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