Reporting and Interpreting Long-Term Tangible

Ch6 Fixed Assets Nature of Fixed Assets Acquisition cost Purachase price expenditures Depreciation Expense = income statement Accumulated Depreciation = Balance sheet estimated useful life Estimated residual value

Define, classify, and explain the nature of long-Term assets.

Fixed assets are long term Assets Fixed assets are tangible assets because they exist physically. They are owned and used by the business and are not held for sale as part of normal operations.

Apply the cost principle to the acquisition of long- Term assets.

Recording costs as assets is called capitalizing the costs. Acquisition cost includes: 1.purchase price, and 2.all expenditures needed to prepare the asset for use.

Purchase cost Purchase cost Legal fees Legal fees Surveying fees Surveying fees Purchase cost Purchase cost Legal fees Legal fees Surveying fees Surveying fees LandLand Purchase/construction cost Purchase/construction cost Sales taxes Sales taxes Transportation costs Transportation costs Installation costs Installation costs Purchase/construction cost Purchase/construction cost Sales taxes Sales taxes Transportation costs Transportation costs Installation costs Installation costs Equipment Purchase/construction cost Purchase/construction cost Legal fees Legal fees Appraisal fees Appraisal fees Architectural fees Architectural fees Purchase/construction cost Purchase/construction cost Legal fees Legal fees Appraisal fees Appraisal fees Architectural fees Architectural fees BuildingsBuildings 9-10

Alaissa purchased a new Cars for $26,000,000 less a $1,000,000 discount. Alaissa paid $125,000 for transportation and $625,000 for installation of the Cars. Prepare the journal entry for the acquisition assuming alaissa paid cash for the new Cars.

1 Analyze 2 Record Alhaker purchased a new ride for $26,000,000 less a $1,000,000 discount. Alhaker paid $125,000 for transportation and $625,000 for installation of the ride. Prepare the journal entry for the acquisition assuming Alhaker paid cash for the new ride.

Depreciation is a cost allocation process that matches costs of operational assets with periods benefited by their use. Cost Allocaton Balance Sheet Income Statement Expense Acquisition Cost Depreciation Expense Income Statement Depreciation for the current year Balance Sheet Accumulated Depreciation Total of depreciation to date for an asset

Depreciation calculations require three amounts for each asset:  Acquisition cost.  Estimated useful life.  Estimated residual value. The effects of $130 of depreciation on the accounting equation and the journal entry to record them follow: 1 Analyze 2 Record 9-14

2008 Depreciation Includes $130 for 2008 Book value

Apply various depreciation methods as economic benefits are used up over time.

Initial Cost Residual Value - = Depreciable Cost Useful Life 1 Periodic Depreciation Expense

1- Straight-Line 3- Declining- Balance Other 2- Units-of-Production Use of Depreciation Methods

FactsFacts Original Cost.....………….. $24,000 Estimated Life in years…..5 years Estimated Residual Value...$2,000 Original Cost.....………….. $24,000 Estimated Life in years…..5 years Estimated Residual Value...$2,000

Straight-Line Method Cost – estimated residual value Estimated life = Annual depreciation

Straight-Line Method $24,000 – $2,000 5 years = $4,400 annual depreciation

Accum. Depr.Book ValueDepr.Book Value at Beginningat BeginningExpenseat End YearCostof Yearof Year for Yearof Year 1$24,000$24,000$4,400$19, ,000$ 4,40019,6004,40015, ,0008,800 15,200 4,400 10, ,00013,200 10,800 4,400 6, ,00017,6006,4004,4002,000 Cost ($24,000) – Residual Value ($2,000) Estimated Useful Life (5 years) = Annual Depreciation Expense ($4,400) Straight-Line Method

= $20,000 per year ($62,500 - $2,500) ×

M9-4 Computing Book Value (Straight-Line Depreciation) Calculate the book value of a two-year-old machine that cost $200,000, has an estimated residual value of $40,000, and has an estimated useful life of four years. The company uses straight-line depreciation. = $40,000 per year ($200,000 - $40,000) ×

E9-7 Computing Depreciation under Alternative Methods Sonic Corporation purchased and installed electronic payment equipment at its drive-inn restaurants in San Marcos, TX, at a cost of $27,000. The equipment has an estimated residual value of $1,500. The equipment is expected to process 255,000 payments over its three-year useful life. Per year, expected payment transactions are 61,200, year 1; 140,250, year 2; and 53,550, year 3. Required: Complete a depreciation schedule for each of the alternative methods. 1. Straight-line. 2. Units-of-production. 3. Double-declining-balance. = $8,500 per year ($27,000 - $1,500) × Straight-line 9-25

E9-7 Computing Depreciation under Alternative Methods 1. Straight-line 9-26