Professional Documents
Culture Documents
Long Lived Assets Full
Long Lived Assets Full
· Natural resources
· E.g., oil, natural gas, forests. Depletion
7-3
Types of Amortization
Tangible assets:
Land →
Plant and equipment → Depreciation expense
Software → Amortization
expense
Natural resources → Depletion expense
7-4
Types of Amortization
Goodwill → Not amortized
Other intangible assets,
(limited life) → Amortization expense
Other intangible assets,
(indefinite life) → Not amortized
Deferred charges → Amortization expense
Research and
development costs → Not capitalized
7-5
Asset vs. Expense?
· Capitalize:
· Betterments (i.e., improves or extends useful
life).
· Replacement of entire asset.
· Expense:
· Long-lived low-cost items (materiality concept).
· Repairs and maintenance.
· Replacement of component part
7-6
What Should be Capitalized?
· All expenditures necessary to make asset
ready for its intended use.
· E.g., purchase price, sales tax, commissions paid,
legal fees, delivery charges, site preparation.
· Self constructed assets:
· All construction costs (i.e., materials, labor,
overhead).
· Noncash acquisitions:
· E.g., stock for asset, donated asset.
· Record at fair market value of consideration given
or received.
7-7
What Should be Capitalized?
· Basket purchase:
· Lump sum purchase of different assets.
· Allocate cost based on FMV of acquired assets.
· Revaluation model.
· Continually revalue carrying value to fair value.
7-8
Property, plant and Equipment transactions
illustrated.
Disposal
Acquisition Allocation
( How should a gain
( What is the cost (How should be or loss be
of Asset) expensed) recorded)
Cost of acquisition
• The cost of item, property or equipment includes all expenditures
that are necessary to make the asset ready for intended use.
• Cost of machinery includes
• Purchase price
• Sales tax
• Transportation cost
• Installation cost
• Cost of testing
• Cost of site preparation
Estimate cost of acquisition ?
• Purchase price $540000
• GST
• Frieght
• Unloading and loading due to truck breakdown
• Transit insurance
• Special bedding to be changed twice during the life of the machine
• Compensation to a worker for injury
Allocation of Expenses: Types of
Depreciation methods
• Straight line Method
• Accelerated methods
• Written down value method
• Sum-of-the-year’s digit method
• Benefits provided may be high during the initial year and tends to decline the last year
due to the age
Depreciation
Balance
year 1 800,000 205714.3 594,286
year 2 594,286 171429 422857
year 3 422857 137143 285714
year 4 285714 102857 182857
year 5 182857 68571 114286
year 6 114286 34286 80,000
Units-of- Production method
• Assumes depreciation solely from the use of asset
• For eg bus useful life is 200,000 km with the estimated cost of 8 lakhs
lakhs and scrap value of 80,000
•-
Year Km ran Depreciation expense
Year 1 10,000 km 36000
Year 2` 30,000 km 144,000
Journal entries
• Purchase of an asset
• Depreciation of an asset
• Depreciation expenses
• To Accumulated Depreciation
• Accumulate depreciation
• To asset account
• Sale of an asset
• Cash
• To Asset account
Problem
• Leo consultant bought a screen projection on April 1 2014 for Rs.
40,000. It was expected to last for nine years and have a residual
value of Rs. 4000. Straight line depreciation is charged. The
equipment was disposed on September 30 2019.
• Balance Sheet value of asset should stand for its future benefits
• If the benefits are expected to be diminished, then the asset should
be impaired.
• A car bought at a cost of Rs. 250,000 two years ago. Undergoes some
major repairs at a cost of Rs. 40,000. The useful life of the car at the
time of the purchase was five years and the residual value was Rs.
25,000. Depreciation was charged on the straight line basis.
• As the result of the repairs, the life of the car extended by two years.
While residual value would be unchanged.
Useful Life Revision
• Vinod bought a computer for Rs. 100,000 with an estimated residual
value of Rs. 10,000. At that time it seemed that the computer would
be useful for six years.
• After three years,he thinks that the compute will last only two more
years at the end of which is expected to realize Rs. 5000