Chapter 9: Fixed Assets and Intangible Assets

Operating Lease

An operating lease is accounted for as if the lessee is renting the asset for the lease term

Is the purchased Item (cost) long lived?

If yes, the item is capitalized as an asset on the balance sheet as either a fixed asset or an investment If no, the item is classified and recorded as an expense

Investments

Investments are long lived assets that are not used in the normal operations and are held for future resale

Capital Lease

Is accounted for as if the lessee has purchased the asset. The lessee debits an asset account for the fair market value of the asset and credits a long term lease liability account

Fixed Assets

Long term or relatively permanent assets such as equipment, machinery, buildings, and land

Depreciation

This periodic recording of the cost of fixed assets as an expense is called depreciation

Depletion

This process of transferring the cost of natural resources to an expense account is called depletion

Straight Line Method

The Straight Line Method provides for the same amount of depreciation expense for each year of the asst's useful life

Three factors determine the depreciation expense for a fixed asset

The asset's initial cost The asset's expected useful life The asset's estimated residual value

Copyright

The exclusive right to publish and sell a literary, artistic, or musical composition is granted by a copyright

Expected Useful Life

The expected useful life of a fixed asset is estimated at the time the asset is placed into service

Boot

The remaining balance -the amount owed- is either paid in cash or recorded as a liability. Normally called boot, which is its tax name

Residual Value

The residual value of a fixed asset at the end of its useful tlife is estimated at the time the asset is placed into service

Fixed Assets (Characteristics)

They exist physically and, thus, are tangible assets They are owned and used by the company in its normal operations They are not offered for sale as part of normal operations

Amortization

Which is the amount of cost to transfer to expense

Classifying Costs

A cost that has been incurred may be classified as a fixed asset, an investment, or an expense

Lease

A lease is a contract for the use of an asset for a period of time

Trademark

A name, term, or symbol used to identify a business and its products

Commercial Substance

Accounting for the exchange of similar assets depends on whether the transaction has commercial substance

Extraordinary Repairs

After a fixed asset has been placed in service, costs may be incurred to extend the asset's useful life

Asset Improvements

After a fixed asset has been placed in service, costs may be incurred to improve the asset

Patents

Allows manufactures to acquire exclusive rights to produce and sell goods with one or more unique features. Provided by the federal government to inventors

Tips for Fixed Assets:

Although fixed assets may be sold, they should not be offered for sale as part of normal operations. (ex. Cars and Trucks are not fixed assets of the dealership)

Book Value

Cost minus accumulated depreciation

Ordinary Maintenance and Repairs

Costs related to the ordinary maintenance and repairs of a fixed asset are recorded as an expense of the current period. Such expenditures are revenue expenditures and are recorded as increases to Repairs and Maintenance Expense

Revenue Expenditures

Costs that benefit only the current period are called revenue expenditures

Capital Expenditures

Costs that improve the asset or extend its useful life are capital expenditures

Functional Depreciation

Factors include obsolesence and changes in customer needs

Physical Depreciation

Factors include wear and tear during use or from exposure to weather

Goodwill

Goodwill refers to an intangible asset of a business that is created from such favorable factors as location, product quality, reputation, and managerial skill

Is the asset used in normal operations?

If yes, the asset is classified and recorded as a fixed asset If no, the asset is classified and recorded as an investment

Trade-In Allowance

May be either greater or less than the book value of the old equipment

MACRS

Modified Accelerated Cost Recovery System - The Internal Revenue Code uses the MACRS to compute depreciation for tax purposes

Intangible Assets

Patents, copyrights, trademarks, and goodwill are long-lived assets that are sued in the operations of a business and are not held for sale. These assets are called intangible assets because they do not exist phsyically

Double-Declining Balance Method

Provides for a declining periodic expense over the expected useful life of the aset

Units of Production Method

Provides the same amount of depreciation expense for each unit of production. Depending on the asset, the units of production can be expressed in terms of hours, miles driven, or quantity produced