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Fundamental Accounting Principles, Volume 2, 14th Canadian Edition Lecture Notes

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    Fundamental Accounting Principles, 1 4 th Canadian edition 12 - 1 R esource Manual to accompany Fundamental Accounting Principles , 14 th edition, By Larson/Jensen Prepared by: Jeanine Wall, CMA, Red River College

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    12 - 2 Fundamental Accounting Principles , 1 4 th Canadian edition CHAPTER 10 PROPERTY , PLANT AND EQUIPMENT AND INTANGI B LES Related Assignment Materials Student Learning Objectives Quick Studies Exercises Problems 1. Describe property, plant and equipment (PPE) an d c alculate their cost. 10 - 1, 10 - 2, 10 - 3 10 - 1, 10 - 2, 10 - 3, 10 - 4, 10 - 5 , 10 - 9 10 - 1A, 10 - 7A, 10 - 10A , 10 - 13A, 10 - 15A. 10 - 1B , 10 - 7B, 10 - 10B, 10 - 13B, 10 - 15B. 2. Explain, record and calculate depreciation using the methods of straight - line, units - of - production and double - declining - balance. 10 - 4, 10 - 5, 10 - 6, 10 - 7, 10 - 8, 10 - 9, 10 - 10 , 10 - 11 10 - 5, 10 - 6 , 10 - 7, 10 - 8, 10 - 9, 10 - 10, 10 - 11, 10 - 12 , 10 - 18, 10 - 19, 10 - 21, 10 - 26, 10 - 27, 10 - 28, 10 - 29 10 - 2A, 10 - 3A, 10 - 4 A , 10 - 5A, 10 - 6A, 10 - 7A, 10 - 8A, 10 - 9A, 10 - 10A, 10 - 12 A, 10 - 13 A, 10 - 14A, 10 - 15A , 10 - 16A, 10 - 17A, 10 - 19A, 10 - 20A. 10 - 2B, 10 - 3B , 10 - 4B, 10 - 5B, 10 - 6B, 10 - 7B, 10 - 8B, 10 - 9B, 10 - 10B, 10 - 12B, 10 - 13B, 10 - 14B, 10 - 15B, 10 - 16B, 10 - 17B, 10 - 19B, 10 - 20B . 3. Explain and calculate depreciation for partial years. 10 - 9, 10 - 10 , 10 - 11 10 - 13, 10 - 14, 10 - 15, 10 - 21, 10 - 26, 10 - 28, 10 - 29 10 - 3A, 10 - 4A, 10 - 5A, 10 - 7A, 10 - 8A, 10 - 9A, 10 - 12A 10 - 13A, 10 - 14A, 10 - 15A, 10 - 16A, 10 - 17A, 10 - 19A, 10 - 20A. 10 - 3B , 10 - 4B, 10 - 5B, 10 - 7B, 10 - 8B, 10 - 9B, 10 - 12B, 10 - 13B, 10 - 14B, 10 - 15B, 10 - 16B, 10 - 17B, 10 - 19B, 10 - 20B . 4. Explain and calculate revised depreciation . 10 - 12 , 10 - 13 10 - 16, 10 - 17, 10 - 18 10 - 10A, 10 - 11A, 10 - 12 A, 10 - 20A . 10 - 10B, 10 - 11B, 10 - 12B, 10 - 16B, 10 - 20B . 5. Explain and record impairment losses. 10 - 14 10 - 19 10 - 13 A . 10 - 13B , 10 - 15B. 6. Account for asset disposal through discarding, selling or exchanging an asset . 10 - 15, 10 - 16 , 10 - 17 10 - 20, 10 - 21, 10 - 22, 10 - 23, 10 - 24 10 - 14A, 10 - 15A, 10 - 16A, 10 - 17A, 10 - 19A. 10 - 14B, 10 - 16B, 10 - 17B, 10 - 19B . 7. Account for intangible assets and their amortization . 10 - 1 8, 10 - 19 10 - 25, 10 - 2 6, 10 - 27, 1 0 - 28 10 - 18 A , 10 - 19A . 10 - 18B, 10 - 19B . 8. * Appendix 10A - Explain and calculate revised deprecation when there is a subsequent capital expenditure that creates a partial period depreciation. 10 - 20 10 - 29 10 - 20A . 10 - 20B .

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    Fundamental Accounting Principles, 1 4 th Canadian edition 12 - 3 Chapter Outline Property, plant and equipment (LO1) Property, plant and equipment may be tangible or intangible. A ssets used in the operations to help generate revenue and have a useful life of more than one accounting period are property, plant and equipment. Cost of Property, plant and equipment A. Consistent with cost principle, property, plant and equipment are recorded at cost. Cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use. B. Subsequent expenditures may be incurred after an asset is placed in service. Capital expenditures are costs of PPE that provide material benefits extending beyond the current period. They are debited to PPE accounts and appear on the balance sheet. Revenue expenditures are normal costs incurred to keep an asset in its normal running condition. They are expense s and would appear on the income statement. C. Subsidiary ledgers may be kept for maintaining control of large numbers of assets. Low cost asset purchases are usually expensed under the materiality principle. D. Low cost assets may be expensed (treated as revenue expenditures) under the materiality principle . E. Land purchased as a building site — cost includes purchase price, commissions, title insurance, legal fees, accrued property taxes, surveying, clearing, landscaping, and local government assessments (current or future) for streets, sewers, etc. Also includes cost of removal of any existing structures (less proceeds from sale of residual material F. Land Improvements — Costs that increase the usefulness of the land. 1. Examples: parking lot surfaces, driveways, fences, and lighting systems have limited useful lives. 2. Costs are charged to a separate Land Improvement account. 3. Costs are allocated to the periods they benefit through depreciation. . G. Buildings 1. If purchased — Cost usually include its purchase price, brokerage fees, taxes, title fees, attorney costs, and all expenditures to make it ready for its intended use. (any necessary repairs or renovations such as wiring, lighting, flooring and wall coverings). 2. If constructed for own use — Costs includes materials and labour plus a reasonable amount of indirect overhead cost (heat, lighting, power, and depreciation on machinery used to construct the asset). Cost also includes design fees, building permits, and insurance during construction. H. Leasehold improvements are alterations or improvements made to leased property. Leasehold improvements become part of the property and revert to the lessor at the end of the lease. These amounts are depreciate d over the life of the lease or life of the improvements, whichever is less. I. Machinery and Equipment — costs include all normal and necessary expenditures to purchase them and prepare them for their intended use (purchase price, taxes, transportation charges, insurance while in transit, and the installing, assembling and testing of machinery and equipment).

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    12 - 4 Fundamental Accounting Principles , 1 4 th Canadian edition J. Lump - Sum Purchase — a group of property, plant and equipment purchased with a single transaction for a lump - sum price. Individual asset cost determined by allocating the cost of the purchase among the different types of assets acquired based on their relative values . Depreciation (LO2) The process of allocating to expense the cost of a capital asset to the accounting periods benefiting from its use. Recorded as a debit to Depreciation Expense and a credit to Accumulated Depreciation. Factors in Computing Depreciation 1. Cost — described above. 2. Residual value — ( residual value ) an estimate of the asset's value at the end of its benefit period. 3. Useful life — ( service life ) length of time the asset is expected to be productively used in a company's operations. Factors affecting useful life include: a) Inadequacy — a condition in which the capacity of property, plant and equipment becomes too small for the productive demands of the business. b) Obsolescence — a condition in which, because of new inventions and improvements, a capital asset can no longer be used to produce goods or services with a competitive advantage. c) K. Depreciation Methods 1. Straight - line Method — charges the same amount to expense for each period of the asset’s useful life. Calculation:  Cost minus residual value (equals the cost to be depreciate d) divided by the asset's useful life . (usually in years ) 2. Units - of - Production Method — charges a varying amount to expense for each period of an asset’s useful life depending on its usage. Charges are based on the consumed capacity of the asset. Examples of capacity measurements: miles driven, product outputs, hours used. Calculation:  Cost minus residual value divided by the number of units to be produced equals the depreciation per unit.  Depreciation per unit X number of units consumed in period equals the period’s depreciation. 3. Declining - Balance Method — an accelerated depreciation method. Charges larger depreciation during the early years of an asset's life and smaller expenses in the later years. Double - declining balance method (DDB) is also referred to as being twice the straight line rate. 4. Calculation: Calculate the rate. 2/useful life= % (or 100%/useful life X 2) Calculate annual depreciation as : Net Book Value X Rate

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    Fundamental Accounting Principles, 1 4 th Canadian edition 12 - 5 Note: Depreciation is a method of allocation, not of valuation. The cost of a capital asset, less estimated residual, is allocated over the estimated useful life in a systematic and rational manner. The amount of depreciation charged per year may vary with the different methods. However, the total depreciation over an asset’s life will be the same regardless of which method is used. Depreciation for Tax Reporting — differences between financial and tax accounting systems are normal and expected. 1. Many companies use accelerated depreciation in computing taxable income because it postpone its tax payments by charging higher depreciation expense in the early years and lower amounts in the later years. 2. Federal income tax regulations require a company to depreciate assets according to the Capital Cost Allowance system (CCA) 3. The income tax regulations specify maximum CCA rates that businesses may claim but a business may decide to claim less than the maximum or claim none at all. Partial Year Depreciation (LO3) When an asset is purchased (or disposed of) at a time other than the beginning or end of an accounting period, depreciation is recorded for the part of the year the asset was in use. The two methods we will examine are: 4. Nearest whole month, depreciation is calculated if the asset was in use for more than half of the month of acquisition. 5. Half - Year Convention, six months depreciation is recorded for the partial year, regardless of when the asset was acquired. Revising Depreciation Rates (LO4) If estimated residual value and/or useful life is revised: Depreciation expense calculations are revised by spreading the remaining cost to be depreciate d over the revised useful life remaining. Calculation : Remaining Book value - Revised residual value Revised remaining useful life The revision is referred to as a change in an accounting estimate and is reflected in future financial statements. Past statements are not changed. Revised depreciation due to a capital expenditure being added to an asset during a period is also possible. Depreciation would be calculated from the date of the capital expenditure. This involves bringing depreciation up to date at the old rate and then calculating a partial year at the new rate. Students frequently have difficulty with this topic. It is helpful to demonstrate the calculation of both parts of the depreciation expense. Although this journal entry should be shown as only one entry at ye ar end, it can be helpful to break the entry into its two parts for demonstration purposes. Impairment of PPE Assets (LO5) L. An impairment loss happens when a PPE item’s book value is greater than the amount to be recovered through the asset’s use or sale. Assets should be assessed for impairment annually.

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    12 - 6 Fundamental Accounting Principles , 1 4 th Canadian edition Technological, economic or legal factors can all cause impairments to occur. The journal entry to record impairment: Date Impairment loss XX Asset account XX The asset’s book value will be reduced. Depreciation would be revised to reflect this change. Disposals of property, plant and equipment (LO6) A ssets may be discarded, sold, or exchanged due to wear and tear, obsolescence, inadequacy, or damage by fire or other accident. M. In general, accounting for disposals requires the following steps: 1. Record depreciation expense up to the date of disposal. This updates the accumulated depreciation account. 2. Remove the balances of the disposed asset and related accumulated depreciation accounts. 3. Record any cash (and other assets) received or paid in the disposal. 4. Record any gain or loss resulting from comparing the asset's book value with the value received in the disposal. N. Discarding Property, plant and equipment — follow general accounting procedure above. 1. If fully depreciate d — no loss (can never have a gain if discarding) 2. If not fully depreciate d — Record a loss (debit) equal to the book value. O. Selling Property, plant and equipment — follow general accounting procedure above. Compare value received to book value to determine gain (receive value greater than book value) or loss (receive value less than book value). 1. Sale is at a gain if value received exceeds book value. 2. Sale is at a loss if value received is less than book value. Students frequently have difficulty in deriving the journal entry involving a gain or loss. It is very helpful to have them journalize the parts of the entry that they already know such as cash received, debit to accumulated depreciation and credit to the asset account. I usually leave a space between the debits and credits and show the calculation as being the difference between the two sides. A debit or credit can then be recorded with the entry still in the correct order. They just have to fill in th e space! Intangible Assets (LO7) In tangible assets have no physical substance but provide future economic benefits. This is a difficult topic for students to grasp. Examples include patents, copyrights, leaseholds, drilling rights and trademarks. Accounting for intangibles is similar to accounting for PPE. Intangibles are recorded at cost when purchased. Cost is allocated to the asset over its useful life through amortization. The asset account itself is reduced. There is no accumulated account used. In this way intangibles will al ways be shown at net book value. Revising Deprecation (LO8) (Appendix 10A) Subsequent capital expenditure s will change the book value of the asset. A revision to depreciation is required to reflect the change. The first step is to bring depreciation up to d ate at

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    Fundamental Accounting Principles, 1 4 th Canadian edition 12 - 7 the time o f the subsequent capital expenditure. (using the original rate) The capital expenditure may involve replacing a portion of an asset or adding to the asset without removing any portion. A journal entry is done to record the addition or the addition and removal of an old part. If an old part is removed there may be a loss recorded. Depreciation is then calculated at the revised rate.

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    12 - 8 Fundamental Accounting Principles , 1 4 th Canadian edition VISUAL # 10 - 1 FORMULAE FOR DEPRECIATION METHODS 1. STRAIGHT LINE Cost - Estimated Residual Value Annual Estimated Useful Life (in years) Depreciation 2. UNITS OF PRODUCTION Depreciation a) Cost - Estimated Residual Value per Predicted units of production Unit b) Depreciation per unit x units produced = Depreciation for PERIOD Depreciation should stop when book value is equal to residual value. 3. DOUBLE DECLINING BALANCE Step 1: Calculate rate to be used ---- 2/Estimated useful life Step 2. Multiply Net Book Value by Rate Net Book Value =Cost – Accumulated Depreciation to Date Depreciation should stop when book value is equal to residual value. =

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    Fundamental Accounting Principles, 1 4 th Canadian edition 12 - 9 Alternate Demo Problem Chapter 10 A new machine cost $ 10 0,000, has an estimated useful life of five years and an estimated residual value of $15,000 at the end of that time. It is expected that the machine can produce 17 0,000 widgets during its useful life. The New Times Company purchases this machine on January 1, 2014 , and uses it for exactly three years. During these years the annual production of widgets has been 80,000, 50,000, and 30,000 units, r espectively. On January 1, 2014 , the machine is sold for $45,000. Required: 1. Calculate the depreciation expense for each of the first three years using a. straight - line b. units - of - production c. double - declining - balance 2. Prepare the proper journal entry for the sale of the machine under the three different depreciation methods.

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    12 - 10 Fundamental Accounting Principles , 1 4 th Canadian edition Solution to Alternate Demo Problem Chapter 10 1a . Straight - line The depreciation expense each year is equal to (cost - residual ) / useful life. In this example the cost is $ 10 0,000, the residual is $15,000, and the useful life is 5 years. Therefore, Annual depreciation = ( 10 0,000 - 15,000)/ 5 = 17,000 each year 1b. Units - of - production The depreciation expense each year is equal to a rate [(cost - residual ) / total production] multiplied by the actual number of units produced that year. In this example the rate would be $0.50 per widget, ( 10 0,000 - 15,000)/ 170 ,000, and the depreciation expense for each of the first three years would be : 2014 = .50 x 80,000 = 40,000 20 10 = .50 x 50,000 = 25,000 2013 = .50 x 30,000 = 15,000 1c. Double - declining - balance The depreciation expense each year is equal to a rate (twice the straight - line rate, or 2 / useful life) multiplied by the asset’s net book value (cost less accumulated depreciation ) at the beginning of the year. In this example the rate would be 2/5, or 40%, and the depreciation expense for each of the first three years would be 2014 = .40 x 10 0,000 = 4 0,000 20 10 = .40 x 60,000 = 24,000 20 13 = .40 x 36,000 = 14,400

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    Fundamental Accounting Principles, 1 4 th Canadian edition 12 - 11 2. The journal entry for the sale of the asset will have the same general form regardless of the method of depreciation adopted, except that whether there is a gain or a loss on the sale may change according to the depreciation method used. The gain or loss on disposal of the asset is determined by comparing the sale price, in this case $45,000, with the net book value of the asset at the time of the sale. Straight - line Cash ................................ ....................... 45,000 Accumulated depreciation ....................... 51,000 Loss on sale of machine .......................... 4,000 Machine ................................ .......... 10 0,000 Units - of - production Cash ................................ ....................... 45,000 Accumulated depreciation ....................... 80,000 Machine ................................ .......... 10 0,000 Gain on sale of machine .................. 2 5,000 Double - declining - balance Cash ................................ ....................... 45,000 Accumulated depreciation ....................... 78,400 Machine ................................ .......... 10 0,000 Gain on sale of machine .................. 23,400

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    11 - 2 Fundamental Accounting Principles, 14 th Canadian edition CHAPTER 11 CURRENT LIABILITIES Related Assignment Materials Student Learning Objectives Quick Studies Exercises Problems 1. Describe the characteristics of liabilities and explain the diff erence between current and long – term liabilities. 11 - 1, 11 - 2 11 - 1, 11 - 2, 11 - 3, 11 - 4 , 11 - 17 11 - 1A, 11 - 4A, 11 - 5A 11 - 6A . 11 - 1B, 11 - 5B, 11 - 6B . 2. Identify and describe known current liabilities. 11 - 3, 11 - 4, 11 - 5, 11 - 6, 11 - 7 11 - 5, 11 - 6, 11 - 7, 11 - 8, 11 - 9, 11 - 15, 11 - 16 , 11 - 17 11 - 5A, 11 - 6A . 11 - 5B, 11 - 6B . 3. Prepare entries to account for short - term notes payable. 11 - 8, 11 - 9 11 - 9, 11 - 10, 11 - 11 , 11 - 17 11 - 2A, 11 - 5A , 11 - 6A . 11 - 2B, 11 - 5B, 11 - 6B . 4. Account for estimated liabilities including warranties and corporate income taxes. 11 - 10, 11 - 11, 11 - 12, 11 - 13 , 11 - 14 11 - 12, 11 - 13 , 11 - 14, 11 - 15 , 11 - 16 , 11 - 17 11 - 3A, 11 - 4A, 11 - 5A , 11 - 6A . 11 - 3B, 11 - 4B, 11 - 5B, 11 - 6B . Note: Analytical & Review Problems may be assigned to student for additional enrichment. Chapter Outline I. Characteristics of Liabilities (LO1) A. Defining liabilities — a future payment of assets or services that a company is presently obligated to make as a result of past transactions or events. Note three crucial factors: 1. Due to past transaction or event. 2. Present obligation. 3. Future payment of assets or services. B. Classifying liabilities 1. Current liabilities (also called short - term liabilities) — expected to be settled within one year of the balance sheet date or within the operating cycle of the business, whichever is longer, using current assets. 2. Long - term liabilities — do not require settlement within one year or the current operating cycle, whichever is longer 3. Current portion of long - term debt refers to the part of a long term liability which is due within one year of the balance sheet date or one operating, cycle, whichever is longer. . 4. Balance sheet presentation of current liabilities - listed by maturity or due dates

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    Fundamental Accounting Principles, 1 4 th Canadian edition 11 - 3 II. Known (Determinable) Liabilities(LO2) S et by agreements, contracts or laws and are measurable. Examples of these current liabilities include: A. Trade accounts payable (or accounts payable) — amounts owed to suppliers for products or services purchased with credit. B. Payroll Liabilities - employee compensation amounts owed to employees. Amounts withheld could include CPP, EI and taxes owing to the Receiver General on behalf of employees. Other possibilities include amounts owing for union dues or medical insurance. C. PST and GST Payable — Provincial sales taxes collected are recorded in an account called PST Payable. PST must be remitted periodically to the appropriate government agency. As these taxes are paid the following journal entry is made: PST Payable XXX Cash XXX GST charged is 5% of sales price. GST is both paid by a business and collected from customers from sales. The net amount of these two amounts is either payable or receivable, depending upon the balance. Assuming GST is payable, the following entry would be made quarterly. (Some large businesses may need to remit monthly, while certain others elect to pay annually.) GST Payable(net of receivable) XXX Cash XXX GST Payable(net of receivable) XXX Cash XXX D. Unearned revenues — (deferred revenues) amounts received in advance from customers for future products or services. Reported as current liabilities. III. Short - term note payable (LO3) A written promise to pay a specified amount on a specified future date within one year or the company’s operating cycle, whichever is longer. Notes payable are interest - bearing. Can be used to purchase merchandise inventory or to replace an account payable. Short term payables may result from borrowings from a bank. Balance sheet shows a short - term note payable reported as a current liability and interest owing on the note as an additional current liability.

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    11 - 4 Fundamental Accounting Principles, 14 th Canadian edition IV Estimated Liabilities(or Provisions) (LO4) Obligations that exist but have an uncertain amount, but can be estimated. Examples are: A. Warranty liabilities — Seller reports the expected warranty expense/liability in the period when revenue from the sales of the product is reported. This satisfies the matching principle. Estimated warranty liability is increased with an estimate of warranty expense each year. As warranty costs are incurred, this account is debited or decreased. B. Income tax liabilities for corporations — Creates a liability until paid to government. Payments must usually be paid monthly. The amount to be paid each month is equal to one twelfth of the corporation’s estimated income tax liability for the year. Actual amount of total income tax for the period is not known until after the end of the accounting period.. C. Contingent liabilities are not recorded because they do not meet the recognition criteria. If it is probable that a liability will occur, this should be disclosed in the notes to financial statements.

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    Copyright © 2013 McGraw - Hill Ryerson. All rights reserved. 12 - 2 Fundamental Accounting Principles, 14 th Canadian edition CHAPTER 12 PARTNERSHIPS Related Assignment Materials Student Learning Objectives Quick Studies Exercises Problems 1. Identify characteristics of partnerships . 12 - 1, 12 - 2 12 - 1 2. Prepare entries when forming a partnership. 12 - 3 12 - 2 12 - 3A, 12 - 5A. 12 - 3B , 12 - 5B . 3. Allocate and record income and loss among partners. 12 - 4, 12 - 5, 12 - 6 12 - 2, 12 - 3, 12 - 4, 12 - 5, 12 - 6, 12 - 7 12 - 1A, 12 - 2A, 12 - 3A, 12 - 5A. 12 - 1B, 12 - 2B, 12 - 3B , 12 - 5B. 4. Account for the admission and w ithdrawal of a partner. 12 - 7, 12 - 8, 12 - 9, 12 - 10, 12 - 11, 12 - 12 , 12 - 13 12 - 8, 12 - 9, 12 - 10, 12 - 11, 12 - 12 12 - 4A, 12 - 5A, 12 - 6A. 12 - 4B, 12 - 5B, 12 - 6B. 5. Prepare entries for partnership liquidation. 12 - 14, 12 - 15 12 - 13, 12 - 14, 12 - 15, 12 - 16 12 - 7A, 12 - 8A. 12 - 7B, 12 - 8B. Note: Analytical & Review Problems may be assigned to students for additional enrichment.

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