10 Fixed Assets and Intangible Assets Student Version

10 Fixed Assets and Intangible Assets Student Version

1 Describe, classify, and account for the cost of fixed assets. 10 -2

1 Fixed assets have the following characteristics: 1. They exist physically and, thus, are tangible assets. 2. They are owned and used by the company in its normal operations. 3. They are not offered for sale as part of normal operations. 10 -3

1 Exhibit 2 10 -4 Classifying Costs

1 Exhibit 3 10 -5 Costs of Acquiring Fixed Assets (continued)

1 Exhibit 3 10 -6 Costs of Acquiring Fixed Assets (continued)

1 Exhibit 3 10 -7 Costs of Acquiring Fixed Assets (continued)

1 Exhibit 3 10 -8 Costs of Acquiring Fixed Assets (continued)

1 Cost of Acquiring Fixed Assets Excludes: 1. 2. 3. 4. 5. Vandalism Mistakes in installation Uninsured theft Damage during unpacking and installing Fines for not obtaining proper permits from government agencies These costs are expenses. 10 -9

1 Capital and Revenue Expenditures 10 -10

2 Compute depreciation, using the following methods: straight-line method, units-of-production method, and double-declining balance method. 10 -11

2 Depreciation Over time, fixed assets such as equipment, buildings, and land improvements lose their ability to provide services. The periodic recording of the cost of fixed assets to expense is called depreciation. 10 -12

2 Residual Value The expected useful life of a fixed asset is estimated at the time the asset is placed into service. The residual value of a fixed asset at the end of its useful life is estimated at the time the asset is placed into service. 10 -13

2 Straight-Line Method The straight-line method provides for the same amount of depreciation expense for each year of the asset’s useful life. Annual depreciation 10 -14 = Cost – estimated residual value Estimated life

2 A depreciable asset cost $24, 000. Its estimated residual value is $2, 000 and its estimated useful life is five years. Annual depreciation 10 -15 = Cost – estimated residual value Estimated life = $24, 000 – $2, 000 5 years expected useful life = $4, 400

2 If the preceding equipment was purchased and placed into service on October 1, the depreciation would be $1, 100, computed as follows: $4, 400 × 3/12 = $1, 100 10 -16

2 Units-of-Production Method The units-of-production method provides for the same amount of depreciation expense for each unit produced or each unit of capacity used by the asset. Depreciatio n per unit = 10 -17 Cost – Residual Value Total Units of Production

2 A depreciable asset cost $24, 000. Its estimated residual value is $2, 000 and it is expected to have an estimated life of 10, 000 operating hours. Depreciatio n per unit Cost – Residual Value = Total units of production Depreciatio n per unit $24, 000 – $2, 000 = Depreciatio 10, 000 hours expected useful life n per unit 10 -18 = $2. 20 per hour

2 A depreciable asset cost $24, 000. Its estimated residual value is $2, 000 and it is expected to have an estimated life of 10, 000 operating hours. During the year the asset was operated 2, 100 hours. Depreciation per Unit × Total n = Units of Production Used Depreciatio n = ($2. 20 per hour) × (2, 100 hours) Depreciation = 10 -19 $4, 620

2 Double-Declining-Balance Method The double-declining-balance method provides for a declining periodic expense over the estimated useful life of the asset. 10 -20

2 Book Value Beginning Year of Year 1 $24, 000 Rate 40% Annual Deprec. Accum. Deprec. Year-End $9, 600 $24, 000 ×. 40 10 -21 Book Value Year-End

2 Book Value Beginning Year of Year 1 2 $24, 000 14, 400 Rate 40% Annual Deprec. $9, 600 5, 760 Accum. Deprec. Year-End Book Value Year-End $9, 600 $14, 400 ×. 40 10 -22

2 Book Value Beginning Year of Year 1 2 10 -23 $24, 000 14, 400 Rate 40% Annual Deprec. Accum. Deprec. Year-End Book Value Year-End $9, 600 5, 760 $9, 600 15, 360 $14, 400 8, 640

2 Book Value Beginning Year of Year 1 2 3 10 -24 $24, 000 14, 400 8, 640 Rate 40% 40% Annual Deprec. Accum. Deprec. Year-End Book Value Year-End $9, 600 5, 760 3, 456 $9, 600 15, 360 18, 816 $14, 400 8, 640 5, 184

2 Book Value Beginning Year of Year 1 2 3 4 10 -25 $24, 000 14, 400 8, 640 5, 184 Rate 40% 40% Annual Deprec. Accum. Deprec. Year-End Book Value Year-End $9, 600 5, 760 3, 456 2, 074 $9, 600 15, 360 18, 816 20, 890 $14, 400 8, 640 5, 184 3, 110

2 Book Value Beginning Year of Year 1 2 3 4 5 $24, 000 14, 400 8, 640 5, 184 3, 110 Rate 40% 40% 40% Annual Deprec. Accum. Deprec. Year-End Book Value Year-End $9, 600 5, 760 3, 456 2, 074 1, 244 $9, 600 15, 360 18, 816 20, 890 22, 134 $14, 400 8, 640 5, 184 3, 110 1, 866 DEPRECIATION STOPS WHEN BOOK VALUE EQUALS RESIDUAL VALUE! 10 -26 STOP

2 Book Value Beginning Year of Year 1 2 3 4 5 Rate $24, 000 40% 14, 400 40% 8, 640 40% 5, 184 40% 3, 110 – $2, 000 Annual Deprec. Accum. Deprec. Year-End Book Value Year-End $9, 600 5, 760 3, 456 2, 074 1, 110 $9, 600 15, 360 18, 816 20, 890 22, 000 $14, 400 8, 640 5, 184 3, 110 2, 000 “Forced” annual depreciation 10 -27 Desired ending book value

2 If the preceding equipment was purchased and placed into service on October 1, depreciation for the year ending December 31 would be $2, 400, computed as follows: $9, 600 × 3/12 = $2, 400 10 -28

2 The depreciation for the second year would then be $8, 640, computed as follows: $8, 640 = [40% × ($24, 000 – $2, 400)] 10 -29

2 Revising Depreciation Estimates A machine purchased on January 1, 2009, for $140, 000 was originally estimated to have a useful life of five years and a residual value of $10, 000. The asset has been depreciated for two years using the straight-line method. Annual $140, 000 – $10, 000 Depreciation (S/L) = 5 years Annual $26, 000 per year Depreciation (S/L) = 10 -30 (continued)

2 At the end of 2011, the asset’s book value is $88, 000, determined as follows: Asset cost $140, 000 Less accumulated depreciation ($26, 000 per year × 2 years) 52, 000 Book value, end of second year $ 88, 000 10 -31 (continued)

2 During 2012, the company estimates that the remaining useful life is eight years (instead of three) and that the residual value is $8, 000 (instead of $10, 000). Depreciation expense for each of the remaining eight years is determined as follows: Book value, end of second year Less revised estimated residual value Revised remaining depreciation cost Revised annual depreciation expense [($88, 000 – $8, 000) ÷ 8 years] 10 -32 $88, 000 $80, 000 $10, 000

3 Journalize entries for the disposal of fixed assets. 10 -33

3 Discarding Fixed Assets A piece of equipment acquired at a cost of $25, 000 is fully depreciation at December 31, 2009. On February 14, 2010, the equipment is discarded. 10 -34

3 Equipment costing $6, 000, with no residual value, is depreciated at an annual straight-line rate of 10%. After the December 31, 2009, adjusting entry, Accumulated Depreciation—Equipment has a $4, 750 balance. On March 24, 2010, the asset is removed from service and discarded. $600 × 3/12 10 -35

3 The discarding of the equipment is then recorded as follows (note that this is the second of two entries on March 24): 10 -36

3 Selling Fixed Assets Equipment was purchased at a cost of $10, 000. It had no estimated residual value and was depreciated at a straight-line rate of 10%. The equipment is sold for cash on October 12 of the eighth year of its use. The balance of the accumulated depreciation account as of the preceding December 31 is $7, 000. 10 -37

3 The entry to update the depreciation for the nine months of the current year is as follows: 10 -38

3 Assumption 1 The equipment is sold on October 12 for $2, 250. No gain or loss. 10 -39

3 Assumption 2 The equipment is sold on October 12 for $1, 000; a loss of $1, 250. 10 -40

3 Assumption 3 The equipment is sold on October 12 for $2, 800; a gain of $550. 10 -41

4 Compute depletion and journalize the entry for depletion. 10 -42

4 Natural Resources The process of transferring the cost of natural resources to an expense account is called depletion. 10 -43

4 A business paid $400, 000 for the mining rights to a mineral deposit estimated at 1, 000 tons of ore. Step 1: Determine the depletion rate per ton. Depletion = Rate 10 -44 Cost of Resources Estimated Total Units of Resources

4 A business paid $400, 000 for the mining rights to a mineral deposit estimated at 1, 000 tons of ore. Step 1: Determine the depletion rate per ton. $. 40 per = ton 10 -45 $400, 000 1, 000

4 A business paid $400, 000 for the mining rights to a mineral deposit estimated at 1, 000 tons of ore. Step 2: Multiply the depletion rate by the quantity extracted during period. $0. 40 per ton × $90, 000 tons = $36, 000 10 -46

4 The adjusting entry to record the depletion is shown below. 10 -47

5 Describe the accounting for intangible assets, such as patents, copyrights, and goodwill. 10 -48

5 Intangible Assets Patents, copyrights, trademarks, and goodwill are long-lived assets that are useful in the operations of a business and not held for sale. These assets are called intangible assets because they do not exist physically. 10 -49

5 Exhibit 10 10 -50 Comparison of Intangible Assets

6 Describe how depreciation expense is reported in an income statement and prepare a balance sheet that includes fixed assets and intangible assets. 10 -51

6 • Intangible assets are usually reported in the • • 10 -52 balance sheet, supported by a note with a separate listing. The balance in each class of intangible assets should be disclosed net of any amortization. The cost and related accumulated depletion of mineral rights are normally shown as part of the Fixed Assets section of the balance sheet.

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