BAT4M University/College Grade 12 Accounting Chapter 9 Study Notes

BAT4M University/College Grade 12 Accounting Chapter 9 Study Notes 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 – price occurs when property, plant, and equipment are all purchased together for a single – 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? – line assets that consistently generate revenue over time should be amortized using straight – 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 Net Book Value and Market Value), CR Accumulated Amortization – Asset – Impairment expense is recorded as an operating expense Revisions – when revisions are made, no correction is made to previous amortization entries – amortization expenses for current/future years is re-evaluated – Remaining Amortizable Cost (at time of revision) = Net Book Value (at time of revision) – Revised Residual Value – Revised Annual Amortization Expense = Remaining Amortizable Cost / Remaining Estimated Useful Life Disposals – Occurs when assets are: retired, sold, or exchanged – 4 Steps in recording disposals: update amortization, calculate Net Book Value, calculate gain or loss, and record the disposal – DR Cash (or other asset), Accumulated Amortization, and Loss on Disposal (OR CR Gain on Disposal), CR Long-term asset account Retirement – The asset is simply disposed – Asset account is reduced to 0 – Loss on Disposal = Net Book Value of the asset when it is retired – DR Accumulated Amortization, Loss on Disposal, CR Asset Sale (Gain) – Any gain on the sale of an asset = Proceeds – NBV – DR Cash, Accumulated Amortization, CR Gain on Disposal, Asset Sale (Loss) – Loss on sale of an asset = Proceeds – NBV – DR Cash, Accumulated Amortization, Loss on Disposal, CR Office Furniture Exchanges – Trade in allowance is often given to reduce the purchase price of an asset – Can be either monetary or nonmonetary Monetary Exchanges – Sale Of old asset, purchase of new asset – 4 Steps: Update any unrecorded amortization, calculate NBV, calculate gain/loss on disposal, record exchange – Remove the cost and accumulated amortization of asset – Record any gain/loss – Record new asset at fair market value plus cash paid (or less cash received) – Record cash paid/received – Cash E.g. DR Asset (new), Accumulated Amortization, Loss on Disposal, CR Asset (old), Nonmonetary Exchanges – Are often recorded the same way as monetary – If does not change the operations of the business, does not be recorded Natural Resources Cost – Physically extracted – Only nature can replace them – Treated the same as property, plant, and equipment Amortization – Units of activity is generally used to amortize natural resources – Amortization is debited to an inventory account rather than an expense account – E.g. DR Inventory, CR Accumulated Amortization – Labour is also considered a cost of extracting the resource and is recorded as inventory Disposal – Accounted for just like property, plant, and equipment Intangible Assets – rights, privileges, competitive advantages that hold no physical substance – proof can be a contract, license, or other document – recorded at cost – if there is a limited useful life, amortization is calculated for the shorter of either the estimated useful life or legal life – typically amortized by straight-line – intangible assets with indefinite lives are not amortized Limited Lives (Patents, Copyrights, R&D Costs, Deferred Costs) – patents are exclusive rights – copyrights are also exclusive rights – R&D costs are expensed if unsuccessful, but included in the cost of patent if they are successful Indefinite Lives (Trademarks and Goodwill) – Trademarks identify an enterprise or topic – Royalties are payments to the franchisor and are recorded as operating expenses – Goodwill can be similar to good reputation or anything extra that increases the value of the company Ratios – Asset Turnover = Net Sales / Average Total Assets – Indicates how efficiently a company uses its assets – Shows that every dollar invested in assets produced x amount of dollars in revenue – Return on Assets = Net Income / Average Total Assets – Measures overall profitability