1. Fixed Assets and Intangible Assets Chapter 7

2. Characteristics of Fixed Assets  They exist physically and thus are tangible assets.  The are owned and used by the company in its normal operations.  They are not offered for sale as part of normal operations.

3. Costs to Include in Fixed Assets Land Building

4. Costs to Include in Fixed Assets Machinery & Equipment Land Improvements

5. Accounting for Depreciation  Over time, fixed assets other than land lose their ability to provide services.  The cost of these fixed assets should be expensed in a systematic manner during their useful lives.  This is called depreciation. Factors include wear and tear Physical Depreciation Physical Depreciation Factors include obsolescence Functional Depreciation Functional Depreciation

7. Two Common Depreciation Methods Asset acquired Equal amounts of depreciation each period Residual value Straight-Line –Same amount of depreciation expense each year. Straight-Line Double-declining-balance

8. Straight-Line Cost – Estimated Residual Value Estimated Useful Life Example: Assume a $24,000 depreciable asset with an estimated 5-year useful life and estimated $2,000 residual value. Rate is 1/5 OR 20% per year Asset cost = $24,000 Depreciation = $4,400 per year Residual value = $2,000 Annual depreciation expense: ($24,000 - $2,000) / 5 = $4,400 Annual Depreciation =

9. Double-Declining-Balance Double the Straight-Line Rate × Book Value Example: Assume a $24,000 depreciable asset with an estimated 5- year useful life and estimated $2,000 residual value. Residual Value Double Straight Line Rate

10. Double-Declining-Balance –Accelerated method that provides more depreciation in earlier years. Asset acquired Depreciation expense larger in earlier periods Residual value Double-Declining-Balance

12. Disposal of Fixed Assets  Asset that are no longer useful can be Discarded Sold Traded  Book value must be removed from the accounts  Depreciation must be up to date

13. Discarding Fixed Assets  Happens when fixed assets are no longer useful to the business and have no market value.  Assume a $100,000 fixed asset, 10-year life, no salvage value, straight line depreciation, is discarded in March of the 11 th year.  What is the impact on the accounts and on the Financial Statements?

14. Discarding Fixed Assets  Assume a $100,000 fixed asset, 10-year life, no salvage value, straight line depreciation, is discarded on July 1 of the 10 th year.  Illustrate the effect of discarding the asset on the accounts and financial statements.

15. 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 gain or loss.

16. Selling Fixed Assets #1  Assume that equipment costing $25,000 is sold for $5,000. The accumulated depreciation on the date of sale is $20,000.  Illustrate the effect of discarding the asset on the accounts and financial statements.

17. Selling Fixed Assets #2  Assume that equipment costing $25,000 is sold for $2,000. The accumulated depreciation on the date of sale is $20,000.  Illustrate the effect of discarding the asset on the accounts and financial statements.

18. Selling Fixed Assets #3  Assume that equipment costing $25,000 is sold for $9,000. The accumulated depreciation on the date of sale is $20,000.  Illustrate the effect of discarding the asset on the accounts and financial statements.

19. Sale of Fixed Assets Equipment acquired on January 3, 1999, at a cost of $51,500, has an estimated useful life of 4 years and an estimated residual value of $3,500. a.What was the annual amount of depreciation for the years 1999, 2000 and 2001 using the straight-line method of depreciation? b.What was the book value of the equipment on January 1, 2002? c.Assuming that the equipment was sold on January 2, 2002, for $13,000, illustrate the effect of the sale on the accounts and financial statements. d.Assuming that the equipment was sold on January 2, 2002, for $17,000 instead of $13,000, illustrate the effect of the sale on the accounts and financial statements.

20. Revenue and Capital Expenditures Capital Expenditures  Are asset improvements.  Addition, Betterment, Extraordinary Repairs  Increase fixed assets. Revenue Expenditures  Ordinary repairs and maintenance.  Increase repairs and maintenance expense.

21. Natural Resources  Natural resources include timber, metal ores, and minerals.  As resources are harvested or mined and then sold, a portion of the cost of acquiring them must be expensed.  This is called depletion.

22. Calculating Depletion Depletion Expense = Depletion Rate × Quantity Extracted Cost of Resource Estimated Total Units of Resource Depletion Rate =

23. Natural Resources - Depletion Example  Assume that a business paid $18,000,000 for the mining rights to a mineral deposit estimated at 30,000,000 tons of ore.  8,500,000 tons were mined during a year.  Illustrate the effects of recording the depletion expense on the accounts and financial statements.

24. Intangible Assets  Long-lived assets that are used in the operations of a business and are not held for sale; examples include patents, copyrights, trademarks, and goodwill.  These do not exist physically  Accounted for in a similar way as fixed assets.  Cost is transferred to expense through amortization.

25. Intangible Assets  Patent Exclusive right to produce and sell goods with one or more unique features.  Copyright Exclusive right to publish and sell a literary, artistic, or musical composition.  Trademark A name, term, or symbol used to identify a business and its products.

26. Goodwill  Intangible created from favorable business factors such as location, product quality, reputation, and managerial skill.  Only recorded if objectively determined by a transaction (e.g., purchase of a business for more than the fair value of identifiable net assets).  Not amortized – impaired values are adjusted.  Goodwill is the most frequently reported intangible asset.

27. Financial Reporting