1. © 2007 McGraw-Hill Ryerson Ltd.
Electronic Presentations in Microsoft® PowerPoint®
Capital Assets and Goodwill
CHAPTER 12
Slides Content
1-3 Learning objectives
Terminology- link to exercises/problems
Amortization-link to exercises/problems
Partial year amortization-link to exercises/problems
Revising rates
Disposal of capital assets
Natural resources
Intangible assets
46 Goodwill
Review
Appendix 12A
End slide
Photo credit
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2. © 2007 McGraw-Hill Ryerson Ltd.
Learning Objectives
Describe capital assets and apply the cost principle to calculate their cost.
Explain, record, and calculate amortization using the methods of straight-line, units of production, and double-declining balance.
Explain and calculate amortization for partial years.
Explain and calculate revised amortization.
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3. © 2007 McGraw-Hill Ryerson Ltd.
Learning Objectives
Account for asset disposal through discarding, selling, or exchanging an asset.
Account for natural resources and their amortization.
Account for intangible capital assets and their amortization.
Account for goodwill.
Explain and account for exchanging dissimilar and similar assets. Appendix 12A
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Capital Assets
Characteristics:
Used in the operations of a company.
Have a useful life greater than one accounting period.
May be classified as Tangible or Intangible.
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5. Tangible Capital Assets
Also referred to as Property, Plant and Equipment or as Fixed Assets.
Examples: buildings, land, equipment, leasehold improvements, vehicles, and natural resources.
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6. Intangible Capital Assets
Lack physical substance.
Examples: patents, trademarks, and copyrights.
Goodwill is also an intangible capital asset but it is shown separately on the balance sheet.
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Cost of Capital Assets
Capital assets are recorded at cost which, includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.
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Capital Expenditures
Provide material benefits extending beyond the current period.
Are reported on the balance sheet as capital assets.
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Revenue Expenditures
Do not provide material benefits extending beyond the current period.
Are reported on the income statement as expenses.
Examples: supplies, lubricants, repair and maintenance costs.
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Betterments
An expenditure to make a capital asset more efficient or productive and/or extend the useful life of the capital asset beyond original expectations.
Examples: major overhauls of machinery, roof replacements, and plant expansions.
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Land
Is not subject to amortization.
Cost of land includes:
Purchase price
Legal fees
Real estate commissions
Accrued property taxes
Payments for surveying, grading, draining, and clearing the land
Assessments by local governments
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Land Improvements
Assets that increase the usefulness of the land but have a limited life.
Costs are charged to a separate asset account.
Costs are amortized over the period they benefit.
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Buildings
Costs include all expenditures to make the building ready for its intended use.
Costs are amortized over the period they benefit.
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14. Leasehold Improvements
Costs of alterations or improvements to leased property.
Costs are amortized over the life of the improvements or the life of the lease, whichever is shorter.
Examples include flooring, painting, storefronts, and partitions.
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15. Machinery and Equipment
Costs include all expenditures normal and necessary to purchase it and prepare it for its intended use.
Costs are amortized over the periods they benefit.
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Amortization
A process of systematically allocating the cost of a capital asset to expense over its estimated useful life.
Amortization does not measure the decline in value or deterioration of an asset.
Amortization begins to be recorded when the asset is put into use.
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Amortization
Capital assets help the organization earn revenues over several accounting periods.
The cost of these assets is amortized (spread out) over these same periods.
Cost
Useful life
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Amortization
Factors relevant in determining amortization:
Cost
Residual value
Useful life
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Amortization Methods
The most commonly used methods are:
Straight-line
Units-of-production
Double-declining balance
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20. Straight-Line Method
The same amount is expensed each period of the asset’s useful life.
Straight-line amortization expense
Cost – Estimated residual value =
Estimated useful life
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Illustration
A piece of shoe-inspection machinery is purchased on January 1, 2011.
The relevant data is as follows:
Cost $10,000
Estimated residual value ,000
Cost to be amortized $9,000
Estimated useful life:
Accounting periods years
Units inspected ,000 shoes
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22. Illustration: Straight-Line Method
Straight-line amortization expense
Cost – Estimated salvage value =
Estimated useful life
$10,000 – $1,000 =
5 years =
$1,800/ year
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23. © 2007 McGraw-Hill Ryerson Ltd.
Illustration: Straight-Line Method
The annual adjusting entry to record amortization on this equipment would be:
Amortization Expense, equipment ,800
Accumulated Amortization, –equipment ,800
2011
2012
2013
2014
2015
Equipment
$10,000
Less: Acc. Amort.
1,800
3,600
5,400
7,200
9,000
Book Value
$8,200
$6,400
$4,600
$2,800
$1,000
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24. Units-of-Production Method
This method is employed when the use of an asset varies greatly from one period to the next.
The amount charged to expense is based on the usage of the asset.
Amortization per unit
Cost – Estimated residual value =
Total estimated units of production
Annual amortization expense
Actual production
Amortization per unit = x
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Illustration: Units-of-Production Method
$10,000 – $1,000
Amortization per unit (shoe) =
36,000 units (shoes) =
$.25/shoe
Assume actual production is as follows:
Units (shoes) 7, , , , ,000
x x x x x.25
Amortization $1,750 $2,000 $2,250 $1, $1,250*
*Maximum amortization allowed since 36,000 units have been produced.
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Illustration: Units-of-Production Method
2011
2012
2013
2014
2015
Equipment
$10,000
Less: Acc. Amort.
1,750
3,750
6,000
7,750
9,000
Book Value
$8,250
$6,250
$4,000
$2,250
$1,000
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27. Declining-Balance Method
This method yields larger amortization expenses in the early years of an asset’s life and smaller charges in later years.
A constant rate, up to twice the straight-line rate, is applied to the asset’s beginning of the period book value.
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28. Double-Declining Balance Method
Steps:
Compute the double-declining balance rate.*
rate = 2 / (estimated life in years)
Multiply the rate by the asset’s opening book value.
amortization expense = rate x book value
*Note: Salvage value is not used in this calculation.
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Illustration: Double-Declining-Balance Method
Rate = 2 / 5 years x 100%
= 40% per year
Year
Book Value at
start of period
Amortization Expense
Accumulated Amortization
end of period
2011
$10,000
40% x 10,000
= $4,000
$4,000
$6,000
2012
6,000
40% x 6,000
= 2,400
6,400
3,600
2013
40% x 3,600
= 1,440
7,840
2,160
2014
40% x 2,160
= 864
8,704
1,296
2015
296 (maximum)
9,000
1,000
(salvage value)
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Illustration: Double Declining Balance Method
2011
2012
2013
2014
2015
Equipment
$10,000
Less: Acc. Amort.
4,000
6,400
7,840
8,704
9,000
Book Value
$6,000
$3,600
$2,160
$1,296
$1,000
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Comparison of Methods
Period
Straight-line
Units-of-production
Double-Declining Balance
2011
$1,800
$1,750
$4,000
2012
1,800
2,000
2,400
2013
2,250
1,440
2014
1,750
864
2015
1,250
296
$9,000
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32. Partial-Year Amortization
Assets may be purchased or disposed of at any time during the year.
Amortization for a partial year is recorded when the purchase or disposal is made at a time other than the beginning or end of the accounting period.
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33. Partial-Year Amortization
Methods:
Nearest whole month
If the asset is in use for more than half of the month, amortization is calculated for the whole month.
If the asset is in use for less than half of the month, amortization is not calculated for the month.
Half-year rule
Six months’ amortization is recorded regardless when an asset is acquired or disposed of.
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Mini-Quiz
Gamma Company purchased a computer costing $4,000 on April 16. It is expected to last for three years and then sell for $400.
Calculate amortization for the first year using the:
Straight-line method.
Double declining balance method.
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35. Mini-Quiz
Gamma Company purchased a computer costing $4,000 on April 16. It is expected to last for three years and then sell for $400.
Straight-line amortization expense
Cost – Estimated residual value
Portion of year = X
Estimated useful life
$4,000 – $400 =
X 8/12 year
3 years
= $800
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36. Mini-Quiz = = = $1778 (rounded)
Gamma Company purchased a computer costing $4,000 on April 16. It is expected to last for three years and then sell for $400.
DDB amortization expense
DDB rate x Cost x Portion of year = =
(2 x 1/3) x $4,000 x 8/12
= $1778 (rounded)
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37. Revising Amortization Rates
Amortization rates for current and future periods may be revised if there is a change in an asset’s:
Estimated residual value and/or useful life. or
Cost due to betterments.
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38. Changes in Estimated Useful Life and/or Estimated Salvage Value
The unamortized cost of the asset is amortized (spread) over the remaining life of the asset.
This is considered to be a change in an accounting estimate and not an error.
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39. Changes in Estimated Useful Life and/or Estimated residual Value
Example: Straight-line Method
Revised amortization for remaining years
Remaining book value
Revised residual value =
Revised remaining useful life
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40. Disposal of Capital Assets
Capital assets may be disposed of for a variety of reasons such as:
Obsolescence
Wear and tear
Damage
Changing business plans
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41. Disposal of Capital Assets
Accounting for disposal involves:
Recording of amortization up to date of disposal.
Removal of asset and associated accumulated amortization from the accounts.
Recording any cash received or paid in the disposal.
Recording any gain or loss on disposal.
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Natural Resources
Tangible capital assets such as standing timber, mineral deposits, and oil fields.
Are recorded at cost, which includes all expenditures necessary to acquire and prepare the resource for use.
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43. Natural Resources
Natural resources are amortized based on units extracted or depleted.
Amortization per unit
Cost – Estimated residual value =
Total units of capacity
Amortization expense
Units extracted
Amortization per unit = x
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Intangible Assets
Have no physical substance.
Are used in operations.
Are recorded at cost when purchased.
Are amortized over their estimated useful life.
Examples include patents, trademarks, and copyrights.
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Intangible Assets
Amortization
Estimated useful life may be affected by legal, regulatory, competitive, or other factors.
Only the straight-line method is used.
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Goodwill
The amount by which the value of a company exceeds the fair market value of the company’s net assets if purchased separately.
Goodwill
Is an intangible asset but not a capital asset.
Is reported separately on the balance sheet.
Is not amortized but is subject to impairment.
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Review
Discuss the four issues in accounting for capital assets.
The four main accounting issues include:
Computing their costs
Allocating their costs to the periods they benefit
Accounting for expenditures such as repairs and improvements
Recording their disposal.
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Review
Explain the difference between revenue and capital expenditures and how they are recorded in the accounting system.
Revenue expenditures such as ordinary repairs expire in the current accounting period. They are debited to expense and are thus matched with current revenues.
Capital expenditures such as extraordinary repairs and betterments, benefit future periods. They are debited to asset accounts and are matched with future periods through amortization expense.
Immaterial long-term expenditures are treated as current period expenses.
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49. Exchanging Dissimilar and Similar Assets-Appendix 12A
Exchanging Dissimilar Assets
Any gain or loss on the disposal on the exchange is recorded.
The gain or loss is computed by comparing the book value of the asset given up with the fair market value of the asset received (or trade-in allowance).
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50. Exchanging Dissimilar and Similar Assets-Appendix 12A
Exchanging Similar Assets: Non-monetary
If the amount of cash exchanged on a trade-in of capital assets is less than 10% of the total consideration, the transaction is a non-monetary transaction and a gain or loss is not recorded.
Exchanging Similar Assets: Monetary
If the amount of cash exchanged on a trade-in of capital assets is greater than 10% of the total consideration, the transaction is a monetary transaction and a gain or loss is recorded.
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End of Chapter
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Photograph Credits
Slide
Credit 5
Punchstock/Digital Vision
Punchstock/Stockbyte
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