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