Chapter 9: CAPITAL ASSETS Quiz for chapter 9 will be Thurs or Friday of next week. CHAPTER 9.

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Presentation transcript:

Chapter 9: CAPITAL ASSETS Quiz for chapter 9 will be Thurs or Friday of next week. CHAPTER 9

Changes in Estimated Useful Life (or Residual Value) Management should periodically review its estimates of the useful life and salvage value of the company’s amortizable assets. If wear and tear or obsolescence indicates that the estimates are too low or too high, the estimates should be changed. Changes in estimates are made for current and future years only. They are not made retroactively for past period. CAPITAL Expenditure during useful life

Changes in Estimated Useful Life (or Residual Value) When a change in amortization is made: 1. There is no correction of past amortization numbers 2. Amortization expense for current and future years is revised. In order to calculate the new amortization expense, we must first calculate the asset’s net book value at the time of the change. New NBV = Original cost – Accumulated amortization cost + any improvement – impairment loss

Changes in Estimated Useful Life (or Residual Value) For example, Park Accounting decides on December 15, 2011 to extend the estimated useful life of its car by one more year (to Dec due to its great condition) Salvage value is changed from $2000 to $700. This car was purchased on Jan for $25000, and its original useful life estimate was 5 years. The net book value on December 2011 is ? Amort expense in the past= (25000 – 2000) / 5 = 4600

Changes in Estimated Useful Life (or Residual Value) Accumulated amort = 4600 * 3 = NBV = – = Revised annual amort expense = (11200 – 700) / 3 years = 3500 On Dec 31, 2011 (2012 and 2013), Park accounting will record $3500 If Units of Activity method was used, the calculation would be the same except that the remaining useful life is expressed as units rather than years. CAPITAL Expenditure during useful life

Changes in Estimated Useful Life (or Residual Value) If the declining balance method was used then the new rate would be applied to the net book value at the time of the change in estimate.

Classwork / Homework P498 E9.6 (I will take up this question) P503 P9.4 and P9.5