Ch6 Fixed Assets Nature of Fixed Assets Acquisition cost
Purachase price expenditures Depreciation Expense = income
statement Accumulated Depreciation = Balance sheet estimated useful
life Estimated residual value
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Define, classify, and explain the nature of long-Term
assets.
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Fixed assets are long term Assets Fixed assets are tangible
assets because they exist physically. They are owned and used by
the business and are not held for sale as part of normal
operations.
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Apply the cost principle to the acquisition of long- Term
assets.
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Recording costs as assets is called capitalizing the costs.
Acquisition cost includes: 1.purchase price, and 2.all expenditures
needed to prepare the asset for use.
Alaissa purchased a new Cars for $26,000,000 less a $1,000,000
discount. Alaissa paid $125,000 for transportation and $625,000 for
installation of the Cars. Prepare the journal entry for the
acquisition assuming alaissa paid cash for the new Cars.
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1 Analyze 2 Record Alhaker purchased a new ride for $26,000,000
less a $1,000,000 discount. Alhaker paid $125,000 for
transportation and $625,000 for installation of the ride. Prepare
the journal entry for the acquisition assuming Alhaker paid cash
for the new ride.
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Depreciation is a cost allocation process that matches costs of
operational assets with periods benefited by their use. Cost
Allocaton Balance Sheet Income Statement Expense Acquisition Cost
Depreciation Expense Income Statement Depreciation for the current
year Balance Sheet Accumulated Depreciation Total of depreciation
to date for an asset
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Depreciation calculations require three amounts for each asset:
Acquisition cost. Estimated useful life. Estimated residual value.
The effects of $130 of depreciation on the accounting equation and
the journal entry to record them follow: 1 Analyze 2 Record
9-14
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2008 Depreciation Includes $130 for 2008 Book value 2008
9-15
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Apply various depreciation methods as economic benefits are
used up over time.
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Initial Cost Residual Value - = Depreciable Cost Useful Life 1
Periodic Depreciation Expense 2 3 4 5
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1- Straight-Line 3- Declining- Balance Other 2-
Units-of-Production Use of Depreciation Methods
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FactsFacts Original Cost....... $24,000 Estimated Life in
years..5 years Estimated Residual Value...$2,000 Original
Cost....... $24,000 Estimated Life in years..5 years Estimated
Residual Value...$2,000
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Straight-Line Method Cost estimated residual value Estimated
life = Annual depreciation
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Straight-Line Method $24,000 $2,000 5 years = $4,400 annual
depreciation
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Accum. Depr.Book ValueDepr.Book Value at Beginningat
BeginningExpenseat End YearCostof Yearof Year for Yearof Year
1$24,000$24,000$4,400$19,600 224,000$ 4,40019,6004,40015,200
324,0008,800 15,200 4,400 10,800 424,00013,200 10,800 4,400 6,400
524,00017,6006,4004,4002,000 Cost ($24,000) Residual Value ($2,000)
Estimated Useful Life (5 years) = Annual Depreciation Expense
($4,400) Straight-Line Method
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= $20,000 per year ($62,500 - $2,500) 1313 9-23
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M9-4 Computing Book Value (Straight-Line Depreciation)
Calculate the book value of a two-year-old machine that cost
$200,000, has an estimated residual value of $40,000, and has an
estimated useful life of four years. The company uses straight-line
depreciation. = $40,000 per year ($200,000 - $40,000) 1414
9-24
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E9-7 Computing Depreciation under Alternative Methods Sonic
Corporation purchased and installed electronic payment equipment at
its drive-inn restaurants in San Marcos, TX, at a cost of $27,000.
The equipment has an estimated residual value of $1,500. The
equipment is expected to process 255,000 payments over its
three-year useful life. Per year, expected payment transactions are
61,200, year 1; 140,250, year 2; and 53,550, year 3. Required:
Complete a depreciation schedule for each of the alternative
methods. 1. Straight-line. 2. Units-of-production. 3.
Double-declining-balance. = $8,500 per year ($27,000 - $1,500) 1313
1. Straight-line 9-25
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E9-7 Computing Depreciation under Alternative Methods 1.
Straight-line 9-26
