Capital Assets

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CHAPTER
9
Chapter 9 CAPITAL ASSETS
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Straight Line Method vs Declining Balance Method

• 94 of public companies in Canada use the
  straight line method of amortization.
• Companies may use one method for one type of
  capital asset and another method for a different
  type of capital asset.
• All companies in Canada must report income tax to
  CRA and CRA mandates that companies use declining
  balance method when reporting their corporate
  income.

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Double Declining Balance Method

• Amortization expense is calculated based on the
  declining book value.
• A expense Begining book value amorization
  rate
• BBV Initial cost Accumulated amoritization
• Example On Jan 2, 2008 Mabasa Company acquires a
  delievery truck at a cost of 43000. The truck
  is expected to have a residual value of 3000 at
  the end of its four year useful life. Calculate
  the amortization using the
• straight line method
• declining balance method (a) for each year of
  the trucks life

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Double Declining Balance Method

• Straight line method
• (43000 3000) / 4 years 10,000 per year
• This means every year, amorization expense is
  10,000
• Double Declining Balance Method
• We will use double the rate of straight line
  method.
• SLM uses 10,000 / 40,000 100 25
• So The declining-balance rate is 50 (25 x 2)
• This rate (50) is applied to net book value at
  the beginning of the year.

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Double Declining Balance Method

• Year Begining Rate Amorization Acc amount NBV
• 2008 43000 50 21500 21500 21500
• 2009 21500 50 10750 32250 10750
• 2010 10750 50 5375 37625 5375
• 2011 5375 50 2375 40000 3000
• Amortization expense amounts are a lot higher in
  the early years.
• The declining balance method respects the
  matching principle The higher amortization
  expense in early years is matched with the higher
  benefits received in these years.

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DECLINING-BALANCE METHOD

• Accelerated methods result in more amortization
  in early years and less in later years

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UNITS-OF-ACTIVITY METHOD

• Useful life is expressed (instead of time period)
  in terms of total units of production or activity
  expected from the asset
• Example, equipments useful life is units of
  output, hours in use or kilometers driven.
  (truck)
• Not suitable for buildings or furniture

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Units of Activity Method

• The total units of activity for entire useful
  life are estimated first.
• This amount is divided into amortizable cost to
  determine the amortizable cost per unit.
• The amortizable cost per unit is then multiplied
  by the actual units of activity during the year
  to calculate the annual amortization expense.

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Units of Activity Method

• For example, 1 Stop Florists delivery trucks
  total estimated life 200,000 km
• It is driven 30,000 kilometres in the first year.
• Initial cost 25000 and Residual Value (SV)
  2000
• Amortizable cost Cost RV 25000 -2000 23000
• AC per unit AC / Total Units of Activity
  23000 / 200,000 km 0.115 / km 11.5 cents
  per km
• Annual Amortization Expense 0.115 30,000km
  3450 (2008)
• In 2009, they drove 60,000km so 0.115 60,000
  6900

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Units of Activity Method

• In 2009, they drove 60,000km so 0.115 60,000
  6900
• Year Units of A A Expense Acc Amort NBV
• 25000
• 2008 25000 3450 3450 21550
• 2009 60000 6900 10350 14650
• 2010 40000 4600 14950 10050

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UNITS-OF-ACTIVITY METHOD

• To use the units-of-activity method,
• 1) the total units of activity for the entire
  useful life are estimated,
• 2) the amount is divided into amortizable cost
  to calculate the amortization cost per unit, and
• 3) the amortization cost per unit is then
  applied to the units of activity during the year
  to calculate the annual amortization.

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Classwork / Homework

• P498 E9.3 and E9.4
• P502 P9.3