1. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2. Recording Fixed Assets Fixed assets should be recorded at the cost of acquiring them, including: Purchase price; Taxes paid on the purchase; Fees such as closing costs paid to attorneys; Delivery costs; Insurance costs during transit; and Installation costs. A fixed asset is any tangible resource that is expected to be used in the normal course of operations for more than one year and is not intended for resale. Ex. Land, Buildings, Equipment, Furniture, Fixtures, etc.

3. Recording Fixed Assets (Example) Purchase Price: $60,000 Additional Sales Tax: $3,600 County Fee: $400 GPS System: $1,000 Insurance: $1,400 Dozier Building Supply Assume Dozier Building Supply buys a delivery truck and pays the following:

4. Recording Fixed Assets (Example cont.) Assets=Liabilities+Equity +65,000 -65,000 The entry to record the purchase of the truck is: Notice that all costs except insurance are included in the cost of the truck.

5. Expensing Fixed Assets Depreciation expense is recognized each period to apply the matching principle and the cumulative depreciation expense is called accumulated depreciation. Depreciation the process of allocating the cost of a fixed asset over its useful life. A fixed asset converts to an expense as it is used or consumed.

6. Recording Depreciation Depreciation expense is recorded at the end of an accounting period with an adjusting journal entry, by debiting Depreciation Expense and crediting Accumulated Depreciation. -=

7. Straight-Line Depreciation Assets=Liabilities+Equity -10,000 Assume that Dozier’s purchased a truck on 1/1/2012 for $65,000. The truck has a salvage value of $15,000 and a useful life of 5-years or 100,000 miles. Using straight-line depreciation, Dozier would record $10,000 per year or [($65,000 – 15,000) ÷ 5 = $10,000]. GENERAL JOURNAL DateDebitCredit 2012 Dec 31Depreciation Expense 10,000 Description Accumulated Depreciation

8. Double-Declining Depreciation Assets=Liabilities+Equity -26,000 Recall that Dozier’s purchased a truck for $65,000 on 1/1/2012. The truck had a salvage value of $15,000 and a 5-year life. The straight-line rate is 1/5 or 20%. Thus, the double-declining depreciation for 2012 would be [$65,000 x (2 x 20%) = $26,000].

9. Units of Activity Method Assets=Liabilities+Equity -12,000 Dozier’s purchased a truck worth $65,000 on 1/1/2012. It has a salvage value of $15,000 and a life of 100,000 miles. Depreciation per unit is $0.50 per mile [or ($65,000 – 15,000) ÷ 100,000]. If Dozier drives the truck 24,000 miles in 2012, depreciation expense is $12,000 (or 24,000 x $0.50). GENERAL JOURNAL DateDebitCredit 2012 Dec 31Depreciation Expense12,000 Description Accumulated Depreciation

10. Adjustments during Useful Life Changes in Estimates Additional Improvement Expenditures Significant Declines in Asset Market Values Adjustments for fixed assets can arise from:

11. Changes in Depreciation Estimates Assume Thomas Supply purchases a machine for $90,000 on 1/1/2012, with a 10 year useful life and $10,000 salvage value. Using straight-line method, Thomas records $8,000 depreciation expense [($90,000 – $10,000) ÷ 10] each year. Assets=Liabilities+Equity -8,000 GENERAL JOURNAL DateDebitCredit 2012 Dec 31Depreciation Expense8,000 Accumulated Depreciation Description

12. Changes in Depreciation Estimates Year 5: Thomas estimates that the machine will last only 8 years and have a salvage value of $6,000. The prospective revision (current and future) will not correct the first 4 years. Calculate net book value at the time of estimate revision (or unexpired cost): Cost of the asset, January 1, 2012$90,000 Less: Accumulated depreciation for four years$32,000 Net book value on January 1, 2016$58,000 Step 1 Step 2 Calculate depreciable cost for future depreciation: Net book value on January 1, 2016$58,000 Less: Revised estimated salvage value $6,000 Remaining depreciable cost$52,000 Step 3 Calculate revised depreciation expense: $52,000 Remaining depreciable cost ÷ 4 remaining useful life = $13,000 annual depreciation Total useful life now is eight years. Thus, there are only four years remaining.

13. Capital Expenditure A company purchases a fixed asset for $50,000 on 1/1/2012, with a 5-year life and no salvage. During the fifth and final year of the asset’s life, the company incurs $8,000 for upgrades that extend the asset’s life for 2 years. General Journal Year fiveFixed Asset$8,000 Cash$8,000 (To record upgrade to asset) Assets=Liabilities+Equity +8,000 -8,000

14. Change in Depreciation Due to Capital Expenditure Calculate depreciable cost: Cost of the asset, Jan. 1, 2012$50,000 Less: Accumulated depreciation for four years$40,000 Add: Capital Expenditure $ 8,000 Updated Net Book Value on Jan. 1, 2016$18,000 Less: Estimated salvage value$ 0 Remaining depreciable cost$18,000 Step 1 Step 2 Calculate depreciation expense: Remaining depreciable cost$18,000 Divided by remaining useful life÷ 3 Annual depreciation expense$ 6,000

15. Revenue Expenditure A company purchases a fixed asset for $50,000 on 1/1/2012, with a 5-year life and no salvage. During the fifth and final year of the asset’s life, the company incurs $1,000 in ordinary maintenance. General Journal Year fiveMaintenance Expense$1,000 Cash$1,000 (To record normal maintenance) Assets=Liabilities+Equity -1,000

16. Asset Impairment When a fixed asset’s market value falls materially below its net book value and the decline in value is deemed to be permanent, the asset is considered impaired. Under GAAP, companies apply conservatism by writing these assets down from their book values to their market values. Assume a machine losses value equal to $100,000: General Journal Loss on Impairment$100,000 Fixed Asset$100,000 (To record permanent impairment asset) Assets=Liabilities+Equity -100,000 Included in Other Expenses in the Income Statement

17. Disposal of Fixed Assets The accounting for the disposal of a fixed asset consists of the following three steps: 1. Update depreciation on the asset. 2. Calculate gain or loss on the disposal. 3. Record the disposal.

18. Rule for Calculating the Gain or Loss on Disposal If Proceeds from Sale > Net Book Value, then Gain on Disposal If Proceeds from Sale < Net Book Value, then Loss on Disposal

19. Horizontal and Vertical Analyses A good place to start in the analyses of fixed assets is with performance of horizontal and vertical analyses.HorizontalAnalysis Vertical Analysis Fixed assetsCY Fixed assets – PY Fixed assets PY Fixed Assets Fixed assets Total Assets Depreciation Expense CY Depreciation – PY Depreciation PY Depreciation Depreciation Expense Total Sales

20. Fixed Asset Turnover Ratio How do you find out if the company is using fixed assets productively to generate revenues? Total Revenues Average Net Book Value of Fixed Assets Where average Net Book Value =Beginning Net Book Value + Ending Net Book Value 2 The fixed asset turnover ratio compares total revenues during a period to the average net book value of fixed assets for the period.

21. Average Life of Fixed Assets ? Represents the number of years, on average, that a company expects to use its fixed assets. ? Is calculated as: Average useful life = Cost of Fixed Assets ÷ Depreciation Expense ? A higher number represents a longer useful life and works best with straight-line depreciation.

22. Average Age of Fixed Assets ? Represents the number of years, on average, that a company has used its fixed assets. ? Is calculated as: Average age = Accumulated Depreciation ÷ Depreciation Expense ? A higher number means assets are older and works best with straight- line depreciation.

23. Intangible Assets An intangible asset is a resource that is used in operations for more than one year but has no physical substance. Examples include: Patent Trademark Copyright Franchise Goodwill

24. Amortizing Intangible Assets Suppose that a company possesses a $60,000 patent that has the maximum legal life of 20 years. The company believes that the patent will be useful for only 12 years and will then be worthless. How do we record amortization? $60,000 ÷ 12 = $5,000 per year General Journal End of yearAmortization Expense$5,000 Patent$5,000 Assets=Liabilities+Equity -5,000

25. End of Chapter 8