usually labeled as fixed assets or property plant and equipment (PPE) (this does not include land)
ex: buildings, equipment and furniture
assets are expected to be useful for longer than one year
Intangible Assets
assets that have no physical substance (other than pieces of paper) but give the entity valuable rights
ex: prepaid expenses, notes payable and goodwill
Asset Measurement Concept
when PPE is acquired, it is recorded in the accounts at its cost
this is because it is a nonmonetary cost
the cost of an asset includes all costs incurred to make the asset ready for its intended use
Capital lease
a lease for a long period of time (almost the whole life of the asset)
is recorded as an asset (regular short term leases are not recorded)
the amount recorded for a capital lease is the amount the entity would have paid if it had purchased the item rather than leasing it.
Depreciation
Land continues to be reported on the balanse sheet at its acquisition cost
- the portion of the asset that is used up in each year of its life, until it is sold or scrapped or useless (wear out physically or become obsolete- called obsolesence). Listed as an expense.
NOT related to the changes in the market value of an asset
service life
the period of time over which a plant asset is estimated to be of service to the company
includes both physical wear and obsolesense (but the shorter of the two periods)
Obsolesense
loss of usefullness because of the development of improved equipment, changes in stylem and other causes not related to the physical condition of the asset
residual value
the amount an entity expects to be able to sell the plant asset for at the end of its service life
- does not appear on accounts. it is merely an estimated number used to calculate depreciation
Depreciable Cost
the difference between the cost of a plant asset and its residual value
Total cost= 22,000
Residual Value= 2,000
Depreciable Cost= 20,000
Factors relevant to the depreciation of an asset
original cost
residual value
service life
factors 1&2= depreciable cost
all 3 used to calculate depreciation expense for a given year
factors 2&3 are estimates
Depreciation Methods
Units of production
straight line
accelerated
Units of production depreciation
a cost per unit of production is calculated and depreciation expense for a year is found by multplying this unit cost by the number of units that the asset produced in that year
ex: truck purchased in 2011 for $44K, est service for 100K miles and residual value of $4K
depreciable cost= $40K
est cost per mile= $.40 (40k/100)
in 2012 the truck was driven 15k miles. the depreciation expense in 2012 was $6k (.40*15k)
Straight Line Depreciation
annual depreciation expense as a function of time is a straight line. Charging off an equal fraction of the asset cost each year
*most companies use this method
% of cost charged off each year is called the depreciation rate= (1/# of years of service life)
depreciation expense= multiplying the depreciable cost by the depreciation rate, if the dep cost os $9k and the rate is 20%, the dep expense is $1,800
Accelerated Depreciation
writes off the cost of an asset faster than straight line depreciation. More depreciation expense is reported in the early years of the asset's service life and therefore less in the later years.
the total amount of depreciation expense is the same as in the straight line method
- principally used in calculating taxable income
Deferred Income Taxes
the difference between the income tax paid and the income tax expense
liability on the balance sheet
accounting for depreciation
debit the expense account, credit the asset account
recognize the appropriate amount of expense
recognize an equal decrease in the amount of the asset (decreases in PPE are not shown as direct reduction in the asset amount, instead, decreases in the asset amount of PPE asset because of depreciation expenses are accumulated in a seperate account called Accumulated depreciation, a contra asset account)
a decrease in an asset is always a credit
accumulated depreciation is a decrease in an asset and therefore has a credit balance
Accumulated depreciation
deduction from the original cost of the asset, the remaining amount is called Book Value. Book value does NOT report the fair value of the asset.
Ex:
PPE= 10K
Less accumulated dep= 4K
Book Value= 6K
After the cost of an asset has been completely written off as depreciation expense, no more depreciation is recorded, even though the asset continues to be used
True
Gain (or Loss) on disposition of PPE
the difference between the book value and the amount actually realized from a sale of a plant asset
ex:
book value 10K is sold for 12K, 2K is the gain on the disposition of PPE and is reported on the income statement
Sale of a PPE Asset
asset cost 40K, accumulated dep 30K and sold for 12K
Cash 12,000
Accumulated Dep 30,000
PPE 40,000
Gain on disposition of PPE 2,000
purpose of depreciation
to write off a fair share of the cost of the asset in each year in which it provides service
depreciation expense does NOT represent a decrease in the asset's real value or usefullness during the year
Accounting for PPE
original cost is known
service life is an estimate
residual value is an estimate
book value represents that portion of the cost NOT yet expensed
Wasting Assets
natural resources, such as coal, oil and other minerals
ex: natural gas, an iron ore mine and oil well
depletion
the name of a process of writing off the cost of wasting assets
similiar to depreciation of PPE, BUT in depletion the asset account is reduced DIRECTLY. Therefore, an accumulated depletion account is not normally used
calculated by multplying the quantity of the resource used in a period by a unit cost
intangible assets
intangible items are not treated as assets unless they have been acquired at a measureable cost
when they are recognized as assets, their cost is written off over their service life
max life of a patent is 17 years
max life of an intagible asset is 40 years
amortization
the process of writing off the cost of intangible assets
writing off assets
depreciation- refers to PPE assets
depletion- refers to wasting assets
amortization- refers to intangible assets
in financial accounting depreciation is calculated either by
an accelerated method
or by straight line method
accelerated depreciation is ofen used for income tax purposes because it decreased the amount of taxable income in the early years
