1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 9 Fixed & Intangible Assets

2 FIXED ASSETS Fixed assets are –Long term or relatively permanent –Tangible, i.e., physical –Owned, used by business –Not held for resale Also called Property, Plant, & Equipment (PPE) Fixed assets are –Long term or relatively permanent –Tangible, i.e., physical –Owned, used by business –Not held for resale Also called Property, Plant, & Equipment (PPE) LG 1

3 CLASSIFYING COSTS Expenditures must be classified as –Expenses –Investments –Fixed assets Expenditures must be classified as –Expenses –Investments –Fixed assets LG 1

4 EXHIBIT 2 Expense No Yes Fixed Assets Investments No Yes When is a purchased item a fixed asset? LG 1

5 ASSET COST Cost of asset includes –All amounts spent to get asset in place –All amounts spent to get asset ready to use LG 1

6 EXERCISE 9-1a Press “Enter” or click left mouse button for answer. Indicate which costs to acquire a printing press should be debited to the asset. 1.Freight 2.Special foundation 3.Sales tax on purchase 4.Insurance while in transit 5.Fee paid for installation 6.New parts to replace damaged parts LG 1 Click button to skip this exercise

7 CAPITAL & REVENUE EXPENDITURES Money spent on assets after they are acquired are divided between –Capital expenditures –Improve asset –Extend useful life –Revenue expenditures –Ordinary maintenance & repairs LG 1

8 REVENUE EXPENDITURES Revenue expenditures –Are ordinary repairs & maintenance –Benefit only current period –Increase (debit) repairs & maintenance expense Revenue expenditures –Are ordinary repairs & maintenance –Benefit only current period –Increase (debit) repairs & maintenance expense LG 1

9 CAPITAL EXPENDITURES Capital expenditures –Are asset improvement –Benefit current & future periods –Increase (debit) fixed asset Capital expenditures –Are asset improvement –Benefit current & future periods –Increase (debit) fixed asset LG 1

10 EXERCISE 9-5a (partial) Press “Enter” or click left mouse button for answer. Hicks incurred the following costs related to trucks and vans in operating a delivery service. Identify the capital expenditures. 1.Replaced radio with new radio with greater range. 2.Overhauled engine on 3-yr. old truck 3.Changed oil all trucks, vans 4.Installed security systems 5.Changed radiator fluid on 4-yr. Old truck 6.Installed hydraulic lift LG 1 Click button to skip this exercise

11 EXERCISE 9-5b (partial) Press “Enter” or click left mouse button for answer. Hicks incurred the following costs related to trucks and vans in operating a delivery service. Identify the revenue expenditures. 1.Replaced radio with new radio with greater range. 2.Overhauled engine on 3-yr. old truck 3.Changed oil all trucks, vans 4.Installed security systems 5.Changed radiator fluid on 4-yr. Old truck 6.Installed hydraulic lift LG 1 Click button to skip this exercise

12 EXHIBIT 4 LG 2

13 DEPRECIATION METHODS 3 methods to calculate depreciation expense –Straight-line depreciation Same amount of depreciation each year –Units of production depreciation Depreciation varies with asset use –Declining balance Accelerated method provides more depreciation in earlier years 3 methods to calculate depreciation expense –Straight-line depreciation Same amount of depreciation each year –Units of production depreciation Depreciation varies with asset use –Declining balance Accelerated method provides more depreciation in earlier years LG 2

14 STRAIGHT-LINE DEPRECIATION Depreciation expense = (Cost – Residual value) / Useful life LG 2

15 UNITS-OF-PRODUCTION DEPRECIATION Depreciation expense = {(Cost – Residual value)/ Productive activity} * Current activity LG 2

16 DECLINING-BALANCE DEPRECIATION Depreciation expense = 2*(1/Life) * (Cost – Accumulated Depreciation) For double-declining balance: LG 2

17 LG 2 What happens when estimates are revised? Assume book value is 88,000 when residual value revised to 8,000 and remaining life extended to 8 years.

18 REVISED DEPRECIATION LG 2 (Book value – Revised residual value) / Remaining useful life (88,000 – 8,000) / 8 yrs. 10,000 per year (Book value – Revised residual value) / Remaining useful life (88,000 – 8,000) / 8 yrs. 10,000 per year

19 ASSET DISPOSAL Assets can be –Discarded –Sold First, bring depreciation expense up to date Assets can be –Discarded –Sold First, bring depreciation expense up to date LG 3

20 INTANGIBLE ASSETS Intangible assets are –Long term or relatively permanent –Without physical properties –Owned, used by business –Not held for resale Intangible assets are –Long term or relatively permanent –Without physical properties –Owned, used by business –Not held for resale LG 4

21 INTANGIBLE ASSETS: Examples Examples of intangible assets are –Patents –Copyrights, trademarks –Goodwill Cost of intangible assets is amortized over useful (legal life) LG 4

22 INTANGIBLE ASSETS: Definitions Patent –Exclusive right to produce, sell goods with 1 or more unique features Copyright –Exclusive to publish, sell literary, artistic, musical composition Trademark –Name, term, symbol used to identify business, product LG 4

23 AMORTIZING COST Amortization –Term used to match cost of intangible asset against revenue over useful (legal) life Amortization similar to straight-line depreciation Amortization expense = (Cost – Residual value) / Useful life LG 4

24 INTANGIBLE ASSET: Goodwill Goodwill –Arises when one business buys another business –Created when purchase price of business greater than fair market value of net assets –Not amortized; impaired value adjusted LG 4

25 FINANCIAL UTILIZATION Financial utilization measures efficient revenue generation of operational assets Fixed Asset Turnover = Revenue/ Ave. Book Value Fixed Assets Financial utilization measures efficient revenue generation of operational assets Fixed Asset Turnover = Revenue/ Ave. Book Value Fixed Assets LG 6

26 Never test the depth of the water with both feet. (Clones are people two) If you think nobody cares if you're alive, try missing a couple of car payments.