Learning Objectives Understand the Business – LO1 Define, classify, and explain the nature of long-lived assets. Study the accounting methods – LO2 Apply the cost principle to the acquisition of long-lived assets. – LO3 Apply various amortization methods as economic benefits are used up over time. – LO4 Explain the effect of asset impairment on the financial statements. – LO5 Analyze the disposal of long-lived tangible assets. – LO6 Analyze the acquisition, use, and disposal of long-lived intangible assets. Evaluate the results – LO7 Interpret the fixed asset turnover ratio. – LO8 Describe factors to consider when comparing companies’ long- lived assets. Review the chapter 1© McGraw-Hill Ryerson. All rights reserved.

Amortization Methods © McGraw-Hill Ryerson. All rights reserved.2 LO3 Cost, purchased on January 1, 2012 Estimated residual value Estimated useful life $62,500 $2,500 3 years; 100 km Example Purchase of a New Long-Lived Tangible Asset: Asset Cost includes the purchase cost, sales tax, legal fees and other costs needed to acquire and prepare the asset for use. Residual (or salvage) value is an estimate of the amount the company will receive when it disposes of the asset. Useful life is the expected service life of an asset to the present owner. Land is the only tangible asset that has an unlimited life. Amortizable cost is the portion of the asset’s cost that will be used in generating revenue; calculated as asset cost minus residual value. $62,500 - $2,500 = $60,000

Straight-Line Method © McGraw-Hill Ryerson. All rights reserved.3 (Cost – Residual Value) x = Amortization Expense ___1___ Useful Life A systematic and rational allocation of the cost of the asset in equal periodic amounts over its useful life. ($62,500 – 2,500) x 1/3 = $20,000 per year Amortization Expense is constant each year Accumulated Amortization increases by an equal amount each year. Book Value decreases by the same equal amount each year. LO3

Units-of-Production Method © McGraw-Hill Ryerson. All rights reserved.4 (Cost – Residual Value) x = Amortization Expense Actual Production This Period Estimated Total Production Allocates the cost of an asset based on the relationship of its periodic output to its total estimated output. ($62,500 – 2,500) x 30,000/100,000 = $18,000 in year 1 ($62,500 – 2,500) x 50,000/100,000 = $30,000 in year 2 ($62,500 – 2,500) x 20,000/100,000 = $12,000 in year 3 Amortization Expense, Accumulated Amortization and Book Value vary from period to period, depending on the number of units produced. LO3

Declining-Balance Method © McGraw-Hill Ryerson. All rights reserved.5 (Cost – Accumulated Amortization) x = Amortization Expense ___2___ Useful Life Assigns more amortization to early years of an asset’s life and less amortization to later years. ($62,500 – 0 ) x 2/3 = $41,667 in year 1 ($62,500 – 41,667) x 2/3 = $13,889 in year 2 ($62,500 – 55,556) x 2/3 = $ 4,629 in year 3 Amortization Expense is higher in the early years of an asset’s life The calculated Amortization Expense of $4,629 would not be recorded because the Book Value would fall below the Residual Value. The maximum amortization expense is $4,444. LO3

© McGraw-Hill Ryerson. All rights reserved.6 Summary of Amortization Methods The amount of amortization expense recorded each year depends on the method of amortization used. Depending upon the amortization method used, Net Income can vary. Different amortization methods can be used for different assets, provided they are used consistently. LO3

© McGraw-Hill Ryerson. All rights reserved.7 Partial-Year Amortization Tax Amortization When an asset is acquired during the year, amortization is calculated for the fraction of the year the asset is owned. Straight-line and declining-balance methods require partial year calculations; units-of-production does not. Capital cost allowance (CCA) is the amortization process required by the Canada Revenue Agency. CCA is similar to the declining-balance. Companies usually have two sets of records: Using an appropriate amortization method to report to shareholders Using CCA to determine income taxes. LO3

© McGraw-Hill Ryerson. All rights reserved.8 Changes in Amortization LO3 Amortization is based on estimates, and estimates may change. (Book Value – New Residual Value) x = Amortization Expense ___1___ Remaining Life Original Information: Cost $60,000,000, Useful Life 20 years, Residual Value $3,000,000 At the beginning of year 5, the estimates are revised: Revised Information: Useful Life 25 years, Residual Value $2,400,000 Revised Amortization Expense: ($48,600,000 - $2,400,000) x 1/21 = $2,200,000 per year 25 years – 4 years = 21 remaining years Original Asset Cost Less Accumulated Amortization (4 years) Current Book Value $60,000,000 $11,400,000 $48,600,000 Original Amortization Expense: ($60,000, ,000,000) x 1/20 = $2,850,000 per year