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FINANCIAL MANAGEMENT
CHECK POINT 55: CAPITAL ASSETS MANAGEMENT

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1. classification of capital assets
2. capital asset register
3. small business example
capital asset record
4. capital assets life span
5. capital assets life span classification
6. AICPA's definition of assets depreciation
7. capital assets depreciation factors
8. capital assets depreciation methods
9. the straight-line method of depreciation
10. small business example
the straight-line method of depreciation
11. the production method of depreciation
12. small business example
the production method of depreciation
13. characteristics of the production method of depreciation
14. the double-declining balance method of depreciation
15. small business example
the double-declining  balance method of depreciation
16. characteristics of the double-declining  balance method
17. popularity of various methods of depreciation
18. additional accounting rules for depreciation
19. small business example
depreciation for partial accounting periods
20. modified accelerated cost recovery system (MACRS)
21. the tax reform act of 1986
22. accounting for additions and betterments
23. accounting for ordinary and extraordinary repairs
24. methods of assets disposal
25. accounting of assets disposal
26. accounting problems for intangible capital assets
27. accounting rules for intangible capital assets
28. for serious business owners only
29. the latest information online
 

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FINANCIAL MANAGEMENT
CHECK POINT 55: CAPITAL ASSETS MANAGEMENT

Please Select Any Topic In Check Point 55 Below And Click.

1. classification of capital assets
2. capital asset register
3. small business example
capital asset record
4. capital assets life span
5. capital assets life span classification
6. AICPA's definition of assets depreciation
7. capital assets depreciation factors
8. capital assets depreciation methods
9. the straight-line method of depreciation
10. small business example
the straight-line method of depreciation
11. the production method of depreciation
12. small business example
the production method of depreciation
13. characteristics of the production method of depreciation
14. the double-declining balance method of depreciation
15. small business example
the double-declining  balance method of depreciation
16. characteristics of the double-declining  balance method
17. popularity of various methods of depreciation
18. additional accounting rules for depreciation
19. small business example
depreciation for partial accounting periods
20. modified accelerated cost recovery system (MACRS)
21. the tax reform act of 1986
22. accounting for additions and betterments
23. accounting for ordinary and extraordinary repairs
24. methods of assets disposal
25. accounting of assets disposal
26. accounting problems for intangible capital assets
27. accounting rules for intangible capital assets
28. for serious business owners only
29. the latest information online
 

DO I NEED TO KNOW THIS CHECK POINT?

 

WELCOME TO CHECK POINT 55

TUTORIAL 1 General Management TUTORIAL 2 Human
Resources Management
TUTORIAL 3 Financial Management TUTORIAL 4 Operations Management TUTORIAL 5 Marketing
And Sales Management
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HOW CAN YOU BENEFIT FROM CHECK POINT 55?

 
The main purpose of this check point is to provide you and your management team with detailed information about Capital Assets Management and how to apply this information to maximize your company's performance.
 
In this check point you will learn:
 
• About classification of capital assets.
• About capital assets register and records.
• About capital assets life span classification.
• About capital assets depreciation and depreciation factors.
• About three main capital assets depreciation methods.
• About modified accelerated cost recovery system.
• About accounting for additions and betterments.
• About accounting for ordinary and extraordinary repairs.
• About methods of asset disposal.
• About accounting rules for intangible capital assets... and much more.
 

LEAN MANAGEMENT GUIDELINES FOR CHECK POINT 55

 
You and your management team should become familiar with the basic Lean Management principles, guidelines, and tools provided in this program and apply them appropriately to the content of this check point.
 
You and your team should adhere to basic lean management guidelines on a continuous basis:
 
Treat your customers as the most important part of your business.
Provide your customers with the best possible value of products and services.
Meet your customers' requirements with a positive energy on a timely basis.
Provide your customers with consistent and reliable after-sales service.
Treat your customers, employees, suppliers, and business associates with genuine respect.
Identify your company's operational weaknesses, non-value-added activities, and waste.
Implement the process of continuous improvements on organization-wide basis.
Eliminate or minimize your company's non-value-added activities and waste.
Streamline your company's operational processes and maximize overall flow efficiency.
Reduce your company's operational costs in all areas of business activities.
Maximize the quality at the source of all operational processes and activities.
Ensure regular evaluation of your employees' performance and required level of knowledge.
Implement fair compensation of your employees based on their overall performance.
Motivate your partners and employees to adhere to high ethical standards of behavior.
Maximize safety for your customers, employees, suppliers, and business associates.
Provide opportunities for a continuous professional growth of partners and employees.
Pay attention to "how" positive results are achieved and constantly try to improve them.
Cultivate long-term relationships with your customers, suppliers, employees, and business associates.

1. CLASSIFICATION OF CAPITAL ASSETS

CAPITAL ASSETS

Business owners and financial managers must have a good understanding about capital assets management, which represents an integral part of the financial management process.

Apart from utilizing inventory throughout the process of generating funds, the company has a need to acquire and to use additional assets in order to accomplish its commercial objectives. These assets have a useful life of more than one year and are known as Capital Assets, or Fixed Assets, or Long-Term Assets.

Accounting procedures related to Capital Assets Management are mainly concerned with the determination and recording of the cost of assets, methods of depreciation, disposal, and disclosure of assets in financial statements. There are two basic types of capital assets as illustrated below.

TWO BASIC TYPES OF CAPITAL ASSETS

 
Tangible Capital Assets   Intangible Capital Assets

These include land, buildings, production and office equipment, furniture, vehicles, airplanes, and boats, i.e. any physical substance.


 

These include patents, trademarks, copyrights, leaseholds, leasehold improvements, franchises, licenses, formulas, processes, and goodwill.

 

ADDITIONAL INFORMATION ONLINE

Intangible Assets By Larry Walther.
Intro To Fixed Assets #33 By David Krug.
Intro To Fixed Assets #34 By David Krug.
About Intangible Assets By Larry Walther.
What Is Goodwill? By Money Week Videos.
Intangible Assets By Mary Adams, Conference Live.

2. CAPITAL ASSET REGISTER

CAPITAL ASSET REGISTER

Capital Assets Management ensures thorough control over the purchase, utilization, storage, and disposal of company assets. The price of these assets normally includes all costs incurred during their acquisition, transportation, and installation on the company's premises.

Full details of purchased assets should be entered into the Capital Asset Register at cost. This register includes individual Capital Assets Records for equipment, vehicles, and other long-lived Assets. A typical Capital Asset Record is presented below.

Capital assets management can be maintained manually or by using a specific accounting software program.

POPULAR ACCOUNTING SOFTWARE PROGRAMS
There are several excellent Accounting Software Programs available to small business owners at present. Some of the most popular accounting software packages are presented below:

• Sage One

• QuickBooks Intuit

• FreshBooks

• Harvest Software Systems

• NetSuite

Various accounting software programs may include additional functions, depending on each specific package. This is discussed in detail in Integrated Financial Management in Tutorial 3.
 

ADDITIONAL INFORMATION ONLINE

Sage Fixed Assets 2013.O By SageFixedAssets.
Sage Fixed Assets Tracking By SageFixedAssest.
Sage Fixed Assets Depreciation By SageFixedAssets.

3. SMALL BUSINESS EXAMPLE
CAPITAL ASSET RECORD

CAPITAL ASSET RECORD

Asset Description: Vehicle.

Asset Allocation: Sales Department.

Purchase Date:
01.01.2009

Serial No: 12345

Original Cost: $20,000

Estimated Service Life:
5 Years

Estimated Salvage
Value:
$5,000

Method Of Depreciation: Straight line

Disposal Date: 01.01.20014

Method Of Disposal:
(  ) Sold; (  ) Trade-In; (  ) Scrap

Year

Beginning Book Value

Annual
Depreciation
Expense

Accumulated Depreciation

Ending
Book
Value

2009

$20,000

$3,000 

$3,000        

$17,000          

2010

17,000

3,000

6,000        

14,000          

2011

14,000

3,000

9,000        

11,000          

2012

 11,000

3,000

12,000        

8,000          

2013

 8,000

3,000

15,000        

5,000          

4. CAPITAL ASSETS LIFE SPAN

CAPITAL ASSETS LIFE SPAN

The Useful Life of all tangible assets, except land, is limited to a certain number of years. For this reason, the total cost of such assets must be distributed over the expected period of useful service and applied as an operating expense.

This procedure is known as the Depreciation of capital assets, and it should be recorded in the Capital Asset Register in accordance with a particular Depreciation Method selected by management.

The Life Span of capital assets depends primarily upon the nature of their utilization and can be classified into two types illustrated below.

TWO TYPES OF CAPITAL ASSETS LIFE SPAN

 
The Technical Life Span   The Economic Life Span

5. CAPITAL ASSETS LIFE SPAN CLASSIFICATION

A detailed classification of Capital Assets Life Span is outlined below.
 

CAPITAL ASSETS LIFE SPAN CLASSIFICATION

 
The Technical Life Span   The Economic Life Span

The technical life span is determined by various factors of an operational nature and terminates when the asset cannot provide further service for which it was purchased originally.


 

The economic life span depends upon various external factors, such as   technological improvements or changing requirements, and terminates when the asset's performance becomes uneconomical.

As soon as it has been selected, purchased, and installed on the company's premises, the asset starts to lose its original value due to depreciation and obsolesce.

6. AICPA’s DEFINITION OF ASSETS DEPRECIATION

DEPRECIATION

According to the American Institute Of Certified Public Accountants (AICPA):

"The cost of productive facility is one of the costs of the services it renders during its useful economic life. Generally Accepted Accounting Principles  (GAAP) require that this cost be spread over the expected useful life of the  facility in such a way as to allocate it as equitably as possible to the periods  during which services are obtained from the use of the facility. 

This procedure  is known as depreciation accounting, a system of accounting which aims to  distribute the cost or other basic value of tangible capital assets, less salvage  (if any), over the estimated useful life of the unit... in a systematic and rational  manner. It is a process of allocation, not of valuation." (10)

7. CAPITAL ASSETS DEPRECIATION FACTORS

DEPRECIATION

There are several factors that affect the computation of Depreciation for a specific accounting period as outlined below.
 

CAPITAL ASSETS DEPRECIATION FACTORS

1.

Cost.
This is the net purchase price paid to acquire a capital asset. Cost of an asset includes all relevant taxes and import duties, if applicable, as well as transportation and installation expenses.

2.

Salvage Value.
This is the estimated net price that is expected to be obtained once the capital asset is disposed, i.e. sold, traded-in, or scrapped. The salvage value is also termed Disposable Value, or Residual Value.

3.

Depreciable Cost.
The depreciable cost of a capital asset is the difference between its cost and  salvage value. For example, a vehicle that costs $20,000 and has a salvage value of $5,000 would have a depreciable cost of $15,000.

4.

Estimated Service Life.
This is the total number of service units expected from a capital asset. Service units are usually measured in terms of the number of years the asset is expected to be in use, e.g. building or equipment. Sometimes, however, the estimated service life is measured in different terms, e.g. expected mileage from a vehicle or a truck, or the number of units expected to be produced by a particular machine.

 

ADDITIONAL INFORMATION ONLINE

Depreciation By InlandRevenueNZ.
Depreciation Explained By Soni Bros.
What Is Depreciation? By Siu Lin Hui, CashFlowKungFu.
Depreciation, Depletion, And Amortization By Alison Riley.
What Are Depreciation And Amortization? By MOneryWeekVideos.

8. CAPITAL ASSETS DEPRECIATION METHODS

DEPRECIATION METHODS

Several methods of depreciation are used by accountants to allocate the cost of a capital asset to a specific accounting period. Some of the most commonly used Depreciation Methods are illustrated below.

CAPITAL ASSETS DEPRECIATION METHODS

   
The Straight-Line
Method
  The Production
Method
  The Double-Declining
Method
 

ADDITIONAL INFORMATION ONLINE

Please watch these excellent videos professionally narrated and produced by Susan Crosson and SFCC:

FA 9 1 - Long-Lived Assets By Susan Crosson.
FA 9 2 - Long-Lived Assets Buy & Lump-Sum Purchase By Susan Crosson.
FA 9 3 - Straight Line Depreciation By Susan Crosson.
FA 9 4 - Units Of Production Depreciation By Susan Crosson.
FA 9 5 - Declining Balance Depreciation By Susan Crosson.
FA 9 6 - Disposal By Trash, Donation, Or Sold For Book Value By Susan Crosson.
FA 9 7 - Disposal By Sale Or Trade-In By Susan Crosson.
FA 9 8 - Partial Years, Tax Methods, Rate Revisions By Susan Crosson.

© 2008 - 2013 Susan Crosson and CFCC. All rights reserved.

9. THE STRAIGHT-LINE METHOD OF DEPRECIATION

THE STRAIGHT-LINE METHOD OF DEPRECIATION

The Straight-Line Method prescribes an equal distribution of depreciation over the estimated service life of a capital asset, taking into account its salvage value. Thus, according to the Straight-Line Method, the depreciation expense can be determined as follows:

Annual Depreciation = Cost - Salvage Value
                                         Estimated Service Life


Consider, from the previous example, that an asset costs $20,000, its estimated service life period is 5 years, and its salvage value is $5,000. In this case, Annual Depreciation is determined as follows:

Annual Depreciation = $20,000 - $5,000 = $3,000
                                               5 Years


The straight-line depreciation is characterized by the same depreciation expense during each year and gradual increase in Accumulated Depreciation.  At the end of the estimated service life of capital asset, its Book Value, or Carrying Value, i.e. the difference between the cost of the asset and accumulated depreciation, equals the estimated salvage value.

Note:

Please consult with your accountant or CPA for additional information.

10. SMALL BUSINESS EXAMPLE
THE STRAIGHT-LINE METHOD OF DEPRECIATION

THE STRAIGHT-LINE METHOD OF DEPRECIATION

Date

Cost

Annual
Depreciation

Accumulated
Depreciation

Ending Book
Value

Purchase date

$20,000

----

----

$20,000

End of 1st year

20,000

$3,000

$3,000

17,000

End of 2nd year

20,000

3,000

6,000

14,000

End of 3rd year

20,000

3,000

9,000

11,000

End of 4th year

20,000

3,000

12,000

8,000

End of 5th year

20,000

3,000

15,000

5,000

11. THE PRODUCTION METHOD OF DEPRECIATION

THE PRODUCTION METHOD OF DEPRECIATION

The Production Method is based on allocating an equal depreciation expense in accordance with the actual use of a capital asset. The Production Method completely ignores the passage of time during which the asset is used and aims at determining the Depreciation Per Unit Of Service. Thus, according to the Production Method, the depreciation expense can be determined as follows:

Depreciation Per = Cost - Salvage Value
Unit Of Service       Estimated Units Of Service Life


Consider, for example, a company vehicle that has an estimated service life of 100,000 miles. If the net cost of the vehicle is $20,000 and its salvage value is $5,000, the Depreciation Per Mile can be determined as follows:

Depreciation = $20,000 - $5,000 = $0.15 Per Mile
Per Mile                100,000 Miles

Note:

Please consult with your accountant or CPA for additional information.

12. SMALL BUSINESS EXAMPLE
THE PRODUCTION METHOD OF DEPRECIATION

THE PRODUCTION METHOD OF DEPRECIATION

Date

Cost

Miles

Annual Depreciation

Accumulated Depreciation

Ending
Book Value

Purchase
date

$20,000

----

----

----

$20,000

End of 1st year

20,000

15,000

$2,250

$2,250

17,750

End of 2nd year

20,000

25,000

 3,750

 6,000

14,000

End of 3rd year

20,000

30,000

 4,500

10,500

9,500

End of 4th year

20,000

20,000

 3,000

13,500

6,500

End of 5th year

20,000

10,000

 1,500

15,000

5,000

13. CHARACTERISTICS OF THE PRODUCTION METHOD OF DEPRECIATION

CHARACTERISTICS OF THE PRODUCTION METHOD OF DEPRECIATION

Company's vehicles are usually depreciated on the basis of the Production Method as illustrated above. In this case the actual Annual Depreciation will depend upon the annual mileage traveled by a particular vehicle. Since most vehicles and trucks are usually kept by a company for a period not exceeding 5 years, the above depreciation schedule covers the same period.

The Production Method is characterized by unequal depreciation during each year of use. The Depreciation Expense is determined in direct relation to actual output obtained from the capital asset, e.g. the mileage of the company's vehicle. At the end of the asset’s estimated service life, i.e. passage of 100,000 miles, its Ending Book Value equals to the estimated Salvage Value, provided of course, that there were no major accidents.

14. THE DOUBLE-DECLINING-BALANCE METHOD OF DEPRECIATION

THE DOUBLE-DECLINING-BALANCE METHOD OF DEPRECIATION

The Double-Declining-Balance Method is an accelerated method of depreciation that prescribes application of a fixed percentage against the ending book value of the capital asset. 

The fixed percentage used in the Double-Declining-Balance Method equals twice the straight-line percentage. Thus, if the estimated service life of an asset is 5 years, the annual percentage for depreciation, in this case will be as follows:


Annual Depreciation Rate = 2 x 100% = 40%
                                                    5 Years


The use of data from the Straight-Line Method and application of a fixed 40% annual depreciation rate to the ending book value provides the result illustrated below.

Note:

Please consult with your accountant or CPA for additional information.

15. SMALL BUSINESS EXAMPLE
THE DOUBLE-DECLINING-BALANCE METHOD OF DEPRECIATION

THE DOUBLE-DECLINING-BALANCE METHOD OF DEPRECIATION

Date

Cost

Annual 
Depreciation

Accumulated Depreciation

Ending Book
Value

Purchase date

$20,000

-

-

$20,000

End of 1st year

20,000

40% x $20,000 = $8,000

$8,000

12,000

End of 2nd year

20,000

40% x $12,000 = $4,800

12,800

7,200

End of 3rd year

20,000

 

     2,200 * 

5,000

End of 4th year

20,000

 

 

5,000

End of 5th year

20,000

 

 

5,000

* Depreciation is limited to an amount necessary to reduce the Ending Book Value to  Salvage Value (refers to $2,200 above).

 

16. CHARACTERISTICS OF THE DOUBLE-DECLINING-BALANCE METHOD

CHARACTERISTICS OF THE DOUBLE-DECLINING-BALANCE MET

The Double-Declining-Balance Method is characterized by very substantial depreciation during the first year of the asset's use and declining depreciation during each year thereafter.

Final depreciation is limited to the amount necessary to reduce the Ending Book Value to the Estimated Salvage Value of the asset. For this reason, depreciation in the example above is applied in full only during the first two years. Partial depreciation of $2,200 is applied during the third year to bring the ending book value of the asset to $5,000, i.e. the estimated salvage value.

 

ADDITIONAL INFORMATION ONLINE

Double Declining Method By Bruce Fried.
Double-Declining Balance Method By Kristin Ingram.
Double-Declining Depreciation Method By Dee Amaradasa.
Depreciation - Double Declining Method By Brian R. Lazarus.
Double-Declining Balance Depreciation By SilenceDogoodsghost.

17. POPULARITY OF VARIOUS METHODS OF DEPRECIATION

SURVEY BY THE AICPA

According to recent surveys of 600 companies by the American Institute of Certified Public Accountants (AICPA), the Straight Line Method of depreciation is by far the most popular method. 

The total percentage above exceeds 100% since some companies use more than one depreciation method. (11) The final results are outlined below.

POPULARITY OF VARIOUS METHODS OF DEPRECIATION

1.

The Straight Line Depreciation Method  - about 95% of companies.

2.

The Accelerated Depreciation Method - about 17% of companies.

3.

The Production Depreciation Method - about 8% of companies.

18. ADDITIONAL ACCOUNTING RULES FOR DEPRECIATION

IMPORTANCE OF TIMING IN CAPITAL ASSETS DEPRECIATION

Another important aspect of capital assets depreciation relates to the Timing Of The Purchase. 

In most cases, capital assets are purchased when they are needed and disposed of when they are no longer useful. Consequently, it is often necessary to determine the Depreciation For Partial Accounting Periods. If an asset has been purchased at some point during a particular accounting period, the depreciation calculation should be rounded off to the nearest month, as outlined below.

DEPRECIATION FOR PARTIAL ACCOUNTING PERIODS

1.

If the purchase date is between the 1st and the 15th of the month, the calculation of depreciation should start from the first day of that month

2.

If the purchase date is between the 16th and 31st of the month, the calculation of depreciation should start from the first day of the next month.

19. SMALL BUSINESS EXAMPLE
DEPRECIATION FOR PARTIAL ACCOUNTING PERIODS

DEPRECIATION FOR PARTIAL ACCOUNTING PERIODS

Assume, for example, that the company's fiscal year starts on January 1 and ends on December 31. If a capital asset was purchased on August 15, the depreciation must be recorded for 5 full months. The 5 month depreciation based on the data from the Straight-Line Method example is calculated as follows:

(Cost - Salvage Value)  x Depreciation Period
  Estimated Service Life             12 Month


Or:

($20,000 - $5,000) x 5   =  $1,250
            5 Years           12

Note:

Please consult with your accountant or CPA for additional information.

20. MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)

MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)

In 1981 the Congress approved a new method of depreciation, the Modified Accelerated Cost Recovery System (MACRS). In accordance with this method, the concepts of service life value and salvage value of a capital asset could be discarded, and, instead, a cost recovery allowance would have to be computed on the following basis, as outlined below. (12)

The capital asset to be recovered under MACRS was generally defined as tangible property subject to depreciation and placed in service between December 31, 1980 and January 1, 1987.

COST RECOVERY ALLOWANCE BASED ON MACRS

1.

On the unadjusted cost of capital assets being recovered.

2.

Over a period of years prescribed by the law for all capital assets of a similar type.

3.

By applying the straight-line method or by prescribed percentages not exceeding 150% of the declining balance method with a half-year convention.

Note: 

Please consult with your accountant or CPA for additional information.

21. THE TAX REFORM ACT OF 1986

THE TAX REFORM ACT OF 1986

In 1986 the Congress passed The Tax Reform Act Of 1986, outlining new federal tax laws. According to these laws, the basic MACRS concepts were retained with the following changes outlined below. (13)

 

DETAILS OF THE TAX REFORM ACT OF 1986

1.

The accelerated method prescribed by the new law for most capital assets, excluding real estate, is based on a 200% declining balance with a half-year convention.

2.

The new law applies to all capital assets placed in service after December 31, 1986.

3.

The MACRS applies to all capital assets placed in service before January 1987. However, for capital assets placed in service between July 31, 1986 and January 1, 1987, the new law may apply, based on an asset-by-asset evaluation.

Note: 

Please consult with your accountant or CPA for additional information.

22. ACCOUNTING FOR ADDITIONS AND BETTERMENTS

ADDITIONS AND BETTERMENTS

Capital asset management also entails control over capital expenditures which relate to Additions and Betterments of existing assets illustrated below.
 

ADDITIONS AND BETTERMENTS TO CAPITAL ASSETS

 
Additions   Betterments

Additions are enlargements of the physical capacity of an asset, e.g. an additional  floor is added to the existing building.


 

Betterments are improvements to capital assets that do not change its physical size, e.g. an air-conditioning system installed in the existing building.

In both cases, the expense must be capitalized over a number of years and depreciated as an ordinary capital asset. (14)

Note:

Please consult with your accountant or CPA for additional information.

23. ACCOUNTING FOR ORDINARY AND EXTRAORDINARY REPAIRS

THE REVENUE EXPENDITURE

Another important element of capital asset management relates to Revenue Expenditure. The revenue expenditure includes cost of repairs, maintenance, consumables, and other items needed to operate and to maintain a capital asset.

All revenue expenditures must be charged to the Operating Expense Account since they provide a benefit only during the current accounting period. It is necessary, however, to distinguish between ordinary and extraordinary repairs outlined below. (15).

ACCOUNTING FOR ORDINARY AND EXTRAORDINARY REPAIRS

1.

Ordinary Repairs.
Ordinary repairs relate specifically to maintaining a capital asset in good working condition and are treated as an operating expense.

2.

Extraordinary Repairs.
Extraordinary repairs are more significant in nature, e.g. overhaul of a water boiler will result in extension of the estimated service life of this capital asset. The total cost of extraordinary repairs must be debited from the accumulated depreciation of the asset, thereby increasing its book value. Subsequently, the asset must be depreciated again by applying the usual depreciation method.

Note: 

Please consult with your accountant or CPA for additional information.

24. METHODS OF ASSET DISPOSAL

ADDITIONS AND BETTERMENTS

Once a capital asset is no longer required or cannot be used by the company, it should be disposed of. Three main Methods Of Asset Disposal are illustrated below.
 

METHODS OF ASSET DISPOSAL

   
Sale   Trade-in   Scrap
In this case the asset is sold to another party for cash.   In this case the asset is used as a down-payment to purchase or is exchanged for another asset.   In this case the asset does not have meaningful value and is sold as scrap or simply given away.

Note:

Please consult with your accountant or CPA for additional information.

 

ADDITIONAL INFORMATION ONLINE

Fixed Asset Disposal By RockySpearsVideo.
Asset Disposal Part 1 By Bruce Fried, CSMDTube.
Asset Disposal Part 2 By Bruce Fried, CSMDTube.
3 Ways To Dispose Of An Asset By Nerd Enterprises, Inc.

25. ACCOUNTING OF ASSET DISPOSAL

GAIN OR LOSS ON THE CAPITAL ASSET DISPOSAL

Regardless of method of disposal, it is necessary to determine a Gain Or Loss On The Capital Asset Disposal as illustrated below.
 

ACCOUNTING OF ASSET DISPOSAL

 
Gain On Disposal   Loss On Disposal

If the cash received through disposal of the asset exceeds its ending book value, the difference is termed the gain on disposal.


 

If the cash received through disposal of the asset is less than its ending book value, the difference is termed the loss on disposal.

Note:

Please consult with your accountant or CPA for additional information.

26. ACCOUNTING PROBLEMS FOR INTANGIBLE CAPITAL ASSETS

INTANGIBLE CAPITAL ASSETS

Capital assets management also entails control over purchase, recording, and disposal of Intangible Assets, i.e. patents, copyrights, trademarks, goodwill, and others as described earlier.

Accounting problems that relate to intangible assets are the same as those related to tangible ones. According to the Accounting Principles Board, the three main problems are outlined below. (16).

ACCOUNTING PROBLEMS FOR INTANGIBLE CAPITAL ASSETS

1.

Determination of an initial carrying amount, i.e. initial cost.

2.

Reduction of the initial cost, after acquisition, under normal business conditions through periodic write-off, or amortization, in a manner similar to depreciation.

3.

Accounting for the initial cost if the asset's value declines substantially and permanently.

 

AMORTIZATION OF INTANGIBLE CAPITAL ASSETS

In addition to the abovementioned problems, intangible assets have no physical qualities, and their value and service life may be quite difficult to estimate. 

In accordance with the decision of the Accounting Principles Board, all intangible assets purchased from others must be recorded as assets and written off through periodic Amortization

If, however, intangible assets are developed by the company, all development costs must be treated as Operating Expenses. Additional information related to intangible assets is summarized below.

Note:

Please consult with your accountant or CPA for additional information.

27. ACCOUNTING RULES FOR INTANGIBLE CAPITAL ASSETS

ACCOUNTING RULES FOR INTANGIBLE CAPITAL ASSETS

Type

Description

Special Accounting Guidelines

Patent

Patent is an exclusive right to make a particular product or use a specific process. This right is granted by the federal government to the patent owner for a period of 17 years

A patent must be recorded at the acquisition cost and amortized over its useful life period, which may be less than the legal life of 17 years. The cost of successfully defending a patent in a patent infringement suit must be added to the patent acquisition cost.

Copyright

Copyright is an exclusive right to publish and sell literary, musical, and other artistic materials. Copyright also includes computer software programs. This right is granted by the federal government to the copyright owner for a period of the author's life plus 50 years.

A copyright must be recorded at the acquisition cost and amortized over its useful life period, which may be less than the legal life, but not to exceed 40 years.

Trademark,
Service Mark

A trademark or a service mark is a registered symbol or name giving the exclusive the right to the owner to use it to identify products or services in a specific class category.

The trademark or service mark must be recorded at the acquisition cost, and amortized over its useful life period not to exceed 40 years.

Franchise,
License,
Formula,
Process

Franchise, license, formula, or process provides the right to the owner to make and sell a unique brand of a product or service in an exclusive territory.

The franchise, license, formula, or process cost must be recorded at the acquisition cost and amortized over its useful life period not to exceed 40 years.

Leasehold

Leasehold provides the right to the user (leasee) to occupy land or buildings under a long-term rental contract with the property owner (leaser).

The leasehold cost must be amortized by the user (leasee) over the lease period. Payments to the property owner (leaser) during the lease period must be debited to lease expense account.

Leasehold
Improvement

Leasehold improvements to leased property made by the leasee become the property of the leaser at the end of the lease.

The leasehold improvements cost must be amortized over the lease period and debited to the lease expense account.

Goodwill

Goodwill may apply to an existing business organization and its' value depends upon the organization's ability to generate profits during a specified period in the future.

The cost of goodwill must be amortized by the new owners, who purchase the existing business from current owners, over a reasonable period not to exceed 40 years.

28. FOR SERIOUS BUSINESS OWNERS ONLY

ARE YOU SERIOUS ABOUT YOUR BUSINESS TODAY?

Reprinted with permission.

29. THE LATEST INFORMATION ONLINE

 

LESSON FOR TODAY:
The Essence Of Good Capital Assets Management
Is To Maximize Your Company's Capital!

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