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Chapter 8

COM 270 Chapter 8: PDF COM 270 Notes - Ch. 8

Course Code
COM 270
Graham Chris

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current assets (i.e. short-term investment, temporary investment, marketable
security, investment hold for security) - have the intent to be sold within the
next year & there is a readily available market price
capital (non-current/long-term) assets: long-lived assets that are normally used
by a company in generating revenues & providing services - 3 categories:
(1) non-current investments: bonds & shares (debt) in other companies
(2) property, plant & equipment: tangible, physical assets bought to
aid in the generation of revenues, not for the purpose of resale !
(ex. land, buildings, equipment)
-“productive assets”
(3) intangible assets: long term intangible assets without a physical
presence (ex. trademarks, patents, copyrights, software)
-usually have legal or contractual rights associated with them
-have a probable future value/benefits, but no physical form
-if they have been self-developed, they do not show up on IS
-if bought from someone else, they have an apparent value then,
& thus show up on IS
-goodwill: arises when 2 businesses are combined
valuation of PP&E — embody & represent future economic benefit to a
company through their ability to generate revenues in the future
-cash is received over several future periods
-aid in producing products, facilitating sales, providing services
-do not produce revenue on their own - usually in combo with other
PP&E items, & employee effort
-embody secondary future benefit when no longer of use to company
-under IFRS, there are 2 valuation models:
(1) cost model: PP&E assets are represented at their carrying amount, which is
the amount presented on the statement of finical position
the only model allowed under ASPE
carrying amount (net book value): original cost, less accumulated
depreciation & accumulated impairment losses
-does not represent what the asset is worth (not the market value, just
the usefulness that it still has for the business)
-accumulated depreciation is a contra-asset account!
(a normal asset account, but with a credit balance)
all PP&E are initially recorded at their cost
(2) revaluation model: assets are carried at their face value, less any
subsequent accumulated depreciation & accumulated impairment losses
-rarely used
-results in unrealized gains & losses
-can have lots of fluctuations & having to change account balances
costs: the price paid to acquire goods & services
-subsequent costs: costs incurred after an asset purchase will either be:
(a) capitalized (betterment/improvement): cost that has been recorded as an
asset, rather than an expense, in the case where the expenditure:
(a) increases original performance, &/or
(b) increases original lifespan (not just a routine repair) , &/or
(c) reduces operating costs
spreads out the expense then over a longer time period
cost gets added to that specific asset’s account (ex. truck account)
-purchase price (less any rebates or discounts)
-non-refundable taxes
-import duties on purchase price
-legal costs associated with the purchase
-shipping/transportation costs
-site preparation, installation, & set-up costs
(b) expensed: treated as a period cost, as something that is required for
the normal operation of an asset
cost gets added to expense account, appearing immediately on FS
-re-occurring &/or regular expenses
-unnecessary costs
depreciation: costs that have been capitalized are eventually expensed in
future periods, through the depreciation process
-distributes an expense over an assets lifetime
-partial period depreciation: only depreciate the PP&E for the period
or quantity of the period it was used (down to the month)
-in order to depreciated PP&E, must know:
(i) original cost
(ii) estimated residual value (ERV): amount management estimates
they would receive if the asset were to be sold in the condition it is
expected to be in at the end of its useful life
salvage value: amount received for just trading it is for scrap
(iii) estimated useful life (EUL): amount of time or number of units an
asset is expected to last/produce
(iv) depreciable amount: cost - ERV
-cost of land is not depreciated
depreciation methods — look at the revenue pattern/usefulness of the asset in
order to determine which method to use:
(1) straight-line depreciation method: allocates the asset’s
depreciable cost evenly over its useful life
-simplest & most commonly used method
-annual depreciation expense = (Original Cost - Estimated Residual
Value)/Estimated Useful Life (in years)
(2) diminishing (declining) balance method (accelerated depreciation):
allocates more of the asset’s cost to early periods in its useful life, &
less as time goes by
-carrying value (NBV) & size of depreciation expense
decreases each year
-assets with longer useful lives will have lower % rates
-depreciation expense is different every year (gets smaller)
-NBV drops every year, therefore depreciation expense drops
-depreciation expense = NBV x fixed declining balance % rate
-in the last year, depreciation expense is just whatever amount
is needed in order to get it down to its residual value
-double-declining balance (DDB): depreciation rate is
double the straight-line rate
(3) units-of-production (units-of-activity) method: allocates the asset’s
depreciable amount on the basis of its output
-able to actually put a unit to its usefulness
-does the best job at allocating costs to the periods in which its
economic benefits were consumed
-only method under which depreciation expense can be $0,
even while the asset is held for use
-depreciation expense per unit = (cost - ERV)/EUL (in units)
-each method starts with the same cost amount, & ends with the same
total amount of depreciated expense taken over its life
recording depreciation expense — use the same type of adjusting entry for all
depreciation methods:!
[debit Depreciation Expense] (a general account)!
[credit Accumulated Depreciation] (specific account for each asset)
-each specific asset has its own Accumulated Depreciation account
-use a contra-asset account in order to provide more info, than simply
reducing the asset directly & only showing the remaining value
-depreciation is a non-cash expense - should never involve cash
changes in depreciation estimates — companies are required to annual review
ERV, EUL, & depreciation methods use
-changes are done prospectively (going forward), not retrospectively (never go
back & change a previous financial statement)
impaired: when an asset is not as valuable as the current NBV
-when indications of impairment are present, management determines:
(i) the total of all the future cash flows that are expected to be
generated from the assets use
(ii) the asset’s fair value less any selling costs
-recoverable amount (RA): the greater of (i) or (ii), & represents the
best course of action
-impairment loss (IL): the difference between the asset’s current value
(NBV) & the estimated recoverable amount
impairment loss = NBV - RA
-impairment charge: deducting more than just its depreciation expense
COM 270 - Chapter 8: Long-Term Assets
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