AC113.01: Seminar Unit 8 May 13, 2011 School of Business and Management

Agenda Welcome Seminar Rules and Polling Fixed Assets andChapter 7 Fixed Assets and Intangible Assets Intangible Assets Questions

Seminar Rules by Greg Rose 1.If I type *BREAK* everybody quit typing, OK? Type “OK” if you get this one! 2.When asking questions, please RAISE YOUR HAND (TYPE //). Otherwise you might interrupt a stream of dialogue. 3.Please do NOT start side conversations. 4.Do not interject “I agree” or “good point” because this clutters the seminar. We assume you agree and think the point is good! 5.Don`t worry about typos. Be clear as you can and refrain from smileys and slang – use proper English. Assignments Grading Late Policy Seminar procedures and Polling Questions

Chapter 7 Fixed Assets and Intangible Assets

Learning Objective 1 Define, classify, and account for the cost of fixed assets

Characteristics of Fixed Assets They exist physically and thus are tangible assets The are owned and used by the company in its normal operations They are not offered for sale as part of normal operations

Fixed Assets as a Percentage of Total Assets

Classifying Costs

Costs to Include in Fixed Assets

Revenue and Capital Expenditures Capital Expenditures Are asset improvements Benefit current and future periods Increase fixed assets Revenue Expenditures Ordinary repairs and maintenance Benefit only the current period Increase repairs and maintenance expense

Revenue and Capital Expenditures

Learning Objective 2 Compute depreciation using the straight-line and double-declining- balance methods

Accounting for Depreciation Over time, fixed assets other than land lose their ability to provide services The cost of these fixed assets should be expensed in a systematic manner during their useful lives This is called depreciation Factors include wear and tear PhysicalDepreciation Factors include obsolescence FunctionalDepreciation

Factors in Computing Depreciation Expense

Two Common Depreciation Methods Asset acquired Equal amounts of depreciation each periodResidualvalue Straight-Line –Same amount of depreciation each year

Straight-Line Cost – Estimated Residual Value Estimated Useful Life Example: Assume a $24,000 depreciable asset with an estimated 5-year useful life and estimated $2,000 residual value. Annual depreciation expense: ($24,000 - $2,000) / 5 = $4,400 Rate is 1/5 OR 20% per year Asset cost = $24,000 Depreciation = $4,400 per year Residual value = $2,000

Two Common Depreciation Methods Straight-Line Double-Declining-Balance –Accelerated method that provides more depreciation in earlier years Asset acquired Depreciation expense larger in earlier periodsResidualvalue

Double-Declining-Balance Double the Straight-Line Rate* Book Value Example: Assume a $24,000 depreciable asset with an estimated 5-year useful life and estimated $2,000 residual value. Residual Value Double Straight Line Rate

Comparing Depreciation Methods

Depreciation for Federal Income Tax Modified Accelerated Cost Recovery System (MACRS) –Specifies eight classes of useful life and depreciation rates for each class. –Residual value is ignored. –Fixed assets are assumed to be put in and taken out of service in the middle of the year. Five year class: light trucks and automobiles Seven year class: machines and equipment

Learning Objective 3 Describe the accounting for the disposal of fixed assets

Disposal of Fixed Assets Asset can be –Discarded –Sold –Traded Book value must be removed from the accounts Depreciation must be up to date

Discarding Fixed Assets Happens when fixed assets are no longer useful to the business and have no market value. Assume a $25,000 fixed asset that is fully depreciated is discarded:

Discarding Fixed Assets Assume a $6,000 fixed asset with $4,750 of accumulated depreciation on December 31 is discarded in March:

Selling Fixed Assets Similar to discarding fixed assets, except that the cash or other asset received must also be recorded Could result in gain or loss

Selling Fixed Assets Example: Assume that equipment costing $10,000 is depreciated at an annual straight-line rate of 10%. The equipment is sold for cash at book value on October 12 of the eighth year of use. Accumulated depreciation at the previous December 31 is $7,000. Accumulated Depreciation after adjustment = $7,750 Book value is now = $2,250

Selling Fixed Assets #1 The asset is sold for $2,250

Selling Fixed Assets #2 The asset is sold for $1,000

Selling Fixed Assets #3 The asset is sold for $2,800

Learning Objective 4 Describe the accounting for depletion of natural resources

Natural Resources Natural resources include timber, metal ores, and minerals As resources are harvested/mined and sold, a portion of the cost of acquiring them must be expensed This is called depletion

Calculating Depletion Depletion = Quantity Extracted × Depletion Rate Depletion Rate = Cost of the Natural Resource Estimated Size of the Resource Estimated Size of the Resource

Depletion Example Assume that a business paid $400,000 for the mining rights to a mineral deposit estimated at 1,000,000 tons of ore. Depletion rate = $400,000/1,000,000 = $0.40 per ton If 90,000 tons are mined during the year, annual depletion is $36,000

Learning Objective 5 Describe the accounting for intangible assets

Intangible Assets Long-lived assets lacking physical properties that are useful in the operations of a business and not held for sale; examples include patents, copyrights, trademarks, and goodwill. Accounted for similar to fixed assets. Cost is transferred to expense through amortization.

Types of Intangible Assets

Amortization Matching the cost of an intangible asset with its revenue over its useful (legal) life. Amortization expense calculation is similar to straight-line depreciation: Amortization = Cost – Estimated Residual Value Estimated Useful Life Estimated Useful Life

Patent Amortization Assume a company acquires patent rights for $100,000. The remaining legal life of the patent rights is 14 years, however the company feels the remaining useful life is five years.

Goodwill Created from favorable business factors Only recorded if objectively determined by a transaction Not amortized – impaired values are adjusted. Goodwill is the most frequently reported intangible asset.

Intangible Assets

Learning Objective 6 Describe how depreciation expense is reported in an income statement, and prepare a balance sheet that includes fixed assets and intangible assets

Financial Reporting Depreciation and amortization should be reported separately Description of computations should be disclosed Each class of fixed asset should be disclosed Related accumulated depreciation should also be reported Income Statement BalanceSheet

Financial Reporting

End of Chapter 7

Questions Thank you for attending this seminar.