CAPITAL ASSETSCAPITAL ASSETS

UnitUnit

99

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 ASSETSCAPITAL ASSETSCAPITAL ASSETS

TANGIBLE CAPITAL ASSETSTANGIBLE CAPITAL ASSETS

Tangible capital assets include: property, plant and equipment

LandLand improvementsBuildingsEquipment

natural resources such as mineral deposits, oil and gas reserves, and timber

INTANGIBLE CAPITAL ASSETSINTANGIBLE CAPITAL ASSETS

Intangible capital assets provide future benefits through the special rights and privileges they convey.

Examples:Patents, copyrights, sports contracts, and

trademarks

©

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 DETERMINING THE COST OF CAPITAL ASSETSCAPITAL ASSETS

DETERMINING THE COST OF DETERMINING THE COST OF CAPITAL ASSETSCAPITAL ASSETS

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 MEASUREMENT OF CAPITAL ASSET COSTCAPITAL ASSET COST

MEASUREMENT OF MEASUREMENT OF CAPITAL ASSET COSTCAPITAL ASSET COST

The cost of Land includes:1. purchase price2. closing costs such as title and

legal fees3. accrued property taxes and other liens

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.

LANDLANDLANDLAND

LANDLAND

EXAMPLEEXAMPLE

LANDLAND

EXAMPLEEXAMPLEABC company acquires land for $100,000 cash. An old warehouse on the property is removed at a cost of $7,500. The company received $1,500 from the warehouse scraps. Legal fees cost $3,000. Taxes paid at the time of purchase amounted to $1,100. Costs of filling and grading the land is $15,000. Cost of fences around the land is 3,000. What is the value of the land?

Cash Paid 100,000

Removal of Warehouse 6,000 (7,500-1,500)

Legal fees 3,000

Taxes 1,100

Filling & Grading 15,000

Total Cost 125,100

Note: Fencing is considered a land improvement

The cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use, such as:1. parking lots2. fencing3. landscaping4. lighting

Lighting

Parking Lot

LAND IMPROVEMENTSLAND IMPROVEMENTSLAND IMPROVEMENTSLAND IMPROVEMENTS

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.

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.

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.

BUILDINGSBUILDINGSBUILDINGSBUILDINGS

BUILDINGSBUILDINGS

EXAMPLEEXAMPLE

BUILDINGSBUILDINGS

EXAMPLEEXAMPLEABC company acquires a building for $100,000 cash. Improvements to the building include architects fees of $2,000 and construction costs of $$15,000. Legal fees cost $3,000. Cost of fences and a parking lot around the building is $13,000. What is the value of the building?

Cash Paid 100,000

Legal fees 3,000

Architects Fees 2,000

Construction 13,000

Total Cost 128,000

Note: Fencing and parking lot are considered a land improvement

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.

EQUIPMENTEQUIPMENTEQUIPMENTEQUIPMENT

EQUIPMENTEQUIPMENT

ExampleExample

EQUIPMENTEQUIPMENT

ExampleExampleABC company acquires a equipment for $100,000 cash. Transporting the equipment cost $3,000. The equipment was damaged during transportation and cost $1,000 to repair. Assembling and testing the equipment costs $2,000. Servicing and maintaining the equipment will cost $5000 per year?

Cash Paid 100,000

Transportation 3,000

Assembling & Testing 2,000

Total Cost 105,000

Note: servicing and repair are expenditures

BASKET PURCHASEBASKET PURCHASE

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

BASKET PURCHASEBASKET PURCHASEEXAMPLEEXAMPLE

ABC company acquires land and building for $100,000 cash. The fair market value of the land is $60,000 while the building was appraised at $80,000.

Fair Market Value Allocated % Allocated Cost

Land 60,000 60,000/140,000=43% 100,000*43%=43,000

Building 80,000 80,000/140,000=57% 100,000*57%=57,000

Total 140,000 100,000

Land $43,000

Building 57,000

Cash 100,000

Natural resources consist of standing timber and underground deposits of oil, gas, and minerals.

Natural resources, frequently called wasting assets, have two distinguishing characteristics:

1. They are physically extracted in operations.

2. They are replaceable only by an act of nature.

NATURAL RESOURCESNATURAL RESOURCESNATURAL RESOURCESNATURAL RESOURCES

The acquisition cost of a natural resource is the cash or cash equivalent price necessary to acquire the resource and prepare it for its intended use.

If the resource is already discovered, cost is the price paid for the property.

ACQUISITION COSTACQUISITION COSTACQUISITION COSTACQUISITION COST

Intangible assets are rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.

INTANGIBLE ASSETSINTANGIBLE ASSETSINTANGIBLE ASSETSINTANGIBLE ASSETS

In general, accounting for intangible assets parallels the accounting for capital assets. Intangible assets are:

1. recorded at cost;

2. written off over useful life in a rational and systematic manner;

3. at disposal, net book value is eliminated and gain or loss, if any, is recorded.

ACCOUNTING FOR ACCOUNTING FOR INTANGIBLE ASSETSINTANGIBLE ASSETSACCOUNTING FOR ACCOUNTING FOR

INTANGIBLE ASSETSINTANGIBLE ASSETS

TYPES OF INTANGIBLE ASSETSTYPES OF INTANGIBLE ASSETS

PatentsCopyrightsTrademarks and Trade NamesFranchises and LicensesGoodwillResearch and Development Costs

PATENTSPATENTS

Exclusive right to manufacture, sell or control granted for 20 years

Legal costs of protecting a patent in an infringement suit are added to the Patent account and amortized over the remaining life of the patent

Copyrights are granted by the federal government giving the owner the exclusive right to reproduce and sell artistic or published work

Copyrights extend for the life of the creator plus 50 years

COPYRIGHTSCOPYRIGHTS

TRADE MARKS/NAMESTRADE MARKS/NAMES

Word, phrase, jingle or symbol that distinguishes or identifies a particular enterprise or product

If indefinite life, do not amortize. Test for impairment

FRANCHISESFRANCHISES

Contractual agreement under which the franchiser grants the franchisee the rightTo sell certain productsTo render specific services or to use certain

trademarks or trade names, usually within a designated geographic area

LICENSESLICENSES

Operating rights permit the enterprise to use public property in performing its service (i.e. the use of airwaves for radio or TV broadcasting)

GOODWILLGOODWILL

Goodwill represents favourable attributes that relate to a business enterprise

Record only in an exchange transaction that involves the purchase of an entire business

Goodwill equals the excess of cost over the fair market value of the net assets (assets less liabilities) acquired

Goodwill is not written off as it has an unlimited useful life. It must be tested regularly for impairment.

Research costs–record as an expense when incurred

Development costs–capitalize if associated with an identifiable, feasible product. Otherwise, expense

RESEARCH AND DEVELOPMENT RESEARCH AND DEVELOPMENT COSTSCOSTS

Ordinary repairs are expenditures to maintain the operating efficiency and expected productive life of the capital asset.

They are debited to Repairs Expense as incurred and are often referred to as operating expenditures.

Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life of the capital asset.

1. Expenditures are usually material in amount and occur infrequently during the period of ownership.

2. Since additions and improvements increase the company’s investment in productive facilities, they are debits to the capital asset affected, and are referred to as capital expenditures.

EXPENDITURES DURING EXPENDITURES DURING USEFUL LIFEUSEFUL LIFE

EXPENDITURES DURING EXPENDITURES DURING USEFUL LIFEUSEFUL LIFE