ch08 SM Carlon 5e

Solutions Manual
to accompany
Financial
Accounting:
Recording, Analysis
and Decision Making
Fifth Edition
Prepared by
Ngaire Kirk
John Wiley & Sons Australia, Ltd 2016

Chapter 8: Reporting and analysing non-current assets
CHAPTER 8 – REPORTING AND ANALYSING NON-CURRENT ASSETS
ASSIGNMENT CLASSIFICATION TABLE
Brief
Learning Objectives Exercises Exercises Problems
1. Explain the business context of non- 6
current assets and the need for decision
making for non-current assets
2. Describe how the cost principle applies to 1 1 1A, 2A, 1B,

property, plant and equipment assets. 2B
3. Explain the concept of depreciation.
4. Calculate depreciation using various 2, 3 2, 3, 4, 7, 10 2A, 4A, 6A,

methods and contrast the expense 7A, 8A, 2B,
patterns of the methods. 4B, 6B, 7B,
8B
5. Account for subsequent expenditures. 4
6. Account for asset impairments. 5 5A, 5B
7 Account for the revaluation of property, 6, 7 4A, 6A, 4B,

plant and 6B
equipment assets.
8 Account for the disposal of property, plant 4 6, 8 2A, 3A, 4A,

and equipment assets. 2B, 3B, 4B
9. Describe the use of an asset register.
10. Identify the basic issues related to 5 9, 10, 11 9A, 9B

reporting intangible assets.
11. Describe the common types of intangible 10

assets.
12. Explain the nature and measurement of

agricultural
assets.
13. Account for the acquisition and depletion

of natural
resources.
14. Indicate how non-current assets are 6, 7 10, 12 2A, 10A,

reported in the 2B, 10B
statement of financial position, and explain
the methods
of evaluating the use of non-current
assets.
© John Wiley and Sons Australia Ltd, 2016 8.1

Solutions manual to accompany Financial Accounting: Recording, Analysis and Decision Making 5e
CHAPTER 8 – REPORTING AND ANALYSING NON-CURRENT ASSETS
ANSWERS TO QUESTIONS
1. Review the chapter for the kinds of questions decision makers require for non-current
assets including what non-current assets does the entity need to sustain or expand
its future operations and profitability? How much of the entity’s resources should be
tied up in non-current assets? Should an entity buy or rent?
2. For PPE assets, the cost principle states that PPE assets are recorded at cost, which
consists of all expenditure necessary to acquire the asset and make it ready for its
intended use.
3. GST only impacts on accounting for the purchase and sale of non-current assets.
4. The primary advantages of leasing are:

(a) reduced risk of obsolescence
(b) nil or low down payment
(c) shared tax advantages
(d) reduced recorded assets and liabilities.
5. The effects of the three methods on annual depreciation expense are:

(a) Straight-line – constant amount
(b) Diminishing-balance – decreasing amount
(c) Units-of-production – varying amount.
6. Capital expenditures are additions and improvements incurred to increase the

operating efficiency, productive capacity or the expected useful life of the asset.
These expenditures are usually material in amount, incur infrequently and are
recorded as debits to the PPE asset affected, whereas expenses are expenditures
for the ordinary repairs made to maintain the operating efficiency and expected
productive life of the asset. These expenditures usually occur frequently and are
recorded as a debit to the Repairs and Maintenance Expense account as incurred
and are an expense in the income statement.
7. In a sale of PPE assets, the carrying (book) value of the asset is compared to the
proceeds received from the sale. If the proceeds of the sale exceed the carrying
value of the PPE asset, a gain on disposal occurs. If the proceeds of the sale are
less than the carrying value of the PPE asset sold, a loss on disposal occurs.

8. Depreciation, amortisation and depletion are all concerned with writing off the cost of
an asset to expense over the periods benefited. Depreciation refers to allocating the
cost of a PPE asset to expense over its useful life in a rational and systematic
manner. Amortisation is the allocating of the cost of an intangible asset to expense.
Depletion is the allocating of the capitalised preproduction costs of natural resources
to inventory to reflect the units removed. The depleted amounts are recognised as
expenses as part of Cost of Sales, when the natural resource inventory is sold.
9. The favourable attributes which could result in goodwill include exceptional

management, desirable location, good customer relations, skilled employees, high
quality products, fair pricing policies and harmonious relations with trade unions.
10. After initial recognition of cost, each class of non-current asset may be measured on
the cost or fair value basis. Any revaluations of non-current assets must be carried
out by class of asset. For intangibles to be revalued there must be an active market.
increases and decreases within the same class must not be offset against one
another. Any initial revaluation to a value above the up-to-date carrying amount is
referred to as a revaluation increase and is credited directly to equity to an account
entitled Revaluation Surplus. Any initial revaluation to a value below the up-to-date
carrying amount is a revaluation decrease. A revaluation decrease is treated as an
expense in the income statement. If in a subsequent period the initial revaluations
reverse, the revaluation increase (decrease) for an asset it should be offset against
the previous revaluation decrease (increase) of that asset, to the extent of the
amount of the previous revaluations. For reversals against the Revaluation Surplus
there must be balances available for that asset in the reserve.
The steps to record the revaluation are:
(a) Record the depreciation (if it is a depreciable asset) to date of revaluation
(b) Transfer the balance of the contra account, Accumulated Depreciation, to the
asset account to give the assets carrying value
(c) Record the revaluation.
11. Agricultural assets are living animals and plants (biological assets) that are a result of
agricultural activity. Agricultural assets include forests, livestock, crops, fruit bearing
trees and produce of aquaculturalists. Once the assets are mature and no longer
‘living’ – the tree is felled, the crops harvested, sheep shorn or animals are
slaughtered – the assets fall within the scope of IAS 102 Inventories and are
measured according to that standard.
12. By selecting a higher estimated useful life, Jonty Ltd is spreading the PPE asset’s
cost over a longer period of time. The depreciation expense reported in each period
is lower and profit is higher. Amber Ltd’s choice of a shorter estimated useful life will
result in higher depreciation expense reported in each period and lower profit.
Therefore, Jonty Ltd may appear to be a better performer.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 8.1

Knight Ltd
The GST exclusive amount of all of the expenditure except for fencing should be included in
the cost of the land. Therefore the cost of the land is:
(a) $214,600*
(b) $195,091 (214,600/1.1)**
(c) $186,609 (214,600/1.15)**
* $180,000 + $10,000 + $9,500 + $8,100 + $7,000.
** To calculate the GST exclusive amount divide the GST inclusive amount by (1+GST rate).
BRIEF EXERCISE 8.2

Brianna Ltd
Purchase: GST Exclusive amount is $96,600

Depreciable amount is $92,600 ($96,600 - $4,000).
With a 5 year useful life, annual depreciation is $18,520 ($92,600 ÷ 5).
Under the straight-line method, depreciation is the same each year. Thus, depreciation is
$18,520 for both the first and second years.
BRIEF EXERCISE 8.3

Brianna Ltd
The declining-balance rate is 30% (1/5 x 1.5) and this rate is applied to book value at the
beginning of the year. The calculations are:
Carrying Amount x Rate = Depreciation

Year 1 $96,600 30% $28,980
Year 2 ($96,600 - $28,980) 30% $20,286

BRIEF EXERCISE 8.4

James Ltd
(a) Accumulated Depreciation – Delivery Equipment $59,000

Delivery Equipment $59,000
(b) Accumulated Depreciation – Delivery Equipment $56,000

Loss on Disposal $3,000
Delivery Equipment $59,000
$59,000
Cost of delivery equipment

Less accumulated depreciation 56,000
Carrying value at date of disposal 3,000
Proceeds from sale 0
Loss on disposal $ 3,000
BRIEF EXERCISE 8.5

Elliot Ltd
(i)
(a) 1/7/15 Patent $220,000
Cash/Accounts Payable $220,000
31/6/16 Patent Amortisation Expense ($220,000 ÷ 10) $22,000

Accumulated Amortisation Patents $22,000
(b) Intangible Assets $198,000

The patent cost less accumulated amortisation would be shown in the notes to the
financial statements with the net amount recorded in the Statement of Financial
Position.
(ii)
(a) 1/7/15 Patent $200,000
GST $20,000
Cash/Accounts Payable $220,000
31/6/16 Patent Amortisation Expense ($200,000 ÷ 10) $20,000

Accumulated Amortisation Patents $20,000
(b) Intangible Assets $180,000

The patent cost less accumulated amortisation would be shown in the notes to the
financial statements with the net amount recorded in the Statement of Financial
Position.

BRIEF EXERCISE 8.6

Fish Ltd
Average cost of PPE assets

(a) Average useful life =
Depreciati on expense
= ((40.8b+39.2b)/2)/1.6b =25 years
Accumulate d depreciati on
(b) Average Age =
Depreciati on expense
=9.6b/1.6b = 6.0 years
Net sales
(c) Asset turnover ratio =
Average total assets
=21.17b/ (37.42b+35.58b)/2 = 0.58 times
BRIEF EXERCISE 8.7

Irish Ltd
Partial Statement of Financial Position
as at 31 March 2017
Note $ ‘000
Non-Current Assets
Property, plant and equipment 13 1916.9
Goodwill 15 198.9
Other intangibles assets 16 59.4
In the Notes to the financial statements the following disclosures would be made:
Note 13
Property, plant and equipment $ ‘000 $ ‘000
Land and buildings $782.4
Plant and equipment 3294.6
Accumulated depreciation (2160.1)
Total property, plant and equipment $1916.9
Notes 15 & 16
Goodwill $ ‘000 $ ‘000
Goodwill $520.4
Impairment of goodwill (321.5) $198.9
Other intangibles 145.9
Accumulated amortisation (86.5) 59.4
Total goodwill and intangible assets $258.3

SOLUTIONS TO EXERCISES
EXERCISE 8.1
Sunny Ltd
(a) The following points explain the application of the cost principle in determining the
acquisition of PPE assets.
1. Under the cost principle, the acquisition cost for a PPE asset includes all
expenditures necessary to acquire the asset and make it ready for its intended use.
2. For example, the cost of factory machinery includes the purchase price, freight costs
paid by the purchaser, insurance costs during transit, and installation costs.
3. Cost consists of the fair value of all expenditures necessary to acquire the asset and
make it ready for its intended use.
4. Fair value is 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.
(b) 1. Land 5. Delivery truck

2. Delivery Truck 6. Factory Machinery
3. Land Improvements 7. Motor Vehicle Expense
4. Prepaid Insurance 8. Factory Machinery

EXERCISE 8.2
Tops Ltd
Cost of new machine $228,000 purchased 1 October 2015

Balance date 31 December
Estimated residual $28,000
Depreciable amount = Cost less Residual = $228,000 - $28,000 = $200,000
(a) Straight line depreciation rate = 100% ÷ 10 years = 10%
2015 Depreciation expense = Depreciable amount x dep’n rate x 3 months

= $200,000 x 10% x 3/12
= $5,000
2016 Depreciation expense = Depreciable amount x dep’n rate

= $200,000 x 10%
= $20,000
(b) Diminishing-balance method: Straight line rate doubled (given in question)

10% x 2 = 20%
2015 depreciation = $228,000 x 20% x 3/12 = $11,400
Carrying value January 1, 2016 = $228,000 - $11,400 = $216,600

Remember the Diminishing-balance method applies the rate to the carrying value not
the depreciable amount.
2016 depreciation = $216,600 x 20% = $43,320
(c) Units-of-production method:

Depreciation cost per unit = Depreciable amount ÷ Total units of production
= $200,000 ÷ 40,000 hours
= $5.00 per hour
2015 depreciation = 1800 hours x $5.00 = $9,000.

EXERCISE 8.3
AJ Bus Ltd
(a) Bus purchased $268,000 and residual value $10,000. Therefore the depreciable
amount $258,000 ($268,000 - $10,000).
Depreciation cost per unit = Depreciable amount ÷ Total units of

production
= $258,000 ÷ 120,000 kilometres
= $2.15 per kilometre
(b) Calculation End of Year

Annual
Units of Depreciation Depreciation Accumulated Carrying
Years Production X Cost/Unit = Expense Depreciation Value
2015 29,000 $2.15 $62,350 $62,350 $205,650
2016 28,000 2.15 60,200 122,550 145,450
2017 30,000 2.15 64,500 187,050 80,950
2018 20,000 2.15 43,000 230,050 37,950
2019 13,000 2.15 27,920 258,000 10,000
120,000 $258,000

EXERCISE 8.4
Lion Ltd
Balance date 30 June
1 January 2016 Equipment Cost $180,000

Estimated Residual 20,000
Depreciable Amount $160,000
Straight line depreciation rate = 100% ÷ 8 years = 12.5%
(a) Depreciation expense for year 2016

$160,000 x 12.5% x 6 months = $10,000
Depreciation expense for year 2017

$160,000 x 12.5% = $20,000
b) Journal entry for overhaul
(i) Equipment $8,800

Cash/Payables $8,800
(ii) Equipment $8,000

GST Paid 800
(c) Depreciation expense for year 2019:
Carrying value at 30/6/18 $180,000 less ($10,000 + $20,000 + $20,000) = $130,000.
1 July 2018 addition $8,800. Therefore the carrying amount is now $138,800 which will also
be the depreciable amount as the expected residual is nil.
Depreciation rate is 100% ÷ 5 years = 20%

Depreciation expense 2019 is $138,800 x 20% = $27,760.

EXERCISE 8.5
Able Ltd
1 Oct 2016 Equipment Cost $160,000

Useful life is 8 years  depreciation rate 12.5%

Depreciation 30/6/2017 = $150,000 x 12.5% x 8/12 = $12,500
Carrying amount 30/6/2017= $160,000 - $12,500 = $147,500

Recoverable amount $98,750 is the higher of the net selling price ($98,750) and value in use
($90,000)
Impairment write down = $147,500 - $98,750 = $48,750
Journal Entries
1/10/1 Machinery $160,000
6
(Being purchase)
30/6/17 Depreciation Expense 12,500
Accumulated Dep’n Machinery 12,500
(Being annual depreciation)
1/7/17 Impairment Loss 48,750
Accumulated Impairment Loss 48,750
(Being impairment writedown)

EXERCISE 8.6
Wall Ltd

Useful life 8 years. Depreciation rate 100% ÷ 8 years = 12.5%

Annual depreciation is $6,250p.a. ($50,000 ÷ 8 or $50,000 x 12.5%)
After revaluation 1 July 2017, new depreciation is over 7 years.
(a) Journal Entries $ $

1/1/15 Equipment 55,000
Cash 55,000
(Being purchase of equipment)

Accumulated Depreciation Equipment 3,125
($50,000 ÷ 8 x 6/12)

($50,000 ÷ 8)

($50,000 ÷ 8)
Revaluation
1/7/17 Accumulated Depreciation Equipment 15,625
Equipment 15,625
(Carrying value before revaluation = $39,375)
Equipment 30,625
Revaluation Surplus 30,625
(New carrying amount $70,000. Revaluation (70,000-
39,375) = 30,625)

70,000 ÷ 7 years]
Sale
[$70,000  7 years x 6/12 dep’n to date of sale]

Cash 56,500
Equipment 70,000
Gain on sale of equipment 1,500
(Being disposal of equipment)
Calculation of gain on sale

Cost $70,000
Accumulated Depreciation (10,000 + 5,000) (15,000)
Carrying amount of equipment sold 55,000
Proceeds from sale 56,500
Gain on sale $1,500

(b)

Useful life 8 years. Depreciation rate 100% ÷ 8 years = 12.5%

Annual depreciation is $5625p.a. ($45,000 ÷ 8 or $45,000 x 12.5%)
After revaluation 1 July 2017, new depreciation is over 7 years.
Journal Entries $ $
1/4/15 Equipment 50,000
GST Paid 5,000
Cash 55,000

Accumulated Depreciation Equipment 2813
($45,000÷ 8 x 6/12)

($45,000 ÷ 8)

($45,000 ÷ 8)
Revaluation
Equipment 14,063
Equipment 34,063
[New carrying amount $70,000. Revaluation (70,000-
35,937)=34,063]

(70,000 ÷ 7 years)
Sale
[$70,000  7 years x 6/12 dep’n to date of sale]

Cash 56,500
Loss on sale of equipment 3,636
GST Collected 5,136
Equipment 70,000
(Being disposal of equipment)
Calculation of loss on sale

Cost $70,000
Accumulated Depreciation (10,000 + 5,000) (15,000)
Proceeds from sale (net of GST) 51,364
Loss on sale $3,636

EXERCISE 8.7
(a)
Capers Ltd
1 July 2014 Equipment Cost $200,000
Useful life 10 years. Depreciation rate 100% ÷ 10 years = 10%

Annual depreciation is $18,500 p.a. ($185,000 x 10%)
Journal Entries $ $
1/7/14 Equipment 200,000
GST Paid 20,000
Cash 220,000

($185,000 x 10%)

($185,000 x 10%)
Revaluation
Equipment 37,000
Equipment 17,000
(New carrying amt $163,000 + $17,000 = $180,000)

[($180,000 - $10,000) ÷ 8 years]
Revaluation downward
[($180,000 - $10,000) ÷ 8 years x 6/12]

Equipment 31,875
(Carrying value before revaluation downwards
$148,125)

Revaluation Expense 3,000
Equipment 20,000
(Being revaluation downward by $20,000)
(b) New carrying value = $128,125 (148,125-20,000)

EXERCISE 8.8
Zhou Ltd
2016 $ $
Jan. 1 Accumulated Depreciation – Machinery 60,000
Machinery 60,000
(Machine scrapped fully depreciated. Cost =
66,000/1.1)
June 30 Depreciation Expense 2,500

Accumulated Depreciation – Computer 2,500
[$30,000 (33,000/1.1) x 1/6 x 6/12 – dep’n to date of
sale]
June 30 Cash 13,200

Loss on Disposal 500
Computer 30,000
GST collected 1,200
Calculation of loss on disposal

Cost $30,000
Accumulated Depreciation (5,000 x 3 years + 2,500) (17,500)
Proceeds from sale excluding GST 12,000
Loss on disposal $500
Dec 31 Depreciation Expense 3,000

Accumulated Depreciation – Truck 3,000
[($20,000* - $2,000) x 1/6] (Update depreciation)
*22,000/1.1
Dec 31 Loss on Scrapping 5,000

[($20,000 - $2,000) x 5]
Delivery Truck 20,000
(Removal of asset from books)

EXERCISE 8.9
Wilkins Ltd
$ $
1/1/15 Patents 400,000
GST Paid 40,000
Cash 440,000
(Purchase of patent useful life 10 years)
1/7/15 Franchise 300,000

GST Paid 30,000
Cash 330,000
(Purchase of franchise – remaining useful life 6
years)
1/9/15 Research and development expense 140,909.01

GST Paid 14,091.91
Cash 155,000
(Assumed it was basic research and therefore
expensed)
Amortisation calculations:
Patent Expense ($400,000 ÷ 10) 40 000
Franchise Expense [($300,000 ÷ 6) X 6/12] 25,000
31/12/15 Amortisation Expense 65,000

Accumulated Amortisation Patents 40,000
Accumulated Amortisation Franchise 25,000
Ending balances 31/12/15:

Patent = $360,000 ($400,000 - $40,000)
Franchises = $275,000 ($300,000 - $25,000)

EXERCISE 8.10
(a) A company should depreciate its buildings because depreciation is necessary in

order to allocate the cost of the buildings to the reporting periods in which the future
benefits are consumed. Without depreciation, the depreciable assets would be
overstated and not be a faithful representation of their future benefits.
(b) A building can have a nil carrying value if it had no estimated residual value and it
was fully depreciated – that is, if it has been used for a period longer than its
expected life. Because depreciation is used to allocate cost rather than to reflect
market value, it is not at all unlikely that a building could have a low or nil carrying
value, but a positive market value.
(c) Examples of intangibles that might be found on a university campus are; franchises
of a bookstore chain or food outlets, and patents developed by academics.
(d) Typical company or product trade names are:
Clothes: Colorado, Esprit, Lisa Ho, King Gee, Guess, Trelise Cooper.
Perfume: Tommy Hilfiger, Estee Lauder, Chanel No. 5, Lancôme.
Cars: Daewoo, Nissan, Holden, Ford, Toyota. Honda
Shoes: Nike, Diesel, Vans, Diana Ferrari, Sachi, Ziera
Breakfast Cereals: Rice Bubbles, Coco Pops, Weet-Bix, Uncle Toby’s.
Trade names and trademarks are reported on the Statement of Financial Position if the
trade name or trademark is purchased. If it is developed by the entity, it cannot be
recognised.

EXERCISE 8.11
MouseTrap Ltd
Issue to be raised in the memo includes:
By increasing the estimated life on its capitalised software costs, MouseTrap will increase its
reported profit because amortisation expense will decrease. From an analyst’s perspective,
one concern would be whether this twelve-year life is reasonable given that software
products become obsolete very quickly. Another concern is that the qualitative characteristic
of comparability is affected: for example, it becomes more difficult to compare the current
year’s results with previous years’ because previous years used the three-year estimated
life.
EXERCISE 8.12
Beta Ltd
Year ended 31 January 2015.
(a) Average useful life of PPE Assets = Average cost of PPE assets
Depreciation expense
= ($105,282  $90,861)  2
$6,399
= 15.3 years
(b) Average age of PPE Assets = Accumulated depreciati on

Depreciation expense
= $38,797
$6,399
= 6 years
(c) Asset turnover ratio = Net sales

Average total assets
= $1,663,970
($609,041  $515,357 )  2
= 3 times
(d) The average age of PPE assets is often compared with the average useful life
calculation. If the ratios are close together, the company may need to replace its assets
in the near future, assuming the assumptions made in calculating the ratios are correct.
(A test of these assumptions might be to compare the calculations with industry
averages or those of competitors.) The asset turnover ratio is one indicator of how
efficient a company is using its assets, usually the higher the ratio the better.

SOLUTIONS TO PROBLEM
SET A
PROBLEM SET A 8.1

Cameron Ltd
Item Land Building Other Accounts

1 $250,000
2 $4,900 Land Improvements
3 27,000
4 7,270
5 $21,900
6 51,000
7 629,500
8 31,800 Land Improvements
9 5,320 Land Tax Expense
(12,700)
$271,570 $702,400 $42,020

PROBLEM SET A 8.2
Balance date is 30 June

Porter Ltd
(a) 1
2015
$ $
Aug 1 Land 2,630,000
Cash 2,630,000
(Purchase of Land)
Oct 1 Depreciation Expense 16,875

Accumulated Dep’n – Equipment 16,875
($675,000 x 1/10 x 3/12)
Oct 1 Cash 350,000

Equipment 675,000
Gain on Disposal 130,625
Cost (1/1/09) $675,000

Accum. Dep’n – Equipment $455,625
[($675,000 x 1/10 x 6.75yrs)]
Carrying amount 219,375
Cash proceeds 350,000
Gain on disposal $130,625
Dec 1 Cash 1,800,000

Land 300,000
Gain on Disposal 1,500,000
(Sale of Land)
2016
Jan 1 Equipment 1,000,000
Cash 1,000,000
(Purchase of Equipment)
June 30 Accumulated Dep’n – Equipment 470,000

Equipment 470,000
(Equipment fully depreciated on 31/12/2014)
(a) 2
2016
Accumulated Dep’n – Buildings 712,500
($28,500,000 x 1/40)
June 30 Depreciation Expense 4,735,500

Accumulated Depreciation - Equipment 4,735,500
$46,855,000* x 1/10 4,685,500

$1,000,000 x 1/10 x 6/12 50,000
4,735,500
*($48,000,000 - $675,000 - $470,000)

(a) 3
Porter Ltd
Partial Statement of financial position
as at 30 June 2016
Property, plant and equipment*

Land $6,330,000
Buildings $28,500,000
Less: Accumulated depreciation – buildings 12,812,500 15,687,500
Equipment 47,855,000
Less: Accumulated depreciation – equip. 8,826,750 39,028,250
Total property, plant and equipment $61,045,750
* See T-accounts which follow.
Note that in the external reports the total of Property, plant and equipment would be a
one line item in the statement of financial position and the detailed breakdown above
would be disclosed in the notes to the financial statements.
Land
30/06/15 Bal. B/d 4,000,000 1/12/15 Cash 300,000
1/8/15 Cash 2,630,000 30/6/16 Bal. c/d 6,330,000
6,630,000 6,630,000
30/6/16 Bal. b/d 6,330,000
Buildings
30/06/15 28,500,000
Accumulated Depreciation – Buildings

30/06/15 12,100,000
30/06/16 Bal. b/d 12,812,500 30/06/16 Dep’n Exp. 712,500
12,812,500 12,812,500
30/06/16 Bal b/d 12,812,500
Equipment
30/06/15 48,000,000 1/10/15 Cash, etc. 675,000
01/01/16 Cash 1,000,000 30/6/16 Acc. Depr. 470,000
- 30/06/16 Bal. c/d 47,855,000
49,000,000 49,000,000
30/06/16 Bal. b/d 47,855,000
Accumulated Depreciation – Equipment

01/10/15 Equipment, etc. 455,625 30/06/15 5,000,000
30/06/16 Equip. 470,000 1/10/15 Dep’n Exp. 16,875
30/06/16 Bal. c/d 8,826,750 30/06/16 Dep’n Exp. 4,735.500
9,752,375 9,752,375
31/12/16 Bal. b/d 8,826,750

(b) 1
2015
$ $
Aug 1 Land 2,390,909
GST Paid 239,091
Cash 2,630,000
(Purchase of Land)
Oct 1 Depreciation Expense 15,341

($613,636($675000/1.1) x 1/10 x 3/12)
Oct 1 Cash 350,000

Equipment 613,636
GST Collected 31,818
Cost (1/1/09) (675000/1.1) $613,636

Accum. Dep’n – Equipment [($613,636 x 1/10 x 6.75yrs)] 414,204
Cash proceeds (350,000/1.1) 318,182
Dec 1 Cash 1,800,000

Land ($300000/1.1) 272,727
GST Collected (($1800000/1.1)*1/10) 163,636
(Sale of Land)
2016
Jan 1 Equipment 909,091
GST Paid 90,909
Cash 1,000,000
(Purchase of Equipment)
June 30 Accumulated Dep’n – Equipment 470,000

Equipment 470,000
(Equipment fully depreciated on 31/12/2014)
(b) 2
2016
($28,500,000 x 1/40)
June 30 Depreciation Expense 4,737,091

Accumulated Depreciation – Equipment 4,737,091
$46,916,364* x 1/10 4,691,636

$909,091 x 1/10 x 6/12 45,455
4,737,091
*($48,000,000 - $613,636 - $470,000)

3. Porter Ltd
as at 30 June 2016
Property, plant and equipment Note

Land 1 $6,188,182
Equipment 2 47,825,455
Less: Accumulated depreciation – equip. 3 8,868,228 38,957,227
Notes
1 Land: 4,000,000+2,390,909-272,727
2 Equipment: 48,000,000-613,636+909,091-470,000
3 Accumulated Depreciation: 5,000,000+15,341-41,204-470,000+4,737,091

PROBLEM SET A 8.3
CupCake Ltd
2015 $ $
Jan 1 Accumulated Dep’n – Machinery 52,000
Machinery 52,000
(Scrapping machinery fully depr’d 31/12/15)

Accumulated Dep’n – Computer 3,500
(Update depreciation $49,000 x 1/7x 6/12)
June 30 Cash 31,000

Computer 49,000
(Sale of computer)
Calculation of disposal
Cost (1/1/12) $49,000
Accum. Dep’n – Equipment 24,500
[($49,000 x 1/7 x 3.5yrs)]
Dec 31 Depreciation – Truck 3,000

Accumulated Dep’n – Truck 3,000
([($27,000-$3,000) x 1/8] update depr’n)
Dec 31 Accumulated Dep’n – Truck (5yrs) 15,000

Loss on Disposal 12,000
Truck 27,000
(Scrapping of truck after 5 years)

PROBLEM SET A 8.4

Jupiter Ltd
Year ending 30 June 2016

$ $
(a) 1/7/15 Land 400,000
Buildings 250,000
Cash/Payables 650,000
1/10/15 Machinery 120,000

(b) 30/6/16 Depreciation Expense 55,700

Accumulated Depreciation - Building 12,500
Accumulated Depreciation - Machinery 43,200
(Depreciation Building $250,000 ÷ 20 = $12,500)
(Depreciation Machinery
Rate = 1  4 9,000
120,000
= 1 - .5233
= 48% (approximately)
Dep’n 30/06/13= $120,000 x 48% x 9/12
=$43,200
(c) 1/7/16 Land 80,000

1/7/16 Accumulated Depreciation – Building 12,500

Building 62,500
(d) 31/12/16 Depreciation Expense 18,432

[($120,000 - $43,200) x 48% x 6/12]
Cost of Machinery $120,000

Accumulated Dep’n ($43,200 + $18,432) (61,632)
Carrying amount at date of sale 58,368
Proceeds 50,000
Loss on disposal $8,368
31/12/16 Cash 50,000

Accumulated Depreciation – Machinery 61,632
Machinery 120,000

PROBLEM SET A 8.5

Shark Ltd
Year ending 30 June
$ $
(a) 30/6/16 Depreciation Expense – Machinery 10,000
($50,000 x 1/5 or #1 $2000, #2 $5000, #3 $3000)
(b) 30/6/16 Impairment Loss 7,000

Accumulated Impairment Loss Machine #2 7,000
(Writedown of mach #2 to recoverable amount)
Machine CV Recoverable Amt Adj

1 $8,000 $9,000 nil
2 20,000 13,000 7,000
3 12,000 13,000 nil
(c) 30/6/17 Depreciation Expense – Machinery 8,250

(Depn #1 $2,000, #2 $3,250(13,000/4), #3 $3,000)
(d) 30/6/17 Accumulated Impairment Loss Machine #2 5,250

Income – Impairment Loss Reversal 5,250
(Writedown of mach #2 to recoverable amount)

1 $6,000 6,500 nil
2 9,750* 17,000 5,250**
3 9,000 9,500 nil
* $25,000-5,000-7,000-3,250=$9,750
**#2CV had the machine not been impaired
$25,000-5,000-5,000=$15,000 max reversal
permitted $15,000-9,750 =$5,250
This will reinstate #2 to CV of $15,000.

PROBLEM SET A 8.6

Toy Ltd
Journal Entries $ $
(a)
30/6/15 Land – Wellington 1,400,000
Land – Auckland 400,000
Revaluation Surplus 1,800,000
(Revaluation of land Wellington $1,400,000, Auckland 400,000)
30/6/15 Accumulated Dep’n – Buildings 150,000

Building– Auckland 150,000
(To close off the accumulated dep’n to asset A/c)
Loss on revaluation of building 50,000
Building– Auckland 100,000
(Revalue building from $850,000 to $750,000)
(b)
30/6/16 Depreciation Expense – Buildings 50,000
(Depreciation expense for the year $750,000 x 1/15)

PROBLEM SET A 8.7

Button Ltd
(a)
Accumulated
Depreciation
Year Calculation 31/15
MACHINE 1
2012 $43,500 X 10% = $4,350 $4,350
2013 $43,500 X 10% = $4,350 8,700
2014 $43,500 X 10% = $4,350 13,050
2015 $43,500 X 10% = $4,350 17,400
MACHINE 2
2013 $38,400 x 18.75% = $7,200 $7,200
2014 $31,200 x 18.75% = $5,850 13,050
2015 $25,350 x 18.75% = 4,753(rounding) 17,803
MACHINE 3
2013 1,000 X $2.00a = $2,000 $2,000
2014 3,000 x $2.00 = $6,000 8,000
2015 4,000 x $2.00 = $8,000 16,000
a
$20,000 ÷ 10,000 hours = $2.00 per machine hour
(b) Depreciation expense for Machine 3 in 2015 under:

 Straight-line method: ($26,000-$6,000)/5 = $4,000
 Diminishing-balance rate (assuming 1.5 straight-line rate) = 1.5x 1/5 = 30%
o 2013 = $26,000 x 30% = $7,800
o 2014 = ($26,000-$7,800) x 30% = $5,460
o 2015 = ($26,000-$7,800-$5,460) x 30% = $3,822
 Units-of-production (from answer (a) above for 2015 = $16,000
Depreciation expense in 2015 is highest under Units-of-production method. The

higher the expense, the lower the tax payment. So Units-of-production method is the
preferred method for tax purposes for Machine 3 in 2015.
(c) As a manager whose bonus is linked to profit, I would prefer a depreciation method that
resulted in the lowest expense. From (b) above, Diminishing-balance method resulted in
the lowest depreciation expense for Machine 3 in 2015. However, it should be noted that
diminishing-balance method results in higher depreciation expenses in the earlier year of
an asset’s life.

PROBLEM SET A 8.8

Carpet Ltd
(a)
STRAIGHT-LINE DEPRECIATION
Calculation End of Year

Annual
Depreciable Depreciation Depreciation Accumulated Carrying
Years Cost X Rate = Expense Depreciation Amount
2015 *$360,000 25% $90,000 $90,000 $310,000
2016 360,000 25% 90,000 180,000 220,000
2017 360,000 25% 90,000 270,000 130,000
2018 360,000 25% 90,000 360,000 40,000
* ($400,000 – $40,000)
DIMINISHING-BALANCE DEPRECIATION

Carrying Annual
Amount Depreciation Depreciation Accumulated Carrying
Years Beginning of x Rate# = Expense Depreciation Amount
Year
2015 $400,000 44% $176,000 $176,000 $224,000
2016 224,000 44% 98,560 274,560 125,440
2017 125,440 44% 55,194 329,754 70,246
2018 70,246 44% *30,246 360,000 40,000
* Adjusted for rounding error so ending carrying amount will equal

residual value.
# Depreciation rate = 1  4 $40,000

$400,000
= 1 – 0.5623
= 44% approximately
(b) Straight-line depreciation provides the lowest amount for 2015 depreciation expense
($90,000) and, therefore, the highest 2015 profit. Diminishing-balance depreciation
provides the highest amount for 2015 depreciation expense ($176,000) and,
therefore, the lowest 2015 profit. Over the four-year period, both methods result in
the same total depreciation expense ($360,000) and, therefore, the same total profit.

PROBLEM SET A 8.9

Wang Ltd
Year end 30 June 2016 $ $
(a) Jul 1 Patent 25,000
Cash 100,000
(Successfully defend Patent)
Jul to Dec 1 Development Costs (expenses) 100,000

(Development expenses incurred in devoping new
product)
Jan 1 Patent 100,000

Development Costs (expenses) 100,000
((Transfer development costs for patent for new
product to asset account)
Apr 1 Brand Expense 30,000

(Developed brand for new product)
May 1 Copyright 250,000

(Purchased copyright)
(b) Amortisation journals entries for year ended 31 December 2016
June 30 Amortisation Expense 18,571

[($80,000 ÷ 8 years) + (($25,000 ÷ 7 years)
+(100,000/10 * 6/12)]
June 30 Amortisation Expense 4,433

Accumulated amortisation Copyrights 4,433
[($36,000 x 1/10) + ($250,000 x 1/50 x 2/12)]
(c) Intangible Assets

Patents ($205,000 cost less $28,571 amortisation) (1) $176,429
Copyrights ($286,000 cost less $18,833 amortisation (2) 267,167
Total intangible assets $443,595
(1) Cost ($80,000 + $25,000 + 100,000);

amortisation ($10,000 + $18,571)
(2) Cost ($36,000 + $250,000);
Amortisation ($14,400 + $4,433).
(d) The intangible assets of Wang Ltd consist of two patents and two copyrights. One patent
with a cost of $105,000 is being amortised over 10 years; the other patent granted 1 July
2015 was developed at a cost $100,000 and is being amortised over its legal life of 10
years. A copyright with a cost of $36,000 is being amortised over 10 years; the other
copyright with a cost of $250,000 is being amortised over 50 years.

PROBLEM SET A 8.10

Ross Ltd & Yang Ltd
(a)
Ross Ltd Yang Ltd
(1) Average age of PPE $1,420,000 $937,500
assets  3.3years  7.2years
$420,000 $130,000
(2) Average useful life $3,360,000 $2,000,000

 8years  15years
$420,000 $130,000
(3) Asset turnover ratio $10,300,000 $12,600,000

 2.3times  3.36times
$4,480,000 $3,750,000
(b) Based on the asset turnover ratio, Yang Ltd. is more effective in using assets to
generate sales as its asset turnover ratio is higher than Ross Ltd’s ratio.
One factor that complicates the comparison of the asset turnovers of the two
companies is the wide difference in average age of the PPE assets. Assuming the
estimated useful lives are realistically measured, Ross Ltd’s assets are in need of
replacement much sooner than Yang Ltd’s (8-3.3 years versus 15-7.2 years).
Another factor is the different composition of total assets for each company. For
example, Ross Ltd has recorded goodwill, but Yang Ltd does not. Deleting the
goodwill from Ross Ltd’s asset turnover ratio improves the ratio to about 2.5. Also, a
much greater proportion of Ross Ltd’s total assets consist of PPE and intangibles.
Finally, we are not told which valuation models are being used. If one company uses
the revaluation model and the other the cost model, the comparison would become
even more problematic.

SOLUTIONS TO PROBLEM
SET B
PROBLEM SET B 8.1

Box Ltd
Item Land Building Other Accounts

1 $260,000
2 $6,750 Land Improvements
3 19,000
4 $23,000
5 2,179
6 29,000 Land Improvements
7 40,000
8 6,500 Land Tax Expense
9 600,000
10 (5,000)
$276,179 $663,000 $42,250

PROBLEM SET B 8.2

King Ltd
2016 $ $
(a) 1. April 1 Land 2,400,000
Cash 2,400,000
May 1 Depreciation Expense 24,000

($720,000 x 1/10 x 4/12)
May 1 Cash 420,000

Equipment 720,000
Cost (1/1/12) $720,000

[($720,000 x 1/10 x 4 + $24,000)]
Carrying value 408,000
June 1 Cash 1,800,000

Land 500,000
July 1 Equipment 2,000,000

Cash 2,000,000
Dec. 31 Depreciation Expense 50,000

($500,000 x 1/10- machine to be scrapped)
Dec. 31 Accumulated Dep’n – Equipment 500,000

Equipment 500,000
(Equipment at 31/12/16 is now fully depreciated)
(a) 2. Dec. 31 Depreciation Expense 795,000

($31,800,000 x 1/40)
Dec. 31 Depreciation Expense 4,778,000

Accumulated Depreciation - Equipment 4,778,000
$46,780,000* x 1/10 $4,678,000

$2,000,000 x 1/10 x 6/12 100,000
$4,778,000
*($48,000,000 - $720,000 - $500,000)

(a) 3.
King Ltd
as at 31 December 2016
Property, Plant and Equipment*

Land $5,500,000
Equipment 48,780,000
Less: Accumulated depreciation – equip. 10,040,000 38,740,000
* See T-accounts which follow.
Note that in the external reports the total of Property, Plant and Equipment would be
a one line item in the statement of financial position and the detailed breakdown
above would be disclosed in the notes to the financial statements.
Land
31/12/15 Bal. B/d 3,600,000 1/6/16 Cash 500,000
1/4/16 Cash 2,400,000 31/12/16 Bal. c/d 5,500,000
6,000,000 6,000,000
31/12/16 Bal. b/d 5,500,000
Buildings
31/12/15 31,800,000
Accumulated Depreciation – Buildings

31/12/15 14,520,000
31/12/16 Bal. b/d 15,315,000 31/12/16 Dep’n Exp. 795,000
15,315,000 15,315,000
31/12/16 Bal b/d 15,315,000
Equipment
31/12/15 48,000,000 1/5/16 Cash, etc. 720,000
1/7/16 Cash 2,000,000 31/12/16 Accum. Depr. 500,000
- 31/12/16 Bal. c/d 48,780,000
50,000,000 50,000,000
31/12/16 Bal. b/d 48,780,000
Accumulated Depreciation - Equipment

1/5/16 Equipment 312,000 31/12/16 6,000,000
31/12/16 Equipment 500,000 1/5/16 Dep’n Exp. 24,000
31/12/16 Dep’n Exp. 50,000
31/12/16 Bal. c/d 10,040,000 31/12/16 Dep’n Exp. 4,778,000
10,852,000 10,852,000
31/12/16 Bal. b/d 10,040,000

(b) 1.
April 1 Land 2,181,818
GST Paid 218,182
Cash 2,400,000
May 1 Depreciation Expense 21,812

[$720,000 /1.1)x 1/10 x 4/12]
May 1 Cash 420,000

Equipment 654,545
GST Collected 38,182
Cost (1/1/12) $654,545

[($654,545 x 1/10 x 4 + $21,818)]
Proceeds (420,000/1.1) 381,818
June 1 Cash 1,800,000

Land (500,000/1.1) 454,545
GST Collected ((18,000,000/1.1))*1/10) 163,636
July 1 Equipment (2000000/1.1) 1,818,182

GST Paid ((2000000/1.1)*1/10) 181,818
Cash 2,000,000
Dec. 31 Depreciation Expense 45,455

[($500,000/1.1) x 1/10- machine to be scrapped]
Dec. 31 Accumulated Dep’n – Equipment 454,545

Equipment 454,545
(Equipment at 31/12/16 is now fully depreciated)
(b) 2. 2016
Dec 31 Depreciation Expense 795,000
($31,800,000 x 1/40)
Dec 31 Depreciation Expense 4,780,000

Accumulated Depreciation – Equipment 4,780,000
$46,890,910* x 1/10 4,689,091

$1,818,182 x 1/10 x 6/12 90,909
4,780,000
*($48,000,000 - $654,545 - $454,545)
(b) 3. King Ltd

Partial Statement of Financial Position

as at 31 December 2016
Property, plant and equipment Note

Land 1 $5,327,273
Equipment 2 48,709,092
Less: Accumulated depreciation – equip. 3 10,109,092 38,600,000
Notes
1 Land: 3,600,000+2,181,818-454,545
2 Equipment: 46,890,910 + 1,818,182
3 Accumulated Depreciation: 6,000,000+21,818-283,636+45,455-454,545+4,780,000

PROBLEM SET B 8.3
Cox Ltd
2016
$ $
Jan 1 Accumulated Dep’n – Machinery 78,000
Machinery 78,000
(Scrapping machinery fully depreciated 31/12/15)

Accumulated Dep’n – Office Equipment 7,350
(Update depreciation $73,500 x 1/5 x 6/12)
June 30 Cash 30,000

Accumulated Depreciation – Office Equipment 51,450
Office Equipment 73,500
(Sale of office equipment )
Calculation of disposal
Cost (1/1/2013) $73,500
Accumulated Depreciation – Office Equipment 51,450
[($73,500 x 1/5 x 3.5yrs)]
Dec 31 Depreciation – Truck 4,500

( [($40,500 - $4,500) x 1/8] update depreciation)
Dec 31 Accumulated Depreciation – Truck (5yrs) 22,500

Truck 40,500
(Scrapping of truck after 5 years)

PROBLEM SET B 8.4
Mars Ltd
Year ending 30 June 2016
$ $
(a) 1/7/15 Land 1,200,000
Buildings 500,000
Cash/Payables 1,700,000
1/10/15 Machinery 120,000

(b) 30/6/16 Depreciation Expense 55,700

Accumulated Depreciation - Building 12,500
(Depreciation Building $500,000 ÷ 40 = $12,500)
(Depreciation Machinery
Rate = 1  4 9,000
120,000
= 1 - .5233
= 48% (approximately
= $120,000 x 48% x 9/12
= $43,200
(c) 1/7/16 Land 200,000

Note: The $200,000 is considered “other comprehensive income” and
would appear on the Statement of Profit and Loss and Comprehensive
Income per IAS 1.
1/7/16 Accumulated Depreciation – Building 12,500

Building 37,500
(d) 31/12/16 Depreciation Expense 18,432

[($120,000 - $43,200) x 48% x 6/12]
Cost of Machinery $120,000

Accumulated Depreciation ($43,200 + $18,432) (61,632)
Carrying amount at date of sale 58,368
Proceeds 50,000
Loss on disposal $8,368
31/12/16 Cash 50,000

Machinery 120,000

PROBLEM SET B 8.5

Fox Ltd
Year ending 30 June
$ $
(a) 01/07/15 Machinery 85,000
Cash 85,000
(Purchase of machine)
30/6/16 Depreciation Expense – Machinery 10,000

(($85,000-$5,000) ÷ 8)
(b) 30/6/16 Impairment Loss 14,000

Accumulated Impairment Loss - Machinery 14,000
(Writedown of machine to recoverable amount)

30/6/16 $75,000 $61,000 14,000
(c) 30/6/17 Depreciation Expense – Machinery 8,000

(Depreciation ($61,000 - $5000) ÷ 7yrs remaining)
(d) 30/6/17 Accumulated Impairment Loss - Machinery 12,000

Income – Impairment Loss Reversal 12,000
(Write-down of machine to recoverable amount)
Maximum reversal $85,000 – $20,000* = $65,000

*2 years of normal depreciation had the asset not
been impaired.
30/6/17 $53,000** $70,000 $12,000
**$85,000 -$10,000-$8,000-$14,000= $53,000
The max reversal is to a carrying value of $65,000

Adjustment $53,000 - $65,000 = $12,000

PROBLEM SET B 8.6

Red Ltd
Journal Entries $ $
30/6/16 Land – Darwin 200,000
(Revaluation of land Darwin to $600,000)
30/6/16 Revaluation Surplus 200,000

Land – Perth 200,000
(Revalue Land – Perth downwards to $1,000,000)
30/6/16 Accumulated Depreciation – Buildings 150,000

Buildings– Perth 150,000
(To close off the accumulated depreciation to asset
account)

Loss on Revaluation - Building 50,000
Buildings – Perth 150,000
(Revalue building from $650,000 to $500,000)

PROBLEM SET B 8.7

Winter Ltd
(a)
Accumulated
Depreciation
Year Calculation 31/12
MACHINE 1
2012 $108,750 X 10% = $10,875 $10,875
2013 $108,750 X 10% = $10,875 21,750
2014 $108,750 X 10% = $10,875 32,625
2015 $108,750 X 10% = $10,875 43,500
MACHINE 2
2013 $96,000 x 18.75% = $18,000 $18,000
2014 $78,000 x 18.75% = $14,625 32,625
2015 $63,375 x 18.75% = 11,883 (rounding) 44,508
MACHINE 3
2013 1,000 X $5.00a = $5,000 $5,000
2014 3,000 x $5.00 = $15,000 20,000
2015 4,000 x $5.00 = $20,000 40,000
a
$50,000 ÷ 10,000 hours = $5.00 per machine hour
(b) Depreciation expense for Machine 3 in 2015 under:

 Straight-line method: ($65,000-$15,000)/5 = $10,000
 Diminishing-balance rate (assuming 1.5 straight-line rate) = 1.5 x 1/5 = 30%
o 2013 = $65,000 x 30% = $19,500
o 2014 = ($65,000-$19,500) x 30% = $13,650
o 2015 = ($65,000-$19,500-$13.650) x 30% = $9,555
 Units-of-production (from answer (a) above for 2015 = $20,000
Depreciation expense in 2015 is highest under Units-of-production method. The

higher the expense, the lower the tax payment. So Units-of-production method is the
preferred method for tax purposes for Machine 3 in 2015.
(c) As a manager whose bonus is linked to profit, I would prefer a depreciation method that
resulted in the lowest expense. From (b) above, Diminishing-balance method resulted in the
lowest depreciation expense for Machine 3 in 2015. However, it should be noted that
diminishing-balance method results in higher depreciation expenses in the earlier years of
an asset’s life.

PROBLEM SET B 8.8

Buttercup Ltd
(a)
STRAIGHT-LINE DEPRECIATION

Annual
Depreciable Depreciation Depreciation Accumulated Carrying
Years Cost X Rate = Expense Depreciation Amount
2015 *$270,000 20% $54,000 $54,000 $256,000
2016 270,000 20% 54,000 108,000 202,000
2017 270,000 20% 54,000 162,000 148,000
2018 270,000 20% 54,000 216,000 94,000
2019 270,000 20% 54,000 270,000 40,000
* ($310,000 – $40,000)
DIMINISHING-BALANCE DEPRECIATION

Carrying Annual
Value Depreciation Depreciation Accumulated Carrying
Years Beginning of x Rate# = Expense Depreciation Amount
Year
2015 $310,000 34% $105,400 $105,400 $204,600
2016 204,600 34% 69,564 174,964 135,036
2017 135,036 34% 45,912 220,876 89,124
2018 89,124 34% 30,302 251,178 58,822
2019 58,822 34% *18,822 270,000 40,000
* Adjusted so ending carrying value will equal residual value.
# Depreciation rate = 1  5 40,000

310,000
= 1 – 0.6639
= 34% approximately
(b) Straight-line depreciation provides the lowest amount for 2015 depreciation expense
($54,000) and, therefore, the highest 2015 profit. Diminishing-balance depreciation
provides the highest amount for 2015 depreciation expense ($105,400) and,
therefore, the lowest 2015 profit. Over the five-year period, both methods result in the
same total depreciation expense ($270,000) and, therefore, the same total profit.

PROBLEM SET B 8.9

Future Ltd
Year ended 31 December 2017

$ $
(a) Jan 1 Patents 13,500
Cash 13,500
(Defence of patent)
Jan - Development Costs 180,000

Jun Cash 180,000
(Development costs for a patent)
Jul 1 Patents 180,000

Development Costs 180,000
(Development costs transferred to patent granted on 1 July)
Sep 1 Advertising Expense 45,000

Cash 45,000
(Advertising cost paid)
Oct. 1 Copyright 200,000

Cash 200,000
(Copyright useful life 50 years)
(b) Amortisation journals for year ended 31 December 2017
Dec. 31 Patent Amortisation Expense 14,000

[($80,000 x 1/10) + ($13,500 x 1/9) + ($180,000 x 1/20 x 6/12)]
Dec. 31 Copyrights Amortisation Expense 7,400

Accumulated Amortisation Copyrights 7,400
[($64,000 x 1/10) + ($200,000 x 1/50 x 3/12)]
(c) Intangible Assets

Patents ($273,500 cost less $22,000 amortisation) (1) $251,500
Copyrights ($264,000 cost less $33,000 amortisation (2) 231,000
Total intangible assets $482,500
(1) Cost ($80,000 + $13,500 + $180,000);

Amortisation ($8,000 + $14,000)
(2) Cost ($64,000 + $200,000);
Amortisation ($25,600 + $7,400).
(d) The intangible assets of Future Ltd consist of two patents and two copyrights. One patent with
a cost of $93,500 is being amortised over 10 years; the other patent was obtained at a cost of
$180,000 and is being amortised over 20 years. A copyright with a cost of $64,000 is being
amortised over 10 years; the other copyright with a cost of $200,000 is being amortised over
50 years.

PROBLEM SET B 8.10

Zhou Ltd & Wang Ltd
(a)
Zhou Ltd Wang Ltd
(1) Average age of PPE $360,000 $750,000
assets = 2.25 years = 6.05 years
$160,000 $124,000
(2) Average useful life $1,410,000 $1,160,000

=8.81 years = 9.35 years
$160,000 $124,000
(3) Asset turnover ratio $3,680,000 $3,440,000

= 1.3 times = 1.72 times
$2,840,000 $2,000,000
(b) Based on the asset turnover ratio, Wang Ltd is more effective in using assets to
generate sales. Its asset turnover ratio is 30% higher than Zhou Ltd’s ratio.
One factor that complicates the comparison of the asset turnovers of the two
companies is the wide difference in average age of the PPE assets. Assuming the
estimated useful lives are realistically measured, Wang Ltd’s assets are in need of
replacement much sooner than Zhou Ltd’s (9.35-6.05 years versus 8.81-2.25 years).
Another factor is the different composition of total assets for each company. For
example, Zhou Ltd has recorded goodwill, but Wang Ltd does not. Deleting the
goodwill from Zhou Ltd’s asset turnover ratio improves the ratio to about 1.5. Also, a
much greater proportion of Zhou Ltd’s total assets consist of PPE and intangibles.
Finally, we are not told which valuation models are being used. If one company uses
the revaluation model and the other the cost model, the comparison would become
even more problematic.

BUILDING BUSINESS SKILLS
FINANCIAL REPORTING AND ANALYSIS
BUILDING BUSINESS SKILLS 8.1 FINANCIAL REPORTING PROBLEM
Domino’s Pizza Enterprises Ltd
(a) At 4 July 2013 the carrying (book) value of property, plant and equipment was
$49,693,000 as shown in the Statement of Financial Position
Refer note 18 for details of the cost

Cost $72,452,000.
(b) Depreciation is calculated on a straight-line basis so as to write off the cost of each
asset over its expected useful life to its estimated residual value. Leasehold
improvements are depreciated over the period of the lease or the estimated useful
life, whichever is the shorter, using the straight-line method the assets (refer to note
3.15). The estimated useful lives, residual values and depreciation method are
reviewed at the end of each annual reporting period, with the effect of any changes
recognised on a prospective basis.
(c) Depreciation and amortisation expense, as disclosed in note 11.2, is 2013,

$12,792,000; 2012, $10,029,000.
Note 11.2 reveals depreciation expense for 2013, $ 7,869,000 and 2012, $6,938,000
and amortisation expense 2013, $4,924,000 and 2012, $3,091,000.
(d) Additions to non-current assets. See notes 18, 19, 20:
Item 2013 2012

$’000 $’000
Plant & Equipment* 30,261 20,886
Goodwill 13,853 8,648
Other intangible assets 8,813 7,350
*Note additions include acquisitions through business combinations
(e) Note 27 and 38 disclose that the company has financial leases with present value of
lease payments of $83,000 and non-cancellable operating leases for premises and
motor vehicles of $74,424,000. Therefore, it appears the company mainly engages in
operating leases. The split between the motor vehicles and the premises is not given.
The implication for financial statement analysis is that there are assets and liabilities
not disclosed in the financial statements. (Note that there is a strong movement by
standard setters to include all non-cancellable leases as finance leases.)

BUILDING BUSINESS SKILLS 8.2 COMPARATIVE ANALYSIS PROBLEM
CSR Ltd vs Boral Ltd

(a)
CSR Ltd Boral Ltd
(1) Average useful life of PPE =
assets
Average cost of PPE assets ((1,403.5+1,281.7)/2)/ ((4,607.9+4,594.7)/2)/

Depreciation expense = 85.7 263.5
= 15.67 years 17.46 years
(2) Average age of PPE assets =

Accumulated depreciati on 702.0/85.7 2,627.6/263.5
Depreciation expense =
= 8.2 years 10 years
(3) Asset turnover ratio =

Net sales 1,682.5/((2,032.7+2,2 5,209.4/((6,316.4+6,4
Average total assets = 45.5)/2) 99.1)/2)
= 0.787 times 0.813 times
(b) The average useful life and the average age of PPE assets are useful to compare
these ratios with averages of other companies in the same industry. CSR’s and
Boral’s PPE assets have been used for 8.2 years and 10 years respectively. CSR’s
PPE assets have a shorter estimated life than Boral’s PPE assets. The remaining
estimated life of CSR’s PPE assets is 7.47 years (15.67 - 8.2), while Boral’s PPE
assets have a remaining estimated life of 7.46 years (17.46 - 10). So on average
both entities have similar aged assets.
The asset turnover ratio measures how efficiently a company uses its assets to
generate sales. It shows the dollars of sales generated by each dollar invested in
assets. CSR’s asset turnover ratio is 0.787 times and Boral’s 0.813 times.
Therefore, it can be concluded that Boral is slightly more efficient in usage of assets.

BUILDING BUSINESS SKILLS 8.3 COMPARATIVE ANALYSIS PROBLEM
Meds4U Ltd and Hope Ltd
(a) The primary intangibles of a healthcare products company would probably be

patents, goodwill and trademarks. The nature of each of these is quite different; thus
an investor would normally want to know what the composition of intangible assets is
if it is material. If all intangibles were classified as goodwill then investors would be
concerned as they would expect to see the company recognising patents from their
development expenditures.
(b) The asset turnover ratio is calculated as net sales divided by average total assets.
This would be calculated as follows for these two companies:
Meds4U Ltd Hope Ltd.

$47,314 $53,796
=0.89 = 1.01
($54,422  $51,472)  2 ($63,706 + $42,906)  2
This suggests that Hope Ltd is slightly more effective in using its assets to generate
sales.
(c) Many corporate executives complain that investors are too concerned about the
short-term and don’t reward good long-term planning. As a consequence, they feel
that the requirement that research and development expenditures be expensed
immediately penalises those executives who do invest in the future. As a
consequence, when profit does not look good, it is always tempting to cut research
and development expenditures, since this will cause a direct increase in current year
reported profits. Of course, it will also diminish the company’s long-term prospects.
(d) If an entity reports goodwill on its statement of financial position, it can only have
resulted from one thing – the entity must have purchased another entity. This is
because entities are not allowed to record internally created goodwill. They can only
report purchased goodwill. Ironically, if you want to report a large amount of goodwill,
all you have to do is overpay when you purchase another business – the more you
overpay, the more goodwill you will report. Obviously, reporting a lot of goodwill is not
such a good thing. There is an asset impairment test which requires an entity to test
annually for the impairment of goodwill.

BUILDING BUSINESS SKILLS 8.4 FINANCIAL ANALYSIS ON THE WEB
The answer to this question will vary on the company the student selects. Try and encourage
students within the class to select different industries to be examined and then the class
discussion can also focus on the differences between industries.

CRITICAL THINKING
BUILDING BUSINESS SKILLS 8.5 COMMUNICATION ACTIVITY
The CEO would be arguing for recognising the internally generated intangibles.
The IASB member would be arguing for the IAS 38 rule which prohibits the recognition of
internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance.
Format of the short report.
This should be set out in the style required in your accounting course. This may differ slightly
from class to class but in general terms it should include the following elements:
Headings
Title
To
From
Date
Re (what the report is about)
Introduction
Discussion
Conclusion
Recommendations
You should use some sort of numbering system whether alphanumeric or not.
Some of the issues to be raised in the report:
1. One of the primary underlying principals in accounting is that the transaction or event
needs to be clearly identified. Expenditures on internally generated assets, such as
brands, mastheads, publishing titles and customer lists, may not be recognised as an
asset because the costs incurred are considered indistinguishable from expenditure
incurred to develop the business as a whole (internally generated goodwill). This is
specifically mentioned in IAS 38 paragraph 64 which states that expenditure on
internally generated brands, mastheads, publishing titles, customer lists and items
similar in substance cannot be distinguished from the cost of developing the business
as a whole. Therefore, such items are not recognised as intangible assets.
2. One of the issues is how to measure the internally generated intangibles. They are
treated in a similar vein to the internally generated goodwill and IAS 38 imposes the
restriction of only recognising the item when it is purchased. This restriction has been
imposed on the basis of the uncertainty surrounding the value of internally generated
goodwill. It is difficult to audit the value assigned to these assets.
3. The IASB framework as such does not prohibit the recognition of the internally
generated intangibles. The recognition of an asset would not be dependent upon the
requirement that the future economic benefit be purchased, only that it be controlled.
The CEO would argue strongly that the value of the intangible can be reliably
measured. If other entities can purchase these types of assets then they must be
able to be measured.

4. There is international controversy regarding the treatment of goodwill. The argument

for amortisation is that a company pays a premium for the future earning capacity of
the entity it purchased and this is realised over time and as such should be amortised
against the future earnings. The counter argument is that the premium paid is for the
synergies of the new earning capacity of the investor and investee companies and,
as such, it should only be written down or amortised if the asset is impaired. The
current standard on goodwill does not require amortisation, but an impairment test.
5. The main issue at hand is that there is an inconsistency if you wish to compare the
performance of two entities which are structured differently. Company A may have
grown internally and developed intangibles which are valuable and vital to the
company’s performance. Company B may have grown by purchasing other business
entities and as such have identified and recognised on their statement of financial
position various intangible assets. The issue is how Company A can communicate to
the market that they are strong performers. One side issue is that if the assets are
not recognised in Company A then their return on assets will look superior to that of
Company B who has more assets recognised on their statement of financial position.

BUILDING BUSINESS SKILLS 8.6 ETHICS CASE
Glass Ltd
(a) The stakeholders in this situation are:

 Angela Smith, managing director of Glass Ltd
 Jonty Upright, accountant
 The shareholders of Glass Ltd
 Potential investors in Glass Ltd
(b) The intentional misstatement of the life of an asset or the amount of the residual
value is unethical for whatever the reason. There is nothing unethical per se about
changing the estimate either of the life of an asset or of an asset’s residual value if
the change is an attempt to improve the allocation of the asset’s depreciable cost
over the asset’s useful life. In this case, it appears from the accountant’s reaction that
the revisions in the useful life and residual value are intended only to improve
earnings which would be unethical.
The fact that the competition uses a longer life on its equipment is not necessarily
relevant. The competition’s maintenance and repair policies and activities may be
different. The competition may use its equipment fewer hours a year (e.g. one shift
rather than two shifts daily) than Glass Ltd.
(c) Profit (ignoring income tax) in the year of change is increased $400,000
implementing the managing director’s proposed changes.
Old Estimates
Asset cost $7,000,000
Estimated residual 600,000
Depreciable amount 6,400,000
Depreciation per year ($6,400,000 ÷ 8) $800,000
Revised
Estimates
Asset cost $7,000,000
Estimated residual 600,000
Depreciable amount 6,400,000
Depreciation taken to date ($800,000 x 2) 1,600,000
$4,800,000
Remaining life in years 12years

Depreciation per year $400,000
Change in depreciation $800,000 - $400,000= $400,000

BUILDING BUSINESS SKILLS 8.7 GROUP DECISION CASE
Auckland Ltd & Wellington Ltd
(a) Auckland: Straight-line method
Annual Depreciation
Building [($460,000 - $60,000) x 2%*] $8,000
Equipment [($200,000 - $15,000) x 12.5%**] 23 125
Total annual depreciation $31 125
Total accumulated depreciation ($31,125 x 3) $93 375
* (100% ÷ 50 years) = 2%
**(100% ÷ 8 years) = 12.5%
Wellington Ltd: diminishing-balance method at double the straight line.
Year Depreciation @ 4%* Depreciation @ 25%** Total Depreciation

2015 18,400 50,000 68,400
2016 17,664 37,500 55,164
2017 16,957 28,125 45,082
168,646
* (100% ÷ 50 years) = 2%* 2

**(100% ÷ 8 years) = 12.5%*2
(b)
Wellington
Auckland Ltd
Year Ltd Profit Calculation for Wellington Ltd
Profit as Adjusted
2015 $126,000 $139,275 $102,000 + $68,400 - $31,125 = $139,275
2016 123,800 138,039 $114,000 + $55,164 - $31,125= $138,039
2017 117,500 141,457 $127,500 + $45,082 - $31,125 = $141,457
Total profit $367,300 $418,771
(c) As shown above, when the two companies use the same depreciation method,
Wellington Ltd is more profitable than Auckland Ltd. When the two companies are
using different depreciation methods, Wellington Ltd has more cash than Auckland
Ltd for two reasons:
1. its earnings are generating more cash than the earnings of Auckland Ltd, and
2. depreciation expense has no effect on cash.
Cash generated by operations can be arrived at by adding depreciation expense to

profit. If this is done, it can be seen that Wellington Ltd’s operations generate more
cash ($343,500 + $168,646 = $512,146) than Auckland Ltd’s ($367,300 + $93,375 =
$460,675). Based on the above analysis, Ms James should invest in Wellington Ltd.
Not only is it in a better cash financial position than Auckland Ltd, but it is also more
profitable.

BUILDING BUSINESS SKILLS 8.8 SUSTAINABILITY
Fonterra Co-operative Group sustainability
1. The term sustainability is about making sure the social, economic and environmental
needs of our community are met and kept healthy for future generations. Sustainable
development must not just be about economic growth but also environmental quality and
social equity.
Corporate social responsibility (CSR) for business means companies must be aware and
have a core understanding of CSR characteristics; an understanding of the basic issues and
how they may affect decision making; to be able to apply this basic knowledge with
competence to specific activities; and have strategic alignment ie have an in depth
understanding of the issues and possess the expertise to embed CSR principles into the
business decision making process.
2. Fonterra’s latest sustainability report. The answer will change here depending on which
year the sustainability report is accessed.
The following is the link to the website where the report can be downloaded:
http://www.fonterra.com/. Once the site is accessed, click on sustainability or search the site
for sustainability.
The students are required to report on: goals, measurement and achievement in
 Water
 Waste
 Resources- and energy use, and
 Climate change
3. Climate change can affect asset values either directly e.g. through rising water levels,
floods, erosion, droughts etc. damaging land and buildings, leading to asset impairments, or
indirectly through changing demands for products and thus the production facilities required
for their manufacture. It could also provide new opportunities for capital investment.

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Solutions Manual

John Wiley & Sons Australia, Ltd 2016

CHAPTER 8 – REPORTING AND ANALYSING NON-CURRENT ASSETS

ASSIGNMENT CLASSIFICATION TABLE

2. Describe how the cost principle applies to 1 1 1A, 2A, 1B,

3. Explain the concept of depreciation.

4. Calculate depreciation using various 2, 3 2, 3, 4, 7, 10 2A, 4A, 6A,

5. Account for subsequent expenditures. 4

6. Account for asset impairments. 5 5A, 5B

7 Account for the revaluation of property, 6, 7 4A, 6A, 4B,

8 Account for the disposal of property, plant 4 6, 8 2A, 3A, 4A,

9. Describe the use of an asset register.

10. Identify the basic issues related to 5 9, 10, 11 9A, 9B

11. Describe the common types of intangible 10

12. Explain the nature and measurement of

13. Account for the acquisition and depletion

14. Indicate how non-current assets are 6, 7 10, 12 2A, 10A,

© John Wiley and Sons Australia Ltd, 2016 8.1

CHAPTER 8 – REPORTING AND ANALYSING NON-CURRENT ASSETS

4. The primary advantages of leasing are:

5. The effects of the three methods on annual depreciation expense are:

6. Capital expenditures are additions and improvements incurred to increase the

© John Wiley and Sons Australia Ltd, 2016 8.2

9. The favourable attributes which could result in goodwill include exceptional

© John Wiley and Sons Australia Ltd, 2016 8.3

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 8.1

BRIEF EXERCISE 8.2

Purchase: GST Exclusive amount is $96,600

BRIEF EXERCISE 8.3

Carrying Amount x Rate = Depreciation

© John Wiley and Sons Australia Ltd, 2016 8.4

BRIEF EXERCISE 8.4

(a) Accumulated Depreciation – Delivery Equipment $59,000

(b) Accumulated Depreciation – Delivery Equipment $56,000

Cost of delivery equipment

BRIEF EXERCISE 8.5

31/6/16 Patent Amortisation Expense ($220,000 ÷ 10) $22,000

(b) Intangible Assets $198,000

31/6/16 Patent Amortisation Expense ($200,000 ÷ 10) $20,000

(b) Intangible Assets $180,000

© John Wiley and Sons Australia Ltd, 2016 8.5

BRIEF EXERCISE 8.6

Average cost of PPE assets

= ((40.8b+39.2b)/2)/1.6b =25 years

=9.6b/1.6b = 6.0 years

=21.17b/ (37.42b+35.58b)/2 = 0.58 times

BRIEF EXERCISE 8.7

© John Wiley and Sons Australia Ltd, 2016 8.6

(b) 1. Land 5. Delivery truck

© John Wiley and Sons Australia Ltd, 2016 8.7

Cost of new machine $228,000 purchased 1 October 2015

(a) Straight line depreciation rate = 100% ÷ 10 years = 10%

2015 Depreciation expense = Depreciable amount x dep’n rate x 3 months

2016 Depreciation expense = Depreciable amount x dep’n rate

(b) Diminishing-balance method: Straight line rate doubled (given in question)

2015 depreciation = $228,000 x 20% x 3/12 = $11,400

Carrying value January 1, 2016 = $228,000 - $11,400 = $216,600

2016 depreciation = $216,600 x 20% = $43,320

(c) Units-of-production method:

2015 depreciation = 1800 hours x $5.00 = $9,000.

© John Wiley and Sons Australia Ltd, 2016 8.8

Depreciation cost per unit = Depreciable amount ÷ Total units of