1. Electronic Presentation by Douglas Cloud Pepperdine University
Survey of Accounting
Electronic Presentation by Douglas Cloud Pepperdine University
Carl S.Warren

2. Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

3. Chapter 7
Fixed Assets and Intangible Assets

4. After studying this chapter, you should be able to:
Learning Objectives
1. Define, classify, and account for the cost of fixed assets.
2. Compute depreciation, using the straight-line, and declining-balance methods.
3. Describe the accounting for the depletion of natural resources.
4. Describe the accounting for the disposal of fixed assets.
After studying this chapter, you should be able to:
Continued

5. Learning Goals
5. Classify fixed asset costs as either capital expenditures or revenue expenditures.
6. Describe accounting for intangible assets.
7. Describe how depreciation expense is reported in an income statement, and prepare a balance sheet that includes fixed assets and intangible assets.
8. Analyze the utilization of fixed assets.

6. Learning Objective 1
Define, classify, and account for the cost of fixed assets.

7. Nature of Fixed Assets
Fixed assets are long term or relatively permanent 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.

8. Nature of Fixed Assets
If the purchased item is long-lived, then it should be capitalized, which means it is shown as an asset rather than an expense.

9. Expense Fixed Assets Investment Is the purchased item long-lived? no
yes no
Expense
Is the asset used in a productive purpose? no
yes
Fixed Assets
Investment

10. Land Purchase price Sales taxes Permits from government agencies
Broker’s commissions
Title fees
Surveying fees
Continued

11. Land Purchase price Sales taxes Permits from government agencies
Broker’s commissions
Title fees
Surveying fees
Delinquent real estate taxes
Razing or removing unwanted buildings, less the salvage
Grading and leveling
Paving a public street bordering the land

12. Buildings Architects’ fees Engineers’ fees
Insurance costs incurred during construction
Interest on money borrowed to finance construction
Walkways to and around the building
Continued

13. Buildings Sales taxes Repairs (purchase of existing building)
Reconditioning (purchase of an existing building)
Modifying for use
Permits from governmental agencies

14. Land Improvements Trees and shrubs Fences Outdoor lighting
Concrete sewers and drainage
Paved parking areas

15. Machinery and Equipment
Sales taxes
Freight
Installation
Repairs (purchase of used equipment)
Reconditioning (purchase of used equipment)
Continued

16. Machinery and Equipment
Insurance while in transit
Assembly
Modifying for use
Testing for use
Permits from governmental agencies

17. Learning Objective 2
Compute depreciation, using the straight-line and declining-balance methods.

19. Use of Depreciation Methods
Source: Accounting Trends & Techniques, 55th. ed., American Institute of Certified Public Accountants, New York, 2001

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

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

22. $24,000 – $2,000 Straight-Line Method 5 years
= $4,400 annual depreciation

23. Straight-Line Method
The straight-line method is widely used by firms because it is simple and it provides a reasonable transfer of cost to periodic expenses if the asset is used about the same from period to period.

24. Straight-Line Method
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 $19,600
2 24,000 $ 4,400 19,600 4,400 15,200
3 24,000 8, ,200 4, ,800
4 24,000 13, , , ,400
5 24,000 17,600 6,400 4,400 2,000
Cost ($24,000) – Residual Value ($2,000)
Annual Depreciation
Expense ($4,400) =
Estimated Useful Life (5 years)

25. Ending book value equals the residual value
Straight-Line Method
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 $19,600
2 24,000 $ 4,400 19,600 4,400 15,200
3 24,000 8, ,200 4, ,800
4 24,000 13, , , ,400
5 24,000 17,600 6,400 4,400 2,000
Ending book value equals the residual value

26. Declining-Balance Method
Step 1
Ignoring residual value, determine the straight-line rate
$24,000 - $2,000
5 years
= $4,800
$4,800
$24,000
= 20%

27. Declining-Balance Method
= $4,800
$24,000 - $2,000
5 years
$4,800
$24,000
= 20%
Step 1
Ignoring residual value, determine the straight-line rate
There’s a shortcut. Simply divide the number of years by one (1 ÷ 5 = .20).

28. Declining-Balance Method
Step 2
Double the rate.
.20 x 2 = .40
For the first year, the cost of the asset is multiplied by 40 percent. After the first year, the declining book value of the asset is multiplied by 40 percent.

29. Declining-Balance Method
Step 3
Build a table.

30. Desired ending book value
Declining-Balance Method
Accum. Depr Book Value.
Beginning at Beginning Depr Book Value
Year of Year Rate of Year for Year Year-End
1 40% $24, $9, $14,400.00
2 $ 9, % 14, , ,640.00
3 15, % 8, , ,184.00
4 18, % 5, , ,110.40
5 20, , , ,000.00
Desired ending book value
$3, – $2,000.00

31. Comparing Straight-Line With the Declining-Balance Method
5,000
4,000 3,000
2,000 1,000
Depreciation ($)
Life (years)
Life (years)

32. Learning Objective 3
Describe the accounting for depletion of natural resources.

33. Natural Resources
Depletion is the periodic transferring of the cost of natural resources, such as metal ores and other minerals removed from the earth, to an expense account.

34. Natural Resources
Paid $400,000 for the mining rights to a mineral deposit estimated at 1,000,000 tons of ore. During the year, 90,000 tons are mined.

35. Learning Objective 4
Describe the accounting for the disposal of fixed assets.

36. Discarding Fixed Assets
An item of equipment acquired at a cost of $25,000 is fully depreciated with no salvage value at December 31, On February 14, 2005, the equipment is discarded.

37. Discarding Fixed Assets
Equipment costing $6,000 is depreciated at an annual straight-line rate of 10%. The Accumulated Depreciation balance related to this equipment is $4,900. The asset is removed from service on March 24.

38. Selling Fixed Assets
Equipment is acquired at a cost of $10,000 and is depreciated at an annual straight-line rate of 10%. It is sold for $1,000 cash on October 12 of the eighth year of its use. The balance in Accumulated Depreciation is $7,750.

39. Learning Objective 5
Classify fixed asset costs as either capital expenditures or revenue expenditures.

40. Capital and Revenue Expenditures
Expenditures to repair or maintain plant assets that do not extend the life or enhance the value are known as revenue expenditures.

41. Capital and Revenue Expenditures
Expenditures made for acquiring, constructing, adding, or replacing fixed assets are known as capital expenditures.

42. Learning Objective 6
Describe the accounting for intangible assets.

43. Patents
The exclusive right granted by the federal government to produce and sell goods with one or more unique features is a patent.
Patent Office ?

44. Patents Maximum life 20 years Costs: Initial cost of purchased patent
Any related legal fees
The straight-line method normally is used to amortize patents.

45. Patents
A business acquires patent rights for $100,000. The patent had been granted 6 years earlier by the Federal Patent Office. The remaining useful life is estimated at 5 years.

46. Copyrights and Trademarks
The exclusive right to publish and sell a literary, artistic, or musical composition is granted by a copyright.
A copyright has a maximum life of 70 years beyond the death of the author.

47. Copyrights and Trademarks
A trademark is a name, term, or symbol used to identify a business and its products.

48. Goodwill
Goodwill refers to an intangible asset of the business that is created from such favorable factors as location, production quality, reputation, and managerial skills.

49. Learning Objective 7
Describe how depreciation expense is reported in an income statement, and prepare a balance sheet that includes fixed assets and intangible assets.

50. Discovery Mining Co. Partial Balance Sheet December 31, 2005
Accum. Book
Property, plant, and equipment: Cost Depr. Value
Land $ 30,000 $ 30,000
Buildings 110,000 $ 26,000 84,000
Factory equipment 650, , ,000
Office equipment 120, , ,000
$910,000 $231,000 $ 679,000
Accum. Book
Mineral deposits: Cost Depr. Value
Alaska deposit $1,200,000 $ 800,000 $400,000
Wyoming deposit , , ,000
$1,950,000 $1,000, ,000
Total property, plant, and equipment $1,629,000
Intangible assets:
Patents $ 75,000
Goodwill ,000
Total intangible assets $125,000

51. Partial Income Statement for the Year Ended December 31, 2005
Parker Company
Partial Income Statement for the Year Ended December 31, 2005
Operating Expenses:
Delivery expense $ 18,000
Advertising expense 33,000
Sales salaries expense 41,000
Office salaries expense 37,000
Administrative salaries 69,000
Depreciation expense 28,000
Taxes and insurance expense ,000
Total operating expenses $248,000

52. Partial Statement of Cash Flows—Operating Activities
Alert Company
Partial Statement of Cash Flows—Operating Activities
for the Year Ended December 31, 2005
Operating Activities:
Net income $8,400
Adjustments to reconcile net income to cash
generated by operating activities:
Depreciation and amortization 3,400
Decrease in accounts receivable 800
Increase in salaries payable 400
Increase in inventory (1,600)
Gain on sale of equipment (600)
Net cash provided by operating activities $10,800

53. Partial Statement of Cash Flows—Investing Activities
Alert Company
Partial Statement of Cash Flows—Investing Activities
for the Year Ended December 31, 2005
Investing Activities:
Purchase of short-term investments $14,000
Proceeds from the sale of equipment 2,100
Payment for purchase of equipment (15,200)
Purchase of long-term investments (6,000)
Cash used for investing activities $(5,100)

54. Learning Objective 8
Analyze the utilization of fixed assets.

55. Operational Utilization Analysis
Used portion of the fixed asset
Total fixed asset capacity
The closer the operational utilization approaches 100 percent, the more efficient the fixed assets.

56. Financial Utilization Analysis
Revenue per Unit of Fixed Assets
Total Revenues
Number of fixed asset units
Use this ratio only when there is a correlation between the number of fixed asset units and total revenues.

57. Financial Utilization Analysis
Fixed Asset Turnover Ratio
Revenue
Average book value of fixed assets
The larger the ratio, the more efficiently a business is using its fixed assets.

58. Chapter 7
The End