1. Fixed and Intangible Assets
Chapter 10

2. Classifying Costs Is the asset used in normal operations?
Yes – asset is recorded as a fixed asset
No – asset is recorded as an investment
Is the purchased item long-lived?
Yes – asset recorded on balance sheet as fixed asset or an investment
No – item is recorded as an expense

3. Capital & Revenue Expenditures
Revenue Expenditures – only benefit the current period.
Example: Oil change for a truck
Capital Expenditures – improve the asset or extend its useful life.
Example: Overhaul of an engine for a truck

4. Depreciation
The periodic recording of the cost of fixed assets as an expense.
Physical depreciation – wear and tear during use or from exposure to weather
Functional depreciation – obsolescence and changes in customer needs that cause the asset to no longer provide services for which it was intended

5. Straight-Line Method
Straight-line is the most widely used depreciation.
Annual depreciation = Cost – Residual Value
Useful Life
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Example: Initial cost $20,000
Expected useful life yrs
Estimated residual value $2,000
($20,000 - $2,000)/3 = $6,000

6. Units-of-Production Method
Provides the same amount of depreciation for each unit produced.
Depreciation per Unit = Cost-Residual Value
Total Units of Production
Depreciation Expense = Depreciation per Unit
x Total Units Produced
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Example: Initial Cost $20,000
Estimated residual value $2,000
Useful operating hours hrs
($20,000 - $2,000)/1000 = $18.00 per hour
Operated – 100 hours $18.00 x 100 = $1,800

7. Double-Declining Method
1. Find the Straight-line Percentage
100%/Useful Life
Example: 5 years useful life
100/5 = 20%
2. Multiply step 1 by 2
Example: 20% x 2 = 40%
3. Multiply the double-declining balance rate by the book value of the asset
Example: First year book value $20,000 x 40% = $8,000
Second year book value $12,000 x 40% = $4,800
When the double-declining method is used, the estimated residual value is not considered.

8. Partial Depreciation
If an asset is used only part of a year, the annual depreciation is prorated.
Example: Straight-line method
Initial cost $20,000
Expected useful life yrs
Estimated residual value $2,000
Placed in service October 1
($20,000 - $2,000)/3 = $6,000 x 3/12 = $1,500

9. Discarding Fixed Assets
A fixed asset that is no longer used and has no residual value, is discarded.
Example: A piece of equipment which cost $10,000 and is fully depreciated is discarded.
Accumulated Depreciation $10,000
Equipment $10,000

10. Discarding Fixed Assets
If an asset has not been fully depreciated, depreciation should be recorded before removing the asset.
Example: Equipment Cost $10,000
Straight-line method 10%
The equipment is discarded on April 1.
($10,000 x 10% = $1,000 x 3/12 = $250)
Depreciation Expense $250
Accumulated Depreciation – Equip $250
Accumulated Depreciation – Equip $9,250
Loss on Disposal – Equip $750
Equipment $10,000

11. Selling Fixed Assets
Entry similar to discarding an asset except the receipt of cash is also recorded.
Example: Equipment Cost $10,000
Straight-line rate 10%
Sold in 8th year
Acc. Depreciation Balance $8,000
Sold on October 1
Depreciation Expense $750
Acc. Depreciation $750
($10,000 x 10%) x 9/12 = $750
See next slide for scenarios:

12. Selling Fixed Assets Scenarios
Sold at book value no gain or loss
Cash $1,250
Acc. Depreciation $8,750
Equipment $10,000
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Sold below book value for $500
Cash $ 500
Acc. Depreciation $8,750
Loss on Sale – Equip $ 750
Equipment $10,000
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Sold above book value for $2,000
Cash $2,000
Equipment $10,000
Gain on Sale – Equip $

13. Natural Resources
The process of transferring the cost of natural resources to an expense account is depletion.
1. Depletion Rate = Cost of Resource
Estimated Total Units of Resource
2. Depletion Expense = Depletion Rate x Quantity Extracted
Example: Cost of mineral deposit $200,000
Est. Total Units of Resource 1,000,000 tons
Tons mined during year 50,000 tons
$200,000/1,000,000 = .20 per ton
.20 per ton x 50,000 tons = $10,000
Depletion Expense $10,000
Acc. Depletion $10,000

14. Intangible Assets Intangible assets do not physically exist.
Patents are issued by government for inventions. These rights continue in effect for 20 years. They are amortized.
Example: Amortization Expense – Patents $2,000
Patents $2,000
Copyright are exclusive rights to publish and sell a literary, artistic, or musical composition. These rights are good for 70 years beyond the author’s death. They are amortized
Trademark is a name, term or symbol used to identify a business and its products. They can be registered for 10 years and renewed for 10 year periods.
Goodwill is created from such favorable factors as location product quality, reputation, and managerial skill. They are not amortized.
Loss from Impaired Goodwill $1,000
Goodwill $1,000