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Recording Fixed Assets
A fixed asset is any tangible resource that is expected to
be used in the normal course of operations for more than
one year and is not intended for resale. Ex. Land,
Buildings, Equipment, Furniture, Fixtures, etc.
Fixed assets should be recorded at the
cost of acquiring them, including:
• Purchase price;
• Taxes paid on the purchase;
• Fees such as closing costs paid to attorneys;
• Delivery costs;
• Insurance costs during transit; and
• Installation costs.
Recording Fixed Assets (Example)
Assume Dozier Building Supply buys a
delivery truck and pays the following:
Dozier
Building
Supply
Purchase Price:
$60,000
Additional Sales Tax:
$3,600
County Fee: $400
GPS System:
$1,000
Insurance: $1,400
Recording Fixed Assets (Example cont.)
The entry to record the purchase of the truck is:
GENERAL
JOURNAL
Date
Description
20xx
Month
X Equipment
Cash
Assets
+65,000
-65,000
=
Liabilities
Debit
Credit
65,000
65,000
+
Equity
Notice that all costs except insurance are
included in the cost of the truck.
Expensing Fixed Assets
A fixed asset converts to an expense as it is
used or consumed.
Depreciation the process of allocating the
cost of a fixed asset over its useful life.
Depreciation expense is recognized each
period to apply the matching principle and
the cumulative depreciation expense is called
accumulated depreciation.
Recording Depreciation
Depreciation expense is recorded at the end of
an accounting period with an adjusting journal
entry, by debiting Depreciation Expense and
crediting Accumulated Depreciation.
Balance in
Fixed Asset Account
-
Accumulated
Depreciation
=
Net Book
Value of Asset
Straight-Line Depreciation
Assume that Dozier’s purchased a truck on 1/1/2012
for $65,000. The truck has a salvage value of $15,000
and a useful life of 5-years or 100,000 miles. Using
straight-line depreciation, Dozier would record $10,000
per year or [($65,000 – 15,000) ÷ 5 = $10,000].
GENERAL
JOURNAL
Date
Description
2012
Dec
31 Depreciation Expense
Debit
10,000
10,000
Accumulated Depreciation
Assets
-10,000
=
Liabilities
Credit
+
Equity
-10,000
Double-Declining Depreciation
Recall that Dozier’s purchased a truck for $65,000 on
1/1/2012. The truck had a salvage value of $15,000
and a 5-year life. The straight-line rate is 1/5 or 20%.
Thus, the double-declining depreciation for 2012
would be [$65,000 x (2 x 20%) = $26,000].
GENERAL
JOURNAL
Date
Description
2012
Dec
31 Depreciation Expense
Accumulated DepreciationEquipment
Assets
-26,000
=
Liabilities
Debit
Credit
26,000
26,000
+
Equity
-26,000
Units of Activity Method
Dozier’s purchased a truck worth $65,000 on 1/1/2012.
It has a salvage value of $15,000 and a life of 100,000
miles. Depreciation per unit is $0.50 per mile [or
($65,000 – 15,000) ÷ 100,000]. If Dozier drives the truck
24,000 miles in 2012, depreciation expense is $12,000
(or 24,000 x $0.50).
GENERAL
JOURNAL
Date
2012
Dec
Description
Debit
31 Depreciation Expense
12,000
12,000
Accumulated Depreciation
Assets
-12,000
=
Liabilities
Credit
+
Equity
-12,000
Adjustments during Useful Life
Adjustments
for fixed assets
can arise from:
Changes in
Estimates
Additional
Improvement
Expenditures
Significant
Declines in
Asset
Market
Values
Changes in Depreciation Estimates
Assume Thomas Supply purchases a machine for $90,000 on
1/1/2012, with a 10 year useful life and $10,000 salvage
value. Using straight-line method, Thomas records $8,000
depreciation expense [($90,000 – $10,000) ÷ 10] each year.
GENERAL
JOURNAL
Date
Description
2012
Dec
31 Depreciation Expense
Accumulated
Depreciation
Assets
-8,000
=
Liabilities
Debit
Credit
8,000
8,000
+
Equity
-8,000
Changes in Depreciation Estimates
Year 5: Thomas estimates that the machine will last only 8
years and have a salvage value of $6,000. The prospective
revision (current and future) will not correct the first 4 years.
Step
1
Step
2
Step
3
Total
usefulrevision
life now is eight
Calculate net book value at the time of
estimate
years. Thus, there are only
(or unexpired cost):
four years
remaining.
Cost of the asset, January 1, 2012
$90,000
Less: Accumulated depreciation for four years $32,000
Net book value on January 1, 2016
$58,000
Calculate depreciable cost for future depreciation:
Net book value on January 1, 2016
$58,000
Less: Revised estimated salvage value
$6,000
Remaining depreciable cost
$52,000
Calculate revised depreciation expense:
$52,000 Remaining depreciable cost ÷ 4 remaining useful
life = $13,000 annual depreciation
Capital Expenditure
• A company purchases a fixed asset for
$50,000 on 1/1/2012, with a 5-year
life and no salvage. During the fifth
and final year of the asset’s life, the
company incurs $8,000 for upgrades
that extend the asset’s life for 2 years.
Year five
Assets
+8,000
-8,000
General Journal
Fixed Asset
Cash
(To record upgrade to asset)
=
Liabilities
+
$8,000
$8,000
Equity
Change in Depreciation Due
to Capital Expenditure
Step
1
Calculate depreciable cost:
Cost of the asset, Jan. 1, 2012
Less: Accumulated depreciation for four years
Add: Capital Expenditure
Updated Net Book Value on Jan. 1, 2016
Less: Estimated salvage value
Remaining depreciable cost
Step
2
Calculate depreciation expense:
Remaining depreciable cost
Divided by remaining useful life
Annual depreciation expense
$50,000
$40,000
$ 8,000
$18,000
$
0
$18,000
$18,000
÷
3
$ 6,000
Revenue Expenditure
• A company purchases a fixed asset for
$50,000 on 1/1/2012, with a 5-year life
and no salvage. During the fifth and
final year of the asset’s life, the
company incurs $1,000 in ordinary
maintenance.
General Journal
Year five
Maintenance Expense
Cash
(To record normal maintenance)
Assets
-1,000
=
Liabilities
+
Equity
-1,000
$1,000
$1,000
Asset Impairment
When a fixed asset’s market value falls materially
below its net book value and the decline in value is
deemed to be permanent, the asset is considered
impaired. Under GAAP, companies apply
conservatism by writing these assets down from their
book values to their market values.
Assume a machine losses value equal to $100,000:
General Journal
Loss on Impairment
Fixed Asset
(To record permanent impairment asset)
Included in Other
Expenses in the
Income Statement
$100,000
$100,000
Assets = Liabilities + Equity
-100,000
-100,000
Disposal of Fixed Assets
• The accounting for the disposal of a
fixed asset consists of the following
three steps:
1. Update depreciation
on the asset.
2. Calculate gain or loss
on the disposal.
3. Record the disposal.
Rule for Calculating the Gain or
Loss on Disposal
If Proceeds from Sale > Net Book Value,
then Gain on Disposal
If Proceeds from Sale < Net Book Value,
then Loss on Disposal
Horizontal and Vertical Analyses
A good place to start in the analyses of fixed
assets is with performance of horizontal and
vertical analyses.
Fixed assets
Horizontal
Analysis
Vertical Analysis
CY Fixed assets – PY Fixed assets
PY Fixed Assets
Fixed assets
Total Assets
Depreciation CY Depreciation – PY Depreciation Depreciation Expense
Expense
PY Depreciation
Total Sales
Fixed Asset Turnover Ratio
How do you find out if the company is
using fixed assets productively to
generate revenues?
The fixed asset turnover ratio compares total
revenues during a period to the average net
book value of fixed assets for the period.
Total Revenues
Average Net Book
Value of Fixed Assets
Where average Net
Book Value =
Beginning Net Book Value + Ending Net Book
Value
2
Average Life of Fixed Assets
?
?
?
• Represents the number of years, on
average, that a company expects to
use its fixed assets.
• Is calculated as: Average useful life =
Cost of Fixed Assets ÷ Depreciation Expense
• A higher number represents a
longer useful life and works best
with straight-line depreciation.
Average Age of Fixed Assets
?
• Represents the number of years, on
average, that a company has used
its fixed assets.
?
• Is calculated as: Average age =
Accumulated Depreciation ÷ Depreciation
Expense
?
• A higher number means assets are
older and works best with straightline depreciation.
Intangible Assets
An intangible
asset is a
resource that
is used in
operations for
more than one
year but has
no physical
substance.
Examples include:
•Patent
•Trademark
•Copyright
•Franchise
•Goodwill
Amortizing Intangible Assets
Suppose that a company possesses a $60,000
patent that has the maximum legal life of 20
years. The company believes that the patent
will be useful for only 12 years and will then be
worthless. How do we record amortization?
$60,000 ÷ 12 = $5,000 per year
General Journal
End of year Amortization Expense
$5,000
Patent
Assets
-5,000
$5,000
= Liabilities +
Equity
-5,000
End of Chapter 8