d

n
a
s
t
e
s
e
s
l
A
b
i
d
g
e
n
x
a
i
t
F
s
In
t
0
e
s
1
s
r
A
e
t
p
a
h
C

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Lea
rni
ng
Obj
ect
ive
s

1. Define, classify, and account for the cost

of fixed assets.
2. Compute depreciation, using the
following methods: straight-line method,
units-of-production method, and doubledeclining-balance method.
3. Journalize entries for the disposal of fixed
assets.
4. Compute depletion and journalize the
entry for depletion.

Lea
rni
ng
Obj
ect
ive
s

5. Describe the accounting for intangible

assets, such as patents, copyrights, and

goodwill.

6. Describe how depreciation expense is

reported in an income statement and

prepare a balance sheet that includes fixed
assets and intangible assets.

7. Describe and illustrate the fixed asset

turnover ratio to assess the efficiency of a

companys use of its fixed assets.

Lear
n
i
O bj e n g
Defi
ctive
ne, c
lass
ify,
an d
the
acco
cost
un t
of fix
ed a for
sset
s

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Nat
ure
of
Fix
ed
Ass
ets

Fixed assets are long-term or relatively

permanent assets, such as equipment,
machinery, buildings, and land. Other
descriptive titles for fixed assets are plant
assets or property, plant, and equipment.

Nat
ure
of
Fix
ed
Ass
ets

Fixed assets have the following

characteristics:
They exist physically and, thus, are

tangible assets.

They are owned and used by the company

in its normal operations.

They are not offered for sale as part of

normal operations.

NATUR
E OF
FIXED
ASSET
S

CLASSI
FYING
COSTS

Co
sts
of
Ac
qui
rin
g
Fix
ed
Ass
ets

o Unnecessary costs that do not increase

the assets usefulness are recorded as an

expense.
Vandalism
Mistakes in installation
Uninsured theft
Damage during unpacking and installing
Fines for not obtaining proper permits from

government agencies

Ca
pit
al
an
d
Re
ve
nu
e
Ex
pe
ndi
tur
es

Expenditures that benefit only the current

period are called revenue expenditures.

Ca
pit
al
an
d
Re
ve
nu
e
Ex
pe
ndi
tur
es

o Expenditures that improve the asset or

extend its useful life are capital
expenditures.

C
A
PI
T
A
L
A
N
D
R
E
V
E
N
U
E
E
X
P
Revenue
Expenditures

Normal and
ordinary repairs
and maintenance

Capital
Expenditures

Additions,
improvements,
and extraordinary
repairs

Or
din
ary
Mai
nte
na
nce
an
d
Re
pai
rs

o On April 9, the firm paid $300 for a tuneup of a delivery truck.

revenue
expenditure

Ass
et
Im
pro
ve
me
nts

o On May 4, a $5,500 hydraulic lift was

installed on the delivery truck to allow for

easier and quicker loading of heavy cargo.

capital expenditure

Ext
rao
rdi
nar
y
Re
pai
rs
The engine of a forklift that is near the end
of its useful life is overhauled at a cost of
$4,500, which extends its useful life by eight
years. Work on the forklift was completed on
October 14.

capital
expenditure

CAPITA
L AND
REVEN
UE
EXPEN
DITURE
S

Lea
sin
g
Fix
ed
Ass
ets

o The two parties to a lease contract are as

follows:

The lessor is the party who owns the asset.

The lessee is the party to whom the rights to

use the asset are granted by the lessor.

Lea
sin
g
Fix
ed
Ass
ets

A capital lease is accounted for as if the

lessee has, in fact, purchased the asset.
The asset is then amortized (written off as
an expense) over the life of the capital
lease.

Lea
sin
g
Fix
ed
Ass
ets

o A lease that is not classified as a capital

lease for accounting purposes is classified

as an operating lease. An operating lease
is treated as an expense, because the
lessee is renting the asset for the lease
term.

Lear
n
i
O bj e n g
c
tive
Com
pute
de pr
follo
wi
ec

m et
ing m
ia
h
o
d
and
, u ni
etho tion, us
doub
ts
d
in
le-de -of-prod s: straig g the
u
h
clini
ng-b ction m t-line
e
al a n
ce m thod,
etho
d

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

De
pre
cia
tio
n

Over time, most fixed assets (equipment,

buildings, and land improvements) lose
their ability to provide services. The
periodic recording of the cost of fixed
assets as an expense is called
depreciation.

Acc
ou
nti
ng
for
De
pre
cia
tio
n

o Depreciation can be caused by physical or

functional factors.

Physical depreciation factors include

wear and tear during use or from

exposure to the weather.
Functional depreciation factors include

obsolescence and changes in customer

needs that cause the asset to no longer
provide services for which it was intended.

Acc
ou
nti
ng
for
De
pre
cia
tio
n

Two common misunderstandings that

exist about depreciation as used in
accounting include:
Depreciation does not measure a decline

in the market value of a fixed asset.

Depreciation does not provide cash to

replace fixed assets as they wear out.

Fac
tor
s in
Co
mp
uti
ng
De
pre
cia
tio
n

Three factors determine the depreciation

expense for a fixed asset. These three
factors are:
The assets initial cost
The assets expected useful life
The assets estimated residual value

Fac
tor
s in
Co
mp
uti
ng
De
pre
cia
tio
n

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 also
estimated at the time the asset is placed
into service.

FACTO
RS IN
COMPU
TING
DEPRE
CIATIO
N

FACTO
RS IN
COMPU
TING
DEPRE
CIATIO
N

Str
aig
htLin
e
Me
tho
d

The straight-line method provides for the

same amount of depreciation expense for
each year of the assets useful life.
Annual
=
Depreciation

Cost Residual Value

Useful Life

Str
aig
htLin
e
Me
tho
d
Initial cost: $24,000
Expected useful life

5 years

Estimated residual value: $2,000

o The annual straight-line depreciation of

$4,400 is computed below:

Cost Residual Value

Annual Depreciation =
Useful Life
$24,000 - $2,000
=
5 years
=

$4,400

Str
aig
htLin
e
Me
tho
d

o If the preceding equipment was purchased

and placed into service on October 1, the
depreciation for the first year of use would
be $1,100, computed as follows:
$4,400 x 3/12 = $1,100

Str
aig
htLin
e
Me
tho
d

The straight-line percentage can be

determined by dividing 100% by the
number of years of expected useful life,
as shown below.

Uni
tsofPro
du
cti
on
Me
tho
d

o The units-of-production method provides

the same amount of depreciation expense

for each unit produced or each unit of
capacity used by the asset.
Step 1. Determine the depreciation per unit

as:

Cost Residual Value

Depreciation per Unit
Total Units of Production
=

Step 2. Compute the depreciation expense

Depreciation Expense = Depreciation per Unit x Total

as:

Units of

Output Used

Uni
tsofPro
du
cti
on
Me
tho
d

A depreciable asset costs $24,000. Its

estimated residual value is $2,000, and it
is expected to have a useful life of 10,000
operating hours. During the year, the
asset was operated 2,100 hours.

U
ni
ts
of
Pr
o
d
u
ct
io
n
M
e

Do
ubl
eDe
clin
ing
Bal
anc
e
Me
tho
d

The double-declining-balance method

provides for a declining periodic expense
over the expected useful life of the asset.

Do
ubl
eDe
clin
ing
Bal
anc
e
Me
tho
d

o The double-declining-balance method is

applied in three steps:

Step 1. Determine the straight-line percentage

using the expected useful life.

Step 2. Determine the double-declining-balance

rate by multiplying the straight-line rate from

Step 1 by 2.

Step 3. Compute the depreciation expense by

multiplying the double-declining-balance rate

from Step 2 times the book value of the
asset.
(continued)

Do
ubl
eDe
clin
ing
Bal
anc
e
Me
tho
d

o The double-declining-balance rate is

determined by doubling the straight-line

rate.

o A shortcut to determining the straight-line

rate is to divide one by the number of
years (for example, 1 5 = 0.20).

o Using the double-declining-balance

method, a five-year life results in a 40

percent rate (0.20 2).

Do
ubl
eDe
clin
ing
Bal
anc
e
Me
tho
d

For the first year, the book value of the

equipment is its initial cost of $24,000.

After the first year, the book value (cost

minus accumulated depreciation) declines
and, thus, the depreciation also declines.

Do
ubl
eDe
clin
ing
Bal
anc
e
Me
tho
d

The double-declining-balance depreciation

for the full five-year life of the equipment
is shown below.

DEPRECIATION STOPS
WHEN BOOK VALUE
STOP
EQUALS RESIDUAL VALUE!

Do
ubl
eDe
clin
ing
Bal
anc
e
Me
tho
d
Forced
Desired
depreciation
ending
for 5th year book value

Do
ubl
eDe
clin
ing
Bal
anc
e
Me
tho
d

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:
First year partial
= $9,600 x 3/12 = $2,400
depreciation

Do
ubl
eDe
clin
ing
Bal
anc
e
Me
tho
d

o The depreciation for the second year

would then be $8,640, computed as
follows:
Second year
depreciation = [40% x ($24,000 $2,400)]
Second year
depreciation = $8,640

Do
ubl
eDe
clin
ing
Bal
anc
e
Me
tho
d

o The double-declining-balance method

provides a higher depreciation in the first

year of the assets use, followed by
declining depreciation amounts. Thus, it is
called an accelerated depreciation
method.

Co
mp
ari
ng
De
pre
cia
tio
n
Me
tho
ds

Co
mp
ari
ng
De
pre
cia
tio
n
Me
tho
ds

De
pre
cia
tio
n
for
Fed
era
l
Inc
om
e
Tax

The Internal Revenue Code specifies the

Modified Accelerated Cost Recovery
System (MACRS) for use by businesses in
computing depreciation for tax purposes.

De
pre
cia
tio
n
for
Fed
era
l
Inc
om
e
Tax

MACRS specifies eight classes of useful

life and depreciation rates for each of the
eight classes. The two most common
classes are the five-year class (includes
automobiles and light-duty trucks) and
the seven-year class (includes most
machinery and equipment).

De
pre
cia
tio
n
for
Fed
era
l
Inc
om
e
Tax

For the five-year-class assets,

depreciation is spread over six years, as
shown below.

Re
visi
ng
De
pre
cia
tio
n
Est
im
ate
s

A machine is purchased on January 1,

2013, for $140,000.

Re
visi
ng
De
pre
cia
tio
n
Est
im
ate
s

At the end of 2014, the assets book value

is $88,000, as shown below.

Re
visi
ng
De
pre
cia
tio
n
Est
im
ate
s

During 2015, the company estimates that

the machines remaining useful life is eight
years (instead of three) and that its residual
value is $8,000 (instead of $10,000).
Depreciation expense for each of the
remaining eight years is determined as
follows:

REVISI
NG
DEPRE
CIATIO
N
ESTIMA
TES

Lear
n
i
O bj e n g
c
t
ive
Journ
al i z e
e en
di s p
tries
osal
for t
of fix
he
ed a
sset
s

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Dis
car
din
g
Fix
ed
Ass
ets

Equipment acquired at a cost of $25,000

is fully depreciation at December 31,
2013. On February 14, 2014, the
equipment is discarded.

Dis
car
din
g
Fix
ed
Ass
ets

Equipment costing $6,000, with no

residual value, is depreciated at an annual
straight-line rate of 10%. After the
December 31, 2013, adjusting entry,
Accumulated DepreciationEquipment
has a $4,650 balance. On March 24, 2014,
the asset is removed from service and
discarded.

$600 3/12

Dis
car
din
g
Fix
ed
Ass
ets

Dis
car
din
g
Fix
ed
Ass
ets

o The discarding of the equipment is then

recorded as shown below. (Note that this is

the second of two entries on March 24.)

Sel
lin
g
Fix
ed
Ass
ets

Equipment was purchased at a cost of

$10,000. It had no estimated residual
value and was depreciated at a straightline 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.
(continued)

Sel
lin
g
Fix
ed
Ass
ets

o The entry to update the depreciation for

the nine months of the current year is as

follows:

(continued)

Sel
lin
g
Fix
ed
Ass
ets

After the current depreciation is recorded,

the book value of the asset is $2,250
($10,000 $7,750).

Sel
lin
g
Fix
ed
Ass
ets

o After the current depreciation is recorded,

the book value of the asset is $2,250
($10,000 $7,750).

Sel
lin
g
Fix
ed
Ass
ets

o After the current depreciation is recorded,

the book value of the asset is $2,250
($10,000 $7,750).

Lear
n
i
O bj e n g
ctive
Com
pu t

journ
alize
e de
the
pl e t
e n tr
ion a
y for
nd
depl
etion

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Nat
ura
l
Res
our
ces

The process of transferring the cost of

natural resources to an expense account
is called depletion.

Nat
ura
l
Res
our
ces
Step 1:

Step 2:

Determine the depletion rate as:

Multiply the depletion rate by the

quantity extracted during the period.

Nat
ura
l
Res
our
ces

A company paid $400,000 for the mining

rights to a mineral deposit estimated at
1,000,000 tons of ore. During the year,
the company mined 90,000 tons of the
mineral deposit.

Nat
ura
l
Res
our
ces

o The depletion expense for the year is

computed as shown below.
Step 1.

Step 2.

Nat
ura
l
Res
our
ces

The adjusting entry to record the

depletion is shown below.

Lear
n
i
O bj e n g
ctive
Desc
r i be
the
in

pa t e
t
nts, angible account
copy
in
a
righ ssets, s g for
ts, a
u
n d g c h as
oodw
ill

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Int
an
gib
le
Ass
ets

Patents, copyrights, trademarks, and

goodwill are long-lived assets that are
used in the operations of a business and
not held for sale. These assets are called
intangible assets because they do not
exist physically.

Int
an
gib
le
Ass
ets

o The accounting for intangible assets is

similar to that for fixed assets. The major

issues are:
Determining the initial cost.
Determining the amortization, which is the

amount of cost to transfer to expense.

Pat
ent
s

The exclusive right granted by the federal

government to produce and sell goods
with one or more unique features is called
a patent. These rights continue in effect
for 20 years.

Pat
ent
s

At the beginning of its fiscal year, a

business acquires patent rights for
$100,000. The patents remaining useful
life is estimated at 5 years. The entry to
amortize the patent at the end of the year
is as follows:

Pat
ent
s

Because a patent (as well as other

intangible assets) does not exist
physically, it is acceptable to credit the
asset. This approach is different from
physical fixed assets, which require the
use of a contra asset account.

Co
pyr
igh
ts
an
d
Tra
de
ma
rks

The exclusive right granted by the federal

government to publish and sell a literary,
artistic, or musical composition is called a
copyright. A copyright extends for 70
years beyond the authors death.

Co
pyr
igh
ts
an
d
Tra
de
ma
rks

A trademark is a unique name, term, or

symbol used to identify a business and its
products. Most businesses identify their
trademarks with in their
advertisements and on their products.
Trademarks can be registered for 10 years
and renewed for 10-year periods
thereafter.

Go
od
will

In business, goodwill refers to an

intangible asset of a business that is
created from such favorable factors as
location, product quality, reputation, and
managerial skill.

Go
od
will

Generally accepted accounting principles

(GAAP) permit goodwill to be recorded in
the accounts only if it is objectively
determined by a transaction.

Go
od
will

A loss should be recorded if the business

prospects of an acquired firm (and the
acquired goodwill) become significantly
impaired. Assume that on December 31,
FaceCard Company has determined that
$250,000 of the goodwill created from the
purchase of Electronic Systems is
impaired.

INTAN
GIBLE
ASSET
DISCLO
SURE

COMPA
RISON
OF
INTAN
GIBLE
ASSET
S

Lear
n
i
O bj e n g
Desc
c
tive
ribe
how
repo
rted
d ep r
pre
in
ec
ia
an in
pare
com tion exp
a ba
e sta
lanc
ense
fixed
e
t
e
is
asse
s
ts an heet th ment an
at in
d int
clud d
angi
es
ble a
sset
s

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Fix
ed
an
d
Int
an
gib
le
Ass
ets

Fix
ed
an
d
Int
an
gib
le
Ass
ets

o
o
o

Intangible assets are usually reported in

the balance sheet in a separate section
following fixed assets.
The balance of 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.

Lear
n
i
O bj e n g
Desc
c
t
i
ribe
v
e
a
asse
nd i l
lu
t
the turnov strate
effic
e
ienc r ratio the fixed
use y of a coto asses
of it
s fix mpany s
ed a
s
sset
s

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Fix
ed
Ass
et
Tur
no
ver
Rat
io

One measure of the revenue-generating

efficiency of fixed assets is the fixed asset
turnover ratio. It measures the number of
dollars of revenue earned per dollar of
fixed assets and is computed as follows:
Fixed Asset
Turnover =
Ratio

Net Sales
Average Book Value of Fixed
Assets

x
i
d
n
e
p
p
A changingd
e

Ex ar Fix s
l
i
t
e
m
s
i
S
As

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

Exc
ha
ngi
ng
Si
mil
ar
Fix
ed
Ass
ets

Old equipment is often traded for new

equipment having a similar use. In such
cases, the seller allows the buyer a tradein allowance for the old equipment traded
in.

The remaining balancethe amount owed

is either paid in cash or recorded as a
liability. It is normally called boot.

Gai
n
on
Exc
ha
ng
e

(see next slide)

Gai
n
on
Exc
ha
ng
e

Los
s
on
Exc
ha
ng
e

This time assume that only a $675 tradein allowance was allowed toward the
purchase of the new equipment. Because
the market value of the new equipment is
$5,000, the cash paid on the exchange is
$4,325.

Los
s
on
Exc
ha
ng
e

d
n
a
s
t
e
s
e
s
l
A
b
i
d
g
e
n
x
a
i
t
F
s
In
t
d
e
s
n
s
E
A
e
Th

c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.