Chapter 7 Solutions 2241

Chapter 7
Property, Plant, and Equipment, and Intangible Assets
Exercises
(5-10 min.)
E 7-15
Land: $150,000 + $100,000 + $5,000 + $3,000 + $25,000 =

$283,000
Land improvements:
$100,000 + $10,500 + $18,000 = $128,500
Building: $70,000 + $3,750,000 = $3,820,000

(10-15 min.) E 7-16
Allocation of cost to individual machines:
Machine
1
2
3
Totals
Appraised
Percentage of Total
Value
Net Realizable Value
$ 27,000 $27,000 / $108,000
=
45,000
45,000 / 108,000
=
36,000
36,000 / 108,000
=
$108,000
Total
Cost
0.250 $100,000 0.250
0.417 100,000 0.417
0.333 100,000 0.333
1.000
Sale price of machine no. 2.................................................

Cost.......................................................................................
Gain on sale of machine......................................................
Cost of
Each Asset
=
$25,000
=
41,700
=
33,300
$100,000
$45,000
41,700
$ 3,300
(15 min.) E 7-18

Chapter 7
Property, Plant, and Equipment, Natural Resources, and Intangible Assets

Copyright 2010 Pearson Canada Inc.
Journal
ACCOUNT TITLES AND EXPLANATION
1.
a. Land
Cash...
b. Building [$2,250 + $20,000 + $700,000 +
($29,000 9/12)]
Note Payable
Cash [$2,250 + $20,000 + ($29,000 9/12)]
c. Depreciation Expense...
Accumulated Depreciation
($744,000 $60,000) / 25 3/12..
2. BALANCE SHEET
Capital assets:
Land................................................................................
Building...........................................................................
Less Accumulated depreciation...................................
Building, net...................................................................
DEBIT
CREDIT
200,000
200,000
744,000
700,000
44,000
6,840
6,840
$200,000
$744,000
(6,840)
737,160
3. INCOME STATEMENT
Expense:
Depreciation expense....................................................
6,840
(10-15 min.) E 7-22

Journal
DATE
DEBIT
Year
11
Depreciation Expense
Accumulated Depreciation Building
55,833
Year
12
Accumulated Depreciation Building
55,833*
_____
*Computation:
Depreciable cost: $900,000 $100,000 = $800,000

Depreciation through year 10:
CREDIT
55,833
55,833
$800,000 30 = $26,667 10 = $266,670

Assets remaining depreciable carrying amount:
$900,000 $266,670 $75,000 = $558,330
New estimated useful life remaining: 10 years
New annual depreciation: $558,330 10 = $55,833
Chapter 7

(15-20 min.)
E 7-23
Journal
DATE
2012
June
30
30
DEBIT
CREDIT
Depreciation for 6 months:

Depreciation Expense..................................................... 1,800a
Fixtures......................................................................
1,800
Sale of fixtures:
Cash................................................................................. 5,000
Store Fixtures ($6,000 + $1,800)..................................... 7,800
Loss on Sale of Fixtures.................................................
2,200b
Fixtures......................................................................
15,000
_____
a
2011 depreciation: $15,000 2/5 = $6,000
2012 depreciation: ($15,000 $6,000) 2/5 6/12 = $1,800
Loss is computed as follows:

Sale price of old fixtures..............................................................
Carrying amount of old fixtures:
Cost.......................................................................................... $15,000
Less: Accumulated depreciation........................................... (7,800)
Loss on sale..................................................................................
$ 5,000
7,200
$ 2,200
(10-15 min.)
Cost of old truck
E 7-24
$280,000
Less Accumulated depreciation:

($280,000 $40,000)
130 + 180 + 180 + 90

1,000
Carrying amount of old truck

Journal Entry:
(139,200)
_______
$140,800
Cost of tractor-trailer rig

Accumulated depreciation
Loss on derecognition
Chapter 7
139,200
140,800
280,000

Problems
Group A
(20-30 min.)
Req. 1
ITEM
LAND
(a)
$280,000
(b)
8,100
(c)
LAND
IMPROVEMENTS
WAREHOUSE
OFFICE
BUILDING
P 7-50A
FURNITURE
$70,000
$31,600
(d)
1,000
(e)
7,500
(f)
3,400
(g)
$1,500
(h)
24,500
(i)
920,000
(j)
50,200
(k)
9,700
(l)
8,200*
(m)
57,600
(n)
234,300
(o)
3,000
51,000
6,000
(p)
$115,700
(q)
2,300
Totals
$296,600
$103,800
$1,241,000
$126,200
Computations:
(a)
Land:
$320,000 / $400,000 $350,000 = $280,000
Office building:
$80,000 / $400,000 $350,000 = $70,000
(n)
Land improvements:$60,000 0.05 = $3,000
Warehouse:
$60,000 0.85 = $51,000
Office building:
$60,000 0.10 = $6,000
_____
*Some accountants would debit this cost to the Land account.
$118,000
(continued) P 7-50A
Req. 2
Journal
DATE
DEBIT
CREDIT
2011
Dec.
31 Depreciation Expense Land

Improvements ($103,800 / 20 4/12)...........................
1,730
Land Improvements..................................................
1,730
31 Depreciation Expense Warehouse

($1,241,000 / 40 4/12)..................................................
10,342
Warehouse.................................................................
10,342
31 Depreciation Expense Office

Building ($126,200 / 40 4/12).....................................
1,052
Office Building...........................................................
1,052
31 Depreciation Expense
Furniture ($118,000 / 8 4/12)........................................
4,917
Furniture........................................................................
4,917
_____
*$1,593 ($95,600 / 20 4/12) if $8,200 (l in Req. 1) is debited
to Land.
Req. 3
This problem shows how to determine the cost of property, plant, and equipment. It also
demonstrates the computation of depreciation for property plant and equipment. Because
virtually all businesses use property, plant, and equipment, a manager needs to understand
how those assets costs and depreciation amounts are determined. Depreciation affects net
income. Managers need to understand the meaning, components, and computation of net
Chapter 7

income because often their performance is measured by how much net income the business
earns. This problem covers all these concepts with specific examples.
(15 min.)
P7-51A
Req. 1
Journal
Equipment............................................................
Cash..................................................................
DEBIT
100,000
CREDIT
100,000
Depreciation Expense Buildings.

Accumulated Depreciation Buildings
($400,000 $50,000) / 20 = $17,500
17,500
Depreciation Expense Security Equipment

Accumulated Depreciation Equipment.....
[($600,000 $260,000) 2/10] + ($100,000
2/10 6/12) = $78,000
78,000
17,500
78,000
Req. 2
BALANCE SHEET
Capital assets:
Land...................................................................................
Buildings...........................................................................
Less: Accumulated Depreciation ($87,500 + $17,500)..
Equipment ($600,000 + $100,000)...
Less: Accumulated Depreciation ($260,000 + $78,000)
$ 150,000
400,000
(105,000)
700,000
(338,000)
Total Capital Assets, net
$807,000
Chapter 7

(25-35 min.)
P 7-52A
Journal
DATE
DEBIT
CREDIT
2011
Jan.
Cash
70,000
Accumulated Amortization
Motor Carrier Equipment (old)............................
67,000
Motor Carrier Equipment (old)..................................
130,000
Gain on sale of Motor carrier

equipment................................................................
Jan.
Motor Carrier Equipment (new)
176,000
Cash
July
7,000
176,000
Depreciation Expense Building

[($650,000 $250,000) / 40 6/12]
5,000
Building................................................................
3
5,000
Cash ..............................................................................
100,000
Note Receivable..............................................................
400,000
Building ($145,000 + 5,000).................................
150,000
Building......................................................................
Oct.
29
Land [$150,000/($150,000 + $300,000)

$420,000]....................................................................
Building [$300,000/($150,000 +
$300,000) $420,000]................................................
Cash
650,000
140,000
280,000
420,000
(continued) P 7-52A
Journal
DATE
DEBIT
CREDIT
2011
Dec.
31
Motor Carrier Equipment
($176,000 1/6 2).........................................................
58,667
Motor Carrier Equipment.....................................
Dec.
31
58,667
Building [$280,000 (10% $280,000)]/40
2/12)
1,050
Buildings...............................................................
Chapter 7

1,050
11
11
(30-40 min.) P 7-54A
Req. 1
B.W. Soffer Inc.
Straight-Line Depreciation Schedule
Depreciation for the Year
1
DATE
03-01-2011
ASSET
COST
Depreciation Depreciable Depreciation ACCUMULATED

ASSET
RATE
COS EXPENSE DEPRECIATION CARRYING
T
=
AMOUNT
$240,000
$240,000
31-12-2011
1/5
$220,000
$44,000
$ 44,000
196,000
31-12-2012
1/5
220,000
44,000
88,000
152,000
31-12-2013
1/5
220,000
44,000
132,000
108,000
31-12-2014
1/5
220,000
44,000
176,000
64,000
31-12-2015
1/5
220,000
44,000
220,000
20,000
Asset cost: $224,000 + $6,200 + $6,700 + $3,100 = $240,000

Depreciation for the year: ($240,000 $20,000) / 5 years = $44,000
B.W. Soffer Inc.

Units-of-Production Depreciation Schedule
1
DATE
03-01-2011
ASSET
COST
DEPRECIATIO NUMBER OF DEPRECIATION ACCUMULATE

N
EXPENSE
D
DOCUMENT
PER
DEPRECIATIO
S
=
DOCUMENT
N
$240,000
ASSET CARR
AMOUNT
$240,000
31-12-2011
$1.10
50,000
$55,000
$ 55,000
185,000
31-12-2012
1.10
45,000
49,500
104,500
135,500
31-12-2013
1.10
40,000
44,000
148,500
91,500
31-12-2014
1.10
35,000
38,500
187,000
53,000
31-12-2015
1.10
30,000
33,000
220,000
20,000
Total books
200,000
Depreciation per document: ($224,000 + $6,200 + $6,700 + $3,100 $20,000) / 200,000

units = $1.10
Chapter 7

13
13
(continued) P 7-54A
Req. 1
B.W. Soffer Inc.
Double-Diminishing-Balance Depreciation Schedule
1
DATE
03-01-2011
ASSET
COST
DEPRECIABLE DEPRECIATIO ACCUMUL ASSET

DDB RATE
COST
N
ATED
CARRYING
=
EXPENSE DEPRECIA AMOUNT
TION
$240,000
$240,000
31-12-2011
0.40
$240,000
$96,000
$ 96,000
144,000
31-12-2012
0.40
144,000
57,600
153,600
86,400
31-12-2013
0.40
86,400
34,560
188,160
51,840
31-12-2014
0.40
51,840
20,736
208,896
31,104
31,104
11,104
220,000
20,000
31-12-2015
DDB rate = (1/5 years 2) = 2/5 = 0.4

Req. 2
The depreciation method that maximizes reported income in the first year of the
computers life is the straight-line method, which produces the lowest depreciation for that
year ($44,000). The straight-line method allocates the cost of the asset evenly over its
estimated useful life.
The units-of-production method would allocate the cost of the asset to each of the
documents produced. This method would match expense to the actual use of the asset.
The double-diminishing balance method would allocate most of the cost of the asset to
the beginning of its useful life when the computer would be at its most useful and
competitive stage. If the estimated life is less than anticipated due to a more efficient
computer being developed, this would be the most appropriate depreciation method. This
method would minimize income as it produces the highest depreciation for the year
($96,000).
For tax purposes, however, the maximum capital cost allowance allowed by CRA is 30%, so the company
could claim only $72,000 ($240,000 30%).
Chapter 7

15
15
Problems Group B
(20-25 min.) P 7-58B
Req. 1
ITEM
(a)
LAND
LAND
IMPROVEMENTS
$135,000
$26,000
(c)
25,000
$21,300
3,550
(g)
$ 45,000
(h)
200
(i)
EQUIPMENT
1,200
(e)
(f)
WAREHOUSE
$45,000
(b)
(d)
GARAGE/
SHOWROOMS
3,700
(j)
322,000
(k)
3,300
(l)
5,350*
(m)
49,500
2,200
234,000
(n)
8,900
(o)
17,450
(p)
3,300
(q)
$ 8,000
(r)
80,000
Totals
$143,450
$86,000
$654,000
$68,500
Computations:
(a)
Land:
$150,000 / $200,000 $180,000 = $135,000
Warehouse:
$50,000 / $200,000 $180,000 = $45,000
(k)
Land improvements: $55,000 0.06 = $ 3,300
Garage/showroom:
$55,000 0.90 = $49,500
Warehouse:
$55,000 0.04 = $ 2,200
_____
*Some might decide to debit this cost to the Land account.
$88,000
(continued) P 7-58B
Req. 2
Journal
DATE
Dec.
31
DEBIT
CREDIT
Depreciation Expense Land

Improvements ($86,000 / 10 9/12).................................
6,450*
Land Improvements....................................................
31
6,450
Depreciation Expense Garage/

Showroom ($654,000 / 40 9/12)
12,263
Garage
Showroom...........................................................................
31
12,263
Depreciation Expense Warehouse

($68,500 / 40 9/12)...........................................................
1,284
Warehouse...................................................................
31
1,284
Equipment ($88,000 / 8 9/12).....................................
8,250
Equipment...................................................................
8,250
_____
*$6,049 ($80,650 / 10 9/12) if $5,350 (l in Req. 1) is debited to Land.
Chapter 7

17
17
(continued) P 7-58B
Req. 3
The issues in this problem were as follows:
Allocating costs to the appropriate asset
Determining the total cost of each asset
Calculating the depreciation for each asset based on corporate policy
Ensuring that depreciation expensed reflects the partial year the asset was in use.
It is important to value assets appropriately in order to report the correct value of assets
on the Balance Sheet. The rate of depreciation will affect net income, which is the measure
of corporate performance. It is also important to classify these costs as assets in order to
ensure assets are not understated and income understated. This decision would affect
assets and income over the 40 (buildings) 10 (land improvements) and 8 (equipment) years
of amortization.
(15 min.)
P 7-59B
DEBIT
80,000
CREDIT
Req. 1
Journal
Security Equipment................................................................................
Cash...................................................................................................
Depreciation Expense Buildings.......................................................
Accumulated Depreciation Buildings.........................................
($310,000 $70,000) / 20 = $12,000
12,000
Depreciation Expense Security Equipment

Accumulated Depreciation Security Equipment........................
[($620,000 $370,000) 2/8] + ($80,000
2/8 3/12) = $67,500
67,500
Req. 2
BALANCE SHEET
Property plant and equipment:
80,000
12,000
67,500
Land...................................................................................................................
Buildings...........................................................................................................
Less: Accumulated Depreciation ($40,000 + $12,000)...................................
Equipment ($620,000 + $80,000)......................................................................
Less: Accumulated Depreciation ($370,000 + $67,500)
$200,000
310,000
(52,000)
700,000
(437,500)
Total Capital assets, net
$720,500
Chapter 7

19
19
(25-25 min.) P 7-60B

Journal
DATE
DEBIT
CREDIT
2011
Jan.
Communication Equipment (new).................................
118,000
Cash
Cash
Communication Equipment (old)
June
118,000
18,000
85,000
Communication Equipment (old)............................
96,000
Gain on sale of Communication

equipment (old)..................................................
7,000
30 Depreciation Expense Building

[($495,000 $95,000) / 40 6/12].............................
5,000
Accumulated Amortization
Building.....................................................................
June
30
Cash
5,000
50,000
Note Receivable..............................................................
250,000
Building ($255,000 + $5,000)..............................
Nov.
260,000
Building.....................................................................
495,000
Gain on Sale of Building..........................................
65,000
Communication Equipment
($75,000 / $100,000 $80,000)...
Televideo Equipment
($25,000 / $100,000 $80,000)............................
Cash..........................................................................
60,000
20,000
80,000
(continued) P 7-60B
Journal
DATE
Dec.
DEBIT
CREDIT
($118,000 2/5)..............................................................
47,200
Communication Equipment.............................
47,200
($60,000 2/5 2/12)
4,000
Televideo Equipment
($20,000 2/5 2/12)..............................................
2/12)
1,333
Communication Equipment...................................
4,000
Televideo Equipment.............................................
Chapter 7

1,333
21
21
(20-25 min.)
P 7-63B
Req. 1
(Thousands)
$5,941
(3,810)
$2,131
Cost of premises and equipment......................................

Less: Accumulated depreciation.......................................
Carry amount of premises and equipment
Req. 2
Evidences of premises and equipment:
1. Premises and equipment increased on the balance sheet.
2. Goodwill increased on the balance sheet.
3. Statement of cash flows reports Acquisitions of premises and equipment.
4. Statement of cash flows reports cash used in acquisitions, which would suggest
increase in goodwill.
Req. 3
Premises and Equipment
11/01/10 Bal.
Purchased
during
2011
10/31/11 Bal.
5,246
Sold
during
7472011
5,941
Accum. depn.
of assets
sold during
52* 2011
52*
10/31/11 Bal.
Depn. during
2011
03/31/11 Bal.
3,428
434
3,810
_____
*Determined by deduction.
Carrying amount of disposed assets was 0 (cost 52 thousand less accumulated
depreciation of 52 thousand)
Req. 4
CCs accounting policies state that goodwill is evaluated annually for impairment. If there
is no reduction in the goodwill value, no amortization is charged to income.

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Chapter 7

Property, Plant, and Equipment, and Intangible Assets

Land: $150,000 + $100,000 + $5,000 + $3,000 + $25,000 =

$100,000 + $10,500 + $18,000 = $128,500

Building: $70,000 + $3,750,000 = $3,820,000

Sale price of machine no. 2.................................................

(15 min.) E 7-18

Property, Plant, and Equipment, Natural Resources, and Intangible Assets

(10-15 min.) E 7-22

ACCOUNT TITLES AND EXPLANATION

Depreciable cost: $900,000 $100,000 = $800,000

$800,000 30 = $26,667 10 = $266,670

Property, Plant, and Equipment, Natural Resources, and Intangible Assets

ACCOUNT TITLES AND EXPLANATION

Depreciation for 6 months:

Loss is computed as follows:

Cost of old truck

Less Accumulated depreciation:

130 + 180 + 180 + 90

Carrying amount of old truck

Cost of tractor-trailer rig

Property, Plant, and Equipment, Natural Resources, and Intangible Assets

ACCOUNT TITLES AND EXPLANATION

31 Depreciation Expense Land

31 Depreciation Expense Warehouse

31 Depreciation Expense Office

Property, Plant, and Equipment, Natural Resources, and Intangible Assets

Depreciation Expense Buildings.

Depreciation Expense Security Equipment

Total Capital Assets, net

Property, Plant, and Equipment, Natural Resources, and Intangible Assets

ACCOUNT TITLES AND EXPLANATION

Motor Carrier Equipment (old)..................................

Gain on sale of Motor carrier

Motor Carrier Equipment (new)

Depreciation Expense Building

Land [$150,000/($150,000 + $300,000)

ACCOUNT TITLES AND EXPLANATION

Property, Plant, and Equipment, Natural Resources, and Intangible Assets

(30-40 min.) P 7-54A

Depreciation Depreciable Depreciation ACCUMULATED

Asset cost: $224,000 + $6,200 + $6,700 + $3,100 = $240,000

B.W. Soffer Inc.

DEPRECIATIO NUMBER OF DEPRECIATION ACCUMULATE

Depreciation per document: ($224,000 + $6,200 + $6,700 + $3,100 $20,000) / 200,000

Property, Plant, and Equipment, Natural Resources, and Intangible Assets

DEPRECIABLE DEPRECIATIO ACCUMUL ASSET

DDB rate = (1/5 years 2) = 2/5 = 0.4

Property, Plant, and Equipment, Natural Resources, and Intangible Assets

ACCOUNT TITLES AND EXPLANATION

Depreciation Expense Land

Depreciation Expense Garage/

Depreciation Expense Warehouse

Property, Plant, and Equipment, Natural Resources, and Intangible Assets

Allocating costs to the appropriate asset

Determining the total cost of each asset

Calculating the depreciation for each asset based on corporate policy

Depreciation Expense Security Equipment

Total Capital assets, net

Property, Plant, and Equipment, Natural Resources, and Intangible Assets

(25-25 min.) P 7-60B

ACCOUNT TITLES AND EXPLANATION

Communication Equipment (new).................................

Communication Equipment (old)............................