BSAD 221 Introductory Financial Accounting Donna Gunn, CA

1. BSAD 221Introductory Financial AccountingDonna Gunn, CA

2. 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:

3. 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 Measuring and Recording Acquisition Cost

4. 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 factory • What is the cost of the land?

5. 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

6. Acquisition Cost – Land • Purchase price • Real estate commissions • Title insurance premiums • Delinquent taxes • Surveying fees • Title search and transfer fees Land is not amortizable.

7. 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

8. Lump-Sum (or Basket)Purchases of Assets Great-West Lifeco Inc. paid $2,800,000 for a combined purchase of land and a building. The land is appraised at $300,000 and the building at $2,700,000. How much of the purchase price is allocated to land and how much to the building?

9. Lump-Sum (or Basket)Purchases of Assets

10. Lump-Sum (or Basket)Purchases of Assets

11. No Yes Capital Expenditures: Record an asset Expenses: Record an expense Capital Expenditure versusan Immediate Expense Does the expenditure increase capacity or efficiency or extend useful life?

12. Record Repair and Maintenance Expense Record an Asset for Capital Expenditures • Extraordinary repairs: • Major engine overhaul • Modification of body for new use of truck • Addition to storage capacity of truck • Ordinary repairs: • Repair of transmission or other mechanism • Oil change, lubrication, etc. • Replacement tires, windshield • Paint job Capital Expenditure versusan Immediate Expense

13. Cost Allocation Amortization Amortization – systematially allocates the cost of an asset to the period benefited by their use. Balance Sheet Income Statement Acquisition Cost Expense (Unused) (Used)

14. Amortization forthe current year Total of amortizationto date on an asset Amortization IncomeStatement AmortizationExpense Balance Sheet AccumulatedAmortization

15. Net Book Value Cost – Accumulated Amortization = Book value Book Value is NOT Market Value

16. The calculation of amortization requires three amounts for each asset: Acquisition cost. Estimated useful life. Estimated residual value. Amortization Concepts

17. Straight-line Units-of-production Double declining balance (diminishing balance) Alternative Amortization Methods

18. Amortization Expense per Year Cost - Residual ValueLife in Years = 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.

19. $1,744,000 = Straight-Line Method Amortization Expense per Year Cost - Residual ValueLife in Years = $45,000,000 - $1,400,00025 years =

20. Straight-Line Method Net Book Value

21. Amortization Rate Cost - Residual Value Estimated Total Production = Amortization Expense Amortization Rate × = Units-of-Production Method Step 1: Step 2: Actual Annual Production

22. 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?

23. Amortization Rate $45,000,000 - $1,400,000 87,200 hours = = $500 / hour Step 2: Amortization Expense = $500/hour x 3,460 hours = $1,730,000 Units-of-Production Method Step 1:

24. Units-of-Production Method Net Book Value

25. AnnualAmortizationExpense NetBookValue 2 ( ) × = Useful Life in Years Double-Declining-Balance Method Declining balance rate of 2 isdouble-declining-balance (DDB) rate. Cost – Accumulated Amortization Annual computation ignores residual value.

26. 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.

27. AnnualAmortizationexpense NetBookValue 2 ( ) × = Useful Life in Years Double-Declining-Balance Method

28. AnnualAmortizationexpense NetBookValue 2 ( ) × = Useful Life in Years ( 2 ) $45,000,000 × = $3,600,000 25 years 2 ( ) ($45,000,000 – $3,600,000) × = $3,312,000 25 years Double-Declining-Balance Method Year 1 Amortization: Year 2 Amortization:

29. ( ) 2 ($45,000,000 – $6,912,000) × = $3,047,000 25 years Double-Declining-Balance Method