BSAD 221 Introductory Financial Accounting Donna Gunn, CA

BSAD 221Introductory Financial

Accounting

Donna Gunn, CA

Types of Assets

Long-lived assets used in the operationof a business are divided into categories:

Property, Plant and Equipment(Tangible long-lived assets)

Intangible Assets

Measuring and Recording Acquisition Cost

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

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

factoryWhat is the cost of the land?

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

Acquisition Cost – Land• Purchase price

• Real estate commissions

• Title insurance premiums

• Delinquent taxes

• Surveying fees

• Title search and transfer fees

Land is not amortizable.

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

Lump-Sum (or Basket)Purchases of Assets

Great-West Lifeco Inc. paid $2,800,000 for acombined purchase of land and a building.

The land is appraised at $300,000and the building at $2,700,000.

How much of the purchase price is allocatedto land and how much to the building?


Appraised % of Purchase AssignedAsset Value Value Price Cost a b* c b × c

Land

$2,700,000 90% Building 300,000 10%

Total

$3,000,000 100% *$2.7M/$3M


Appraised % of Purchase AssignedAsset Value Value Price Cost a b c b × c

Land

$2,700,000 90% $2,800,000 $2,520,000Building 300,000 10% $2,800,000 280,000

Total

$3,000,000 100% $2,800,000

Does the expenditure increase capacityor efficiency or extend useful life?

Capital Expenditures:Record an asset

Expenses:Record an expense

Capital Expenditure versusan Immediate Expense

Yes No

Capital Expenditure versusan Immediate Expense

Record an Asset forCapital Expenditures

Extraordinary repairs:•Major engine overhaul

•Modification of body for new use of truck

•Addition to storage capacity of truck

Record Repair andMaintenance Expense

Ordinary repairs:

•Repair of transmission or other mechanism

•Oil change, lubrication, etc.

•Replacement tires, windshield

•Paint job

Amortization – systematially allocates the cost of an asset to the period benefited by their use.

Cost

Allocation

(Unused)

Balance Sheet

(Used)

Income Statement

Expense

Amortization

AcquisitionCost

AmortizationExpense

IncomeStatement

AccumulatedAmortization

Amortization forthe current year

Total of amortizationto date on an asset

Amortization

Balance Sheet

Net Book Value

Book Value is NOT Market Value

Cost – Accumulated Amortization = Book value

Amortization Concepts

The calculation of amortization requires three amounts for each asset:

• Acquisition cost.

• Estimated useful life.

• Estimated residual value.

Alternative Amortization Methods

• Straight-line

• Units-of-production

• Double declining balance (diminishing balance)

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.

Cost - Residual ValueLife in Years

AmortizationExpense per Year

=

=

= $1,744,000

$45,000,000 - $1,400,00025 years

Cost - Residual ValueLife in Years

AmortizationExpense per Year

=



Net Book Value

Depreciation Accumulated Accumulated Undepreciated Expense Amortization Amortization BalanceYear (debit) (credit) Balance (book value)

45,000,000 1 1,744,000 1,744,000 1,744,000 43,256,0002 1,744,000 1,744,000 3,488,000 41,512,0003 1,744,000 1,744,000 5,232,000 39,768,000

5,232,000 5,232,000

Amortization Rate

= Cost - Residual Value Estimated Total Production

Step 1:

Step 2:

Amortization Expense = Amortization

Rate × Actual Annual Production

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?

Step 1:

Step 2:

Amortization Expense = $500/hour x 3,460 hours = $1,730,000

Amortization Rate = $45,000,000 - $1,400,000

87,200 hours = $500 / hour



Net Book Value

Accumulated Unamortized Amortization Amortization BalanceYear Hours Expense Balance (book value)

45,000,0001 3,460 1,730,000 1,730,000 43,270,0002 3,600 1,800,000 3,530,000 41,470,0003 3,350 1,675,000 5,205,000 39,795,000

AnnualAmortization

Expense

NetBookValue ( )Useful Life in Years

2= ×

Cost – Accumulated Amortization

Declining balance rate of 2 isdouble-declining-balance (DDB) rate.

Annual computation ignores residual value.

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.


AnnualAmortization

expense

NetBookValue

( )Useful Life in Years 2

= ×


AnnualAmortization

expense

NetBookValue

( )Useful Life in Years 2

= ×


Year 1 Amortization:

Year 2 Amortization:

( ) $45,000,000 ×

25 years 2

= $3,600,000

( )($45,000,000 – $3,600,000) ×

25 years2

= $3,312,000

( )($45,000,000 – $6,912,000) × 25 years

2= $3,047,000


Amortization Accumulated Unamortized Expense Amortization Balance

Year (debit) Balance (book value) 45,000,0001 3,600,000 3,600,000 41,400,0002 3,312,000 6,912,000 38,088,0003 3,047,040 9,959,040 35,040,960

BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Documents

Transcript of BSAD 221 Introductory Financial Accounting Donna Gunn, CA