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Fundamental Accounting Principles, Volume 2, 14th Canadian Edition Solution Manual

Fundamental Accounting Principles, Volume 2, 14th Canadian Edition Solution Manual simplifies difficult concepts with detailed summaries and structured insights.

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    Last revised: November 19, 2012 10 - 1 SOLUTIONS MANUAL to accompany Fundamental Accounting Principles 14 th Canadian Edition by Larson/Jensen Prepared by: Tilly Jensen, Athabasca University Wendy Popowich, Northern Alberta Institute of Technology Susan Hurley, Northern Alberta Institute of Technology Ruby So Koumarelas, Northern Alberta Institute of Technology Technical checks by: Ross Meacher Betty Young, Red River College, ANSR Source

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    Last revised: November 19, 2012 10 - 2 Chapter 10 Property, Plant and Equipment and Intangibles Chapter Opening Critical Thinking Challenge Questions* How do PPE assets generate sales? The article says that property, plant and equipment ( PPE ) are an “asset group on the balance sheet”. What other asset groups are there? - PPE assets, such as manufacturing equipment and the building in which the equipment is housed, are responsible for producing the goods a company sells to “generate sales”. Other asset groups on the balance sheet are current assets, long - term investment s , and intangible assets. *The Chapter 10 Critical Thinking Challenge questions are asked at the beginning of this chapter . Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter . The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students at Connect.

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    Last revised: November 19, 2012 10 - 3 Concept Review Questions 1. A property, plant and equipment asset is long - lived in that it has a service life of longer than one accounting period; it is used in the production or sale of products or services. 2. Land held for future expansion is classified as a long - term investment. It is not a property, plant and equipment asset because it is not being used in the production or sale of other assets or services. 3. The cost of a property, plant and equipment asset includes all normal, reasonable, and necessary costs of getting the asset in place and ready to use. 4. Land is an asset with an unlimited life and, therefore, is not subject to depreciation . Land improvements have limited lives and are subject to depreciation . 5. No. The Accumulated Depreciation , Machinery account is a contra asset account with a credit balance that does not represent cash or any other funds . Funds available for buying machinery would be shown on the balance sheet as liquid assets with debit balances. The balance of the Accumulated Depreciation , Machinery account shows the portion of the machinery's original cost that has been charged to depreciation expense, and gives some indication of how soon the asset will need to be replaced. 6. Revenue expenditures, such as r epairs , are made to keep a plant and equipment asset in normal, good operating condition, and should be charged to expense of the current period. Capital expenditures are made to extend the service potential or the life of a plant and equipment asset beyond the original estimated life and are charged to the plant and equipment asset account. 7. Because the $75 cost of the plant and equipment asset is not likely to be material to the users of the financial statements, the materiality principle justifies charging it to expense. 8. Danier Leather did not report any gains or losses on disposal of assets for its year ended June 25, 2011. High Liner Foods reported a “loss on disposal of assets” of $ 271 ,000 for its December 31, 2011 year end. Shoppers Drug Mart showed a $2,015,000 “loss on sale or disposal of property and equipment, including impairments” for its December 31, 2011 year end. WestJet reported a “loss on disposal of property and equipment of $54,000 for its December 31, 2011 year end . 9. A company might sell or exchange an asset when it reaches the end of its useful life, or if it becomes inadequate or obsolete, or because the company has changed its business plans. An asset may also be damaged or destroyed by fire or some other accident. 1 0 . An intangible asset has no physical existence. Its value comes from the unique legal and contractual rights held by its owner. 1 1 . Intangible assets are generally recorded at their cost and amortized over their predicted useful life in a manner that is similar to what is used to depreciate plant and equipment assets . 12. High Liner Foods reported $103,109,000 as Intangible assets at December 31, 2011. 13. A business has goodwill when the price paid for a company being purchased exceeds the fair market value of this company’s net assets (assets minus liabilities) if purchased separately. 14. Shoppers Drug Mart reported $2,499,722,000 as Goodwill at December 31, 2011.

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    Last revised: November 19, 2012 10 - 4 QUICK STUDY Quick Study 10 - 1 (5 minutes) $18,000 + $180,000 + $3,000 + $600 = $201,600 Quick Study 10 - 2 (10 minutes) 1. (a) R (b) C (c) R (d) C 2. (a) Mar. 15 Repairs Expense ................................ . 120 Accounts Payable .......................... 120 To record repairs. (b) Mar. 15 Refrigeration Equipment .................... 40,000 Accounts Payable .......................... 40,000 To record capital expenditure. (c) Mar. 15 Repairs Expense ................................ . 200 Accounts Payable .......................... 200 To record repairs. (d) Mar. 15 Office Building ................................ .... 175,000 Accounts Payable .......................... 175,000 To record capital expenditure.

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    Last revised: November 19, 2012 10 - 5 Quick Study 10 - 3 (10 minutes) (a) (b) (c) PPE Item Appraised Values Ratio of Individual Appraised Value to Total Appraised Value (a)  Total Appraised Value Cost Allocation (b) x Total Actual Cost Land .............. $ 320,000 320,000  500,000 = .64 or 64% $ 345,600 1 Building ........ 180,000 180,000  500,000 = .36 or 36% 194,400 2 Totals ............ $ 500,000 $ 540,000 1. 64% x 540,000 = 345,600 2. 36% x 540,000 = 194,400 201 4 Apr. 14 Land ................................ ........................... 345,600 Building ................................ ..................... 194,400 Cash ................................ ...................... 85,000 Notes Payable ................................ ....... 455,000 To record purchase of land and building. Quick Study 10 - 4 (10 minutes) TechCom Partial Balance Sheet October 31, 201 4 Assets Current assets: Cash ................................ ................................ ....... $ 9,000 Accounts receivable ................................ .............. $16,400 Less: Allowance for doubtful accounts ............ 800 15,600 Total current assets ................................ ............... $ 24,600 Property, plant and equipment: Land ................................ ................................ ........ $48,000 Vehicles ................................ ................................ .. $62,000 Less: Accumulated depreciation ....................... 13,800 48,200 Equipment ................................ .............................. $25,000 Less: Accumulated depreciation ....................... 3,800 21,200 Total property, plant and equipment .................... 117,400 Intangible assets: Patent ................................ ................................ ..... $20,100 Less: Accumulated amortization, patent 3,100 17,000 Total assets ................................ ................................ ..... $159,000

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    Last revised: November 19, 2012 10 - 6 Quick Study 10 - 5 (10 minutes) ($55,900 – $1,900)/4 = $13,500/year Quick Study 10 - 6 (10 minutes) Rate per copy = ($45,000 – $5,000)/4,000,000 copies = $0.01/copy Year Calculation Annual Depreciation 201 4 $.01 × 650,000 = $ 6,500 201 5 $.01 × 798,000 = 7,980 201 6 $.01 × 424,000 = 4,240 201 7 $.01 × 935,000 = 9,350 201 8 $.01 × 1,193,000 = 11,930 $40,000 Quick Study 10 - 7 (10 minutes) Annual rate of depreciation = 2/5 = .40 or 40% per year Year Calculation Annual Depreciation 201 4 40% × $86,000 = $34,400 201 5 40% × ($86,000 – $34,400) = 20,640 201 6 40% × ($86,000 – $34,400 – $20,640) = 12,384 201 7 40% × ($86,000 – $34,400 – $20,640 – $12,384) = 2,576 * 201 8 0 $70,000 * The calculation shows $7,430 of depreciation but that amount would cause accumulated depreciation to exceed the maximum allowed of cost less resi d ual ($86,000 – $16,000 = $70,000). Therefore, the depreciation for 201 7 must be adjusted to $2,576.

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    Last revised: November 19, 2012 10 - 7 Quick Study 10 - 8 (10 minutes) Computer panel: $4,000/8 years = $500 depreciation Drycleaning drum: $70,000 - $5,000 = $65,000/400,000 garments = $0.1625/garment; $0.1625/garment × 62,000 garments = $10,075 depreciation Stainless steel housing: $85,000 - $10,000 = $75,000/20 years = $3,750 depreciation Miscellaneous parts: $26,000/2 years = $13,000 depreciation Total depreciation on the dry cleaning equipment for 201 4 = $500 + $10,075 + $3,750 + $13,000 = $27,325 Quick Study 10 - 9 (10 minutes) 201 4 201 5 a. $5,000 $6,000 b. $3,000 $6,000 Calculations: a. 60,000 - 0 = 6,000/year x 10/12 = 5,000 10 years b. 6,000/year x 6/12 = 3,000 Quick Study 10 - 10 (10 minutes) 201 4 201 5 a. $10,000 $10,000 b. $6,000 $10,800 Calculations: a. 2/10 = .2 or 20%; 20% x 60,000 = 12,000 x 10/12 = 10,000 for 201 4 20% x (60,000 – 10,000) = 10,000 for 201 5 b. 20% x 60,000 = 12,000 x 6/12 = 6,000 for 201 4 20% x (60,000 – 6,000) = 10,800 for 201 5

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    Last revised: November 19, 2012 10 - 8 Quick Study 10 - 11 (10 minutes) 201 4 201 5 a. 10,000 14,000 b. 10,000 14,000 Calculations: 75,000 – 15,000 = 60,000/120,000 = $0.50 depreciation expense per unit produced $0.50 x 20,000 = $10,000 for 201 4 ; $0.50 x 28,000 = $14,000 for 201 5 NOTE: The units - of - production method is a usage - based method as opposed to a time - based method (such as straight - line and double - declining - balance) and therefore partial periods do not affect the calculations. Quick Study 10 - 12 (10 minutes) [($35,720 – $11,820 1 ) – $1,570]/ 7 2 years remaining = $3,190 1. ($35,720 – $4,200)/8 = $3,940/year × 3 years = $11,820 2.10 – 3 = 7 Quick Study 10 - 13 (10 minutes) 201 4 Jan. 3 Barbe c ue – Rotisserie …………………………………… 1,000 Cash ………………………………………………….. 1,000 To record the purchase of electronic rotisserie. Dec. 31 Depreciation Expense, Barbe c ue ……………………… 1,560 Accumulated Depreciation, Barbe c ue ………… 1,560 To record revised depreciation on the barbe c ue caused by the addition of a rotisserie; $7,000 - $200 = $6,800 ÷ 5 years = $1,360 PLUS $1,000 ÷5 years = $200; Total depreciation = $1,360 + $200 = $1,560.

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    Last revised: November 19, 2012 10 - 9 Quick Study 10 - 1 4 (10 minutes) Impairment losses occurred on the computer and the furniture in the amounts of $1,500 and $21,000, respectively. Calculations: Asset Cost Accumulated Depreciation Book Value Recoverable Amount Impairment Loss Building $1,200,000 $465,000 $735,000 $735,000 N/A Computer 3,500 1,800 1,700 200 $ 1,500 Furniture 79,000 53,000 26,000 5,000 21,000 Land 630,000 0 630,000 790,000 N/A Machine 284,000 117,000 167,000 172,000 N/A Quick Study 10 - 1 5 (10 minutes) a. 201 4 Oct. 1 Accumulated Depreciation , Equipment ................ 39,000 Cash ................................ ................................ ........ 17,000 Equipment ................................ ......................... 56,000 To record sale of equipment. b. Oct. 1 Accumulated Depreciation , Machinery ................ 96,000 Cash ................................ ................................ ........ 27,000 Machinery ................................ .......................... 109,000 Gain on Disposal ................................ ............... 14,000 To record sale of equipment. c. Oct. 1 Accumulated Depreciation , Truck ........................ 33,000 Cash ................................ ................................ ........ 11,000 Loss on disposal ................................ .................... 4,000 Delivery truck ................................ .................... 48,000 To record sale of equipment. d. Oct. 1 Accumulated Depreciation , Furniture .................. 21 ,000 Loss on disposal ................................ .................... 5 ,000 Furniture ................................ ............................ 26 ,000 To record disposal of equipment.

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    Last revised: November 19, 2012 10 - 10 Quick Study 10 - 1 6 (10 minutes) 201 4 Dec 31 Accumulated Depreciation , Automobile .............. 13,500 Computer * ................................ .............................. 5, 80 0 Automobile ................................ ........................ 15,000 Cash ................................ ................................ ... 2,750 Gain on Disposal ................................ ............... 1,5 5 0 To record exchange. *Computer = FV of assets received = $5, 80 0 as given Quick Study 10 - 1 7 (15 minutes) 201 4 Mar. 1 Accumulated Depreciation , Machine (old) .......... 36,000 Machine (new) 2 ................................ ..................... 117 ,000 Cash 1 ................................ ............................ 63,000 Machine (old) ................................ ............... 90,000 To record exchange of machines. 1. Cash paid = $123,000 - $60,000 = $63,000 2. Machine (new) = $63,000 cash paid + $54,000 book value of old = $117,000 Quick Study 10 - 1 8 (10 minutes) 2014 Jan. 4 Franchise ................................ ............................... 95,000 Cash 95,000 To record purchase of franchise. Dec. 31 Amortization Expense, Franchise ........................ 9,500 Accumulated Amortization, Franchise .......... 9,500 To record amortization of franchise; $95,000/10 years = $9,500 per year

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    Last revised: November 19, 2012 10 - 11 Quick Study 10 - 1 9 (10 minutes) 201 4 Oct. 1 Mineral Rights 35,000,000 Water Rights 4,000,000 Cash 9,000,000 Long - Term Note Payable 30,000,000 To record the purchase of intangibles. Dec. 31 Amortization Expense, Mineral Rights 875,000 Accumulated Amortization, Mineral Rights 875,000 To record amortization of mineral rights; $35,000,000 ÷ 10 years = $3,500,000/year; $3,500,000/year × 3/12 = $875,000. 31 Amortization Expense, Water Rights 100,000 Accumulated Amortization, Water Rights 100,000 To record amortization of water rights; $4,000,000 ÷ 10 years = $400,000/year; $400,000/year × 3/12 = $100,000. * Quick Study 10 - 20 (20 minutes) Motor (old) $45,000 - $5,000 = $40,000 ÷ 10 yrs × 8/12 = $ 2,667 Motor (new) $60,000 - $10,000 = $50,000 ÷ 8 yrs × 4/12 = 2,083 Metal housing $68,000 - $15,000 = $53,000 ÷ 25 yrs = 2,120 Misc. parts $15,000 ÷ 5 yrs = 3,000 Total depreciation expense to be recorded on the machine for 201 4 = $ 9,870

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    Last revised: November 19, 2012 10 - 12 EXERCISES Exercise 10 - 1 (10 minutes) Invoice cost ................................ ........................... $1 5 , 0 00 Freight costs ................................ ......................... 260 Steel mounting ................................ ...................... 795 Assembly ................................ ............................... 375 Raw materials for testing ................................ ...... 12 0 Less: discount ($1 5 , 0 00 × 2%) ............................ 300 Total acquisition costs ................................ ..... $1 6 , 25 0 Note: The $190 repairs are an expense and therefore not capitalized. Exercise 10 - 2 (15 minutes) Cost of land: Purchase price for land ................................ ................................ $ 1, 2 00 ,000 Purchase price for old building ................................ 48 0,000 Demolition costs for old building ................................ 75 ,0 00 L evelling the lot ................................ ................................ 105 ,000 Total cost of land ................................ ................................ $ 1,8 60 ,0 00 Cost of new building: Construction costs ................................ ................ $ 2,880,0 00 Less: Cost of land improvements* ...................... 215 ,0 00 Cost of new building ................................ ............. $ 2 , 665 ,0 00 *The land improvements are a distinct PPE asset that depreciates at a different rate than the building. Therefore it should be debited to an account separate from the building. Journal entry: 201 4 Mar. 10 Land ................................ ................................ ....... 1,8 60 ,0 00 Land Improvements ................................ .............. 215 ,0 00 Building ................................ ................................ . 2, 665 ,0 00 Cash ................................ ................................ . 4,7 40 ,000 To record costs of plant assets.

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    Last revised: November 19, 2012 10 - 13 Exercise 10 - 3 (15 minutes) Allocation of total cost: (a) (b) (c) PPE Asset Appraised Values Ratio of Individual Appraised Value to Total Appraised Value (a)  Total Appraised Value Cost Allocation (b) x Total Actual Cost Land $ 249 , 480 249 , 48 0  594 ,000 = .42 or 42% $ 244 , 346 2 Land Imprv. 83 , 16 0 83 , 16 0  594 ,000 = .14 or 14% 81,448 3 Building 261 , 36 0 261 , 36 0  594 ,000 = .44 or 44% 255 , 981 4 Totals $ 594 ,000 $ 581 , 775 1 1. 552 , 375 + 2 9, 4 00 = 5 8 1 , 775 2. 42% x 5 8 1 , 775 = 244 , 346 3. 14% x 5 8 1 , 775 = 81,448 4. 44% x 5 8 1 , 775 = 255 , 981 Journal entry: 201 4 Apr. 12 Land ................................ ................................ .................... 244,346 Land Improvements ................................ ........................... 81,448 Building ................................ ................................ .............. 255,981 Cash ................................ ................................ ............. 581,775 To record costs of lump - sum purchase.

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    Last revised: November 19, 2012 10 - 14 Exercise 10 - 4 (20 minutes) 201 4 Jan. 1 Land ................................ ................................ ................ 1, 296 ,000 Building ................................ ................................ .......... 1, 512 ,000 Equipment ................................ ................................ ...... 1,123,2 00 Tools ................................ ................................ ............... 3 88 , 8 00 Cash ................................ ................................ .......... 1,104 ,000 Notes Payable ................................ ........................... 3 , 216 ,000 To record lump - sum purchase. Calculations: (a) (b) (c) PPE Asset Appraised Values Ratio of Individual Appraised Value to Total Appraised Value (a)  Total Appraised Value Cost Allocation (b) x Total Actual Cost Land $ 1,152 ,000 1,152 ,000  3, 840 ,000 = .30 or 30% $ 1, 296 ,000 1 Building 1, 344 ,000 1, 344 ,000  3, 840 ,000 = .35 or 35% 1, 512 ,000 2 Equipment 998 , 4 00 998 , 4 00  3, 840 ,000 = .26 or 26% 1,123 , 2 00 3 Tools 345 , 6 00 345 , 6 00  3, 840 ,000 = .09 or 9% 3 88 , 8 00 4 Totals $ 3, 840 ,000 $ 4 , 32 0,000 1. 30% x 4,320 ,000 = 1, 296 ,000 2. 35% x 4,320 ,000 = 1, 512 ,000 3. 26% x 4,320 ,000 = 1,123 , 2 00 4. 9% x 4,320 ,000 = 3 88 , 8 00 Exercise 10 - 5 (10 minutes) 201 4 Dec. 31 Depreciation Expense, Truck 11 , 1 00 Accumulated Depreciation , Truck 11 , 1 00 To record depreciation . Calculation: [( 37 , 5 00 + 13 , 5 00 + 6 , 75 0 + 5 , 25 0) – 7 , 5 00] / 5 years = 11 , 1 00

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    Last revised: November 19, 2012 10 - 15 Exercise 10 - 6 (15 minutes) (a) (b) (c) Year Straight - line Double - declining - balance (Rate = 2/4 = .50 or 50%) Units - of - production (Rate = [( 169 , 2 00 – 24 ,000)/181,500] = . 8 0/unit) 201 4 36 , 30 0 1 50% × 169 , 2 00 = 84 , 6 00 30,640 (. 8 0 × 38,300) 201 5 36 , 30 0 50% × ( 169 , 2 00 – 84 , 6 00) = 42 , 30 0 32,920 (. 8 0 × 41,150) 201 6 36 , 30 0 $ 18 , 300 2 42,080 (. 8 0 × 52,600) 201 7 36 , 30 0 0 39 , 56 0 3 1. ( 169,200 – 24 ,000)/4 = 36 , 300 /year 2. Maximum depreciation is limited to $ 145 , 2 00 which is cost less residual ($ 169 , 2 00 – $ 24 ,000) therefore depreciation for 201 6 is $ 18 , 30 0 calculated as $ 145 , 2 00 – $ 126 , 90 0 accumulated depreciation recorded to date. 3. Maximum depreciation is limited to $ 145 , 2 00 which is cost less residual ($ 169 , 2 00 – $ 24 ,000 ) therefore depreciation for 201 7 is $ 39,560 calculated as $ 145 , 2 00 – $ 105 , 64 0 accumulate d depreciation recorded to date.

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