Learning Objectives Power Notes 1.Nature of Fixed Assets 2.Accounting for Depreciation 3.Capital and Revenue Expenditures 4.Disposal of Fixed Assets Chapter.
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Learning Objectives
Power Notes
1. Nature of Fixed Assets2. Accounting for Depreciation3. Capital and Revenue Expenditures4. Disposal of Fixed Assets
Chapter 10 Fixed Assets
C10
LIABILITIES
OWNER’SEQUITY
Fixed assets are long- term, relatively permanent, tangible assets such as buildings and equipment used to help produce revenues.
REVENUES
ASSETS
EXPENSES
FixedAssets
Nature of Fixed Assets
Nature of Fixed Assets
LIABILITIES
OWNER’SEQUITY
Fixed assets are long- term, relatively permanent, tangible assets such as buildings and equipment used to help produce revenues.
REVENUES
ASSETS
EXPENSES
FixedAssets
All fixed assets except land lose their capacityto provide services. This loss of productive capacity is recognized as depreciation expense.
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
Vandalism and uninsured theft
Mistakes in installation
Damage during unpacking and installing
Costs of Acquiring Fixed Assets Exclude:
Factors that Determine Depreciation Expense
minus
Initial Cost $24,000a
equals
Factors that Determine Depreciation Expense
Estimated Residual Value $2,000b
minus
Initial Cost $24,000a
divided by
Depreciable Cost $22,000
equals
Factors that Determine Depreciation Expense
Estimated Residual Value $2,000b
minus
Initial Cost $24,000a
equals
Estimated Useful Life 5 yearsc
divided by
Depreciable Cost $22,000
equals
Factors that Determine Depreciation Expense
Estimated Residual Value $2,000b
minus
Initial Cost $24,000a
Periodic Depreciation Expense $4,400 per year
equals
Estimated Useful Life 5 yearsc
divided by
Depreciable Cost $22,000
equals
Factors that Determine Depreciation Expense
Estimated Residual Value $2,000b
minus
Initial Cost $24,000a
Recording Depreciation
General Journal
Description Debit Credit
General Ledger
Equipment 24,000Cash 24,000
Equipment
24,000A
A
Accum. Depreciation
Depreciation Expense
Record straight-line depreciation for first year. Record straight-line depreciation for first year.
B
B
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years.
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years.
A
Record straight-line depreciation for first year. Record straight-line depreciation for first year.
General Journal
Description Debit Credit
General Ledger
Equipment 24,000Cash 24,000
Depreciation Expense 4,400Accum. Depreciation 4,400
Equipment
24,000A
B
A
Accum. Depreciation
Depreciation Expense
B
Recording Depreciation
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years.
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years.
A
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years.
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years.
A
Record straight-line depreciation for first year. Record straight-line depreciation for first year.
General Journal
Description Debit Credit
General Ledger
Equipment 24,000Cash 24,000
Depreciation Expense 4,400Accum. Depreciation 4,400
Equipment
24,000A
B
A
Accum. Depreciation
Depreciation Expense
B
$24,000 - $2,000
5 years= $4,400
Recording Depreciation
Record straight-line depreciation for first year. Record straight-line depreciation for first year.
General Journal
Description Debit Credit
General Ledger
Equipment 24,000Cash 24,000
Depreciation Expense 4,400Accum. Depreciation 4,400
Equipment
24,000A
B
A
Accum. Depreciation
4,400 B
Depreciation Expense
4,400B
B
$24,000 - $2,000
5 years= $4,400
Recording Depreciation
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years.
Purchase equipment for $24,000. Estimated residual value is $2,000 and useful life is 5 years.
A
General Ledger
Equipment
24,000A
Accum. Depreciation
4,400 B
Depreciation Expense
4,400B
Calculation of Book Value
General Ledger
Calculation of Book Value
Equipment
24,000A
Accum. Depreciation
4,400 B
Depreciation Expense
4,400B
Original Cost $24,000Less Accum. Depr. 4,400
Book Value 19,600
The following four depreciation methods are acceptable for Financial Accounting purposes:1. Straight-Line2. Units-of-Production3. Declining-Balance4. Sum-of-Years-Digits
Straight-line is far more widely used than other methods.
Declining-balance and sum-of-years-digits are known as accelerated depreciation methods.
Depreciation Methods
Comparing Depreciation Methods
Straight-LineMethod
De
pre
ciat
ion
($
)
10,000
8,000
6,000
4,000
2,000
0Life (years)
Declining-BalanceMethod
Life (years)
Accum. Depr. Book Value Depr. Book Valueat Beginning at Beginning Expense at End
Year 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 4,400.0015,200.00
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
Straight - Line Depreciation
Cost ($24,000) - Residual Value ($2,000)
Estimated Useful Life (5 years)=
Annual DepreciationExpense ($4,400)
Accum. Depr. Book Value Depr. Book Valueat Beginning at Beginning Expense at End
Year 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% 5,760.008,640.00
3 24,000 15,360.00 8,640.00 40% 3,456.005,184.00
4 24,000 18,816.00 5,184.00 40% 2,073.603,110.40
5 24,000 20,889.60 3,110.40 –– 1,110.402,000.00
Declining - Balance Depreciation
Note the acceleration of depreciation expense into early years of the life of the asset.
Capital and Revenue Expenditures
EXPENDITURE
Increases operating
efficiency or adds to
capacity?
Yes
Capital Expenditure
(Debit fixed asset account)
Capital and Revenue Expenditures
EXPENDITURE
Increases operating
efficiency or adds to
capacity?
Increases useful life
(extraordinary repairs)?
No
Yes
Capital Expenditure
(Debit fixed asset account)
Capital and Revenue Expenditures
EXPENDITURE
Increases operating
efficiency or adds to
capacity?
Increases useful life
(extraordinary repairs)?
No
Yes
Capital Expenditure
(Debit fixed asset account)
Capital Expenditure
(Debit accumulated
depreciation account)
Yes
Revenue Expenditure
(Debit expense account for
ordinary maintenance and repairs)
EXPENDITURE
Increases operating
efficiency or adds to
capacity?
Increases useful life
(extraordinary repairs)?
No No
Yes
Capital Expenditure
(Debit fixed asset account)
Capital Expenditure
(Debit accumulated
depreciation account)
Yes
Capital and Revenue Expenditures
LIABILITIES
OWNER’SEQUITY
REVENUES
ASSETS
EXPENSES
Capital and Revenue Expenditures
CAPITAL EXPENDITURES
1. Initial cost2. Additions3. Betterments4. Extraordinary repairs
net income
LIABILITIES
OWNER’SEQUITY
REVENUES
ASSETS
EXPENSES
Capital and Revenue Expenditures
CAPITAL EXPENDITURES
Normal and ordinary repairs and maintenance
net income
REVENUE EXPENDITURES
When fixed assets lose their usefulness they may be disposed of in one of the following ways:
1. discarded,2. sold, or3. traded (exchanged) for similar assets.
Required entries will vary with type of disposition and circumstances, but the following entries will always be necessary:
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.
Accounting for Fixed Asset Disposals
Date Description Debit Credit
Discarding Fixed Assets
Accumulated Depreciation 25,000Equipment 25,000
Loss on Disposal of Equipment 1,100Accumulated Depreciation 4,900
Equipment 6,000
Feb. 14
Write off fully depreciated equipment.
Write off partially depreciated equipment.
Mar. 24
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 of Fixed Assets
Date Description Debit Credit
Sale of Fixed Assets
Cash 1,000Loss on Disposal of Equipment 1,250Accumulated Depreciation 7,750Equipment 10,000
Cash 2,800Accumulated Depreciation 7,750Equipment 10,000Gain on Disposal of Equipment 550
Oct. 12
Sold below book value, for $1,000.
Sold above book value, for $2,800.
Oct. 12
Sold equipment with a book value of $2,250(cost $10,000, accumulated depreciation $7,750).
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). Losses must be recognized (recorded).
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.
Exchanges of Similar Fixed Assets
Quoted price of new equipment acquired $15,000
Cost of old equipment traded in $12,500Accum. depreciation at date of exchange 10,100
Book value at date of exchange $ 2,400
Exchanges of Similar Fixed Assets
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
Quoted price of new equipment acquired $15,000
Cost of old equipment traded in $12,500Accum. depreciation at date of exchange 10,100
Book value at date of exchange $ 2,400
Losses are recognized for financial reporting.
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