Accounting 1B Chapter 10 - Fixed Assets and Intangible Assets
What are the steps to accounting for the disposal of a fixed asset?
(1) Depreciate the asset up to the date of sale (2) Calculate Book Value (3) Compare BV to Proceeds, The difference is is GAIN or LOSS (3a) If proceeds are = to BV, no gain or loss is recorded (3b) If proceeds are less than BV, record a loss (3c) IF proceeds are greater than BV, record a gain (4) Remove the aset and associated A/D from books, record cash and gain or loss.
What are the three factors that determine the dep'n expense for a fixed asset?
(1) initial cost (2) useful life of the asset (3) estimated residual value
What are examples of costs that can be capitalized on BUILDINGS?
-Architectural fees -Engineers' fees -Building permits -Contractor's charges -Payments for material, labor, and overhead -Insurance costs during construction cost of interest on borrowed money (DURING CONTRUCTION PERIOD) -Walkways to and around the building -Costs to repair and renovate the building for its intended use.
What is considered an investment?
-Long-lived assets that are NOT used in the normal operations AND are held for future resale. -These assets are reported on the balance sheet in a section entitled Investments. -Depending on the investment, they can be classified as Current Assets or Long-Term Assets NOTE: undeveloped land can be an investment if it is acquired/purchased for resale. TRICKY
Describe the nature of a fixed asset
-Long-term, relatively permanent assets such as land, building, machinery, equipment. -These assets exist physically and are tangible -They are owned and used by the company in normal ops. -They are not offered by sale as part of normal ops.
What are examples of costs that can be capitalized on MACHINERY AND EQUIPMENT?
-Purchase price (LESS discounts) -Transportation charges (freight) -Insurance (while in transit) -Sales taxes -Assembly -Modification for use -Purchase Commission -Installation Costs -Cost of testING the asset before use -Major repairs or modification of used equipment purchased.
What is the process to evaluate an expenditure and determine whether it should be treated as EXPENSE?
-Repair (ordinary) -Paint (aesthetic reasons) -Ordinary maintenance (e.g. oil change) (called revenue expenditures -Vandalism -Mistakes in installation -Uninsured theft -Damage during unpacking and installing -Fines for not obtaining proper permits
Describe the formula and units-of-output method of depreciation
-This method is aka units of activity/production method. -This method also allocates a fixed amount of dep'n to each unit of output produced by the asset. STEP 1: -(COST-SALVAGE VALUE)/USEFUL LIFE, IN UNITS STEP 2: MULTIPLY DEP'N PER UNIT BY ACTUAL USAGE TO GET DEP'N PER YEAR. BEWARE - DANGER : THERE'S ONE HELLA BIG CATCH.....If production during one year pushes the aggregate actual production beyond the estimated useful life in units, your need to reduce the actual usage (for accounting calculation) for that year so that the aggregate actual usage equals the total estimated useful life in units
What is a capital lease? Describe the accounting treatment.
A capital lease is accounted for as if the lessee has purchased the asset. dr Asset a/c for FMV cr Long-term lease liability The asset is written off as an expense over the life of the lease. THE LEASE LIABILITY IS RECORDED ON THE BALANCE SHEET. Remember this or DIE
What is amortization?
Amortization is for intangibles what depreciation is for fixed assets. The cost is amortized over the expected useful life which may be less than its legal life.
What is an operating lease?
An operating lease is accounted for as if the lessee is renting the asset for the lease term dr Rent Expense (when lease payments are made) cr Cash NO LEASE LIABILITY IS RECORDED WHICH IS GOOD FOR THE BALANCE SH
What is the process to evaluate an expenditure and determine whether it should be treated as CAPITALIZATION ?
CAPITALIZATION of Fixed Asset - Cost of Asset and items necessary to put it into its intended use. See previous examples involved land, building, machinery, equipment, brokerage commissions, etc. -DEBIT SPECIFIC FIXED ASSET ACCOUNT OR YOU'RE GOING TO DIE... --------------------------------------------------- - Asset Improvements (capital expenditures) ---Increase the capacity or efficiency of an asset (e.g. Add extra features to existing asset) -DEBIT SPECIFIC FIXED ASSET ACCOUNT OR IT'S A TRAIN WRECK. ---------------------------------------------------- EXTRAORDINARY REPAIRS (capital expenditures) - Extends its useful life (e.g. major overhaul) -DEBIT ACCUMULATED DEPRECIATION OR ELSE IT'S ALL OVER.
How does capitalization affect assets and/or taxable income?
Capitalization increases assets and spreads expense (depreciation) over the useful life. Tax effects occur over time.
What are examples of intangible assets?
Copyrights, trademarks, goodwill and patents.
Depreciable cost
Cost minus salvage value. This is the maximum depreciation that can be taken.
FUN FACTS ON DEP'N
DIFFERENT METHODS CAN BE USED FOR TAX AND BOOK For tax straight line or Modified Accelerated Cost Recovery System (MACRS) can be used.
What are examples of costs that can be capitalized on FURNITURE AND FIXTURES?
Desks Chairs File Cabinets
Salvage value or residual value or scrap value
Expected cash value of an asset at the end of its useful life
How do expenses affect assets and / or taxable income?
Expenses don't increase assets. They do lower taxable income right away.
Classifying Costs: What are the three terms that are used to describe a cost that has been incurred?
Fixed asset Investment Expense
What is a fixed asset?
Fixed assets are aka: - property, plant, and equipment OR -plant assets. -Items included as fixed assets include land, building or equipment. -Such assets normally last more than a year AND -are used in the normal operations.
Describe the formula and straight-line method of depreciation
Formula: COST - SALVAGE VALUE/ USEFUL LIFE, IN YEARS. Allocates an EQUAL amount of depreciation. to EACH YEAR of asset use. YOU WILL DIE IF YOU DON'T REMEMBER TO PRORATE THE DEPN ON AN ASSET PURCHASED DURING THE YEAR. I MEAN IT!
What is goodwill? How is it amortized?
Goodwill is the excess of cost of an acquired company over the sum of market value of it's net assets (assets minor liabilities. In other, simpler words, it's when you pay more than something is worth. Goodwill is difference of what you paid vs what it's worth? Goodwill is NOT amortized, it is evaluated periodically. If impaired (the future prospects of the purchased firm) is written down an a loss is recognized.
What is the method of amortization for a patent developed internally?
Internally developed patents are not amortized. Any R&D costs are usually recorded as current opex in the period in which they are recorded. If you develop the patent - it's not amortized.
What is a lease?
It is a contract for the use of an asset for a period of time.
Estimated useful life
Length of the service period expected from asset. -Set at time of acquisition by management -Can be expressed in years, units of output, miles etc.
Who is granted the rights to use the asset as outlined in the lease?
Lessee. The Lessee pays rent on a periodic basis for the lease term. The lessee is granted the rights to use the asset by the lessor.
Who issues the lease?
Lessor THE lessor owns the asset.
Does a company need to use the same method of depreciation for all of its fixed assets?
No . One method can be used for depreciating equipment and another for buildings.
Capitalizing a Fixed Asset: What are the components of cost of a fixed asset?
ONLY costs necessary for preparing the fixed asset for use are included as a cost of the asset. Recording an asset as the purchase price PLUS any other costs incurred to bring the asset to its intended purpose (ready for use) NET of all discounts Freight and installation are the primary examples of costs added to the purchase price. Interest expense incurrend during the contruction process is also capitalized on a building. t.
What is the depreciation?
Over time, fixed assets, with the exception of land lose their ability to provide services. This could be due to (1) physical depreciation (e.g. wear and tear during use or weather and (2) Functional depreciation (e.g. obsolescence of technological assets)
What are examples of costs that can be capitalized on land ?
Purchase price Sales Tax Permits from gov agencies Brokerage commissions Title fees Grading and leveling Survey and Legal Fees Back Property taxes the purchase pays (delinquent taxes) Cost of clearing the land and removing any unwanted buildings (demolition) LESS any salvage Paving a public street bordering the land. DO NOT DEPRECIATE LAND OR YOU'RE DEAD!
Cost
Purchase price plus all cost associated with putting the asset in use
STRAIGHT LINE METHOD
SL (1) spreads expense evenly (2) ez to use (3) ez to forecast earnings Aslo , when an asset's revenues are about the same from period to period, sl dep'n provides a good MATCHING of dep'n expense with the asset's revenues DUDE - SL IS MOST COMMON AS 82% OF THE COMPANIES USE IT.
What is the most common method for amortization? What is the entry.
SL is the most common method. Dr Amortization Cr Patent NOTE: NO ACCUMULATED DEPN ACCOUNT for patents If you purchase the patent, it needs to be amortized
OH Lord, what do you do if an asset is only used for part of the year?
The annual dep'n is prorated. Talk about how this could af affect the next fiscal year's dep'n charges on an ongoing basis.
What determines the accounting for a lease?
The classification of the lease determines the accounting treatment.
What is an intangible asset? Why are they called intangible?
These are long-lived assets that are used in the operations of a business and not held for sale. They are called intangible because they have no physical substance.
DDB - Double Decline Balance. This doesn't stand for double dutch baby! Describe this method of dep'n and the formula
This is an accelerated method of dep'n that multiples the asset's decreasing book value by a constant %age that is 2X the SL dep'n rate Steps - (1) Compute SL Rate (2) Multiply the SL Rate x 2 to get DDB rate (3) Multiply DDB rate by BOOK VALUE (IGNORE SALVAGE VALUE OR ELSE IT'S A TRAIN WRECK! (4) Book Value is Cost minus Accumulated Dep'n. BEWARE - DANGER : THERE'S ONE HELLA BIG CATCH.. You CANNOT depreciate below salvage value, may need to plug depreciation towards end of useful life so that total aggregate dep'n does not exceed depreciable base (Cost minus salvage value)
UOP - UNITS OF PRODUCTION AKA UNITS OF ACTIVITY and/or PRODUCTION METHOD
This method best fits an asset that depreciates due to wear and tear rather than obsolesce. Remember - with this method depreciation is recorded ONLY when the asset is used. UOP is often used when a fixed asset's in-service time (or use) varies from year to year. In that way, it would do a good job matching the dep'n expense with the asset's revenues
What are examples of Natural Resources?How is the usage of Natural Resource Assets recorded?
Timber, metal ores, minerals etc. These assets are expense through depletion. The formula is similar to UOP.
What is a trademark? How is it amortized?
Trademark is a name, term or symbol used to identify a business and its products. Trademarks are NOT amortized. Instead they are evaluated periodically and if impaired are written down and a loss is recognized.
Describe Pro-rating the first year of deepen
When using a time based dep'n method (SL or DDB - dependent on the passage of time, the dep'n recorded in the fiscal year of the acquisition will be pro-rated to account for the fact that the asset was not owned for the entire year.
DDB Double Declining Balance
best for assets that creat more revenue in early years because higher dep'n is taken early and offsets greater revenue
What are examples of costs that can be capitalized on land improvements?
fencing paved parking areas or walkways sprinkler systems landscaping (trees and shrubs) outdoor lighting signage THESE IMPROVEMENTS ARE SUBJECT TO DEPRECIATION. REMEMBER THIS OR YOU'RE DEAD!