9 Fixed &
Intangible Assets
FINANCIAL
ACCOUNTING
PowerPoint Presentation by
2ND EDITION
BY
DUCHAC, REEVE, & WARREN
Gail B. Wright
Professor of Accounting
Bryant University
© Copyright 2007 Thomson South-Western, a part
of The Thomson Corporation. Thomson, the Star
Logo, and South-Western are trademarks used
herein under license.
1
LG 1
FIXED ASSETS
Fixed assets are
– Long term or relatively
permanent
– Tangible, i.e., physical
– Owned, used by business
– Not held for resale
Also called Property, Plant, &
Equipment (PPE)
2
LG 1
CLASSIFYING COSTS
Expenditures must be classified as
– Expenses
– Investments
– Fixed assets
3
LG 1
EXHIBIT 2
When is a purchased
item a fixed asset?
Yes
No
Expense
Yes
Fixed
Assets
No
Investments
4
LG 1
ASSET COST
Cost of asset includes
– All amounts spent to get asset in place
– All amounts spent to get asset ready
to use
5
LG 1
EXERCISE 9-1a
Indicate which costs to acquire a printing press should be debited to
the asset.
1.
2.
3.
4.
5.
6.
Freight
Special foundation
Sales tax on purchase
Insurance while in transit
Fee paid for installation
New parts to replace damaged parts
Click
button to
skip this
exercise
Press “Enter” or click left mouse button for answer.
6
LG 1
CAPITAL & REVENUE
EXPENDITURES
Money spent on assets after they are
acquired are divided between
– Capital expenditures
– Improve asset
– Extend useful life
– Revenue expenditures
– Ordinary maintenance & repairs
7
LG 1
REVENUE EXPENDITURES
Revenue expenditures
– Are ordinary repairs & maintenance
– Benefit only current period
– Increase (debit) repairs &
maintenance expense
8
LG 1
CAPITAL EXPENDITURES
Capital expenditures
– Are asset improvement
– Benefit current & future periods
– Increase (debit) fixed
asset
9
LG 1
EXERCISE 9-5a (partial)
Hicks incurred the following costs related to trucks and vans in
operating a delivery service. Identify the capital expenditures.
1.
2.
3.
4.
5.
6.
Replaced radio with new radio with greater range.
Overhauled engine on 3-yr. old truck
Changed oil all trucks, vans
Installed security systems
Changed radiator fluid on 4-yr. Old truck
Installed hydraulic lift
Click
button to
skip this
exercise
Press “Enter” or click left mouse button for answer.
10
LG 1
EXERCISE 9-5b (partial)
Hicks incurred the following costs related to trucks and vans in
operating a delivery service. Identify the revenue expenditures.
1.
2.
3.
4.
5.
6.
Replaced radio with new radio with greater range.
Overhauled engine on 3-yr. old truck
Changed oil all trucks, vans
Installed security systems
Changed radiator fluid on 4-yr. Old truck
Installed hydraulic lift
Click
button to
skip this
exercise
Press “Enter” or click left mouse button for answer.
11
LG 2
EXHIBIT 4
12
LG 2
DEPRECIATION METHODS
3 methods to calculate depreciation expense
– Straight-line depreciation
• Same amount of depreciation each year
– Units of production depreciation
• Depreciation varies with asset use
– Declining balance
• Accelerated method provides more depreciation in
earlier years
13
LG 2
STRAIGHT-LINE
DEPRECIATION
Depreciation expense =
(Cost – Residual value) /
Useful life
14
LG 2
UNITS-OF-PRODUCTION
DEPRECIATION
Depreciation expense =
{(Cost – Residual value)/ Productive activity} *
Current activity
15
LG 2
DECLINING-BALANCE
DEPRECIATION
For double-declining balance:
Depreciation expense =
2*(1/Life) * (Cost – Accumulated Depreciation)
16
LG 2
What happens when
estimates are revised?
Assume book value is
88,000 when residual
value revised to 8,000 and
remaining life extended to
8 years.
17
LG 2
REVISED DEPRECIATION
(Book value – Revised residual value) /
Remaining useful life
(88,000 – 8,000) / 8 yrs.
10,000 per year
18
LG 3
ASSET DISPOSAL
Assets can be
– Discarded
– Sold
First, bring depreciation
expense up to date
19
LG 4
INTANGIBLE ASSETS
Intangible assets are
– Long term or relatively
permanent
– Without physical properties
– Owned, used by business
– Not held for resale
20
LG 4
INTANGIBLE ASSETS:
Examples
Examples of intangible assets are
– Patents
– Copyrights, trademarks
– Goodwill
Cost of intangible assets is
amortized over useful (legal life)
21
LG 4
INTANGIBLE ASSETS:
Definitions
• Patent
– Exclusive right to produce, sell goods with 1 or more
unique features
• Copyright
– Exclusive to publish, sell literary, artistic, musical
composition
• Trademark
– Name, term, symbol used to identify business, product
22
LG 4
AMORTIZING COST
• Amortization
– Term used to match cost of intangible asset
against revenue over useful (legal) life
• Amortization similar to straight-line
depreciation
Amortization expense =
(Cost – Residual value) /
Useful life
23
LG 4
INTANGIBLE ASSET:
Goodwill
• Goodwill
– Arises when one business buys another
business
– Created when purchase price of business
greater than fair market value of net assets
– Not amortized; impaired value adjusted
24
LG 6
FINANCIAL UTILIZATION
Financial utilization measures efficient
revenue generation of operational assets
Fixed Asset Turnover =
Revenue/ Ave. Book Value Fixed Assets
25
Never test the depth of the water with
both feet.
(Clones are people two)
If you think nobody cares if you're
alive, try missing a couple of car
payments.
26