1. 9 Fixed Assets and Intangible Assets Student Version

2. 9-2 Describe, classify, and account for the cost of fixed assets. 1 9-2

3. 9-3 Fixed assets have the following characteristics: 1.They exist physically and, thus, are tangible assets. 2.They are owned and used by the company in its normal operations. 3.They are not offered for sale as part of normal operations. 1 Nature of Fixed Assets

4. 9-4 1 Classifying Costs Exhibit 2

5. 9-5 1 Costs of Acquiring Fixed Assets Exhibit 3 (continued)

6. 9-6 1 Costs of Acquiring Fixed Assets (continued) Exhibit 3 (continued)

7. 9-7 1 Costs of Acquiring Fixed Assets (continued) Exhibit 3 (continued)

8. 9-8 1 Costs of Acquiring Fixed Assets (continued) Exhibit 3

9. 9-9 Cost of Acquiring Fixed Assets Excludes: 1.Vandalism These costs are expenses. 2.Mistakes in installation 4.Damage during unpacking and installing 3.Uninsured theft 5.Fines for not obtaining proper permits from government agencies 1

10. 9-10 Capital and Revenue Expenditures 1

11. 9-11 2 Compute depreciation, using the following methods: straight-line method, units-of-production method, and double-declining balance method. 9-11

12. 9-12 Over time, fixed assets such as equipment, buildings, and land improvements lose their ability to provide services. The periodic recording of the cost of fixed assets to expense is called depreciation. 2 Accounting for Depreciation

13. 9-13 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 estimated at the time the asset is placed into service. 2 Residual Value

14. 9-14 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 = 2

15. 9-15 A depreciable asset cost $24,000. Its estimated residual value is $2,000 and its estimated useful life is five years. Annual depreciation Cost – estimated residual value Estimated life = Annual depreciation $24,000 – $2,000 5 years expected useful life = Annual depreciation = $4,400 2

16. 9-16 If the preceding equipment was purchased and placed into service on October 1, the depreciation would be $1,100, computed as follows: $4,400 × 3/12 = $1,100 2 Straight-Line Method

17. 9-17 Units-of-Production Method 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. Depreciation per unit Cost – Residual Value Total Units of Production = 2 2

18. 9-18 A depreciable asset cost $24,000. Its estimated residual value is $2,000 and it is expected to have an estimated life of 10,000 operating hours. Depreciation per unit Cost – Residual Value Total units of production = Depreciation per unit $24,000 – $2,000 10,000 hours expected useful life = Depreciation per unit = $2.20 per hour 2

19. 9-19 A depreciable asset cost $24,000. Its estimated residual value is $2,000 and it is expected to have an estimated life of 10,000 operating hours. During the year the asset was operated 2,100 hours. Depreciation Depreciation per Unit × Total Units of Production Used = Depreciation ($2.20 per hour) × (2,100 hours) = Depreciation $4,620 = 2

20. 9-20 Double-Declining-Balance Method The double-declining-balance method provides for a declining periodic expense over the estimated useful life of the asset. 2

21. 9-21 $24,000 ×.40 1$24,00040%$9,600 2 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End

22. 9-22 1$24,00040%$9,600$9,600$14,400 214,40040%5,760 $14,400 ×.40 2 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End

23. 9-23 1$24,00040%$9,600$9,600$14,400 214,40040%5,76015,3608,640 2 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End

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

25. 9-25 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 2 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End

26. 9-26 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 2 DEPRECIATION STOPS WHEN BOOK VALUE EQUALS RESIDUAL VALUE! STOP Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End

27. 9-27 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 Desired ending book value “Forced” annual depreciation 2 Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End

28. 9-28 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 × 3/12 = $2,400 2 Double-Declining-Balance Method

29. 9-29 The depreciation for the second year would then be $8,640, computed as follows: $8,640 = [40% × ($24,000 – $2,400)] 2 Double-Declining-Balance Method

30. 9-30 A machine purchased on January 1, 2009, 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) = 2 (continued)

31. 9-31 At the end of 2011, the asset’s book value is $88,000, determined as follows: Asset cost$140,000 Less accumulated depreciation ($26,000 per year × 2 years) 52,000 Book value, end of second year$ 88,000 2 (continued) Revising Depreciation Estimates

32. 9-32 During 2012, 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 years 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 [($88,000 – $8,000)/8 years]$10,000 2

33. 9-33 Journalize entries for the disposal of fixed assets. 3 9-33

34. 9-34 Discarding Fixed Assets A piece of equipment acquired at a cost of $25,000 is fully depreciation at December 31, 2009. On February 14, 2010, the equipment is discarded. 3

35. 9-35 Equipment costing $6,000, with no residual value, is depreciated at an annual straight-line rate of 10%. After the December 31, 2009, adjusting entry, Accumulated Depreciation—Equipment has a $4,750 balance. On March 24, 2010, the asset is removed from service and discarded. $600 × 3/12 3

36. 9-36 The discarding of the equipment is then recorded as follows (note that this is the second of two entries on March 24): 3 Discarding Fixed Assets

37. 9-37 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. 3

38. 9-38 The entry to update the depreciation for the nine months of the current year is as follows: 3 Selling Fixed Assets

39. 9-39 The equipment is sold on October 12 for $2,250. No gain or loss. Assumption 1 3

40. 9-40 Assumption 2 The equipment is sold on October 12 for $1,000; a loss of $1,250. 3

41. 9-41 Assumption 3 The equipment is sold on October 12 for $2,800; a gain of $550. 3

42. 9-42 Compute depletion and journalize the entry for depletion. 4 9-42

43. 9-43 The process of transferring the cost of natural resources to an expense account is called depletion. Natural Resources 4

44. 9-44 A business paid $400,000 for the mining rights to a mineral deposit estimated at 1,000,000 tons of ore. Step 1: Determine the depletion rate per ton. Cost of Resources Estimated Total Units of Resources Depletion Rate = 4 Natural Resources

45. 9-45 $400,000 1,000,000 $0.40 per ton = 4 Step 1: Determine the depletion rate per ton. Natural Resources A business paid $400,000 for the mining rights to a mineral deposit estimated at 1,000,000 tons of ore.

46. 9-46 Step 2: Multiply the depletion rate by the quantity extracted during period. $0.40 per ton × $90,000 tons = $36,000 4 Natural Resources A business paid $400,000 for the mining rights to a mineral deposit estimated at 1,000,000 tons of ore.

47. 9-47 The adjusting entry to record the depletion is shown below. 4 Natural Resources

48. 9-48 Describe the accounting for intangible assets, such as patents, copyrights, and goodwill. 5 9-48

49. 9-49 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. 5 Intangible Assets

50. 9-50 5 Comparison of Intangible Assets Exhibit 10

51. 9-51 6 Describe how depreciation expense is reported in an income statement and prepare a balance sheet that includes fixed assets and intangible assets.

52. 9-52 6

53. 9-53 The cost and related accumulated depletion of mineral rights are normally shown as part of the Fixed Assets section of the balance sheet. Intangible assets are usually reported in the balance sheet, supported by a note with a separate listing. The balance in each class of intangible assets should be disclosed net of any amortization. 6

54. 9-54