Chapter 7 Capital Assets
Intangible assets with indefinite lives
- assets include licenses and franchises (ex: NHL franchise) -trademarks that do not expire and Goodwill -these assets are not amortized (like land) but they are test for impairment every year, even if there is no indication that impairment has occured * under ASPE, intangibles with indefinite lives are only tested for impairment if there is indication of impairment
Intangible Assets with finite lives
-Include assets like patents and copyrights that have finite and measurable useful lives -ex: machinery, they are amortized over their useful lives, usually using the straight line method, -tested for impairment when there is suspicion that impairment has occurred
derecognition occurs when
-company disposes of the asset thru sale or otherwise -no future benefit is expected from the asset, either in use or on disposal
on derecognition, the entity must:
1. Record depreciation expense, if applicable, up to date of disposal 2. remove the asset and any accumulated depreciation from the entity's books 3. record gain or loss on disposal (the difference between the carrying value of the asset and the proceeds of any disposal, if any)
Depreciation Methods
1. Straight line 2. declining balance 3. Units of production
Calculating depreciation
1. determine acquisition cost (purchase price+anything needed to put asset into service) 2.estimate useful life and residual life 3. select a depreciation method
Cost incurred subsequent to acquisition
Costs of ordinary repairs/maintenance (i.e. that are necessary to maintain a fixed asset in normal operating condition) are expensed and reported in total on the income statement
which depreciation method is used by the Canada Revenue Agency (CRA) for capital cost allowance purposes
Declining balance
Journal entry for impairment
Dr Impairment loss X Cr. Accumulated Depreciation X x= carrying value of asset - recoverable amount
journal entry to record capitalization
Dr. Asset Cr. Cash/A/P/ Parts inventory
Derecognition journal entry
Dr. selling price (usually cash) Dr. Acc dep *Dr. Loss on sale if Cr>Dr* Cr. original Cost of asset *Cr. Gain on sale if Dr>Cr*
Tangible capital assets
Have a physical existence, e.g. property, plant equipment, natural resources
capital assets
Long term assets meeting following criteria -They are held for use in the normal course of operations (e.g. production or supply of goods and services -have been acquired, constructed or developed with the intention of being used on a continuing bases (not selling) -are not intended for sale in the ordinary course of business
Change in depreciation method
Remaining book value - new residual value / updated remaining useful value aka how many years left from new useful life
Types of capital assets
Tangible Intangible
units of production method
Units realized this period X unit rate where unit rate = (cost -residual value)/ total estimated units of activity = $ per units of activity units measured of capicity of the asset, ex hours of operation, finished goods produced method provides the best matching of the cost of the asset
can impairment losses be reversed?
Yes if the recoverable amount subsequently increases No if under ASPE
impairment
a permanent decline in the fair value of an asset if its carrying value (net book value) exceeds its recoverable amount (amount able to sell)
declining balance method/double declining method
asset net book value x rate -type of accelerated depreciation, generating higher expense in early years of the asset's file -appropriate if asset efficiency and earning power decline as the asset ages -stop depreciation once asset book value equals its residual value
Straight line method
calculation of depreciation expense= (cost -residual value)/estimated service life -most popular method -depreciation expense same every year(except years of acquisition and disposal) -appropriate if asset provides constant level of benefits throughout its useful life
Asset net book value
cost-accumulated depreciation
costs incurred subsequent to the acquisition of an asset should be capitalized under these conditions
if the create likely additional future benefits by: -extending the asset's useful life and/or -increasing the asset's productivity
Derecognition of capital assets
means removal of an asset from the company's accounting records
Is land subject to depreciation?
no it has an indefinite useful life
Intangible Capital Assets
no physical existence, value comes from rights conferred upon holder, e.g. brand names, trademarks, patents, copyrights, licenses
accounting for a change in depreciation is done
prospectively: no changes in previous years' depreciation appropriate treatment is to depreciate the remaining book value - the revised estimate of the residual value over the (upadted) remaining useful life
double declining balance method
rate = (1/useful life in years) x 2
Accumulated depreciation
represents the total amount of depreciation expense that has been recorded for an asset since the asset was acquired -it is reported on the balance sheet as a contra asset account -total amount of depreciation of previous years combined
which methods need the date of purchase?
straight line double defining method
cost
the amount of consideration given up to get the asset, including all costs required to install the asset at the location and in the condition necessary for its intended use - purchase price + any other cost that makes asset ready to use ex: purchase price, construction costs, transportation costs etc
Depreciation expense
the amount of depreciation recorded each period and should be reported on the income statement -only record it's current year, not a combination of previous years
recoverable amount
the higher of the asset's fair value - cost to sell and its value in use ( estimated future net cash flow from use of the asset plus its residual value)
capitalized
the process of adding an asset to the book value
Depreciation process
the process of allocating the cost of a depreciable capital assets to expense over the asset's useful life
depreciable capital assets
they provide benefits over several years -the cost is allocated (matched) to the periods in which the asset is used and revenues are generated by its use