C9 - 1
Learning Objectives
Power Notes
1,Nature of Fixed Assets
2,Accounting for Depreciation
3,Capital and Revenue Expenditures
4,Disposal of Fixed Assets
5,Leasing Fixed Assets
6,Internal Control of Fixed Assets
7,Natural Resources
8,Intangible Assets
9,Financial Reporting
10,Financial Analysis and Interpretation
Chapter F9
Fixed Assets and Intangible Assets
C9
C9 - 2
Fixed Assets and Depreciation
Depreciation Methods
Capital and Revenue Expenditures
Disposal of Fixed Assets
Leasing Fixed Assets
Depletion and Amortization
Balance Sheet Presentation
Fixed Assets to Long-Term Debt
Slide # Power Note Topics
3
18
22
28
35
36
38
40
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F9
Fixed Assets and Intangible Assets
C9 - 3
LIABILITIES
OWNER’S
EQUITY
Fixed assets are long-
term,relatively permanent,
tangible assets such as
buildings and equipment
used to help produce
revenues.
REVENUES
ASSETS
EXPENSES
Fixed
Assets
Nature of Fixed Assets
C9 - 4
Nature of Fixed Assets
LIABILITIES
OWNER’S
EQUITY
Fixed assets are long-
term,relatively permanent,
tangible assets such as
buildings and equipment
used to help produce
revenues.
REVENUES
ASSETS
EXPENSES
Fixed
Assets
All fixed assets except
land lose their capacity
to provide services,
This loss of productive
capacity is recognized as
depreciation expense.
C9 - 5
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
C9 - 6
Vandalism and uninsured theft
Mistakes in installation
Damage during unpacking and installing
Costs of Acquiring Fixed Assets Exclude:
C9 - 7
Factors that Determine Depreciation Expense
minus
Initial Cost $24,000a
C9 - 8
equals
Factors that Determine Depreciation Expense
Estimated Residual Value $2,000b
minus
Initial Cost $24,000a
C9 - 9
divided by
Depreciable Cost $22,000
equals
Factors that Determine Depreciation Expense
Estimated Residual Value $2,000b
minus
Initial Cost $24,000a
C9 - 10
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
C9 - 11
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
C9 - 12
Recording Depreciation
General Journal
Description Debit Credit
General Ledger
Equipment 24,000
Cash 24,000
Equipment
24,000
A
A
Accum,Depreciation
Depreciation Expense
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.A
C9 - 13
Record straight-line depreciation for first year.
General Journal
Description Debit Credit
General Ledger
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum,Depreciation 4,400
Equipment
24,000
A
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.A
C9 - 14
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.
General Journal
Description Debit Credit
General Ledger
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum,Depreciation 4,400
Equipment
24,000
A
B
A
Accum,Depreciation
Depreciation Expense
B
$24,000 - $2,000
5 years = $4,400
Recording Depreciation
C9 - 15
Record straight-line depreciation for first year.
General Journal
Description Debit Credit
General Ledger
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum,Depreciation 4,400
Equipment
24,000
A
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.A
C9 - 16
General Ledger
Equipment
24,000A
Accum,Depreciation
4,400 B
Depreciation Expense
4,400B
Calculation of Book Value
C9 - 17
General Ledger
Calculation of Book Value
Equipment
24,000A
Accum,Depreciation
4,400 B
Depreciation Expense
4,400B
Original Cost $24,000
Less Accum,Depr,4,400
Book Value 19,600
C9 - 18
The following four depreciation methods are
acceptable for Financial Accounting purposes:
1,Straight-Line
2,Units-of-Production
3,Declining-Balance
4,Sum-of-Years-Digits
Straight-line is far more widely used than other
methods,
Declining-balance and sum-of-years-digits are
known as accelerated depreciation methods.
Depreciation Methods
C9 - 19
Comparing Depreciation Methods
Straight-Line
Method
Depre
ciat
ion
($)
10,000
8,000
6,000
4,000
2,000
0
Life (years)
Declining-Balance
Method
Life (years)
C9 - 20
Accum,Depr,Book Value Depr,Book Value
at 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 4,400.00 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
Straight - Line Depreciation
Cost ($24,000) - Residual Value ($2,000)
Estimated Useful Life (5 years)
= Annual DepreciationExpense ($4,400)
C9 - 21
Accum,Depr,Book Value Depr,Book Value
at 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% 5,760.00 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
Declining - Balance Depreciation
Note the acceleration of depreciation
expense into early years of the life of the asset.
C9 - 22
Capital and Revenue Expenditures
EXPENDITURE
Increases
operating
efficiency or
adds to
capacity?
Yes
Capital Expenditure
(Debit fixed asset
account)
C9 - 23
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)
C9 - 24
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
C9 - 25
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
C9 - 26
LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
EXPENSES
Capital and Revenue Expenditures
CAPITAL
EXPENDITURES
1,Initial cost
2,Additions
3,Betterments
4,Extraordinary
repairs
net income
C9 - 27
LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
EXPENSES
Capital and Revenue Expenditures
CAPITAL
EXPENDITURES
Normal and
ordinary repairs
and maintenance
net income
REVENUE
EXPENDITURES
C9 - 28
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 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
C9 - 29
Date Description Debit Credit
Discarding Fixed Assets
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.
Write off partially depreciated equipment.
Mar,24
C9 - 30
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
C9 - 31
Date Description Debit Credit
Sale of Fixed Assets
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
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).
C9 - 32
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).
C9 - 33
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 $12,500
Accum,depreciation at date of exchange 10,100
Book value at date of exchange $ 2,400
C9 - 34
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 $12,500
Accum,depreciation at date of exchange 10,100
Book value at date of exchange $ 2,400
Losses are
recognized for
financial
reporting.
C9 - 35
All leases are either capital leases or operating leases,
Capital leases include one or more of the following:
1,Lease transfers ownership to the lessee at the end of
the lease term.
2,An option for a bargain purchase by the lessee.
3,Lease term extends over most of the life of the asset.
4,Lease requires rental payments that approximate fair
market value of the asset.
Capital leases are accounted for as if the lessee has
purchased the asset,Lessee debits an asset account for
the fair market value and credits a long-term liability.
Operating leases are accounted for as rent expense.
Leasing Fixed Assets
C9 - 36
Date Description Debit Credit
Natural Resources and Depletion
Depletion Expense 36,000
Accumulated Depletion 36,000
($400,000 / 1,000,000 tons) = $0.40 per ton
90,000 tons x $0.40 = $36,000
Dec,31
Paid $400,000 for the mining rights to a
mineral deposit estimated at 1,000,000 tons of
ore,During the year,90,000 tons are mined.
Depletion is the periodic allocation of the cost of metal
ores and other minerals removed from the earth.
C9 - 37
Date Description Debit Credit
Intangible Assets and Amortization
Amortization Expense 20,000
Patents 20,000
11 years – 6 years = 5-year life
($100,000 / 5 years) = $20,000 per year
Dec,31
Paid $100,000 for patent rights,The patent life is 11
years and was issued 6 years prior to purchase.
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).
C9 - 38
Discovery Mining Co.
Balance Sheet
December 31,20--
Accum,Book
Property,plant,and equipment,Cost Depr,Value
Land $ 30,000 $ 30,000
Buildings 110,000 $ 26,000 84,000
Factory equipment 650,000 192,000 458,000
Office equipment 120,000 13,000 107,000
$910,000 $231,000 $ 679,000
Accum,Book
Mineral deposits,Cost Depl,Value
Alaska deposit $1,200,000 $ 800,000 $400,000
Wyoming deposit 750,000 200,000 550,000
$1,950,000 $1,000,000 950,000
Total property,plant,and equipment $1,629,000
Intangible assets:
Patents $ 75,000
Goodwill 50,000
Total intangible assets $125,000
C9 - 39
Discovery Mining Co.
Balance Sheet
December 31,20--
Accum,Book
Property,plant,and equipment,Cost Depr,Value
Land $ 30,000 $ 30,000
Buildings 110,000 $ 26,000 84,000
Factory equipment 650,000 192,000 458,000
Office equipment 120,000 13,000 107,000
$910,000 $231,000 $ 679,000
Accum,Book
Mineral deposits,Cost Depl,Value
Alaska deposit $1,200,000 $ 800,000 $400,000
Wyoming deposit 750,000 200,000 550,000
$1,950,000 $1,000,000 950,000
Total property,plant,and equipment $1,629,000
Intangible assets:
Patents $ 75,000
Goodwill 50,000
Total intangible assets $125,000
C9 - 40
Ratio of Fixed Assets to Long-Term Liabilities
(in millions)
1996 1995Procter & Gamble
Property,plant,equip,(net) $11,118 $11,026
Long-term liabilities (debt) $ 4,670 $5,161
C9 - 41
Ratio of Fixed Assets to Long-Term Liabilities
(in millions)
2000 1999Procter & Gamble
Property,plant,equip,(net) $11,118 $12,626
Long-term liabilities (debt) $ 4,670 $6,231
Use,To indicate the margin of safety
to long-term creditors
Ratio of fixed assets to
long-term liabilities 2.4 2.0
C9 - 42
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F9,
Power NotesChapter F9
Fixed Assets and Intangible Assets
Learning Objectives
Power Notes
1,Nature of Fixed Assets
2,Accounting for Depreciation
3,Capital and Revenue Expenditures
4,Disposal of Fixed Assets
5,Leasing Fixed Assets
6,Internal Control of Fixed Assets
7,Natural Resources
8,Intangible Assets
9,Financial Reporting
10,Financial Analysis and Interpretation
Chapter F9
Fixed Assets and Intangible Assets
C9
C9 - 2
Fixed Assets and Depreciation
Depreciation Methods
Capital and Revenue Expenditures
Disposal of Fixed Assets
Leasing Fixed Assets
Depletion and Amortization
Balance Sheet Presentation
Fixed Assets to Long-Term Debt
Slide # Power Note Topics
3
18
22
28
35
36
38
40
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F9
Fixed Assets and Intangible Assets
C9 - 3
LIABILITIES
OWNER’S
EQUITY
Fixed assets are long-
term,relatively permanent,
tangible assets such as
buildings and equipment
used to help produce
revenues.
REVENUES
ASSETS
EXPENSES
Fixed
Assets
Nature of Fixed Assets
C9 - 4
Nature of Fixed Assets
LIABILITIES
OWNER’S
EQUITY
Fixed assets are long-
term,relatively permanent,
tangible assets such as
buildings and equipment
used to help produce
revenues.
REVENUES
ASSETS
EXPENSES
Fixed
Assets
All fixed assets except
land lose their capacity
to provide services,
This loss of productive
capacity is recognized as
depreciation expense.
C9 - 5
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
C9 - 6
Vandalism and uninsured theft
Mistakes in installation
Damage during unpacking and installing
Costs of Acquiring Fixed Assets Exclude:
C9 - 7
Factors that Determine Depreciation Expense
minus
Initial Cost $24,000a
C9 - 8
equals
Factors that Determine Depreciation Expense
Estimated Residual Value $2,000b
minus
Initial Cost $24,000a
C9 - 9
divided by
Depreciable Cost $22,000
equals
Factors that Determine Depreciation Expense
Estimated Residual Value $2,000b
minus
Initial Cost $24,000a
C9 - 10
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
C9 - 11
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
C9 - 12
Recording Depreciation
General Journal
Description Debit Credit
General Ledger
Equipment 24,000
Cash 24,000
Equipment
24,000
A
A
Accum,Depreciation
Depreciation Expense
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.A
C9 - 13
Record straight-line depreciation for first year.
General Journal
Description Debit Credit
General Ledger
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum,Depreciation 4,400
Equipment
24,000
A
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.A
C9 - 14
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.
General Journal
Description Debit Credit
General Ledger
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum,Depreciation 4,400
Equipment
24,000
A
B
A
Accum,Depreciation
Depreciation Expense
B
$24,000 - $2,000
5 years = $4,400
Recording Depreciation
C9 - 15
Record straight-line depreciation for first year.
General Journal
Description Debit Credit
General Ledger
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum,Depreciation 4,400
Equipment
24,000
A
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.A
C9 - 16
General Ledger
Equipment
24,000A
Accum,Depreciation
4,400 B
Depreciation Expense
4,400B
Calculation of Book Value
C9 - 17
General Ledger
Calculation of Book Value
Equipment
24,000A
Accum,Depreciation
4,400 B
Depreciation Expense
4,400B
Original Cost $24,000
Less Accum,Depr,4,400
Book Value 19,600
C9 - 18
The following four depreciation methods are
acceptable for Financial Accounting purposes:
1,Straight-Line
2,Units-of-Production
3,Declining-Balance
4,Sum-of-Years-Digits
Straight-line is far more widely used than other
methods,
Declining-balance and sum-of-years-digits are
known as accelerated depreciation methods.
Depreciation Methods
C9 - 19
Comparing Depreciation Methods
Straight-Line
Method
Depre
ciat
ion
($)
10,000
8,000
6,000
4,000
2,000
0
Life (years)
Declining-Balance
Method
Life (years)
C9 - 20
Accum,Depr,Book Value Depr,Book Value
at 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 4,400.00 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
Straight - Line Depreciation
Cost ($24,000) - Residual Value ($2,000)
Estimated Useful Life (5 years)
= Annual DepreciationExpense ($4,400)
C9 - 21
Accum,Depr,Book Value Depr,Book Value
at 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% 5,760.00 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
Declining - Balance Depreciation
Note the acceleration of depreciation
expense into early years of the life of the asset.
C9 - 22
Capital and Revenue Expenditures
EXPENDITURE
Increases
operating
efficiency or
adds to
capacity?
Yes
Capital Expenditure
(Debit fixed asset
account)
C9 - 23
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)
C9 - 24
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
C9 - 25
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
C9 - 26
LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
EXPENSES
Capital and Revenue Expenditures
CAPITAL
EXPENDITURES
1,Initial cost
2,Additions
3,Betterments
4,Extraordinary
repairs
net income
C9 - 27
LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
EXPENSES
Capital and Revenue Expenditures
CAPITAL
EXPENDITURES
Normal and
ordinary repairs
and maintenance
net income
REVENUE
EXPENDITURES
C9 - 28
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 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
C9 - 29
Date Description Debit Credit
Discarding Fixed Assets
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.
Write off partially depreciated equipment.
Mar,24
C9 - 30
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
C9 - 31
Date Description Debit Credit
Sale of Fixed Assets
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
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).
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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).
C9 - 33
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 $12,500
Accum,depreciation at date of exchange 10,100
Book value at date of exchange $ 2,400
C9 - 34
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 $12,500
Accum,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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All leases are either capital leases or operating leases,
Capital leases include one or more of the following:
1,Lease transfers ownership to the lessee at the end of
the lease term.
2,An option for a bargain purchase by the lessee.
3,Lease term extends over most of the life of the asset.
4,Lease requires rental payments that approximate fair
market value of the asset.
Capital leases are accounted for as if the lessee has
purchased the asset,Lessee debits an asset account for
the fair market value and credits a long-term liability.
Operating leases are accounted for as rent expense.
Leasing Fixed Assets
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Date Description Debit Credit
Natural Resources and Depletion
Depletion Expense 36,000
Accumulated Depletion 36,000
($400,000 / 1,000,000 tons) = $0.40 per ton
90,000 tons x $0.40 = $36,000
Dec,31
Paid $400,000 for the mining rights to a
mineral deposit estimated at 1,000,000 tons of
ore,During the year,90,000 tons are mined.
Depletion is the periodic allocation of the cost of metal
ores and other minerals removed from the earth.
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Date Description Debit Credit
Intangible Assets and Amortization
Amortization Expense 20,000
Patents 20,000
11 years – 6 years = 5-year life
($100,000 / 5 years) = $20,000 per year
Dec,31
Paid $100,000 for patent rights,The patent life is 11
years and was issued 6 years prior to purchase.
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).
C9 - 38
Discovery Mining Co.
Balance Sheet
December 31,20--
Accum,Book
Property,plant,and equipment,Cost Depr,Value
Land $ 30,000 $ 30,000
Buildings 110,000 $ 26,000 84,000
Factory equipment 650,000 192,000 458,000
Office equipment 120,000 13,000 107,000
$910,000 $231,000 $ 679,000
Accum,Book
Mineral deposits,Cost Depl,Value
Alaska deposit $1,200,000 $ 800,000 $400,000
Wyoming deposit 750,000 200,000 550,000
$1,950,000 $1,000,000 950,000
Total property,plant,and equipment $1,629,000
Intangible assets:
Patents $ 75,000
Goodwill 50,000
Total intangible assets $125,000
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Discovery Mining Co.
Balance Sheet
December 31,20--
Accum,Book
Property,plant,and equipment,Cost Depr,Value
Land $ 30,000 $ 30,000
Buildings 110,000 $ 26,000 84,000
Factory equipment 650,000 192,000 458,000
Office equipment 120,000 13,000 107,000
$910,000 $231,000 $ 679,000
Accum,Book
Mineral deposits,Cost Depl,Value
Alaska deposit $1,200,000 $ 800,000 $400,000
Wyoming deposit 750,000 200,000 550,000
$1,950,000 $1,000,000 950,000
Total property,plant,and equipment $1,629,000
Intangible assets:
Patents $ 75,000
Goodwill 50,000
Total intangible assets $125,000
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Ratio of Fixed Assets to Long-Term Liabilities
(in millions)
1996 1995Procter & Gamble
Property,plant,equip,(net) $11,118 $11,026
Long-term liabilities (debt) $ 4,670 $5,161
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Ratio of Fixed Assets to Long-Term Liabilities
(in millions)
2000 1999Procter & Gamble
Property,plant,equip,(net) $11,118 $12,626
Long-term liabilities (debt) $ 4,670 $6,231
Use,To indicate the margin of safety
to long-term creditors
Ratio of fixed assets to
long-term liabilities 2.4 2.0
C9 - 42
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F9,
Power NotesChapter F9
Fixed Assets and Intangible Assets
