entity to use a capital asset that is fully depreciated, if the asset continues
to contribute to revenues for a longer period than the original estimate of the useful life. This
situation can occur because estimates are predictions. It isnt possible to know with certainty
how long an asset can or will be used. If an estimate proves to be too short or conservative, the
asset will continue to be used after its fully depreciated. The carrying amount of such an asset
would be zero or equal to its residual value.
Q8-26.
The reason that its necessary to allocate the purchase price to individual assets is that the items
dont all have equal useful lives. The furniture may have a useful life as long as 20 or 25 years.
Its very unlikely that the equipment wouldnt have as long a useful life because it would have
significantly more wear and tear and would need to be replaced. Its also likely that the selling
company didnt purchase these assets at the same time. Some assets may be nearing the end of
their useful lives while other assets would have been recently purchased. For that reason, its
necessary to determine the fair values of the individual assets so that they can be accounted for in
a way that reflects the period of time over which they are likely to contribute to the revenues of
the restaurant. Since allocating the purchase price of a bundle of assets is subjective (the exact
fair value of an asset, especially a used asset, can often not be determined with precision),
managers will have some flexibility in how to allocate the cost. As a result, managers can make
choices to achieve reporting objectives. For example, if the objective were to maximize income
the managers might allocate more of the cost to assets with longer lives. If the objective is to
minimize taxes, then allocating more of the cost to assets that are depreciated more quickly for
tax purposes would serve to defer taxes.

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EXERCISES
E8-1.
a) $100,000 would be capitalized. The HST is refundable so it isnt capitalized.
b) The $12,500 would be capitalized to the equipment as its a cost associated with getting
the asset ready for use.
c) The $6,700 would be capitalized to the asset as its part of the cost associated with
getting the asset ready for use.
d) The $8,000 should be expensed as these costs were incurred due to the mistake by
workers. The amount wasnt necessary to get the asset ready for use.
E8-2.
Straight-line depreciation method
a.
Display cases
$150,000
Taxes (non-refundable)
2,500
Delivery
5,000
Set up
8,000
Total cost
$165,500
Dr.
Dr.
Furniture (asset +)
165,500
Refundable taxes (asset +)
19,500
Cr.
Cash (asset -)
185,000
*Its assumed everything was paid in cash; other assumptions are reasonable.
b.
Straight line
Year
End
Dec. 31
Purchase
1
2
3
4
5
6
$165,500
165,500
165,500
165,500
165,500
165,500
165,500
Cost
RV
UL
165,500
5,000
5
Cost
Accumulated
Depreciation
(AD)
$16,050
48,150
80,250
112,350
144,450
160,500
Carrying
Amount
(CA)
$165,500
149,450
117,350
85,250
53,150
21,050
5,000
Total
Depreciation
Expense
(DE)
$16,050
32,100
32,100
32,100
32,100
16,050
$160,500
purchase price + associated costs

residual value
useful life
Depreciation expense {DE} = (165,500 5,000)/5 years = $32,100

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c. Display cases are sold at the end of year 3 for $25,000. The entry for the year 3 depreciation
expense would be made before the gain or loss is calculated. The carrying amount of the cases at
the end of year 3 was $85,250.
Proceeds
$25,000
Carrying Amount
85,250
Loss ($60,250)
There is a loss of $60,250
At the time of sale, it would be first necessary to record depreciation for the third year:
Dr.
Depreciation expense
32,100
Cr.
Accumulated depreciation
To record the depreciation expense for year 3.
Cash
25,000
80,250
Loss on disposal of furniture
60,250
Cr.
Furniture
To record the sale of the furniture in the third year.
32,100
Dr.
Dr.
Dr.
165,500
E8-3.
Declining balance depreciation method
a.
Display cases
$150,000
Taxes (non-refundable)
2,500
Delivery
5,000
Set up
8,000
Total cost
$165,500
Dr.
Dr.
Furniture (asset +)
165,500
19,500
Cr.
Cash (asset -)
185,000
Dr.
Dr.
Furniture (asset +)
165,500
19,500
Cr.
Cash (asset -)
185,000

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b.
Year End
Dec. 31
Purchase
1
2
3
4
5
6
Declining balance
Accumulated
Depreciation
Cost
(AD)
$165,500
165,500
165,500
165,500
165,500
165,500
165,500
Carrying
Amount
(CA)
$-
$165,500
$-
33,100
86,060
117,836
136,902
148,341
160,500
132,400
79,440
47,664
28,598
17,159
5,000
33,100
52,960
31,776
19,066
11,439
12,159
Total
Cost
Rate
RV
UL
$165,500
40%
5,000
5 years
Depreciation
Expense
(DE)
$160,500

residual value
useful life
Carrying Amount = Cost - AD

DE = Rate * Previous Carrying Amount
AD = Current DE + previous years AD
Note year six depreciation expense is greater than year five even though its only depreciation
for a half the year. This is because the assets useful life has ended (asset is being replaced) at
this time and the remaining amount minus the residual value must be expensed when using the
declining balance method.
c. Display cases are sold at the end of year 3 for $25,000. The entry for the year 3 depreciation
expense would be made before the gain or loss is calculated.
Proceeds
Carrying
amount
Loss
$25,000
47,664
($22,664)
There is a loss of $22,664.

Dr.
31,776
Cr.
To record the depreciation expense for year 3.
Dr.
Cash
25,000
Dr.
117,836
Dr.
Loss on disposal of furniture
22,664
Cr.
Furniture
To record the sale of the furniture in year 3
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31,776
165,500
Page 8-10
E8-4.
a.
Cost
Installation
Training
400,000
25,000
65,000
490,000
Dr.
Computer equipment
490, 000
Cr.
Cash
490, 000
To record the purchase of computer equipment. [The service contract and the refundable taxes
arent included in the capitalized cost of the asset.]
b.
Declining balance
Year End
Dec. 31
Purchase
2017
2018
2019
2020
Cost
$490,000
490,000
490,000
490,000
490,000
Accumulated
Depreciation
(AD)
$0
245,000
367,500
428,750
455,000
Carrying amount
(CA)
$490,000
245,000
122,500
61,250
35,000
Total
Cost
Rate
RV
UL
490,000
50%
35,000
4
Depreciation
Expense
(DE)
$0
245,000
122,500
61,250
26,250
455,000

residual value
useful life
CA= Cost - AD
DE = Rate * Previous Carrying Amount
The depreciation expense in 2020 would reduce the carrying amount of the asset to $35,000, its
estimated residual value. However, given that residual values are imprecise and difficult to
estimate it would also be reasonable not to make an adjustment since the carrying amount would
be close to the estimated residual value. If the full 50% was expensed in 2020 the depreciation
expense would have been $30,625 and the carrying amount $30,625.

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c. The new computer equipment is sold at the end of 2019 for $55,000. The entry for the 2019
amortization expense would be made before the gain or loss is calculated.
Proceeds
Carrying Amount
Loss
$55,000
61,250
(6,250)

Dr.
61,250
Cr.
Accumulated Depreciation
To record the depreciation expense for 2019.
61,250
Dr.
Dr.
Dr.
Cash
55,000
428,750
Loss on disposal of computer equipment
6,250
Cr. Computer equipment
490,000
To record the sale of the computer equipment in 2019.
E8-5.
a.
Cost
Installation
Training
$400,000
25,000
65,000
490,000
Dr.
Computer equipment
490, 000
Cr.
Cash
490, 000
To record the purchase of computer equipment. [The service contract and the refundable taxes
arent included in the capitalized cost of the asset.]
b.
Straight Line
Accumulated
Depreciation
Year End
Carrying
Amount
(AD)
Depreciation
Expense
Dec. 31
Purchase
Cost
490,000
(CA)
490,000
2017
490,000
113,750
376,250
113,750
2018
490,000
227,500
262,500
113,750
2019
490,000
341,250
148,750
113,750
2020
490,000
455,000
35,000
113,750
Total
Cost
490,000
RV
35,000
(DE)
0
455,000

residual value

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UL
useful life
Depreciation expense {DE} =

(purchase price {Cost} - residual value{RV})
useful life {UL}
DE=
113,750
c. The new computer equipment is sold at the end of 2019for $55,000. The entry for the 2019
amortization expense would be made before the gain or loss is calculated.
Proceeds
Carrying Amount
Loss
$55,000
148,750
(93,750)

Dr.
113,750
Cr.
113,750
Dr.
Dr.
Dr.
Cash
55,000
341,250
Loss on disposal of computer equipment
93,750
Cr.
Computer equipment
490,000
To record the sale of the computer equipment in 2019.

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E8-6.
a.
Stamping machine
$60,000
Taxes (non-refundable taxes only)
2,200
Delivery & installation
4,000
Total
$66,200
Dr.
Machinery
66,200
Cr.
Cash
66,200
To record the purchase of the stamping machine. (Payments are assumed to be in cash. Other
assumptions are also possible.
b.
Units of production
Year
End
Dec. 31
Purchase
2017
2018
2019
2020
Cost
$66,200
66,200
66,200
66,200
66,200
Accumulated
Depreciation
(AD)
$0
7,464
44,784
60,956
62,200
# of Units over
life
Cost
RV
UL
500,000
$66,200
$4,000
4
Carrying Amount
(CA)
$66,200
58,736
21,416
5,244
4,000
Total
Depreciation
Expense
(DE)
$0
7,464
37,320
16,172
1,244
62,200
% of
production
% UOP
12.0%
60.0%
26.0%
2.0%
100%
units of
production
#of Units
60,000
300,000
130,000
10,000
500,000
estimate
residual value
useful life
DE=(#units in period/#units over life)*(Cost-RV)

DE = (%UOP)*(Cost-RV)
AD = Current AE + previous years AD
CA = Cost - AD
c. The machine is sold at the end of 2019 for $2,000. The entry for the 2019 depreciation
expense would be made before the gain or loss is calculated. The depreciation expense for 2019,
assuming 75,000 units were sold and no adjustment was made for the reduced total output:
Depreciation for 2019 = 75,000/500,000 x ($66,200 $4,000)
= $9,330
AD (2018)
$44,784

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DE (2019)
AD(2019)
Proceeds
Carrying amount
Loss
9,330
$54,114
$2,000
12,086 ($66,200 $54,114)
$(10,086)

Dr.
9,330
Cr.
Cash
2,000
54,114
Loss on disposal of machinery
10,086
Cr.
Machinery
To record disposal of the stamping machine.
9,330
Dr.
Dr.
Dr.

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66,200
Page 8-15
E8-7.
a.
Stamping machine
$60,000
2,200
4,000
Total
$66,200
Dr.
Machinery
66,200
Cr.
Cash
66,200
assumptions are also possible.
b.
Straight line
Year End
Dec. 31
Purchase
2017
2018
2019
2020
Cost
$66,200
66,200
66,200
66,200
66,200
Cost
66,200
RV
UL
4,000
4 years
Accumulated
Depreciation
(AD)
$0
15,550
31,100
46,650
62,200
Carrying
Amount
(CA)
$66,200
50,650
35,100
19,550
4,000
Total
Depreciation
Expense
(DE)
$0
15,550
15,550
15,550
15,550
$62,200

residual
value
useful life

useful life {UL}
DE=
15,550

CA = Cost - AD
This assumes that the machine was purchased early in 2017.

Solutions Manual
Page 8-16
c. The machine is sold at the end of 2019 for $2,000. The entry for the 2019 Depreciation
$2,000
Proceeds
19,550
CA
$(17,550)
Loss

Dr.
15,550
Cr.
To record the Depreciation expense for 2019.
Cash
2,000
46,650
17,550
Cr.
Machinery
15,550
Dr.
Dr.
Dr.
66,200
E8-8.
a.
Stamping machine
$60,000
2,200
4,000
Total
$66,200
Dr.
Machinery
66,200
Cr.
Cash
66,200
assumptions are also possible.)
b.
Year End
Dec. 31
Purchase
2017
2018
2019
2020
Cost
Rate
RV
Declining balance
Accumulated
Depreciation
Cost
(AD)
$66,200
$0
66,200
33,100
66,200
49,650
66,200
57,925
66,200
62,200
66,200
50%
4,000
Carrying
Depreciation
Amount
Expense
(CA)
(DE)
$66,200
$0
33,100
33,100
16,550
16,550
8,275
8,275
4,000
4,275
Total
$62,000

residual value

Solutions Manual
Page 8-17
UL
4 useful life
CA = Cost - AD
DE = Rate * Previous CA
c. The machine is sold at the end of 2019 for $2,000. The entry for the 2019 Depreciation
$2,000
Proceeds
8,275
CA
$(6,275)
Loss
There is a loss of $6,275.
Dr.
8,275
Cr.
To record the Depreciation expense for 2019.
Cash
2,000
57,925
6,275
Cr.
Machinery
8,275
Dr.
Dr.
Dr.
66,200
E8-9
Asset
a.
b.
c.
d.
Carrying
Amount
Value in use Fair value

Recoverable Writeless cost to
Amount
down
sell
Apartment $18,000,000 $23,000,000 $20,500,000 $23,000,000
$0
building
Patent
7,000,000
3,250,000
2,500,000
3,250,000 3,750,000
Assembly
25,000,000 12,750,000 18,000,000 18,000,000 7,000,000
line
Service
4,500,000
6,000,000
6,250,000
6,250,000
0
centre
Recoverable Amount is the greater of value-in-use and the fair value less cost to sell.

Solutions Manual
Page 8-18
E8-10.
Total Purchase
Equipment #1
Equipment #2
$175,000
75,000
100,000
Dr.
Dr.
Equipment #1
75,000
Equipment #2
100,000
Cr.
Cash
To record the purchase of 2 pieces of equipment.
175,000
Equipment #1 Annual depreciation expense = 75,000/5 = 15,000

Equipment #2 Annual depreciation expense = 100,000/8 = 12,500
Total depreciation expense, equipment = 27,500
Dr.
Depreciation expense, equipment

27,500
Cr.
Accumulated depreciation, equipment
27,500
To record depreciation expense for equipment for December 31, 2018.
E8-11.
a. Purchased a new operating table for the clinic. Capitalize: This asset helps the clinic
provide its services over many periods.
b. Paid for advertising on radio and in community newspapers. Expense: This is the cost of
doing business and doesnt provide a measurable future benefit.
c. Paid to have the clinics lawn cut. Expense: This is considered as maintenance rather than
betterment.
d. Purchased a supply of syringes. Inventoryexpensed when used: The syringes arent a
capital asset. They are consumed when used providing services to clients.
e. Purchased original native art for the waiting room area. Capitalize: The art enhances the
waiting area. Its a capital asset that will be enjoyed by waiting customers for many years.
f. Payment for malpractice insurance for the year for the veterinarians. Expense: This is an
operating expense; it doesnt provide future benefit to the practice. It provides protection
over the year.
g. Payment for replacing windows broken during a storm. Expensed/Capitalize: This is
normally considered a repair. However if the windows were upgraded and as a result reduced
energy cost it may be a betterment which entitles the new windows to be capitalized.
E8-12.
Dr.
Cash
Cr.
Land
Cr.
Gain on sale of land
To record the sale of land in 2018.
3,500,000

Solutions Manual
2,500,000
1,000,000
Page 8-19
E8-13.
a.
Year End
Dec. 31
Purchase
2012
2013
2014
2015
2016
2017
Cost
100,000
100,000
100,000
100,000
100,000
100,000
100,000
Cost
RV
UL
100,000
8,000
10
Straight line
Accumulated
Depreciation
(AD)
0
9,200
18,400
27,600
36,800
46,000
50,600
Carrying
Amount
(CA)
100,000
90,800
81,600
72,400
63,200
54,000
49,400
Total
Depreciation
Expense
(DE)
0
9,200
9,200
9,200
9,200
9,200
4,600
50,600

residual value
useful life

useful life {UL}
DE=
9,200
CA = Cost - AD
June 30, 2017
Proceeds
$37,000
CA
49,400
Loss
(12,400)
Depreciation expense in 2017 was divided in half because the asset was only used for half the
year.
Dr.
4,600
Cr.
To record a half year of Depreciation expense for 2017
Dr.
Dr.
Dr.
Cash
Loss on disposal of equipment
Cr.
Equipment
To record sale of the equipment in 2017
4,600
37,000
50,600
12,400

Solutions Manual
100,000
Page 8-20
b.
Straight line
Year End
Dec. 31
Purchase
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Cost
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
5,000,000
Cost
5,000,000
RV
UL
1,000,000
25 years
Accumulated
Depreciation
(AD)
0
160,000
320,000
480,000
640,000
800,000
960,000
1,120,000
1,280,000
1,440,000
1,600,000
1,760,000
1,920,000
2,080,000
2,240,000
2,280,000
Carrying
Amount
(CA)
5,000,000
4,840,000
4,680,000
4,520,000
4,360,000
4,200,000
4,040,000
3,880,000
3,720,000
3,560,000
3,400,000
3,240,000
3,080,000
2,920,000
2,760,000
2,720,000
Total
Depreciation
Expense
(DE)
0
160,000
160,000
160,000
160,000
160,000
160,000
160,000
160,000
160,000
160,000
160,000
160,000
160,000
160,000
40,000
2,280,000

residual
value
useful life

useful life {UL}
DE=
160,000
CA = Cost - AD
March 31, 2017
Proceeds
$7,500,000
CA
2,720,000
Gain
4,780,000
In 2017 25% of a years depreciation was expensed because the building was sold on March 31.

Solutions Manual
Page 8-21
Dr.
40,000
Cr.
40,000
To record a quarter year of Depreciation expense for 2017
Dr.
Dr.
Cash
Cr.
Equipment
Cr.
Gain on sale
To record sale of the building in 2017
7,500,000
2,280,000
5,000,000
4,780,000
c.
Straight line
Year End
Dec. 31
Purchase
2015
2016
2017
Cost
RV
UL
Cost
60,000
60,000
60,000
60,000
60,000
10,000
5 years
Accumulated
Depreciation
(AD)
0
10,000
20,000
30,000
Carrying
Amount
(CA)
60,000
50,000
40,000
30,000
Total
Depreciation
Expense
(DE)
0
10,000
10,000
10,000
30,000

residual value
useful life

useful life {UL}
DE=
10,000
CA = Cost - AD
December 31, 2017
Proceeds
$30,000
CA
30,000
-
There is no gain or loss on this disposal because CA =

Proceeds
Dr.
10,000
Cr.
To record a full year of depreciation expense for 2017
Dr.
Dr.
Cash
Cr.
Delivery van
To record sale of the delivery van
10,000
30,000
30,000

Solutions Manual
60,000
Page 8-22
E8-14.
a.
b.
c.
d.
e.
f.
Intangible: The design doesnt have physical qualities.

Tangible: Office furniture has physical substance.
Intangible: A right doesnt have physical substance.
Tangible: Land is a tangible asset, since it has physical substance.
Intangible: A right is an intangible asset since it doesnt have physical substance.
Tangible: The building has physical substance.
E8-15.
Fair market value of assets
Fair market value of liabilities
Fair market value of net assets
$25,000,000
6,000,000
$19,000,000
Price paid for 100% of common shares

Goodwill
$22,000,000
19,000,000
$3,000,000
Resolute would report $3,000,000 of goodwill on its consolidated balance sheet.

E8-16.
a.
Fair market value of assets
Fair market value of liabilities
$27,500,000
15,000,000
$12,500,000
Price paid for 100% of common shares

Goodwill
$16,000,000
12,500,000
$3,500,000
b.
Dr.
Write-down of goodwill (income statement)

Cr.
Goodwill (balance sheet)
1,000,000
1,000,000
The goodwill will be reported on the balance sheet at $2,500,000 and the income statement will
show the write-down (an expense) of $1,000,000.

Solutions Manual
Page 8-23
E8-17.
a.
Annual Depreciation expense = ($102,000-12,000)/5 = $18,000
Year End
30-Jun
Purchase
2018
2019
2020
2021
2022
Cost
$102,000
102,000
102,000
102,000
102,000
102,000
Cost
RV
UL
$102,000
$12,000
5 years
Straight line
Accumulated
Carrying
Depreciation
Amount
(AD)
(CA)
$0
$102,000
18,000
84,000
36,000
66,000
54,000
48,000
72,000
30,000
90,000
12,000
Total
Depreciation
Expense
(DE)
$0
18,000
18,000
18,000
18,000
18,000
90,000

residual value
useful life
(
[
[
DE=
])
18,000

CA = Cost - AD

Solutions Manual
Page 8-24
b.
Year
End
30-Jun
Purchase
Declining balance
Accumulated
Depreciation
Cost
(AD)
$102,000
$0
Carrying
amount
(CA)
$102,000
Depreciation
Expense
(DE)
$0
2018
102,000
35,700
66,300
35,700
2019
102,000
58,905
43,095
23,205
2020
102,000
73,988
28,012
15,083
2021
102,000
83,792
18,208
9,804
2022
102,000
90,000
12,000
6,208
Total
Cost
$102,000
Rate
35%
RV
$12,000
UL
5 years
90,000

residual value
useful life
CA = Cost - AD
Note: The Depreciation expense in the sixth year is reduced to reflect the residual value of
$12,000.

Solutions Manual
Page 8-25
c.
i.
Proceeds $45,000
Carrying Amount 30,000
Gain 15,000
Dr.
Cash
45,000
Dr.
72,000
Dr.
Cr.
Equipment
102,000
Gain on disposal of equipment
15,000
To record the disposal of the equipment when straight-line depreciation is used
ii. Proceeds
$45,000
Carrying Amount 18,208
Gain
26,792
Dr.
Dr.
Cash
45,000
83,792
Cr.
Equipment
102,000
Cr.
Gain on disposal of equipment
26,792
To record the disposal of the equipment when declining-balance depreciation is used
d.
The difference in the amount of the gain between the two different methods is a result of timing
and useful life of the asset. In this case using the declining balance method depreciated the asset
faster than using straight line. As a result the gain is smaller using the straight line method
because the carrying amount of the asset at the end of 2021 is greater using straight line.
Therefore the gain (or loss) depends on how the equipment is accounted for. The proceeds from
the sale are not affected by the carrying amount of the asset. Thus, gains and losses are affected
by accounting estimates.

Solutions Manual
Page 8-26
E8-18.
a. Depreciation expense = ($200,000-10,000)/8 = $23,750
Straight line
Year End
30-Jun
Purchase
2018
2019
2020
2021
2022
2023
2024
2025
Cost
$200,000
200,000
200,000
200,000
200,000
200,000
200,000
200,000
200,000
Cost
RV
UL
$200,000
$10,000
8 years
(
DE=
Accumulated
Depreciation
(AD)
$0
23,750
47,500
71,250
95,000
118,750
142,500
166,250
190,000
Carrying
Amount
(CA)
$200,000
176,250
152,500
128,750
105,000
81,250
57,500
33,750
10,000
Total
Depreciation
Expense
(DE)
$0
23,750
23,750
23,750
23,750
23,750
23,750
23,750
23,750
190,000

residual value
useful life
[
[
])
23,750

CA = Cost - AD

Solutions Manual
Page 8-27
ii.
Year End
30-Jun
Purchase
2018
2019
2020
2021
2022
2023
2024
2025
Cost
Rate
RV
UL
Declining balance
Accumulated
Depreciation
Cost
(AD)
$200,000
$0
200,000
60,000
200,000
102,000
200,000
131,400
200,000
151,980
200,000
166,386
200,000
176,470
200,000
183,529
200,000
190,000
$200,000
30%
$10,000
8 years
Carrying
Amount
(CA)
$200,000
140,000
98,000
68,600
48,020
33,614
23,530
16,471
10,000
Total
Depreciation
Expense
(DE)
$0
60,000
42,000
29,400
20,580
14,406
10,084
7,059
6,471
190,000

residual value
useful life
CA = Cost - AD
The expense in the last year was $6,471 so that the residual value of the equipment would be
$10,000 at the end of the assets 8-year useful life.

Solutions Manual
Page 8-28
iii.
Year End
30-Jun
Purchase
2018
2019
2020
2021
2022
2023
2024
2025
Units of production
Accumulated
Depreciation
Cost
(AD)
200,000
0
200,000
19,000
200,000
38,000
200,000
66,500
200,000
95,000
200,000
123,500
200,000
152,000
200,000
171,000
200,000
190,000
Cost
RV
UL
$200,000
$10,000
8 years
Carrying
Amount
(CA)
200,000
181,000
162,000
133,500
105,000
76,500
48,000
29,000
10,000
Total
Depreciation
Expense
(DE)
0
19,000
19,000
28,500
28,500
28,500
28,500
19,000
19,000
190,000
% units of
production
% UOP
10.0%
10.0%
15.0%
15.0%
15.0%
15.0%
10.0%
10.0%
100%

residual value
useful life

CA = Cost - AD
b.
In theory it shouldnt matter. If the bank lender officer is sophisticated he/she would realized
there is no difference in the economic condition of the company under the three methods. If the
banker isnt sophisticated or its too difficult or costly for him/her to adjust for the different
methods then the choice the company makes could matter. If the loan amount is based on the
value of assets for collateral then its likely that the company will favour the method that leaves
the highest residual value of the asset (carrying amount). If the bank is focused on the income
statement then a lower depreciation expense will reflect a higher net income. In this case if the
loan application was in the first two years then the units of production method is the best options
since depreciation expense is lowest and the carrying amount of the asset is highest of the three
methods. Latter periods will depend on whether the choice is to have a higher carrying amount
for the asset or a lower depreciation expense.

Solutions Manual
Page 8-29
E8-19.
a.
These expenditures should be expensed because they dont extend the life of the asset or
improve performance. These costs are needed to ensure that the trucks operate as
expected and are useful for the expected life. Its a requirement of the asset.
b.
Presumably, the new colours represent promotion for the airline. This promotion provides
value for the airline by providing a unique identity. The promotional value of the paint
job will last as long as the paint job does, so the cost of the paint job should be
capitalized. Generally promotion costs are expensed but because the paint job provides
other benefits to the plane a case can be made to capitalize.
c.
Replacing the windows is a repair. There is no enhancement to the building and so the
cost should be expensed.
d.
The rewiring improves the service quality that can be offered to customersit provides a
future benefitso the expenditure should be capitalized.
e.
This expenditure doesnt increase the life or efficiency of the computers. Replacing the
CPU is required to have the computers function as originally anticipated. The expenditure
should be expensed when incurred.
f.
Cleaning the carpets doesnt make them better or improve their life. The cleaning cost is
a maintenance cost that should be expensed when incurred.
g.
The cost of the extension should be capitalized. The extension will provide an increased
benefit to the owners of the building buy adding more useable area or more places to rent
out.
h.
Although this training will provide future benefit to the business its difficult to measure
this benefit therefore the costs would be expensed. Human capital isnt recorded as an
asset on the balance sheet. An exception to the treatment of not recording human capital
on the balance sheet may occur when a business purchases another business and human
capital could be part of the goodwill purchased.
E8-20.
If were sure that the building will be demolished at the end of the 45 years, there are only 13
years remaining in the useful life of the building so the roof should be depreciated over 13 years.
Its unreasonable to depreciate the roof over a longer period since the roof provides no benefits if
the building underneath it isnt there. The benefits from the roof will be received equally over
time, so the straight-line method is appropriate. Since the roof cant be sold when the building is
demolished it has a zero residual value.

Solutions Manual
Page 8-30
E8-21.
The following table indicates the costs that should be included in the cost of the pool.
Item
Included Excluded
i. Permits
$1,000
ii. Design
8,000
iii. Redesign
$5,000
iv. Clearing
v. Pool
vi. Damage
12,000
150,000
22,000
vii. Meals
2,000
viii. Penalties
9,000
ix. Damage
x.
Patio
5,500
45,000
xi. Wiring
15,000
xii. Plants
9,200
Reason
Necessary cost to construct the pool.
Should be excluded if these are incremental
costs over what would have been charged had
the changes been originally included. In other
words, if the design would have been say
$13,000 and the changes were originally
planned, then this cost should be capitalized. If
the costs were incurred because the changes
were required after construction began, then
they shouldnt be capitalized. The latter
interpretation is used here.
If the damage had to occur to build the pool
then the cost should be capitalized. If the
damage wasnt necessary and could have been
avoided then it should be expensed. The former
interpretation is taken here.
Necessary cost to construct the pool. (Perhaps
not necessary but part of the labour cost to build
the pool.)
If these penalties were incurred for good reason
(perhaps not to disturb guests at certain times)
they should be capitalized as part of the cost of
the pool.
This damage appears to have been avoidable so
it shouldnt be capitalized.
Necessary cost to construct the pool. Possible
that these should be capitalized and amortized
separate from the pool (perhaps different useful
life).
Necessary cost to construct the pool. Possible
that these should be capitalized and amortized
separate from the pool (perhaps different useful
life).
The plants should be capitalized but probably
separately from the pool.
$273,200 $10,500

Solutions Manual
Page 8-31
E8-22.
Note to help ratio analysis
If the numerator of a ratio increases or the denominator decrease then the whole ratio will
increase.
If the numerator of a ratio decreases or the denominator increase then the whole ratio will
decrease.
If the effect on the numerator increases the ratio and the effect on decreases the ratio
(conflicting) then the amount that is smallest will have the greatest impact and determine which
way the ratio is going to change. For example, if the current ratio is greater than 1 (i.e. CA is
larger than CL) and CA increase by the same amount as CL (CA is showing increase ratio and
CL is showing decrease in ratio, conflicting which way the ratio should go), thus CL is the
smaller amount and the determining factor on the ratio. In this case the ratio would decrease.
Return on assets = (NI + After tax interest expense)/Average TA;
PM% = NI/Sales;
Current ratio = CA/CL;
D/E ratio = L/OE;
Fixed Asset Turnover = Revenue/Average Fixed Asset
Note: the following table indicates the effect on the ratios in the year of the transaction. Different
effects may occur in future periods.
Return on assets
a. Writedown of a machine.
Decrease
b. Changes in fair value are Increase
included in net income.
c. Equipment is purchased for
cash and depreciation is
expensed in the year of
purchase.
d. Capitalize development costs.
Costs were incurred in cash and
depreciation will begin in a
future period.
Profit
margin
percentage
Current
ratio
Debt-toequity ratio
Fixed-asset
turnover
ratio
Decrease
Increase
No Effect
No Effect
Increase
Decrease
Increase
Decrease
Decrease
Decrease
Decrease
Increase
Decrease
No Effect
No Effect
Decrease
No Effect
Decrease
a.
Dr. Write down (OE-)
Cr. Capital Asset (A-)
Overall, the assets, owners equity, and net income will decrease (conflicting ROA ratio).
Average total assets decrease less than net income (the denominator is an average) so the net
effect is to decrease ROA.

Solutions Manual
Page 8-32
b.
Dr. Land (A+)
Cr. Gain (OE+)
c.
Dr. Equipment (A+)
Cr. Cash (A-)
Dr. Depreciation (OE-)
Cr Accumulated depreciation (A-)
Assumption is made that equipment is paid for in cash. The purchase decreases the current ratio
(cash decreases). ROA decreases because net income decreases and total assets increase
d.
Net income isnt affected by capitalizing development costs. Depreciation of development costs
from previous years isnt considered here. Its also assumed development costs are paid in cash.
Dr. Development costs (A +)
Cr. Cash (A-)
Current assets would decrease but total assets would remain the same. There is no effect on net
income or owners equity. There is no effect on the fixed asset turnover ratio because
development costs are an intangible asset, not PPE.
E8-23.
Note to help ratio analysis
If the numerator of a ratio increases or the denominator decrease then the whole ratio will
increase.
If the numerator of a ratio decreases or the denominator increase then the whole ratio will
decrease.
If the effect on the numerator increases the ratio and the effect on decreases the ratio
(conflicting) then the amount that is smallest will have the greatest impact and determine which
way the ratio is going to change. For example, if the current ratio is greater than 1 (i.e. CA is
larger than CL) and CA increase by the same amount as CL (CA is showing increase ratio and
CL is showing decrease in ratio, conflicting which way the ratio should go), thus CL is the
smaller amount and the determining factor on the ratio. In this case the ratio would decrease.
Return on assets = (NI + After tax interest expense)/Average TA;
PM% = NI/Sales;
Current ratio = CA/CL;
D/E ratio = L/OE;
Fixed Asset Turnover = Revenue/Average Fixed Asset
Note: the following table indicates the effect on the ratios in the year of the transaction. Different
effects may occur in future periods.
Solutions Manual
Page 8-33
Return on
assets
a. Sale of a building
Ambiguous
b. Recoverable amount No Effect
c. An intangible asset No Effect
Profit margin
percentage
Current
ratio
Debt-toequity
ratio
Fixed-asset
turnover
ratio
Increase
No Effect
No Effect
No Effect
No Effect
Decrease
Decrease
No Effect
No Effect
Increase
No Effect
No Effect
Decrease
Decrease
Increase
No Effect
was acquired.
d. Expense
costs.
research
Decrease
a.
Dr.
Dr.
Notes Receivable (A+)

Accumulated depreciation (A+)
Cr. Building (A-)
Cr. Gain on Building (OE+)
Return on asset is ambiguous because we dont know how large the gain on sale is and we dont
know the proportional change in net income and average total assets. Profit margin percentage
increases because the building is sold at a gain and so net income increases.
b.
The greater of the value-in-use and the fair value less selling cost is called the recoverable
amount. If this amount is less than the carrying amount then there is a write-down. Since this
didnt happen there is no change.
c. Since there are no factors that limit the useful life of the intangible asset there will be no need
to amortize it, thus no expense and no change in net income or owners equity. We also can
assume that cash was paid for the new asset thus a decrease in current asset but no effect to total
assets.
d.
The effect of expensing research costs is compared to net income before the research costs is
expensed. Thus net income decreases as a result of expensing research. Its also assumed
research costs are paid in cash.
Dr. Research expense
Cr. cash
Higher expense and fewer assets mean lower net income, equity, and assets. Overall, the assets,
owners equity, and net income will decrease (conflicting ROA ratio). Average total assets
decrease less than net income (the denominator is an average) so the net effect is to decrease
ROA.

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Page 8-34
E8-24.
Owners
equity
Total
assets
Cash from
operations
Investing
cash
flows
(cash
flow
statement
Total cash
flow
Net income
Gross margin
No effect
No effect
No effect No effect No effect
Increase
Decrease
No effect
No effect
No effect No effect No effect
Increase
Decrease
Decrease*
No effect
Increase
Decrease
No effect
No effect
Decrease
Decrease**
Decrease
Decrease
Decrease
e. Building
Increase
No effect
Increase Increase
Fair Value
increase
*Assumes equipment depreciation isnt included in COGS
** Assumes that repairs are a product cost and included in COGS
No effect
No
effect
No
effect
No
effect
a. An
intangible
asset no
factors limit
its useful
life.
b. Capitalize
development
costs.
c. Purchase
equipment
d. Repairs
Decrease
No effect
E8-25.
Fixed Asset Turnover Ratio
Revenue
Average PPE
Average Capital Asset
Beginning Fixed Assets+ Ending Fixed Assets

2
2017
=
=
=
=
Beginning PPE + Ending PPE

2
5,250,000 + 6,125,000
2
5,687,500
Revenue
Average PPE
12,525,000
5,687,500

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Page 8-35
2.20
2018
Average Capital Assets
=
=
Average Capital Asses
=
=
Beginning PPE + Ending PPE

2
6,125,000+5,925,000
2
6,025,000
Revenue
Average PPE
16,750,000
6,025,000
2.78
The increase in the fix asset turnover ratio indicates improving efficiency in the use of PPE to
generate sales. Sales increased by a larger proportion that average PPE, which means that
amount of sales per dollar of PPE has increased.

Solutions Manual
Page 8-36
E8-26.
Assumption is no depreciation was taken in the first year of acquisition.
Year End
Purchase
Cost
450,000
2015
2016
Straight line
Accumulated
Carrying
Depreciation
Depreciation
Amount
Expense
(AD)
0
(CA)
450,000
(DE)
450,000
56,250
393,750
56,250
450,000
112,500
337,500
56,250
2017
450,000
168,750
281,250
56,250
2018
450,000
225,000
225,000
56,250
Total
Cost
$450,000
RV
$0
UL
8 years
DE=
225,000

residual value
useful life
[
[
])
56,250

Proceeds
210,000
Carrying Amount
225,000
Loss
(15,000)
The balance in accumulated depreciation after 4 years (assuming zero salvage) =

4 x ($450,000 0)/8= $225,000
Dr.
Dr.
Dr.
Cash
210,000
225,000
15,000
Cr.
Equipment
To record the disposal of heavy machinery in 2018.
450,000
The $210,000 proceeds from selling the equipment will appear in the investing section of the
statement of cash flows. The loss will need to be added back in the operating section if the
indirect method is used. However, the loss doesnt affect operating cash flows. Overall there is a
positive cash flow despite the loss.

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Page 8-37
E8-27.
Straight line
Accumulated
Carrying
Depreciation
Depreciation
Amount
Expense
(AD)
(DE)
(CA)
1,500,000
Year End
Purchase
Cost
1,500,000
2013
1,500,000
200,000
1,300,000
200,000
2014
1,500,000
400,000
1,100,000
200,000
2015
1,500,000
600,000
900,000
200,000
2016
1,500,000
800,000
700,000
200,000
2017
1,500,000
1,000,000
500,000
200,000
Total
Cost
$1,500,000
RV
$100,000
UL
7 years
(
DE=
1,000,000

residual value
useful life
(
[
[
])
200,000
DA = Current DE + previous years AD

CA = Cost - AD
Proceeds
$425,000
Carrying Amount
500,000
Loss
(75,000)
Dr.
Dr.
Dr.
Cash
425,000
1,000,000
75,000
Cr.
Equipment
To record the disposal of machinery in 2018.

Solutions Manual
1,500,000
Page 8-38
Declining balance
Year End
Cost
1,500,000
Purchase
Accumulated
Carrying
Depreciation
Depreciation
amount
Expense
(AD)
(CA)
1,500,000
(DE)
2013
1,500,000
375,000
1,125,000
375,000
2014
1,500,000
656,250
843,750
281,250
2015
1,500,000
867,188
632,813
210,938
2016
1,500,000
1,025,391
474,609
158,203
2017
1,500,000
1,144,043
355,957
118,652
Total
Cost
$1,500,000
Rate
25%
RV
$100,000
UL
7 years
1,144,043

residual value
useful life
CA = Cost - AD
Proceeds
$425,000
Carrying Amount
355,957
Gain
69,043
Dr.
Dr.
Cash
425,000
1,144,043
Cr.
Machinery
Cr.
Gain on disposal of machinery
To record the disposal of the machinery
1,500,000
69,043
Declining balance depreciates the machinery at a much faster rate than straight line in the first
few years of the equipments. It isnt until the 7th year that straight line catches up. As a result
the early disposal of the equipment resulted in a loss for straight line, not enough depreciation
was expensed year over year, and a gain using declining balance, too much depreciation taken.
(Of course depreciation is intended to reflect the NRV of a capital asset throughout its life.)
While the choice of depreciation method affects what is reported in the financial statements, it
doesnt affect the economic reality of the company. The economic position of the company is the
same. The representation of that reality is different. Depreciation is meant to allocate the cost of
the equipment over the revenue it helped to earn, and not the outlay involved in acquiring the
equipment. Therefore depreciation doesnt affect cash flow as its a non-cash transaction.

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Page 8-39
E8-28
a. No effectwould be deducted from net income in the calculation of cash from operations
using the indirect method.
b. No effect
c. Investing cash outflow
d. No effectwould be added back to net income in the calculation of cash from operations
e. Investing cash inflow
f. Operating cash outflow
g. No effect would be added back to net income in the calculation of cash from operations
h. Investing cash outflow.
i. Financing cash inflow. Until the equipment is purchased there wont be a cash outflow for
investing.
E8-29.
a.
Given the half-year rule in the first year, the maximum CCA that can be claimed in 2017
is [ x 30% of $25,000] = $3,750.
b.
The maximum in 2018 is [30% of ($25,000 3,750)] = $6,375.
c.
On a 15 year straight-line basis without salvage, the annual depreciation expense would
be $1,667. DE = [(25,000-0)/15]
d.
Managements estimate of useful life has no effect on CCA. The Income Tax Act clearly
specifies how CCA is calculated for different types of assets. Importantly, for financial
reporting purposes managers have choices regarding depreciation method, useful life, and
residual value. These choices dont exist for tax purposes.
e.
The amounts in a. and c. are different because the half-year rule doesnt apply for
financial reporting. Useful life and residual value arent important for calculating CCA
but are used when calculating depreciation expense for financial reporting. Financial
accounting has a choice of method (straight line, declining balance, or units of
production) whereas declining balance with the half year rule and a prescribed rate is
used for tax.

Solutions Manual
Page 8-40
E8-30.
a. The carrying amount for land and building would be $7,500,000 and $10,500,000
respectively.
b. The balance in the accumulated depreciation account would be:
Proportion of building not depreciated = 19/25 = 0.76
Gross amount reported for the building = $10,500,000/0.76 = $13,815,789
Accumulated depreciation = Gross amount Net amount
= $13,815,789 $10,500,000
= $3,315,789
c. The change in the value of land and building would be reflected in the statement of
comprehensive income under revaluation surplus, which is included in other comprehensive
income. This revaluation surplus is included in accumulated other comprehensive income in
the equity portion of the balance sheet.
d. Benefits Reporting assets at fair value is more relevant than reporting at cost. It terms of
land and building, in particular land, presenting the assets at fair value is a better
representation of the value of the company. This is particularly true for property owning firms
where the value of the firm maybe understated unless property owned is reflected at fair
value. Having a more current measure is more valuable than a historical, but if the land and
building are to be used for operating purposes for their useful lives the relevance of current
fair value is limited because the land and buildings arent going to be sold.
Problems The revaluation amount is only as accurate as the date the asset was revalued.
Therefore unless the firm revalues the asset on a frequent basis, the value of the asset will
never be accurate. Also, estimating the value of many assets, often land and buildings, is very
subjective. Its also costly to regularly revalue assets. Depreciation expense would increase,
which would lower net income in periods there is a depreciation expense.

Solutions Manual
Page 8-41
PROBLEMS
P8-1.
*** This is a sample solution and students should look at the factors that might affect their
decision on a depreciation policy***
The problem should be regarded from two levels. The first consideration is the actual utilization
of the cars and the second is the objectives of financial reporting. The useful life of the car would
depend on the extent to which the vehicle would be used each year. If the vehicle were to be used
extensively, it would perhaps be appropriate to expect that the car would be replaced as quickly
as three years. This decision would be based on an estimate of when the vehicle would begin to
require frequent and substantial repairs or would become unreliable, in which case the restaurant
would need to replace the vehicle. If the restaurant was to hire casual employees who may
carelessly drive the vehicle, plans to replace the vehicle sooner might be appropriate. The
anticipated residual value could be estimated by reference to wholesale values of used cars that
are three years old with the anticipated mileage and condition that is expected at that time. That
said, an estimated useful life of between three and six years would probably be acceptable.
The accountant might also consider the objectives of financial reporting. The restaurant has ten
investors who arent involved in management and who rely on the financial statements for
information. The founder might be interested in showing the absentee owners higher net income,
which could be achieved by choosing a longer useful life. If the absentee owners had a close
relationship with the company (getting information beyond the financial statements) financial
reporting could be simplified by using the CCA rates regardless of how the car was to be used
may be appropriate. This treatment would lower net income in the early years of the cars lives.

Solutions Manual
Page 8-42
P8-2.
The amounts (revenue and expenses) in the table below were arbitrarily chosen to demonstrate
what happens with and without a write down. This table isnt necessary to answer the question
but will be useful to help students understand the implications of accounting for write downs.
The numbers are arbitrary and the chart is designed to show the effect.
Without write down
Assets to be depreciated by 2 million for 6 more years
2017
2018
Revenue
65,000,000
65,000,000
Unusual Sales
(net of expenses)
13,000,000
Expenses
(35,000,000)
(35,000,000)
Depreciation
(2,000,000)
(2,000,000)
Net Income
2019
65,000,000
2020
65,000,000
2021
65,000,000
2022
65,000,000
2023
65,000,000
(35,000,000)
(2,000,000)
(35,000,000)
(2,000,000)
(35,000,000)
(2,000,000)
(35,000,000)
(2,000,000)
(35,000,000)
(2,000,000)
41,000,000
28,000,000
28,000,000
28,000,000
28,000,000
28,000,000
28,000,000
2017
65,000,000
2018
65,000,000
2019
65,000,000
2020
65,000,000
2021
65,000,000
2022
65,000,000
2023
65,000,000
(35,000,000)
(35,000,000)
(35,000,000)
(35,000,000)
(35,000,000)
(35,000,000)
30,000,000
30,000,000
30,000,000
30,000,000
30,000,000
30,000,000
Effects of write down

Revenue
Unusual Sales
(net of expenses)
Expenses
Depreciation
Write down
Net Income
13,000,000
(35,000,000)
(2,000,000)
(12,000,000)
29,000,000
In 2017, there is unusual earnings of 13 million that analysts didnt expect would be earned.
a.
The write-down reduces income in the current year because of the loss and increases net
income in future years because the depreciation expense will be lower (because theres
less to depreciate). As a result of the writedown Esterhazy only exceeded analysts
expectations by $1,000,000, instead of by $13,000,000. For example looking at the chart
the analysts have predicted they will earn $28 million in 2017 but with the write down
they will earn $29 million (instead of $41 million), $1 million more than expectations
(remember analysts didnt anticipate the $13 million extra).
b.
Assuming the users accepted the write-down at face value, their expectations about future
profitability would be reduced (of course the high earnings in 2017 may increase
expectations unrealistically). The financial statements of the current year should be
interpreted with the understanding that the total write-down reduced current earnings and
is a one-time occurrence. Most users would see the effect of the one-time write-down in
2017. What would be less obvious is the improvement in earnings after 2017 as a result
of the lower depreciation expense. The effect of the write-down after 2018 wouldnt be
explicitly stated or reported separately. The effect on depreciation expense would be
reflected in ordinary operations. As a result, some stakeholders could have a more
positive sense of the performance of the company than is merited.

Solutions Manual
Page 8-43
c.
The motive for the amount and timing of the write-down appears to be to avoid the
prospect of dealing with analysts expectations of profits that could not be attained in the
future. The managers may have been trying to show a steady income trend rather than
having an unusually good year followed by a weaker year, which may not be well
received by the market. By taking the write-off, Esterhazy managers may have been
trying to dampen stakeholders expectations for future profits. Another explanation is that
the assets were actually overstated on the balance sheet and a write-down was
appropriate. This highlights the problem for users. It will rarely be clear what the
motivation of the managers is making it more difficult to interpret the financial
statements.
d.
It may not matter in the sense of analysts being misled if they understand exactly what
was done. However, those who receive the financial statements of the company in the
next few years may not be aware of the write-down and believe that the firm is more
profitable than would have been the case in the absence of the write-down. The writedown could also have an effect on contracts that are based on financial statement
numbers. The underlining economic activity is the same in each period. The difference is
how the capital assets are accounted for and reported on the financial statements.

Solutions Manual
Page 8-44
P8-3.
The amounts (revenue and expenses) in the table below were arbitrarily chosen to demonstrate
what happens with and without a write down. This table isnt necessary to answer the question
but will help students understand the implications of accounting for write downs. The numbers
are arbitrary and the chart is designed to show the effect.
Without write down (000's)
Asset was to be amortized by 35 million for 10 years
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Revenue
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
Expenses
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
Depreciation
(35,000)
(35,000)
(35,000)
(35,000)
(35,000)
(35,000)
(35,000)
(35,000)
(35,000)
(35,000)
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
15,000
Net Income
Effects of write down (000's)

Revenue
Expenses
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
$100,000
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
(50,000)
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
Write down
(350,000)
Net Income
(300,000)
Expensing reduces income in the current year by $350,000,000. In future years, income will be
higher than otherwise because it wont be necessary to amortize the cost of the technologies
under development. For example, if the technologies under development were capitalized and
amortized over 10 years (see chart) there would be $35,000,000 of depreciation charged every
year. As a result, using Plumas approach, the company takes a big hit in 2017 but then has
income that is higher than it otherwise would have been had there been no write down. Plumas
approach creates a matching problem because if the technologies under development actually
generate revenues, some of the costs associated with those revenues wont be matched to the
revenues. Margins will be overstated as a result. Users may have a difficult time understanding
why Plumas expensed the amount, given that IFRS permits the amount to be treated as an asset.
The implication is that the technologies have no value and that the company made a mistake in
acquiring them (which may or may not be true). Interpretations could be confusing because
margins would be higher than otherwise and it may make comparisons with other entities more
difficult, depending on how those other entities account for similar acquisitions. One possible
motive is that users may welcome the conservative accounting policy and consider the company
as credible. Another is that Plumas was willing to have low income this year to enjoy a higher
base in future years. In doing so, management might believe that stock market investors will
respond favourably to the higher income. This write down approach could have possibly been an
opportunity for management to take a big bath.

Solutions Manual
Page 8-45
P8-4.
a.
Under IFRS biological assets are valued at their fair value less cost to sell with gains and
losses reflected in the income statement for the period in which they occur. Therefore as the calf
matures its fair value less cost to sell will likely increase.
b.
ASPE doesnt provide specific guidelines as it pertains to biological assets however,
when a cow that wasnt purchased is old enough to produce milk, the cost that could appear on
the balance sheet might include the veterinary costs and any other costs that can specifically be
traced to the calf (although its more likely that those costs would simply be expensed as
incurred). The allocation of other costs would probably be difficult, although conceptually it
might seem appropriate since it may be considered as getting the asset ready for use, in this case
to produce milk.
c.
Under IFRS there is a standard for accounting for biological assets and provides a more
relevant representation of the farms financial position than ASPE (ASPE essentially ignores the
existence of biological assets that aren't purchased). Its likely that IFRS provides more useful
information to stakeholders since it recognizes the existence of biological assets and recognizes
their changing value. ASPE statements may be misleading because is leaves out a significant
asset (the cows). This is a much more conservative approach then under IFRS. IFRS has its
shortfalls as well as there is a great deal of uncertainty regarding valuation and the opportunity
for managers to select fair values in a way that servers their reporting objectives.

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Page 8-46
P8-5.
(The assumption is the Wishart is using straight line depreciation.)
a.
Revenue The change would have no effect on current or future revenues since
increasing a useful life estimate doesnt increase the amount of business the company
does.
Expenses Increasing the useful life will decrease the amount of depreciation expense
recognized in each period because the carrying amount is expensed over a longer period
of time.
Net Income Will be higher given because expenses are lower.
PP&E A change in estimate wont have an immediate effect on the carrying value of
PP&E. However since the depreciation is expensed over a longer period and the amount
expensed each year is reduced, the carrying value of the asset will decrease more slowly.
Total Assets Same explanation as PP&E
Shareholders equity An increase in net income will increase shareholders equity by
the same amount with the reduction in expenses period to period.
In the later years of the PPEs life expenses will be greater than if the useful life hadnt
been extended.
b.
Profit Margin With revenue staying the same and expenses decreasing profit margin
will go up once new estimates are implemented.
ROA ROA will increase because the numerator increases by more than the
denominator (the denominator is an average so the impact of the higher net income on the
denominator is half of the impact on the numerator.
Fixed Asset Turnover The fixed asset turnover ratio would decrease because the
denominator will be larger since the value of fixed assets will retain its more of its value
with lower depreciation.
Debt-to-equity Since debt doesnt change and equity will increase from a higher net
income, the overall ratio will decrease.
c.
While not getting the capital needed to make improvements could hurt the company
economically, the change in useful life estimate doesnt have a real economic impact. The
economic burden has already been recorded in a previous period.
d.
Depreciation is an estimate; therefore it isnt unusual for companies to adjust useful life
as more information and usage data becomes available. There are many factors that may affect
the estimate such as the efficiency of equipment, recycling programs, or population shrinkage.
e.
As a prospective lender I look at the basis for the increase in useful life. While increasing
the useful life, if justified, provides more relevant information, not having the actual data to
justify the reason for the change in estimate makes it unreliable. Therefore as a prospective
lender I would have to consider all facts leading to the change in the estimate.

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Page 8-47
P8-6.
a. (assuming cash was paid to buy equipment)
Dr.
Equipment
150,000
Cr.
Cash
To record the purchase of equipment.
150,000
b.
The overhaul done on the equipment would be considered a betterment because its extending
the life of the equipment (2 years) thus increasing the future benefit of this equipment and this
increase in benefit will increase the assets contribution to earnings. Accordingly, the cost of the
work should be capitalized over the new remaining life of the asset (in this case the remaining
life increased from two to four years), assuming the useful life of the overhaul was longer than
the remaining useful life of the equipment. If the useful life of the overhaul was shorter than the
remaining life of the equipment it should be depreciated over the period until the next overhaul.
c. The treatment of the service done in May 2016 depends on its nature. It appears that this
expenditure is a repair expense. This servicing of the broken down equipment is expensed in this
period because this expenditure provides no additional future benefit to the asset but simply
helps the asset perform as intended.
d.
In this case, capitalizing a betterment as done in part b increases the assets depreciation expense
(see chart below in part e). An expense as done in part c doesnt affect the depreciation expense.
e.
The following assumes a full year of depreciation in fiscal 2012 of the original cost of the asset.
The betterment was depreciated for a full fiscal year in 2016. An answer could incorporate the
one-month difference between the January purchase and the February betterment.
Year End
Dec.31
Purchase
2012
2013
Cost
150,000
150,000
150,000
Straight line
Accumulated
Depreciation
(AD)
$0
22,500
45,000
2014
2015
150,000
150,000
67,500
90,000
Betterment
2016
2017
2018
2019
248,000
248,000
248,000
248,000
248,000
$90,000
125,750
161,500
197,250
233,000
Carrying
Amount
(CA)
$150,000
127,500
105,000
Depreciation
Expense
(DE)
$0
22,500
22,500
82,500
60,000
Total
$158,000
122,250
86,500
50,750
15,000
Total
22,500
22,500
90,000
$0
35,750
35,750
35,750
35,750
233,000

Solutions Manual
Cost
RV
UL
$150,000
$15,000
6 years

residual value
useful life

DE=
New CA
RV
UL
DE=
useful life {UL}

22,500
$158,000
$15,000
4 years
35,750
NBV-2015
Betterment
$60,000
98,000
New value
158,000
CA (2015) + Cost of betterment

residual value
extended useful life
Page 8-48
P8-7.
Assets
(=)
Liabilities
Owners Equity
(+)
Long-term
Tran
s
Beg
(i)
Property,
plant, and
equipment
Cash
Accumulated
Depreciation
Debt
1,125,000
(337,500)
90,000
R/E
(ii)
45,000
(165,000)
(ii)
(ii)
217,500
(157,500)
(iii)
(iii)
(iv)
(285,000)
622,500
(iv)
337,500
(v)
(48,000)
(v)
(v)
(127,500)
(vi)
(vi)
Capital assets
$1,425,000
(423,000)
Ending carrying amount
$1,002,000
Depreciation
Expense
(423,000)
(30,000)
60,000
(iv)
(vi)
1,425,000
Write
Down
Loss
787,500
(iii)
(22,500)
Gain
337,500
(48,000)
(127,500)
787,500
60,000
(30,000)
(48,000)
(127,500)
The ending net book value on December 31, 2017 is $1,002,000
P8-8.
Assets
Trans
Beg
Cash
80,000
Property,
plant, and
equipment
(=)
Accumulated
Depreciation
1,070,000
(ii)
(237,500)
337,500
(iii)
50,000
(135,000)
(iv)
107,500
(147,500)
(v)
(vi)
End (i)
1,125,000
Capital asset
Beginning carrying amount
Liabilities
Owners Equity
(+)
Notes
Payable
(471,000)
Beg
(100,000)
Beg
(ii)
100,000
115,000
(iii)
(iii)
(iv)
(iv)
(41,500)
(v)
(v)
(115,000)
(vi)
(vi)
(512,500)
(i)
(i)
R/E
Gain
612,500
(30,000)
Loss
40,000
Write down
41,500
Depreciation
Expense
115,000
(ii)
30,000
(40,000)
(41,500)
(115,000)
612,500
$1,070,000
(471,000)
$599,000
The net book value on July 1, 2017 is $599,000

Solutions Manual
Page 8-49
P8-9.
a.
Net income
Understated
Total assets
Understated
Owners
equity
Understated
b.
Overstated
Overstated
Overstated
c.
Understated
Understated
Understated
d.3
Overstated
Understated
Understated4
e.
Understated
Understated
Understated
Current
ratio
[1.65]
No
change
No
change
No
change
No
change
No
change
Return on assets1
Understated
Debt-toequity ratio
[1.25]
Overstated
Fixed asset
turnover
ratio
Overstated
Understated
Understated
No effect2
Understated
Overstated
Overstated
Overstated5
Overstated4
Overstated
Overstated
Overstated
Overstated
When the net income and total assets change by the same amount the impact of net income in the numerator is
greater because the denominator is an average.
2
Advertising is an intangible asset and so doesnt affect property, plant, and equipment .
3
Assume straight-line depreciation and company stops taking depreciation after 10 years.
4
Since building has been completely depreciated equity is understated.
5
Overstated because assets are understated because the building has been fully depreciated when there should be
another ten of life remaining and net income is overstated because there is no depreciation expense.

Solutions Manual
Page 8-50
P8-10.
a. At first glance, one might believe that Aguanish is the better investment because its net
income is considerably higher. However, upon closer inspection it becomes clear that the
difference between the two companies net incomes is the depreciation expense. Therefore,
based on this information it seems that the companies are equally good investments (of
course other factors specific to each company may play a role, but these need not be
considered here).
b. Each company may have a different reason for using a different depreciation method.
Aguanishs management may have been trying to increase bonuses this year and therefore
made a choice that results in a higher net income during earlier periods. Lanigan may have a
closer relationship with its shareholders and may have determined it was reasonable to
prepare its financial statements on a tax basis to simplify things. Also, each company may
have felt that the method they chose for depreciation would best match expenses to revenues.
There is no correct method of depreciation. Management has choice and that choice is
expressed in these financial statements.
c. Using different depreciation methods doesnt matter in the sense that the underlying
economic activity isnt impacted. However, alternate choices may result in different
economic outcomes such as different bonuses for managers. The use of different depreciation
methods also limits the comparability of statements from different companies. As there are
no requirements that one method be used over another, lack of comparability is one of the
limitations of this choice.

Solutions Manual
Page 8-51
P8-11.
R & D expenditures
2018
$490
2017
$270
2016
$190
2015
115.0
Amortization (3 years)
163.3
90.0
63.3
38.33
$1,593.90
$995.50
$671.00
187.00
1,217.20
977.80
592.10
271.1
36.67
36.67
38.33
38.33
38.33
63.33
63.33
63.33
From 2017
90.00
90.00
From 2018
163.33
Total Amortization
316.67
191.67
138.33
75.00
1,533.86
1,169.47
730.43
346.1
$60.03
$(173.97)
$(59.43)
(159.1)
$ 2,777.50
$ 2,471.70
$ 2,321.00
715.0
1,175.00
685.00
415.00
225.00
758.33
441.67
250.00
111.67
$3,194.17
$2,715.03
$2,486.00
$828.33
1,083.20
889.80
812.40
300.30
$2,110.97
$1,825.23
$1,673.60
528.03
Cash from operations (before)
$137.50
$(198.00)
$(90.20)
Add back R&D expenditures
490.00
270.00
190.00
$627.50
$72.00
$99.80
$(220.10)
$(271.70)
$(1,177.00)
(490.00)
(270.00)
(190.00)
Adjusted spent on investing
$(710.10)
$(541.70)
$(1,367.00)
Income as reported -expensed
2018
(113.3)
2017
(252.3)
2016
(111.1)
Equity as reported -expensed
1,694.3
1,581.9
1,508.7
Revenues
Other Expenses
R&D
From 2014
From 2015
From 2016
Total expenses
a.
Income (capitalize R&D)

Total assets (before)
Add R&D capitalized
Less accumulated amortization
b.
Adjusted total assets

Less liabilities
c.
d.
Shareholders equity
Adjusted cash from operations

Cash spent on investing (before)
plus R&D

Solutions Manual
Page 8-52
e.
2018
-4.32%
2017
-10.53%
2016
-7.32%
$ 2,954.60
$ 2,600.52
$ 1,657.17
(113.3)
(252.3)
(111.1)
ROA (expense R&D)*

Average assets (expense)
Net income (expense)
ROA (capitalize R&D)*
Average assets (capitalize)
Net income (capitalize)
2.03%
-6.69%
-3.59%
2,954.60
2,600.52
1,657.17
$60.03
$(173.97)
$(59.43)
*ROA = Net income/average assets

Debt/equity (expense R&D)
0.64
0.56
0.54
0.72
0.82
Debt/equity(capitalize R&D)
0.51
0.49
0.49
0.57
0.57
Profit margin(expense R&D)
-0.07
-0.25
-0.17
-1.06
-49.00
0.04
-0.17
-0.09
-0.85
-35.67
Profit margin(capitalize R&D)
f.
At face value, the company appears to be more profitable and less leveraged with the R&D costs
capitalized. (That relationship would eventually reverse as the growth in R&D investment
slowed.) Given the uncertainty of future benefits from the R&D, expensing would seem
appropriate. If value of R&D cant be reliably estimated expensing is consistent with
conservatism. By requiring the expensing of R&D the predictive value of net income is
sacrificed as is the usefulness of net income as a measure of management performance. By not
capitalizing research costs what may be a valuable asset in general is ignored and matching is
undermined. Expensing also removes any information value of the accounting treatment for
research because management doesnt have to assess the future usefulness of the expenditure (if
management had to decide whether to capitalize or not, it would be making a statement about its
assessment of the usefulness of the costs). However, development can be very hard to assess,
which would open the door for management having more opportunity to pursue self-interests.
The preparers of the financial statements would likely prefer to report higher income in the
earlier years and would prefer to show more equity on the balance sheet (higher income might
help Mirror raise additional capital).

Solutions Manual
Page 8-53
P8-12.
R & D expenditures
depreciation (3 years)
a.
b.
c.
d.
Revenues
Other Expenses
R&D
From 2013
From 2014
From 2015
From 2016
From 2017
Total amortization
Total expenses
Income (capitalize R&D)
2016
$2,712,500
904,167
2015
$1,550,000
516,667
2014
$581,250
193,750
8,983,800
4,105,950
5,611,000
3,262,750
3,782,000
2,805,500
1,054,000
2,123,500
129,167
193,750
516,667
129,167
193,750
193,750
516,667
904,167
516,667
904,167
1,162,500
2,583,333
6,689,283
2,294,517
1,614,584
4,877,334
733,666
839,583
3,645,083
136,917
322,917
2,446,417
1,392,417
Total assets (before)

Add R&D capitalized
Less accumulated amortization
Adjusted total assets
Less liabilities
Shareholders equity
9,784,375
8,718,750
5,489,583
13,013,542
4,011,595
9,001,947
8,707,125
5,231,250
2,906,250
11,032,125
3,047,495
7,984,630
8,176,250
2,518,750
1,291,667
9,403,333
2,452,875
6,950,458
2,518,750
968,750
452,084
3,035,416
730,438
Cash from operations (before)

Add back R&D expenditures
Adjusted cash from operations
465,000
3,487,500
3,952,500
(775,000)
2,712,500
1,937,500
(232,500)
1,550,000
1,317,500
(1,395,000)
(3,487,500)
(4,882,500)
(1,085,000)
(2,712,500)
(3,797,500)
(5,425,000)
(1,550,000)
(6,975,000)
1,390,350
5,772,780
(364,250)
5,659,630
(573,500)
5,723,375
15.04%
9,784,375
1,390,350
19.08%
12,022,833.50
2,294,517
-4.31%
8,707,125
(364,250)
7.18%
10,217,729.00
733,666
-10.72%
8,176,250
(573,500)
2.20%
6,219,374.50
136,917
0.69
0.45
0.15
0.26
0.54
0.38
(0.06)
0.13
0.43
0.35
(0.15)
0.04
Cash spent on investing (before)

plus R&D
Adjusted spent on investing
Income as reported -expensed
Equity as reported -expensed
e.
2017
$3,487,500
1,162,500
ROA (expense R&D)*

Average assets (expense)
Net income (expense)
ROA (capitalize R&D)*
Average assets (capitalize)
Net income (capitalize)
*ROA = Net income/average assets
Debt/equity (expense R&D)

Debt/equity(capitalize R&D)
Profit margin(expense R&D)
Profit margin(capitalize R&D)

Solutions Manual
Page 8-54
f.
At face value, the company appears to be more profitable and less leveraged with the R&D costs
capitalized. (That relationship would eventually reverse as the growth in R&D investment
slowed.) Given the uncertainty of future benefits from the R&D, expensing would seem
appropriate. If value of R&D cant be reliably estimated expensing is consistent with
conservatism. By requiring the expensing of R&D the predictive value of net income is
sacrificed as is the usefulness of net income as a measure of management performance. By not
capitalizing research costs what may be a valuable asset in general is ignored and matching is
undermined. Expensing also removes any information value of the accounting treatment for
research because management doesnt have to assess the future usefulness of the expenditure (if
management had to decide whether to capitalize or not, it would be making a statement about its
assessment of the usefulness of the costs). However, development can be very hard to assess,
which would open the door for management having more opportunity to pursue self-interests.
The preparers of the financial statements would likely prefer to report higher income in the
earlier years and would prefer to show more equity on the balance sheet (higher income might
help Florze raise additional capital).

Solutions Manual
Page 8-55
P8-13.
Mr. Peribonka,
There are three possible methods which could be used for depreciation in your case: straight line,
declining balance, and units of production. Based on the information you have provided, I have
calculated potential scenarios for depreciating the equipment over its useful life (provided in
Appendix A below). Using the straight line method, depreciation expense is about $13,333 per
year. To compute declining balance I used a 30% rate which is the rate used for taxes based on
the equipment falling into CCA Class 43. For the tax method I applied the half-year rule, which
is required for tax purposes. This method yields a higher depreciation expense in the earlier
years. Under units of production, based on your sales estimates, depreciation expense is low in
the first year but higher than straight line from 2018-2020 then lower again in the last two years.
Although the depreciation method wont change the underlying economic activity, the choices
made will impact equity, assets, and net income as well as any financial ratios which use these
financial statement items. Since the primary users are yourself and the bank (I will discuss the
tax authorities below) you may be better off selecting a depreciation method that yields a lower
expense in the early years; either straight line or units of production. Doing this will help you
meet any bank covenants which may rely on financial ratios and help your business to appear
stronger in the earlier years. An additional benefit of using the units of production method is that
it will help to match expenses to the revenues they help generate and provide more useful
information on how the business is performing.
You should also be aware that for tax purposes, declining balance must be used at the rate
prescribed in the Income Tax Act. Additionally, in 2017 only one half of the depreciation
expense can be claimed for tax purposes. Using this approach simplifies your financial reporting
because you wont have to adjust the depreciation expense when preparing your tax return.
Should you have any additional questions, please feel free to contact me.
Kind Regards,
Accountant
Appendix A:
Straight line
Accumulated
Depreciation
Year End
(AD)
Carrying
Amount
Depreciation
Expense
(DE)
Purchase
Cost
$80,000
$0
(CA)
$80,000
2017
80,000
13,333
66,667
13,333
2018
80,000
26,667
53,333
13,333
2019
80,000
40,000
40,000
13,333
2020
80,000
53,333
26,667
13,333
2021
80,000
66,667
13,333
13,333
2022
80,000
80,000
13,333

Solutions Manual
$0
Page 8-56
Total
Cost
RV
UL
$80,000
6 years
80,000

residual value
useful life

useful life {UL}
DE=
13,333

Year End
Declining balance
Accumulated
Depreciation
Cost
$80,000
Purchase
(AD)
Carrying
amount
$0
(CA)
$80,000
Depreciation
Expense
(DE)
$0
2017
80,000
12,000
68,000
12,000*
2018
80,000
32,400
47,600
20,400
2019
80,000
46,680
33,320
14,280
2020
80,000
56,676
23,324
9,996
2021
80,000
63,673
16,327
6,997
2022
80,000
68,571
11,429
4,898
Total
68,571
*Applies the half year rule for tax purposes

Cost
$80,000
Rate
30%
RV
$0
UL

residual value
useful life
CA = Cost - AD

Solutions Manual
Page 8-57
Units of production
Accumulated
Depreciation
Year
End
Purchase
Cost
$80,000
2017
(AD)
Carrying
Amount
Depreciation
Expense
% units of
production
(DE)
% UOP
$0
(CA)
$80,000
80,000
6,061
73,939
6,061
7.58%
2018
80,000
20,606
59,394
14,545
18.18%
2019
80,000
44,848
35,152
24,242
30.30%
2020
80,000
69,091
10,909
24,242
30.30%
2021
80,000
76,364
3,636
7,273
9.09%
2022
80,000
80,000
3,636
4.55%
80,000
100%
Total
Cost
RV
$0
80,000
residual value
UL
useful life

CA = Cost - AD
%
2017
Production
25,000
7.58%
2018
60,000
18.18%
2019
100,000
30.30%
2020
100,000
30.30%
2021
30,000
9.09%
2022
15,000
4.55%
Total
330,000
100.00%

Solutions Manual
Page 8-58
P8-14.
July 15, 2017
Coaticooks Management,
The first item of concern is to determine whether a write-down is required. As a public
corporation you are required to follow IFRS. If a write-down is required it must be recorded
immediately and be recognized in your 2nd quarter (June 30) financial statements and in the
current fiscal years annual report.
Under IFRS an asset is impaired if its recoverable amount is less than its carrying amount. The
recoverable amount is the greater of value-in-use and fair value less cost to sell. Management
estimates that the value-in-use is $42 million. The patent will have no residual value at the end of
its life. This is greater than is fair value of $7 million. Since the carrying amount of the patent is
$93,750,000 (see chart provided in appendix A of this report) the patent is impaired and a write
down is required (the carrying amount > value-in-use).
For the 2nd quarter financial statements and the current years financial statements, the patent
must be recorded on the balance sheet at its new carrying value of $42 million. A write down or
loss from asset impairment must be reported in the income statement for $51,750,000 along with
a depreciation expense of $6,250,000 to account for the depreciation for the first half of the year
before the impairment was discovered. The yearly depreciation expense has decreased from
$12.5 million to $5.6 million, which only half is to be expensed for the remainder of 2012.
Journal entries for the end of June
Dr. Depreciation expense
Cr. Accumulated depreciation
To record Depreciation for the first half of 2017
Dr. Loss due to impairment of patient
Cr. Accumulated depreciation
To record the write down of the patent
6,250,000
6,250,000
51,750,000
51,750,000
I recommend that the above information be recognized and disclosed on the 2nd quarter and yearend financial statements. As far as how the market will interpret this information, I would
speculate that it wont be favourable, although the market would have already responded when
the news of the competing product was announced and investors understood that Coaticooks
revenues and profits would be affected. The effect will be seen as a one-time event, although one
that will have a long-term effect on earnings unless the lost earnings stream can be replaced.
Stock prices will take a hit this year with the poorer than expected earnings but they should
stabilize at a lower price.
If you have any further questions or concerns please contact me at my office.
Campbell Accounting

Solutions Manual
Page 8-59
Straight line
Year End
Dec. 31
Cost
Accumulated
Depreciation
Carrying
Amount
Depreciation
Expense
Cost
$125,000,000
purchase price
(AD)
(CA)
(DE)
RV
residual value
UL
10 years
Purchase
$125,000,000
$0
$125,000,000
$0
2015
125,000,000
12,500,000
112,500,000
12,500,000
2016
2017 (1st
half)
125,000,000
25,000,000
100,000,000
12,500,000
125,000,000
31,250,000
93,750,000
6,250,000
useful life {UL}
Total
31,250,000
DE=
12,500,000
42,000,000
New balance
2017 - mid
year
2017 (2nd
half)
Writedown
51,750,000
125,000,000
83,000,000
42,000,000
New value
125,000,000
85,800,000
39,200,000
2,800,000
RV
2018
125,000,000
91,400,000
33,600,000
5,600,000
UL
7.5
2019
125,000,000
97,000,000
28,000,000
5,600,000
DE=
5,600,000
2020
125,000,000
102,600,000
22,400,000
5,600,000
2021
125,000,000
108,200,000
16,800,000
5,600,000
Tot dep exp
73,250,000
2022
125,000,000
113,800,000
11,200,000
5,600,000
Write down
51,750,000
2023
125,000,000
119,400,000
5,600,000
5,600,000
Cost
2024
125,000,000
125,000,000
P8-15.
a.
The entry that was made in 2014:
Dr.
Delivery expense (expense +)
Cr.
Cash (asset -)
5,600,000
Total
73,250,000
useful life
CA (mid-2017)
residual value
remaining useful life
125,000,000
36,000
The entry that should have been made in 2014:

Dr.
Truck (asset +)
36,000
Cr.
Cash (asset -)
36,000
36,000
Mathematical assessment for questions b through d

(The Amount recorded in error The amount that should have been recorded) = Net Effect on
Account (difference because the error was recorded)
If its negative, the account is understated; if its positive, the account is overstated.

Solutions Manual
Page 8-60
Straight line
Accumulated
Depreciation
Year End
Dec. 31
Cost
(AD)
Carrying
Amount
Depreciation
Expense
(CA)
(DE)
Purchase
$36,000
$0
$36,000
$0
2014
36,000
6,200
29,800
6,200
2015
36,000
12,400
23,600
6,200
2016
36,000
18,600
17,400
6,200
2017
36,000
24,800
11,200
6,200
Total
24,800
AE=
6,200
Cost
36,000
Sale-2017
6,000
RV
5,000
Carrying Amount
11,200
UL
5 years
G/L
(5,200)
Truck Expensed
2014
Truck expense
2015
2016
2017
(36,000)
Sale of truck
6,000
Net Income
(36,000)
6,000
Total Assets
Cash operations
(36,000)
Cash investing
6,000
Truck Capitalized & depreciated

Depreciation expense -Truck
(6,200)
(6,200)
(6,200
Sale of truck- loss
(6,200)
(5,200)
Net Income
(6,200)
(6,200)
(6,200)
Total Assets
29,800
23,600
17,400
(11,400)
cash operations
cash investing
(36,000)
6,000
Effect and Error in 2014-2017 understated (-); overstated (+)

2014
2015
2016
2017
Net Income
(29,800)
6,200
6,200
Total Assets
(29,800)
(23,600)
(17,400)
cash operations
(36,000)
36,000
cash investing

Solutions Manual
17,400
-
Page 8-61
b.
Assuming the truck was purchased January 1, 2014 and has a salvage value $5000, the
annual depreciation expense would be $6,200. As a result of the error net income would
have been understated in 2014 by $29,800 ($36,000 - $6,200). In 2015 and 2016, income
would be overstated by $6,200, the amount of depreciation that wasnt expensed because
of the error. Total assets would be understated by $29,800 in 2014, $23,600 in 2015, and
$17,400 in 2016 as a result of the error.
c.
Assuming the truck was sold at the end of the year, the expense would be understated by
$6,200, because no depreciation expense would have been recorded, thus overstating net
income by the same amount. The accumulated depreciation at the time of the sale should
have been $24,800 (4 x $6,200) and the carrying value would have been $11,200. As a
result, there should have been a loss of $5,200. However, because the truck was
expensed in 2014, there was no asset recorded on the books so there is a gain on disposal
of $6,000. Had the truck been accounted for properly, there would have been a net effect
on the income statement of -$11,400 (-$5,200 - $6,200). Instead, there is a gain of
$6,000, for a net difference or overstatement of $17,400. Because the truck was sold, the
asset balance will correct itself and there should be no difference at the end of 2017.
d.
There would be no overall effect on cash flow because of the error (assuming no tax or
other secondary effects). However, there would be classification differences. In 2014,
CFO would have been understated by $36,000 (because the truck was expensed) and cash
from investing activities would have been overstated by $36,000 because the truck should
have been classified as an investing cash outflow. There would be no effect on the other
years because no cash was exchanged in the other years until 2017, when $6,000 was
received for the sale of the truck. This should be reported as an investing cash inflow
regardless of the error.
e.
The error could be very misleading for users. The income statement, balance sheet, and
cash flow statement all would have material errors. As a result some stakeholders could
make bad decisions. For example, as a result of the error a shareholder might have sold
his or her shares because of the seemingly poor performance when in fact actual
performance would have been better. There is virtually no chance that an external user of
the financial statements would be aware of or be able to detect the error.

Solutions Manual
Page 8-62
P8-16.
Mathematical assessment for questions a through c
Net Effect on Account
(difference because the error
was recorded)
The amount
recorded in error
The amount that should

have been recorded
If the difference is negative, the account is understated; if its positive, the account is overstated.
The way it was recorded - capitalizing extra work
Declining balance
Year
Dec. 31
Cost
.
Acc
Dep.
Carrying
Amount
.
Dep
Expense
(AD)
(CA)
(DE)
2017
2018
Dep. expense -Lathe
(350,000)
(280,000)
(224,000)
Net Income
(350,000)
(280,000)
(224,000)
Total Assets
1,400,000
1,120,000
896,000
Pur.
$1,750,000
$0
$1,750,000
$0
2017
1,750,000
350,000
1,400,000
350,000
Cash from Operations
2018
1,750,000
630,000
1,120,000
280,000
Cash from Investing
(1,750,000)
2019
1,750,000
854,000
896,000
224,000
Total cash Flow
(1,750,000)
Cost
1,750,000
Rate
20%
Total
2019
854,000
The way it should be recorded - expensing extra work

Declining balance
Year
Dec. 31
Cost
Dep. expense -Lathe
(310,000)
(248,000)
(198,400)
Extra work ( expensed
(200,000)
Acc
Dep
Carrying
Amount
Dep
Expense
Net Income
(510,000)
(248,000)
(198,400)
(AD)
(CA)
(DE)
Total Assets
1,240,000
992,000
793,600
(200,000)
Pur.
1,550,000
1,550,000
2017
1,550,000
310,000
1,240,000
310,000
Cash from Investing
(1,550,000)
2018
1,550,000
558,000
992,000
248,000
Total cash Flow
(1,750,000)
2019
1,550,000
756,400
793,600
198,400
Effect and Error in 2010 understated (-); overstated (+)
Cost
1,550,000
Rate
20%
Total
2017
756,400
2018
2019
Net Income
160,000
(32,000)
(25,600)
Total Assets
160,000
128,000
102,400
200,000
(200,000)
Cash from Investing

Total cash Flow

Solutions Manual
Page 8-63
a.
The $200,000 of unnecessary costs shouldnt be capitalized as part of the cost of the
lathe, but should have been expensed when incurred. The cost of removing parts of the
lathe line due to improper installation doesnt provide any future benefit. The work
performed only returned the asset to a condition in which it should have been in the first
place, thus the extra work could have been avoided. Therefore, the additional repair work
should be expensed and not capitalized. (The actual reinforcement of the building that
should have been done in the first place could be capitalized, but not the cost of moving
and reinstalling the line. This analysis assumes that the $200,000 in question is the cost of
moving and reinstalling the line.)
b.
In 2017, the net effect of capitalizing and depreciating the $200,000 and the
resulting $40,000 increase in depreciation expense is that income was $160,000 greater
than it would have been (overstated) had the unnecessary costs been expensed. Net
Income was understated in 2018 by $32,000 and 2019 by $25,600.
Because of the recording error assets were overstated by $160,000 in 2017, $128,000 in
2018, and $102,400 in 2019. The overstatement will continue to decreases and eventually
the asset account will correct itself when the asset is completely depreciated.
c. The effect on the operating cash flows would be an overstatement of cash flow from
operations in 2017 of $200,000 and an understatement of cash for investing activities of
$200,000. There would be no effect on the other years and total cash flow would be
unaffected.
d. The error could be very misleading for users. The income statement, balance sheet, and
cash flow statement all would have material errors. As a result, some stakeholders could
make bad decisions. For example, as a result of the error a shareholder might have sold
his or her shares because of the seemingly poor performance when in fact actual
performance would have been better. There is virtually no chance that an external user of
the financial statements would be aware of or be able to detect the error.

Solutions Manual
Page 8-64
P8-17.
[This is a challenging problem. Students have to identify the problem and consider
alternative ways that it can be dealt with. Importantly, there is no right answer to the
question. Students can interpret the scenario in different ways and make different
recommendations. There are limited ways for the calculations to be done so these should be
fairly standard across student answers. What will differ is how students analyze and use
the information and the calculations. Note that the question doesnt address the issue of
assets held for sale versus held for use, which is beyond the scope of the course.]
To:
The president, Judge Ltd.
From: A. Student, Consultant

I have reviewed the information that you have provided and prepared my recommendations
regarding the appropriate accounting for the building that is no longer being used.
The first consideration is the use of the financial statements. A crucial user group is the creditors
who will be watching closely to ensure that the debt-to-equity ratio does not exceed the agreed
amount of 1.5:1 at the end of any quarter. Should the covenant be violated, your loans would
become payable in full in 30 days. As far as I can tell, based on the information provided, the
company would have significant difficulty in making alternative financing arrangements. As the
president of the company, you are expected to consider the interests of shareholders in any case.
However, in this particular case, you are a shareholder yourself and you have no doubt a strong
interest in ensuring that the company continues to operate. A violation of the covenants could
result in a loss of employment and a loss of invested funds. A third user of the financial
statements will be the Judge family who will be using the financial statements to monitor the
performance of the company and as a basis for decisions. Given that the creditors have been
sufficiently astute to impose covenants, I assume that they have also insisted that the financial
statements are audited and therefore they must comply with ASPE (or IFRS).
The specific issue at hand is the accounting for the building that has not been used for four years.
It is clear that the property is not very marketable in the current business climate as you have
been unable to locate a tenant or buyer for two years. The two questions that arise are whether or
not the property should be sold at the offered price of $2 million. The second question is, if the
property is not sold, should it be written down on the balance sheet to an amount below the
current carrying amount?
Based on my calculations, the debt to equity ratio will be 1.29 ($4,500,000/$3,500,000) if it is
neither sold nor written down. If the building is sold and the full $2 million is used for operations
and no amount is used to pay back debt then the debt to equity will be 2.11 (see table below),
which is above the maximum allowed. A write down to fair value (which I assume will be $2
million) would also result in a debt to equity ratio of 2.11. If the land and building are sold for $2
million and the proceeds used to reduce debt then the debt to equity ratio would be 1.17. A final
option is to pay back $1.5 million in debt and use $500,000 for operations thus resulting in a
ratio of 1.41. This last option seems most appropriate and stays within the debt covenant and
provides the company with needed cash. This discussion assumes that the creditors would be
Solutions Manual
Page 8-65
open to receiving partial payment of the long-term debt. In fact the loan agreement might not
allow that. There does not seem to be any indication that a more favourable price could be
obtained by delaying the sale of the property. The consequences of the sale on the income
statement would be a loss of $920,000.
Should the offer be rejected, a decision remains regarding the reporting of the land and building
on the balance sheet. It is clear that the value has been impaired, and ASPE will require that the
impairment be recognized in the current year. An auditor would likely insist that the property
should not be reported above the offer that has been received. The effect of a write-down even to
$2,000,000 would reduce equity whereby the debt-to-equity covenant would be violated and the
loans immediately repayable. However, I have to wonder why the write-down was not required
before. Perhaps there is some belief that the net recoverable amount is greater than the carrying
amount. I should also note that the $2,000,000 offered is not necessarily an indicator of the real
estates market value. The bidder may have made a low offer in the hopes of getting a good deal
on the land. It is possible that the net recoverable amount is higher than $2,000,000. A write
down of less than $500,000 would be required to keep the debt-to-equity covenant below the 1.5
threshold.
Based on my analysis, I recommend that the offer be accepted, and the debt be reduced by $1.5
million. There is very little chance that the reporting of a loss can be avoided and the disposal of
the property is the best advice I have. Before actions, however, I suggest that you obtain the
advice of a taxation adviser, as there may be taxation consequences of the alternatives I have
presented. The owners might also consider contributing additional equity to the company, which
would give the firm more time to locate a more favourable offer.

Solutions Manual
Page 8-66
30-Jun-17
R/E
1,450,000
Sell Land &
30-Jun-17
Current
Land - Carrying Amount
Sell Land or
Sell Land &
pay part of
Maximum
Write down
Pay Loan
Loan Back
Write down
$3,370,000
Offer
2,000,000
Loss or write down
1,370,000
Pay loan amount
500,000
2,000,000
1,500,000
8,000,000
6,630,000
4,630,000
5,130,000
7,500,000
Current liabilities
$1,150,000
$1,150,000
$1,150,000
$1,150,000
$1,150,000
Long- term debt
3,350,000
3,350,000
1,350,000
1,850,000
3,350,000
4,500,000
4,500,000
2,500,000
3,000,000
4,500,000
Commons shares
1,600,000
1,600,000
1,600,000
1,600,000
1,600,000
Retained earnings
1,900,000
530,000
530,000
530,000
1,400,000
Owner's Equity
3,500,000
2,130,000
2,130,000
2,130,000
3,000,000
Total L&OE
8,000,000
6,630,000
4,630,000
5,130,000
7,500,000
450,000
(920,000)
(920,000)
(920,000)
(50,000)
1.29
2.11
1.17
1.41
1.50
Total Assets
Net Income
Debt to Equity =

Solutions Manual
Page 8-67
P8-18.
[This is another good thinking problem. The components are quite straight forwardthe
issue is how the purchase price should be allocated among a bundle of itemsbut the
challenge for students is to consider how to do it. This is a very practical problem and the
topic was covered in the text. The problem is that because a bundle of items was purchased,
the actual price of each item in the bundle isnt known. An independent expert has only
provided ranges of values so its safe to assume that exact values cant be determined. To
answer, students must consider the objectives of the managers and the facts and any
constraints. Different approaches are possible and acceptable. What is most important is
for students to provide a cogent explanation for the choice that is made. The solution below
is an example rather than the model solution.]
To:
The controller, Quabbin Corp.
From: A. Student, Consultant
I have reviewed your information and have prepared my report on the appropriate accounting
treatment for the recent purchase of assets.
The first consideration is the purpose for which the financial statements will be used. The two
primary groups of users of the financial statements are the silent investors and the bank. I am
assuming that the five investors each own an equal share of the firm. Therefore, the silent
investors own 60 percent and collectively reflect the controlling interest of the company. There
will therefore be a stewardship role for the financial statements. Secondly, the company will be
applying for an increase in the line of credit, and the financial statements will provide
information for that lending decision. The company is large enough that the bank is likely to
expect audited financial statements and the financial statements must comply with ASPE. The
need for additional financing suggests that minimizing taxes would make sense to conserve cash.
The silent shareholders can be communicated with separately to explain any accounting issues
that might be of concern. It would seem that the bank is a key stakeholder that must be satisfied,
however, so I recommend a strategy that will report higher assets and income. That said, the
bank would likely want these new assets as collateral against the loan so the banks risk is
mitigated, depending on the amount of additional borrowing that is required.
The issue at hand is the allocation of the total cost of a bundle of assets among the specific
assets. The appraiser has provided ranges of values for the assets. The more of the cost that is
allocated to land, the higher income will be currently and over time because there is less to
depreciate (land is non-depreciable) and the greater the balance sheet value of total assets in
future years. Similarly, the least amount should be allocated to the equipment because its
amortized over the shortest period of time. Assuming that Canada Revenue Agency will accept
the full range of choices being discussed, the firm will also pay more income tax during the years
that the land is owned if more is allocated to the land (CCA cant be claimed on land). This is an
undesirable by-product of my strategy.
The appraisals suggest a range of $350,000 between the highest and lowest values for the land,
$700,000 range for the building, and $500,000 range for the equipment. For the most favourable
presentation to the bank, land should be allocated $1,300,000, building $2,400,000, and
Solutions Manual
Page 8-68
equipment $1,500,000. I note that if you choose to minimize taxable income, a smaller amount
would be allocated to land ($950,000), the most to the equipment ($2,000,000), and the
remainder to the buildings ($2,250,000). For your information these different strategies will
result in a difference in taxable income of $72,000 for the current year (taking into account the
half year rule). At a tax rate of 20%, this would mean that the former strategy would result in
$14,400 in extra tax that would have to be paid this year.
The journal entry for the high income/high asset strategy would be:
Dr.
Dr.
Dr.
Land
Building
Equipment
Cr. Cash
1,300,000
2,400,000
1,500,000
5,200,000
Mathematical support for income tax calculation with half year rule:
High Assets
Value
Dep.
Assigned
Rate expense
Land
$1,300,000 N/A
Building
2,400,000 4%
$48,000
Equipment
1,500,000 30%
225,000
5,200,000
273,000
Low Assets
Land
$950,000 N/A
Building
Equipment
2,250,000 4%
2,000,000 30%
$45,000
300,000
5,200,000
345,000
Difference
Tax rate
72,000
20%
Additional Taxes
14,400

Solutions Manual
Page 8-69
P8-19.
a.
Dr.
Mining properties (asset +)
25,000,000
Dr.
Equipment (asset +)
18,000,000
Dr.
Buildings (asset +)
5,000,000
Cr.
Cash (asset -)
48,000,000
To record the purchase of equipment and buildings and the exploration and development costs.
b.
Mining Properties - Straight line
Mining Properties - Declining balance
.
Year
30-Jun
Acc Dep.
(AD)
Cost
.
Dep
Expense
(DE)
Carrying
Amount
(CA)
.
YE
30-Jun
.
Carrying
Amount
(CA)
Acc Dep.
(AD)
Cost
Dep Expense
(DE)
Purchase
$25,000,000
$0
$25,000,000
$0
Purchase
$25,000,000
$0
$25,000,000
$0
2018
25,000,000
2,500,000
22,500,000
2,500,000
2018
25,000,000
5,000,000
20,000,000
5,000,000
2019
25,000,000
5,000,000
20,000,000
2,500,000
2019
25,000,000
9,000,000
16,000,000
4,000,000
2020
25,000,000
7,500,000
17,500,000
2,500,000
2020
25,000,000
12,200,000
12,800,000
3,200,000
2021
25,000,000
10,000,000
15,000,000
2,500,000
2021
25,000,000
14,760,000
10,240,000
2,560,000
2022
25,000,000
12,500,000
12,500,000
2,500,000
2022
25,000,000
16,808,000
8,192,000
2,048,000
2023
25,000,000
15,000,000
10,000,000
2,500,000
2023
25,000,000
18,446,400
6,553,600
1,638,400
2024
25,000,000
17,500,000
7,500,000
2,500,000
2024
25,000,000
19,757,120
5,242,880
1,310,720
2025
25,000,000
20,000,000
5,000,000
2,500,000
2025
25,000,000
20,805,696
4,194,304
1,048,576
2026
25,000,000
22,500,000
2,500,000
2,500,000
2026
25,000,000
21,644,557
3,355,443
838,861
2027
25,000,000
25,000,000
2,500,000
2027
25,000,000
25,000,000
3,355443
Cost
$25,000,000
Total
25,000,000
Cost
$25,000,000
Total
25,000,000
RV
Rate
20%
UL
10 years
DE=
2,500,000

Solutions Manual
RV
UL
10 years
Page 8-70
Mining Properties - Units of production
Year
30-Jun
Acc.
Dep.
(AD)
Cost
Purchase
Carrying
Amount
(CA)
Dep.
Expense
(DE)
% units of
production
% UOP
units of
production
#of Units
1.6%
5,000
$25,000,000
$0
$25,000,000
$0
2018
25,000,000
403,226
24,596,774
403,226
2019
25,000,000
2,419,355
22,580,645
2,016,129
8.1%
25,000
2020
25,000,000
5,645,161
19,354,839
3,225,806
12.9%
40,000
2021
25,000,000
8,870,968
16,129,032
3,225,806
12.9%
40,000
2022
25,000,000
12,096,774
12,903,226
3,225,806
12.9%
40,000
2023
25,000,000
15,322,581
9,677,419
3,225,806
12.9%
40,000
2024
25,000,000
18,548,387
6,451,613
3,225,806
12.9%
40,000
2025
25,000,000
21,774,194
3,225,806
3,225,806
12.9%
40,000
2026
25,000,000
24,193,548
806,452
2,419,355
9.7%
30,000
2027
25,000,000
25,000,000
806,452
3.2%
10,000
25,000,000
100%
310,000
# of Units over life
310,000
Cost
Total
$25,000,000
RV
UL
10 years
Equipment - Straight line
Year
Equipment - Declining balance
Acc.
Carrying
Dep.
Dep.
Amount
Expense
YE
(DE)
1,450,000
30-Jun
Purchas
e
2018
Cost
$18,000,00
0
18,000,000
(AD)
Acc.
Carrying
Dep.
Dep.
Amount
Expense
(DE)
3,600,000
(CA)
$18,000,00
0
14,400,000
3,600,000
30-Jun
Purchas
e
2018
Cost
$18,000,00
0
18,000,000
1,450,000
(CA)
$18,000,00
0
16,550,000
2019
18,000,000
2,900,000
15,100,000
1,450,000
2019
18,000,000
6,480,000
11,520,000
2,880,000
2020
18,000,000
4,350,000
13,650,000
1,450,000
2020
18,000,000
8,784,000
9,216,000
2,304,000
2021
18,000,000
5,800,000
12,200,000
1,450,000
2021
18,000,000
10,627,200
7,372,800
1,843,200
2022
18,000,000
7,250,000
10,750,000
1,450,000
2022
18,000,000
12,101,760
5,898,240
1,474,560
2023
18,000,000
8,700,000
9,300,000
1,450,000
2023
18,000,000
13,281,408
4,718,592
1,179,648
2024
18,000,000
10,150,000
7,850,000
1,450,000
2024
18,000,000
14,225,126
3,774,874
943,718
2025
18,000,000
11,600,000
6,400,000
1,450,000
2025
18,000,000
14,500,000
3,500,000
274,874
2026
18,000,000
13,050,000
4,950,000
1,450,000
2026
18,000,000
14,500,000
3,500,000
2027
18,000,000
14,500,000
3,500,000
1,450,000
2027
18,000,000
14,500,000
3,500,000
Cost
$18,000,00
0
Total
14,500,00
0
Cost
$18,000,000
Total
14,500,00
0
RV
$3,500,000
Rate
20%
UL
10 years
RV
$3,500,000
UL
10 years
$0
DE=
$0
1,450,000

Solutions Manual
(AD)
$0
$0
Page 8-71
Equipment - Units of production
Year
30-Jun
Purchase
Acc.
Dep.
(AD)
Cost
$18,000,000
Dep.
Expense
(DE)
$0
% units of
production
% UOP
units of
production
#of Units
$0
Carrying
Amount
(CA)
$18,000,000
1.6%
5,000
2018
18,000,000
233,871
17,766,129
233,871
2019
18,000,000
1,403,226
16,596,774
1,169,355
8.1%
25,000
2020
18,000,000
3,274,194
14,725,806
1,870,968
12.9%
40,000
2021
18,000,000
5,145,161
12,854,839
1,870,968
12.9%
40,000
2022
18,000,000
7,016,129
10,983,871
1,870,968
12.9%
40,000
2023
18,000,000
8,887,097
9,112,903
1,870,968
12.9%
40,000
2024
18,000,000
10,758,065
7,241,935
1,870,968
12.9%
40,000
2025
18,000,000
12,629,032
5,307,968
1,870,968
12.9%
40,000
2026
18,000,000
14,032,258
3,967,742
1,403,226
9.7%
30,000
2027
18,000,000
14,500,000
3,500,000
467,742
3.2%
10,000
14,500,000
100%
310,000
310,000
Cost
$18,000,000
RV
$3,500,000
UL
10 years
Total
Building - Straight line
Year
30-Jun
Acc.
Dep.
(AD)
Cost
Building - Declining balance

Carrying
Amount
(CA)
Dep.
Expense
(DE)
YE
30-Jun
Cost
Acc.
Dep.
(AD)
Carrying
Amount
(CA)
Dep.
Expense
(DE)
Purchase
$5,000,000
$0
$5,000,000
$0
Purchase
$5,000,000
$0
$5,000,000
$0
2018
5,000,000
500,000
4,500,000
500,000
2018
5,000,000
1,000,000
4,000,000
1,000,000
2019
5,000,000
1,000,000
4,000,000
500,000
2019
5,000,000
1,800,000
3,200,000
800,000
2020
5,000,000
1,500,000
3,500,000
500,000
2020
5,000,000
2,440,000
2,560,000
640,000
2021
5,000,000
2,000,000
3,000,000
500,000
2021
5,000,000
2,952,000
2,048,000
512,000
2022
5,000,000
2,500,000
2,500,000
500,000
2022
5,000,000
3,361,600
1,638,400
409,600
2023
5,000,000
3,000,000
2,000,000
500,000
2023
5,000,000
3,689,280
1,310,720
327,680
2024
5,000,000
3,500,000
1,500,000
500,000
2024
5,000,000
3,951,424
1,048,576
262,144
2025
5,000,000
4,000,000
1,000,000
500,000
2025
5,000,000
4,161,139
838,861
209,715
2026
5,000,000
4,500,000
500,000
500,000
2026
5,000,000
4,328,911
671,089
167,772
2027
5,000,000
5,000,000
500,000
2027
5,000,000
5,000,000
671,089
Cost
5,000,000
Cost
5,000,000
Rate
20%
RV
UL
Total
5,000,000
10
DE=
500,000

Solutions Manual
RV
UL
10
Total
Page 8-72
5,000,000
Building - Units of production
Year
30-Jun
Purchase
Cost
Acc.
Dep.
(AD)
Carrying
Amount
(CA)
Dep.
Expense
(DE)
% units of
production
% UOP
units of
production
#of Units
$5,000,000
$0
$5,000,000
$0
2018
5,000,000
80,645
4,919,355
80,645
1.6%
5,000
2019
5,000,000
483,871
4,516,129
403,226
8.1%
25,000
2020
5,000,000
1,129,032
3,870,968
645,161
12.9%
40,000
2021
5,000,000
1,774,194
3,225,806
645,161
12.9%
40,000
2022
5,000,000
2,419,355
2,580,645
645,161
12.9%
40,000
2023
5,000,000
3,064,516
1,935,484
645,161
12.9%
40,000
2024
5,000,000
3,709,677
1,290,323
645,161
12.9%
40,000
2025
5,000,000
4,354,839
645,161
645,161
12.9%
40,000
2026
5,000,000
4,838,710
161,290
483,871
9.7%
30,000
2027
5,000,000
5,000,000
161,290
3.2%
10,000
5,000,000
100%
310,000

Cost
310,000
Total
5,000,000
RV
UL
10
Note that for declining balance adjustments would have to be made to the amount of expense in
2026 for the end of life of the asset.
c.
The units-of-production method makes most sense for this company. It matches cost to revenues
in a sensible manner when output varies, and the income of the mine each year would be a
reasonable representation of the profitability of the company. Units-of-production fits because
there is a reasonable estimate of output. Declining balance would result in huge losses in the
early years and large profits later, although if maintenance costs increase as the assets age,
declining balance may result in smoother income (this would likely only be the case for the
equipment). The straight-line method would show losses in the first two years and last two and
higher profits in years 2020 to 2025. It would be difficult to understand the rationale for straightline in this situation. What makes the units-of-production method preferable in this situation is
that the amount of palladium in the ground can be reasonably estimated. The same depreciation
method wouldnt have to be used for each type of capital asset. Units-of-production is well suited
for the mining properties because its good matching of the cost to find and extract the palladium
to revenue it helps earn. Declining balance or straight line might be more suitable for the
equipment. The equipment has value at the end of the life of the mine and quite possibly will be
moved and used at new mining location in the future, thus all revenue earned at that mine may
not be the best matching of expenses to revenue. The building could be amortized straight line
(gets used up with time) or units of production (the building is only good for the life of the
mine). A good argument could be made for both cases.

Solutions Manual
Page 8-73
d.
If the mine is shut down due to low selling prices and the eventual reopening is highly certain, it
would be logical to suspend depreciation until production resumes. However, its necessary to
consider the reason for depreciation before coming to a conclusion. The units of production
method is tied to actual production so when production ceases so should depreciation. The other
two methods are tied to the passage of time. The question is whether the consumption of the
assets stops when production stops. For some assets, it does and for others it doesnt. In normal
circumstances, the building would continue to be used up even if the mine was closed. However,
in this case the building actually has a longer life than the ten-year life of the mine so the issue is
more complex. The equipment may continue to weather even if it isnt being used during a mine
closure. Conceptually, it makes sense to continue depreciating assets when time-based methods
(straight line, declining balance) are being used. In any event, all users of the financial statements
are likely to be aware of the shut-down and wouldnt interpret the financial statements differently
if the depreciation was continued. The more likely consequence of continuing depreciation is on
the years following the resumption of production, when the depreciation would be lower than if
depreciation had not been continued during the shutdown.
e.
If the mine was shut permanently, the remaining account balances would have to be written off.
The building and mining properties wouldnt likely be saleable so they would be written down to
zero. The equipment would generate proceeds that would be recognized in the financial
statements.
Dr.
Dr.
Dr.
Dr.
Dr.
Cash
(Proceeds)
Accumulated Depreciation Mining Properties
Accumulated Depreciation - Equipment
Accumulated Depreciation Buildings
Loss on disposal of mining assets
Cr.
Mining properties
25,000,000
Cr.
Equipment
18,000,000
Cr.
Buildings
5,000,000
The entry above assumes that the net proceeds of disposing of the capital assets will be less than
their net book values.

Solutions Manual
Page 8-74
P8-20.
a.
i
Product Development Capitalized
Net income before development costs

Development costs
Net income
ii
$242,500
0
$242,500
Net income before development costs
$242,500
Development costs
-205,000
Net income
Barkway Inc.
Cash Flow Statement
For the Year Ended August 31, 2018
$37,500
Barkway Inc.
Cash Flow Statement
For the Year Ended August 31, 2018
Cash from operations

Net income
Product Development - Expensed

$242,500
Net income
$37,500
Add: Depreciation
92,500
Add: Depreciation
92,500
Add: Net decrease in non-cash working capital
52,500
Add: Net decrease in non-cash working capital
52,500
Add: Loss on sale of capital assets
87,500
Add: Loss on sale of capital assets
87,500
475,000
Investing activities
Proceeds from the sale of capital assets
270,000
122,500
Purchase of capital assets
(245,000)
Cost of Product development
(205,000)
Cost of Product development
Cash from (used for) investing activities
(327,500)
Financing activities
122,500
(245,000)
(122,500)
Increase in long-term debt
187,500
187,500
Repayment of mortgage loan
(62,500)
Repayment of mortgage loan
(62,500)
Dividends
(25,000)
Dividends
(25,000)
Cash from (used for) financing activities
100,000
100,000
Change in cash during 2018
247,500
247,500
Cash and equivalents, beginning of the year

Cash and equivalents, end of the year
55,000
$302,500

55,000
$302,500
b.
The perception one obtains from the statements of cash flows, if the costs are expensed, is that
the company is able to generate less cash from operating activities than if the costs are
capitalized. This makes the company appear to be more risky since cash from operations is an
important indicator of liquidity. The effect may be especially significant in this case because,
when the costs are expensed, cash from operations is significantly lower than if they were
capitalized.
c.
In 2018, capitalizing the costs increases the total assets, net income and shareholders equity. For
future years, if no more product development cost are incurred, net income will be higher if the
product development costs were expensed in 2018 because depreciation is required if the product
Solutions Manual
Page 8-75
costs are capitalized. Once product development costs are completely depreciated value of the
asset accounts will be the same under both approaches.
d.
Assuming this is the first year when product development costs are eligible for capitalization, the
managers would likely prefer to capitalize the costs as doing so would make income higher and
therefore result in a larger bonus. Over the life of the entity, the same amount of production costs
will be expensed so the overall effect on net income will be the same. The managers would
likely prefer to get their bonuses sooner rather than later.
P8-21.
a. i.
Okotoks Ltd.
Cash Flow Statement
For the Year Ended April 30, 2017
(Costs capitalized)
Okotoks Ltd.
Cash Flow Statement
For the Year Ended April 30, 2017
(Costs expenses)

Net loss
Add: Depreciation

($42,500)
167,500
Net loss
($117,500)
Add: Depreciation
137,500
Less: Gain on sale of capital assets
47,500
Less: Gain on sale of capital assets
47,500
Less: Net increase in non-cash working capital
56,000
Less: Net increase in non-cash working capital
56,000
21,500
(83,500)
155,000
(662,500)
Costs of Betterment
(105,000)
Costs of Betterment
(612,500)
Repayment of long-term loan
155,000
(662,500)
(507,500)
500,000
(375,000)

Repayment of long-term loan
500,000
(375,000)
Sale of common stock
525,000
Sale of common stock
525,000
650,000
650,000
59,000
59,000
49,000
49,000
$108,000
$108,000
b.
The perception one obtains from the statements of cash flows if the costs are expensed is that the
ability of the company to generate cash from operating activities is less than if the costs are
capitalized. That makes the company appear to be more risky since cash from operations is an
important indicator of liquidity. The effect may be especially significant in this case because,
when the costs are expensed, cash from operations is negative whereas its positive if they are
treated as betterments.
Solutions Manual
Page 8-76
c.
Capitalizing the costs as betterments increases the total assets and shareholders equity and
increases income in the years when additional expenditures on betterments exceeds the
depreciation of betterments and decreases income in other years. In 2018, when the costs are
treated as betterments, capital assets, total assets, shareholders equity, and net income are higher
than if the costs were treated as repairs and expensed. Once the betterment costs are fully
amortized all will be the same.
d.
When legitimate alternatives exist managers will consider their objectives of financial reporting
when making accounting choices. In the year the expenditures occur income will be higher if the
costs are capitalized. This will serve a short-term objective of income maximization, attractive if
senior management has an income-based bonus plan, managers are trying to impress external
stakeholders, or if the selling price of the business is based on net income in 2017.
P8-22.
a.
Disposals
Proceeds
Building
$780,000
Land
225,000
Equipment
100,000
Gain(Loss)
($110,000)
75,000
32,000
Total
Carrying
Amount
$890,000
150,000
68,000
$1,108,000
b.
Purchases
Building/Land
Equipment
Price
$487,000
315,000
$802,000
Opening: Dec 31, 2017 PPE

Less: Depreciation
Less: Carrying Amount of Disposals (part a)
Plus: Purchases
Closing: Dec 31, 2018 PPE
$4,750,000
310,000
1,108,000
802,000
$4,134,000

Solutions Manual
Page 8-77
P8-23.
a.
The following response assumes that the change will have no effect on income tax expense.
Reported net income

Adjustment (add)
Net income before adjustment
2017
(169,000,000)
175,000,000
6,000,000
Revised forecasts
Less: Adjustment for depreciation
Previous forecasts
2018
11,000,000
16,500,000
(5,500,000)
2019
35,000,000
16,500,000
18,500,000
2020
71,000,000
16,500,000
54,500,000
b.
There are a number of explanations. The first is that the assets are actually impaired. That is, as
management explains, because of the competitive environment and poor performance, these
assets are overvalued at cost. In this situation, a write down is appropriate because the future
benefits associated with the assets are less than the carrying amount. Another possibility is
earnings management. Operating income is negative in 2017 and management may feel that
given the loss it might take a big bath now and enjoy higher income in the future. The question
says that the CEO is new so the bath gives her a better chance of improving future earnings by
eliminating some expenses. The new CEO can point to the old management to blame for the
problems. Also, if management receives a bonus on profits in excess of some target amount and
wouldnt have received a bonus in 2017 in any event, by writing down the assets future profits
will be higher and larger bonuses may be obtained.
c.
Write-downs can be a tricky business for people analyzing financial statements. They tend to
distort the historical trends that exist in the numbers and make it difficult to interpret. In
Mildmays case the write-down was classified as non-recurring, which should be interpreted to
mean that it wont occur with any regularity in the future. However, the write-down does have an
impact on future earnings that may not be clear to some stakeholders because future earnings
will be higher than if the write-down had not occurred. In addition, the effect of the write-down
will be felt for eight years, yet comparative information is typically provided for two years. That
means that in the third year from the write-down there will be no information about the
writedown in the financial statements. Also, investors who base their projection of future
earnings on the current years may understate their estimates and be positively surprised about
future income if they dont take into consideration the effect of the write-down.

Solutions Manual
Page 8-78
P8-24.
(This is a very challenging question. It requires students to think carefully about the entity being
reported on and the impact of non-arms length transactions on financial reporting. The question
also has broader business applications. That is, students have to think about what the business
being purchased represents before focussing on the financial statements. In this case there may
be very little to the business that the client is considering buying.)
Dear Wolfgang:
Thank you for the opportunity to advise you on your prospective purchase of Wandas Fashions.
There are a number of challenges in assessing the attractiveness of purchasing this business.
Before considering any financial information that might be provided, I first want to address the
business itself. The information you provided indicates that Wanda has been in business for
many years and has many loyal customers. A key question is if you buy the business what is it
that you are buying? The tangible assets you will acquire include inventory, and some capital
assets (sewing machines, mannequins, pressing equipment, furniture and fixtures, and signage).
It would seem that these would have a relatively modest value and if you chose to start up a
business you could acquire these easily on your own, probably at relatively low cost. What truly
creates the value for Wandas business is Wanda herself and her loyal customers. The key
question is will Wandas customers come to you in large numbers for their tailoring needs? The
customer list is a valuable asset, but if the customers are loyal to Wanda as opposed to the
location of the business, you may lose many customers. Indeed, the customers may simply
continue to go to Wanda for their tailoring needs. As part of the contract to purchase Wandas
Fashions, will Wanda be prohibited from returning to the tailoring business? If not, many of the
customers on her list may simply stay with her in a new location. In that case, you will have paid
money for nothing. (Note that there are legal issues associated with non-competition clauses in
contracts. You should consult a lawyer with respect to this matter.) Also, will you be able to
provide the services that Wanda provides her customers? Wanda carries a line of clothing that
she designs herself. If many customers are attracted to her designs, will you be able to satisfy
their fashion needs? The standard tailoring and alterations services should be no problem to
provide but except for the location of Wandas store, is it necessary to buy a business to provide
those services? In addition, one of Wandas customers is her brothers business. Can you expect
to get this business? Will the terms of the arrangement with Wendel be the same as with Wanda?
If not, a significant chunk of business may be lost or renegotiation may make it less profitable.
The financial performance of Wandas Fashions is included in the financial statements of a group
of businesses operated by Wanda and her husband. From a financial standpoint, the financial
statements that Wanda can provide will be very difficult to interpret. This is because of the
extensive inter-relationships among these various businesses and the existence of many nonarms length transactions (transactions between relatives that cannot be assumed to take place at
market value). It is very important that you segregate the revenues and costs associated with the

Solutions Manual
Page 8-79
business activities that you are interested in acquiring and determine the impact of these nonarms length activities on the statements.
Among the concerns, you should discuss with Wanda are:
a. How much revenue did Wandas Fashions itself earn in each of the last few years. The
financial statements will contain revenues for many other activities that Wanda and her
husband are involved in. You must ensure that you have the revenues of Wandas Fashions
alone.
b. Expenses; More challenging will be segregating the expenses of Wandas Fashions. While
some expenses will be easily associated with the business, others will not For example,
utilities costs may be difficult to attribute to Wandas Fashions alone.
c. The value of free labour provided by Wandas children will have to be determined. You will
not have Wandas children to work for no money. You will have to pay employees to the
extent necessary. As a result, the statements for Wandas Fashions will understate the actual
cost of labour. I assume that the university tuition and the cost of the car were not deducted
as expenses of the businesses; if they were, this has to be clarified. The statements will also
not include a charge for Wanda herself (because Wandas Fashions is an unincorporated
business, wages paid to the proprietor do not appear in the statements).
d. Wandas Fashions does not pay rent. Again because Wandas Fashions is one of a group of
unincorporated businesses, paying rent to another business in the group is not meaningful. As
a result, the financial statements will not reflect occupancy costs. You will have to find out
from Wanda how much rent you will have to pay for the space the business will occupy. To
determine whether this amount is reasonable, you should ask other tenants in the building
and other businesses in the area how much rent they pay. I assume you will not be buying the
building itself.
e. What is the fair value of the assets in Wandas Fashions? It will be useful to know the value
of the tangible assets you will be obtaining. In particular, is the entire inventory in stock
usable? Are some of the fabrics out of style or damaged? You should only purchase the
inventory that you believe will be appropriate for the business you will operate.
f. Financial statements prepared for tax purposes may not provide a good indication of the
performance of a business. For tax purposes, the main goal is to reduce taxes, which means
that revenues may be deferred and expenses advanced to the extent allowable by the Income
Tax Act.
In sum, opening your own business can be exciting and challenging. Acquiring an existing
business can make starting out in business easier. However, I encourage you to proceed very
carefully. As I discussed, it at all clear what you will be getting if you buy Wandas Fashions.
The financial statements will be very difficult to interpret as discussed above. As well, there may
in fact be very little to Wandas Fashions itself. It may make more sense for you to simply start
up a tailoring business on your own and tough it out.
Please contact me if you need further advice.

Solutions Manual
Page 8-80
USING FINANCIAL STATEMENTS

TELUS
FS8-1.
a.
What amount of property, plant, and equipment does TELUS report on its December 31,
2011 balance sheet: $7,964,000,000
b.
What amount of goodwill does TELUS report on its December 31, 2011 balance sheet:
$3,661,000
c.
What amount of property, plant and equipment was disposed of or retired during fiscal
2011: $264,000,000
What amount of accumulated depreciation was associated with the property, plant, and
equipment that was disposed of or retired? $253,000,000
d.
What amount did TELUS expense for depreciation and amortization during 2011:
$1,331,000,000 + $479,000,000 = $1,810,000,000
e.
What is the cost of TELUS network assets on December 31, 2011: $23,766,000,000
What is carrying amount (net book value) of TELUS network assets on December 31,
2011: $6,338,000,000
What is the amount of accumulated depreciation associated with TELUS network assets:
$17,428,000,000
f.
Over what period is TELUS depreciating its wireless site equipment: 6.5 to 8 years
g.
How much cash did TELUS spend on the purchase of capital assets in 2011:
$1,847,000,000
h.
How much was TELUS amortization expense for software in 2011: $431,000,000
FS8-2.
TELUS net income for 2011 was $1,215,000,000. Its CFO was $2,550,000,000. The large
difference is caused by non-cash items such as depreciation and amortization and deferred
income taxes that are deducted in the calculation of net income, but have no effect on cash from
operations. These were offset by the employer contribution to employee defined benefit plans
and the net change in non-cash operating working capital (these were the largest ones).
It seems that TELUS had a good year. It was able to increase net income over 2010 levels,
although cash from operations was lower. From this information the liquidity position seems ok.
CFO is positive and adequate to cover capital expenditures and dividends (though just barely).
The amount of cash on hand increased over the year.
FS8-3.
The carrying amount of property, plant, and equipment TELUS reports on its December 31, 2011
balance sheet is $7,964,000,000. The balance sheet represents a snapshot of TELUS assets and
liabilities on the date of December 31, 2011 this value represents the net value PP&E taking into
account what was paid for the asset less any impairment (loss in value) and depreciation (usage).
TELUS net PP&E makes up approximately 40% of TELUS total asset base. This high
proportion makes sense given TELUS business as the company drives revenues from PP&E
intensive telephone and communication services. This means TELUS must make large
investments in PP&E to provide its service to customers. The net realizable value of PP&E is
unknown since these assets are recorded at historical cost.
Solutions Manual
Page 8-81
FS8-4.
TELUS is contractually committed to purchase $188,000,000 of PP&E through 2013. These
purchase commitments are not reflected on the balance sheet, but are disclosed in the notes to the
financial statements. IFRS doesnt allow reporting these purchase commitments (executor
contracts) as liabilities on the balance sheet because the business transaction (i.e. purchase) has
yet to occur (what asset would be reporteddoes the asset meet the definition of an asset?). On
the other hand a case can be made that the amount owing, if the arrangements cant be cancelled,
should be reported as a liability since it represents an amount the entity will have to pay.
Disclosure is appropriate because the future cash outlay is needed which is of relevance and
interest to readers of the financial statements.
FS8-5.
The value of TELUS fully depreciated PP&E is $3,000,000,000 with a carrying value of $0, on
December 31 2011. It is possible for TELUS to be using assets that are fully depreciated the
period of which an asset is depreciated is an estimate. As a result assets may last longer than
their estimated useful lives.
FS8-6.
Goodwill is an intangible asset where the value assigned is the amount paid for an acquisition of
another entity that is over and above the fair value of the entitys identifiable net assets.
Goodwill only arises when TELUS purchases an entity for a price higher than the fair value of
the entitys identifiable net assets. TELUS reported goodwill of $3,661,000,000 on December 31
2011. Goodwill isnt amortized but must be assessed for impairment which compares the
recoverable amount to the cash generating units to the carrying amount of its cash generating
unit. TELUS added $110,000,000 of goodwill in 2011. It is very possible and likely that TELUS
has developed and created valuable business intangibles like strategic synergies, competitive
advantages, customer loyalty, brand recognition and other items that are highly valuable, but not
reported on the balance sheet. Because this goodwill is internally generated and not through
acquisitions it cant be reported on the balance sheet.
FS8-7.
Intangible assets are separate identifiable assets that are non-physical, meaning they cant be
seen or touched. TELUS reported $6,153,000,000 in intangible assets on its December 31, 2011
balance sheet. TELUS categorizes its intangible assets into two categories: intangible assets
subject to amortization and intangible assets with an indefinite life. The largest single intangible
asset is the spectrum licences with a carrying amount of $4,867,000,000. The intangible assets
with an estimated useful life are amortized using the straight-line method over the estimated
useful life. The intangible assets with indefinite lives arent amortized because it isnt possible to
determine if or when the asset will be used up. These assets are periodically assessed for
impairment to ensure the reported value does not exceed the recoverable amounts.
FS8-8.
The TELUS brand is valuable, but because it is internally developed intangible asset so
according to IFRS and ASPE it is not reported on the balance sheet as an intangible asset. The
value of a brand name develops from advertising, promotion, and other investments that develop
Solutions Manual
Page 8-82
the product or company name. At the time that money is spent it is difficult to know whether
there will be a future benefit associated with the expenditure and therefore the definition of an
asset isnt met. It might be possible to determine a fair value of a brand, but brands are unique so
measuring them is very imprecise and not permitted under IFRS. Brand names can appear as
assets when they are purchased. In such instances, a business transaction can be attributed to the
direct creation of the brand while an accurate fair value can easily be obtained and verified, as it
represents the purchase price.
FS8-9.
Some of the estimates and judgement that TELUS must make with respect to its capital assets
include useful life, residual values, the type of depreciation method (i.e. straight line or
accelerated method), future cash flow generation attributable to the individual asset, and any
impairment tests. Some of the challenges that TELUS managers can face when making these
estimates and judgements include accuracy of the estimates, classification of the assets as to
whether to expense or capitalize or which category does the asset fall under. TELUS has assets
that have very long lives and so estimates of the lives can be imprecise, as can estimates of
residual values. Determining whether an asset is impaired when the life is long can also be
difficult because discounted future cash flows have to be estimated. One of the IFRS objectives
is fair presentation of the financial statements as managers achieving this objective can be
difficult when estimates are needed. Judgement required can be reduced by bringing in experts to
value the assets or determine amortization and depreciation when the assets are sold. The latter
option would generate more reliable value however waiting to the end of the assets life will not
make the financial statements relevant to the users. An overly conservative estimate (take more
depreciation) would make the entity appear to not be performing as well while a lenient estimate
would have the opposite effect.
FS8-10.
TELUS capitalizes its PP&E on the balance sheet as long term assets and sets up a contra asset
account to record depreciation. PP&E is initially recorded at the transaction valuethe amount
paid for the asset. PP&E is depreciated using the straight-line method. In 2011 TELUS reported
a depreciation expense of $1,331,000,000 for PP&E. As of December 31 2011, TELUS reported
a total accumulated depreciation of $20,347,000,000. TELUS depreciates its PP&E expenses for
a few reasons: it matches the cost of earning revenue to the revenue it helped earn, it reflects the
physical use of the asset, and it reflects obsolescence. The carrying amount is a rather poor
indicator of what an asset can be sold for. Carrying amount when using historical cost is simply
the capitalized amount that hasnt be depreciated. Its not intended to be an indication of market
value.
FS8-11.
In millions of dollars
Total assets
Net income
Finance costs
Tax rate (income taxes/income before taxes)

Solutions Manual
2011
2010
2009
$19,931 $19,624 $19,525
1,215
1,052
377
522
23.6%
24.2%
Page 8-83
ROA
(net income + Finance costs*(1 tax rate)/average assets)
7.60%
7.40%
TELUS has increased its ROA from 2010 to 2011 which is an indication that its assets are being
better managed to generate the improved return. TELUS improved ROA was a result of
increasing net income rather than reducing assets which indicates better utilization of assets.
FS8-12.
It would be very difficult to get into TELUS business because of the huge investment in capital
assets thats required. From the balance sheet the company has a net investment in PPE of almost
$8 billion, which is after accumulated depreciation. Generally, capital intensive businesses are
difficult to get into because

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CHAPTER 8

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

purchase price + associated costs

Depreciation expense {DE} = (165,500 5,000)/5 years = $32,100

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

purchase price + associated costs

Carrying Amount = Cost - AD

There is a loss of $22,664.

purchase price + associated costs

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

There is a loss of $6,250

purchase price + associated costs

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Depreciation expense {DE} =

There is a loss of $93,750

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

DE=(#units in period/#units over life)*(Cost-RV)

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

There is a loss of $10,086

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

purchase price + associated costs

Depreciation expense {DE} =

AD = Current DE + previous years AD

This assumes that the machine was purchased early in 2017.

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

There is a loss of $17,550

purchase price + associated costs

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Value in use Fair value

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Equipment #1 Annual depreciation expense = 75,000/5 = 15,000

Depreciation expense, equipment

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

purchase price + associated costs

Depreciation expense {DE} =

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

purchase price + associated costs

Depreciation expense {DE} =

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

purchase price + associated costs

Depreciation expense {DE} =

There is no gain or loss on this disposal because CA =

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

Intangible: The design doesnt have physical qualities.

Price paid for 100% of common shares

Resolute would report $3,000,000 of goodwill on its consolidated balance sheet.

Price paid for 100% of common shares

Write-down of goodwill (income statement)

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

purchase price + associated costs

AD = Current DE + previous years AD

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

purchase price + associated costs

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

John Friedlan, Financial Accounting: A Critical Approach, 4th edition

purchase price + associated costs

AD = Current DE + previous years AD

John Friedlan, Financial Accounting: A Critical Approach, 4th edition