1. C10 - 1 Learning Objectives Power Notes 1.Nature of Fixed Assets 2.Accounting for Depreciation 3.Capital and Revenue Expenditures 4.Disposal of Fixed Assets 5.Leasing Fixed Assets 6.Internal Control of Fixed Assets 7.Natural Resources 8.Intangible Assets 9.Financial Reporting 10.Financial Analysis and Interpretation Chapter 10 Fixed Assets and Intangible Assets Fixed Assets and Intangible Assets C10

2. C10 - 2 Fixed Assets and Depreciation Depreciation Methods Capital and Revenue Expenditures Disposal of Fixed Assets Leasing Fixed Assets Depletion and Amortization Balance Sheet Presentation Fixed Assets to Long-Term Debt Slide #Power Note Topics 3 18 22 28 35 36 38 40 Note: To select a topic, type the slide # and press Enter. Power Notes Chapter 10 Fixed Assets and Intangible Assets Fixed Assets and Intangible Assets

3. C10 - 3 LIABILITIES OWNER’S EQUITY Fixed assets are long- term, relatively permanent, tangible assets such as buildings and equipment used to help produce revenues. REVENUES ASSETS EXPENSES FixedAssets Nature of Fixed Assets

4. C10 - 4 Nature of Fixed Assets LIABILITIES OWNER’S EQUITY Fixed assets are long- term, relatively permanent, tangible assets such as buildings and equipment used to help produce revenues. REVENUES ASSETS EXPENSES FixedAssets All fixed assets except land lose their capacity to provide services. This loss of productive capacity is recognized as depreciation expense.

5. C10 - 5 Costs of Acquiring Fixed Assets Include:  Sales tax and freight costs  Installation and assembling 4 Repairs and reconditioning (used assets) 4 Testing and modifying 4 Insurance while asset is in transit

6. C10 - 6 4 Vandalism and uninsured theft 4 Mistakes in installation 4 Damage during unpacking and installing Costs of Acquiring Fixed Assets Exclude:

7. C10 - 7 Factors that Determine Depreciation Expense minus Initial Cost $24,000 a

8. C10 - 8 equals Factors that Determine Depreciation Expense Estimated Residual Value $2,000 b minus Initial Cost $24,000 a

9. C10 - 9 divided by Depreciable Cost $22,000 equals Factors that Determine Depreciation Expense Estimated Residual Value $2,000 b minus Initial Cost $24,000 a

10. C10 - 10 equals Estimated Useful Life 5 years c divided by Depreciable Cost $22,000 equals Factors that Determine Depreciation Expense Estimated Residual Value $2,000 b minus Initial Cost $24,000 a

11. C10 - 11 Periodic Depreciation Expense $4,400 per year equals Estimated Useful Life 5 years c divided by Depreciable Cost $22,000 equals Factors that Determine Depreciation Expense Estimated Residual Value $2,000 b minus Initial Cost $24,000 a

12. C10 - 12 Recording Depreciation General Journal DescriptionDebitCredit General Ledger Equipment24,000 Cash24,000 Equipment 24,000 A A Accum. Depreciation Depreciation Expense Record straight-line depreciation for first year. B B Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. A

13. C10 - 13 Record straight-line depreciation for first year. General Journal DescriptionDebitCredit General Ledger Equipment24,000 Cash24,000 Depreciation Expense 4,400 Accum. Depreciation 4,400 Equipment 24,000 A B A Accum. Depreciation Depreciation Expense B Recording Depreciation Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. A

14. C10 - 14 Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. A Record straight-line depreciation for first year. General Journal DescriptionDebitCredit General Ledger Equipment24,000 Cash24,000 Depreciation Expense 4,400 Accum. Depreciation 4,400 Equipment 24,000 A B A Accum. Depreciation Depreciation Expense B $24,000 - $2,000 5 years = $4,400 Recording Depreciation

15. C10 - 15 Record straight-line depreciation for first year. General Journal DescriptionDebitCredit General Ledger Equipment24,000 Cash24,000 Depreciation Expense 4,400 Accum. Depreciation 4,400 Equipment 24,000 A B A Accum. Depreciation 4,400 B Depreciation Expense 4,400 B B $24,000 - $2,000 5 years = $4,400 Recording Depreciation Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. A

16. C10 - 16 General Ledger Equipment 24,000 A Accum. Depreciation 4,400 B Depreciation Expense 4,400 B Calculation of Book Value

17. C10 - 17 General Ledger Calculation of Book Value Equipment 24,000 A Accum. Depreciation 4,400 B Depreciation Expense 4,400 B Original Cost$24,000 Less Accum. Depr.4,400 Book Value19,600

18. C10 - 18 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 Straight-line is far more widely used than other methods. Declining-balance sum-of-years-digits Declining-balance and sum-of-years-digits are known as accelerated depreciation methods. Depreciation Methods

19. C10 - 19 Comparing Depreciation Methods Straight-Line Method Depreciation ($) 10,000 8,000 6,000 4,000 2,000 0 Life (years) Declining-Balance Method Life (years)

20. C10 - 20 Accum. Depr.Book ValueDepr.Book Value at Beginningat BeginningExpenseat End YearCostof Yearof Year for Yearof Year 1$24,000$24,000.00$4,400.00$19,600.00 224,000$ 4,400.0019,600.004,400.0015,200.00 324,0008,800.00 15,200.00 4,400.00 10,800.00 424,00013,200.00 10,800.00 4,400.00 6,400.00 524,00017,600.00 6,400.00 4,400.00 2,000.00 Straight - Line Depreciation Cost ($24,000) - Residual Value ($2,000) Estimated Useful Life (5 years) = Annual Depreciation Expense ($4,400)

21. C10 - 21 Accum. Depr.Book ValueDepr.Book Value at Beginningat BeginningExpenseat End YearCostof Yearof YearRatefor Yearof Year 1$24,000$24,000.0040%$9,600.00$14,400.00 224,000$ 9,600.0014,400.0040%5,760.008,640.00 324,00015,360.008,640.0040%3,456.005,184.00 424,00018,816.005,184.0040%2,073.603,110.40 524,00020,889.603,110.40 –– 1,110.402,000.00 Declining - Balance Depreciation Note the acceleration of depreciation expense into early years of the life of the asset.

22. C10 - 22 Capital and Revenue Expenditures EXPENDITURE Increases operating efficiency or adds to capacity? Yes Capital Expenditure (Debit fixed asset account)

23. C10 - 23 Capital and Revenue Expenditures EXPENDITURE Increases operating efficiency or adds to capacity? Increases useful life (extraordinary repairs)? No Yes Capital Expenditure (Debit fixed asset account)

24. C10 - 24 Capital and Revenue Expenditures EXPENDITURE Increases operating efficiency or adds to capacity? Increases useful life (extraordinary repairs)? No Yes Capital Expenditure (Debit fixed asset account) Capital Expenditure (Debit accumulated depreciation account) Yes

25. C10 - 25 Revenue Expenditure (Debit expense account for ordinary maintenance and repairs) EXPENDITURE Increases operating efficiency or adds to capacity? Increases useful life (extraordinary repairs)? No No Yes Capital Expenditure (Debit fixed asset account) Capital Expenditure (Debit accumulated depreciation account) Yes Capital and Revenue Expenditures

26. C10 - 26 LIABILITIES OWNER’S EQUITY REVENUES ASSETS EXPENSES Capital and Revenue Expenditures CAPITAL EXPENDITURES 1. Initial cost 2. Additions 3. Betterments 4. Extraordinary repairs net income

27. C10 - 27 LIABILITIES OWNER’S EQUITY REVENUES ASSETS EXPENSES Capital and Revenue Expenditures CAPITAL EXPENDITURES Normal and ordinary repairs and maintenance net income REVENUE EXPENDITURES

28. C10 - 28 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. Accounting for Fixed Asset Disposals

29. C10 - 29 DateDescriptionDebitCredit DateDescriptionDebitCredit Discarding Fixed Assets Accumulated Depreciation25,000 Equipment25,000 Loss on Disposal of Equipment1,100 Accumulated Depreciation4,900 Equipment6,000 Feb. 14 Write off fully depreciated equipment. Write off partially depreciated equipment. Mar. 24

30. C10 - 30 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. Sale of Fixed Assets

31. C10 - 31 DateDescriptionDebitCredit DateDescriptionDebitCredit Sale of Fixed Assets Cash1,000 Loss on Disposal of Equipment1,250 Accumulated Depreciation7,750 Equipment10,000 Cash2,800 Accumulated Depreciation7,750 Equipment10,000 Gain on Disposal of Equipment550 Oct. 12 Sold below book value, for $1,000. Sold above book value, for $2,800. Oct. 12 Sold equipment with a book value of $2,250 (cost $10,000, accumulated depreciation $7,750).

32. C10 - 32 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. 4 TIA > Book Value = Gain on Trade 4 TIA < Book Value = Loss on Trade 4 Gains 4 Gains are never recognized (not recorded). 4 Losses 4 Losses must be recognized (recorded).

33. C10 - 33 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. Exchanges of Similar Fixed Assets Quoted price of new equipment acquired$15,000 Cost of old equipment traded in$12,500 Accum. depreciation at date of exchange10,100 Book value at date of exchange$ 2,400

34. C10 - 34 Exchanges of Similar Fixed Assets 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 Quoted price of new equipment acquired$15,000 Cost of old equipment traded in$12,500 Accum. depreciation at date of exchange10,100 Book value at date of exchange$ 2,400 Losses are recognized for financial reporting.

35. C10 - 35 All leases are either capital leases or operating leases. Capital leases include one or more of the following: 1.Lease transfers ownership to the lessee at the end of the lease term. 2.An option for a bargain purchase by the lessee. 3.Lease term extends over most of the life of the asset. 4.Lease requires rental payments that approximate fair market value of the asset. Capital leases are accounted for as if the lessee has purchased the asset. Lessee debits an asset account for the fair market value and credits a long-term liability. Operating leases are accounted for as rent expense. Leasing Fixed Assets

36. C10 - 36 DateDescriptionDebitCredit DateDescriptionDebitCredit Natural Resources and Depletion Depletion Expense36,000 Accumulated Depletion36,000 ($400,000 / 1,000,000 tons) = $0.40 per ton 90,000 tons x $0.40 = $36,000 Dec. 31 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. Depletion is the periodic allocation of the cost of metal ores and other minerals removed from the earth.

37. C10 - 37 DateDescriptionDebitCredit DateDescriptionDebitCredit Intangible Assets and Amortization Amortization Expense20,000 Patents20,000 11 years – 6 years = 5-year life ($100,000 / 5 years) = $20,000 per year Dec. 31 Paid $100,000 for patent rights. The patent life is 11 years and was issued 6 years prior to purchase. Amortization is the periodic cost expiration of intangible assets which do not have physical attributes and are not held for sale (patents, copyrights, and goodwill).

38. C10 - 38 Discovery Mining Co. Balance Sheet December 31, 20-- Accum.Book Property, plant, and equipment: CostDepr.Value Land$ 30,000$ 30,000 Buildings110,000$ 26,00084,000 Factory equipment650,000192,000458,000 Office equipment120,00013,000107,000 $910,000$231,000$ 679,000 Accum.Book Mineral deposits: CostDepl.Value Alaska deposit$1,200,000$ 800,000$400,000 Wyoming deposit750,000200,000550,000 $1,950,000$1,000,000950,000 Total property, plant, and equipment$1,629,000 Intangible assets: Patents$ 75,000 Goodwill50,000 Total intangible assets$125,000

39. C10 - 39 Discovery Mining Co. Balance Sheet December 31, 20-- Accum.Book Property, plant, and equipment: CostDepr.Value Land$ 30,000$ 30,000 Buildings110,000$ 26,00084,000 Factory equipment650,000192,000458,000 Office equipment120,00013,000107,000 $910,000$231,000$ 679,000 Accum.Book Mineral deposits: CostDepl.Value Alaska deposit$1,200,000$ 800,000$400,000 Wyoming deposit750,000200,000550,000 $1,950,000$1,000,000950,000 Total property, plant, and equipment$1,629,000 Intangible assets: Patents$ 75,000 Goodwill50,000 Total intangible assets$125,000

40. C10 - 40 Ratio of Fixed Assets to Long-Term Liabilities (in millions) 19961995 Procter & Gamble Property, plant, equip. (net)$11,118$11,026 Long-term liabilities (debt)$ 4,670$5,161

41. C10 - 41 Ratio of Fixed Assets to Long-Term Liabilities (in millions) 20001999 Procter & Gamble Property, plant, equip. (net)$11,118$12,626 Long-term liabilities (debt)$ 4,670$6,231 Use:To indicate the margin of safety to long-term creditors Ratio of fixed assets to long-term liabilities2.4 2.0

42. C10 - 42 Note: To see the topic slide, type 2 and press Enter. This is the last slide in Chapter 10. Power Notes Chapter 10 Fixed Assets and Intangible Assets Fixed Assets and Intangible Assets