Module 8 Capital Assets/Fixed Assets. SAP 2007 / SAP University Alliances Introductory Accounting Describe capital assets and issues in accounting for

Module 8

Capital Assets/Fixed Assets

SAP 2007 / SAP University Alliances Introductory Accounting

Learning Objectives


Capital Assets


Tangible Capital Assets


InTangible Capital Assets


Cost of Capital Assets


Capital Expenditures


Revenue Expenditures


Betterments


Land


Land Improvements


Buildings


Leasehold Improvements


Machinery and Equipment


Amortization


Cost

Useful life

Amortization


Amortization


Amortization Methods


Straight-line amortization expense

=Cost – Estimated salvage value

Estimated useful life

Straight Line Method


A piece of shoe-inspection machinery is purchased on January 1, 2008.

The relevant data is as follows:

Cost $10,000Estimated salvage value 1,000Cost to be amortized $9,000Estimated useful life:Accounting periods 5 yearsUnits inspected 36,000 shoes

Example


Straight-line amortization expense

=Cost – Estimated salvage value

Estimated useful life

Example: Straight-Line Method

$10,000 – $1,000

5 years=

= $1,800/ year


The annual adjusting entry to record amortization on this equipment would be:

Amortization Expense, equipment 1,800

Accumulated Amortization, –equipment 1,800

20082008 20092009 20102010 20112011 20122012

EquipmentEquipment $10,000$10,000 $10,000$10,000 $10,000$10,000 $10,000$10,000 $10,000$10,000

Less: Acc. Amort.Less: Acc. Amort. 1,8001,800 3,6003,600 5,4005,400 7,2007,200 9,0009,000

Book ValueBook Value $8,200$8,200 $6,400$6,400 $4,600$4,600 $2,800$2,800 $1,800$1,800



Units-of-Production Method

Amortization per unit =

Cost – Estimated salvage value

Total estimated units of production

Annual amortization

expense=

Actual production x Amortization per unit


Amortization per unit (shoe)

Example: Units-of-Production Method

$10,000 – $1,000

36,000 units (shoes)=

$.25/shoe

Assume actual production is as follows:Assume actual production is as follows:

2008 2009 2010 2011 20122008 2009 2010 2011 2012

Units (shoes) 7,000 8,000 9,000 7,000 6,000

x.25 x.25 x.25 x.25 x.25

Amortization $1,750 $2,000 $2,250 $1,750 $1,250*

=

*Maximum amortization allowed since 36,000 units have been produced.


20082008 20092009 20102010 20112011 20122012






Declining Balance Method


Double-Declining-Balance Method


Example: Double-Declining-Balance MethodRate = 2 / 5 years x 100%

= 40% per year

YearYear Book Value atBook Value at

start of periodstart of period

Amortization Amortization ExpenseExpense

Accumulated Accumulated AmortizationAmortization

Book Value atBook Value at

end of periodend of period

20082008 $10,000$10,000 40% x 10,000 40% x 10,000

= $4,000= $4,000

$4,000$4,000 $6,000$6,000

20092009 6,0006,000 40% x 6,00040% x 6,000

= 2,400= 2,400

6,4006,400 3,6003,600

20102010 3,6003,600 40% x 3,60040% x 3,600

= 1,440= 1,440

7,8407,840 2,1602,160

20112011 2,1602,160 40% x 2,16040% x 2,160

= 864= 864

8,7048,704 1,2961,296

20122012 1,2961,296 296 296 (maximum)(maximum)

9,0009,000 1,0001,000

(salvage value)(salvage value)


20082008 20092009 20102010 20112011 20122012




Example: Double-Declining-Balance Method


Comparison of Methods- Amortization Expense

PeriodPeriod Straight-lineStraight-line Units-of-Units-of-productionproduction

Double-Double-Declining Declining BalanceBalance

20082008 $1,800$1,800 $1,750$1,750 $4,000$4,000

20092009 1,8001,800 2,0002,000 2,4002,400

20102010 1,8001,800 2,2502,250 1,4401,440

20112011 1,8001,800 1,7501,750 864864

20122012 1,800 1,800 1,2501,250 296296

$9,000$9,000 $9,000$9,000 $9,000$9,000


Partial Year Amortization


Partial Year Amortization


Revising Amortization Rates


Changes in Estimated Useful Life and/or Estimated Salvage Value


Example: Straight-line Method

Revised amortization for remaining years

=

Remaining book value

Revised salvage value

Revised remaining useful life

Changes in Estimated Useful Life and/or Estimated Salvage Value


Disposal of Capital Assets


Disposal of Capital Assets


Natural Resources


Amortization per unit =

Cost – Estimated salvage value

Total units of capacity

Amortization expense = Units

extractedx Amortization per unit

Natural resources are amortized based on units extracted or depleted.

Natural Resources


Intangible Assets


Intangible Assets


Goodwill


Exchanging Dissimilar and Similar Assets


Exchanging Dissimilar and Similar Assets

Documents

Module 8 Capital Assets/Fixed Assets. SAP 2007 / SAP University Alliances Introductory Accounting Describe capital assets and issues in accounting for