Chapter 9: CAPITAL ASSETS Quiz for chapter 9 will be Thurs or Friday of next week. (May 22 or May 23) CHAPTER 9

Some capital assets are exchanged for new capital assets. Let’s say your old F150 (2004) is no longer needed, so you want to trade in for F F is worth $2000 and the seller is willing to give you $2000 credit. The new F is worth $40,000. Then how much would you have to pay to the dealership? You would have to pay $ (because $40,000 – 2000 = 38000) Exchange of PPE

Trade in allowance is the amount of money that the seller is willing to reduce the purchase price of the new capital asset for the old capital asset. The new capital asset is seen as being purchased for cash plus the value of the old asset. The trade in allowance rarely reflects the fair market value. The new asset is recorded at the fair market value of the old asset and a purchase of the new asset. Exchange of PPE

When the net book vaule > market value  loss When the net book value < market value  gain The steps are same as the “Disposals of PPE” Step 1: Update any unrecorded amortization expense to the date of the exchange Step 2: Calculate net book value (cost – accumulated amortization) Step 3:Calculate any gain or loss on disposal Step 4: Record the Journal Entry Exchange of PPE

Park Accounting exchanged old computer for new computer on October 1, 2008 The original cost of the old computers was $61000 on January Amortization is calculated using SLM over 3 year useful life, with a salvage value of $1000. The fair market value of the old computer on October 1 is $5000. The price of the new computer is $ Park received an $8000 trade in allowance from the retailer. Park paid $43000 cash for the new computers. Park’s year end is December 31. Exchange of PPE

Step 1: SLM = (61000 – 1000) /36 = per month. 9 months * = Oct 1 Amortization Expense Accumulated Amortization15000 Step 2: Cost – Accumulated Amort = – (33 months * ) = – = $6000 Step 3: Gain or Loss = FMV – NBV = 5000 – 6000 = Exchange of PPE

Step 4: Journal Entry Oct 1 Computer (new)48000 Accumulated Amort – computer55000 Loss on Disposal1000 Computers (old)61000 Cash43000 To record exchange of computers plus cash Note: The cost of the new computers is determined by the fair market value of the old computers + cash paid. Exchange of PPE

40% of public companies (Toronto Stock Exchange) in Canada are mining and energy companies. Natural resources consist of standing timber and underground deposits of oil, gas, and minerals. Natural resources, frequently called wasting assets, because they have two distinguishing characteristics: 1. They are physically extracted in operations. 2. They are replaceable only by an act of nature. NATURAL RESOURCES

Natural Resources Natural resources are tangible assets, similar to property, plant and equipment. A key distinction is between natural resources and PPE (Property, Plant and Equipment) is that natural resources physically deplete.

The acquisition cost of a natural resource is the cash or cash equivalent price necessary to acquire the resource and prepare it for its intended use. If the resource is already discovered, cost is the price paid for the property. Cost of a natural resource can also be increased by future removal and site restoration cleanup costs, which are often large. ACQUISITION COST

AMORTIZATIONAMORTIZATION The units-of-activity method is generally used to calculate amortization, because periodic amortization generally is a function of the units extracted during the year. Cameco invests $5.5 million in a mine that is estimated to have 10 million tonnes of uranium and a $200,000 salvage value. In the first year, 800,000 tonnes of uranium are extracted.

AMORTIZATIONAMORTIZATION Amortizable Cost per unit = (5,500,000 – 200,000) / 10,000,000 = $0.53 per tonne Amortization for first year = 0.53 * 800,000 tonnes = $424,000 Dec 31 Inventory Accumulated Amort Initially “amortization expense” is replaced by “Inventory” account because the uranium is the inventory that Cameco can sell in near future.

AMORTIZATIONAMORTIZATION When sold, the inventory costs are transferred to cost of goods sold and matched with the period’s revenue. In other words, the amortization is charged to the income statement only in the period in which the related goods are sold.  honors matching principle For example, assume Cameco does not sell all of the 800,000 tonnes of uranium extracted in 2008.

AMORTIZATIONAMORTIZATION It sells 700,000 tonnes and stores 100,000 tonnes for later sale. In this situation, Cameco would include $371,000 (because 700,000 * 0.53 = ) in the cost of the resource sold on its income statement.

ILLUSTRATION FORMULA TO CALCULATE AMORTIZATION EXPENSE Amortizable Cost = (Cost – Residual Value + Restoration Costs) Total Estimated Units Amortization Cost per Unit Amortization Cost per Unit Number of Units Extracted and Sold Amortization Expense

ILLUSTRATION STATEMENT PRESENTATION OF AMORTIZATION Accumulated Amortization, a contra asset account, is deducted from the cost of the natural resource in the balance sheet as follows:

(P499) E9.8 (Jan 2 transaction) and E9.10 DISPOSALS - Sale