accelerated

A depreciation method that provides for a higher depreciation amount in the first year of the
depreciation
assets use, followed by a gradually declining amount of depreciation.
method
amortization The periodic transfer of the cost of an intangible asset to expense.
book value The cost of a fixed asset minus accumulated depreciation on the asset.
boot The amount a buyer owes a seller when a fixed asset is traded in on a similar asset.
capital The costs of acquiring fixed assets, adding to a fixed asset, improving a fixed asset, or extending
expenditures a fixed assets useful life.
capital leases Leases that include one or more provisions that result in treating the leased assets as purchased
assets in the accounts.
copyright An exclusive right to publish and sell a literary, artistic, or musical composition.
depletion The process of transferring the cost of natural resources to an expense account.
depreciation The systematic periodic transfer of the cost of a fixed asset to an expense account during its
expected useful life.
double-
declining- A method of depreciation that provides periodic depreciation expense based on the declining book
balance value of a fixed asset over its estimated life.
method
fixed asset The number of dollars of sales that are generated from each dollar of average fixed assets during
turnover ratio the year, computed by dividing the net sales by the average net fixed assets.
fixed assets
Longterm or relatively permanent tangible assets such as equipment, machinery, and buildings
(or plant
that are used in the normal business operations and that depreciate over time.
assets)
goodwill An intangible asset that is created from such favorable factors as location, product quality,
reputation, and managerial skill.
intangible Long-term assets that are useful in the operations of a business, are not held for sale, and are
assets without physical qualities.
operating Leases that do not meet the criteria for capital leases and thus are accounted for as operating
leases expenses.
patents Exclusive rights to produce and sell goods with one or more unique features.
residual value The estimated value of a fixed asset at the end of its useful life.
revenue Costs that benefit only the current period or costs incurred for normal maintenance and repairs of
expenditures fixed assets.
straight-line A method of depreciation that provides for equal periodic depreciation expense over the estimated
method life of a fixed asset.
trade-in
The amount a seller allows a buyer for a fixed asset that is traded in for a similar asset.
allowance
trademark A name, term, or symbol used to identify a business and its products.
units-of-
A method of depreciation that provides for depreciation expense based on the expected
production
productive capacity of a fixed asset.
method
Capitalization Of Fixed Asset Cost
1. Question: What is to be capitalized on purchased (acquired) fixed asset?

Answer:
Capitalized amount = Cost of asset + Costs incurred in preparing it for
its intended use
Cost of asset = Fair Market Value (FMV) of asset received or

Cash paid plus FMV of assets given.

2. Question: What journal entry should I make when fixed asset is received as a gift?

Answer:

[Debit]. Asset (at Fair Market Value) = xx

[Credit]. Income = xx

3. Question: What are other capitalized costs for assets acquired by gift or purchase?

Answer:

Shipping cost, insurance cost during shipping, installation cost and

testing

Land and Building

4. Question: What is total cost of land and building that should be capitalized?
Answer:

Purchase price + Delinquent taxes assumed + Legal fees + Title

insurance

5. Question: How to allocate total acquisition cost to land and building, using Relative Fair
Market Value Method?

Answer:

First, determine total Fair Market value: FMV of land + FMV of

building

Second, Allocate:

Land = FMV of land / (Total FMV Total Cost)

Building = FMV of building / (Total FMV Total Cost)

Capitalization of Interest
6. Question: What to be and what not to be capitalized on?

Answer:

Capitalize on assets constructed for companys use; and/or assets

manufactured for resale resulting from special order. Do not capitalize
on inventory manufactured in the ordinary course of business.

7. Question: What interest to be capitalized?

Answer:

Interest capitalized: Interest on debt incurred for construction of asset,

and/or interest on other debt that could be avoided by repayment of
debt.
8. Question: What to be computed on?

Answer:

Compute on: weighted-average accumulated expenditures

Costs Incurred After Acquisition

9. Question: Should I capitalized expenditures after acquisition of fixed asset?

Answer:

Capitalize if:

Bigger the cost makes the asset bigger, such as an addition to a building; or

Better the cost makes the asset better, such as an improvement that makes an asset
perform more efficiently; or

Longer the cost makes the asset last longer, it extends the useful life

Do not capitalize: Repairs and maintenance

Depreciation
10. Question: What basic terms should I know before attempting to work on depreciation of
fixed asset, at minimum?

Answer:

At the minimum, you should know the followings:

 Land ownerships is non-depreciable

Straight-line rate = 100% / Useful life (in years)

Depreciable basis = Cost Salvage value

Book value = Cost Accumulated depreciation

Note: Cost is all capitalized costs (see capitalization of fixed asset cost)

11. Question: What depreciation method should I use?

Answer:

Use straight-line when: benefit from asset is uniform over life

Use accelerated when: Asset more productive in earlier years; or

costs of maintenance increase in later years; or risk of obsolescence is
high.

Use units-of-production when: usefulness decreases with use

12. Question: How to compute depreciation using STRAIGHT-LINE Method?

Answer:

Annual Depreciation = Depreciable Basis x Straight-line Rate

Partial Year = Annual depreciation x Portion of year

13. How to compute depreciation using DOUBLE-DECLINING BALANCE Method?

Answer:

Annual depreciation = (Book Value x Straight-line rate) x 2

Partial Year = [(Book Value x Straight-line rate) x 2] x portion of year

14. How to compute depreciation using SUM-of-the YEARS-DIGITS Method?

Answer:

Annual Depreciation = Depreciable basis x Fraction

Fraction:

1st Year 2nd Year 3rd Year

Numerator n n-1 n-2

Denominator [n(n+1)]/2 [n(n+1)]/2 [n(n+1)]/2

Partial year:

1st Year = 1st years depreciation x portion of year

2nd Year = Reminder of 1st Years deprec + 2nd Years deprec x portion of year

3rd Year = Reminder of 2nd Years deprec + 3rd Years deprec x portion of year

15. How to compute depreciation using UNITS-of-PRODUCTION Method?

Answer:

Depreciation rate = Depreciable basis / Total estimated units to be

produced (hours)

Annual Depreciation = Depreciation rate x Number of units (hours

used)
16. How do I compute depreciation using Group or Composite Methods?

Answer:

They are based on straight-line. But gains or losses not recognized on

disposal. Here is journal entry you should make on the disposal:

[Debit]. Cash (proceed) = xx

[Debit]. Accum. Deprec (plug) = xx

[Credit]. Asset (original cost) = xx

Impairment of Fixed asset

17. Question: When does impairment occur?

Answer:

Impairment of fixed asset occurs if undiscounted future cash flow less

than asset carrying amount from events such as: a decrease in the
market value of the asset; or an adverse action or assessment by a
regulator; or an operating or cash flow loss associated with a revenue
producing asset.

18. Question: What to do if an impairment loss occur?

Answer:

When an impairment loss occurs: Asset should be written down to fair

market value (or discounted net cash flow). Use the following entry:

[Debit]. Loss due to impairment = xx

[Cerdit]. Accum, deprec = xx

Note that test for impairment (future cash flow) is different from write-
down amount (net realizable value).

19. Question: Would you show me an example of application of Impairment Rules?

Answer:

Here are two examples:

Example 1: An asset has carrying value of $1,000,000, undiscounted

future cash flow expected from asset is $900,000, while Fair market
value of the asset is only $600,000. In this case impairment exists since
$900,000 expected cash flow less than $1,000,000 carrying amount.
Therefore, write asset down by $400,000 ($1,000,000 reduced to
$600,000).

Example 2: An asset has carrying value of $800,000, undiscounted

future cash flow expected from asset is $900,000, while its Fair market
value of asset is $600,000. No impairment adjustment in this case,
since $900,000 expected cash flow exceeds $800,000 carrying
amount.

Disposal of Fixed Asset

20. Question: What is journal entry of fixed asset disposal, in general?

Answer:

[Debit]. Cash (proceeds) = xx

[Debit]. Accumulated depreciation (balance) = xx

[Debit]. Loss on disposal (plug) = xx

[Credit]. Gain on disposal (plug) = xx

[Credit]. Asset (original cost) = xx

Note that a disposal in involuntary conversion is recorded in the same

manner as a sale

21. Question: What is journal entry of non-monetary exchanges of fixed asset?

Answer:

[Debit]. Cash (amount received)

[Debit]. Asset New (FMV) = xx

[Debit]. Accumulated depreciation (balance on old asset) = xx

[Debit]. Loss on disposal (plug)

[Credit]. Cash (amount paid)

[Credit]. Gain on disposal (plug) = xx

[Credit]. Asset Old (Original cost) = xx

22. Question: What is Fair Market Value of a non-monetary exchange of fixed asset?

Answer:

It is fair value of asset received or asset given + Cash paid Cash

received.

Exception notes: Applies to exchanges when:

FMV is not determinable

 Exchange is only to facilitate subsequent sales to customers (e.g. ownership of inventory in
one city is swapped for similar inventory in another to facilitate prompt delivery to
customer in distant city)

Transaction lacks commercial substance (risk, timing, and amount of future cash flows will
not significantly change as a result of the transaction).

23. Question: How to determine if a fixed asset exchange is in loss or gain position, and what
journal entry should I make?

Answer:

Recognize LOSS if FMV of asset given is LESS THANCarrying

value of asset given. Key in the following the following journal entry:

[Debit]. Cash (amount received) = xx

[Debit]. Asset New (FMV) = xx

[Debit]. Loss on disposal (plug) = xx

[Credit]. Cash (amount paid) = xx

[Credit]. Asset Old (carrying value) = xx

Recognize GAIN if FMV of asset given is GREATER THANCarrying

value of asset given. Gain recognized only when cash received. Amount
to be recognized = (FMV of asset given Carrying value of asset given)
x percentage. (Note: *Percentage = Cash received / [cash + FMV of
asset received]). In this position, you would make the following journal
entry:

[Debit]. Cash (amount received) = xx

[Debit]. AssetNew (plug) = xx

[Credit]. Gain on disposal (computed amount) = xx

[Credit]. AssetOld (carrying value) = xx

NO GAIN recognized when cash paid or no cash involved. In this case,

you would make the following journal entry:

[Debit]. Asset New (plug) = xx

[Debit]. Accumulated depreciation (balance on old asset) = xx

[Credit]. Cash (amount paid) = xx

[Credit]. Asset Old (original cost) = xx

Cash paid plus FMV of assets given.

2. Question: What journal entry should I make when fixed asset is received as a gift?

Answer:
[Debit]. Asset (at Fair Market Value) = xx
[Credit]. Income = xx

3. Question: What are other capitalized costs for assets acquired by gift or purchase?

Answer:
Shipping cost, insurance cost during shipping, installation cost and
testing
Land and Building
4. Question: What is total cost of land and building that should be capitalized?

Answer:
Purchase price + Delinquent taxes assumed + Legal fees + Title
insurance
5. Question: How to allocate total acquisition cost to land and building, using Relative Fair
Market Value Method?

Answer:
First, determine total Fair Market value: FMV of land + FMV of
building
Second, Allocate:

Land = FMV of land / (Total FMV Total Cost)

Building = FMV of building / (Total FMV Total Cost)

Capitalization of Interest
6. Question: What to be and what not to be capitalized on?

Answer:
Capitalize on assets constructed for companys use; and/or assets
manufactured for resale resulting from special order. Do not capitalize
on inventory manufactured in the ordinary course of business.
7. Question: What interest to be capitalized?

Answer:
Interest capitalized: Interest on debt incurred for construction of asset,
and/or interest on other debt that could be avoided by repayment of
debt.
8. Question: What to be computed on?

Answer:
Compute on: weighted-average accumulated expenditures

Costs Incurred After Acquisition

9. Question: Should I capitalized expenditures after acquisition of fixed asset?

Answer:
Capitalize if:

Bigger the cost makes the asset bigger, such as an addition to a building; or

Better the cost makes the asset better, such as an improvement that makes an asset
perform more efficiently; or

Longer the cost makes the asset last longer, it extends the useful life

Do not capitalize: Repairs and maintenance

Depreciation
10. Question: What basic terms should I know before attempting to work on depreciation of
fixed asset, at minimum?

Answer:
At the minimum, you should know the followings:
 Land ownerships is non-depreciable

Straight-line rate = 100% / Useful life (in years)

Depreciable basis = Cost Salvage value

Book value = Cost Accumulated depreciation

Note: Cost is all capitalized costs (see capitalization of fixed asset cost)

11. Question: What depreciation method should I use?

Answer:
Use straight-line when: benefit from asset is uniform over life
Use accelerated when: Asset more productive in earlier years; or
costs of maintenance increase in later years; or risk of obsolescence is
high.
Use units-of-production when: usefulness decreases with use

12. Question: How to compute depreciation using STRAIGHT-LINE Method?

Answer:
Annual Depreciation = Depreciable Basis x Straight-line Rate
Partial Year = Annual depreciation x Portion of year

13. How to compute depreciation using DOUBLE-DECLINING BALANCE Method?

Answer:
Annual depreciation = (Book Value x Straight-line rate) x 2
Partial Year = [(Book Value x Straight-line rate) x 2] x portion of year
14. How to compute depreciation using SUM-of-the YEARS-DIGITS Method?

Answer:
Annual Depreciation = Depreciable basis x Fraction
Fraction:
1st Year 2nd Year 3rd Year
Numerator n n-1 n-2
Denominator [n(n+1)]/2 [n(n+1)]/2 [n(n+1)]/2
Partial year:

1st Year = 1st years depreciation x portion of year

2nd Year = Reminder of 1st Years deprec + 2nd Years deprec x portion of year

3rd Year = Reminder of 2nd Years deprec + 3rd Years deprec x portion of year

15. How to compute depreciation using UNITS-of-PRODUCTION Method?

Answer:
Depreciation rate = Depreciable basis / Total estimated units to be
produced (hours)
Annual Depreciation = Depreciation rate x Number of units (hours
used)

16. How do I compute depreciation using Group or Composite Methods?

Answer:
They are based on straight-line. But gains or losses not recognized on
disposal. Here is journal entry you should make on the disposal:
[Debit]. Cash (proceed) = xx
[Debit]. Accum. Deprec (plug) = xx
[Credit]. Asset (original cost) = xx

Impairment of Fixed asset

17. Question: When does impairment occur?

Answer:
Impairment of fixed asset occurs if undiscounted future cash flow less
than asset carrying amount from events such as: a decrease in the
market value of the asset; or an adverse action or assessment by a
regulator; or an operating or cash flow loss associated with a revenue
producing asset.

18. Question: What to do if an impairment loss occur?

Answer:
When an impairment loss occurs: Asset should be written down to fair
market value (or discounted net cash flow). Use the following entry:
[Debit]. Loss due to impairment = xx
[Cerdit]. Accum, deprec = xx
Note that test for impairment (future cash flow) is different from write-
down amount (net realizable value).

19. Question: Would you show me an example of application of Impairment Rules?

Answer:
Here are two examples:
Example 1: An asset has carrying value of $1,000,000, undiscounted
future cash flow expected from asset is $900,000, while Fair market
value of the asset is only $600,000. In this case impairment exists since
$900,000 expected cash flow less than $1,000,000 carrying amount.
Therefore, write asset down by $400,000 ($1,000,000 reduced to
$600,000).
Example 2: An asset has carrying value of $800,000, undiscounted
future cash flow expected from asset is $900,000, while its Fair market
value of asset is $600,000. No impairment adjustment in this case,
since $900,000 expected cash flow exceeds $800,000 carrying
amount.

Disposal of Fixed Asset

20. Question: What is journal entry of fixed asset disposal, in general?

Answer:
[Debit]. Cash (proceeds) = xx
[Debit]. Accumulated depreciation (balance) = xx
[Debit]. Loss on disposal (plug) = xx
[Credit]. Gain on disposal (plug) = xx
[Credit]. Asset (original cost) = xx
Note that a disposal in involuntary conversion is recorded in the same
manner as a sale

21. Question: What is journal entry of non-monetary exchanges of fixed asset?

Answer:
[Debit]. Cash (amount received)
[Debit]. Asset New (FMV) = xx
[Debit]. Accumulated depreciation (balance on old asset) = xx
[Debit]. Loss on disposal (plug)
[Credit]. Cash (amount paid)
[Credit]. Gain on disposal (plug) = xx
[Credit]. Asset Old (Original cost) = xx

22. Question: What is Fair Market Value of a non-monetary exchange of fixed asset?

Answer:
It is fair value of asset received or asset given + Cash paid Cash
received.
Exception notes: Applies to exchanges when:

FMV is not determinable

Exchange is only to facilitate subsequent sales to customers (e.g. ownership of inventory in

one city is swapped for similar inventory in another to facilitate prompt delivery to
customer in distant city)

Transaction lacks commercial substance (risk, timing, and amount of future cash flows will
not significantly change as a result of the transaction).

23. Question: How to determine if a fixed asset exchange is in loss or gain position, and what
journal entry should I make?

Answer:
Recognize LOSS if FMV of asset given is LESS THANCarrying
value of asset given. Key in the following the following journal entry:
[Debit]. Cash (amount received) = xx
[Debit]. Asset New (FMV) = xx
[Debit]. Loss on disposal (plug) = xx
[Credit]. Cash (amount paid) = xx
[Credit]. Asset Old (carrying value) = xx

Recognize GAIN if FMV of asset given is GREATER THANCarrying

value of asset given. Gain recognized only when cash received. Amount
to be recognized = (FMV of asset given Carrying value of asset given)
x percentage. (Note: *Percentage = Cash received / [cash + FMV of
asset received]). In this position, you would make the following journal
entry:
[Debit]. Cash (amount received) = xx
[Debit]. AssetNew (plug) = xx
[Credit]. Gain on disposal (computed amount) = xx
[Credit]. AssetOld (carrying value) = xx

NO GAIN recognized when cash paid or no cash involved. In this case,

you would make the following journal entry:
[Debit]. Asset New (plug) = xx
[Debit]. Accumulated depreciation (balance on old asset) = xx
[Credit]. Cash (amount paid) = xx
[Credit]. Asset Old (original cost) = xx