Question 5 (13 marks)

True Dough Systems Inc. (TDS) is a commercial marijuana producer in Perth, Ontario. TDS recently expanded its operation by constructing a new greenhouse building. The building is expected to have a useful life of 20 years and a residual value of $50,000. Building construction began on January 1, 2020, and was completed on August 1, 2020. Costs incurred during the construction of the building were as follows:

January 1, 2020

$520,000

February 1, 2020

$360,000

April 30, 2020

$200,000

August 1, 2020

$350,000

Other capital asset information related to the new building is as follows:

Asset

Estimated fair value*

Installation costs incurred

Useful life

Residual value

Lighting system

$250,000

$26,000

10 years

$14,000

Air filtration system

$200,000

$33,000

15 years

Irrigation system

$150,000

$12,500

10 years

$20,000

* The lighting, air filtration, and irrigation systems were purchased as a package deal for $500,000. The estimated fair value of each system is indicated as if each system was purchased separately. Installation costs were incurred separately.

TDS had the following borrowings during 2020:

A building construction loan of $500,000 at 7% was taken out on January 1, 2020, and repaid on September 1, 2020.

A bank loan of $2,000,000 with interest of 8% was outstanding for the entire 2020 year.

Bonds payable of $6,000,000 (at par), with an effective annual interest rate of 4%, were also outstanding the entire year.

TDS has a December 31 year end, reports using IFRS, and uses the straight-line method of depreciation. All of the assets were put into use on August 1, 2020.

a) Calculate the cost of each asset as it would appear on TDS's August 1, 2020, statement of financial position. (9 marks)

b) Determine the depreciation expense related to the building only, for the year ended December 31, 2020. (1 mark)

c) Assume that the irrigation system will need to be replaced on December 31, 2026, at a total cost of $175,000. Provide the journal entry to record the purchase of the new system and the derecognition of the old system. (3 marks)