7-1 electronic presentation by douglas cloud pepperdine university carl s.warren survey of...
TRANSCRIPT
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Electronic Presentation by Douglas Cloud
Pepperdine University
Electronic Presentation by Douglas Cloud
Pepperdine University
Carl S.Warren
Survey of Accounting
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Task Force Clip Art Task Force Clip Art included in this electronic included in this electronic presentation is used with presentation is used with
the permission of New the permission of New Vision Technology of Vision Technology of
Nepean Ontario, Canada.Nepean Ontario, Canada.
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Fixed Assets and Intangible Assets
Chapter 7
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1. Define, classify, and account for the cost of fixed assets.
2. Compute depreciation, using the straight-line, and declining-balance methods.
3. Describe the accounting for the depletion of natural resources.
4. Describe the accounting for the disposal of fixed assets.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
ContinuedContinuedContinuedContinued
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5. Classify fixed asset costs as either capital expenditures or revenue expenditures.
6. Describe accounting for intangible assets.7. Describe how depreciation expense is reported in an income statement, and
prepare a balance sheet that includes fixed assets and intangible assets.8. Analyze the utilization of fixed assets.
Learning GoalsLearning GoalsLearning GoalsLearning Goals
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1Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
Define, classify, and account for the cost of fixed assets.
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Nature of Fixed AssetsNature of Fixed AssetsNature of Fixed AssetsNature of Fixed Assets
Fixed assets are long term or relatively permanent assets
Fixed assets are long term or relatively permanent assets
Fixed assets are tangible assets because they exist physically.
Fixed assets are tangible assets because they exist physically.
They are owned and used by the business and are not held for sale as
part of normal operations.
They are owned and used by the business and are not held for sale as
part of normal operations.
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Nature of Fixed AssetsNature of Fixed AssetsNature of Fixed AssetsNature of Fixed Assets
If the purchased item is long-lived, then it should be capitalized, which means it is shown as an asset rather
than an expense.
If the purchased item is long-lived, then it should be capitalized, which means it is shown as an asset rather
than an expense.
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yes
Fixed Assets
no
Is the purchased item long-lived?
Is the asset used in a productive purpose?
yes no
Expense
Investment
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LandLandLandLand
• Purchase pricePurchase price• Sales taxesSales taxes• Permits from government Permits from government
agenciesagencies• Broker’s commissionsBroker’s commissions• Title feesTitle fees• Surveying feesSurveying fees
• Purchase pricePurchase price• Sales taxesSales taxes• Permits from government Permits from government
agenciesagencies• Broker’s commissionsBroker’s commissions• Title feesTitle fees• Surveying feesSurveying fees
ContinuedContinuedContinuedContinued
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• Purchase pricePurchase price• Sales taxesSales taxes• Permits from government Permits from government
agenciesagencies• Broker’s commissionsBroker’s commissions• Title feesTitle fees• Surveying feesSurveying fees
• Purchase pricePurchase price• Sales taxesSales taxes• Permits from government Permits from government
agenciesagencies• Broker’s commissionsBroker’s commissions• Title feesTitle fees• Surveying feesSurveying fees
• Delinquent real estate taxesDelinquent real estate taxes• Razing or removing Razing or removing
unwanted buildings, less the unwanted buildings, less the salvagesalvage
• Grading and levelingGrading and leveling• Paving a public street Paving a public street
bordering the landbordering the land
• Delinquent real estate taxesDelinquent real estate taxes• Razing or removing Razing or removing
unwanted buildings, less the unwanted buildings, less the salvagesalvage
• Grading and levelingGrading and leveling• Paving a public street Paving a public street
bordering the landbordering the land
LandLandLandLand
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BuildingsBuildings
Architects’ fees Engineers’ fees Insurance costs incurred
during construction Interest on money
borrowed to finance construction
Walkways to and around the buildingContinuedContinuedContinuedContinued
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Sales taxes Repairs (purchase of
existing building) Reconditioning
(purchase of an existing building)
Modifying for use Permits from
governmental agencies
BuildingsBuildings
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• Trees and shrubs
• Fences
• Outdoor lighting
• Concrete sewers and drainage
• Paved parking areas
Land ImprovementsLand Improvements
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Machinery and EquipmentMachinery and Equipment
• Sales taxes• Freight• Installation• Repairs (purchase of used
equipment)• Reconditioning (purchase
of used equipment)
ContinuedContinued
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• Insurance while in transit
• Assembly
• Modifying for use
• Testing for use
• Permits from governmental agencies
Machinery and EquipmentMachinery and Equipment
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Compute depreciation, using the straight-line and declining-balance methods.2
Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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Use of Depreciation MethodsUse of Depreciation MethodsUse of Depreciation MethodsUse of Depreciation Methods
S/LDBUOPOther
Source: Accounting Trends & Techniques, 55th. ed., American Institute of Certified Public Accountants, New York, 2001
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DataDataDataData
Original Cost.....………….. $24,000
Estimated Life in years….. 5 years
Estimated Residual Value... $2,000
Original Cost.....………….. $24,000
Estimated Life in years….. 5 years
Estimated Residual Value... $2,000
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Straight-Line MethodStraight-Line MethodStraight-Line MethodStraight-Line Method
Cost – estimated residual value
Estimated life
= Annual depreciation
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Straight-Line MethodStraight-Line MethodStraight-Line MethodStraight-Line Method
$24,000 – $2,000
5 years
= $4,400 annual depreciation
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Straight-Line MethodStraight-Line MethodStraight-Line MethodStraight-Line Method
The straight-line method is widely used by firms because it is simple
and it provides a reasonable transfer of cost to periodic
expenses if the asset is used about the same from period to period.
The straight-line method is widely used by firms because it is simple
and it provides a reasonable transfer of cost to periodic
expenses if the asset is used about the same from period to period.
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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 $4,400 $19,600
2 24,000 $ 4,400 19,600 4,400 15,200
3 24,000 8,800 15,200 4,400 10,800
4 24,000 13,200 10,800 4,400 6,400
5 24,000 17,600 6,400 4,400 2,000
Straight-Line MethodStraight-Line MethodStraight-Line MethodStraight-Line Method
Cost ($24,000) Cost ($24,000) –– Residual Value ($2,000) Residual Value ($2,000)
Estimated Useful Life (5 years)Estimated Useful Life (5 years)=
Annual DepreciationAnnual DepreciationExpense ($4,400)Expense ($4,400)
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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 $4,400 $19,600
2 24,000 $ 4,400 19,600 4,400 15,200
3 24,000 8,800 15,200 4,400 10,800
4 24,000 13,200 10,800 4,400 6,400
5 24,000 17,600 6,400 4,400 2,000
Ending book value equals the residual valueEnding book value equals the residual value
Straight-Line MethodStraight-Line MethodStraight-Line MethodStraight-Line Method
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Declining-Balance MethodDeclining-Balance MethodDeclining-Balance MethodDeclining-Balance Method
Step 1Step 1
Ignoring residual value, determine the straight-line rate
= $4,800 $24,000 - $2,000
5 years
$4,800
$24,000= 20%
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Declining-Balance MethodDeclining-Balance MethodDeclining-Balance MethodDeclining-Balance Method
= $4,800 $24,000 - $2,000
5 years
$4,800
$24,000= 20%
Step 1Step 1
Ignoring residual value, determine the straight-line rate
There’s a shortcut. Simply divide the number of years by
one (1 ÷ 5 = .20).
There’s a shortcut. Simply divide the number of years by
one (1 ÷ 5 = .20).
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Declining-Balance MethodDeclining-Balance MethodDeclining-Balance MethodDeclining-Balance Method
Double the rate.
Step 2Step 2
.20 x 2 = .40
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 by 40 percent.
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 by 40 percent.
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Build a table.
Step 3Step 3
Declining-Balance MethodDeclining-Balance MethodDeclining-Balance MethodDeclining-Balance Method
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Accum. Depr. Book Value. Beginning at Beginning Depr. Book ValueYear of Year Rate of Year for Year Year-End
1 40% $24,000.00 $9,600.00 $14,400.00
2 $ 9,600.00 40% 14,400.00 5,760.00 8,640.00
3 15,360.00 40% 8,640.00 3,456.00 5,184.00
4 18,816.00 40% 5,184.00 2,073.60 3,110.40
5 20,889.60 --- 3,110.40 1,110.40 2,000.00
Declining-Balance MethodDeclining-Balance MethodDeclining-Balance MethodDeclining-Balance Method
$3,110.40 – $2,000.00$3,110.40 – $2,000.00Desired ending book value
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Comparing Straight-Line With the Comparing Straight-Line With the Declining-Balance MethodDeclining-Balance Method
Comparing Straight-Line With the Comparing Straight-Line With the Declining-Balance MethodDeclining-Balance Method
Straight-LineMethod
Dep
reci
atio
n ($
)
5,000
4,000
3,000
2,000
1,000
0Life (years)
Declining-BalanceMethod
Life (years)
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Describe the accounting for depletion of natural resources.3
Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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Natural ResourcesNatural ResourcesNatural ResourcesNatural Resources
Depletion is the periodic transferring of the cost of natural resources, such
as metal ores and other minerals removed from the earth, to an
expense account.
Depletion is the periodic transferring of the cost of natural resources, such
as metal ores and other minerals removed from the earth, to an
expense account.
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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.
Natural ResourcesNatural ResourcesNatural ResourcesNatural Resources
LiabilitiesDec. 31
Net Effect
Revenue Net IncomeDec. 31 -36,000
Net Effect -36,000
Trans. Date
Trans. Date
Income StatementExpense
Depletion Expense 36,000
36,000
(Net Income)
-36,000 -36,000
Retained Earnings
Balance SheetAssets Stockholders' Equity
Accum. Depletion 36,000
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Describe the accounting for the disposal of fixed assets.4
Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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Discarding Fixed AssetsDiscarding Fixed AssetsDiscarding Fixed AssetsDiscarding Fixed AssetsAn item of equipment acquired at a cost of $25,000 is fully depreciated with no salvage value at December 31, 2004. On February 14, 2005,
the equipment is discarded.
LiabilitiesFeb. 14
Net Effect
Revenue Net Income
Trans. Date
Trans. Date
Income StatementExpense
Acc. Deprec. -25,000
0
Balance SheetAssets Stockholders' Equity
Equipment - 25,000
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Discarding Fixed AssetsDiscarding Fixed AssetsDiscarding Fixed AssetsDiscarding Fixed AssetsEquipment costing $6,000 is depreciated at an annual straight-line rate
of 10%. The Accumulated Depreciation balance related to this equipment is $4,900. The asset is removed from service on March 24.
LiabilitiesMar. 24
Net Effect
Revenue Net IncomeMar. 24 -1,100
Net Effect -1,100
Trans. Date
Trans. Date
Income StatementExpense
Loss on Disposal 1,100
1,100
Retained Earnings
(Net Income)
Acc. Deprec. - 4,900
-1,100 -1,100
Balance SheetAssets Stockholders' Equity
Equipment - 6,000
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Selling Fixed AssetsSelling Fixed AssetsSelling Fixed AssetsSelling Fixed AssetsEquipment is acquired at a cost of $10,000 and is depreciated at an annual
straight-line rate of 10%. It is sold for $1,000 cash on October 12 of the eighth year of its use. The balance in Accumulated Depreciation is $7,750.
LiabilitiesOct. 12
Net Effect
Revenue Net IncomeOct. 12 -1,250
Net Effect -1,250
Balance SheetAssets Stockholders' Equity
Cash 1,000
Ret. Earnings (Net Income)
Equipment - 10,000
Acc. Deprec. - 7,750
Trans. Date
Trans. Date
Income StatementExpense
Loss on Sale of Equipment 1,250
1,250
-1,250 -1,250
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5Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
Classify fixed asset costs as either capital expenditures or revenue expenditures.
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Expenditures to repair or maintain plant assets that do
not extend the life or enhance the value are known as revenue expenditures.
Expenditures to repair or maintain plant assets that do
not extend the life or enhance the value are known as revenue expenditures.
Capital and Revenue ExpendituresCapital and Revenue ExpendituresCapital and Revenue ExpendituresCapital and Revenue Expenditures
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Expenditures made for acquiring, constructing, adding,
or replacing fixed assets are known as capital expenditures.
Expenditures made for acquiring, constructing, adding,
or replacing fixed assets are known as capital expenditures.
Capital and Revenue ExpendituresCapital and Revenue ExpendituresCapital and Revenue ExpendituresCapital and Revenue Expenditures
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Describe the accounting for intangible assets.6
Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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PatentsPatentsPatentsPatents
??Patent Office
The exclusive right granted by the
federal government to produce and sell goods with one or
more unique features is a patent.
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PatentsPatentsPatentsPatents
Maximum life 20 years
Costs: Initial cost of purchased patent Any related legal fees
The straight-line method normally is used to amortize patents.
The straight-line method normally is used to amortize patents.
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PatentsPatentsPatentsPatentsA business acquires patent rights for $100,000. The patent had been granted 6
years earlier by the Federal Patent Office. The remaining useful life is estimated at 5 years.
LiabilitiesDec. 31
Net Effect
Revenue Net IncomeDec. 31 -20,000
Net Effect -20,000
Trans. Date
Trans. Date
Income StatementExpense
Amort. Expense - Patents 20,000
20,000
(Net Income)
-20,000 -20,000
Retained Earnings
Balance SheetAssets Stockholders' Equity
Patents - 20,000
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Copyrights and TrademarksCopyrights and TrademarksCopyrights and TrademarksCopyrights and Trademarks
The exclusive right to publish and sell a literary, artistic, or
musical composition is granted by a copyright.
A copyright has a maximum life of 70 years beyond the death of the author.
A copyright has a maximum life of 70 years beyond the death of the author.
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Copyrights and TrademarksCopyrights and TrademarksCopyrights and TrademarksCopyrights and Trademarks
A trademark is a name, term, or symbol used to
identify a business and its products.
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GoodwillGoodwillGoodwillGoodwill
Goodwill refers to an intangible asset of the business that is created from such favorable
factors as location, production quality, reputation, and managerial skills.
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Describe how depreciation expense is reported in an income statement, and prepare a balance sheet that includes fixed assets and intangible assets.
7Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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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 $ 75,000Goodwill 50,000 Total intangible assets $125,000
Discovery Mining Co.Partial Balance Sheet
December 31, 2005Accum. Book
Property, plant, and equipment: Cost Depr. Value
Land $ 30,000 $ 30,000Buildings 110,000 $ 26,000 84,000Factory equipment 650,000 192,000 458,000Office equipment 120,000 13,000 107,000
$910,000 $231,000 $ 679,000
Accum. Book Mineral deposits: Cost Depr. Value
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Parker CompanyPartial Income Statement
for the Year Ended December 31, 2005
Operating Expenses:Delivery expense $ 18,000Advertising expense 33,000Sales salaries expense 41,000Office salaries expense 37,000Administrative salaries 69,000Depreciation expense 28,000Taxes and insurance expense 22,000 Total operating expenses $248,000
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Alert CompanyPartial Statement of Cash Flows—Operating Activities
for the Year Ended December 31, 2005
Operating Activities:Net income $8,400Adjustments to reconcile net income to cashgenerated by operating activities:
Depreciation and amortization 3,400Decrease in accounts receivable 800Increase in salaries payable 400Increase in inventory (1,600)Gain on sale of equipment (600)
Net cash provided by operating activities $10,800
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Alert CompanyPartial Statement of Cash Flows—Investing Activities
for the Year Ended December 31, 2005
Investing Activities:Purchase of short-term investments $14,000Proceeds from the sale of equipment 2,100Payment for purchase of equipment (15,200)Purchase of long-term investments (6,000) Cash used for investing activities $(5,100)
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Analyze the utilization of fixed assets.8
Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective
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Operational Utilization Operational Utilization AnalysisAnalysis
Operational Utilization Operational Utilization AnalysisAnalysis
Used portion of the fixed asset
Total fixed asset capacity
The closer the operational utilization approaches 100 percent, the more
efficient the fixed assets.
The closer the operational utilization approaches 100 percent, the more
efficient the fixed assets.
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Financial Utilization Financial Utilization AnalysisAnalysis
Financial Utilization Financial Utilization AnalysisAnalysis
Total Revenues
Number of fixed asset units
Use this ratio only when there is a correlation between the number of fixed
asset units and total revenues.
Use this ratio only when there is a correlation between the number of fixed
asset units and total revenues.
Revenue per Unit of Fixed AssetsRevenue per Unit of Fixed Assets
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Financial Utilization Financial Utilization AnalysisAnalysis
Financial Utilization Financial Utilization AnalysisAnalysis
Revenue
Average book value of fixed assets
The larger the ratio, the more efficiently a business is using its fixed assets.
The larger the ratio, the more efficiently a business is using its fixed assets.
Fixed Asset Turnover RatioFixed Asset Turnover Ratio
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The EndThe End
Chapter 7Chapter 7
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