fixed assets & intangibles chapter 9. nature of fixed assets are long-term or relatively...

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Fixed Assets & Intangibles Chapter 9

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Page 1: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Fixed Assets & Intangibles

Chapter 9

Page 2: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Nature of Fixed Assets

Are long-term or relatively permanent assetsThey are Tangible assets because they exist physically.They are owned and used by the businessNot offered for sale as part of the normal operations

Page 3: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Consists of

If the purchased item is long-lived, then it should be capitalized. It should appear on the balance sheet as an asset. If not cost is reported as an expense on the income statement

Page 4: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Cost of Acquiring Fixed Assets

Land Purchase price Sales taxes Permits Title fees Surveying fees Removing unwanted

buildings paving

Page 5: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Cost of Acquiring Fixed Assets

Building Architects’ fees Engneers’ fees Insurance cost Interest on

construction reconditioning

Page 6: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Cost of Acquisition

Land Improvement Trees and shrubs Fences Outdoor lighting Paved parking areas

Page 7: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Cost of Acquisition

Machinery & Equipment Sales taxes Freight Installation Repairs reconditioning

Page 8: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Notes

Only costs necessary for preparing a long-lived asset for use should be included as a cost of the asset.Unnecessary costs that do not increase the asset’s usefulness are recorded as an expense Vandalism Mistakes in installation Uninsured theft Damage during unpacking and installing Fines for not obtaining proper permits from

governmental agencies

Page 9: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Capital & Revenue Expenditures

Once a fixed asset has been acquired and placed in service: Expenditures may be

incurred for ordinary maintenance and repairs.

Expenditures may be incurred for improving an asset or extraordinary repairs that extend the asset’s useful life.

Ordinary Maintenance and Repairs: Expense in the current

period Revenue Expenses

Page 10: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Revenue Expenditure

Suppose that a tune up is done the delivery truck for a cost of $500 paid in cash.

Account Debit Credit

Repairs and maintenance expense

$500

Cash $500

Page 11: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Capital Expenditures

Asset Improvements:

Improve an asset

Capital expenditures

Recorded as increases in the fixed asset account.

Changes the depreciation for the remaining life of the asset

Page 12: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Capital Expenditures

Suppose that a new lift placed in the delivery truck for a cost of $5,500 paid in cash.

Account Debit Credit

Delivery Truck $5,500

Cash $5,500

Page 13: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Capital Expenditures

Extraordinary repairsAn expenditure that increases the useful

life of an asset beyond its original estimate.Debited to the related accumulated

depreciation account.Considered capital expenditures

Page 14: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Capital Expenditures

Suppose that a new engine is placed in the delivery truck for a cost of $7,000 paid in cash.

Account Debit Credit

Accumulated Depreciation- Truck $7,000

Cash $7,000

Page 15: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Leasing Assets

Lease - is a contract for the use of an asset for a stated period of time.

Parties to a leaseLesser – party who owns the assetLessee – party to whom the rights to use

the asset are granted by the lesserObligated to make periodic rent payments for

the lease them

Page 16: Fixed Assets & Intangibles Chapter 9. Nature of Fixed Assets Are long-term or relatively permanent assets They are Tangible assets because they exist

Leasing Assets

Types of Leases Capital lease

Is accounted for as if the lessee has purchased the asset.

Debit the asset account for the fair market value of the asset

Credits the long-term lease liability account Asset is written off as expense over the life of the capital

lease. Amortization expense

Operating Lease Lessee records the payments under an operating lease

by debiting rent expense and crediting cash.