In Class Demo Questions - Solutions

INSTRUCTORS:
Explain to students that, as a business grows, they will purchase long-lived
assets. Give them an example of the difference between current assets
(supplies and inventory) and long-lived assets (equipment and computers).
Explain why long-lived assets are assets (match the definition of the element
assets). Then explain to them that, just like when we recognize the USE of
supplies to help generate revenue (supplies expense increases, the asset
supplies decreases) we have to recognize the USE of long-lived assets.

That is the topic for today!

Explain that you will cover the following:

1. Determining the cost of a long-lived asset – what needs to be capitalized

(recorded as an asset on the balance sheet) as part of the equipment
account (ICDQ8-1).
2. Learn how to calculate the use of long-lived assets and record that use at
the end of every period (full year and partial year)
3. Learn how to dispose of a long-lived asset.

Note that there are 3 videos posted on the CONTENT site of D2L which go
through all the information in the chapter so there is NO NEED for you to do any
questions from the chapter. Point out to the class that the years in the videos
may start with 2016 but the textbook has been updated to 2021.

You can work just from this In Class Demo Question package.
ICDQ8-1

Divito Inc. bought equipment on January 1, 2021, for $55,000. The business also paid the
following amounts: $800 for shipping, $200 for insurance while the equipment was being
shipped, $2,400 for a two-year insurance policy, $2,000 to train employees on how to use the
equipment and $3,800 for testing and installing the equipment. All of the costs were paid in
cash.

Required: determine which costs should be capitalized (included as part of the cost of the
equipment). Support your decision with reasoning (be sure to mention purchase costs or
necessary to make it ready for use). If the cost is not capitalized as part of the equipment how
would you record it? Provide the account name and the reason you would record it that way.
Then record all the costs in the accounting records, using the expanded accounting equation
and account names (see chart, below).

INSTRUCTORS: be sure to discuss why it is important to determine the cost of a long-lived

asset, which is that we can only expense costs when they are used or consumed to help
generate business and, as yet, these costs have future value as they will be used in the future to
help run the business and earn a profit.

Account to record
Description of Cost Cost Reasoning
into:
invoice cost 55,000 Equipment Purchase costs, so include.
shipping costs 800 Equipment Must be shipped to location to be ready
for use.
Insurance on shipping 200 Equipment Part of shipping cost and must be shipped
to be ready for use.
2 year insurance policy 2,400 Prepaid Insurance This is part of operating the equipment,
not getting it ready for use.
Train employees 2,000 Training Expense This is part of operating the equipment,
not getting it ready for use.
Testing & Installing 3,800 Equipment The equipment will only be ready for use
when it is tested and installed.

The expanded accounting equation is provided for you on the next page.
INSTRUCTORS: note the 2 red ones the students had to name themselves!!

Equity
Retained Earnings
Asset Liabilities Owners'
Capital Profit
Revenue Expenses

Accounts payable

Training Expense
Equipment
Insurance
Prepaid
Cash

Openin
N/A N/A N/A N/A N/A N/A N/A N/A
g
Trans. 1 -55,000 55,000
Trans. 2 -800 800
Trans. 3 -200 200
+2,40
Trans. 4 -2,400 0
Trans. 5 -2,000 2,000
Trans. 6 -3,800 3,800
Total -64,200 2,400 59,800 2,000

ICDQ8-2

What is accumulated depreciation? Which element does it belong in?

 Total value of the long-lived asset that you have used up since the day it become ready for use!
 Belongs as a negative in the asset element, similar to allowance for doubtful accounts
 Negative because it recognizes the amount used up from the long-lived asset account, such as
Equipment

What is depreciation expense? Which element does it belong in?

 Value of the long-lived asset that was used for THIS PERIOD ONLY.
 Belongs in the element expense as it has been used, consumed or incurred to help generate
revenue.
ICDQ8-3

You are running a business and you have the following information about a new long-lived asset you
purchased. Calculate the depreciation expense and the accumulated depreciation for the life of the
asset.

Cost $59,800

Ready for use date January 1, 2021

Estimated useful life 4 years

Residual value $7,000

1. Calculate the depreciable amount (cost – residual value).

59,800 – 7,000 = 52,800

2. Determine the annual depreciation (depreciable amount / estimated useful life).

52,800 / 4 years = 13,200 / year

3. If required, determine the monthly depreciation (annual depreciation / 12 months).

13,200 / 12 months = 1,100 / month

INSTRUCTORS: complete the chart on the whiteboard WITH the students so

they can see how this is calculated.

Depreciation Accumulated Book value (cost -

Year ended
expense depreciation acc. depr.)

31-Dec-21 13,200 13,200 46,600

31-Dec-22 13,200 26,400 33,400
31-Dec-23 13,200 39,600 20,200
31-Dec-24 13,200 52,800 7,000

Record the depreciation expense for December 31, 2021 and December 31, 2022, in the expanded
accounting equation. The chart is below.
INSTRUCTORS: Be sure to show students the sense behind
accumulated depreciation!!

Equity
Retained Earnings
Asset Liabilities Owners
Profit
' Capital
Revenue Expense

Accumulated depreciation

Depreciation Expense
2021

Accounts payable
Equipment

Revenue
Cash

Balance N/A 59,800 0 N/A N/A N/A 0

Dec 31 -13,200 13,200
Balance 59,800 -13,200 13,200

How would this long-lived asset be presented on the balance sheet on December 31, 2021? What would
show up on the income statement and where?

Balance sheet:

Property, plant & equipment:

Equipment 59,800
Less: accumulated depreciation (13,200)
Net book value 46,600

Income statement:
Operating expenses include depreciation of 13,200.
 Equity
Retained Earnings
Asset Liabilities Owners' Profit
Capital Revenu
Expense
e

Accumulated depreciation

Depreciation Expense
2022

Accounts payable
Equipment

Revenue
Cash

Balance N/A 59,800 -13,200 N/A N/A N/A 0

Dec. 31 -13,200 13,200
Balance 59,800 -26,400 13,200

How would this long-lived asset be presented on the balance sheet on December 31, 2022? What would
show up on the income statement and where?

Balance sheet:

Property, plant & equipment:

Equipment 59,800
Less: accumulated depreciation (26,400)
Net book value 33,400

Income statement:
Operating expenses include depreciation of 13,200.
ICDQ8-4

Assume now, instead of purchasing the long-lived asset on January 1, 2021, that you bought it and put it
into use on May 1, 2021.

Cost $59,800

Ready for use date May 1, 2021

Estimated useful life 4 years

Residual value $7,000

INSTRUCTORS: Be sure to point out to students that the calculation of

the amounts, below, do not change due to it being purchased in the
middle of a year.

1. Calculate the depreciable amount (cost – residual value).

59,800 – 7,000 = 52,800

2. Determine the annual depreciation (depreciable amount / estimated useful life).

52,800 / 4 years = 13,200 / year

3. If required, determine the monthly depreciation (annual depreciation / 12 months).

13,200 / 12 months = 1,100 / month

INSTRUCTORS: complete the chart on the whiteboard WITH the students so

they can see how this is calculated.

Year ended Depreciation expense Accumulated Book value

depreciation
(cost - acc. depr.)

31-Dec-21 8,800 8,800 51,000

31-Dec-22 13,200 22,000 37,800

31-Dec-23 13,200 35,200 24,600

 31-Dec-24 13,200 48,400 11,400

30-Apr-25 4,400 52,800 7,000

Record the depreciation expense for December 31, 2021, in the expanded accounting equation. The
chart is below.
 Equity
Retained Earnings
Asset Liabilities Owners'
Profit
Capital
Revenue Expense

Accumulated depreciation

Depreciation Expense
2021

Accounts payable
Equipment

Revenue
Cash

Balance N/A 59,800 0 N/A N/A N/A 0

Dec. 31 -8,800 8,800
Balance 59,800 -8,800 8,800

How would this long-lived asset be presented on the balance sheet on December 31, 2021? What would
show up on the income statement and where?

Balance sheet:

Property, plant & equipment:

Equipment 59,800
Less: accumulated depreciation (8,800)
Net book value 51,000

Income statement:
Operating expenses include depreciation of 8,800.
ICDQ8-5

Assume the same information as for ICDQ8-4 but, instead of keeping the equipment for 4 years, you sell
it for $10,000 on October 31, 2024. Record the sale in the expanded accounting equation, using account
names.

INSTRUCTORS: Be sure to show students how to calculate the partial year in the
year of disposal. Advise them that this is where students often mess up on the
super quiz and final exam!

Depreciation Accumulated Book value (cost -

Year ended
expense depreciation acc. depr.)
31-Dec-21 8,800 8,800 51,000
31-Dec-22 13,200 22,000 37,800
31-Dec-23 13,200 35,200 24,600
31-Oct-24 11,000 46,200 13,600
Calculate the depreciation expense for the year of disposal.

January 1, 2024 – October 31, 2024: 10 months * 1,100 / month = 11,000

Record the depreciation expense to the date of disposal (see the expanded accounting equation, below)

See below.

Determine the selling price.

$10,000 (given in question always – point this out to students!)

Determine the gain or loss on disposal (compare the selling price to the book value after you record the
depreciation). If you sold the asset for more than the book value, you have a gain. If you sold it for less,
you have a loss.

Book value = 13,600, Selling price = $10,000

10,000 – 13,600 = -3,600 LOSS

Record the sale (what did you get, what did you give away?) in the expanded accounting equation,
below.

Point out to students what they got (cash) and what they gave away (the equipment and also
the accumulated depreciation). They must also record the loss on disposal.
 Equity
Liabili Retained Earnings
Asset Owners'
ties Profit
Capital
Revenue Expense

Accumulated depreciation

Depreciation Expense
2024

Accounts payable

Gain on disposal

Loss on disposal
Equipment

Revenue
Cash

Balance N/A 59,800 -35,200 N/A N/A N/A 0

Oct. 31 -11,000 11,000
Balance 59,800 -46,200 11,000
Oct. 31 10,000 -59,800 +46,200 3,600
Balance 10,000 0 0 11,000 3,600

ICDQ8-6

Assume the same information as for ICDQ8-4 but, instead of keeping the equipment for 4 years, you sell
it for $15,000 on November 30, 2024. Record the sale in the expanded accounting
equation, using account names.

INSTRUCTORS: Once again, be sure to show students how to calculate the

partial year in the year of disposal. Advise them that this is where students
often mess up on the super quiz and final exam!

Depreciation Accumulated Book value (cost -

Year ended
expense depreciation acc. depr.)
31-Dec-21 8,800 8,800 51,000
31-Dec-22 13,200 22,000 37,800
31-Dec-23 13,200 35,200 24,600
30-Nov-24 12,100 47,300 12,500
Calculate the depreciation expense for the year of disposal.

January 1, 2024 – November 30, 2024: 11 months * 1,100 / month = 12,100

Record the depreciation expense to the date of disposal (see the expanded accounting equation, below)
Determine the selling price.

$15,000 (given in question always – point this out to students!)

Determine the gain or loss on disposal (compare the selling price to the book value after you record the
depreciation). If you sold the asset for more than the book value, you have a gain. If you sold it for less,
you have a loss.

Book value = 13,600, Selling price = $10,000

15,000 – 12,500 = +2,500 GAIN

Record the sale (what did you get, what did you give away?) in the expanded accounting equation,
below.

Point out to students what they got (cash) and what they gave away (the equipment and also
the accumulated depreciation). They must also record the gain on disposal.

Liabili
ties Equity
Asset Retained Earnings
Owners'
Profit
Capital
Revenue Expense
Accumulated depreciation

Depreciation Expense
2024
Accounts payable

Gain on disposal

Loss on disposal
Equipment

Revenue
Cash

Balance N/A 59,800 -35,200 N/A N/A N/A 0

Nov. 30 -12,100 12,100
Balance 59,800 47,300 12,100
Nov. 30 15,000 -59,800 +47,300 2,500
Balance 15,000 0 0 2,500 12,100