bsad 221 introductory financial accounting donna gunn, ca
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BSAD 221 Introductory Financial Accounting Donna Gunn, CA. Property, Plant and Equipment (Tangible long-lived assets). Intangible Assets. Types of Assets. Long-lived assets used in the operation of a business are divided into categories:. Acquisition cost includes: the purchase price and - PowerPoint PPT PresentationTRANSCRIPT
BSAD 221Introductory Financial
Accounting
Donna Gunn, CA
Types of Assets
Long-lived assets used in the operationof a business are divided into categories:
Property, Plant and Equipment(Tangible long-lived assets)
Intangible Assets
Measuring and Recording Acquisition Cost
Acquisition cost includes:
• the purchase price and
•all expenditures needed to prepare the asset for its intended use.
In most circumstances, it does not include financing charges
Land
A business purchases land for a new production facility at a cost of $300,000.
It also pays: • $10,000 in real estate commission,• $8,000 in back property tax, • $5,000 for removal of an old building, • $1,000 survey fee, and • $260,000 to prepare the foundation for the
factoryWhat is the cost of the land?
Land
Purchase price of land $300,000
Add related costs: Real estate commission $10,000 Back property tax 8,000 Removal of buildings 5,000 Survey fees 1,000
Total cost of land $324,000
Acquisition Cost – Land• Purchase price
• Real estate commissions
• Title insurance premiums
• Delinquent taxes
• Surveying fees
• Title search and transfer fees
Land is not amortizable.
Acquisition Cost – Buildings / Equipment
• Purchase Price
• Legal fees related to purchase
• Repair / construction costs required for use
• Installations costs
• Transportation costs
Any costs required to bring the asset to use
Lump-Sum (or Basket)Purchases of Assets
Great-West Lifeco Inc. paid $2,800,000 for acombined purchase of land and a building.
The land is appraised at $300,000and the building at $2,700,000.
How much of the purchase price is allocatedto land and how much to the building?
Lump-Sum (or Basket)Purchases of Assets
Appraised % of Purchase AssignedAsset Value Value Price Cost a b* c b × c
Land
$2,700,000 90% Building 300,000 10%
Total
$3,000,000 100% *$2.7M/$3M
Lump-Sum (or Basket)Purchases of Assets
Appraised % of Purchase AssignedAsset Value Value Price Cost a b c b × c
Land
$2,700,000 90% $2,800,000 $2,520,000Building 300,000 10% $2,800,000 280,000
Total
$3,000,000 100% $2,800,000
Does the expenditure increase capacityor efficiency or extend useful life?
Capital Expenditures:Record an asset
Expenses:Record an expense
Capital Expenditure versusan Immediate Expense
Yes No
Capital Expenditure versusan Immediate Expense
Record an Asset forCapital Expenditures
Extraordinary repairs:•Major engine overhaul
•Modification of body for new use of truck
•Addition to storage capacity of truck
Record Repair andMaintenance Expense
Ordinary repairs:
•Repair of transmission or other mechanism
•Oil change, lubrication, etc.
•Replacement tires, windshield
•Paint job
Amortization – systematially allocates the cost of an asset to the period benefited by their use.
Cost
Allocation
(Unused)
Balance Sheet
(Used)
Income Statement
Expense
Amortization
AcquisitionCost
AmortizationExpense
IncomeStatement
AccumulatedAmortization
Amortization forthe current year
Total of amortizationto date on an asset
Amortization
Balance Sheet
Net Book Value
Book Value is NOT Market Value
Cost – Accumulated Amortization = Book value
Amortization Concepts
The calculation of amortization requires three amounts for each asset:
• Acquisition cost.
• Estimated useful life.
• Estimated residual value.
Alternative Amortization Methods
• Straight-line
• Units-of-production
• Double declining balance (diminishing balance)
Straight-Line Method
At the beginning of the year, WestJet purchased an aircraft $45,000,000 cash. The equipment has an estimated useful life of 25 years and an
estimated residual value of $1,400,000.
Cost - Residual ValueLife in Years
AmortizationExpense per Year
=
=
= $1,744,000
$45,000,000 - $1,400,00025 years
Cost - Residual ValueLife in Years
AmortizationExpense per Year
=
Straight-Line Method
Straight-Line Method
Net Book Value
Depreciation Accumulated Accumulated Undepreciated Expense Amortization Amortization BalanceYear (debit) (credit) Balance (book value)
45,000,000 1 1,744,000 1,744,000 1,744,000 43,256,0002 1,744,000 1,744,000 3,488,000 41,512,0003 1,744,000 1,744,000 5,232,000 39,768,000
5,232,000 5,232,000
Amortization Rate
= Cost - Residual Value Estimated Total Production
Step 1:
Step 2:
Amortization Expense = Amortization
Rate × Actual Annual Production
Units-of-Production Method
Units-of-Production Method
WestJet purchases an aircraft.Cost - $45,000,000 cash
The aircraft has 87,200 fight hours of useful life.Estimated residual value of $1,400,000.
If the aircraft is used for Year 1 - 3,460 flight hours Year 2 - 3600 flight hours
What is the amount of amortization expense?
Step 1:
Step 2:
Amortization Expense = $500/hour x 3,460 hours = $1,730,000
Amortization Rate = $45,000,000 - $1,400,000
87,200 hours = $500 / hour
Units-of-Production Method
Units-of-Production Method
Net Book Value
Accumulated Unamortized Amortization Amortization BalanceYear Hours Expense Balance (book value)
45,000,0001 3,460 1,730,000 1,730,000 43,270,0002 3,600 1,800,000 3,530,000 41,470,0003 3,350 1,675,000 5,205,000 39,795,000
AnnualAmortization
Expense
NetBookValue ( )Useful Life in Years
2= ×
Cost – Accumulated Amortization
Declining balance rate of 2 isdouble-declining-balance (DDB) rate.
Annual computation ignores residual value.
Double-Declining-Balance Method
WestJet purchased an aircraft for $45,000,000 cash.
Estimated useful life of 25 years Estimated residual value of $1,400,000.
Calculate the amortization expense for the first two years.
Double-Declining-Balance Method
AnnualAmortization
expense
NetBookValue
( )Useful Life in Years 2
= ×
Double-Declining-Balance Method
AnnualAmortization
expense
NetBookValue
( )Useful Life in Years 2
= ×
Double-Declining-Balance Method
Year 1 Amortization:
Year 2 Amortization:
( ) $45,000,000 ×
25 years 2
= $3,600,000
( )($45,000,000 – $3,600,000) ×
25 years2
= $3,312,000
( )($45,000,000 – $6,912,000) × 25 years
2= $3,047,000
Double-Declining-Balance Method
Amortization Accumulated Unamortized Expense Amortization Balance
Year (debit) Balance (book value) 45,000,0001 3,600,000 3,600,000 41,400,0002 3,312,000 6,912,000 38,088,0003 3,047,040 9,959,040 35,040,960