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


 Fixed assets are long-term or relatively permanent

assets, such as equipment, machinery, buildings, and land.
Other descriptive titles for fixed assets are plant assets
or property, plant, and equipment.
Fixed assets have the following characteristics:
 They exist physically and, thus, are tangible assets.
 They are owned and used by the company in its
normal operations.
 They are not offered for sale as part of normal
Costs of Acquiring Fixed Assets
Costs of Acquiring Fixed Assets
Costs of Acquiring Fixed Assets
 Unnecessary costs that do not increase the asset’s
usefulness are recorded as an expense.
 Vandalism
 Mistakes in installation
 Uninsured theft
 Damage during unpacking and installing
 Fines for not obtaining proper permits from
government agencies
Capital and Revenue Expenditures
  Capital
Expenditures Expenditures
 Normal and  Additions, improvements,
ordinary repairs and extraordinary repairs
and maintenance
Leasing Fixed Assets

The two parties to a lease contract:

THE two parties to a lease contract:

The lessor is the party who owns the asset.

The lessee is the party to whom the rights to
use the asset are granted by the lessor.
 A capital lease is accounted for as if the lessee has, in
fact, purchased the asset. The asset is then amortized
(written off as an expense) over the life of the capital

A lease that is not classified as a capital lease for
accounting purposes is classified as an operating
lease. An operating lease is treated as an expense,
because the lessee is renting the asset for the lease
Objective 2: Compute
depreciation, using the following
methods: straight-line method,
units-of-production method, and
double-declining-balance method.


 Over time, most fixed assets (equipment, buildings, and

land improvements) lose their ability to provide services.
The periodic recording of the cost of fixed assets as an
expense is called depreciation.
 Depreciation can be caused by physical or functional
 Physical depreciation factors include wear and
tear during use or from exposure to the weather.
 Functional depreciation factors include
obsolescence and changes in customer needs that
cause the asset to no longer provide services for
which it was intended.
 Two common misunderstandings that exist
about depreciation as used in accounting include:
1. Depreciation does not measure a decline in the
market value of a fixed asset.
2. Depreciation does not provide cash to replace fixed
assets as they wear out.
 Three factors determine the depreciation
expense for a fixed asset:
1. The asset’s initial cost
2. The asset’s expected useful life
3. The asset’s estimated residual value
 The expected useful life of a fixed asset is estimated at
the time the asset is placed into service. The residual
value of a fixed asset at the end of its useful life is also
estimated at the time the asset is placed into service.
Depreciation Methods
 The straight-line method provides for the same amount
of depreciation expense for each year of the asset’s
useful life.

Annual Cost – Residual Value

Depreciation Useful Life

Initial cost $24,000

Expected useful life 5 years
Estimated residual value $2,000
 Initial cost $24,000
 Expected useful life 5 years
 Estimated residual value $2,000

The annual straight-line depreciation of $4,400

is computed below:
Cost – Residual Value
Annual Depreciation =
Useful Life
$24,000 - $2,000
5 years
= $4,400
If the preceding equipment was purchased and
placed into service on October 1, the depreciation
for the preceding
If the first year ofequipment
use wouldwas
be $1,100, computed
purchased and
as placed
follows:into service on October 1, the
$4,400 x 3/12 = $1,100
depreciation for the first year of use w
The straight-line percentage can be determined by
dividing 100% by the number of years of expected
useful life, as shown below.
$1,100, computed as follows:
Units-of-Production Method
 The units-of-production method provides the same
amount of depreciation expense for each unit produced
or each unit of capacity used by the asset.
 Step 1. Determine the depreciation per unit as:
Cost – Residual Value
Depreciation per Unit =
Total Units of Production

 Step 2. Compute the depreciation expense as:

Depreciation Expense = Depreciation per Unit x Total Units of
Production Used
Units-of-Production Method
A depreciable asset costs $24,000. Its estimated
residual value is $2,000, and it is expected to have a
useful life of 10,000 operating hours. During the year,
the asset was operated 2,100 hours.
Double-Declining-Balance Method
 The double-declining-balance method provides for a
declining periodic expense over the expected useful life
of the asset.
The double-declining-balance method is applied in
three steps:
Step 1. Determine the straight-line percentage using
the expected useful life.
Step 2. Determine the double-declining- balance rate
by multiplying the straight-line rate from Step 1 by 2.
Step 3. Compute the depreciation expense by
multiplying the double-declining-balance rate from
Step 2 times the book value of the asset.
 The double-declining-balance rate is determined by
doubling the straight-line rate.
 A shortcut to determining the straight-line rate is to
divide one by the number of years (for example, 1 ÷ 5 =
 Using the double-declining-balance method, a five-year
life results in a 40 percent rate (0.20 × 2).

 For the first year, the book value of the equipment is its initial
cost of $24,000.
 After the first year, the book value (cost minus accumulated
depreciation) declines and, thus, the depreciation also
The double-declining-balance depreciation for the full
five-year life of the equipment is shown below.

depreciation for 5th year
If the preceding equipment was purchased and placed
into service on October 1, depreciation for the year
ending December 31 would be $2,400, computed as
First year partial
= $9,600 x 3/12 = $2,400
The depreciation for the second year would then be
$8,640, computed as follows:
Second year
= [40% x ($24,000 – $2,400)]
Second year
= $8,640
 The double-declining-balance method
provides a higher depreciation in the first
year of the asset’s use, followed by
declining depreciation amounts. Thus, it is
called an accelerated depreciation
Comparing Depreciation Methods
Discarding Fixed Assets Objective 3:
Journalize entries
for the disposal of
fixed assets.

Equipment acquired at a cost of $25,000 is fully

depreciated at December 31, 2011. On February 14,
2012, the equipment is discarded.

Note: The entry to record the disposal of a fixed

asset removes the cost of the asset and its
accumulated depreciation from the accounts.
Equipment costing $6,000, with no residual value, is
depreciated at an annual straight-line rate of 10%.
After the December 31, 2011, adjusting entry,
Accumulated Depreciation—Equipment has a $4,750
balance. On March 24, 2012, the asset is removed
from service and discarded.

$600 × 3/12
The discarding of the equipment is then recorded
as shown below. (Note that this is the second of
two entries on March 24.)
Equipment was purchased at a cost of $10,000. It had
no estimated residual value and was depreciated at a
straight-line rate of 10%. The equipment is sold for
cash on October 12 of the eighth year of its use. The
balance of the accumulated depreciation account as of
the preceding December 31 is $7,000.
The entry to update the depreciation for the nine
months of the current year is as follows:
After the current depreciation is recorded, the book
value of the asset is $2,250 ($10,000 – $7,750).
Sold at book value for $2,250. No gain or loss.

After the current depreciation is recorded, the book

value of the asset is $2,250 ($10,000 – $7,750).
Sold below book value for $1,000. Loss of $1,250.
After the current depreciation is recorded, the book
value of the asset is $2,250 ($10,000 – $7,750).

Sold below book value for $1,000. Loss of $1,250.

Objective 4:
depletion and
journalize the
entry for

The fixed assets of some companies include :

Metal ores
Other natural resources
As the resource is harvested a portion of the cost is
The process of transferring the cost of natural
resources to an expense account is called depletion.
Objective 5:
Describe the accounting
for intangible assets, such
as patents, copyrights,
and goodwill.

 Patents, copyrights, trademarks, and goodwill are long-

lived assets that are used in the operations of a business
and not held for sale. These assets are called intangible
assets because they do not exist physically.

 The accounting for intangible assets is

similar to that for fixed assets. The major
issues are:
 Determining the initial cost.
 Determining the amortization, which is the
amount of cost to transfer to expense.
 The exclusive right granted by the federal government
to produce and sell goods with one or more unique
features is called a patent. These rights continue in effect
for 20 years.
At the beginning of its fiscal year, a business acquires
patent rights for $100,000. The patent’s remaining
useful life is estimated at 5 years. The entry to
amortize the patent at the end of the year is as follows:
Examples of Patents
Copyrights and Trademarks
 The exclusive right granted by the federal government
to publish and sell a literary, artistic, or musical
composition is called a copyright. A copyright extends
for 70 years beyond the author’s death.

 A trademark is a unique name, term, or symbol used to

identify a business and its products. Most businesses
identify their trademarks with ® in their advertisements
and on their products. Trademarks can be registered for
10 years and renewed for 10-year periods thereafter.
Examples of Copyrights and
 In business, goodwill refers to an intangible asset of a
business that is created from such favorable factors as
location, product quality, reputation, and managerial skill.
 Generally accepted accounting principles (GAAP)
permit goodwill to be recorded in the accounts only if it
is objectively determined by a transaction.
A loss should be recorded if the business prospects of an
acquired firm (and the acquired goodwill) become significantly
impaired. Assume that on December 31, FaceCard Company
has determined that $250,000 of the goodwill created from
the purchase of Electronic Systems is impaired.
Comparison of Intangible Assets
Objective 6:
Fixed and Intangible Assets Describe how
depreciation expense is
reported in an income
statement and prepare a
balance sheet that
includes fixed assets and
intangible assets.
Objective 7:

Fixed and Intangible Assets Describe and

illustrate the fixed
asset turnover ratio to
assess the efficiency
of a company’s use of
its fixed assets.

 Intangible assets are usually reported in the balance

sheet in a separate section following fixed assets.
 The balance of each class of intangible assets should be
disclosed net of any amortization.
 The cost and related accumulated depletion of mineral
rights are normally shown as part of the Fixed Assets
section of the balance sheet.
Fixed Asset Turnover Ratio
 One measure of the revenue-generating efficiency of
fixed assets is the fixed asset turnover ratio. It measures
the number of dollars of revenue earned per dollar of
fixed assets and is computed as follows:

Fixed Asset
Turnover = Net Sales
Ratio Average Book Value of Fixed
Assignments all due Friday, 12/05
1. PE 9-9A page 434
2. PE 9-9B page 434
3. Exercise 9-23 page 439
4. Exercise 9-24 page 439
5. CP 9-5 page 446
6. Compute the fixed asset turnover for one of your
companies. Use the most current year.
 All work is to be written or typed out clearly showing all work.
Be sure to indicate each assignment by number and hand in
when complete.