module 8 capital assets/fixed assets. sap 2007 / sap university alliances introductory accounting...

Module 8

Capital Assets/Fixed Assets

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Learning Objectives

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Capital Assets

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Tangible Capital Assets

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InTangible Capital Assets

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Cost of Capital Assets

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Capital Expenditures

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Revenue Expenditures

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Betterments

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Land

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Land Improvements

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Buildings

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Leasehold Improvements

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Machinery and Equipment

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Amortization

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Cost

Useful life

Amortization

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Amortization

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Amortization Methods

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Straight-line amortization expense

=Cost – Estimated salvage value

Estimated useful life

Straight Line Method

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A piece of shoe-inspection machinery is purchased on January 1, 2008.

The relevant data is as follows:

Cost $10,000Estimated salvage value 1,000Cost to be amortized $9,000Estimated useful life:Accounting periods 5 yearsUnits inspected 36,000 shoes

Example

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Straight-line amortization expense

=Cost – Estimated salvage value

Estimated useful life

Example: Straight-Line Method

$10,000 – $1,000

5 years=

= $1,800/ year

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The annual adjusting entry to record amortization on this equipment would be:

Amortization Expense, equipment 1,800

Accumulated Amortization, –equipment 1,800

20082008 20092009 20102010 20112011 20122012

EquipmentEquipment $10,000$10,000 $10,000$10,000 $10,000$10,000 $10,000$10,000 $10,000$10,000

Less: Acc. Amort.Less: Acc. Amort. 1,8001,800 3,6003,600 5,4005,400 7,2007,200 9,0009,000

Book ValueBook Value $8,200$8,200 $6,400$6,400 $4,600$4,600 $2,800$2,800 $1,800$1,800

Example: Straight-Line Method

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Units-of-Production Method

Amortization per unit =

Cost – Estimated salvage value

Total estimated units of production

Annual amortization

expense=

Actual production x Amortization per unit

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Amortization per unit (shoe)

Example: Units-of-Production Method

$10,000 – $1,000

36,000 units (shoes)=

$.25/shoe

Assume actual production is as follows:Assume actual production is as follows:

2008 2009 2010 2011 20122008 2009 2010 2011 2012

Units (shoes) 7,000 8,000 9,000 7,000 6,000

x.25 x.25 x.25 x.25 x.25

Amortization $1,750 $2,000 $2,250 $1,750 $1,250*

=

*Maximum amortization allowed since 36,000 units have been produced.

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20082008 20092009 20102010 20112011 20122012

EquipmentEquipment $10,000$10,000 $10,000$10,000 $10,000$10,000 $10,000$10,000 $10,000$10,000

Less: Acc. Amort.Less: Acc. Amort. 1,7501,750 3,7503,750 6,0006,000 7,7507,750 9,0009,000

Book ValueBook Value $8,250$8,250 $6,250$6,250 $4,000$4,000 $2,250$2,250 $1,000$1,000

Example: Straight-Line Method

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Declining Balance Method

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Double-Declining-Balance Method

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Example: Double-Declining-Balance MethodRate = 2 / 5 years x 100%

= 40% per year

YearYear Book Value atBook Value at

start of periodstart of period

Amortization Amortization ExpenseExpense

Accumulated Accumulated AmortizationAmortization

Book Value atBook Value at

end of periodend of period

20082008 $10,000$10,000 40% x 10,000 40% x 10,000

= $4,000= $4,000

$4,000$4,000 $6,000$6,000

20092009 6,0006,000 40% x 6,00040% x 6,000

= 2,400= 2,400

6,4006,400 3,6003,600

20102010 3,6003,600 40% x 3,60040% x 3,600

= 1,440= 1,440

7,8407,840 2,1602,160

20112011 2,1602,160 40% x 2,16040% x 2,160

= 864= 864

8,7048,704 1,2961,296

20122012 1,2961,296 296 296 (maximum)(maximum)

9,0009,000 1,0001,000

(salvage value)(salvage value)

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20082008 20092009 20102010 20112011 20122012

EquipmentEquipment $10,000$10,000 $10,000$10,000 $10,000$10,000 $10,000$10,000 $10,000$10,000

Less: Acc. Amort.Less: Acc. Amort. 4,0004,000 6,4006,400 7,8407,840 8,7048,704 9,0009,000

Book ValueBook Value $6,000$6,000 $3,600$3,600 $2,160$2,160 $1,296$1,296 $1,000$1,000

Example: Double-Declining-Balance Method

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Comparison of Methods- Amortization Expense

PeriodPeriod Straight-lineStraight-line Units-of-Units-of-productionproduction

Double-Double-Declining Declining BalanceBalance

20082008 $1,800$1,800 $1,750$1,750 $4,000$4,000

20092009 1,8001,800 2,0002,000 2,4002,400

20102010 1,8001,800 2,2502,250 1,4401,440

20112011 1,8001,800 1,7501,750 864864

20122012 1,800 1,800 1,2501,250 296296

$9,000$9,000 $9,000$9,000 $9,000$9,000

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Partial Year Amortization

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Partial Year Amortization

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Revising Amortization Rates

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Changes in Estimated Useful Life and/or Estimated Salvage Value

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Example: Straight-line Method

Revised amortization for remaining years

=

Remaining book value

Revised salvage value

Revised remaining useful life

Changes in Estimated Useful Life and/or Estimated Salvage Value

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Disposal of Capital Assets

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Disposal of Capital Assets

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Natural Resources

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Amortization per unit =

Cost – Estimated salvage value

Total units of capacity

Amortization expense = Units

extractedx Amortization per unit

Natural resources are amortized based on units extracted or depleted.

Natural Resources

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Intangible Assets

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Intangible Assets

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Goodwill

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Exchanging Dissimilar and Similar Assets

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Exchanging Dissimilar and Similar Assets