Survey of accounting 6e chapter 7

Fixed Assets and Intangible
Assets

Chapter
7

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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.

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Learning
Objective 1
Define, classify, and account for the cost of
fixed assets

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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.

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Fixed Assets as a Percentage of
Total Assets
Exhibit 1: Fixed Assets as a Percent of Total Assets- Selected Companies

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Classifying Costs
Exhibit 2: Classifying Costs

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Costs to Include in Fixed Assets
Land

Building

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Costs to Include in Fixed Assets
Machinery & Equipment

Land Improvements

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Revenue and Capital
Expenditures
Capital Expenditures
• Are _____

improvements
• Benefit _______ and
______ periods
• Increase ______
______

Revenue
Expenditures
• Ordinary ______
and __________
• Benefit only the
_____ period
• Increase _______
and _________
expense

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Revenue and Capital Expenditures

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Learning
Objective 2
Compute depreciation using the straight-line and
double-declining-balance methods

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Accounting for Depreciation
• Over time, fixed assets other than ____ lose their
ability to provide services.
• The cost of these fixed assets should be
expensed in a systematic manner during their
_____ lives.
• This is called depreciation.
_______
Depreciation

_________
Depreciation

• Factors include
wear and tear

• Factors include
obsolescence

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Factors in Computing Depreciation
Expense
Exhibit 4: Depreciation Expense Factors

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Two Common Depreciation
Methods
• Straight-Line
• Double-declining-balance

Straight-Line

– _____ amount of depreciation each year.
______ amounts of depreciation each period

Asset
acquired

Residual
value

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Straight-Line
–

Annual Depreciation =

Example: Assume a $24,000 depreciable asset with an
estimated 5-year useful life and estimated $2,000 residual value.
Annual depreciation expense: ($24,000 - $2,000) / 5 = $4,400
Depreciation = $4,400 per year

Asset cost =
$24,000

Residual value
= $2,000

Rate is 1/5
OR
20% per year
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Double-Declining-Balance
• Double-Declining-Balance
– Accelerated method that provides _____
depreciation in earlier years.
Depreciation expense _______ in earlier
periods

Asset
acquired

Residual
value

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Double-Declining-Balance
Double the Straight-Line Rate × Book Value

Example: Assume a $24,000 depreciable asset with an estimated 5year useful life and estimated $2,000 residual value.

Double
Straight Line
Rate

Residual
Value

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Comparing Depreciation Methods
Exhibit 5: Summary of Depreciation Methods

Exhibit 6: Comparing Depreciation Methods

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Depreciation for Federal Income
Tax
• ________ ___________ ____ _______ _____
(MACRS)
• Specifies _____ classes of useful life and
depreciation rates for each class.
• Residual value is ______.
• Fixed assets are assumed to be put in and taken out
of service in ___________.
Five year class:

Light-duty trucks and automobiles

Seven year class:
Machinery and equipment
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Learning
Objective 3
Describe the accounting for the disposal of fixed
assets

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Disposal of Fixed Assets
• Asset that are no longer useful can be

• Discarded
• Sold
• Traded
• Book value must be removed from the accounts
• Depreciation must be up to date

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Discarding Fixed Assets
• Happens when fixed assets are no longer useful to the
business and have no market value.

• Assume a $25,000 fixed asset that is fully depreciated is
discarded:

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Discarding Fixed Assets
• Assume a $6,000 fixed asset with $4,750 of
accumulated depreciation on December 31 is discarded
in March:

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Selling Fixed Assets
• The entry to record sale of fixed assets is similar to
discarding fixed assets, except that the cash or other
asset received must also be recorded.
• Sale of fixed assets could result in gain or loss.

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Selling Fixed Assets
• Example: Assume that equipment costing $10,000 is
depreciated at an annual 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
after adjustment = $7,750

=$7,000 + $750

Book value is now = $2,250

=$10,000 – $7,750

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