Accounting Principles 7Th Canadian Edition Volume 2 By Jerry J. Weygandt

Accounting Principles 7Th Canadian Edition Volume 2 By Jerry J. Weygandt

ISBN: 9781119048473

CHAPTER 9: Long-Lived assets

CHAPTER STUDY OBJECTIVES

1. Calculate the cost of property, plant, and equipment. The cost of property, plant, and equipment includes all costs that are necessary to acquire the asset and make it ready for its intended use. All costs that benefit future periods (that is, capital expenditures) are included in the cost of the asset. When applicable, cost also includes asset retirement costs. When multiple assets are purchased in one transaction, or when an asset has significant components, the cost is allocated to each individual asset or component using their relative fair values.
2. Apply depreciation methods to property, plant, and equipment. After acquisition, assets are accounted for using the cost model or the revaluation model. Depreciation is recorded and assets are carried at cost less accumulated depreciation. Depreciation is the allocation of the cost of a long-lived asset to expense over its useful life (its service life) in a rational and systematic way. Depreciation is not a process of valuation and it does not result in an accumulation of cash. There are three commonly used depreciation methods:

Effect on Annual

Method                     Depreciation                                 Calculation

Straight-line              Constant amount                        (Cost − residual value) ÷

estimated useful life

(in years)

Diminishing-                   Diminishing                            Carrying amount at

balance                         amount                                beginning of year ×

diminishing-balance rate

Units-of-                         Varying                                (Cost − residual value) ÷

production                       amount                                total estimated units-of-

production × actual

activity during the year

Each method results in the same amount of depreciation over the asset’s useful life. Depreciation expense for income tax purposes is called capital cost allowance (CCA).