1. Financial Accounting Lesson 7: Fixed and Intangible Assets
Ben Trnka/Boz Bostrom

2. Fixed Assets are typically quite significant

3. Overview
Understand accounting for Property, Plant, and Equipment starting with inception and through disposal
Learn the three main methods of depreciation
Understand how to deplete natural resources
Understand broad accounting of intangibles

4. Acquiring Property, Plant, and Equipment
What are some example of Property, Plant, and Equipment?
Land, Office Buildings, Factories, Machinery, Vehicles, Computers
How can companies acquire Property, Plant, and Equipment?
Buy from another company
Construct own assets

5. Acquiring Property, Plant, and Equipment
Capitalizing vs. expensing
When a purchase is capitalized, an asset is created
Expense is recorded as the asset is used up
When a purchase is expensed, there is an immediately decrease to net income
If fixed assets are purchased, what is capitalized?
Purchase Price, Sales Tax, Legal Fees, Transportation Costs, Setup
Pretty much anything to get the asset ready for use
If fixed assets are constructed, what is capitalized?
All constructions costs – materials, labor
Interest on a loan to finance the construction

6. Acquisition Journal Entry
When an Asset is Purchased
When an Asset is Constructed
The Fixed Asset is debited
Credit generally to cash or notes payable
Dr Factory $1M
Cr Notes Payable $1M
Throughout Construction:
Construction in Progress $400K
Cash or Notes Payable $400K
Construction in Progress $600K
Cash or Notes Payable $600K
Construction Completed:
Factory $1M
Construction in Progress $1M

7. During Use - Depreciation
Depreciation allocates the cost of an asset over its useful life
NOT a way to measure the value of an asset
Need to know three pieces of information:
1. Cost
2. Estimated Useful Life
3. Estimated Salvage Value
Three ways to measure depreciation:
1. Straight Line
2. Units of Production
3. Declining Balance

8. During Use – Depreciation – Straight Line
Costco purchased a new forklift. Pertinent information:
Cost - $100,000
Estimated Life – 5 years
Salvage Value - $10,000
Depreciation per year = Cost- Salvage Value 100,000-10,000 = 18,000
Useful Life
What is the journal entry in year 1? What is the financial statement impact?

9. During Use – Depreciation – Straight Line Entries in Years 2-5

10. During Use – Depreciation – Units of Production
Costco purchased a new forklift. Pertinent information:
Cost - $100,000
Estimated Life – 15,000 Hours
Salvage Value - $10,000
Depreciation rate = Cost- Salvage Value 100,000-10,000 = $6 per hour
Useful Life (in units) 15,000 hours
What is the journal entry in year 1 assuming the forklift was used for 4,000 hours?
What is the financial statement impact?

11. During Use – Depreciation – Units of Production Year-by-Year Summary
What if things don’t work out exactly as planned?
Adjust the last year to meet expected salvage value

12. During Use – Depreciation – Declining Balance
Costco purchased a new forklift. Pertinent information:
Cost - $100,000
Estimated Life – 5 years
Salvage Value - $10,000
Costco has elected to use the double declining balance method
Depreciation Rate = __1___ X X 2 = 40% - Depreciate 40% of
Useful Life Carrying Value each year
- Carrying value is cost less accumulated depreciation
What is the journal entry in year 1?
What is the financial statement impact?

13. During Use – Depreciation – Declining Balance Year-by-Year Summary
Adjust the last year to meet expected salvage value

14. During Use – Depreciation - Summary

15. Method choice and tax considerations
A goal of financial accounting is to provide users with useful information
Companies prefer to show higher net income and thus usually choose straight- line
For tax purposes, different rules apply
For tangible assets other than buildings/land, companies generally can deduct 100% of the cost of the asset in the year purchased
Thus, some companies can show financial statement income but not pay tax

16. During Use – Repairs and Maintenance Vs. Additions and Improvements
Repairs/maintenance
Routine costs to keep assets in proper condition
Don’t extend life of asset or increase its value
Additions/improvement
Often referred to as capital expenditures
Significant expenditures which increase life and/or value of asset
Not always clear / judgement often needed
Management may have incentive to capitalize expenditures
In 2001/2002 WorldCom capitalized $3.8 billion which should have been expensed

17. During Use – Repairs and Maintenance Vs. Additions and Improvements
Normal Maintenance/repairs are expensed as incurred
Dr. Maintenance Expense $1,000
Cr. Cash $1,000
Additions and improvements are capitalized
Dr. Factory $1,000

18. Disposition of Fixed Assets
Computation of gain/loss:
Proceeds
Less: Net Book Value (Cost less accumulated depreciation)
Equals: Gain/(Loss)
Proceeds: $25,000
Net book value: $30,000 ($100,000 - $70,000)
Gain/(Loss): ($5,000)
Dr. Cash ,000
Dr. Accumulated Depreciation 70,000
Dr. Loss on Sale ,000
Cr. Building ,000
Example: A company sells a building with a cost of $100,000 and Accumulated Depreciation of $70,000. The company receives $25,000 cash. What is the gain/(loss) and journal entry?

19. Disposition of Fixed Assets
Computation of gain/loss:
Proceeds
Less: Net Book Value (Cost less accumulated depreciation)
Equals: Gain/(Loss)
Proceeds: $45,000
Net book value: $30,000 ($100,000 - $70,000)
Gain/(Loss): $15,000
Dr. Cash ,000
Dr. Accumulated Depreciation 70,000
Cr. Gain on Sale ,000
Cr. Building ,000
Example: A company sells a building with a cost of $100,000 and Accumulated Depreciation of $70,000. The company receives $45,000 cash. What is the gain/(loss) and journal entry?

20. Natural Resources - Depletion
When a company uses natural resources, they record depletion using the units of production method
Example: A company purchased a tract of timber for $900,000, with an estimated 2,000,000 board feet included in the land. The land will be worth $50,000 after the timber is harvested. What is the first year journal entry if 100,000 board feet are harvested?
Cost per board foot: Cost of Asset – Residual Value = $900,000-$50,000 = $0.425/Board foot Life in Units 2,000,000
Expense in year 1 = .425 * 100,000 = $42,500
Journal Entry
Dr. Depletion Expense $42,500
Cr. Accumulated Depletion $42,500

21. Intangibles
Any asset that is not physical in nature, no tangible substance. Two main groups:
Indefinite Lived Intangibles
Created when one company purchases either another company or its intangible assets
Goodwill, Trademarks/Brands
Check for impairment annually, do not amortize
Definite Lived Intangibles
Patents, Copyrights, Franchises, Licenses
Record amortization to allocate the value of the asset over its useful life
Amortize using straight line

22. Amortization Example
A company developed a patent, which has a 20 year life. The patent was capitalized at a cost of $50,000. What is the amortization entry each year?
$50,000/20 years = $2,500 Amortization Expense per year
Dr. Amortization Expense $2,500
Cr. Patent $2,500

23. Thanks for tuning in! Key Takeaways
In general, capitalize all costs needed to bring a long-lived asset to its intended use
The three main depreciation methods are straight line, units of production, and declining balance
Natural resources are depleted using a system similar to units of production
Indefinite lived intangibles are tested for impairment annually
Definite lived intangibles are amortized each year
Thanks for tuning in!