Chapter 9 Fixed Assets Intangible Assets BMGT220 10 27 13 Fixed assets long term relatively permanent assets such as equipment machinery buildings and land aka plant property equipment assets Characteristics of fixed assets 1 exist physically tangible 2 owned used by company in normal operations 3 not offered for sale as part of normal operations revenue expenditures costs that benefit only the current period or costs incurred for normal maintenance and repairs of fixed assets capital expenditures costs of acquiring fixed assets adding to a fixed asset improving a fixed asset or extending a fixed asset s useful life 1 2 lease contract for use of an asset for period of time lessor party who OWNS asset lessee party to whom rights to use asset are granted by lessor 2 types of lease CAPITAL AND OPERATING capital lease lease that includes one or more provisions that result in treating the leased asset as a purchased asset in the accounts operating lease lease that does not meet the criteria for capital leases and thus is accounted for as an operating expense depreciation periodic recording of the cost of fixed assets as an expense 2 types of depreciation physical wear and tear use exposure to weather functional obsolescence and changes in customer needs advances in technology depreciation does NOT measure decline in market value depreciation does NOT provide cash to replace fixed assets as they wear out 3 factors of depreciation expense for fixed asset 1 asset s initial cost 2 asset s expected useful life 3 asset s estimated residual value residual value estimated value of a fixed asset at the end of it s useful life depreciable cost amount of asset s cost that s allocated over it s useful life as depreciation expense 3 depreciation methods straight line method provides for equal periodic depreciation expense over estimated life of fixed asset cost of residual value useful life time units of output method provides for depreciation expense based on expected productive capacity of fixed asset cost of residual value total units of output total units of output used double declining balance method provides for periodic depreciation expense based on declining book value of fixed asset over estimated life book value cost of fixed asset accumulated depreciation accelerated depreciation method provides for higher depreciation amount in the first year of the asset s use followed by a gradually declining amount of depreciation MACRS Modified Accelerated Cost Recovery System Depletion process of transferring the cost of natural resources to an expense account Depletion rate cost of resource estimated total units of resource Depletion expense depletion rate quantity extracted Intangible assets long term useful in the operations of a business and not held for sale without physical qualities Amortization periodic transfer of cost of an intangible asset to expense Patents exclusive rights to produce and sell goods with one or more unique features Copyright exclusive right to sell and publish a literary artistic or musical composition Trademark name term symbol used to identify a business and it s products Goodwill intangible asset created from such favorable factors as location product quality reputation and managerial skill Fixed asset turnover ratio number of dollars or sales that re generated from each dollar of average fixed assets during the year computed by dividing net sales by average net fixed assets Trade in allowance amount seller allows buyer for a fixed asset that s traded in for similar asset
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