1. Fixed Assets and Intangible Assets
Chapter 10

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

3. Nature of Fixed Assets
Fixed assets are long-term or relatively permanent assets, such as equipment, machinery, buildings, and land. Other descriptive titles for fixed assets are plant assets or property, plant, and equipment.

4. Nature of Fixed Assets
Fixed assets have the following characteristics:
They exist physically and, thus, are tangible assets.
They are owned and used by the company in its normal operations.
They are not offered for sale as part of normal operations.

5. CLASSIFYING COSTS

9. Costs of Acquiring Fixed Assets
Only costs necessary for preparing the fixed asset for use are included as a cost of the asset.
Unnecessary costs that do not increase the asset’s usefulness are recorded as an expense.
Vandalism
Mistakes in installation
Uninsured theft
Damage during unpacking and installing
Fines for not obtaining proper permits from government agencies

10. Capital and Revenue Expenditures
Expenditures that benefit only the current period are called revenue expenditures.
Normal and ordinary repairs and maintenance
Expenditures that improve the asset or extend its useful life are capital expenditures.
Additions, improvements, and extraordinary repairs

11. Ordinary Maintenance and Repairs
On April 9, the firm paid $300 for a tune-up of a delivery truck.
Costs related to the ordinary maintenance and repairs of fixed assets are recorded as an expense of the current period.
revenue expenditure

12. Asset Improvements
On May 4, a $5,500 hydraulic lift was installed on the delivery truck to allow for easier and quicker loading of heavy cargo.
After a fixed asset has been placed in service, cost may be incurred to improve the asset.
capital expenditure

13. Extraordinary Repairs
The engine of a forklift that is near the end of its useful life is overhauled at a cost of $4,500, which extends its useful life by eight years. Work on the forklift was completed on October 14.
After a fixed asset has been placed in service, cost may be incurred to improve the asset.
capital expenditure

14. CAPITAL AND REVENUE EXPENDITURES

15. Leasing Fixed Assets
A Lease is a contract for the use of an asset for a period of time e.g. automobiles, computers, buildings and airplanes are often leased.
The two parties to a lease contract are as follows:
The lessor is the party who owns the asset.
The lessee is the party to whom the rights to use the asset are granted by the lessor.

16. Leasing Fixed Assets
A capital lease is accounted for as if the lessee has, in fact, purchased the asset. The asset is then amortized (written off as an expense) over the life of the capital lease.
A lease that is not classified as a capital lease for accounting purposes is classified as an operating lease. An operating lease is treated as an expense, because the lessee is renting the asset for the lease term.

17. Learning Objective 2
Compute depreciation, using the following methods: straight-line method, units-of-production method, and double-declining-balance method

18. Depreciation
Over time, most fixed assets (equipment, buildings, and land improvements) lose their ability to provide services. The periodic recording of the cost of fixed assets as an expense is called depreciation.

19. Accounting for Depreciation
Depreciation can be caused by physical or functional factors.
Physical depreciation factors include wear and tear during use or from exposure to the weather.
Functional depreciation factors include obsolescence and changes in customer needs that cause the asset to no longer provide services for which it was intended.

20. Accounting for Depreciation
Two common misunderstandings that exist about depreciation as used in accounting include:
Depreciation does not measure a decline in the market value of a fixed asset.
Depreciation does not provide cash to replace fixed assets as they wear out.

21. Factors in Computing Depreciation
Three factors determine the depreciation expense for a fixed asset. These three factors are:
The asset’s initial cost
The asset’s expected useful life
The asset’s estimated residual value

22. Factors in Computing Depreciation
The expected useful life of a fixed asset is estimated at the time the asset is placed into service.
The residual value of a fixed asset at the end of its useful life is also estimated at the time the asset is placed into service.

23. INITIAL COST – ACCUMULATED DEPRECIATION = BOOK VALUE

24. The three Depreciation methods: (used more often)
Straight line method
Units-of-production deprecation
Double declining balance method

25. Straight-Line Method
The straight-line method provides for the same amount of depreciation expense for each year of the asset’s useful life.
Annual Depreciation
Cost – Residual Value
Useful Life =

26. Straight-Line Method Initial cost: $24,000
Expected useful life 5 years
Estimated residual value: $2,000
The annual straight-line depreciation of $4,400 is computed below:
Annual Depreciation =
Cost – Residual Value
Useful Life
$24,000 - $2,000
5 years =
$22,000
5 years =
= $4,400

27. Accumulated Depreciation
Straight-Line Method
Initial Cost – Accumulated depreciation
$22,000
5 years =
= $4,400
Annual Depreciation
Year
cost
Depreciation exp
Accumulated Depreciation
Book value 1
24,000
4,400
19,600 2
8,800
15,200 3
13200
10,800 4
17600
6,400 5
22,000
2,000
Last book value
Equals residual value
Last Accumulated Depreciation
Equals depreciable value

28. Straight-Line Method
If the preceding equipment was purchased and placed into service on October 1, the depreciation for the first year of use would be $1,100, computed as follows:
$4,400 x 3/12 = $1,100

29. Straight-Line Method
The straight-line percentage can be determined by dividing 100% by the number of years of expected useful life, as shown below.

30. Units-of-Production Method
The units-of-production method provides the same amount of depreciation expense for each unit produced or each unit of capacity used by the asset.
Step 1. Determine the depreciation per unit as:
Step 2. Compute the depreciation expense as:
Depreciation per Unit =
Cost – Residual Value
Total Units of Production
Depreciation Expense = Depreciation per Unit x Total Units of Output Used

31. Units-of-Production Method
A depreciable asset costs $24,000. Its estimated residual value is $2,000, and it is expected to have a useful life of 10,000 operating hours. During the year, the asset was operated 2,100 hours.
Depreciation per hour= (24,000- 2,000)/10,000 hours
= per hour
2. Depreciation expense= 2.20 x 2100 = $ 4,620

32. Units-of-Production Method
Initial Cost – Accumulated depreciation
Depreciation per hour= (24,000- 2,000)/10,000 hours
= per hour
operating hours
Year
cost
Depreciation exp
Accumulated Depreciation
Book value
2,100 1
24,000
4,620
19,380 2 3 4 5
Total operating hours
Equal useful life
Last Accumulated Depreciation
Equals depreciable value
Last book value
Equals residual value

33. Double-Declining-Balance Method
The double-declining-balance method provides for a declining periodic expense over the expected useful life of the asset.

34. Double-Declining-Balance Method
The double-declining-balance method is applied in three steps:
Step 1. Determine the straight-line percentage using the expected useful life.
Step 2. Determine the double-declining-balance rate by multiplying the straight-line rate from Step 1 by 2.
Step 3. Compute the depreciation expense by multiplying the double-declining-balance rate from Step 2 times the book value of the asset.
(continued)

35. Double-Declining-Balance Method
The double-declining-balance rate is determined by doubling the straight-line rate.
A shortcut to determining the straight-line rate is to divide one by the number of years (for example, 1 ÷ 5 = 0.20).
Using the double-declining-balance method, a five-year life results in a 40 percent rate (0.20 × 2).

36. Double-Declining-Balance Method
For the first year, the book value of the equipment is its initial cost of $24,000.
After the first year, the book value (cost - accumulated depreciation) declines and, thus, the depreciation also declines.

37. Double-Declining-Balance Method
Initial Cost – Accumulated depreciation
Year
cost
Book value at the Beginning of the year
Depreciation exp
= 0.40 X Book value at the Beginning of the year
Accumulated Depreciation
Book value at the End of the year 1
24,000
9,600
14,400 2
5,760
15,360
8,640 3
3,456
18,816
5,184 4
2,073.6
20,889.6
3,110.4 5 OR
22000 –
1,110.4
22,000
2,000
Last Accumulated Depreciation
Equals depreciable value
Last book value
Equals residual value

38. Double-Declining-Balance Method
The double-declining-balance depreciation for the full five-year life of the equipment is shown below.
DEPRECIATION STOPS WHEN BOOK VALUE EQUALS RESIDUAL VALUE!
STOP

39. Double-Declining-Balance Method
“Forced” depreciation for 5th year
Desired ending book value

40. Double-Declining-Balance Method
If the preceding equipment was purchased and placed into service on October 1, depreciation for the year ending December 31 would be $2,400, computed as follows:
= $9,600 x 3/12 = $2,400
First year partial depreciation
The depreciation for the second year would then be $8,640, computed as follows:
= [40% x ($24,000 – $2,400)]
Second year depreciation
= $8,640

41. Double-Declining-Balance Method
The double-declining-balance method provides a higher depreciation in the first year of the asset’s use, followed by declining depreciation amounts. Thus, it is called an accelerated depreciation method.

42. Comparing Depreciation Methods

43. Comparing Depreciation Methods

44. Depreciation for Federal Income Tax

45. Learning Objective 3
Journalize entries for the disposal of fixed assets

46. Disposal of Fixed Assets
Fixed assets that are no longer useful may be discarded or sold. In such cases, the fixed asset is removed from the accounts.
Just because a fixed asset is fully depreciated, however, doesn’t mean that it should be removed from the accounts (as long as asset is being used)

47. Discarding Fixed Assets
If a fixed asset is no longer used and has no residual value, it’s discarded.
Equipment acquired at a cost of $25,000 is fully depreciation at December 31, On February 14, 2014, the equipment is discarded.

48. Discarding Fixed Assets
Equipment costing $6,000, with no residual value, is depreciated at an annual straight-line rate of 10%. After the December 31, 2013, adjusting entry, Accumulated Depreciation— Equipment has a $4,650 balance. On March 24, 2014, the asset is removed from service and discarded.

49. Discarding Fixed Assets

50. Discarding Fixed Assets
The discarding of the equipment is then recorded as shown below. (Note that this is the second of two entries on March 24.)
= 4800
6000 – 4800 = 1200

51. Selling Fixed Assets
The entry to records the sale of the fixed assets is similar to the entries for discarding an asset. The only difference is recording the receipt of cash.
If selling price > book value  Gain
If selling price < book value  Loss
Equipment was purchased at a cost of $10,000. It had no estimated residual value and was depreciated at a straight-line rate of 10%. The equipment is sold for cash on October 12 of the eighth year of its use. The balance of the accumulated depreciation account as of the preceding December 31 is $7,000.
(continued)

52. Selling Fixed Assets
The entry to update the depreciation for the nine months of the current year is as follows:
10000 X 10% = 1000
1000 X 9/12 = 750
(continued)
= 7750

53. Selling Fixed Assets
After the current depreciation is recorded, the book value of the asset is $2,250 ($10,000 – $7,750).

54. Selling Fixed Assets
After the current depreciation is recorded, the book value of the asset is $2,250 ($10,000 – $7,750).

55. Selling Fixed Assets
After the current depreciation is recorded, the book value of the asset is $2,250 ($10,000 – $7,750).

56. Learning Objective 4
Compute depletion and journalize the entry for depletion

57. Learning Objective 5
Describe the accounting for intangible assets, such as patents, copyrights, and goodwill

58. Intangible Assets
Patents, copyrights, trademarks, and goodwill are long-lived assets that are used in the operations of a business and not held for sale. These assets are called intangible assets because they do not exist physically.

59. Intangible Assets
The accounting for intangible assets is similar to that for fixed assets. The major issues are:
Determining the initial cost.
Determining the amortization, which is the amount of cost to transfer to expense.

60. COMPARISON OF INTANGIBLE ASSETS

61. 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

62. Fixed and Intangible Assets

63. Fixed and Intangible Assets
In the Income Statement, depreciation expense should be reported separately. A description of the methods used in computing depreciation should also be reported
In the Balance sheet, each class of fixed assets should be disclosed on the face of the statement or in the notes. The related accumulated deprecation should be disclosed, either by class or total
Intangible assets are usually reported in the balance sheet in a separate section following fixed asset

64. Fixed and Intangible Assets
Intangible assets are usually reported in the balance sheet in a separate section following fixed assets.
The balance of each class of intangible assets should be disclosed net of any amortization.
The cost and related accumulated depletion of mineral rights are normally shown as part of the Fixed Assets section of the balance sheet.

65. Learning Objective 7
Describe and illustrate the fixed asset turnover ratio to assess the efficiency of a company’s use of its fixed assets

66. H.W:
PE 10-1A
PE 10-2A , PE 10-2B
PE 10-3A , PE10-3B
PE10-4A , PE10-4B
PE10-6A
EX10-9
EX10-10
EX10-12
EX10-13
EX10-14

67. Fixed Assets and Intangible Assets
The End