1. Reporting and Interpreting Long-Term Tangible
Chapter 6 T.Hend Alajaji
Chapter 9: Reporting and Interpreting Long-Lived Tangible and Intangible Assets.

2. Depreciation Expense = income statement
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

5. Define, classify, and explain the nature of long-Term assets.
Learning Objective 1
Define, classify, and explain the nature of long-Term assets.
Learning objective number 1 is to define, classify, and explain the nature of long-lived assets.

6. Nature of Fixed 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.

7. Apply the cost principle to the acquisition of long-Term assets.
Learning Objective 2
Apply the cost principle to the acquisition of long-Term assets.
Learning objective number 2 is to apply the cost principle to the acquisition of long-lived assets.

8. Cost of
Fixed Assets

9. Acquisition of Fixed Assets
Acquisition cost includes:
purchase price, and
all expenditures needed to prepare the asset for use.
The cost of a tangible asset includes the purchase price as well as all costs necessary to get the asset in place and ready for its intended use. We record the purchase price net of any cash discounts taken.
Finance charges are not included in the cost of an asset. If we elect to finance the purchase over a period of time, the interest cost is charged as an expense when incurred. Recording acquisition costs as assets is referred to as capitalizing the costs.
Recording costs as assets is called capitalizing the costs.

10. Acquisition (Cost ) of Fixed Assets
Purchase cost
Legal fees
Surveying fees
Land
Purchase/construction cost
Legal fees
Appraisal fees
Architectural fees
Buildings
Part I
When purchasing land, the cost includes the purchase price, legal fees, surveying fees, broker’s commissions, and other costs generally incurred in connection with the purchase such as taxes and recording fees. As noted earlier, land is not a depreciable asset.
Part II
Whether we purchase or construct a building, the cost should include the purchase price plus any legal fees, appraisal fees, and architectural fees.
Part III
Equipment is recorded at its purchase price less any available cash discounts. In addition to the purchase price, the cost of equipment includes sales taxes, delivery charges, and installation costs.
Purchase/construction cost
Sales taxes
Transportation costs
Installation costs
Equipment
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11. Cash Purchase
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.
Part I
Let’s see how to record the purchase of an asset. Our first example will be a purchase for cash. Cedar Fair purchased a new ride for $26,000,000 less a $1,000,000 discount. Cedar Fair paid $125,000 for transportation and $625,000 for installation of the ride. We will record the purchase assuming that Cedar Fair paid cash for the new ride and for the transportation and installation.
Part II
Cedar Fair’s cost is $25,750,000, the purchase price less the discount ($1,000,000) plus the transportation ($125,000) and installation ($625,000) costs.
Part III
The asset account, Cash, will be decreased by the total cost of $25,750,000, and the asset account, Rides and Equipment, will be increased by the same amount. Let’s look at the journal entry.
Part IV
The entry to record the purchase includes a debit to the asset account Rides and Equipment account and a credit to Cash for $25,750,000.

12. 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. 1
Analyze 2
Record

13. Accumulated Depreciation
Depreciation Expense
Depreciation is a cost allocation process that matches costs of operational assets with periods benefited by their use.
Acquisition
Cost
Expense
Cost Allocaton
Balance Sheet
Income Statement
Depreciation Expense
Income Statement
Depreciation for the current year
Part I
Depreciation is a process of cost allocation. We allocate the cost of the asset to expense over its useful life in some rational and systematic manner. We do not want to confuse asset valuation, an economic concept, with allocation. The unused portion of the asset’s cost appears on the balance sheet. We allocate a portion of the cost to expense on the income statement each accounting period.
Part II
The current year’s depreciation is an expense on the income statement. Accumulated depreciation represents the depreciation taken on the asset since its purchase, and is deducted from the asset’s cost on the balance sheet.
Balance Sheet
Accumulated Depreciation
Total of depreciation to date for an asset

14. Depreciation Expense
The effects of $130 of depreciation on the accounting equation and the journal entry to record them follow: 1
Analyze 2
Record
Part I
Depreciation expense increases the contra asset account Accumulated Depreciation and increases the expense account Depreciation Expense.
Part II
We debit the expense account Depreciation Expense and credit the contra asset account Accumulated Depreciation.
Part III
Regardless of the method used to calculate depreciation expense, we must know three amounts for the asset: (1) the asset’s acquisition cost; (2) the estimated useful life of the asset, and (3) the estimated residual (salvage) value we expect to receive at the end of its useful life. Once these three amounts are known, we select the depreciation method that we will use to calculate depreciation expense.
Depreciation calculations require three amounts for each asset:
Acquisition cost.
Estimated useful life.
Estimated residual value.
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15. Depreciation Expense 2008 Depreciation Includes $130 for 2008
Part I
Cedar Fair’s income statement in the upper left shows the $130 million of Depreciation Expense in 2008.
Part II
The balance sheet in the lower right shows that this $130 million, when combined with depreciation of prior years, brought the total Accumulated Depreciation to $720 million at December 31, 2008.
Part III
The $1,800 difference between the Property and Equipment’s $2,520 cost and $720 of Accumulated Depreciation is called the book (or carrying) value. Most companies report a breakdown of these totals by class of asset (e.g., buildings, equipment) in their financial statement notes.
Includes $130 for 2008
Book value 2008
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16. Learning Objective 3
Apply various depreciation methods as economic benefits are used up over time.
Learning objective number 3 is to apply various depreciation methods as economic benefits are used up over time.

17. Depreciation Expense Factors
Initial Cost
Residual Value - =
Depreciable Cost
Useful Life 1
Periodic Depreciation Expense 2 3 4 5

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

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

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

21. $24,000 – $2,000 Straight-Line Method 5 years
= $4,400 annual depreciation

22. Straight-Line Method Cost ($24,000) – Residual Value ($2,000) =
Accum. Depr. Book Value Depr. Book Value at Beginning at Beginning Expense at End Year Cost of Year of Year for Year of Year
1 $24,000 $24,000 $4,400 $19, ,000 $ 4,400 19,600 4,400 15, ,000 8,800 15,200 4,400 10, ,000 13,200 10,800 4,400 6, ,000 17,600 6,400 4,400 2,000
Annual Depreciation
Expense ($4,400)
Cost ($24,000) – Residual Value ($2,000) =
Estimated Useful Life (5 years)

23. Straight-Line Method = $20,000 per year ($62,500 - $2,500) × 1 3
($62,500 - $2,500) ×
1 3
Part I
Depreciation expense for each year is determined by taking the asset’s cost less its estimated residual value and multiplying this amount by the fraction of 1 over the asset’s estimated useful life in years.
Part II
The annual depreciation is $20,000. Cost minus residual value ($62,500 - $2,500 = $60,000) is multiplied by one third.
Part III.
Notice that depreciation expense is the same amount in each of the three years. If we plot this amount on a graph, it would be a straight-line. That is how we got the name straight-line for this method. Accumulated depreciation increases by $20,000 each year. The cost of the asset ($62,500) less accumulated depreciation at the end of any year is called book value. Book value decreases by $20,000 each year. The book value is equal to the estimated salvage value at the end of the asset’s useful life. We want this to be true regardless of the method we use.
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24. 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) ×
1 4
Part I
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.
Part II
Depreciation expense for each year is determined by taking the asset’s cost less its estimated residual value and multiplying this amount by the fraction of 1 over the asset’s estimated useful life in years.
Part III
The annual depreciation is $40,000. Cost minus residual value ($200,000 - $40,000 = $160,000) is multiplied by one fourth.
Part IV
After two years, the book value is $120,000 ($200,000 cost less $80,000 of accumulated depreciation).
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25. 1 3 ($27,000 - $1,500) × $8,500 per year = 1. Straight-line
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.
1. Straight-line
Part I
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. Complete a depreciation schedule for each of the alternative methods.
1. Straight-line.
2. Units-of-production.
3. Double-declining-balance.
Part II
Requirement 1. Straight-line method.
Depreciation expense for each year is determined by taking the asset’s cost less its estimated residual value and multiplying this amount by the fraction of 1 over the asset’s estimated useful life in years.
Part III
The annual depreciation is $8,500. Cost minus residual value ($27,000 - $1,500 = $25,500) is multiplied by one third. =
$8,500 per year
($27,000 - $1,500) ×
1 3
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26. 1. Straight-line E9-7 Computing Depreciation under Alternative Methods
At the end of three years, the Accumulated Depreciation balance is $25,500 and the book value is $1,500.
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