9 Fixed Intangible Assets FINANCIAL ACCOUNTING 2 ND

9 Fixed & Intangible Assets FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN Power. Point Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. 1

LG 1 FIXED ASSETS Fixed assets are – Long term or relatively permanent – Tangible, i. e. , physical – Owned, used by business – Not held for resale Also called Property, Plant, & Equipment (PPE) 2

LG 1 CLASSIFYING COSTS Expenditures must be classified as – Expenses – Investments – Fixed assets 3

LG 1 EXHIBIT 2 When is a purchased item a fixed asset? Yes No Expense Yes Fixed Assets No Investments 4

LG 1 ASSET COST Cost of asset includes – All amounts spent to get asset in place – All amounts spent to get asset ready to use 5

LG 1 EXERCISE 9 -1 a Indicate which costs to acquire a printing press should be debited to the asset. 1. 2. 3. 4. 5. 6. Freight Special foundation Sales tax on purchase Insurance while in transit Fee paid for installation New parts to replace damaged parts Click button to skip this exercise Press “Enter” or click left mouse button for answer. 6

LG 1 CAPITAL & REVENUE EXPENDITURES Money spent on assets after they are acquired are divided between – Capital expenditures – Improve asset – Extend useful life – Revenue expenditures – Ordinary maintenance & repairs 7

LG 1 REVENUE EXPENDITURES Revenue expenditures – Are ordinary repairs & maintenance – Benefit only current period – Increase (debit) repairs & maintenance expense 8

LG 1 CAPITAL EXPENDITURES Capital expenditures – Are asset improvement – Benefit current & future periods – Increase (debit) fixed asset 9

LG 1 EXERCISE 9 -5 a (partial) Hicks incurred the following costs related to trucks and vans in operating a delivery service. Identify the capital expenditures. 1. 2. 3. 4. 5. 6. Replaced radio with new radio with greater range. Overhauled engine on 3 -yr. old truck Changed oil all trucks, vans Installed security systems Changed radiator fluid on 4 -yr. Old truck Installed hydraulic lift Click button to skip this exercise Press “Enter” or click left mouse button for answer. 10

LG 1 EXERCISE 9 -5 b (partial) Hicks incurred the following costs related to trucks and vans in operating a delivery service. Identify the revenue expenditures. 1. 2. 3. 4. 5. 6. Replaced radio with new radio with greater range. Overhauled engine on 3 -yr. old truck Changed oil all trucks, vans Installed security systems Changed radiator fluid on 4 -yr. Old truck Installed hydraulic lift Click button to skip this exercise Press “Enter” or click left mouse button for answer. 11

LG 2 EXHIBIT 4 12

LG 2 DEPRECIATION METHODS 3 methods to calculate depreciation expense – Straight-line depreciation • Same amount of depreciation each year – Units of production depreciation • Depreciation varies with asset use – Declining balance • Accelerated method provides more depreciation in earlier years 13

LG 2 STRAIGHT-LINE DEPRECIATION Depreciation expense = (Cost – Residual value) / Useful life 14

LG 2 UNITS-OF-PRODUCTION DEPRECIATION Depreciation expense = {(Cost – Residual value)/ Productive activity} * Current activity 15

LG 2 DECLINING-BALANCE DEPRECIATION For double-declining balance: Depreciation expense = 2*(1/Life) * (Cost – Accumulated Depreciation) 16

LG 2 What happens when estimates are revised? Assume book value is 88, 000 when residual value revised to 8, 000 and remaining life extended to 8 years. 17

LG 2 REVISED DEPRECIATION (Book value – Revised residual value) / Remaining useful life (88, 000 – 8, 000) / 8 yrs. 10, 000 per year 18

LG 3 ASSET DISPOSAL Assets can be – Discarded – Sold First, bring depreciation expense up to date 19

LG 4 INTANGIBLE ASSETS Intangible assets are – Long term or relatively permanent – Without physical properties – Owned, used by business – Not held for resale 20

LG 4 INTANGIBLE ASSETS: Examples of intangible assets are – Patents – Copyrights, trademarks – Goodwill Cost of intangible assets is amortized over useful (legal life) 21

LG 4 INTANGIBLE ASSETS: Definitions • Patent – Exclusive right to produce, sell goods with 1 or more unique features • Copyright – Exclusive to publish, sell literary, artistic, musical composition • Trademark – Name, term, symbol used to identify business, product 22

LG 4 AMORTIZING COST • Amortization – Term used to match cost of intangible asset against revenue over useful (legal) life • Amortization similar to straight-line depreciation Amortization expense = (Cost – Residual value) / Useful life 23

LG 4 INTANGIBLE ASSET: Goodwill • Goodwill – Arises when one business buys another business – Created when purchase price of business greater than fair market value of net assets – Not amortized; impaired value adjusted 24

LG 6 FINANCIAL UTILIZATION Financial utilization measures efficient revenue generation of operational assets Fixed Asset Turnover = Revenue/ Ave. Book Value Fixed Assets 25

Never test the depth of the water with both feet. (Clones are people two) If you think nobody cares if you're alive, try missing a couple of car payments. 26