1 9 Fixed Assets and Intangible Assets Principles of Corporate Financial Accounting, 9e After studying this chapter, 2 you should be able to: 1. Define, classify, and account for the cost of fixed assets. 2. Compute depreciation, using the following methods: straight-line method, units-of-production method, and double-declining-balance method. (sum-of- year-digit method) 3. Journalize entries for the disposal of fixed assets. 4. Compute depletion and journalize the entry for depletion. 5. Describe the accounting for intangible assets, such as patents, copyrights, and goodwill. 6. Describe how depreciation expense is reported in an income statement, and prepare a balance sheet that includes fixed assets and intangible assets. 3 Objective 1 Define, classify, and account for the cost of fixed assets. Nature of Fixed Assets 4 固定資產 Fixed assets are long-term or relatively permanent assets. They are tangible assets (有形資產) because they exist physically. They are owned and used by the business, not offered for sale, as part of normal operations. They have future economic benefits. The life for those are over 1 year. 6 Issues in Accounting for Plant Assets ACQUISITION USE DISPOSAL 取得 使用 報廢或處分 7 Issues in Accounting for Plant Assets Acquisition 1.Compute cost. 8 Classifying Costs Is the purchased item long-lived? YES N0 Is the asset used in a Expense productive purpose? YES NO Fixed Assets Investment 9 Cost of Acquiring Fixed Assets The cost of acquiring fixed assets includes all amounts spent to get the asset in place and ready for use 使資產達到可供使用的地點及狀態之前 所發生之一切合理及必要支出 Includes purchase price, tax, freight, and other reasonable and necessary expenditures Excludes financing charges and cash discounts. 12 Land Purchase price Sales taxes Permits from government agencies Broker’s commissions Title fees Surveying fees Delinquent real estate taxes Razing or removing unwanted buildings, less any salvage Grading and leveling Paving a public street bordering the land Land is not depreciable. 13 Land Improvement Trees and shrubs Fences Outdoor lighting Paved parking areas Parking lots, driveways, fences, walks, etc. Depreciate over useful life 14 Building Architects’ fees Engineers’ fees Insurance costs incurred during construction Interest on money borrowed to finance construction Walkways to and around the building Sales taxes Repairs (purchase of existing building) Reconditioning (purchase of existing building) Modifying for use Permits from government agencies 15 Machinery & Equipment Sales taxes Freight Installation Repairs (purchase of used equipment) Reconditioning (purchase of used equipment) Insurance while in transit Assembly Modification for user Testing for use Permits from government agencies Cost of Acquiring Fixed Assets 16 excludes: Vandalism (故意破壞行為) Mistakes in installation Uninsured theft Damage during unpacking and installing Fines for not obtaining proper permits from government agencies 21 Objective 2 Compute depreciation using the following methods: straight-line method, units-of-production method, double-declining-balance method. 22 Issues in Accounting for Plant Assets Acquisition Use 1. Compute cost. 2. Allocate cost to periods benefited. 23 Depreciation Over time, fixed assets such as equipment, buildings, and land improvements lose their ability to provide services. The periodic transfer of the cost of fixed assets to expense is called depreciation (折舊費用). 24 Depreciation Depreciation is a cost allocation process that systematically and rationally matches acquisition costs of plant assets with periods benefited by their use. Balance Sheet Income Statement Cost Acquisition Expense Cost Allocation (Unused) (Used) 未消耗 已消耗 25 Reasons for Depreciation Physical depreciation (實體性折舊) occurs from wear and tear while in use and from the action of the weather. Functional depreciation (功能性折舊) occurs when a fixed asset is no longer able to provide services at the level for which it was intended. 26 Accounting for Depreciation Adjusting entry debits “Depreciation Expense” credits “Accumulated Depreciation” The use of a contra asset account (資產抵銷 科目) allows the original cost to remain unchanged in the fixed asset account. 27 Accounting for Depreciation Depreciation for Income Depreciation Expense the current year Statement Balance Accumulated Total depreciation to Depreciation date of balance sheet Sheet 28 Accounting for Depreciation Partial Balance Sheet Fixed Assets $XX,XXX Less: Accumulated Depreciation －XX Equipment XX,XXX Net Book Value (淨帳面價值) $XX,XXX Net Book Value ≠ Market Value 29 The net book value (淨帳面價值) of a fixed asset in the balance sheet usually does not agree with the market value (市場價值), realized from its sale. Fixed assets are held for use in a business rather than for sale. It is assumed that the business will continue as a going concern. Depreciation ≠ Cash Saving 30 Depreciation does not provide cash needed to replace fixed assets as they wear out. Depreciation does not require an outlay of cash in the period in which it is recorded. The cash account is neither increased or decreased by the periodic entries that transfer the cost of fixed assets to depreciation expense accounts. 32 Factors in Computing Depreciation The calculation of depreciation requires three amounts for each asset: (a) cost, (b) its expected useful life, and (c) its estimated residual value at the end of the useful life. Also called the scrap value, salvage value, or trade-in value. The Fixed Asset’s Initial Cost 33 取得成本 The cost of acquiring fixed assets include all amounts spent to get the asset in place and ready for use. Purchase price, Tax, Freight, and Other reasonable and necessary expenditures 34 Expected Useful life 耐用年限 A fixed asset’s expected useful life must also be estimated at the time the asset is placed in service. 35 Expected Useful life For financial reporting purposes, estimates of expected useful lives are available from various trade associations and other publications. For federal income taxes purposes, the Internal Revenue Service (內地稅務局； 相當於我國之國稅局）has established guidelines for useful lives. 36 Residual Value 殘值 A fixed asset’s residual value is the value to be received when to dispose the fixed asset at the end of the useful life. 37 Depreciable Cost 可折舊成本 The depreciable cost is the difference between its initial cost and its residual value of a fixed asset which is the amount that is spread over the asset’s life as depreciation expense. 38 Depreciation Methods Straight-line method 直線法 Units-of-production 生產數量法 Accelerated Method 加速遞減法 Double-declining-balance, and 倍數餘額遞減法 Sum-of-the-years-digits method. 年數合計法 39 Use of Depreciation Methods Straight-Line Units-of-Production Declining-Balance Others 3% 7% 2% 88% Source: Accounting Trends & Techniques, 59th ed., American Institute of Certified Public Accountants, New York, 2005. 40 Straight-Line Method (SLM) The straight-line method provides for the same amount of depreciation expense for each year of the asset’s useful life. Estimated Cost – Residual Annual Value = DFepreciation Estimated Life 41 Straight-Line Method When an asset is used for only part of a year, the annual depreciation is prorated. 非期初取得時，折舊費用提列係以期間 為基礎加以分攤 Assume that the fiscal year ends on December 31, and that the asset is placed in service on October 1. The depreciation for the first fiscal year of use would be 3/12 of annual depreciation. 42 SLM Depreciation Rate The annual depreciation may be converted to a percentage of the depreciable cost; A useful life of 20 years converts to a 5%. A useful life of 8 years converts to a 12.5%. a fraction of the depreciable cost. An asset with a three-year useful life is 1/3. An asset with a eight-year useful life is 1/8. 43 Straight-Line Method Example An asset costs $24,000. Its estimated residual value is $2,000 and its estimated life is 5 years. Cost – Estimated Residual Value Annual depreciation = Estimated Life Annual depreciation = $24,000 – $2,000 5 years Annual depreciation = $4,400 Depreciation Table 44 of Straight Line Method Depreciation Accumulated Accumulated Undepreciated Expense Depreciation Depreciation Balance Year (debit) (credit) Balance (book value) 2001 $ 24,000 2002 $ 4,400 $ 4,400 $ 4,400 19,600 2003 $ 4,400 4,400 8,800 15,200 2004 $ 4,400 4,400 13,200 10,800 2005 $ 4,400 4,400 17,600 6,400 2006 $ 4,400 4,400 22,000 2,000 $ 22,000 $ 22,000 Salvage Value SLM $10,000 45 $9,000 Depreciation $8,000 Expense $7,000 Depreciation Expense $6,000 $5,000 is reported on the $4,000 Income Statement. $3,000 $2,000 $1,000 $0 2001 2002 2003 2004 2005 2006 For the year ended December 31 $30,000 $25,000 $24,000 Net Book Value is Book Value $20,000 $19,600 reported on the $15,000 $15,200 Balance Sheet. $10,000 $10,800 $6,400 $5,000 $2,000 $0 SLM 2001 2002 2003 2004 2005 2006 As of December 31 46 The straight-line method is widely used by firms because it is simple and provides a reasonable transfer of cost to periodic expenses by assuming that the asset is used about the same from period to period. 每期所提供的效能是一致的 47 Example Exercise 9-2 Equipment that was acquired at the beginning of the year at a cost of $125,000 has an estimated residual value of $5,000 and an estimated useful life of 10 years. Determine the (a)depreciable cost, (b)straight-line rate, and (c)annual straight-line depreciation. 48 Follow My Example 9-2 a) Depreciable cost $120,000 ($125,000 – $5,000) b) Depreciation rate: 10% = (1/10) c) $12,000 ($120,000 x 10%) or ($120,000 ÷ 10 years) For Practice: PE 9-2A, PE 9-2B 49 Units-of-Production Method The units-of-production method provides for the same amount of depreciation expense for each unit produced or each unit of capacity used by the asset. 50 Units-of-Production Method Step 1: Depreciation = Cost - Salvage Value Per Unit Total Estimated Units of Production Step 2: Number of Depreciation Depreciation = × Units Produced Expense Per Unit in the Period 51 An asset costs $24,000. Its estimated residual value is $2,000 and its expected to have an estimated life of 10,000 operating hours. Cost – Estimated Residual Value Hourly Depreciation = Estimated Hours $24,000 – $2,000 Hourly Depreciation = 10,000 Estimated Hours Hourly depreciation = $2.20 hourly depreciation Depreciation Table of Units-of- 52 Production Method Accumulated Undepreciated Depreciation Depreciation Balance Year Units Expense Balance (book value) 2001 $ 24,000 2002 2,200 $ 4,840 $ 4,840 19,160 2003 3,000 $ 6,600 11,440 12,560 2004 - $ - 11,440 12,560 2005 3,700 $ 8,140 19,580 4,420 2006 1,100 $ 2,420 22,000 2,000 10,000 $ 22,000 Salvage Value No depreciation expense if the equipment is idle. 53 The units-of-production method is more appropriate than the straight-line method when the amount of use of a fixed asset varies from year to year. This method better matches the depreciation expense with the related revenue. 收益與費用有較佳的配合 54 Example Exercise 9-3 Equipment acquired at a cost of $180,000 has an estimated residual value of $10,000, an estimated useful life of 40,000 hours, and was operated 3,600 hours during the year. Determine the depreciable cost, depreciation rate, and the units-of-production depreciation for the year. 55 Follow My Example 9-3 a) $170,000 ($180,000 – $10,000) b) $4.25 per hour ($170,000/40,000 hours) c) $15,300 (3,600 hours x $4.25) For Practice: PE 9-3A, PE 9-3B Double-Declining-Balance Method 56 (DDB) The double-declining-balance method provides for a declining periodic expense over the estimated useful life of the asset. Also called “accelerated depreciation method”. 加速折舊法 57 Double-Declining-Balance Method Step 1: Straight-line 100 % = depreciation rate Useful life in periods Step 2: Straight-line Double-declining- = 2 × depreciation balance rate rate Step 3: Depreciation Double-declining- Beginning period = × expense balance rate book value Ignores salvage value 60 A depreciable asset cost $24,000. Its estimated residual value is $2,000 and and its estimated life is 5 years. . 61 Year Double- Depreciation Accum. Book Value Declining- for Year Depr. At End Balance At End Of Year Rate of Year (1) (2)= (4) (3)= (4)= of last year x (1) ∑(2) $24,000-(3) 0 $24,000.00 1 40% $9,600.00 $9,600.00 14,400.00 2 40% 5,760.00 $15,360.00 8,640.00 3 40% 3,456.00 18,816.00 5,184.00 4 40% 2,076.60 20,889.60 3,110.40 5 40% 1,110.40 22,000.00 2,000.00 62 Year Double- Depreciation Accum. Book Value Declining- for Year Depr. At End Balance At End Of Year Rate of Year (1) (2)= (4) (3)= (4)= of last year x (1) ∑(2) $24,000-(3) 0 $24,000.00 1 40% $9,600.00 $9,600.00 14,400.00 2 40% 5,760.00 $15,360.00 8,640.00 3 40% $24,000 x 0.40 18,816.00 3,456.00 5,184.00 4 40% 2,076.60 20,889.60 3,110.40 5 40% 1,110.40 22,000.00 2,000.00 63 Year Double- Depreciation Accum. Book Value Declining- for Year Depr. At End Balance At End Of Year Rate of Year (1) (2)= (4) (3)= (4)= of last year x (1) ∑(2) $24,000-(3) 0 $24,000.00 1 40% $9,600.00 $9,600.00 14,400.00 2 40% 5,760.00 $15,360.00 8,640.00 3 40% 3,456.00 18,816.00 5,184.00 $14,400 x 0.40 4 40% 2,076.60 20,889.60 3,110.40 5 40% 1,110.40 22,000.00 2,000.00 64 Year Double- Depreciation Accum. Book Value Declining- for Year Depr. At End Balance At End Of Year Rate of Year (1) (2)= (4) (3)= (4)= of last year x (1) ∑(2) $24,000-(3) 0 $24,000.00 1 40% $9,600.00 $9,600.00 14,400.00 2 40% 5,760.00 $15,360.00 8,640.00 3 40% 3,456.00 18,816.00 5,184.00 4 40% 2,076.60 20,889.60 3,110.40 5 40% 1,110.40 22,000.00 2,000.00 65 Year Double- Depreciation Accum. Book Value Declining- for Year Depr. At End Balance At End Of Year Rate of Year (1) (2)= (4) (3)= (4)= of last year x (1) ∑(2) $24,000-(3) 0 $24,000.00 1 40% $9,600.00 $9,600.00 14,400.00 2 40% 5,760.00 $15,360.00 8,640.00 3 40% 3,456.00 18,816.00 5,184.00 4 40% 2,073.60 20,889.60 3,110.40 5 40% 1,110.40 22,000.00 2,000.00 66 Year Double- Depreciation Accum. Depr. Book Value Declining- for Year At End At End Balance of Year Of Year Rate (1) (2)= (4) (3)= (4)= of last year x (1) ∑(2) $24,000-(3) 0 $24,000.00 1 40% $9,600.00 $9,600.00 14,400.00 2 40% 5,760.00 $15,360.00 8,640.00 3 40% 3,456.00 18,816.00 5,184.00 4 40% 2,073.60 20,889.60 3,110.40 5 40% 1,244.00 22,134.00 1,865.60 DEPRECIATION STOPS WHEN BOOK STOP VALUE EQUALS RESIDUAL VALUE! 68 Year Double- Depreciation Accum. Depr. Book Value Declining- for Year At End At End Balance of Year Of Year Rate (1) (2)= (4) (3)= (4)= of last year x (1) ∑(2) $24,000-(3) 0 $24,000.00 1 40% $9,600.00 $9,600.00 14,400.00 2 40% 5,760.00 $15,360.00 8,640.00 3 40% 3,456.00 18,816.00 5,184.00 4 40% 2,073.60 20,889.60 3,110.40 5 40% 1,111.40 22,000.00 2,000.00 Desired ending “Forced” annual book value 69 For the first year of use, the initial actual cost of the asset, without deducting the residual value, is multiplied by the double-declining balance rate and multiplies by the year fraction. After the first year, the declining book value (cost minus accumulated depreciation) of the asset is multiplied by this rate. 70 Double-declining-balance method is most appropriate when the decline in an asset’s productivity or earning power is greater in the early years of its use than in later years. 71 Using the double-declining-balance method is often justified because repairs tend to increase with the age of an asset. The reduced amounts of depreciation in later years are thus offset to some extent by increased repair expenses. 72 Double-Declining-Balance Method Depreciation Repair Expense Expense Early Years High Low Later Years Low High Early years’ total expense approximates later years’ total expense. 73 Double-Declining-Balance Method Repair Expense Depreciation Expense 1 2 3 4 74 Sum-of-the-Years-Digits (SYD) Depreciation expense is determined by multiplying the original cost of the asset less its estimated residual value by a smaller fraction each year. The number of years of useful life remaining at the Depreciation beginning of each year ＝ (Cost－Residual) X Expense Sum of the digits of the years of the asset’s useful life 75 Sum-of-the-Years-Digits Assume an asset with a cost of $24,000, an estimated residual value of $2,000, and an estimated useful life of five years. Calculate the annual depreciation for each year. 76 Sum-of-the-Year-Digits Y Cost Rate Depreciation Accum. Book E Less for Dep. Value A Residual Year At End at End R Value of Year of Year 1 $22,000 5/15 $7,333.33 $7,333.33 $16,666.67 2 22,000 4/15 5,866.67 13,200.00 10,800.00 3 22,000 3/15 4,400.00 17,600.00 6,400.00 4 22,000 2/15 2,933.33 20,533.33 3,467.67 5 22,000 1/15 1,467.67 22,000.00 2,000.00 77 Partial Year Depreciation When the date an asset is first put into service is not the beginning of a fiscal year, each full year’s depreciation must be allocated between the two fiscal years benefited. 78 Example of Partial Year Depreciation Assume that at September 1, 2007, A company purchased a fixed asset by $24,000 with an estimated residual value of $2,000, and an estimated useful life of five years. Determine the depreciation for year 1 and year 2. 79 Sum-of-the-Years-Digits Year 1 $22,000 X 5/15 X 3/12 Year 2 $22,000 X 5/15 X 9/12 $22,000 X 4/15 X 3/12 80 Example Exercise 9-4 Equipment that was acquired at the beginning of the year at a cost of $125,000 has an estimated residual value of $5,000 and an estimated useful life of 10 years. Determine the (a) depreciable cost, (b) double-declining-balance rate, and (c) double-declining balance depreciation for the first year. 81 Follow My Example 9-4 a) $120,000 ($125,000 – $5,000) b) 20% [(1/10) x2] c) $25,000 ($125,000 x 20%) For Practice: PE 9-4A, PE 9-4B 82 Summary of Depreciation Methods Method Useful Depreciable Depreciation Depreciation Life Cost Rate Expense Straight- Years Cost Less Straight-line Constant line Residual Value rate* Units-of- Total Cost less (cost-residual Variable Production estimated residual value value)/total units of estimated production units of production Double- Years Declining book Straight-ling Declining declining- value, but not rate*X2 Balance below residual value *straight-line rate = (1/useful life) 83 Comparing Depreciation Methods Straight-Line Units-of-Production $5,000 $10,000 $4,000 $8,000 Depreciation Depreciation Annual Annual $3,000 $6,000 $2,000 $4,000 $1,000 $2,000 $0 $0 1 2 3 4 5 1 2 3 4 5 Life in Years Life in Years Double-Declining-Balance $10,000 Depreciation $8,000 Annual $6,000 $4,000 $2,000 $0 1 2 3 4 5 Life in Years 89 Revising Depreciation Rates Predicted Predicted salvage value useful life So depreciation is an estimate. Over the life of an asset, new information may come to light that indicates the original estimates were inaccurate. 90 Revising Depreciation Estimates When the estimates of the residual value and the useful life are revised, they are used to determine the depreciation expense in future period. They do not affect the amounts of depreciation expense recorded in earlier years. Statement of Financial Accounting Standards No. 154 “Accounting Changes and Error Corrections.” 91 Revising Depreciation Estimates A machine purchased for $140,000 was originally estimated to have a useful life of five years and a residual value of $10,000. The asset has been depreciated for two years using the straight-line method. Annual $140,000 – $10,000 Depreciation (S/L) = 5 years Annual $26,000 per year Depreciation (S/L) = 92 At the end of two years, the asset’s book value is $88,000, determined as follows: Asset Cost $140,000 Less: Accumulated Depreciation 52,000 Book Value, end of second year $ 88,000 93 During the third year, the company estimates that the remaining useful life is eight years (instead of three) and that the residual value is $8,000 (instead of $10,000). Depreciation expense for each of the remaining eight year is determined as follows: Book value, end of second year $88,000 Less revised estimated residual value 8,000 Revised remaining depreciation cost $80,000 Revised annual depreciation expense $10,000 ($80,000/8 years) 94 Example Exercise 9-5 A warehouse with a cost of $500,000 has an estimated residual value of $120,000, an estimated useful life of 40 years, and is depreciated by the straight-line method. Determine the amount of annual depreciation. Determine the book value at the end of the 20th year of use. If at the start of the 21st year it is estimated that the remaining life is 25 years and that the residual value is $150,000, determine the depreciation expense for each of the remaining 25 years. 95 Follow My Example 9-5 a. $9,500 [($500,000 – $120,000)/40] b. $310,000 [$500,000 – ($9,500 x 20)] c. $6,400 [310,000 – $150,000)/25] For Practice: PE 9-5A, PE 9-5B 96 Issues in Accounting for Plant Assets Use 2. Allocate cost to Acquisition periods benefited. 1. Compute cost. 3. Account for subsequent expenditures. 98 REVENUE CAPITAL EXPENDITURES EXPENDITURES 收益支出 資本支出 Expenditures that Expenditures that benefit only the current improve the asset or period extend its useful life Normal and ordinary 1) Additions 增添 repairs and 2) Improvements 改良 maintenance 3) Extraordinary Repairs 正常及普通維修 大修 100 Revenue and Capital Expenditures Financial Statement Effect Current Current Treatment Statement Expense Income Taxes Capital Balance sheet Expenditure account debited Deferred Higher Higher Revenue Income statement Currently Expenditure account debited recognized Lower Lower If the amounts involved are not material, most companies expense the item. 101 Revenue and Capital Expenditures 102 Ordinary Maintenance and Repairs On April 9, the firm paid $300 for a tune-up of a delivery truck. Journal Page X Date Description P.R. Debit Credit Apr. 9 Repairs and Maintenance Exp. 300 This Cash is a revenue 300 expenditure This is a revenue expenditure 103 Asset Improvements On May 4, a $5,500 hydraulic lift was installed on the delivery truck to allow for easier and quicker loading of heavy cargo. Journal Page X Date Description P.R. Debit Credit May 4 Delivery Truck 5,500 This Cash is a revenue 5,500 expenditure This is a capital expenditure 104 Extraordinary Repairs The engine of a forklift that is near the end of its useful life is overhauled at a cost of $4,500, which extends its useful life eight years. Work on the forklift was completed on Oct. 14. Journal Page X Date Description P.R. Debit Credit This is a revenue Oct. 14 expenditure Accum. Depreciation—Forklift 4,500 Cash 4,500 This is a capital expenditure 105 Example Exercise 9-1 On June 18 GTS Co. paid $1,200 to upgrade a hydraulic lift and $45 for an oil change for one of its delivery trucks. Journalize the entries for the hydraulic lift upgrade and oil change expenditures. 106 Follow My Example 9-1 June 18 Delivery Truck 1,200 Cash 1,200 18 Repairs and Maintenance Exp. 45 Cash 45 For Practice: PE 9-1A, PE 9-1B 107 Objective 3 Journalize entries for the disposal of fixed assets. 108 Issues in Accounting for Plant Assets Use Acquisition 2. Allocate cost to periods benefited. Disposal 1. Compute cost. 3. Account for 4. Record disposal subsequent expenditures. 110 Discarding Plant Assets Update depreciation to the date of disposal. Journalize disposal by: Recording cash Recording a received (debit) gain (credit) or paid (credit). or loss (debit). Removing accumulated Removing the depreciation (debit). asset cost (credit). 111 Discarding Plant Assets If Cash >Update depreciation (credit). BV, record a gain to the date of disposal. If Cash < BV, record a loss (debit). = BV, no disposal by: If Cash Journalizegain or loss. Recording cash Recording a received (debit) gain (credit) or paid (credit). or loss (debit). Removing accumulated Removing the depreciation (debit). asset cost (credit). 112 Discarding Fixed Assets A piece of equipment acquired at a cost of $25,000 is fully depreciation. On February 14, the equipment is discarded. Journal Page X Date Description P.R. Debit Credit Feb. 14 Accumulated Depr.—Equipment 25,000 Equipment 25,000 To write off equipment discarded. 113 Equipment costing $6,000 is depreciated at an annual straight-line rate of 10%. On December 31 of the preceding fiscal, Accumulated Depreciation—Equipment, after the adjusting entry, had a $4,750 balance. The equipment was discarded on March 24. Journal Page X Date Description P.R. Debit Credit Mar. 24 Depreciation Expense .—Equipment 150 Accumulated Depr.—Equipment 150 To record current depreciation on $600 x 3/12 equipment discarded. 114 The discarding of the equipment is then recorded by the following entry: Journal Page X Date Description P.R. Debit Credit Mar. 24 Accumulated Depr.—Equipment 4,900 Loss on Disposal of Fixed Assets 1,100 Equipment 6,000 To write off equipment discarded. 115 Selling Fixed Assets Equipment costing $10,000 is depreciated at an annual straight-line rate of 10%. The equipment is sold for cash on October 12. Accumulated Depreciation (last adjusted December 31) has a balance of $7,000 and needs to be updated. 116 The net book value, before adjusting entry, is illustrated as follows. Equipment $10,000 Accumulated depreciation 7,000 Net book value $ 3,000 117 Update the Depreciation Journal Page X Date Description P.R. Debit Credit Oct. 12 Depreciation Expense—Equipment 750 Accumulated Depr.—Equipment 750 To record current depreciation on equipment sold (#10,000X3/4X10%) 118 The net book value, after adjusting entry, is illustrated as follows. Equipment $10,000 Accumulated depreciation 7,750 Net book value $ 2,250 119 Assumption 1－ No gain or loss The equipment is sold on October 12 for $2,250. The net book value before disposal is $2,250. Journal Page X Date Description P.R. Debit Credit Oct. 12 Cash 2,250 Accumulated Depr.—Equipment 7,750 Equipment 10,000 Sold equipment at book value. 120 Assumption 2－Loss The equipment is sold on October 12 for $1,000. The net book value before disposal is $2,250. There will have a loss of $1,250. Journal Page X Date Description P.R. Debit Credit Oct. 12 Cash 1,000 Accumulated Depr.—Equipment 7,750 Loss on Disposal of Fixed Assets 1,250 Equipment 10,000 Sold equipment at a loss. 121 Assumption 3－Gain The equipment is sold on October 12 for $2,800; the net book value before disposal is $2,250. There will have a gain of $550. Journal Page X Date Description P.R. Debit Credit Oct. 12 Cash 2,800 Accumulated Depr.—Equipment 7,750 Equipment 10,000 Gain on Disposal of Fixed Assets 550 Sold equipment at a loss. 122 Example Exercise 9-6 Equipment was acquired at the beginning of year at a cost of $91,000. The equipment was depreciated using the straight-line method based upon an estimated useful life of 9 years and an estimated residual value of $10,000. a.What was the depreciation for the first year? b.Assuming the equipment was sold at the end of the second year for $78,000, determine the gain or loss on sale of the equipment. c.Journalize the entry to record the sale. 123 Follow My Example 9-6 a. $9,000 [($91,000 – $10,000)/9] b. $5,000 gain; $78,000 – [$91,000 – ($9,000 x 2)] c. Cash 78,000 Accum. Depreciation—Equipment 18,000 Equipment 91,000 Gain on Disposal of Fixed Assets 5,000 For Practice: PE 9-6A, PE 9-6B 124 Exchanged Fixed Assets 資產交換 When old equipment is traded for new equipment, the seller often allows the buyer an amount for the old equipment traded in. This amount, called the trade-in allowance (抵換折讓), may be either greater or less than the book value of the equipment. The remainder, the boot (現金), is either paid in cash or recorded as a liability. Classification of 125 Exchange Fixed Assets Similar Assets Exchange Exchanges of equipment having similar use will not significantly change the company’s future cash flows. Lacking in commercial substance. Dissimilar Assets Exchange Exchanges of equipment having dissimilar use will significantly change the company’s future cash flows. having commercial substance. 127 Exchanged Fixed Assets SIMILAR Accounting for exchanges of similar assets depends on whether the book value of the asset(s) given up is less or more than the market value of the asset(s) received. A loss is recognized A gain is not when the book value recognized when the given up is less than book value given up is the market value more than the market received. value received. 128 Exchanged Fixed Assets Original Cost of Old Asset Accumulated Depreciation Trade-in Allowance Book Value of Old Asset Gain or Fair Value of Old Asset (Loss) Cash paid or Fair Value of New Asset (Received) Cost for New Assets 129 Exchanged Fixed Assets ＋ Gain BV出 ＝ FV出 － Loss ＋ Cash paid FV出 ＝ FV入 － Cash received 130 Similar Assets Exchange Gains on exchanges (trade-in allowance) of similar fixed assets are not recognized for financial reporting purposes. This is based on the theory that revenue occurs from the production and sale of goods produced by fixed assets and not from the exchange of similar fixed assets. 131 Similar Assets Exchange Exception: Gains on exchanges (trade-in allowance) of similar fixed assets are recognized if cash (boot) is received. 132 Similar Assets Exchange For financial reporting purposes, losses are recognized on exchange of similar fixed assets if the trade-in allowance is less than the book value of the old equipment. This is based on the theory of conservatism (穩健主義或保守原則) 133 Dissimilar Assets Exchange Gains (losses) on exchanges To be recognized No matter cash paid or received in exchange Similar Asset Exchange: 134 Cost of New Assets-in When The trade-in allowance exceeds the book value of an asset traded in： Method One List Price Cost of Unrecognized ＝ Of － New Asset Gains New Asset Method Two Cash Given Cost of Book Value ＝ ＋ (or Liability New Asset Of Old Asset Assumed) Similar Exchange of Assets 135 －Example one: Gains On June 19, assume that new equipment being purchased has a list price of $5,000. The dealer allows a trade-in allowance of $1,100 on the old, similar equipment. The old equipment cost $4,000 and has a book value of $800. 136 Old Asset New Asset Cost $4,000 Accum. Dep. 3,200 Book Value 800 Gain or (Loss) 300 Fair Value 1,100 5,000 Cash paid 3,900 (3,900) Or (Received) 137 Method One List price of new equipment $5,000 Trade-in allowance $1,100 Book value of old equipment 800 Unrecognized gain on exchange (300) Cost of new equipment $4,700 138 Method Two Book value of old equipment $ 800 Cash paid at date of exchange 3,900 Cost of new equipment $ 4,700 Note that either method provides the same cost for the new equipment. Similar Exchange of Assets 139 －Example one: Gains On June 19, equipment was exchanged at a gain of $300. Journal Page X Date Description P.R. Debit Credit June 19 Equipment (new) 4,700 Accumulated Depr.—Equipment 3,200 Equipment (old) 4,000 Cash 3,900 To record exchange of equipment. Similar Exchange of Assets 140 － Example Two: Losses On September 7, new equipment was acquired by trading in old equipment with a cost of $7,000 and a book value of $2,400, and giving a cash payment of $8,000 in exchange of new equipment of list price $10,000. 141 Old Asset New Asset Cost 7,000 Accum. Dep. 4,600 Book Value 2,400 Gain or (Loss) 400 Fair Value 2,000 10,000 Cash paid 8,000 (8,000) Or (Received) 142 Journal Page X Date Description P.R. Debit Credit Sept 7 Accumulated Depr.—Equipment 4,600 Equipment (new) 10,000 Loss on Disposal of Fixed Assets 400 Equipment (old) 7,000 Cash 8,000 To record exchange of equipment. 143 Example Exercise 9-7 On the first day of the fiscal year, a delivery truck with a list price of $75,000 was acquired in exchange for an old delivery truck and $63,000 cash. The old truck had a cost of $50,000 and accumulated depreciation of $39,500. a. Determine the cost of the new truck for financial reporting purposes. b. Journalize the entry to record the exchange. 144 Similar Exchange of Assets Old Truck New Truck Original Cost $50,000 Accum. Depreciation 39,500 Book Value 10,500 Trade-in Allowance Fair Value 12,000 75,000 Cash paid (received) 63,000 (63,000) 145 Follow My Example 9-7 a. $73,500 List price of new truck $75,000 Trade-in allowance on old truck $12,00 ($75,000 – $63,000) 0 Book value of old truck ($50,000 – $39,500) 10,500 Unrecognized gain on ( 1,500) exchange Cost of new truck $73,500 (or Continued) 146 Follow My Example 9-7 Book value of old truck $10,500 ($50,000 – $39,500) Plus cash paid at date of exchange 63,000 Cost of new truck $73,500 b. Truck (new) 73,500 Accumulated Depreciation - Truck (old) 39,500 Truck (old) 50,000 Cash 63,000 For Practice: PE 9-7A, PE 9-7B 147 Objective 4 Compute depletion and journalize the entry for depletion. 148 Natural Resources To be part of the fixed assets and Include Timber, Metal ores, Minerals, or Other natural resources. 149 Depletion of Natural Resources The process of transferring the cost of natural resources to an expense account is called depletion (折耗費用提 列). 150 Depletion Computation STEP 1: The Cost Depletion of the Estimated ＝ ÷ Rate Mineral Quantities Deposit STEP 2: The Quantity Depletion Depletion ＝ Extracted X Expense Rate During the Period 151 Depletion of Natural Resources Total depletion cost for a period is: Unit Depletion Number of Units Rate × Extracted in Period Cost of Total goods sold Inventory depletion for sale cost Unsold Inventory 152 Recording Depletion A business paid $400,000 for the mining rights to a mineral deposit estimated at 1,000,000 tons of ore. The depletion rate is $0.40 per ton ($400,000/1,000,000 tons). 153 If 90,000 tons are mined during the year, an adjusting entry is required at the end of the accounting period. Journal Page X Date Description P.R. Debit Credit Dec. 31 Depletion Expense 36,000 Accumulated Depletion 36,000 Depletion of mineral deposit. 154 Example Exercise 9-8 Earth’s Treasures Mining Co. acquired mineral rights for $45,000,000. The mineral deposit is estimated at 50,000,000 tons. During the current year, 12,600,000 tons were mined and sold. a) Determine the depletion rate. b) Determine the amount of depletion expense for the current year. c) Journalize the adjusting entry on December 31 to recognize the depletion expense. 155 Follow My Example 9-8 a. $0.90 per ton = $45,000,000/50,000,000 tons b. $11,340,000 – (12,600,000 tons x $0.90 per ton) c. Dec. 31 Depletion Expense11,340,000 Accumulated Depletion 11,340,000 Depletion of mineral deposit. For Practice: PE 9-8A, PE 9-8B Fixed Assets Used in 159 Extracting Natural Resources Specialized fixed assets may be required to extract the natural resource. These assets are recorded in a separate account and depreciated. 160 Objective 5 Describe the accounting for intangible assets, such patents, copyrights, and goodwill. 161 The Nature of Intangible Assets The intangible assets do not exist physically; are long-lived assets and more than one- year; are useful in the operations of a business and not held for sale; have the future economic benefits but with significant uncertainty of future economic benefits. 162 Classifications of Intangible Assets With definite lives (年限有限) Patents (專利權), Copyrights (版權), With indefinite lives (年限無限) Trademarks (商標權), and Goodwill (商譽). 163 Accounting for Intangible Assets Two major concerns: the initial costs and the amount of cost to transfer to expense, the amortization (攤銷費用). With definite lives To be amortized over the period With indefinite lives Not be amortized but to evaluate the impairment loss, if any, at the end of the year 164 Patents The exclusive right granted by the federal government to manufacturers to produce and sell goods with one or more unique features is a patent (專利 權). These rights continue in effect for 20 years. 165 The Acquisition of A Patents By purchase (向外購買取得) The initial costs of a patent include any related purchasing price, legal fees incurred and others. By self R&D (自行研究發展取得) The initial costs of a patent include any related legal fees incurred and others. 166 R&D Costs for A Patent The R&D costs are usually accounted for as current operation expenses in the period in which they are incurred and being not capitalized to be an assets because the future benefits are highly uncertain. 167 Amortization of A Patent The cost is written off, or amortized, over the years of the patent’s expected usefulness (預期使用年限). The period of time may be less than the remaining legal life of the patent, and also change as technology or consumer tastes change. 168 Amortization Method The straight-line method is normally used to determine the periodic amortization expense. To debit “an expense account” and To credit directly to “the patents account”. 169 Journalizing Purchasing of A Patent At the beginning of its fiscal year, a business acquires a patent right for $100,000. Its remaining useful life is estimated at 5 years. Journal Page X Date Description P.R. Debit Credit Dec. 31 Patent 100,000 Cash 100,000 Recording of a patent acquisition. 170 Journalizing Amortization of A Patent Journal Page X Date Description P.R. Debit Credit Dec. 31 Amortization Expense-Patents 20,000 Patents 20,000 Patent amortization ($100,000/5). Because a patent (and other intangible assets) does not exist physically, it is acceptable to credit the asset. This approach is different from physical fixed assets that require the use of a contra asset account. 171 A Copyright The exclusive right granted by the federal government to publish and sell a literary, artistic, or musical composition is a copyright (版權). A copyright extends for 70 years beyond the author’s death. 172 The Acquisition of A Copyright By purchase The initial costs should include purchase price, legal costs and others. By self R&D The initial costs should include all costs of creating work, any administrative costs, legal costs and others. 173 The Amortization of A Copyright The copyrights are amortized over their estimated useful lives. 174 Trademark商標 A trademark is a unique name, term, or symbol used to identify a business and its products. Most businesses identify their trademarks with ® in their advertisements and on their products. For example, the Coke ® logo, owned by the Coca-Cola company. 175 Trademark Trademarks can be registered for 10 years and can be renewed every 10 year period thereafter. 176 The Acquisition of A Trademark By purchase The initial costs include the purchase price, the legal costs of registration, and others. By self R&D The initial costs include the legal costs of registration, and others. 177 The Amortization of A Trademark The costs of trademarks are not amortized over a useful life Because the trademarks are considered to have an indefinite useful life. 178 The Impairment of A Trademark The trademarks should be tested periodically for impaired value (價值減 損), however. When a trademark is impaired from competitive threats or other circumstances, the trademark should be written down and a loss recognized 179 Goodwill 商譽 In business, goodwill refers to an intangible asset of a business that is created from such favorable factors as location, product quality, reputation, and managerial skill, etc.. For example, 7-11 convenience store. 180 Goodwill Goodwill allows a business to earn a rate of return on its investment that is often in excess of the normal rate (超額盈 餘) for other firms in the same business. 181 Goodwill Generally accepted accounting principles permit goodwill to be recorded in the accounts only if it is objectively determined by a transaction (透過購買 取得可入帳). In other words, the goodwill will not be recorded in the company book if the goodwill is created by the business alone (自行創造不可入帳). 182 The Acquisition of A Goodwill By purchase The purchase of a business at a price in excess of the net assets (assets less liabilities) of the acquired business. The excess is recorded as goodwill. The goodwill is reported as an intangible asset. Goodwill often arises from merger transactions. 183 The Acquisition of A Goodwill By self research and development The relevant expenditures can not be capitalized as an asset because the future economic benefits are uncertain. 184 The Amortization A Goodwill The goodwill is not amortized because the future economic future benefits are uncertain and the life is indefinite. 185 Impaired Goodwill A loss should be recorded if the business prospects of the acquired firm (and the acquired goodwill) become significantly impaired (無形資產-商譽減損). Journal Page X Date Description P.R. Debit Credit Mar. 19 Loss from Goodwill Impaired 50,000 Goodwill 50,000 Impaired Goodwill. 186 Intangible Assets with Finite Lives Intangible Description Amortization Periodic Asset Period Expense Patent Exclusive Estimated Amortization right to benefit useful life not expense. from an to excess innovation. legal life. Copyright Exclusive Estimated Amortization right to benefit useful life not expense. from a literary, to exceed artistic, or legal life. musical composition. 187 Intangible Assets with Infinite Lives Intangible Description Amortization Periodic Asset Period Expense Trademark Exclusive None Impairment use of a loss if fair name, term, value less than or symbol. carrying value (impaired). Goodwill Excess of None Impairment purchase loss if fair price of a value less than business carrying value over its net (impaired). assets. 188 Example Exercise 9-9 On December 31 it was estimated that goodwill of $40,000 was impaired. In addition, a patent with an estimated useful economic life of 12 years was acquired for $84,000 on July 1. a. Journalize the adjusting entry on December 31, for the impaired goodwill. b. Journalize the adjusting entry on December 31 for the amortization of the patent rights. 189 Follow My Example 9-9 a. Dec. 31 Loss from Impaired Goodwill 40,000 Goodwill 40,000 Impaired goodwill. b. Dec. 31 Amortization Expense—Patents 3,500 Patents 3,500 Amortized patent rights [($84,000/12) x (6/12)]. For Practice: PE 9-9A, PE 9-9B 190 Objective 6 Describe how depreciation expense is reported in an income statement, and prepare a balance sheet that includes fixed assets and intangible assets. 191 F/S Presentation of Fixed Assets The amount of each major class of fixed assets should be disclosed in the balance sheet or in notes. The related accumulated depreciation should also be disclosed, either by major class or in total. 192 The fixed assets may be shown at their book values (cost less accumulated depreciation), or Office equipment $125,750 Less: accumulated depreciation 86,300 Net book value $ 39,450 at their net amounts. Office equipment, net (Note B) $39,450 F/S Presentation of 193 Natural Resources The cost of mineral rights or ore deposits is normally shown as part of the fixed asset section of the balance sheet. The related accumulated depletion should also be disclosed. 194 The mineral rights are shown at their book values (cost less accumulated depreciation), or at their net of depletions, accompanies by a note to show the amount of the accumulated depletion. 195 F/S Presentation of Intangible Assets Intangible assets are usually reported (net of amortization) in the balance sheet in a separate section immediately following fixed assets; to be disclosed the balance of each major class at an amount net of amortization taken to date. Fixed Assets and Intangible Assets in the 196 Balance Sheet Fixed Asset Turnover Ratio 197 固定資產週轉率 One measure of the revenue- generating efficiency of fixed assets is the fixed asset turnover ratio. It measures the number of dollars of revenue earned per dollar of fixed assets and is computed as follows: Fixed Asset Revenues = Turnover Ratio Average Book Value of Fixed Assets 198 Financial Analysis and Interpretation For Marriott International, Inc. (in millions) Fixed Asset Revenue Turnover Ratio = Average Book Value of Fixed Assets Fixed Asset $11,550 Turnover Ratio = ($2,341 + 2,389)/2 Fixed Asset 4.88 Turnover Ratio = Conclusion: For every dollar of fixed assets, Marriott earns $4.88 of revenue.
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