AFM Chapter 7 Depreciation Merge

Chapter 7
Long-Lived
Nonmonetary
Assets and Their
Amortization
McGraw-Hill/Irwin Copyright © 2011. The McGraw-Hill Companies. All Rights Reserved.

2
Nature of Fixed Assets

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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, are not offered for
sale as part of normal operations and
have material value
2
Nature of Long-Lived Assets
• Benefits obtained from expenditures on

goods or services acquired.
– Expense when benefits are obtained in current
period.
– Capitalize when benefits expected to be
obtained in future periods (i.e., capital asset).
• Similar to a prepaid expense.
• Amortization is process of matching capitalized
costs with revenues obtained from their use.
7-3
Types of Long-Lived Assets
 Tangible asset.
 Asset with physical substance.
 Property, plant, and equipment.
 Also known as fixed assets.
 Intangible asset.
 Intellectual property.
 No physical substance.
 E.g., patent rights, copyrights.
7-4
5
Fixed Asset Criteria 10-1

Is the purchased
item long-lived?
yes no
Have material value? Expense

yes no
Is the asset used in a supplies

productive purpose?
yes no
Tangible? Investment property
yes no
Fixed Assets 5
Intangible Assets
6
Fixed Assets as a Percent of Total 10-1

Assets—Selected Companies
Fixed Assets as a Percent

of Total Assets
Service Firms:
Pembangunan Jaya Ancol Tbk. (Recreation Park) 35.74%
Bayu Buana Tbk. (Travel Agent) 8.65%
Bank Rakyat Indonesia Tbk. (Bank) 1.18%
Manufacturing Firms:
Kimia Farma Tbk. (Pharmaceuticals) 78.67%
Sepatu Bata Tbk. (Shoes Factory) 25.13%
Indofood Sukses Makmur Tbk. (Food and Beverage) 39.97%
Merchandising Firms:
Alfa Retailindo Tbk. 44.07%
Hero Supermarket Tbk. 34.25%
Metro Supermarket Tbk. 22.72%
6
What Should be Capitalized?
 All expenditures necessary to make asset
ready for its intended use.
 E.g., purchase price, sales tax, commissions paid,
legal fees, delivery charges, site preparation.
 Self constructed assets:
 All construction costs (i.e., materials, labor,
overhead).
 Noncash acquisitions:
 E.g., stock for asset, donated asset.
 Record at fair market value of consideration given
or received.
7-7
8
Cost of Acquiring Fixed Assets
LAND
 Purchase price
 Sales taxes
 Permits from government agencies
 Broker’s commissions
 Title fees
 Surveying fees
 Delinquent real estate taxes
 Razing or removing unwanted
buildings, less any salvage
 Grading and leveling
 Paving a public street bordering the
land
9
CostCost
of Acquiring Fixed
of Acquiring Assets
Fixed Assets 10-1
BUILDING
 Architects’ fees
 Engineers’ fees
 Insurance costs incurred during construction
 Interest on money borrowed to finance
construction
 Walkways to and around the building
 Sales taxes
 Repairs (purchase of existing building)
 Reconditioning (purchase of existing
building)
 Modifying for use
 Permits from government agencies
10
CostCost
of Acquiring Fixed
of Acquiring Assets
Fixed Assets 10-1
MACHINERY AND  Modification for use

EQUIPMENT  Testing for use
 Sales taxes  Permits from government
 Freight agencies
 Installation LAND
 Repairs (purchase of used IMPROVEMENT
equipment)
 Trees and shrubs
 Reconditioning (purchase
 Fences
of used equipment)
 Outdoor lighting
 Insurance while in transit
 Paved parking areas
 Assembly
Asset vs. Expense?
 Determination not clear-cut.
 Capitalize:
 Betterments (i.e., improves or extends useful
life).
 Replacement of entire asset.
 Expense:
 Long-lived low-cost items (materiality concept).
 Repairs and maintenance.
 Replacement of component part (e.g., elevator
in a building).
7-11
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Capital
Cost and
Capital Revenue
of and
AcquiringExpenditures
Revenue
Fixed
Expenditures
Assets 10-1
Expenditures that benefit only the

current period are called revenue
expenditures. Expenditures that
improve the asset or extend its useful
life are capital expenditures.
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Capital
Cost and
Capital Revenue
of and
Revenue
Fixed
Expenditures
Assets 10-1
REVENUE CAPITAL
EXPENDITURES EXPENDITURES
Normal and 1) Additions
ordinary repairs 2) Improvements
and maintenance 3) Extraordinary
repairs
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Capital
Cost and
Capital Revenue
of and
Revenue
Fixed
Expenditures
Assets 10-1
Ordinary Maintenance and Repairs
On April 9, the firm paid Rp 300,000
for a tune-up of a delivery truck.
Apr. 9 Repairs and Maintenance Exp. 300 000

Cash 300 000
This is a revenue expenditure
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Capital
Cost and
Capital Revenue
of and
Revenue
Fixed
Expenditures
Assets 10-1
Asset Improvements
On May 4, a Rp 5,500,000 hydraulic lift was
installed on the delivery truck to allow for easier
and quicker loading of heavy cargo.
May 4 Delivery Truck 5 500 000
Cash 5 500 000
This is a capital expenditure
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Capital
Cost and
Capital Revenue
of and
Revenue
Fixed
Expenditures
Assets 10-1
Extraordinary Repairs
The engine of a forklift that is near the end of its
useful life is overhauled at a cost of Rp 4,500,000
which extends its useful life eight years. Work on
the forklift was completed on Oct. 14.
Oct. 14 Accum. Depreciation—Forklift 4 500 000
Cash 4 500 000
This is a capital expenditure

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Capital and
Capital
Cost Revenue
of and
or
Revenue
Revenue
Fixed
Expenditure
Expenditures
Assets 10-1
17
What Should be Capitalized?
 Basket purchase:
 Lump sum purchase of different assets.
 Allocate cost based on FMV of acquired assets.
 IFRS differences:
 Cost model (i.e., similar to GAAP).
 Revaluation model.
 Continually revalue carrying value to fair value.
 Relevance over objectivity.
7-18
Depreciation Expense
 Gradual conversion of capitalized cost
into expense.
 Book value of asset equals the original
cost minus the depreciation
accumulated to date.
 Calculating depreciation.
 GAAP: “systematic and rational” method.
 IFRS: reflect pattern of usage.
7-19
Types of Amortization
Tangible assets:
Land → Not amortized
Plant and equipment → Depreciation expense
Natural resources → Depletion expense
7-20
Types of Amortization
Intangible assets:
Goodwill → Not amortized
Other intangible assets,
(limited life) → Amortization expense
Other intangible assets,
(indefinite life) → Not amortized
Leasehold improvements → Amortization expense
Deferred charges → Amortization expense
Research and
development costs → Not capitalized
7-21
Judgments Required
 Service life of asset.

– Deterioration (i.e., physical process of wearing out).
– Obsolescence (i.e., loss of usefulness because of
change in technology or tastes).
– Service life usually shorter than physical life.
 Residual value at the end of its service life.
 Often an immaterial amount.
 Method of depreciation used to allocate cost
over useful life of asset.
7-22
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Depreciation
Capital
Cost of and
or
Acquiring
Revenue
Revenue
Fixed
Expenditure
Expenditures
Assets 10-2
10-1
Depreciation Methods
 Straight-line method.
 (Original cost - residual value) ÷ Service life.
 Equal expense for all years.
 Can be shown as a rate (e.g., 5 year asset is same
as 20% depreciation rate).
 Accelerated methods.
 Higher expense in early years.
 Declining-balance method.
 Sum of the years’ (or years’ digits) method.
7-24
Declining Balance Method
 Declining-balance rate is % of straight-line
rate (e.g., 200% of 20% equals 40%).
 Depreciation expense.
 Book value x Declining-balance rate.
 Expense continually goes down because book
value is continually decreasing.
7-25
Years Digits Method
 Sum years of useful life (i.e., 1 + 2 + 3 + 4 + etc.).
 Depreciation expense:
 (Original cost - residual value) x Fraction
 Example using 5-year asset:

 Sum of years digits = 1 + 2 + 3 + 4 + 5 = 15.
 Year 1: (Original cost - residual value) x 5/15.
 Year 2: (Original cost - residual value) x 4/15.
 Year 3: (Original cost - residual value) x 3/15, etc.
7-26
Units of Production Method
 Depreciation based on units of service rather
than time (e.g., miles traveled).
 Depreciation rate:
 (Original cost - residual value) ÷ Total service units.
 Rate x Units of service consumed.
7-27
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Straight-Line Method 10-2

The straight-line method provides
for the same amount of
depreciation expense for each year
of the asset’s useful life.
Cost – estimated residual value
Annual depreciation =
Estimated life
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10-2
A depreciable asset cost Rp 24,000,000. Its
estimated residual value is Rp 2,000,000
and its estimated life is 5 years.

Annual depreciation =
Estimated life
Annual depreciation = Rp 24,000,000 – Rp 2,000,000

5 years
Annual depreciation = Rp 4,400,000

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10-2
The straight-line method is
widely used by firms because it
is simple and it provides a
reasonable transfer of cost to
periodic expenses if the asset is
used about the same from
period to period.
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Units-of-Production Method 10-2

The units-of-production method provides

for the same amount of depreciation
expense for each unit produced or each
unit of capacity used by the asset.

Unit depreciation =
Estimated hours, units, etc.
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10-2
A machine with a cost Rp 24,000,000. Its
estimated residual value is Rp 2,000,000 and its
expected to have an estimated life of 10,000
operating hours.
Hourly depreciation =
Estimated hours
Rp 24,000,000 – Rp 2,000,000
Hourly depreciation =
10,000 estimated hours
Hourly depreciation = Rp 2,200 hourly

depreciation 32
34
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10-2
The units-of-production method

is more appropriate than the
straight-line method when the
amount of use of a fixed asset
varies from year to year.
33
34
Double-Declining-Balance Method 10-2

The double-declining-
balance method provides
for a declining periodic
expense over the estimated
useful life of the asset.
34
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10-2
A double-declining balance rate is
determined by doubling the straight-
line rate. A shortcut to determining
the straight-line rate is to divide one
by the number of years (1/5 = .20).
Hence, using the double-declining-
balance method, a five-year life
results in a 40 percent rate (.20 x 2).
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10-2
For the first year, the cost of the asset
is multiplied by 40 percent. After the
first year, the declining book value of
the asset is multiplied 40 percent.
Continuing with the example where
the fixed asset cost Rp 24,000,000
and has an expected residual value of
Rp 2,000,000 a table can be built.
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10-2
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Book Value title style
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End
1 Rp 24,000,000 40% Rp 9,600,000
Rp 24,000,000 x .40
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40
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10-2
1 Rp 24,000,000 40% Rp 9,600,000 Rp9,600,000 Rp14,400,000

2 14,400,000 40% 5,760,000
Rp 14,400,000 x .40
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10-2
1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000

2 14,400,000 40% 5,760,000 15,360,000 8,640,000
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40
10-2
1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000

2 14,400,000 40% 5,760,000 15,360,000 8,640,000
3 8,640,000 40% 3,456,000 18,816,000 5,184,000
40
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10-2
1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000

2 14,400,000 40% 5,760,000 15,360,000 8,640,000
3 8,640,000 40% 3,456,000 18,816,000 5,184,000
4 5,184,000 40% 2,073,600 20,889,600 3,110,040
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10-2
1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000

2 14,400,000 40% 5,760,000 15,360,000 8,640,000
3 8,640,000 40% 3,456,000 18,816,000 5,184,000
4 5,184,000 40% 2,073,600 20,889,600 3,110,040
5 3,110,040 40% 1,110,400 22,000,000 2,000,000
DEPRECIATION STOPS WHEN

BOOK VALUE EQUALS STOP
RESIDUAL VALUE! 42
45
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10-2
1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000

2 14,400,000 40% 5,760,000 15,360,000 8,640,000
3 8,640,000 40% 3,456,000 18,816,000 5,184,000
4 5,184,000 40% 2,073,600 20,889,600 3,110,040
5 3,110,040 – Rp 2,000,000 1,110,400 22,000,000 2,000,000
“Forced” Desired
annual ending book
depreciation value
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Summary of 10-2
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Comparing 10-2
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Depreciation for Govenment Income 10-2

Tax
Indonesia Directorate
General of Tax (DGT) specifies
the depreciation rate for each group
of fixed asset.
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10-2
DGT specifies Six classes of useful
life and depreciation rates for each
class. The two most common classes
are the 4-year class (includes public
transport vehicles and office
equipment from woods) and the 8-
year class (includes most machinery,
automobiles and equipment).
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Use of Depreciation
Capital
Cost
Exhibit of and
5: or
Use Methods
Acquiring
Revenue
Revenue
Fixed
Expenditure
Expenditures
Assets
of Depreciation 10-2
10-1
Methods
7% 3%
2%
Straight-line
Units-of-production
Double-declining-
balance
Other
88%
Source: Accounting Trends & Techniques, 59th ed., American

Institute of Certified Public Accountants, New York, 2005.
28
Accounting for Depreciation
 Changes in estimates (i.e., service life, residual value)?
 Charge off book value over remaining service life.
 Fully depreciated assets?
 Show in financial statements until disposal.
 Partial year acquisition?
 Half year convention commonly used (i.e., record half year’s
depreciation in year of acquisition and disposition).
 Required disclosure?
 Depreciation expense for period, original cost,
accumulated depreciation, method used.
7-49
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Revising Depreciation Estimates 10-2

A machine purchased for Rp 140,000,000 was
originally estimated to have a useful life of five
years and a residual value of Rp 10,000,000.
The asset has been depreciated for two years
using the straight-line method.
Annual Rp140,000,000 – Rp10,000,000
Depreciation (S/L) = 5 years
Annual
= Rp26,000,000 per year
Depreciation (S/L)
50
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10-2
At the end of two years, the asset’s book value
is Rp 88,000,000, determined as follows:
Asset cost Rp 140,000,000

Less accumulated depreciation
(Rp 26,000,000 per year x 2 years) 52,000,000
Book value, end of second year Rp 88,000,000
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10-2
During the third year, the company estimates that
the remaining useful life is eight years (instead of
three) and that the residual value is Rp 8,000,000
(instead of Rp 10,000,000). Depreciation expense
for each of the remaining eight year is determined
as follows:
Book value, end of second year Rp 88,000,000
Less revised estimated residual value 8,000,000
Revised remaining depreciation cost Rp 80,000,000
Revised annual depreciation expense
(Rp80,000,000 ÷ 8 years) Rp 10,000,000 52
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Plant and Equipment:
Disposal
• Recording the sale of depreciable asset:
– Record asset (e.g., cash) received.
– Remove original cost.
– Remove accumulated depreciation.
– Record gain or loss.
• Gain = Cash received > Book value of asset.
• Loss = Cash received < Book value of asset.
• Gain/loss shown in current period income
statement.
7-53
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Discarding Fixed Assets 10-3

A piece of equipment acquired at a cost of
Rp 25,000,000 is fully depreciation. On
February 14, the equipment is discarded.
Feb. 14 Accumulated Depr.—Equipment 25 000 00

Equipment 25 000 00
To write off equipment
discarded.
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10-3
Equipment costing Rp 6,000,000 is depreciated
at an annual straight-line rate of 10%. After the
adjusting entry, Accumulated Depreciation—
Equipment had a Rp 4,750,000 balance. The
equipment was discarded on March 24.
Mar. 24 Depreciation Expense—Equipment 150 000
Accum. Depr.—Equipment 150 000
To record current
Rp 600,000 x 3/12
depreciation on
equipment discarded.
55
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10-3
The discarding of the equipment is then
recorded by the following entry:
Mar. 24 Accum. Depreciation—Equipment 4 900 000

Loss on Disposal of Fixed Assets 1 100 000
Equipment 6 000 000
To write off equipment
discarded.
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Selling Fixed Assets 10-3

Equipment costing Rp 10,000,000 is depreciated at
an annual straight-line rate of 10%. The equipment
is sold for cash on October 12. Accumulated
Depreciation (last adjusted December 31) has a
balance of Rp 7,000,000 and needs to be updated.
Oct. 12 Depreciation Expense—Equipment 750 000
Accum. Depr.—Equipment 750 000
To record current
depreciation on Rp 10,000,000
equipment sold. x ¾ x 10%
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Assumption 1 10-3
The equipment is sold on October
12 for Rp 2,250,000. No gain or
loss.
Oct. 12 Cash 2 250 000
Accum. Depreciation—Equipment 7 750 000
Equipment 10 000 000
Sold equipment at book
value.
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Assumption 2 10-3
The equipment is sold on October 12
for Rp 1,000,000; a loss of Rp
1,250,000.
Oct. 12 Cash 1 000 000
Loss on Disposal of Fixed Assets 1 250 000
Sold equipment at a loss.
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Assumption 3 10-3
The equipment is sold on October 12
for Rp 2,800,000; a gain of Rp
550,000.
Oct. 12 Cash 2 800 000
Gain on Disp. of Fixed Assets 550 000
Sold equipment at a gain.
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Impaired Assets
 Impaired if remaining benefits (i.e., as measured by
sum of future cash flows generated by use of asset)
is less than book value.
 GAAP:
 If entity expects to hold asset, write down to fair value.
 If entity expects to sell asset write down to lower of cost
or fair value less cost of disposal.
 IFRS (i.e., when using cost model):
 Reduce asset to recoverable amount.
 Recoverable amount = higher of fair value (less disposal
cost) or value in use (i.e., present value of future cash
flows). 7-61
Exchange and Trade-Ins
 Similar assets:
 Same general type or performing same
function.
 New asset value is additional amount paid
plus book value of old asset.
 No gain or loss is recorded.
 Dissimilar assets:
 Record asset received at fair value.
 Recognize gain or loss on disposal of old
asset. 7-62
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Exchanging Fixed Assets 10-3

When old equipment is traded for new

equipment, the seller often allows the buyer
a trade-in allowance for the old equipment
traded. The remainder, the boot, is either
paid in cash or recorded as a liability.
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10-3
IMPORTANT!
Gains on exchanges of similar
fixed assets are not recognized
for financial reporting purposes.
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10-3
On June 19, assume that new
equipment being purchased has a list
price of Rp 5,000,000. The dealer
allows a trade-in allowance of Rp
1,100,000 on the old, similar
equipment. The old equipment cost
Rp 4,000,000 and has a book value
of Rp 800,000.
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Two Methods of Determining Cost 10-3

Method One
List price of new equipment Rp 5,000,000
Trade-in allowance Rp 1,100,000
Book value of old equipment 800,000
Unrecognized gain on exchange (300,000)
Cost of new equipment Rp 4,700,000
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10-3
Method Two
Book value of old equipment Rp 800,000
Cash paid at date of exchange 3,900,000
Cost of new equipment Rp 4,700,000
Note that either method provides the same

cost for the new equipment.
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10-3
On June 19, equipment was
exchanged at a gain of Rp 300,000.
June 19 Accum. Depreciation—Equipment 3 200 000

Equipment (new equipment) 4 700 000
Equipment (old equipment) 4 000 000
Cash 3 900 000
To record exchange of
equipment.
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Losses on Exchanges 10-3

For financial reporting purposes, losses are
recognized on exchange of similar fixed
assets if the trade-in allowance is less than
the book value of the old equipment. On
September 7, new equipment with price
Rp. 10.000.000 was acquired by trading in
old equipment with a cost of Rp 7,000,000
and a book value of Rp 2,400,000 and
giving a cash payment of Rp 8,000,000.
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10-3
Click to edit
Cost of old equipment
Master title style
Rp 7,000,000
Accumulated depreciation at date of exchange 4,600,000
Book value at September 7, date of exchange Rp 2,400,000
Trade-in allowance on old equipment 2,000,000
Loss on exchange Rp 400,000
Sept 7 Accum. Depreciation—Equipment 4 600 000

Loss on Disposal of Fixed Assets 400 000
Equipment 7 000 000
Cash 8 000 000
To record exchange of
equipment with loss. 70
74
Group Depreciation
• Time saver over unit (item) depreciation.

• Treats all similar assets as a “pool” or
group.
• No gain/loss on disposal.
– Reduce Accumulated Depreciation for
difference between cost and proceeds
received.
7-71
Depreciation Clarification
• Process of allocation, not valuation (i.e., book
value is not market value).
• Does not represent accumulation of any
tangible thing (is not money).
• Simply amount of original cost that has been
expensed.
• Funding depreciation is a financing
transaction (unrelated to recording
depreciation).
7-72
Natural Resources
 Measure cost same as other assets.

 Exploration costs?
 Full cost method (i.e., capitalize costs of
both successful and unsuccessful efforts).
 Successful efforts method (i.e., only
capitalize costs involved with successful
efforts.
 Both allowed under GAAP.
7-73
Depletion
 Amortizing costs of natural resources.
 Units of production method ordinarily used.
 Depletion rate:
 (Cost of reserve) ÷ Total units in reserve.
 Depletion expense:
 Rate x Units of reserve extracted.
 Accretion.
 Increase in value arising from natural growth.
 Not recognized in accounts until sold.
 But costs incurred are capitalized.
7-74
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Natural Resources 10-4

The process of
transferring the cost of
natural resources to an
expense account is called
depletion.
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Recording Depletion 10-4

A business paid Rp 400,000,000 for

the mining rights to a mineral deposit
estimated at 1,000,000 tons of ore.
The depletion rate is Rp 400 per ton
(Rp 400,000,000/1,000,000 tons).
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10-4
If 90,000 tons are mined during the
year, an adjusting entry is required
at the end of the accounting period.
Adjusting Entry
Dec. 31 Depletion Expense 36 000 000
Accumulated Depletion 36 000 000
Depletion of mineral
deposit.
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Intangible Assets
 Cost of intangible assets.
 Internally developed → expensed as incurred.
 Acquired → capitalized.
• Intangible assets with limited life.
• E.g., patents, copyrights.
• Amortized over useful life (may be shorter than
legal life).
• Amortization should reflect the pattern in which
economic benefits are consumed (use straight-
line if cannot be determined).
7-78
Intangible Assets
• Intangible assets with indefinite lives.
• E.g., renewable broadcast license.
• Considered indefinite if no legal, regulatory,
contractual, competitive or other limiting factors.
• Not amortized, but tested for impairment.
• If impaired, written down to realizable value and
charged against income.
7-79
Intangible Assets
• Goodwill.
• Occurs when one company buys another.
• Created when purchase price exceeds fair value
of net assets.
• Not amortized, but annual impairment test.
• Any write-down is charged against income.
7-80
Intangible Assets
• Leasehold improvements.
 Improvements made to leased property.
 Revert to property owner at end of lease.
 Amortized over the shorter of useful life or length
of lease.
 But if renewal likely, amortize through renewed
period.
• Deferred charges.
 Usually start-up costs in pre-operating period.
 Can expense or capitalize and amortize over a
short period (i.e., one to five years).
7-81
Research & Development
(R&D) Costs
 Costs incurred to develop new knowledge/
products or improve existing goods, processes,
or services.
 GAAP:
 Expense all since future benefits uncertain.
 Follows conservatism and objectivity concepts, but
violates matching concept.
 IFRS:
 Expense in research phase.
 Capitalize development costs if expected to be
recovered from future sales.
7-82
Research & Development
(R&D) Costs
 Software development:
 Costs are expensed until technological feasibility
of product has been established (i.e., detailed
design, working prototype).
 After technological feasibility, capitalize costs up
to point where product is available for release to
customer.
 Amortization based on greater of straight-line
amount or ratio of year’s revenues to total
anticipated revenues.
 Internal use → use commitment to develop as
capitalization point. 7-83
84
Intangible Assets 10-5

Patents, copyrights, trademarks, and
goodwill are long-lived assets that
are useful in the operations of a
business and not held for sale. These
assets are called intangible assets
because they do not exist physically.
84
85
10-5
The exclusive right granted by the
federal government to
manufacturers to produce and sell
goods with one or more unique
features is a patent. These rights
continue in effect for 20 years.
85
86
Journalizing Amortization of a 10-5

Patent
At the beginning of its fiscal year, a business

acquires a patent right for Rp 100,000,000. Its
remaining useful life is estimated at 5 years.
Adjusting Entry
Dec. 31 Amortization Expense—Patents 20 000 000
Patents 20 000 000
Patent amortization
(Rp 100,000,000/5).
86
87
87
10-5
Adjusting Entry
Dec. 31 Amortization Expense—Patents 20 000 000
Patents 20 000 000
Patent amortization
(Rp 100,000,000/5).
Because a patent (and other intangible assets) does not

exist physically, it is acceptable to credit the asset. This
approach is different from physical fixed assets that
require the use of a contra asset account.
87
88
88
Copyright 10-5
The exclusive right granted by the
federal government to publish and
sell a literary, artistic, or musical
composition is a copyright. A
copyright extends for 70 years
beyond the author’s death.
88
89
Trademark 10-5
A trademark is a unique name, term, or
symbol used to identify a business and its
products. Most businesses identify their
trademarks with ® in their advertisements
and on their products. Trademarks can be
registered for 10 years and can be
renewed every 10 year period thereafter.
89
90
Goodwill 10-5
In business, goodwill refers to an
intangible asset of a business that is
created from such favorable factors
as location, product quality,
reputation, and managerial skill.
90
91
10-5
Generally accepted accounting principles

permit goodwill to be recorded in the
accounts only if it is objectively
determined by a transaction.
91
92
Impaired Goodwill 10-5

A loss should be recorded if the business
prospects of the acquired firm (and the acquired
goodwill) become significantly impaired.
Mar. 19 Loss from Impaired Goodwill 50 000 000

Goodwill 50 000 000
Impaired goodwill.
92
93
Analysis of Nonmonetary
Assets
• Average age of depreciable assets.
• (Accumulated depreciation) ÷ (Annual
depreciation expense).
• Asset’s depreciation period.
• (Original cost) ÷ (Annual depreciation expense).
• Annual expenditure for an intangible asset
category.
• (Annual amortization expense) plus (minus)
increase (decrease) in asset’s balance.
7-93
94
10-6
Objective 6
Describe how depreciation
expense is reported in an
income statement, and
prepare a balance sheet
that includes fixed assets
and intangible assets.
94
95
10-6
 The amount of each major class of fixed
assets should be disclosed in the balance
sheet or in notes.
 The fixed assets may be shown at their net
amount.
Office equipment Rp 125,750,000
Less accumulated depreciation 86,300,000
Net book value Rp 39,450,000
95
96
10-6
 The cost of mineral rights or ore deposits is
normally shown as part of the fixed asset
section of the balance sheet. The related
accumulated depletion should also be
disclosed.
 Intangible assets are usually reported (net of
amortization) in the balance sheet in a
separate section immediately following fixed
assets.
96
97
Fixed Assets and Intangible

Assets in the Balance Sheet 10-6
Click to edit Master title style PT ASTRA AGRO LESTARI Tbk
BALANCE SHEET (PARTIAL)
31-Dec-07
Assets
Total Current Assets 1,647,854,000,000
Property,Plant, and Equipment

Cost Accum.Depr Book Value
Land 102,249,000,000 0 102,249,000,000
Road & Bridges 430,410,000,000 162,006,000,000 268,404,000,000
Building, Installations and Machinery 794,147,000,000 217,622,000,000 576,525,000,000
Machinery and Equipment 766,698,000,000 291,510,000,000 475,188,000,000
Vehicles 257,916,000,000 147,864,000,000 110,052,000,000
Office and Housing Equipment 48,010,000,000 37,758,000,000 10,252,000,000
Construction in Progress 212,904,000,000 0 212,904,000,000
2,612,334,000,000 856,760,000,000 1,755,574,000,000
Plantations
Mature Plantations
Cost Accum. Depl. Book Value
Oil Palm 1,207,204,000,000 543,310,000,000 663,894,000,000
Rubber 19,834,000,000 8,492,000,000 11,342,000,000
Cocoa 0 0 0
1,227,038,000,000 551,802,000,000 675,236,000,000
Immature Plantations
Oil Palm 659,536,000,000 0 659,536,000,000
Rubber 7,760,000,000 0 7,760,000,000
667,296,000,000 667,296,000,000
Total Property, Plant and Equipment 2,430,810,000,000
Intagible Assets
97
Goodwill 66,947,000,000
Total Intagible Asset 66,947,000,000
98
Fixed Asset Turnover Ratio 10-6

One measure of the revenue-generating
efficiency of fixed assets is the fixed asset
turnover ratio. It measures the number of
dollars of revenue earned per dollar of fixed
assets and is computed as follows:
Fixed Asset Revenue
Turnover Ratio
=
Average Book Value of
Fixed Assets
98
100
99
Financial Analysis and Interpretation 10-6

For Rimo Department Store
Fixed Asset Revenue
Turnover Ratio
=
Average Book Value of
Fixed Assets
Fixed Asset Turnover Rp 199,246,551,622

= (24,661,628,738 + 33,455,273,668)/2
Ratio
Fixed Asset 6.68
Turnover Ratio
=
Conclusion: For every Rupiahs of fixed assets,
Rimo earns Rp6.68 of revenue. 99
101

AFM Chapter 7 Depreciation Merge

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Chapter 7

McGraw-Hill/Irwin Copyright © 2011. The McGraw-Hill Companies. All Rights Reserved.

Nature of Fixed Assets

Fixed assets are long-term or

• Benefits obtained from expenditures on

Fixed Asset Criteria 10-1

Have material value? Expense

Is the asset used in a supplies

Fixed Assets as a Percent of Total 10-1

Fixed Assets as a Percent

Cost of Acquiring Fixed Assets

MACHINERY AND  Modification for use

Expenditures that benefit only the

Apr. 9 Repairs and Maintenance Exp. 300 000

This is a revenue expenditure

This is a capital expenditure

This is a capital expenditure

 Service life of asset.

 Example using 5-year asset:

Straight-Line Method 10-2

Cost – estimated residual value

Annual depreciation = Rp 24,000,000 – Rp 2,000,000

Annual depreciation = Rp 4,400,000

Units-of-Production Method 10-2

The units-of-production method provides

Cost – estimated residual value

Hourly depreciation = Rp 2,200 hourly

The units-of-production method

Double-Declining-Balance Method 10-2

1 Rp 24,000,000 40% Rp 9,600,000

1 Rp 24,000,000 40% Rp 9,600,000 Rp9,600,000 Rp14,400,000

1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000

1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000

3 8,640,000 40% 3,456,000 18,816,000 5,184,000

1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000

1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000

DEPRECIATION STOPS WHEN

1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000

Depreciation for Govenment Income 10-2

Source: Accounting Trends & Techniques, 59th ed., American

Revising Depreciation Estimates 10-2

Asset cost Rp 140,000,000

Discarding Fixed Assets 10-3

Feb. 14 Accumulated Depr.—Equipment 25 000 00

Mar. 24 Accum. Depreciation—Equipment 4 900 000

Selling Fixed Assets 10-3

Exchanging Fixed Assets 10-3

When old equipment is traded for new

Two Methods of Determining Cost 10-3

Note that either method provides the same

June 19 Accum. Depreciation—Equipment 3 200 000

Losses on Exchanges 10-3

Sept 7 Accum. Depreciation—Equipment 4 600 000

• Time saver over unit (item) depreciation.

 Measure cost same as other assets.

Natural Resources 10-4

Recording Depletion 10-4

A business paid Rp 400,000,000 for

Intangible Assets 10-5

Journalizing Amortization of a 10-5

At the beginning of its fiscal year, a business

Because a patent (and other intangible assets) does not

Generally accepted accounting principles

Impaired Goodwill 10-5