Académique Documents
Professionnel Documents
Culture Documents
Tangible asset
y Asset with physical substance y Property, plant, and equipment = fixed asset.
Intangible asset
y Intellectual property. y No physical substance
y Examples are patent rights, copyrights
2
Amortization
y y
View capital asset as bundle of services Similar to prepaid expenses, cost is expensed as company benefits from the services
y y y y Land - no depreciation Plant and equipment - depreciation Natural resources - depletion Intangible assets - amortization
3
Depreciation Methods
y
Accelerated methods
y Declining balance methods y Sum of the years or years digits methods
Impaired Assets
y
An asset for which its remaining benefits, as measured by the sum of future cash flows the assets use will generate, is less than its book value If entity expects to hold asset
y Write asset down to fair value
Group Depreciation
Group depreciation
Treats all similar assets as a pool or group rather than calculating for each item separately. No gain or loss recognized when an individual item is disposed.
Credit asset account for original cost. Debit cash for amount of proceeds. Debit accumulated depreciation for difference.
Accumulated depreciation
Does not represent the accumulation of any tangible thing. Sum of the original cost that has been expensed. Funding the purchase of new assets is usually unrelated 7 to depreciation
Goodwill
When one company buys another. Goodwill = Purchase price of company fair value of net assets.
Net assets include tangible assets and recognized intangible assets net of liabilities assumed by the purchaser.
Recorded as an asset upon acquisition. Not amortized. Annual impairment test. Any write down is charged against income.
Amortized over useful life Useful life can equal or be shorter than legal life
10
Stern Corporation
Stern Corporation
Transaction
Cost of patent written off as an expense over the reminder of its legal life as of Dec 31, 2005. Patents remaining legal life was 5 years July 1, 2006: Typewriter that had cost of $1,027 and had been fully depreciated on Dec 31, 2005, was sold for $75 Oct 1, 2006: company sold a desk for $80 (Book cost of $490 with an accumulated depreciation of $395 as of Jan 1, 2006)
12
Depreciation Rates
Buildings: 2% Factory machinery: 10% Furniture and fixtures: 10% Automotive equipment: 20% Office machines: 10%
Included in the factory machinery cost of $3,425,585 was machine costing $85,000 that had been fully depreciated on Dec 21, 2005, and that was still in use
13
Stern Corporation Balance Sheet As of Dec 31, 2005 Current Assets Cash A/R Less: Allowance for Doubtful Accounts US Treasury Secuirties at Cost Inventories Total Current Assets Other Assets Investments Land Building Less: Accumulated Depreciation Factory Machinery Less: Accumulated Depreciation Furniture and Fixtures Less: Accumulated Depreciation Automotive Equipment Less: Accumulated Depreciation Office Machines Less: Accumulated Depreciation Tools Patent Prepaid Expenses Total Assets 671,344 988,257 29648 958,609 274060 1734405 3,638,418 412294 186563 2405259 663379 3425585 1642358 56484 40400 58298 37156 42534 28005 1741880 1783227 16084 21142 14529 61294 56250 100190 8,031,871
14
Stern Corporation Balance Sheet As of Dec 31, 2005 Current Liabilities A/P Taxes Payable Accrued Salaries, Wages, and Interest LT Debt, Due within one year Total Current Liabilities Noncurrent Liabilities LT Debt Shareholders Equity Common Stock Retianed Earnings Total Shareholders' Equity Total Liabilities and Shareholder's Equity 510,000 709354 141,478 69300 1,430,132 1247368 2503275 2851096 5354371 8,031,871 15
16
17
18
Gross Land Building Factory machinery Furniture and fixtures Automotive equipment Office machines Tools Patent Total $186,563 2,405,259 3,394,352 55,994 49,944 41,507 53,444 45,000 $6,232,063
Net $186,563 1,693,775 1,439,926 10,390 7,979 10,378 53,444 45,000 $3,455,955
19
$2,776,108
Expenditure on R&D Goodwill Live stock Land with unlimited useful life for the enterprise
20
Defined Terms
Depreciation
Measure of..,
Wearing out / consumption / loss of value on Usage / effluxion of time / obsolescence through technology and market change
Depreciable asset
Used more than one accounting period Having limited useful life Used for production or supply of goods and services
21
Defined Terms
Useful life
Period of usage by firm No. of production or similar units expected to be obtained by suing the asset
Depreciable amount
= historical cost estimated residual value
22
23
Any addition or extension which retains a separate identity and is capable of being used after the existing asset is disposed of, is depreciated independently on the basis of an estimate of its own useful life
24
25
Depreciation
Quantum of depreciation to be provided in an accounting period involves.., Exercise of judgment by management in light of..,
Technical Commercial Accounting Legal requirements Need periodical review and revision
26
Depreciation Methods
Applied consistently to provide comparability Combination of more than method is sometimes used Depreciable assets which do not have material value, depreciation is often allocated fully in accounting period in which they are acquired
27
On change in method
Depreciation is calculated using new method from the date of asset coming into use Deficiency or surplus on change need to be adjusted during the year of change [charged to P&L statement]
28
Depreciation
Companies Act 1956 lays down rates of depreciation in respect of various assets Estimates useful life of an asset is shorter than under the provision of relevant statute Depreciation provision computed by applying higher rate Depreciable assets are disposed / discarded / demolished / destroyed, the net surplus or deficiency, if material, is disclosed separately
29
Assets depreciation rates and useful life are disclosed only of they are different from the principal rates specified in the statute governing the enterprise
30
Expenditure on real estate development Livestock Government grants and subsidies Assets under leasing rights
32
Definitions
Fixed asset
Used for producing and providing services Not held for sale
Judgment required Aggregate individually insignificant items, and to apply the criteria to aggregate value Stand-by equipment is capitalized Servicing equipment is capitalized General machinery spares charged to P&L on consumption Any specific machinery spares which irregular in nature allocate over a period not exceeding useful life of the principal item Accounting can be improved if the total expenditure is allocated to component parts, when in practice separable, and estimates are made of useful lives of these components
34
Components of Cost
Purchase price Import duties Non-refundable taxes or levies Directly attributable cost in bringing the asset to its working condition..,
Site preparation Initial delivery and handling costs Installation costs special foundations for plant Professional fees architect fees or engineers fees
Deduct trade discount and rebates from purchase price Commissioning cost.., Expenditure on test runs Expenditure on experimental production
35
Components of Cost
Administration and general overheads expenses are excluded Any specific direct admin and OH expenses related to making the asset workable is included Expenses during prolonged period between installation and commercial start up
Will be charged to P&L statements Treated as deferred revenue expenditure amortized over a period not exceeding 3 to 5 years after commencement of commercial production
36
37
Non-Monetary Consideration
FA acquired in exchange for another asset Cost of FA = FMV of consideration given When asset is same; cost = net book value FA acquired in exchange for shares in the enterprise,
Cost of FA = FMV (or) Cost of FA = FMV of shares
38
Improvement
Expenditure increasing future benefits Added to gross book value Includes..,
Addition Extension
39
Upward revaluation does not provide a basis for crediting to the P&L statement the accumulated depreciation existing at the date of revaluation
40
Systematic basis of valuation is required when select assets are revalued Not appropriate to have revalued class of assets net book value more than recoverable amount of the assets of that class
41
Hire purchase
Proportional value to the extent of payment is shown in the balance sheet Appropriate disclosure regarding HP should be made
Goodwill
Recorded in books only when some consideration in money or money;s worth has been paid for it Arises from..,
Business connections Trade name Reputation of an enterprise Intangible benefits enjoyed by an enterprise
Goodwill is written off over a period Many of them they retain it as an asset without writing off
45
Disclosure
Expenditure incurred on account of FA in the course of construction or acquisition On revaluation of FA, show disclose..,
Method adopted to compute the revalued amounts Nature of any indices used Year of any appraisal made Whether an external value was involved?
46
Stafford Press
Case: 7-3 Page: 213
47
Stafford Press
Founded in: 1996 Founded as: one-man job printing firm Founded in: a small southwestern town Owner: Lucas Stafford Product line: concentrated on special line of printing Experienced: rapid growth due to high degree of technical proficiency
48
50 $918,871
53
54
Discussion Question
Analyze the effect of each of these transactions on the items in the balance sheet and income statement For transactions that affect owners equity, distinguish between those that affect the net income of the current year and those that do not Show the appropriate JEs
55
Debit Credit
Equipment (109,868 + 450 + 1,629) Cash (possibly other items) 111,947 111,947
58
This is the entry when equipment traded in was similar, then the journal entry is constructed so that no gain or loss on disposal is recorded
Equipment (new) (20,830 + 6,050) Accumulated Depreciation (old) Loss on Sale of Fixed Assets Cash Equipment (old)
This is the entry is when assumed that the trade-in was not similar
In either case trade-in allowance $7,200 is irrelevant In the second case loss $750 is the difference between the fair value of trade-in, $6,050, and its $6,800 net book 60 value
The repair of the damage during the move has not improved the equipment so as to constitute a betterment; thus it is expensed
However, I dont think an event that changes a fixed assets future salvage value is any more relevant, in terms of the cost concept, than an event that changes its current market value. Thus, in my view, rather than adjusting the cost of the asset, it is better to amortize the reduction in salvage value by adjusting the depreciation charge for the rest of the equipments useful life, which constitutes a change in an estimate. Since the accumulated depreciation was $3,220, and annual depreciation was $805, the asset was 4 years old, and thus had 6 years left of useful life. The amount of remaining depreciation is the net book value at the end of 4 years, $6,780, less the newly estimated S1,290 salvage value, or $5,490. Divided by 6 years, the new annual depreciation expense on this item would be $915. (Easier, though not quite as thorough: the $660 lesser salvage value, spread over 6 years, is $110 per year, added to the current depreciation charge of $805, makes a total of $915.)
64
Discussion Question
Adjust the balance sheet in Exhibit 1 to show the effect of these transaction
65
Total amount of expenditures necessary to ready the asset for its intended use, which includes..,
Price of acquiring legal title Costs of delivery Installation Training of employees Modification of facilities to use the asset
68
Estimating Depreciation
Estimate salvage value Salvage value = expected selling price of the asset any removal costs Depreciable cost = cost salvage value Use appropriate depreciation method based on following two criteria..,
Not subject to manipulation by management distorting income Some resemblance to the decline in value of assets measured on historical cost basis
70
Straight-Line Depreciation
An equal portion of depreciable cost is charged to some measure of length of an assets life Measure may be..,
Periods of time Units of products
Straight-Line Depreciation
Example
Depreciation - Straight Line Method Purchase price of new furnace 13,000 Less: Trade-in allowance -3000 Less: Discount for cash -500 9,500 Value of old furnace 3000 Total assets paid 12,500 Freight charges for delivery 500 Installation costs 2000 Training costs for employees 1000 Total cost 16,000 Less: Salvage value -6000 Depreciable cost 10,000 Estiamted life: 5 years Expected metal melt: 250,000 pounds Shedule of Depreciation Expense Expected Melt (in Time Year pounds) Base 1 40,000 2,000 2 45,000 2,000 3 50,000 2,000 4 55,000 2,000 5 60,000 2,000 Total 250,000 10,000
72
73
74
75
76
Determines companys cost structure and ability to improve its capital and employee productivity Influences periodic income through depreciation and depletion charges Improve or depress current profits by lowering or raising the level of maintenance expenditures required to maintain FAs
77
Accelerated depreciation
Mostly confined to tax reporting
78