Chapter 10 - Property, Plant, Equipment : Accounting Model Basics PDF

Preview

Summary

CHAPTER 10PROPERTY, PLANT, AND EQUIPMENT:ACCOUNTING MODEL BASICSASSIGNMENT CLASSIFICATION TABLETopicsBrief Exercises Exercises ProblemsWriting Assignment Definition and recognition of PP&E 1, 2 1, 5, 7 1, 3, 6 Measurement of PP&E assets at acquisition. 3, 4, 19, 23, 24, 252, 3, 4, 5,...

Description

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

CHAPTER 10

PROPERTY, PLANT, AND EQUIPMENT: ACCOUNTING MODEL BASICS

ASSIGNMENT CLASSIFICATION TABLE Topics

Brief Exercises

Exercises

Problems

Writing Assignment

1.

Definition and recognition of PP&E

1, 2

1, 5, 7

1, 3, 6

2.

Measurement of PP&E assets at acquisition.

3, 4, 19, 23, 24, 25

2, 3, 4, 5, 6, 7, 8, 9, 10, 30, 31, 32

3, 5

1,5

3.

Determining asset cost under special situations.

5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16

2, 3, 4, 5, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21

1, 2, 4, 5, 6, 7, 8, 9

1,2,3,4,5

4.

Costs included in 3, 4, 17 specific types of PP&E.

6, 7, 8, 9, 10, 22

4, 7

1,2,

5.

The cost model, revaluation model using asset reduction method

19, 20

23, 24, 25, 26

10, 11, 12, 13

6

6.

The fair value model.

20

23, 24

12

7.

Costs subsequent to acquisition.

21, 22

27, 28, 29

13

8.

Differences between ASPE and IFRS.

3, 4, 9, 17, 20, 22, 25

3, 4, 5, 10, 11, 14, 22

1, 6, 14

1, 6

Solutions Manual 10-1 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

ASSIGNMENT CLASSIFICATION TABLE (CONTINUED) Topics

Brief Exercises

Exercises

Problems

Writing Assignment 2

9. *

Capitalized borrowing costs for qualifying assets.*

23, 24, 25

5, 30, 31, 32

14, 15

10.

Revaluation model using proportionate method.*

18, 19, 20

25, 26

11

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

Solutions Manual 10-2 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Item

Description

E10-1

Cost elements and asset componentization. Purchase and self-constructed cost of assets with government grants. Entries for asset acquisition, including self-construction. Treatment of various costs. Asset acquisition Acquisition costs of equipment. Acquisition costs of realty and directly attributable costs. Acquisition costs of realty. Acquisition costs of realty. Natural Resource - Oil

E10-2 E10-3 E10-4 E10-5 E10-6 E10-7 E10-8 E10-9 E10-10 E10-11 E10-12 E10-13 E10-14 E10-15 E10-16 E10-17 E10-18 E10-19 E10-20 E10-21 E10-22 E10-23 E10-24 *E10-25 *E10-26 E10-27 E10-28 E10-29 *E10-30

Acquisition cost of truck. Correction of improper cost entries. Entries for equipment acquisitions. Entries for acquisition of assets. Purchase of equipment with noninterestbearing debt. Purchase of equipment with noninterestbearing debt Monetary exchange with boot. Non-monetary exchange with boot. Non-monetary exchange with boot. Non-monetary exchanges Government assistance. Biological assets. Measurement after acquisition – the fair value model versus the cost model. Measurement after acquisition – the fair value model. Measurement after acquisition – the revaluation model. Measurement after acquisition – the revaluation model. Analysis of subsequent expenditures Analysis of subsequent expenditures. Analysis of subsequent expenditures. Capitalization of borrowing costs.

Level of Difficulty

Time (minutes)

Simple

10-15

Moderate

20-25

Simple

15-20

Moderate Moderate Moderate Moderate

30-40 25-35 10-15 10-15

Moderate Simple Simple

15-20 10-15 10-15

Simple Moderate Simple Simple Moderate

10-15 15-25 15-20 20-25 15-20

Moderate

15-20

Moderate Moderate Moderate Simple Simple Moderate Moderate

15-20 20-25 15-20 10-15 10-15 15-20 15-20

Moderate

15-20

Moderate

15-20

Simple

15-20

Moderate Simple Simple Moderate

20-25 15-20 10-15 20-25

Solutions Manual 10-3 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item

Description

*E10-31 *E10-32 P10-1

Capitalization of borrowing costs. Capitalization of borrowing costs. Purchases by deferred payment, lumpsum, and non-monetary exchange. Classification of acquisition and other asset costs. Classification of acquisition costs. Classification of land and building costs. Classification of costs and interest capitalization. Acquisition costs and costs subsequent to acquisition Monetary and non-monetary exchanges with boot. Non-monetary exchanges with boot. Measurement after acquisition – the revaluation model. Revaluation model – asset adjustment and proportionate methods. Fair value model and cost model. Analysis of subsequent expenditures. Acquisition cost, capitalization of interest. Capitalization of interest, disclosures.

P10-2 P10-3 P10-4 P10-5 P10-6 P10-7 P10-8 P10-9 *P10-10 P10-11 P10-12 *P10-13 *P10-14

Level of Difficulty

Time (minutes)

Moderate Moderate Moderate

20-25 20-25 35-45

Moderate

35-40

Moderate Moderate Moderate

40-55 35-45 30-35

Moderate

30-40

Moderate

35-45

Moderate Moderate

30-40 30-40

Complex

35-45

Moderate Moderate Moderate Moderate

20-25 20-25 25-35 20-30

Solutions Manual 10-4 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 10-1 (a) 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. (b) The proposed expansion will affect the balance sheet, 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 10-5 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 10-1 (CONTINUED) (c) 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.

Solutions Manual 10-6 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 10-2 (a) Accounting standards require that the following two recognition criteria be satisfied when recognizing an item of PP&E: (1) it is probable that the item’s associated future economic benefits will flow to the entity, and (2) its cost can be measured reliably. Playtime’s new piece of equipment will be used to produce a new toy which is expected to be very popular and generate sales and cash flows, therefore criteria (1) is satisfied. The cost of the equipment will be reliably measurable (based on purchase price), therefore criteria (2) is satisfied. The new piece of equipment satisfies both recognition criteria, and should be recognized and capitalized as an item of PP&E. (b) Under IFRS, the parts of PP&E with relatively significant costs are capitalized and depreciated separately. Considering that each significant part is separable and may be replaced, the injection unit, clamping unit, and electrical equipment should each be capitalized as asset components and depreciated separately. Assuming that the cost of each part in the group of other parts is not relatively significant, the group of other parts should be capitalized and depreciated as one component. (c) Under ASPE, the costs of significant separable components are allocated to those parts when practical, but in practice, this has not been done to the same extent as required under IFRS. For example, under ASPE, Playtime may record the purchase of the equipment without asset componentization, in which case, the total cost of the equipment would be recorded in the Equipment account as one asset, and depreciation would be calculated based on the useful life of the entire piece of equipment.

Solutions Manual 10-7 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

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.

Solutions Manual 10-8 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

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 used as management intended, even if it has not begun to be used. ASPE Direct labour $79,000 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, capitalization of construction costs stops when the asset is substantially complete and ready for productive use, as predetermined by management. It is likely that the amount of variable overhead costs allocated based on direct labour hours would also be increased. 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.

Solutions Manual 10-9 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 10-5 (a) Purchase: Equipment......................................................................... 40,000 Accounts Payable....................................................

40,000

Payment: Accounts Payable............................................................. 40,000 Equipment................................................................ Cash..........................................................................

800 39,200

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

40,000

Payment: Accounts Payable............................................................. 40,000 Cash.......................................................................... Finance Expense.............................................................. 800 Equipment................................................................

40,000 800

(c) Management should strongly encourage the adoption of a policy or procedure that would require recoding purchases of PPE at the net amount, at date of purchase on account. This would avoid the error of misclassifying the discount forfeited to the asset account instead of Finance Expense as properly shown above. The following illustrates the entries when the payment is made within the discount period: Purchase: Equipment......................................................................... 39,200 Accounts Payable....................................................

39,200

Payment: Accounts Payable............................................................. 39,200 Cash..........................................................................

39,200

Solutions Manual 10-10 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 10-5 (CONTINUED) (c) (continued) The following illustrates the entries when the payment is not made within the discount period: Purchase: Equipment......................................................................... 39,200 Accounts Payable....................................................

39,200

Payment: Accounts Payable............................................................. 39,200 Finance Expense .............................................. 800 Cash..........................................................................

40,000

BRIEF EXERCISE 10-6 Trucks................................................................................ 58,802 Notes Payable.......................................................... Using tables: Present value of the single payment $80,000 X .73503

58,802

$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) The variables are as given for the financial calculator above, nper is n and rate is i. BRIEF EXERCISE 10-7 Solutions Manual 10-11 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

Trucks ............................................................................... 80,000 Notes Payable..........................................................

80,000

BRIEF EXERCISE 10-8

Land Building Equipment

Fair Value $ 95,000 250,000 110,000 $455,000

% of Total 95/455 250/455 110/455

Cost $406,000 $406,000 $406,000

Recorded Amount $ 84,769 223,077 98,154 $406,000

BRIEF EXERCISE 10-9 (a) Land .................................................................................. 85,000 Common Shares......................................................

85,000

Under IFRS, the fair value of the asset acquired should be used to measure its acquisition cost, unless that fair value cannot be estimated reliably. (b) Land ................................................................................... 85,000 Common Shares......................................................

85,000

Under ASPE, the more reliable of the fair value of the asset received or the equity instruments given up should be used to measure the acquisition cost of the asset. In this example, the common shares are so thinly traded (infrequent trading) that the estimated fair value of the land is more reliable, and the land would be recorded at $85,000. Solutions Manual 10-12 Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Chapter 10

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 10-10 Trucks (new)...................................................................... 2,600 Accumulated Depreciation - Trucks................................ 20,700 Trucks (old).............................................................. 23,000 Cash.......................................................................... 300* *The transaction is non-monetary because the amount of cash is not significant and it lacks comm...