The document summarizes accounting principles for fixed assets, including: 1) Fixed assets are long-term tangible assets used in production that are not held for resale. 2) Costs associated with acquiring fixed assets include purchase price, transportation, installation, and permits. 3) Depreciation is allocated over the useful life of an asset to match costs with revenues. Straight-line and reducing balance methods are described. 4) Gains or losses may occur on disposal of fixed assets depending on sale price versus book value. Journal entries are provided as examples.

1. WEEK 6 ACCOUNTING FOR FIXED ASSET

3. 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.

4. Classifying Costs Is the purchased item long-lived? Yes Is the asset used in production purpose? No Expense Yes Fixed Assets No Investment

5. Cost of Fixed Assets

10. 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 no longer able to provide services at the level for which it was intended, e.g., personal computer.

11. Depreciation Expense Factors Initial Cost Residual Value - = Depreciable Cost Useful Life 1 Periodic Depreciation Expense 2 3 4 5

14. Straight-Line Reducing- Balance Other Units-of-Production Source: Accounting Trends & Techniques, 56 th . ed., American Institute of Certified Public Accountants, New York, 2002. Use of Depreciation Methods

15. Facts Original Cost.....………….. RM24,000 Estimated Life in years….. 5 years Estimated Life in hours….. 10,000 Estimated Residual Value... RM2,000

16. Straight-Line Method Cost – estimated residual value Estimated life = Annual depreciation

17. Straight-Line Method RM 24,000 – RM2,000 5 years = RM 4,400 annual depreciation

18. 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.

21. Book Value Accum. Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End 1 $24,000 40% $9,600 Reducing-Balance Method $24,000 x .40

22. 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 Reducing-Balance Method

23. 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 Reducing-Balance Method $14,400 x .40

24. 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 Reducing-Balance Method

25. 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 Reducing-Balance Method

26. 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 Reducing-Balance Method

27. 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 Reducing-Balance Method STOP!

28. 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 Reducing-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.

29. 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 Reducing-Balance Method $3,110 – $2,000

30. 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 Reducing-Balance Method

31. Comparing Straight-Line With the Reducing-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

32. 16 17 18 19 Accumulated Depreciation — Office Equipment 4,400 00 Dec. 31 4,400 Depreciation Expense Dec. 31 4,400 Accumulated Depreciation — Office Equipment 53 Recording Depreciation in the Book Depreciation Expense 4,400 00 31

33. The balance sheet would show the office equipment at cost, less the accumulated depreciation. Office equipment $24,000 Less accumulated depreciation 4,400 $19,600 Book value

35. 16 17 18 19 Accumulated Depreciation — Office Equipment 4,400 00 Dec. 31 4,400 Profit & Loss a/c Dec. 31 4,400 Accumulated Depreciation — Office Equipment 53 Recording Depreciation in the Book – Alternative Method Profit & Loss 4,400 00 31

41. 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

42. 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 1. Accumulated Depreciation (last adjusted December 31) has a balance of $7,000. Oct. 1 Depreciation Expense —Equipment 750 00 Accumulated Depr. — Equipment 750 00 $10,000 x ¾ x10%

43. Sale of Fixed Assets Assumption 1: The equipment is sold for $2,250, so there is no gain or loss. Oct. 1 Cash 2 250 00 Accumulated Depr. — Equipment 7 750 00 Equipment 10 000 00

44. Sale of Fixed Assets Assumption 2: The equipment is sold for $1,000, so there is a loss of $1,250. Oct. 1 Cash 1 000 00 Accumulated Depr. — Equipment 7 750 00 Equipment 10 000 00 Loss on Disposal of Fixed Assets 1 250 00

45. Sale of Fixed Assets Assumption 2: The equipment is sold for $2,800, so there is a gain of $550. Equipment 10 000 00 Gain on Disposal of Fixed Assets 550 00 Accumulated Depr. — Equipment 7 750 00 Oct. 1 Cash 2 800 00