Chapter-10-Fixed-assets

,*,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Click to edit Master title style,Chapter 10,Fixed Assets and Intangible Assets,Accounting,21,st,Edition,Warren Reeve Fess,PowerPoint Presentation by Douglas Cloud,Professor Emeritus of AccountingPepperdine University, Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.,Task Force Image Gallery,clip art included in this electronic presentation is used with the permission of NVTech Inc.,Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.,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,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,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.,Classifying Costs,Is the purchased item long-lived?,Yes,Is the asset used in a productive purpose?,No,Expense or Current Asset,Yes,Fixed Assets,No,Investment,Classifying Costs,Is the purchased item,long-lived,?,Yes,Is the asset used in a,productive purpose,?,No,Current Asset,Yes,Fixed Assets,No,Investment,Does the purchased item generate,future benefits,?,Expense,No,Yes,Cost of,Fixed Assets,Land,Purchase price,Sales taxes,Permits from government agencies,Brokers commissions,Title fees,Surveying fees,Land,Purchase price,Sales taxes,Permits from government agencies,Brokers 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,Architects fees,Engineers fees,Insurance costs incurred during construction,Interest on money borrowed to finance construction,Walkways to and around the building,Buildings,Buildings,Sales taxes,Repairs (purchase of existing building),Reconditioning (purchase of an existing building),Modifying for use,Permits from governmental agencies,Trees and shrubs,Fences,Parking areas,Outdoor lighting,Concrete sewers and drainage,Paved parking areas,Land Improvements,Machinery and Equipment,Sales taxes,Freight,Installation,Repairs (purchase of used equipment),Reconditioning (purchase of used equipment),Machinery and Equipment,Insurance while in transit,Assembly,Modifying for use,Testing for use,Permits from governmental agencies,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,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.,Depreciation Expense Factors,Initial Cost,Residual Value,-,=,Depreciable Cost,Useful Life,1,Periodic Depreciation Expense,2,3,4,5,Straight-Line,Declining- 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,Facts,Original Cost. $24,000,Estimated Life in years.5 years,Estimated Life in hours. 10,000,Estimated Residual Value.$2,000,Straight-Line Method,Cost,estimated residual value,Estimated life,= Annual depreciation,Straight-Line Method,$24,000,$2,000,5 years,=,$4,400 annual depreciation,Straight-Line Rate,$24,000,$2,000,5 years,=,$4,400,$4,400,$24,000,= 18.3%,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.,Accum. Depr.Book ValueDepr.Book Valueat Beginningat BeginningExpenseat EndYearCostof Yearof Year for Yearof Year,1$24,000$24,000,$4,400,$19,600,224,000$ 4,40019,600,4,400,15,200,324,0008,800 15,200,4,400,10,800,424,00013,200 10,800,4,400,6,400,524,00017,6006,400,4,400,2,000,Cost ($24,000),Residual Value ($2,000),Estimated Useful Life (5 years),=,Annual Depreciation,Expense ($4,400),Straight-Line Method,Units-of-Production Method,Cost,estimated residual value,Estimated life in units, hours, etc.,= Depreciation per unit, hour, etc.,$24,000,$2,000,10,000 hours,= Depreciation per unit, hour, etc.,= $2.20 per hour,Units-of-Production Method,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,Declining-Balance Method,Step 1,Ignoring residual value, determine the straight-line rate,=,$4,800,$24,000,$2,000,5 years,$4,800,$24,000,=,20%,Theres a shortcut. Simply divide one by the number of years (1 5 = .20).,Declining-Balance Method,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,Build a table.,Step 3,Declining-Balance Method,Book Value Accum.,Beginning Annual Deprec. Book Value,Year of Year Rate Deprec. Year-End Year-End,1$24,00040%$9,600,Declining-Balance Method,$24,000 x .40,Book Value Accum.,Beginning Annual Deprec. Book Value,Year of Year Rate Deprec. Year-End Year-End,1$24,00040%$9,600$9,600$14,400,Declining-Balance Method,Book Value Accum.,Beginning Annual Deprec. Book Value,Year of Year Rate Deprec. Year-End Year-End,1$24,00040%$9,600$9,600$14,400,214,40040%5,760,Declining-Balance Method,$14,400 x .40,Book Value Accum.,Beginning Annual Deprec. Book Value,Year of Year Rate Deprec. Year-End Year-End,1$24,00040%$9,600$9,600$14,400,214,40040%5,76015,3608,640,Declining-Balance Method,Book Value Accum.,Beginning Annual Deprec. Book Value,Year of Year Rate Deprec. Year-End Year-End,1$24,00040%$9,600$9,600$14,400,214,40040%5,76015,3608,640,38,64040%3,45618,8165,184,Declining-Balance Method,Book Value Accum.,Beginning Annual Deprec. Book Value,Year of Year Rate Deprec. Year-End Year-End,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,Declining-Balance Method,Book Value Accum.,Beginning Annual Deprec. Book Value,Year of Year Rate Deprec. Year-End Year-End,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,STOP!,Declining-Balance Method,Book Value Accum.,Beginning Annual Deprec. Book Value,Year of Year Rate Deprec. Year-End Year-End,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,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.,Book Value Accum.,Beginning Annual Deprec. Book Value,Year of Year Rate Deprec. Year-End Year-End,1$24,00040%$9,600$9,600$14,400,214,40040%5,76015,3608,640,38,64040%3,45618,8165,184,45,18440% 2,07420,8903,110,53,110-1,110,Declining-Balance Method,$3,110, $2,000,Book Value Accum.,Beginning Annual Deprec. Book Value,Year of Year Rate Deprec. Year-End Year-End,1$24,00040%$9,600$9,600$14,400,214,40040%5,76015,3608,640,38,64040%3,45618,8165,184,45,18440% 2,07420,8903,110,53,110-1,11022,0002,000,Desired ending book value,Declining-Balance Method,Comparing Straight-Line With the Declining-Balance Method,Straight-Line,Method,Depreciation ($),5,000,4,0003,000,2,0001,000,0,Life (years),Declining-Balance,Method,Life (years),1 2 3 4,1 2 3 4,Revising,Depreciation,Estimates,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,Equipment,130,000,Accumulated Depreciation,4,000,4,000,4,000,4,000,4,000,4,000,4,000,4,000,4,000,4,000,40,000,Before revising,Book value = $90,000,Revising Depreciation Estimates,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,=,Expenditures made to acquire new plant assets are known as,capital expenditures.,Capital and Revenue Expenditures,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,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,LIABILITIES,OWNERS,EQUITY,REVENUES,ASSETS,EXPENSES,CAPITAL EXPENDITURES,1. Initial cost,2. Additions,3. Betterments,4. Extraordinary repairs,net income,Capital and Revenue Expenditures,LIABILITIES,OWNERS,EQUITY,REVENUES,ASSETS,EXPENSES,net income,Normal and ordinary repairs and maintenance,REVENUE EXPENDITURES,Capital and Revenue Expenditures,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 its balance from the ledger.,A piece of equipment acquired at a cost of $25,000 is fully depreciation. On February 14, the equipment is discarded.,Discarding Fixed Assets,Discarding Fixed Assets,Feb.14Accumulated Depr.,Equipment,25 000 00,To write off fully depreciated equipment.,Equipment 25 000 00,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.24Depreciation Expense.,Equipment,150 00,To record current depreciation on equipment discarded.,Accum. Depreciation,Equipment 150 00,Discarding Fixed Assets,$600 x 3/12,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.24Accumulated Depr.,Equipment,4 900 00,Loss on Disposal of Fixed Asset1 100 00,To write off equipment discarded.,Equipment 6 000 00,Discarding Fixed Assets,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,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.12Depreciation Expense,Equipment,750 00,To record current depreciation on equipment sold.,Accumulated Depr.,Equipment 750 00,$10,000 x 9/12 x10%,Sale of Fixed Assets,Assumption 1: The equipment is sold for $2,250, so there is no gain or loss.,Oct.12Cash2 250 00,Sold equipment.,Accumulated Depr.,Equipment 7 750 00,Equipment 10 000 00,Sale of Fixed Assets,Assumption 2: The equipment is sold for $1,000, so there is a loss of $1,250.,Oct.12Cash1 000 00,Sold equipment.,Accumulated Depr.,Equipment 7 750 00,Equipment 10 000 00,Loss on Disposal of Fixed Assets1 250 00,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.12Cash2 800 00,Natural Resources and Depletion,Depletion is the process of transferring the cost of natural resources to an expense account.,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).,Natural Resources and Depletion,Adjusting Entry,Accumulated Depletion36 000 00,During the current year, 90,000 tons are mined. The periodic depletion is $36,000 (90,000 tons x $0.40).,Dec. 31Depletion Expense36 000 00,DateDescriptionDebitCredit,Intangible Assets and Amortization,Dec. 31Amortization Expense20,000,Patents20,000,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,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 SheetDecember 31, 2006,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,120,000,13,000,107,000,$910,000$231,000$ 679,000,Accum.Book,Mineral deposits:,CostDepr.Value,Ratio of Fixed Assets to Long-Term Liabilities,(in millions),20022001,Procter & Gamble,Fixed assets (net)$13,349$13,095,Long-term debt$11,201$9,792,Ratio of fixed assets to,long-term liabilities1.2 1.3,Use:To indicate the margin of safety to long-term creditors,Ratio of Fixed Assets to,Turnover,(in millions),20062005,Marriott Intl Inc.,Revenue$12,160,Average BV of fixed assets$1,238$2,341,F,ixed asset turnover ratio,=,12,160 / ( 1,238 + 2,341) / 2 = 6.80,Use:To indicate the,ability to generate revenue,The End,Chapter 10,