9.9: Exercises

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9.1 Dixon Ltd. has recently purchased a piece of specialized manufacturing equipment. The following costs were incurred when this equipment was installed in the company's factory facilities in 2020.

Cash price paid, net of $1,600 discount, including $3,900 of recoverable tax	$	82,300
Freight cost to ship equipment to factory		3,300
Direct employee wages to install equipment		5,600
External specialist technician needed to complete final installation		4,100
Repair costs during the first year of operations		1,700
Materials consumed in the testing process		2,200
Direct employee wages to test equipment		1,300
Costs of training employees to use the equipment		1,400
Overhead costs charged to the machine		5,300
Legal fees to draft the equipment purchase contract		2,400
Government grant received on purchase of the equipment		(8,000)
Insurance costs during first year of operations		900

Required: Determine the total cost of the equipment purchased. If an item is not capitalized, describe how it would be reported.

9.2 Argyris Mining Inc. completed construction of a new silver mine in 2020. The cost of direct materials for the construction was $2,200,000 and direct labour was $1,600,000. In addition, the company allocated $250,000 of general overhead costs to the project. To finance the project, the company obtained a loan of $3,000,000 from its bank. The loan funds were drawn on February 1, 2020, and the mine was completed on November 1, 2020. The interest rate on the loan was 8% p.a. During construction, excess funds from the loan were invested and earned interest income of $30,000. The remainder of the funds needed for construction was drawn from internal cash reserves in the company. The company has also publicly made a commitment to clean up the site of the mine when the extraction operation is complete. It is estimated that the mining of this particular seam will be completed in ten years, at which time restoration costs of $100,000 will be incurred. The appropriate discount rate for this type of expenditure is 10%.

Required: Determine the cost of the silver mine to be capitalized in 2020.

9.3 Cheng Manufacturing Ltd. recently purchased a group of assets from a bankrupt company during a liquidation auction. The total proceeds paid for the assets were $220,000 and included a specialized lathe, a robotic assembly machine, a laser guided cutting machine, and a delivery truck. To make the bid at the auction, the company hired a qualified equipment appraiser who provided the following estimates of the fair value of the assets, based on their conditions, productive capacities, and intended uses:

Specialized lathe	$	30,000
Robotic assembly machine	$	90,000
Laser guided cutting machine	$	110,000
Delivery truck	$	20,000

Required: Determine the cost of each asset to be capitalized on Cheng Manufacturing Ltd.'s books.

9.4 Prabhu Industries Ltd. recently exchanged a piece of manufacturing equipment for another piece of equipment owned by Zhang Inc. Prabhu Industries was required to pay an amount of cash to finalize the exchange. The following information is obtained regarding the exchange:

	Prabhu	Zhang
Equipment, at cost	25,000	21,000
Accumulated depreciation	10,000	8,000
Fair value of equipment	17,000	19,000
Cash paid	2,000

Required:

Prepare the journal entries required by each company to record the exchange, assuming the exchange is considered to have commercial substance.
Repeat part (a) assuming the exchange does not have commercial substance.
Repeat part (b) assuming the accumulated depreciation recorded by Prabhu is only $5,000 instead of $10,000.

9.5 Lo-Dun Inc. is a publicly traded financial services company. The company recently acquired two assets in the following transactions:

Transaction 1: Lo-Dun acquired a new computer system to assist with its programmed trading activities. The computer system had a list price of $85,000, but the salesperson indicated that the price could likely be negotiated down to $80,000. After further negotiation, the company acquired the asset by issuing 15,000 of its own common shares. At the time of the transaction, the shares were actively trading at $5.25 per share.

Transaction 2: Lo-Dun acquired new office furniture by making a down payment of $5,000 and issuing a non-interest bearing note with a face amount of $45,000. The note is due in one year. The market rate of interest for similar transactions is 9%.

Required: Prepare the journal entries for Lo-Dun Inc. to record the transactions. Provide a rationale for the amount recorded for each item.

9.6 Pei Properties recently purchased a vacant office condo where it plans to operate an employment-training centre. The total purchase price of the condo was $625,000 with an expected useful life of 30 years with no residual value. The local government in this municipality was very interested in this project, providing a grant of $90,000 for the purchase of the condo. The only condition of the grant was that the employment-training centre be operated for a period of at least five years. Pei Properties believes that this target can be achieved with the business plan it has prepared.

Required:

Prepare the journal entry to record the purchase of the condo, assuming the company uses the deferral method to record the government grant.
Repeat part (a) assuming the company uses the offset method to record the government grant.
Determine the annual effect on the income statement for each of the above methods.

9.7 Finucane Manufacturing Inc. owns a large factory building that it purchased in 2016. At the time of purchase, the company decided to apply the revaluation model to the property; the first revaluation occurred on December 31, 2018. On January 1, 2019, the recorded cost of the building was $1,200,000, and the accumulated depreciation was nil, as the company applies the revaluation model by eliminating accumulated depreciation. The balance in the revaluation surplus account on January 1, 2019, was $150,000. As well, the company decided on this date to obtain annual appraisals of the property in order to revalue it at every reporting period. The appraised values obtained over the next three years were as follows:

Date	Appraised Value
December 31, 2019	$1,250,000
December 31, 2020	$1,000,000
December 31, 2021	$1,150,000

Required: Prepare all the required journal entries for this property for the years ended December 31, 2019 to 2021. Assume that the building is depreciated on a straight-line basis over 30 years with no residual value. Also assume that the company does not make annual transfers from the revaluation surplus account to retained earnings.

9.8 Kappi Capital Inc. holds a number of investment properties that it accounts for under IAS 40 using the fair value method. The company purchased a new rental property on January 1, 2020, for $1,500,000. The appraised value on December 31, 2020, was $1,450,000 and the appraised value on December 31, 2021, was $1,625,000.

Required: Prepare the adjusting journal entries for this property on December 31, 2020, and December 31, 2021.

9.9 Sun Systems Ltd. operates a manufacturing facility where specialized electronic components are assembled for use in consumer products. The facility was purchased in 2014 for a cost of $800,000, excluding the land component. At the time of purchase, it was believed that the building would have a useful life of 40 years with no residual value. The company follows the policy of recording a full year of depreciation in the year of an asset's acquisition and no depreciation in the year of an asset's disposal. During 2020, the following transactions with respect to the building occurred:

Regular repairs to exterior stucco and mechanical systems were incurred at a total cost of $32,000.
In the middle of the year, the existing boiler system failed and required replacement. The replacement cost of the new unit was $125,000. Management considers this to be a major component of the building, but had not separately recorded the cost of the original boiler, as it was included in the building purchase price. It is estimated inflation has increased the cost of these types of units by 15% since 2014.
The entire building was repainted at a cost of $15,000 during the year. This did not extend the useful life of the building, but improved its overall appearance.
A major structural repair to the foundation was undertaken during the year. This repair cost $87,000 and was expected to extend the useful life of the building by ten years over the original estimate.
A small fire in the staff kitchen caused damage that cost $5,000 to repair.

Required: Prepare the journal entries to record the transactions that occurred in 2020. Assume all transactions were settled in cash.

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