Survey of accounting 6e chapter 7

Fixed Assets and Intangible Assets Chapter ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objectives After studying this chapter, you should be able to: • Define, classify, and account for the cost of fixed assets • Compute depreciation using the straight-line and doubledeclining-balance methods • Describe the accounting for the disposal of fixed assets • Describe the accounting for the depletion of natural resources • Describe the accounting for intangible assets • Describe how depreciation expense is reported on an income statement, and prepare a balance sheet that includes fixed assets and intangible assets ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Define, classify, and account for the cost of fixed assets ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Characteristics of Fixed Assets • They exist physically and thus are tangible assets • The are owned and used by the company in its normal operations • They are not offered for sale as part of normal operations ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Fixed Assets as a Percentage of Total Assets Exhibit 1: Fixed Assets as a Percent of Total Assets- Selected Companies ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Classifying Costs Exhibit 2: Classifying Costs ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Costs to Include in Fixed Assets Land Building ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Costs to Include in Fixed Assets Machinery & Equipment Land Improvements ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Revenue and Capital Expenditures Capital Expenditures • Are _ improvements • Benefit _ and periods • Increase Revenue Expenditures • Ordinary and • Benefit only the _ period • Increase _ and _ expense ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Revenue and Capital Expenditures ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe the accounting for depletion of natural resources ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Natural Resources • Natural resources include timber, metal ores, and minerals • As resources are harvested or mined and then sold, a portion of the cost of acquiring them must be expensed • This is called depletion ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Calculating Depletion Depletion Rate = Depletion Expense = _× _ ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Depletion Example • Assume that a business paid $400,000 for the mining rights to a mineral deposit estimated at 1,000,000 tons of ore • Depletion rate = $400,000/1,000,000 = $0.40 per ton • If 90,000 tons are mined during the year, annual depletion is $36,000 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe the accounting for intangible assets ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Intangible Assets • Long-lived assets that are used in the operations of a business and are not held for sale; examples include _, , , and _ • These not exist physically • Accounted for similar to fixed assets • Cost is transferred to expense through ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Types of Intangible Assets Exhibit 7: Frequency of Intangible Asset Disclosures for 500 Firms ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Amortization • Matching the cost of an intangible asset with its revenue over its useful (legal) life • Amortization expense calculation is similar to straightline depreciation: Amortization = – ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Patent Amortization • Assume a company acquires patent rights for $100,000 The remaining legal life of the patent rights is 14 years, however the company feels the remaining useful life is five years ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Goodwill • Created from business factors • Only recorded if objectively determined by a _ • Not amortized – _ are adjusted • Goodwill is the most frequently reported _ asset ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Intangible Assets Exhibit 8: Comparison of Intangible Assets ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe how depreciation expense is reported on an income statement, and prepare a balance sheet that include fixed assets and intangible assets ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Financial Reporting Income Statement • _ and should be reported separately • Description of should be disclosed Balance Sheet • Each _ of _ should be disclosed • Related _ should also be reported ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Financial Reporting Exhibit 9: Fixed Assets and Intangible Assets in the Balance Sheet ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part End of Chapter ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part ... December 31 is $7, 000 Accumulated Depreciation after adjustment = $7, 750 = $7, 000 + $75 0 Book value is now = $2,250 =$10,000 – $7, 750 ©2013 Cengage Learning All Rights Reserved May not be scanned,... straight-line rate of 10% The equipment is sold for cash at book value on October 12 of the eighth year of use Accumulated depreciation as of the preceding December 31 is $7, 000 Accumulated Depreciation... doubledeclining-balance methods • Describe the accounting for the disposal of fixed assets • Describe the accounting for the depletion of natural resources • Describe the accounting for intangible assets •