1. Power Notes
Chapter 10
Fixed Assets
Learning Objectives
1. Nature of Fixed Assets 2. Accounting for Depreciation 3. Capital and Revenue Expenditures 4. Disposal of Fixed Assets
C10

2. Nature of Fixed Assets
Fixed assets are long- term, relatively permanent, tangible assets such as buildings and equipment used to help produce revenues.
ASSETS
LIABILITIES
OWNER’S
EQUITY
Fixed
Assets
REVENUES
EXPENSES

3. Nature of Fixed Assets
Fixed assets are long- term, relatively permanent, tangible assets such as buildings and equipment used to help produce revenues.
ASSETS
LIABILITIES
OWNER’S
EQUITY
Fixed
Assets
All fixed assets except land lose their capacity
to provide services.
This loss of productive capacity is recognized as depreciation expense.
REVENUES
EXPENSES

4. Costs of Acquiring Fixed Assets Include:
Sales tax and freight costs
Installation and assembling
Repairs and reconditioning (used assets)
Testing and modifying
Insurance while asset is in transit

5. Costs of Acquiring Fixed Assets Exclude:
Vandalism and uninsured theft
Mistakes in installation
Damage during unpacking and installing

6. Factors that Determine Depreciation Expense
Initial Cost $24,000 a
minus

7. Factors that Determine Depreciation Expense
Initial Cost $24,000 a
minus b
Estimated Residual Value $2,000
equals

8. Factors that Determine Depreciation Expense
Initial Cost $24,000 a
minus b
Estimated Residual Value $2,000
equals
Depreciable Cost $22,000
divided by

9. Factors that Determine Depreciation Expense
Initial Cost $24,000 a
minus b
Estimated Residual Value $2,000
equals
Depreciable Cost $22,000
divided by c
Estimated Useful Life 5 years
equals

10. Factors that Determine Depreciation Expense
Initial Cost $24,000
minus b
Estimated Residual Value $2,000
equals
Depreciable Cost $22,000
divided by c
Estimated Useful Life 5 years
equals
Periodic Depreciation Expense $4,400 per year

11. Recording Depreciation
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. A B
Record straight-line depreciation for first year.
General Ledger
General Journal
Equipment
Description Debit Credit A
24,000
Equipment 24,000
Cash 24,000 A
Accum. Depreciation B
Depreciation Expense

12. Recording Depreciation
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. A B
Record straight-line depreciation for first year.
General Ledger
General Journal
Equipment
Description Debit Credit A
24,000
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum. Depreciation 4,400 A
Accum. Depreciation B
Depreciation Expense

13. Recording Depreciation
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. A B
Record straight-line depreciation for first year.
General Ledger
General Journal
Equipment
Description Debit Credit A
24,000
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum. Depreciation 4,400 A
Accum. Depreciation B
Depreciation Expense
$24,000 - $2,000
5 years
= $4,400

14. Recording Depreciation
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. A B
Record straight-line depreciation for first year.
General Ledger
General Journal
Equipment
Description Debit Credit A
24,000
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum. Depreciation 4,400 A
Accum. Depreciation B
4,400 B
Depreciation Expense B
$24,000 - $2,000
5 years
4,400
= $4,400

15. Calculation of Book Value
General Ledger
Equipment A
24,000
Accum. Depreciation
4,400 B
Depreciation Expense B
4,400

16. Calculation of Book Value
General Ledger
Equipment A
Original Cost $24,000
Less Accum. Depr. 4,400
Book Value 19,600
24,000
Accum. Depreciation
4,400 B
Depreciation Expense B
4,400

17. Depreciation Methods
The following four depreciation methods are acceptable for Financial Accounting purposes: 1. Straight-Line 2. Units-of-Production 3. Declining-Balance 4. Sum-of-Years-Digits Straight-line is far more widely used than other methods. Declining-balance and sum-of-years-digits are known as accelerated depreciation methods.

18. Comparing Depreciation Methods
Straight-Line
Method
Declining-Balance
Method
10,000
8,000 6,000
4,000 2,000
Depreciation ($)
Life (years)
Life (years)

19. Straight - Line Depreciation
Accum. Depr. Book Value Depr. Book Value at Beginning at Beginning Expense at End Year Cost of Year of Year for Year of Year
1 $24,000 $24, $4, $19, ,000 $ 4, , , , ,000 8, , , , ,000 13, , , , ,000 17, , , ,000.00
Cost ($24,000) - Residual Value ($2,000)
Annual Depreciation
Expense ($4,400) =
Estimated Useful Life (5 years)

20. Declining - Balance Depreciation
Accum. Depr. Book Value Depr. Book Value at Beginning at Beginning Expense at End Year Cost of Year of Year Rate for Year of Year
1 $24,000 $24, % $9, $14, ,000 $ 9, , % 5, , ,000 15, , % 3, , ,000 18, , % 2, , ,000 20, , –– 1, ,000.00
Note the acceleration of depreciation expense into early years of the life of the asset.

21. Capital and Revenue Expenditures
Increases operating efficiency or adds to capacity?
Yes
Capital Expenditure
(Debit fixed asset account)

22. Capital and Revenue Expenditures
Increases operating efficiency or adds to capacity?
Increases useful life (extraordinary repairs)? No
Yes
Capital Expenditure
(Debit fixed asset account)

23. Capital and Revenue Expenditures
Increases operating efficiency or adds to capacity?
Increases useful life (extraordinary repairs)? No
Yes
Yes
Capital Expenditure
(Debit accumulated
depreciation account)
Capital Expenditure
(Debit fixed asset account)

24. Capital and Revenue Expenditures
Revenue Expenditure (Debit expense account for ordinary maintenance and repairs)
Increases operating efficiency or adds to capacity?
Increases useful life (extraordinary repairs)? No No
Yes
Yes
Capital Expenditure
(Debit accumulated
depreciation account)
Capital Expenditure
(Debit fixed asset account)

25. Capital and Revenue Expenditures
LIABILITIES
CAPITAL EXPENDITURES
ASSETS
OWNER’S
EQUITY
1. Initial cost
2. Additions
3. Betterments
4. Extraordinary repairs
net income
EXPENSES
REVENUES

26. Capital and Revenue Expenditures
LIABILITIES
CAPITAL EXPENDITURES
ASSETS
OWNER’S
EQUITY
net income
REVENUE EXPENDITURES
EXPENSES
REVENUES
Normal and ordinary repairs and maintenance

27. Accounting for Fixed Asset Disposals
When fixed assets lose their usefulness they may be disposed of in one of the following ways: 1. discarded, 2. sold, or 3. traded (exchanged) for similar assets. Required entries will vary with type of disposition and circumstances, but the following entries will always be necessary: Asset account must be credited to remove the asset from the ledger, and the related Accumulated Depreciation account must be debited to remove its balance from the ledger.

28. Discarding Fixed Assets
Date Description Debit Credit
Accumulated Depreciation 25,000 Equipment 25,000 Loss on Disposal of Equipment 1,100 Accumulated Depreciation 4,900 Equipment 6,000
Feb. 14
Write off fully depreciated equipment.
Mar. 24
Write off partially depreciated equipment.

29. Sale of Fixed Assets
When fixed assets are sold, the owner may break even, sustain a loss, or realize a gain. 1. If the sale price is equal to book value, there will be no gain or loss. 2. If the sale price is less than book value, there will be a loss equal to the difference. 3. If the sale price is more than book value, there will be a gain equal to the difference. Gain or loss will be reported in the income statement as Other Income or Other Loss.

30. Sale of Fixed Assets Sold equipment with a book value of $2,250
(cost $10,000, accumulated depreciation $7,750).
Date Description Debit Credit
Cash 1,000 Loss on Disposal of Equipment 1,250 Accumulated Depreciation 7,750 Equipment 10,000 Cash 2,800 Gain on Disposal of Equipment 550
Oct. 12
Sold below book value, for $1,000.
Oct. 12
Sold above book value, for $2,800.

31. Exchanges of Similar Fixed Assets
Trade-in Allowance (TIA) – amount allowed for old equipment toward the purchase price of similar new assets.
Boot – balance owed on new equipment after trade-in allowance has been deducted.
TIA > Book Value = Gain on Trade
TIA < Book Value = Loss on Trade
Gains are never recognized (not recorded).
Losses must be recognized (recorded).

32. Exchanges of Similar Fixed Assets
Quoted price of new equipment acquired $15,000
Cost of old equipment traded in $12,500
Accum. depreciation at date of exchange 10,100
Book value at date of exchange $ 2,400
Case One (GAIN)
Trade-in allowance, $3,000
Cash paid, $12,000 ($15,000 – $3,000)
TIA > Book Value = Gain
$3,000 – $2,400 = $600
Boot + Book = Cost of New Equipment $12,000 + $2,400 = $14,400
Gains are not recognized for financial reporting.

33. Exchanges of Similar Fixed Assets
Quoted price of new equipment acquired $15,000
Cost of old equipment traded in $12,500
Accum. depreciation at date of exchange 10,100
Book value at date of exchange $ 2,400
Case Two (LOSS)
Trade-in allowance, $2,000
Cash paid, $13,000 ($15,000 – $2,000)
TIA < Book Value = Loss
$2,000 – $2,400 = $400
Cost of New Equipment =
Quoted Price of New Asset $15,000
Losses are recognized for financial reporting.