CHAPTER%2008%20POWER%20POINT%202008

CHAPTER%2008%20POWER%20POINT%202008 - CHAPTER 8 CAPITAL...

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1 CHAPTER 8 CAPITAL ASSETS
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2 CAPITAL ASSETS -ASSETS USED IN A BUSINESS , NOT INTENDED FOR SALE, TO BE USED FOR A LONG PERIOD OF YEARS. CAPITAL ASSETS 1) TANGIBLE ASSETS 2) INTANGIBLE ASSETS HAVE PHYSICAL DO NOT HAVE A PHYSICAL SUBSTANCE SUBSTANCE TANGIBLE ASSETS ALSO CALLED – PROPERTY ,PLANT AND EQUIPMENT OR – FIXED ASSETS LAND, BUILDING, EQUIPMENT, HOW DO WE RECORD ASSETS - ANSWER: AT THE HISTORICAL COST HISTORICAL COST- THE PURCHASE PRICE PAID TO ACQUIRE
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3 AMORTIZATION AMORTIZATION THE PROCESS OF ALLOCATING THE COST (TO EXPENSE) OF THE ASSET OVER ITS’ LIFE. DUE TO TIME AND USE AMORTIZATION METHODS STRAIGHT LINE METHOD ACCELERATED METHOD UNITS OF PRODUCTION METHOD CAPITAL COST ALLOWANCE-CCA MUST BE APPLIED CONSISTENTLY
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4 STRAIGHT LINE METHOD FORMULA : ORIGINAL COST – RESIDUAL VALUE ESTIMATED USEFUL LIFE = AMORTIZATION FOR THE YEAR AMORTIZE THE ASSET THE SAME AMOUNT EVERY YEAR. AT THE END THE NBV IS EQUAL TO SALVAGE VALUE NBV - > NET BOOK VALUE (HISTORICAL COST – SALVAGE VALUE)
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5 EXAMPLE : KIMMYB COMPANY EXAMPLE (TO BE USED IN EACH SCENARIO) KIMMY CO. PURCHASED A PHOTOCOPIER FOR $22,000 , IT IS ESTIMATED TO HAVE A USEFUL LIFE OF 4 YEARS AND A RESIDUAL VALUE OF $2,000. ( THE PHOTOCOPIER WILL BE USEFUL FOR 8000 HOURS OVER ITS’ LIFE).
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6 STRAIGHT LINE METHOD OF AMORTIZATION 22,000 – 2,000 4 = $5,000 AMORTIZATION A YEAR. DR AMORTIZATION EXPENSE 5,000 CR ACCUM AMORTIZATION 5000 COPIER ACCUM . AMORTIZ,-COPIER 22,000 I I 5000 I I 5000 I 10000 I 5000 I 15000 I 5000 I I 20,000 NBV MAX RESIDUAL VALUE 22,000-20,000 = 2,000
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7 ACCELERATED METHOD OF AMORTIZATION 1.DECLINING BALANCE METHOD 2.DOUBLE DECLINING BALANCE METHOD EARLY YEARS LARGE AMORTIZATION ,… LATER YEARS SMALLER AMORTIZATION FORMULA : CARRYING VALUE X RATE % NET BOOK VALUE X RATE % (HIST. COST – ACCUM DEPREC.) DOUBLE THE STRAIGHT LINE RATE
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8 BACK TO EXAMPLE KIMMY CO. DECLINING BALANCE DOUBLE DECLINING BALANCE RATE : 100 % 4 YEARS = 25 % X 2 = 50 % YEAR 1 ( 22000-ZERO ) X 50 % = 11,000 DR AMORTIZATION EXPENSE 11,000 CR ACCUM AMORTIZATION 11000 YEAR 2 (22000 – 11000) X 50% = 5,500 YEAR 3 (22000 – 16500 ) X 50% = 2750 YEAR 4 (22000 – 19250 ) x 50 % = 1875 max 750
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9 DECLINING BALANCE METHOD ……. COPIER ACCUM AMORTIZATION 22,000 I I 11000 I 5500 I 16500 I 2750 I 19250 I 750 I 20000
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10 UNITS OF PRODUCTION METHOD AMORTIZATION IS BASED ON UNITS OF PRODUCTION OR UNITS PRODUCED EXAMPLES: KILOMETERS DRIVEN HOURS USED UNITS PRODUCED FORMULA ; HISTORICAL COST – RESIDUAL VALUE TOTAL ESTIMATED UNITS OF OUTPUT = AMORTIZATION EXP PER UNIT AMORTIZATION PER UNIT X UNITS PRODUCED IN THE YEAR= AMORTIZATION FOR THE YEAR.
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11 BACK TO EXAMPLE KIMMY CO UNITS OF PRODUCTION METHOD. KIMMY CO USED THE PHOTO COPIER FOR 2300 HOURS IN
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CHAPTER%2008%20POWER%20POINT%202008 - CHAPTER 8 CAPITAL...

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