Managerial accounting

1. Depreciation and Plant AssetDepreciation and Plant Asset
CHAPTERCHAPTER
1010

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 ASSETSCAPITAL ASSETS

3. TANGIBLE ASSETSTANGIBLE ASSETS
Tangible assets include:
• property, plant and equipment
• natural resources such as mineral deposits,
oil and gas reserves, and timber

4. PROPERTY, PLANT AND EQUIPMENTPROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment can be
classified as:
1. Land (Non-Depreciable)
2. Land improvements (Depreciable)
3. Buildings (Depreciable)
4.Equipment (Depreciable)
**Land is the only capital asset that is
not amortized/ depreciated.

5. INTANGIBLE ASSETSINTANGIBLE ASSETS
Intangible assets provide future benefits
through the special rights and privileges they
convey.
Examples:
• Patents, copyrights, sports contracts, and
trademarks
©™

6. • 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.
• Expenditures that are not necessary
should be recorded as expenses,
losses, or other assets.
Invoice
DETERMINING THE COST OFDETERMINING THE COST OF
CAPITAL ASSETSCAPITAL ASSETS

7. COMPUTATION OF COST OF LANDCOMPUTATION OF COST OF LAND
Sometimes purchased land has a building on it that must
be removed to make the site suitable for construction of
a new building. In this case, all demolition and removal
costs less any proceeds from salvaged materials are
chargeable to the Land account.
Land
Cash price of property 100,000$
Net removal cost of warehouse 6,000
Legal fee 3,000
Cost of land 109,000$

8. COMPUTATION OF COST OFCOMPUTATION OF COST OF
DELIVERY TRUCKDELIVERY TRUCK
The cost of equipment consists of the cash purchase price
(22,000), provincial sales taxes (2000), freight charges
(500), and insurance during transit paid by the purchaser
(1000). It also includes expenditures required in
assembling (200), installing (300), and testing (200) the
unit. However, recurring costs such as motor vehicle
licenses (1000) and accident insurance (1,500) on company
cars and trucks are expensed as incurred.
So, what is the total o this Delivery Truck???
$26,200?? OR $28,700??
Why $26,200 is correct??

9. Three factors that affect the computation of
depreciation are:
FACTORS IN COMPUTINGFACTORS IN COMPUTING
DEPRECIATIONDEPRECIATION
1. Cost: all expenditures necessary to acquire the asset
and make it ready for intended use.
2. Useful life: estimate of the expected life based on
need for repair, service life, and vulnerability to
obsolescence.
3. Salvage value: estimate of the asset’s value at the
end of its useful life.

10. DEPRECIATION METHODSDEPRECIATION 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 (GAAP). Management selects the
method that is appropriate for their company. Once a
method is chosen, it should be applied consistently.

11. FORMULA FOR STRAIGHT-LINE METHODFORMULA FOR STRAIGHT-LINE METHOD
Cost Salvage
Value
Depreciable
Cost
Useful Life
(in Years)
Annual
Depreciation
Expense
Depreciable
Cost
$25,000 - $2,000 = $23,000
$23,000 ÷ 5 = $4,600

12. FORMULA FORFORMULA FOR
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
Unlike the other amortization methods, salvage value is ignored
in determining the amount to which the declining balance rate is
applied.
A common application of the declining-balance method is the
double-declining-balance method, in which the declining-balance
rate is double the straight-line rate.
If Kim’s Florists uses the double-declining-balance method, the
amortization is 40% (2 x the straight-line rate of 20%).
Straight-
Line Rate
x2
Depreciation
Expense
Depreciable
Cost
per Unit
$25,000 x 40% = $10,000

13. FORMULA FOR UNITS-OF-ACTIVITY METHODFORMULA FOR UNITS-OF-ACTIVITY METHOD
Depreciable
Cost
Total
Units of
Activity
Depreciable
Cost per Unit
$23,000 ÷ 200,000 km = $0.115
Units of
Activity during
the Year
Annual
Depreciation
Expense
Depreciable
Cost per Unit
$0.115 x 30,000 km = $3,450

14. Capital assets may be disposed of by
a) retirement
b) sale, or
c) exchange
CAPITAL ASSET DISPOSALSCAPITAL ASSET DISPOSALS

15. • A patent is an exclusive right issued by the Federal
Government that enables the recipient to
manufacture, sell, or otherwise control his or her
invention for a period of 20 years from the date of
filing the application.
PATENTSPATENTS

16. • Copyrights are granted by the federal
government, giving the owner the
exclusive right to reproduce and sell
an artistic or published work.
• Copyrights extend for the life of the
creator plus 50 years or useful life,
whichever is shorter.
COPYRIGHTSCOPYRIGHTS

17. • A trademark or trade name is a word,
phrase, jingle, or symbol that distinguishes
or identifies a particular enterprise or
product.
• If the trademark or trade name is
purchased, the cost is the purchase price.
• If it is developed by a company, the cost
includes legal fees, registration fees, design
costs, and successful legal defence fees.
• Intangible assets with indefinite useful lives
are not depreciated.
TRADEMARKS AND TRADE NAMESTRADEMARKS AND TRADE NAMES

18. • A franchise is a contractual arrangement
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 geographical area.
• Another type of franchise, commonly
referred to as a license or permit, is entered
into between a governmental body and a
business enterprise and permits the
enterprise to use public property in
performing its services.
FRANCHISES AND LICENSESFRANCHISES AND LICENSES

19. • Goodwill is the value of all favourable
attributes that relate to a business
enterprise.
• These attributes may include exceptional
management, desirable location, good
customer relations, and skilled employees.
• Goodwill cannot be sold individually in
the marketplace; it can be identified only
with the business as a whole.
GOODWILLGOODWILL