1. Chapter 9: CAPITAL ASSETS Schedule for the remainder of this semester: We will learn Chapter 13: Corporation CHAPTER 9

2. 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

3. 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

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

5. 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

6. 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

7. The cost of Land includes: 1. purchase price 2. closing costs such as title and legal fees 3.accrued property taxes and other liens (=debt) 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

8. Land is not amortized because land has an unlimited useful life. Land improvements are structural additions made to land such as driveways, parking lots, fences and landscaping. Land improvements are recorded as a separate account from land account. Land Improvements are amortized. LANDLAND

9. 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

10. 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.(=legal fees) 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. BUILDINGSBUILDINGS

11. 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

12. 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. But prepaid insurance and license expense will be separated from the equipment account. EQUIPMENTEQUIPMENT

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

14. For example, Tim Horton bought a building and a parcel of land on July 31 for $300,000, paying $50,000 cash and incurring a mortgage payable for the balance. The land was recently appraised at $120,000 whereas the building was appraised at $200,000. The $300,000 cost should be allocated based on fair market values. Land = 120,0000 / 320,000 = 37.5% Building = 200,000 / 320,000 = 62.5% Land account = 0.375 * 300,000 = 112,500 Building account = 0.625 * 300,000 = 187,500 Basket Purchase

15. Amortization is the process of allocating the expense (or cost) of a capital asset over its useful (service) life. Cost allocation is designed to provide for the proper matching of expenses with revenues in accordance with the matching principle. During an asset’s life, its usefulness may decline because of wear and tear or obsolescence. Land is the only capital asset that is not amortized. AMORTIZATIONAMORTIZATION

16. FACTORS IN CALCULATING AMORTIZATION Illustration 10-6

17. AMORTIZATION METHODS Three methods of recognizing amortization are: 1. Straight-line, 2. Units of activity, and 3. Declining-balance. Each method is acceptable under generally accepted accounting principles. Management selects the method that is appropriate for their company. Once a method is chosen, it should be applied consistently.

18. STRAIGHT-LINE METHOD

19. Amortization is constant for each year of the asset's useful life

20. Classwork / Homework P495 BE9.1, BE9.2, BE9.3, BE9.4 P497 E9.1, E9.2 (a and b) P502 P9.1 (don’t do Feb 15 transaction)