1. Professor Eric Carstensen
Fixed Assets – Part 1
Professor Eric Carstensen
MiraCosta College

2. 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.

3. 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

4. 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 = 28,500).
All Normal and Reasonable expenditures required to make assets ready to generate revenues can be included in the cost of the asset.

5. 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

6. 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?)

7. 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

8. 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

9. 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

10. 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.