BUSI 353

ASSIGNMENT #6

GENERAL INSTRUCTIONS FOR ALL ASSIGNMENTS:

(A) See the course outline for due dates.
(B) Please do not use a cover page. Provide your full name and student number on the top
of the first page and then proceed with your answers.
(C) All assignments must be typed and submitted via Canvas using PDF.
(D) Use Arial font and font size 11 with a minimum 2.5-centimetre (1-inch) margin.
(E) For some questions, a page limit is indicated at the top. If you are having difficulty
maintaining the page limit, consider that a challenge for being clear and concise.
Effective use of point form is a good technique for being clear and concise. Do not feel
obligated to use the entire page limit. Often times, the best answers are the ones that
directly address the relevant aspects of the question.
(F) It is unnecessary to repeat the question. You can assume that I am familiar with the
question and proceed with your answer.
(G) Failure to comply with the above instructions may result in a deduction of marks.

** SHOW YOUR WORK **

Question 1

Corinth Biotech Limited (CBL) started operations in January 2018. CBL reports under IFRS.
The following activities occurred during the year:

1. On January 31, 2018, the shareholder, John Ahaz, contributed a parcel of land and a
building located in Burnaby to CBL in return for 1,000 common. The land’s appraised
value was $110,000 while the building’s appraised value was $420,000. The value of
the common shares is unknown.

2. John hired several employees to conduct research and development. The following
amounts were expended during the year:

 $82,000 for conceptual formulation and design of possible new products.

 $110,000 for evaluation of product alternatives.

Of the $110,000 of expenditures, $75,000 were attributable to a clearly defined product,

Product X, which is technically feasible. Management has indicated its intention to
produce and market the product. The future market for the product is clearly defined
and John is convinced that he can do an initial public offering to raise enough money to
complete the product for sale. Product X is expected to begin generating revenue early
next year.

3. On November 30, 2018, CBL decided that it needed to move its offices from Burnaby to
Vancouver. Accordingly, it traded its Burnaby land and building for a different land and
building located in Vancouver. The appraised value of the Vancouver land was
$106,000 while the appraised value of the Vancouver building was $480,000. On this
date, the Burnaby land had an appraised value of $145,000 but the value of the Burnaby
building was unknown. The transaction lacks commercial substance.

Assume that CBL amortizes its buildings on a declining-balance method at a rate of 6% per
year, prorated monthly.
 REQUIRED

1. Prepare all of the relevant journal entries for the above activities. Your entries should
include any relevant adjusting journal entry(ies) at December 31, 2018, CBL’s year-end.

2. What is meant by “commercial substance” as it pertains to non-monetary transactions?

3. Assume that for item #3, CBL entered the transaction as previously described and that CBL
paid an additional $85,000. If the transaction was considered to have commercial
substance, what would be the appropriate journal entry? Assume that the appraised value
of the Vancouver land is more reliable than the appraised value of the Burnaby land.

Question 2 (ASPE)

Timmons Limited built a plant facility and started commercial production in July 2014. The plant
facility had a capital cost of $4,600,000, and equipment in the plant had a cost of $3,875,000.
Both of these capital assets were depreciated, starting in 2014, on a straight-line basis
assuming a residual value of 10% of the original cost, a 20-year useful life for the plant facility,
and an eight-year useful life for the equipment. Timmons claimed a half-year worth of
depreciation in 2014.

In December 2018, the market for Timmons’ products declined precipitously because of a
significant improvement in similar new competing products that are being sold for a lower price.
Operations in the plant were temporarily suspended while inventory was reduced. The plant
facility and the equipment are being re-tooled and improved in order to reduce the production
costs.

Assume that the plant facility and the equipment are an asset group for the purposes of
determining a write down, if any.

The fair value of this asset group is $3,449,080. If the asset group were sold, Timmons would
incur a 2% brokerage fee along with legal and other selling costs of $144,000.

The following probability-weighted future cash flow information is available (assume all cash
flows occur at the end of the year, unless otherwise noted):

Year ===> Jan2019 Dec2019 Dec2020 Dec2021 Dec2022 Dec2023

CASH FLOWS
Sales revenue 1,300,000 1,300,000 1,300,000 1,300,000 1,300,000
Cost of goods sold (650,000) (650,000) (650,000) (650,000) (650,000)
Other operating costs (29,000) (29,000) (29,000) (29,000) (89,000)
Retool (paid. Jan. 1, 2019) (200,000) 0 0 0 0 0
Residual value 0 0 0 0 1,250,000

(200,000) 621,000 621,000 621,000 621,000 1,811,000

The relevant discount rate is 7%. Because of the various changes in the business, Timmons
anticipates that it will now use the plant facility and equipment until December 2023, after which
it will sell the capital assets for their residual value as noted in the cash flows.

REQUIRED

1. Calculate the net book value of the plant and equipment at the end of 2018, before retooling
costs.

2. Outline ASPE’s recognition criteria for an impairment loss on capital assets.

3. Is the carrying amount of the plant facility and equipment “recoverable”? Justify and explain
your answer. Show your work.

4. Prepare the relevant journal entry(s) to record the write down(s) for this asset group. Show
your work.

5. Under ASPE, can this impairment write down be reversed? Briefly explain.

Question 3 (IFRS)

Refer back to the information given in Question #2 above. Assume the assets are being
accounted for under the cost model (as opposed to the revaluation model). Answer the
following questions:

1. Under IFRS, what is the equivalent terminology for an “asset group” when considering
impairment of property, plant and equipment? Do not use an abbreviation.

2. What is the definition of “recoverable amount”? Compute the recoverable amount of the
CGU in this question. Show your work.

3. Ignore your answer to part 2. Assume the “value in use” amount for this CGU is $3,300,000.
Prepare the journal entry to record the write down of this CGU.

4. Under IFRS, can this impairment write down be reversed?

Question 4

Read the article entitled “Lies, Damned Lies, and Managed Earnings The crackdown is here”. It
is posted on Canvas at the bottom of the Assignments section in the Assignments tab.

In one part of the article, Harvey Goldschmid makes a couple of comments regarding “cookie jar
reserves”. Explain to an unsophisticated investor what Goldschmid is saying. For example:

1. Why would it be more difficult to fairly value a company? Consider how earnings are used
in valuations of businesses. Etc.

2. What does he mean by “dim the signals”? What signals do financial statements give? How
would a user identify such signals in financial statements? How do “cookie jar reserves” dim
those signals? Etc.