Post on 20-Oct-2021
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Fixed Assets and Fixed Assets and Intangible AssetsIntangible Assets
10
1
Intangible AssetsIntangible Assets
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1. Define, classify, and account for the
cost of fixed assets.
2. Compute depreciation, using the
After studying this chapter, you should
be able to:
2
2. Compute depreciation, using the
following methods: straight-line
method, units-of-production method,
and double-declining-balance
method.
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3. Journalize entries for the disposal of
fixed assets.
4. Compute depletion and journalize the
After studying this chapter, you should
be able to:
3
4. Compute depletion and journalize the
entry for depletion.
5. Describe the accounting for
intangible assets, such as patents,
copyrights, and goodwill.
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44
6. Describe how depreciation expense is
reported in an income statement, and
prepare a balance sheet that includes
After studying this chapter, you should
be able to:
4
prepare a balance sheet that includes
fixed assets and intangible assets.
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Define, classify,
Objective 1Objective 1
10-1
5
and account for the
cost of fixed assets.
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Nature of Fixed Assets
Fixed assets are long-term or
relatively permanent assets. They are
tangible assets because they exist
10-1
6
tangible assets because they exist
physically. They are owned and used
by the business and are not offered for
sale as part of normal operations.
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Fixed Assets as a Percent of Total Assets—
Selected Companies10-1Fixed Assets as a Percent
of Total Assets—Selected
Companies
10-1
77
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Is the purchased
item long-lived?
yes no
Classifying Costs 10-1
88
Is the asset used in a
productive purpose?
Expense
yes
Fixed Assets
no
Investment
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99
� Purchase price
� Sales taxes
� Permits from government agencies
� Broker’s commissions
� Title fees
LAND
Cost of Acquiring Fixed Assets 10-1
99
� Title fees
� Surveying fees
� Delinquent real estate taxes
� Razing or removing unwanted
buildings, less any salvage
� Grading and leveling
� Paving a public street bordering the
land
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1010
� Architects’ fees
� Engineers’ fees
� Insurance costs incurred during construction
� Interest on money borrowed to finance
construction
BUILDING
Cost of Acquiring Fixed Assets 10-1
1010
construction
� Walkways to and around the building
� Sales taxes
� Repairs (purchase of existing building)
� Reconditioning (purchase of existing
building)
� Modifying for use
� Permits from government agencies
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1111
� Sales taxes
� Freight
� Installation
Cost of Acquiring Fixed Assets
MACHINERY AND
EQUIPMENT
LAND
� Modification for user
� Testing for use
� Permits from government
agencies
10-1
1111
� Repairs (purchase of used
equipment)
� Reconditioning (purchase
of used equipment)
� Insurance while in transit
� Assembly
� Trees and shrubs
� Fences
� Outdoor lighting
� Paved parking areas
LAND
IMPROVEMENT
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1212
Cost of Acquiring Fixed Assets Excludes:
� Vandalism
� Mistakes in installation
� Uninsured theft
� Damage during unpacking
10-1
12
� Damage during unpacking
and installing
� Fines for not obtaining proper
permits from government
agencies
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1313
Expenditures that benefit only the
current period are called revenue
expenditures. Expenditures that
Capital and Revenue Expenditures 10-1
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expenditures. Expenditures that
improve the asset or extend its useful
life are capital expenditures.
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1414
CAPITAL
EXPENDITURES
1) AdditionsNormal and
REVENUE REVENUE
EXPENDITURESEXPENDITURES
10-1
1414
1) Additions
2) Improvements
3) Extraordinary
repairs
ordinary repairs
and maintenance
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1515
Ordinary Maintenance and Repairs
On April 9, the firm paid $300 for a
tune-up of a delivery truck.
Apr. 9 Repairs and Maintenance Exp. 300 00
10-1
1515
Apr. 9 Repairs and Maintenance Exp. 300 00
Cash 300 00
This is a revenue expenditureThis is a revenue expenditureThis is a revenue expenditureThis is a revenue expenditure
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1616
Asset Improvements
On May 4, a $5,500 hydraulic lift was installed on
the delivery truck to allow for easier and quicker
loading of heavy cargo.
May 4 Delivery Truck 5 500 00
10-1
1616
May 4 Delivery Truck 5 500 00
Cash 5 500 00
This is a capital expenditureThis is a capital expenditureThis is a capital expenditureThis is a capital expenditure
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1717
Extraordinary Repairs
The engine of a forklift that is near the end of its
useful life is overhauled at a cost of $4,500, which
extends its useful life eight years. Work on the
forklift was completed on Oct. 14.
10-1
1717
Oct. 14 Accum. Depreciation—Forklift 4 500 00
Cash 4 500 00
This is a capital expenditureThis is a capital expenditureThis is a capital expenditureThis is a capital expenditure
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1818
10-1Capital or Revenue Expenditure
1818
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1919
10-1
Example Exercise 10-1
On June 18 GTS Co. paid $1,200 to upgrade a
hydraulic lift and $45 for an oil change for one of
its delivery trucks. Journalize the entries for the
hydraulic lift upgrade and oil change expenditures.
19
hydraulic lift upgrade and oil change expenditures.
19
Follow My Example 10-1
June 18 Delivery Truck 1,200
Cash 1,200
18 Repairs and Maintenance Exp. 45
Cash 45
For Practice: PE 10-1A, PE 10-1B
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2020
Leasing Fixed Assets
A capital lease is accounted
for as if the lessee has, in fact,
purchased the asset. The
10-1
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purchased the asset. The
asset is then amortized over
the life of the capital lease.
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2121
Leasing Fixed Assets
A lease that is not
classified as a capital
lease for accounting
purposes is classified as
10-1
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purposes is classified as
an operating lease (an
operating leases is treated
as an expense).
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2222
Compute depreciation using the
following methods: straight-line
Objective 2Objective 2
10-2
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following methods: straight-line
method, units-of-production method,
double-declining-balance method.
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2323
Over time, fixed assets such as
equipment, buildings, and land
improvements lose their ability to
10-2Accounting for Depreciation
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improvements lose their ability to
provide services. The periodic
transfer of the cost of fixed assets to
expense is called depreciation.
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2424
Physical depreciation occurs from wear
and tear while in use and from the
action of the weather Functional
10-2Physical and Functional
Depreciation
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action of the weather Functional
depreciation occurs when a fixed asset
is no longer able to provide services at
the level for which it was intended.
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2525
Factors in Computing Depreciation
The three factors in determining the
amount of depreciation expense to be
recognized each period are: (a) the fixed
10-2
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recognized each period are: (a) the fixed
asset’s initial cost, (b) its expected useful
life, and (c) its estimated value at the end
of the useful life.
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2626
The fixed asset’s estimated value at
the end of its useful life is called the
residual value, scrap value, salvage
10-2Residual Value
26
residual value, scrap value, salvage
value, or trade-in value. A fixed
asset’s residual value and its expected
useful life must be estimated at the
time the asset is placed in service.
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2727
10-2
2727
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2828
2%
7% 3%
Exhibit 5: Use of Depreciation
Methods
Straight-line
Units-of-production
Double-declining-
10-2
2828
88%
Source: Accounting Trends & Techniques, 59th ed., American
Institute of Certified Public Accountants, New York, 2005.
Double-declining-
balance
Other
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2929
Straight-Line Method 10-2
The straight-line method provides
for the same amount of
depreciation expense for each year
of the asset’s useful life.
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of the asset’s useful life.
Annual depreciation =Cost – estimated residual value
Estimated life
29
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3030
A depreciable asset cost $24,000. Its
estimated residual value is $2,000 and
its estimated life is 5 years.
Annual depreciation =Cost – estimated residual value
10-2
3030
Annual depreciation =Cost – estimated residual value
Estimated life
Annual depreciation =$24,000 – $2,000
5 years
Annual depreciation = $4,400
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3131
The straight-line method is
widely used by firms because it
is simple and it provides a
reasonable transfer of cost to
10-2
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reasonable transfer of cost to
periodic expenses if the asset is
used about the same from
period to period.
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3232
10-2
Example Exercise 10-2
Equipment that was acquired at the beginning of the year
at a cost of $125,000 has an estimated residual value of
$5,000 and an estimated useful life of 10 years.
Determine the (a) depreciable cost, (b) straight-line rate,
and (c) annual straight-line depreciation.
32
and (c) annual straight-line depreciation.
32
Follow My Example 10-2
(a) $120,000 ($125,000 – $5,000)
(b) 10% = (1/10)
(c) $12,000 ($120,000 x 10%) or ($120,000 ÷ 10 years)
For Practice: PE 10-2A, PE 10-2B
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3333
Units-of-Production Method 10-2
The units-of-production method provides
for the same amount of depreciation
expense for each unit produced or each
3333
expense for each unit produced or each
unit of capacity used by the asset.
Unit depreciation =Cost – estimated residual value
Estimated hours, units, etc.
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3434
10-2
A depreciable asset cost $24,000. Its
estimated residual value is $2,000 and
its expected to have an estimated life
of 10,000 operating hours.
Cost – estimated residual value
3434
Hourly depreciation =$24,000 – $2,000
10,000 estimated hours
Hourly depreciation = $2.20 hourly depreciation
Hourly depreciation =Cost – estimated residual value
Estimated hours
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3535
The units-of-production method
is more appropriate than the
straight-line method when the
10-2
35
straight-line method when the
amount of use of a fixed asset
varies from year to year.
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3636
10-2
Example Exercise 10-3
Equipment acquired at a cost of $180,000 has an
estimated residual value of $10,000, an estimated useful
life of 40,000 hours, and was operated 3,600 hours
during the year. Determine the (a) depreciable cost, (b)
depreciation rate, and (c) the units-of-production
depreciation for the year.
36
depreciation for the year.
36
Follow My Example 10-3
(a) $170,000 ($180,000 – $10,000)
(b) $4.25 per hour ($170,000/40,000 hours)
(c) $15,300 (3,600 hours x $4.25)
For Practice: PE 10-3A, PE 10-3B
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3737
Double-Declining-Balance Method
The double-declining-
balance method provides
for a declining periodic
10-2
37
for a declining periodic
expense over the estimated
useful life of the asset.
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3838
A double-declining balance rate is
determined by doubling the straight-
line rate. A shortcut to determining
the straight-line rate is to divide one
10-2
38
the straight-line rate is to divide one
by the number of years (1/5 = .20).
Hence, using the double-declining-
balance method, a five-year life
results in a 40 percent rate (.20 x 2).
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3939
For the first year, the cost of the asset
is multiplied by 40 percent. After the
first year, the declining book value of
the asset is multiplied 40 percent.
Continuing with the example where
10-2
39
Continuing with the example where
the fixed asset cost $24,000 and has
an expected residual value of $2,000,
a table can be built.
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4040
Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 $24,000 40% $9,600
10-2
4040
$24,000 x .40
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4141
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760
Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
10-2
4141
$14,400 x .40
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4242
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
10-2
4242
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4343
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
10-2
4343
3 8,640 40% 3,456 18,816 5,184
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4444
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
10-2
4444
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
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4545
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
10-2
4545
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
5 3,110 40% 1,244 22,134 1,866
STOPSTOPDEPRECIATION STOPS WHEN
BOOK VALUE EQUALS
RESIDUAL VALUE!
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4646
1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
Book Value Accum.
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
10-2
4646
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
5 3,110 – $2,000 1,110 22,000 2,000
Desired
ending book
value
“Forced”
annual
depreciation
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4747
10-2
Example Exercise 10-4
Equipment that was acquired at the beginning of the year
at a cost of $125,000 has an estimated residual value of
$5,000 and an estimated useful life of 10 years.
Determine the (a) depreciable cost, (b) double-
declining-balance rate, and (c) double-declining balance
depreciation for the first year.
47
depreciation for the first year.
47
Follow My Example 10-4
(a) $120,000 ($125,000 – $5,000)
(b) 20% [(1/10) x2]
(c) $25,000 ($125,000 x 20%)
For Practice: PE 10-4A, PE 10-4B
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4848
Summary of
Depreciation Methods10-2
4848
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4949
10-2Comparing
Depreciation Methods
4949
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5050
Depreciation for Federal Income Tax
The Internal Revenue Code
specifies the Modified Accelerated
Cost Recovery System (MACRS)
10-2
50
Cost Recovery System (MACRS)
for use by businesses in computing
depreciation for tax purposes.
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5151
MACRS specifies eight classes of
useful life and depreciation rates for
each class. The two most common
classes are the 5-year class (includes
10-2
51
classes are the 5-year class (includes
automobiles and light duty trucks)
and the 7-year class (includes most
machinery and equipment).
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5252
A machine purchased for $140,000 was
originally estimated to have a useful life of five
years and a residual value of $10,000. The
asset has been depreciated for two years using
Revising Depreciation Estimates 10-2
5252
the straight-line method.
$140,000 – $10,000
5 years
Annual
Depreciation (S/L) =
$26,000 per yearAnnual
Depreciation (S/L) =
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5353
At the end of two years, the asset’s book value
is $88,000, determined as follows:
10-2
5353
Asset cost $140,000
Less accumulated depreciation
($26,000 per year x 2 years) 52,000
Book value, end of second year $ 88,000
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5454
During the third year, the company estimates
that the remaining useful life is eight years
(instead of three) and that the residual value is
$8,000 (instead of $10,000). Depreciation
expense for each of the remaining eight year is
determined as follows:
10-2
5454
determined as follows:
Book value, end of second year $88,000
Less revised estimated residual value 8,000
Revised remaining depreciation cost $80,000
Revised annual depreciation expense
($80,000 ÷ 8 years) $10,000
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5555
Example Exercise 10-5
A warehouse with a cost of $500,000 has an estimated
residual value of $120,000, an estimated useful life of
40 years, and is depreciated by the straight-line method.
(a) Determine the amount of annual depreciation. (b)
10-2
55
(a) Determine the amount of annual depreciation. (b)
Determine the book value at the end of the 20th year of
use. (c) If at the start of the 21st year it is estimated that
the remaining life is 25 years and that the residual value
is $150,000, determine the depreciation expense for
each of the remaining 25 years.
55
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5656
Follow My Example 10-5
a. $9,500 [($500,000 – $120,000)/40]
b. $310,000 [$500,000 – ($9,500 x 20)]
10-2
56For Practice: PE 10-5A, PE 10-5B 56
b. $310,000 [$500,000 – ($9,500 x 20)]
c. $6,400 [310,000 – $150,000)/25]
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5757
Journalize entries
Objective 3Objective 3
10-3
57
for the disposal of
fixed assets.
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5858
Discarding Fixed Assets
A piece of equipment acquired at a cost of
$25,000 is fully depreciation. On February
14, the equipment is discarded.
10-3
58
Feb. 14 Accumulated Depr.—Equipment 25 000 00
Equipment 25 000 00
To write off equipment
discarded.
58
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5959
Equipment costing $6,000 is depreciated at an
annual straight-line rate of 10%. After the
adjusting entry, Accumulated Depreciation—
Equipment had a $4,750 balance. The
equipment was discarded on March 24.
10-3
5959
equipment was discarded on March 24.
Mar. 24 Depreciation Expense—Equipment 150 00
Accum. Depr.—Equipment 150 00
To record current
depreciation on
equipment discarded.
$600 x 3/12
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6060
The discarding of the equipment is then
recorded by the following entry:
10-3
6060
Mar. 24 Accum. Depreciation—Equipment 4 900 00
Loss on Disposal of Fixed Assets 1 100 00
Equipment 6 000 00
To write off equipment
discarded.
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6161
Equipment costing $10,000 is depreciated at an
annual straight-line rate of 10%. The equipment is
sold for cash on October 12. Accumulated
Depreciation (last adjusted December 31) has a
balance of $7,000 and needs to be updated.
Selling Fixed Assets 10-3
6161
balance of $7,000 and needs to be updated.
Oct. 12 Depreciation Expense—Equipment 750 00
Accum. Depr.—Equipment 750 00
To record current
depreciation on
equipment sold.
$10,000 x ¾ $10,000 x ¾
x10%x10%
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6262
The equipment is sold on October
12 for $2,250. No gain or loss.
Oct. 12 Cash 2 250 00
10-3Assumption 1
6262
Oct. 12 Cash 2 250 00
Accum. Depreciation—Equipment 7 750 00
Equipment 10 000 00
Sold equipment at book
value.
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6363
Oct. 12 Cash 1 000 00
The equipment is sold on October 12
for $1,000; a loss of $1,250.
10-3Assumption 2
63
Oct. 12 Cash 1 000 00
Accum. Depreciation—Equipment 7 750 00
Loss on Disposal of Fixed Assets 1 250 00
Equipment 10 000 00
Sold equipment at a loss.
63
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6464
Oct. 12 Cash 2 800 00
The equipment is sold on October 12
for $2,800; a gain of $550.
10-3Assumption 3
64
Oct. 12 Cash 2 800 00
Accum. Depreciation—Equipment 7 750 00
Equipment 10 000 00
Sold equipment at a gain.
64
Gain on Disp. of Fixed Assets 550 00
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6565
10-3
Example Exercise 10-6
Equipment was acquired at the beginning of year at a
cost of $91,000. The equipment was depreciated using
the straight-line method based upon an estimated useful
life of 9 years and an estimated residual value of
65
life of 9 years and an estimated residual value of
$10,000.
65
a. What was the depreciation for the first year?
b. Assuming the equipment was sold at the end of the
second year for $78,000, determine the gain or loss on
sale of the equipment.
c. Journalize the entry to record the sale.
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6666
Follow My Example 10-6
a. $9,000 [($91,000 – $10,000)/9]
b. $5,000 gain; $78,000 – [$91,000 – ($9,000 x 2)]
10-3
66For Practice: PE 10-6A, PE 10-6B 66
c. Cash 78,000
Accum. Depreciation—Equipment 18,000
Equipment 91,000
Gain on Disposal of Fixed Assets 5,000
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6767
Exchanging Fixed Assets
When old equipment is traded for new
equipment, the seller often allows the buyer
a trade-in allowance for the old equipment
10-3
67
a trade-in allowance for the old equipment
traded. The remainder, the boot, is either
paid in cash or recorded as a liability.
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6868
10-3
Gains on exchanges of similar
IMPORTANT!
68
Gains on exchanges of similar
fixed assets are not recognized
for financial reporting purposes.
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6969
On June 19, assume that new
equipment being purchased has a list
price of $5,000. The dealer allows a
trade-in allowance of $1,100 on the
10-3
69
trade-in allowance of $1,100 on the
old, similar equipment. The old
equipment cost $4,000 and has a
book value of $800.
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7070
Two Methods of Determining Cost
Method One
List price of new equipment $5,000
Trade-in allowance $1,100
10-3
7070
Book value of old equipment 800
Unrecognized gain on exchange (300)
Cost of new equipment $4,700
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7171
Method Two
Book value of old equipment $ 800
Cash paid at date of exchange 3,900
10-3
7171
Cost of new equipment $4,700
Note that either method provides the same
cost for the new equipment.
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7272
On June 19, equipment was
exchanged at a gain of $300.
June 19 Accum. Depreciation—Equipment 3 200 00
10-3
7272
June 19 Accum. Depreciation—Equipment 3 200 00
Equipment (old equipment) 4 000 00
To record exchange of
equipment.
Cash 3 900 00
Equipment (new equipment) 4 700 00
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7373
Losses on Exchanges
For financial reporting purposes, losses are
recognized on exchange of similar fixed
assets if the trade-in allowance is less than
the book value of the old equipment. On
10-3
73
the book value of the old equipment. On
September 7, new equipment was acquired
by trading in old equipment with a cost of
$7,000 and a book value of $2,400, and
giving a cash payment of $8,000.
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7474
Cost of old equipment $7,000
Accumulated depreciation at date of exchange 4,600
Book value at September 7, date of exchange $2,400
Trade-in allowance on old equipment 2,000
Loss on exchange $ 400
Sept 7 Accum. Depreciation—Equipment 4 600 00
10-3
7474
Sept 7 Accum. Depreciation—Equipment 4 600 00
Equipment 10 000 00
Loss on Disposal of Fixed Assets 400 00
Equipment 7 000 00
Cash 8 000 00
To record exchange of
equipment with loss.
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7575
10-3
Example Exercise 10-7
On the first day of the fiscal year, a delivery truck with a
list price of $75,000 was acquired in exchange for an
old delivery truck and $63,000 cash. The old truck had
a cost of $50,000 and accumulated depreciation of
75
a cost of $50,000 and accumulated depreciation of
$39,500.
75
a. Determine the cost of the new truck for financial
reporting purposes.
b. Journalize the entry to record the exchange.
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7676
Follow My Example 10-7
a. $73,500
List price of new truck $75,000
Trade-in allowance on old truck
($75,000 – $63,000) $12,000
10-3
7676
($75,000 – $63,000) $12,000
Book value of old truck
($50,000 – $39,500) 10,500
Unrecognized gain on exchange (1,500)
Cost of new truck $73,500
(Continued)
or
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7777
Follow My Example 10-7
Book value of old truck ($50,000 –
$39,5000) $10,500
Plus cash paid at date of exchange 63,000
Cost of new truck $73,500
10-3
77
For Practice: PE 10-7A, PE 10-7B77
Cost of new truck $73,500
b. Truck (new) 73,500
Accumulated Depreciation—
Truck (old) 39,500
Truck (old) 50,000
Cash 63,000
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7878
Compute depletion
Objective 4Objective 4
10-4
78
and journalize the
entry for depletion.
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7979
The process of
transferring the cost of
natural resources to an
Natural Resources 10-4
79
natural resources to an
expense account is called
depletion.
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8080
Recording Depletion 10-4
A business paid $400,000 for the
mining rights to a mineral deposit
estimated at 1,000,000 tons of ore.
80
estimated at 1,000,000 tons of ore.
The depletion rate is $0.40 per ton
($400,000/1,000,000 tons).
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8181
10-4
If 90,000 tons are mined during the
year, an adjusting entry is required
at the end of the accounting period.
8181
Dec. 31 Depletion Expense 36 000 00
Accumulated Depletion 36 000 00
Depletion of mineral
deposit.
Adjusting Entry
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8282
10-4
Example Exercise 10-8
Earth’s Treasures Mining Co. acquired mineral rights for
$45,000,000. The mineral deposit is estimated at
50,000,000 tons. During the current year, 12,600,000
tons were mined and sold.
82
tons were mined and sold.
82
a. Determine the depletion rate.
b. Determine the amount of depletion expense for the
current year.
c. Journalize the adjusting entry on December 31 to
recognize the depletion expense.
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8383
Follow My Example 10-8
a. $0.90 per ton = $45,000,000/50,000,000 tons
b. $11,340,000 – (12,600,000 tons x $0.90 per ton)
10-4
c. Dec. 31Depletion Expense 11,340,000
83
For Practice: PE 10-8A, PE 10-8B83
c. Dec. 31Depletion Expense 11,340,000
Accumulated Depletion 11,340,000
Depletion of
mineral deposit.
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8484
Describe the accounting
Objective 5Objective 5
10-5
84
for intangible assets,
such patents, copyrights,
and goodwill.
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8585
Intangible Assets
Patents, copyrights, trademarks, and
goodwill are long-lived assets that
are useful in the operations of a
10-5
85
are useful in the operations of a
business and not held for sale. These
assets are called intangible assets
because they do not exist physically.
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8686
The exclusive right granted by the
federal government to
manufacturers to produce and sell
10-5
86
goods with one or more unique
features is a patent. These rights
continue in effect for 20 years.
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8787
At the beginning of its fiscal year, a business
acquires a patent right for $100,000. Its
remaining useful life is estimated at 5 years.
10-5Journalizing Amortization of a
Patent
87
Dec. 31 Amortization Expense—Patents 20 000 00
Patents 20 000 00
Patent amortization
($100,000/5).
Adjusting Entry
87
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8888
10-5
Dec. 31 Amortization Expense—Patents 20 000 00
Patents 20 000 00
Patent amortization
($100,000/5).
Adjusting Entry
88
($100,000/5).
Because a patent (and other intangible assets) does not
exist physically, it is acceptable to credit the asset. This
approach is different from physical fixed assets that
require the use of a contra asset account.
88
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8989
The exclusive right granted by the
federal government to publish and
sell a literary, artistic, or musical
10-5Copyright
89
sell a literary, artistic, or musical
composition is a copyright. A
copyright extends for 70 years
beyond the author’s death.
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9090
A trademark is a unique name, term, or
symbol used to identify a business and its
products. Most businesses identify their
trademarks with ® in their advertisements
10-5Trademark
90
trademarks with ® in their advertisements
and on their products. Trademarks can be
registered for 10 years and can be
renewed every 10 year period thereafter.
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9191
In business, goodwill refers to an
intangible asset of a business that is
created from such favorable factors
10-5Goodwill
91
created from such favorable factors
as location, product quality,
reputation, and managerial skill.
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9292
Generally accepted accounting principles
permit goodwill to be recorded in the
accounts only if it is objectively
10-5
92
accounts only if it is objectively
determined by a transaction.
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9393
Impaired Goodwill 10-5
A loss should be recorded if the business
prospects of the acquired firm (and the acquired
goodwill) become significantly impaired.
93
Mar. 19 Loss from Impaired Goodwill 50 000 00
Goodwill 50 000 00
Impaired goodwill.
93
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9494
10-5
Example Exercise 10-9
On December 31 it was estimated that goodwill of
$40,000 was impaired. In addition, a patent with an
estimated useful economic life of 12 years was acquired
for $484,000 on July 1.
94
a. Journalize the adjusting entry on December 31,
for the impaired goodwill.
b. Journalize the adjusting entry on December 31
for the amortization of the patent rights.
94
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9595
Follow My Example 10-9
a. Dec. 31 Loss from Impaired Goodwill 40,000
Goodwill 40,000
Impaired goodwill.
10-5
b. Dec. 31 Amortization Expense—Patents 3,500
95
For Practice: PE 10-9A, PE 10-9B95
b. Dec. 31 Amortization Expense—Patents 3,500
Patents 3,500
Amortized patent rights
[($84,000/12) x (6/12)].
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9696
Describe how depreciation
expense is reported in an
Objective 6Objective 6
10-6
96
expense is reported in an
income statement, and
prepare a balance sheet
that includes fixed assets
and intangible assets.
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9797
10-6
� The fixed assets may be shown at their net
� The amount of each major class of fixed
assets should be disclosed in the balance
sheet or in notes.
97
� The fixed assets may be shown at their net
amount.
Office equipment $125,750
Less accumulated depreciation 86,300
Net book value $ 39,450
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9898
10-6
� The cost of mineral rights or ore deposits is
normally shown as part of the fixed asset
section of the balance sheet. The related
accumulated depletion should also be
disclosed.
98
disclosed.
� Intangible assets are usually reported (net of
amortization) in the balance sheet in a
separate section immediately following fixed
assets.
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9999
10-6Fixed Assets and Intangible Assets in the Balance Sheet
9999
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100100
10-6Fixed Asset Turnover Ratio
One measure of the revenue-generating
efficiency of fixed assets is the fixed asset
turnover ratio. It measures the number of
dollars of revenue earned per dollar of fixed
assets and is computed as follows:
100100
assets and is computed as follows:
Fixed Asset
Turnover Ratio
Revenue
Average Book Value of
Fixed Assets
=
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101101
10-6Financial Analysis and Interpretation
For Marriott International, Inc. (in millions)
Fixed Asset
Turnover Ratio
Revenue
Average Book Value of
Fixed Assets
=
Fixed Asset $11,550
101101
Fixed Asset
Turnover Ratio
$11,550
($2,341 + 2,389)/2 =
Fixed Asset
Turnover Ratio= 4.88
Conclusion: For every dollar of fixed assets,
Marriott earns $4.88 of revenue.