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SM 10

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267 views191 pages

SM 10

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 10

PROPERTY, PLANT, AND EQUIPMENT:

ACCOUNTING MODEL BASICS

Learning Objectives
1. Identify the business importance and characteristics of
property, plant, and equipment assets and explain the
recognition criteria.
2. Identify the costs to include in the measurement of property,
plant, and equipment at acquisition.
3. Determine asset cost when the transaction has delayed
payment terms or is a lump-sum purchase, a nonmonetary
exchange, or a contributed asset.
4. Identify the costs included in specific types of property, plant,
and equipment.
5. Understand and apply the cost model, the revaluation model
using the asset adjustment method, and the fair value model
6. Explain and apply the accounting treatment for costs incurred
after acquisition.
7. Identify differences in accounting between IFRS and ASPE,
and what changes are expected in the near future.
8. Calculate the amount of borrowing costs to capitalize for
qualifying assets.
9. Understand and apply the revaluation model using the
proportionate method.

Solutions Manual 10.1 Chapter 10

Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Ite LO BT Ite LO BT Item LO BT Ite LO BT Ite LO BT

m m m m
Brief Exercises
1. 1 C 7. 3 AP 13. 3 AP 19. 5 C 25. 2,8 AP
2. 1,7 C 8. 3 AP 14. 3 AP 20. 5,9 AP 26. 2,8 AP
3. 2,4,7 C 9. AP 15. 3 AP 21. 5,9 AP 27. 2,7, AP
3,7 8
4. 2,4,7 AP 10. 3
AP 16. 3 AP 22. 5,7 C
5. 3 AP 11. 3
AP 17. 4,7 AP 23. 6 C
6. 3 AP 12. 3
AP 18. 4 C 24. 6,7 C
Exercises
1. 1 C 8. 2,4 AP 15. 3 AP 22. 4,7 C 29. 6 AP
2. 2,3 C 9. 2,4 AP 16. 3 AP 23. 5 AP 30. 6 K
3. 2,3,7 AP 10. 2,4,7 AN 17. 3 AP 24. 5 AP 31. 2,8 AP
4. 2,3,7 AP 11 AP 18. 3 AP 25. 5 AP 32. 2,8 AP
. 3,7
5 2,3,7,8 AP 12. 3 AP 19. 3 AP 26. 5,9 AP 33. 2,8 AP
6. 2,4 C 13. 3 AP 20. 3 AP 27. 5,9 AP
7. 2,4 C 14. 3,7 AP 21. 3 AP 28. 6 AP
Problems
1. 2,7 C 4. 2,3 AP 7. 2,3,6 AP 10. 5 AP 13. 6 C
2. 1,2,3 AP 5. 2,3 AP 8. 3 AP 11. 5 AP 14. 7,8 AP
3. 1,2 AP 6. 2,3,7 AP 9. 3 AP 12. 5 AP 15. 8 AP
Cases and Integrated Case
CA1. 5 AP IC 1. 3,4 AN IC2. 2,4, AN
Research and Analysis
1. 1,3 AP 2. 4 AP 3. 5 AN 4. 2 AN 5. 3 AN
6. 2 AN

Solutions Manual 10.2 Chapter 10

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
S Simple
M Moderate
C Complex
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
Reporting Financial Reporting
Stat. & Gov. Strategy and Governance
Mgt. Accounting Management Accounting
Audit Audit and Assurance
Finance Finance
Tax Taxation
DAIS Data Analytics and Information Systems

Solutions Manual 10.3 Chapter 10

ASSIGNMENT CLASSIFICATION TABLE

Brief Writing
Topics Exercises Exercises Problems Assignment

1. Definition and 1, 2 1, 5, 7 1, 3, 6
recognition of PP&E

2. Measurement of PP&E 3, 4, 20, 2, 3, 4, 5, 3, 5

assets at acquisition. 25, 26, 27 6, 7, 8, 9,
10, 31, 32,
33

3. Determining asset cost 5, 6, 7, 8, 2, 3, 4, 5, 1, 2, 4, 5,

under special 9, 10, 11, 11, 12, 13, 6, 7, 8, 9
situations. 12, 13, 14, 14, 15, 16,
15, 16 17, 18, 19,
20, 21

4. Costs included in 3, 4, 17,18 6, 7, 8, 9, 4, 7

specific types of PP&E. 10, 22

5. The cost model, 19,21, 22 23, 24, 25, 10, 11, 12,
revaluation model 26,27 13
using asset reduction
method, and the fair
value model

6. Costs subsequent to 23, 24 28, 29, 30 13

acquisition.

7. Differences between 2, 3, 4, 9, 3, 4, 5, 10, 1, 6, 14

ASPE and IFRS. 17, 22, 24, 11, 14, 22
27

8. Capitalized borrowing 25, 26, 27 5, 30, 32, 14, 15

costs for qualifying 33
assets.*

9. Revaluation model 20, 21, 22 26, 27 11

using proportionate
method.*

* This material is covered in an Appendix to the chapter.

Solutions Manual 10.4 Chapter 10

ASSIGNMENT CHARACTERISTICS TABLE

Level of Time
Item Description Difficulty (minutes)

E10.1 Cost elements and asset Simple 20-25

componentization
E10.2 Purchase and cost of self-constructed Moderate 20-25
assets
E10.3 Entries for asset acquisition, including Simple 15-20
self-construction
E10.4 Treatment of various costs Moderate 30-40
E10.5 Asset acquisition Moderate 25-35
E10.6 Acquisition costs of equipment Moderate 10-15
E10.7 Directly attributable costs Moderate 10-15
E10.8 Acquisition costs of realty Moderate 15-20
E10.9 Acquisition costs of realty Simple 10-15
E10.10 Natural Resource – Oil Moderate 15-20
E10.11 Acquisition costs of vehicles Simple 15-20
E10.12 Correction of improper cost entries Moderate 15-25
E10.13 Entries for equipment acquisitions Simple 15-20
E10.14 Entries for acquisition of assets Simple 20-25
E10.15 Purchase of equipment with noninterest- Moderate 15-20
bearing debt
E10.16 Purchase of equipment with debt Moderate 30-40
E10.17 Asset exchange, monetary transaction Moderate 15-20
E10.18 Nonmonetary exchange Moderate 20-25
E10.19 Nonmonetary exchange Moderate 15-20
E10.20 Nonmonetary exchange Simple 10-15
E10.21 Government assistance Simple 20-25
E10.22 Biological assets Moderate 15-20
E10.23 Analytics in action Moderate 15-20
E10.24 Measurement after acquisition – fair value Moderate 15-20
model versus cost model
E10.25 Measurement after acquisition – fair value Moderate 15-20
model
*E10.26 Measurement after acquisition – Moderate 15-20
revaluation model
*E10.27 Measurement after acquisition – Simple 30-40
revaluation model
E10.28 Analysis of subsequent expenditures Moderate 20-25
E10.29 Analysis of subsequent expenditures Simple 15-20
E10.30 Analysis of subsequent expenditures Simple 10-15

Solutions Manual 10.5 Chapter 10

ASSIGNMENT CHARACTERISTICS TABLE

(CONTINUED)
Level of Time
Item Description Difficulty (minutes)

*E10.31 Capitalization of borrowing costs Moderate 20-25

*E10.32 Capitalization of borrowing costs Moderate 20-25
*E10.33 Capitalization of borrowing costs Moderate 20-25

P10.1 Classification of specialized assets Moderate 35-45

P10.2 Purchases by deferred payment, lump- Moderate 35-45
sum, and non-monetary exchange
P10.3 Classification of acquisition and other Moderate 35-40
asset costs
P10.4 Classification of acquisition costs Moderate 40-55
P10.5 Classification of land and building costs Moderate 50-60
P10.6 Classification of costs and interest Moderate 30-35
capitalization
P10.7 Acquisition costs and costs subsequent to Moderate 30-40
acquisition
P10.8 Monetary and non-monetary exchanges Moderate 35-45
P10.9 Non-monetary exchanges Moderate 30-40
P10.10 Measurement after acquisition – the Moderate 30-40
revaluation model
*P10.11 Revaluation model – asset adjustment Complex 35-45
and proportionate methods
P10.12 Fair value model and cost model Complex 50-55
P10.13 Analysis of subsequent expenditures Moderate 20-25
*P10.14 Acquisition cost, capitalization of interest Moderate 25-35
*P10.15 Capitalization of interest, disclosures Moderate 15-20

Solutions Manual 10.6 Chapter 10

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 10.1

Expanding aircraft capacity by 150% will result in more frequent

service on existing routes, better customer service, and higher
sales revenue. With extra aircraft in its fleet, Caruso will also be
able to respond to changes in customer demand more quickly.
On the other hand, expanding aircraft capacity by as much as
150% to service existing routes may signal over-investment in
aircraft and related PP&E. Airlines typically take delivery of new
aircraft in stages over several years, when the demand for added
routes or added flights justify the major expenditure. Caruso’s
profitability will decline if the increase in sales revenue does not
cover the increase in expenses as a result of the expansion.
Some internally generated funds will be used and a new bank
loan will be taken on to finance the expansion; Caruso will have
considerably less financial flexibility. Less free cash flow and
more bank covenants will affect future operating, investment,
debt retirement, and dividend payment decisions.

The proposed expansion will affect the statement of financial

position, income statement, and statement of cash flows as
follows:
1. Increase in total assets (due to addition of new aircraft and
proportionately smaller decrease in cash)
2. Increase in total liabilities (due to new bank loan)
3. Increase in sales revenue
4. Increase in interest expense
5. Increase in depreciation expense
6. Increase in operating expense
7. Increase in financing inflows of cash
8. Increase in investing outflows of cash
9. Operating inflows and outflows of cash will change

Solutions Manual 10.7 Chapter 10

BRIEF EXERCISE 10.1 (CONTINUED)

Rate of return on assets = net income / average total assets

Rate of return on assets will likely decrease, due to significant

increase in interest expense and depreciation expense affecting
net income, and significant increase in average total assets.

Asset turnover = net sales / average total assets

Asset turnover will likely decrease, due to significant increase in

average total assets.
LO 1 BT: C Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

Solutions Manual 10.8 Chapter 10

BRIEF EXERCISE 10.2

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.

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.

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.
LO 1,7 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.9 Chapter 10

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.
LO 2,4,7 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.10 Chapter 10

BRIEF EXERCISE 10.4

IFRS
Direct labour $73,000
Material purchased for building 82,500
Interest on loan to finance construction 2,300
Allocation of variable plant overhead based on
labour hours worked on building 29,000
Architectural drawings for building 7,500
Total cost of new building $194,300

Under IFRS, capitalization of construction costs stops when the

item is in the location and condition necessary for it to be
capable of operating in the manner management intended, even
if it has not begun to be used. IFRS also requires the
capitalization of borrowing costs that are directly attributable to
the qualifying asset.

ASPE
Direct labour $73,000
Indirect labour 6,000
Material purchased for building 82,500
Allocation of variable plant overhead based on
labour hours worked on building 29,000
Architectural drawings for building 7,500
Total cost of new building $198,000

Under ASPE, management is allowed to choose between

capitalizing and expensing borrowing costs. With ASPE, the
capitalization of construction costs stops when the asset is
substantially complete and ready for productive use, as
predetermined by management. In this case management
considers the building ready for productive use when operating
in the building. The $6,000 of additional direct labour costs is
therefore capitalized, but this is a matter of judgement because
management may also take into account occupancy level (CPA
Handbook 3061.12).
Solutions Manual 10.11 Chapter 10
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

BRIEF EXERCISE 10.4 (CONTINUED)

Note: For PP&E assets, only directly attributable costs are

capitalized. The president's salary is a fixed cost, thus the
allocation is not directly traceable and not eligible for
capitalization.
LO 2,4,7 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.12 Chapter 10

BRIEF EXERCISE 10.5

a. Purchase:
Equipment.........................................................................
40,000
Accounts Payable.................................................... 40,000
To record purchase of equipment on account

Payment:
Accounts Payable.............................................................
40,000
Equipment................................................................ 800
Cash.......................................................................... 39,200
To record payment on account

b. Purchase:
Equipment.........................................................................
40,000
Accounts Payable.................................................... 40,000
To record purchase of equipment on account

Payment:
Accounts Payable.............................................................
40,000
Cash.......................................................................... 40,000
To record payment on account

Finance Expense..............................................................
800
Equipment................................................................ 800
To record discount lost

c. Management could consider adopting a policy or procedure

that would require recording purchases of PP&E 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 shown above. If the
discount is lost due to late payment of the Accounts Payable,
the entry on payment would debit Finance Expense for the
amount of the forfeited discount.
LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.13 Chapter 10

BRIEF EXERCISE 10.6

Vehicles.............................................................................
58,802
Notes Payable.......................................................... 58,802

Using tables:
Present value of the single payment
$80,000 X .73503 $58,802.40

Using a financial calculator:

PV ? Yields $58.802.39
I 8%
N 4
PMT $0
FV $(80,000)
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $58,802.39
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.14 Chapter 10

BRIEF EXERCISE 10.7

Vehicles ............................................................................
80,000
Notes Payable.......................................................... 80,000
LO 3 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.8

Fair % of Recorded
Value Total 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

A step-by-step solution of the problem can be found in the

student resources section of the online course.

LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.15 Chapter 10

BRIEF EXERCISE 10.9

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.

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.
LO 3,7 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.10

Vehicles (new)...................................................................
2,600
Accumulated Depreciation - Vehicles............................. 20,700
Vehicles (old)........................................................... 23,000
Cash.......................................................................... 300

The transaction is nonmonetary because the amount of cash is

not significant and it lacks commercial substance, so no gain is
recognized.
LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.16 Chapter 10

BRIEF EXERCISE 10.11

Equipment1........................................................................
7,000
Accumulated Depreciation – Machinery......................... 2,000
Loss on Disposal of Machinery....................................... 4,000
Machinery................................................................. 9,000
Cash.......................................................................... 4,000

The consideration paid is fair value of machinery plus cash

1
$3,000 + $4,000 = $7,000
The consideration received: the equipment will be the same fair
value. The transaction has commercial substance.
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.12

Vehicles (new)1..................................................................
33,000
Loss on Disposal of Vehicles.......................................... 1,000
Accumulated Depreciation - Vehicles............................. 27,000
Vehicles (used)........................................................ 30,000
Cash.......................................................................... 31,000

The consideration paid is fair value of used vehicle plus cash

paid
1
$2,000 + $31,000

Spencer assumes that the amount of cash paid is significant and

therefore the transaction is monetary. In addition, the
transaction has commercial substance as the asset obtained will
have different future cash flows than the asset given up.
Spencer expects the performance of the asset to be much
improved compared to the old asset, since the vehicle obtained
is new.
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.17 Chapter 10

BRIEF EXERCISE 10.13

The trade-in allowance is not representative of the fair value of

the used vehicle given up in the exchange. The trade-in
allowance of $5,000 is essentially used to change the new
vehicle’s selling price without reducing its list price. The $5,000
represents a combination of the fair value of the used vehicle of
$2,000 and a discount on the list price of the new vehicle of
$3,000.

Before Spencer negotiated the trade, they would have realized

that there was a loss to be recognized on the disposal of the
used vehicle. The carrying amount of the used vehicle was
$30,000 - $27,000 = $3,000 and the fair value was $2,000. The
loss of $1,000 must be recorded.

The price of the new vehicle is the list price of $36,000 less the
discount of $3,000 or $33,000. This is the fair value of the new
vehicle.

Vehicles (new)...................................................................
33,000
Loss on Disposal of Vehicles.......................................... 1,000
Accumulated Depreciation - Vehicles............................. 27,000
Vehicles (used)........................................................ 30,000
Cash.......................................................................... 31,000
LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.18 Chapter 10

BRIEF EXERCISE 10.14

Land 470,000
Cash.......................................................................... 470,000
To record purchase of land

Cash ...................................................................................
140,000
Land.......................................................................... 140,000
To record collection of grant received
LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.15

Land 470,000
Cash.......................................................................... 470,000
To record purchase of land

Cash ...................................................................................
140,000
Deferred Revenue–Government Grants................ 140,000
To record collection of grant received
LO 3 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.16

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

b.
Equipment.........................................................................
55,000
Donation Revenue................................................... 55,000
LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.19 Chapter 10

BRIEF EXERCISE 10.17

a. IFRS

Mineral Resources1...........................................................
487,700
Cash.......................................................................... 487,700
To record the purchase and development costs of gold mine

Mineral Resources............................................................
12,300
Accumulated Depreciation –
Equipment........................................................... 12,300
To record cost of construction of mine shafts

Mineral Resources2...........................................................
95,000
Asset Retirement Obligation............................... 95,000
To record asset retirement obligation
1
$400,000 + $100,000 - $12,300 = $487,700
2
$75,000 + $20,000

b. ASPE

Mineral Resources............................................................
75,000
Asset Retirement Obligation............................... 75,000
To record asset retirement obligation
1
$400,000 + $100,000 - $12,300 = $487,700
LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.20 Chapter 10

BRIEF EXERCISE 10.18

a. Under the new ASPE standard, Fresh Oranges Inc.’s

orchard of orange trees are held for use to produce or
supply agricultural inventory; they are developed or
acquired for use on a continuing basis with other than short
productive lives; and they are not intended for sale in the
normal course of business. ASPE section 3041 requires the
use of the cost model for productive biological assets (that
is, assets held for use in the production or supply of
agricultural inventories). Therefore, the orchard is required
to be measured at cost, including costs directly attributable
to acquiring, developing or bettering the assets.

b. These assets are amortized, similar to other Property, Plant

and Equipment (PP&E). Because the Orange trees have a
limited life, they should be amortized in a rational and
systematic manner over their expected life of 50 years.
LO 4 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 10.19

Companies, like Brookfield Asset Management, have large

amounts of Property, Plant and Equipment (PP&E) on their
balance sheets. Traditionally, companies have recorded PP&E at
cost and then depreciated the assets. Under IFRS, companies
can measure PP&E at fair value using the revaluation method if
fair value can be measured reliably. Buildings, land, and other
property may have fair value attributed to the location, time
period, economic environment, current demand and current
supply. With Big Data, information related to historical sales,
unit sales, trends, current prices, current demand in the region,
and days on market are available on thousands of comparable
properties. The availability of Big Data thus allows for more
accurate fair valuation estimates of PP&E at any given year end.
LO 5 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.21 Chapter 10

*BRIEF EXERCISE 10.20

Accumulated Depreciation – Buildings ......................... 110,000

Buildings.................................................................. 110,000
To eliminate the accumulated depreciation
The Buildings account is now $400,000 - $110,000 = $290,000.

Buildings ($330,000 – $290,000)......................................

40,000
Revaluation Surplus (OCI)...................................... 40,000
To adjust the Buildings account to fair value

Proportional
Before after
revaluation revaluation
(A) (B) (B) – (A)
Buildings $400,000 x 330/290 $455,172 $55,172
Accumulated
depreciation 110,000 x 330/290 125,172 15,172
Carrying amount $290,000 x 330/290 $330,000 40,000

Buildings ..........................................................................
55,172
Accumulated Depreciation -
Buildings.............................................................. 15,172
Revaluation Surplus (OCI)...................................... 40,000
To adjust the Buildings account (net) to
fair value
LO 5.9 BT: AP Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.22 Chapter 10

*BRIEF EXERCISE 10.21

a. Cost Model
Jan. 5 Cash....................................................... 325,000
Accumulated Depreciation – Buildings 110,000
Buildings........................................... 400,000
Gain on Disposal of Buildings......... 35,000

b. Revaluation Model using Asset Adjustment Method

Jan. 5 Cash....................................................... 325,000

Loss on Disposal of Buildings............ 5,000
Buildings........................................... 330,000

c. Revaluation Model using Proportionate Method

Jan. 5 Cash....................................................... 325,000

Accumulated Depreciation – Buildings1 125,172
Loss on Disposal of Buildings............ 5,000
2
Buildings .......................................... 455,172
1
($110,000 + $15,172)
2
($400,000 + $55,172)
LO 5.9 BT: AP Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.23 Chapter 10

BRIEF EXERCISE 10.22

IFRS ASPE
a. Land held for May be an investment, Likely
undetermined but also qualifies as considered
future use investment property an
under IAS 40 (fair value investment
model or cost model) (cost model)

b. Vacant building May be an investment, Likely

leased out under but also qualifies as considered
operating lease investment property an
under IAS 40 (fair value investment
model or cost model) (cost model)
c. Property held by Treated as inventory Treated as
subsidiary (real under IAS 2 inventory
estate firm) in
ordinary course
of business
Treated as PP&E long-
d. Property held for lived asset under IAS 16 Treated as
use in the (cost model or PP&E asset
manufacturing of revaluation model) (cost model)
products
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Solutions Manual 10.24 Chapter 10

BRIEF EXERCISE 10.23

a. Revenue expenditure
b. Revenue expenditure
c. Capital expenditure
d. Capital expenditure
e. Capital expenditure
f. Revenue expenditure
g. Revenue expenditure
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Solutions Manual 10.25 Chapter 10

BRIEF EXERCISE 10.24

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.
Solutions Manual 10.26 Chapter 10
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

LO 6,7 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.27 Chapter 10

*BRIEF EXERCISE 10.25

Expenditures
Capitalization Weighted-Average
Date Amount Period Accumulated
Expenditures
3/1 $1,500,000 10/12 $1,250,000
6/1 1,200,000 7/12 700,000
$1,950,000

LO 2,8 BT: AP Difficulty: S Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

*BRIEF EXERCISE 10.26

Total weighted-average accumulated expenditures $1,950,000

Less: financed by specific construction loan 1,000,000
Weighted-average accumulated expenditures
financed by general borrowings $ 950,000

Capitalization rate calculation on general borrowings:

Principal Borrowing Cost
13%, 5-year note $2,000,000 $260,000
15%, 4-year note 3,500,000 525,000
$5,500,000 $785,000

$785,000
Capitalization rate = = 14.27%
$5,500,000
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Solutions Manual 10.28 Chapter 10

*BRIEF EXERCISE 10.27

Avoidable costs on asset-specific debt

($1,000,000 x 12% x 10/12) $100,000
Avoidable costs on general debt
($950,000 x 14.27%) 135,565
Total avoidable borrowing costs $235,565

The avoidable borrowing costs would be capitalized as part

of the cost of the building under IFRS.
Under ASPE, interest costs directly attributable to the
construction of the building would be capitalized if that is the
accounting policy used by the entity. However, the company
could also choose an accounting policy whereby such costs
are expensed under ASPE.

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Solutions Manual 10.29 Chapter 10

SOLUTIONS TO EXERCISES

EXERCISE 10.1

a. specific costs b. componentization

(separate recognition)?
1. Head office - purchase price - boardroom table,
boardroom table and - delivery charges executive chairs
executive chairs - assembly costs (if - table probably has a much
applicable) longer useful life than the
chairs
2. Landfill site - purchase price, transfer - different parts of the
taxes, surveying, and legal landfill site (used portions
fees vs. unused portions)
- costs of any work required - any buildings on the site
to prepare land and make it
suitable to accept refuse
- decommissioning or
restoration costs
associated with the closure
of the facility
3. Escalator in - purchase price - depending on how they
shopping mall - transportation charges are powered, the motor
- installation / assembly element might be
costs recognized separately
4. Forklift vehicles in a - purchase price, including - depending on how they
manufacturing plant delivery costs are powered, the motor
element might be
recognized separately
5. Stand-alone training - purchase price of facility, - building, flight simulator,
facility for pilot equipment, and furniture desks, whiteboards,
training, including a and fixtures electronic instructional
flight simulator and - installation / assembly aids, land
classrooms costs - all have different useful
equipped with desks, - delivery charges lives and rates of
whiteboards, and - professional fees for design depreciation
electronic
instructional aids
6. Large passenger - purchase price - exterior shell of aircraft,
aircraft used in - extras / changes to interior interior seating, carpeting,
commercial flights design of aircraft and storage
- costs to imprint company compartments, engines,
logo on plane electrical systems
- registrations - all have different useful
lives and rates of
depreciation

Solutions Manual 10.30 Chapter 10

EXERCISE 10.1 (CONTINUED)

a. specific costs b. componentization (separate
recognition)?
7. Medical office building - purchase price - land portion (when
- land transfer taxes on purchasing a building, land
purchase is generally also purchased
- surveying and legal fees as a lump sum purchase)
- architectural fees - building shell (including
- renovation and repair construction and design
costs and cost of costs)
permits - building services systems
- excavation and (e.g., elevators, HVAC,
construction costs plumbing system, heating
and air-conditioning
system, computer network
wiring)
- fixed equipment / fixtures
(e.g., roof, sterilizers,
casework, fume hoods)
- all have different useful
lives and rates of
depreciation
8. Computer equipment - purchase price - possibly separate the
- lease payout at end of computer processing unit
term if applicable (desktop tower, laptop) from
- installation / setup costs the peripherals (keyboards,
mouse, monitor, printer,
scanner)
- all have different useful
lives and rates of
depreciation (since
generally on a refresh of the
equipment, only the
processing unit is replaced
and the peripherals remain)

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Solutions Manual 10.31 Chapter 10

EXERCISE 10.2

a. Machinery:
Cash paid for machinery, including sales tax of $107,000
$7,000
Freight and insurance while in transit 2,000
Cost of moving machinery into place at factory 3,100
Wage cost for technicians to test machinery 4,000
Materials cost for testing 500
Special plumbing fixtures required for new
machinery 8,000
Provincial government grant (25,000)
Total cost $99,600

The GST of $5,000 paid on the purchase of the machinery should

be reported as GST Receivable. The insurance premium paid
during the first year of operations should be reported as
insurance expense. Repair costs incurred in the first year of
operations should be reported as repairs and maintenance
expense. The insurance and repair costs relate to periods
subsequent to purchase. The government grant could
alternatively be credited to a deferred revenue account rather
than to the machinery account.

b. Equipment (Self-Constructed):
Material and purchased parts ($200,000 X .98) $196,000
Labour costs for manufacturing the equipment 190,000
Overhead costs (only variable portion 30,000
capitalized)
Cost of installing equipment 4,400
Total cost $420,400

Solutions Manual 10.32 Chapter 10

EXERCISE 10.2 (CONTINUED)

b. (continued)

Note that the cost of material and purchased parts is reduced by

the amount of cash discount not taken because the equipment
should be reported at its cash equivalent price. The imputed
interest on funds used during construction is related to share
financing and should not be capitalized or expensed. This item
is an opportunity cost that is not reported.

The standards for manufactured inventories require that a

portion of all production overhead costs be applied to an
inventory asset, however the standard for PP&E assets is
different. 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 is generally expensed rather than capitalized.
(Note: Care must be taken to determine whether the assets are
made for resale or for the entity’s own use, as the treatment of
the fixed overhead is different under each of these
circumstances.)

Profit on self-construction should not be recorded. Profit should

only be reported when the asset is sold.
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Solutions Manual 10.33 Chapter 10

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
1
Inventory ................................................................. 32,325
Salaries and Wages Expense................................. 56,000
Supplies.................................................................... 980
1
($23,000 + $625 + $8,700)
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.

Solutions Manual 10.34 Chapter 10

EXERCISE 10.3 (CONTINUED)

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 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.
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Solutions Manual 10.35 Chapter 10

EXERCISE 10.4

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

Solutions Manual 10.36 Chapter 10

EXERCISE 10.4 (CONTINUED)

Under IFRS, borrowing costs are defined as “interest and other

costs that an entity incurs in connection with the borrowing of
funds”. Under IFRS, 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.

Capitalization of borrowing costs related to a qualifying asset

results in higher net income and total assets in the period(s) of
construction (since capitalization of borrowing costs results in
lower interest expense and finance expense in those period(s),
and depreciation expense would not begin until the asset is
available for use). In the periods after construction is complete,
and the asset is in the location and condition necessary for use
as management intended, net income would be lower than if
borrowing costs were initially expensed. This is because the
capitalized interest (included in the asset account) would be
depreciated along with the construction cost of the related
asset in those periods. A potential investor who may analyze
the company’s profitability, and compare the company’s net
income to the net income reported by competitor companies
should consider the effect of capitalization of borrowing costs
on the subject company’s financial statements.

Solutions Manual 10.37 Chapter 10

EXERCISE 10.4 (CONTINUED)

d.
Errors are most easily made distinguishing between land and
land improvements purchases. Land does not depreciate but
land improvements, because of their limited useful lives, must
be depreciated. An error charging a land improvement to land
would cause an increase in income for the duration of the land
improvement’s useful life and an increase in assets as long as
the land is owned. Similarly, if there is an amount charged to
building, rather than the land account, it would cause a
decrease in income each year (relating to an overstatement of
annual depreciation expense) and a decrease to assets as long
as the land is owned.
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Solutions Manual 10.38 Chapter 10

*EXERCISE 10.5

a.
Hayes Industries Corp.
Acquisition of Assets 1 and 2

Use appraised values to break-out the lump-sum purchase

Lump-
Description Appraisal % Sum Cost
Machinery $ 90,000 90/120 $100,000 $75,000
Equipment 30,000 30/120 100,000 25,000
$120,000

Machinery..........................................................................
75,000
Equipment.........................................................................
25,000
Cash..........................................................................
100,000

Acquisition of Asset 3

Use the cash price as a basis for recording the asset with a
discount recorded on the note.

Machinery..........................................................................
35,000
Cash..........................................................................10,000
Notes Payable..........................................................25,000

The difference between the $25,000 notes payable and the sum
of the two instalment payments of $15,000 each will be
amortized to interest expense over the two years using the
effective interest method.

Solutions Manual 10.39 Chapter 10

*EXERCISE 10.5 (CONTINUED)

a. (continued)
Acquisition of Asset 4

The exchange lacks commercial substance and is considered

nonmonetary. Because the exchange lacks commercial
substance, the cost of the asset received is recorded at the
carrying amount of the asset(s) given up, which is adjusted for
the inclusion of any cash or other monetary assets. No gain is
triggered on the exchange.

Vehicles (new)1..................................................................
60,000
Accumulated Depreciation - Vehicles.............................
35,000
Cash.........................................................................10,000
Vehicles (old)...........................................................85,000

1
$85,000 – $35,000 + $10,000

Acquisition of Asset 5

Under IFRS, the fair value of the equipment acquired should be

used to measure its acquisition cost.

Equipment ........................................................................
900
Common Shares...................................................... 900

Solutions Manual 10.40 Chapter 10

*EXERCISE 10.5 (CONTINUED)

a. (continued)
Construction of Building

Schedule of Weighted-Average Accumulated Expenditures

Current Year Weighted-Av.

Capitalization Accumulated
Date Amount Period Expenditures
February 1 $ 150,000 9/12 $112,500
February 1 120,000 9/12 90,000
June 1 360,000 5/12 150,000
September 1 480,000 2/12 80,000
November 1 100,000 0/12 0
$1,210,000 $432,500

Total weighted-average accumulated expenditures $432,500

Less: financed by specific construction loan 600,000
Weighted-average accumulated expenditures
financed by general borrowings (cannot be less
than zero) $0

Capitalization rate calculation on general borrowings:

Principal Borrowing Cost
8%, other general debt $200,000 $16,000
6%, loan payable 350,000 21,000
$550,000 $37,000

$37,000
Capitalization rate = = 6.73%
$550,000

Solutions Manual 10.41 Chapter 10

*EXERCISE 10.5 (CONTINUED)

a. (continued)

Avoidable costs on asset-specific debt

($432,500 x 12%) $51,900
Avoidable costs on general debt
($0 x 6.73%) 0
Total avoidable borrowing costs $51,900

The asset-specific debt was $600,000, however, the avoidable

interest cost is calculated by capping the debt at weighted-
average accumulated expenditures ($432,500 in this case). The
weighted expenditures are less than the amount of specific
borrowing; the specific borrowing rate is used.

Borrowing costs to be capitalized = Total avoidable borrowing

costs – investment income (resulting from investment of idle
funds) = $51,900 – $4,600 = $47,300

Land ..................................................................................
150,000
1
Buildings ($1,060,000 + $47,300).................................... 1,107,300
Cash.......................................................................... 1,210,000
Interest Expense...................................................... 47,300
1
($1,210,000 less $150,000 for land)

Note: Private entities that choose to apply ASPE have the

choice of either capitalizing or expensing the interest costs
related to the acquisition, construction, or development of
qualifying assets.
b.
Under ASPE, interest costs directly attributable to the
construction of the building would be capitalized if that is the
accounting policy used by the entity. However, the company
could also choose an accounting policy whereby such costs
are expensed under ASPE.

Solutions Manual 10.42 Chapter 10

*EXERCISE 10.5 (CONTINUED)

c. A two-year, zero-interest-bearing instalment note with a

face value of $30,000 was given in exchange for machinery,
Asset 3. The remaining outstanding liability on the
purchase is $25,000 (total cash equivalent purchase price
of $35,000 less down payment of $10,000).
Using a financial calculator:
PV $ 25,000
I ?% Yields 13.066%
N 2
PMT $(15,000)
FV 0
Type 0

Using Excel =RATE(nper,pmt,pv,fv,type)

Result: 13.066%
The effective interest rate is 13.066%. This rate should be used
to amortize to interest expense over the two-year period.

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Solutions Manual 10.43 Chapter 10

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.
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Solutions Manual 10.44 Chapter 10

EXERCISE 10.7

According to IAS 16, these costs can be capitalized:

Cost of the manufacturing plant 2,500,000
Initial delivery and handling costs 200,000
Cost of site preparation 600,000
Consultants’ fees 100,000
Estimated dismantling costs to be
incurred after 7 years 300,000
$3,700,000

Interest charges paid on “indirect financing charges” to the

supplier of the manufacturing plant (not a qualifying asset
under IAS 23 capitalization of borrowing costs) of $200,000 and
operating losses before commercial production amounting to
$400,000 are not regarded as directly attributable costs and
thus cannot be capitalized. They should be expensed to the
income statement in the period they are incurred.
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Solutions Manual 10.45 Chapter 10

EXERCISE 10.8

Land
Item Land Improve- Buildings Other Accounts
ments
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
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Solutions Manual 10.46 Chapter 10

EXERCISE 10.9

The allocation of costs would be as follows:

Land Buildings
Land $460,000
Demolition costs 50,000
Salvage (6,300)
Legal fees 1,850
Survey $2,200
Plans 82,000
Liability insurance 900
Construction 3,640,000
Interest _______ 170,000
$505,550 $3,895,100

According to the architects’ and engineers’ assessment, the

cost of the building should be componentized in the accounting
records as follows (due to different useful lives and
depreciation rates):

Buildings
Buildings – Structure 55% $2,142,305
Buildings – HVAC 35% 1,363,285
Buildings – Roof 10% 389,510
100% $3,895,100

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Solutions Manual 10.47 Chapter 10

EXERCISE 10.10
a.
The purchase cost of $472,000, the royalties payable under the
purchase agreement, the legal obligation of $46,000 related to
future cleanup and reconditioning costs, and the constructive
obligation of $30,000 would be capitalized in the Mineral
Resources asset account. The remainder of the costs
described would be considered operational and expensed
during the period.
b.
Under ASPE, only the purchase cost of $472,000, the royalties
payable under the purchase agreement and the legal obligation
of $46,000 related to future cleanup and reconditioning costs
would be capitalized in the Mineral Resources asset account.
The cost of the constructive obligation of $30,000 would not be
capitalized.
c.
Under IFRS, both the legal obligation of $46,000 and the
constructive obligation of $30,000 are recorded as a liability on
the company’s statement of financial position. Therefore, under
IFRS, debt increases by $76,000. Total assets increase by the
same amount. Overall, as a result of the purchase agreement,
debt to total assets increases to 61%1, signalling that the
percentage of total assets provided by creditors has increased,
which a creditor would view as unfavourable. The creditor may
also analyze that the legal and constructive obligations are
included in debt in the debt to total assets ratio, but that they
will not result in cash outflows until the mine is abandoned,
which may take place several years in the future.
Befor Effect of
e lease After
Total liabilities $580 add $76 $656
Total assets 1,000 add $76 1,076

Debt to asset ratio 58% 61%1

LO 2,4,7 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM:
Reporting and Finance

Solutions Manual 10.48 Chapter 10

EXERCISE 10.11

1. Vehicles (#1)......................................................................
23,900
Cash..........................................................................
23,900
To record purchase of Truck #1

2. Vehicles (#2)......................................................................
25,636
Cash..........................................................................2,000
Notes Payable.......................................................... 23,636
To record purchase of Truck #2

Using tables:
Present value of the single payment
$26,000 X .90909 $23,636.34

Using a financial calculator:

PV ? Yields $23,636.36
I 10%
N 1
PMT $0
FV $(26,000)
Type 0

Solutions Manual 10.49 Chapter 10

EXERCISE 10.11 (CONTINUED)

a. (continued)
2. (continued)

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $23,636.36

3. Vehicles (#3)......................................................................
21,000
Sales Revenue......................................................... 21,000
To record purchase of Truck #3

Cost of Goods Sold..........................................................

16,500
Inventory..................................................................
16,500
To record cost of goods sold
In this example, the nonmonetary asset exchange has
commercial substance and fair values are reliably measurable,
therefore the exchange is recorded at the fair value of the
asset(s) (the computer) given up. If the fair value of what is
acquired is more reliably measurable, the exchange would be
recorded at the fair value of Truck #3.

Solutions Manual 10.50 Chapter 10

EXERCISE 10.11 (CONTINUED)

a. (continued)

4. Vehicles (#4) (1,000 shares X $23)...................................

23,000
Common Shares......................................................
23,000
To record purchase of Truck #4

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. In this case, the fair value of
the shares appears to be a better gauge of the fair value of
the truck received. Vehicles are very often sold at a price
well below the list price.

b.
Transaction 4 involves a share-based payment. 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. If Jackson 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 the truck, therefore the fair value of the
truck (as determined by a reliable, independent appraiser, for
example or from negotiating a cash purchase) would be used
to measure the acquisition cost.
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Solutions Manual 10.51 Chapter 10

EXERCISE 10.12

a. 1. Land ...................................................................................
131,250
Buildings – Structure........................................................
260,313
Buildings – Roof...............................................................
45,937
Equipment.........................................................................
262,500
Cash..........................................................................
700,000

$150,000
$700,000 X = $131,250 Land
$800,000

$350,000
$700,000 X = $306,250 Buildings
$800,000

Since there are different useful lives to major components

on the buildings, then they should be recorded as follows:

Buildings
Buildings – Structure 85% 260,313
Buildings – Roof 15% 45,937
100% $306,250

$300,000
$700,000 X = $262,500 Equipment
$800,000

2. Equipment.........................................................................
25,000
Cash..........................................................................
2,000
Notes Payable..........................................................
23,000

3. Equipment1........................................................................
19,600
Accounts Payable....................................................
19,600
1
($20,000 X .98)

4. Land ...................................................................................
27,000
Revenue--Government Grants 27,000

5. Buildings...........................................................................
600,000
Cash..........................................................................
600,000

Solutions Manual 10.52 Chapter 10

EXERCISE 10.12 (CONTINUED)

b. 1. Buildings – Structure........................................................
260,313
Buildings – Roof...............................................................
45,937
Land ($150,000 – $131,250)..................................... 18,750
Buildings..................................................................
250,000
2
Equipment ...............................................................
37,500
2
($300,000 – $262,500)

2. Interest Payable................................................................
2,300
Equipment................................................................
2,300

3. Purchase Discounts.........................................................
400
Cash ………………………………. 19,600
Equipment................................................................
400
Accounts Payable ……….. 19,600

4. Land ...................................................................................
27,000
Revenue – Government Grants 27,000

5. Sales Revenue..................................................................
140,000
Buildings..................................................................
140,000

Solutions Manual 10.53 Chapter 10

EXERCISE 10.12 (CONTINUED)

c. 1. The cost principle has been violated.

2. The cost principle has been violated. The cost of the
equipment should be the cash purchase price,
excluding future financing charges. The interest on
the note should be recognized as it accrues (the
matching concept). This may not be in the same
accounting period as the purchase of the equipment.
3. The cost principle has been violated. The discount
should be included as a reduction of the cost of the
equipment. The Purchase Discounts account only
applies to purchases of merchandise inventory under
a periodic inventory system.
4. The initial incorrect treatment does not reflect the
land as an asset on the statement of financial
position. Even though the cost of the land is nil, not
showing the land on the statement of financial
position does not achieve representational
faithfulness of the nature of the transaction as an
increase in the assets and an increase in the equity
of the owners.
5. The cost principle and the revenue recognition
principle have been violated.
LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.54 Chapter 10

EXERCISE 10.13

1. Equipment ($50,000 + $3,500)..........................................

53,500
GST Receivable.................................................................
2,500
Accounts Payable.................................................... 56,000
Purchase of equipment on account

Accounts Payable.............................................................
56,000
Finance Expense..............................................................
560
Equipment ($56,000 X .01)...................................... 560
Cash..........................................................................
56,000
Payment on account

2. Equipment (new) ($40,500 + $8,000)...............................

48,500
Accumulated Depreciation -
Equipment.....................................................................
38,000
Gain on Disposal of Equipment............................6,000
Accounts Payable.................................................... 40,500
Equipment (old)....................................................... 40,000
To record exchange of equipment
1
Cost (old) $40,000
Accumulated Depreciation 38,000
Carrying value 2,000
Fair market value (old) 8,000
Gain on disposal $6,000

Accounts Payable.............................................................
40,500
Cash..........................................................................
40,500
Payment on account

Solutions Manual 10.55 Chapter 10

EXERCISE 10.13 (CONTINUED)

3. Equipment ($35,182 + $10,000)........................................

45,182
Notes Payable.......................................................... 35,182
Cash..........................................................................
10,000
Purchase of equipment for cash and
a note payable
Using tables:
Present value of annuity of $20,000 @ 9% for 2 years
$20,000 X 1.75911 $35,182.20
Using a financial calculator:
PV ? Yields $35,182.22
I 9%
N 2
PMT $(20,000)
FV $0
Type 0
Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $35,182.22

Solutions Manual 10.56 Chapter 10

EXERCISE 10.13 (CONTINUED)

First payment on the note:

Interest Expense1..............................................................
3,166
Notes Payable...................................................................
16,834
Cash..........................................................................
20,000
1
$35,182 X 9% = $3,166
To record instalment payment on note.
Second payment on the note:
Interest Expense2..............................................................
1,652
Notes Payable...................................................................
18,348
Cash..........................................................................
20,000
2
($35,182 – $16,834) X 9%
= $18,348 X 9% = $1,652 (rounded)
To record instalment payment on note.
LO 3 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.57 Chapter 10

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
To record purchase of property

Machinery1.........................................................................
312,900
Repairs and Maintenance Expense.................................
12,500
Cash..........................................................................
325,400
1
($305,000 X 98%) + $14,000
To record payments related to machinery

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.

Solutions Manual 10.58 Chapter 10

EXERCISE 10.14 (CONTINUED)

c. Machinery..........................................................................
312,900
Repairs and Maintenance Expense.................................
12,500
Finance Expense..............................................................
6,100
Cash..........................................................................
331,500
LO 3,7 BT: AP Difficulty: S Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.59 Chapter 10

EXERCISE 10.15

a. Equipment.........................................................................
682,342
Notes Payable.......................................................... 682,342
Using tables:
Present value of annuity @ 10% for 5 years
$180,000 X 3.79079 $682,342.20

Using a financial calculator:

Yields
PV ?
$682,341.62
I 10%
N 5
PMT $(180,000)
FV $0
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $682,341.62

Solutions Manual 10.60 Chapter 10

EXERCISE 10.15 (CONTINUED)

b. December 31, 2023

Interest Expense1..............................................................
68,234
Interest Payable.......................................................
68,234
1
(10% X $682,342)

January 2, 2024
Interest Payable................................................................
68,234
Notes Payable ($180,000 – $68,234)................................
111,766
Cash..........................................................................
180,000

Note 10% Reduction

Year Payment Interest of Principal Balance
1/2/23 $682,342
12/31/23 $180,000 $68,234 $111,766 570,576
12/31/24 180,000 57,058 122,942 447,634

c. December 31, 2024

Interest Expense...............................................................
57,058
Interest Payable.......................................................
57,058

January 2, 2025
Interest Payable................................................................
57,058
Notes Payable ($180,000 – $57,068)................................
122,942
Cash..........................................................................
180,000

d. Depreciation Expense1.....................................................
85,293
Accumulated Depreciation -
Equipment............................................................
85,293
1
($682,342  8)
LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.61 Chapter 10

EXERCISE 10.16

a. 1. $30,000
2. $26,790

Using tables:
Present value of annuity @ 8% for 2 years
$600* X 1.78326 $1,069.96
Present value of a single payment @ 8% for 2 yrs.
$30,000 X .85734 25,720.20
*($30,000 x 2%) = $600 $26,790.16
Using a financial calculator:
PV ? Yields $26,790.12
I 8%
N 2
PMT $(600)
FV $(30,000)
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $26,790.12

Solutions Manual 10.62 Chapter 10

EXERCISE 10.16 (CONTINUED)

a. (continued)

3. $25,720

Using tables:
Present value of a single payment @ 8% for 2 yrs.
$30,000 X .85734 $25,720.20

Using a financial calculator:

PV ? Yields $25,720.16
I 8%
N 2
PMT $0
FV $(30,000)
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $25,720.16
A step-by-step solution for this section of the problem can be
found in the student resources section of the online course.

Solutions Manual 10.63 Chapter 10

EXERCISE 10.16 (CONTINUED)

b. 8% interest-bearing note
09/01/23 Equipment.........................................................................
30,000
Notes Payable..........................................................
30,000

12/31/23 Interest Expense1..............................................................

800
Interest Payable.......................................................
800
1
($30,000 X 8% X 4/12)

09/01/24 Interest Payable................................................................

800
Interest Expense...............................................................
1,600
Cash..........................................................................
2,400

12/31/24 Interest Expense...............................................................

800
Interest Payable.......................................................
800

09/01/25 Interest Payable................................................................

800
Interest Expense...............................................................
1,600
Notes Payable...................................................................
30,000
Cash..........................................................................
32,400

2% interest-bearing note
09/01/23 Equipment [part a.]...........................................................
26,790
Notes Payable..........................................................
26,790

12/31/23 Interest Expense2..............................................................

714
Notes Payable..........................................................
514
3
Interest Payable ......................................................
200
2
($26,790 X 8% X 4/12)
3
($30,000 X 2% X 4/12)

Solutions Manual 10.64 Chapter 10

EXERCISE 10.16 (CONTINUED)

b. (continued)
09/01/24 Interest Payable................................................................
200
4
Interest Expense ..............................................................
1,429
Notes Payable..........................................................
1,029
Cash ($30,000 X 2%)................................................600
4
($26,790 X 8% X 8/12)

12/31/24 Interest Expense5..............................................................

756
Notes Payable..........................................................
556
Interest Payable.......................................................
200
5
($28,333 X 8% X 4/12) or $2,267 X 4/12

09/01/25 Interest Payable................................................................

200
6
Interest Expense ..............................................................
1,511
Notes Payable
($30,000–$1,1117)..........................................................
28,889
Cash..........................................................................
30,600
6
($2,267 – $756)
7
($2,267 – $600 – $556)

Year 8% Interest Payment Balance

09/01/23 $26,790
09/01/24 $2,143 $(600) 28,333
09/01/25 2,267 (600) 30,000

Non-interest-bearing note
09/01/23 Equipment [part a.]...........................................................
25,720
Notes Payable..........................................................
25,720

12/31/23 Interest Expense8..............................................................

686
Notes Payable..........................................................
686
8
($25,720 X 8% X 4/12) or $2,058 X 4/12

Solutions Manual 10.65 Chapter 10

EXERCISE 10.16 (CONTINUED)

b. (continued)

Year 8% Interest Balance

09/01/23 $25,720
09/01/24 $2,058 27,778
09/01/25 2,222 30,000

09/01/24 Interest Expense9..............................................................

1,372
Notes Payable..........................................................
1,372
9
($25,720 X 8% X 8/12) or ($2,058 – $686)

12/31/24 Interest Expense10.............................................................

741
Notes Payable..........................................................
741
10
($27,778 X 8% X 4/12) or $2,222 X 4/12

09/01/25 Interest Expense11.............................................................

1,481
Notes Payable..........................................................
1,481
To record interest expense
11
$2,222 – $741

Notes Payable...................................................................
30,000
Cash..........................................................................
30,000
To record note repayment
LO 3 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.66 Chapter 10

EXERCISE 10.17

Depreciation Expense1.....................................................
700
Accumulated Depreciation—Equipment............... 700
1
($11,200 – $700 = $10,500;
$10,500  5 = $2,100;
$2,100 X 4/12 = $700)
To record depreciation expense to date of
exchange

Equipment (New)2.............................................................15,200
Accumulated Depreciation—Equipment........................ 7,000
3
Gain on Disposal of Equipment ............................ 1,000
Equipment (Old)....................................................... 11,200
Cash.......................................................................... 10,000
To record equipment exchange
3
Cost of old asset $11,200
Accum. depr. ($6,300 + $700) (7,000 )
Carrying amount 4,200
Fair market value of old asset (5,200 )
Gain on disposal of equipment $ 1,000
2
Cash paid $10,000
Fair value of old melter 5,200
Cost of new melter $15,200

The transaction is monetary since there is significant cash

involved. Cash makes up 66% ($10,000 / [$10,000 + $5,200]) of
the fair value of the transaction. A gain is recognized because
the earnings process is complete and the company’s economic
circumstances have changed due to this transaction.
LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.67 Chapter 10

EXERCISE 10.18

a. The exchange has commercial substance:

Stacey Limited:
Equipment (New)1.............................................................
28,000
Accumulated Depreciation – Equipment........................ 31,250
Equipment (Old)....................................................... 50,000
Cash.......................................................................... 3,000
Gain on Disposal of Equipment2............................ 6,250
1 2
Valuation of new equipment: Calculation of
gain:
Fair value of $25,000 Fair value of old
equip. given equipment $25,000
Cash 3,000 Carrying value of
old equipment (18,750)
New equip. $28,000 Gain on disposal $ 6,250

Note: Since little cash is involved, the transaction is considered

nonmonetary.

Chokar Limited:
Cash ...................................................................................
3,000
Equipment (New)...............................................................
25,000
Accumulated Depreciation – Equipment........................ 22,000
1
Loss on Disposal of Equipment ..................................... 5,000
Equipment (Old)....................................................... 55,000
1
Calculation of loss:
Carrying value of old $33,000
equipment
Fair value of old equipment 28,000
Loss on exchange $ 5,000

Solutions Manual 10.68 Chapter 10

EXERCISE 10.18 (CONTINUED)

b. The exchange does not have commercial substance:

Stacey Limited:
Equipment (New)1.............................................................
21,750
Accumulated Depreciation – Equipment........................ 31,250
Equipment (Old)....................................................... 50,000
Cash.......................................................................... 3,000
1
Valuation of new equipment:
Carrying value of old
equipment $18,750
Cash paid 3,000
New equipment $21,750
Chokar Limited:
Cash ...................................................................................
3,000
1
Equipment (New) .............................................................25,000
Accumulated Depreciation - Equipment......................... 22,000
2
Loss on Disposal of Equipment ..................................... 5,000
Equipment (Old)....................................................... 55,000
2
Fair value of new
equipment + cash $28,000
received ($3,000)
Carrying value of old
equipment (33,000)
Loss on disposal $ (5,000)
1
The new equipment cannot be recorded at cost exceeding its
fair value of $25,000.

Solutions Manual 10.69 Chapter 10

EXERCISE 10.18 (CONTINUED)

c. In determining whether the transaction has commercial

substance the two companies would need to determine if
they remain in the same economic position before and after
the exchange. If the amount, timing, or risk of future cash
flows associated with the equipment received is different
from the configuration of cash flows for the equipment
given up, or if the specific value of the part of the entity
affected by the transaction has changed as a result, the
transaction has commercial substance.
LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.70 Chapter 10

EXERCISE 10.19
a. Equipment (New)1.............................................................
50,100
Accumulated Depreciation—
Equipment......................................................................
20,000
Equipment (Old)....................................................... 65,000
Cash..........................................................................5,100
1
Valuation of new equipment:
Cash $4,000
Installation cost
(cash) 1,100
Carrying value of
old equipment 45,000
New equipment $50,100

Since little cash is involved, the transaction is considered

nonmonetary. The transaction does not have commercial
substance; therefore, the exchange is recorded at the
carrying amount of the asset(s) given up, which is
adjusted for the inclusion of any cash or other monetary
assets.
b. Equipment (New)1.............................................................
55,900
Accumulated Depreciation—Equipment........................ 20,000
2
Gain on Disposal of Equipment 5,800
Equipment (Old)....................................................... 65,000
Cash..........................................................................5,100
1 2
Valuation of new equipment: Calculation of gain:
Cash $4,000
Installation cost Fair value of old
(cash) 1,100 equipment $50,800
Fair value of Carrying value of
old equipment 50,800 old equipment (45,000)
New equipment $55,900 Gain on disposal $ 5,800

The transaction has commercial substance, therefore the

exchange is recorded at the fair value of the asset(s) given up.

Solutions Manual 10.71 Chapter 10

LO 3 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.72 Chapter 10

EXERCISE 10.20
This is a nonmonetary transaction with commercial substance.
Both parties should record the transaction at fair value of what
was given up. Jamil has given up time valued at $650. Ralph
has given up time valued at $500. The two parties to the
transaction do not have to record the transaction at the same
amount and would likely not be aware of the exact fair value of
what they are receiving in exchange.

On Jamil’s books of account:

J. Jonas, Drawings...........................................................
650
Service Revenue...................................................... 650

Since Jamil is receiving something that he uses on a personal

basis and not a business asset or service, the benefit of the
transaction is a personal one and is considered Drawings from
the business.

On Ralph’s books of account:

Office Expense..................................................................
500
Service Revenue...................................................... 500

Since Ralph would usually pay for the professional services of

an accountant to help in preparing his tax and GST returns, he
is receiving a business service.
LO 3 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.73 Chapter 10

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.

Solutions Manual 10.74 Chapter 10

EXERCISE 10.21 (CONTINUED)

a. & b. (continued)

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

c. Cost Reduction Method:

Lightstone Equipment Ltd.

Statement of Financial Position
August 31, 2024
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, 2024

Operating expenses:
Depreciation expense $3,183

Solutions Manual 10.75 Chapter 10

EXERCISE 10.21 (CONTINUED)

c. (continued)

Deferral Method:
Lightstone Equipment Ltd.
Statement of Financial Position
August 31, 2024

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, 2024

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.
LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.76 Chapter 10

EXERCISE 10.22

a.
Under IFRS, separate standards for biological assets are set out
in IAS 41 Agriculture. IAS 41 defines a biological asset as a
living animal or plant; therefore, grapevines would be covered
by the standard and considered a biological asset. Biological
assets are measured initially, and at every date of the statement
of financial position, at fair value less costs to sell, with
changes in value recognized on the income statement as the
values change. IAS 41 does not mandate how costs associated
with the grapevines (i.e., the new grape trellis system) should
be accounted for. They could be capitalized as part of the
biological asset or expensed directly. As long as the
expenditures do not create assets that still exist at year end, the
net impact on the financial statements will be the same. The
carrying amount of the grapevines on the statement of financial
position at December 31, 2023 will be $295,000 – (4% X
$295,000) = $283,200, or fair value less costs to sell at that date.

Major repairs to sprayer equipment and a new customer wine

cellar qualify for capitalization as property, plant, and
equipment. Grapevine fertilizer and harvesting labour would
likely be included in the cost of inventory.

Because biological assets are measured at every date of the

statement of financial position at fair value less costs to sell,
the carrying amount of the grapevines on the statement of
financial position at December 31, 2024 will be $316,800
($330,000 – 4% of $330,000).

Solutions Manual 10.77 Chapter 10

EXERCISE 10.22 (CONTINUED)

Under ASPE, the general principles established for PP&E

assets are also followed for biological assets. Therefore, the
carrying amount of the grapevines may be based on cost of the
grapevines.
LO 4,7 BT: C Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.78 Chapter 10

EXERCISE 10.23
a.
Fixed Asset
PP&E (Fixed Average Fixed
Year Net Sales Turnover
Assets) Assets
Ratio
2021 $51,235,125 $5,025,135 - -
2022 52,235,125 6,044,892 $5,535,014 9.44
2023 48,235,125 6,523,489 6,284,191 7.68

b. The ratio is decreasing from 2022 to 2023, thus, for every

dollar invested in PP&E, Nasim Inc. is generating $1.76 less
of revenue than it was one year ago.

Fixed Asset Turnover Ratio

10.00

8.00

6.00
4.00

2.00

0.00
2022 2023

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001, cpa-t007 CM: Reporting and DAIS

Solutions Manual 10.79 Chapter 10

EXERCISE 10.24

a. Fair value model

If the company chooses to measure the investment property

under the fair value model, it will have to recognize in net
income or loss, for each period, changes in fair value from year
to year. Thus, the impact on net income or loss for the various
years would be summarized as follows:

Carrying
Value
before Net
Cost adjustment Fair Value income
Year (millions) (millions) (millions) (loss)
2023 $50 $50 $50 $0
2024 50 60 10
2025 60 63 3
2026 63 58 (5)

December 31, 2024

Investment Property.........................................................
10,000,000
Gain or Loss in Value of Investment
Property................................................................. 10,000,000

December 31, 2025

Investment Property.........................................................
3,000,000
Gain or Loss in Value of
Investment Property........................................ 3,000,000

December 31, 2026

Gain or Loss in Value of Investment
Property.........................................................................
5,000,000
Investment Property................................................ 5,000,000

Solutions Manual 10.80 Chapter 10

EXERCISE 10.24 (CONTINUED)

b. Cost model

If the company decided to measure the investment property

under the cost model, it would have to account for it under IAS
16 using the cost model prescribed under that standard (which
requires that the asset be carried at its cost less accumulated
depreciation and any accumulated impairment losses).
According to IAS 16, when investment property is measured
under the cost model, the fluctuations in the fair value of the
investment property from year to year are not recorded and
thus would have no effect on net income. Instead, depreciation
will be the only charge to net income or loss for each period
(unless there is impairment, which will also be a charge to the
net income or loss for the year). In addition, the building
should be componentized into its major components if they
have relative significant costs and/or differing useful lives or
depreciation patterns. However, in this question, not enough
information is given to separate the building into its component
parts, thus only one buildings account has been used.

December 31, 2023 (and each December 31 through to 2026)

Depreciation Expense1.....................................................
2,000,000
Accumulated Depreciation –
Buildings.............................................................. 2,000,000
1
($50,000,000 – $10,000,000) ÷ 20)
LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.81 Chapter 10

EXERCISE 10.25

a.
The cost model in IAS 16 requires the asset to be depreciated
over its useful life using a method that corresponds to how
Nevine receives the economic benefits the asset offers. The
annual straight-line depreciation is calculated as follows:

The original acquisition cost would have been allocated as

follows since Nevine is using the cost model and thus must
depreciate the shopping centre components:
Land 25% $2,700,000
Building 75% 8,100,000
100% $10,800,000

Shopping centre building annual depreciation:

= ($8,100,000 – $1,100,000) ÷ 35 years = $200,000 per year

Each May 31 the following entry is recorded to recognize

depreciation:
Depreciation Expense......................................................
200,000
Accumulated Depreciation –
Buildings.............................................................. 200,000

The statement of financial position (partial) presentation would

be:
May 31, 2023 May 31, 2024 May 31,2025
Land, at cost $2,700,000 $2,700,000 $2,700,000
Buildings, at cost
less accum.
depr. 7,900,000 7,700,000 7,500,000
$10,600,000 $10,400,000 $10,200,000

Note that the fair value of the investment property must be

disclosed in the financial statements, even if the cost model is
used.

Solutions Manual 10.82 Chapter 10

EXERCISE 10.25 (CONTINUED)

b.
Because cost allocation and depreciation are not issues under
the fair value model, it is likely that Nevine would not separate
out the cost of the land from that of the building and its
components as indicated in the cost model allocation of
acquisition costs described in part a. Therefore, assume that
the investment property is in an account entitled Investment
Property—Shopping Centre carried at $10.8 million as at June 2,
2022.

On May 31, 2023, the property is written down to its fair value at
that date of $10,500,000. On May 31, 2024 and 2025, the asset
account is adjusted to $10,300,000 and $11,000,000,
respectively. Changes in the fair values are recognized in the
income statement and the property is reported on the statement
of financial position at its fair value at each statement of
financial position date. The following entries are made:

May 31, 2023

Gain or Loss in Value of Investment
Property1......................................................................
300,000
Investment Property................................................ 300,000
1
($10,800,000 – $10,500,000)

May 31, 2024

Gain or Loss in Value of Investment
Property2......................................................................
200,000
Investment Property................................................ 200,000
2
($10,500,000 – $10,300,000)

May 31, 2025

Investment Property.........................................................
700,000
Gain or Loss in Value of Investment
Property3............................................................... 700,000
3
($11,000,000 – $10,300,000)

Solutions Manual 10.83 Chapter 10

EXERCISE 10.25 (CONTINUED)

b. (continued)

The cost of the investment property on June 2, 2022 is the

acquisition cost of $10,800,000. If a statement of financial
position were prepared shortly after that date, for example on
June 5, 2022, what amount would be reported under the fair
value model? Because fair value does not include transaction
costs, the fair value would exclude the legal ($300,000) and
survey and transfer fees ($500,000) added into the cost of the
asset. Its fair value at that time is $10,000,000 and a loss of
$10,800,000 – $10,000,000 = $800,000 would be recognized. At
May 31, 2023, a gain of $10,500,000 – $10,000,000 = $500,000
would be reported instead of a $300,000 loss.
LO 5 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.84 Chapter 10

EXERCISE 10.26

Asset Adjustment Method

Accumulated Depreciation – Buildings 50,000

Buildings.................................................................. 50,000
To eliminate the accumulated depreciation

The Buildings account is now $350,000 - $50,000 = $300,000,

and the related Accumulated Depreciation account is zero.

Revaluation Gain or Loss ................................................

25,000
Buildings ($300,000–$275,000)............................... 25,000
To adjust the Buildings account to fair value

Accumulated Depreciation – Equipment........................ 40,000

Equipment................................................................ 40,000
To eliminate the accumulated depreciation

The Equipment account is now $120,000 - $40,000 = $80,000,

and the related Accumulated Depreciation account is zero.

Equipment ($90,000–$80,000)..........................................
10,000
Revaluation Surplus (OCI)...................................... 10,000
To adjust the Equipment account to fair value

IAS 16 paragraphs 31-42 require that asset revaluation

surpluses be prepared on an individual asset basis (reference is
made to the revaluation of asset items, not asset classes as a
group). This is consistent with the application of the LCNRV
rule for inventory, which must be applied on an item-by-item
basis.

Solutions Manual 10.85 Chapter 10

EXERCISE 10.26 (CONTINUED)

b.
Depreciation Expense1.....................................................
13,750
Accumulated Depreciation – 13,750
Buildings..............................................................
1
($275,000 ÷ 20)

Depreciation Expense2.....................................................
11,250
Accumulated Depreciation – 11,250
Equipment...........................................................
2
($90,000 ÷ 8)

c.
Proportionate Method

Buildings:
Proportional
Before after
revaluation revaluation
(A) (B) (B) – (A)
Building $350,000 x 275/300 $320,833 $(29,167)
Accumulated
depreciation 50,000 x 275/300 45,833 (4,167)
Carrying amount $300,000 x 275/300 $275,000 $(25,000)

Equipment:
Proportional
Before after
revaluation revaluation
(A) (B) (B) – (A)
Equipment $120,000 x 90/80 $135,000 $15,000
Accumulated
depreciation 40,000 x 90/80 45,000 5,000
Carrying amount $ 80,000 x 90/80 $ 90,000 $10,000

Solutions Manual 10.86 Chapter 10

EXERCISE 10.26 (CONTINUED)

c. (continued)

The journal entry to revalue the building on December 31, 2022:

Accumulated Depreciation – Buildings.......................... 4,167

Revaluation Gain or Loss ................................................
25,000
Buildings.................................................................. 29,167

The journal entry to revalue the equipment on December 31,

2022:

Equipment.........................................................................
15,000
Accumulated Depreciation – Equipment........................ 5,000
Revaluation Surplus (OCI)...................................... 10,000
To adjust the Equipment account to fair value

The journal entries to record depreciation expense for the year

ended December 31, 2023:

Depreciation Expense3.....................................................
13,750
Accumulated Depreciation – 13,750
Buildings..............................................................
3
($275,000 ÷ 20)
To record depreciation expense

Depreciation Expense4.....................................................
11,250
Accumulated Depreciation – 11,250
Equipment...........................................................
4
($90,000 ÷ 8)
To record depreciation expense
LO 5,9 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.87 Chapter 10

EXERCISE 10.27

a.
December 31, 2023
Depreciation Expense1.....................................................
11,500
Accumulated Depreciation –
Buildings.............................................................. 11,500
1
($230,000 ÷ 20)
To record depreciation expense

b.
December 31, 2024
Depreciation Expense......................................................
11,500
Accumulated Depreciation –
Buildings.............................................................. 11,500
To record depreciation expense

c.
December 31, 2025
Depreciation Expense......................................................
11,500
Accumulated Depreciation –
Buildings.............................................................. 11,500
To record depreciation expense

Accumulated Depreciation – Buildings ......................... 34,500

Buildings.................................................................. 34,500
To eliminate the accumulated depreciation

The Buildings account is now $230,000 - $34,500 = $195,500,

and the related Accumulated Depreciation account is zero.

Buildings ($205,000 – $195,500)......................................

9,500
Revaluation Surplus (OCI)...................................... 9,500
To adjust the Buildings account to fair value

Solutions Manual 10.88 Chapter 10

EXERCISE 10.27 (CONTINUED)

d.
Effective January 1, 2026, the depreciation rate is adjusted to
reflect the change in the depreciable amount. The $205,000
January 1, 2026 carrying amount is now allocated over the
remaining 17 (20 – 3) years. The new rate, therefore, is $12,059
($205,000 ÷ 17) per year.

December 31, 2026

Depreciation Expense......................................................
12,059
Accumulated Depreciation –
Buildings.............................................................. 12,059

e.
December 31, 2027
Depreciation Expense......................................................
12,059
Accumulated Depreciation – 12,059
Buildings..............................................................
($205,000 ÷ (20 – 3))

f.
December 31, 2028
Depreciation Expense......................................................
12,059
Accumulated Depreciation – 12,059
Buildings..............................................................

Using the asset adjustment method, remember that the

Accumulated Depreciation account was reduced to $0 at the
end of 2025. Its balance three years later on December 31, 2025
therefore is $36,177 ($12,059 x 3), and the Buildings account
under this method is still at the December 31, 2025 revaluation
amount of $205,000.

Solutions Manual 10.89 Chapter 10

EXERCISE 10.27 (CONTINUED)

f. (continued)

Accumulated Depreciation – Buildings.......................... 36,177

Buildings.................................................................. 36,177
To eliminate the accumulated depreciation

The Buildings account is now $205,000 - $36,177 = $168,823,

and the related Accumulated Depreciation account is zero.

Revaluation Surplus (OCI) (part c.).................................

9,500
Revaluation Gain or Loss ................................................
9,323
Buildings ($168,823 – $150,000)............................. 18,823
To adjust the Buildings account to fair value

Proportionate Method

December 31, Proportional

2025 Before after
revaluation x 205,000 revaluation
(A) ÷ 195,500 (B) (B) – (A)
Building $230,000 $241,176 $11,176
Accumulated
depreciation 34,500 36,176 1,676
Carrying amount $195,500 $205,000 $9,500

Buildings...........................................................................
11,176
Accumulated Depreciation–
Buildings............................................................ 1,676
Revaluation Surplus (OCI)...................................... 9,500

Solutions Manual 10.90 Chapter 10

EXERCISE 10.27 (CONTINUED)

g. (continued)

December 31, 2028 Proportional

Before after
revaluation x 150,000 revaluation
(A) ÷ 168,823 (B) (B) – (A)
Building $241,176 $214,286 $(26,890)
Accumulated
depreciation 72,353 64,286 (8,067)
Carrying amount $168,823 $150,000 $18,823

Accumulated Depreciation–Buildings............................ 8,067

Revaluation Surplus (OCI)...............................................9,500
Revaluation Gain or Loss ................................................
9,323
Buildings.................................................................. 26,890

Solutions Manual 10.91 Chapter 10

EXERCISE 10.27 (Continued)

Revaluation Model - Asset Revaluation Model - Proportionate
h. Adjustment Method Method
Accum. Carrying Accum. Carrying
Buildings Depr. Amount Buildings Depr. Amount
Jan. 2, 2023 $230,000 $230,000
Depreciation $11,500 $11,500
Dec. 31, 2023 230,000 11,500 $218,500 230,000 11,500 $218,500
Depreciation 11,500 11,500
Dec. 31, 2024 230,000 23,000 207,000 230,000 23,000 207,000
Depreciation 11,500 11,500
Unadj. Dec. 2025 230,000 34,500 195,500 230,000 34,500 195,500
Reval. Adjustment (34,500) (34,500) 1,676 1,676
Reval. Surplus (OCI) 9,500 9,500
Dec. 31, 2025 205,000 - 205,000 241,176 36,176 205,000
Deprec. (17 yrs. rem.) 12,059 12,059
Dec. 31, 2026 205,000 12,059 192,941 241,176 48,235 192,941
Depreciation 12,059 12,059
Dec. 31, 2027 205,000 24,118 180,882 241,176 60,294 180,882
Depreciation 12,059 12,059
Unadj. Dec. 2028 205,000 36,177 168,823 241,176 72,353 168,823
Reval. Adjustment (36,177) (36,177) (26,890) (26,890)
Reval Gain or Loss (9,323) 9,323
Reval. Surplus (OCI) (9,500) 9,500
Dec. 31, 2028 $150,000 - $150,000 $214,286 $64,286 $150,000

Solutions Manual 10.92 Chapter 10

EXERCISE 10.27 (CONTINUED)

h. (Continued)

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

i
The revaluation model results in more relevant information on
the statement of financial position because the building is
revalued to fair value every three years. An investor may be
better able to assess the current economic position of the
company with this information. However, the revaluation model
increases the risk of error and bias in the financial statements
because the revaluation model uses a fair value amount that is
not necessarily supported by a transaction with commercial
substance.

Fair value is defined as “the price that would be received to sell

an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date,” and
independent valuators and market-related evidence are used to
the extent possible, but other methods may be used if
necessary.

An investor in Algo should be aware that the fair value amount

that is applied in the revaluation model requires a degree of
professional judgement in calculation and application, and that
the determination of fair value can have a material effect on the
statement of financial position as well as the statement of
comprehensive income.
LO 5,9 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.93 Chapter 10

EXERCISE 10.28
1. As the building was acquired in 1983, 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—
Buildings1.......................................................................
800,000
Loss on Disposal of Buildings........................................
200,000
Buildings..................................................................
1,000,000
1
($1,000,000 X 40/50)
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

Solutions Manual 10.94 Chapter 10

EXERCISE 10.28 (CONTINUED)

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
LO 6 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.95 Chapter 10

EXERCISE 10.29
a.
1/30 Accumulated Depreciation—
Buildings1.....................................................................
112,200
2
Loss on Disposal of Buildings .......................................
24,900
Buildings..................................................................
132,000
Cash..........................................................................
5,100
1
(5% X $132,000 = $6,600; $6,600 X 17 = $112,200)
2
($132,000 – $112,200) + $5,100
3/10 Repairs and Maintenance Expense................................. 2,900
Cash..........................................................................
2,900

3/20 Repairs and Maintenance Expense................................. 185

Cash.......................................................................... 185

5/18 Machinery (new)................................................................

5,500
3
Accumulated Depreciation—Machinery ........................ 2,100
4
Loss on Disposal of Machinery ......................................1,400
Machinery (old)........................................................ 3,500
Cash..........................................................................
5,500
3
(10% X $3,500 X 6 = $2,100)
4
($3,500 – $2,100)

6/23 Repairs and Maintenance Expense................................. 6,900

Cash..........................................................................
6,900

b. The answer would not change. Regardless of the increase

in useful life, the amount involved would not be considered
material and would therefore be expensed in the current
year based on the company’s policy. The estimate of useful
life would be revised for the purposes of calculating
depreciation.
LO 6 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.96 Chapter 10

EXERCISE 10.30

a. C
b. E
c. C
d. C
e. C
f. C
g. C
h. E
i C
j. E or C if the company prepares financial statements in
accordance with ASPE; C if the company prepares
financial statements in accordance with IFRS (assuming
that the overhaul involves a substantial amount of time to
get the asset ready for its intended use, otherwise
expense).
k. C
l. C
LO 6 BT: K Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.97 Chapter 10

*EXERCISE 10.31

a. Calculation of Weighted-Average Accumulated

Expenditures
Expenditures
Capitalization Weighted-Average
Date Amount X Period = Accumulated
Expenditures
Mar. 1 $ 360,0001 10/12 $ 300,000
June 1 600,000 7/12 350,000
July 1 1,500,000 6/12 750,000
Dec. 1 1,500,000 1/12 125,000
$3,960,000 $1,525,000

1
(Total expend. $510,000 – cost of land $150,000)
Total weighted-average accumulated expenditures $1,525,000
Less: financed by specific construction loan 3,000,000
Weighted-average accumulated expenditures
financed by general borrowings (cannot be less
than zero) $0

Capitalization rate calculation on general borrowings:

Principal Borrowing Cost
13%, $4 million bond $4,000,000 $520,000
10%, $1.6 million note 1,600,000 160,000
$5,600,000 $680,000

$680,000
Capitalization rate = = 12.14%
$5,600,000

Solutions Manual 10.98 Chapter 10

*EXERCISE 10.31 (CONTINUED)

a. (continued)
Avoidable costs on asset-specific debt
($1,525,0001 x 12%) $183,000
Avoidable costs on general debt
($0 x 12.14%) 0
Total avoidable borrowing costs $183,000
1
The asset-specific debt was $3,000,000, however the avoidable
interest cost is calculated by capping the debt at weighted-
average accumulated expenditures ($1,525,000 in this case).
The weighted expenditures are less than the amount of specific
borrowing; the specific borrowing rate is used.

Borrowing costs to be capitalized = Total avoidable borrowing

costs – investment income (resulting from investment of idle
funds) = $183,000 – $49,000 = $134,000

b.
Actual interest paid during the year:
$3,000,000 X 12% $ 360,000
$4,000,000 X 13% 520,000
$1,600,000 X 10% 160,000
$1,040,000

Allocation of Capitalized Building Components

Expenditures
Buildings – Buildings Buildings –
Date Total Structure – Roof HVAC
Mar. 1 $ 360,000 $ 360,000 $0 $0
June 1 600,000 600,000 0 0
July 1 1,500,000 1,100,000 400,000 0
Dec. 1 1,500,000 800,000 0 700,000
$3,960,000 $2,860,000 $400,000 $700,000
100% 72.22% 10.10% 17.68%

Solutions Manual 10.99 Chapter 10

*EXERCISE 10.31 (CONTINUED)

b. (continued)

Buildings – Structure ($134,000 x 72.22%)..................... 96,775

Buildings – Roof ($134,000 x 10.10%)............................. 13,534
Buildings – HVAC ($134,000 x 17.68%)........................... 23,691
1
Interest Expense ..............................................................
906,000
Cash.......................................................................... 1,040,000
1
Actual interest for year $1,040,000
Less: Amount capitalized (134,000)
Interest expense $ 906,000

LO 2,8 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.100 Chapter 10

*EXERCISE 10.32

a. Oksana Inc. should report $55,0001 as capitalized borrowing

costs at 12/31/23. Since the weighted-average accumulated
expenditures is less than the asset-specific debt, the amount
of interest to be capitalized is
Weighted-Average Accumulated Expenditures X Interest Rate
on Asset-Specific Debt
= Avoidable Borrowing Costs on the Asset-Specific Debt

Since Oksana Inc. has outstanding debt incurred specifically for

the construction project, in an amount greater than the
weighted-average accumulated expenditures of $800,000, the
interest rate on the asset-specific debt of 10% is used for
capitalization purposes. Therefore, the avoidable borrowing
costs on the asset-specific debt is $80,000 ($800,000 X .10),
which is less than the actual interest.

Finally, the $25,000 of interest income earned from temporary

investment of the unexpended portion of the loan is offset
against the amount eligible for capitalization.
1
($80,000 – $25,000 = $55,000)

b. $47,000—Under IFRS, assets that qualify for capitalization of

borrowing costs are assets that require substantial time to get
ready for their intended use or sale. This may include
inventories; items of property, plant, and equipment; investment
properties; or intangible assets. Therefore, qualifying assets
include assets constructed for an enterprise’s own use (i.e., the
warehouse) and assets intended for sale or lease that are
produced as discrete projects (i.e., the special-order machine).
In addition, borrowing costs incurred on routinely manufactured
inventories that require an extended time period for completion
would be capitalized.

Solutions Manual 10.101 Chapter 10

*EXERCISE 10.32 (CONTINUED)

c. $02—Capitalization of borrowing costs begins on the

date when: (1) expenditures for the asset have been made, (2)
activities that are necessary to get the asset ready for its
intended use are in progress, and (3) borrowing costs are being
incurred.
The amount to be capitalized is determined by applying a
capitalization rate to the weighted-average amount of
accumulated expenditures for the asset during the period.

Because the $7,000,000 of expenditures incurred for the year

ended April 30, 2024 were incurred evenly throughout the year,
the weighted-average amount of expenditures for the year is
$3,500,000 ($7,000,000  2). Therefore, the maximum amount of
borrowing costs that could be capitalized is $385,000 ($3,500,000
X 11%). In any period, the total amount of borrowing costs to be
capitalized shall not exceed the total amount of borrowing costs
incurred by the enterprise. (Total borrowing costs incurred was
$1,100,000). Finally, the $450,000 of interest income earned from
temporary investment of the unexpended portion of the loan is
offset against the amount eligible for capitalization.
2
($385,000 – $450,000 = $0 of capitalized borrowing costs)
LO 2,8 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.102 Chapter 10

*EXERCISE 10.33

Step 1—Determine the expenditures on the qualifying asset.

Calculation of Weighted-Average Accumulated

Expenditures
Expenditures
Capitalization Weighted-Average
Date Amount X Period = Accumulated
Expenditures
Feb. 1 $ 120,000 11/12 $110,000
Mar. 1 24,000 10/12 20,000
July 1 60,000 6/12 30,000
Dec. 1 180,000 1/12 15,000
$384,000 $175,000

Step 2—Determine the avoidable borrowing costs on the asset-

specific debt.

Avoidable borrowing costs on asset-specific borrowing:

Asset-specific borrowing (weighted) = $100,000 x 11/12 = $91,667
Related borrowing costs = $91,667 x 12% = $11,000

Step 3—Determine the avoidable borrowing costs on the non-

asset-specific debt.

Total weighted-average accumulated expenditures $175,000

Less: financed by specific construction loan
($100,000 x 11/12) 91,667
Weighted-average accumulated expenditures
financed by general borrowings (cannot be less
than zero) $ 83,333

Solutions Manual 10.103 Chapter 10

*EXERCISE 10.33 (CONTINUED)

Step 3 (continued)
Calculation of capitalization rate on general borrowings:
Weighted
Principal debt Borrowing
amount Weight outstanding Cost
7% 10-year bonds,
issued June 15, 2017 $500,000 12/12 $500,000 $35,000
6% 12-year bonds,
issued May 1, 2023 300,000 8/12 200,000 12,000
9% 15-year bonds,
issued May 1, 2008,
matured May 1, 2023 300,000 4/12 100,000 9,000
$800,000 $56,000
$56,000
Capitalization rate = = 7%
$800,000
Avoidable borrowing costs on non-asset-specific debt
= $83,333 x 7% = $5,833

Step 4—Determine the borrowing costs to capitalize by applying

the capitalization rate to the appropriate expenditures on the
qualifying asset.

Avoidable borrowing costs on asset-specific debt $11,000

Avoidable borrowing costs on non-asset-specific debt 5,833
Total avoidable borrowing costs $16,833

Total actual borrowing costs incurred during the year:

Construction note, $100,000 x 12% x 11/12 $11,000
10-year bond, $500,000 x 7% x 12/12 35,000
12-year bond, $300,000 x 6% x 8/12 12,000
15-year bond, $300,000 x 9% x 4/12 9,000
$67,000
The amount of the borrowing costs to capitalize is the lower of
the avoidable and the actual, which is $16,833.
LO 2,8 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.104 Chapter 10

TIME AND PURPOSE OF PROBLEMS

Problem 10.1

Purpose—to provide a real company example to demonstrate how classifications

of assets to property, plant, and equipment are not always straight forward.
Student must draw on knowledge of the fundamental principles to argue the
treatment of specialized assets. A discussion of aircraft engine spares and
purchase deposits are included in this problem.

Problem 10.2

Purpose—to provide a property, plant, and equipment problem consisting of

three transactions that have to be recorded: (1) an asset purchased on a
deferred payment contract, (2) a lump-sum purchase, and (3) a nonmonetary
exchange. Three additional transactions require classification as PP&E, or other
assets.

Problem 10.3

Purpose—to provide a problem involving the proper classification of costs related

to PP&E. Property, plant, and equipment must be segregated into land, buildings,
leasehold improvements, and equipment for purposes of the analysis. Costs
such as demolition costs, real estate commissions, imputed interest, and royalty
payments are presented. An excellent problem for reviewing the first part of this
chapter.

Problem 10.4

Purpose—to provide a problem involving the proper classification of costs related

to PP&E. Such costs as land, freight and unloading, installation, parking lots,
GST, and sales taxes must be identified and appropriately classified. Also
reviews calculations for double-declining and straight-line depreciation and
calculation of gain or loss on disposal. An excellent problem for reviewing the first
part of this chapter.

Problem 10.5

Purpose—to provide a problem involving the proper classification of costs related

to land and buildings. Typical transactions include allocation of the cost of
removal of a building, legal fees paid, general expenses, insurance during

Solutions Manual 10.105 Chapter 10

construction, and special tax assessments. A good problem for providing a broad
perspective as to the types of costs expensed and capitalized.
TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 10.6

Purpose—to provide the student with a problem in which schedules must be

prepared on the costs of constructing buildings, assuming an “increased income”
approach and a “conservative” approach. Interest costs and government grants
are included. The student must discuss which items can be included or omitted
from the buildings’ cost under GAAP and the implications of the choice.

Problem 10.7

Purpose—to provide a problem involving the proper classification of costs related

to PP&E assets. The transactions include exchanges for shares and a deferred
payment contract as well as costs subsequent to acquisition. The student is
asked to consider alternative methods to account for the transactions.

Problem 10.8

Purpose—to provide the student with a problem involving the exchange of

machinery. Four different exchange transactions are possible, and journal entries
are required for each possible transaction. The exchange transactions cover the
receipt and payment of cash as well as the purchase of a machine with a trade-in
from a dealer of machinery.

Problem 10.9

Purpose—to provide the student with another problem involving the exchange of
productive assets. This problem is unusual because it involves the exchange of
two assets for inventory and the amount of the cash is less than 10%. As a
result, the entire transaction is nonmonetary in nature.

Problem 10.10

Purpose—to provide the student with a problem to apply the revaluation model
over multiple years with multiple classes of assets.

Solutions Manual 10.106 Chapter 10

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 10.11

Purpose—to provide the student with a problem to apply the revaluation model,
and to compare and contrast the asset adjustment method with the proportionate
method. The preparation of a continuity schedule for all transactions from the
date of purchase are included in the instructions to this problem.

Problem 10.12

Purpose—to provide the student with a problem to apply the fair value model,
and to compare and contrast the fair value model with the cost model.

Problem 10.13

Purpose—to provide a problem involving the proper classification of costs related

to PP&E assets. The transactions include repairs, additions, and modifications to
a building. The student is asked to consider whether the various costs should be
capitalized or expensed and to consider alternative methods to account for the
transactions.

*Problem 10.14

Purpose—to provide the student with a problem in which schedules must be

prepared on the costs of acquiring land and the costs of constructing a building.
Interest costs to be capitalized must be calculated over two accounting periods
and contrasted to the treatment of interest under ASPE.

*Problem 10.15
Purpose—to provide the student with a problem to calculate capitalized interest
and to present disclosures related to capitalized interest.

Solutions Manual 10.107 Chapter 10

SOLUTIONS TO PROBLEMS

PROBLEM 10.1

a. 1. As a public company following IFRS, Air Canada is required to

capitalize avoidable interest on self-constructed assets. The
amounts expended under assets for development are
ultimately incurred in bringing a capital asset to the condition
of use. Once the development is completed, the combined
costs are reclassified from the category “Purchase deposits
and assets under development” to “Aircraft and flight
equipment.”

2. Spare engines are not consumed when used repeatedly, as

would be the case with spare parts. Spare parts are classified
as inventory and expensed when used in repairs and
maintenance of aircraft and flight equipment. Spare engines
are constantly being recycled by the process of overhauls.
Overhauled engines are brought back to an “as new”
condition. Spare engines are therefore long-lived assets used
in operations and are properly classified as property and
equipment. They are depreciated over the remaining useful life
of the fleet to which they relate.

3. Purchase deposits must be made to secure construction

contracts on the manufacture of aircraft. Aircraft are not
manufactured unless they are pre-sold. Deposits are therefore
similar to the payment of progress billings on construction
contracts. They are non-refundable and represent a portion of
the purchase price of aircraft under development or
construction, not yet delivered or available for use.

b. Purchase deposits and assets under development are by their

very nature incomplete assets. Consequently, depreciation is
not recorded because the assets have not yet been placed
into use in operations. Once development or construction has
been completed, the asset is reclassified to Aircraft and flight

Solutions Manual 10.108 Chapter 10

equipment, and starts being used. At that point, depreciation

begins.

Solutions Manual 10.109 Chapter 10

PROBLEM 10.1 (CONTINUED)

c. As mentioned in part a., spare engines are never consumed

through use. The overhaul costs would likely be expensed
once the spare engine was released for use and installed on
the aircraft. Since the overhaul costs are repeated and get
consumed each cycle, the charge to the income statement as
an expense is appropriate.

d. If Air Canada followed ASPE, it would have a choice as to

whether or not it wanted to capitalize avoidable interest
incurred to finance assets under development.
LO 2,7 BT: C Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.110 Chapter 10

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.

Solutions Manual 10.111 Chapter 10

PROBLEM 10.2 (CONTINUED)

b. (continued) – Transaction 1
Asset cost = Present value of the note + Freight + Installation
– Government Grant
Using tables:
Present value of annuity @ 10% for 4 years
($20,000 ÷ 4) X 3.16986 $15,849.30

Using a financial calculator:

PV ? Yields $15,849.33
I 10%
N 4
PMT $(5,000)
FV $0
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $15,849.33

Solutions Manual 10.112 Chapter 10

PROBLEM 10.2 (CONTINUED)

b. (continued) – Transaction 1

Present value of instalment note $15,849

Freight 425
Installation costs 500
Less: Government Grant (2,000)
Total $14,774

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

Transaction 3. The cost of a nonmonetary asset acquired in

exchange for dissimilar nonmonetary assets should be
recorded at the fair value of the assets given up plus any cash
paid, unless the fair value of the asset received is more reliably
measurable. Since only the fair value of the new machine is
provided, it will be used as the cost. Furthermore, any gain or
loss on exchange is also recognized.

Cost of new machine $64,000

Solutions Manual 10.113 Chapter 10

PROBLEM 10.2 (CONTINUED)

b. (continued)
Although not required, the entry to record the exchange follows:
Machinery (New).................................................................
64,000
Accumulated Depreciation – Machinery............................. 45,000
Machinery (Old)......................................................... 80,000
Cash.......................................................................... 25,000
Gain on Disposal of Machinery.................................. 4,000

c. 1. A building purchased for speculative purposes is not a PP&E

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 PP&E 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 PP&E assets as
they have no physical substance. The rights should be
classified as intangible assets.
LO 1,2,3 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.114 Chapter 10

PROBLEM 10.3
a. Golden Corporation
ANALYSIS OF LAND ACCOUNT
for 2023
Balance at January 1, 2023 $ 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, 2023 $1,727,500

Golden Corporation
ANALYSIS OF BUILDINGS – STRUCTURE ACCOUNT
for 2023
Balance at January 1, 2023 $ 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, 2023 $1,278,500

Solutions Manual 10.115 Chapter 10

PROBLEM 10.3 (CONTINUED)

a. (continued)
Golden Corporation
ANALYSIS OF BUILDINGS – ROOF ACCOUNT
for 2023
Balance at January 1, 2023 $ 0
Cost of new building constructed
on land site number 622
“Green roof”1 36,000
Balance at December 31, 2023 $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.

Golden Corporation
ANALYSIS OF LEASEHOLD IMPROVEMENTS ACCOUNT
for 2023
Balance at January 1, 2023 $705,000
Office space 89,000
Balance at December 31, 2023 $794,000

Golden Corporation
ANALYSIS OF EQUIPMENT ACCOUNT
for 2023
Balance at January 1, 2023 $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, 2023 $962,900

Solutions Manual 10.116 Chapter 10

PROBLEM 10.3 (CONTINUED)

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.

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.
LO 1,2 BT: AP Difficulty: M Time: 55 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.117 Chapter 10

PROBLEM 10.4
a.
Webb Corporation
ANALYSIS OF LAND ACCOUNT
2023
Balance at January 1, 2023 $300,000
Plant facility acquired from Knorman Corp.
- fair value of land (share-based payment) 230,000
Balance at December 31, 2023 $530,000

Webb Corporation
ANALYSIS OF LAND IMPROVEMENTS ACCOUNT
2023
Balance at January 1, 2023 $140,000
Parking lots, streets, and sidewalks 95,000
Balance at December 31, 2023 $235,000

Webb Corporation
ANALYSIS OF BUILDINGS ACCOUNT
2023
Balance at January 1, 2023 $1,100,000
Plant facility acquired from Knorman
Corp. —fair value of building (share-based
payment) 690,000
Balance at December 31, 2023 $1,790,000

Solutions Manual 10.118 Chapter 10

PROBLEM 10.4 (CONTINUED)

a. (continued)

Webb Corporation
ANALYSIS OF EQUIPMENT ACCOUNT
2023
Balance at January 1, 2023 $ 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, 2023
(item 5) 80,000*
Equipment sold July 1, 2023 (item 6) 44,000* 124,000
Balance at December 31, 2023 $1,303,000

*(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.

Solutions Manual 10.119 Chapter 10

PROBLEM 10.4 (CONTINUED)

b. (continued)

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, 2023, 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, 2023

(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, 2023

Cost, January 1, 2015 $80,000

Accumulated depreciation (double-declining-
balance method, 10-year life) January 1,
2015, to June 30, 2023 (Schedule 3) 67,920
Asset carrying value June 30, 2023 $12,080
Loss on scrapping of equipment $12,080

Solutions Manual 10.120 Chapter 10

PROBLEM 10.4 (CONTINUED)

b. (continued)
Schedule 3
Accumulated Depreciation Using
Double-Declining-Balance Method
June 30, 2023
(Double-declining-balance rate is 20%)

Carrying Value
at Beginning of Depreciation Accumulated
Year Year Expense Depreciation
2015 $80,000 $16,000 $16,000
2016 64,000 12,800 28,800
2017 51,200 10,240 39,040
2018 40,960 8,192 47,232
2019 32,768 6,554 53,786
2020 26,214 5,243 59,029
2021 20,971 4,194 63,223
2022 16,777 3,355 66,578
2023 (6 months) 13,422 1,342 67,920
$67,920

Schedule 4
Loss on Disposal of Equipment
July 1, 2023
Cost, January 1, 2020 $44,000
Depreciation (straight-line method, salvage value
of $2,000, 7-year life) January 1, 2020, to
July 1, 2023 [3½ years X ($44,000 – $2,000)  7] (21,000)
Asset carrying value July 1, 2023 $23,000

Asset carrying value $23,000

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

Solutions Manual 10.121 Chapter 10

PROBLEM 10.4 (CONTINUED)

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.
LO 2,3 BT: AP Difficulty: M Time: 60 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.122 Chapter 10

PROBLEM 10.5

1 Land (Schedule A) 181,100

.
Buildings – Structure (Schedule B) 116,860
Buildings – HVAC (Schedule B) 30,000
1
Insurance Expense (6 months X $95 ) 570
Prepaid Insurance (16 months X $95) 1,520
Retained Earnings 43,800
Salaries and Wages Expense 32,100
Land and Building 405,950
To record correction for initial entries of transactions

Schedule A for Land

Amount consists of acquisition cost
(fair value of land and building
since share-based payment) $166,000
Removal of old building 9,800
Legal fees (title search) 1,300
Special tax assessment 4,000
Total $181,100

Schedule B – for Buildings

Buildings–Structure amount consists of:
Legal fees (construction contract) $ 2,470
Construction costs (1st payment) 60,000
Construction costs (2nd payment) 40,000
Insurance (2 months)
([$2,280  24] = $951 X 2 = $190) 190
Plant superintendent’s salary 4,200
Construction costs (final payment) 10,000
Total $116,860

Buildings–HVAC amount consists of:

Furnace and air-conditioning systems $30,000

Solutions Manual 10.123 Chapter 10

PROBLEM 10.5 (CONTINUED)

2 Land and Building 4,060

.
Depreciation Expense 2,141
Accumulated Depreciation—Buildings –
Structure 1,169
Accumulated Depreciation.—Buildings –
HVAC 750
To correct recording of depreciation expense

Schedule C
Depreciation expense recorded $ 4,060
Depreciation that should be recorded
for the Buildings – Structure
(1.0% X $116,860)2 (1,169)
Depreciation that should be recorded
for the Buildings – HVAC
(2.5% X $30,000)3 (750)
Depreciation expense reduction $ 2,141
2
useful life is 50 years, 1/50 years = 2.0%
2.0%X 6/12 = 1.0%
3
useful life is 20 years, 1/20 years = 5% 5.0%
X 6/12 = 2.5%

LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.124 Chapter 10

PROBLEM 10.6

a. Kerr Corp.
Cost of Buildings
Conservative approach
Fixed-price contract (original) $1,300,000
Plans, specifications, and blueprints 25,000
Architect’s fees 82,000
Upgrading of windows 46,000
Internal direct labour and materials 67,000
Variable overhead based on direct labour hours 10,000
Less: Municipal government grant (36,000)
Cost of Buildings $1,494,000

In this approach, conservative refers to expensing as many costs as

possible rather than placing them on the statement of financial
position as part of the building’s cost for future depreciation. The
building costs included direct costs of construction as well as variable
overhead. Fixed overhead (executive time of $54,000) was expensed
directly. GAAP generally requires fixed overhead to be expensed in
the construction of PP&E, however, some exceptions do exist.
Interest costs were also expensed directly. Current ASPE does not
specify that interest costs on self-constructed assets must be
capitalized but rather that the policy selected must be applied
consistently and be disclosed.

This is different from the IFRS standards, where borrowing costs are
more widely defined as “interest and other costs that an entity incurs
in connection with the borrowing of funds” (ASPE limits capitalization
to interest costs), and IFRS requires capitalization of borrowing costs
of qualifying assets (ASPE allows a choice between capitalization
and expensing).

Solutions Manual 10.125 Chapter 10

PROBLEM 10.6 (CONTINUED)

b. Kerr Corp.
Cost of Buildings
“Increased Income” approach
Fixed-price contract (original) $1,300,000
Plans, specifications, and blueprints 25,000
Architect’s fees 82,000
Upgrading of windows 46,000
Internal direct labour and materials 67,000
Variable overhead based on direct labour hours 10,000
Allocated cost of executive time1 54,000
Interest cost on building construction 63,000
Interest cost on maintenance building construction 3,200
Less: Municipal government grant (36,000)
Cost of Buildings $1,614,200

1
In order to report increased income, the accountant would include
certain expenditures in the cost of the building, rather than expensing
them directly. For example, interest costs on self-construction of the
building and maintenance building may be capitalized. Generally,
only directly attributable costs are capitalized, and no fixed overhead
is charged to a PP&E asset account. However, if there were fixed
costs that could be considered directly attributable to construction,
due to the increased activity, the capitalization of some fixed
overhead costs is permitted. For example, if the executive in charge
of construction had to hire an additional person to take on some other
responsibilities usually carried out by the executive because so much
of his or her time was taken up with construction, a case could be
made to capitalize part of the executive’s cost. The calculations
above assume a case can be made in this situation.

Solutions Manual 10.126 Chapter 10

PROBLEM 10.6 (CONTINUED)

c. For 2024 Conservative Increased Income

approach approach
Other expenses 120,200 (3)
Total expenses related to
building $120,200 $0

For subsequent years Conservative Increased Income

approach approach
Depreciation expense $37,350 (1) $40,355 (2)
Total expenses related to
building $37,350 $40,355

(1) $1,494,000 / 40 years = $37,350

(2) $1,614,200 / 40 years = $40,355
(3) Other expenses = $54,000 + $63,000 + $3,200 = $120,200

In 2024, the “conservative” approach results in lower income and

lower assets because expenditures such as the allocation of the
executive’s cost and the interest costs on self-construction of the
building and maintenance building are expensed. In subsequent
years however, higher income will result because of a lower
depreciation expense.

In determining the amount to be capitalized, the company should

consider comparability and consistency, as well as the need for
financial information to be faithfully representative, objective, and
neutral. The company’s need to report increased income for a bank
loan is a temporary position when considering the selection of a
suitable accounting policy. For consistency, the same policy will be
applied to future construction projects, and this policy may not be to
the company’s advantage in the future. Increased income may also
result in increased taxable income and increased taxes payable
(depending on income tax rules).

Solutions Manual 10.127 Chapter 10

PROBLEM 10.6 (CONTINUED)

c. (continued)

The accountant should also consider the impact of capitalizing fixed

overhead costs on the cost of products manufactured. If assigning
fixed overhead to the construction of the building results in less fixed
overhead being allocated to the inventory being produced, then a
reasonable allocation of fixed costs to inventory (and ultimately to
cost of goods sold) may not be achieved.

Finally, the accountant may also want to be consistent with U.S.

GAAP and IFRS where capitalization of interest is required.
Consistency with U.S. GAAP and IFRS would be desirable if the
company sells its shares on U.S. or international stock markets or
where the company is a subsidiary of an international company and
consistency with the parent company’s accounting policies is more
efficient. Conformance to IFRS should also be considered if the
company is considering going public in the future and will then be
required to conform to IFRS.
LO 2,3,7 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.128 Chapter 10

PROBLEM 10.7
a.

1. Land 623,333
Buildings 311,667
Common Shares1 900,000
Cash 35,000
1
The market value of the assets is the most clearly determined
value of the shares issued in exchange.

Allocation of broker’s fee:

$600,000
$35,000 X = $23,333 Land
$900,000
$300,000
$35,000 X = $11,667 Warehouse
$900,000
2. Equipment2 17,950
Notes Payable 8,450
Cash ($7,000 + $1,000 + $1,500) 9,500
To record purchase of equipment
2
Asset cost = (Present value of the annuity + down
payment) + Installation + Rearrangement
= $8,450 + $7,000 + $1,000 + $1,500
= $17,950

Repairs and Maintenance Expense 500

Cash 500
To record repairs and maintenance expense

Solutions Manual 10.129 Chapter 10

PROBLEM 10.7 (CONTINUED)

a. (continued)
2. (continued)

Using tables:
Present value of an annuity @ 12% for 2 yrs.
$5,000 X 1.69005 $8,450.25
Using a financial calculator:
PV ? Yields $8,450.26
I 12%
N 2
PMT $(5,000)
FV $0
Type 0

Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $8,450.26

Solutions Manual 10.130 Chapter 10

PROBLEM 10.7 (CONTINUED)

a. (continued)

3. Machinery3 50,000
Cash 50,000
3
If the information was available, the original cost of the old
motor and the related accumulated depreciation would have
been removed from the accounts as the asset has been
retired and is no longer in use.

4. Land 35,995
4
Buildings 97,005
5
Prepaid Expenses 250
Prepaid Insurance 940
Cash 134,190
5
($1,000 X 3/12) Property tax after Sept. 30

Calculation of purchase cost of land and building:

Purchase price $125,000
Unpaid property taxes for previous year 900
Current year taxes until Sept. 30
($1,000 X 9/12) 750
Total cost $126,650
$27,000
$126,650 X = $35,995 Land
$95,000

$68,000
$126,650 X = $90,655 Buildings
$95,000
4
Calculation of cost of building:
Building cost $90,655
Reshingling roof 2,200
Hauling refuse 230
Cleaning outside walls and windows 750
Painting inside walls 3,170
Total cost $ 97,005

Solutions Manual 10.131 Chapter 10

PROBLEM 10.7 (CONTINUED)

a. (continued)
5. Repairs and Maintenance Expense 35,000
Cash 35,000

6. Depreciation Expense6 750

Accumulated Depreciation
– Equipment 750
6
($15,000 X 10% X 6/12)
To record depreciation expense

Equipment (New) 21,000

Accumulated Depreciation
– Equipment 7 9,750
Loss on Disposal of Equipment 4,250
Equipment (Old) 15,000
Cash 20,000
7
($15,000 X 60%) + $750
To record purchase of equipment with trade-in

7. Repairs and Maintenance Expense 12,000

Cash 12,000
b. #4: The previous owner’s unpaid property taxes on the property
for the previous year has been included in the land account
only, rather than allocated between land and building since
unpaid municipal taxes consist of a lien on the land and not
on the building.
#5: The decision to capitalize or expense the amount depends
on the interpretation of the nature of the repair of the
plumbing system. If it is considered to increase the future
service potential of the building it would be treated as a
major overhaul. If it is considered to maintain the existing
level of service of the building, the amount would be
expensed. Additional information would be required.
LO 2,3,6 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.132 Chapter 10

PROBLEM 10.8

1. Chesley Corporation
Cash 23,000
Machinery (New) 69,000
Accumulated Depreciation – Machinery 50,000
Loss on Disposal of Machinery1 18,000
Machinery (Old) 160,000
1
Calculation of loss: Carrying value $110,000
Fair value (92,000)
Loss $ 18,000

Secord Company
Machinery (New) 92,000
Accumulated Depreciation – Machinery 45,000
2
Loss on Disposal of Machinery 6,000
Cash 23,000
Machinery (Old) 120,000
2
Calculation of loss: Carrying value $ 75,000
Fair value (69,000)
Loss $ 6,000

2. Chesley Corporation
Machinery (New)3 92,000
Accumulated Depreciation - Machinery 50,000
Loss on Disposal of Machinery 18,000
Machinery (Old) 160,000
3
the new machinery cannot be recorded at a cost higher than its
fair value.

Solutions Manual 10.133 Chapter 10

PROBLEM 10.8 (CONTINUED)

a. (continued)
2. (continued)

Bateman Company
Machinery (New) 76,000
Accumulated Depreciation - Machinery 71,000
Machinery (Old) 147,000

*It is assumed the transaction lacks commercial substance.

3. Chesley Corporation
Machinery (New) 4 100,000
Accumulated Depreciation - Machinery 50,000
Loss on Disposal of Machinery 18,000
Machinery (Old) 160,000
Cash 8,000
4
the new machinery cannot be recorded at a cost higher than its
fair value.

Shripad Company
Machinery (New) 77,000
Accumulated Depreciation – Machinery 75,000
Cash 8,000
Machinery (Old) 160,000

Solutions Manual 10.134 Chapter 10

PROBLEM 10.8 (CONTINUED)

a. (continued)
4. Chesley Corporation
Machinery (New) ($92,000 + $93,000) 185,000
Accumulated Depreciation - Machinery 50,000
Loss on Disposal of Machinery 18,000
Machinery (Old) 160,000
Cash 93,000

Ansong Corporation
Cash 93,000
Inventory (Used) 92,000
Sales Revenue 185,000
To record sale with trade-in

Cost of Goods Sold 130,000

Inventory 130,000
To record cost of goods sold

b. For Transactions #1 and #4 with Secord and Ansong, no

alternative situation would change the accounting for the
transaction since they are monetary transactions.

For the accounting for Transaction #2 with Bateman to change,

the situation would have to result in different cash flows over
the course of the machine’s life so as to cause the transaction
to have commercial substance.

Chesley Corporation
Machinery (New) 92,000
Accumulated Depreciation - Machinery 50,000
Loss on Disposal of Machinery5 18,000
Machinery (Old) 160,000
5
Calculation of loss: Carrying value $110,000
Fair value (92,000)
Loss $ 18,000

Solutions Manual 10.135 Chapter 10

PROBLEM 10.8 (CONTINUED)

b. (continued)

Bateman Company
Machinery (New) 92,000
Accumulated Depreciation - Machinery 71,000
Gain on Disposal of Machinery 16,000
Machinery (Old) 147,000

Calculation of gain: Fair value $92,000

Carrying value (76,000)
Gain $16,000

For Transaction #3 with Shripad, situations that could result in

different cash flows over the course of the machine’s life would
cause the transaction to have commercial substance.

Chesley Corporation
Machinery (New) 100,000
Accumulated Depreciation - Machinery 50,000
Loss on Disposal of Machinery 18,000
Machinery (Old) 160,000
Cash 8,000

Shripad Company
Machinery (New) 92,000
Accumulated Depreciation - Machinery 75,000
Cash 8,000
Gain on Disposal of Machinery6 15,000
Machinery (Old) 160,000
6
Calculation of gain: Fair value $100,000
Carrying value (85,000)
Gain $15,000

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

Solutions Manual 10.136 Chapter 10

PROBLEM 10.9

a. Garrison Books
1. Equipment (new) 198,000
Accumulated Depreciation –
Equipment (Crane #6RT) 15,000
Accumulated Depreciation –
Equipment (Crane #S79) 18,000
Loss on Disposal of Equipment1 1,500
Cash 17,500
Equipment (Crane #6RT) 130,000
Equipment (Crane #S79) 120,000
1
Calculation of Loss on Disposal:
Fair value of Crane #6RT $128,000
Carrying value of Crane #6RT (115,000)
Gain $13,000

Fair value of Crane # S79 $87,500

Carrying value of Crane # S79 (102,000)
Loss $14,500
Net loss = $14,500 – $13,000 = $1,500

Pisani Books
2. Inventory (Used) 215,500
Sales Revenue 198,000
Cash 17,500
To record sale with trade-in

Cost of Goods Sold 165,000

Inventory 165,000
To record cost of goods sold

Solutions Manual 10.137 Chapter 10

PROBLEM 10.9 (CONTINUED)

b. Garrison Books
2
1. Equipment (New) 198,000
Accumulated Depreciation—
Equipment (Crane #6RT) 15,000
Accumulated Depreciation—
Equipment (Crane #S79) 18,000
Loss on Disposal of Equipment 1,500
Cash 17,500
Equipment (Crane #6RT) 130,000
Equipment (Crane #S79) 120,000
2
Carrying amount of the assets given up = $217,000 [($130,000 –
$15,000) + ($120,000 - $18,000)]; however, the fair value of the asset
plus cash acquired of $215,500 ($198,000 + $17,500) is less than
that amount. Therefore, a loss is recognized for the difference
between carrying amount of the assets given up and fair value of the
assets acquired. The same entry as part a. is recorded.

Pisani Books
2. Inventory (Used) 182,500
Inventory 165,000
Cash 17,500

No gain may be recognized because the transaction is nonmonetary

and lacks commercial substance. The amount of cash involved is not
significant.

Because the transaction lacks commercial substance, it is recognized

as an exchange of inventory and not as a sale with a corresponding
cost of goods sold.

Solutions Manual 10.138 Chapter 10

PROBLEM 10.9 (CONTINUED)

c. 1. For Garrison Construction Ltd.: Both methods yield the

same entry. However, the assessment of the transaction
as lacking commercial substance should be reviewed
carefully. Since Garrison’s goal is to acquire a larger
crane that is more useful for new contracts, it is
questionable whether the smaller old cranes have the
same value in use as the new crane and perform the
same function, especially since two old cranes are
exchanged for one new crane. The amount of cash being
considered non-significant should also be examined
carefully.

2. For Pisani Manufacturing Inc.: Method b. where revenue is

not recognized is more conservative. It is questionable,
however, whether the transaction lacks commercial
substance in this case especially since two old cranes are
exchanged for one new crane. Where the exchange
involves relatively similar inventory items and the
exchange takes place to facilitate a sale to an outside
customer, the earnings process is not considered
completed. This is not clearly evident in this problem. The
final decision should be based on an analysis of the effect
on future cash flows, the basis for determining
commercial substance.

The approach used for method a. presents the culmination of the

earnings process for both companies and is less conservative to
Pisani. Given the fact that two older small cranes are exchanged for
one new larger crane, it is more persuasive that this transaction has
commercial substance. The transaction would also represent the
culmination of the earnings process for Pisani Manufacturing since
the transaction is with a customer (Garrison) and not with another
manufacturer. Note that each company could very well come to a
different conclusion.
LO 3 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.139 Chapter 10

PROBLEM 10.10

July 1, 2023 required journal entry:

Buildings (Building #1)........................................................

400,000
Buildings (Building #2)........................................................
210,000
Machinery (Building #1)......................................................
75,000
Machinery (Building #2)......................................................
45,000
Common Shares........................................................ 730,000

December 31, 2023 required journal entries:

Depreciation Expense1........................................................
20,000
Acc. Depn. – Buildings (Building #1)......................... 20,000
1
($400,000 ÷ 10 x 1/2)
To record depreciation on Building #1

Depreciation Expense2........................................................
10,500
Acc. Depn. – Buildings (Building #2)......................... 10,500
2
($210,000 ÷ 10 x 1/2)
To record depreciation on Building #2

Depreciation Expense3........................................................
12,500
Acc. Depn. – Machinery (Building #1)....................... 12,500
3
($75,000 ÷ 3 x 1/2)
To record depreciation on Machinery in Building #1

Depreciation Expense4........................................................
2,500
Acc. Depn. – Machinery (Building #2)....................... 2,500
4
($45,000 ÷ 9 x 1/2)
To record depreciation on Machinery in Building #2

Solutions Manual 10.140 Chapter 10

PROBLEM 10.10 (CONTINUED)

a. (continued)

Acc. Depn. – Buildings (Building #1)...................................

20,000
Buildings (Building #1)............................................... 13,000
Revaluation Surplus (OCI)......................................... 7,000
To revalue manufacturing plant – (Building #1)

The Buildings (Building #1) account is now $400,000 - $13,000 =

$387,000, and the related accumulated depreciation is account is
zero.

Acc. Depn. – Buildings (Building #2)...................................

10,500
Revaluation Gain or Loss ...................................................
21,500
Buildings (Building #2)............................................... 32,000
To revalue storage warehouse – (Building #2)

The Buildings (Building #2) account is now $210,000 - $32,000 =

$178,000, and the related accumulated depreciation is account is
zero.

December 31, 2024 required journal entries:

Depreciation Expense5........................................................
40,737
Acc. Depn. – Buildings (Building #1)......................... 40,737
5
($387,000 ÷ 9.5 years)
To record depreciation on Building #1

Depreciation Expense6........................................................
18,737
Acc. Depn. – Buildings (Building #2)......................... 18,737
6
($178,000 ÷ 9.5 years)
To record depreciation on Building #2

Depreciation Expense7........................................................
25,000
Acc. Depn. – Machinery (Building #1)....................... 25,000
7
($75,000 ÷ 3)
To record depreciation on Machinery in Building #1

Solutions Manual 10.141 Chapter 10

Solutions Manual 10.142 Chapter 10

PROBLEM 10.10 (CONTINUED)

a. (continued)

Depreciation Expense8........................................................
5,000
Acc. Depn. – Machinery (Building #2)....................... 5,000
8
($45,000 ÷ 9)
To record depreciation on Machinery in Building #2

Acc. Depn. – Buildings (Building #1)...................................

40,737
Revaluation Surplus (OCI)..................................................
6,263
Buildings (Building #1)............................................... 47,000
To revalue manufacturing plant – (Building #1)

The asset account is now $387,000 - $47,000 = $340,000, and the

related accumulated depreciation is account is zero. The Revaluation
Surplus (OCI) account has a balance of $737 ($7,000 - $6,263)

Acc. Depn. – Buildings (Building #2)...................................

18,737
Revaluation Gain or Loss.......................................... 737
Buildings (Building #2)............................................... 18,000
To revalue storage warehouse – (Building #2)

The asset account is now $178,000 - $18,000 = $160,000, and the

related accumulated depreciation is account is zero.

July 1, 2023 required journal entry:

Same as part a.

December 31, 2023 required journal entries:

Depreciation Expense9........................................................
20,000
Acc. Depn. – Buildings (Building #1)......................... 20,000
9
($400,000 ÷ 10 x 1/2)
To record depreciation on Building #1

Solutions Manual 10.143 Chapter 10

PROBLEM 10.10 (CONTINUED)

b. (continued)

Depreciation Expense10......................................................
10,500
Acc. Depn. – Buildings (Building #2)......................... 10,500
10
($210,000 ÷ 10 x 1/2)
To record depreciation on Building #2

Acc. Depn. – Buildings (Building #1)...................................

20,000
Acc. Depn. – Buildings (Building #2)...................................
10,500
Revaluation Gain or Loss ...................................................
14,500
Buildings (Building #1)............................................... 13,000
Buildings (Building #2)............................................... 32,000
To revalue (Building #1) and (Building #2)

The Buildings (Building #1) asset account is now $400,000 - $13,000 =

$387,000, and the related accumulated depreciation is account is zero.

The Buildings (Building #2) asset account is now $210,000 - $32,000 =

$178,000, and the related accumulated depreciation is account is zero.

December 31, 2024 required journal entries:

Depreciation Expense11......................................................
40,737
Acc. Depn. – Buildings (Building #1)......................... 40,737
11
($387,000 ÷ 9.5 years)
To record depreciation on Building #1

Depreciation Expense12......................................................
18,737
Acc. Depn. – Buildings (Building #2)......................... 18,737
12
($178,000 ÷ 9.5 years)
To record depreciation on Building #2

Solutions Manual 10.144 Chapter 10

PROBLEM 10.10 (CONTINUED)

b. (continued)

Acc. Depn. – Buildings (Building #1)...................................

40,737
Acc. Depn. – Buildings (Building #2)...................................
18,737
Revaluation Gain or Loss ...................................................
5,526
Buildings (Building #1)............................................... 47,000
Buildings (Building #2)............................................... 18,000
To revalue (Building #1) and (Building #2)
The Buildings (Building #1) asset account is now $387,000 - $47,000 =
$340,000, and the related accumulated depreciation is account is zero.
The Buildings (Building #2) asset account is now $178,000 - $18,000 =
$160,000, and the related accumulated depreciation is account is zero.

c.
Where revaluations are made on an asset-by-asset basis 2023:
Revaluation Gain or Loss $21,500

Where revaluations are made on a class-by-class basis 2023:

Revaluation Gain or Loss $14,500

On a class-by-class basis (as recorded in part b.), the revaluation

write-downs are netted against the revaluation surpluses of other
assets (in this case the $7,000 revaluation surplus for the
manufacturing plant (Building #1)). This is not a neutral treatment, as
it tends to minimize the losses recorded on the income statement.

IAS 16 paragraphs 31-42 require that asset revaluation surpluses be

recorded on an individual asset basis (reference is made to the
revaluation of asset items, not asset classes as a group). This is
consistent with the application of the LCNRV rule for inventory, which
must be applied on an item-by-item basis.
LO 5 BT: AP Difficulty: C Time: 45 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.145 Chapter 10

PROBLEM 10.11
a. Asset Adjustment Method

December 31, 2023

Machine #1

Depreciation Expense1........................................................
51,667
Accumulated Depreciation – Machinery
(Machine #1)......................................................... 51,667
1
$310,000 ÷ 6 remaining years
To record depreciation expense (Machine #1)

Accumulated Depreciation – Machinery

(Machine #1)..................................................................
103,333
2
Machinery (Machine #1) ........................................... 103,333
2
$51,667 X 2 years
To eliminate accumulated depreciation (Machine #1)

The Machinery (Machine #1) account balance is now $310,000 -

$103,333 = $206,667, and the related Accumulated Depreciation
account is zero.

Machinery (Machine #1).....................................................

23,333
3
Revaluation Gain or Loss ......................................... 20,000
Revaluation Surplus (OCI)......................................... 3,333
To adjust the Machinery (Machine #1) account to fair value
3
Recognized in income (up to the extent of revaluation loss previously
recognized in income for the same asset). [Refer to part b. to see
calculations]

The Machinery (Machine #1) account balance is now $206,667 +

$23,333 = $230,000

Solutions Manual 10.146 Chapter 10

PROBLEM 10.11 (CONTINUED)

a. (continued)

Machine #2

Depreciation Expense4........................................................
46,316
Accumulated Depreciation – Machinery
(Machine #2)......................................................... 46,316
4
$440,000 ÷ 9.5 years
To record depreciation expense (Machine #2)

Accumulated Depreciation – Machinery

(Machine #2)5.................................................................
92,632
Machinery (Machine #2)............................................ 92,632
5
$46,316 X 2 years
To eliminate accumulated depreciation (Machine #2)

The Machinery (Machine #2) account is now $440,000 - $92,632 =

$347,368, and the related Accumulated Depreciation account is zero.

Revaluation Surplus (OCI)6.................................................

12,500
Revaluation Gain or Loss ...................................................
6,868
Machinery (Machine #2)............................................ 19,368
To adjust the Machinery (Machine #2) account to fair value
6
Recognized in OCI (up to the extent of revaluation surplus previously
recognized in OCI for the same asset). [Refer to part b. to see
calculations]

The Machinery (Machine #2) account is now $347,368 - $19,368 =

$328,000

Solutions Manual 10.147 Chapter 10

PROBLEM 10.11 (CONTINUED)

b. Proportionate Method
December 31, 2023

Machine #1

Depreciation Expense7........................................................
51,667
Accumulated Depreciation – Machinery
(Machine #1)......................................................... 51,667
7
$310,000 ÷ 6 years
To record depreciation expense (Machine #1)
Proportional
Before after
revaluation revaluation
(A) (B) (B) – (A)
Machine #1 $413,333 x 230/206.666 $460,000 $46,667
Accumulated
depreciation 206,6678 x 230/206.666 230,000 23,333
Carrying amount $206,666 x 230/206.666 $230,000 $23,334
8 *
[$103,333 + ($51,667 X 2)] adjusted for rounding

Machinery (Machine #1).....................................................

46,667
Revaluation Gain or Loss.......................................... 20,000
Revaluation Surplus (OCI)......................................... 3,334
Accumulated Depreciation – Machinery
(Machine #1) ........................................................ 23,333
To adjust the Machinery (Machine #1) account to fair value

Machine #2

Depreciation Expense9........................................................
46,316
Accumulated Depreciation – Machinery
(Machine #2)......................................................... 46,316
9
$440,000 ÷ 9.5 years
To record depreciation expense (Machine #2)
Solutions Manual 10.148 Chapter 10
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 10.11 (CONTINUED)

b. (continued)

Proportional
Before after
revaluation X 328,000 revaluation
(A) / 347,368 (B) (B) – (A)
Machine #2 $555,789 $524,800 $(30,989)
Accumulated
depreciation 208,42110 196,800 (11,621)
Carrying amount $347,368 $328,000 $(19,368)
10
$115,789 + $46,316 X 2

Accumulated Depreciation – Machinery

(Machine #2)..................................................................
11,621
Revaluation Surplus (OCI)..................................................
12,500
Revaluation Gain or Loss ...................................................
6,868
Machinery (Machine #2) ........................................... 30,989
To adjust the Machinery (Machine #2) account to fair value

Solutions Manual 10.149 Chapter 10

PROBLEM 10.11 (CONTINUED)

Revaluation Model - Asset Revaluation Model - Proportionate

c. Adjustment Method (1) Method (2)
Accum. Carrying Accum. Carrying
Mach. #1 Depr. Amount Mach. #1 Depr. Amount
Jan. 2, 2020 $440,000 $440,000
Depreciation $55,000 $55,000
Dec. 31, 2020 440,000 55,000 $385,000 440,000 55,000 $385,000
Depreciation 55,000 55,000
Unadj. Dec. 2021 440,000 110,000 330,000 440,000 110,000 330,000
(110,000
Reval. Adjustment (110,000) ) (26,667) (26,667)
Reval. Gain or Loss (20,000) 20,000
Dec. 31, 2021 310,000 - 310,000 413,333 103,333 310,000
Deprec. (6 yrs. rem.) 51,667 51,667
Dec. 31, 2022 310,000 51,667 258,333 413,333 155,000 258,333
Depreciation 51,667 51,667
Unadj. Dec. 2023 310,000 103,333 206,667 413,333 206,667 206,667
Reval. Adjustment (103,333) (103,333) 46,667 46,667
Rev. Gain or Loss 20,000 (20,000)
Reval. Surplus (OCI) 3,333 (3,333)
Dec. 31, 2023 $230,000 - $230,000 $460,000 $230,000 $230,000

Solutions Manual 10.150 Chapter 10

PROBLEM 10.11 (CONTINUED)

Revaluation Model - Asset Adjustment Revaluation Model - Proportionate

c. (continued) Method (1) Method (2)
Accum. Carrying Accum. Carrying
Mach. #2 Depr. Amount Mach. #2 Depr. Amount
Jan. 2, 2019 $540,000 $540,000
Depreciation $22,500 $22,500
Dec. 31, 2019 540,000 22,500 517,500 540,000 22,500 $517,500
Depreciation 45,000 45,000
Dec. 31, 2020 540,000 67,500 472,500 540,000 67,500 472,500
Depreciation 45,000 45,000
Unadj. Dec. 2021 540,000 112,500 427,500 540,000 112,500 427,500
Reval. Adjustment (112,500) (112,500) 15,789 15,789
Reval. Surplus (OCI) 12,500 (12,500)
Dec. 31, 2022 440,000 - 440,000 555,789 115,789 440,000
Deprec. (9.5 yrs. rem.) 46,316 46,316
Dec. 31, 2022 440,000 46,316 393,684 555,789 162,105 393,684
Depreciation 46,316 46,316
Unadj. Dec. 2023 440,000 92,632 347,368 555,789 208,421 347,368
Reval. Adjustment (92,632) (92,632) (30,989) (30,989)
Reval. Surplus (OCI) (12,500) 12,500
Rev. Gain or Loss (6,868) 6,868
Dec. 31, 2023 $328,000 - $328,000 $524,800 $196,800 $328,000

Solutions Manual 10.151 Chapter 10

PROBLEM 10.11 (CONTINUED)

The effects on the 2023 statement of comprehensive income are the

same under both the asset adjustment method and the proportionate
method. Revaluation of machine #1 results in a Revaluation Gain of
$20,000, and a Revaluation Surplus (OCI) of $3,333. Revaluation of
machine #2 results in a decrease in Revaluation Surplus (AOCI) from
$12,500 to zero, and a Revaluation Loss of $6,868.

The effects on the December 31, 2023 statement of financial position

are different under each method. Under the asset adjustment
method, for each machine, the Machinery asset account balance
represents the fair value of the machine as at December 31, 2023,
and the Accumulated Depreciation – Machinery account balance is
zero. Under the proportionate method, for each machine, the
Machinery asset account balance and the Accumulated Depreciation
– Machinery account balance are proportionately adjusted to reflect
the new carrying amount, which is equal to the fair value of the
machine as at December 31, 2023.

f.
A potential investor would likely prefer that Camco use the
proportionate method to apply the revaluation method, because
the proportionate method provides additional useful and relevant
information. Presenting an adjusted balance in the accumulated
depreciation account provides information about the relative age of
the asset, and allows the potential investor to assess when assets
may need to be replaced. Presenting a zero balance in the
accumulated depreciation account, as under the asset adjustment
method, does not give this type of information.
LO 5 BT: AP Difficulty: C Time: 55 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.152 Chapter 10

PROBLEM 10.12

a. Fair value model

March 1, 2023
Investment Property............................................................
1,275,000
Cash.......................................................................... 1,275,000

December 31, 2023

Investment Property............................................................
47,000
Gain or Loss in Value of Investment
Property1............................................................ 47,000
1
($1,322,000 - $1,275,000)

December 31, 2024

Gain or Loss in Value of Investment
Property2.......................................................................
67,000
Investment Property.................................................. 67,000
2
($1,255,000 - $1,322,000)

December 31, 2025

Gain or Loss in Value of Investment
Property3.......................................................................
32,000
Investment Property.................................................. 32,000
3
($1,223,000 - $1,255,000)

b. Cost model

March 1, 2023
Buildings (Investment Property) (75%)............................... 956,250
Land (25%).........................................................................
318,750
Cash.......................................................................... 1,275,000

December 31, 2023

Depreciation Expense4........................................................
21,042
Accumulated Depreciation – Buildings
(Investment Property)........................................... 21,042
4
($956,250 - $325,000) / 25 = $25,250; $25,250 X 10/12

Solutions Manual 10.153 Chapter 10

PROBLEM 10.12 (CONTINUED)

b. (continued)

December 31, 2024

Depreciation Expense.........................................................
25,250
Accumulated Depreciation – Buildings
(Investment Property)........................................... 25,250

December 31, 2025

Depreciation Expense.........................................................
25,250
Accumulated Depreciation – Buildings
(Investment Property)........................................... 25,250

The effects on the 2023 statement of comprehensive income are

different under each model. Under the fair value model, the
adjustment to fair value each year is included in net income, resulting
in recording a significant gain in the year. Under the cost model, net
income is affected by depreciation expense only, which is a constant
amount each year with application of straight-line depreciation.

The effects on the 2023 statement of financial position are different

under each model. Under the fair value model, the Investment
Property is separately reported as an item of PP&E, and valued at fair
value. Under the cost model, the land and building are included with
PP&E; the land is valued at cost and the building is valued at cost
less accumulated depreciation.

Solutions Manual 10.154 Chapter 10

PROBLEM 10.12 (CONTINUED)

The fair value model results in more relevant information on the

statement of financial position because the investment property is
revalued to fair value every year. An investor may be better able to
assess the current economic position of the company with this
information. However, the fair value model increases the risk of error
and bias in the financial statements because the fair value model
uses a fair value amount that is not necessarily supported by a
transaction with commercial substance.

Fair value is defined as “the price that would be received to sell an

asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date,” and independent
valuators and market-related evidence are used to the extent
possible, but other methods may be used if necessary.

An investor in Jessi should be aware that the fair value amount that is
applied in the fair value model requires a degree of professional
judgement in calculation and application, and that the determination
of fair value can have a material effect on the statement of financial
position as well as the income statement.

The cost model results in more neutral information on the financial

statements, because the property is valued at cost less accumulated
depreciation – buildings (investment property).
LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.155 Chapter 10

PROBLEM 10.13

(1) Any addition to plant assets is capitalized because a new

asset has been created. This addition increases the service
potential of the plant. The addition should be componentized
into its major elements if the components make up a
relatively significant portion of the addition’s total cost, and/or
have different useful lives or depreciation patterns.

(2) Expenditures that do not increase the service benefits of the

asset are expensed. Painting costs are considered ordinary
repairs because they maintain the existing condition of the
asset or restore it to normal operating efficiency.

(3) The approach to follow is to remove the old carrying amount

of the roof (remove both the original cost and the
accumulated depreciation of the old roof and recognize the
loss) and substitute the cost of the new roof. It is assumed
that the expenditure increases the future service potential of
the asset. The removal cost will increase the loss on the old
roof. The roof should be accounted for separately from the
other parts of the building if it has a different useful life or
depreciation pattern.

Solutions Manual 10.156 Chapter 10

PROBLEM 10.13 (CONTINUED)

(4) Conceptually, the approach is to remove the old carrying

amount of the electrical system (remove both the original cost
and the accumulated depreciation of the old electrical
system). However, practically it is often difficult, if not
impossible, to determine this amount. The accounting
standard differs under ASPE and IFRS. In this case, under
ASPE, one of two approaches is followed. One approach is
to capitalize the replacement on the theory that sufficient
depreciation was taken on the old system to reduce the
carrying amount
to almost zero. A second approach is to debit accumulated
depreciation on the theory that the replacement extends the
useful life of the asset and thereby recaptures some or all
of the past depreciation. In our present situation, the problem
specifically states that the useful life is not extended
and therefore debiting accumulated depreciation is not
appropriate. Thus, this expenditure should be added to the
cost of the plant facility. A similar choice is not available
under IFRS. IFRS indicates that the original cost should be
estimated and removed from the asset account and the
related accumulated depreciation account, and the new cost
should be recognized.

(5) See discussion in (4) above. In this case, because the useful
life of the asset has increased, under ASPE, a debit to
accumulated depreciation would appear to be the most
appropriate choice.
LO 6 BT: C Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

(6)

Solutions Manual 10.157 Chapter 10

*PROBLEM 10.14

a. 2023 2024
Land (Schedule 1) $192,000 $192,000
Buildings 34,8751 720,2192
Interest expense 3,125 34,656
1
$30,000 (architectural fees) + $3,000 (building permits) + $1,875
(2023 capitalized interest)
2
$34,875 (2023 capitalized building cost) + $240,000 (Mar. 1) +
$360,000 (May 1) + $60,000 (July 1) + $25,344 (2024 capitalized
interest)

Schedule 1 - Balance in the Land Account

Purchase Price $184,000
Surveying Costs 2,000
Title Transfer Fees 4,000
Demolition Costs 3,000
Salvage Recovery (1,000)
Total Land Cost $192,000

2023 - Calculations for Buildings – Capitalized Borrowing Costs:

Weighted Average Expenditures for 2023:

Weighted
Date Amount Fraction Expenditures
1-Dec $192,000 1/12 $16,000
1-Dec 30,000 1/12 2,500
1-Dec 3,0003 1/12 250
$225,000 $18,750

3
$3,000 for building permits

Solutions Manual 10.158 Chapter 10

*PROBLEM 10.14 (CONTINUED)

a. (continued)

Weighted Average Borrowings for 2023:

Weighted Interest Amount
Date Amount Fraction Expenditure Rate Capita-
lizable
1-Dec $600,000 1/12 $50,000
but limited to 18,750 0.10 $1,875
Interest to be recorded as Interest Expense 3,125
($600,000 X 10% X 1/12 - $1,875)

Weighted Average Expenditures for 2024:

Weighted
Date Amount Fraction Expenditure
1-Jan $225,000 6/12 $112,500
1-Jan 1,875 6/12 938
1-Mar 240,000 4/12 80,000
1-May 360,000 2/12 60,000
1-Jul 60,000 0/124 0
$886,875 $253,438
4
Construction completed July 1, 2024

Weighted Average Borrowings for 2024:

Weighted Interest Amount
Date Amount Fraction Borrowing Rate Capita-
lizable
1-Jan $600,000 6/12 $300,000
but limited to 253,438 0.10 $25,344
Interest taken to Interest Expense 34,656
($600,000 X 10% X 6/12 - $25,344) +
($600,000 X 10% X 6/12)

Solutions Manual 10.159 Chapter 10

*PROBLEM 10.14 (CONTINUED)

b.
2023 2024
Land $192,000 $192,000
5
Buildings 33,000 693,000 6
Interest expense 5,000 60,000
5
$30,000 (architectural fees) + $3,000 (building permits)
6
$33,000 (2023 capitalized building cost) + $240,000 (Mar. 1) +
$360,000 (May 1) + $60,000 (July 1)

c.
IFRS ASPE Difference
2023 2024 2023 2024 2023 2024
$34,87 $720,21 $33,00 $693,00 $1,8 $27,21
Buildings 5 9 0 0 75 9
Interest 3,1 60,00 (1,87 (25,34
Expense 25 34,656 5,000 0 5) 4)

The amounts of the differences are very likely not material to the
statement of income or the statement of financial position. The size of
the interest expense difference needs to be compared to all
expenses, and buildings need to be compared to all of the assets.
The building difference in 2024 is 3.9% of the building cost and would
likely be minimal as a % of all assets.

d.
If Inglewood pays for the construction with internally generated funds,
Inglewood will incur an opportunity cost of using the funds for
construction, and the company will forego the opportunity to invest
the funds elsewhere. This opportunity cost would not be recorded in
the financial statements. Compared to paying for the construction
with internally generated funds, the borrowing of funds for
construction and capitalization of borrowing costs will result in higher
total assets in the periods beginning in the year of construction,
higher debt, and higher depreciation expense in the periods after
construction is complete.
LO 7,8 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.160 Chapter 10

Solutions Manual 10.161 Chapter 10

*PROBLEM 10.15

a. Calculation of Weighted-Average Accumulated Expenditures

Expenditures Weighted-
Capita- Average
Date Amount X lization = Accumulated
Period Expenditures
July 30/23 $1,200,000 10/12 $1,000,000
Jan. 30/24 1,500,000 4/12 500,000
May 31/24 1,000,000 0 0
June 30/24 1,300,000 0 0
$5,000,000 $1,500,000

b. Weighted-Average
Accumulated Capitalization Avoidable
Expenditures X Rate = interest
$1,500,000 13%1 $195,000

Loans Outstanding During Construction Period:

Principal Interest
1
14½% five-year note (12/12) $2,000,000 $290,000
12% ten-year bond (12/12) 3,000,000 360,000
$5,000,000 $650,000

Total interest $650,000

= = 13% (capitalization rate)
Total principal $5,000,000

c. 1. and 2.

Total actual interest cost $650,000

Total interest capitalized $195,000
Total interest expensed $455,000
LO 8 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual 10.162 Chapter 10

CASES

See the Case Primer on the Student Website as well as the summary case
primer in the front of the text.

CA 10.1 REAL ESTATE INVESTMENT TRUST (RE)

Case Overview:

- RE is an investment trust that directly distributes taxable income to unit

holders. The units are listed on a stock exchange. Therefore, IFRS is a
constraint.
- The trust’s legal structure is important, since this creates cash flow
implications. The trust must pay out substantially all its cash flows, which
then results in distributable income to unit holders. At the same time, there
is a bias towards showing stable and growing distributions. The trust must
be careful that expenses are not understated and income overstated due
to cash flow implications. Note that although this is based on IFRS, it is
not defined by IFRS, so there may be some room for additional bias.
- The student is to take on the role of the auditor. The auditor is must
ensure transparency and full disclosure.
- The trust’s assets consist primarily of property and equipment valued at
$1.7 billion, as compared with the $1.9 billion total assets. As a result,
accounting policies are particularly important.

Solutions Manual 10.163 Chapter 10

CA 10.1 RE (CONTINUED)

Analysis and Recommendations:

Issue: The units of RE trade on a Canadian Stock exchange. The company may
choose to measure the property and equipment (P&E) assets using the
amortized cost method or the fair value method. The choice of method will affect
net income and possibly the amount of distributable income. Currently the P&E
assets are worth $1.7 billion of the company’s total $1.9 billion assets.
Measure the P&E assets at Measure the P&E assets at fair value.
amortized cost.
- Historically RE accounts - Under IFRS, RE has the option to use
for these assets at fair value under the revaluation model.
amortized cost. The gains and losses would generally
- There has been no flow through OCI unless there is an
change in the business. impairment.
- The amortized cost - However, if these are investment
method is more objective properties, the properties may be valued
and does not incur at fair value with gains and losses
additional costs to flowing through income. Care must be
continually revalue. taken to analyze whether the hotels are
- Revaluation can be investment properties as per IAS 40. If
subjective and difficult to RE operates the hotels to generate
substantiate. This profit, the hotels would not qualify as
translates into additional investment properties.
difficulty with the audit - This accounting policy choice affects net
process. income and possibly distributable
- Any fair value gains or income. Any gains or losses from fair
losses would not be value adjustment are not taxable or
recognized when deductible for the purpose of determining
calculating distributable taxes payable.
income. These gains / - Using fair value is more relevant, since it
losses are neither taxable more appropriately reflects the economic
nor deductible for the value of the properties. In terms of
purpose of determining maintaining capital, it is important that
taxes payable. the entity be properly financed.
- There are additional costs associated
with revaluing the assets each reporting
period and this also introduces volatility
related to the revaluation process. Note
that if the properties are investment
properties, fair values must be reported
whether or not the trust recognizes the
fair values in the accounts.

Solutions Manual 10.164 Chapter 10

INTEGRATED CASES

IC 10.1 ATLANTIC EXPLORATION LIMITED (AEL)

Note that this case is adapted from a CPA Canada case. The solution has been
changed and updated to reflect this adaptation.

Memo to: Alex Green, Audit Partner

From: Audit Manager, CPA
Subject: Financial reporting issues for Atlantic Explorations Limited

Certain financial reporting issues have arisen with our audit of Atlantic
Explorations Limited (AEL). Please find enclosed a summary of these issues and
subsequent recommendations.

Overview
The various stakeholders’ needs, and biases are listed below:
 The group of 10 will want information regarding their investment. Iskra /
Colin will want the statements to positively reflect the business
decisions that have been made in their role as the executive
management team.
 New investors will want to determine if AEL is a good investment,
particularly since AEL is looking to raise $1.5 million. AEL has a bias
towards making the statements look good in order to attract new
financing.
 The bank is interested in AEL’s ability to repay its outstanding loan.
Therefore, there may be a bias towards reflecting AEL’s ability to do
this within the statements.
 The government will want to determine the royalty value on treasure
found and needs fair value information. Note that the higher the fair
value, the higher the royalties. There may be a bias toward valuing the
treasure more conservatively. The government also wants to assess
the viability of AEL when determining whether to provide additional
grants.
 Iskra and Colin will use the statements in order to assess company
performance. Specifically, to determine whether the company is
profitable and has sufficient cash flows.

Solutions Manual 10.165 Chapter 10

IC 10.1 AEL (CONTINUED)

GAAP is likely a constraint since the users want information that is relevant and
representationally faithful. The company needs to decide whether to use ASPE
or IFRS. The analysis provides options under ASPE and IFRS. Differences
between ASPE and IFRS are highlighted.

Case Overview: This is a start-up company (with experienced founders) in need

of capital. The business is capital intensive given the significant costs of
exploration and there is potential for large gains in the future. Therefore, the
financial statements will not have predictive value at this stage. Management
may want to include additional notes that explain the nature of the business and
its stage (e.g., exploration stage for the treasure-hunting part).

Analysis and recommendations

Solutions Manual 10.166 Chapter 10

IC 10.1 AEL (CONTINUED)

Issue: The revenue cycle of the salvage operations for this business is long term.
As a result, management has revenue recognition accounting policy choices
related to the salvage operations.
% Completion method Completed Contract Zero profit method
- There is a continuous - It is difficult to measure the - Under IFRS the company
earnings process that is percentage completed. may use the percentage
made up of multiple - Items may never be found of completion or zero-
significant performance or recovered. profit method.
obligations, including - This method is - If the outcome of the
locating the item, conservative and does not salvage operation is not
determining whether it is reflect the activities as determinable, the
likely to be retrieved, they are being performed, company would
and the retrieval itself. although, it does reflect recognize recoverable
- This treatment reflects the risky nature of the revenues up to costs
when work is performed. business. incurred, which results in
- Revenues are - This option is only allowed zero profits.
recognized earlier, which under ASPE. - Since the last payment is
recognizes profit earlier. not recoverable unless
- Earlier recognition is the items are salvaged,
acceptable, since the this might be the
recovered vessel preferred accounting
remains in the policy.
possession of the - This would have the
company until all impact of recognizing
amounts are paid. There zero profits in the early
is only uncertainty if stages of the contract.
items are not recovered. Therefore, this is more
- The company could use conservative and
historical information to transparent since it
assess the likelihood of reflects the riskiness
recoverability if feasible. associated with salvage
- Collectibility is not an operations.
issue for the first two
payments since both are
paid before the end of
the contract.

Solutions Manual 10.167 Chapter 10

IC 10.1 AEL (CONTINUED)

% Completion method Completed Contract Zero profit method
- An alternative is to consider
the contract to contain two
performance obligations
instead of three. This would
include the salvage operation
and the successful delivery of
the salvaged items with each
having its own transaction
price. The first two payments
cover the salvage operation,
whether successful or not,
and the third payment is
contingent upon delivery of
the salvaged items. The
company could use the %
completion approach for the
recognition of the first two
payments since the work is
already done. The third
payment would be recognized
when the items are recovered.
- This is allowed under both
IFRS and ASPE.
- This is the most significant
part of the operations
currently. Therefore, the
company will want the
statements to reflect this and
the associated profitability.

Recommendation:

It is important to first determine whether ASPE or IFRS will be followed. This will
determine which of the revenue reporting options are acceptable. Given the
information currently available, the zero profit method may be preferable as
discussed above.

Solutions Manual 10.168 Chapter 10

IC 10.1 AEL (CONTINUED)

Issue: The revenue cycle of the treasure hunting operations for this business is
speculative. As a result, management has a revenue recognition accounting
policy choice to make.

Early recognition – when No recognition until sold

found/retrieved
- The company research shows there are - There is currently no contract
significant sunken vessels. for this work with any buyers.
- The company has permits to investigate The performance obligation
area. consists of delivering the items
- Once a discovery is made, based on recovered but the transaction
sampling, the company is able to price may be unclear as it may
measure revenue within a given range. be determined based on the
- There are several interested buyers. value of the artifacts recovered,
Therefore, this would meet the definition either by their historical
of an asset, since future benefits will significance to collectors, or by
accrue through the sale of the items. reference to their material (gold,
- Government will be interested in the silver, etc.).
treasure value to predict royalty - The company does not yet have
payments. a buyer. It is uncertain if there is
- This is allowable under IFRS or ASPE, a buyer or market due to the
although this is the more aggressive unique nature of the treasure.
treatment. - Collectibility is an issue if no
buyer currently exists.
- The company must book the 1%
royalty at the same time.

Recommendation and Reason - either of the above options are acceptable.

Solutions Manual 10.169 Chapter 10

IC 10.1 AEL (CONTINUED)

Issue: The company incurs significant exploration costs. Given the long-term
nature and uncertainty regarding the potential revenue related to the salvage and
treasure hunting operations, the company must decide whether to expense or
capitalize these costs.

Expense Capitalize
- Similar to mining companies, - The company could capitalize these
there is a large level of costs, since the costs are directly
uncertainty related to future incurred to find treasure.
benefits. There are significant - The word treasure by definition has
upfront costs related to these value and is potentially saleable.
activities. - The company has already found some
- There is uncertainty regarding treasure; therefore, costs are
future benefits. Specifically, can recoverable.
the company find, retrieve, and - Management must prove that the
then sell items for more than expenditures meet the definition of an
cost. asset. Specifically, there are future
- It is difficult to determine the benefits and the company can control /
value of treasure and whether access the resources in place. Note that
the company can recover it. management may be able to argue there
Additionally, finding a buyer may are future benefits, since they have
be difficult, given these are buyers. Additionally, management may
unique items and there may not argue that they have control / access,
be any market. since they have permits and expertise
- The company may not be able to from salvage operations.
raise enough funds to bring the - The company will have to ensure that all
treasure to the surface. costs deferred are recoverable.
- Expensing costs may be more - The company may wish to consider
transparent, as it reflects the whether the “Successful Efforts” method
higher risk. The company may typically used for Oil and Gas exploration
want to segregate different types might apply. AEL would initially capitalize
of operations on the statements exploration search costs until the search
so that these costs do not activities for each area are complete. If
eliminate the profit on the the search/treasure hunt activities are
salvage operations. not successful, the costs would be
written off to expense. Alternatively, for
successful efforts, the costs would
remain capitalized as an asset until
salvage operations of the “wreck and its
treasures” occurs and related
amortization begins.

Recommendation and Reason - either of the above options is acceptable.

Solutions Manual 10.170 Chapter 10

IC 10.1 AEL (CONTINUED)

Issue: The company has and expects to continue receiving grants.

 Accrue if management expects to meet the government payout criteria.
 Conversely, the grants can be used to offset wages and exploration
costs by reducing the expense line.

Recommendation – Either option is acceptable.

Solutions Manual 10.171 Chapter 10

IC 10.2 OG LIMITED (OG)

Case Overview
OG Limited is an exploration and development company with several wells in
production. Therefore, the company is very capital intensive. Its shares trade on
the London Stock Exchange (LSE); requiring OG to use IFRS. This is a reporting
constraint. Also, management has stock options; this may create a bias to make
the company appear more profitable. It is the auditor’s role to ensure
transparency.

Analysis and recommendations

Issue: OG recently had a well explode. Capping the well took more than a month
and incurred significant costs.
Capitalize Expense
- OG may argue that the recent - The cost for capping the well does
expenditures make the well safer and not extend the life of well. It just
adds value. restores the well back to the original
estimated life.
- Well capping is an ordinary risk of
conducting business and should be
treated as an ongoing ordinary cost of
doing business.
- The numerous failed attempts at
capping the well do not add economic
value. These are sunk costs.
Recommendation and Reason – It is likely more conservative and prudent to
expense as this is an ordinary risk of doing business.

Issue: An exploded well has resulted in an oil spill that OG has committed to
cleaning up.
Accrue the liability Disclose only
- The cleanup costs are estimated to - Since the cleanup costs are
be between $5 million and $10 million. estimated to range anywhere between
Therefore, the cost is measurable and $5 million and $10 million, the costs
the expected value can be used. are difficult to measure with any
- This is a constructive obligation meaningful accuracy.
since the company announced that it
will take responsibility for the cleanup.
- This provides more transparency.
Recommendation and Reason – OG should accrue the costs, since it appears
that the costs are measurable and likely to be incurred.

Solutions Manual 10.172 Chapter 10

IC 10.2 OG (CONTINUED)

Issue: Even though OG is taking responsibility for the cleanup related to the oil
spill, the farmers have filed a class action lawsuit for $100 million.
Accrue the liability Disclose only
- OG’s lawyers estimate that the - Given that OG is being sued for 10X
lawsuit can be settled at 10% of the value that lawyers estimate for
the value of the entire suit settlement, the actual value of the
brought forward. OG may use obligation is difficult to measure.
this expected value as a
measurement of the obligation.
- A constructive obligation exists,
since OG has accepted
responsibility for the spill and
has agreed to clean it up.
- This provides more
transparency.
Recommendation and Reason - OG should accrue the costs, since it appears
that the costs are measurable and likely to be incurred.

Issue: The company currently capitalizes the costs for searching and finding new
wells, regardless of whether the activities result in a new oil or gas producing well
being discovered.
Capitalize Expense
- Capitalizing the costs is - OG should expense the dry wells,
consistent with the full cost since they do not meet the definition
method where all costs to find of an asset. There is no future
wells – even dry holes – are economic benefit.
necessary to find the productive - This is consistent with the successful
wells. Capitalize all the costs efforts approach, where companies
incurred to get asset ready for initially capitalize exploration costs
use. until the drilling activities for each oil
- These are all direct costs, since field are complete. If the drilling
OG could not find the activities are not successful and no
productive wells without digging proven reserves are found, the costs
and searching. are written off to expense as a “dry
- This approach provides more hole.” Alternatively, for activities that
transparency since it shows the are likely to be commercially
true cost of running the developed, the costs remain
business. capitalized as an asset until
production begins.

Solutions Manual 10.173 Chapter 10

IC 10.2 OG (CONTINUED)

Recommendation and Reason – OG should consider expensing the costs

associated to the dry wells, since this is a better reflection of the ongoing costs of
doing business. However, capitalizing would also be acceptable, provided that
when the company prepares its annual financial statements, it assesses the net
capitalized costs to determine whether it is likely that the costs will be recovered
in the future.

Issue: OG has recently discovered gold when excavating a site. It is now

mining and selling the gold. OG is trying to determine what cost should be
assigned to the gold inventory, either cost or market price.

Record at NRV Record at cost

- Since a market exists for the gold, - It may be difficult to measure the
the fair value is easy to measure. value of the gold when it is still in the
- Mining the gold is a significant ground, since OG does not know how
event. Given that a customer always much gold is there.
exists, revenues are recognized at the - Even after the gold is mined, OG
time of extraction. does not have any identified
- There is industry specific GAAP that customers and has made no gold
allows mining companies to recognize deliveries.
inventories at NRV.
Recommendation and Reason – OG should record the gold at cost, since it is
better to wait until a customer is identified.

Other Considerations:
- Is the well impaired given the identified problems in the case? If so, how
should its value be measured?
- Should an asset retirement obligation (ARO) be recognized given the
company’s assertion that it will make efforts to restore site? Has this
created a constructive obligation?
- If an ARO is recognized, how should it be measured?

Solutions Manual 10.174 Chapter 10

RESEARCH AND ANALYSIS

RA 10.1 Kinaxis INC.

a. Kinaxis is a leading provider of cloud based, supply chain decision making

and planning software as a service (Saas) solution. It can help its
customers solve complex business problems using both human
intelligence and machine (artificial) intelligence, with the support of
community supply chain experts. Kinaxis helps its customers increase
their revenues, lower their costs, and reduce their risks.

b. Kinaxis reports Property and equipment, of USD $30.746 million in 2020,

along with Right-of-use assets (leased) of USD $15.722 million in 2020.
The property and equipment is made up of land, computer equipment,
computer software, office furniture and equipment, and leasehold
improvements. This information is contained in Note 6 to the Financial
Statements. The Right-of-use assets are made up of Offices and Data
centres. This information is contained in Note 7 to the Financial
Statements. It is interesting to note that Kinaxis does not own any
buildings or office space but rather leases all its premises, as categorized
under Offices, as a right-to-use asset. Property and equipment, together
with the right-of-use assets, represents 10.85% of total assets, and
18.93% of total assets if cash is removed. The later might be a more
relevant ratio as many technology companies keep significant amounts of
cash on hand to fund future development that will end up categorized as a
tangible capital asset or an intangible asset. Cash is the most significant
asset as it makes up 42.7% of total assets.

Items are classified as property and equipment because of their

characteristics. Right-of-use assets are leased by the company and
reported on the statement of financial position. These assets should be
considered as part of the total capital asset pool as they contribute to
producing revenue for the business. These assets are all held to be used
by Kinaxis to deliver services to its customers either directly or indirectly.
The assets are long-lived, have physical substance, and provide benefits
over more than one accounting period. Kinaxis recognizes these items on
the statement of financial position when they meet the definition of an
asset, have the characteristics required of property and equipment or
right-of-use items, when it is likely that future economic benefits
associated with the item will flow to the company, and finally, when their
cost can be reliably measured.

Solutions Manual 10.175 Chapter 10

RA 10.1 KINAXIS INC. (CONTINUED)

c. As indicated in the Significant Accounting Policy Note 3 (f), property and
equipment are measured at cost less accumulated depreciation and
accumulated impairment losses. For property and equipment, cost
includes expenditures that are directly attributable to the acquisition of the
asset. For right-of-use assets, cost is based on the initial amount of the
lease liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct costs incurred and an estimate
of costs to dismantle and remove the underlying asset or to restore the
underlying asset or the site on which it is located, less any lease
incentives received.

d. According to the information in Note 6 to the Financial Statements, Kinaxis

paid USD $11.719 million in additions for property and equipment in 2019
and USD $14.779 million in 2020. In Note 7, the company reports
additional right-of-use assets of $2.949 in 2019 and $10.813 in 2020. The
company financed these additions from its excess cash flows from
operating activities.

e. (USD dollars in millions) Percentage

2019 2020 Increase
Sales $191.549 $224.189 17.04%
Fixed asset additions 11.719 14.779 26.11%
Right-of-use asset
additions 2.949 10.813 266.67%
Intangible asset
additions 0 14.250 N/A

The growth in fixed asset, right-of-use assets and intangible asset additions
substantially outpaced the growth in sales. As a company that operates on
the model of software as a service, the more customers the business has,
the more infrastructure (computer hardware and software) is needed to
support a growing and larger customer base. The large acquisition of
intangible assets came from the purchase of two other companies, Prana
Consulting and Rubikloud Technologies. These acquisitions provided the
company with customer relationships and artificial intelligence technology.
The company expects that these two acquisitions will allow it to provide
additional and broader services to its customers and should result in
increased revenues in the future. It makes sense that Kinaxis is investing at a
higher rate in fixed assets if it is anticipating additional growth in its customer
base. As an investor, these acquisitions should be viewed as an investment
in future earnings generation.

Solutions Manual 10.176 Chapter 10

RA 10.2 STORA ENSO OYJ

a. Stora Enso is a renewable materials innovator in the global biomaterials,

paper, packaging, and wood products industry. The company has
biological assets primarily in China, Brazil, and Uruguay and Laos. Its
main markets are in Europe, although it has been growing in Asia and
South America.

b. As per Notes 2 and 12 regarding Forest assets, it is stated that standing

trees are considered biological assets. The company follows IAS 41 to
account for its biological assets. These assets are valued at fair value less
costs to sell. Fair value is determined using discounted cash flows from
continuing operations based on sustainable forest management plans.

Note 2 outlines the valuation method used on the presumption that fair
values can be measured for the biological assets Stora holds. Forest
assets are valued based on using the discounted cash flow model
assuming sustainable continuing operations and estimating for growth for
one growth cycle. Note 12 states the yearly harvest rates are estimated
based on growth rates and multiplied by the actual wood prices. Costs for
harvesting and fertilizer are deducted to determine net annual cash flows.
The biological assets’ fair values are measured as “the present value of
the harvest from one growth cycle based on the productive forestland.”
Note 2 – Critical Accounting Estimates and Judgements, outlines in more
detail the types of estimates required including growth, harvest, selling
prices, and costs.

If Stora was using ASPE instead of IFRS, there would be a difference as

new standards have come into place as of January 1, 2021. The standing
trees would be considered productive biological assets and measured at
cost, including the costs directly attributable to acquiring, developing, or
bettering the asset.

c. The company’s statement of financial position shows biological assets of

EUR 4,250 million in 2020 (EUR 3,627 million in 2019). This includes
biological assets in subsidiaries and joint operations. In Note 12, the
company discloses that it also has an indirect share of biological assets
held by equity-accounted investments of EUR 778 million (EUR 753
million in 2019). Key changes during 2020 were as follows (in millions):

 increase due to currency translation differences EUR 99

 increase due to unrealized changes in fair value EUR 560
 increase due to cost of additions EUR 81
 decrease due to harvesting EUR 128
 increase due to reclassification from PPE EUR 16
Solutions Manual 10.177 Chapter 10
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Solutions Manual 10.178 Chapter 10

RA 10.2 STORA ENSO OYJ (CONTINUED)

d. The consolidated income statement indicates that the company had a net
profit of EUR 617, including the impact of a valuation increase of their
biological assets of EUR 428 million (before income tax) in 2020. The
same occurred in 2019 with a valuation increase in biological assets of
EUR 442 million and net profit of EUR 856.

e. Stora Enso’s “Sustainability Agenda” is referenced on page 6 of the

Sustainability section in its Annual Report. Below is an excerpt from the
report:

“Our Sustainability Agenda encompasses the social, environmental, and

economic responsibility of our operations throughout the value chain. The
agenda is based on the Triple Bottom Line framework widely used in
corporate responsibility work. It addresses the ten sustainability topics
identified as material to Stora Enso and our key stakeholders: Employees
and wider workforce; Community; Business ethics; Materials, water, and
energy; Carbon dioxide; Forests, plantations, and land use; Customers;
Suppliers; and Investors. As respect for human rights is considered so
integral to our long-term success, it constitutes an overarching theme of
our Sustainability Agenda.”

The company’s business model is built upon sustainability. It focuses on

ensuring that all stakeholders are considered in its approach. Customers
who use these products as a part of their day-to-day life, likely do so to
minimize their environmental footprint. Given this, it is extremely important
that sustainability is fully integrated into all operations of the company.
This is important as it contributes to the brand and image of the company.

Stora Enso provides a well formatted chart on page 9 of the sustainability

section in its annual report, a copy of which is provided below. Here a
reader will find a listing of the KPIs that the organization believes support
its sustainability agenda. In order to track progress, the chart lists KPIs,
the target outcomes, and progress over a 3-year period.

Solutions Manual 10.179 Chapter 10

There are 14 KPIs. Five are listed as achieved (35.7% of total), three are
listed as in progress (21.4% of total), and the remaining are not yet
achieved (42.9% of total). While it appears that Stora Enso is making
great progress, there is still a significant amount of work to do to meet
these objectives.

Solutions Manual 10.180 Chapter 10

RA 10.3 BROOKFIELD ASSET MANAGEMENT INC.

a. Brookfield Asset Management Inc. (BAM) describes itself as a global

alternative asset management company. It owns and operates assets around
the world that relate primarily to property, renewable energy, infrastructure,
and private equity.

Note 2 (g) indicates that BAM has the following types of operating tangible
capital assets:
 Investment properties
 Property, plant, and equipment
 Renewable power assets (dams, penstocks, powerhouses,
hydroelectric generating units, wind generating units, solar generating
units, gas-fired cogenerating units, and other assets)
 Infrastructure assets, including utilities, transport, midstream and data
assets (buildings, transmission stations and towers, leasehold
improvements, plant and equipment, network systems, track, district
energy systems, pipelines, and gas storage assets)
o Includes sustainable resources (land use in the production of
standing timber, bridges and roads used in sustainable
resources production)
 Hospitality assets
 Private Equity

b.
Type of asset Accounting model used
Investment properties Fair value

Property, plant, and equipment Revaluation model is used for certain

classes of PP&E
Renewable power assets (dams, penstocks, These are classified as PP&E and
powerhouses, hydroelectric generating units, are accounted for using the
wind generating units, solar generating units, revaluation model. Fair value is
gas-fired cogenerating units, and other assets) determined by using a 20 year
discounted cash flow model.

Solutions Manual 10.181 Chapter 10

RA 10.3 BROOKFIELD ASSET MANAGEMENT INC.

(CONTINUED)
b. Continued

Infrastructure assets, including utilities, transport, Revaluation model

midstream and data assets (buildings, transmission
stations and towers, leasehold improvements, plant and
equipment, network systems, track, district energy
systems, pipelines, and gas storage assets)
Sustainable resources (land used in the production of
standing timber, bridges and roads used in sustainable
resources production) Revaluation model
Hospitality assets Classified as PP&E;
revaluation model
Private Equity Cost model

The statement of operations discloses fair value changes of ($1,423) (all

amounts in millions). Various changes include those related to property, plant,
and equipment measured using the fair value model (detailed in Note 24: Fair
Value Changes):

 Investment properties, a loss $ (269)

 Other fair value changes, a loss (1,052)
 Impairment (808)

The company also records fair value adjustments on its sustainable resources
accounted for using the fair value model. Note 7 shows that the company’s
sustainable resources in timberlands and other agricultural assets had $2 million
in fair value adjustments in 2020.

Solutions Manual 10.182 Chapter 10

RA 10.3 BROOKFIELD ASSET MANAGEMENT INC.

(CONTINUED)
For those measured using the revaluation model: changes in fair value are
included in other comprehensive income (in $ millions). Of the $100,009 reported
as PP&E, $85,805 relates to PP&E carried at FV, while only $14,204 relates to
PP&E carried at amortized cost (Note 12).

 Revaluation of PP&E, a gain $4,786

For those measured using the revaluation model or the cost/amortized cost
model: depreciation expense is recognized as an expense in net income.

 Depreciation expense (amounts from Note 12):

$1,365 + $1,257 + $457 + $1,464 = $4,543

Solutions Manual 10.183 Chapter 10

RA 10.3 BROOKFIELD ASSET MANAGEMENT INC.

(CONTINUED)
c. Continued

To provide some indication about the significance of the effects of the above on
the components of comprehensive income, note the following:

Net income $ 707

Other comprehensive income 2,313
Comprehensive income $3,020

d. Information found in Note 2

Type of asset FV Methods and Assumptions
Investment properties, at One of two approaches: 1) Discounted cash
FV flows; using assumptions for the projected cash
flows from future net operating income, discount
rate, terminal capitalization rate, and investment
horizon, or 2) a direct capitalization approach by
applying a capitalization rate to stabilized net
income.
PP&E, at revalued FVs
Renewable power Discounted cash flows; using assumptions of
future cash flows (including future electricity
prices), and the discount rate by geographical
location.
Infrastructure
Discounted cash flows; assumptions for future
cash flows by estimating future revenues,
operating costs, maintenance and other capital
expenditures. Discount rates are selected for
each asset considering volatility and the
geography of revenue streams.

Hospitality Fair value is determined by using a depreciated

replacement cost method based on the age,
physical condition, and the construction costs of
the assets. Fair values are also reviewed in
reference to each assets’ enterprise value which
is determined using a discounted cash flow
model.
Sustainable resources, The note references that the revaluation method
timberlands, and other is used and included in PPE, but the specific
agricultural assets method of how fair value is determine was not
mentioned.

Solutions Manual 10.184 Chapter 10

RA 10.4 ACQUISITION AND INSTALLATION COSTS

Memo to: Owner-manager
Subject: Accounting for various machinery costs

The $7,500 in costs to get the asset in place and ready for use should be
capitalized as part of the cost of the machine. This is justified because the
primary purpose in accounting for plant asset costs is to allocate the cost the
asset, which includes the cost of getting the asset ready for use, over the period
of time during which the benefits are being received from the use of the asset.
Therefore, both the $40,000 asset cost and the $7,500 installation cost should
be matched against the revenue generated by the use of this asset over its
useful life.

Although it may be true that these installation costs will not be recovered if the
machine were to be sold, this is not relevant since the machine was acquired to
be used, not sold. Assuming the asset has no salvage value at the end of its
useful life and there is approximately equal use of the machine every year for the
next 10 years, the owner could allocate $4,750 (10% of $47,500) against each
year’s operations as depreciation. However, if the owner’s suggestion of
expensing the $7,500 was followed, during the first year that asset is owned the
income statement would reflect $11,500 ($7,500 plus 10% of $40,000) in
expenses related to this asset. The following nine years would only reflect a
depreciation expense of $4,000 per year. This would result in an overstatement
of expenses by $6,750 in year one and an understatement of expenses by $750
per year for the subsequent nine years. This is not a proper matching of revenue
and expenses.

The purpose of accounting for plant assets is not to arrive at an approximation of

the current market value of the asset at the end of each year, but rather to have
the value approximate the future benefits that the asset will provide for the
business.

Solutions Manual 10.185 Chapter 10

RA 10.4 ACQUISITION AND INSTALLATION COSTS

(CONTINUED)
With regard to the tax on these expenses there are two factors that should be
taken into consideration:

1. The $7,500 is not a proper deduction under federal income tax regulations,
since the tax rules are similar to GAAP and require these costs to be included in
the capital cost of the machine. If the $7,500 were incorrectly deducted in the
year of acquisition, and a subsequent correction were made in a later year upon
review of the return, additional tax plus interest and penalties would be incurred.

2. Even if the $7,500 could be deducted in the first year, there would be no total
tax savings over the entire life of the asset, unless the tax rates applicable to the
business were reduced during the following years. There is some value to taking
the $7,500 deduction right now because of the time value of money. If the
taxable income rates increased, there would be an increase in total taxes
payable, due to higher rates applicable during the period when the equivalent
depreciation deductions (capital cost allowance) would be reduced. However,
GAAP is not determined by income tax effects. In many instances, private entity
ASPE requires different accounting treatment for an item than the Income Tax
Act does.

2. Assuming that the $7,500 could be deducted for tax purposes in the first year,
this would not impact the accounting for the machine under GAAP. GAAP is not
determined by income tax effects. In many instances, private entity ASPE
requires different accounting treatment for an item than the Income Tax Act does.
An example of this is depreciation expense; the Income Tax Act requires the use
of capital cost allowance where the method and rate are pre-determined. Under
GAAP, companies can select the depreciation methods and estimate the useful
life and residual values.

Solutions Manual 10.186 Chapter 10

RA 10.5 GOVERNMENT FUNDING

Note: The solution below is valid for companies following either ASPE or IFRS.
The accounting treatment is the same under both standards.

Memo
To: Hotel Resort Limited Board of Directors
Subject: Government Forgivable Loan and Student Costs Grant

There are two types of government assistance that the federal government has
agreed to provide the company. Each type will be discussed separately since the
accounting treatment will be different.

Forgivable Loan – Facilities Construction

There are two alternatives for recording this loan. One option is the cost
reduction approach. The second is the deferral method approach. Both options
assume that the loan will be forgiven.

Option 1
The cost reduction method would record the $50 million against the cost of the
facility construction upon receipt from the federal government. This would result
in a net asset cost of $650 million ($700 million - $50 million), which would then
be depreciated over the useful life of the asset.

This would result in less depreciation being recorded each year, when compared
to an asset constructed with no government funding. This treatment has the
effect of reducing total assets, reducing operating expenses, and increasing net
income over the life of the asset.

Option 2
The deferral method would record the $50 million as deferred revenue on the
statement of financial position. This deferred revenue would be amortized to
income over the life of the asset, thereby also increasing net income over the life
of the asset. The related asset would be recorded at $700 million and
depreciated over its useful life. In this case, the amortization of the deferred
revenue could either be recorded as a reduction of the depreciation expense or
as a separate component of income.

Both methods result in the same amount of net income. The difference between
the methods relates to the presentation on the balance sheet. The related note
disclosure for the cost reduction method would be as follows:

Solutions Manual 10.187 Chapter 10

RA 10.5 GOVERNMENT FUNDING (CONTINUED)

The federal government of Canada has granted financial assistance in the form
of a forgivable loan for the construction of a tourist facility in Yellowknife. A loan
totalling $50 million has been advanced and will be forgiven provided the full
amount is used to construct the facility, the resort is in operation for 15 years,
and the resort is not sold within this time period. The company has recorded the
government assistance as a reduction of the capital cost of the resort facilities.

If the grant is recorded as deferred revenue, the note would read as follows:

The federal government of Canada has granted financial assistance in the form
of a forgivable loan for the construction of a tourist facility in Yellowknife. A loan
totalling $50 million has been advanced and will be forgiven provided the full
amount is used to construct the facility, the resort is in operation for 15 years,
and the resort is not sold within this time period. The company has recorded the
government assistance as deferred revenue and amortizes the amount to income
over the useful life of the related resort asset.

This forgivable loan will be accounted for as government assistance, provided

that the company intends to comply with the terms and conditions for
forgiveness. At each reporting date, the company will have to assess whether or
not these terms can still be met. In the event the terms cannot be met, the
amount will come due and a liability will be required to be set up with a related
expense to income at that time. No further amortization of the deferred revenue
would be recorded if that was the method adopted.

Student Costs Grant

The second type of grant assistance is the funding to cover the operational costs
related to payroll for 50 summer students to work for four months and the related
room and board costs. This funding should be recorded against the related
salaries and accommodation expenses or as income in the income statement at
the time it becomes receivable. As a result, it will increase the net income for
each year.

The related note disclosure would be:

The federal government of Canada has granted financial assistance in the form
of an annual government grant to cover 70% of the payroll and room and board
costs for 50 summer students. The company is required to hire and pay these
students for four months on a full-time basis. During the year, the company
received money, which has been recorded as a reduction of the related payroll
and accommodation costs for these students.

Solutions Manual 10.188 Chapter 10

RA 10.6 CAPITALIZING COSTS FOR SELF-CONSTRUCTED

ASSETS
Note: the solution will be the same regardless if the company is a private entity or
a publicly accountable enterprise.
a. The materials consumed, and direct labour used in the construction of the
equipment should be charged to the equipment account. No gain on self-
constructed assets should be recorded because such an approach would
violate the historical cost principle. Technically, only directly attributable
costs can be capitalized as part of the asset. The controversy centres on
the assignment of indirect costs (overhead), commonly consisting of
power, heat, light, insurance, property taxes on buildings, etc. The
suggested approaches are discussed below.
b. 1. Many argue that only variable overhead costs that increase due to the
construction should be assigned to the cost of the asset, since these can
be shown to be directly attributable to the construction of the asset. This
approach assumes that the company will continue to have the same fixed
costs regardless of whether the company constructs the asset or not. It is
difficult to determine that these fixed costs are directly attributable to the
asset construction itself. An argument could be made that the additional
fixed costs related to the portion of the space solely devoted to the asset
construction are directly attributable to this construction and should be
added to the cost of the asset. This approach assumes that if the assets
were not being constructed, then these additional costs would not be
incurred. Therefore, only the incremental costs between the asset not
being constructed and the asset being constructed should be charged.
2. Proponents of alternative (2) argue that such assets should be given the
same treatment as inventory items and that all costs should be allocated
to the value of the asset, just as if saleable goods were being produced.
They state that no special treatment should be granted in the allocation of
any cost if sufficient facts are available to enable the allocation. They also
argue that allocation of overhead to fixed assets is similar to the allocation
to joint products and by-products and should be made at regular rates. No
item should be capitalized at an amount greater than that prevailing in the
market. Although a portion of fixed costs can be allocated as part of
inventory production, this is not the case with property, plant, and
equipment, where the accounting rules are clear and only directly
attributable costs can be allocated.

Solutions Manual 10.189 Chapter 10

RA 10.6 CAPITALIZING COSTS FOR SELF-CONSTRUCTED

ASSETS (CONTINUED)
c. Since the cost of development is generally higher on the first few units, the
additional cost of $273,000 should be allocated to all four machines. If this
cost is due to inefficiency, abnormal wastage, or excessive cost and not
development cost, the additional cost should be expensed. It is important to
ensure that the total cost allocated does not exceed the fair value in the
marketplace. To the extent that the machines represent the same future
economic benefits, they should have the same cost basis. The additional
cost incurred in producing the first machine is shared across all four
machines.

Solutions Manual 10.190 Chapter 10

LEGAL NOTICE

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.

MMXXI xii F1

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