1. Visit UMT online at www.umtweb.edu© South-Western 2004 Survey of Accounting, 2/e 1 of 57 Chapter 7, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University of Management and Technology 1901 North Fort Myer Drive Arlington, VA 22209 Voice: (703) 516-0035 Fax: (703) 516-0985 Website: www.umtweb.edu

2. 2 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

3. Visit UMT online at www.umtweb.edu© South-Western 2004 Survey of Accounting, 2/e 3 of 57 Chapter 7, ACCT125 Chapter 7 Fixed Assets and Intangible Assets

4. 4 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 After studying this chapter, you should be able to: ContinuedContinued Learning Objectives 1.Define, classify, and account for the cost of fixed assets. 2.Compute depreciation, using the straight-line, and declining- balance methods. 3.Describe the accounting for the depletion of natural resources. 4.Describe the accounting for the disposal of fixed assets.

5. 5 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Learning Objectives 5.Classify fixed asset costs as either capital expenditures or revenue expenditures. 6.Describe accounting for intangible assets. 7.Describe how depreciation expense is reported in an income statement, and prepare a balance sheet that includes fixed assets and intangible assets. 8.Analyze the utilization of fixed assets.

6. 6 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 1 Define, classify, and account for the cost of fixed assets. Learning Objective

7. 7 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Fixed assets are long term or relatively permanent assets Fixed assets are tangible assets because they exist physically. They are owned and used by the business and are not held for sale as part of normal operations. Nature of Fixed Assets

8. 8 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 If the purchased item is long-lived, then it should be capitalized, which means it is shown as an asset rather than an expense. Nature of Fixed Assets

9. 9 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 yes Fixed Assets no Is the purchased item long-lived? Is the asset used in a productive purpose? yes no Expense Investment

10. 10 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Purchase price Sales taxes Permits from government agencies Broker’s commissions Title fees Surveying fees Purchase price Sales taxes Permits from government agencies Broker’s commissions Title fees Surveying fees ContinuedContinued Land

11. 11 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Purchase price Sales taxes Permits from government agencies Broker’s commissions Title fees Surveying fees 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 the salvage Grading and leveling Paving a public street bordering the land Delinquent real estate taxes Razing or removing unwanted buildings, less the salvage Grading and leveling Paving a public street bordering the land Land

12. 12 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Architects’ fees Engineers’ fees Insurance costs incurred during construction Interest on money borrowed to finance construction Walkways to and around the building ContinuedContinued Buildings

13. 13 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Sales taxes Repairs (purchase of existing building) Reconditioning (purchase of an existing building) Modifying for use Permits from governmental agencies Buildings

14. 14 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Land Improvements Trees and shrubs Fences Outdoor lighting Concrete sewers and drainage Paved parking areas

15. 15 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Machinery and Equipment Sales taxes Freight Installation Repairs (purchase of used equipment) Reconditioning (purchase of used equipment) Continued

16. 16 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Insurance while in transit Assembly Modifying for use Testing for use Permits from governmental agencies Machinery and Equipment

17. 17 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Compute depreciation, using the straight-line and declining-balance methods. 2 Learning Objective

18. 18 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125

19. 19 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Source: Accounting Trends & Techniques, 55 th. ed., American Institute of Certified Public Accountants, New York, 2001 Use of Depreciation Methods

20. 20 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Original Cost.....………….. $24,000 Estimated Life in years…..5 years Estimated Residual Value...$2,000 Original Cost.....………….. $24,000 Estimated Life in years…..5 years Estimated Residual Value...$2,000 Data

21. 21 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Cost – estimated residual value Estimated life = Annual depreciation Straight-Line Method

22. 22 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 $24,000 – $2,000 5 years = $4,400 annual depreciation Straight-Line Method

23. 23 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 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. Straight-Line Method

24. 24 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Accum. Depr.Book ValueDepr.Book Value at Beginningat BeginningExpenseat End YearCostof Yearof Year for Yearof Year 1$24,000$24,000$4,400$19,600 224,000$ 4,40019,6004,40015,200 324,0008,800 15,200 4,400 10,800 424,00013,200 10,800 4,400 6,400 524,00017,6006,4004,4002,000 Cost ($24,000) – Residual Value ($2,000) Estimated Useful Life (5 years) = Annual Depreciation Expense ($4,400) Straight-Line Method

25. 25 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Accum. Depr.Book ValueDepr.Book Value at Beginningat BeginningExpenseat End YearCostof Yearof Year for Yearof Year 1$24,000$24,000$4,400$19,600 224,000$ 4,40019,6004,40015,200 324,0008,800 15,200 4,400 10,800 424,00013,200 10,800 4,400 6,400 524,00017,6006,4004,4002,000 Ending book value equals the residual value Straight-Line Method

26. 26 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Step 1 Ignoring residual value, determine the straight-line rate = $4,800 $24,000 - $2,000 5 years $4,800 $24,000 = 20% Declining-Balance Method

27. 27 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 = $4,800 $24,000 - $2,000 5 years $4,800 $24,000 = 20% Step 1 Ignoring residual value, determine the straight-line rate There’s a shortcut. Simply divide the number of years by one (1 ÷ 5 =.20). Declining-Balance Method

28. 28 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Double the rate. Step 2.20 x 2 =.40 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 by 40 percent. Declining-Balance Method

29. 29 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Build a table. Step 3 Declining-Balance Method

30. 30 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Accum. Depr. Book Value. Beginning at Beginning Depr. Book Value Year of Year Rate of Year for Year Year-End 140%$24,000.00$9,600.00$14,400.00 2$ 9,600.0040%14,400.005,760.008,640.00 315,360.0040%8,640.003,456.005,184.00 418,816.0040% 5,184.002,073.603,110.40 520,889.60---3,110.401,110.402,000.00 $3,110.40 – $2,000.00 Desired ending book value Declining-Balance Method

31. 31 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Straight-Line Method Depreciation ($) 5,000 4,000 3,000 2,000 1,000 0 Life (years) Declining-Balance Method Life (years) Comparing Straight-Line With the Declining-Balance Method

32. 32 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Describe the accounting for depletion of natural resources. 3 Learning Objective

33. 33 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Depletion is the periodic transferring of the cost of natural resources, such as metal ores and other minerals removed from the earth, to an expense account. Natural Resources

34. 34 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Paid $400,000 for the mining rights to a mineral deposit estimated at 1,000,000 tons of ore. During the year, 90,000 tons are mined. Natural Resources

35. 35 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Describe the accounting for the disposal of fixed assets. 4 Learning Objective

36. 36 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 An item of equipment acquired at a cost of $25,000 is fully depreciated with no salvage value at December 31, 2004. On February 14, 2005, the equipment is discarded. Discarding Fixed Assets

37. 37 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Equipment costing $6,000 is depreciated at an annual straight-line rate of 10%. The Accumulated Depreciation balance related to this equipment is $4,900. The asset is removed from service on March 24. Discarding Fixed Assets

38. 38 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Equipment is acquired at a cost of $10,000 and is depreciated at an annual straight- line rate of 10%. It is sold for $1,000 cash on October 12 of the eighth year of its use. The balance in Accumulated Depreciation is $7,750. Selling Fixed Assets

39. 39 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 5 Classify fixed asset costs as either capital expenditures or revenue expenditures. Learning Objective

40. 40 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Expenditures to repair or maintain plant assets that do not extend the life or enhance the value are known as revenue expenditures. Capital and Revenue Expenditures

41. 41 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Expenditures made for acquiring, constructing, adding, or replacing fixed assets are known as capital expenditures. Capital and Revenue Expenditures

42. 42 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Describe the accounting for intangible assets. 6 Learning Objective

43. 43 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 ? ? Patent Office The exclusive right granted by the federal government to produce and sell goods with one or more unique features is a patent. Patents

44. 44 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Maximum life20 years Costs:  Initial cost of purchased patent  Any related legal fees The straight-line method normally is used to amortize patents. Patents

45. 45 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 A business acquires patent rights for $100,000. The patent had been granted 6 years earlier by the Federal Patent Office. The remaining useful life is estimated at 5 years. Patents

46. 46 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 The exclusive right to publish and sell a literary, artistic, or musical composition is granted by a copyright. A copyright has a maximum life of 70 years beyond the death of the author. Copyrights and Trademarks

47. 47 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 A trademark is a name, term, or symbol used to identify a business and its products. Copyrights and Trademarks

48. 48 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Goodwill refers to an intangible asset of the business that is created from such favorable factors as location, production quality, reputation, and managerial skills. Goodwill

49. 49 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Describe how depreciation expense is reported in an income statement, and prepare a balance sheet that includes fixed assets and intangible assets. 7 Learning Objective

50. 50 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Alaska deposit$1,200,000$ 800,000$400,000 Wyoming deposit 750,000 200,000 550,000 $1,950,000$1,000,000 950,000 Total property, plant, and equipment$1,629,000 Intangible assets: Patents$ 75,000 Goodwill 50,000 Total intangible assets$125,000 Discovery Mining Co. Partial Balance Sheet December 31, 2005 Accum.Book Property, plant, and equipment: CostDepr.Value Land$ 30,000$ 30,000 Buildings110,000$ 26,00084,000 Factory equipment650,000192,000458,000 Office equipment 120,000 13,000107,000 $910,000$231,000$ 679,000 Accum.Book Mineral deposits:CostDepr.Value

51. 51 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Parker Company Partial Income Statement for the Year Ended December 31, 2005 Operating Expenses: Delivery expense$ 18,000 Advertising expense33,000 Sales salaries expense41,000 Office salaries expense37,000 Administrative salaries69,000 Depreciation expense28,000 Taxes and insurance expense 22,000 Total operating expenses$248,000

52. 52 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Alert Company Partial Statement of Cash Flows—Operating Activities for the Year Ended December 31, 2005 Operating Activities: Net income$8,400 Adjustments to reconcile net income to cash generated by operating activities: Depreciation and amortization3,400 Decrease in accounts receivable800 Increase in salaries payable400 Increase in inventory(1,600) Gain on sale of equipment (600) Net cash provided by operating activities$10,800

53. 53 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Alert Company Partial Statement of Cash Flows—Investing Activities for the Year Ended December 31, 2005 Investing Activities: Purchase of short-term investments$14,000 Proceeds from the sale of equipment2,100 Payment for purchase of equipment(15,200) Purchase of long-term investments (6,000) Cash used for investing activities$(5,100)

54. 54 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Analyze the utilization of fixed assets. 8 Learning Objective

55. 55 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Used portion of the fixed asset Total fixed asset capacity The closer the operational utilization approaches 100 percent, the more efficient the fixed assets. Operational Utilization Analysis

56. 56 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Total Revenues Number of fixed asset units Use this ratio only when there is a correlation between the number of fixed asset units and total revenues. Revenue per Unit of Fixed Assets Financial Utilization Analysis

57. 57 of 57Visit UMT online at www.umtweb.edu Chapter 7, ACCT125 Revenue Average book value of fixed assets The larger the ratio, the more efficiently a business is using its fixed assets. Fixed Asset Turnover Ratio Financial Utilization Analysis