Long Live Monetary Assets and Amortization Chapter 7
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Long Live Monetary Assets and Amortization Chapter 7



A Basic Powerpoint Slide about Monetary Assets, Amortization and even a brief guide about Internal Control of Fixed Assets.

A Basic Powerpoint Slide about Monetary Assets, Amortization and even a brief guide about Internal Control of Fixed Assets.

-Managerial Accounting Topic-



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Long Live Monetary Assets and Amortization Chapter 7 Long Live Monetary Assets and Amortization Chapter 7 Presentation Transcript

  • From Guide of Internal Control of the National Council of Social Service Sherinne Christie Ann Z. Albao Reporter, 2012
  • Policies and procedures applied to fixed assets should be formalized. The roles and responsibility of the staff involved in different processes should be clearly defined. Policies should be established on the fixed asset capitalization limit, asset categorization and depreciation policy. Guidelines should be established on the treatment of the fixed assets that are obsolete, expired or spoiled. This will safeguard and ensure consistency in accounting of fixed assets. Lack of internal controls may lead to:  Unauthorized movement of assets  Inaccurate or misleading recording and reporting of fixed assets (including supplies and inventories)
  • The lack of controls may lead to unauthorized requisition or movement of assets and this may lead to unaccounted, missing or misappropriation of assets.  Segregation of Duties – requesting for assets should not be the same staff in charge of the store or issuing the supplies & inventories. If possible, the supervisor or board member should be involved.  Proper Authorization – requisition of assets should be submitted and approved accordingly.  Supporting Documents – Requisition and issue records should be maintained.
  • The lack of proper control may lead to fixed assets not ordered or improperly ordered. This facilitate the misappropriation of fixed assets received from the suppliers.  Segregation of Duties - for staffs in-charged of received purchases and making requisition.  Verification – Deliver receipts should be determined; loading operations are to be supervised. Check delivery is according to specification in purchase order.  Acceptance – should be received in good order and indicated and signed on the delivery reports.  Supporting Documents – purchase order, delivery orders, acknowledgement of donated assets should be filed.
  • The lack of control may lead to unauthorized access and usage of fixed assets.  Storage and Access to Store – proper storage, authorization and access to fixed assets. Stricter measures for assets having high value or pilferage rate.  Fixed Asset Register – a record of fixed assets should be maintained with complete details (purchase date, description, etc.)  Insurance Coverage  Periodical Physical check – check for damage, maintenance, obsolete and discrepancies in assets.  Annual Review  Supporting Documents – documentary records
  •  Proper Authorization – transfer, disposal (sale, condemned, obsolete or redundant) or loss of assets should be submitted for approval and inspection by the supervisor or person appointed by the board with updated accounting records.  Supporting Documents – Approval to transfer or dispose assets and documents to evidence actual transfer, disposal or loss should be kept.
  • Long-Lived Nonmonetary Assets and Their Amortization (Part Two)
  •  Does not represent the “accumulation” of any tangible thing. (Not money)  Funding Depreciation – is a financing transaction (unrelated to recording depreciation).  Not a means of automatically creating a fund for replacing assets.  A systematic allocation of the original cost of an asset to the periods in which the asset provides benefits to the entity.
  •  Material objects of economic value and utility to man produced by nature.  Natural Resources  It cannot be produced by man.  Coal, oil, gas, ore, precious metals & gems, minerals, timber and so on.  Physically consumed  Irreplaceable
  •  Acquisition cost – price paid to obtain a property containing the natural resource.  Exploration cost – incurred in the attempt to locate the natural resource that has economic value.  Development cost – is the cost incurred to exploit or extract the natural resource discovered through successful exploration.  Restoration cost – necessary to bring the property to its present/original condition.
  •  They are also assets of the company that owns the right to extract them. (e.g. coal, oil, minerals, gas).  Measuring the cost of these wasting assets are the same as those for tangible assets. TWO METHODS OF EXPLORATION COST:  Full cost method  Successful efforts method
  •  Full cost method – all exploration cost should be capitalized as asset value of the reserves during the year.  Successful efforts method – only cost incurred at discovered reserves should be capitalized and the “dry hole” costs should be an expense.  Depletion – the process of amortizing the cost of natural resources in the accounting period (same as depreciation).
  • A petroleum company explores 10 location, incurring costs of $ 10 million each. It discovers oil and gas at three of these locations.  Full cost method – recorded as $ 100 million  Successful cost method – asset recorded is $ 30 million and $ 70 million will be charged as expense. If an oil property cost $ 250 million and is estimated to contain 50 million barrels of oil. The company produced 8 million barrels of oil for that year. Depletion for a period = (cost of reserve/estimated no. of units, let say barrels) * no. of units extracted during the period. = ($ 250 million/50 million barrels)* 8 million barrels = $ 5 per barrel (depletion rate) * 8 million barrels = $ 40 million is the total depletion for the year.
  • An entity has acquired the right to use a property to explore a land with possible oil. The acquisition cost is P 3,000,000, exploration cost P 2,000,000 and the development cost are P 5,000,000. The total cost of the wasting asset is P 10 million. It is estimated that the natural resource can produce 1 million units. Depletion rate per unit = cost of reserve/no. of estimated units. = P 10 million/ 1 million units = P 10 per unit In the first year: P 250,000 units were extracted. Depletion 2,500,000 Accumulated Depreciation 2,500,000
  •  The increase in the value arising through natural process of growth or aging. (e.g. timberland, cattle, tobacco, wine and other agricultural products).  Not recognized in accounts until sold.  Cost incurred in the growing or aging process are added to the asset value (similar in the case of cost incurred un the manufacturing of goods).
  •  Also an increase in the value of asset.  Not the opposite of depreciation  Recognized in unusual circumstances.  e.g. Buying a company and current value of assets is above book value – These assets are written up to their current value.  Increase in value is recognized in accounts only when revenue is realized.  Not recorded until asset has been sold.
  • Limited Useful Life Indefinite Useful Life Good will  An identifiable nonmonetary asset without physical substance.  Must be controlled by the entity as a result of past event and from which future economic benefits are expected to flow to the entity.
  •  Patents, Copyrights, Franchise, Licenses and Lease.  Usually converted into expense over a number of accounting periods.  The systematic allocation of the costs of these assets to the periods in which they provide benefits is called amortization.  Amortization is the same process as the depreciation of tangible assets.
  • Intangible Asset Term Patents 20 years (R.A. No 8293) Copyrights Life of author and 50 years after his or her death Licenses Depends upon the licenses one to five years at best Franchise Depends upon the contract Lease Depends upon the contract An entity developed a patent at cost of P200,000 and spent P120,000 for licensing of patent including legal fees and cost of models and drawings that accompany the registration on January 1, 2011. Patent P 120,000.00 Research and Development Expense* P 200,000.00 Cash P320,000.00 Amortization (of Patent for 2012) P 6000.00 Patent P 6000.00
  •  Broadcasting License and Trademarks.  Recognized as long lived assets with indefinite useful lives that are not amortized.  They are subjected to periodic impairment tests.  It is considered indefinite if there are no legal, regulatory, contractual, competitive, economic or other factors that limits its life. Intangible Term Impairment Franchise/License Depends upon contract Annually Trademark 10 years Every 10 years
  •  The excess of acquisition cost over net assets required.  Often referred to as the most “intangible” of all intangible assets.  Not specifically identifiable, indeterminate life, inherent in continuing business and relates to an entity as a whole.  Arises as part of a purchase transaction*.  Cannot be amortized under any circumstances. Subjected to annual impairment test. Any write down due to impairment is charge to income.
  •  Initially recorded at their cost.  If acquired by purchase the cost includes purchase price and direct attributable expenditure.  If developed internally cost also includes licensing and other legal fees. All related research and development cost is expense*  Any engineering and consulting costs to develop the patent and design changes require by the patent authority is patent cost.
  •  Technology-based intangible asset  Legal fees and other costs of successfully prosecuting or defending a patent is expense.  If litigation is unsuccessful, the legal and remaining costs of the patent is written as loss.  Can be renewed for life extension as a new patent with improvement and changes.  Useful life limited by agreement and law.  But due to technological advancement or other reasons, practical life will be shorter than legal age.
  •  Also initially recorded at their cost.  Artistic related intangible asset  Cost consist of all expenses incurred in the production of the work including those require to established or obtain the right.  If copyright is purchased the cost includes cash paid and direct attribute costs for its use.  The useful life is that period in which benefits, royalties and sales are expected.  Usually advisable to write cost of copyright against the revenue of the first printing.
  •  Reverts the owner at the end of the period.  Any improvements of the property belonged to the owner; not to the lessee.  The useful life of the improvements corresponds to the period of the lease.  Even though improvements are capitalized, the useful life of these improvements is not determined by the physical characteristics of the improvement but by the terms of the lease agreement.
  •  Same as prepaid expenses.  Included as long-lived assets only if they have a relatively long life.  Long-lived assets subject to amortization are deferred charges in the literal sense.  Restricted to long-lived tangibles.  Practice varies greatly in companies.  Some companies charge them as expense even though there is no offsetting revenue and some capitalized them.
  •  Cost incurred to developed new knowledge, products or innovations, services and processes.  Can help increase revenues or lower cost.  Previously capitalized & amortized but it is no longer permitted.  R&D efforts are highly uncertain and efforts can be unsuccessful and cannot be identified in advance.
  •  A type of research and development cost.  Incurred until technological feasibility has been established.  But are expected to be recovered from future sales, which is capitalized once the product’s technical feasibility is established and costs of software developed for internal use, once that commitment is made to develop it.
  •  Average age of depreciation Accumulated depreciation/Annual Depreciation Expense  Asset’s depreciation period Cost/ Annual depreciation expense  Annual expenditure for an intangible asset Annual amortization expense +/- increase or decrease in asset’s balance. The result is the estimated expenditure amount.
  • Anthony, Robert N., et.al. Accounting: Text and Cases 13th Edition, (McGraw-Hill Companies, Inc © 2011), pp. 186-198. Valix, Conrado T., et.al. Financial Accounting: 2010 Volume One, (GIC Enterprises & Co., Inc. © 2010), pp. 1125-1239. www.ipophil.gov.ph, Intellectual Property of the Philippines Website, (Philippine Government., © 2012), Last access: July 19, 2012.
  • Long-Lived Nonmonetary Assets and Their Amortization Problem 7-1 Problem 7-4 Case 7-2
  •  Machine cost: $ 300,000  Estimated Useful Life: 6 years  Residual Value: $ 18,000  Expected number of units to be produced during it’s useful life: 3,525,000 units  Net cost: $ 282,000
  • (a) Units of Production Method: = $ 282,000/3,525,000 units = $ 0.08 per unit (Depreciation Rate) *Depreciation Charge = No. of units in Year n * Depreciation Rate Year Units Depreciation Charge* 1 930,000 $74,400.00 2 800,000 $64,000.00 3 580,000 $46,400.00 4 500,000 $40,000.00 5 415,000 $33,200.00 6 300,000 $24,000.00
  • (b) Sum-of-the-years’ digits method SYD = n((n+1)/2) = 6 ((6+1)/2) = 6 (7/2) = 6 (3.5) = 21 Depreciation Rate for Year 1 is 6/21.
  • Year Units Depreciation Charge (UPM) SYD Depreciation Charge (SYD) 1 930,000 $74,400.00 6/21 $80,571.43 2 800,000 $64,000.00 5/21 $67,142.86 3 580,000 $46,400.00 4/21 $53,714.29 4 500,000 $40,000.00 3/21 $40,285.71 5 415,000 $33,200.00 2/21 $26,857.14 6 300,000 $24,000.00 1/21 $13,428.57 The units-of-production method showed a difference in depreciation charges in each year than the sum-of-the-years’ digits method.
  • Land was purchased for $ 75,000 cash. This land was to be used for a new office building. It was agreed that Chipper Company would pay for the razing of the building currently on the land; this cost $ 5,600 in cash. Land 80,600 Cash 80,600 Chipper Company contracted with Cody construction to build the new office building. It was agreed that Chipper would pay Cody with 3,000 shares of the company’s common stock currently selling in $ 30 per share, a $ 16,000 note and $ 32,000 in cash.
  • Building 138,000 Ordinary Share 90,000 Notes Payable 16,000 Cash 32,000 Chipper purchased some office equipment from Northern Office Equipment for $ 9,600 cash. Mr. Chipper was a close friend of the owner and was sold this price lower than normally would be charged. The prices charged to “normal” customers would total to be $ 12,000. Office Equipment 9,600 Cash 9,600
  • a. Architect’s Fees Capitalized as additional cost of the additional wing of the factory building b. Cost of snow removal during construction. Capitalized as additional cost of the additional wing of the factory building c. Cash discounts earned for prompt payment on materials purchased for construction. The cash discount will be deducted from the Building cost d. The cost of building a combined construction office and tool shed that would be torn down once the factory wing is completed. Capitalized as additional cost of the additional wing of the factory building e. Interest on money borrowed to finance construction. Capitalized as additional cost of the additional wing of the factory building
  • f. Local real estate taxes for the period of construction on the portion of land to be occupied by the new wing. Expense g. The cost of mistakes during construction Expense h. The overhead costs of the maintenance department. Expense i. Cost of insurance during construction and the cost of damages or losses on any injuries and losses not covered by insurance. The insurance cost is capitalized as additional cost of the additional wing of the factory building while the cost of the damages, injuries and loss is expensed.
  • a.)The Archer company bought the land and the buildings at a single cost. The Archer company wanted to razed the buildings. The costs of the buildings will be attributed to the cost of the land. b.)The cost of the razing of the buildings will be added to the cost of the land since any additional cost incurred to bring the asset to its present location, condition or form is added to the cost of the asset.
  • c.)  The company owned these assets for a while and the accounts for both land and buildings are separated.  The cost of the razing of the old buildings will be charged as loss on retirement of old building and is not allowed to be charged as additional cost for the construction of the new buildings because this is part of a service cost related to the old building when retired from use.
  •  This differ from the answers of the previous questions because the first case, the company bought the land and has intentions to razed the buildings. It’s interests is on the land itself and to bring it to it’s original form they razed it. Any cost incurred to bring it to asset to its present form is added to cost of the asset while the latter case the buildings and land are separate accounts and the carrying amount of the old building and the net cost of the razing shall be charged to the loss on retirement of the old building. (These are stated in the specific principles on land and building)