Chapter 8

CHAPTER
10 Fixed Assets and

Intangible Assets
human/iStock/360/Getty Images
Warren
Reeve
Duchac
Learning Objectives
• LO1: Define, classify, and account for the cost of fixed assets.
• LO2: Compute depreciation, using the following methods: straight-line
method, units-of-output method, and double-declining-balance method.
• LO3: Journalize entries for the disposal of fixed assets.
• LO4: Compute depletion and journalize the entry for depletion.
• LO5: Describe the accounting for intangible assets, such as patents,
copyrights, and goodwill.
• LO6: Describe how depreciation expense is reported in an income statement
and prepare a balance sheet that includes fixed assets and intangible assets.
• LO7: Describe and illustrate the fixed asset turnover ratio to assess the
efficiency of a company’s use of its fixed assets.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Nature of Fixed Assets
• Fixed assets are long-term or relatively permanent

assets such as equipment, machinery, buildings, and
land.
• Other descriptive titles for plant assets or property,
plant, and equipment.
• Fixed assets have the following characteristics:
o They exist physically and, thus, are tangible assets.
o They are owned and used by the company in its normal
operations.
o They are not offered by sale as part of normal operations.
Fixed Assets as a Percent of
Total Assets—Selected Companies
Classifying Costs
(slide 1 of 2)
• A cost that has been incurred may be classified as a

fixed asset, an investment, or an expense.
• Items that are classified and recorded as fixed assets
include land, buildings, or equipment. Such assets
normally last more than a year and are used in the
normal operations.
• Investments are long-lived assets that are not used in
the normal operations and are held for future resale.
Such assets are reported on the balance sheet in a
section entitled Investments.
Classifying Costs
(slide 2 of 2)
• Classifying a cost involves the following steps:

o Step 1. Is the purchased item long-lived?
 If yes, the item is recorded as an asset on the balance sheet, either
as a fixed asset or an investment. Proceed to Step 2.
 If no, the item is classified and recorded as an expense.
o Step 2. Is the asset used in normal operations?
 If yes, the asset is classified and recorded as a fixed asset.
 If no, the asset is classified and recorded as an investment.
Classifying Costs
Costs of Acquiring Fixed Assets
Capital and Revenue Expenditures
• Costs that benefit only the current period, such as

ordinary maintenance and repairs, are called revenue
expenditures.
• Costs that improve the asset or extend its useful life,
such as improvements or extraordinary repairs, are
called capital expenditures.
Ordinary Maintenance and Repairs
• Costs related to the ordinary maintenance and repairs

of a fixed asset are revenue expenditures and are
recorded as increases to Repairs and Maintenance
Expense.
• For example, $300 paid for a tune-up of a delivery
truck is recorded as follows:
Asset Improvements
• Costs related to improvements are capital expenditures and are

recorded as increases to the fixed asset account.
• For example, the service value of a delivery truck is improved
by adding a $5,500 hydraulic lift to allow for easier and
quicker loading of heavy cargo. The expenditure is recorded as
follows:
• Because the cost of the delivery truck has increased,

depreciation for the truck will also change over its remaining
life.
Extraordinary Repairs
• Costs related to extraordinary repairs are capital expenditures

and are recorded as a decrease in an accumulated depreciation
account.
• For example, the engine of a forklift that is near the end of its
useful life may be overhauled at a cost of $4,500, extending its
useful life by eight years. The expenditure is recorded as
follows:
• Because the forklift’s remaining useful life has changed,

depreciation for the forklift will also change based on the new
book value of the forklift.
Example Exercise Capital and Revenue Expenditures
On June 18, GTS Co. paid $1,200 to upgrade a hydraulic

lift and $45 for an oil change for one of its delivery
trucks. Journalize the entries for the hydraulic lift
upgrade and oil change expenditures.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Depreciation
• Over time, fixed assets, with the exception of land,

lose their ability to provide services.
• Thus, the costs of fixed assets such as equipment and
buildings should be recorded as an expense over their
useful lives.
• This periodic recording of the cost of fixed assets as
an expense is called depreciation.
• Because land has an unlimited life, it is not
depreciated.
Accounting for Depreciation
(slide 1 of 2)
• The adjusting entry to record depreciation debits

Depreciation Expense and credits a contra asset
account entitled Accumulated Depreciation or
Allowance for Depreciation.
• The use of a contra asset account allows the original
cost to remain unchanged in the fixed asset account.
Accounting for Depreciation
(slide 2 of 2)
• Depreciation can be caused by physical or functional

factors.
o Physical depreciation factors include wear and tear during
use or from exposure to weather.
o Functional depreciation factors include obsolescence and
changes in customer needs that cause the asset to no longer
provide services for which it was intended.
Factors in Computing Depreciation Expense
(slide 1 of 3)
• Three factors determine the depreciation expense for

a fixed asset. These three factors are as follows:
o The asset’s initial cost
o The asset’s expected useful life
o The asset’s estimated residual value
Factors in Computing Depreciation Expense
(slide 2 of 3)
• The expected useful life of a fixed asset is estimated

at the time the asset is placed into service.
o Estimates of expected useful lives are available from
industry trade associations.
Depreciation Expense Factors
Use of Depreciation Methods
Straight-Line Method
(slide 1 of 4)
• The straight-line method provides for the same

amount of depreciation expense for each year of the
asset’s useful life.
(slide 2 of 4)
• Assume that equipment was purchased on January 1

as follows:
• The annual straight-line depreciation is computed as

follows:
(slide 3 of 4)
• Assume the preceding equipment was purchased and

placed into service on October 1. If an asset is used
for only part of a year, the annual depreciation is
prorated. Therefore, the depreciation for the year
ending December 31 is computed as follows:
(slide 4 of 4)
• The computation of straight-line depreciation may be

simplified by converting the annual depreciation to a
percentage of depreciable cost.
• The straight-line percentage is determined by
dividing 100% by the number of years of expected
useful life, computed as follows:
Double-Declining-Balance Method
(slide 1 of 6)
• The double-declining-balance method provides for

a declining periodic expense over the expected useful
life of the asset.
(slide 2 of 6)
• The double-declining-balance method is applied in

the following three steps:
o Step 1. Determine the straight-line percentage, using the
expected useful life.
o Step 2. Determine the double-declining-balance rate by
multiplying the straight-line rate from Step 1 by 2.
o Step 3. Compute the depreciation expense by multiplying
the double-declining-balance rate from Step 2 times the
book value of the asset. (For the first year, the book value
of the asset is its initial cost.)
(slide 3 of 6)
• Assume that equipment was purchased as follows:
• For the first year, the depreciation is computed as

follows:
o Step 1. Straight-line percentage = 20% (100% ÷ 5)
o Step 2. Double-declining-balance rate = 40% (20% × 2)
o Step 3. Depreciation expense = $9,600 ($24,000 × 40%)
(slide 4 of 6)
• The double-declining-balance depreciation for the

full five-year life of the equipment is as follows:
The estimated residual value for the equipment is $2,000.

However, when the double-declining-balance method is used, the
asset should not be depreciated below its estimated residual
value. Therefore, the depreciation for the fifth year is $1,110.40
($3,110.40 – $2,000.00) instead of $1,244.16 (40% × $3,110.40).
(slide 6 of 6)
• 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 method.
• An asset’s revenues are often greater in the early
years of its use than in later years. In such cases, the
double-declining-balance method provides a good
matching of depreciation expense with the asset’s
revenues.
Units-of-Output Method (not examinable)
(slide 1 of 3)
• The units-of-output method provides the same

amount of depreciation expense for each unit of
output of the asset. Depending on the asset, the units
of output can be expressed in terms of hours, miles
driven, or quantity produced.
(slide 2 of 3)
• The units-of-output method is applied in the

following two steps:
o Step 1. Determine the depreciation per unit as follows:
o Step 2. Compute the depreciation expense as follows:
(slide 3 of 3)
• Assume that equipment 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. The units-of-
output depreciation is computed as follows:
o Step 1. Determine the depreciation per hour as follows:
o Step 2. Compute the depreciation expense as follows:
Example Exercise Straight-Line Depreciation
Equipment acquired at the beginning of the year at a cost

of $125,000 has an estimated residual value of $5,000
and an estimated useful life of 10 years.
1/ Determine (a) the depreciable cost, (b) the straight-
line rate, and (c) the annual straight-line depreciation.
2/ Determine (a) the double-declining-balance rate and
(b) the double-declining-balance depreciation for the first
year.
a) Depreciable cost = 125,000 - 5,000= 120,000
b) Straight-line rate = 100% / 10 year = 10%
c) Annual straight-line depreciation = 120,000 x 10% =
12,000
part.
Example Exercise Double-Declining-Balance Depreciation
Equipment acquired at the beginning of the year at a

cost of $125,000 has an estimated residual value of
$5,000 and an estimated useful life of 10 years.
Determine (a) the double-declining-balance rate and (b)
the double-declining-balance depreciation for the first
year.
a) The DDB rate = 10% x 2 = 20%
b) The DDB depreciation = 125,000 x 20% = 25,000
part.
Example Exercise Units-of-Output Depreciation
Equipment acquired at the beginning of the year at a cost of

$180,000 has an estimated residual value of $10,000, has an
estimated useful life of 40,000 hours, and was operated 3,600
hours during the year. Determine (a) the depreciable cost, (b)
the depreciation rate, and (c) the unit-of-output depreciation for
the year.
a) Depreciable cost = 180,000 – 10,000 = $170,000

b) The depreciation rate = 170,000 / 40,000 = $4.25
c) This year depreciation = 4.25 x 3,600 = $15,300
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part
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Summary of Depreciation Methods
Comparing Depreciation Methods

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Chapter 8

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CHAPTER

10 Fixed Assets and

• Fixed assets are long-term or relatively permanent

• A cost that has been incurred may be classified as a

• Classifying a cost involves the following steps:

• Costs that benefit only the current period, such as

• Costs related to the ordinary maintenance and repairs

• Costs related to improvements are capital expenditures and are

• Because the cost of the delivery truck has increased,

• Costs related to extraordinary repairs are capital expenditures

• Because the forklift’s remaining useful life has changed,

On June 18, GTS Co. paid $1,200 to upgrade a hydraulic

• Over time, fixed assets, with the exception of land,

• The adjusting entry to record depreciation debits

• Depreciation can be caused by physical or functional

• Three factors determine the depreciation expense for

• The expected useful life of a fixed asset is estimated

• The straight-line method provides for the same

• Assume that equipment was purchased on January 1

• The annual straight-line depreciation is computed as

• Assume the preceding equipment was purchased and

• The computation of straight-line depreciation may be

• The double-declining-balance method provides for

• The double-declining-balance method is applied in

• Assume that equipment was purchased as follows:

• For the first year, the depreciation is computed as

• The double-declining-balance depreciation for the

The estimated residual value for the equipment is $2,000.

• The double-declining-balance method provides a

• The units-of-output method provides the same

• The units-of-output method is applied in the

o Step 2. Compute the depreciation expense as follows:

• Assume that equipment costs $24,000. Its estimated

o Step 2. Compute the depreciation expense as follows:

Equipment acquired at the beginning of the year at a cost

Equipment acquired at the beginning of the year at a

Equipment acquired at the beginning of the year at a cost of

a) Depreciable cost = 180,000 – 10,000 = $170,000

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