Chapter 9 Fixed Assets

Summarize Asset Sale Information

1. Receive documentation from the purchasing department regarding the sale of assets. Includes a signed asset disposition from that authorizes someone to sell the asset. A copy of the bill of sale needs to be accompanied with the document and proof of amount paid. 2. Write down the original asset cost and the total accumulated depreciation, located in your fixed assets database or spreadsheet.

Update Accounting Records

1. Record the sale of the asset in your fixed assets database or spreadsheet. Print the fixed asset report after recording this transaction. Compare total for report to the general ledger. Must be in the same amounts in both locations. 2. File a copy of the gain or loss calculation in the journal entry book. File in the permanent file to document the addition or removal of fixed assets.

Calculate Gain or Loss on Sale

1. Subtract the sale amount and accumulated depreciation from the original asset cost. A Positive amount left is a loss on the sale of the asset. A negative amount left is a gain on the sale of an asset. 2. Create journal entry for the gain or loss transaction. Assets original cost goes in "credit" and the accumulated depreciation goes in the "debit" column. Sale amount is a debit to cash. Gains are recorded as a credit. Loss recorded as debit.

High Ratio of Accumulated Depreciation to Fixed Assets

A company's owning long term assets that require minimal replacement will also show a high ratio of accumulated depreciation to fixed assets, even though there is no real need to buy new equipment. In this case, look at the amount of repairs and maintenance expense to see if a sufficient amount is being spent to keep equipment operational. A company's accounting staff may not make journal entries that would eliminate from the Balance Sheet the asset cost and depreciation associated with assets that are no longer on the premises. If so, the volume of accumulated depreciation listed in the Balance Sheet may appear to be quite high, indicating less of improper asset management than of inadequate accounting for eliminated assets.

Intangible Asset

A non-physical asset having a useful life greater than one year. -Marketing-related intangible assets Trademarks, newspaper mastheads, internet domain names and non-competition agreements. -Customer-related intangible assets Customer lists, order backlog and customer relationships. -Artistic-related intangible assets Performance events, literary works, musical works, pictures, motion pictures and television programs. -Contract-based intangible assets Licensing agreements, service contracts, lease agreements, franchise agreements, broadcast rights, employee contracts, use rights (such as drilling or water rights) -Technology-based intangible assets Patented technology, computer software, trade secrets (such as secret formulas and recipes)

What is Amortization?

Amortization is the write-off of an intangible asset over its expected period of use.

What is a fixed asset?

An item with a useful life greater than one year and which exceeds an entity's capitalization limit. It is purchased for the productive use within the entity, not purchased for resale. Also known as property, plant and equipment.

Calculating the Accumulated Depreciation to Fixed Assets Ratio

Compare the amount of Accumulated Depreciation to the gross amount of Fixed Assets recorded on the Balance Sheet to get a general idea to the extent to which the company has replaced existing assets with new ones on an on-going basis. If the proportion of Accumulated Depreciation is quite high, this is evidence that not too many assets have been added and may indicate lack of cash. Divide the total Accumulated Depreciation by the total amount of Fixed Assets. Run the same calculation for different classes of assets to see if there are certain types of assets where the company is not making sufficient investment in new assets. Accumulated Depreciation ------------------------------- Total Fixed Assets

Calculating Repairs and Maintenance to Fixed Assets Ratio

Divide the total amount of repairs and maintenance expense by the total amount of fixed assets. Use total amount of fixed assets, not net of depreciation. Total Repairs and Maintenance Expense --------------------------------------------- Total Fixed Assets before Depreciation Total Repairs and Maintenance Expense can be manipulated by charging the salaries of repairmen to another account.

Cost not to be assigned to a fixed asset

Do not assign the following costs to a fixed asset. Administration and general overhead costs Costs incurred after an asset is ready for use but has not yet been used or is not yet operating at full capacity Costs incurred that are not necessary to bring the asset to the location and condition necessary to operate Initial operating losses New customer acquisition costs New facility opening costs New product or service introduction costs Relocation or reorganization costs Do not recognize the ongoing costs of servicing a Fixed Asset, which typically includes maintenance labor, consumables and minor maintenance parts. These costs should be charged to expense as incurred.

How to calculate double-declining depreciation

Double-Declining method is more appropriate than straight line depreciation if the asset depreciates more quickly or has greater production capacity in the earlier years than it does as it ages. Multiply book value at the beginning of the fiscal year by a multiple of the straight line rate of depreciation. 2 X straight line depreciation rate times book value at beginning of the year

How to record depreciation expense

Each month, calculate depreciation for all fixed assets. Then create a single entry for all of the assets at the same time. Debit to Depreciation Expense account and credit to Accumulated Depreciation account. Depreciation Expense is deducted from Sales in the Income Statement. Accumulated Depreciation is listed as a reduction of Fixed Assets in the Balance Sheet.

Which Costs Can I assign to a Fixed Asset?

Generally, costs include the purchase price and any costs associated with bringing the asset to the location and condition needed for it to operate in the manner intended by management. Following are Fixed Assets costs: Purchase price of the item and related taxes. Construction costs of the item including labor and employee benefits. Import duties. Inbound freight and handling. Interest costs incurred during the period required to bring an asset to the condition and location of its intended use. Site preparation. Installation and assembly. Asset start-up testing. Professional fees.

How do I record a gain or loss on an asset sale?

If company sells an asset, verify the sale information, calculate the gain or loss on the sale. Update the accounting records.

High cap limits

If you set a high cap limit, there will be fewer assets to record in a fixed assets register. This can greatly reduce the workload of the accounting staff. If you set the limit too high, then a larger number of big ticket purchases will be charged as expense in the current period, which tends to make month to month results vary more than normal operating results would normally indicate.

What is the useful life of an asset?

It is the estimated lifespan of a depreciable fixed asset during which it can be expected to contribute to company operations. Useful lives for classes of assets are: 5 years -- automobiles, computers, office machines 7 years -- office furniture and fixtures 10 years -- water transportation equipment, single-purpose agricultural structures, trees or vines bearing nuts or fruits 15 years -- land improvements

Which Fixed Assets can not be depreciated?

Land is not depreciated since it has an unlimited useful life. If it has a limited use (i.e. quarry) then it can be depreciated over its useful life. If the cost of land includes costs for site dismantlement or restoration, then depreciate these costs over the period for which any resulting benefits are obtained. If the land has a building, separate the costs and depreciate the building.

What is MACRS

Modified Accelerated Cost Recovery System. The asset depreciation system used in the U.S. to calculate depreciation for tax reporting purposes. MARCS sets forth the allowable depreciation periods and calculations for various classes of assets. Tax account usually handles this. If you prepare your own taxes, get the MACRS information from IRS form 946.

What is a capital expenditure

Money spent to acquire or upgrade an asset. Record a capital expenditure as a fixed asset rather than charging it to expense. Examples: buildings, machinery, office equipment. Since there is a record keeping cost associated with capital expenditures, you generally charge those items to expense if they cost less than a certain pre-determined limit, which is known as the capitalization limit. The reverse of a capital expenditure is an operational expenditure where the cost is incurred strictly for current operations. Charge operational expenditures to expense when incurred.

When to stop assigning costs to a Fixed Asset

Only assign costs until the asset is in the location and condition to operational as intended by management. Once the asset is operational, no further costs should be charged to it, even if it is not performing as intended by management.

When is a fixed asset impaired?

Recognize an impairment loss on property, plant and equipment when the asset is non-recoverable and exceeds its fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows you expect to result from the use and disposition of the asset. The amount of the impairment loss is the amount bay which the asset's carrying amount exceeds its fair value. If you recognize an impairment loss, the net carrying amounts the former carrying amount minus the impairment loss. Adjust the depreciation of the asset to its now reduced carrying amount. You cannot reverse a recognized impairment loss.

How to calculate straight line depreciation

Recognize depreciation expense evenly over the useful life of the asset. The rate is 1 / estimated useful life X (cost minus estimated salvage value)

Ratio of Repairs and Maintenance to Fixed Assets

Repairs and Maintenance to Fixed Assets Ratio is important for estimating the age of the entity's fixed assets. If the ratio is on an increasing trend line, then the company probably needs some asset replacements. In increased trend line may also indicate high usage which may prematurely require higher levels of repair work. When the ratio is increasing but suddenly drops with no corresponding increase in fixed assets, a company may be running out of cash and cannot afford to either repair existing assets or purchase new ones.

What Controls Should I Have Over Fixed Assets?

Require an authorization to buy and sell them and to ensure they haven't left the premises. The most essential controls for fixed assets are: 1. Require a signed capital investment approval form prior to purchase- 2. Assign responsibility for assets 3. Require a signed capital asset disposition from prior to disposition 4. Verify that cash receipts from asset sales are properly handled

Low cap limits

Setting a low cap limit creates a larger fixed assets register on which your local government jurisdiction will charge personal property taxes. An excessively high cap level will yield so few reportable assets, it may trigger a time-consuming government tax audit.

What is net accumulated amortization?

The cost of an intangible asset that has not yet been charged to amortization expense. Calculated as original cost of intangible asset minus its accumulated amortization.

What is Accumulated Amortization?

The cumulative amortization expense that has so far been charged against an intangible asset. Amortization is recorded on the balance sheet below the intangible assets line item. Net amount of intangible assets is listed immediately below it.

Depreciation

The gradual charging to expense of an asset's cost over its expected useful life. A $3,000 item with a 3 year life would be deprecated at $1,000 per year for 3 years unless it has significant salvage value at the end. Then reduct the amount of depreciation accordingly.

Accumulated Depreciation to Fixed Assets Ratio

The ratio can present an incorrect unfavorable view of the company's policy if the company has taken an aggressive approach to depreciation, using accelerated depreciation calculations and short estimated time periods over which assets are depreciated. Under this treatment, depreciation levels will rise rapidly leading one to believe that the asset base is older than it really is.

What is a capitalization limit (aka cap limit)

The threshold above which an entity capitalizes purchased or constructed assets. Below the cap limit, assets are generally charged to expense. There is no specifically required cap limit. Consider a number of factors before selecting your limit. If the cap limit is too low, some expenditures will be shifted to fixed assets that you would normally have charged off at once, which will make short term profits look somewhat higher. A low cap limit increases your depreciation expense in later years.

What is Accumulated Depreciation?

The total of all of the depreciation expense to date on a fixed asset. Asset's original cost minus accumulated depreciation equals its book value.

How to calculate Sum-of-the-Years' Digits Depreciation

This is more appropriate than straight line depreciation if the asset depreciates more quickly or has greater production in the earlier years than it does as it ages. No of yrs of useful life remain Applicable Percentage = ---------------------------------- SYD SYD = Est.Useful life X (Est. Useful Life + 1) / 2 i.e. 10 X 11 =. 110 divided by 2 = 55

When do I derecognize an asset?

When derecognizing an asset you are removing it from the accounting records. Do this when it is disposed of or when no economic benefits can be expected from its use or disposal. Can be caused by events such as an assets sale, scrapping, or donation. You can recognize a gain or a loss, though a gain cannot be recorded as revenue. The gain or loss is calculated as the net disposal proceeds minus the asset's carrying value.

When to eliminate Accumulated Depreciation

When you sell or dispose of an asset, remove all associated accumulated depreciation at the same time. Otherwise a large amount of depreciation will build up on the balance sheet over time.