1. Fixed Assets and Intangible Assets
Chapter 9
Student Version
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2. Define, classify, and account for the cost of fixed assets.
Learning Objective 1
Define, classify, and account for the cost of fixed assets.

3. LO 1
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. LO 1
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. Costs of Acquiring Fixed Assets
LO 1
Costs of Acquiring Fixed Assets
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

6. Capital and Revenue Expenditures
LO 1
Capital and Revenue Expenditures
Expenditures that benefit only the current period are called revenue expenditures.
Expenditures that improve the asset or extend its useful life are capital expenditures.

7. Ordinary Maintenance and Repairs
LO 1
Ordinary Maintenance and Repairs
On April 9, the firm paid $300 for a tune-up of a delivery truck.
revenue expenditure

8. LO 1
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.
capital expenditure

9. Extraordinary Repairs
LO 1
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.
capital expenditure

10. Leasing Fixed Assets The two parties to a lease contract are:
LO 1
Leasing Fixed Assets
The two parties to a lease contract are:
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.

11. LO 1
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.

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

13. LO 2
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.

14. Accounting for Depreciation
LO 2
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.

15. Factors in Computing Depreciation
LO 2
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

16. Factors in Computing Depreciation
LO 2
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.

17. LO 2
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 =

18. LO 2
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 =
= $4,400

19. LO 2
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

20. Units-of-Production Method
LO 2
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 Production Used

21. Units-of-Production Method
LO 2
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.

22. Units-of-Production Method
LO 2
Units-of-Production Method

23. Double-Declining-Balance Method
LO 2
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.
(continued)

24. Double-Declining-Balance Method
LO 2
Double-Declining-Balance Method
Step 3. Compute the depreciation expense by multiplying the double-declining-balance rate from Step 2 times the book value of the asset.

25. Double-Declining-Balance Method
LO 2
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 minus accumulated depreciation) declines and, thus, the depreciation also declines.

26. Double-Declining-Balance Method
LO 2
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

27. Double-Declining-Balance Method
LO 2
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

28. Double-Declining-Balance Method
LO 2
Double-Declining-Balance Method
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
Second year depreciation

29. Double-Declining-Balance Method
LO 2
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.

30. Depreciation for Federal Income Tax
LO 2
Depreciation for Federal Income Tax
MACRS (used for tax purposes) specifies eight classes of useful life and depreciation rates for each of the eight classes.
The two most common classes are the five-year class (includes automobiles and light-duty trucks) and the seven-year class (includes most machinery and equipment).

31. Depreciation for Federal Income Tax
LO 2
Depreciation for Federal Income Tax
For the five-year-class assets, depreciation is spread over six years, as shown below.

32. Revising Depreciation Estimates
LO 2
Revising Depreciation Estimates
A machine is purchased on January 1, 2011, for $140,000.
(continued)

33. Revising Depreciation Estimates
LO 2
Revising Depreciation Estimates
At the end of 2012, the asset’s book value is $88,000, as shown below.
(continued)

34. Revising Depreciation Estimates
LO 2
Revising Depreciation Estimates
During 2013, the company estimates that the machine’s remaining useful life is eight years (instead of three) and that its residual value is $8,000 (instead of $10,000). Depreciation expense for each of the remaining eight years is determined as follows:
(concluded)

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

36. Discarding Fixed Assets
LO 3
Discarding Fixed Assets
Equipment acquired at a cost of $25,000 is fully depreciation at December 31, On February 14, 2012, the equipment is discarded.
Note: The entry to record the disposal of a fixed asset removes the cost of the asset and its accumulated depreciation from the accounts.

37. Discarding Fixed Assets
LO 3
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, 2011, adjusting entry, Accumulated Depreciation—Equipment has a $4,750 balance. On March 24, 2012, the asset is removed from service and discarded.

38. Discarding Fixed Assets
LO 3
Discarding Fixed Assets
$600 × 3/12

39. Discarding Fixed Assets
LO 3
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.)

40. LO 3
Selling Fixed Assets
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.

41. LO 3
Selling Fixed Assets
The entry to update the depreciation for the nine months of the current year is as follows:

42. LO 3
Selling Fixed Assets
After the current depreciation is recorded, the book value of the asset is $2,250 ($10,000 – $7,750).
Sold below book value for $1,000. Loss of $1,250.

43. LO 3
Selling Fixed Assets
After the current depreciation is recorded, the book value of the asset is $2,250 ($10,000 – $7,750).
Sold above book value for $2,800. Gain of $550.

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

45. LO 4
Natural Resources
The process of transferring the cost of natural resources to an expense account is called depletion.

46. Natural Resources Step 1: Determine the depletion rate as:
LO 4
Natural Resources
Step 1: Determine the depletion rate as:
Step 2: Multiply the depletion rate by the quantity extracted during the period.

47. LO 4
Natural Resources
A company paid $400,000 for the mining rights to a mineral deposit estimated at 1,000,000 tons of ore. During the year, the company mined 90,000 tons of the mineral deposit.

48. LO 4
Natural Resources
The depletion expense for the year is computed as shown below.
Step 1.
Step 2.

49. LO 4
Natural Resources
The adjusting entry to record the depletion is shown below.

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

51. LO 5
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.
The accounting for intangible assets is similar to that for fixed assets.

52. LO 5
Patents
The exclusive right granted by the federal government to produce and sell goods with one or more unique features is called a patent. These rights continue in effect for 20 years.

53. LO 5
Patents
At the beginning of its fiscal year, a business acquires patent rights for $100,000. The patent’s remaining useful life is estimated at 5 years. The entry to amortize the patent at the end of the year is as follows:

54. LO 5
Patents
Because a patent (as well as other intangible assets) does not exist physically, it is acceptable to credit the asset. This approach is different from physical fixed assets, which require the use of a contra asset account.

55. Copyrights and Trademarks
LO 5
Copyrights and Trademarks
The exclusive right granted by the federal government to publish and sell a literary, artistic, or musical composition is called a copyright. A copyright extends for 70 years beyond the author’s death.

56. Copyrights and Trademarks
LO 5
Copyrights and Trademarks
A trademark is a unique name, term, or symbol used to identify a business and its products. Most businesses identify their trademarks with ® in their advertisements and on their products. Trademarks can be registered for 10 years and renewed for 10-year periods thereafter.

57. LO 5
Goodwill
In business, goodwill refers to an intangible asset of a business that is created from such favorable factors as location, product quality, reputation, and managerial skill.
Generally accepted accounting principles (GAAP) permit goodwill to be recorded in the accounts only if it is objectively determined by a transaction.

58. LO 5
Goodwill
A loss should be recorded if the business prospects of an acquired firm (and the acquired goodwill) become significantly impaired. Assume that on December 31, FaceCard Company has determined that $250,000 of the goodwill created from the purchase of Electronic Systems is impaired.

59. 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.

60. Fixed and Intangible Assets
LO 6
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.

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

62. Fixed Asset Turnover Ratio
LO 7
Fixed Asset Turnover Ratio
One measure of the revenue-generating efficiency of fixed assets is the fixed asset turnover ratio. It measures the number of dollars of revenue earned per dollar of fixed assets and is computed as follows:
Fixed Asset Turnover Ratio
Net Sales
Average Book Value of Fixed Assets =

63. Fixed Assets and Intangible Assets
The End