Valuation and Reporting of Fixed and Intangible Assets Chapter 7

Fixed Asset Cost The cost of a fixed asset includes all reasonable and necessary costs to get the asset in place and ready for its intended use  Costs that do not increase the asset’s usefulness are treated as expenses

Depreciation Depreciation is a process of allocation, not valuation  Purpose is to allocate the cost of the asset over the periods in which it will provide benefits No attempt is made to adjust the asset’s cost to approximate its current value Depreciation expense is based on estimates of the asset’s useful life and salvage value  Only the original cost is known with certainty

Depreciation Various methods of calculating depreciation are acceptable  Straight line method (Cost – salvage value) / useful life  Units of output method (Cost – salvage value) / total expected output * current output  Accelerated methods Declining balance method Sum of the years’ digits method

Depreciation Double declining balance method  Straight line rate is calculated by dividing 100% by the useful life and doubling that rate  The rate is multiplied by the book value each year to determine the depreciation expense  Depreciation stops when the salvage value is reached

Depreciation Example

Subsequent Expenditures Various types of expenditures are made after a fixed asset has been acquired  Revenue expenditure Normal maintenance to keep the asset operating as designed Does not add to the asset’s value, improve its functionality, or extend its life Treat as an expense

Subsequent Expenditures  Capital Expenditure Increase the asset’s life, improve its capacity, or increase its value Replacement of major components or addition of new components Treat as an additional cost of the asset  Capitalize and depreciate  If a replacement of an existing component, write off the remaining value of the component being replaced as depreciation expense

Disposal of Fixed Assets Steps in accounting for the disposal  Update depreciation to the date of the disposal  Compare book value to selling price (if any) to determine any gain or loss  Remove the asset’s original cost and its accumulated depreciation from the books, and record the cash received and any gain or loss

Intangible Assets Provide future benefits but have no physical substance  Usually some sort of legal right Patents, copyrights, trademarks, franchise fees, leaseholds, goodwill, etc.  Recorded at original cost  Amortized using the straight line method No salvage value No accumulated amortization account  Asset account is reduced directly

Presentation of Fixed Assets Property, plant and equipment  Show at cost, less accumulated depreciation Intangibles  Show at depreciated cost