ACG 2021 Fixed Assets Intangible Assets Accounting for Depreciation Nature of Fixed Assets Are long term or relatively permanent assets They are Tangible assets because they exist physically They are owned and used by the business Not offered for sale as part of the normal operations Consists of Factories tools Machinery and Equipment or trucks Land 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 Created by M Mari Fall 2007 Page 1 of 5 ACG 2021 Fixed Assets Intangible Assets 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 Cost of Acquiring Fixed Assets Sales taxesPurchase priceTress and shrubsBuilding Engineers feesArchitects fees Insurance costs incurred during construction Interest on money borrowed to finance construction Walkways to and around the building Sales taxes Repairs to used building purchased Reconditioning on used building purchased Machinery Equipment Land Land Improvements Freight Sales taxes Fences Installation Permits from government agencies Brokers commissions Outdoor lighting Repairs on used equipment purchased Reconditioning on the purchase of used equipment Insurance while in transit Assembly Modifying for use Modifying for use Testing for use Permits from government agencies Permits from government agencies Paved parking areas Title fees Surveying fees Delinquent real estate taxes Razing or removing unwanted buildings Grading and leveling Paving a public street bordering the land Only costs necessary for preparing a long lived asset for use should be included as a cost of the asset Created by M Mari Fall 2007 Page 2 of 5 ACG 2021 Fixed Assets Intangible Assets Unnecessary costs that do not increase the asset s usefulness are recorded as an expense o Vandalism o Mistakes in installation o Uninsured theft o Damage during unpacking and installing o Fines for not obtaining proper permits from governmental agencies Capital and 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 Suppose that a tune up is done the delivery truck for a cost of 500 paid in cash Account Repairs and maintenance expense Cash Debit Credit 500 500 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 Created by M Mari Fall 2007 Page 3 of 5 ACG 2021 Fixed Assets Intangible Assets Suppose that a new lift placed in the delivery truck for a cost of 5 500 paid in cash Account Delivery Truck Cash Debit 5 500 Credit 5 500 Extraordinary repairs o An expenditure that increases the useful life of an asset beyond its original estimate o Debited to the related accumulated depreciation account o Considered capital expenditures Suppose that a new engine is placed in the delivery truck for a cost of 7 000 paid in cash Account Accumulated Depreciation Truck Cash Debit 7 000 Credit 7 000 Leasing Fixed Assets Lease is a contract for the use of an asset for a stated period of time Created by M Mari Fall 2007 Page 4 of 5 ACG 2021 Fixed Assets Intangible Assets Parties to a lease o Lesser party who owns the asset o Lessee party to whom the rights to use the asset are granted by the lesser Obligated to make periodic rent payments for the lease them Types of Leases o 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 o Operating Lease Lessee records the payments under an operating lease by debiting rent expense and crediting cash Created by M Mari Fall 2007 Page 5 of 5