Transcript Click to edit Master title style Fixed Assets and Intangible Assets Nature of Fixed Assets Click to edit Master title style 9-1 Fixed assets are.

1
Click to edit Master title style
9
Fixed Assets and
Intangible Assets
1
2
Nature of Fixed Assets
Click to edit Master title style
9-1
Fixed assets are long-term or
relatively permanent assets. They are
tangible assets because they exist
physically. They are owned and used
by the business and are not offered for
sale as part of normal operations.
2
3
Classifying Costs
Click to edit Master title style
9-1
Is the purchased
item long-lived?
yes
no
Is the asset used in a
productive purpose?
yes
Fixed Assets
Expense
no
Investment
83
4
Cost of Acquiring Fixed Assets
Click to edit Master title style
9-1
LAND








Purchase price
Sales taxes
Permits from government agencies
Broker’s commissions
Title fees
Surveying fees
Delinquent real estate taxes
Razing or removing unwanted
buildings, less any salvage
 Grading and leveling
 Paving a public street bordering the
land
94
5
Cost of Acquiring Fixed Assets
Click to edit Master title style










BUILDING
Architects’ fees
Engineers’ fees
Insurance costs incurred during construction
Interest on money borrowed to finance
construction
Walkways to and around the building
Sales taxes
Repairs (purchase of existing building)
Reconditioning (purchase of existing
building)
Modifying for use
Permits from government agencies
9-1
5
10
6
Cost of Acquiring Fixed Assets
Click to edit Master title style
MACHINERY AND
EQUIPMENT




Sales taxes
Freight
Installation
Repairs (purchase of used
equipment)
 Reconditioning (purchase
of used equipment)
 Insurance while in transit
 Assembly
9-1
 Modification for user
 Testing for use
 Permits from government
agencies
LAND
IMPROVEMENT




Trees and shrubs
Fences
Outdoor lighting
Paved parking areas
6
11
7
Click to edit Master title style
9-1
Cost of Acquiring Fixed Assets Excludes:
 Vandalism
 Mistakes in installation
 Uninsured theft
 Damage during unpacking
and installing
 Fines for not obtaining proper
permits from government
agencies
7
8
Revenue and Capital Expenditures
Click to edit Master title style
9-1
Expenditures that benefit only the
current period are called revenue
expenditures. Expenditures that
improve the asset or extend its useful
life are capital expenditures.
8
9
Click to edit Master title style
REVENUE
EXPENDITURES
CAPITAL
EXPENDITURES
Normal and
ordinary repairs
and maintenance
1) Additions
2) Improvements
3) Extraordinary
repairs
9-1
9
14
10
Ordinary Maintenance and Repairs
Click to edit Master title style
9-1
On April 9, the firm paid $300 for a
tune-up of a delivery truck.
Apr. 9 Repairs and Maintenance Exp.
Cash
300 00
300 00
This is a revenue expenditure
10
15
11
Asset Improvements
Click to edit Master title style
9-1
On May 4, a $5,500 hydraulic lift was installed on
the delivery truck to allow for easier and quicker
loading of heavy cargo.
May 4 Delivery Truck
Cash
5 500 00
5 500 00
This is a capital expenditure
11
16
12
Revenue and Capital Expenditures
Click to edit Master title style
9-1
12
18
13
9-1
Click to edit Master title style
Example Exercise 9-1
On June 18 GTS Co. paid $1,200 to upgrade a
hydraulic lift and $45 for an oil change for one of
its delivery trucks. Journalize the entries for the
hydraulic lift upgrade and oil change expenditures.
Follow My Example 9-1
June 18 Delivery Truck
1,200
Cash
1,200
18 Repairs and Maintenance Exp.
45
Cash
45
For Practice: PE 9-1A, PE 9-1B
13
19
14
Leasing Fixed Assets
Click to edit Master title style
9-1
A capital lease is accounted
for as if the lessee has, in fact,
purchased the asset. The
asset is then amortized over
the life of the capital lease.
14
15
Leasing Fixed Assets
Click to edit Master title style
9-1
A lease that is not
classified as a capital
lease for accounting
purposes is classified as
an operating lease (an
operating leases is treated
as an expense).
15
16
Accounting for Depreciation
Click to edit Master title style
9-2
Over time, fixed assets such as
equipment, buildings, and land
improvements lose their ability to
provide services. The periodic
transfer of the cost of fixed assets to
expense is called depreciation.
16
17
Factors in Computing Depreciation
Click to edit Master title style
9-2
The three factors in determining the
amount of depreciation expense to be
recognized each period are: (a) the fixed
asset’s initial cost, (b) its expected useful
life, and (c) its estimated value at the end
of the useful life.
17
18
Residual Value
Click to edit Master title style
9-2
The fixed asset’s estimated value at
the end of its useful life is called the
residual value, scrap value, salvage
value, or trade-in value. A fixed
asset’s residual value and its expected
useful life must be estimated at the
time the asset is placed in service.
18
19
Click
5 to edit Master title style
Use of Depreciation
Methods
7%
9-2
3%
2%
Straight-line
Units-of-production
Double-decliningbalance
Other
88%
Source: Accounting Trends & Techniques, 59th ed., American
Institute of Certified Public Accountants, New York, 2005.
19
28
20
9-2
Straight-Line Method
Click to edit Master title style
The straight-line method provides
for the same amount of
depreciation expense for each year
of the asset’s useful life.
Cost – estimated residual value
Annual depreciation =
Estimated life
20
29
21
9-2
Click to edit Master title style
A depreciable asset cost $24,000. Its
estimated residual value is $2,000 and
its estimated life is 5 years.
Cost – estimated residual value
Annual depreciation =
Estimated life
Annual depreciation = $24,000 – $2,000
5 years
Annual depreciation = $4,400
21
30
22
Click to edit Master title style
9-2
The straight-line method is
widely used by firms because it
is simple and it provides a
reasonable transfer of cost to
periodic expenses if the asset is
used about the same from
period to period.
22
23
9-2
Click to edit Master title style
Example Exercise 9-2
Equipment that was acquired at the beginning of the year
at a cost of $125,000 has an estimated residual value of
$5,000 and an estimated useful life of 10 years.
Determine the annual straight-line depreciation.
Follow My Example 9-2
$12,000 ($120,000 ÷ 10 years)
For Practice: PE 9-2A, PE 9-2B
23
32
24
Units-of-Production Method
Click to edit Master title style
9-2
The units-of-production method provides
for the same amount of depreciation
expense for each unit produced or each
unit of capacity used by the asset.
Cost – estimated residual value
Unit depreciation =
Estimated hours, units, etc.
24
33
25
9-2
Click to edit Master title style
A depreciable asset cost $24,000. Its
estimated residual value is $2,000 and
its expected to have an estimated life
of 10,000 operating hours.
Cost – estimated residual value
Hourly depreciation =
Estimated hours
$24,000 – $2,000
Hourly depreciation =
10,000 estimated hours
Hourly depreciation = $2.20 hourly depreciation
25
34
26
Click to edit Master title style
9-2
The units-of-production method
is more appropriate than the
straight-line method when the
amount of use of a fixed asset
varies from year to year.
26
27
9-2
Example Exercise 9-3
Click to edit Master title style
Equipment acquired at a cost of $180,000 has an
estimated residual value of $10,000, an estimated useful
life of 40,000 hours, and was operated 3,600 hours
during the year. Determine the (a) depreciable cost, (b)
depreciation rate, and (c) the units-of-production
depreciation for the year.
Follow My Example 9-3
(a) $170,000 ($180,000 – $10,000)
(b) $4.25 per hour ($170,000/40,000 hours)
(c) $15,300 (3,600 hours x $4.25)
For Practice: PE 9-3A, PE 9-3B
27
36
28
Double-Declining-Balance Method
Click to edit Master title style
9-2
The double-decliningbalance method provides
for a declining periodic
expense over the estimated
useful life of the asset.
28
29
Click to edit Master title style
9-2
A double-declining balance rate is
determined by doubling the straightline rate. A shortcut to determining
the straight-line rate is to divide one
by the number of years (1/5 = .20).
Hence, using the double-decliningbalance method, a five-year life
results in a 40 percent rate (.20 x 2).
29
30
Click to edit Master title style
9-2
For the first year, the cost of the asset
is multiplied by 40 percent. After the
first year, the declining book value of
the asset is multiplied 40 percent.
Continuing with the example where
the fixed asset cost $24,000 and has
an expected residual value of $2,000,
a table can be built.
30
31
Click
to edit MasterAccum.
title style
Book Value
Beginning
Year of Year
1
$24,000
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
40%
$9,600
9-2
$24,000 x .40
31
40
32
Click
to edit MasterAccum.
title style
Book Value
Beginning
Year of Year
1
2
$24,000
14,400
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
40%
40%
$9,600
5,760
$9,600
9-2
$14,400
$14,400 x .40
32
41
33
Click
to edit MasterAccum.
title style
Book Value
Beginning
Year of Year
1
2
$24,000
14,400
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
40%
40%
$9,600
5,760
$9,600
15,360
9-2
$14,400
8,640
33
42
34
Click
to edit MasterAccum.
title style
Book Value
Beginning
Year of Year
1
2
3
$24,000
14,400
8,640
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
40%
40%
40%
$9,600
5,760
3,456
$9,600
15,360
18,816
9-2
$14,400
8,640
5,184
34
43
35
Click
to edit MasterAccum.
title style
Book Value
Beginning
Year of Year
1
2
3
4
$24,000
14,400
8,640
5,184
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
40%
40%
40%
40%
$9,600
5,760
3,456
2,074
$9,600
15,360
18,816
20,890
9-2
$14,400
8,640
5,184
3,110
35
44
36
Click
to edit MasterAccum.
title style
Book Value
Beginning
Year of Year
1
2
3
4
5
$24,000
14,400
8,640
5,184
3,110
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
40%
40%
40%
40%
40%
$9,600
5,760
3,456
2,074
1,244
$9,600
15,360
18,816
20,890
22,134
9-2
$14,400
8,640
5,184
3,110
1,866
DEPRECIATION STOPS WHEN
STOP
BOOK VALUE EQUALS
RESIDUAL VALUE!
36
45
37
Click
to edit MasterAccum.
title style
Book Value
Beginning
Year of Year
1
2
3
4
5
Rate
$24,000
40%
14,400
40%
8,640
40%
5,184
40%
3,110 – $2,000
9-2
Annual
Deprec. Book Value
Deprec. Year-End Year-End
$9,600
5,760
3,456
2,074
1,110
“Forced”
annual
depreciation
$9,600
15,360
18,816
20,890
22,000
$14,400
8,640
5,184
3,110
2,000
Desired
ending book
value
37
46
38
9-2
Example Exercise 9-4
Click to edit Master title style
Equipment that was acquired at the beginning of the year
at a cost of $125,000 has an estimated residual value of
$5,000 and an estimated useful life of 10 years.
Determine the (a) depreciable cost, (b) doubledeclining-balance rate, and (c) double-declining balance
depreciation for the first year.
Follow My Example 9-4
(a) $120,000 ($125,000 – $5,000)
(b) 20% [(1/10) x2]
(c) $25,000 ($125,000 x 20%)
For Practice: PE 9-4A, PE 9-4B
38
47
39
Summary of
Depreciation Methods
Click to edit Master title style
9-2
39
48
40
Comparing
Depreciation Methods
Click to edit Master title style
9-2
40
49
41
Depreciation for Federal Income Tax
Click to edit Master title style
9-2
The Internal Revenue Code
specifies the Modified Accelerated
Cost Recovery System (MACRS)
for use by businesses in computing
depreciation for tax purposes.
41
42
Revising Depreciation Estimates
Click to edit Master title style
9-2
A machine purchased for $140,000 was
originally estimated to have a useful life of five
years and a residual value of $10,000. The
asset has been depreciated for two years using
the straight-line method.
Annual
$140,000 – $10,000
Depreciation (S/L) =
5 years
Annual
$26,000 per year
Depreciation (S/L) =
42
52
43
Click to edit Master title style
9-2
At the end of two years, the asset’s book value
is $88,000, determined as follows:
Asset cost
$140,000
Less accumulated depreciation
($26,000 per year x 2 years)
52,000
Book value, end of second year $ 88,000
43
53
44
Click
to
edit
Master
title
style
During the third year, the company estimates
9-2
that the remaining useful life is eight years
(instead of three) and that the residual value is
$8,000 (instead of $10,000). Depreciation
expense for each of the remaining eight year is
determined as follows:
Book value, end of second year
Less revised estimated residual value
Revised remaining depreciation cost
Revised annual depreciation expense
($80,000/8 years)
$88,000
8,000
$80,000
$10,000
44
54
45
9-2
Click to edit Master title style
Example Exercise 9-5
A warehouse with a cost of $500,000 has an estimated
residual value of $120,000, an estimated useful life of
40 years, and is depreciated by the straight-line method.
(a) Determine the amount of annual depreciation. (b)
Determine the book value at the end of the 20th year of
use. (c) If at the start of the 21st year it is estimated that
the remaining life is 25 years and that the residual value
is $150,000, determine the depreciation expense for
each of the remaining 25 years.
45
55
46
9-2
Click to edit Master title style
Follow My Example 9-5
a. $9,500 [($500,000 – $120,000)/40]
b. $310,000 [$500,000 – ($9,500 x 20)]
c. $6,400 [310,000 – $150,000)/25]
For Practice: PE 9-5A, PE 9-5B
56
46
47
Discarding Fixed Assets
Click to edit Master title style
9-3
A piece of equipment acquired at a cost of
$25,000 is fully depreciation. On February
14, the equipment is discarded.
Feb. 14 Accumulated Depr.—Equipment
Equipment
To write off equipment
25 000 00
25 000 00
discarded.
58
47
48
Click to edit Master title style
9-3
Equipment costing $6,000 is depreciated at an
annual straight-line rate of 10%. After the
adjusting entry, Accumulated Depreciation—
Equipment had a $4,750 balance. The
equipment was discarded on March 24.
Mar. 24 Depreciation Expense—Equipment
Accum. Depr.—Equipment
To record current
depreciation on
equipment discarded.
150 00
150 00
$600 x 3/12
48
59
49
Click to edit Master title style
9-3
The discarding of the equipment is then
recorded by the following entry:
Mar. 24 Accum. Depreciation—Equipment
Loss on Disposal of Fixed Assets
Equipment
To write off equipment
discarded.
4 900 00
1 100 00
6 000 00
49
60
50
Selling Fixed Assets
Click to edit Master title style
9-3
Equipment costing $10,000 is depreciated at an
annual straight-line rate of 10%. The equipment is
sold for cash on October 12. Accumulated
Depreciation (last adjusted December 31) has a
balance of $7,000 and needs to be updated.
Oct. 12 Depreciation Expense—Equipment
Accum. Depr.—Equipment
To record current
depreciation on
equipment sold.
750 00
750 00
$10,000 x ¾
x10%
50
61
51
Assumption 1
Click to edit Master title style
9-3
The equipment is sold on October
12 for $2,250. No gain or loss.
Oct. 12 Cash
Accum. Depreciation—Equipment
Equipment
Sold equipment at book
value.
2 250 00
7 750 00
10 000 00
51
62
52
Assumption 2
Click to edit Master title style
9-3
The equipment is sold on October 12
for $1,000; a loss of $1,250.
Oct. 12 Cash
Accum. Depreciation—Equipment
Loss on Disposal of Fixed Assets
Equipment
Sold equipment at a loss.
1 000 00
7 750 00
1 250 00
10 000 00
52
63
53
Assumption 3
Click to edit Master title style
9-3
The equipment is sold on October 12
for $2,800; a gain of $550.
Oct. 12 Cash
Accum. Depreciation—Equipment
Equipment
Gain on Disp. of Fixed Assets
Sold equipment at a gain.
2 800 00
7 750 00
10 000 00
550 00
53
64
54
9-3
Click to edit Master title style
Example Exercise 9-6
Equipment was acquired at the beginning of year at a
cost of $91,000. The equipment was depreciated using
the straight-line method based upon an estimated useful
life of 9 years and an estimated residual value of
$10,000.
a. What was the depreciation for the first year?
b. Assuming the equipment was sold at the end of the
second year for $78,000, determine the gain or loss on
sale of the equipment.
c. Journalize the entry to record the sale.
54
65
55
9-3
Click to edit Master title style
Follow My Example 9-6
a. $9,000 [($91,000 – $10,000)/9]
b. $5,000 gain; $78,000 – [$91,000 – ($9,000 x 2)]
c. Cash
78,000
Accum. Depreciation—Equipment 18,000
Equipment
91,000
Gain on Disposal of Fixed Assets
5,000
For Practice: PE 9-6A, PE 9-6B
66
55
56
Natural Resources
Click to edit Master title style
9-4
The process of
transferring the cost of
natural resources to an
expense account is called
depletion.
56
57
Intangible Assets
Click to edit Master title style
9-5
Patents, copyrights, trademarks, and
goodwill are long-lived assets that
are useful in the operations of a
business and not held for sale. These
assets are called intangible assets
because they do not exist physically.
57
58
Click to edit Master title style
9-5
The exclusive right granted by the
federal government to
manufacturers to produce and sell
goods with one or more unique
features is a patent. These rights
continue in effect for 20 years.
58
59
Copyright
Click to edit Master title style
9-5
The exclusive right granted by the
federal government to publish and
sell a literary, artistic, or musical
composition is a copyright. A
copyright extends for 70 years
beyond the author’s death.
59
60
Trademark
Click to edit Master title style
9-5
A trademark is a unique name, term, or
symbol used to identify a business and its
products. Most businesses identify their
trademarks with ® in their advertisements
and on their products. Trademarks can be
registered for 10 years and can be
renewed every 10 year period thereafter.
60
61
Goodwill
Click to edit Master title style
9-5
In business, goodwill refers to an
intangible asset of a business that is
created from such favorable factors
as location, product quality,
reputation, and managerial skill.
61
62
Click to edit Master title style
9-5
Generally accepted accounting principles
permit goodwill to be recorded in the
accounts only if it is objectively
determined by a transaction.
62
63
Click to edit Master title style
9-6
 The amount of each major class of fixed
assets should be disclosed in the balance
sheet or in notes.
 The fixed assets may be shown at their net
amount.
Office equipment
Less accumulated depreciation
Net book value
$125,750
86,300
$ 39,450
63
64
Click to edit Master title style
9-6
 The cost of mineral rights or ore deposits is
normally shown as part of the fixed asset
section of the balance sheet. The related
accumulated depletion should also be
disclosed.
 Intangible assets are usually reported (net of
amortization) in the balance sheet in a
separate section immediately following fixed
assets.
64