CAPITAL ASSETS Unit 9

Capital assets are long-lived assets that are used in the operations of a business and are not intended for sale to customers. Capital assets are subdivided into two classes: 1. Tangible (with physical substance) 2. Intangible (without physical substance) CAPITAL ASSETS

TANGIBLE CAPITAL ASSETS Tangible capital assets include: property, plant and equipment Land Land improvements Buildings Equipment natural resources such as mineral deposits, oil and gas reserves, and timber

INTANGIBLE CAPITAL ASSETS Intangible capital assets provide future benefits through the special rights and privileges they convey. Examples: Patents, copyrights, sports contracts, and trademarks © 

Capital assets are recorded at cost in accordance with the cost principle. Cost consists of all expenditures necessary to 1) acquire the asset and 2) make it ready for its intended use. These costs include purchase price, freight costs, and installation costs. DETERMINING THE COST OF CAPITAL ASSETS

Cost is measured by the cash paid in a cash transaction or by the cash equivalent price when non-cash assets are used in payment. The cash equivalent price is equal to the fair market value of the asset given up or the fair market value of the asset received, whichever is more clearly determinable. MEASUREMENT OF CAPITAL ASSET COST

The cost of Land includes: 1. purchase price 2. closing costs such as title and legal fees 3.accrued property taxes and other liens on the land assumed by the purchaser All necessary costs incurred in making land ready for its intended use are debited to the Land account. LANDLAND

LANDEXAMPLELANDEXAMPLE ABC company acquires land for $100,000 cash. An old warehouse on the property is removed at a cost of $7,500. The company received $1,500 from the warehouse scraps. Legal fees cost $3,000. Taxes paid at the time of purchase amounted to $1,100. Costs of filling and grading the land is $15,000. Cost of fences around the land is 3,000. What is the value of the land? Cash Paid100,000 Removal of Warehouse 6,000 (7,500-1,500) Legal fees 3,000 Taxes 1,100 Filling & Grading 15,000 Total Cost125,100 Note: Fencing is considered a land improvement

The cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use, such as: 1. parking lots 2. fencing 3. landscaping 4. lighting Lighting Parking Lot LAND IMPROVEMENTS

The cost of buildings includes all necessary expenditures relating to the purchase or construction of a building. When a building is purchased, such costs include the purchase price and closing costs. Costs to make the building ready for its intended use consist of expenditures for remodelling and replacing or repairing the roof, floors, wiring, and plumbing. When a new building is constructed, cost consists of the contract price plus payments for architects’ fees, building permits, interest payments during construction, and excavation costs. BUILDINGSBUILDINGS

BUILDINGSEXAMPLEBUILDINGSEXAMPLE ABC company acquires a building for $100,000 cash. Improvements to the building include architects fees of $2,000 and construction costs of $$15,000. Legal fees cost $3,000. Cost of fences and a parking lot around the building is $13,000. What is the value of the building? Cash Paid100,000 Legal fees 3,000 Architects Fees 2,000 Construction 13,000 Total Cost128,000 Note: Fencing and parking lot are considered a land improvement

The cost of equipment consists of the cash purchase price, freight charges, and insurance paid by the purchaser during transit. Cost includes all expenditures required in assembling, installing, and testing the unit. EQUIPMENTEQUIPMENT

EQUIPMENTExampleEQUIPMENTExample ABC company acquires a equipment for $100,000 cash. Transporting the equipment cost $3,000. The equipment was damaged during transportation and cost $1,000 to repair. Assembling and testing the equipment costs $2,000. Servicing and maintaining the equipment will cost $5000 per year? Cash Paid100,000 Transportation 3,000 Assembling & Testing 2,000 Total Cost105,000 Note: servicing and repair are expenditures

BASKET PURCHASE Allocate cost of a group of assets in proportion to relative fair market values.

BASKET PURCHASE EXAMPLE ABC company acquires land and building for $100,000 cash. The fair market value of the land is $60,000 while the building was appraised at $80,000. Fair Market ValueAllocated %Allocated Cost Land60,00060,000/140,000=43%100,000*43%=43,000 Building80,00080,000/140,000=57%100,000*57%=57,000 Total 140, ,000 Land$43,000 Building 57,000 Cash100,000

Natural resources consist of standing timber and underground deposits of oil, gas, and minerals. Natural resources, frequently called wasting assets, have two distinguishing characteristics: 1. They are physically extracted in operations. 2. They are replaceable only by an act of nature. NATURAL RESOURCES

The acquisition cost of a natural resource is the cash or cash equivalent price necessary to acquire the resource and prepare it for its intended use. If the resource is already discovered, cost is the price paid for the property. ACQUISITION COST

Intangible assets are rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance. INTANGIBLE ASSETS

In general, accounting for intangible assets parallels the accounting for capital assets. Intangible assets are: 1. recorded at cost; 2. written off over useful life in a rational and systematic manner; 3. at disposal, net book value is eliminated and gain or loss, if any, is recorded. ACCOUNTING FOR INTANGIBLE ASSETS

TYPES OF INTANGIBLE ASSETS Patents Copyrights Trademarks and Trade Names Franchises and Licenses Goodwill Research and Development Costs

PATENTS Exclusive right to manufacture, sell or control granted for 20 years Legal costs of protecting a patent in an infringement suit are added to the Patent account and amortized over the remaining life of the patent

Copyrights are granted by the federal government giving the owner the exclusive right to reproduce and sell artistic or published work Copyrights extend for the life of the creator plus 50 years COPYRIGHTS

TRADE MARKS/NAMES Word, phrase, jingle or symbol that distinguishes or identifies a particular enterprise or product If indefinite life, do not amortize. Test for impairment

FRANCHISES Contractual agreement under which the franchiser grants the franchisee the right To sell certain products To render specific services or to use certain trademarks or trade names, usually within a designated geographic area

LICENSES Operating rights permit the enterprise to use public property in performing its service (i.e. the use of airwaves for radio or TV broadcasting)

GOODWILL Goodwill represents favourable attributes that relate to a business enterprise Record only in an exchange transaction that involves the purchase of an entire business Goodwill equals the excess of cost over the fair market value of the net assets (assets less liabilities) acquired Goodwill is not written off as it has an unlimited useful life. It must be tested regularly for impairment.

Research costs–record as an expense when incurred Development costs–capitalize if associated with an identifiable, feasible product. Otherwise, expense RESEARCH AND DEVELOPMENT COSTS

Ordinary repairs are expenditures to maintain the operating efficiency and expected productive life of the capital asset. They are debited to Repairs Expense as incurred and are often referred to as operating expenditures. Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life of the capital asset. 1. Expenditures are usually material in amount and occur infrequently during the period of ownership. 2. Since additions and improvements increase the company’s investment in productive facilities, they are debits to the capital asset affected, and are referred to as capital expenditures. EXPENDITURES DURING USEFUL LIFE