1. Click to edit Master title style 1 1 1 Fixed Assets and Intangible Assets 9

2. Click to edit Master title style 2 2 2 Nature of Fixed Assets Fixed assets are long-term or relatively permanent assets. They are tangible assets because they exist physically. They are owned and used by the business and are not offered for sale as part of normal operations. 9-1

3. Click to edit Master title style 3 3 3 8 Is the purchased item long-lived? yes Is the asset used in a productive purpose? no Expense yes Fixed Assets no Investment Classifying Costs 9-1

4. Click to edit Master title style 4 4 4 9  Purchase price  Sales taxes  Permits from government agencies  Broker’s commissions  Title fees  Surveying fees  Delinquent real estate taxes  Razing or removing unwanted buildings, less any salvage  Grading and leveling  Paving a public street bordering the land LAND Cost of Acquiring Fixed Assets 9-1

5. Click to edit Master title style 5 5 5 10  Architects’ fees  Engineers’ fees  Insurance costs incurred during construction  Interest on money borrowed to finance construction  Walkways to and around the building  Sales taxes  Repairs (purchase of existing building)  Reconditioning (purchase of existing building)  Modifying for use  Permits from government agencies BUILDING Cost of Acquiring Fixed Assets 9-1

6. Click to edit Master title style 6 6 6 11  Sales taxes  Freight  Installation  Repairs (purchase of used equipment)  Reconditioning (purchase of used equipment)  Insurance while in transit  Assembly  Trees and shrubs  Fences  Outdoor lighting  Paved parking areas Cost of Acquiring Fixed Assets MACHINERY AND EQUIPMENT LAND IMPROVEMENT  Modification for user  Testing for use  Permits from government agencies 9-1

7. Click to edit Master title style 7 7 7 Cost of Acquiring Fixed Assets Excludes:  Vandalism  Mistakes in installation  Uninsured theft  Damage during unpacking and installing  Fines for not obtaining proper permits from government agencies 9-1

8. Click to edit Master title style 8 8 8 Expenditures that benefit only the current period are called revenue expenditures. Expenditures that improve the asset or extend its useful life are capital expenditures. Revenue and Capital Expenditures 9-1

9. Click to edit Master title style 9 9 9 14 CAPITAL EXPENDITURES 1) Additions 2) Improvements 3) Extraordinary repairs Normal and ordinary repairs and maintenance REVENUE EXPENDITURES 9-1

10. Click to edit Master title style 10 15 Ordinary Maintenance and Repairs On April 9, the firm paid $300 for a tune-up of a delivery truck. Apr. 9Repairs and Maintenance Exp.300 00 Cash300 00 This is a revenue expenditure 9-1

11. Click to edit Master title style 11 16 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. May 4 Delivery Truck5 500 00 Cash5 500 00 This is a capital expenditure 9-1

12. Click to edit Master title style 12 18 Revenue and Capital Expenditures 9-1

13. Click to edit Master title style 13 9-1 Example Exercise 9-1 On June 18 GTS Co. paid $1,200 to upgrade a hydraulic lift and $45 for an oil change for one of its delivery trucks. Journalize the entries for the hydraulic lift upgrade and oil change expenditures. 19 Follow My Example 9-1 June 18Delivery Truck1,200 Cash1,200 18Repairs and Maintenance Exp.45 Cash45 For Practice: PE 9-1A, PE 9-1B

14. Click to edit Master title style 14 Leasing Fixed Assets A capital lease is accounted for as if the lessee has, in fact, purchased the asset. The asset is then amortized over the life of the capital lease. 9-1

15. Click to edit Master title style 15 Leasing Fixed Assets A lease that is not classified as a capital lease for accounting purposes is classified as an operating lease (an operating leases is treated as an expense). 9-1

16. Click to edit Master title style 16 Over time, fixed assets such as equipment, buildings, and land improvements lose their ability to provide services. The periodic transfer of the cost of fixed assets to expense is called depreciation. Accounting for Depreciation 9-2

17. Click to edit Master title style 17 Factors in Computing Depreciation The three factors in determining the amount of depreciation expense to be recognized each period are: (a) the fixed asset’s initial cost, (b) its expected useful life, and (c) its estimated value at the end of the useful life. 9-2

18. Click to edit Master title style 18 The fixed asset’s estimated value at the end of its useful life is called the residual value, scrap value, salvage value, or trade-in value. A fixed asset’s residual value and its expected useful life must be estimated at the time the asset is placed in service. Residual Value 9-2

19. Click to edit Master title style 19 28 Source: Accounting Trends & Techniques, 59 th ed., American Institute of Certified Public Accountants, New York, 2005. Use of Depreciation Methods Straight-line Units-of-production Double-declining- balance Other 9-2 5

20. Click to edit Master title style 20 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 – estimated residual value Estimated life 29 9-2

21. Click to edit Master title style 21 30 A depreciable asset cost $24,000. Its estimated residual value is $2,000 and its estimated life is 5 years. Annual depreciation = Cost – estimated residual value Estimated life Annual depreciation = $24,000 – $2,000 5 years Annual depreciation =$4,400 9-2

22. Click to edit Master title style 22 The straight-line method is widely used by firms because it is simple and it provides a reasonable transfer of cost to periodic expenses if the asset is used about the same from period to period. 9-2

23. Click to edit Master title style 23 9-2 Example Exercise 9-2 Equipment that was acquired at the beginning of the year at a cost of $125,000 has an estimated residual value of $5,000 and an estimated useful life of 10 years. Determine the annual straight-line depreciation. 32 Follow My Example 9-2 $12,000 ($120,000 ÷ 10 years) For Practice: PE 9-2A, PE 9-2B

24. Click to edit Master title style 24 Units-of-Production Method 33 The units-of-production method provides for the same amount of depreciation expense for each unit produced or each unit of capacity used by the asset. Unit depreciation = Cost – estimated residual value Estimated hours, units, etc. 9-2

25. Click to edit Master title style 25 34 A depreciable asset cost $24,000. Its estimated residual value is $2,000 and its expected to have an estimated life of 10,000 operating hours. Hourly depreciation = $24,000 – $2,000 10,000 estimated hours Hourly depreciation = $2.20 hourly depreciation Hourly depreciation = Cost – estimated residual value Estimated hours 9-2

26. Click to edit Master title style 26 The units-of-production method is more appropriate than the straight-line method when the amount of use of a fixed asset varies from year to year. 9-2

27. Click to edit Master title style 27 9-2 Example Exercise 9-3 Equipment acquired at a cost of $180,000 has an estimated residual value of $10,000, an estimated useful life of 40,000 hours, and was operated 3,600 hours during the year. Determine the (a) depreciable cost, (b) depreciation rate, and (c) the units-of-production depreciation for the year. 36 Follow My Example 9-3 (a)$170,000 ($180,000 – $10,000) (b)$4.25 per hour ($170,000/40,000 hours) (c)$15,300 (3,600 hours x $4.25) For Practice: PE 9-3A, PE 9-3B

28. Click to edit Master title style 28 Double-Declining-Balance Method The double-declining- balance method provides for a declining periodic expense over the estimated useful life of the asset. 9-2

29. Click to edit Master title style 29 A double-declining balance rate is determined by doubling the straight- line rate. A shortcut to determining the straight-line rate is to divide one by the number of years (1/5 =.20). Hence, using the double-declining- balance method, a five-year life results in a 40 percent rate (.20 x 2). 9-2

30. Click to edit Master title style 30 For the first year, the cost of the asset is multiplied by 40 percent. After the first year, the declining book value of the asset is multiplied 40 percent. Continuing with the example where the fixed asset cost $24,000 and has an expected residual value of $2,000, a table can be built. 9-2

31. Click to edit Master title style 31 40 $24,000 x.40 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End 1$24,00040%$9,600 9-2

32. Click to edit Master title style 32 41 1$24,00040%$9,600$9,600$14,400 214,40040%5,760 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End $14,400 x.40 9-2

33. Click to edit Master title style 33 42 1$24,00040%$9,600$9,600$14,400 214,40040%5,76015,3608,640 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End 9-2

34. Click to edit Master title style 34 43 1$24,00040%$9,600$9,600$14,400 214,40040%5,76015,3608,640 38,64040%3,45618,8165,184 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End 9-2

35. Click to edit Master title style 35 44 1$24,00040%$9,600$9,600$14,400 214,40040%5,76015,3608,640 38,64040%3,45618,8165,184 45,18440%2,07420,8903,110 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End 9-2

36. Click to edit Master title style 36 45 1$24,00040%$9,600$9,600$14,400 214,40040%5,76015,3608,640 38,64040%3,45618,8165,184 45,18440%2,07420,8903,110 53,11040%1,24422,1341,866 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End STOP DEPRECIATION STOPS WHEN BOOK VALUE EQUALS RESIDUAL VALUE! 9-2

37. Click to edit Master title style 37 46 1$24,00040%$9,600$9,600$14,400 214,40040%5,76015,3608,640 38,64040%3,45618,8165,184 45,18440%2,07420,8903,110 53,110 – $2,0001,11022,0002,000 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End Desired ending book value “Forced” annual depreciation 9-2

38. Click to edit Master title style 38 9-2 Example Exercise 9-4 Equipment that was acquired at the beginning of the year at a cost of $125,000 has an estimated residual value of $5,000 and an estimated useful life of 10 years. Determine the (a) depreciable cost, (b) double- declining-balance rate, and (c) double-declining balance depreciation for the first year. 47 Follow My Example 9-4 (a)$120,000 ($125,000 – $5,000) (b)20% [(1/10) x2] (c)$25,000 ($125,000 x 20%) For Practice: PE 9-4A, PE 9-4B

39. Click to edit Master title style 39 48 Summary of Depreciation Methods 9-2

40. Click to edit Master title style 40 49 Comparing Depreciation Methods 9-2

41. Click to edit Master title style 41 Depreciation for Federal Income Tax The Internal Revenue Code specifies the Modified Accelerated Cost Recovery System (MACRS) for use by businesses in computing depreciation for tax purposes. 9-2

42. Click to edit Master title style 42 52 A machine purchased for $140,000 was originally estimated to have a useful life of five years and a residual value of $10,000. The asset has been depreciated for two years using the straight-line method. Revising Depreciation Estimates $140,000 – $10,000 5 years Annual Depreciation (S/L) = $26,000 per year Annual Depreciation (S/L) = 9-2

43. Click to edit Master title style 43 53 At the end of two years, the asset’s book value is $88,000, determined as follows: Asset cost$140,000 Less accumulated depreciation ($26,000 per year x 2 years) 52,000 Book value, end of second year$ 88,000 9-2

44. Click to edit Master title style 44 54 During the third year, the company estimates that the remaining useful life is eight years (instead of three) and that the residual value is $8,000 (instead of $10,000). Depreciation expense for each of the remaining eight year is determined as follows: Book value, end of second year$88,000 Less revised estimated residual value 8,000 Revised remaining depreciation cost$80,000 Revised annual depreciation expense ($80,000/8 years)$10,000 9-2

45. Click to edit Master title style 45 Example Exercise 9-5 A warehouse with a cost of $500,000 has an estimated residual value of $120,000, an estimated useful life of 40 years, and is depreciated by the straight-line method. (a) Determine the amount of annual depreciation. (b) Determine the book value at the end of the 20 th year of use. (c) If at the start of the 21 st year it is estimated that the remaining life is 25 years and that the residual value is $150,000, determine the depreciation expense for each of the remaining 25 years. 55 9-2

46. Click to edit Master title style 46 For Practice: PE 9-5A, PE 9-5B 56 Follow My Example 9-5 a.$9,500 [($500,000 – $120,000)/40] b.$310,000 [$500,000 – ($9,500 x 20)] c.$6,400 [310,000 – $150,000)/25] 9-2

47. Click to edit Master title style 47 Discarding Fixed Assets A piece of equipment acquired at a cost of $25,000 is fully depreciation. On February 14, the equipment is discarded. Feb.14Accumulated Depr.—Equipment25 000 00 Equipment 25 000 00 To write off equipment discarded. 58 9-3

48. Click to edit Master title style 48 59 Equipment costing $6,000 is depreciated at an annual straight-line rate of 10%. After the adjusting entry, Accumulated Depreciation— Equipment had a $4,750 balance. The equipment was discarded on March 24. Mar.24Depreciation Expense—Equipment 150 00 Accum. Depr.—Equipment 150 00 To record current depreciation on equipment discarded. $600 x 3/12 9-3

49. Click to edit Master title style 49 60 The discarding of the equipment is then recorded by the following entry: Mar.24Accum. Depreciation—Equipment 4 900 00 Loss on Disposal of Fixed Assets 1 100 00 Equipment 6 000 00 To write off equipment discarded. 9-3

50. Click to edit Master title style 50 61 Equipment costing $10,000 is depreciated at an annual straight-line rate of 10%. The equipment is sold for cash on October 12. Accumulated Depreciation (last adjusted December 31) has a balance of $7,000 and needs to be updated. Selling Fixed Assets Oct.12Depreciation Expense—Equipment 750 00 Accum. Depr.—Equipment 750 00 To record current depreciation on equipment sold. $10,000 x ¾ x10% 9-3

51. Click to edit Master title style 51 62 The equipment is sold on October 12 for $2,250. No gain or loss. Oct.12Cash 2 250 00 Accum. Depreciation—Equipment 7 750 00 Equipment 10 000 00 Sold equipment at book value. Assumption 1 9-3

52. Click to edit Master title style 52 Oct.12Cash 1 000 00 Accum. Depreciation—Equipment 7 750 00 Loss on Disposal of Fixed Assets1 250 00 Equipment 10 000 00 Sold equipment at a loss. The equipment is sold on October 12 for $1,000; a loss of $1,250. 63 Assumption 2 9-3

53. Click to edit Master title style 53 Oct.12Cash 2 800 00 Accum. Depreciation—Equipment 7 750 00 Equipment 10 000 00 Sold equipment at a gain. The equipment is sold on October 12 for $2,800; a gain of $550. 64 Gain on Disp. of Fixed Assets550 00 Assumption 3 9-3

54. Click to edit Master title style 54 9-3 Example Exercise 9-6 Equipment was acquired at the beginning of year at a cost of $91,000. The equipment was depreciated using the straight-line method based upon an estimated useful life of 9 years and an estimated residual value of $10,000. 65 a.What was the depreciation for the first year? b.Assuming the equipment was sold at the end of the second year for $78,000, determine the gain or loss on sale of the equipment. c.Journalize the entry to record the sale.

55. Click to edit Master title style 55 For Practice: PE 9-6A, PE 9-6B 66 Follow My Example 9-6 a.$ 9,000 [($91,000 – $10,000)/9] b.$5,000 gain; $78,000 – [$91,000 – ($9,000 x 2)] 9-3 c.Cash78,000 Accum. Depreciation—Equipment18,000 Equipment91,000 Gain on Disposal of Fixed Assets5,000

56. Click to edit Master title style 56 The process of transferring the cost of natural resources to an expense account is called depletion. Natural Resources 9-4

57. Click to edit Master title style 57 Intangible Assets Patents, copyrights, trademarks, and goodwill are long-lived assets that are useful in the operations of a business and not held for sale. These assets are called intangible assets because they do not exist physically. 9-5

58. Click to edit Master title style 58 The exclusive right granted by the federal government to manufacturers to produce and sell goods with one or more unique features is a patent. These rights continue in effect for 20 years. 9-5

59. Click to edit Master title style 59 The exclusive right granted by the federal government to publish and sell a literary, artistic, or musical composition is a copyright. A copyright extends for 70 years beyond the author’s death. Copyright 9-5

60. Click to edit Master title style 60 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 can be renewed every 10 year period thereafter. Trademark 9-5

61. Click to edit Master title style 61 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. Goodwill 9-5

62. Click to edit Master title style 62 Generally accepted accounting principles permit goodwill to be recorded in the accounts only if it is objectively determined by a transaction. 9-5

63. Click to edit Master title style 63 9-6  The fixed assets may be shown at their net amount.  The amount of each major class of fixed assets should be disclosed in the balance sheet or in notes. Office equipment$125,750 Less accumulated depreciation 86,300 Net book value$ 39,450

64. Click to edit Master title style 64 9-6  The cost of mineral rights or ore deposits is normally shown as part of the fixed asset section of the balance sheet. The related accumulated depletion should also be disclosed.  Intangible assets are usually reported (net of amortization) in the balance sheet in a separate section immediately following fixed assets.