chapter 6 finishing up

Long Term Assets

  • Definition: Long term assets are assets owned for longer than one year.

  • Examples:

    • Property
    • Plant (includes machinery)
    • Equipment (vehicles)
    • Land
    • Note: Land is the only property, plant, and equipment that is not subject to depreciation (according to IFRS).

Capital Expenditure

  • Criteria for Capitalization:
    1. Benefits more than one period
    2. Enhances service potential
    3. Material in value
    • Example: A whiteboard marker would not be capitalized due to its immaterial value, despite being used for two years.

Depreciation Methods

Overview

  • Main Methods:
    1. Units of Production
    2. Straight Line
    3. Double Declining Balance (DDB)
Units of Production
  • Criteria: Based on usage rather than time.
    • Use Case: Vehicles, measured by kilometers driven.
  • Formula: extDepreciationRate=extCost−extResidualValueextEstimatedUnitsofOutputext{Depreciation Rate} = \frac{ ext{Cost} - ext{Residual Value}}{ ext{Estimated Units of Output}}
    • Multiply by the number of units used.
Straight Line Method
  • Criteria: Time-based depreciation method. This method allocates the same amount of depreciation expense each year.
  • Formula: extAnnualDepreciation=extCost−extEstimatedResidualValueextEstimatedUsefulLife(inyears)ext{Annual Depreciation} = \frac{ ext{Cost} - ext{Estimated Residual Value}}{ ext{Estimated Useful Life (in years)}}
    • If useful life = 5 years, divide by 5.
Double Declining Balance Method
  • Criteria: Accelerated depreciation method, where assets lose value more in the earlier years of their life.
  • Formula: extDepreciationExpense=extNetBookValueimes2next{Depreciation Expense} = ext{Net Book Value} imes \frac{2}{n}
    • Where: Net Book Value = Cost - Accumulated Depreciation
    • This method involves doubling the straight-line rate.
Half Year Rule
  • Definition: A policy in which an asset's first year depreciation is calculated at half the expected amount.

Selling Long-Term Assets

  • Two Steps when Selling:
    1. Update depreciation until the date of sale.
    2. Remove the cost of the asset and accumulated depreciation from books, recording any gains or losses.
  • Differences with Inventory Sales:
    • When selling long-term assets, you do not debit Cost of Goods Sold.
    • Journal Entries Required:
    • Debit Cash
    • Credit Asset Account
    • Debit Accumulated Depreciation
    • Record the difference as a gain or loss (Cash received vs. Book value).

Intangible Assets

  • Definition: Assets that cannot be physically touched or seen.

Journal Entry Examples for Transactions

1. Sale of Equipment (January 2)
  • Scenario: Sold equipment with cost $130,000, accumulated depreciation $67,000, for cash $70,000.
  • Journal Entry:
    • Debit Cash: $70,000
    • Debit Accumulated Depreciation: $67,000
    • Credit Equipment: $130,000
    • Credit Gain on Sale: $7,000 (Difference between cash received and net book value of asset).
2. Purchase of Equipment
  • Scenario: Purchased new equipment for cash $176,000.
  • Journal Entry:
    • Debit Equipment: $176,000
    • Credit Cash: $176,000
3. Sale of Building (July)
  • Scenario: Sold a building with cost $650,000, accumulated depreciation $145,000 for cash $100,000, and a note receivable $400,000.
  • Calculate Depreciation for 6 months at straight line.
  • Journal Entry:
    • Debit Cash: $100,000
    • Debit Note Receivable: $400,000
    • Credit Building: $650,000
    • Debit Accumulated Depreciation: $150,000 (including up-to-date depreciation), showing no gains or losses on sale.
4. Basket Purchase of Land and Building
  • Scenario: Purchased land and building for $420,000 (land value $150,000, building value $300,000).
  • Allocation Method:
    • Total Fair Value = $450,000
    • Land = $150,000 / $450,000 = 33%
    • Building = $300,000 / $450,000 = 67%
    • Cost of Land = $420,000 * 33% = $140,000
    • Cost of Building = $420,000 * 67% = $280,000
  • Journal Entry:
    • Debit Land: $140,000
    • Debit Building: $280,000
    • Credit Cash: $420,000
5. Depreciation Journal Entries
  • Double Declining Balance:
    • Formula: Net Book Value * 2n\frac{2}{n} (where n = useful life)
  • Straight Line Calculation:
    • Formula: extCost−extResidualValueextUsefulLife\frac{ ext{Cost} - ext{Residual Value}}{ ext{Useful Life}} , prorated for actual months owned.

Test Two Overview

  • Coverage: Chapters 4, 5, and 6. Worth 20% of your final grade.

  • Chapters Breakdown:

    • Chapter 4: Bank Reconciliation
    • Chapter 5: Inventory Systems (calculate ending inventory and cost of goods sold using FIFO, weighted average, specific identification).
    • Chapter 6: Depreciation Methods (calculate using straight line, units of production, and double declining balance).

  • Practice: Review bank reconciliations, calculate costs of goods sold using different methods, and understanding and calculating depreciation methods.

  • Exam Tip: Practice journal entries for various transactions and ensure comprehension of depreciation calculations and their journal entries.