1

6 – Property, Plant and Equipment

Problems with Solutions

The following problems are broken out into two lists: List A comprises of problems I
strongly encourage you to try out as they go to the core of the materials. List B comprises
of extra practice problems. The great majority of students will only work through the List
A problems.

List A –

Brief Exercises 10.5, 10.8, 10.9, 11.2, 11.3, 11.8

Exercises 10.4ab, 10.14, 11.2, 11.3, 11.13 (ignore part c), 11.16, 11-26
Problems 10.2 (ignore transaction 3), 11.1 (ignore part b)

List B –

Brief Exercises 10.2. 10.3, 10.6, 10.7, 10.14, 10.16, 10.21, 10.22, 11.1, 11.4
Exercises 10.3, 10.6, 10.8, 10.21, 10.27, 11.1, 11.4 (ignore parts e and f),
11.9 (ignore part f), 11.1
Problems 10.4, 11.3 (ignore part a5,c)

The solutions to ch 10 start on page 2, the solutions to ch 11 start on page 23.

SOLUTIONS – CHAPTER 10

BRIEF EXERCISE 10.2

a. Accounting standards require that the following two recognition criteria be satisfied
when recognizing an item of PP&E: (1) it is probable that the item’s associated
future economic benefits will flow to the entity, and (2) its cost can be measured
reliably. Playtime’s new piece of equipment will be used to produce a new toy that
is expected to be very popular and generate sales and cash flows, therefore criteria
(1) is satisfied. The cost of the equipment will be reliably measurable (based on
purchase price), therefore criteria (2) is satisfied. The new piece of equipment
satisfies both recognition criteria, and should be recognized and capitalized as an
item of PP&E.

b. Under IFRS, the parts of PP&E with relatively significant costs are capitalized and
depreciated separately. Considering that each significant part is separable and may
be replaced, the injection unit, clamping unit, and electrical equipment should each
be capitalized as asset components and depreciated separately. Assuming that the
cost of each part in the group of other parts is not relatively significant, the group of
other parts should be capitalized and depreciated as one component.

c. Under ASPE, the costs of significant separable components are allocated to those
parts when practical, but in practice, this has not been done to the same extent as
required under IFRS. For example, under ASPE, Playtime may record the purchase
of the equipment without asset componentization, in which case, the total cost of the
equipment would be recorded in the Equipment account as one asset, and
depreciation would be calculated based on the useful life of the entire piece of
equipment.

BRIEF EXERCISE 10.3

a. Land cost = $570,000 + $6,000 + $48,000 = $624,000

Under IFRS, the temporary use of the land as a parking lot and its net cost or
revenue are not necessary to develop the land or the new building, therefore the net
cost or revenue cannot be included in the cost of the land or the new building. The
net revenue of $4,000 is recognized in income when earned.

b. Land cost = $570,000 + $6,000 + $48,000 = $624,000

Under ASPE, any net revenue or expenses generated prior to substantial completion
and readiness for use are included in the asset’s cost. The net revenue of $4,000
would be included in the cost of the new building and credited to the Buildings
account.

BRIEF EXERCISE 10.5

a. Purchase:
Equipment 40,000
Accounts Payable 40,000

Payment:
Accounts Payable 40,000
Equipment 800
Cash 39,200

b. Purchase:
Equipment 40,000
Accounts Payable 40,000

Payment:
Accounts Payable 40,000
Cash 40,000

Finance Expense 800

Equipment 800
To record discount lost

c. Management could consider adopting a policy or procedure that would require

recording purchases of PPE at the net amount, at date of purchase on account. This
would avoid the error of misclassifying the discount forfeited to the asset account
instead of Finance Expense as properly shown above. If the discount is lost due to
late payment of the Accounts Payable, Finance Expense would be debited for the
amount of the forfeited discount instead of the PPE account.

BRIEF EXERCISE 10.6

Vehicles 58,802
Notes Payable 58,802
N = 5, I = 8, FV = 80,000
CPT PV = 58,802

BRIEF EXERCISE 10.7

Vehicles 80,000
Notes Payable 80,000

BRIEF EXERCISE 10.8

Fair Value % of Total Recorded

Cost Amount
Land $ 95,000 95/455 $406,000 $ 84,769
Building 250,000 250/455 406,000 223,077
Equipment 110,000 110/455 406,000 98,154
$455,000 $406,000

BRIEF EXERCISE 10.9

a.

Land 85,000
Common Shares 85,000

Under IFRS, the fair value of the asset acquired should be used to measure its acquisition
cost, unless that fair value cannot be estimated reliably.

b.

Land 85,000
Common Shares 85,000

Under ASPE, the more reliable of the fair value of the asset received or the equity
instruments given up should be used to measure the acquisition cost of the asset. In this
example, the common shares are so thinly traded (infrequent trading) that the estimated
fair value of the land is more reliable, and the land would be recorded at $85,000.

BRIEF EXERCISE 10.14

Land 470,000
Cash 470,000

Cash 140,000
Land 140,000

BRIEF EXERCISE 10.16

a.
Equipment 55,000
Contributed Surplus – Donated Capital 55,000

b.
Equipment 55,000
Donation Revenue 55,000

BRIEF EXERCISE 10.21

a. Revenue expenditure
b. Revenue expenditure
c. Capital expenditure
d. Capital expenditure
e. Capital expenditure
f. Revenue expenditure
g. Revenue expenditure

BRIEF EXERCISE 10.22

a. The cost of the new powertrain is measurable and it will produce future economic
benefits to Shipper. Thus, the new powertrain should be recognized as an asset.

b. Under IFRS, for replacement parts that meet the recognition criteria for PP&E, the
replaced part’s carrying amount is removed from the asset account whether it was
originally recognized as a separate component or not, and the cost of the
replacement part is capitalized as a separate component. The original invoice for the
transport truck did not specify the cost of the powertrain (i.e., it appears it was not
componentized on the original purchase); however, the cost of the replacement—
$40,000—can be used as an indication (usually by discounting) of the likely cost of
the item seven years ago. If an appropriate discount rate is taken, say 5% per annum
for this example, $40,000 discounted back seven years amounts to $28,427 ($40,000
/ (1.05)7), which should be removed from the asset account along with the related
accumulated depreciation on the old powertrain to date, and the difference recorded
as a loss. The cost of the new power train, $40,000, would be capitalized and
depreciated as a separate component in its own asset account.

c. Under ASPE, for major replacements, if the cost of the previous part is known, its
carrying amount is removed from the asset account. If not, the asset account, its
accumulated depreciation, or an expense could be charged with the cost. The
original invoice for the transport truck did not specify the cost of the power-
train; it is assumed that the cost of the previous powertrain is
not known. Therefore, the asset account, its accumulated depreciation, or an expense
could be debited with the cost of the new powertrain.

EXERCISE 10.3

a.
1. Land 92,000
Revenue -- Government Grants 92,000

2. Land 407,000
Buildings – Structure 887,000
Buildings – HVAC 220,000
Buildings – Interior Coverings 116,000
Common Shares 1,630,000

Under IFRS, the fair value of the asset(s) acquired should be used to measure
acquisition cost, and it is presumed that this value can be determined except in
rare cases.

3. Machinery 89,305
Inventory ($23,000 + $625 + $8,700) 32,325
Salaries and Wages Expense 56,000
Supplies 980

Note: For PP&E assets, only the directly attributable costs are capitalized. Since
fixed overhead is generally not directly attributable, but rather allocated on some
rational basis, the fixed overhead applied of $39,200 (70% x $56,000) is
generally expensed rather than capitalized. Any lost revenue attributed to the
downtime during construction is not realized and should not be recorded.

b. If Producers follows ASPE, it would have the choice as to whether or not it wishes
to keep track of the major components of buildings, if it was not practicable to do
so. Under IFRS, when assets are purchased in exchange for shares, the value of the
assets must be used in the measurement of cost. ASPE is more flexible, so the more
reliable of the fair value of the assets received or the equity instruments given up
would be recorded as asset cost. Any lost revenue attributed to the downtime during
construction is not realized and should not be recorded.

EXERCISE 10.4

a.

Land Buildings Machinery Other

Legal fees for title search $ 520
Property tax arrears at property purchase date 4,500
Architect’s fees $ 2,800
Cash paid for land and old building 112,000
Removal of old building, net ($20,000 – $5,500) 14,500
Surveying before construction 370
Interest on short-term loans during construction 7,400
Excavation for basement before construction 19,000
Machinery purchased (2% discount) $63,700 $1,300 Finance Expense
Freight on machinery purchased 1,340
Exchange on foreign currency purchase of machinery 1,200
Storage charges due to delayed completion 2,180 Operating Expenses
New building construction costs 485,000
Assessment by city for drainage 1,600
Fence surrounding property 15,000 Land Improvement
Hauling charges for machinery 620 Operating Expenses
Installation of machinery 2,000
Customs duty for machinery purchase 5,400
Municipal grant _______ (8,000) ______ ______
$133,120 $506,570 $73,640 $19,100

b. Under IFRS, borrowing costs are defined as “interest and other costs that an entity incurs in connection with the borrowing of
funds,” and borrowing costs incurred on qualifying assets must be capitalized. ASPE is more restrictive and includes only interest
costs in the definition of borrowing costs. Under ASPE, interest costs may be capitalized or expensed, depending on the
accounting policy used by the entity.

EXERCISE 10.6

Capitalized cost of the equipment:

Invoice purchase price $100,000

Provincial sales tax, 7% (non-refundable) 7,000
Transportation cost 1,700
Net direct costs of adjusting the equipment so it will work as intended,
and professional fees associated with the acquisition and
installation
($300 + $200 – $4001 + $11,000) 11,100
Total cost $119,800

The GST is excluded because it is recoverable. The $500 storage cost is not included in
the cost of the equipment since it was not a required cost to bring the equipment to the
location and to make it operational. The additional $3,000 labour and $2,000 material
costs before the machine operated at full capacity are inventory production costs incurred
after the equipment was in a condition to operate as management intended and they,
along with the sales of $5,500, are excluded. Lastly, the borrowing costs of $800 were
not incurred to finance the acquisition, construction, or development of a qualifying
asset—one that requires a substantial period of time to get ready for its intended use.
1
Note: Depending on the outcome of the Exposure Draft proposing amendments to IAS
16, the $400 proceeds from selling to employees items produced during the trial runs may
be prohibited from being used as a reduction in the cost of the asset and rather be treated
as a source of income. 2
2
Discussed more fully in the Looking Ahead section of Chapter 10.
 10

EXERCISE 10.8

Land Improve-
Item Land ments Buildings Other Accounts
1. ($275,000) Notes
Payable
2. $275,000
3. $8,000
4. 7,000
5. 6,000
6. (1,000)
7. 22,000
8. 250,000
9. 9,000
10. $ 4,000
11. 11,000
12. (5,000)
13. 13,000
14. 19,000
15. 14,000
16. 3,000
17. 150
GST Receivable

 11

EXERCISE 10.14

a.
1. Land 550,000
Buildings – Structure 1,500,000
Buildings – HVAC 175,000
Machinery 725,000
Common Shares 2,950,000

Transaction 1 involves a share-based payment. Under IFRS, the fair value of the assets
acquired should be used to measure acquisition cost, unless that fair value cannot be
estimated reliably.

2. Buildings ($98,000 + $59,000) 157,000

Machinery 110,000
Land Improvements 131,000
Land 16,000
Cash 414,000

Machinery ($305,000 X 98%) + $14,000 312,900

Repairs and Maintenance Expense 12,500
Cash 325,400

b. Under ASPE, the more reliable of the fair value of each asset received or the
equity instruments given up should be used to measure the acquisition cost. If
Craig prepares financial statements in accordance with ASPE, it would be a
private company, and its shares would not be actively traded. The fair value of its
common shares would likely not be more reliable than the fair value of each asset,
therefore the fair value of each asset would be used to measure the acquisition
cost of plant assets acquired from Desbury Company.

c. Machinery 312,900
Repairs and Maintenance Expense 12,500
Finance Expense 6,100
Cash 331,500

 12

EXERCISE 10.21

a. and b.

Purchase price [($50,000 / $195,000) x $235,000] $60,256

Architectural drawings and engineering fees 18,000
Gutting of building 17,000
Construction 108,400
Provincial government grant1 (75,000)
Total cost $128,656
1
The government grant could alternately be shown as deferred revenue and not be
included as a reduction to the asset’s cost. In this case, the cost would be $203,656.

Note that the building interior improvements are expected to last for the remainder of
the useful life of the building. Since the building structure and the building interior and
services have the same useful life and expected depreciation pattern, there is no need to
separate into the component parts.

The effect of this capital asset on the company’s income statement would result from the
depreciation of the asset’s cost less its residual value over its useful life. The net effect
would be the same whether the cost reduction method or the deferral method is used for
the government grant, since the deferred revenue would be amortized to revenue on the
same basis as the related asset.

Cost reduction method:

Depreciation expense = ($128,656 - $65,000) = $3,183
20 years

Deferral method:
Depreciation expense = ($203,656 - $65,000) = $6,933
20 years

Amortization of deferred revenue to revenue

= $75,000 = (3,750 )
20 years
Net effect on income statement $3,183

 13

c. Cost Reduction Method:

Lightstone Equipment Ltd.

Statement of Financial Position
August 31, 2021
Property, Plant, and Equipment:
Buildings $128,656
Less: Accumulated Depreciation (3,183 ) $125,473

Lightstone Equipment Ltd.

Income Statement
For the year ended August 31, 2021

Operating expenses:
Depreciation expense $3,183

Deferral Method:
Lightstone Equipment Ltd.
Statement of Financial Position
August 31, 2021

Property, Plant, and Equipment:

Buildings $203,656
Less: Accumulated Depreciation (6,933 )
Less: Deferred Revenue - Government Grant1 (71,250 )
$125,473

Lightstone Equipment Ltd.

Income Statement
For the year ended August 31, 2021

Operating expenses:
Depreciation expense $6,933
Other revenues:
Revenue – Government Grants2 3,750
$3,183
1
The Deferred Government Grant could also be shown in Long-term Liabilities.
2
The Revenue – Government Grants could also be shown netted against Depreciation
Expense.

 14

EXERCISE 10.27

1. As the building was acquired in 1980, based on the information in the question it
does not appear that the building has been recorded in the accounts in its
component parts, but rather grouped together in the buildings account. Thus, the
old roof was included in the buildings account and must be removed from that
account. Since the building structure and the roof have different remaining
useful lives, they should be recorded in separate accounts:

Buildings–Roof 2,500,000
Cash 2,500,000
Purchase of new roof

Accumulated Depreciation—Buildings
($1,000,000 x 40/50) 800,000
Loss on Disposal of Buildings 200,000
Buildings 1,000,000
Disposal of old roof

2. Repairs and Maintenance Expense 57,000

Cash 57,000

3. Buildings–HVAC 700,000
Cash 700,000
Purchase of HVAC

Accumulated Depreciation - Buildings 200,000

Buildings 200,000
Disposal of old HVAC

Note: The IFRS requirement is to estimate the cost of the old heating system and
remove the cost along with any accumulated depreciation that would have been
charged on the old heating system, as well as recognize a loss, if not fully
depreciated.

4. Repairs and Maintenance Expense 44,000

Cash 44,000

 15

PROBLEM 10.2

(a) The major characteristics of tangible capital assets, such as land, buildings, and
equipment that differentiate them from other types of assets are presented below.
1. Plant assets are acquired for use in the regular operations of the enterprise
and are not for resale.
2. Tangible capital assets possess physical substance or existence and are
thus differentiated from intangible assets such as patents and goodwill.
Unlike other assets that possess physical substance (i.e., raw material),
property, plant, and equipment do not physically become part of the
product held for resale.
3. These assets are durable and long-term in nature and are used to earn
income in more than one reporting period. They are usually subject to
depreciation.

(b) Transaction 1. To properly reflect cost, assets purchased on deferred payment

contracts should be accounted for at the present value of the consideration exchanged
between the contracting parties at the date of the consideration. When no interest rate
is stated, interest must be imputed at a rate that approximates the rate that would be
negotiated in an arm’s-length transaction. In addition, all costs necessary to ready the
asset for its intended use are considered to be costs of the asset. The government grant
of $2,000 can be applied directly to the asset or alternatively could be shown as a
separate Deferred Revenue – Government Grant and amortized in the same manner as
the related asset.

Asset cost = Present value of the note + Freight + Installation – Government Grant

PV of Note: N = 4, I = 10, PMT = $5,000

PV = 15,849

Present value of instalment note $15,849

Freight 425
Installation costs500
Less: Government Grant (2,000)
Total $14,774

 16

Transaction 2. The lump-sum purchase of a group of assets should be accounted for by

allocating the total cost among the various assets on the basis of their relative fair
market values. The $8,000 of interest expense incurred for financing the purchase
is a period cost and is not a factor in determining asset cost.

Inventory $210,000 x ($ 50,000/$250,000) = $42,000

Land $210,000 x ($ 80,000/$250,000) = $67,200
Building $210,000 x ($120,000/$250,000) = $100,800

c. 1. A building purchased for speculative purposes is not a PPE asset as it is not

being used in normal operations. The building is more appropriately classified as
an investment. Alternatively, the property may be classified as an investment
property (a special classification of a tangible capital asset). An investment
property as defined in IAS 40, is a “property held to earn rentals or for capital
appreciation or both, rather than for a. use in the production or supply of goods
or services or for administration purposes; or b. sale in the ordinary course of
business.” If the property qualifies as an investment property under IAS 40,
then either the cost model or the fair value model can be used to measure and
account for the property.

2. The two-year insurance policy covering plant equipment is not a tangible PPE
asset as it is not long-term in nature, not subject to depreciation, and has no
physical substance. This policy is more appropriately classified as a current asset
(prepaid insurance).

3. The rights for the exclusive use of a process used in the manufacture of ballet
shoes are not tangible PPE assets as they have no physical substance. The rights
should be classified as intangible assets.

 17

PROBLEM 10.3

a. Golden Corporation
ANALYSIS OF LAND ACCOUNT
for 2020

Balance at January 1, 2020 $ 310,000

Land site number 621

Acquisition cost $800,000
Fee to real estate agent 7,000
Clearing costs $33,500
Less amounts recovered 11,000 22,500
Total land site number 621 829,500

Land site number 622

Acquisition cost 560,000
Demolition cost 28,000
Total land site number 622 588,000
Balance at December 31, 2020 $1,727,500

Golden Corporation
ANALYSIS OF BUILDINGS – STRUCTURE ACCOUNT
for 2020
Balance at January 1, 2020 $ 883,000
Cost of new building constructed
on land site number 622
Construction costs $340,000
Excavation fees 38,000
Architectural design fees 15,000
Building permit fee 2,500 395,500
Balance at December 31, 2020 $1,278,500

Golden Corporation
ANALYSIS OF BUILDINGS – ROOF ACCOUNT
for 2020
Balance at January 1, 2020 $ 0
Cost of new building constructed
on land site number 622
“Green roof”1 36,000
Balance at December 31, 2020 $36,000
1
The “green roof” requires a separate account from building structure as it has a different
useful life than the building. The “green roof” is expected to require retrofitting every 7
years, so it must be recognized separately from the remainder of the building.

 18

Golden Corporation
ANALYSIS OF LEASEHOLD IMPROVEMENTS ACCOUNT
for 2020
Balance at January 1, 2020 $705,000
Office space 89,000
Balance at December 31, 2020 $794,000

Golden Corporation
ANALYSIS OF EQUIPMENT ACCOUNT
for 2020
Balance at January 1, 2020 $845,000
Cost of the new equipment acquired
Invoice price $111,000
Freight costs 3,300
Installation costs 3,600 117,900
Balance at December 31, 2020 $962,900

b. Items that were not used to determine the answer to a. above are as follows:

1. Interest imputed on common share financing is not recorded and thus does
not appear in any financial statement.

2. Land site number 623, which was acquired for $265,000, should be
included in Golden’s statement of financial position as land held for resale
(investment section).

3. Royalty payments of $15,300 should be included as a normal operating

expense on Golden’s income statement.

c. 1. The interest imputed on common share financing is not included because it

violates the historical cost principle.

2. The land held for resale would be shown as an investment in order to

provide information that is more relevant and useful to users. The land is
not held for use in the production of goods and services, for rental to
others, or for administrative purposes. Classifying the land as an
investment on the statement of financial position provides representational
faithfulness of management’s intentions concerning this asset.

 19

3. The royalty payments are not a component of cost under the historical cost
principle. They do not have future benefits and are a recurring period cost
based on the usage of the equipment.

 20

PROBLEM 10.4

a.
Webb Corporation
ANALYSIS OF LAND ACCOUNT
2020
Balance at January 1, 2020 $300,000
Plant facility acquired from Knorman Corp.
- fair value of land (share-based payment) 230,000
Balance at December 31, 2020 $530,000

Webb Corporation
ANALYSIS OF LAND IMPROVEMENTS ACCOUNT
2020
Balance at January 1, 2020 $140,000
Parking lots, streets, and sidewalks 95,000
Balance at December 31, 2020 $235,000

Webb Corporation
ANALYSIS OF BUILDINGS ACCOUNT
2020
Balance at January 1, 2020 $1,100,000
Plant facility acquired from Knorman
Corp. —fair value of building (share-based payment)
690,000
Balance at December 31, 2020 $1,790,000

Webb Corporation
ANALYSIS OF EQUIPMENT ACCOUNT
2020
Balance at January 1, 2020 $ 960,000
Cost of new equipment acquired
Invoice price $400,000
Freight and unloading costs 13,000
Provincial sales taxes 28,000
Installation costs 26,000 467,000
$1,427,000
Deduct cost of equipment disposed of
Equipment scrapped June 30, 2020
(item 5) 80,000*
Equipment sold July 1, 2020 (item 6) 44,000* 124,000
Balance at December 31, 2020 $1,303,000

 21

*(As instructed, the accumulated depreciation account can be ignored for this part of the
problem.)

b. Items that were not used to determine the answer to a. above are as follows:
1. The tract of land, which was acquired for $150,000 as a potential future
building site, should be included on Webb’s statement of financial
position as an investment in land with a non-current classification.

2. The $110,000 and $320,000 carrying values respective to the land and
building carried on Knorman’s books at the exchange date are not used by
Webb.

3. The $20,000 GST paid on the purchase of equipment is not included in the
cost. It is recoverable as an input tax credit for companies engaged in
commercial activity and would be debited to GST Receivable.

4. The $12,080 loss (Schedule 2) incurred on the scrapping of a piece of

equipment on June 30, 2020, should be included in the other expenses and
losses section on Webb’s income statement. The $67,920 accumulated
depreciation (Schedule 3) should be deducted from the Accumulated
Depreciation—Equipment account on Webb’s statement of financial
position.

5. The $3,000 loss on disposal of equipment on July 1, 2020 (Schedule 4)

should be included in the other expenses and losses section of Webb’s
income statement. The $21,000 accumulated depreciation (Schedule 4)
should be deducted from the Accumulated Depreciation—Equipment
account on Webb’s statement of financial position.

Schedule 2
Loss on Scrapping of Equipment
June 30, 2020

Cost, January 1, 2012 $80,000

Accumulated depreciation (double-declining-
balance method, 10-year life) January 1,
2012, to June 30, 2020 (Schedule 3) 67,920
Asset carrying value June 30, 2020 $12,080
Loss on scrapping of equipment $12,080

 22

Schedule 3
Accumulated Depreciation Using
Double-Declining-Balance Method
June 30, 2020
(Double-declining-balance rate is 20%)

Carrying Value at
Beginning of Year Depreciation Accumulated
Year Expense Depreciation
2012 $80,000 $16,000 $16,000
2013 64,000 12,800 28,800
2014 51,200 10,240 39,040
2015 40,960 8,192 47,232
2016 32,768 6,554 53,786
2017 26,214 5,243 59,029
2018 20,971 4,194 63,223
2019 16,777 3,355 66,578
2020 (6 months) 13,422 1,342 67,920
$67,920

Schedule 4
Loss on Disposal of Equipment
July 1, 2020

Cost, January 1, 2017 $44,000

Depreciation (straight-line method, salvage value
of $2,000, 7-year life) January 1, 2017, to
July 1, 2020 [3½ years X ($44,000 – $2,000) ÷ 7] (21,000)
Asset carrying value July 1, 2020 $23,000

Asset carrying value $23,000

Proceeds from sale (20,000)
Loss on disposal $ 3,000

c. The land would be transferred from an Investment account to a Land account

within Property, Plant, and Equipment. The transfer would be done at carrying
value at the date of the transfer. The carrying value would usually be the cost base
(unless there had been an impairment and writedown of the cost) or the fair value
if the land was considered to be a qualifying investment property.

 23

SOLUTIONS – CHAPTER 11

BRIEF EXERCISE 11.1

Recording and reporting accumulated depreciation and impairment losses provides users
with relevant and faithfully representative information. Accumulated depreciation is the
total cost of existing property, plant, and equipment that has been allocated and matched
to the revenues that it helped generate. This is relevant information; for example, a high
amount of accumulated depreciation relative to total cost would help users understand
that the existing property, plant, and equipment has been available for use in generating
revenues for a long period of time, or has been used extensively in generating revenues.
Recording accumulated depreciation results in faithfully representative, neutral financial
statements that are free from bias. Accumulated impairment losses is the cumulative
amount of impairment losses that have been recorded for existing property, plant, and
equipment. An impairment loss is recorded when the carrying amount of an asset exceeds
its recoverable amount. Recording an impairment loss provides users with faithfully
representative and neutral information about the expected benefit to be realized from an
asset, relative to its carrying amount.

BRIEF EXERCISE 11.2

(a) Under IFRS, asset componentization is more strictly applied. The aircraft engines
would be recorded and depreciated separately from the aircraft’s body.

October 1, 2020

Aircraft – Engines 20,000,000

Aircraft – Body 80,000,000
Cash 100,000,000

December 31, 2020

Depreciation Expense 2,325,000

Accumulated Depreciation – Aircraft - Engines1 450,000
Accumulated Depreciation – Aircraft – Body2 1,875,000
1
($20,000,000 – $2,000,000) / 10 X 3/12 = $450,000
2
($80,000,000 – $5,000,000) / 10 x 3/12 = $1,875,000

(b) Under ASPE, the practice has been not to recognize asset components to the same
extent as under IFRS. For example, under ASPE, Ocean Airways may record the
purchase of the aircraft without asset componentization, in which case the total $100
million cost of the aircraft would be recorded in one Aircraft asset account on

 24

October 1, 2020, and depreciation expense would be calculated based on useful life
of the entire aircraft as opposed to separately for the body and the engines.

BRIEF EXERCISE 11.3

Original Cost = $30,000 + $200 + $100 + $500 + $400 = $31,200

$31,200 – $6,000
(a) X 6/12 = $1,260
10

$31,200 – $0
(b) X 6/12 = $1,300
12

Under ASPE, depreciation expense is the larger of the original cost less salvage value
over the asset’s total expected life ($1,300), and the original cost less residual value over
the asset’s useful life to the entity ($1,260 calculated in part (a) above).

BRIEF EXERCISE 11.4

$100,000 – $25,000
(a) X 10/12= $7,813
8

$100,000 – $0
(b) X 10/12 = $8,333
10

Under ASPE, depreciation expense is the larger of the original cost less salvage value
over the asset’s total expected life ($8,333), and the original cost less residual value over
the asset’s useful life to the entity ($7,813 calculated in part (a) above).

BRIEF EXERCISE 11.8

(a) ($48,000 - $3,000) / 275,000 = $0.1636 per km

2020: 52,000 x $0.1636 = $8,507

2021: 65,000 X $0.1636 = $10,634

(b) 2020: $48,000 x 30% x ½ = $7,200

2021: ($48,000 - $7,200) x 30% = $12,240

Note: CCA works like the double-declining balance method after the first year but no
residual value is used in the calculation of CCA at the end of the useful life.

 25

EXERCISE 11.1

(a) Factors to consider in establishing the asset’s useful life include the following:
• physical life of the asset (this may be the case for example for the board room
table and chairs, weight and aerobic equipment and trucks based on kilometres);
• timing of replacement by more efficient and economical assets (for example
dental equipment); and
• obsolescence due to new technological advances (for example, computers) or due
to new techniques (for example weight and aerobic equipment)

(b) (1) boardroom table and chairs: straight-line method with useful life of the asset
determined based on physical life of the assets. All accounting periods will
benefit equally from the use of the table and chairs and the straight-line method
will achieve the best matching of costs to benefits received.

(2) dental equipment: straight-line method with useful life of the asset based on
supersession by more efficient and economical assets or based on new
technological advances or new techniques. All accounting periods will benefit
equally from the use of the dental equipment and the straight-line method will
achieve the best matching of costs to benefits received.

(3) long haul trucks for the trucking business: activity method with depreciation as
a function of kilometres driven. The trucks will contribute proportionately more
to revenues in periods of heavier usage and this method will result in better
matching of costs to revenues generated.

(4) weight and aerobic equipment: straight-line method with depreciation as a

function of obsolescence due to new techniques and fashions in the fitness
industry. For certain types of equipment, physical life may be more appropriate,
where the equipment is not subject to obsolescence (for example, free weights).
For certain types of equipment, a declining-balance method could also be used
based on greater benefits received in the early years, for example, equipment
which is subject to fashions or trends in fitness.

(5) classroom computers: straight-line method with useful life of the asset
determined based on obsolescence due to technological advances. The
computers contribute to revenues equally in all years that they are used. A
declining-balance method could also be used if greater benefits are received in
the early years when the equipment can be used in programs where more
technologically advanced equipment is required to attract students to the college,
or where repair costs increase as the equipment gets older. The equipment
would then be rotated to open labs for general students and to staff after a few
years of use. For either the straight-line or declining balance methods, a group
method would likely be used because of the large numbers of individual
computers used.

 26

(c) Estimates of asset useful life are estimates of expected benefit or utility to the
company. Arriving at a good estimate of asset useful life requires information about
expected usage, expected repairs, planned maintenance, and eventual technical or
commercial obsolescence. With this information, a company can manage its assets
better, ensure that expected asset benefit or utility to the company is yielded, and run
its business more efficiently.

EXERCISE 11.2

a. Total cost of property = $220,000 + $3,000 + $1,500

= $224,500

Cost of the building = $224,500 x 75% = $168,375

b. Depreciable amount = Cost – Residual Value

= $168,375 – $115,000 = $53,375

c. Useful life is limited to 10 years. This is the number of years the building will
contribute economic benefits to the company.

d. Depreciation expense 2020 (straight-line)

= ($168,375 – $115,000) / 10 x 3.5 months/12 = $1,557

e. Depreciation expense 2020 (double-declining)

= $168,375 x 20%1 x 3.5 months/12 = $9,822

Depreciation expense 2021 = ($168,375 – $9,822) x 20%1

= $31,711
1
Rate = (1 ÷ 10) x 2 = 20%

(f) Carrying amount = $168,375 – $9,822 – $31,711 = $126,842

(g) Under ASPE, depreciation expense is the higher of two amounts: (1) cost less
salvage value over the life of the asset, and (2) cost less residual value over the
asset’s useful life.

Under ASPE, depreciation expense 2020 (straight-line)

= ($168,375 - $0) / 20 X 3.5 months/12 = $2,455

 27

EXERCISE 11.3

$769,000 – $300,000
a. = $23,450 per year
20 years

2020: $23,450 x 9/12 = $17,588

2021: $23,450

100%
b. = 5%; 5% x 2 = 10%
20

9/12 x 10% x $769,000 = $57,675 for 2020

10% x ($769,000 – $57,675) = $71,133 for 2021

OR

3/12 x 10% x $769,000 = $19,225

+ 9/12 x 10% x ($769,000 – $76,900) = 51,908
$71,133 for 2021

These two approaches will always yield the same result.

$769,000 – $0
c. = $25,633 per year
30 years

2020: $25,633xX 9/12 = $19,225

2021: $25,633

Under ASPE, depreciation expense is the higher of two amounts: (1) cost less salvage
value over the life of the asset, and (2) cost less residual value over the asset’s useful life.
(1) ($769,000 - $0) / 30 = $25,633
(2) ($769,000 - $300,000) / 20 = $23,450

(d) It might be more appropriate to select the straight-line method if the benefits of the
asset are expected to flow to the entity evenly over time, and if the decline in
usefulness of the asset is expected to be constant from period to period. It might be
more appropriate to select the double-declining-balance method if the greatest
benefits of the asset are expected to be yielded in the early years.

 28

(e) Under IFRS, depreciation expense is computed as follows:

Component 1:
$400,000 – $100,000 = $12,000 per year
25 years
2020: $12,000 x 9/12 = $9,000
2021: $12,000

Component 2:
$254,000 – $154,000 = $5,000 per year
20 years
2020: $5,000 x 9/12 = $3,750
2021: $5,000

Component 3:
$115,000 – $46,000 = $2,300 per year
30 years
2020: $2,300 x 9/12 = $1,725
2021: $2,300

(f) Under ASPE, the practice has been not to recognize asset components to the same
extent as under IFRS. Consequently, the depreciation expense would be the same as
calculated in c.

EXERCISE 11.4

$315,000 – $15,000
a. 2021 Straight-line = $30,000/year
10 years

$315,000 – $15,000
b. 2021 Output = $1.25/output unit
240,000 total units

25,500 units x $1.25 = $31,875

$315,000 – $15,000
c. 2021 Working hours = $12.00/hour
25,000 total hours

2,650 hours x $12.00 = $31,800

d. Declining balance 2020: 1/10 x 2 = 20%.

2020: 20% x $315,000 x 8/12 = $42,000

 29

2021: 20% x ($315,000 – $42,000) = $54,600

OR

1st full year (20% x $315,000) = $63,000

2nd full year [20% x ($315,000 – $63,000)] = $50,400

2020 Depreciation 8/12 x $63,000 = $42,000

2021 Depreciation 4/12 x $63,000 = $21,000

8/12 x $50,400 = 33,600
$54,600

g. For the straight-line method, under ASPE, depreciation expense is the higher of two
amounts: (1) cost less salvage value over the life of the asset, and (2) cost less
residual value over the asset’s useful life.

(1) ($315,000 - $3,000) / 15 = $20,800

(2) ($315,000 - $15,000) / 10 = $30,000
In this case, since (2) is the higher of the two amounts, the straight-line
depreciation is the same under both ASPE and IFRS.

EXERCISE 11.9

(a) Examination of the depreciation schedule under declining balance indicates there
is a residual value, as the depreciation amount in the fourth year is truncated to an
amount less than the continuation of the series of the first three years. When there
is any residual value and the amount is unknown (as is the case here), the cost
would have to be determined by looking at the data for the double-declining
balance method.

100%
= 20%; 20% x 2 = 40%
5

Cost x 40% = $30,000

$30,000 ÷ .40 = $75,000 Cost of asset

b. $75,000 cost [from a.] – $60,000 total depreciation

= $15,000 residual value.

c. The lower charge to income for Year 1 will be yielded by the straight-line method,
and this will yield the higher net income.

d. The higher charge to income for Year 4 will be yielded by the straight-line
method.

 30

e. The method that produces the higher carrying amount at the end of Year 3 would
be the method that yields the lower accumulated depreciation at the end of Year 3
which is the straight-line method.

Calculations:
St.-line = $75,000 – ($12,000 + $12,000 + $12,000) = $39,000 carrying amount,
end of Year 3.
D.D.B. = $75,000 – ($30,000 + $18,000 + $10,800) = $16,200 carrying amount,
end of Year 3.

g. The double-declining balance method in this case: The method that will yield the
higher gain (or lower loss) if the asset is sold at the end of Year 3 is the method
which will yield the lower carrying amount [see part e.] at the end of Year 3.

h. For the straight-line method under ASPE, depreciation expense is the higher of
two amounts: (1) cost less salvage value over the life of the asset, and (2) cost less
residual value of the asset’s useful life.

(1) ($75,000 - $0) / 6 = $12,500

(2) ($75,000 – $15,000) / 5 = $12,000

Since (1) is the higher depreciation amount, annual depreciation expense under
ASPE would be $12,500. Parts c. through g. would result in the same answers for
ASPE and IFRS.

h. Since the capital cost allowance approach is required for tax purposes, for
simplicity and for cost-purposes (not having to maintain records for accounting and
taxation), it is not unusual for smaller companies to use the capital cost allowance
approach for financial reporting purposes as well. A potential investor would want
to base their investment decision on relevant and faithfully representative
information. The capital cost allowance approach is based on the rules as defined in
the Income Tax Act, and may not necessarily reflect the expected usage or pattern
in which the asset benefits are expected to be consumed, rendering financial
statements not as relevant to a potential investor. However, the capital cost
allowance approach requires no estimates of residual value, salvage value, useful
life, or physical life. As a result, calculation of depreciation expense may be more
neutral and free from bias.

 31

EXERCISE 11.11
a.
Depreciation taken (DDB): $60,000 x 40% .................................................... $24,000
Correct depreciation (SL): ($60,000 – $5,000) / 5 years ............................... 11,000
Overstatement of depreciation ........................................................................ $13,000

The correcting entry needed is as follows:

Accumulated Depreciation–Machinery .........................................................
13,000
Depreciation Expense ........................................................................
13,000
Calculation of corrected net income:
Net income as reported .................................................................................. $53,000
Add: Overstatement of depreciation expense ................................................ 13,000
Corrected net income ..................................................................................... $66,000

(a) Under ASPE, depreciation expense is the higher of : (1) cost less salvage value over
the life of the asset, and (2) cost less residual value of the asset’s useful life.
(1) ($60,000 – $3,000) / 6 = $9,500
(2) ($60,000 - $5,000) / 5 = $11,000
Since (2) is the higher depreciation amount, annual depreciation expense under ASPE
would be $11,000 (the same as for IFRS). The correcting journal entry and calculation
of corrected net income would be the same as well.

(b) A potential investor would want to base their investment decision on relevant and
faithfully representative information. If the error was not detected and corrected by
Gibbs, net income in 2020 would be understated, and total assets at end of 2020
would be understated. The financial statements would be less relevant (they would
have less predictive value), and the financial statements would not be as faithfully
representative (they would not be free from error). As well, comparability of the
financial statements with financial statements of previous periods, would be
compromised. A potential investor might forego investing in Gibbs, based on this
understated amount of net income and total assets.

 32

EXERCISE 11.13

a. Depletion charge:
Depreciable Cost of Timberland:
$1,400 – $420 = $980 per hectare
Total depreciable cost: $980 X 9,000 hectares
= $8,820,000 cost of timber
Depletion Rate = ($8,820,000 ÷ 3,500,000 m3) = $2.52 per m3 Depletion charge
(and portion of depletion included in cost of timber sold in 2009) = $2.52 x
700,000 m3 = $1,764,000

Inventory 1,764,000
Accumulated Depletion 1,764,000
To record depletion

Cost of Goods Sold 1,764,000

Inventory 1,764,000
To record cost of goods sold

b. Cost of Timber Sold related to depletion:

$8,820,000 – $1,764,000 = $7,056,000
$7,056,000 + $100,000 for seedlings = $7,156,000
Produced in 2020: ($7,156,000 ÷ 5,000,000 m3) x 900,000 m3 = $1,288,080

Inventory 1,288,080
Accumulated Depletion 1,288,080
To record depletion
Sold in 2020: ($7,156,000 ÷ 5,000,000 m3) x 540,000 m3 = $772,848 where
540,000 is 60% of 900,000 m3

Cost of Goods Sold 772,848

Inventory 772,848
To record cost of goods sold

Sold in 2021: ($7,156,000 ÷ 5,000,000 m3) X 360,000 m3 = $515,232 where

360,000 is 40% of 900,000 m3

Cost of Goods Sold…………………515,232

Inventory……………….……… 515,232
To record cost of goods sold

 33

c. The spraying costs as well as the costs to maintain the fire lanes and roads are
expensed each period and are not part of the depletion base. The company would
record them as follows:

Repairs and Maintenance Expense $10,000

Cash $10,000

d. The Fire Lanes and Roads would be depreciated over their useful life. They have a
physical life of 30 years. However, if the lanes’ and roads’ useful life can be
directly assigned to the timberland and the production that is estimated to take
place over a shorter span than 30 years, the depreciation would be calculated on a
units-of-production basis over the quantity of timber to be extracted. Since the
company is maintaining its timberland and is planting new seedlings, it is likely
that the timberland will last for more than 30 years.

EXERCISE 11.16

(a) No correcting entry is necessary because changes in estimate are handled in the
current and prospective periods.

b. Original annual charge: ($56,000 – $4,000) ÷ 8 = $6,500

Revised annual charge:
Carrying amount as of 1/1/2020 [$56,000 – ($6,500 X 5)] =
= $23,500
Remaining useful life = 5 years (10 years – 5 years)
Revised residual value = $4,500
($23,500 – $4,500) ÷ 5 = $3,800

Depreciation Expense 3,800

Accumulated Depreciation - Equipment 3,800

c. Under ASPE, depreciation expense is the higher of : (1) cost less salvage value
over the life of the asset, and (2) cost less residual value of the asset’s useful life.
(1) ($56,000 – $0) / 8.5 = $6,588
(2) ($56,000 - $4,000) / 8 = $6,500

Since (1) is the higher depreciation amount, annual depreciation expense under
ASPE would be $6,588.

Carrying amount as of 1/1/2020 is $23,060 [$56,000 – ($6,588 x 5)] = $23,060.

Remaining useful life = 6 years (11 years – 5 years)
In 2020, depreciation expense is re-computed as per the formula above:
(1) ($23,060 - $100)/6 = $3,827
(2) ($23,060 - $4,500)/5 = $3,712

 34

Therefore, depreciation expense is $3,827.

Depreciation Expense 3,827

Accumulated Depreciation - Equipment 3,827

d. Revised annual charge:

Old depreciation rate = (100% ÷ 8) x 2 = 25%
Carrying amount as of 1/1/2020 =
= [$56,000 x (1 – 25%)5] = $13,289
Remaining useful life = 5 years
Revised depreciation rate = (100% ÷ 5) x 2 = 40%
$13,289 x 40% = $5,316

Depreciation Expense 5,316

Accumulated Depreciation - Equipment 5,316

EXERCISE 11.26

a. Situation 1

Depreciation Expense1 2,700

Accumulated Depreciation - Equipment 2,700
1
($120,000 – $12,000) ÷ 10 x 3/12 = $2,700

Cash 28,000
Loss on Disposal of Equipment 13,700
Accumulated Depreciation—Equipment
($75,600 + $2,700) 78,300
Equipment 120,000

Situation 2

Depreciation Expense2 1,750

Accumulated Depreciation - Machinery 1,750
2
($38,000 – $2,000) ÷ 12 x 7/12 = $1,750

Cash 10,000
Loss on Disposal of Machinery 2,250
Accumulated Depreciation—Machinery
($24,0003 + $1,750) 25,750
Machinery 38,000
3
Accumulated depreciation to December 31, 2019 is
($38,000 – $2,000) ÷ 12 x 8 yrs = $24,000

 35

Situation 3
Cash 5,200
Accumulated Depreciation— Equipment 8,500
Equipment 12,000
Gain on Disposal of Equipment 1,700

b. The treatment for the above journal entries would be the same under both ASPE
and IFRS.

 36

PROBLEM 11.1

a. 1. Depreciation Base Calculation:

Purchase price $85,000
Less: Purchase discount (2%) (1,700)
Freight 800
Installation 3,800
87,900
Less: Residual value 1,500
Depreciation base $86,400

Straight line — 2020: ($86,400 ÷ 8 years) x 8/12 = $7,200

2021: ($86,400 ÷ 8 years) = $10,800

2. Double-declining balance for 2020:

($87,900 x 25% x 8/12) = $14,650
DDB for 2021: ($87,900 – $14,650) x 25% = $18,313

c. An activity method. These methods allocate the depreciation base based on actual
usage of the asset over its estimated useful life measured, for example, in units of
output. In years where production is low, depreciation expense will also be low
and in years of high production, depreciation expense will be high. This will
match the depreciation expense with the decline in benefits the equipment has to
offer.

If the asset benefits are actually delivered as the asset is used, this would be an
appropriate basis for the depreciation calculations. An example of this is when
equipment deteriorates through wear and tear associated with use. However, if the
asset deteriorates on another basis, such as on the basis of time, this would not be
an appropriate method. In this latter case, depreciation should be recognized
equally over time (straight line method) even if the asset is not being used. The
primary concern is not how the revenues are earned, but rather with the pattern in
which the physical capacity, wear and tear, technical obsolescence, or legal life
are used up as the asset is available to the entity.

d. The selection of a depreciation method for financial reporting purposes has no

impact on cash flows. Cash flows would be the same regardless of the
depreciation method selected. Phoenix Corp. would therefore have the same
amount of cash in order to repay its debt. If Phoenix’s creditors use ratios as part
of the debt agreements, the depreciation method that helps Phoenix meet its debt
covenants would be prefered by management. For example, an activity method
would yield a lower debt to total assets ratio in the early years since the asset’s
carrying amount would be higher compared to the company’s debt. It would also
produce a higher profit margin since the depreciation expense would be lower in
the early years. Creditors however are usually not fooled by the selection of
depreciation methods and would concentrate on the company’s debt repayment

 37

ability as demonstrated by cash flows. Creditors would be aware of management’s

choice of depreciation method by reading the note to the financial statements on
the topic of accounting policies.

e. The depreciation period ends when the asset is derecognized, or when it is

classified as held for sale. Depreciation continues even if the asset is idle or has
been taken out of service. In this case, the depreciation period ends on September
15, 2022, when the asset meets all criteria for classification as held for sale.

DDB —2022: ($87,900 – $14,650 – $18,313) X 25% X 8.5/12 = $9,728

PROBLEM 11.3

a. Depreciation Base Calculation:

Purchase price $77,000
Overhaul 5,200
Direct material 400
Direct labour 800
83,400
Less: Residual value 5,000
Depreciation base $78,400

Straight- Activity – based on output Activity – based on input

line
Dep’n. Hours of Dep’n.
Year expense Units produced Dep’n. expense operation expense
2017 5,8801 110,000 7,1832 10,000 7,8403
2018 15,680 270,000 17,631 20,000 15,680
2019 15,680 264,000 17,239 20,000 15,680
2020 15,680 310,000 20,243 20,000 15,680
2021 15,680 134,000 8,750 18,000 14,112
2022 9,800 112,000 7,354 12,000 9,408
Total $78,400 1,200,000 $78,400 100,000 $78,400

Declining Balance
Ending
Dep’n. Carrying
Year expense Amount
2017 12,5104 70,890
2018 28,356 42,534
2019 17,014 25,520
2020 10,208 15,312
2021 6,125 9,187
2022 4,187 5,000
Total $78,400

 38

Depreciation calculations:

1. Straight-line:
$78,400 ÷ 5 = $15,680/yr.
2017: $15,680 x 4.5/12 = $5,880
2018-2021: $15,680/yr.
2022: $15,680 x 7.5/12 = $9,800

2. Units-of-output:
$78,400 ÷ 1,200,000 units = $.0653/unit
2017: $.0653 x 110,000 = $7,183
2018: $.0653 x 270,000 = $17,631
2019: $.0653 x 264,000 = $17,239
2020: $.0653 x 310,000 = $20,243
2021: $.0653 x 134,000 = $8,750
2022: $.0653 x 112,000 = $7,354*
* rounded to bring carrying amount equal to residual value

3. Working hours:
$78,400 ÷ 100,000 hrs. = $.784/hr.
2017: $.784 x 10,000 = $ 7,840
2018: $.784 x 20,000 = $15,680
2019: $.784 x 20,000 = $15,680
2020: $.784 x 20,000 = $15,680
2021: $.784 x 18,000 = $14,112
2022: $.784 x 12,000 = $ 9,408

4. Double-declining balance:
2017: $83,400 x 2/5 x 4.5/12 = $12,510
2018: ($83,400 – $12,510) x 2/5 = $28,356
2019: ($70,890 – $28,356) x 2/5 = $17,014
2020: ($42,534 – $17,014) x 2/5 = $10,208
2021: ($25,520 – $10,208) x 2/5 = $6,125
2022: ($9,187 – $5,000) = $4,187 amount needed to bring carrying amount equal to
residual value

b. 1. Straight-line = $83,400 – $5,880 – (3 x $15,680) = $30,480

2. Activity method: output = $83,400 – $7,183 – $17,631 –
$17,239 – $20,243 = $21,104
3. Activity method: input = $83,400 – $7,840 – (3 x $15,680)
= $28,520
4. Declining balance: $83,400 – $12,510 – $28,356 –
$17,014 – $10,208 = $15,312

 39

d. If management had the objective of minimizing taxes, they would be tempted to

choose the method with the highest depreciation expense to lowering net income
and reducing taxes payable. Therefore, management would consider selecting the
double-declining balance method which would result in the highest depreciation
expense ($12,510) in 2017. However, because entities must follow Canadian
Taxation rules and use Capital Cost Allowance (CCA) rates prescribed by the
Income Tax Act, management would not be able to use any other method for
taxation purposes than the allowed CCA method. Therefore, “depreciation” that
could be deducted for tax purposes would be limited to a maximum of $8,340 in
2017 as per the above CCA calculations.

e. If management determines before the end of useful life that the hours of operation
or units produced do not correspond to the original estimates, then an adjustment
to the original estimate or total hours of operation or units produced would be
applied prospectively and a new depreciation rate would be calculated. If the
discrepancy is not determined until the end of its useful life, then depreciation in
the last year is adjusted to achieve carrying amount equal to residual value.