BAT4M University/College Grade 12 Accounting Chapter 9 Study Notes

Long Lived Assets (Property, Plant, and Equipment)


–          long term assets used for the production/sale of goods/services to customers

–          consist of: land, land improvements, buildings, and equipment


Determining Cost

–          costs incurred that only benefit the current period are called operating expenditures

–          costs incurred that will benefit future periods are called capital expenditures



–          cost includes: purchase price, closing costs (legal fees), and any extra costs to prepare the land for use

–          the cost of the land is the debit balance of land


Land Improvements

–          structural additions to land such as parking lots or driveways

–          recorded separately from land and are also amortized



–          purchase price, legal fees, and costs of preparing the building are debited to Buildings



–          can be any type of equipment that includes purchase price, freight charges, insurance, and cost of assembly


Basket Purchase

–          occurs when property, plant, and equipment are all purchased together for a single price

–          each item in the basket is taken as a percentage using their fair market value and using a percentage to calculate allocated cost



–          process of cost allocation

–          recorded through adjusting entries

–          factors in calculating amortization: cost, useful life, and residual value

–          all assets must be recorded at cost

–          useful life is an estimate of the expected life of an asset

–          can be expressed in time or units of output

–          residual value is an estimate of the asset’s value at the end of its useful life


Straight Line

–          same cost occurs every year of the asset’s useful life

–          Amortizable Cost = Cost – Residual Value

–          Annual Amortization Expense = Amortizable Cost / Estimated Useful Life

–          Percentages can also be used to calculate straight line amortization


Declining Balance

–          amortization is based on the declining value of the asset

–          calculated by multiplying the book value by a percentage

–          companies often use double declining balance amortization to amortize their assets at double the rate of straight line amortization


Units of Activity

–          useful life is expressed in terms of units, not time

–          Amortizable Cost = Cost – Residual Value

–          Amortizable Cost per Unit = Amortizable Cost / Estimated Units of Activity

–          Annual Amortization Expense = Amortizable Cost per Unit * Units of Activity Used During the Year


Which Method Should be Used?

–          assets that consistently generate revenue over time should be amortized using straight line

–          assets that generate large revenue in the first few years but produce less later should be amortized using declining balance

–          Assets with usages that vary over years or can be easily measured using units should be amortized using units of activity

–          All methods are acceptable

–          Straight line produces steady net income and amortization expense

–          Declining balance produces low net income at first, then high net income later

–          Units of activity produce varying net incomes

–          Income tax regulations require the single declining balance method of amortization to be used

–          The CRA does not allow taxpayers to estimate amortization rates

–          Taxpayers are given classes for their assets known as the capital cost allowance (CCA)


Capital Expenditures during Useful Life

–          ordinary repairs are expenses that maintain the asset

–          often small amounts that are debited to repair or maintenance expense

–          additions and improvements are costs that increase the operating efficiency of assets

–          often large and rarely happen

–          debited to the asset account



–          permanent decline in the net book value of an asset is known as impairment loss

–          only recorded if impairment is permanent

–          DR Loss on Impairment (difference between Net Book Value and Market Value), CR Accumulated Amortization – Asset

–          Impairment expense is recorded as an operating expense



–          when revisions are made, no correction is made to previous amortization entries

–          amortization expenses for current/future years is re-evaluated

–          Remaining Amortizable Cost (at time of revision) = Net Book Value (at time of revision) – Revised Residual Value

–          Revised Annual Amortization Expense = Remaining Amortizable Cost / Remaining Estimated Useful Life



–          Occurs when assets are: retired, sold, or exchanged

–          4 Steps in recording disposals: update amortization, calculate Net Book Value, calculate gain or loss, and record the disposal

–          DR Cash (or other asset), Accumulated Amortization, and Loss on Disposal (OR CR Gain on Disposal), CR Long-term asset account



–          The asset is simply disposed

–          Asset account is reduced to 0

–          Loss on Disposal = Net Book Value of the asset when it is retired

–          DR Accumulated Amortization, Loss on Disposal, CR Asset


Sale (Gain)

–          Any gain on the sale of an asset = Proceeds – NBV

–          DR Cash, Accumulated Amortization, CR Gain on Disposal, Asset


Sale (Loss)

–          Loss on sale of an asset = Proceeds – NBV

–          DR Cash, Accumulated Amortization, Loss on Disposal, CR Office Furniture



–          Trade in allowance is often given to reduce the purchase price of an asset

–          Can be either monetary or nonmonetary


Monetary Exchanges

–         Saleof old asset, purchase of new asset

–          4 Steps: Update any unrecorded amortization, calculate NBV, calculate gain/loss on disposal, record exchange

–          Remove the cost and accumulated amortization of asset

–          Record any gain/loss

–          Record new asset at fair market value plus cash paid (or less cash received)

–          Record cash paid/received

–          E.g. DR Asset (new), Accumulated Amortization, Loss on Disposal, CR Asset (old), Cash


Nonmonetary Exchanges

–          Are often recorded the same way as monetary

–          If does not change the operations of the business, does not be recorded


Natural Resources Cost

–          Physically extracted

–          Only nature can replace them

–          Treated the same as property, plant, and equipment



–          Units of activity is generally used to amortize natural resources

–          Amortization is debited to an inventory account rather than an expense account

–          E.g. DR Inventory, CR Accumulated Amortization

–          Labour is also considered a cost of extracting the resource and is recorded as inventory



–          Accounted for just like property, plant, and equipment


Intangible Assets

–          rights, privileges, competitive advantages that hold no physical substance

–          proof can be a contract, licence, or other document

–          recorded at cost

–          if there is a limited useful life, amortization is calculated for the shorter of either the estimated useful life or legal life

–          typically amortized by straight-line

–          intangible assets with indefinite lives are not amortized


Limited Lives (Patents, Copyrights, R&D Costs, Deferred Costs)

–          patents are exclusive rights

–          copyrights are also exclusive rights

–          R&D costs are expensed if unsuccessful, but included in the cost of patent if they are successful


Indefinite Lives (Trademarks and Goodwill)

–          Trademarks identify an enterprise or topic

–          Royalties are payments to the franchisor and are recorded as operating expenses

–          Goodwill can be similar to good reputation or anything extra that increases the value of the company



–          Asset Turnover = Net Sales / Average Total Assets

–          Indicates how efficiently a company uses its assets

–          Shows that every dollar invested in assets produced x amount of dollars in revenue

–          Return on Assets = Net Income / Average Total Assets

–          Measures overall profitability