This document outlines the key concepts and objectives covered in Chapter 10 of the textbook, which discusses accounting for fixed assets and intangible assets. The objectives include defining fixed assets, computing depreciation using different methods, classifying asset costs, journalizing asset disposals, and accounting for leases, depletion, and intangible assets. It provides examples and explanations of straight-line, units-of-production, and declining-balance depreciation methods. It also distinguishes between capital and revenue expenditures and covers accounting for asset sales, trades, and discards.
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3. 1. Define fixed assets and describe the
accounting for their cost.
2. Compute depreciation, using the following
methods: straight-line method, units-of-
production method, and declining-balance
method.
3. Classify fixed asset costs as either capital
expenditures or revenue expenditures.
4. Journalize entries for the disposal of fixed
assets.
5. Define a lease and summarize the accounting
rules related to the leasing of fixed assets.
Objectives
After studying this
chapter, you should
be able to:
4. 6. Describe internal controls over fixed assets.
7. Compute depletion and journalize the entry for
depletion.
8. Describe the accounting for intangible assets,
such as patents, copyrights, and goodwill.
9. Describe how depreciation expense is
reported in an income statement, and prepare
a balance sheet that includes fixed assets and
intangible assets.
10. Compute and interpret the ratio of fixed assets
to long-term debt.
Objectives
5. Nature of Fixed Assets
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.
6. Classifying Costs
Is the purchased
item long-lived?
Yes
Is the asset used in
a productive
purpose?
No
Expense
Yes
Fixed Assets
No
Investment
7.
8. Land
• Purchase price
• Sales taxes
• Permits from government
agencies
• Broker’s commissions
• Title fees
• Surveying fees
9. Land
• 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
10. Architects’ fees
Engineers’ fees
Insurance costs incurred
during construction
Interest on money
borrowed to finance
construction
Walkways to and around
the building
Buildings
11. Buildings
Sales taxes
Repairs (purchase of
existing building)
Reconditioning
(purchase of an existing
building)
Modifying for use
Permits from
governmental agencies
12. • Trees and shrubs
• Fences
• Parking areas
• Outdoor lighting
• Concrete sewers and drainage
• Paved parking areas
Land Improvements
13. Machinery and Equipment
• Sales taxes
• Freight
• Installation
• Repairs (purchase
of used equipment)
• Reconditioning
(purchase of used
equipment)
14. Machinery and Equipment
• Insurance while in
transit
• Assembly
• Modifying for use
• Testing for use
• Permits from
governmental
agencies
15. 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
16. Nature of Depreciation
All fixed assets except land lose their capacity
to provide services. This loss of productive
capacity is recognized as Depreciation Expense.
Physical depreciation occurs from wear and tear
while in use and from the action of the weather.
Functional depreciation occurs when a fixed asset is
longer able to provide services at the level for
which it was intended, e.g., personal computer.
23. Straight-Line Method
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.
24. 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 $24,000 $4,400 $19,600
2 24,000 $ 4,400 19,600 4,400 15,200
3 24,000 8,800 15,200 4,400 10,800
4 24,000 13,200 10,800 4,400 6,400
5 24,000 17,600 6,400 4,400 2,000
Cost ($24,000) – Residual Value ($2,000)
Estimated Useful Life (5 years)
=
Annual
Depreciation
Expense ($4,400)
Straight-Line Method
26. $24,000 – $2,000
10,000 hours
= Depreciation per unit, hour, etc.
= $2.20 per hour
Units-of-Production Method
27. 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.
Units-of-Production Method
29. There’s a shortcut. Simply
divide one by the number of
years (1 ÷ 5 = .20).
Declining-Balance Method
30. Double the straight-line 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 40 percent.
Declining-Balance Method
32. Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600
Declining-Balance Method
$24,000 x .40
33. Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600 $9,600 $14,400
Declining-Balance Method
34. Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760
Declining-Balance Method
$14,400 x .40
35. Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
Declining-Balance Method
36. Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
Declining-Balance Method
37. Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
Declining-Balance Method
38. Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
5 3,110 40% 1,244 22,134 1,866
STOP!
Declining-Balance Method
39. Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
5 3,110 40% 1,244 22,134 1,866
Declining-Balance Method
If we use this approach in Year 5, we will
end the year with a book value of $1,866.
Remember, the residual value at the end of
Year 5 is expected to be $2,000, so we must
modify our approach.
40. Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
5 3,110 --- 1,110
Declining-Balance Method
$3,110 – $2,000
41. Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
5 3,110 --- 1,110 22,000 2,000
Desired
ending book
value
Declining-Balance Method
42. Comparing Straight-Line With the
Declining-Balance Method
Straight-Line
Method
Depreciation
($)
5,000
4,000
3,000
2,000
1,000
0
Life (years)
Declining-Balance
Method
Life (years)
1 2 3 4 1 2 3 4
43.
44. Revising Depreciation Estimates
A machine purchased for
$130,000 was originally
estimated to have a useful
life of 30 years and a
residual value of $10,000.
The asset has been
depreciated for ten years
using the straight- line
method.
Annual
Depreciation
$130,000 – $10,000
30 years
$4,000 per year
46. During the eleventh year, it is estimated that the
remaining useful life is 25 years (rather than 20) and
that the revised estimated residual value is $5,000.
Book value – revised residual value
Revised estimated remaining life
Revising Depreciation Estimates
$90,000 – $5,000
25 years
$3,400 revised
annual depreciation
=
47. Expenditures made to
acquire new plant
assets are known as
capital expenditures.
Capital and Revenue Expenditures
48. 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
49. EXPENDITURE
Increases
operating
efficiency or adds
to capacity?
Capital
Expenditure
(Debit fixed asset
account)
Yes
Capital and Revenue Expenditures
Increases
useful life
(extraordinary
repairs)?
No
Capital Expenditure
(Debit accumulated
depreciation account)
Yes
Revenue
Expenditure
(Debit expense
account for
ordinary
maintenance
and repairs)
No
52. 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:
An asset account must be credited to remove the asset
from the ledger, and the related Accumulated
Depreciation account must be debited to remove it’s
balance from the ledger.
53. A piece of equipment
acquired at a cost of
$25,000 is fully
depreciation. On February
14, the equipment is
discarded.
Discarding Fixed Assets
55. Equipment costing $6,000 is depreciation 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. 24 Depreciation Expense.—Equipment 150 00
To record current depreciation
on equipment discarded.
Accum. Depreciation—Equipment 150 00
Discarding Fixed Assets
$600 x 3/12
56. Equipment costing $6,000 is depreciation 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. 24 Accumulated Depr.—Equipment 4 900 00
Loss on Disposal of Fixed Asset 1 100 00
To write off equipment
discarded.
Equipment 6 000 00
Discarding Fixed Assets
57. Gain or loss will be reported in the income
statement as Other Income or Other Loss.
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.
Sale of Fixed Assets
58. Sale of Fixed Assets
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.
Oct. 12 Depreciation Expense—Equipment 750 00
To record current depreciation
on equipment sold.
Accumulated Depr.—Equipment 750 00
$10,000 x ¾
x10%
59. Sale of Fixed Assets
Assumption 1: The equipment is sold
for $2,250, so there is
no gain or loss.
Oct. 12 Cash 2 250 00
Sold equipment.
Accumulated Depr.—Equipment 7 750 00
Equipment 10 000 00
60. Sale of Fixed Assets
Assumption 2: The equipment is sold
for $1,000, so there is a
loss of $1,250.
Oct. 12 Cash 1 000 00
Sold equipment.
Accumulated Depr.—Equipment 7 750 00
Equipment 10 000 00
Loss on Disposal of Fixed Assets 1 250 00
61. Sale of Fixed Assets
Assumption 2: The equipment is sold
for $2,800, so there is a
gain of $550.
Sold equipment.
Equipment 10 000 00
Gain on Disposal of Fixed Assets 550 00
Accumulated Depr.—Equipment 7 750 00
Oct. 12 Cash 2 800 00
62. 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).
63. CASE ONE (GAIN):
Trade-in allowance, $1,100
Cash paid, $3,900 ($5,000 – $1,100)
TIA > Book Value = Gain
$1,100 – $800 = $300
Boot + Book = Cost of New Equipment
$3,900 + $800 = $4,700
List price of new equipment acquired $5,000
Cost of old equipment traded in $4,000
Accum. depreciation at date of exchange 3,200
Book value at date of exchange $ 800
Exchanges of Similar Fixed Assets
Gains are not
recognized for
financial reporting.
64. Exchanges of Similar Fixed Assets
June 19 Accumulated Depr.—Equipment 3 200 00
Equipment (new equipment) 4 700 00
Equipment (old equipment) 4 000 00
Cash 3 900 00
On June 19, equipment exchanged
at a gain of $300.
65. CASE TWO (LOSS):
Trade-in allowance, $2,000
Cash paid, $8,000 ($10,000 – $2,000)
TIA<Book Value = Loss
$2,000 – $2,400 = $400
List price of new equipment acquired $10,000
Cost of old equipment traded in $7,000
Accum. depreciation at date of exchange 4,600
Book value at date of exchange $2,400
Exchanges of Similar Fixed Assets
Losses are
recognized for
financial reporting.
66. Exchanges of Similar Fixed Assets
Sept. 7 Accumulated Depr.—Equipment 4 600 00
Equipment (new equipment) 10 000 00
Loss on Disposal of Fixed Assets 400 00
On September 7, equipment
exchanged at a loss of $400.
Equipment (old equipment) 7 000 00
Cash 8 000 00
68. Natural Resources and Depletion
A business paid
$400,000 for the
mining rights to a
mineral deposit
estimated at 1,000,000
tons of ore. The
depletion rate is $0.40
per ton ($400,000 ÷
1,000,000 tons).
69. Natural Resources and Depletion
Adjusting Entry
Accumulated Depletion 36 000 00
During the current year, 90,000 tons are
mined. The periodic depletion is
$36,000 (90,000 tons x $0.40).
Dec. 31 Depletion Expense 36 000 00
70. Date Description Debit Credit
Intangible Assets and Amortization
Dec. 31 Amortization Expense 20,000
Patents 20,000
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).
11 years – 6 years = 5-year life
($100,000 / 5 years) = $20,000 per year
71. 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, 2006
Accum. Book
Property, plant, and equipment: Cost Depr. Value
Land $ 30,000 $ 30,000
Buildings 110,000 $ 26,000 84,000
Factory equipment 650,000 192,000 458,000
Office equipment 120,000 13,000 107,000
$910,000 $231,000 $ 679,000
Accum. Book
Mineral deposits: Cost Depr. Value
72. Ratio of Fixed Assets to Long-Term Liabilities
(in millions)
2002 2001
Procter & Gamble
Fixed assets (net) $13,349 $13,095
Long-term debt $11,201 $9,792
Ratio of fixed assets to
long-term liabilities 1.2 1.3
Use: To indicate the margin of safety
to long-term creditors