Upload
chastity-christal-kelley
View
213
Download
0
Tags:
Embed Size (px)
Citation preview
Adjustments for Useful LifeLO3
Changes in Estimates
Additional Improvemen
t Expenditures
Significant Declines in
Asset Market Values
Adjustments for fixed assets can arise from:
Changes in Depreciation EstimatesAssume Thomas Supply purchases a machine for $90,000 on
1/1/2010, with a 10 year useful life and $10,000 salvage value. Using straight-line, Thomas records $8,000
depreciation expense.
GENERAL J OURNAL
Date Description Debit Credit 2010 Dec
31
Depreciation Expense
8,000
Accumulated Depreciation-Truck
8,000
Assets = Liabilities + Equity-8,000 -8,000
Changes in Depreciation EstimatesYear 5: Thomas estimates that the machine will last only 8 years and have a salvage value of $6,000. The prospective revision (current and future) will not correct the first 4 years.
Calculate net book value at the time of estimate revision (or unexpired cost):Cost of the asset, January 1, 2010 $90,000Less: Accumulated depreciation for four years $32,000Net book value on January 1, 2014 $58,000
Step 1
Step 2
Calculate depreciable cost for future depreciation:Net book value on January 1, 2014 $58,000Less: Estimated salvage value $6,000Remaining depreciable cost $52,000
Step 3 Calculate revised depreciation expense: $52,000 ÷ 4 remaining years = $13,000 annual depreciation
Expenditures After AcquisitionThe accounting treatment for expenditures made during the useful life of a fixed asset depends on whether they are classified as capital or revenue expenditures.
• A capital expenditure increases the expected useful life or productivity of the asset.
• A revenue expenditure maintains the expected useful life or productivity of the asset.
Capital Expenditure• A company purchases a fixed asset for
$50,000 on 1/1/2010, with a 5-year life and no salvage. During the fifth and final year of the asset’s life, the company incurs $8,000 for upgrades that extend the asset’s life for 2 years.
General JournalYear five Fixed Asset $8,000
Cash $8,000(To record upgrade to asset)
Assets = Liabilities + Equity+8,000-8,000
Change in Depreciation Due to Capital ExpenditureCalculate net book value after capital expenditure:Cost of the asset, January 1, 2010 $50,000Less: Accumulated depreciation for four years $40,000Net book value on January 1, 2014 $10,000Plus: Upgrades made in 2014 $ 8,000Updated Net Book Value for 2014 $18,000
Step 1
Step 2
Calculate depreciable expense:Updated book value for 2014 $18,000Less: Estimated salvage value $ 0Remaining depreciable cost $18,000Divided by remaining useful life ÷ 3Annual depreciation expense $ 6,000
Revenue Expenditure• A company purchases a fixed asset for
$50,000 on 1/1/2010, with a 5-year life and no salvage. During the fifth and final year of the asset’s life, the company incurs $1,000 in ordinary maintenance.
General JournalYear five Maintenance Expense $1,000
Cash $1,000(To record normal
maintenance)
Assets = Liabilities + Equity-1,000 -1,000
Potential Fraud Issue
Asset ImpairmentWhen a fixed asset’s market value falls materially
below its net book value and the decline in value is deemed to be permanent, the asset is considered
impaired. Under GAAP, companies apply conservatism by writing these assets down from their
book values to their market values.
Assume a machine losses value equal to $100,000:
General JournalLoss on Impairment $100,000
Fixed Asset $100,000(To record permanent impairment asset)
Assets = Liabilities + Equity-100,000 -100,000
Included in Other Income in the Income Statement
Disposal of Fixed Assets
• The accounting for the disposal of a fixed asset consists of the following three steps:
LO4
1. Update depreciation on the asset.
2. Calculate gain or loss on the disposal.
3. Record the disposal.
Rule for Calculating the Gain or Loss on Disposal
If Proceeds from Sale > Net Book Value, then Gain on Disposal
If Proceeds from Sale < Net Book Value, then Loss on Disposal
Evaluating Management of Fixed Assets
Three issues are important when managing fixed assets:
LO5
1. How productive are the company’s fixed assets in generating revenues?
2. What is the condition of the company’s fixed assets?
3. How are cash flows affected by the purchase of fixed assets?
Horizontal and Vertical Analyses
A good place to start in the analyses of fixed assets is with performance of horizontal and
vertical analyses.
Horizontal AnalysisHorizontal Analysis Vertical Vertical AnalysisAnalysis
Fixed assets CY Fixed assets – PY Fixed assetsPY Fixed Assets
Fixed assetsTotal Assets
Depreciation Expense
CY Depreciation – PY DepreciationPY Depreciation
Depreciation ExpenseTotal Sales
[A1]Key Formula
Horizontal ExampleLet’s look at McDonald’s 2008 & 2007 analyses.
Vertical ExampleLet’s look at McDonald’s 2008 & 2007 analyses.
Fixed Asset Turnover RatioHow do you find out if the company is
using fixed assets productively to generate revenues?
Total RevenuesAverage Net Book Value of Fixed
AssetsWhere average Net Book Value = Beginning Net Book Value + Ending
Net Book Value2
The fixed asset turnover ratio compares total revenues during a period to the average net
book value of fixed assets for the period.
Fixed Asset Turnover ExampleMcDonald’s 2008 fixed asset turnover
ratio is calculated as follows.
Average Life of Fixed Assets
Average Age of Fixed Assets
Acquiring Fixed Assets – Cash Flow Effects
LO6
Determining fixed assets’ effects on cash flow is another important issue.
McDonald’s 2008 Capital Expenditures from the Statement of Cash Flows
2008 2007 2006Property and equipment expenditures($2,135.7) ($1,946.6) ($1,741.9)
A negative number indicates investment
in operating activities.
Intangible AssetsLO7
An intangible asset is a
resource that is used in
operations for more than one year but has no
physical substance.
Examples include:•Patent•Trademark•Copyright•Franchise•Goodwill
Recording Goodwill
Goodwill is created when one company
buys another company and pays more than the value of the net
assets of the purchased company.
Suppose that Buyer Company purchases Seller Company for $8 million when the
value of Seller Company’s net
assets is $6 million. How will we record this?
Recording GoodwillGeneral Journal
Net Assets of Seller Company $6,000,000
Goodwill $2,000,000
Cash(To record the purchase of Seller)
$8,000,000
Assets = Liabilities + Equity+6,000,000+2,000,000-8,000,000
The premium paid for GOODWILL is usually due to the acquired company’s customers, its reputation, its
employees, its market share, or its research.
Amortizing Intangible AssetsSuppose that a company possesses a $60,000 patent that has the maximum legal life of 20 years. The company believes that the patent
will be useful for only 12 years and will then be worthless. How do we record amortization?
$60,000 ÷ 12 = $5,000 per year
General JournalEnd of year Amortization Expense $5,000
Patent $5,000
Assets = Liabilities + Equity-5,000 -5,000
Remember
End of Chapter 8