Chapter 10

Capital Assets

• 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 ASSETS

Tangible capital assets include:

• property, plant and equipment– Land

– Land improvements

– Buildings

– Equipment

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

INTANGIBLE CAPITAL ASSETS

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

Examples:

• Patents, copyrights, sports contracts, and trademarks

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• 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

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

• 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

BASKET PURCHASE

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

• Amortization is the process of allocating to expense the cost of a capital asset over its useful (service) life in a rational and systematic manner.

• Cost allocation is designed to provide for the proper matching of expenses with revenues in accordance with the matching principle.

• During an asset’s life, its usefulness may decline because of wear and tear or obsolescence.

• Recognition of amortization does not result in the accumulation of cash for the replacement of the asset.

• Land is the only capital asset that is not amortized.

AMORTIZATIONAMORTIZATIONAMORTIZATIONAMORTIZATION

FACTORS IN CALCULATING AMORTIZATION