Professor Eric Carstensen Fixed Assets – Part 1 Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

What Are Fixed Assets? Fixed Assets, also known as Plant Assets or Property, Plant & Equipment (PP&E) are Non-Current Assets. Remember, Current Assets are used up or converted to cash within one year or less. Non-Current Assets are used up over a period of longer than a year. PP&E can consist of Land, Buildings, Equipment, Vehicles, Computers, for example.

Four Main Considerations Valuation – Total Cost & Lump Sum Allocation Cost Allocation / Depreciation Methods Straight Line Method Units of Production Method Double-Declining Balance Method Improvements vs. Normal Repairs & Maintenance Changes in Assumptions Disposal of Assets

Valuation Assume your new Equipment cost $24,000 and you were charged $1,000 to ship it from the manufacturer. Additionally, you had to pay an electrician $1,500 to hook it up and another $2,000 for a permit from the city. The total cost of this asset as recorded on the books would be $28,500 (24,000 + 1,000 + 1,500 + 2,000 = 28,500). All Normal and Reasonable expenditures required to make assets ready to generate revenues can be included in the cost of the asset.

Valuation - Continued * = Equipment 30,000 10.0% 270,000 27,000 Suppose you negotiate the purchase of a businesses assets for a price of $270,000. You are not sure how to allocate the costs among the assets. The best way to do so is to get appraised values and develop percentages and use them to prorate the purchase price: Appraised Value Percent of Total Purchase Price Prorated Value Equipment 30,000 10.0% * 270,000 = 27,000 Building 120,000 40.0% 108,000 Land 150,000 50.0% 135,000 Total 300,000 100.0% The resulting journal entry to record the purchase would be: Cash

Cost Allocation – Depreciation Expense Formula for Straight Line Method: Depreciation Expense = Asset Cost - Salvage Value Expected Useful Life Formula for Units of Production Method: Expected Units of Production As Discussed on Slide 4 Best Estimate Best Estimate in years or months Best Estimate (manufacturer?)

Cost Allocation – Straight Line Method Asset Cost 27,000 Salvage Value 2,000 Depreciable Basis 25,000 Expected Life 5 years Depreciation Expense 5,000 per year Year Accumulated Depreciation Book Value 1 22,000 2 10,000 17,000 3 15,000 12,000 4 20,000 7,000 Depreciation Expense - Asset Accum. Depreciation - Asset

Cost Allocation – Units of Production Asset Cost 27,000 Salvage Value 2,000 Depreciable Basis 25,000 Expected Volume 5,000 units Depreciation Expense 5 per units Year Units of Production Deprec. Per Unit Accumulated Depreciation Book Value 1 1,200 6,000 21,000 2 800 4,000 10,000 17,000 3 1,100 5,500 15,500 11,500 4 1,000 20,500 6,500 900 4,500 year 2 Depreciation Expense - Asset Accum. Depreciation - Asset

Cost Allocation – Double Declining Balance Method Asset Cost 27,000 Salvage Value 2,000 Depreciable Basis 25,000 Expected Life 5 years Depreciation Expense 5,000 per year Depreciation Rate 20% Double Declining Rate 40% Year Beginning Book Value Accumulated Depreciation Ending Book Value 1 10,800 16,200 2 6,480 17,280 9,720 3 3,888 21,168 5,832 4 2,333 23,501 3,499 1,499

Fixed Assets – Part 1 Concluded This time, we covered Valuation / Cost Determination and Cost Allocation (depreciation methods). In the Part 2 presentation, we will cover Improvements and Disposal.