1. Professor Eric Carstensen
Fixed Assets – Part 2
Professor Eric Carstensen
MiraCosta College

2. 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

3. Improvements vs. Normal Repairs & Maintenance
An Improvement (also referred to as Betterments) must do at least one of the following (may do both):
Extend the Useful Life of the asset
Increase the Salvage Value of the asset
Improvements are Capitalized (expense is matched to revenues realized)
Repairs and Maintenance are Period Expenses (expensed during the period incurred)

4. Improvements - Continued
Suppose we spend $3,000 to replace the motor in our delivery truck. This is
expected to extend the life of the truck for another 3 years. The journal entry
to record this would be:
Truck*
3,000
Cash
Since this extends the life of the truck, this is an improvement.
Suppose you took the truck to the dealership to repair the back bumper that
was damaged by one of the drivers. The cost of the new bumper was $1,500
and the resulting journal entry would be:
Repairs & Maintenance - Truck**
1,500
* Asset Account
** Expense Account

5. Improvements - Continued
Revised Depreciation Expense =
Book Value -
Revised Salvage Value
Revised Remaining Life
Asset Cost
As Discussed on Slide 4
Best Estimate Given Most Up To Date
Information (Usage/Wear and Tear)
Note: This formula can be used when Salvage Value Changes, when
Useful Life changes or both change.

6. Improvements - Concluded
Using these numbers from Part 1, Slide #7, assume that Salvage Value has been revised to $1,000 and the remaining useful life
has been revised to 4 years at the end of year 2.
Year
Asset Cost
Depreciation Expense
Accumulated Depreciation
Book Value 1
27,000
5,000
22,000
Revised Depreciation =
Book Value - Revised Salvage 2
10,000
17,000
Expense
Revised Remaining Life 3
15,000
12,000 4
20,000
7,000
(17, ,000) / (4 - 2) 5
25,000
2,000
8,000
18,000
9,000
26,000
1,000

7. Disposal of Assets
Assets remain on the books until disposal, whether or not they are fully depreciated.
Selling and donating assets are some of the types of disposals.
Upon disposal, we remove the asset from the books along with associated accumulated depreciation. We also account for any cash received and any resulting gain or loss.

8. Disposal of Assets – Gain
Using these numbers from Part 1, Slide #7, assume that this asset is
sold at the end of year 3 for $14,000.
Year
Asset Cost
Depreciation Expense
Accumulated Depreciation
Book Value 1
27,000
5,000
22,000 2
10,000
17,000 3
15,000
12,000 4
20,000
7,000 5
25,000
2,000
==> Since the amount of cash exceeds the book value, there is a
gain on disposal:
Cash
14,000
Accum. Depreciation
Asset
Gain on Disposal

9. Disposal of Assets - Loss
Using these numbers from Part 1, Slide #7, assume that this asset is
sold at the end of year 3 for $10,000.
Year
Asset Cost
Depreciation Expense
Accumulated Depreciation
Book Value 1
27,000
5,000
22,000 2
10,000
17,000 3
15,000
12,000 4
20,000
7,000 5
25,000
2,000
==> Since the amount of cash is less than the book value, there is a
loss on disposal:
Cash
Accum. Depreciation
Loss on Disposal
Asset

10. Disposal of Assets - Donation
Using these numbers from Part 1, Slide #7, assume that this asset
is donated to charity in year 3.
Year
Asset Cost
Depreciation Expense
Accumulated Depreciation
Book Value 1
27,000
5,000
22,000 2
10,000
17,000 3
15,000
12,000 4
20,000
7,000 5
25,000
2,000
==> Let's assume further that the fair market value of the asset is
equal to the book value:
Charitable Donations
Accum. Depreciation
Asset

11. Fixed Assets – Part 2 Concluded
In this Part 2 presentation, we covered Improvements and Disposal.
If you haven’t seen the Part 2 presentation, it covers asset Valuation and Depreciation methods.