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Learning Objectives

Power Notes. Chapter 10. Fixed Assets. 1. Nature of Fixed Assets 2. Accounting for Depreciation 3. Capital and Revenue Expenditures 4. Disposal of Fixed Assets. Learning Objectives. C10. Nature of Fixed Assets.

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Learning Objectives

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  1. Power Notes Chapter10 Fixed Assets 1. Nature of Fixed Assets 2. Accounting for Depreciation 3. Capital and Revenue Expenditures 4. Disposal of Fixed Assets Learning Objectives C10

  2. Nature of Fixed Assets Fixed assets are long-term, relatively permanent, tangible assets such as buildings and equipment used to help produce revenues. ASSETS LIABILITIES OWNER’S EQUITY Fixed Assets REVENUES EXPENSES

  3. Nature of Fixed Assets Fixed assets are long-term, relatively permanent, tangible assets such as buildings and equipment used to help producerevenues. ASSETS LIABILITIES OWNER’S EQUITY Fixed Assets All fixed assets except land lose their capacity to provide services. This loss of productive capacity is recognized as depreciation expense. REVENUES EXPENSES

  4. Costs of Acquiring Fixed Assets Include: • Sales tax and freight costs • Installation and assembling • Repairs and reconditioning (used assets) • Testing and modifying • Insurance while asset is in transit

  5. Costs of Acquiring Fixed Assets Exclude: • Vandalism and uninsured theft • Mistakes in installation • Damage during unpacking and installing

  6. a Initial Cost $24,000 minus Factors that Determine Depreciation Expense

  7. a Initial Cost $24,000 minus b equals Factors that Determine Depreciation Expense Estimated Residual Value $2,000

  8. a Initial Cost $24,000 minus b equals divided by Factors that Determine Depreciation Expense Estimated Residual Value $2,000 Depreciable Cost $22,000

  9. a Initial Cost $24,000 minus b equals divided by c equals Factors that Determine Depreciation Expense Estimated Residual Value $2,000 Depreciable Cost $22,000 Estimated Useful Life 5 years

  10. minus b equals divided by c equals Periodic Depreciation Expense $4,400 per year Factors that Determine Depreciation Expense a Initial Cost $24,000 Estimated Residual Value $2,000 Depreciable Cost $22,000 Estimated Useful Life 5 years

  11. A B A A B Recording Depreciation Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. Record straight-line depreciation for first year. General Ledger General Journal Equipment Description Debit Credit 24,000 Equipment 24,000 Cash 24,000 Accum. Depreciation Depreciation Expense

  12. A B A A B Recording Depreciation Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. Record straight-line depreciation for first year. General Ledger General Journal Equipment Description Debit Credit 24,000 Equipment 24,000 Cash 24,000 Depreciation Expense 4,400 Accum. Depreciation 4,400 Accum. Depreciation Depreciation Expense

  13. A B A A B Recording Depreciation Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. Record straight-line depreciation for first year. General Ledger General Journal Equipment Description Debit Credit 24,000 Equipment 24,000 Cash 24,000 Depreciation Expense 4,400 Accum. Depreciation 4,400 Accum. Depreciation Depreciation Expense $24,000 - $2,000 5 years = $4,400

  14. A B A A B B B Recording Depreciation Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years. Record straight-line depreciation for first year. General Ledger General Journal Equipment Description Debit Credit 24,000 Equipment 24,000 Cash 24,000 Depreciation Expense 4,400 Accum. Depreciation 4,400 Accum. Depreciation 4,400 Depreciation Expense 4,400 $24,000 - $2,000 5 years = $4,400

  15. A B B Calculation of Book Value General Ledger Equipment 24,000 Accum. Depreciation 4,400 Depreciation Expense 4,400

  16. Original Cost $24,000 Less Accum. Depr. 4,400 Book Value 19,600 A B B Calculation of Book Value General Ledger Equipment 24,000 Accum. Depreciation 4,400 Depreciation Expense 4,400

  17. Depreciation Methods The following four depreciation methods are acceptable for Financial Accounting purposes: 1. Straight-Line 2. Units-of-Production 3. Declining-Balance 4. Sum-of-Years-Digits Straight-line is far more widely used than other methods. Declining-balance and sum-of-years-digits are known as accelerated depreciation methods.

  18. Comparing Depreciation Methods Straight-Line Method Declining-Balance Method 10,000 8,000 6,000 4,000 2,000 0 Depreciation ($) Life (years) Life (years)

  19. Straight - Line Depreciation Accum. Depr. Book Value Depr. Book Value at Beginning at Beginning Expense at EndYear Cost of Year of Year for Year of Year 1 $24,000 $24,000.00 $4,400.00 $19,600.00 2 24,000 $ 4,400.00 19,600.00 4,400.00 15,200.00 3 24,000 8,800.00 15,200.00 4,400.00 10,800.00 4 24,000 13,200.00 10,800.00 4,400.00 6,400.00 5 24,000 17,600.00 6,400.00 4,400.00 2,000.00 Cost ($24,000) - Residual Value ($2,000) Annual Depreciation Expense ($4,400) = Estimated Useful Life (5 years)

  20. Declining - Balance Depreciation Accum. Depr. Book Value Depr. Book Value at Beginning at Beginning Expense at EndYear Cost of Year of Year Rate for Year of Year 1 $24,000 $24,000.00 40% $9,600.00 $14,400.00 2 24,000 $ 9,600.00 14,400.00 40% 5,760.00 8,640.00 3 24,000 15,360.00 8,640.00 40% 3,456.00 5,184.00 4 24,000 18,816.00 5,184.00 40% 2,073.60 3,110.40 5 24,000 20,889.60 3,110.40 –– 1,110.40 2,000.00 Note the acceleration of depreciation expense into early years of the life of the asset.

  21. Capital and Revenue Expenditures EXPENDITURE Increases operating efficiency or adds to capacity? Yes Capital Expenditure (Debit fixed asset account)

  22. No Capital and Revenue Expenditures EXPENDITURE Increases operating efficiency or adds to capacity? Increases useful life (extraordinary repairs)? Yes Capital Expenditure (Debit fixed asset account)

  23. No Capital and Revenue Expenditures EXPENDITURE Increases operating efficiency or adds to capacity? Increases useful life (extraordinary repairs)? Yes Yes Capital Expenditure (Debit accumulated depreciation account) Capital Expenditure (Debit fixed asset account)

  24. No No Capital and Revenue Expenditures EXPENDITURE Revenue Expenditure (Debit expense account for ordinary maintenance and repairs) Increases operating efficiency or adds to capacity? Increases useful life (extraordinary repairs)? Yes Yes Capital Expenditure (Debit accumulated depreciation account) Capital Expenditure (Debit fixed asset account)

  25. Capital and Revenue Expenditures LIABILITIES CAPITAL EXPENDITURES ASSETS OWNER’S EQUITY net income 1. Initial cost 2. Additions 3. Betterments 4. Extraordinary repairs EXPENSES REVENUES

  26. Capital and Revenue Expenditures LIABILITIES CAPITAL EXPENDITURES ASSETS OWNER’S EQUITY net income REVENUE EXPENDITURES EXPENSES REVENUES Normal and ordinary repairs and maintenance

  27. Accounting for Fixed Asset Disposals When fixed assets lose their usefulness they may be disposed of in one of the following ways: 1. discarded, 2. sold, or 3. traded (exchanged) for similar assets. Required entries will vary with type of disposition and circumstances, but the following entries will always be necessary: Asset accountmustbecreditedtoremovetheassetfromthe ledger, and the related Accumulated Depreciation account must be debited to remove its balance from the ledger.

  28. Discarding Fixed Assets Date Description Debit Credit Accumulated Depreciation 25,000 Equipment 25,000 Loss on Disposal of Equipment 1,100 Accumulated Depreciation 4,900 Equipment 6,000 Feb. 14 Write off fully depreciated equipment. Mar. 24 Write off partially depreciated equipment.

  29. Sale of Fixed Assets When fixed assets are sold, the owner may break even, sustain a loss, or realize a gain. 1. If the sale price is equal to book value, there will be no gain or loss. 2. If the sale price is less than book value, there will be a loss equal to the difference. 3. If the sale price is more than book value, there will be a gain equal to the difference. Gain or loss will be reported in the income statement as Other Income or Other Loss.

  30. Sale of Fixed Assets Sold equipment with a book value of $2,250 (cost $10,000, accumulated depreciation $7,750). Cash 1,000 Loss on Disposal of Equipment 1,250 Accumulated Depreciation 7,750 Equipment 10,000 Cash 2,800 Accumulated Depreciation 7,750 Equipment 10,000 Gain on Disposal of Equipment 550 Date Description Debit Credit Oct. 12 Sold below book value, for $1,000. Oct. 12 Sold above book value, for $2,800.

  31. Exchanges of Similar Fixed Assets • Trade-in Allowance (TIA) – amount allowed for old equipment toward the purchase price of similar new assets. • Boot – balance owed on new equipment after trade-in allowance has been deducted. • TIA > Book Value = Gain on Trade • TIA < Book Value = Loss on Trade • Gains are never recognized (not recorded). • Lossesmust be recognized (recorded).

  32. Exchanges of Similar Fixed Assets Quoted price of new equipment acquired $15,000 Cost of old equipment traded in $12,500 Accum. depreciation at date of exchange 10,100 Book value at date of exchange $ 2,400 Case One (GAIN) Trade-in allowance, $3,000 Cash paid, $12,000 ($15,000 – $3,000) TIA > Book Value = Gain $3,000 – $2,400 = $600 Boot + Book = Cost of New Equipment $12,000 + $2,400 = $14,400 Gains are not recognized for financial reporting.

  33. Exchanges of Similar Fixed Assets Quoted price of new equipment acquired $15,000 Cost of old equipment traded in $12,500 Accum. depreciation at date of exchange 10,100 Book value at date of exchange $ 2,400 Case Two (LOSS) Trade-in allowance, $2,000 Cash paid, $13,000 ($15,000 – $2,000) TIA < Book Value = Loss $2,000 – $2,400 = $400 Cost of New Equipment = Quoted Price of New Asset$15,000 Losses are recognized for financial reporting.

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