Intermediate Accounting 2 (Chapter 16 Answers)

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Chapter 16
Property, Plant and Equipment (Part 2)
PROBLEM 1: TRUE OR FALSE

1. FALSE – PAS 16 defines depreciation as the “systematic
allocation of the depreciable amount of an asset over its
estimated useful life.”
2. FALSE – revaluation model
3. TRUE = (120K – 20K) ÷ 10 years = 10K annual depreciation;

10K annual depreciation ÷ 100K depreciable amount =10%
4. FALSE – 800K
5. TRUE
6. FALSE
7. TRUE
8. TRUE
9. FALSE – recognized in OCI and accumulated in equity
10. FALSE – (180K – 10K) – 200K = 30K loss
PROBLEM 2: MULTIPLE CHOICE – THEORY

1. D
2. B
3. A
Depreciation starts when the asset is available for use in the
manner intended by management.
Costs incurred while an item capable of operating in the
manner intended by management has yet to be brought into
use are recognized as expenses.
4. D – see the word “not” in the problem

5. D
6. D
7. D - PAS 16 encourages the note disclosure of the gross
carrying amounts of fully depreciated assets. If the fully
depreciated assets were removed from the ledger, information
on the gross carrying amounts to be disclosed in the notes
would not be readily available.
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8. B
9. D
10. D
PROBLEM 3: EXERCISES
1. Solutions:
Requirement (a): Straight line method
Initial cost (Historical cost) of equipment 1,000,000
Residual value (100,000)
Depreciable amount 900,000
Divide by: Estimated useful life 4
Annual depreciation 225,000
 Depreciation table:
Accumulated Carrying
Date Depreciation depreciation amount
Jan. 1, 20x1 1,000,000
Dec. 31, 225,000 775,000
20x1 225,000
Dec. 31, 225,000 450,000 550,000
20x2
Dec. 31, 225,000 675,000 325,000
20x3
Dec. 31, 225,000 900,000 100,000
20x4
900,000
 Journal entries:
Dec. 31, Depreciation expense 225,000
20x1
Accumulated depreciation 225,000
20x2
Requirement (b): Sum-of-the-years’ digits method

SYD denominator = Life x [(Life + 1) ÷ 2]
SYD denominator = 4 x [(4 + 1) ÷ 2] = 10
Accumulate
Depreciab SYD Depreciatio d Carrying
Date le amount rate n depreciation amount
1,000,00
1/1/x1
0
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12/31/x
1
900,000 4/10 360,000 360,000 640,000
12/31/x
2
900,000 3/10 270,000 630,000 370,000
12/31/x
3
900,000 2/10 180,000 810,000 190,000
12/31/x
900,000 1/10 90,000 900,000 100,000
4
900,000
20x1
20x2
Requirement (c): Double declining balance method

Double declining rate = 2 ÷ Life
Double declining rate = 2 ÷ 4 = 50%
Year Depreciation
20x1 (1M x 50%) 500,000
20x2 (1M – 500K) x 50% 250,000
20x3 (1M – 500K – 250K) x 50% 125,000
(1M – 500K – 250K – 125K –100K
20x4 RV) 25,000
Date Depreciation Accumulated Carrying amount
depreciation
Jan. 1,
20x1 1,000,000
Dec. 31,
20x1 500,000 500,000 500,000
Dec. 31,
20x2 250,000 750,000 250,000
Dec. 31,
20x3 125,000 875,000 125,000
Dec. 31,
20x4 25,000 900,000 100,000
900,000
20x1
20x2
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2. Solutions:
Requirement (a): Based on Input
Depreciation rate = Depreciable amount ÷ Estimated total hours
Depreciation rate = 900,000 ÷ 12,000
Depreciation rate = 75 per hour of input
Dec. Depreciation expense (3,600 x 270,000

31, 75) 270,000
20x1
Accumulated depreciation
31, 75) 225,000
20x2
Requirement (a): Based on Output

Depreciation rate = Depreciable amount ÷ Estimated total units
Depreciation rate = (900,000 ÷ 720,000)
Depreciation rate = 1.25 per unit of output
Dec. Depreciation expense (240K x 300,000

31, 1.25) 300,000
20x1
31, 1.25) 250,000
20x2
3. Solution:
Double declining
Yr. Straight line SYD
balance
(75,000* / 4) = 4/10 x 75,000* =
1 30,000
50% x 80,000 = 40,000
18,750
3/10 x 75,000 =
2 18,750 22,500
50% x 40,000 = 20,000
2/10 x 75,000 =
3 18,750 15,000
50% x 20,000 = 10,000
1/10 x 75,000 =
4 18,750 7,500
50% x 10,000 = 5,000
* 80,000 - 5,000 = 75,000 depreciable amount
Yea Straight Double declining

SYD
r line balance
18,750 x
20x 30,000 x 9/12 =
9/12 40,000 x 9/12 = 30,000
1 22,500
= 14,062.50
20x
18,750 30,000 x 3/12 = 7,500 40,000 x 3/12 = 10,000
2
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22,500 x 9/12 =
20,000 x 9/12 = 15,000
16,875
20x
18,750 22,500 x 3/12 = 5,625 20,000 x 3/12 = 5,000
3
15,000 x 9/12 =
10,000 x 9/12 = 7,500
11,250
20x
18,750 15,000 x 3/12 = 3,750 10,000 x 3/12 = 2,500
4
7,500 x 9/12 = 5,625 5,000 x 9/12 = 3,750
18,750 x
20x
3/12 7,500 x 3/12 = 1,875 5,000 x 3/12 = 1,250
5
= 4,687.50
The asset is acquired on Mar. 18, 20x1 (last half of the month). Accordingly, it is
depreciated starting on Apr. 1, 20x1.
4. Solution:
Step 1: Carrying amount as at the beg. of the period of change
 Double declining balance rate (2 ÷ Life) or (2 ÷ 10 yrs.) 20%
 Carrying amt. on Jan. 1, 20x4 (40M x 80% x 80% x
80%) 20,480,000
Step 2: Apply the changes

Carrying amount on Jan. 1, 20x4 20,480,000
Residual value (2,000,000)
Depreciable amount 18,480,000
Divide by: Revised remaining useful life (12 yrs. – 3
yrs.) 9
Straight line depreciation 2,053,333
Journal entry:
Dec. 31, Depreciation expense 2,053,33
20x4
Accumulated depreciation 3 2,053,33
3
5. Solutions:
Requirement (a):
Replacement cost 21,000,000
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Less: Depreciation (21M x 20/60(a)) (7,000,000)

Fair value 14,000,000
Carrying amount (10M – 5M) (5,000,000)
Revaluation surplus – gross of tax 9,000,000
Less: Deferred tax (9M x 30%) (2,700,000)
Revaluation surplus – net of tax 6,300,000
(a)
Total economic life = Effective life + Remaining economic life (20 + 40 = 60)
Requirement (b):
 Proportional method
Historical
Cost Replacement cost Increase
11,000,00
Building 10,000,000 21,000,000 0
(2,000,000
Accum. depreciation (5,000,000) (7,000,000) )
CA/ DRC/ RS (a) 5,000,000 14,000,000 9,000,000
(a)
Carrying amount/ Depreciated replacement cost/ Revaluation surplus – gross of tax
Date Building 11,000,0

Accumulated depreciation 00 2,000,000
Revaluation surplus 6,300,000
Deferred tax liability 2,700,000
 Elimination method
DateAccumulated depreciation (elimination) 5,000,000
Building (balancing figure) 4,000,000
The building’s carrying amount after the revaluation is analyzed as

follows:
Proportional Elimination
Building (10M + 11M); (10M + 4M) 21,000,000 14,000,000
A/D (5M + 2M); (5M - 5M) (7,000,000) -
Carrying amount (equal to fair value) 14,000,000 14,000,000
Requirement (c):
Residual value -
Divide by: 40
Revised annual depreciation 350,000
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6. Solutions:
Requirement (a):
Less: Carrying amount (40M – 10M) (30,000,000)
Revaluation surplus - gross of tax 18,000,000
Less: Deferred tax (18M x 30%) (5,400,000)
Revaluation surplus - net of tax 12,600,000
Requirement (b):
Historical Cost Fair value % change
Building 40,000,000
Accum. depreciation (10,000,000)
48,000,00
Carrying amount 30,000,000 160%*
0
* (48,000,000 ÷ 30,000,000) = 160% increase
Historical % Revalued
Cost change amounts
Building 40,000,000 160% 64,000,000
Accum. depreciation (10,000,000) 160% (16,000,000)
Carrying amount 30,000,000 48,000,000
Date Building (64M – 40M) 24,000,00

Accum. depreciation (16M – 0 6,000,000
10M) 5,400,000
Revaluation surplus 0
Requirement (b): Elimination method

DateAccumulated depreciation (elimination) 10,000,0
Building (balancing figure) 00
Deferred tax liability 8,000,000 5,400,00
12,600,0
00

follows:
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Proportion Eliminatio
al n
Building (40M + 24M); (40M + 8M) 64,000,000 48,000,000
Accum. Depreciation (10M + 6M); (10M - (16,000,000
-
10M) )
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. D
 SLM = (1M x 95%) ÷ 10 = 95,000
 SYD denominator = {10 x [(10 + 1) ÷ 2]} = 55
SYD depreciation in 20x2 = 950,000 x 9/55 = 155,455
 DDB rate = 2 ÷ 10 = 20%
DDB depreciation in 20x2 = 1M x 80% x 20% = 160,000
 UOPM (input) depreciation in 20x2 = 950,000 x (2,800/28,000)
= 95,000
 UOPM (output) depreciation in 20x2 = 950,000 x
(9,800/84,000) = 110,833
2. C
Purchase price 480,000
Commission 20,000
Freight 22,000
Installation and testing 18,000
Total cost 540,000
Residual value (40,000)
 SLM = 500,000 x 8/10 + 40,000 = 440,000

 SYD denominator = {10 x [(10 + 1) ÷ 2]} = 55
SYD accumulated depreciation on Dec. 31, 20x2 = 500,000 x
[(10 + 9) ÷ 55] = 172,727
SYD carrying amount on Dec. 31, 20x2 = 540,000 - 172,727 =
367,273
 DDB rate = 2 ÷ 10 = 20%
DDB carrying amount on Dec. 31, 20x2 = 540M x 80% x 80%
= 345,600
 UOPM (input) Accumulated depreciation on Dec. 31, 20x2 =
500,000 x [(2,000 + 2,700 ) ÷ 25,000] = 94,000
Carrying amount on Dec. 31, 20x2 = 540,000 – 94,000 =
446,000
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 UOPM (output) Accumulated depreciation on Dec. 31, 20x2 =

500,000 x [(8,000 + 10,000 ) ÷ 100,000] = 90,000
Carrying amount on Dec. 31, 20x2 = 540,000 – 90,000 =
450,000
3. C
Solution:
SYD denominator = Life x [(Life + 1) / 2] = 4 x [(4+1) / 2] = 10
Historical cost 20,000
Estimated residual value (2,000)
Depreciation - 20x1 (18,000 x 4/10) 7,200

Depreciation - 20x2 (18,000 x 3/10) 5,400
Depreciation - 20x2 (18,000 x 2/10) 3,600
Accumulated depreciation - 12/31/20x3 16,200

Accumulated depreciation - 12/31/20x3 (16,200)
Carrying amount - 12/31/20x3 3,800
4. B
Yr. Straight line SYD

(100,000 – 10,000) ÷ 5 =
1 90,000 x 5/15 = 30,000
18,000
2 18,000 90,000 x 4/15 = 24,000
3 18,000 90,000 x 3/15 = 18,000
4 18,000 90,000 x 2/15 = 12,000
5 18,000 90,000 x 1/15 = 6,000
5. A (110,000 – 5,000) ÷ 10 yrs. = 10,500
6. A
Solution:
150% declining balance rate = 1.5/Life = 1.5/5 = 30%
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Depreciation - 20x1 (200,000 x 30%) 60,000

Depreciation - 20x2 (200,000 - 60,000) x 30% 42,000
Accumulated depreciation - 12/31/x2 102,000
7. D
Solution:
 Composite life = Depreciable amount ÷ Annual depreciation
Composite life = 280,000 ÷ 70,000 = 4 years
 Composite rate = Annual depreciation ÷ Total cost

Composite rate = 70,000 ÷ 290,000 = 24.14%
 Depreciation in current year:

Total depreciable amount 280,000
Depreciable amount of old tools (8,000)
Depreciable amount of new tools 12,000
Revised depreciable amount 284,000
Divide by: Original composite life 4
Total cost 290,000

Cost of old tools (8,000)
Cost of new tools 12,000
Revised total cost 294,000
Multiply by: Original composite rate 24.14%
Revised annual depreciation 70,972*
* Answer rounded-off to 71,000.
8. C
Solutions:
 Retirement method:
Cost of disposals (12,000 + 24,000 + 36,000) 72,000
Net disposal proceeds (1,000 + 1,600 + 2,000) (4,600)
Depreciation expense 67,400
 Replacement method:
Cost of additions as replacements (20,000 + 44,000) 64,000
Cost of disposals but not replaced 24,000
Proceeds from sale of old tools (1,000 + 1,600 + 2,000) (4,600)
Depreciation expense 83,400
 Inventory method:
Tools
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beg. bal. 300,000 4,600 Proceeds from asset disposals

Additions 124,000 67,400 Depreciation (squeeze)
352,00
0 end. bal. (per physical count)
9. C
 Useful life = 20 years
 Remaining lease term as of 12/31/01 = (9* + 5 renewal) = 14
* Dec. 31, 2001 completion date of improvements to Dec. 31, 2010 end of original
lease term = 9 yrs.
 Shorter = 14 years
 480,000 x 13/14 = 445,714
10. C
Solution:
 Double declining balance rate (2 ÷ Life) or (2 ÷ 20 yrs.) 10%
 Carrying amt. on Jan. 1, 20x8
(5M x 90% x 90% x 90% x 90% x 90% x 90% x 90%) 2,391,485

 Remaining life = 20 yrs. – 7 yrs. = 13 years
 SYD denominator = {13 x [(13 + 1) ÷ 2]} = 91
 Carrying amount on Jan. 1, 20x8 2,391,485
Revised residual value (200,000 – 20,000) (180,000)
Multiply by: 13/91
SYD depreciation in 20x8 315,926
11. D
Original estimated useful life 8
Original depreciation per year 33,000

Accumulated depreciation - 1/1/x3 (33,000 x 3
yrs.) (99,000)
Carrying amount - 1/1/x3 165,000
Revised residual value (24,000)
Revised depreciable amount 141,000
Divide by: Revised useful life (6 yrs. - 3 yrs.) 3
Depreciation - 20x3 47,000
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Accumulated depreciation - 1/1/x3 (33,000 x 3 yrs.) 99,000

Depreciation - 20x3 47,000
Accumulated depreciation - 12/31/x3 146,000
12. C
Solutions:
(1)
Jan. 1, Cash 100,000
20x7
Accumulated depreciation (1.8M x 5/15) 600,000
Loss on replacement (squeeze) 1,100,0
Equipment (old part) 00 1,800,0
to derecognize the old part 00
Jan. 1, Equipment (new part) 2,100,0
20x7
Cash 00 2,100,0
to recognize the new replacement part 00
On derecognition, the difference between the carrying amount of

the derecognized PPE and the net disposal proceeds, if any, is
recognized as gain or loss in profit or loss.
(2)
Jan. 1, Cash 100,000
20x7
Accumulated depreciation (2.1M x 5/15) 700,000
Loss on replacement (squeeze) 1,300,0
Equipment (old part) 00 2,100,0
to derecognize the old part 00
20x7
Cash 00 2,100,0
13. A
Solution:
(1)
(12,500,00
Less: Depreciation (50M x 8(a)/32(b)) 0)
Fair value (Depreciated replacement cost) 37,500,000
(24,000,00
Less: Carrying amount (40,000,000 – 16,000,000) 0)
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Revaluation surplus, gross of tax 13,500,000

Less: Deferred tax consequence (13.5M x 30%) (4,050,000)
Revaluation surplus, net of tax 9,450,000
(a)
Effective life (Effective age)
(b)
Total economic life = Effective life + Remaining economic life = (8 + 24) = 32

Divide by: Remaining economic life 24
Revised annual depreciation 1,562,500
14. B
Solutions:
Less: Depreciation (30M – 3M) x 7(a)/28 (6,750,000)
(17,200,000
Carrying amount (22M – 2M) x 19/25 + 2M )
Revaluation surplus, gross of tax 6,050,000
Less: Deferred tax consequence (6.050M x 30%) (1,815,000)
Revaluation surplus, net of tax – 12/31/x6 4,235,000
(a)
28 yrs. total economic life – 21 yrs. remaining economic life = 7 yrs. effective life
(1) Carrying amount of building on 12/31/x7:

Fair value on 12/31/x6 23,250,000
Revised residual value (3,000,000)
Revised depreciable amount 20,250,000
Fair value on 12/31/x6 23,250,000

Less: Depreciation in 20x7 (964,286)
Carrying amount of building on 12/31/x7 22,285,714
(2) Carrying amount of revaluation surplus on 12/31/x7:

Annual transfer to retained earnings 201,667

Less: Amount transferred to R/E in 20x7 (201,667)
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15. A
Solution:
 Building:
Less: Depreciation (12M x 10/40*) (3,000,000)
Carrying amount [8M - (8M x 15**/25)] (3,200,000)
Multiply by: 70%
Revaluation surplus – net of tax (Building) 4,060,000
* 10 yrs. effective life + 30 yrs. remaining life = 40 total economic life

**Actual life
 Patio:
Less: Depreciation (4.2M x 10/25*) (1,680,000)
Carrying amount [3M – (3M x 10**/20)] (1,500,000)
Multiply by: 70%
Revaluation surplus – net of tax (Patio) 714,000
* 10 yrs. effective life + 15 yrs. remaining life = 25 total economic life

**Actual life
Total Revaluation Surplus, net of tax: (4.06M + 714K) =

4,774,000
16. D
Solution:
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17. D
Solution:
 Changes in accounting estimates in 20x4:
 Carrying amt. on Jan. 1, 20x4 (20M – 1M) x 7/10 + 1M
R.V. 14,300,000

 Revised estimate of remaining useful life 5 years
 SYD denominator {5 x [(5 + 1) ÷ 2]} 15
 Carrying amount on Jan. 1, 20x4 14,300,000
Revised residual value (800,000)
Revised depreciation table:

Depreciable
Date amount SYD rate Depreciation
12/31/x4 13,500,000 5/15 4,500,000
12/31/x5 13,500,000 4/15 3,600,000
12/31/x6 13,500,000 3/15 2,700,000
12/31/x7 13,500,000 2/15 1,800,000
12/31/x8 13,500,000 1/15 900,000S
13,500,000
 Sale on July 21, 20x6:

Depreciation in 20x4 (4,500,000)
Depreciation in 20x5 (3,600,000)
Depreciation from Jan. 1 to July 31, 20x6 (2.7M x (1,575,000)
7/12)
Carrying amount on date of sale 4,625,000
Net disposal proceeds (4,500,000 – 50,000) 4,450,000

Carrying amount on date of sale (4,625,000)
P a g e | 16
Loss on sale (175,000)
18. B
Solution:
 Gain (loss) in P/L:
Fair value on 1/1/x6 15,000,000

Multiply by: 10/15
Carrying amount on 1/1/11 10,000,000
Net disposal proceeds (12M - .6M) 11,400,000

Carrying amount on 1/1/11 (10,000,000)
Gain on sale - P/L 1,400,000
 Direct transfer within equity:
Fair value on 1/1/x6 15,000,000

Carrying amount on 1/1/x6 (12M x 20/25) (9,600,000)
Divide by: Remaining useful life 15
Annual transfer to retained earnings 360,000
Revaluation surplus - 1/1/x6 5,400,000

Annual transfers (360K x 5 yrs.) (1,800,000)
Revaluation surplus - 1/1/11 3,600,000
19. B
971,065 12/31/x1
Disposal Depreciation -
(squeeze) 715,998 599,035 20x2
12/31/x2 854,102
20. B
P a g e | 17
Solution:
 Cost of acquisitions:
Building
1,000,00
Building, beginning 0
Acquisitions 2,300,00
(squeeze) 0 800,000 Disposals
2,500,00
0 Building, end
 Depreciation expense:
The journal entry to record the sale of the old building is re-
provided below:
20x2 Cash 260,000
Accumulated depreciation (squeeze) 500,000
Loss on sale of building 40,000
Building 800,000
200,000 beg.
Accumulated
depreciation of Depreciation
building sold 500,000 500,000 expense (squeeze)
end 200,000
PROBLEM 5: CLASSROOM ACTIVITY
Solutions:
Requirement (a):
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Aug. 1, 20x1
Building – Construction in progress 2,916,619.26
Cash
2,916,619.26
to record the down payment for the contracted
construction of a building
Aug. 22, 20x1

Building – Construction in progress 22,000.00
Cash 22,000.00
to record the payment for the building permit
The cost of building permit is capitalized because it is

necessary in bringing the asset to its intended condition, i.e., it is
illegal to construct a building without a permit.
Oct. 1, 20x1
Retention payable (1,296,275.22 x 10%)
129,627.52
Cash (1,296,275.22 x 90%)
1,166,647.70
to record the payment for the first progress billing
Dec. 22, 20x1

345,673.39
Cash (3,456,733.93 x 90%)
3,111,060.54
to record the payment for the second progress billing
Dec. 22, 20x1

Charitable contributions 13,000.00
Cash 13,000.00
to record donation for Christmas party of construction
workers
P a g e | 19
Feb. 27, 20x2

162,034.40 Cash (1,620,344.03 x 90%)
1,458,309.63
to record the payment for the third progress billing
Apr. 30, 20x2

Retention payable (432,091.76 x 10%)
43,209.18
Cash (432,091.76 x 90%)
388,882.58
to record the payment for the final progress billing
June 30, 20x2

Cash 12,000.00
to record the cost of occupancy permit
The cost of occupancy permit is capitalized because it is

necessary for the entity to enjoy the economic benefits of the asset,
i.e., it is illegal to occupy a building without a permit.
June 30, 20x2

Retention payable* 680,544.49
Cash 680,544.49
to record the settlement of the 10% retentions on payments
for progress billings
*129,627.52 + 345,673.39 + 162,034.40 + 43,209.18 = 680,544.49
June 30, 20x2

Building (a) 9,756,064.20
Building – Construction in progress (a)
9,756,064.20
to close the “Building – Construction in progress” to the
“Building” account
(a)
Building - Construction in
progress
P a g e | 20
2,916,619.2
8/1/x1 6
8/22/x1 22,000.00
1,296,275.2
10/1/x1 2
3,456,733.9
12/22/x1 3
1,620,344.0
2/27/x2 3
4/30/x2 432,091.76
6/30/x2 12,000.00
9,756,064.20
July 18, 20x2

Taxes and licenses 18,000.00
Cash 18,000.00
to record the tax on the building
Taxes are generally expensed. The only exception is when

the taxes have accrued before an existing building is purchased and
the payment thereof is assumed by the buyer.
July 24, 20x2

Relocation expense 230,000.00
Cash 230,000.00
to record the relocation costs as expense
Aug. 1, 20x2
Opening costs 50,000.00
Cash 50,000.00
to record the opening costs as expense
Opening costs and similar start-up costs are expensed.
Dec. 31, 20x2

Depreciation expense – Bldg. 195,121.29
Accumulated depreciation – Bldg. 195,121.29
to record the depreciation expense for 20x2
* 9,756,064.20 ÷ 25 yrs. = 390,242.57 annual depreciation x 6/12 =

195,121.29
Depreciation begins when the asset is available for use, and

not when it is actually used. The receipt of the occupancy permit on
P a g e | 21
June 30, 20x2 signifies that the building is available for use starting
from this date.
In practice, taxes on the building start to accrue also from the
date of the occupancy permit.
Requirement (b):
20x1 20x2
Building 7,619,628.41 9,756,064.20
Accumulated depreciation - (195,121.29)
Carrying amount - Dec. 31 7,619,628.41 9,560,942.91
P a g e | 22
PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solutions:
Requirement (a): Straight line method
Initial cost (Historical cost) of machine 500,000
Residual value (500,000 x 10%) (50,000)
Divide by: Estimated useful life 4
Annual depreciation 112,500
Accumulated Carrying
Date Depreciation depreciation amount
Jan. 1, 20x1 500,000
Dec. 31, 112,500 387,500
20x1 112,500
Dec. 31, 225,000 275,000
20x2 112,500
Dec. 31, 337,500 162,500
20x3 112,500
Dec. 31, 450,000 50,000
20x4 112,500
450,000
20x1
20x2
Requirement (b): Sum-of-the-years’ digits method

Accumulate
Depreciab SYD Depreciatio d Carrying
Date le amount rate n depreciation amount
1/1/x1 500,000
12/31/x
1
450,000 4/10 180,000 180,000 320,000
12/31/x
2
450,000 3/10 135,000 315,000 185,000
12/31/x
3
450,000 2/10 90,000 405,000 95,000
12/31/x
450,000 1/10 45,000 450,000 50,000
4
P a g e | 23
450,000
20x1
20x2
Requirement (c): Double declining balance method

Double declining rate = 2 ÷ Life
Double declining rate = 2 ÷ 4 = 50%
Depreciatio
Year
n
20x1 (500,000 x 50%) 250,000
20x2 (500,000 - 250,000) x 50% 125,000
20x3 (500,000 - 250,000 - 125,000) x 50% 62,500
(500,000 - 250,000 - 125,000 – 62,500 –
20x4 50,000 RV) 12,500
Date Depreciation Accumulated Carrying amount
depreciation
Jan. 1,
20x1 500,000
Dec. 31,
20x1 250,000 250,000 250,000
Dec. 31,
20x2 125,000 375,000 125,000
Dec. 31,
20x3 62,500 437,500 62,500
Dec. 31,
20x4 12,500 450,000 50,000
450,000
20x1
20x2
2. Solutions:
P a g e | 24
Requirement (a): Based on Input

Depreciation rate = Depreciable amount ÷ Estimated total hours
Depreciation rate = 450,000 ÷ 12,000
Depreciation rate = 37.5 per hour of input

31, 37.5) 135,000
20x1
31, 37.5) 112,500
20x2
Requirement (a): Based on Output

Depreciation rate = Depreciable amount ÷ Estimated total units
Depreciation rate = (450,000 ÷ 360,000)
Depreciation rate = 1.25 per unit of output

31, 1.25) 150,000
20x1
31, 1.25) 125,000
20x2
3. Solution: (450,000 ÷ 5 yrs. remaining lease term) = 90,000
The lease renewal option is ignored because the exercise is not

reasonably certain.
4. Solution:
 Carrying amt. on Jan. 1, 20x8 (9M – 600K) x 8/15 +
600K 5,080,000

 Revised remaining useful life (20 yrs. – 7 yrs.) 13 yrs.
 SYD denominator = Life x [(Life + 1) ÷ 2] = 13 x [(13 + 1) ÷
2] = 91

Less: Revised residual value (800,000)
P a g e | 25
Multiply by: SYD rate in 20x8 13/91

SYD depreciation in 20x8 611,429
Journal entry:
20x8
5. Solutions:
Requirement (a):
Jan. 1, Accumulated depreciation (2.5M x 6/10) 1,500,0
20x7
Loss on replacement (squeeze) 00
Equipment (old part) 1,000,0 2,500,0
to derecognize the old part 00 00
20x7
Cash 00 3,000,0
Requirement (b):
Jan. 1,
Accumulated depreciation (3M x 6/10) 1,800,0
20x7
Loss on replacement (squeeze) 00
Equipment (old part) 1,200,0 3,000,0
to derecognize the old part 00 00
20x7
Cash 00 3,000,0
6. Solutions:
Requirement (a):
Less: Carrying amount (30M – 9M) (21,000,000)
Revaluation surplus - gross of tax 4,200,000
Less: Deferred tax (4.2M x 30%) (1,260,000)
Revaluation surplus - net of tax 2,940,000
Requirement (b):
Historical Cost Fair value % change
Building 30,000,000
P a g e | 26
Accum. depreciation (9,000,000)

25,200,00
Carrying amount 21,000,000 120%*
0
* (25,200,000 ÷ 21,000,000) = 120% increase
Historical % Revalued
Cost change amounts
Building 30,000,000 120% 36,000,000
Accum. depreciation (9,000,000) 120% (10,800,000)
Carrying amount 21,000,000 25,200,000
Dat Building (36M – 30M) 6,000,000

e
Accum. depreciation (10.8M – 1,800,000
9M) 1,260,000
Revaluation surplus
Date
Accumulated depreciation (elimination) 9,000,000
0
4,800,000

follows:
Proportion Eliminatio
al n
Building (30M + 6M); (30M – 4.8M) 36,000,000 25,200,000
Accum. Depreciation (9M + 1.8M); (9M - (10,800,000
-
9M) )
Requirement (c):
Residual value (1,200,000)
Divide by: 8
7. Solutions:
Requirement (a):
Less: Depreciation (32M x 5/25(a)) (6,400,000)
P a g e | 27

Carrying amount (24M – 7.68M) (16,320,000)
Less: Deferred tax (9.28M x 30%) (2,784,000)
Revaluation surplus – net of tax 6,496,000
(a)
Total economic life = Effective life + Remaining economic life (5 + 20 = 25)
Requirement (b):
Historical
Cost Replacement cost Change
Building 24,000,000 32,000,000 8,000,000
Accum. depreciation (7,680,000) (6,400,000) 1,280,000
CA/ DRC/ RS (b) 16,320,000 25,600,000 9,280,000
(b)
Carrying amount/ Depreciated replacement cost/ Revaluation surplus – gross of tax
Date Building (see table above) 8,000,000

Accumulated depreciation 1,280,000
Dat Accumulated depreciation (elimination) 7,680,000
e

follows:
Proportional Elimination
Building (24M + 8M); (24M + 1.6M) 32,000,000 25,600,000
A/D (7.68M - 1.28M); (7.68M - 7.68M) (6,400,000) -
Requirement (c):
Residual value -
Divide by: 20
8. Solution:
P a g e | 28
Land Building
Fair value 8,000,000 16,000,000
(6,000,000 (12,000,000
Carrying amount
) )
Revaluation surplus 2,000,000 4,000,000
Divide by: Remaining economic life N/A 10
Annual transfer to retained
- 400,000
earnings
The revaluation surplus on the land remains in equity and

transferred to retained earnings only when the land is
derecognized.
9. Solution:
 Dec. 31, 20x4:
Dec. Impairment loss 1,200,00

31,
Land 0 1,200,00
20x4
0
 Dec. 31, 20x7:
Dec. Land 3,200,00

P a g e | 29
31, Impairment gain 0 1,200,00

20x7
2,000,00
0
 Dec. 31, 20x9:
Dec. Revaluation surplus 2,000,00

31,
Impairment loss 0
20x9
Land 100,000 2,100,00
0
10. Solution:
 Full-year depreciation charges (partial):

Depreciable
Date amount SYD rate Depreciation
Year 1 3,200,000 4/10 1,280,000
Year 2 3,200,000 3/10 960,000
Year 3 3,200,000 2/10 640,000
Year 4 3,200,000 1/10 320,000
 Depreciation table (partial):

Date Depreciation
P a g e | 30
Feb. 1 – Dec. 31,

20x1
(1.28M x 11/12) 1,173,333
Jan. 1 – Dec. 31,
20x2
(1.28M x 1/12) + (960K x 11/12) 986,667
Jan. 1 – July 31,
20x3
(960K x 1/12) + (640K x 6/12) 400,000
Accumulated depreciation as of date of
2,560,000
sale
 Journal entry:
July 20, Cash (1.8M – 40K) 1,760,00
20x3
Accumulated depreciation 0
Machine 2,560,00 4,000,00
Gain on sale (squeeze) 0 0
320,000
Alternative solution for gain (loss) computation:

Net disposal proceeds 1,760,000
Carrying amount on date of sale (4M - 2,560,000) (1,440,000)
Gain (loss) on sale 320,000

Intermediate Accounting 2 (Chapter 16 Answers)

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Page |1

PROBLEM 1: TRUE OR FALSE

2. FALSE – revaluation model

3. TRUE = (120K – 20K) ÷ 10 years = 10K annual depreciation;

PROBLEM 2: MULTIPLE CHOICE – THEORY

4. D – see the word “not” in the problem

Requirement (b): Sum-of-the-years’ digits method

Requirement (c): Double declining balance method

Dec. Depreciation expense (3,600 x 270,000

Requirement (a): Based on Output

Dec. Depreciation expense (240K x 300,000

Yea Straight Double declining

Step 2: Apply the changes

Less: Depreciation (21M x 20/60(a)) (7,000,000)

Date Building 11,000,0

The building’s carrying amount after the revaluation is analyzed as

Date Building (64M – 40M) 24,000,00

Requirement (b): Elimination method

The building’s carrying amount after the revaluation is analyzed as

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

 SLM = 500,000 x 8/10 + 40,000 = 440,000

 UOPM (output) Accumulated depreciation on Dec. 31, 20x2 =

Depreciation - 20x1 (18,000 x 4/10) 7,200

Historical cost 20,000

Yr. Straight line SYD

5. A (110,000 – 5,000) ÷ 10 yrs. = 10,500

Depreciation - 20x1 (200,000 x 30%) 60,000

 Composite rate = Annual depreciation ÷ Total cost

 Depreciation in current year:

Total cost 290,000

beg. bal. 300,000 4,600 Proceeds from asset disposals

Step 2: Apply the changes

Historical cost 264,000

Accumulated depreciation - 1/1/x3 (33,000 x 3 yrs.) 99,000

On derecognition, the difference between the carrying amount of

Revaluation surplus, gross of tax 13,500,000

Fair value (Depreciated replacement cost) 37,500,000

(1) Carrying amount of building on 12/31/x7:

Fair value on 12/31/x6 23,250,000

(2) Carrying amount of revaluation surplus on 12/31/x7:

Revaluation surplus, net of tax – 12/31/x6 4,235,000

* 10 yrs. effective life + 30 yrs. remaining life = 40 total economic life

* 10 yrs. effective life + 15 yrs. remaining life = 25 total economic life

Total Revaluation Surplus, net of tax: (4.06M + 714K) =

Step 2: Apply the changes

Revised depreciation table:

 Sale on July 21, 20x6:

Net disposal proceeds (4,500,000 – 50,000) 4,450,000

Loss on sale (175,000)

Fair value on 1/1/x6 15,000,000

Net disposal proceeds (12M - .6M) 11,400,000

 Direct transfer within equity:

Fair value on 1/1/x6 15,000,000

Revaluation surplus - 1/1/x6 5,400,000

PROBLEM 5: CLASSROOM ACTIVITY

Aug. 22, 20x1

The cost of building permit is capitalized because it is

Dec. 22, 20x1

Dec. 22, 20x1

Feb. 27, 20x2