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Chapter 7

COMMERCE 1AA3 Chapter Notes - Chapter 7: Book Value, Lump Sum


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Aadil Merali Juma
Chapter
7

Page:
of 3
Long lived assets: Used in business, not held for sale
o Tangible: Have physical form, ex. Buildings, equipment
Depreciation
o Intangible: Special rights, no physical form, ex. Patents, copyrights, trademarks
Amortization
For goodwill: Impairment loss
Cost of asset is sum of all costs to bring asset to intended location and use
Land: Purchase price, real estate commission, survey fees, legal, fees, back property taxes,
cost to grade and clear land
Buildings, Machinery, Equipment:
o Constructed Buildings: Architectural fees, building permits, contractor's charges,
material, labour, overhead and interest
o Existing Buildings: Purchase price, brokerage commission, taxes, repairs
o Machinery & Equipment: Price, transportation, transit insurance, taxes, commission,
installation costs, trial run costs, special equipment platforms
Land Improvements and Leasehold Improvements:
o Land Improvements: Eventually deteriorate, ex, fencing, paving, sprinkler systems,
lighting, parking lots, driveways
o Leasehold improvements: Improvements to leased assets, cost should be
depreciated over lease or life of asset, whichever is shorter
Basket Purchase of Assets: Purchase of several assets using a lump-sum
o Cost of individual asset = Ratio of each asset's market value to market value of all
assets x Lump sum purchase price
Capital Expenditure: Increases asset's productivity or extend its useful life
o Debit asset
Costs that maintain or restore assets are expenses
Depreciation: Process of allocating asset's cost over its useful life
o Not valuation, not setting aside cash
Needed: Cost, estimated useful life, residual value (cash value at end of useful life)
Accumulated Depreciation: Contra-asset, portion of cost that has already been expensed
o Carrying value = Cost - Accumulated Depreciation
Straight Line: (Cost-Residual Value)/Useful life in years
o Equal amounts of expense each year
Units of Production: (Cost-Residual Value)/Useful life in units of production
o Fixed amount for each unit of output
o Depreciation depends on output level
Diminishing Balance: Carrying value x (2/Useful life in years)
o An accelerated depreciation method: Amortizes more in early years, less in later
years
o Residual value not considered until last year
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Cost never amortized below residual value
Sum of Years Digits: n*(n+1)/2
o Dep. Expense: (Years Left/SYD) * Amortizable Cost7
o Also accelerated
Total depreciation always the same
Intangibles
Finite lives: Amortization recorded
Indefinite lives: No amortization, but impairment tests needed
Patents: Exclusive right to manufacture/sell an invention for 20 years
Copyrights: Exclusive right to reproduce/sell artistic work or software,
extend 50 years beyond author's life
Trademarks: Exclusive right to use name, symbol, etc.
o Can have finite or indefinite useful lives
Franchises and Licenses: Permission given to sell product or service,
indefinite life
Goodwill: Excess of cost of acquired company over market value of net
assets
Subject to impairment when recoverable amount less than carrying
amount
Research and development costs must be expensed when incurred
o Some development costs can be capitalized, expensed over life of
product
Net Profit Margin: Net Income/Net Sales
o Measures how much each dollar generates in profits
o Can be increased by increasing sale volume/price, reducing
expenses
Total Asset Turnover: Net Sales/Average Total Assets
o Measures how many sales dollars generated for each dollar of
assets
o Can be increased by increasing sale volume/price, keeping less
inventory on hand, closing unproductive facilities, selling idle
assets, consolidating
ROA = Net Profit Margin x Total Asset Turnover
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find more resources at oneclass.com
find more resources at oneclass.com