Chapter 17
1
Property and
Equipment and
Intangible Assets
College Accounting
10th Edition
McQuaig
McQuaig
Bille
Bille
Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine University
17–1
© 2011 Cengage Learning
Initial Costs of Property
and Equipment
 The original cost of property and equipment
includes all normal expenditures necessary to
acquire, install, and prepare the property and
equipment for its intended use.
 Expenditures that result from carelessness,
vandalism, and other abnormal causes are
not included in the asset’s cost. Such costs
should be charged as an expense.
17–2
Initial Costs of Property
and Equipment
Ham’s Burgers pays for a refrigerator in cash. The
necessary journal entry, in general journal form, is shown
below.
17–3
Land
 Land is the property that is used in the
operations of a business.
 The cost of land includes the amount paid
for the land plus incidental charges
connected with the purchase:
•
•
•
•
Real estate agents’ commissions paid by the
buyer
Surveying, clearing, draining, or grading the
land
Municipal and county assessment charges
Razing cost of old buildings on land
17–4
Land Improvements
 Land improvements–
1) have a determinable or finite useful life
or
2) are not directly associated with a
building.
 Land improvements are recorded in an
account by the same title (Land
Improvements), thus they are not recorded
in the Land account.
17–5
Buildings
 Buildings is an asset account that includes
such items as warehouses, offices, and retail
stores. If a building is constructed, the cost of
each building includes such items as:
 Labor and materials
 Architectural and engineering fees
 Insurance premiums during construction
 Interest on loans during the period of
construction
17–6
Leasehold Improvements
 Improvements made to rental property are
recorded as leasehold improvements.
 The Leasehold Improvements account is
an asset used to record improvements in
rented property that are made or paid for by
the lessee but become the property of the
lessor at the end of the lease term.
17–7
Equipment
 Equipment includes furniture, vehicles,
computes, office equipment, and
manufacturing machinery.
 The Equipment account is a fixed asset.
 The cost of equipment would include not
only the purchase price but also such items
as sales taxes, freight, installation, and
assembly.
17–8
Allocation of the Purchase Price
Between Land and Building
Ham’s Burgers buys some real property, including
land and a building, for $1,600,000. The assessor
valued the property for tax purposes at $1,300,000:
$700,000 for the land and $600,000 for the building.
The allocation is based on the assessor’s
valuations.
17–9
Allocation of the Purchase Price
Between Land and Building
STEP 1. Determine the asset percentages based on the
assessed value.
$700,000
Assessed Value of Land
= 53.8%
=
$1,300,000
Total Assessed Value
$700,000
Assessed Value of Building
= 46.2%
=
$1,300,000
Total Assessed Value
17–10
Allocation of the Purchase Price
Between Land and Building
STEP 2. Determine the purchase price allocated to each
asset by multiplying the purchase price by the
asset percentages.
LAND
Purchase price x STEP 1 = $1,600,000 x 53.8% = $860,800
BUILDING
Purchase price x STEP 1 = $1,600,000 x 46.2% = $739,200
17–11
Allocation of the Purchase Price
Between Land and Building
STEP 3. Record the journal entry for the purchase.
17–12
The Nature and Recording
of Depreciation
 Depreciation, which when used by an
accountant means the process of allocating
the cost of an asset to an expense over its
useful life.
 Depreciation represents a systematic
procedure for spreading the cost of fixed
assets (other than land) over the fiscal
periods in which the company receives
services from such assets.
17–13
Recording of Depreciation
When Ham’s Burger bought the refrigerator for $3,829, he
estimated that it would have a life of five years, and
therefore spreads this cost over the five years it is
expected to help generate revenue.
Ham’s Burgers depreciates the refrigerator $765.80 per
year. The necessary adjusting entry is recorded as
follows:
17–14
The Nature and Recording
of Depreciation
 Accumulated Depreciation is a contraasset account that is deducted from the
related asset account.
 Fixed assets are reported on the balance
sheet at their book value (or carrying
value). Book value is equal to the cost of the
asset minus the accumulated depreciation.
17–15
Depreciation Base
 The depreciation base is the full
depreciation of an asset.
Depreciation Total Cost of
Salvage Value
= an Asset – or Trade-in Value
Base
 Salvage value (or trade-in value) is the
expected value of the asset at disposal.
 If the salvage value is expected to be
insignificant, then a salvage value of zero
is assigned to the asset.
17–16
Useful Life
 The useful life of an asset is the expected
use of the asset.
 The length of an asset’s useful life is
affected by the amount of physical wear and
tear to which it is subjected.
 It’s expected length of life is also affected by
technological change and innovation.
17–17
Straight-Line Method
 A business that uses the straight-line
method calculates an equal amount of
depreciation expense for each year of
service anticipated.
Depreciation
Cost – Salvage Value
= Useful Life (in years)
per Year
 The percentage rate of depreciation per
year is determined by dividing the number
of years of useful life into 1.
17–18
Straight-Line Method
Ham’s Burgers purchases a new 65-lb. capacity
fryer costing $10,500 and having a useful life of
five years. The estimated salvage value at the
end of five years is $1,000.
$10,500
– $1,000
Depreciation
Cost
– Salvage
Value
=
per Year
Useful Life
5 (in years)
= $1,900
OR: 1 ÷ 5 = 20.0% x ($10,500 – $1,000) = $1,900
17–19
Double-Declining-Balance Method
 The double-declining-balance method is
an accelerated method of depreciation that
allows larger amounts of depreciation to be
taken in the early years of an asset’s life.
 Salvage value is not used in determining
depreciation by the double-declining-balance
method until the end of the depreciation
schedule.
17–20
Double-Declining-Balance Method
STEP 1. Calculate the straight-line depreciation rate.
Straight-Line Depreciation Rate =
1
Useful Life
STEP 2. Multiply the straight-line rate by 2.
STEP 1 × 2
STEP 3. Multiply the book value of the asset at the
beginning of the year by double the straightline rate.
Depreciation Expense per Year = Book Value at
Beginning of Year × STEP 2
STEP 4. Do not depreciate below salvage value. The
amount of depreciation can only reduce book
value to salvage value.
17–21
Double-Declining-Balance Method
EXAMPLE: Ham’s Burgers purchases a new 65-lb. capacity
fryer for $10,500, with a useful life of five years. The
estimated salvage value at the end of five years is $1,000.
STEP 1. Compute the straight-line depreciation rate.
Straight-Line
Depreciation Rate =
1
5 years
Straight-Line
.020 x 100% = 20%
Depreciation Rate =
STEP 2.
Multiply the straight-line rate by 2.
0.20 x 2 = 0.40
OR
20% x 2 = 40%
17–22
Double-Declining-Balance Method
STEP 3. Depreciation Expense per Year = Book Value at
Beginning of Year x 0.40 (or 40%)
*rounded
17–23
Double-Declining-Balance Method
STEP 4. Notice that in year 5 the depreciation expense
stops at $1,000 because ending book value
cannot go below the salvage value. The
amount of depreciation for year 5 is
determined by subtracting the salvage value
of $1,000 from the book value of the fryer at
the end of Year 4 ($1,361).
Observe carefully that the salvage (or trade-in)
value is not used until the fifth year.
17–24
Units-of-Production Method
A salesperson’s car cost $24,000 and has a
useful life of 60,000 miles. The estimated
salvage value at the end of 60,000 miles is
$7,200. The car is driven 18,500 this year and
20,000 miles next year.
17–25
Units-of-Production Method
STEP 1. Calculate the depreciation per unit.
Depreciation per Unit =
Depreciation per Unit =
Cost – Salvage Value
Estimated Units of Production
$24,000 – $7,200
60,000 miles
Depreciation per Unit = $0.28 per mile
17–26
Units-of-Production Method
STEP 2.
Multiply the depreciation per unit by the
number of units produced.
Depreciation
= Step 1 x Number of Units
Expense per Year
Produced
Depreciation Expense
$0.28 x 18,500 = $5,180
for 18,500 Miles =
Depreciation Expense
$0.28 x 20,000 = $5,600
for 20,000 Miles =
17–27
Depreciation for Periods of
Less Than a Year
Computed from May 1
17–28
Depreciation for Periods of
Less Than a Year
Computed from November 1
17–29
Modified Accelerated Cost
Recovery System (MACRS)
 For property acquired after 1986, a schedule
of depreciation called the Modified
Accelerated Cost Recovery System
(MACRS) has been established.
 Under MACRS, assets are divided into
classes.
17–30
MACRS Property Classes
17–31
Modified Accelerated Cost
Recovery System (MACRS)
 The following chart provides the percentage of cost
allocation (written off or depreciated) each year for
three-year, five-year, and seven-year property.
17–32
Modified Accelerated Cost
Recovery System (MACRS)
Ham’s Burgers purchases a new fixture (classified as
seven-year property) having a cost of $300.
STEP 1. Determine into which of the eight
classes the asset falls.
The new fixture falls in the seven-year property
category.
STEP 2. Consult the schedule to determine the
percentage figure for each year.
The percentage for the first year is 14.29%.
17–33
Modified Accelerated Cost
Recovery System (MACRS)
STEP 3. Multiply the cost of the asset by the
percentage figure.
Depreciation
Expense for Year 1 = $300 x 0.1429 = $42.87
Depreciation
Expense for Year 2 = $300 x 0.2449 = $73.47
17–34
Capital Expenditures
Capital expenditures include the initial costs debited to
property and equipment; they also include any costs of
enlarging or increasing the capacity of assets.
 Ham’s Burgers spends $20,000 to modify an existing
fast-food restaurant by enlarging it.
17–35
Revenue Expenditures
Revenue expenditures include the costs of maintaining
the operation of an asset, such as the expense of making
normal repairs.
 Ham’s Burgers spent $350 repairing the plumbing in an
existing fast-food restaurant.
17–36
Extraordinary-Repairs
Expenditures
Extraordinary-repairs expenditures refer to a major
overhaul or reconditioning that either extends the useful
life of an asset beyond its original estimated life or
increases the estimated trade-in value.
Example: On January 3, Year 1, Ham’s Burgers bought
a used truck for $18,000. The truck’s estimated useful life
is four years and its trade-in value is $5,000.
17–37
Extraordinary-Repairs
Expenditures
 Straight-line annual depreciation expense is $3,100. On
January 5, Year 4, Ham’s Burger puts in a new engine
and has other major repairs done, for which it spends
$3,480 in cash.
17–38
Extraordinary-Repairs
Expenditures
The extraordinary repair extends the life of the truck
from the present one additional year to three additional
years.
Truck
+
–
Jan. 3, Year 1 18,000
Jan. 5, Year 4 3,480
17–39
Extraordinary-Repairs
Expenditures
 The truck’s book value before the extraordinary repair
was $8,700 ($18,000 – $9,300). After the extraordinary
repair it is $12,180 ($18,000 – $3,480 – $9,300).
17–40
Recalculating Depreciation
New book value ($21,480 – $9,300)
Less trade-in value (assumed the same)
New depreciation base
$12,180
5,600
$ 6,580
Depreciation expense = $6,580 ÷ 3 = $2,193*
*rounded
The adjusting entry for depreciation of the truck at the end
of Year 4 is as follows:
17–41
Discarding or Retiring
Property and Equipment
Step 1. Record the entry to depreciate the
asset up to date, if applicable.
Step 2. Calculate the book value.
Step 3. Determine the gain or loss.
Step 4. Record the entry to discard or sell
the asset.
17–42
Discarding or Retiring
Property and Equipment
A display case that originally cost $1,760, with a zero
salvage value, and that has been fully depreciated is
given away as junk.
17–43
Discarding or Retiring
Property and Equipment
STEP 1. No entry is required because the asset is fully
depreciated.
STEP 2. Once an asset is fully depreciated, the
asset’s book value remains at its estimated
salvage value unless an extraordinary repair
is made or the company disposes of the
asset.
Book Value = $1,760 – $1,760 = $0
17–44
Discarding or Retiring
Property and Equipment
STEP 3. If an asset is fully depreciated and the company
does not receive any cash for discarding the
asset, there is no gain or loss recognized.
STEP 4. A journal entry is made to record disposal of
the display case.
17–45
Discarding an Asset Not
Fully Depreciated
On August 12, Ham’s Burgers discards a printer that
originally cost $1,720. No salvage value is recognized.
Accumulated Depreciation up to the end of the
previous year is $1,032. Depreciation for the current
year through August 12 is $352.
Accumulated Depreciation, Office Equipment
–
+
Bal.
$1,032
352
1,384
17–46
Discarding an Asset Not
Fully Depreciated
STEP 1. Record the entry to depreciate the printer up to date.
Accumulated Depreciation, Office Equipment
–
+
Bal.
$1,032
352
1,384
17–47
Discarding an Asset Not
Fully Depreciated
STEP 2. Calculate the book value.
Book Value = $1,720 – $1,384 = $336
STEP 3. Because the firm realized nothing from the
disposal of the asset, the loss is for the same
amount as the book value.
Loss = $0 – $336 = $(336)
17–48
Discarding an Asset Not
Fully Depreciated
STEP 4. Record the journal entry for the disposal
of the printer.
17–49
Sale of an Asset at a Loss
On August 21, Ham’s Burgers sells a kitchen range for
$150, which originally cost $2,100; accumulated
depreciation to the end of the previous year (December
31) was $1,680. Yearly depreciation is $210.
STEP 1.
Record the entry to depreciate the kitchen
range up to date.
After posting the journal entry, the Accumulated Depreciation,
Equipment account will have a balance of $1,820.
17–50
Sale of an Asset at a Loss
STEP 2.
Calculate the book value.
Book Value = $2,100 – $1,820 = $280
STEP 3.
Determine the gain or loss.
Loss = $150 – $280 = $(130)
17–51
Sale of an Asset at a Loss
STEP 4. The entry to record the sale of the kitchen
range is shown in general journal form.
17–52
Sale of an Asset at a Gain
On October 18, Ham’s Burgers sells a dishwasher for $400
for which it originally paid $4,400; accumulated depreciation
is $3,900. Yearly depreciation is $360.
STEP 1. Record the entry to depreciate the
dishwasher up to date.
After the above entry, Accumulated Depreciation,
Equipment has a balance of $4,260.
17–53
Sale of an Asset at a Gain
STEP 2.
Calculate the book value.
Book Value = $4,400 – $4,260 = $140
STEP 3.
Determine the gain or loss.
Gain = $400 – $140 = $260
17–54
Sale of an Asset at a Gain
STEP 4. The entry, in general journal form, to
record the sale of the dishwasher is as
follows:
17–55
Exchange of Long-Lived Assets
for Other Similar Assets
 A gain on an exchange of this nature results
when the market (or trade-in allowance) is
greater than the book value.
 A loss on an exchange of this nature results
when the market (or trade-in allowance) is less
than the book value.
 Gains and losses are record for GAAP
purposes; however, federal income tax laws
require no gain or loss to be recognized.
17–56
Exchange When Trade-In Value
Is Greater Than Book Value
Ham’s Burgers bought a copier for $2,600. After
some years, Ham’s Burgers decides to trade it in
on a new model. The old copier has
accumulated depreciation of $2,480 on the date
of the trade-in, leaving a book value of $120
($2,600 – $2,480). The new copier has a list
price of $3,350. Ham’s Burgers is allowed a
trade in allowance of $310; the difference is paid
in cash.
17–57
Debit Office
Equipment (new)
for its list price.
Close Accumulated Depreciation,
Office Equipment for the
accumulated depreciation on the old
equipment.
17–58
Remove the
cost of the old
office equipment
from the ledger.
Calculate the gain
($310 – $120) = $190
and credit the gain
account.
Credit Cash, $3,040
(quoted price of the new
copier $3,350, minus the
$310 trade-in allowance).
Exchange When Trade-In Value
Is Less Than Book Value
Ham’s Burgers bought a delivery truck for
$30,400. Four years later, the truck has
accumulated depreciation of $26,200 (book
value = $30,400 – $26,200 = $4,200). Ham’s
Burgers buys a new truck, with a list price of
$35,400, trading in the old one, for which the
company is allowed $2,800, and paying the
difference in cash. The depreciation is up to
date.
17–60
List price of new delivery truck.
Accumulated Depreciation, Delivery
Equipment is debited to remove accumulated
17–61
depreciation related to old delivery truck.
The cost of the
old delivery
truck is removed
from the ledger.
The loss is determined as
follows: $2,800 – $4,200 =
$(1,400).
Credit Cash, $32,600 (quoted
price of the new truck ,
$35,400, minus the $2,800
trade-in allowance).
17–62
Property and
Equipment Records
 Subsidiary ledgers can be used when recording
property and equipment. For example, the Store
Equipment account represents a functional
group; it includes all types of equipment used in
a store.
 When using subsidiary ledgers, Store
Equipment is a controlling account; the property
and equipment ledger is a subsidiary ledger.
17–63
Property and
Equipment Records
17–64
Intangible Assets
Intangible assets are assets that are purchased
for use in the business and have a useful life longer
than one year but have no physical substance.
 A patent is an exclusive right to sell or produce an
invention.
 A copyright is an exclusive right of protection to
creators of artistic works.
 A trademark represents a word, slogan, or symbol
that identifies a company or product.
 A franchise is an exclusive right to use a company’s
name and to sell its products.
 Goodwill represents the value of the business over
its identified assets. It must be determined by the
purchase price.
17–65
Intangible Assets
On January 1, Ham’s Burgers purchases a patent
costing $20,000 with a useful life of 10 years. Ham’s
Burgers pays for the patent in cash
On December 31, the following entry would be made:
17–66