Chapter 10

Fixed Assets and

Intangible Assets
Accounting, 21st Edition
Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud

Professor Emeritus of Accounting
Pepperdine University

Copyright 2004 South-Western, a division

of Thomson Learning. All rights reserved.
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automated, so
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click the
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see this
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Objectives
Objectives
1. Define fixed assets and describe the accounting
for their cost.After studying this
After
studying
this
2. Compute depreciation, using the following
chapter,
should
chapter, you
you
should
methods: straight-line
method,
units-ofproduction method,
declining-balance
be
able
to:
beand
able
to:
method.
3. Classify fixed asset costs as either capital
expenditures or revenue expenditures.
4. Journalize entries for the disposal of fixed assets.
5. Define a lease and summarize the accounting
rules related to the leasing of fixed assets.

Objectives
Objectives
6. Describe internal controls over fixed assets.
7. Compute depletion and journalize the entry for
depletion.
8. Describe the accounting for intangible assets,
such as patents, copyrights, and goodwill.
9. Describe how depreciation expense is
reported in an income statement, and prepare
a balance sheet that includes fixed assets and
intangible assets.
10. Compute and interpret the ratio of fixed assets
to long-term debt.

Nature
Nature of
of Fixed
Fixed Assets
Assets
Fixed
Fixed assets
assets are
are long
long term
term or
or
relatively
relatively permanent
permanent assets
assets
Fixed
Fixed assets
assets are
are tangible
tangible assets
assets
because
because they
they exist
exist physically.
physically.
They
They are
are owned
owned and
and used
used by
by the
the
business
business and
and are
are not
not held
held for
for sale
sale
as
as part
part of
of normal
normal operations.
operations.

Classifying
Classifying Costs
Costs
Is the purchased
item long-lived?
Yes

No

Is the asset used in

a productive
purpose?
Yes
No

Fixed Assets

Expense

Investment

Land
Land

Purchase
Purchase price
price
Sales
Sales taxes
taxes
Permits
Permits from
from government
government
agencies
agencies
Brokers
Brokerscommissions
commissions
Title
Titlefees
fees
Surveying
Surveying fees
fees

Land
Land

Purchase
Purchase price
price
Delinquent
real
estate
taxes
Delinquent
real
estate
taxes
Sales
taxes
Sales taxes
from
Razing
or
Razing
or removing
removing
Permits
government
Permits from
government
unwanted buildings,
buildings, less
less the
the
agencies
agenciesunwanted
salvage
salvage
Brokers
Brokerscommissions
commissions
Grading
and
leveling
Grading
and
leveling
Title
fees
Title fees
Paving
aa public
street
Paving
public
street
Surveying
fees
Surveying fees
bordering
bordering the
the land
land

Buildings
Buildings
Architects fees
Engineers fees
Insurance costs incurred

during construction
Interest on money
borrowed to finance
construction
Walkways to and around
the building

Buildings
Buildings
Sales taxes
Repairs (purchase of

existing building)
Reconditioning
(purchase of an existing
building)
Modifying for use
Permits from
governmental agencies

Land Improvements

Trees and shrubs

Fences
Parking areas
Outdoor lighting
Concrete sewers and drainage
Paved parking areas

Machinery
Machinery and
and Equipment
Equipment

Sales taxes
Freight
Installation
Repairs (purchase of used
equipment)
Reconditioning (purchase
of used equipment)

Machinery
Machinery and
and Equipment
Equipment

Insurance while in transit

Assembly
Modifying for use
Testing for use
Permits from
governmental agencies

Cost
Cost of
of Acquiring
Acquiring Fixed
Fixed Assets
Assets Excludes:
Excludes:

Vandalism
Mistakes in installation
Uninsured theft
Damage during unpacking and installing
Fines for not obtaining proper permits from
government agencies

Nature
Nature of
of Depreciation
Depreciation
All
All fixed
fixed assets
assets except
except land
land lose
lose their
their capacity
capacity
to
to provide
provide services.
services. This
This loss
loss of
of productive
productive
capacity
capacity isis recognized
recognized as
as Depreciation
Depreciation Expense.
Expense.
Physical
Physical depreciation
depreciation occurs
occurs from
from wear
wear and
and tear
tear
while
while in
in use
use and
and from
from the
the action
action of
of the
the weather.
weather.
Functional
Functional depreciation
depreciation occurs
occurs when
when aa fixed
fixed asset
asset
isis longer
longer able
able to
to provide
provide services
services at
at the
the level
level for
for
which
which itit was
was intended,
intended, e.g.,
e.g., personal
personal computer.
computer.

Depreciation
Depreciation Expense
Expense Factors
Factors
Initial Cost

Residual Value

Depreciable Cost
Useful Life

Periodic Depreciation
Expense

Use
Use of
of Depreciation
Depreciation Methods
Methods
Other Units-of-Production
5%

Declining4%
Balance

8%

83%

Straight-Line
Source: Accounting Trends & Techniques, 56th. ed., American Institute of
Certified Public Accountants, New York, 2002.

Facts
Facts
Original
Original Cost.......
Cost....... $24,000
$24,000
Estimated
55 years
Estimated Life
Life in
in years..
years..
years
Estimated
10,000
Estimated Life
Life in
in hours..
hours..
10,000
Estimated
Estimated Residual
Residual Value...
Value...

$2,000
$2,000

Straight-Line
Straight-Line Method
Method
Cost estimated residual value
Estimated life
= Annual depreciation

Straight-Line
Straight-Line Method
Method
$24,000 $2,000
5 years
= $4,400 annual depreciation

Straight-Line
Straight-Line Rate
Rate
$24,000 $2,000
= $4,400
5 years

$4,400
= 18.3%
$24,000

Straight-Line
Straight-Line Method
Method
The
The straight-line
straight-line method
method isis widely
widely used
used
by
by firms
firms because
because itit isis simple
simple and
and itit
provides
provides aa reasonable
reasonable transfer
transfer of
of cost
cost to
to
periodic
periodic expenses
expenses ifif the
the asset
asset isis used
used
about
about the
the same
same from
from period
period to
to period.
period.

Straight-Line
Straight-Line Method
Method
Year

Cost

1
2
3
4
5

$24,000
24,000
24,000
24,000
24,000

Accum. Depr.
at Beginning
of Year

$ 4,400
8,800
13,200
17,600

Book Value
at Beginning
of Year
$24,000
19,600
15,200
10,800
6,400

Depr.
Expense
for Year

Book Value
at End
of Year

$4,400
4,400
4,400
4,400
4,400

$19,600
15,200
10,800
6,400
2,000

Cost ($24,000) Residual Value ($2,000)

Estimated Useful Life (5 years)

Annual
= Depreciation
Expense ($4,400)

Units-of-Production
Units-of-Production Method
Method
Cost estimated residual value
Estimated life in units, hours, etc.
= Depreciation per unit, hour, etc.

Units-of-Production
Units-of-Production Method
Method
$24,000 $2,000
10,000 hours
= Depreciation
perper
unit,
hour, etc.
= $2.20
hour

Units-of-Production
Units-of-Production Method
Method
The
The units-of-production
units-of-production method
method isis
more
more appropriate
appropriate than
than the
the straightstraightline
line method
method when
when the
the amount
amount of
of
use
use of
of aa fixed
fixed asset
asset varies
varies from
from
year
year to
to year.
year.

Declining-Balance
Declining-Balance Method
Method
Step
Step 11
Ignoring residual value,
determine the straight-line rate
$24,000 $2,000
5 years
$4,800
$24,000

= $4,800
= 20%

Declining-Balance
Declining-Balance Method
Method
Theres
Theres aa shortcut.
shortcut. Simply
Simply
divide
divide one
one by
by the
the number
number of
of
years
years (1
(1 55 == .20).
.20).

Declining-Balance
Declining-Balance Method
Method
Step
Step 22
Double the straight-line rate.

.20 x 2 = .40
For
For the
the first
first year,
year, the
the cost
cost of
of the
the asset
asset isis
multiplied
multiplied by
by 40
40 percent.
percent. After
After the
the first
first year,
year,
the
the declining
declining book
book value
value of
of the
the asset
asset isis
multiplied
multiplied 40
40 percent.
percent.

Declining-Balance
Declining-Balance Method
Method
Step
Step 33

Build a table.

Declining-Balance
Declining-Balance Method
Method
Year
1

Book Value
Beginning
of Year
Rate
$24,000

Annual
Deprec.

40%

Accum.
Deprec.
Year-End

$9,600

$24,000
$24,000 xx .40
.40

Book Value
Year-End

Declining-Balance
Declining-Balance Method
Method
Year
1

Book Value
Beginning
of Year
Rate
$24,000

40%

Annual
Deprec.

Accum.
Deprec.
Year-End

$9,600

$9,600

Book Value
Year-End
$14,400

Declining-Balance
Declining-Balance Method
Method
Year
1
2

Book Value
Beginning
of Year
Rate
$24,000
14,400

Annual
Deprec.

40%
40%

Accum.
Deprec.
Year-End

$9,600
5,760

$14,400
$14,400 xx .40
.40

$9,600

Book Value
Year-End
$14,400

Declining-Balance
Declining-Balance Method
Method
Year
1
2

Book Value
Beginning
of Year
Rate
$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

Declining-Balance
Declining-Balance Method
Method
Year
1
2
3

Book Value
Beginning
of Year
Rate
$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

Declining-Balance
Declining-Balance Method
Method
Year
1
2
3
4

Book Value
Beginning
of Year
Rate
$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

Declining-Balance
Declining-Balance Method
Method
Year
1
2
3
4
5

Book Value
Beginning
of Year
Rate
$24,000
STOP!
STOP! 40%
14,400
40%
8,640
40%
5,184
40%
3,110
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

Declining-Balance
Declining-Balance Method
Method

Year
1
2
3
4
5

IfIf we
use
5,
we
use this
this approach
approach in
inYear
Year
5, we
we will
will
Book
Value
Accum.
end
aa book
of
Beginning
Deprec.
Book Value
end the
the year
year with
withAnnual
book value
value
of $1,866.
$1,866.
ofRemember,
Year
Rate
Deprec. value
Year-End
the
at
of
Remember,
the residual
residual
value
at the
the end
endYear-End
of
Year
expected
to
$24,000
$9,600
$9,600so
Year 55 isis40%
expected
to be
be $2,000,
$2,000,
so we
we$14,400
modify
our
14,400 must
40%
5,760
15,360
8,640
must
modify
our approach.
approach.
8,640
40%
3,456
18,816
5,184
5,184
40%
2,074
20,890
3,110
3,110
40%
1,244
22,134
1,866

Declining-Balance
Declining-Balance Method
Method
Year
1
2
3
4
5

Book Value
Beginning
of Year
Rate
$24,000
14,400
8,640
5,184
3,110

40%
40%
40%
40%
---

Annual
Deprec.
$9,600
5,760
3,456
2,074
1,110

Accum.
Deprec.
Year-End
$9,600
15,360
18,816
20,890

$3,110
$3,110 $2,000
$2,000

Book Value
Year-End
$14,400
8,640
5,184
3,110

Declining-Balance
Declining-Balance Method
Method
Year
1
2
3
4
5

Book Value
Beginning
of Year
Rate
$24,000
14,400
8,640
5,184
3,110

40%
40%
40%
40%
---

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

Book Value
Year-End
$14,400
8,640
5,184
3,110
2,000
Desired
ending book
value

Comparing
Comparing Straight-Line
Straight-Line With
With the
the
Declining-Balance
Declining-Balance Method
Method

Depreciation ($)

Straight-Line
5,000
Method

Declining-Balance
Method

4,000
3,000
2,000
1,000
0

1
2
3
Life (years)

1
2
3
Life (years)

Revising
Revising Depreciation
Depreciation Estimates
Estimates
A
Amachine
machine purchased
purchased for
for
$130,000
$130,000 was
was originally
originally
estimated
estimated to
to have
have aa useful
useful
life
life of
of 30
30 years
years and
and aa
residual
residual value
value of
of $10,000.
$10,000.
The
The asset
asset has
has been
been
depreciated
depreciated for
for ten
ten years
years
using
using the
the straightstraightline
line method.
method.

Annual
Depreciation
$130,000 $10,000
30 years

$4,000 per year

Revising
Revising Depreciation
Depreciation Estimates
Estimates
Equipment
130,000

Book value = $90,000

Before
Before revising
revising

Accumulated
Depreciation
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
4,000
40,000

Revising
Revising Depreciation
Depreciation Estimates
Estimates
During the eleventh year, it is estimated that the
remaining useful life is 25 years (rather than 20) and
that the revised estimated residual value is $5,000.
Book value revised residual value
Revised estimated remaining life
$3,400 revised
$90,000 $5,000
= annual depreciation
25 years

Capital
Capital and
and Revenue
Revenue Expenditures
Expenditures
Expenditures
Expenditures made
made to
to
acquire
acquire new
new plant
plant
assets
assets are
are known
known as
as
capital
capital expenditures.
expenditures.

Capital
Capital and
and Revenue
Revenue Expenditures
Expenditures
Expenditures
Expenditures to
to repair
repair or
or
maintain
maintain plant
plant assets
assets that
that do
do
not
not extend
extend the
the life
life or
or enhance
enhance
the
the value
value are
are known
known as
as
revenue
revenue expenditures.
expenditures.

Capital
Capital and
and Revenue
Revenue Expenditures
Expenditures
EXPENDITURE

Increases
Increases
operating
useful life
No
efficiency or adds
(extraordinary
to capacity?
repairs)?
Yes
Capital
Expenditure
(Debit fixed asset
account)

Revenue
Expenditure
(Debit expense
No account for
ordinary
maintenance
and repairs)

Yes
Capital Expenditure
(Debit accumulated
depreciation account)

Capital
Capital and
and Revenue
Revenue Expenditures
Expenditures
LIABILITIES

CAPITAL
EXPENDITURES
1.1.Initial
Initialcost
cost
2.2.Additions
Additions
3.3.Betterments
Betterments
4.4.Extraordinary
Extraordinary
repairs
repairs

ASSETS

OWNERS
EQUITY
net income

EXPENSES

REVENUES

Capital
Capital and
and Revenue
Revenue Expenditures
Expenditures
LIABILITIES
ASSETS

OWNERS
EQUITY
net income

REVENUE
EXPENDITURES
Normal and
ordinary repairs
and maintenance

EXPENSES

REVENUES

Accounting
Accounting for
for Fixed
Fixed Asset
Asset Disposals
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:
An asset account must be credited to remove the asset
from the ledger, and the related Accumulated
Depreciation account must be debited to remove its
balance from the ledger.

Discarding
Discarding Fixed
Fixed Assets
Assets
A
Apiece
piece of
of equipment
equipment
acquired
acquired at
at aa cost
cost of
of
$25,000
$25,000 isis fully
fully
depreciation.
depreciation. On
On
February
February 14,
14, the
the
equipment
equipment isis discarded.
discarded.

Discarding
Discarding Fixed
Fixed Assets
Assets
Feb. 14 Accumulated Depr.Equipment
Equipment
To write off fully depreciated
equipment.

25 000 00
25 000 00

Discarding
Discarding Fixed
Fixed Assets
Assets
Equipment
Equipment costing
costing $6,000
$6,000 isis depreciation
depreciation at
at an
an
annual
annual straight-line
straight-line rate
rate of
of 10%.
10%. After
After the
the
adjusting
adjusting entry,
entry, Accumulated
Accumulated Depreciation
Depreciation
Equipment
Equipment had
had aa $4,750
$4,750 balance.
balance. The
The equipment
equipment
was
was discarded
discarded on
on March
March 24.
24.
Mar. 24 Depreciation Expense.Equipment

150 00

Accum. DepreciationEquipment
To record current depreciation
on equipment discarded.

150 00

$600
$600xx3/12
3/12

Discarding
Discarding Fixed
Fixed Assets
Assets
Equipment
Equipment costing
costing $6,000
$6,000 isis depreciation
depreciation at
at an
an
annual
annual straight-line
straight-line rate
rate of
of 10%.
10%. After
After the
the
adjusting
adjusting entry,
entry, Accumulated
Accumulated Depreciation
Depreciation
Equipment
Equipment had
had aa $4,750
$4,750 balance.
balance. The
The
equipment
equipment was
was discarded
discarded on
on March
March 24.
24.
Mar. 24 Accumulated Depr.Equipment

4 900 00

Loss on Disposal of Fixed Asset

1 100 00

Equipment
To write off equipment
discarded.

6 000 00

Sale
Sale of
of Fixed
Fixed Assets
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.

Sale
Sale of
of Fixed
Fixed Assets
Assets
Equipment
Equipment costing
costing $10,000
$10,000 isis depreciated
depreciated at
at an
an
annual
annual straight-line
straight-line rate
rate of
of 10%.
10%. The
The
equipment
equipment isis sold
sold for
for cash
cash on
on October
October 12.
12.
Accumulated
Accumulated Depreciation
Depreciation (last
(last adjusted
adjusted
December
December 31)
31) has
has aa balance
balance of
of $7,000.
$7,000.
Oct. 12 Depreciation ExpenseEquipment

750 00

Accumulated Depr.Equipment
To record current depreciation
on equipment sold.

750 00

$10,000
$10,000 xx

x10%
x10%

Sale
Sale of
of Fixed
Fixed Assets
Assets
Assumption
Assumption 1:
1: The
The equipment
equipment isis sold
sold
for
for $2,250,
$2,250, so
so there
there isis
no
no gain
gain or
or loss.
loss.
Oct. 12 Cash

2 250 00

Accumulated Depr.Equipment
Equipment
Sold equipment.

7 750 00
10 000 00

Sale
Sale of
of Fixed
Fixed Assets
Assets
Assumption
Assumption 2:
2: The
The equipment
equipment isis sold
sold
for
for $1,000,
$1,000, so
so there
there isis aa
loss
loss of
of $1,250.
$1,250.
Oct. 12 Cash

1 000 00

Accumulated Depr.Equipment

7 750 00

Loss on Disposal of Fixed Assets

1 250 00

Equipment
Sold equipment.

10 000 00

Sale
Sale of
of Fixed
Fixed Assets
Assets
Assumption
Assumption 2:
2: The
The equipment
equipment isis sold
sold
for
for $2,800,
$2,800, so
so there
there isis aa
gain
gain of
of $550.
$550.
Oct. 12 Cash
Accumulated Depr.Equipment
Equipment
Gain on Disposal of Fixed Assets
Sold equipment.

2 800 00
7 750 00
10 000 00
550 00

Exchanges
Exchanges of
of Similar
Similar Fixed
Fixed Assets
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).
Losses must be recognized (recorded).

Exchanges
Exchanges of
of Similar
Similar Fixed
Fixed Assets
Assets
List price of new equipment acquired
Cost of old equipment traded in
Accum. depreciation at date of exchange
Book value at date of exchange

$5,000
$4,000
3,200
$ 800

CASE ONE (GAIN):

Trade-in allowance, $1,100
Cash paid, $3,900 ($5,000 $1,100)
Gains
Gains are
are not
not
TIA > Book Value = Gain
recognized
recognized for
for
$1,100 $800 = $300
financial
financial reporting.
reporting.
Boot + Book = Cost of New Equipment
$3,900 + $800 = $4,700

Exchanges
Exchanges of
of Similar
Similar Fixed
Fixed Assets
Assets
On June 19, equipment exchanged
at a gain of $300.
June 19 Accumulated Depr.Equipment
Equipment (new equipment)

3 200 00
4 700 00

Equipment (old equipment)

4 000 00

Cash

3 900 00

Exchanges
Exchanges of
of Similar
Similar Fixed
Fixed Assets
Assets
List price of new equipment acquired
$10,000
Cost of old equipment traded in
$7,000
Accum. depreciation at date of exchange 4,600
Book value at date of exchange
$2,400
CASE TWO (LOSS):
Trade-in allowance, $2,000
Cash paid, $8,000 ($10,000 $2,000)
TIA<Book Value = Loss
Losses
Losses are
are
$2,000 $2,400 = $400
recognized
recognized for
for

financial
financial reporting.
reporting.

Exchanges
Exchanges of
of Similar
Similar Fixed
Fixed Assets
Assets
On September 7, equipment
exchanged at a loss of $400.
Sept. 7 Accumulated Depr.Equipment
Equipment (new equipment)
Loss on Disposal of Fixed Assets

4 600 00
10 000 00
400 00

Equipment (old equipment)

7 000 00

Cash

8 000 00

Natural
Natural Resources
Resources and
and
Depletion
Depletion
Depletion
Depletion isis the
the process
process of
of
transferring
transferring the
the cost
cost of
of natural
natural
resources
resources to
to an
an expense
expense account.
account.

Natural
Natural Resources
Resources and
and Depletion
Depletion
A business paid
$400,000 for the
mining rights to a
mineral deposit
estimated at 1,000,000
tons of ore. The
depletion rate is $0.40
per ton ($400,000
1,000,000 tons).

Natural
Natural Resources
Resources and
and Depletion
Depletion
During the current year, 90,000 tons are
mined. The periodic depletion is
$36,000 (90,000 tons x $0.40).
Adjusting Entry
Dec. 31 Depletion Expense
Accumulated Depletion

36 000 00
36 000 00

Intangible Assets and Amortization

Amortization is the periodic cost expiration of intangible
assets which do not have physical attributes and are not
held for sale (patents, copyrights, and goodwill).
Date

Description

Dec. 31 Amortization Expense

Patents

Debit Credit

20,000
20,000

Paid $100,000 for patent rights. The patent life is 11

years and was issued 6 years prior to purchase.
11 years 6 years = 5-year life
($100,000 / 5 years) = $20,000 per year

Discovery Mining Co.

Partial Balance Sheet
December 31, 2006
Property, plant, and equipment:
Land
Buildings
Factory equipment
Office equipment

Mineral deposits:
Alaska deposit
Wyoming deposit

Cost
$ 30,000
110,000
650,000
120,000
$910,000
Cost

$1,200,000
750,000
$1,950,000
Total property, plant, and equipment
Intangible assets:
Patents
Goodwill
Total intangible assets

Accum.
Depr.
$ 26,000
192,000
13,000
$231,000

Book
Value
$ 30,000
84,000
458,000
107,000
$ 679,000

Accum.
Depr.

Book
Value

$ 800,000
200,000
$1,000,000

$400,000
550,000
950,000
$1,629,000
$

75,000
50,000
$ 125,000

Ratio of Fixed Assets to Long-Term Liabilities

Procter & Gamble
Fixed assets (net)
Long-term debt

Ratio of fixed assets to

long-term liabilities

(in millions)

2002

2001

$13,349
$11,201

$13,095
$9,792

1.2

1.3

Use:
Use: To
Toindicate
indicate the
the margin
margin of
ofsafety
safety
to
to long-term
long-termcreditors
creditors

Chapter 10
The
The End
End