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 Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives Define fixed assets and describe the accounting for their cost.After studying this After studying this 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 Classify fixed asset costs as either capital expenditures or revenue expenditures Journalize entries for the disposal of fixed assets Define a lease and summarize the accounting rules related to the leasing of fixed assets Objectives Objectives Describe internal controls over fixed assets Compute depletion and journalize the entry for depletion Describe the accounting for intangible assets, such as patents, copyrights, and goodwill 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 Broker’s Broker’s commissions commissions Title Title fees 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 lessthe the agencies agenciesunwanted salvage salvage Broker’s Broker’scommissions 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 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 250 00 Accumulated Depr.—Equipment Equipment Sold equipment 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 000 00 Accumulated Depr.—Equipment 750 00 Loss on Disposal of Fixed Assets 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 800 00 Accumulated Depr.—Equipment Equipment Gain on Disposal of Fixed Assets Sold equipment 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) 200 00 700 00 Equipment (old equipment) 000 00 Cash 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