Burnley, Understanding Financial Accounting, Second Canadian Edition 

                                           

CHAPTER 8

LONG-TERM ASSETS

Learning Objectives
1. Identify and distinguish between the various types of long-term assets.
2. Describe the valuation methods for property, plant, and equipment, including
identifying costs that are usually capitalized.
3. Explain why property, plant, and equipment assets are depreciated.
4. Identify the factors that influence the choice of depreciation method and
implement the most common methods of depreciation.
5. Describe and implement changes in depreciation estimates and methods.
6. Explain what it means if property, plant, and equipment assets are impaired.
7. Account for the disposal of property, plant, and equipment.
8. Explain the accounting treatment for intangible assets, including
amortization.
9. Explain the accounting treatment for goodwill, including impairment.
10. Assess the average age of property, plant, and equipment; calculate the
fixed asset turnover ratio; and assess the results.

_________________________________________________________________________________________________
Solutions Manual 8-1 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

Discussion Questions

 1. 2 C  7. 3,4 C 13. 5 C 19. 7 C 25. 9 C

 2. 3 C  8. 4 C 14. 4 C 20. 4 C 26. 9 C
 3. 2 C  9. 4 C 15. 4 C 21. 4 C 27. 9 C
 4. 2 C 10. 4 C 16. 4 C 22. 8,9 C
5 3 C 11. 4 C 17. 3 C 23. 8 C
 6. 2 AP 12. 4 C 18. 6 C 24. 8 C

Application Problems

 1. 2 K  5. 4 AP  9. 4,7 AP 13. 5 AP 17. 8,9 AP

 2. 2 AP  6. 4 AP  10. 4,7 AP 14. 5 AP
 3. 2 AP  7. 4 AP  11. 4,7 AP 15. 4,5,7 S
 4. 4 AP  8. 4,7 AN  12. 4,7 AP 16. 8 AP

User Perspective Problems

 1. 2 C  4. 3 C  7. 7 C 10. 6 C 13. 2 C

 2. 2 C  5. 2 C  8. 6,9 C 11. 10 AN 14. 2,9 C
 3. 3 C  6. 7 C  9. 2 C 12. 2 C 15. 9 C

Work in Process

 1. 3,4 C  2. 3,4 C  3. 4 C 4. 4 C 5. 3 C

Reading and Interpreting Published Financial Statements

 1. 10 AN  2. 8,9 C  3. 10 AN 4. 10 AN 5. 10 AM

Cases

 1. 2 C 2. 1,2, E 3. 2 AN 4. 4 S 5. 4 E
4

_________________________________________________________________________________________________
Solutions Manual 8-2 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

_________________________________________________________________________________________________
Solutions Manual 8-3 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

Legend: The following abbreviations will appear throughout the solutions manual file

LO Learning objective  
BT Bloom's Taxonomy  
  K Knowledge  
  C Comprehension
  AP Application  
  AN Analysis  
  S Synthesis  
  E Evaluation  
Difficulty: Level of difficulty  
  E Easy  
  M Medium  
  H Hard  
Time: Estimated time to complete in minutes
AACSB Association to Advance Collegiate Schools of Business
  Communication Communication
  Ethics Ethics
  Analytic Analytic
  Tech. Technology
  Diversity Diversity
  Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency Map
  Ethics Professional and Ethical Behaviour
  PS and DM Problem-Solving and Decision-Making
  Comm. Communication
  Self-Mgt. Self-Management
  Team & Lead Teamwork and Leadership

_________________________________________________________________________________________________
Solutions Manual 8-4 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

  Reporting Financial Reporting

  Stat. & Gov. Strategy and Governance
  Mgt. Accounting Management Accounting
  Audit Audit and Assurance
  Finance Finance
  Tax   Taxation

_________________________________________________________________________________________________
Solutions Manual 8-5 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

SOLUTIONS TO DISCUSSION QUESTIONS

DQ8-1 An asset’s (or any accounting element’s) “carrying amount” is its

balance in the books of account, and therefore the amount reported in
the financial statements. If the asset is land, its carrying amount is
likely the same as its cost. However, most items of PP&E, originally
recognized and recorded at their cost, are subsequently depreciated
on a regular basis and they are then carried at cost less accumulated
depreciation. Contra accounts such as Accumulated Depreciation are
deducted from the PP&E asset account in determining the PP&E’s
carrying amount. Impairment losses, if applicable, are also
accumulated in a separate contra account and further reduce the
asset’s carrying amount.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-2 When a company acquires a PP&E asset that will provide benefits to
the entity over a number of future accounting periods, it wouldn’t be
reasonable to deduct the whole cost of that asset from current year’s
revenues as a current year expense. The entity still has an economic
resource – an asset – at the end of the current year. Therefore, such
assets are depreciated to allocate their cost to the accounting periods
in which the assets’ economic benefits are used up and that benefit
from their use.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-3 Accounting standards require that all costs necessary to acquire

equipment, get it in position, and ready it for use be capitalized.
These costs would include the invoice price, non-refundable taxes,
import duties, legal costs associated with the purchase, shipping
costs, installation costs, cost of test runs, and any other costs that
meet the criteria.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-6 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

DQ8-4 If a cost incurred is capitalized as part of PP&E, the cost of the asset is
increased. It also means that the cost is not expensed, and therefore
does not reduce the current period’s net income. Therefore, both the
current statement of financial position and the income statement are
affected, as are the future statements of financial position and income
statements over the useful life of the asset. If capitalized, the cost is
spread out over the useful life of the asset, thereby increasing
depreciation expense in each future year it is used. At the same time,
the carrying amount of the asset on the statement of financial position
decreases.

LO 2 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-5 There are a number of reasons why it is necessary to allocate the

purchase price of a basket purchase to the individual assets. If land and
building and equipment are acquired for a single price, the costs are
assigned to each component because the cost of the land does not
depreciate, and the cost of the equipment and the building probably
need to be depreciated over very different periods of time, and perhaps
using different methods of depreciation. IFRS requires that depreciation
be recognized for asset components using appropriate patterns and
reasonable useful lives for each. Also, if some assets are sold and some
remain, it is important to be able to determine the cost and carrying
amount of those disposed of to properly calculate any resulting gain or
loss on disposal. The cost of those assets remaining will also affect the
balances reported on the statement of financial position.

LO 2 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-7 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

DQ8-6 The cost of a basket purchase is allocated to the items on the basis of
their relative fair values. If there were three items (A, B, and C)
purchased for a single price of $1,000 and the fair values of the three
items were $300 (A), $400 (B), and $500 (C) then the cost of the three
items is allocated as follows:
Percentage of Fair Value
A: $300 / $1,200 = 25.0%
B: $400 / $1,200 = 33.3%
C: $500 / $1,200 = 41.7%
Cost
25.0% x $1,000 = $250
33.3% x $1,000 = $333
41.7% x $1,000 = $417

LO 2 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-7 The purpose of depreciation is to allocate the asset’s economic

benefits over the periods in which these benefits are expected to be
consumed or used up. The allocation is over the asset’s estimated
useful life using a rational and systematic method. There are three
methods of depreciation. The straight-line method which allocates
the costs evenly over the life of the asset, an accelerated method
(such as diminishing balance) that allocates more of the asset’s costs
early in the life of an asset and less in later years, or a method based
on the actual usage of the asset (units-of-activity or units-of-
production method). In practice, the straight-line method and the
diminishing-balance method are most commonly used.

LO 3,4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-8 While the straight-line method is relatively simple to apply, some

assets do not provide their benefits equally each accounting period.
Therefore, the straight-line method would not be representative of
how the company expects to consume the asset’s economic benefits,
so another method of depreciation (i.e. diminishing balance or units-
of-production) would be used.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-8 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

DQ8-9 Companies should choose the depreciation method that most closely
represents the pattern by which the asset’s economic benefits will be
consumed or used up. The economic benefits of many assets, such
as most buildings for example, are consumed or used up evenly over
their useful lives making the straight-line method of depreciation the
most appropriate. It is the most commonly used method. However, it
is not always obvious which pattern is most appropriate.

In some situations, an accelerated depreciation method produces the

best allocation of costs as more of the asset’s economic benefits are
consumed early in its useful life and less as time goes by. This
method allocates larger amounts of depreciation expense in the early
years and less in later years.

For some assets, it is possible to link the consumption of economic

benefits directly with its use. A unit of activity, such as the number of
units it can produce or the number of kilometers that can be driven,
can be determined and used as the basis for allocating the asset’s
cost. In these cases, an activity approach such as units-of-production
results in the best allocation of the asset’s costs to the periods in
which its economic benefits are being consumed or used up.

LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-10 An asset’s residual value is management’s estimate of the net

amount that would be received today if the asset were now as old and
in the same condition it is expected to be at the end of its useful life.
Because depreciation is a process of allocating the cost of an asset to
expense over its useful life, any costs expected to be recovered at the
end of its useful life should not be part of the depreciation expense.
Therefore, the residual value is considered in determining how much
cost should be recognized each period as an expense.

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-9 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

DQ8-11 Estimated residual value and estimated useful life are used directly in
the straight-line method. The estimated residual value is subtracted
from the original cost of the asset to determine the depreciable
amount of the asset, i.e. the amount of the cost that is to be
depreciated over the life of the asset. The depreciable amount is then
divided by the asset’s estimated useful life to determine the
depreciation expense to be allocated to each period.

For the units-of-production method, the estimated residual value is

also subtracted from the original cost of the asset to determine its
depreciable amount. Rather than determining the estimated useful
life in years (as is the case with the straight-line method), it is
estimated in terms of the number of units of use or output that the
asset will produce (i.e. units, km, hours, tonnes, m3). Dividing the
depreciable amount by the estimated useful life in units determines
the depreciation expense per unit. Finally, depreciation expense for
the period is calculated by multiplying the depreciation expense per
unit by the asset’s actual use or output for the period.

Under the diminishing balance method, the estimated useful life is

used to determine the depreciation rate. For example, under the
double diminishing balance method the rate is equal to: (1/estimated
useful life) x 2. This rate is then applied to the asset’s net book value
(i.e. cost – accumulated depreciation) to determine depreciation
expense for the period. The diminishing-balance method does not
explicitly incorporate the estimated residual value in the calculation of
depreciation expense. Instead, it is used as a constraint in setting the
depreciation schedule. After determining the depreciation expense
for the period, the revised net book value is determined and
compared to the estimated residual value.

As an asset cannot be depreciated below its estimated residual value,

for the period in which the net book value falls below the estimated
residual value, depreciation expense must be adjusted. The
maximum depreciation expense for that period will be equal to the
difference between the net book value at the start of the period and
the asset’s estimated residual value.

LO 4 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-10 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

DQ8-12 Some assets have a useful life that is a function of the activity
associated with the asset. In this case, a units-of-activity or units-of-
production approach results in the best allocation of the asset’s
economic benefits. The “units” referred to could be units of input, such
as kilowatt hours used, kilometers driven, flight hours, or they could
be output-related such as customers contacted or units produced (i.e.
units, tonnes, m3).

LO 4 BT: C Difficulty: E Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-13 Companies must periodically revisit the estimates for useful life and
residual value of assets to ensure they remain valid. Changes in
such accounting estimates are handled prospectively (i.e. into the
future). They are not treated retrospectively (i.e. no adjustments are
made to prior periods).

For example, if the straight-line method of depreciation is being used

at the time of the estimate change, the company determines the
carrying amount of the asset at the time of change, subtracts (if
applicable) the revised estimate of its residual value, and allocates
this amount over the estimated remaining useful life. There is no
restatement of prior periods with a change of estimate, nor is any
“catch-up” adjustment made.

LO 5 BT: C Difficulty: H Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-14 By selecting to depreciate their production equipment on a

diminishing balance basis at the rate of 5% per year, management is
expecting a depreciation expense each year that will decline modestly
from year to year over the useful life of the equipment. In using an
accelerated depreciation method like diminishing balances,
management expects that a greater proportion of the production
equipment’s economic benefits will be consumed early in its useful life
and less as time goes on.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-11 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

DQ8-15 The straight-line method results in the higher net income in the year
an asset is purchased because the depreciation expense is lower in
the first year than it would be under the diminishing-balance method.
The diminishing-balance method results in larger amounts of
depreciation expense early in the life of the asset and lower amounts
over time, whereas the straight-line method has equal amounts
spread over the asset’s useful life.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-16 Diminishing balance would result in the greatest reduction in the

carrying amount of a piece of equipment in the year of its acquisition
as this depreciation method is designed to have the most depreciation
expense taken in the first few years of use whereas straight-line is the
same amount every year.

LO 4 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-17 The carrying amount of equipment is based on multiple estimates as

depreciation expense is calculated based on the estimated useful life
of the equipment and the estimated residual value of the equipment.
Depreciation expense affects the amount of accumulated depreciation
and the carrying amount is the cost less accumulated depreciation, so
the carry amount is based on multiple estimates. The carrying amount
of equipment may also be subject to impairment testing if indications
of impairment are present. If this is the case, estimates related to
future cash flows and the estimated fair value less estimated selling
costs would be considered.

LO 3 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-12 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

DQ8-18 When management determines that one of its pieces of

manufacturing equipment is impaired, it means that the company is
unlikely to recover the asset’s carrying amount either by continuing to
use the equipment in operations or by selling the asset. The amount
of the impairment would become a loss in the current period as the
asset no longer embodies all the future economic benefits that had
been expected to flow from it.

LO 6 BT: C Difficulty: H Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-19 If a company records a gain on the disposal of a piece of equipment,

we know that the proceeds received for it, net of any costs to dispose
of the equipment, were greater than the carrying amount of the
equipment. The carrying amount is the cost of the equipment less
accumulated depreciation less any accumulated impairment losses as
well as any depreciation expense recorded to bringing its depreciation
up-to-date as of the date of disposal.
This also tells us that management’s estimates regarding its useful
life and/or residual value were incorrect and that depreciation
expense in prior periods had been overstated (too high).

LO 7 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-20 The Canada Revenue Agency’s (CRA) version of depreciation is

capital cost allowance (CCA). CCA is based on specific rates that
may or may not coincide with management’s assessment of the
asset’s useful life. The CRA sets CCA rates to meet economic
objectives, to encourage corporate investment in productive assets,
and to standardize the method and rates permitted for all taxpayers in
calculating their taxable income. The use of CCA rates removes
much of the management judgement involved in depreciation
calculations (i.e. depreciation method, estimated useful life and
estimated residual value).

LO 4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-13 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

DQ8-21 Key differences between the CCA system and accounting

depreciation include:
• Companies estimate the useful life of assets which is used to
determine the rate of depreciation, whereas under the CCA system,
the CCA rate is specified by the Canada Revenue Agency.
• The CCA rate is the maximum rate that may be used, but it is
possible for companies to use less than this maximum rate.
Companies are not able to do this when determining depreciation
expense for accounting purposes.
• The CCA system ignores an asset’s estimated residual value,
whereas it is a key component in depreciation calculations.
• The CCA system follows an accelerated method similar to
diminishing-balance method, whereas other methods (i.e. units-of-
production or straight-line) are commonly used for determining
depreciation for accounting purposes.

LO 4 BT: C Difficulty: H Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-22 Intangible assets can be recorded if they are purchased from outside
parties, using the same general capitalization principles that are
applied to PP&E. Intangibles that are developed internally by a
company, such as processes that may eventually be patented, cannot
be capitalized unless management is assured the intangible being
developed will deliver economic benefits to the company. Typically,
costs paid to third parties, such as legal and registration costs related
to the patent, are capitalized as part of the cost of the intangible
asset.

Goodwill can be recognized only as a result of a business

combination; that is, only when one company acquires a business
and pays more for it than the fair value of the identifiable net assets of
that business. Internally (self-generated) goodwill cannot be
capitalized.

LO 8,9 BT: C Difficulty: H Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-14 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

DQ8-23 Many intangible assets have a legal life (i.e. patents and copyrights),
but often their useful life is shorter than their legal life. When an
intangible asset is expected to provide economic benefits for an
estimated period into the future, its cost is amortized over that useful
period, similar to PP&E and depreciation. However, there are some
intangible assets whose economic benefits are expected to continue
for an indefinite period into the future (i.e. trademarks), and no
specific useful life can be determined. In this case, the intangible is
not amortized (as the future economic benefits it embodies are not
being used up). Instead, it is examined regularly (annually) for
impairment. This way, the asset is written down when it is determined
that its carrying amount is unlikely to be recoverable (i.e. when the
future economic benefits it embodies have been diminished).

LO 8 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-24 While a patent protects its holder for a period of 20 years from the
date the patent is filed, other factors may reduce its useful life to a
much shorter period. This is especially true when the patent is based
on specific technologies that are likely to be outdated long before the
20 years are up. Other factors such as changing consumer tastes and
preferences, increased competition, newly developed processes, etc.
can affect how long a patent will contribute to an entity’s revenues
and cash flows.

LO 8 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-25 Goodwill is equal to the price paid to purchase a business less the fair
value of the net assets acquired (i.e. the fair value of the assets
acquired less the fair value of any liabilities assumed in the
purchase). This excess amount may be paid because the business
earns profits in excess of what the average business in the industry
earns. This, in turn, may be due to such factors as a productive
workforce, very capable management, or an excellent business
reputation. Goodwill can be recognized in the accounts only when
one business acquires another and pays more for than the fair value
of the net assets acquired.
LO 9 BT: C Difficulty: H Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting
_________________________________________________________________________________________________
Solutions Manual 8-15 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

DQ8-26 Internally generated goodwill is not recognized as an asset in the

accounts because of measurement uncertainty. What would be its
cost? Which expenditures resulted in the goodwill? What would you
capitalize? What are the economic benefits that result from specific
expenditures? These questions are difficult, if not impossible, to
answer. In addition, goodwill is likely the result of training and
educating employees and hiring very capable management. Not only
is it impossible to determine which of these expenditures should be
capitalized as goodwill, but the employees and top management that
may contribute significantly to the excess earnings and goodwill are
not controlled by the entity, a condition necessary to meet the
definition of an asset. Employees and management can leave and
seek employment elsewhere. Therefore, the costs incurred, even if
known, cannot be recognized as an asset.
LO 9 BT: C Difficulty: H Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

DQ8-27 Goodwill is based on numerous estimates, as estimates of the fair

values of the assets and liabilities being purchased are used to
calculate goodwill. Estimates of the fair value of assets including
land, building, equipment, accounts receivable, inventory, etc. are
required before goodwill can be determined. Estimates of the fair
value of any liabilities assumed (such as accounts payable or long-
term debt) are also required to determine goodwill. Estimates are
needed determine the benefits that will be received from purchasing
the company. This amount s added to the estimated values of the
assets and liabilities to arrive at a purchase price.

LO 9 BT: C Difficulty: H Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-16 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

SOLUTIONS TO APPLICATION PROBLEMS

AP8-1A
a. 1. Land
2. Land
3. Land
4. Building
5. Land Improvements
6. Land Improvements (but may also be expensed)
7. Equipment
8. If non-recoverable – Equipment; if GST or HST – no effect on
an asset or an expense account.
9. Equipment
10. Equipment
11. Expense
12. Equipment
13. Expense
14. Expense

b.
11. Expense – minor repairs of equipment only maintain the
equipment in its original state, it is merely keeping the equipment
operational, it is not a betterment
13. Expense – routine maintenance of equipment only restores the
equipment to its original state, it is merely keeping the equipment
operational, it is not a betterment
14. Expense (or a Loss account) – replacing the broken windows only
restores them to their original state; it is not making the asset
more efficient or resulting in it lasting longer than it would have
before it was broken.

LO 2 BT: K Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-17 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-2A Amount paid for land, building and paving, and amount to be
allocated to the components = $3,200,000*

Component Fair Value Percentage Cost Allocated Cost

Land $1,800,000 60%1 X $3.2M $1,920,000

Building 1,080,000 36%2 X $3.2M 1,152,000
Land Improvements 120,000 4%3 X $3.2M 128,000
Total $3,000,000 100% $3,200,000

1 – $1,800,000/$3,000,000 = 60%
2 – $1,080,000/$3,000,000 = 36%
3 – $120,000/$3,000,000 = 4%

* It could be argued that the $200,000 excess of cost over the appraisal
values of the components of the basket purchase should be written off as a
loss, rather than capitalized, because the company should have paid no
more than the fair value for the components. The key concept to bear in
mind in this type of situation is that the recorded cost of an asset should not
exceed its fair value. The $200,000 premium paid can legitimately be
capitalized in this situation because of the added economic benefits of the
property to Matchett Machinery Ltd. Because the location has the effect of
reducing future transportation expenses, the property provides additional
future asset benefits to the company. This treatment is further supported by
the fact that the bank accepted the higher valuation for purposes of
financing.

The purchase price must be allocated because land does not depreciate,
and the useful life of the building and the land improvements (such as
paving and landscaping) are significantly different. Therefore, it is
necessary to recognize the cost of each component separately.

NOTE: The $200,000 premium is not considered ‘Goodwill’ because the

purchase is only of individual assets and not an entire business or business
segment.

LO 2 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-18 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-3A
a. Total basket purchase = $236,000

Fair Value Percentage Cost Allocated Cost

1
Machine X $105,000 39.6% X $236,000 $ 93,456
Machine Y 160,000 60.4%2 X $236,000 $142,544
Total $265,000 100.0% $236,000

1 –$105,000/$265,000 = 39.6%
2 – $160,000/$265,000 = 60.4%

Mar. 20 Machinery (X) 93,456

Machinery (Y) 142,544
Cash 236,000

b. Mar. 24 Machinery (X) 1,782*

Machinery (Y) 2,718*
Cash 4,500
* using the same ratio as the initial basket purchase

Mar. 29 Machinery (Y) 6,500

Cash 6,500

c. Machine X depreciation:
Double-diminishing-balance rate = (1/5) x 2 = .40 or 40%
($93,456 + $1,782) x 40% x 9/12 = $28,571

Machine Y depreciation:
[($142,544 + $2,718 + $6,500) – $14,600] ÷ 8 x 9/12 = $12,859

Dec. 31
Depreciation Expense 28,571
Depreciation Expense 12,859
Accumulated Depreciation, Machinery (X) 28,571
Accumulated Depreciation, Machinery (Y) 12,859

(NOTE: The debits to Depreciation Expense can be combined, however

the credits to Accumulated Depreciation must be kept separate.)
LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-19 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-4A
a. i. Straight-line method depreciation
[($150,000 – $12,000) / 5] = $27,600 per year

ii. Units-of-production method depreciation

($150,000 – $12,000) / 115,000 = $1.20 per unit

Year
2020 $1.20 x 15,000 = $18,000
2021 $1.20 x 24,000 = $28,800
2022 $1.20 x 30,000 = $36,000
2023 $1.20 x 28,000 = $33,600
2024 $1.20 x 18,000 = $21,600
Total units 115,000

iii. Double-diminishing-balance method depreciation

Rate = (1/5) x 2 = .4 or 40%

Year
2020 ($150,000 – $0) x 40% = $60,000
2021 ($150,000 – $60,000) x 40% = 36,000
2022 ($150,000 – $96,000) x 40% = 21,600
2023 ($150,000 – $117,600) x 40% = 12,960
$130,560
2023 Carrying amount = $150,000 – $130,560 = $19,440
Less: Residual value (12,000)
Depreciation for 2024 $ 7,440

b. The company should choose the depreciation method that best reflects the
pattern in which the economic benefits embodied in the asset are expected
to be used up or consumed.

LO 4 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-20 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-5A
Year 2
Depreciation Expense
Straight-line method:
($40,000 - $4,000) ÷ 4 = $ 9,000
Units-of-production method:
($40,000 - $4,000) ÷ 100,000 Km. = $ .36/km.
27,500 km. x $ .36 = $ 9,900
Double-diminishing-balance method:
Rate = (1/4) x 2 = .5 or 50%
Year 1: $40,000 x 50% = $20,000
Year 2: ($40,000 - $20,000) x 50% = $10,000

LO 4 BT: AP Difficulty: E Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-21 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-6A
a. i. Straight-line method:
[($100,000 – $10,000) / 4] = $22,500 per year
ii. Units-of-production method:
($100,000 – $10,000) / 200,000 = $0.45 per unit
Year Units
2020 40,000 x $0.45 = $18,000
2021 50,000 x $0.45 = $22,500
2022 60,000 x $0.45 = $27,000
2023 50,000 x $0.45 = $22,500
iii. Double-diminishing-balance method:
Rate = (1/4) x 2 = .5 or 50%
Year
2020 ($100,000 – $0) x 50% = $50,000
2021 ($100,000 – $50,000) x 50% = $25,000
2022 ($100,000 – $75,000) x 50% = $12,500
$87,500
2023 Carrying amount = $100,000–$87,500 = $12,500
Less: Residual value (10,000)
Depreciation expense, 2023 $ 2,500

b.
Units-of- Double-diminishing-
Straight-line production balance

i. Over 1st 2 years $45,000* $40,500** $75,000***

ii. Over all 4 years $90,000 $90,000 $90,000

* ($22,500 x 2) = $45,000
** ($18,000 + $22,500) = $40,500
*** ($50,000 + $25,000) = $75,000

The double-diminishing-balance method records highest depreciation

expense during the first two years, but the total expense over all four
years is the same under all the methods.
LO 4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-22 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-7A

Rate of depreciation (units-of-production method):

($1,200,000 - $150,000) ÷ 14,000 flying hours = $75/flying hour

2020 depreciation expense:

1,400 flying hours X $75/hr. = $105,000

2021 depreciation expense:

1,650 flying hours X $75/hr. = $123,750

Carrying amount of helicopters, December 31, 2021:

$1,200,000 – ($105,000 + $123,750) = $971,250

LO 4 BT: AP Difficulty: E Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-23 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-8A

a. Statement of Income Decrease in Net Income

(by the amount of the loss, $37,000-$45,000)

Statement of Financial Position Decrease in Assets

[difference between proceeds ($37,000) and carrying amount of

equipment, ($45,000) and decrease in shareholders equity (as retained
earnings would decrease by amount of loss)]

Statement of Cash Flows Increase in Cash

(by selling price, $37,000)

b. Statement of Income No effect

Statement of Financial Position No net effect

(as cash would decrease by $218,000 and equipment would increase by

$218,000)

Statement of Cash Flows Decrease in Cash

(by amount of purchase price)

c. Statement of Income Decrease in Net Income

(by amount of depreciation expenses)

Statement of Financial Position Decrease in Assets

(as carrying amount of equipment would decrease) and decrease in

shareholders equity (as retained earnings would decrease)

Statement of Cash Flows No effect

LO 4,7 BT: AN Difficulty: H Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-24 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-9A

a. Jan. 1, 2020
Equipment 21,000
Cash 21,000

Dec. 31, 2020, 2021, and 2022

Depreciation Expense* 3,600
Accumulated Depreciation, Equipment 3,600

*($21,000 - $3,000) /5 years = $3,600/year

b. Jan. 1, 2020
Equipment 21,000
Cash 21,000

Dec. 31, 2020

Depreciation Expense* 8,400
Accumulated Depreciation, Equipment 8,400

Rate = (1/5) x 2 = .4 or 40%

*$21,000 x 40% = $8,400

Dec. 31, 2021

Depreciation Expense* 5,040
Accumulated Depreciation, Equipment 5,040
*($21,000 - $8,400) x 40% = $5,040

Dec. 31, 2022

Depreciation Expense* 3,024
Accumulated Depreciation, Equipment 3,024
*($21,000 - $8,400 - $5,040) x 40% = $3,024

_________________________________________________________________________________________________
Solutions Manual 8-25 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-9A (Continued)

c. Sept. 30, 2020

Equipment 21,000
Cash 21,000

Dec. 31, 2020

Depreciation Expense* 900
Accumulated Depreciation, Equipment 900
*($21,000 - $3,000) /5 years x (3/12) 1 = $900
1 – 3 months (i.e. October, November and December)

Dec. 31, 2021

Depreciation Expense 3,600
Accumulated Depreciation, Equipment 3,600
Jun. 30, 2022
Depreciation Expense* 1,800
Accumulated Depreciation, Equipment 1,800
*($21,000 - $3,000)/5 years x (6/12)2 = $1,800
2 – 6 months (i.e. January through June)

Cash 13,000
Accumulated Depreciation, Equipment* 6,300
Loss on Disposal 1,700
Equipment 21,000

*$900 + $3,600 + $1,800 = $6,300

LO 4,7 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-26 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-10A

Depreciation expense:
($180,000 - $30,000) / 5 years = $30,000 per year
or /12 = $2,500 per month

Carrying amount of equipment on June 30, 2022:

Cost, April 2, 2020 $180,000

Depreciation expense recognized and
balance of accumulated depreciation on
June 30, 2022:
April 2/20 to June 30/22 = 9+12+6 = 27 months
$2,500 x 27 = ( 67,500)
Carrying amount $112,500

Proceeds of sale $100,000

Carrying amount at June 30, 2022 112,500
Loss on disposal ($ 12,500)

LO 4,7 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-27 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-11A
Accumulated
Cost Depreciation
Equipment:
Jan. 1, 2017 $40,000
Balance, Jan. 1, 2020
($40,000 - $4,000) /6 X 3 yrs. $18,000
Depreciation Jan. 1 to Mar. 31/20
($40,000 - $4,000) /6 X 3/12 1,500
$19,500
Mar. 31/2020
Depreciation Expense 1,500
Accumulated Depreciation, Equipment 1,500

Mar. 31/2020
Cash 29,000
Accumulated Depreciation, Equipment 19,500
Equipment 40,000
Gain on Disposal 8,500

Apr. 12/2020
Equipment 82,000
Cash 82,000

Dec. 31/2020
Depreciation Expense* 9,000
Accumulated Depreciation, Equipment 9,000

*($82,000 - $10,000) / 6 x (9/12) = 9,000

Trucks—Depreciation Expense
Determine rate: (1/4) x 2 = .5 or 50%
2019: $60,000 x 50% = $30,000
2020: ($60,000 - $30,000) x 50% = $15,000

Dec. 31/2020
Depreciation Expense 15,000
Accumulated Depreciation, Trucks 15,000

LO 4,7 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
_________________________________________________________________________________________________
Solutions Manual 8-28 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-12A
a. Mar. 1, 2019
Machinery 80,000
Cash 20,000
Notes Payable 60,000

a.Dec. 31, 2019

Depreciation Expense* 6,667
Accumulated Depreciation, Machinery 6,667
* [($80,000 – $8,000) / 9] x 10/12

Dec. 31, 2020

Depreciation Expense* 8,000
Accumulated Depreciation, Machinery 8,000
* [($80,000 – $8,000) / 9]

Oct. 30, 2021

Depreciation Expense* 6,667
Accumulated Depreciation, Machinery 6,667
* $8,000 x 10/12 = $6,667

Oct. 30, 2021

Cash 62,000
Accumulated Depreciation, Machinery* 21,334
Gain on Disposal 3,334
Machinery 80,000
* ($6,667 + $8,000 + $6,667) = $21,334

_________________________________________________________________________________________________
Solutions Manual 8-29 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-12A (Continued)

c. i.

Year Opening Rate Depreciation Ending

Carrying Expenses carrying
Amount amount
1 $80,000 x 22.22% $17,776 $62,224
2 $62,224 x 22.22% $13,826 $48,398
3 $48,398 x 22.22% $10,754 $37,644

2019 10/12 x $17,776 = $14,813

2020 2/12 x $17,776 = $ 2,963

10/12 x $13,826 = $11,522
$14,485

2021 2/12 x $13,826 = $2,304

8/12 x $10,754 = $7,169
$9,473

ii. Oct. 30, 2021

Depreciation Expense* 9,473
Accumulated Depreciation, Machinery 9,473

Cash 62,000
Accumulated Depreciation, Machinery 38,7711
Gain on Disposal 20,771
Machinery 80,000
1
($14,813 + $14,485 + $9,473) = $38,771

LO 4,7 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-30 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-13A Cost of equipment, Jan. 1, 2020 $18,000

Depreciation expense, 2020, and accumulated
depreciation Jan. 1, 2021
($18,000 - $0)/ 3 years = ( 6,000)
Equipment’s carrying amount, Jan. 1, 2021 $12,000

Depreciation expense, 2021:

($12,000 - $0) / 4* remaining years = $ 3,000
* Total 5 less one year

LO 5 BT: AP Difficulty: E Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

AP8-14A Initial depreciation for Years 1 and 2:

($66,000 – $6,000) ÷ 150,000 units = $0.40 per unit

Carrying amount at end of Year 2 = $66,000 – (45,000 x $0.40)
=$48,000
Revised depreciation calculation in Year 3:

(Carrying amount – Residual value) ÷ Remaining useful life

($48,000 – $6,000) ÷ (120,000 – 45,000) = $0.56 per unit

Depreciation expense for Year 3 = $0.56 x 25,000 units = $14,000

LO 5 BT: AP Difficulty: E Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-31 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-15A

July 1, 2016
Equipment 140,000
Cash 140,000

Dec 31, 2016

Depreciation Expense 1 6,650
Accumulated Depreciation, Equipment 6,650
1
($140,000 – $7,000) / 10 = $13,300 per year
$13,300 per year x 6/12 = $6,650

Dec 31, 2019

Depreciation Expense2 11,750
Accumulated Depreciation, Equipment 11,750
2
A. Determine carrying amount at time of change
$140,000 – ($6,650 + $13,300 + $13,300) = $106,750
B. Determine depreciation expense using revised estimated residual
value and revised estimated useful life
($106,750 – $1,000) / 9 = $11,750

Nov 1, 2020
Depreciation Expense3 9,792
Accumulated Depreciation, Equipment 9,792
3
$11,750/ year x (10/12) = $9,792

Nov 1, 2020
Cash 83,000
Accumulated Depreciation, Equipment 4 54,792
Loss on Disposal 2,208
Equipment 140,000
4
$6,650 + $13,300 + $13,300 + $11,750 + $9,792 = $54,792
LO 4,5,7 BT: S Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-32 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-16A
a.

Customer
Licenses Lists Patents Copyrights
Purchase cost $80,000 $60,000 $160,000 $250,000
Legal fees 12,000
Total cost $92,000 $60,000 $160,000 $250,000
Amortization period N/A 6 years 8 years 10 years
Annual amortization* N/A $10,000 $20,000 $ 25,000

*Assuming the straight-line method is appropriate for all intangibles

with a limited or finite useful life.

b. Intangible assets, at cost less accumulated amortization

Copyrights $ 150,000 *
Patents 80,000 **
Customer Lists 20,000 ***
Licenses 92,000
Total intangible assets $ 342,000

* [$250,000 – ($25,000 x 4)]

** [$160,000 – ($20,000 x 4)]
*** [$60,000 – ($10,000 x 4)]

LO 8 BT: AP Difficulty: E Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-33 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-17A a. Goodwill

Purchase Price $5,658,000

Less: Inventory (1,185,000)
Accounts Receivable (658,000)
Equipment (2,360,000)
Patents (540,000)
Add: Accounts Payable 589,000
Bank Loan Payable 980,000
Goodwill $2,484,000
b.
Amortization Expense 108,000
Accumulated Amortization, Patents 108,000

Patent $540,000/5 = $108,000 (use 5 years as it is expected the patent will

be obsolete in 5 years.

LO 8,9 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-34 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-1B
a. Amount to be capitalized:

Land Building Equipment

Jan. 2 Purchase of land $ 75,000
Jan. 6 Fees related to land
purchase 1,200
Jan. 11 Clearing the land 4,000
Jan. 15 Purchased equipment $120,000
Jan. 17 Building permit $ 900
Jan. 20 Temporary fencing 2,500
Jan. 22 Construction started and
estimated total cost is
noted - This is not
recorded.
Jan. 25 Delivery of equipment 3,500
Feb. 1 Payment for equipment
and delivery - This
reduces the liabilities that
would have been
recorded on January 13
and January 25.
Feb. 28 Architect’s fees 11,000
May 9 Completion of building 380,000
May 11 Tearing down fencing 800
May 14 Installing equipment 2,500
May 24 Party to celebrate
Record as an expense
June 7 Setting up equipment 700
June 10 Advertising for workers
record as an expense

_________________________________________________________________________________________________
Solutions Manual 8-35 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

$ 80,200 $395,200 $126,700

b. The cost of the party and the cost of advertising for workers should be
treated as current period expenses. They were not necessary costs of
acquiring or preparing the land, building or equipment for use.

LO 2 BT: K Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-36 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-2B Amount paid for land, building and land improvements, and amount to
be allocated to the components = $4,860,000

Component Fair Value Percentage Cost Allocated Cost

Land $1,518,900 30.5%1 X $4,860,000 $1,482,300

Building 2,714,100 54.5%2 X $4,860,000 2,648,700
Land Improv. 747,000 15.0%3 X $4,860,000 729,000
Total $4,980,000 100% $4,860,000
1
Land – $1,518,900/$4,980,000 = 30.5%
2
Building – $2,714,100/$4,980,000 = 54.5%
3
Land Improv. – $747,000/$4,980,000 = 15.0%

The purchase price must be allocated because land does not depreciate,
and the useful life of the building and the land improvements (such as
paving and landscaping)are significantly different. Therefore, it is necessary
to recognize the cost of each component separately.

LO 2 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-37 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-3B
a. Total basket purchase = $590,000

Fair Value Percentage Cost Allocated Cost

1
Processing $320,000 53% X $590,000 $312,700
Packaging 284,000 47%2 X $590,000 $277,300
Total $604,000 100.0% $590,000
1
$320,000/$604,000 = 53%
2
$284,000/$604,000 = 47%

May 19 Processing Equipment 312,700

Packaging Equipment 277,300
Cash 590,000

b. Processing Equipment 11,660*

Packaging Equipment 10,340*
Cash 22,000
* using the same ratio as the initial basket purchase
Processing Equipment 5,040
Packaging Equipment 1,680
Cash 6,720

c. Processing equipment depreciation expense:

Straight-line
[($312,700 + $11,660 + $5,040) - $36,000] ÷ 6 x 7/12 = $28,525

Packaging equipment depreciation expense:

[($277,00 + $10,340 + $1,680) – $18,000] ÷ 5 x 7/12 = $31,654

Dec. 31, 2020

Depreciation Expense 28,525
Depreciation Expense 31,654
Accumulated Depreciation, Processing Equipment 28,525
Accumulated Depreciation, Packaging Equipment 31,654

(NOTE: The debits to Depreciation Expense can be combined, however

the credits to Accumulated Depreciation must be kept separate.)

LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
_________________________________________________________________________________________________
Solutions Manual 8-38 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-4B
a. i. Straight-line method depreciation
[($386,000 – $28,000) / 4] = $89,500 per year

ii. Units-of-production method depreciation

($386,000 – $28,000) / 286,400* = $1.25 per unit

Year
2020 $1.25 x 102,400 = $128,000
2021 $1.25 x 32,200 = $ 40,250
2022 $1.25 x 97,300 = $121,625
2023 $1.25 x 54,500 = $ 68,125
Total tonnes *286,400

iii. Double-diminishing-balance method depreciation

Rate = (1/4) x 2 = .5 or 50%

Year
2020 ($386,000 – $0) x 50% = $193,000
2021 ($386,000 – $193,000) x 50% = 96,500
2022 ($386,000 – $289,500) x 50% = 48,250
$337,750

2022 Carrying amount=$386,000–$337,750 = 48,250

Less: Residual value (28,000)
Depreciation for 2023 $20,250

b. The company should choose the depreciation method that best reflects the
pattern in which the economic benefits embodied in the asset are expected
to be used up or consumed.

LO 4 BT: AP Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-39 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-5B
Year 2
Depreciation Expense
Straight-line method:
($196,000 - $12,000) ÷ 8 = $23,000
Units-of-production method:
($196,000 - $12,000) ÷ 230,000 Km. = $ .80/km.
31,600 km. x $ .80 = $25,280
Double-diminishing-balance method:
Rate = (1/8) x 2 = .25 or 25%
Year 1: $196,000 x 25% = $49,000
Year 2: ($196,000 - $49,000) x 25% = $36,750
LO 4 BT: AP Difficulty: E Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-40 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-6B
a. i. Straight-line method:
[($388,000 – $38,000) / 4] = $87,500 per year
ii. Units-of-production method:
($388,000 – $38,000) / 2,500,000 = $0.14 per unit
Year Units
2020 710,000 x $0.14 = $99,400
2021 688,000 x $0.14 = $96,320
2022 595,000 x $0.14 = $83,300
2023 507,000 x $0.14 = $70,980

iii. Double-diminishing-balance method:

Rate = (1/4) x 2 = .5 or 50%
Year
2020 ($388,000 – $0) x 50% $194,000 =
2021 ($388,000 – $194,000) x 50% $97,000 =
2022 ($388,000 – $291,000) x 50% $48,500 =
$339,500
2022 Carrying amount = $388,000 – $339,500 = $48,500
Less: Residual value (38,000)
Depreciation expense, 2023 $10,500
b.
Units-of- Double-diminishing-
Straight-line production balance

i. Over 1st 2 years $175,000* $195,720**$291,000***

ii. Over all 4 years $350,000 $350,000 $350,000

* ($87,500 x 2) = $175,000
** ($99,400 + $96,320) = $195,720
*** ($194,000 + $97,000) = $291,000
The double-diminishing-balance method records highest depreciation
expense during the first two years, but the total expense over all four
years is the same under all the methods.
LO 4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-41 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-7B

Rate of depreciation (units-of-production method):

($2,465,000 - $949,000) ÷ 18,950 flying hours = $80.00/flying hour

2020 depreciation expense:

1,280 flying hours X $80.00/hr. = $102,400

2021 depreciation expense:

5,150 flying hours X $80.00/hr. = $412,000

Carrying amount of airplane, December 31, 2021:

$2,465,000 – ($102,400 + $412,000) = $1,950,600

LO 4 BT: AP Difficulty: E Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-42 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-8B

a. Statement of Income Increase in Net Income

(by the amount of the gains $159,000 - $138,000)

Statement of Financial Position Increase in Assets

[difference between the proceeds ($159,000) and carrying amount of

equipment ($138,000) and increase in shareholders’ equity as
retained earnings would increase (by amount of gain)]

Statement of Cash Flows Increase in Cash

(by selling price, $159,000)

b. Statement of Income No effect

Statement of Financial Position No net effect

(as cash would decrease by $1,118,000 and equipment would

increase by $1,118,000)

Statement of Cash Flows Decrease in Cash

(by amount of purchase price)

c. Statement of Income Decrease in Net Income

(by amount of depreciation expense)

Statement of Financial Position Decrease in Assets

(as carrying amount of equipment would decrease) and decrease in

shareholders’ equity (as retained earnings would decrease)

Statement of Cash Flows No effect

LO 4,7 BT: AN Difficulty: H Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-43 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-9B

a. Jan. 1, 2020
Equipment 48,800
Cash 48,800

Dec. 31, 2020, 2021, and 2022

Depreciation Expense* 11,100
Accumulated Depreciation, Equipment 11,100

*($48,800 - $4,400) /4 years = $11,100/year

b. Jan. 1, 2020
Equipment 48,800
Cash 48,800

Dec. 31, 2020

Depreciation Expense* 24,400
Accumulated Depreciation, Equipment 24,400

Rate = (1/4) x 2 = .5 or 50%

*$48,800 x 50% = $24,400

Dec. 31, 2021

Depreciation Expense* 12,200
Accumulated Depreciation, Equipment 12,200
*($48,800 - $24,400) x 50% = $12,200

Dec. 31, 2022

Depreciation Expense* 6,100
Accumulated Depreciation, Equipment 6,100
*($48,800 - $24,400 - $12,200) x 50% = $6,100

_________________________________________________________________________________________________
Solutions Manual 8-44 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-9B (Continued)

a. May 12, 2020

Equipment 48,800
Cash 48,800

Dec. 31, 2020

Depreciation Expense* 7,400
Accumulated Depreciation, Equipment 7,400
*($48,800 - $4,400) /4 years x (8/12) 1 = $7,400
1 – 8 months (i.e. May though December)

Dec. 31, 2021

Depreciation Expense 11,100
Accumulated Depreciation, Equipment 11,100
Sept.25, 2022
Depreciation Expense* 8,325
Accumulated Depreciation, Equipment 8,325
*($48,800 - $4,400)/4 years x (9/12)2 = $8,325
2 – 9 months (i.e. January through September)

Cash 19,900
Accumulated Depreciation, Equipment* 26,825
Loss on Disposal 2,075
Equipment 48,800

*$7,400 + $11,100 + $8,325 = $26,825

LO 4,7 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-45 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-10B
Depreciation expense:
($448,000 - $28,000) / 5 years = $84,000 per year
or /12 = $7,000 per month

Carrying amount of equipment on May 28, 2023:

Cost, June 22, 2020 $448,000

Depreciation expense recognized and
balance of accumulated depreciation on
June 30, 2022:
June 22/20 to May 28/23 = 6+12+12+5 = 35 months
$7,000 x 35 = (245,000)
Carrying amount $203,000

Proceeds of sale $167,000

Carrying amount at May 28, 2013 $203,000
Loss on disposal ($ 36,000)

May 28/23 Cash 167,000

Accumulated Depreciation, Equipment 245,000
Loss on Disposal 36,000
Equipment 448,000

LO 4,7 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-46 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-11B
Accumulated
Cost Depreciation
Equipment:
Jan. 1, 2020 $255,000
Balance, Jan. 1, 2021
($255,000 - $15,000) /5. $48,000
Depreciation Jan. 1 to Nov. 21/2021
($255,000 - $15,000) /5 X 11/12 44,000
$92,000
Nov 21/2021
Depreciation Expense 44,000
Accumulated Depreciation, Equipment 44,000

Nov. 21/2021
Cash 151,000
Accumulated Depreciation, Equipment 92,000
Loss on Disposal 12,000
Equipment 255,000

Nov. 26/2021
Equipment 389,000
Cash 389,000

Dec. 31/2021
Depreciation Expense * 7,500
Accumulated Depreciation, Equipment 7,500

*($389,000 - $29,000) / 4 x (1/12) = 7,500

Trucks—Depreciation Expense
Determine rate: (1/4) x 2 = .5 or 50%
2019: $148,000 x 50% = $74,000
2020: ($148,000 - $74,000) x 50% = $37,000
$111,000
2020: Carrying Amount ($148,000 - $111,000) = $37,000
Less residual value: (26,700)
Depreciation for 2021 $10,300

LO 4,7 BT: AP Difficulty: M Time: 40 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-47 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-11B (Continued)

Dec. 31/2021
Depreciation Expense 10,300
Accumulated Depreciation, Trucks 10,300

AP8-12B
a. June 6, 2020
Equipment 426,000
Cash 426,000

a. Dec. 31, 2020 (not

required)
Depreciation Expense* 57,750
Accumulated Depreciation, Equipment 57,750
*[($426,000 – $30,000) / 4] = $99,000 x 7/12

Dec. 31, 2021 (not required)

Depreciation Expense 99,000
Accumulated Depreciation, Equipment 99,000

June 21, 2022

Depreciation Expense* 49,500
Accumulated Depreciation, Equipment 49,500
* $99,000 x 6/12 = $49,500

June 21, 2022

Cash 174,000
Accumulated Depreciation, Equipment 206,2501
Loss on Disposal 45,750
Equipment 426,000
1
($57,750 + $99,000 + $49,500) = $206,250

_________________________________________________________________________________________________
Solutions Manual 8-48 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

c. i.
Year Opening Rate Depreciation Ending
Carrying Expenses carrying
Amount amount
1 $426,000 x 50% $213,00 $213,0
0 00
2 $213,000 x 50% $106,50 $106,5
0 00
3 $106,500 x 50% $53,250 $53,25
0

2020
7/12 x $213,000 = $124,250
2021
5/12 x $213,000 = $ 88,750
7/12 x 106,500 = $ 62,125
$150,875
2022
5/12 x $106,500 = $44,375
1/12 x $53,250 = $ 4,438
$48,813

ii. June 21, 2022

Depreciation Expense 48,813
Accumulated Depreciation, Equipment 48,813

Cash 174,000
Accumulated Depreciation, Equipment 323,9381
Gain on Disposal 71,938
Equipment 426,000
1
($124,250 + $150,875 + $48,813) = $323,938
LO 4,7 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-49 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

_________________________________________________________________________________________________
Solutions Manual 8-50 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-13B Cost of equipment, Jan. 1, 2020 $94,000

Accumulated depreciation Dec.31, 2022
($94,000 - $18,000)/ 5 x 3 yrs =15,200 x 3 yrs (45,600)
Equipment’s carrying amount, Jan. 1, 2023 $48,400

Depreciation expense, 2023:

($48,400 - $12,000) / 5* remaining years = $7,280
*Total 8 – 3 years

LO 5 BT: AP Difficulty: E Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

AP8-14B Initial depreciation for 2020 and 2021:

($903,000 – $18,000) ÷ 1,770,000 units = $0.50 per unit

Carrying amount Dec. 31, 2021 = $903,000 – (1,015,000 x $0.50)
=$395,500
Revised depreciation calculation in 2022:

(Carrying amount – Residual value) ÷ Remaining useful life

($395,500 – $15,500) ÷ (2,202,500 – 1,015,000) = $0.32 per unit

Depreciation expense for 2022 = $0.32 x 468,000 units = $149,760

LO 5 BT: AP Difficulty: E Time: 15 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-51 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-15B

Oct. 8, 2017
Equipment 368,000
Cash 368,000

Dec 31, 2017

Depreciation Expense 1 20,400
Accumulated Depreciation, Equipment 20,400
1
($368,000 – $41,600) / 4 x 3/12 = $81,600 per year x 3/12 = $20,400

Dec 31, 2020

Depreciation Expense2 49,200
Accumulated Depreciation, Equipment 49,200
2
A. Determine carrying amount at time of change
$368,000 – ($20,400 + $81,600 + $81,600) = $184,400
B. Determine depreciation expense using revised estimated residual
value and revised estimated useful life
($184,400 – $36,800) / 3 = $49,200

Aug. 28, 2021

Depreciation Expense3 32,800
Accumulated Depreciation, Equipment 32,800
3
$49,200/year x (8/12) = $32,800

_________________________________________________________________________________________________
Solutions Manual 8-52 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-15B (Continued)

Aug. 28, 2021

Cash 105,000
Accumulated Depreciation, Equipment 4 265,600
Gain on Disposal 2,600
Equipment 368,000
4
$20,400 + $81,600 + $81,600 + $49,200 + $32,800 = $265,600

LO 4,5,7 BT: S Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

AP8-16B
a.
Customer Lists
Trademarks Patents
Purchase cost $150,000 $220,000 $360,000
Amortization period N/A 5 years 6 years
Annual amortization* N/A $44,000 $60,000

b. Intangible assets, at cost less accumulated amortization

Trademarks $ 150,000
Patents 120,000 *
Customer Lists 44,000 **
Total intangible assets $ 314,000
* [$360,000 – ($60,000 x 4)]
** [$220,000 – ($44,000 x 4)]
LO 8 BT: AP Difficulty: E Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-53 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

AP8-17B
a. Goodwill
Purchase Price $8,546,000
Less: Inventory (974,000)
Accounts Receivable (529,000)
Prepaid Expenses (71,000)
Equipment (1,897,000)
Building (1,628,000)
Land (1,600,000)
Patents (1,360,000)
Add: Accounts Payable 661,000
Warranty Provision 468,000
Bank Loan Payable 1,820,000
Goodwill $3,436,000

b. Patents
Amortization Expense 170,000
Accumulated Amortization, Patents 170,000

$1,360,000/8 = $170,000 (use 8 years as it is expected the patent will be

obsolete in 8 years.

LO 8,9 BT: AP Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-54 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

USER PERSPECTIVE PROBLEMS

UP8-1 In theory, all expenditures resulting in economic benefits that extend

past the current year should be capitalized. However, the amounts paid for
the small tools are not significant and the cost-benefit and materiality
concepts should be applied in this case. The cost-benefit concept says that
professional judgement should be exercised in applying accounting
standards because the cost of applying some may outweigh the potential
benefits associated with the information that would otherwise be reported.
In this case, the amounts involved are not significant to a reader’s analysis
and decisions (i.e. the items and the related depreciation expense are not
material). The company’s accounting treatment is appropriate and does not
violate accounting standards (IFRS). The qualitative characteristics in the
IFRS conceptual framework would definitely support application of the cost-
benefit and materiality concepts in this situation.

LO 2 BT: C Difficulty: H Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

UP8-2 In theory, all expenditures that increase the future economic

benefits of an asset beyond the current fiscal year should be capitalized.
This relates to expenditures that increase an asset’s capacity, its efficiency,
its residual value, and its useful life, etc., and excludes those that simply
restore an asset to its previous condition. Many companies, based on cost-
benefit considerations (internally) and materiality (relative to user
decisions), set an arbitrary dollar threshold on expenditures of a capital
nature. For example, even though expenditures may, in theory, provide for
long-term future economic benefits, no expenditure under $500 or $1,000 or
$5,000, etc. will be capitalized.

LO 2 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-55 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

UP8-3 If a company were to report land and building as a single amount, the
users would be unable to determine the extent of resources the company
had invested in each type of asset. This information is important for users
to know, as buildings are normally used to generate income, whereas land
may be idle while it is held as future development site, etc. In addition,
building have a finite life and will eventually be substantially renovated or
torn down. This is not the case for land.

It is also important to understand that the process of depreciation has

nothing to do with the value of an asset. Instead, it is a rational allocation of
asset’s cost to net income as the economic benefits from that asset are
consumed or used up. It would not make sense to treat land and buildings
in the same way, as the economic benefits from a building are used up over
time, while the land’s economic benefits remain. As such, only the building’s
cost should be expensed over time, which necessitates that the costs of
buildings be accounted for separately from the costs of land.

Most informed users understand that property, plant and equipment are not
normally presented in the financial statements at their fair value or at their
replacement cost. If users and analysts require this information, they must
obtain it from the company (i.e. users like banks could request this) or make
their own estimates and draw their own conclusions.

In the case of the building, full disclosure requires information on its

historical cost and accumulated depreciation to be reported on the face of
the statement of financial position or in the notes. In this way, the user can
determine the age of the assets, and estimate future cash outflows that may
be required to replace them.

Under IFRS, land and buildings are usually reported at historical cost
because this is the most verifiable amount, as no two appraisers would
necessarily agree on their fair values. The amount expected to be received
when property is sold in the future is not relevant in most cases. Generally,
it is the value of the land that increases rather than the value of the
buildings situated on it. It is common for buildings to be torn down or
substantially renovated after their useful life and for new structures using
new technology, current building codes, and up-to-date requirements to be
built in their place.

_________________________________________________________________________________________________
Solutions Manual 8-56 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

UP8-3 (Continued)

Thus, it is reasonable to recognize a portion of the building’s cost as an

expense each year it is used, while not depreciating the carrying amount of
the land. IFRS does allow property to be measured at a revalued amount
(using the revaluation method) but this method is used mostly by
companies situated in countries experiencing rapid price increases. In such
a case, the qualitative characteristics of faithful representation and
relevance are weighted more heavily in the measurement decision. It is
interesting to note that the revalued assets continue to be depreciated,
using the revalued amounts. In other words, revaluation does not eliminate
the requirement to depreciate assets such as buildings.

LO 3 BT: C Difficulty: H Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

UP8-4 There are many other items on the statement of income that are not
on a cash basis (ie. Sales on account, expenses on account, etc.), so if
your interest is on cash flows from operations, you should be determining
this from the statement of cash flows rather than the statement of income.
Although it doesn’t have a direct effect on the cash flow, depreciation
expense is a valid expense that needs to be reported on the Statement of
Income. Depreciation represents the consumption or usage of long-term
assets being used to generate revenue. Without these assets, revenues
would not be generated. Consequently, the expense related to this usage of
these assets needs to be recognized so that the users of the financial
statements can see all of the expenses that had to be incurred to generate
the revenues for the period.
LO 3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

UP8-5
1.Historical cost is the most verifiable measure, because independent
parties can agree very closely on this amount. Users know about its
limitations, but also know that companies expect to recover future cash
flows from it equal, at a minimum, to the amount reported on the
statement of financial position. Alternatively, fair value measures can be
subject to management’s opinions and bias. Use of fair values also
presents measurement challenges as even independent appraisers can
arrive at different values for same piece of property, plant and equipment.
_________________________________________________________________________________________________
Solutions Manual 8-57 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

_________________________________________________________________________________________________
Solutions Manual 8-58 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

UP8-5 (Continued)

1.Measuring and reporting PP&E at historic cost is an easier method to use,

and less costly to administer. Obtaining fair value amounts for PP&E
assets can be very expensive on a continuing basis, and the amounts
reported are subject to a variety of judgements about how specific assets
will be used. The use of fair values can also cause the financial
statements to fluctuate significantly if fair values are increasing and
decreasing significantly.

LO 2 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

UP8-6 The accountants are correct: if the proceeds of selling property, plant
and equipment are in excess of its carrying amount, a gain is reported and
this increases net income. The excess is reported as a “gain” instead of
“revenue” because the term revenue is reserved for regular operating
activity transactions involving the sale of goods and provision of services or
from allowing others to use our assets. Since the company is not in the
business of selling property, plant and equipment, revenue cannot result
from this type of transaction. If the company was in the business of selling
property, plant and equipment, the items sold would have been classified as
inventory rather than property, plant and equipment.

Users need to understand that such gains (and losses) arise from
transactions peripheral to the major on-going operations of the company,
and that they are not earnings that can be expected to continue in future
periods. Therefore, users are better able to predict future earnings and
cash flows if gains and losses are presented separately from revenue.

LO 7 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-59 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

UP8-7 The gain reported was determined as the excess of the proceeds on
disposal over the carrying amount or undepreciated cost of the equipment
on our books. It is properly called a gain because the term revenue is
reserved for regular operating activity transactions involving the sale of
goods and provision of services or from allowing others to use our assets.
There was no problem with our prior financial statements. Accounting for
most assets relies on estimates. Examples include estimating how much of
our receivables will not be collected, estimating what the net realizable
value of our inventory is, judging whether our PP&E are impaired based on
estimated, but unknown future cash flows, etc. Depreciation expense is an
excellent example of an estimate because the amount of expense charged
to each year is the result of making three estimates: the pattern in which the
asset’s benefits are provided, the asset’s useful life, and its residual value.
Accounting is so reliant on estimates that it would not be reasonable to go
back and adjust prior reports every time an actual amount is later found to
be different from the estimate. Instead, users of financial statements
understand that management’s best estimates are necessary for
accounting measurements and that estimates are used throughout financial
accounting and reporting.

The fact that there was a gain on the sale of the equipment indicates that
the estimates used for useful life and/or residual value were incorrect. The
useful life was either longer than had been estimated and/or the residual
value was higher than estimated. This means that depreciation expense
recorded was higher than it would have been had the estimates been
precisely correct. Again, management uses its best estimates, but actual
results understandably vary.

LO 7 BT: C Difficulty: H Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-60 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

UP8-8 In making a long-term loan to a company, long-term assets such as

property, plant, and equipment and goodwill offer comfort to the lender so
long as the company is operating as a going-concern, and does not appear
to be experiencing financial difficulties. In this case, the long-term assets
will generate cash flows in order to service and extinguish the long-term
loan.

However, if the ability of the company to continue into the future is in doubt,
then the goodwill likely offers less comfort to the lender than does the
property, plant and equipment. The liquidation value of these assets will
likely be much less than their value in use, although items of property, plant
and equipment tend to hold some of their value for resale purposes. In
contrast, the liquidation value of goodwill is likely zero as it is not
separable from the business as a whole. For this reason, when looking for
security for such a loan, lenders will generally exclude goodwill.

LO 6,9 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

UP8-9 As a lender, I’d be interested in the company’s ability to service its

debts in future periods (i.e. pay interest and repay principal) as well as the
amount of collateral that would be available if the company were to default
on its loans.

In terms of servicing its debts, a lender would be interested in the asset’s

value in use. This is most closely linked with the use of historic costs in that
this results in long-term assets being carried at their cost less accumulated
depreciation. The carrying amount for these assets would be the greater of
the future economic benefits that are expected to flow from their use and
the asset’s fair value less selling costs. As such, this value illustrates
management’s expectations in terms of the asset’s ability to contribute to
future earnings that can be used for debt service.

In determining whether there is enough collateral value to cover the

outstanding balance of the loan, historic cost is also relevant. This is
because this valuation has been subject to impairment reviews, and at a
minimum, is no higher than the asset’s recoverable amount to the company.
If the asset is seized as security for non-payment of a debt, the asset may
have to be sold in a forced sale, so a conservative estimate may be better
than a valuation based on fair value. Fair value measures would be useful
in terms of assessing the collateral value if it was necessary to seize the
assets and liquidate them to repay the loan if the company defaults.
_________________________________________________________________________________________________
Solutions Manual 8-61 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

LO 2 BT: C Difficulty: H Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-62 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

UP8-10 As an auditor, you assess the fairness of the value of a company’s

plant, property, and equipment by examining the nature of each asset and
assessing management’s estimates of the assets’ useful life and residual
value. Other factors such as physical condition, usage, age, technological
change, competition, and management’s plans and strategic direction
should also be considered. If there is any indication that an asset might be
impaired, I would also want to review management’s calculations of the
asset’s recoverable amount – both its value in use and its fair value less
costs to sell.
LO 6 BT: C Difficulty: H Time: 20 min. AACSB: None CPA: cpa-t001, caa-t004
CM: Reporting and Audit

UP8-11 Air Canada is depreciating its airframes, plane engines, and buildings
over a longer time period than WestJet. Air Canada will have a lower
depreciation expense per item each year than WestJet, and this will lead to
higher net income for Air Canada. In addition, Air Canada’s carrying
amounts of these assets will be higher on their statement of financial
position. Once these items are fully depreciated by WestJet (i.e. After 40
years for buildings) it will have a higher net income than Air Canada as it
will have no depreciation expense related to them, while Air Canada will still
be depreciating their assets.
LO 10 BT: AN Difficulty: E Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

UP8-12 If it seems unlikely that you will meet your target this year then it
would be to your advantage to write-off the equipment in the current year.
Next year you will not have this write-off and therefore will show higher
earnings. If you have been depreciating the asset over time then you will
also not have the depreciation expense associated with this asset next
year, making it easier to meet your target.
LO 2 BT: C Difficulty: M Time: 15 min. AACSB: Ethics CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-63 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

UP8-13 As an accounting manager, you allocate the purchase price between

the land and the building on the basis of their relative fair values. Although
municipal tax assessment records are not always based on full fair value,
they might give you an idea of the relative values of the land and the
building. An independent appraisal might be another costlier way to get
information on their relative values. You must allocate the purchase price
between the assets because the land is not depreciated while the building
is. Future earnings would be distorted if you failed to allocate the cost in an
appropriate manner. In addition, the allocation used for accounting
purposes is also used for income tax purposes.
For tax purposes, your incentive would be to allocate the maximum amount
possible to the building so that you can deduct as much capital cost
allowance as possible over time. For reporting purposes, there is an
incentive to capitalize more of the cost as a part of the land because this
results in higher net income being reported (due to less depreciation
expense being recognized) and this reflects favourably on your
performance.

LO 2 BT: C Difficulty: M Time: 25 min. AACSB: Ethics CPA: cpa-t001 CM: Reporting

UP8-14
a. Depending on their age, none of the long-term assets will likely be reported
at their current fair value on the books of the candidate company. The most
suspect, however, might be goodwill. Its value depends on preparing a
separate valuation of the business, or part of it, and the net assets to which
the goodwill relates. It is likely that you can make a fair assessment of the
physical assets by looking at market prices or doing an appraisal, but
goodwill and the intangible assets are much more difficult to evaluate due
to the fact there is often no active market in which they trade.

b. There may be intangible assets that are not represented on the books of
the company. Many (or all of) the costs associated with internally
generated intangible assets such as patents, trademarks, human capital,
customer lists, etc. will have been expensed as incurred and will not be
identified as assets on the statement of financial position. The costs
associated with any internally generated goodwill also will not appear in the
records as they are also expensed as incurred.

LO 2,9 BT: C Difficulty: H Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-64 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

UP8-15 It’s debatable whether this is a fair way to present the impairment
charge. Goodwill is an asset that is recognized, measured and recorded
when a company purchases another company and pays more than the fair
value of the net assets. The company has already paid for this asset, and
recording an impairment loss will not effect cash as it is a reduction of the
asset’s carrying amount. The writedown does show that an asset the
company paid for at the time of the acquisition no longer has the value
management determined it had at that time. Financial statement users
should understand that this may indicate that the company overpaid at the
time of acquisition or that management has not been able to safeguard this
asset’s value through its actions. Down playing it as a non-cash charge may
understate its significance.

LO 9 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-65 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

Work in Progress

WIP8-1 Companies depreciate equipment over time because they are using
equipment over time to generate revenue, so they need to recognize
the usage of the equipment over time. The straight-line method
assumes equipment is used at the same rate over its useful life. The
carrying amount is the cost of the equipment less the accumulated
depreciation taken on the equipment. In summary, companies do not
depreciate because assets lose value and carrying amount does not
report fair value for sale purposes. Depreciation is merely a cost
allocation method.

LO3,4 BT: C Difficulty: M Time: 15 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

WIP8-2 Companies depreciate their equipment because they expect to use

their equipment over a certain time (useful life) and need to reflect the
usage of the equipment used generate revenue as an expense on the
income statement. Depreciation expense of equipment is similar to the
treatment of other assets like supplies and inventory when they are
consumed or sold. When they are no longer assets, they become
expenses. The only difference is that depreciation takes place over
several accounting periods. In summary, companies do not depreciate
to arrive at resale values and carrying amount does not represent the
fair value of the asset. Depreciation is merely a cost allocation method.
Carrying amount represents the portion of the asset’s cost that has yet
to be expensed.

LO3,4 BT: C Difficulty: M Time: 15 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-66 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

WIP8-3 Incorrect – “Companies depreciate their capital assets over time

because they understand capital assets immediately begin to lose
value from the date of purchase” Corrected -Companies depreciate
capital assets over time because they are used for longer than a year to
generate revenue and their cost needs to be allocated to expense in
the periods in which they are used.

Incorrect – “Depreciation accounts for this loss” Corrected –

Depreciation accounts for the usage of the asset during the year.

Incorrect- “The straight-line method is a method of evaluating

depreciation which assumes that a capital asset loses its value at the
same rate over a given period of time.” Corrected – While it is correct
that the capital asset is depreciated at the same rate over a given
period, it is not for the purpose of recording a loss in value for the asset.
Rather, depreciation is a cost allocation method to recognize the
consumption of the asset at the same rate, when using straight-line
method. Corrected–“In other words depreciation expense should be the
same every period as long as the capital asset is being used.”

LO4 BT: C Difficulty: M Time: 20 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

WIP8-4 By design, the diminishing-balance depreciation method will have

higher amounts of depreciation expense and corresponding lower net
income in the initial years of depreciating compared to the straight-line
method. The diminishing-balance method purposely allocates more of
the cost of the asset at the beginning of the useful life. At the end of the
assets useful life, the diminishing balance method will have lower
depreciation expense and higher net income than the straight-line
method. Over the life of the asset the same total amount of depreciation
will be taken, regardless of the depreciation method used.
LO4 BT: C Difficulty: M Time: 15 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-67 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

WIP8-5 Although the carrying amount of equipment decreases over time as the
equipment is being used, this decrease is not a reflection of the
equipment’s devaluation. Depreciation is merely a cost allocation
method (i.e. it is allocating a portion of the asset’s cost to each period in
which it has been used to help generate revenue). It is not an asset
valuation method.
LO4 BT: C Difficulty: M Time: 10 min. AACSB: Communication CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-68 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

READING AND INTERPRETING

PUBLISHED FINANCIAL STATEMENTS

R18-1 Reitmans (Canada) Limited

Note: all dollar amounts are in thousands.

a. Average age percentage of Reitmans’ property and equipment.*

= Total accumulated depreciation___

Property and equipment - Land

= $150,698______
$274,804 - $5,860

= $150,698 = 56.0%
$268,944

Average percentage of Dollarama’s property and equipment.*

Dollarama’s ratio for its property, plant and equipment (Appendix A) is

42.5%, calculated as follows:

= Total accumulated depreciation

Property and equipment - Land

= $306,311 _
$743,400 - $22,144

= $306,311 = 42.5%
$721,256

This suggests that Dollarama is able to go longer without replacing its

assets because it ratio is lower compared to Reitmans.

b. The average age (in years) of Reitmans’ leasehold improvements:

= Accumulated depreciation for leasehold improvements

Depreciation expense on leasehold improvements
_________________________________________________________________________________________________
Solutions Manual 8-69 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

= $67,228 = 4.2 years

$15,954

Dollarama’s average age for leasehold improvements (Appendix A) is 6.0

years calculated as follows:

= Accumulated depreciation for leasehold improvements

Depreciation expense (on leasehold improvements)

= $102,429 = 6.0 years

$17,175

Reitmans’ leasehold improvements are newer as they have been used

and depreciated, on average, slightly more than 4 years, while
Dollarama’s have been used and depreciated for 6 years.

c. The annual straight-line rate (expressed in years) used by Reitmans for its
fixtures and equipment is between 3 and 20 years. As such, the company
is using a straight-line rate of between 5% (i.e. 1/20) and 33% (i.e. 1/3).

d. Until assets are ready for use and are being used, their economic benefits
are not being consumed or used up. Until this is the case, there should be no
depreciation recorded.

_________________________________________________________________________________________________
Solutions Manual 8-70 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

RI8-1 (Continued)

e. Reitman’s fixed asset turnover ratio is:

Sales Revenue _
Average Net Property, Plant and Equipment

= $951,989______ = $951,989 = 7.37 times

($124,106 + $134,363) ÷ 2 $129,234.5

Dollarama’s fixed asset turnover ratio (Appendix A) is 7.70 times,

calculated as follows:

Sales Revenue _
Average Net Property, Plant and Equipment

= $2,963,219_____ = $2,963,219 = 7.70 times

($437,089 + $332,225) ÷ 2 $384,657

This means that in its fiscal year ended January 28, 2017, Reitmans
generated, on average, approximately $7.37 of sales from each $1 it had
invested in property, plant and equipment.

In comparison, Dollarama generated about $7.70 in sales from each $1

investment in property, plant and equipment.

It appears that Dollarama is slightly more effective in using its investment

in property, plant, and equipment than is Reitmans.

However, because Dollarama’s fixed assets are older and have been
more heavily depreciated than are Reitmans’, the net carrying amount of
Dollarama’s PP&E (and, therefore, the denominator of the formula) is
relatively low compared to Reitmans’. In interpreting the fixed asset
turnover ratio, differences that affect the carrying amount of the assets
have to be taken into consideration. This includes such things as the
method of depreciation, the rate of depreciation, and the age of the
assets.
_________________________________________________________________________________________________
Solutions Manual 8-71 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

LO10 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

_________________________________________________________________________________________________
Solutions Manual 8-72 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

RI8-2 Metro Inc.

a. Metro holds the following finite intangible assets: leasehold rights,

software, retail network retention premiums, customer relationships. It
also holds banners, private labels and loyalty programs which are
considered to have indefinite useful lives. Intangible assets with finite
useful lives are amortized over their estimated lives. When the life of an
intangible asset is considered to be indefinite, it is expected to continue to
help generate revenues for the foreseeable future. The asset, therefore,
it is not amortized. Instead, it is evaluated each year to determine
whether there has been any impairment in its carrying amount. If there
has been an impairment, the asset’s carrying amount is reduced and an
impairment loss is recorded on the income statement. If there is no
impairment, the asset remains at its current carrying amount until the
following year end, when it will be evaluated again, or earlier if there are
any indications that the asset may be impaired.

b. Amortization is merely a cost allocation method. Metro records intangible

assets with reasonably definite useful lives at cost and then amortizes
them on a straight-line basis over their useful lives. The amortization
method and estimate of the useful lives are reviewed annually. This
allocates the cost of these assets to the periods when the asset’s
economic benefits are being consumed or used up. Although the legal life
is often longer than the useful life, such as with patents, such intangibles
may become obsolete, out of style, or updated by newer designs and
products. For this reason, management wants to allocate the costs of
these intangible assets to only those periods in which they produce
economic benefits (i.e. over their estimated useful life rather than over
their legal life).

c. A major part of Metro is the operation of its pharmacies. Prescription files

are the records of the orders taken by the pharmacy from medical
professionals and relate to individual Metro customers. Careful
maintenance of prescription files is required by law, and is also a
valuable aspect of customer service for a pharmacy. As in most
situations where a pharmacy is located in a grocery or personal products
store, pharmacy customers who come in to pick up their prescriptions
also purchase other products. Therefore, there is a symbiotic relationship
between the grocery and other product sales and those of the pharmacy.
They support one another. Prescription files are similar to a customer list
_________________________________________________________________________________________________
Solutions Manual 8-73 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

for other types of operations. Metro refers to this asset as customer

relationships.

_________________________________________________________________________________________________
Solutions Manual 8-74 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

RI8-2 (Continued)

a. Goodwill arises from accounting for a business merger or combination,

when one entity purchases another business. It represents the excess of
the purchase price over the fair value of identifiable net assets acquired
in that business combination. Goodwill is not amortized; it is tested for
impairment annually or more often if events or changes in circumstances
indicate that goodwill might be impaired.

LO8,9 BT: C Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

RI8-3

Note: all dollar amounts are in thousands.

a. Average age percentage of Maple Leaf’s property and

equipment:

= Total accumulated depreciation

Property and equipment - Land

= $929,834 _
$2,015,109 - $33,891

= $929,834 = 46.9%
$1,981,218

Dollarama’s ratio for all of its property, plant and equipment (Appendix A) is
42.5%, calculated as follows:

= Total accumulated depreciation

Property and equipment - Land

= $306,311 _
$743,400 - $22,144

= $306,311 = 42.5%
$721,256

_________________________________________________________________________________________________
Solutions Manual 8-75 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

This suggests that Dollarama is able to go longer without replacing its

assets because it ratio is lower compared to Maple Leaf, but only by a slight
margin.

_________________________________________________________________________________________________
Solutions Manual 8-76 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

RI8-3 (Continued)

a. The annual straight-line rate (expressed in years) used by

Maple Leaf for its machinery and equipment is between 3 and 20 years. As
such, the company is using a straight-line rate of between 5% (i.e. 1/20)
and 33% (i.e. 1/3).

b. Maple Leaf begins depreciating its property, plant and

equipment as soon as they are available for use as it is only then that the
asset begins to help generate revenues. At this point, some of the asset’s
future economic benefits are being consumed, so a portion of its cost
should be allocated to that period.

c. Since buildings, machinery and equipment are used in the

production of the meat products, the depreciation on these assets is a cost
of production and in added to the cost of the inventory, which ultimately
becomes cost of goods sold.

d. Maple Leaf’s fixed asset turnover ratio is:

Sales Revenue _
Average Net Property, Plant and Equipment

= $3,331,812 = $3,331,812 = 3.07 times

($1,085,275 + $1,082,360) / 2 $1,083,818

This means that in its fiscal year ended December 31, 2016, Maple Leaf
generated, on average, approximately $3.07 of sales from each $1 it had as
a net investment in property, plant and equipment.

In comparison, Dollarama generated $7.70 in sales from each $1

investment in long-term PP&E assets (Appendix A) calculated as follows:

= $2,963,219 = $2,963,219 = 7.70 times

($437,089 + $332,225) / 2 $384,657

The results of the ratios demonstrate that Dollarama did a better job of
using its long-term assets to generate revenue.
_________________________________________________________________________________________________
Solutions Manual 8-77 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

_________________________________________________________________________________________________
Solutions Manual 8-78 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

RI8-3 (Continued)

One must take into consideration that Dollarama is a retailer and Maple
Leaf is a manufacturer. Manufacturers typically require a higher capital
investment as the ratios above reveal.

In interpreting the fixed asset turnover ratio, differences that affect the
carrying amount of the assets have to be taken into consideration. This
includes such things as the method of depreciation, the rate of depreciation,
and the age of the assets.

LO10 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

RI8-4 Spin Master Corp.

Note: all dollar amounts are in thousands.

a. Average age percentage of Spin Master ’s moulds, dies and
tools:

= Accumulated depreciation of moulds, dies and tools

Total cost of moulds, dies and tools

= $77,019 = 80.3%
$95,884

Due to the short estimated useful lives of moulds, dies and tools of 2
years, it makes sense that the assets on hand are 80.3% depreciated.

b. Spin Master depreciates its computer hardware over 3 years, while

Dollarama depreciates its over 5 years. One plausible reason for this may be
that Spin Master makes significant use of IT in the design and development
of its products and, therefore needs to have the latest technology. This
would lead to the replacing their computer hardware more frequently than
Dollarama does.

1. c. Management is saying that the machinery and equipment have

more of their economic benefits consumed in the earlier years of their
useful life with diminishing benefits consumed in subsequent years.
_________________________________________________________________________________________________
Solutions Manual 8-79 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

1. d. Spin Master ’s fixed asset turnover ratio is:

Sales Revenue _
Average Net Property and Equipment

= $1,154,454 = $1,154,454 = 53.58 times

($26,996 + $16,096) / 2 $21,546

This means that in its fiscal year ended December 31, 2016, Spin Master
Corp. generated, on average, $53.58 of sales revenue from each $1 it had
as a net investment in its property, plant and equipment assets. This is not
an unusual ratio for a company in an industry that requires relatively low
capital investment.
LO10 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

RI8-5 Financial Statement Disclosures - company of your choice

Answers to this question will depend on the company selected.

LO10 BT: AN Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

_________________________________________________________________________________________________
Solutions Manual 8-80 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

CASE SOLUTIONS

C8-1 Manuel Manufacturing Company

The $40,000 repair is an expense or a loss. It is not part of the machine’s

cost.
1. and 3.
Accounting standards require that all costs necessary to get equipment
in place and ready for use be capitalized as part of the equipment’s cost.
Examples include the invoice price, shipping costs, installation costs,
cost of test runs, and any other costs that meet the criteria. When the
machine was purchased, $40,000 of repair costs were not considered
“necessary” to get it in place and ready for use. The invoice cost of the
asset was for an asset already capable of being used. The costs
associated with an accident during the transportation of the asset
brought it back only to the condition it was in prior to the accident – the
costs did not increase the benefits it would provide. Therefore, it is
inappropriate to capitalize the costs of the repair.

2. The transportation and installation costs are appropriately capitalized

because they both result in adding economic value to the machine
acquired in Montreal. Manuel Manufacturing needs the machine in its
Hamilton factory and to have it installed there before the company can
begin to benefit from the economic benefits the machine contains.
LO 2 BT: C Difficulty: H Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-81 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

C8-2 Rolling Fields Nursing Home

a. and b. The following costs should be capitalized:

a. Type of cost incurred b. Account

Cost of land, including title search and survey Land
Barn removal and levelling costs Land
Streets, sidewalks, water mains, storm drains, Land Improvements
sewers, to the extent not the responsibility of the
municipal government
Street lighting installation, green spaces, Land Improvements
landscaping
Construction costs: 30 X $180,000 Buildings
Interest costs during construction from direct Buildings
borrowings to finance construction

c. Land improvements: These are depreciated over the useful life of each,
using a pattern of depreciation that corresponds to how the asset’s
economic benefits are used up or consumed. Engineering estimates are
developed for each type to determine its estimated useful life and the costs
should be separately recorded for each component. The above-ground
lighting, green spaces and landscaping should be recognized as separate
components, and the useful life of each component used in determining the
periodic depreciation charge. To the extent that there are components with
similar useful lives and patterns of economic benefit use, these could be
combined for record keeping purposes. It is unlikely that residual values
would be significant for land improvement-type assets.

Buildings: If all the homes are similar in quality, size, and cost, and are
expected to have similar useful lives, residual values, and the pattern in
which their economic benefits are used up or consumed, then the full cost
of all buildings (homes) could be aggregated and depreciated as a single
asset group. However, if any of these variables differs, the company may
want detailed information by type of home so that they can develop cost
and profitability data by type of construction. In either case, the principle
underlying the depreciation calculation is the same: recognize the
depreciable cost of the assets over their useful lives using a method that
_________________________________________________________________________________________________
Solutions Manual 8-82 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

best corresponds with the economic benefits used up by the type of asset.
The straight-line method is often used for buildings.

LO 1,2,4 BT: E Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-83 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

C8-3 Maple Manufacturing

a. The cost of a basket purchase is allocated to the individual assets on the

basis of their relative fair values at the time of acquisition.

Determination of relative fair values:

Fair
Asset Value (FV) Percent of total FV

Building $435,000 $435,000  935,000 = 46.5%

Land 1 500,000 $500,000  935,000 = 53.5%
$935,000
1
$125,000 per hectare x 4 hectares

Allocation of the purchase cost:

Building $850,000 x 46.5% = $395,250
Land $850,000 x 53.5% = $454,750
$850,000

NOTE: Rounding may cause allocations to vary slightly.

b. The company’s accountant probably wanted to allocate more cost to the

building because capital cost allowance (CCA or tax depreciation) can be
claimed on the building, thereby reducing taxable income and income taxes
payable. CCA cannot be claimed on the land. Given that Maple
Manufacturing had significant taxable income in the past, management
probably would like to reduce the company’s tax liability through higher
capital cost allowances. A higher cost allocated to the building, therefore,
reduces the taxes Maple pays.

LO 2 BT: AN Difficulty: M Time: 30 min. AACSB: Ethics and Analytic CPA: cpa-t001
CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-84 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

C8-4 Preakness Consulting and Bellevue Services

a. Depreciation Schedules:

Preakness
Preakness uses straight-line depreciation therefore annual depreciation is
constant for each year.

$660,000 – $30,000 = $126,000 per year

5 years

Bellevue
Bellevue uses the double-diminishing-balance method, which leads to
higher depreciation in the early years and lower depreciation in later years.

DB Rate = (1/5) X 2= .40 or 40%

Year Balance Accumulated Carrying Calculation Depreciation

In PP&E Depreciation Amount of Expense Expense

1 $660,000 $0 $660,000 40% x 660,000 = $264,000

2 660,000 264,000 396,000 40% x 396,000 = 158,400

3 660,000 422,400 237,600 40% x 237,600 = 95,040

4 660,000 517,440 142,560 40% x 142,560 = 57,024

5 660,000 574,464 85,536 40% x 85,536 =

34,214
+ 21,322 1
55,536
1
To reduce the carrying amount to $85,536 - $55,536 = $30,000, its residual
value, at the end of year 5.

_________________________________________________________________________________________________
Solutions Manual 8-85 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

C8-4 (Continued)

b. Preakness Consulting
Statement of Income
For the year ended December 31, 2020

Revenue........................................................... $1,500,000
Expenses:
Salaries and wages......................$750,250
Rent..................................................44,800
Other operating expenses..............110,670
Depreciation ...................................126,000 1,031,720
Income before income tax............................... 468,280
Income tax expense—25%............................. 117,070
Net income...................................................... $ 351,210

Bellevue Services
Statement of Income
For the year ended December 31, 2020

Revenue........................................................... $1,500,000
Expenses:
Salaries and wages......................$747,500
Rent..................................................46,400
Other operating expenses..............109,790
Depreciation ...................................264,000 1,167,690
Income before income tax................................ 332,310
Income tax expense—25%............................... 83,078
Net income....................................................... $ 249,232

_________________________________________________________________________________________________
Solutions Manual 8-86 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

C8-4 (Continued)

c. An unsophisticated investor might believe that Preakness is a

stronger company because its reported net income is higher than
Bellevue’s. However, both companies are equally profitable with the only
substantive difference being how they have chosen to depreciate the
computer system. If all other factors remain constant, Bellevue’s net
income will still be lower than Preakness’ in year 2, but by a much smaller
difference, and in years 3, 4, and 5, Preakness’ income will be lower than
Bellevue’s because its depreciation expense will remain at $126,000 while
Bellevue’s will decline below this amount.

Note that while “accounting” depreciation is not deductible for tax purposes,
the total of depreciation expense and CCA over the life of the specific asset
pool will be identical since the same capital cost of the asset is written off
for both accounting purposes and for tax purposes. Although there are
timing differences between the tax expense and the accounting expense in
each year, the income tax expense reported on the income statement is
generally based on the expenses reported under accounting standards.
This topic is explained in more detail in an intermediate financial accounting
course.

LO 4 BT: S Difficulty: M Time: 50 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

_________________________________________________________________________________________________
Solutions Manual 8-87 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

C8-5

a. Carrying amount on Jan. 1, 2020 = $312,500

[$400,000 – ($400,000 - $50,000) / 20 x 5]

b. At the beginning of 2020, if management concludes that the asset will no

longer be used and that it is to be sold, the classification of the asset
changes from an item of PP&E to an asset “held for sale.” No further
depreciation is taken. At this time, the asset is remeasured to the lower of
its carrying amount and its fair value less costs of disposal (net realizable
value). In early 2020, because its carrying amount and net realizable
value are the same amount, no adjustment is necessary to its $312,500
carrying amount. By December 31, 2020, however, the warehouse must
be written down to the lower net realizable value of $260,000. The
following entry is needed:

Loss on Impairment 52,500

Accumulated Impairment Losses, Buildings * 52,500

* Alternatively, the Buildings account could be credited. Both

approaches reduce the carrying amount of the asset.

On the December 31, 2020 statement of financial position, the warehouse is

separately classified and reported as “held for sale” at
$312,500 - $52,500 = $260,000.

c. The following entry is then made at the time of sale in 2021:

Cash 220,000
Accumulated Depreciation, Buildings 1 87,500
Accumulated Impairment Losses, Buildings 52,500
Loss on Disposal 40,000
Buildings 400,000
1
($350,000 / 20) x 5

_________________________________________________________________________________________________
Solutions Manual 8-88 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

C8-5 (Continued)

d. What the financial vice-president is suggesting is as follows:

• Continue to carry the warehouse as an operating asset during and at
the end of 2020.
• Take normal 2020 depreciation expense of [($400,000 - $50,000)/20]
= $17,500, reducing the asset’s carrying amount to $312,500 -
$17,500 = $295,000. This carrying amount would continue to be
reported as PP&E on the December 31, 2020 statement of financial
position.
• Net income would be higher by the difference between the loss of
$52,500 and depreciation expense of $17,500; therefore, net income
would be $35,000 higher if this treatment were followed.
• In 2021, when the warehouse is sold, a loss of $220,000 - $295,000 =
$75,000 is recognized as a loss on disposal.

This approach, therefore, results in net income that is $35,000 higher in

2020, a balance sheet value that is also $35,000 higher ($295,000 versus
$260,000) at December 31, 2020, and having the warehouse reported as
an item in the company’s productive PP&E assets.

In 2021, when the warehouse is sold for $220,000, a loss of $75,000

($220,000 – NBV $295,000) is reported rather than a loss of $40,000 (per
item c. above). In effect, this transfers a $35,000 loss from 2020 to 2021.

From a shareholder’s perspective, if the dollar amounts of the building and

potential loss were material in relation to the company’s assets and
earnings, the treatment of the building suggested by the financial VP could
make a difference in a decision. This is because the shareholder has no
indication of the impaired state of the warehouse and the fact that the
company will not be able to recover the carrying amount from the asset’s
use or disposal. The user assumes that the asset is still functioning as a
productive asset and contributing to earnings. If the amounts were
significant enough, a shareholder’s decision to hold or sell the company’s
shares could be influenced by the difference in reported earnings and
assets.

_________________________________________________________________________________________________
Solutions Manual 8-89 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

C8-5 (Continued)

Note: There is a flaw in the financial vice-president’s suggestion. Because

the warehouse’s carrying amount is higher than its recoverable amount at
December 31, 2020, accounting standards would require Conservative
Company to recognize an impairment loss in 2020 of $295,000 - $260,000
= $35,000. This write down is required regardless of whether the asset is
classified as held for sale.

LO 4 BT: E Difficulty: H Time: 50 min. AACSB: Ethics and Analytic CPA: cpa-t001 CM:
Reporting

_________________________________________________________________________________________________
Solutions Manual 8-90 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.
Burnley, Understanding Financial Accounting, Second Canadian Edition                                            

Legal Notice

Copyright

Copyright © 2018 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.

The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.

The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.

MMXIVII xii F1

_________________________________________________________________________________________________
Solutions Manual 8-91 Chapter 8
Copyright © 2018 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission is strictly prohibited.