weygandt, kieso, kimmel, trenholm, kinnear accounting principles, fourth canadian edition © 2007...

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Fourth Canadian Edition © 2007 John Wiley & Sons Canada, Ltd.

Prepared by:

Debbie Musil

Kwantlen University College

Chapter 9Chapter 9 Long-Lived Long-Lived AssetsAssets


Long-Lived AssetsLong-Lived Assets

• Property, Plant and EquipmentProperty, Plant and Equipment• Determining cost and amortizationDetermining cost and amortization• Revising amortization; disposalsRevising amortization; disposals

• Natural ResourcesNatural Resources• Cost, amortization and disposalCost, amortization and disposal

• Intangible AssetsIntangible Assets• Accounting for intangible assetsAccounting for intangible assets• Assets with limited and indefinite livesAssets with limited and indefinite lives

• Statement Presentation and AnalysisStatement Presentation and Analysis


Property, Plant and EquipmentProperty, Plant and Equipment

• Long-lived assets owned by a companyLong-lived assets owned by a company• Used in production & sale of goods & servicesUsed in production & sale of goods & services

• Characteristics:Characteristics:• Have physical substanceHave physical substance• Used in the operations of the businessUsed in the operations of the business• Not intended for sale to customersNot intended for sale to customers

• Divided into four classes:Divided into four classes: • Land, land improvements, buildings, Land, land improvements, buildings,

equipmentequipment


Determining CostDetermining Cost

• Cost principle:Cost principle:• Include all costs to acquire asset and make it Include all costs to acquire asset and make it

ready for useready for use• Include purchase price, freight costs paid, Include purchase price, freight costs paid,

testing and installation coststesting and installation costs• These costs are These costs are capital expenditurescapital expenditures

• Benefit future periodsBenefit future periods• Costs that benefit only the current period Costs that benefit only the current period

are called are called operating expendituresoperating expenditures


Land and ImprovementsLand and Improvements

• Cost of land includes:Cost of land includes:• Purchase pricePurchase price• Closing costs such as legal fees and surveysClosing costs such as legal fees and surveys• Costs of preparing land for intended useCosts of preparing land for intended use

• Land improvements:Land improvements:• Structural additions to land such as fences, Structural additions to land such as fences,

parking lots, landscapingparking lots, landscaping• Have limited useful livesHave limited useful lives• Recorded separately from land and amortizedRecorded separately from land and amortized


BuildingsBuildings

• Include costs related to purchase or constructionInclude costs related to purchase or construction• If purchased, include:If purchased, include:

• Purchase price and closing costsPurchase price and closing costs• Costs to make building ready for its intended Costs to make building ready for its intended

use, such as remodelling and repairsuse, such as remodelling and repairs• If constructed, include:If constructed, include:

• Contract price plus architects’ fees, building Contract price plus architects’ fees, building permits, interest payments during permits, interest payments during construction, excavation costsconstruction, excavation costs


EquipmentEquipment

• Cost includes charges paid by purchaser:Cost includes charges paid by purchaser:• Purchase pricePurchase price• Freight charges and insurance during transitFreight charges and insurance during transit• Assembling, installing, testing Assembling, installing, testing

Basket PurchasesBasket Purchases• Property, plant and equipment purchased Property, plant and equipment purchased

together for a single pricetogether for a single price• Total cost is allocated to each asset in proportion to Total cost is allocated to each asset in proportion to

its relative fair market valueits relative fair market value


AmortizationAmortization

• The process of allocating cost to expense The process of allocating cost to expense over the useful (service) life of an assetover the useful (service) life of an asset• Provides proper Provides proper matchingmatching of expenses with of expenses with

revenuesrevenues• A process of A process of cost allocationcost allocation, not determining , not determining

market valuemarket value• Does not accumulate cashDoes not accumulate cash for replacement of for replacement of

the assetthe asset


Calculating AmortizationCalculating Amortization

• To calculate amortization, must determine:To calculate amortization, must determine:• The cost of the assetThe cost of the asset

• Costs to acquire asset and make it ready for useCosts to acquire asset and make it ready for use

• Its estimated useful (productive) lifeIts estimated useful (productive) life• Can be expressed in terms of time, units of activity Can be expressed in terms of time, units of activity

or units of outputor units of output• Based on assessment of use, obsolescence and Based on assessment of use, obsolescence and

other relevant factorsother relevant factors

• The estimated residual valueThe estimated residual value• Estimated value of asset at end of its useful lifeEstimated value of asset at end of its useful life


Amortization MethodsAmortization Methods

• Three alternative methods:Three alternative methods:• Straight-lineStraight-line• Declining-balanceDeclining-balance• Units-of-activityUnits-of-activity

• Each method is acceptable under generally Each method is acceptable under generally accepted accounting principlesaccepted accounting principles

• Management selects the method that best Management selects the method that best measures an asset’s contribution to revenuemeasures an asset’s contribution to revenue

• Once chosen, it should be applied consistentlyOnce chosen, it should be applied consistently


Straight-Line MethodStraight-Line Method

• Amortization expense is Amortization expense is constant every year of asset’s constant every year of asset’s useful lifeuseful life

• Amortizable cost:Amortizable cost: the amount the amount to be amortizedto be amortized

Estimated Estimated Useful LifeUseful Life

Annual Amortization Annual Amortization ExpenseExpense÷÷ ==

CostCost Residual ValueResidual Value Amortizable CostAmortizable Cost-- ==

Amortizable CostAmortizable Cost


Declining-Balance MethodDeclining-Balance Method

• Amortization expense based on Amortization expense based on asset’s asset’s declining net book valuedeclining net book value• Cost less accumulated Cost less accumulated

amortizationamortization• Amortization rate remains Amortization rate remains

constant, but net book value constant, but net book value declines each yeardeclines each year

Net Book Value at Net Book Value at Beginning of YearBeginning of Year

Straight-Line Straight-Line Rate x 2Rate x 2

Annual Amortization Annual Amortization ExpenseExpensexx ==


Units-of-Activity MethodUnits-of-Activity Method

• Useful life expressed as total units Useful life expressed as total units of production or activityof production or activity

• Must estimate the total units of Must estimate the total units of activity that will be obtained from activity that will be obtained from assetasset

Total Estimated Total Estimated Units of ActivityUnits of Activity

Amortizable Cost per Amortizable Cost per UnitUnit÷÷ ==

Units of Activity Units of Activity during the Yearduring the Year

Annual Amortization Annual Amortization ExpenseExpensexx ==

Amortizable CostAmortizable Cost

Amortizable Cost per Amortizable Cost per UnitUnit


Revising AmortizationRevising Amortization

• Annual amortization must be revised if Annual amortization must be revised if there are:there are:• Capital expenditures during the useful life of Capital expenditures during the useful life of

an assetan asset• Impairments in the market value of an assetImpairments in the market value of an asset• Changes in an asset’s useful life or residual Changes in an asset’s useful life or residual

valuevalue


Capital Expenditures During Useful Capital Expenditures During Useful LifeLife

• Expenditures on existing capital assets are Expenditures on existing capital assets are classified as operating or capitalclassified as operating or capital

• Ordinary repairs (operating expenditures):Ordinary repairs (operating expenditures):• Costs to maintain operating efficiency and Costs to maintain operating efficiency and

productive life of the long-lived assetproductive life of the long-lived asset• Usually small amounts that occur frequentlyUsually small amounts that occur frequently• Debited to Repairs Expense as incurredDebited to Repairs Expense as incurred


Capital Expenditures During Useful Capital Expenditures During Useful Life 2Life 2

• Additions and improvements (capital Additions and improvements (capital expenditures):expenditures):• Costs to increase the efficiency, capacity or Costs to increase the efficiency, capacity or

useful life of the long-lived assetuseful life of the long-lived asset• Usually material in amount and occur Usually material in amount and occur

infrequentlyinfrequently• Debited to the long-lived asset affectedDebited to the long-lived asset affected


Revised Amortization CalculationsRevised Amortization Calculations

• When a change is made:When a change is made:• No correction of previous amortization expenseNo correction of previous amortization expense• Amortization expense for current and future years is Amortization expense for current and future years is

revisedrevised

Revised Residual Revised Residual ValueValue

Remaining Amortizable Remaining Amortizable Cost at Time of Change Cost at Time of Change

in Estimatein Estimate-- ==

Remaining Estimated Remaining Estimated Useful LifeUseful Life

Revised Annual Revised Annual Amortization ExpenseAmortization Expense÷÷ ==

Net Book Value at Time Net Book Value at Time of Change in Estimateof Change in Estimate

Remaining Amortizable Remaining Amortizable Cost at Time of Change Cost at Time of Change

in Estimatein Estimate


ImpairmentsImpairments

• Long-lived assets are written down to market Long-lived assets are written down to market value when their value is permanently impairedvalue when their value is permanently impaired

• Impairment lossImpairment loss occurs when: occurs when:• Decline in market value of asset is permanent, andDecline in market value of asset is permanent, and• Net book value of asset is not recoverableNet book value of asset is not recoverable• Amount of loss = net book value less market valueAmount of loss = net book value less market value

• Entry to record impairment loss:Entry to record impairment loss:

Dec. 31 Loss on Impairment 100,000 Accumulated Amortization - Equipment 100,000

To record impairment loss on equipment

Dec. 31 Loss on Impairment 100,000 Accumulated Amortization - Equipment 100,000

To record impairment loss on equipment


Disposals of Property, Plant and Disposals of Property, Plant and EquipmentEquipment

• Four steps required to record a disposal:Four steps required to record a disposal:1. Update amortization1. Update amortization

• For the part of the year to the date of disposalFor the part of the year to the date of disposal

2. Calculate the net book value2. Calculate the net book value= Cost - Accumulated Amortization= Cost - Accumulated Amortization

3. Calculate the gain or loss3. Calculate the gain or loss= Proceeds – Net Book Value= Proceeds – Net Book Value

• Proceeds > net book value: Proceeds > net book value: gaingain• Proceeds < net book value: Proceeds < net book value: lossloss

4. Record the disposal4. Record the disposal


Disposals of Property, Plant and Disposals of Property, Plant and Equipment 2Equipment 2

• Entry to record disposal of asset:Entry to record disposal of asset:

• Retirement of Property, Plant and EquipmentRetirement of Property, Plant and Equipment• No proceeds are receivedNo proceeds are received• Debit accumulated amortization for full amount of Debit accumulated amortization for full amount of

amortization and credit asset account for original costamortization and credit asset account for original cost• May be no difference if fully amortized; otherwise May be no difference if fully amortized; otherwise

difference is a loss on retirementdifference is a loss on retirement

Dr. Cash (or other account)Dr. Accumulated AmortizationDr. Loss on Disposal OR

Cr. Gain on DisposalCr. Property, plant and equipment account

Dr. Cash (or other account)Dr. Accumulated AmortizationDr. Loss on Disposal OR

Cr. Gain on DisposalCr. Property, plant and equipment account


Exchanges in Property, Plant and Exchanges in Property, Plant and EquipmentEquipment

• New asset is purchased by trading in an New asset is purchased by trading in an old assetold asset• A A Trade-in allowanceTrade-in allowance reduces the price of reduces the price of

new assetnew asset• Cash paid = difference between trade-in Cash paid = difference between trade-in

allowance and purchase priceallowance and purchase price


Exchanges in Property, Plant and Exchanges in Property, Plant and Equipment 2Equipment 2

• Trade-in allowance is ignored as fair Trade-in allowance is ignored as fair market value is more relevantmarket value is more relevant

• Accounting treatment is dependent upon Accounting treatment is dependent upon whether the exchange is considered:whether the exchange is considered:• A monetary exchange of assets:A monetary exchange of assets: when a when a

significant amount of cash is involved; orsignificant amount of cash is involved; or• A non-monetary exchange of assets: A non-monetary exchange of assets: when when

little or no cash is involvedlittle or no cash is involved


Monetary Exchange of AssetsMonetary Exchange of Assets

• Monetary exchanges of assets occur when:Monetary exchanges of assets occur when:• The assets exchanged are dissimilar, orThe assets exchanged are dissimilar, or• A significant amount of cash is involvedA significant amount of cash is involved

• Viewed as sale of old asset & purchase of new Viewed as sale of old asset & purchase of new assetasset• Old asset sold for proceeds = fair market valueOld asset sold for proceeds = fair market value• New asset recorded at fair market value of old asset + New asset recorded at fair market value of old asset +

cash paid (or less cash received)cash paid (or less cash received)• Gain or loss = difference between net book value and Gain or loss = difference between net book value and

the fair market value of old assetthe fair market value of old asset


Non-Monetary Exchange of AssetsNon-Monetary Exchange of Assets

• Exchange of assets accounted as for monetary Exchange of assets accounted as for monetary exchanges unless:exchanges unless:• No effect on the operation of the business, orNo effect on the operation of the business, or• Fair values cannot be determinedFair values cannot be determined

• Then accounted for as non-monetary exchange:Then accounted for as non-monetary exchange:• New asset is recorded at net book value of old asset New asset is recorded at net book value of old asset

plus any cash paid (or less any cash received)plus any cash paid (or less any cash received)• No gain or loss is recordedNo gain or loss is recorded

• New asset is basically substituted for old assetNew asset is basically substituted for old asset


Natural ResourcesNatural Resources

• Consists of standing timber and deposits of oil, Consists of standing timber and deposits of oil, gas and mineralsgas and minerals

• Also called Also called wasting assetswasting assets • Differ from other long-lived assets:Differ from other long-lived assets:

• Physically extracted: Physically extracted: depletedeplete as they are used as they are used• Replaced only by an act of natureReplaced only by an act of nature

• Cost determined as for other long-lived assets:Cost determined as for other long-lived assets:• Include costs of acquiring and preparing asset for useInclude costs of acquiring and preparing asset for use• Include Include asset retirement obligationsasset retirement obligations: future restoration : future restoration

and clean-up costsand clean-up costs


Amortization of Natural ResourcesAmortization of Natural Resources

• The The units-of-activity methodunits-of-activity method is used to is used to calculate amortizationcalculate amortization• First calculate the amortizable cost per unitFirst calculate the amortizable cost per unit

• Amortization of natural resources is Amortization of natural resources is debited to debited to inventoryinventory • As it is a cost of extracting a saleable productAs it is a cost of extracting a saleable product

• When product is sold the cost is expensed When product is sold the cost is expensed to to cost of goods soldcost of goods sold


Intangible AssetsIntangible Assets

• Rights, privileges, and competitive advantages Rights, privileges, and competitive advantages that have no physical substancethat have no physical substance

• Recorded at cost, including costs to make ready Recorded at cost, including costs to make ready for its intended usefor its intended use

• If asset has a limited life, it is amortized over its If asset has a limited life, it is amortized over its useful or legal life, whichever is shorteruseful or legal life, whichever is shorter• Straight-line methodStraight-line method is often used is often used

• Assets with indefinite lives are not amortizedAssets with indefinite lives are not amortized


Intangible Assets with Limited LivesIntangible Assets with Limited Lives

• Patent:Patent: right to control an invention for 20 years right to control an invention for 20 years• Copyright:Copyright: right to reproduce and sell artistic or right to reproduce and sell artistic or

published work for life of creator + 50 yearspublished work for life of creator + 50 years• Research and development (R&D) costs:Research and development (R&D) costs:

• Research costs are expensed when incurredResearch costs are expensed when incurred• Development costs which lead to patents, copyrights Development costs which lead to patents, copyrights

and new products and processes are capitalizedand new products and processes are capitalized

• Other intangible assetsOther intangible assets• Customer lists, noncompetition agreements, sports Customer lists, noncompetition agreements, sports

contractscontracts


Intangible Assets with Indefinite Intangible Assets with Indefinite LivesLives

• Trademarks and trade namesTrademarks and trade names• Word, phrase, jingle or symbol that identifies an Word, phrase, jingle or symbol that identifies an

enterprise or productenterprise or product

• Franchises and licencesFranchises and licences• Franchise: contractual arrangement giving the Franchise: contractual arrangement giving the

franchisee rights to sell products and use trademarksfranchisee rights to sell products and use trademarks• Licence: government grant to use public propertyLicence: government grant to use public property

• GoodwillGoodwill• The value of all favourable attributes of a companyThe value of all favourable attributes of a company• Recorded only when a business is purchasedRecorded only when a business is purchased


Statement PresentationStatement Presentation

• Balance sheet:Balance sheet:• Property, plant and equipment often includes natural Property, plant and equipment often includes natural

resourcesresources• Intangible assets are normally listed separatelyIntangible assets are normally listed separately

• For assets that are amortized:For assets that are amortized:• The balances and accumulated amortization of major The balances and accumulated amortization of major

classes of assets should be disclosedclasses of assets should be disclosed• Amortization:Amortization:

• Methods used should be describedMethods used should be described• Amount of amortization expense for period should be Amount of amortization expense for period should be

discloseddisclosed


Using Information in the Financial Using Information in the Financial StatementsStatements

• Asset Turnover Ratio:Asset Turnover Ratio:= Net Sales = Net Sales ÷ Average Total Assets÷ Average Total Assets• Indicates how efficiently a company is using Indicates how efficiently a company is using

its assets to generate salesits assets to generate sales

• Return on AssetsReturn on Assets= Net Income = Net Income ÷ Average Total Assets÷ Average Total Assets• Measures overall profitability of assets used in Measures overall profitability of assets used in

earnings processearnings process


COPYRIGHTCOPYRIGHT

Copyright © 2007 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.

weygandt, kieso, kimmel, trenholm, kinnear accounting principles, fourth canadian edition © 2007...

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