Chapter Opening Critical Thinking Challenge Questions

Fundamental Accounting Principles, Volume 2, 17e Edition By Kermit Larson (Solutions Manual All Chapters)

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Last revised: September 2021

Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 9-2 Chapter 9 Property, Plant and Equipment and Intangibles

Chapter Opening Critical Thinking Challenge Questions*

You are asked by the CFO of YVR to evaluate the newest capital asset, the Airside Operations Building at YVR, and to break it into major components for depreciation purposes. Identify at least five major components and determine an expected life for each of those components.

Components of the Airside Operations Building could include:

• Building exterior walls 40 years
• Roofing 25 years
• Pavement 15 years
• Landscaping 10 years
• Electrical Components 15 years
• Flooring 15 years
• Plumbing 15 years
• Furniture and Fixtures 15 years
• Fire Equipment 20 years
• Snow Removal Equipment 20 years

*The Chapter 9 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students in the print and ebooks. 2 / 4

Last revised: September 2021

Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 9-3 Knowledge Check-Up Questions

• d) 3. d) 4. d) 5. c)
• b) 8. d) 9. c) 10. c)

Concept Review Questions

• A property, plant and equipment asset is long-lived in that it has a service life of longer than

one accounting period; it is used in the production or sale of products or services. It is different from other assets such as receivables or inventory in that the property, plant and equipment is used within the operations of business to generate profit, whereas inventory is purchased or manufactured for resale. Receivables represent the amounts due from customers based on past transactions.

• Land held for future expansion is classified as a long-term investment. It is not a property,

plant and equipment asset because it is not being used in the production or sale of other assets or services.

• The cost of a property, plant and equipment asset includes all normal, reasonable, and

necessary costs of getting the asset in place and ready to use. For example, cost includes such items as the invoice price paid, freight costs, non refundable sales taxes (PST, HST) and all costs incurred related to installing and testing an asset before it is put into use.

• Land is an asset with an unlimited life and, therefore, is not subject to depreciation. Land

improvements refer to items such as fencing, parking lots surfaces, landscape lighting and have limited lives and are depreciated over their useful lives.

• No. The Accumulated Depreciation, Machinery account is a contra asset account with a

credit balance that does not represent cash or any other funds. Funds available for buying machinery would be shown on the balance sheet as liquid assets with debit balances, such as the account Cash and Cash Equivalents. The balance of the Accumulated Depreciation, Machinery account shows the portion of the machinery's original cost that has been charged to depreciation expense, and gives some indication of how soon the asset will need to be replaced.

• Repairs are made to keep a plant and equipment asset in normal, good operating

condition, and should be charged to expense of the current period. Repairs and maintenance expenses decrease profit on the income statement in the current period.Betterments are made to extend the service potential or the life of a plant and equipment asset beyond the original estimated life and are charged to the plant and equipment asset account. After incurring a betterment, a depreciation policy also needs to be established.

• Because the $75 cost of the plant and equipment asset is not likely to be material to the

users of the financial statements, the materiality principle justifies charging it to expense.

• Spin Master had Depreciation and amortization of 103 and 84.6 (millions) in 2020 and 2019

as seen on the Consolidated statements of Cash flows. 3 / 4

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Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 9-4

• A company might sell or exchange an asset when it reaches the end of its useful life, or if it

becomes inadequate or obsolete, or because the company has changed its business plans.An asset may also be damaged or destroyed by fire or some other accident.

• An intangible asset has no physical existence. Its value comes from the unique legal and

contractual rights held by its owner.

• Types of intangible assets are patents, copyrights, leaseholds, drilling rights, and

trademarks.

• Indigo reported $24,571,000 as Intangible assets at March 28, 2020.
• A business can only record goodwill when the price paid for a company being purchased

exceeds the fair market value of this company’s net assets (assets minus liabilities) if purchased separately.

• Recipe reported Goodwill at December 31, 2020 of $198,313,000.
• When an asset is constructed, such as the development of a new runway, all costs for

construction-related materials and labour costs can be capitalized. Also, any electricity and utilities consumed relating to the project, plus a reasonable amount for depreciation on any equipment used during construction. Other permitted costs include design fees, building materials and any interest charges on debt outstanding during the period of construction incurred to finance the project.

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