chapter 9.docx

10 Pages

Financial Accounting
Course Code
Mark Fitzpatrick

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Long Lived Assets (Property, Plant, and Equipment) - long term assets used for the production/sale of goods/services to customers - consist of: land, land improvements, buildings, and equipment Determining Cost - costs incurred that only benefit the current period are called operating expenditures - costs incurred that will benefit future periods are called capital expenditures Land - cost includes: purchase price, closing costs (legal fees), and any extra costs to prepare the land for use - the cost of the land is the debit balance of land Land Improvements - structural additions to land such as parking lots or driveways - recorded separately from land and are also amortized Buildings - purchase price, legal fees, and costs of preparing the building are debited to Buildings Equipment - can be any type of equipment that includes purchase price, freight charges, insurance, and cost of assembly Basket Purchase - occurs when property, plant, and equipment are all purchased together for a single price - each item in the basket is taken as a percentage using their fair market value and using a percentage to calculate allocated cost Amortization - process of cost allocation - recorded through adjusting entries - factors in calculating amortization: cost, useful life, and residual value - all assets must be recorded at cost - useful life is an estimate of the expected life of an asset - can be expressed in time or units of output - residual value is an estimate of the asset’s value at the end of its useful life Straight Line - same cost occurs every year of the asset’s useful life - Amortizable Cost = Cost – Residual Value - Annual Amortization Expense = Amortizable Cost / Estimated Useful Life - Percentages can also be used to calculate straight line amortization Declining Balance - amortization is based on the declining value of the asset - calculated by multiplying the book value by a percentage - companies often use double declining balance amortization to amortize their assets at double the rate of straight line amortization Units of Activity - useful life is expressed in terms of units, not time - Amortizable Cost = Cost – Residual Value - Amortizable Cost per Unit = Amortizable Cost / Estimated Units of Activity - Annual Amortization Expense = Amortizable Cost per Unit * Units of Activity Used During the Year Which Method Should be Used? - assets that consistently generate revenue over time should be amortized using straight line - assets that generate large revenue in the first few years but produce less later should be amortized using declining balance - Assets with usages that vary over years or can be easily measured using units should be amortized using units of activity - All methods are acceptable - Straight line produces steady net income and amortization expense - Declining balance produces low net income at first, then high net income later - Units of activity produce varying net incomes - Income tax regulations require the single declining balance method of amortization to be used - The CRA does not allow taxpayers to estimate amortization rates - Taxpayers are given classes for their assets known as the capital cost allowance (CCA) Capital Expenditures during Useful Life - ordinary repairs are expenses that maintain the asset - often small amounts that are debited to repair or maintenance expense - additions and improvements are costs that increase the operating efficiency of assets - often large and rarely happen - debited to the asset account Impairments - permanent decline in the net book value of an asset is known as impairment loss - only recorded if impairment is permanent - DR Loss on Impairment (difference between
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