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178 Chapter 9 Fixed Assets and Intangible Assets
OBJECTIVE 3
Journalize entries for the disposal of fixed assets.
SYNOPSIS
After a fixed asset is no longer used by a business, it is either discarded or sold. If the asset has no
residual value and is discarded, this event must be recorded on the books of the business. The asset is
removed from assets by debiting the associated accumulated depreciation account and crediting the asset
account for the full cost of the asset. If the asset is not fully depreciated, the depreciation should be
recorded up to the date of removal. The discarding is then recorded as a credit to Accumulated
Depreciation, a debit to Loss on Disposal (for the undepreciated amount), and a credit for the full value of
Relevant Example Exercises and Exhibits
• Example Exercise 10-6 Sale of Equipment
SUGGESTED APPROACH
Whenever a business disposes of a fixed asset—however a business disposes of a fixed asset—both the
asset and its accumulated depreciation must be removed from the accounting records. Remind students
that depreciation must be brought up to date before recording the disposal of an asset. Use the following
notes and Demonstration Problems to illustrate the discard, sale, and exchange of fixed assets.
LECTURE AID—Discarding Fixed Assets
To record a discarded fixed asset:
2. If the asset is not fully depreciated, record a loss equal to the book value of the asset.
Ask your students to record in their notes the discard of the following two assets. After a few minutes,
review the correct answers.
Chapter 9 Fixed Assets and Intangible Assets 179
Machine #1: Original cost, $10,000; accumulated depreciation, $10,000
Entry: Accumulated Depreciation—Machinery 10,000
Machinery…………………….. 10,000
LECTURE AID—Selling Fixed Assets
To record the sale of a fixed asset:
1. Remove the asset and its accumulated depreciation from the accounting records.
3. Record any gain or loss. The gain or loss can be determined by comparing the book value of the asset
to the cash received.
Ask students to record the sale of the following two assets. Then review the correct answers.
Machine #1: Original cost, $50,000; accumulated depreciation, $35,000; sold for $18,000
Entry: Cash……………………………………. 18,000
Machine #2: Original cost, $75,000; accumulated depreciation, $65,000; sold for $4,000
Entry: Cash……………………………………. 4,000
180 Chapter 9 Fixed Assets and Intangible Assets
OBJECTIVE 4
Compute depletion and journalize the entry for depletion.
SYNOPSIS
The fixed assets of some companies include natural assets such as timber, minerals, etc. These resources
are harvested and then sold. A portion of the cost of the asset is recorded as an expense. This process of
transferring the cost of the asset to an expense account is called depletion. Depletion expense is
Key Terms and Definitions
• Depletion - The process of transferring the cost of natural resources to an expense account.
Relevant Example Exercises and Exhibits
• Example Exercise 9-7 Depletion
SUGGESTED APPROACH
Mining companies purchase rights to mineral deposits or natural resources like timber. These rights are
recorded in an asset account when they are purchased. As the metal ore or minerals are mined, they must
be removed from the asset account and shown as an expense. This process is called depletion. It works
DEMONSTRATION PROBLEM—Depletion
A company purchased the rights to a mineral deposit for $500,000. Engineers estimate that the deposit
contains 2 million tons of ore. During the first year of mining operations, 450,000 tons of ore were
removed. What depletion expense would be recorded that first year?
$500,000/2 million tons = $0.25/ton
450,000 tons $0.25/ton = $112,500
Chapter 9 Fixed Assets and Intangible Assets 181
OBJECTIVE 5
Describe the accounting for intangible assets, such as patents, copyrights, and goodwill.
SYNOPSIS
Businesses may also own long-term assets that are intangible. They are called intangible because they do
not exist physically. They include patents, copyrights, trademarks, and goodwill. Accounting for these
assets is similar to that of fixed assets. To account for this asset, the business first determines its initial
cost. Amortization is the decline in the usefulness of an intangible asset. After a business determines the
Key Terms and Definitions
• Amortization - The periodic transfer of the cost of an intangible asset to expense.
• Copyright - An exclusive right to publish and sell a literary, artistic, or musical composition.
Relevant Example Exercises and Exhibits
• Example Exercise 9-8 Impaired Goodwill and Amortization of Patent
• Exhibit 11 – Frequency of Intangible Asset Disclosure for 500 Firms
• Exhibit 12 – Comparison of Intangible Assets
SUGGESTED APPROACH
Intangible assets are long-term assets that have no physical substance but benefit operations. Emphasize
that in most cases, intangible assets involve legal rights. For example, a copyright is the legal right to
publish and sell printed material.
182 Chapter 9 Fixed Assets and Intangible Assets
Patents and goodwill are two intangibles that merit additional coverage of methods for determining cost.
Use the Lecture Aid below to explain the differences in costs capitalized for a purchased and an internally
developed patent, due to accounting rules regarding the treatment of research and development expenses.
LECTURE AID—Patents
If a patent is purchased, the full purchase price is recorded in the Patent account. In most cases, the
purchase price of the patent would reimburse the seller for research costs in developing the product
patented, as well as for the legal costs of filing and defending the patent.
LECTURE AID—Goodwill
Let’s say that you wanted to open a restaurant that specializes in pizza. You price ovens, refrigerators,
tables, chairs, cash registers—all the items you need to open your restaurant. You discover that the
needed equipment will cost $75,000. You also hear that the owner of a local pizzeria wants to sell his
business. This business has all of the equipment you had priced for your own store. Although this
equipment is used, it is in good working order. The business is in a location equivalent to the one you
Chapter 9 Fixed Assets and Intangible Assets 183
OBJECTIVE 6
Describe how depreciation expense is reported in an income statement and prepare a
balance sheet that includes fixed assets and intangible assets.
SYNOPSIS
Financial statements often record depreciation, depletion, and amortization separately because they
increase expenses and reduce revenues but require no cash outlay. The income statement usually reports
these expenses separately, and a description of the methods used to determine the expenses is disclosed.
SUGGESTED APPROACH
Review the following information regarding income statement and balance sheet disclosures:
Income Statement—must show amount of depreciation and amortization expense, either on the statement
or in a footnote. It also must disclose the method used to calculate depreciation.
184 Chapter 9 Fixed Assets and Intangible Assets
OBJECTIVE 7
Describe and illustrate the fixed asset turnover ratio to assess the efficiency of a company’s
use of its fixed assets.
SYNOPSIS
The financial ratio demonstrated is the fixed asset turnover ratio, which measures a company’s efficiency
in using its fixed assets to generate revenue. It is computed as: fixed asset turnover ratio = sales/average
book value of fixed assets. The higher this ratio is, the more efficiently the company is using its fixed
assets. Smaller ratios are usually associated with businesses that require large asset investments, and
higher ratios are associated with firms that require smaller fixed assets or are more labor intensive.
Key Terms and Definitions
Relevant Example Exercises and Exhibits
• Example Exercise 9-9 Fixed Asset Turnover Ratio
• Exhibit 13 – Fixed Asset Turnover Ratio Examples
SUGGESTED APPROACH
After reviewing the computation of this ratio, use TM 10-19 to begin a discussion of which factors could
cause a company’s ratio from year to year to change or remain the same.
Possible explanation: The higher the ratio, the more efficiently a company is using fixed assets. The ratio
is affected two possible ways: 1) fluctuation in net income and 2) changes to average book value of fixed
assets. If fixed assets remain relatively unchanged, increases to net income will affect the ratio positively
Chapter 9 Fixed Assets and Intangible Assets 185
APPENDIX—EXCHANGING SIMILAR FIXED
ASSETS
SYNOPSIS
Sometimes businesses do not purchase assets with cash but exchange assets with other companies or trade
in old equipment for new equipment. Accounting for these transactions depends on whether the future
cash flows of the business will change as a result of the exchange. If the exchange lacks commercial
Key Terms and Definitions
• Boot - The amount a buyer owes a seller when a fixed asset is traded in on a similar asset.
• Trade-In Allowance - The amount a seller allows a buyer for a fixed asset that is traded in for a
similar asset.
SUGGESTED APPROACH
Please note that in presenting the journal entries for the exchange of similar assets, the value placed on the
new assets received in a gain situation is called a “plug” number. If that overly simplistic approach is
offensive, the text presents two methods for calculating the amount to be capitalized on pages 482–483.
LECTURE AID—Exchanging Similar Fixed Assets
To record the exchange of a fixed asset for a similar fixed asset:
1. Remove the old asset and its accumulated depreciation from the accounting records.
3. If there is a loss or gain on the exchange, it can be recorded for financial reporting purposes.
Most exchanges of fixed assets are trade-in arrangements, where an old asset plus some cash are
exchanged for a new asset. To determine whether there is a gain or a loss on the trade, you must compare
186 Chapter 9 Fixed Assets and Intangible Assets
DEMONSTRATION PROBLEM—Exchanging Similar Fixed Assets
A piece of equipment with an original cost of $100,000 and accumulated depreciation of $92,000 is
traded in on a new machine with a cost of $150,000. The seller has agreed to take $140,000 cash plus the
old equipment in exchange for the new machine. Record this transaction.
Cost of new machine $150,000
Cash (boot) paid 140,000
Trade-in allowance $ 10,000
Entry: Accumulated Depreciation—Equipment (old) 92,000
Equipment (new) 150,000
Equipment (old)…………….. 100,000
Entry: Accumulated Depreciation—Equipment (old) 250,000
Equipment (new)…………………………….. 400,000
Type Item Description LO(s) Difficulty Time Est BUSPROG AICPA ACBSP - APC Bloom's EE Excel GL SMH FAI Service Real World Writing Ethics Internet Group
DQ 1 1 Easy 5 min. Analytic Measurement Long-term Asset Reporting Knowledge
DQ 2 1 Easy 5 min. Analytic Measurement Long-term Asset Reporting Knowledge
DQ 3 1 Easy 5 min. Analytic Measurement Long-term Asset Reporting Knowledge
DQ 4 1 Easy 5 min. Analytic Measurement Long-term Asset Reporting Knowledge
DQ 5 1 Easy 5 min. Analytic Measurement Long-term Asset Reporting Knowledge
DQ 6 2 Easy 5 min. Analytic Measurement Long-term Asset Reporting Knowledge
DQ 7 2 Easy 5 min. Analytic Measurement Long-term Asset Reporting Knowledge
DQ 8 2 Easy 5 min. Analytic Measurement Long-term Asset Reporting Knowledge
DQ 9 2 Easy 5 min. Analytic Measurement Long-term Asset Reporting Knowledge
DQ 10 5 Easy 5 min. Analytic Measurement Long-term Asset Reporting Knowledge
PE 6B Sale of equipment 3 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x
PE 7A Depletion 4 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x
PE 7B Depletion 4 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x
PE 8A Impaired goodwill and amortization of patent 5 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x
EX 9 Straight-line depreciation 2 Easy 5 min. Analytic Measurement Long-term Asset Reporting Application x
EX 10 Depreciation by units-of-output method 2 Easy 5 min. Analytic Measurement Long-term Asset Reporting Application x
EX 11 Depreciation by units-of-output method 2 Moderate 10 min. Analytic Measurement Long-term Asset Reporting Application x
EX 12 Depreciation by two methods 2 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x
EX 13 Depreciation by two methods 2 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x
EX 14 Partial-year depreciation 2 Moderate 10 min. Analytic Measurement Long-term Asset Reporting Application x
EX 15 Revision of depreciation 2 Moderate 15 min. Analytic Measurement Long-term Asset Reporting Application x
EX 16 Capital expenditure and depreciation 1,2 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application
EX 17 Entries for sale of fixed asset 3 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x
EX 18 Disposal of fixed asset 3 Moderate 20 min. Analytic Measurement Long-term Asset Reporting Application x
EX 19 Depletion entries 4 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x
EX 20 Amortization entries 5 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x
EX 21 Book value of fixed assets 6 Moderate 15 min. Analytic Measurement Long-term Asset Reporting Application x x
EX 22 Balance sheet presentation 6 Moderate 10 min. Analytic Measurement Long-term Asset Reporting Application
EX 23 Fixed asset turnover ratio 7 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x x x
EX 24 Fixed asset turnover ratio 7 Easy 10 min. Analytic Measurement Long-term Asset Reporting Application x x
EX 25 Asset traded for similar asset Appendix Moderate 10 min. Analytic Measurement Long-term Asset Reporting Application
EX 26 Asset traded for similar asset Appendix Moderate 10 min. Analytic Measurement Long-term Asset Reporting Application
EX 27 Entries for trade of fixed asset Appendix Moderate 10 min. Analytic Measurement Long-term Asset Reporting Application
CP 4 Applying for patents, copyrights and trademarks 5 Moderate 1 hour Reflective Thinking Critical Thinking Long-term Asset Reporting Knowledge x x
CP 5 Fixed asset turnover; three industries 7 Moderate 15 min. Analytic Measurement Long-term Asset Reporting Analysis x x
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