1. Chapter 9: CAPITAL ASSETS Final Exam will be at 8:30am Jan 26 this room CHAPTER 9

2. If annual amortization is inadequate or excessive, a change in the periodic amount should be made. When a change is made, 1. there is no correction of previously recorded amortization expense and 2. amortization expense for current and future years is revised. REVISING PERIODIC AMORTIZATION Revised amortization expense = Net book value at time of revision – revised salvage value Remaining useful life

3. Companies dispose (=gets rid of) of property which is no longer useful to them. There are 3 ways that companies dispose their capital asset: a) retirement b) sale, or c) exchange DISPOSALS of Property, Plant and Equipment

4. Step 1: Update amortization If the disposal occurs in the middle of the accounting period, amortization must be updated for the part of the year that has passed between the last time adjusting entries were recorded and the date of the disposal. Debit Amortization Expense and Credit Accumulated Amortization. DISPOSALS of Property, Plant and Equipment

5. Step 2: Calculate the net book value After updating and recording amortization expense, calculate the net book value. New NBV = Cost – Accumulated Amortization Step 3: Calculate the gain or loss Determine the amount of gain (or loss) on disposal, if any, by comparing the proceeds received to the net book value: Gain (or Loss) = Proceeds – NBV Proceeds = How much money you sold it for DISPOSALS of Property, Plant and Equipment

6. DISPOSALS Of Property, P and E Step 3: Compare net book value to sale proceeds Proceeds > Net book value = gain (cr.) Proceeds < Net book value = loss (dr.) Step 4: Record disposition, removing cost of asset and accumulated amortization, (same number used in step 2) and record proceeds (if any) and gain (credit) or loss (debit) on disposition (if any) 3 4 Cashxxx Accumulated amortizationxxx Capital assetxxx Gain on disposalxxx

7. Instead of selling, some assets are simply retired (thrown away) at the end of their useful lives. Let’s say On August 1, 2008, CKSS throws away photocopier machine which cost $31,200. On August 1, 2004, CKSS purchased this and expected to use it for 4 years of useful life with salvage value = zero CKSS used straight line method. Annual amortization = (31,200 – 0) / 4 years = $7800 per year or $650 per month (=7800 / 12 months) DISPOSALS - Retirement

8. Since 7 months have passed in 2008, so we have to amoritze 7 months of usage. 7 months * 650 = $4550 August 1 Amortization Expense 4550 Accumulated Amortization4550 NBV = 31200 – (650 * 48 months) = 0 Aug 1Accumulated Amortization31200 Photocopier31200 To record retirement of photocopier After posting this journal entry, these two accounts disappear from Balance Sheet. DISPOSALS - Retirement

9. What happens if the company still uses a fully amortized capital asset? The company will still use it without recording any amortization expense. Assume that CKSS retires its photocopier on January 1, 2008. NBV is still $4550, but CKSS could not sell it so they threw it out. Make a journal entry. Jan 1 Accumulated Amortization 26650 Loss on Disposal 4550 Photocopier31200 DISPOSALS - Retirement

10. Many companies would sell their capital asset after using it. (instead of throwing it away) Sometimes they sell it at a price higher than NBV.  Gain on Disposal Sometimes they sell it at a price lower than NBV  Loss on Disposal DISPOSALS - Sale

11. Gain on Disposal: Assume that on July 1, 2008, CKSS sold its photocopier at $1550. What is the journal entry? Step 1: Amortization expense = 650 * 6 = $3900 July 1 Amort Expense3900 Accumulated Amortization3900 NBV = 31200 – (650 * 47 months) = 650 Thus gain would be $900 = (1550 – 650) July1 Cash 1550 Accumulated Amortization 30550 Gain on disposal900 Photocopier31200 DISPOSALS - Sale

12. Loss on Disposal: Assume that on Dec 1, 2007, CKSS sold its photocopier at $50. What is the journal entry? Step 1: Amortization expense = 650 * 11= $7150 Aug 1 Amort Expense7150 Accumulated Amortization7150 NBV = 31200 – (650 * 40 months) = 5200 Thus loss would be -$5150 = (50 – 5200) Aug1 Cash 50 Accumulated Amortization 26000 Loss on disposal 5150 Photocopier31200 DISPOSALS - Sale

13. (P499) E9.7, E9.8 (except Jan 2 transaction) and E9.9 Classwork / Homework