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

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Fundamental Accounting Principles,14th Canadian edition12-1Resource Manualto accompanyFundamental Accounting Principles,14thedition,By Larson/JensenPrepared by:Jeanine Wall, CMA, Red River College

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12-2Fundamental Accounting Principles,14th Canadian editionCHAPTER10PROPERTY,PLANT AND EQUIPMENT AND INTANGIBLESRelated Assignment MaterialsStudent Learning ObjectivesQuick StudiesExercisesProblems1.Describeproperty, plantand equipment(PPE)andcalculate theircost.10-1,10-2,10-310-1,10-2,10-3,10-4,10-5,10-910-1A,10-7A,10-10A,10-13A,10-15A.10-1B,10-7B,10-10B,10-13B,10-15B.2.Explain, record andcalculatedepreciationusingthe methods of straight-line,units-of-production anddouble-declining-balance.10-4,10-5,10-6,10-7,10-8,10-9,10-10,10-1110-5,10-6,10-7,10-8,10-9,10-10,10-11,10-12, 10-18, 10-19, 10-21,10-26, 10-27, 10-28, 10-2910-2A,10-3A,10-4A,10-5A,10-6A,10-7A,10-8A,10-9A,10-10A,10-12A,10-13A,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 calculatedepreciationfor partialyears.10-9,10-10,10-1110-13, 10-14, 10-15,10-21, 10-26,10-28, 10-2910-3A,10-4A,10-5A,10-7A,10-8A,10-9A,10-12A10-13A,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 andcalculatereviseddepreciation.10-12,10-1310-16,10-17,10-1810-10A,10-11A,10-12A,10-20A.10-10B,10-11B, 10-12B, 10-16B,10-20B.5.Explain and recordimpairment losses.10-1410-1910-13A.10-13B, 10-15B.6.Account for asset disposalthrough discarding,sellingor exchanging an asset.10-15,10-16,10-1710-20, 10-21, 10-22, 10-23, 10-2410-14A,10-15A,10-16A,10-17A,10-19A.10-14B,10-16B, 10-17B, 10-19B.7.Account for intangibleassets and theiramortization.10-18,10-1910-25,10-26,10-27, 10-2810-18A, 10-19A.10-18B, 10-19B.8.*Appendix 10A-Explainand calculate reviseddeprecation when there is asubsequent capitalexpenditure that createsapartialperioddepreciation.10-2010-2910-20A.10-20B.

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Fundamental Accounting Principles,14th Canadian edition12-3Chapter OutlineProperty, plant and equipment(LO1)Property, plant and equipmentmay be tangible or intangible. Assets used in the operations tohelp generate revenue and have a useful life of more than one accounting period areproperty,plant and equipment.Cost ofProperty, plant and equipmentA.Consistent with cost principle, property, plant and equipment are recorded at cost. Costincludes all normal and reasonable expenditures necessary to get the asset in place and ready forits intended use.B.Subsequent expenditures may be incurred after an asset is placed in service.Capitalexpendituresare costs of PPE that provide material benefits extending beyond the currentperiod. They are debited to PPE accounts and appear on the balance sheet.Revenueexpendituresare normal costs incurred to keep an asset in its normal running condition. Theyare expensesand wouldappear on the income statement.C.Subsidiary ledgers may be kept for maintaining control of large numbers of assets. Lowcost asset purchases are usually expensed under the materiality principle.D.Low cost assets may be expensed (treated as revenue expenditures) under thematerialityprinciple.E.Land purchased as a building site—cost includes purchase price, commissions, titleinsurance, legal fees, accrued property taxes, surveying, clearing, landscaping, and localgovernment assessments (current or future) for streets, sewers, etc. Also includes cost ofremoval of any existing structures (less proceeds from sale of residual materialF.Land Improvements—Costs that increase the usefulness of the land.1.Examples: parking lot surfaces, driveways, fences, and lighting systems havelimited useful lives.2.Costs are charged to a separate Land Improvement account.3.Costs are allocated to the periods they benefitthrough depreciation..G.Buildings1.If purchased—Cost usually include its purchase price, brokerage fees, taxes, titlefees, attorney costs, and all expenditures to make it ready for its intended use. (anynecessary repairs or renovations such as wiring, lighting, flooring and wall coverings).2.If constructed for own use—Costs includes materials and labour plus a reasonableamount of indirect overhead cost (heat, lighting, power, and depreciation on machineryused to construct the asset). Cost also includes design fees, building permits, andinsurance 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 thelease. These amounts aredepreciated 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 topurchase them and prepare them for their intended use (purchase price, taxes, transportationcharges, insurance while in transit, and the installing, assembling and testing of machinery andequipment).

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12-4Fundamental Accounting Principles,14th Canadian editionJ.Lump-Sum Purchase—a group of property, plant and equipment purchased with a singletransaction for a lump-sum price. Individual asset cost determined by allocating the cost of thepurchase among the different types of assets acquired based on their relative values.Depreciation(LO2)Theprocess of allocating to expense the cost of a capital asset to the accounting periods benefitingfrom its use. Recorded as a debit to Depreciation Expense and a credit to AccumulatedDepreciation.Factors in Computing Depreciation1.Cost—described above.2.Residual value—(residualvalue) an estimate of the asset's value at the end of itsbenefit period.3.Useful life—(service life) length of time the asset is expected to be productivelyused in a company's operations. Factors affecting useful life include:a)Inadequacy—acondition in which the capacity of property, plant andequipment becomes too small for the productive demands of the business.b)Obsolescence—a condition in which, because of new inventions andimprovements, a capital asset can no longer be used to produce goods orservices with a competitive advantage.c)K.Depreciation Methods1.Straight-line Method—charges the same amount to expense for each period of theasset’s useful life.Calculation:Cost minus residual value(equals the cost to bedepreciated)divided by theasset's useful life. (usually in years)2.Units-of-Production Method—charges a varying amount to expense for each periodof an asset’s useful life depending on its usage. Charges are based on the consumedcapacity of the asset. Examples of capacity measurements: miles driven, productoutputs, hours used.Calculation:Cost minus residual valuedivided by the number of units to be produced equalsthedepreciationper unit.Depreciation per unit X number of units consumed in period equals the period’sdepreciation.3.Declining-Balance Method—an accelerated depreciation method. Charges largerdepreciation during the early years of an asset's life and smaller expenses in the lateryears.Double-declining balance method(DDB) is also referred to as being twice the straightline 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,14th Canadian edition12-5Note:Depreciation is a method of allocation, not of valuation. The cost of a capitalasset, less estimated residual, is allocated over the estimated useful life in asystematic and rational manner. The amount of depreciation charged per yearmay vary with the different methods. However, the total depreciation over anasset’s life will be the same regardless of which method is used.Depreciation for Tax Reporting—differences between financial and tax accountingsystems are normal and expected.1.Many companies use accelerated depreciation in computing taxable income becauseit postpone its tax payments by charging higher depreciation expense in the early yearsand lower amounts in the later years.2.Federal income tax regulations require a company to depreciate assets according tothe Capital Cost Allowance system (CCA)3.The income tax regulations specify maximum CCA rates that businesses may claimbut a business may decide to claim less than the maximum or claim none at all.Partial Year Depreciation(LO3)Whenan asset is purchased (or disposed of) at a time other than the beginning or end of anaccounting period, depreciation is recorded for the part of the year the asset was in use. The twomethods we will examine are:4.Nearest whole month, depreciation is calculated if the asset was in use for more thanhalf 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)Ifestimated residual value and/or useful life is revised:Depreciation expense calculations are revised by spreading the remaining cost to bedepreciated over the revised useful life remaining.Calculation:Remaining Book value-Revised residual valueRevised remaining useful lifeThe revision is referred to as achange in an accounting estimateand is reflected in futurefinancial statements. Past statements are not changed.Revised depreciation due to a capital expenditure being added to an asset during a period isalso 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 partialyear at the new rate. Students frequently have difficulty with this topic. It is helpful todemonstrate the calculation of both parts of the depreciation expense. Although this journalentry should be shown as only one entry at year end, it can be helpful to break the entry intoits 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 berecovered through the asset’s use or sale. Assets should be assessed for impairment annually.

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12-6Fundamental Accounting Principles,14th Canadian editionTechnological, economic or legal factors can all cause impairments to occur. The journal entryto record impairment:DateImpairment lossXXAsset accountXXThe asset’s book value will be reduced. Depreciation would be revised to reflect this change.Disposals of property, plant and equipment(LO6)Assets may bediscarded, sold, or exchangeddue to wear and tear, obsolescence, inadequacy, ordamage 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 theaccumulated depreciation account.2.Remove the balances of the disposed asset and related accumulated depreciationaccounts.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 thevalue received in the disposal.N.Discarding Property, plant and equipment—follow general accounting procedure above.1.If fullydepreciated—no loss (can never have a gain if discarding)2.If not fullydepreciated—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.Saleisat 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 knowsuch 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 beingthe difference between the two sides. A debit or credit can then be recorded with theentry still in the correct order. They just have to fill in the space!Intangible Assets(LO7)Intangible assets have nophysical substance but providefuture economic benefits. This is adifficult topic for students to grasp.Examples include patents, copyrights, leaseholds, drillingrights and trademarks. Accounting for intangibles is similar to accounting for PPE. Intangiblesare recorded at cost when purchased. Cost is allocated to the asset over its useful life throughamortization.The asset account itself is reduced. There is no accumulated account used. In thisway intangibles will always be shown at net book value.Revising Deprecation (LO8)(Appendix 10A)Subsequent capital expenditureswill change the book value of the asset. A revision todepreciation is required to reflect the change. The first step is to bring depreciation up todateat

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Fundamental Accounting Principles,14th Canadian edition12-7the time of the subsequent capital expenditure. (using the original rate) The capital expendituremay 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 anold part is removed there may be a loss recorded.Depreciation is then calculated at the revisedrate.

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12-8Fundamental Accounting Principles,14th Canadian editionVISUAL #10-1FORMULAEFORDEPRECIATIONMETHODS1. STRAIGHT LINECost-EstimatedResidualValueAnnualEstimated Useful Life (in years)Depreciation2. UNITS OF PRODUCTIONDepreciationa)Cost-EstimatedResidualValueperPredicted units of productionUnitb)Depreciationper unit x units produced=Depreciationfor PERIODDepreciation shouldstopwhen book value is equal to residual value.3. DOUBLE DECLINING BALANCEStep 1: Calculate rate to be used----2/Estimated useful lifeStep 2. Multiply Net Book Value by RateNet Book Value =Cost–AccumulatedDepreciationto DateDepreciation shouldstopwhen book value is equal to residual value.=

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Fundamental Accounting Principles,14th Canadian edition12-9Alternate Demo Problem Chapter10A new machine cost$100,000, has an estimated useful life of five years and an estimatedresidualvalueof $15,000 at the end of that time. It is expected that the machine can produce170,000 widgets during itsuseful life.The New Times Company purchasesthis 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,respectively. On January 1, 2014, the machine is sold for $45,000.Required:1.Calculate thedepreciationexpense for each of the first three years usinga.straight-lineb.units-of-productionc.double-declining-balance2.Prepare the proper journal entry for the sale of the machine under the three differentdepreciationmethods.

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12-10Fundamental Accounting Principles,14th Canadian editionSolution to Alternate Demo Problem Chapter101a. Straight-lineThedepreciationexpense each year is equal to (cost-residual) / useful life. In this example the cost is$100,000, theresidualis $15,000, and the useful life is 5 years. Therefore,Annualdepreciation=(100,000-15,000)/ 5=17,000each year1b.Units-of-productionThedepreciationexpense each year is equal to a rate[(cost-residual) / total production] multiplied by the actual number of units produced that year.In thisexample the rate would be $0.50 per widget, (100,000-15,000)/ 170,000, and thedepreciationexpense foreach of the first three years would be:2014=.50x80,000=40,0002010=.50x50,000=25,0002013=.50x30,000=15,0001c.Double-declining-balanceThedepreciationexpense each year is equal to a rate (twice the straight-line rate, or 2 / useful life)multiplied by theasset’s net book value (cost lessaccumulateddepreciation) at the beginning of the year.In this example the rate would be 2/5, or 40%, and thedepreciationexpense for each of the first threeyears would be2014=.40x100,000=40,0002010=.40x60,000=24,0002013=.40x36,000=14,400

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Fundamental Accounting Principles,14th Canadian edition12-112.The journal entry for the sale of the asset will have the same general form regardless of the methodofdepreciationadopted, except that whether there is a gain or a loss on the sale may changeaccording to thedepreciationmethod used. The gain or loss on disposal of the asset is determinedby comparing the sale price, in this case $45,000, with the net book value of the asset at the time ofthe sale.Straight-lineCash.......................................................45,000Accumulateddepreciation.......................51,000Loss on sale of machine..........................4,000Machine..........................................100,000Units-of-productionCash.......................................................45,000Accumulateddepreciation.......................80,000Machine..........................................100,000Gain on sale of machine..................25,000Double-declining-balanceCash.......................................................45,000Accumulateddepreciation.......................78,400Machine..........................................100,000Gain on sale of machine..................23,400

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11-2Fundamental Accounting Principles,14th Canadian editionCHAPTER11CURRENT LIABILITIESRelated Assignment MaterialsStudent Learning ObjectivesQuick StudiesExercisesProblems1.Describe the characteristicsof liabilities and explain thedifference between currentand long–term liabilities.11-1,11-211-1,11-2,11-3,11-4,11-1711-1A,11-4A,11-5A11-6A.11-1B,11-5B,11-6B.2.Identify and describeknown current liabilities.11-3,11-4,11-5,11-6,11-711-5,11-6,11-7,11-8,11-9,11-15,11-16,11-1711-5A,11-6A.11-5B,11-6B.3.Prepare entries to accountfor short-term notespayable.11-8,11-911-9,11-10,11-11,11-1711-2A,11-5A,11-6A.11-2B,11-5B,11-6B.4.Account for estimatedliabilities includingwarranties andcorporateincome taxes.11-10,11-11,11-12,11-13,11-1411-12,11-13,11-14,11-15,11-16,11-1711-3A,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 OutlineI.Characteristics of Liabilities(LO1)A.Defining liabilities—a future payment of assets or services that a company is presentlyobligated 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 liabilities1.Current liabilities (also called short-term liabilities)—expected to be settled within oneyear of the balance sheet date or within the operating cycle of the business, whichever islonger, using current assets.2.Long-term liabilities—do not require settlement within one year or the currentoperating cycle, whichever is longer3.Current portion of long-term debt refers to the part of a long term liability which is duewithin 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,14th Canadian edition11-3II.Known (Determinable) Liabilities(LO2)Set by agreements, contracts or laws and are measurable. Examples of thesecurrentliabilitiesinclude:A.Trade accounts payable (or accounts payable)—amounts owed to suppliers for products orservices purchased with credit.B.Payroll Liabilities-employee compensation amounts owed to employees.Amounts withheldcould include CPP, EI and taxes owing to the Receiver General on behalf of employees. Otherpossibilities include amounts owing for union dues or medical insurance.C.PST and GST Payable—Provincial sales taxes collected are recorded in an account called PSTPayable. PST must be remitted periodically to the appropriate government agency. As thesetaxes are paid the following journal entry is made:PST PayableXXXCashXXXGST charged is 5% of sales price. GST is both paid by a business and collected from customersfrom sales. The net amount of these two amounts is either payable or receivable, dependingupon 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)XXXCashXXXGST Payable(net of receivable)XXXCashXXXD.Unearned revenues—(deferred revenues) amounts received in advance from customers forfuture products or services. Reported as current liabilities.III.Short-term note payable(LO3)Awritten promise to pay a specified amount on a specified future date within one year or the company’soperating cycle, whichever is longer. Notes payable are interest-bearing. Can be used topurchase merchandise inventory or to replace an account payable. Short term payables mayresult from borrowings from a bank.Balance sheet shows a short-term note payable reported as a current liability and interest owingon the note as an additional current liability.

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11-4Fundamental Accounting Principles,14th Canadian editionIVEstimated 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 periodwhen revenue from the sales of the product is reported. This satisfies the matchingprinciple. Estimated warranty liability is increased with an estimate of warranty expenseeach 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 onetwelfth of the corporation’s estimated income tax liability for the year. Actual amount oftotal 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 itis probable that a liability will occur, this should be disclosed in the notes to financialstatements.

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Copyright© 2013McGraw-Hill Ryerson. All rights reserved.12-2Fundamental Accounting Principles,14thCanadian editionCHAPTER 12PARTNERSHIPSRelated Assignment MaterialsStudent Learning ObjectivesQuick StudiesExercisesProblems1.Identifycharacteristics ofpartnerships.12-1,12-212-12.Prepare entries whenforming a partnership.12-312-212-3A,12-5A.12-3B,12-5B.3.Allocate and record incomeand loss among partners.12-4,12-5,12-612-2,12-3,12-4,12-5,12-6,12-712-1A,12-2A,12-3A,12-5A.12-1B,12-2B,12-3B,12-5B.4.Account for the admissionandwithdrawalof a partner.12-7,12-8,12-9,12-10,12-11,12-12,12-1312-8,12-9,12-10,12-11,12-1212-4A,12-5A,12-6A.12-4B,12-5B,12-6B.5.Prepare entries forpartnership liquidation.12-14,12-1512-13,12-14,12-15,12-1612-7A,12-8A.12-7B,12-8B.Note:Analytical & Review Problems may be assigned to students for additional enrichment.

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