1. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Fixed Assets and Intangible Assets Chapter 7

2. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objectives After studying this chapter, you should be able to: Define, classify, and account for the cost of fixed assets Compute depreciation using the straight-line and double- declining-balance methods Describe the accounting for the disposal of fixed assets Describe the accounting for depletion of natural resources Describe the accounting for intangible assets Describe how depreciation expense is reported on an income statement, and prepare a balance sheet that includes fixed assets and intangible assets Financial Analysis: Describe and illustrate the fixed asset turnover in assessing a company’s use of fixed assets

3. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Define, classify, and account for the cost of fixed assets Learning Objective 1

4. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Characteristics of Fixed Assets Fixed Assets: Long-term or relatively permanent assets Examples: equipment, machinery, buildings, and land Characteristics: They exist _______ and thus are ______ assets They are owned and used by the company in its normal operations They are not offered for _______ as part of normal operations

5. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Classifying Costs Is the purchased item (cost) long-lived? Is the asset used in normal operations? _______ _________________ Yes No Step 1 Step 2

6. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Costs of Acquiring Fixed Assets

7. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Revenue and Capital Expenditures Capital Expenditures ________________ Benefit _____ and _____ periods Increase _____ assets Revenue Expenditures _________________ Benefit only the _____ period Increase repairs and maintenance expense

8. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Revenue and Capital Expenditures

9. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Compute depreciation using the straight- line and double-declining-balance methods Learning Objective 2

10. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Accounting for Depreciation ____________ : Periodic recording of the cost of fixed assets as an expense Adjustment to record depreciation increases _________________ Contra asset account – __________/__________ Factors include wear and tear ______ Depreciation ______ Depreciation Factors include obsolescence ______ Depreciation ______ Depreciation

11. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Depreciation Expense Factors Factors in Computing Depreciation Expense: _______________

12. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Two Depreciation Methods _____________ depreciation

13. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Straight-Line Method Provides for the ______ amount of depreciation expense each year of the asset’s ________ Asset acquired Equal amounts of depreciation each period Residual value ______________ Annual Depreciation =

14. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Rate is 1/5 OR 20% per year Asset cost = $24,000 Depreciation = $4,400 per year Residual value = $2,000 Straight-Line Method Example: Assume a $24,000 depreciable asset with an estimated 5-year useful life and estimated $2,000 residual value Annual depreciation expense = __________ ÷ ________ = $_____ _____ – ______ ______ _____ Annual Depreciation =

15. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Double-Declining-Balance Method Provides more depreciation in _____ years over the ___________________ This method is applied in three steps: ___________________________________

16. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Asset acquired Depreciation expense ______ in earlier periods Residual value Double-Declining-Balance Method

17. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Double-Declining-Balance Method Example: Assume a $24,000 depreciable asset with an estimated 5-year useful life and estimated $2,000 residual value Step 1. Straight-line percentage = _________ Step 2. Double-declining-balance rate = ___% (___ × ___) Step 3. Depreciation expense = _____ (_____ × ____%)

18. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Depreciation Methods Illustrated Summary of Depreciation Methods Comparing Depreciation Methods MethodUseful Life Depreciable Cost Depreciation Rate Depreciation Expense Straight-lineYears__________ ___________ Double- declining Balance Years__________ ___________

19. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Depreciation for Federal Income Tax Modified Accelerated Cost Recovery System (MACRS) Specifies _____ classes of useful life and depreciation rates for each class ______ value is ignored Fixed assets are assumed to be put in and taken out of service in the middle of the year ____ year class: Light-duty trucks and automobiles ____ year class: Light-duty trucks and automobiles _____ year class: Machinery and equipment

20. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the accounting for the disposal of fixed assets Learning Objective 3

21. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Disposal of Fixed Assets Asset that are no longer useful can be Discarded Sold Traded ____ _____ must be removed from the accounts _________ must be up to date

22. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Discarding Fixed Assets Happens when fixed assets are no longer useful to the business and have no _____ _____ Assume a $25,000 fixed asset that is fully depreciated is discarded:

23. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Discarding Fixed Assets Assume a $6,000 fixed asset with $4,750 of accumulated depreciation on December 31 is discarded in March:

24. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Selling Fixed Assets The entry to record sale of fixed assets is similar to discarding fixed assets, except that the cash or other asset received must also be recorded Sale of fixed assets could result in ____ or ____

25. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Selling Fixed Assets Example: Assume that equipment costing $10,000 is depreciated at an annual straight-line rate of 10%. The equipment is sold for cash at book value on October 12 of the eighth year of use. Accumulated depreciation as of the preceding December 31 is $7,000 Accumulated Depreciation after adjustment = $______ =$7,000 + $750 =$10,000 – $7,750 Book value is now = $______

26. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Selling Fixed Assets The asset is sold for $2,250 No ____ or ____

27. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Selling Fixed Assets The asset is sold for $1,000 $1,000 – $2,250 ____ of $1,250

28. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Selling Fixed Assets The asset is sold for $2,800 $2,800 – $2,250 _____ of $550

29. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the accounting for depletion of natural resources Learning Objective 4

30. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Natural Resources Examples of natural resources include timber, metal ores, and minerals _______: Process of transferring the cost of natural resources to an expense account

31. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Depletion Depletion is determined as follows: Step 1. Step 2. Depletion Expense = ______ ____ × _____ ______ _____ ___ _______ ________ _____ _____ __ _______ Depletion Rate =

32. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Depletion Assume that a business paid $400,000 for the mining rights to a mineral deposit estimated at 1,000,000 tons of ore Depletion rate = $400,000/1,000,000 = $0.40 per Ton If 90,000 tons are mined during the year, annual depletion is $36,000

33. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the accounting for intangible assets Learning Objective 5

34. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Intangible Assets Long-lived assets that are used in the operations of a business and are not held for sale; examples include _____, ______, ______, and ________ Do not exist physically Accounted for similar to fixed assets Cost is transferred to expense through ________

35. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Patents Manufacturers may acquire exclusive rights to produce and sell goods with one or more unique features The initial cost of a purchased patent, including any legal fees, is recorded by increasing an _____ account This cost is written off, or amortized, over the years of the patent’s expected _____ ____ The expected useful life of a patent may be less than its legal life. Patent amortization is normally computed using the _________ method

36. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Patents Assume that at the beginning of its fiscal year, a company acquires patent rights for $100,000. Although the patent will not expire for 14 years, its remaining useful life is estimated as five years. The effect of the amortization of the patent at the end of the fiscal year is as follows:

37. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Copyrights and Trademarks ________: Exclusive right to publish and sell a literary, artistic, or musical composition The costs of a copyright include all costs of creating the work plus any other costs of obtaining the copyright _________: Name, term, or symbol used to identify a business and its products Symbol: ®

38. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Goodwill ________: An intangible asset of a business that is created from such favorable factors as location, product quality, reputation, and managerial skill

39. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Frequency of Intangible Asset Disclosures

40. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Comparison of Intangible Assets

41. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe how depreciation expense is reported on an income statement, and prepare a balance sheet that includes fixed assets and intangible assets Learning Objective 6

42. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Financial Reporting ________ and _________ should be reported separately _____________________ should be disclosed _____________________ should also be reported Income Statement Balance Sheet Balance Sheet

43. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Fixed Assets and Intangible Assets in the Balance Sheet

44. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Financial Analysis: Describe and illustrate the fixed asset turnover in assessing a company’s use of fixed assets Learning Objective 7

45. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Fixed Asset Turnover Measures how efficiently a company is using its fixed assets to generate sales _____________ _________________________ = Fixed Asset Turnover

46. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Fixed Asset Turnover Net sales Beginning of year property, plant, and equipment End of year property, plant, and equipment Year 2Year 1 $35,115$31,755 Average Net Property, Plant, and Equipment 20,22320,307 20,26520,370 20,30720,433 Fixed Asset Turnover ______

47. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. End of Chapter 7