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Test Bank For Accounting Principles 7Th Canadian Edition Volume 2 By Jerry J. Weygandt
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CHAPTER 9 LONG-LIVED ASSETS CHAPTER STUDY OBJECTIVES 1. Calculate the cost of property, plant, and equipment. The cost of property, plant, and equipment includes all costs that are necessary to acquire the asset and make it ready for its intended use. All costs that benefit future periods (that i...

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  • August 18, 2023
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, CHAPTER 9
LONG-LIVED ASSETS
CHAPTER STUDY OBJECTIVES

1. Calculate the cost of property, plant, and equipment. The cost of property, plant, and
equipment includes all costs that are necessary to acquire the asset and make it ready for its
intended use. All costs that benefit future periods (that is, capital expenditures) are included in
the cost of the asset. When applicable, cost also includes asset retirement costs. When multiple
assets are purchased in one transaction, or when an asset has significant components, the cost
is allocated to each individual asset or component using their relative fair values.


2. Apply depreciation methods to property, plant, and equipment. After acquisition, assets
are accounted for using the cost model or the revaluation model. Depreciation is recorded and
assets are carried at cost less accumulated depreciation. Depreciation is the allocation of the
cost of a long-lived asset to expense over its useful life (its service life) in a rational and
systematic way. Depreciation is not a process of valuation and it does not result in an
accumulation of cash. There are three commonly used depreciation methods:
Effect on Annual
Method Depreciation Calculation
Straight-line Constant amount (Cost − residual value) ÷
estimated useful life
(in years)

Diminishing- Diminishing Carrying amount at
balance amount beginning of year ×
diminishing-balance rate

Units-of- Varying (Cost − residual value) ÷
production amount total estimated units-of-
production × actual
activity during the year
Each method results in the same amount of depreciation over the asset’s useful life.
Depreciation expense for income tax purposes is called capital cost allowance (CCA).


3. Explain the factors that cause changes in periodic depreciation and calculate revised
depreciation for property, plant, and equipment. A revision to depreciation will be required if
there are (a) capital expenditures during the asset’s useful life; (b) impairments in the asset’s
fair value; (c) changes in the asset’s fair value when using the revaluation model; and/or (d)
changes in the appropriate depreciation method, estimated useful life, or residual value. An
impairment loss must be recorded if the recoverable amount is less than the carrying amount.
Revisions of periodic depreciation are made in present and future periods, not retroactively. The
new annual depreciation is determined by using the depreciable amount (carrying amount less
the revised residual value), and the remaining useful life, at the time of the revision.

,4. Demonstrate how to account for property, plant, and equipment disposals. The
accounting for the disposal of a piece of property, plant, or equipment through retirement or sale
is as follows:
(a) Update any unrecorded depreciation for partial periods since depreciation was last recorded.
(b) Calculate the carrying amount (cost – accumulated depreciation).
(c) Calculate any gain (proceeds > carrying amount) or loss (proceeds < carrying amount) on
disposal.
(d) Remove the asset and accumulated depreciation accounts at the date of disposal. Record
the proceeds received and the gain or loss, if any.
An exchange of assets is recorded as the purchase of a new asset and the sale of an old asset.
The new asset is recorded at the fair value of the asset given up plus any cash paid (or less any
cash received). The fair value of the asset given up is compared with its carrying amount to
calculate the gain or loss. If the fair value of the new asset or the asset given up cannot be
determined, the new long-lived asset is recorded at the carrying amount of the old asset that
was given up, plus any cash paid (or less any cash received).


5. Record natural resource transactions and calculate depletion. The units-of-production
method of depreciation is generally used for natural resources. The depreciable amount per unit
is calculated by dividing the total depreciable amount by the number of units estimated to be in
the resource. The depreciable amount per unit is multiplied by the number of units that have
been extracted to determine the annual depreciation. The depreciation and any other costs to
extract the resource are recorded as inventory until the resource is sold. At that time, the costs
are transferred to cost of resource sold on the income statement. Revisions to depreciation will
be required for capital expenditures during the asset’s useful life, for impairments, and for
changes in the total estimated units of the resource.


6. Identify the basic accounting issues for intangible assets and goodwill. The accounting
for tangible and intangible assets is much the same. Intangible assets are reported at cost,
which includes all expenditures necessary to prepare the asset for its intended use. An
intangible asset with a finite life is amortized over the shorter of its useful life and legal life,
usually on a straight-line basis. The extent of the annual impairment tests depends on whether
IFRS or ASPE is followed and whether the intangible asset had a finite or indefinite life.
Intangible assets with indefinite lives and goodwill are not amortized and are tested at least
annually for impairment. Impairment losses on goodwill are never reversed under both IFRS
and ASPE.


7. Illustrate the reporting and analysis of long-lived assets. It is common for property, plant,
and equipment, and natural resources to be combined in financial statements under the heading
“property, plant, and equipment.” Intangible assets with finite and indefinite lives are sometimes
combined under the heading “intangible assets” or are listed separately. Goodwill must be
presented separately. Either on the balance sheet or in the notes, the cost of the major classes
of long-lived assets is presented. Accumulated depreciation (if the asset is depreciable) and
carrying amount must be disclosed either in the balance sheet or in the notes. The depreciation
and amortization methods and rates, as well as the annual depreciation expense, must also be
indicated. The company’s impairment policy and any impairment losses should be described
and reported. Under IFRS, companies must include a reconciliation of the carrying amount at

, the beginning and end of the period for each class of long-lived assets and state whether the
cost or revaluation model is used.
The asset turnover ratio (net sales ÷ average total assets) is one measure that is used by
companies to show how efficiently they are using their assets to generate sales revenue. A
second ratio, return on assets (profit ÷ average total assets), calculates how profitable the
company is in terms of using its assets to generate profit.

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