Fixed Assets and Intangible Assets Chapter 7 2014

Fixed Assets and Intangible Assets Chapter 7 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objectives After studying this chapter, you should be able to: • Define, classify, and account for the cost of fixed assets • Compute depreciation using the straight-line and doubledeclining-balance methods • Describe the accounting for the disposal of fixed assets • Describe the accounting for depletion of natural resources • Describe the accounting for intangible assets • Describe how depreciation expense is reported on an income statement, and prepare a balance sheet that includes fixed assets and intangible assets • Financial Analysis: Describe and illustrate the fixed asset turnover in assessing a company’s use of fixed assets © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objective 1 Define, classify, and account for the cost of fixed assets © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Characteristics of Fixed Assets • Fixed Assets: • Long-term or relatively permanent assets • Examples: equipment, machinery, buildings, and land • Characteristics: • They exist _______ and thus are ______ assets • They are owned and used by the company in its normal operations • They are not offered for _______ as part of normal operations © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Classifying Costs Step 1 Is the purchased item (cost) long-lived? Yes Step 2 Is the asset used in normal operations? Yes _____ No _______ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Costs of Acquiring Fixed Assets © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Revenue and Capital Expenditures Revenue Expenditures Capital Expenditures • _________ • Benefit only the _____ period • Increase repairs and maintenance expense • ________ • Benefit _____ and _____ periods • Increase _____ assets © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Revenue and Capital Expenditures © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objective 2 Compute depreciation using the straightline and double-declining-balance methods © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Accounting for Depreciation • ______ : Periodic recording of the cost of fixed assets as an expense • Adjustment to record depreciation increases • _________ • Contra asset account – _____/______ Depreciation • Factors include wear and tear • Factors include obsolescence © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Depreciation Expense Factors • Factors in Computing Depreciation Expense: • _______________ • ________ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Two Depreciation Methods • _____________ depreciation © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Straight-Line Method • Provides for the ______ amount of depreciation expense each year of the asset’s ____ Equal amounts of depreciation each period Asset acquired Annual Depreciation = Residual value ______________ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Straight-Line Method Annual Depreciation = _____ – ______ • Example: Assume a $24, 000 depreciable asset with an estimated 5 -year useful life and estimated $2, 000 residual value Annual depreciation expense = _____ ÷ ____ = $_____ Depreciation = $4, 400 per year Asset cost = $24, 000 Residual value = $2, 000 Rate is 1/5 OR 20% per year © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Double-Declining-Balance Method • Provides more depreciation in _____ years over the __________ • This method is applied in three steps: • ___________________________________ • __________________ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Double-Declining-Balance Method Depreciation expense ______ in earlier periods Asset acquired Residual value © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Double-Declining-Balance Method • Example: Assume a $24, 000 depreciable asset with an estimated 5 -year useful life and estimated $2, 000 residual value • Step 1. Straight-line percentage = _____ • Step 2. Double-declining-balance rate = ___% (___ × ___) • Step 3. Depreciation expense = _____ (_____ × ____%) © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Comparing Depreciation Methods Summary of Depreciation Methods Useful Life Depreciable Cost Depreciation Rate Depreciation Expense Straight-line Years __________ Double-declining Balance Years __________ Method Depreciation Methods Illustrated © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Depreciation for Federal Income Tax • Modified Accelerated Cost Recovery System (MACRS) • Specifies _____ classes of useful life and depreciation rates for each class • ______ value is ignored • Fixed assets are assumed to be put in and taken out of service in the middle of the year ____ year class: Light-duty trucks and automobiles _____ year class: Machinery and equipment © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objective 3 Describe the accounting for the disposal of fixed assets © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Disposal of Fixed Assets • Asset that are no longer useful can be • Discarded • Sold • Traded • _____ must be removed from the accounts • _____ must be up to date © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Discarding Fixed Assets • Happens when fixed assets are no longer useful to the business and have no _____ • Assume a $25, 000 fixed asset that is fully depreciated is discarded: © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Discarding Fixed Assets • Assume a $6, 000 fixed asset with $4, 750 of accumulated depreciation on December 31 is discarded in March: © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Selling Fixed Assets • The entry to record sale of fixed assets is similar to discarding fixed assets, except that the cash or other asset received must also be recorded • Sale of fixed assets could result in ____ or ____ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Selling Fixed Assets • Example: Assume that equipment costing $10, 000 is depreciated at an annual straight-line rate of 10%. The equipment is sold for cash at book value on October 12 of the eighth year of use. Accumulated depreciation as of the preceding December 31 is $7, 000 Accumulated Depreciation after adjustment = $______ =$7, 000 + $750 Book value is now = $______ =$10, 000 – $7, 750 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Selling Fixed Assets • The asset is sold for $2, 250 No ____ or ____ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Selling Fixed Assets • The asset is sold for $1, 000 – $2, 250 ____ of $1, 250 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Selling Fixed Assets • The asset is sold for $2, 800 – $2, 250 _____ of $550 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objective 4 Describe the accounting for depletion of natural resources © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Natural Resources • Examples of natural resources include timber, metal ores, and minerals • _______: Process of transferring the cost of natural resources to an expense account © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Depletion • Depletion is determined as follows: • Step 1. Depletion Rate = _______ _______ • Step 2. Depletion Expense = ______ × ______ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Depletion • Assume that a business paid $400, 000 for the mining rights to a mineral deposit estimated at 1, 000 tons of ore • Depletion rate = $400, 000/1, 000 = $0. 40 per Ton • If 90, 000 tons are mined during the year, annual depletion is $36, 000 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objective 5 Describe the accounting for intangible assets © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Intangible Assets • Long-lived assets that are used in the operations of a business and are not held for sale; examples include _____, ______, and ____ • Do not exist physically • Accounted for similar to fixed assets • Cost is transferred to expense through ____ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Patents • Manufacturers may acquire exclusive rights to produce and sell goods with one or more unique features • The initial cost of a purchased patent, including any legal fees, is recorded by increasing an _____ account • This cost is written off, or amortized, over the years of the patent’s expected _____ • The expected useful life of a patent may be less than its legal life. • Patent amortization is normally computed using the _____ method © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Patents • Assume that at the beginning of its fiscal year, a company acquires patent rights for $100, 000. Although the patent will not expire for 14 years, its remaining useful life is estimated as five years. The effect of the amortization of the patent at the end of the fiscal year is as follows: © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Copyrights and Trademarks • ____: Exclusive right to publish and sell a literary, artistic, or musical composition • The costs of a copyright include all costs of creating the work plus any other costs of obtaining the copyright • _____: Name, term, or symbol used to identify a business and its products • Symbol: ® © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Goodwill • ____: An intangible asset of a business that is created from such favorable factors as location, product quality, reputation, and managerial skill © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Frequency of Intangible Asset Disclosures © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Comparison of Intangible Assets © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objective 6 Describe how depreciation expense is reported on an income statement, and prepare a balance sheet that includes fixed assets and intangible assets © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Financial Reporting Income Statement Balance Sheet • ____ and _____ should be reported separately • _____________________ should be disclosed • ___________ should also be reported © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Fixed Assets and Intangible Assets in the Balance Sheet © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objective 7 Financial Analysis: Describe and illustrate the fixed asset turnover in assessing a company’s use of fixed assets © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Fixed Asset Turnover • Measures how efficiently a company is using its fixed assets to generate sales Fixed Asset Turnover = ___________________ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Fixed Asset Turnover Net sales Beginning of year property, plant, and equipment End of year property, plant, and equipment Average Net Property, Plant, and Equipment Fixed Asset Turnover Year 2 Year 1 $35, 115 $31, 755 20, 307 20, 433 20, 223 20, 307 20, 265 20, 370 ______ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

End of Chapter 7 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.