Session 12

Question 1

Capital Assets

Answer 1

Characteristics:
- Used in the operation of a company.
- Have a useful life greater than one accounting period.

May be classified as:
- Tangible: Also referred to as Property, Plant and Equipement or Fixed Assets
- Intangible: Lack physical substance.

Question 2

Criteria of Property, Plant and Equipment

Answer 2

• Assets tat are held and used in the business.
• Assets are tangible (you can touch them).
• Relatively expensive.
• Last a long time - usually for several yers, and when they become obsolete or worn out, they need to be amortized.
• Can be sold or traded in.

Question 3

Goodwill and Intangible Assets

Answer 3

• These assets have no physical form
• They convey special rights from ownerships of patents, copyrights, trademarks, franchises, leaseholds, and goodwill.
• Amortization is computed over the lesser of the asset’s legal life or estimated useful life.
• Amortization can be written off directly against the intangible asset account with no accumulated amortization account.
• Intangibles assets with indefinite lives are not amortized.

Question 4

Measuring the Cost of Property, and Equipment

Answer 4

• 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.

Question 5

Land (costs incl.)

Answer 5

• The cost of land includes the following:
• Purchase price
• Brokerage commission
• Survey and legal fees
• Any property taxes in arrears
• Cost for grading and clearing the land
• Cost for demolishing or removing unwanted buildings
• The cost of land is not amortized.
• Land improvements is a separate long-term asset account and is subject to amortization.

Question 6

Land Improvements

Answer 6

• Lighting
• Signs
• Fences
• Paving
• Sprinkler systems
• Landscaping

Question 7

Plant (Buildings)(Costs of construction)

Answer 7

• Cost of construction of a building includes:
• Architectural fees
• Building permits
• Contractor’s charges
• Payments for materials, labour and overhead

Question 8

Equipment (and Machinery)

Answer 8

• The cost of equipment and machinery includes:
• Purchase price (less any discounts)
• Transportation charges
• Insurance while in transit
• Purchase commissions
• Installation costs
• Cost of testing the asset before it is used
• Another category of equipment is furniture and fixtures.
• Computers are reported as equipment in some businesses.

Question 9

Construction in Progress and Capital Leases

Answer 9

• Construction in progress is an asset
• Capital leases are arrangements where capital assets are acquired through a lease contract
• Capital leases are reported as assets in the same way as purchased assets
• Capital leases are different from operating leases, which is an ordinary rental agreement

Question 10

Lump-Sum Asset Purchase

Answer 10

• Purchases of capital assets in a group with a single transaction for a lump-sum price. When this occurs, we allocate the cost of the purchase among the different type of assets acquired based on their relative market values (appraisal or taxed-assessed valuations)
• See slide 17 in session 12 for an example of a Lump-Sum calculation.

Question 11

Amortization

Answer 11

• A process of systematically allocating the cost of a capital asset to expense over it’s estimated useful life.

*Amortization: Expense account
*Accumulated amortization: Contra asset account

Question 12

Measuring Amortization

Answer 12

Factors relevant in determining amortization:

• Cost
  *The sum of all costs incurred to bring the asset to its intended purpose, net of all discounts
• Estimated useful life
  *Length of the service period expected from the asset
• Can be expressed in years, units of output, kilometres, etc.
• Estimated salvage (residual value)
  *The expected cash value at the end of the asset’s useful life.

Question 13

Amortization Methods

Answer 13

1) Straight-Line

2) Double-declining balance

Question 14

Straight-Line Method

Answer 14

• The same amount is expensed each period of the asset’s useful life.

Straight-line amortization expense
= Cost - Estimated salvage value / Estimated useful life

Question 15

Double-Declining-Balance Method

Answer 15

• This method yields larger amortization expenses in the early years of an asset’s life and smaller charges in later years.

1) Compute the straight-line amortization rate per year

2) Multiply the straight-line rate by 2 to get the DDB rate

3) Multiply the net book value at the beginning of the year by the DDB rate

Ignore residual value except for the last year

• For an example see slide 32 of session 12.

Question 16

Changes in Estimated Useful Life and/or Estimated Salvage Value

Answer 16

• Amortization rates for current and future periods may be revised if there is a change in an asset’s:

*Estimated salvage value and/or useful life.
*Cost due to betterments.

• 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.

Question 17

Revised Amortization

Answer 17

((*Initial c𝑜𝑠𝑡 −𝑎𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑎𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛)−𝑛𝑒𝑤 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒) / (𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠)

Question 18

Selling PPE

Answer 18

• Accounting for disposal involves:

*Recording of amortization up to date of disposal
*Removal of asset and associated
*Recording any cash received or paid in the disposal
*Recording any gain or loss on disposal

Amount received - Net Book value = Profit or Loss

-If book value > amount received
*Recording of a loss

-If book value < amount received
*Recording of a profit

Question 19

Discarding Assets at Loss

Answer 19

Entry to record the disposal (asset discarded) before being fully amortized.

Accumulated amortization-equipment(debit)
Loss on disposal of PPE(debit)
Equipement(credit)

Question 20

IFRS for PPE

Answer 20

• IFRS follows the general principle of capitalizing an asset when the asset provides future economic benefits.
• IFRS also calls for capitalization for replacement parts and to derecognize the parts that are replaced. In other words, each part of an item of property, plant and equipment that is significant relative to the total cost of the asset must be amortized separately which adds considerable complexity.
• Each part of an item of property, plan and equipment that in significant relative to the total cost of the asset must be depreciated separately. This is called componentization.
• IFRS has the option to use the revaluation model
• To asses impairment under IFRS, assets may be looked at individually or they can be divided into cash generating units (CGUs).
• A final difference for PPE is that IFRS allows assets that were written down to have the impairment reversed in a future period, while this is not possible under ASPE.