# Fixed Assets Part 2 Professor Eric Carstensen Mira

• Slides: 11

Fixed Assets – Part 2 Professor Eric Carstensen Mira. Costa College http: //www. miracosta. edu/instruction/accounting/index. html

Four Main Considerations • Valuation – Total Cost & Lump Sum Allocation • Cost Allocation / Depreciation Methods – Straight Line Method – Units of Production Method – Double-Declining Balance Method • Improvements vs. Normal Repairs & Maintenance – Changes in Assumptions • Disposal of Assets

Improvements vs. Normal Repairs & Maintenance • An Improvement (also referred to as Betterments) must do at least one of the following (may do both): – Extend the Useful Life of the asset – Increase the Salvage Value of the asset • Improvements are Capitalized (expense is matched to revenues realized) • Repairs and Maintenance are Period Expenses (expensed during the period incurred)

Improvements - Continued Suppose we spend \$3, 000 to replace the motor in our delivery truck. This is expected to extend the life of the truck for another 3 years. The journal entry to record this would be: Truck* 3, 000 Cash 3, 000 Since this extends the life of the truck, this is an improvement. Suppose you took the truck to the dealership to repair the back bumper that was damaged by one of the drivers. The cost of the new bumper was \$1, 500 and the resulting journal entry would be: Repairs & Maintenance - Truck** Cash * Asset Account 1, 500 ** Expense Account

Improvements - Continued Revised Depreciation Expense = Book Value - Revised Salvage Value Revised Remaining Life Asset Cost = As Discussed on Slide 4 Revised Salvage Value = Best Estimate Given Most Up To Date Information (Usage/Wear and Tear) Revised Remaining Life = Best Estimate Given Most Up To Date Information (Usage/Wear and Tear) Note: This formula can be used when Salvage Value Changes, when Useful Life changes or both change.

Improvements - Concluded Using these numbers from Part 1, Slide #7, assume that Salvage Value has been revised to \$1, 000 and the remaining useful life has been revised to 4 years at the end of year 2. Year Asset Cost Depreciation Expense Accumulated Depreciation Book Value 1 27, 000 5, 000 22, 000 2 27, 000 5, 000 10, 000 17, 000 3 27, 000 5, 000 12, 000 4 27, 000 5, 000 20, 000 7, 000 5 27, 000 5, 000 2, 000 Revised Depreciation = Book Value - Revised Salvage Expense Revised Remaining Life = (17, 000 - 1, 000) / (4 - 2) = 8, 000 3 27, 000 8, 000 18, 000 9, 000 4 27, 000 8, 000 26, 000 1, 000

Disposal of Assets • Assets remain on the books until disposal, whether or not they are fully depreciated. • Selling and donating assets are some of the types of disposals. • Upon disposal, we remove the asset from the books along with associated accumulated depreciation. We also account for any cash received any resulting gain or loss.

Disposal of Assets – Gain Using these numbers from Part 1, Slide #7, assume that this asset is sold at the end of year 3 for \$14, 000. Year Asset Cost Depreciation Expense Accumulated Depreciation Book Value 1 27, 000 5, 000 22, 000 2 27, 000 5, 000 10, 000 17, 000 3 27, 000 5, 000 12, 000 4 27, 000 5, 000 20, 000 7, 000 5 27, 000 5, 000 2, 000 ==> Since the amount of cash exceeds the book value, there is a gain on disposal: Cash 14, 000 Accum. Depreciation 15, 000 Asset Gain on Disposal 27, 000 2, 000

Disposal of Assets - Loss Using these numbers from Part 1, Slide #7, assume that this asset is sold at the end of year 3 for \$10, 000. Year Asset Cost Depreciation Expense Accumulated Depreciation Book Value 1 27, 000 5, 000 22, 000 2 27, 000 5, 000 10, 000 17, 000 3 27, 000 5, 000 12, 000 4 27, 000 5, 000 20, 000 7, 000 5 27, 000 5, 000 2, 000 ==> Since the amount of cash is less than the book value, there is a loss on disposal: Cash 10, 000 Accum. Depreciation 15, 000 Loss on Disposal 2, 000 Asset 27, 000

Disposal of Assets - Donation Using these numbers from Part 1, Slide #7, assume that this asset is donated to charity in year 3. Year Asset Cost Depreciation Expense Accumulated Depreciation Book Value 1 27, 000 5, 000 22, 000 2 27, 000 5, 000 10, 000 17, 000 3 27, 000 5, 000 12, 000 4 27, 000 5, 000 20, 000 7, 000 5 27, 000 5, 000 2, 000 ==> Let's assume further that the fair market value of the asset is equal to the book value: Charitable Donations 12, 000 Accum. Depreciation 15, 000 Asset 27, 000

Fixed Assets – Part 2 Concluded • In this Part 2 presentation, we covered Improvements and Disposal. • If you haven’t seen the Part 2 presentation, it covers asset Valuation and Depreciation methods.