9
Fixed Assets and
Intangible Assets
Fixed Learning
Assets and Objective
Intangible Assets
1
After studying this chapter, you should be able to:
1
Define, classify, and account for the cost
Insert Chapter Objectives
of fixed assets.
Describe
the nature
of the
using the
2 Compute depreciation,
following methods: straight-line method,
adjusting process.
units-of-production
method, and doubledeclining-balance method.
3
9-2
Journalize entries for the disposal of
fixed assets.
3-1
Fixed Assets and Intangible Assets (continued)
9-3
4
Compute depletion and journalize the
entry for depletion.
5
Describe the accounting for intangible
assets, such as patents, copyrights, and
goodwill.
6
Describe how depreciation expense is
reported in an income statement and
prepare a balance sheet that includes
fixed assets and intangible assets.
1
Describe, classify, and
account for the cost of
fixed assets.
9-4
1
Nature 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 and equipment.
9-5
1
Nature of Fixed Assets
Fixed assets have the following
characteristics:
1. They exist physically and, thus, are
tangible assets.
2. They are owned and used by the
company in its normal operations.
3. They are not offered for sale as part of
normal operations.
9-6
1
Exhibit 1
9-7
Fixed Assets as a Percent of Total
Assets—Selected Companies
1
Exhibit 2
9-8
Classifying Costs
1
Exhibit 3
9-9
Costs of Acquiring Fixed Assets
(continued)
1
Exhibit 3
9-10
Costs of Acquiring Fixed Assets (continued)
(continued)
1
Exhibit 3
9-11
Costs of Acquiring Fixed Assets (continued)
(continued)
1
Exhibit 3
9-12
Costs of Acquiring Fixed Assets (continued)
1
Cost of Acquiring Fixed
Assets Excludes:
1.
2.
3.
4.
Vandalism
Mistakes in installation
Uninsured theft
Damage during unpacking and
installing
5. Fines for not obtaining proper
permits from government agencies
These costs are expenses.
9-13
1
Capital and Revenue
Expenditures
• Expenditures that benefit only the
current period are called revenue
expenditures.
• Expenditures that improve the asset
or extend its useful life are capital
expenditures.
9-14
1
9-15
REVENUE
EXPENDITURES
CAPITAL
EXPENDITURES
Normal and
ordinary repairs
and maintenance
Additions,
improvements,
and extraordinary
repairs
1
Ordinary Maintenance and Repairs
On April 9, the firm paid $300 for a tune-up of a
delivery truck.
This is a revenue
expenditure.
9-16
1
Asset Improvements
On May 4, a $5,500 hydraulic lift was installed on
the delivery truck to allow for easier and quicker
loading of heavy cargo.
This is a capital
expenditure.
9-17
1
Extraordinary Repairs
The engine of a forklift that is near the end of its
useful life is overhauled at a cost of $4,500, which
extends its useful life eight years. Work on the
forklift was completed on October 14.
This is a capital
expenditure.
9-18
1
Capital and Revenue Expenditures
9-19
1
Example Exercise 9-1
Example Exercise 10-1
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.
Follow My Example 9-1
June 18
Delivery Truck…………………........ 1,200
Cash……………………………...
1,200
Follow My Example 6-1
18 Repairs and Maintenance Exp……
Cash………………………….........
45
45
For Practice: PE 9-1A, PE 9-1B
9-20
9-20
1
Leasing Fixed Assets
A capital lease is accounted
for as if the lessee has, in fact,
purchased the asset. The asset
is then amortized over the life
of the capital lease.
9-21
1
Leasing Fixed Assets
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).
9-22
2
Compute depreciation, using the
following methods: straight-line
method, units-of-production
method, and double-declining
balance method.
9-23
2
Accounting for Depreciation
Over time, fixed assets such as
equipment, buildings, and land
improvements lose their ability to
provide services. The periodic
recording of the cost of fixed assets
to expense is called depreciation.
9-24
2
Accounting for Depreciation
1. Physical depreciation factors include
wear and tear during use or from
exposure to the weather.
2. Functional depreciation factors include
obsolescence and changes in customer
needs that cause the asset to no longer
provide services for which it was
intended.
9-25
2
Accounting for Depreciation
• Depreciation does not measure a
decline in the market value of a
fixed asset.
• Depreciation does not provide
cash to replace fixed assets as they
wear out.
9-26
2
Factors in Computing
Depreciation
1. The asset’s initial cost.
2. The asset’s expected useful life.
3. The asset’s estimated residual
value.
9-27
2
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 estimated at the time the asset is
placed into service.
9-28
2
Exhibit 4
9-29
Depreciation Expense Factors
2
Exhibit 5
9-30
Use of Depreciation Methods
2
Straight-Line Method
The straight-line method provides
for the same amount of depreciation
expense for each year of the asset’s
useful life.
Cost – estimated residual value
Annual
=
Estimated life
depreciation
9-31
2
A depreciable asset cost $24,000. Its
estimated residual value is $2,000 and
its estimated useful life is five years.
Cost – estimated residual value
Annual
=
Estimated life
depreciation
Annual
=
depreciation
$24,000 – $2,000
5 years expected useful life
Annual
= $4,400
depreciation
9-32
2
Straight-Line Method
If the preceding equipment
was purchased and placed into
service on October 1, the
depreciation would be $1,100,
computed as follows:
$4,400 × 3/12 = $1,100
9-33
2
Example Exercise 9-2
Example Exercise 10-2
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.
Determine the (a) depreciable cost, (b) straight-line rate,
and (c) annual straight-line depreciation.
Follow My Example 9-2
a. $120,000 ($125,000 – $5,000)
b. 10%
= 1/10
Follow
My Example
6-1
c. $12,000 ($120,000 × 10%) or ($120,000/10 years)
9-34
9-34
For Practice: PE 9-2A, PE 9-2B
2
Units-of-Production Method
The units-of-production method provides
for the same amount of depreciation
expense for each unit produced or each unit
of capacity used by the asset.
Depreciation
per unit =
9-35
Cost – Residual Value
Total Units of Production
2
A depreciable asset cost $24,000. Its
estimated residual value is $2,000 and it is
expected to have an estimated life of
10,000 operating hours.
Depreciation
per unit =
Cost – Residual Value
Total units of production
Depreciation
$24,000 – $2,000
per unit = 10,000 hours expected useful
life
Depreciation
per unit = $2.20 per hour
9-36
2
A depreciable asset cost $24,000. Its estimated
residual value is $2,000 and it is expected to
have an estimated life of 10,000 operating
hours. During the year the asset was operated
2,100 hours.
Depreciation per Unit × Total
Depreciation = Units of Production Used
Depreciation =
($2.20 per hour) × (2,100
hours)
Depreciation = $4,620
9-37
2
Example Exercise 9-3
Example Exercise 10-2
10-3
Units-of-Production Depreciation
Equipment acquired at a cost of $180,000 has an
estimated residual value of $10,000, an estimated
useful life of 40,000 hours, and was operated 3,600
hours during the year. Determine the (a) depreciable
cost, (b) depreciation rate, and (c) the units-ofproduction depreciation for the year.
Follow My Example 9-3
a. $170,000 ($180,000 – $10,000)
b. $4.25 per hour ($170,000/40,000 hours)
c. $15,300 (3,600 hours × $4.25)
9-38
9-38
For Practice: PE 9-3A, PE 9-3B
2
Double-Declining-Balance Method
The double-declining-balance
method provides for a declining
periodic expense over the estimated
useful life of the asset.
9-39
2
Double-Declining-Balance Method
A double-declining balance rate is
determined by doubling the straightline rate. A shortcut to determining the
straight-line rate is to divide one by
the number of years (1/5 = .20).
Hence, using the double-decliningbalance method, a five-year life
results in a 40 percent rate (.20 × 2).
(continued)
9-40
2
Double-Declining-Balance Method
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
40 percent. Continuing with the
example where the fixed asset cost
$24,000 and has an expected
residual value of $2,000, a table can
be built.
9-41
2
Book Value
Beginning
Year of Year
Rate
1
$24,000
40%
Annual
Deprec.
Accum.
Deprec.
Year-End
$9,600
$24,000 × .40
9-42
Book Value
Year-End
2
Book Value
Beginning
Year of Year
Rate
1
2
$24,000
14,400
40%
40%
Annual
Deprec.
$9,600
5,760
Accum.
Deprec.
Year-End
$9,600
$14,400 × .40
9-43
Book Value
Year-End
$14,400
2
Book Value
Beginning
Year of Year
Rate
1
2
9-44
$24,000
14,400
40%
40%
Annual
Deprec.
Accum.
Deprec.
Year-End
$9,600
5,760
$9,600
15,360
Book Value
Year-End
$14,400
8,640
2
Book Value
Beginning
Year of Year
Rate
1
2
3
9-45
$24,000
14,400
8,640
40%
40%
40%
Annual
Deprec.
Accum.
Deprec.
Year-End
$9,600
5,760
3,456
$9,600
15,360
18,816
Book Value
Year-End
$14,400
8,640
5,184
2
Book Value
Beginning
Year of Year
Rate
1
2
3
4
9-46
$24,000
14,400
8,640
5,184
40%
40%
40%
40%
Annual
Deprec.
Accum.
Deprec.
Year-End
$9,600
5,760
3,456
2,074
$9,600
15,360
18,816
20,890
Book Value
Year-End
$14,400
8,640
5,184
3,110
2
Book Value
Beginning
Year of Year
Rate
1
2
3
4
5
$24,000
14,400
8,640
5,184
3,110
40%
40%
40%
40%
40%
Annual
Deprec.
Accum.
Deprec.
Year-End
$9,600
5,760
3,456
2,074
1,244
$9,600
15,360
18,816
20,890
22,134
Book Value
Year-End
$14,400
8,640
5,184
3,110
1,866
DEPRECIATION STOPS WHEN
BOOK VALUE EQUALS
RESIDUAL VALUE!
STOP
9-47
2
Book Value
Beginning
Year of Year
Rate
1
2
3
4
5
$24,000
40%
14,400
40%
8,640
40%
5,184
40%
3,110 – $2,000
Annual
Deprec.
Accum.
Deprec.
Year-End
$9,600
5,760
3,456
2,074
1,110
$9,600
15,360
18,816
20,890
22,000
“Forced”
annual
depreciation
9-48
Book Value
Year-End
$14,400
8,640
5,184
3,110
2,000
Desired
ending book
value
2
Double-Declining-Balance Method
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 follows:
$9,600 × 3/12 = $2,400
9-49
2
Double-Declining-Balance Method
The depreciation for the second year would
then be $8,640, computed as follows:
$8,640 = [40% × ($24,000 – $2,400)]
9-50
2
Example Exercise 9-4
Example Exercise 10-4
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 the (b) double-declining-balance rate, and (c)
double-declining balance depreciation for the first year.
Follow My Example 9-4
a. 20% [(1/10) × 2]
b. $25,000 ($125,000 × 20%)
9-51
9-51
For Practice: PE 9-4A, PE 9-4B
2
Exhibit 6
9-52
Summary of Depreciation Methods
2
Exhibit 7
9-53
Comparing Depreciation Methods
2
Depreciation for Federal
Income Tax
The Internal Revenue Code
specifies the Modified Accelerated
Cost Recovery System (MACRS)
for use by businesses in computing
depreciation for tax purposes.
9-54
2
Depreciation for Federal
Income Tax
MACRS specifies eight classes of
useful life and depreciation rates for
each of the eight classes. The two most
common classes are the 5-year class
(includes automobiles and light duty
trucks) and the 7-year class (includes
most machinery and equipment).
9-55
2
Depreciation for Federal
Income Tax
For the five-year-class assets, depreciation is
spread over six years, as shown below.
9-56
2
Revising Depreciation Estimates
A machine purchased on January 1, 2009, for
$140,000 was originally estimated to have a
useful life of five years and a residual value
of $10,000. The asset has been depreciated
for two years using the straight-line method.
Annual
Depreciation
(S/L)
Annual
Depreciation
(S/L)
9-57
=
$140,000 – $10,000
5 years
= $26,000 per year
(continued)
2
Revising Depreciation Estimates
At the end of 2011, the asset’s book value is
$88,000, determined as follows:
Asset cost
$140,000
Less accumulated depreciation
($26,000 per year × 2 years)
52,000
Book value, end of second year $ 88,000
9-58
(continued)
2
During 2012, the company estimates that the
remaining useful life is eight years (instead of
three) and that the residual value is $8,000
(instead of $10,000). Depreciation expense for
each of the remaining eight years is determined
as follows:
Book value, end of second year
Less revised estimated residual value
Revised remaining depreciation cost
Revised annual depreciation expense
[($88,000 – $8,000)/8 years]
9-59
$88,000
8,000
$80,000
$10,000
2
Exhibit 8
9-60
Book Value of Asset with Change in Estimate
2
Example Exercise 9-5
Revision of Depreciation
A warehouse with a cost of $500,000 has an estimated
residual value of $120,000, an estimated useful life of
40 years, and is depreciated by the straight-line
method. (a) Determine the amount of annual
depreciation. (b) Determine the book value at the end
of the 20th year of use. (c) If at the start of the 21st year
it is estimated that the remaining life is 25 years and
that the residual value is $150,000, determine the
depreciation expense for each of the remaining 25
years.
9-61
9-61
Example Exercise 9-5 (continued)
2
Follow My Example 9-5
a. $9,500 [($500,000 – $120,000)/40]
b. $310,000 [$500,000 – ($9,500 × 20)]
c. $6,400 [310,000 – $150,000)/25]
For Practice: PE 9-5A, PE9-5B
9-62
9-62
3
Journalize entries for
the disposal of fixed
assets.
9-63
3
Discarding Fixed Assets
A piece of equipment acquired at a cost of
$25,000 is fully depreciation at December 31,
2009. On February 14, 2010, the equipment is
discarded.
9-64
3
Equipment costing $6,000, with no residual value,
is depreciated at an annual straight-line rate of
10%. After the December 31, 2009, adjusting entry,
Accumulated Depreciation—Equipment has a
$4,750 balance. On March 24, 2010, the asset is
removed from service and discarded.
$600 × 3/12
9-65
3
Discarding Fixed Assets
The discarding of the equipment is then recorded
as follows (note that this is the second of two
entries on March 24):
9-66
3
Selling Fixed Assets
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.
9-67
3
Selling Fixed Assets
The entry to update the depreciation for the
nine months of the current year is as
follows:
9-68
3
Assumption 1
The equipment is sold on October 12 for
$2,250. No gain or loss.
9-69
3
Assumption 2
The equipment is sold on October 12 for
$1,000; a loss of $1,250.
9-70
3
Assumption 3
The equipment is sold on October 12 for
$2,800; a gain of $550.
9-71
3
Example Exercise 9-6
Sale of Equipment
Equipment was acquired at the beginning of the year
at a cost of $91,000. The equipment was depreciated
using the straight-line method based upon an
estimated useful life of 9 years and an estimated
residual value of $10,000.
a. What was the depreciation for the first year?
b. Assuming the equipment was sold at the end of
the second year for $78,000, determine the gain or
loss on sale of the equipment.
c. Journalize the entry to record the sale.
9-72
9-72
Example Exercise 9-6 (continued)
3
Follow My Example 9-6
a. $9,000 [($91,000 – $10,000)/9]
b. $5,000 gain: $78,000 – [$91,000 – ($9,000 × 2)]
c. Cash…………………………………………… 78,000
Accum. Depreciation—Equipment............ 18,000
Equipment………………………………..
91,000
Gain on Disposal of Fixed Assets……
5,000
For Practice: PE 9-6A, PE 9-6B
9-73
9-73
4
Compute depletion and
journalize the entry for
depletion.
9-74
4
Natural Resources
The process of transferring the
cost of natural resources to an
expense account is called
depletion.
9-75
4
Natural Resources
A business paid $400,000 for the
mining rights to a mineral deposit
estimated at 1,000,000 tons of ore.
Step 1: Determine the depletion rate
per ton.
Depletion
Cost of Resources
=
Rate
Estimated Total Units of
Resources
9-76
4
Natural Resources
A business paid $400,000 for the
mining rights to a mineral deposit
estimated at 1,000,000 tons of ore.
Step 1: Determine the depletion rate
per ton.
$0.40 per
=
ton
9-77
$400,000
1,000,000
4
Natural Resources
A business paid $400,000 for the
mining rights to a mineral deposit
estimated at 1,000,000 tons of ore.
Step 2: Multiply the depletion rate by
the quantity extracted during
period.
$0.40 per ton × $90,000 tons =
$36,000
9-78
4
Natural Resources
The adjusting entry to record the depletion
is shown below.
9-79
4
Example Exercise 9-7
Depletion
Earth’s Treasures Mining Co. acquired mineral rights
for $45,000,000. The mineral deposit is estimated at
50,000,000 tons. During the current year, 12,600,000
tons were mined and sold.
a. Determine the depletion rate.
b. Determine the amount of depletion expense for
the current year.
c. Journalize the adjusting entry on December 31
to recognize the depletion expense.
9-80
9-80
4
Example Exercise 9-7 (continued)
Follow My Example 9-7
a. $0.90 per ton = $45,000,000/50,000,000 tons
b. $11,340,000 = (12,600,000 tons × $0.90 per ton)
c. Depletion Expense……………….. 11,340,000
Accumulated Depletion..........
11,340,000
Depletion of mineral
deposit.
For Practice: PE 9-7A, PE 9-7B
9-81
9-81
5
Describe the accounting
for intangible assets,
such as patents,
copyrights, and goodwill.
9-82
5
Intangible Assets
Patents, copyrights, trademarks, and
goodwill are long-lived assets that
are useful in the operations of a
business and not held for sale. These
assets are called intangible assets
because they do not exist physically.
9-83
5
Patent
The exclusive right granted by the
federal government to manufacturers
to produce and sell goods with one
or more unique features is a patent.
These rights continue in effect for 20
years.
9-84
5
Amortizing a Patent
At the beginning of its fiscal year, a business
acquires a patent right for $100,000. Its
remaining useful life is estimated at 5 years.
9-85
5
Intangible Assets
Because a patent (and other intangible
assets) does not exist physically, it is
acceptable to credit the asset. This
approach is different from physical
fixed assets that require the use of a
contra asset account.
9-86
5
Copyright
The exclusive right granted by
the federal government to
publish and sell a literary,
artistic, or musical composition
is a copyright. A copyright
extends for 70 years beyond the
author’s death.
9-87
5
Trademark
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 can be renewed every 10year period thereafter.
9-88
5
Goodwill
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.
9-89
5
Goodwill
Generally accepted accounting
principles permit goodwill to be
recorded in the accounts only if it
is objectively determined by a
transaction.
9-90
5
Impaired Goodwill
A loss should be recorded if the business
prospects of the acquired firm (and the
acquired goodwill) become significantly
impaired.
9-91
5
Exhibit 9
9-92
Frequency of Intangible Asset
Disclosures for 600 Firms
5
Exhibit 10
9-93
Comparison of Intangible Assets
5
Example Exercise 9-8
Impaired Goodwill and Amortization of Patent
On December 31 it was estimated that goodwill of
$40,000 was impaired. In addition, a patent with an
estimated useful economic life of 12 years was
acquired for $84,000 on July 1.
a. Journalize the adjusting entry on December
31 for the impaired goodwill.
b. Journalize the adjusting entry on December
31 for the amortization of the patent rights.
9-94
9-94
Example Exercise 9-8 (continued)
5
Follow My Example 9-8
a. Dec. 31
b. Dec. 31
Loss from Impaired Goodwill………
Goodwill…………………………….
Impaired goodwill.
40,000
Amortization Expense—Patent…….
Patents………………………………
Amortized patent rights
[($84,000/12] × (6/12].
3,500
40,000
3,500
For Practice: PE 9-8A, PE 9-8B
9-95
9-95
6
Describe how depreciation
expense is reported in an income
statement and prepare a balance
sheet that includes fixed assets
and intangible assets.
9-96
6
9-97
6
• Intangible assets are usually reported in the
•
•
9-98
balance sheet, supported by a note with a
separate listing.
The balance in 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.
6
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:
Revenue
Fixed Asset
=
Turnover Ratio
Average Book Value
of Fixed Assets
9-99
6
For Marriott International, Inc. (in millions)
Fixed Asset
=
Turnover Ratio
Fixed Asset
=
Turnover Ratio
Fixed Asset
=
Turnover Ratio
9-100
Revenue
Average Book Value
of Fixed Assets
$12,160
($1,238 + 2,341)/2
6.79
Appendix 1:
Sum-of-the-Years-Digits
Depreciation
9-101
9-101
An asset costs $24,000, has a five-year life, and an
estimated salvage value of $2,000. Annual
depreciation using sum-of-the-years-digits method
is shown in the column shaded in yellow.
9-102
Appendix 2:
Exchanging Similar Fixed
Assets
9-103
(see Slide 105)
9-104
Calculating the Gain
Price (fair market value) of new equipment
Less assets given up in exchange:
Book value of old equipment ($4,000 – $3,200)
Cash paid on the exchange
Gain on exchange of assets
9-105
$5,000
$ 800
3,900
4,700
$ 300
Loss on Exchange of
Similar Assets
This time assume that only a $675 trade-in
allowance was allowed towards the
purchase of the new equipment. Because
the market value of the new equipment is
$5,000, the cash paid on the exchange
amounts to $4,325.
9-106
9-107
9-108