Chapter 9: CAPITAL ASSETSChapter 9: CAPITAL ASSETS

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94% of public companies in Canada use the straight line method of amortization.

Companies may use one method for one type of capital asset and another method for a different type of capital asset.

All companies in Canada must report income tax to CRA and CRA mandates that companies use declining balance method when reporting their corporate income.

Straight Line Method vs Declining Balance MethodStraight Line Method vs Declining Balance Method

Amortization expense is calculated based on the declining book value.

A expense = Begining book value * amorization rate BBV = Initial cost – Accumulated amoritization Example: On Jan 2, 2008 Mabasa Company acquires

a delievery truck at a cost of $43000. The truck is expected to have a residual value of $3000 at the end of its four year useful life. Calculate the amortization using the straight line method declining balance method (a) for each year of the truck’s life

Double Declining Balance MethodDouble Declining Balance Method

Straight line method: (43000 – 3000) / 4 years = 10,000 per year This means every year, amorization expense is 10,000

Double Declining Balance Method We will use double the rate of straight line method. SLM uses 10,000 / 40,000 * 100 = 25% So The declining-balance rate is 50% (25% x 2) This rate (50%) is applied to net book value at the beginning

of the year.

Double Declining Balance MethodDouble Declining Balance Method

Year Begining Rate Amorization Acc amount NBV

2008 43000 50% 21500 21500 21500

2009 21500 50% 10750 32250 10750

2010 10750 50% 5375 37625 5375

2011 5375 50% 2375 40000 3000

Amortization expense amounts are a lot higher in the early years.

The declining balance method respects the matching principle = The higher amortization expense in early years is matched with the higher benefits received in these years.

Double Declining Balance MethodDouble Declining Balance Method

DECLINING-BALANCE METHODDECLINING-BALANCE METHOD

Accelerated methods result in more amortization in early years and less in later years

UNITS-OF-ACTIVITY METHODUNITS-OF-ACTIVITY METHOD

Useful life is expressed (instead of time period) in terms of total units of production or activity expected from the asset

Example, equipment’s useful life is units of output, hours in use or kilometers driven. (truck)

Not suitable for buildings or furniture

The total units of activity for entire useful life are estimated first.

This amount is divided into amortizable cost to determine the amortizable cost per unit.

The amortizable cost per unit is then multiplied by the actual units of activity during the year to calculate the annual amortization expense.

Units of Activity MethodUnits of Activity Method

For example, 1 Stop Florists delivery truck’s total estimated life = 200,000 km

It is driven 30,000 kilometres in the first year. Initial cost = 25000 and Residual Value (SV) =2000 Amortizable cost = Cost – RV =25000 -2000 = 23000 AC per unit = AC / Total Units of Activity = 23000 /

200,000 km = 0.115 $ / km = 11.5 cents per km Annual Amortization Expense = 0.115 * 30,000km

= $3450 (2008) In 2009, they drove 60,000km so 0.115 * 60,000 =

$6900

Units of Activity MethodUnits of Activity Method

In 2009, they drove 60,000km so 0.115 * 60,000 = $6900

Year Units of A A Expense Acc Amort NBV

25000

2008 25000 3450 3450 21550

2009 60000 6900 10350 14650

2010 40000 4600 14950 10050

Units of Activity MethodUnits of Activity Method

UNITS-OF-ACTIVITY METHODUNITS-OF-ACTIVITY METHODUNITS-OF-ACTIVITY METHODUNITS-OF-ACTIVITY METHODTo use the units-of-activity method, 1) the total units of activity for the entire useful life are estimated, 2) the amount is divided into amortizable cost to calculate the amortization cost per unit, and 3) the amortization cost per unit is then applied to the units of activity during the year to calculate the annual amortization.

Amortized Cost

Total Units of Activity

AmortizableCost per Unit

Units ofActivity during

the YearAmortization

ExpenseAmortizable

Cost per Unit

P498 E9.3 and E9.4 P502 P9.3

Classwork / HomeworkClasswork / Homework