war22ech10fixed assets and intangible assets revisi
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Adeng Pustikaningsih, M.Si.
Dosen Jurusan Pendidikan Akuntansi
Fakultas Ekonomi
Universitas Negeri Yogyakarta
CP: 08 222 180 1695
Email : adengpustikaningsih@uny.ac.id
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Fixed Assets and
Intangible Assets
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After studying this chapter, you should
be able to:
1. Define, classify, and account for the
cost of fixed assets.
2. Compute depreciation, using the
following methods: straight-line
method, units-of-production method,
and double-declining-balance
method.
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After studying this chapter, you should
be able to:
3. Journalize entries for the disposal of
fixed assets.
4. Compute depletion and journalize the
entry for depletion.
5. Describe the accounting for
intangible assets, such as patents,
copyrights, and goodwill.
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After studying this chapter, you should
be able to:
6. Describe how depreciation expense is
reported in an income statement, and
prepare a balance sheet that includes
fixed assets and intangible assets.
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Objective 1
10-1
Define, classify,
and account for the
cost of fixed assets.
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Nature of Fixed Assets
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10-1
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 and are not offered for
sale as part of normal operations.
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Fixed Assets as a Percent
of Total Assets—Selected
Companies
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10-1
Fixed Assets as a Percent
of Total Assets
Service Firms:
Pembangunan Jaya Ancol Tbk. (Recreation Park)
Bayu Buana Tbk. (Travel Agent)
Bank Rakyat Indonesia Tbk. (Bank)
35.74%
8.65%
1.18%
Manufacturing Firms:
Kimia Farma Tbk. (Pharmaceuticals)
Sepatu Bata Tbk. (Shoes Factory)
Indofood Sukses Makmur Tbk. (Food and Beverage)
78.67%
25.13%
39.97%
Merchandising Firms:
Alfa Retailindo Tbk.
Hero Supermarket Tbk.
Metro Supermarket Tbk.
44.07%
34.25%
22.72%
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Classifying Costs
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10-1
Is the purchased
item long-lived?
yes
no
Is the asset used in a
productive purpose?
yes
Fixed Assets
Expense
no
Investment property
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Cost of Acquiring Fixed Assets
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10-1
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
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Cost of Acquiring Fixed Assets
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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
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Cost of Acquiring Fixed Assets
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MACHINERY AND
EQUIPMENT
Sales taxes
Freight
Installation
Repairs (purchase of used
equipment)
Reconditioning (purchase
of used equipment)
Insurance while in transit
Assembly
10-1
Modification for use
Testing for use
Permits from government
agencies
LAND
IMPROVEMENT
Trees and shrubs
Fences
Outdoor lighting
Paved parking areas
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10-1
Cost of Acquiring Fixed Assets Excludes:
Vandalism
Mistakes in installation
Uninsured theft
Damage during unpacking
and installing
Fines for not obtaining proper
permits from government
agencies
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Capital and Revenue Expenditures
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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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REVENUE
EXPENDITURES
CAPITAL
EXPENDITURES
Normal and
ordinary repairs
and maintenance
1) Additions
2) Improvements
3) Extraordinary
repairs
10-1
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Ordinary Maintenance and Repairs
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10-1
On April 9, the firm paid Rp 300,000
for a tune-up of a delivery truck.
Apr. 9 Repairs and Maintenance Exp.
Cash
300 000
300 000
This is a revenue expenditure
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Asset Improvements
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10-1
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
Cash
5 500 000
5 500 000
This is a capital expenditure
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Extraordinary Repairs
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10-1
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
Cash
4 500 000
4 500 000
This is a capital expenditure
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Capital or Revenue Expenditure
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10-1
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10-1
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Example Exercise 10-1
On June 18 GTS Co. paid Rp 1,200,000 to upgrade a
hydraulic lift and Rp 45,000 for an oil change for one
of its delivery trucks. Journalize the entries for the
hydraulic lift upgrade and oil change expenditures.
Follow My Example 10-1
June 18 Delivery Truck
1,200,000
Cash
1,200,000
18 Repairs and Maintenance Exp. 45,000
Cash
45,000
For Practice: PE 10-1A, PE 10-1B
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Leasing Fixed Assets
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10-1
A capital lease is accounted
for as if the lessee has, in fact,
purchased the asset. The
asset is then amortized over
the life of the capital lease.
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Leasing Fixed Assets
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10-1
A lease that is not
classified as a capital
lease for accounting
purposes is classified as
an operating lease (an
operating leases is treated
as an expense).
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Objective 2
10-2
Compute depreciation using the
following methods: straight-line
method, units-of-production method,
double-declining-balance method.
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Accounting for Depreciation
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10-2
Over time, fixed assets such as
equipment, buildings, and land
improvements lose their ability to
provide services. The periodic
transfer of the cost of fixed assets to
expense is called depreciation.
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Physical and Functional
Depreciation
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10-2
Physical depreciation occurs from wear
and tear while in use and from the
action of the weather Functional
depreciation occurs when a fixed asset
is no longer able to provide services at
the level for which it was intended.
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Factors in Computing Depreciation
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10-2
The three factors in determining the
amount of depreciation expense to be
recognized each period are: (a) the fixed
asset’s initial cost, (b) its expected useful
life, and (c) its estimated value at the end
of the useful life.
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Residual Value
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10-2
The fixed asset’s estimated value at
the end of its useful life is called the
residual value, scrap value, salvage
value, or trade-in value. A fixed
asset’s residual value and its expected
useful life must be estimated at the
time the asset is placed in service.
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10-2
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Exhibit 5: Use of Depreciation
Methods
7%
10-2
3%
2%
Straight-line
Units-of-production
Double-decliningbalance
Other
88%
Source: Accounting Trends & Techniques, 59th ed., American
Institute of Certified Public Accountants, New York, 2005.
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Straight-Line Method
10-2
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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
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A depreciable asset cost Rp 24,000,000. Its
estimated residual value is Rp 2,000,000
and its estimated life is 5 years.
Cost – estimated residual value
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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10-2
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Example Exercise 10-2
Equipment that was acquired at the beginning of the year
at a cost of Rp 125,000,000 has an estimated residual
value of Rp 5,000,000 and an estimated useful life of 10
years. Determine the (a) depreciable cost, (b) straightline rate, and (c) annual straight-line depreciation.
Follow My Example 10-2
(a) Rp 120,000,000 (Rp 125,000,000 – Rp 5,000,000)
(b) 10% = (1/10)
(c) Rp 12,000,000 (Rp 120,000,000 x 10%) or (Rp 120,000,000 ÷ 10 years)
For Practice: PE 10-2A, PE 10-2B
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Units-of-Production Method
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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.
Cost – estimated residual value
Unit depreciation =
Estimated hours, units, etc.
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10-2
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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.
Cost – estimated residual value
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
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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.
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10-2
Example Exercise 10-3
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Equipment acquired at a cost of Rp 180,000,000 has an
estimated residual value of Rp 10,000,000 an estimated
useful life of 40,000 hours, and was operated 3,600
hours during the year. Determine the (a) depreciable
cost, (b) depreciation rate, and (c) the units-ofproduction depreciation for the year.
Follow My Example 10-3
(a) Rp 170,000,000 (Rp 180,000,000 – Rp 10,000,000)
(b) Rp 4,250 per hour (Rp 170,000,000/40,000 hours)
(c) Rp 15,300 (3,600 hours x Rp 4,250)
For Practice: PE 10-3A, PE 10-3B
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Double-Declining-Balance Method
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10-2
The double-decliningbalance method provides
for a declining periodic
expense over the estimated
useful life of the asset.
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10-2
A double-declining balance rate is
determined by doubling the straightline 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-decliningbalance 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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Book Value
Beginning
Year of Year
Rate
10-2
Annual
Deprec. Book Value
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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Book Value
Beginning
Year of Year
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
1 Rp 24,000,000
40% Rp 9,600,000
2
40%
14,400,000
10-2
Rp9,600,000
Rp14,400,000
5,760,000
Rp 14,400,000 x .40
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Book Value
Beginning
Year of Year
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
1 Rp 24,000,000
40% Rp 9,600,000 Rp 9,600,000
2
40%
14,400,000
10-2
5,760,000
15,360,000
Rp 14,400,000
8,640,000
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Book Value
Beginning
Year of Year
Rate
10-2
Annual
Deprec. Book Value
Deprec. Year-End Year-End
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
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Book Value
Beginning
Year of Year
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
1 Rp 24,000,000
40% Rp 9,600,000 Rp 9,600,000
2
3
4
40%
40%
40%
14,400,000
8,640,000
5,184,000
10-2
5,760,000
3,456,000
2,073,600
15,360,000
18,816,000
20,889,600
Rp 14,400,000
8,640,000
5,184,000
3,110,040
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Book Value
Beginning
Year of Year
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
1 Rp 24,000,000
40% Rp 9,600,000 Rp 9,600,000
2
3
4
5
40%
40%
40%
40%
14,400,000
8,640,000
5,184,000
3,110,040
10-2
5,760,000
3,456,000
2,073,600
1,110,400
15,360,000
18,816,000
20,889,600
22,000,000
Rp 14,400,000
8,640,000
5,184,000
3,110,040
2,000,000
DEPRECIATION STOPS WHEN
STOP
BOOK VALUE EQUALS
RESIDUAL VALUE!
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Book Value
Beginning
Year of Year
1 Rp 24,000,000
2
3
4
5
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
40% Rp 9,600,000 Rp 9,600,000
14,400,000
40%
8,640,000
40%
5,184,000
40%
3,110,040 – Rp 2,000,000
10-2
5,760,000
3,456,000
2,073,600
1,110,400
―Forced‖
annual
depreciation
15,360,000
18,816,000
20,889,600
22,000,000
Rp 14,400,000
8,640,000
5,184,000
3,110,040
2,000,000
Desired
ending book
value
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10-2
Example Exercise 10-4
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Equipment that was acquired at the beginning of the year
at a cost of Rp 125,000,000 has an estimated residual
value of Rp 5,000,000 and an estimated useful life of 10
years. Determine the (a) depreciable cost, (b) doubledeclining-balance rate, and (c) double-declining balance
depreciation for the first year.
Follow My Example 10-4
(a) Rp 120,000,000 (Rp 125,000,000 – Rp 5,000,000)
(b) 20% [(1/10) x2]
(c) Rp 25,000,000 (Rp 125,000,000 x 20%)
For Practice: PE 10-4A, PE 10-4B
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Summary of
Depreciation Methods
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10-2
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Comparing
Depreciation Methods
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10-2
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Depreciation for Govenment Income
Tax
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10-2
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 8year class (includes most machinery,
automobiles and equipment).
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Revising Depreciation Estimates
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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)
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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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During the third year, the company estimates that
10-2
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
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10-2
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Example Exercise 10-5
A warehouse with a cost of Rp 500,000,000 has an
estimated residual value of Rp 120,000,000 an estimated
useful life of 40 years, and is depreciated by the
straight-line method. (a) Determine the amount of
annual depreciation. (b) Determine the book value at
the end of the 20th year of use. (c) If at the start of the
21st year it is estimated that the remaining life is 25
years and that the residual value is Rp 150,000,000
determine the depreciation expense for each of the
remaining 25 years.
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10-2
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Follow My Example 10-5
a. Rp 9,500,000 [(Rp 500,000,000 – Rp
120,000,000)/40]
b. Rp 310,000,000 [Rp 500,000,000 – (Rp
9,500,000 x 20)]
c. Rp 6,400,000 [Rp 310,000,000 – Rp
150,000,000)/25]
For Practice: PE 10-5A, PE 10-5B
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Objective 3
10-3
Journalize entries
for the disposal of
fixed assets.
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Discarding Fixed Assets
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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
Equipment
To write off equipment
25 000 00
25 000 00
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
Accum. Depr.—Equipment
To record current
depreciation on
equipment discarded.
150 000
150 000
Rp 600,000 x 3/12
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10-3
The discarding of the equipment is then
recorded by the following entry:
Mar. 24 Accum. Depreciation—Equipment
Loss on Disposal of Fixed Assets
Equipment
To write off equipment
discarded.
4 900 000
1 100 000
6 000 000
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Selling Fixed Assets
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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
Accum. Depr.—Equipment
To record current
depreciation on
equipment sold.
750 000
750 000
Rp 10,000,000
x ¾ x 10%
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Assumption 1
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10-3
The equipment is sold on October
12 for Rp 2,250,000. No gain or
loss.
Oct. 12 Cash
Accum. Depreciation—Equipment
Equipment
Sold equipment at book
value.
2 250 000
7 750 000
10 000 000
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Assumption 2
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10-3
The equipment is sold on October 12
for Rp 1,000,000; a loss of Rp
1,250,000.
Oct. 12 Cash
Accum. Depreciation—Equipment
Loss on Disposal of Fixed Assets
Equipment
Sold equipment at a loss.
1 000 000
7 750 000
1 250 000
10 000 000
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Assumption 3
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10-3
The equipment is sold on October 12
for Rp 2,800,000; a gain of Rp
550,000.
Oct. 12 Cash
Accum. Depreciation—Equipment
Equipment
Gain on Disp. of Fixed Assets
Sold equipment at a gain.
2 800 000
7 750 000
10 000 000
550 000
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10-3
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Example Exercise 10-6
Equipment was acquired at the beginning of year at a
cost of Rp 91,000,000. The equipment was depreciated
using the straight-line method based upon an estimated
useful life of 9 years and an estimated residual value of
Rp 10,000,000.
a. What was the depreciation for the first year?
b. Assuming the equipment was sold at the end of the
second year for Rp 78,000,000 determine the gain or
loss on sale of the equipment.
c. Journalize the entry to record the sale.
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10-3
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Follow My Example 10-6
a.
Rp 9,000,000 [(Rp 91,000,000 – Rp 10,000,000)/9]
b.
Rp 5,000,000 gain; Rp 78,000,000 – [Rp 91,000,000 – (Rp
9,000,000 x 2)]
c.
Cash
Accum. Depreciation—Equipment
Equipment
Gain on Disposal of Fixed Assets
For Practice: PE 10-6A, PE 10-6B
78,000,000
18,000,000
91,000,000
5,000,000
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Exchanging Fixed Assets
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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
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10-3
Method One
List price of new equipment
Trade-in allowance
Book value of old equipment
Unrecognized gain on exchange
Cost of new equipment
Rp 5,000,000
Rp 1,100,000
800,000
(300,000)
Rp 4,700,000
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10-3
Method Two
Book value of old equipment
Cash paid at date of exchange
Cost of new equipment
Rp 800,000
3,900,000
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
Equipment (new equipment)
Equipment (old equipment)
Cash
To record exchange of
equipment.
3 200 000
4 700 000
4 000 000
3 900 000
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Losses on Exchanges
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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 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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Cost of old equipment
Rp 7,000,000
Accumulated depreciation at date of exchange
Book value at September 7, date of exchange
Trade-in allowance on old equipment
Loss on exchange
Sept 7
Accum. Depreciation—Equipment
Equipment
Loss on Disposal of Fixed Assets
Equipment
Cash
To record exchange of
equipment with loss.
10-3
4,600,000
Rp 2,400,000
2,000,000
Rp 400,000
4 600 000
10 000 000
400 000
7 000 000
8 000 000
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10-3
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Example Exercise 10-7
On the first day of the fiscal year, a delivery truck with a
list price of Rp 75,000,000 was acquired in exchange for
an old delivery truck and Rp 63,000,000 cash. The old
truck had a cost of Rp 50,000,000 and accumulated
depreciation of Rp 39,500,000.
a. Determine the cost of the new truck for financial
reporting purposes.
b. Journalize the entry to record the exchange.
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10-3
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Follow My Example 10-7
a.
Rp 73,500,000
List price of new truck
Trade-in allowance on old truck
($75,000 – $63,000)
Book value of old truck
($50,000 – $39,500)
Unrecognized gain on exchange
Cost of new truck
Rp 75,000,000
Rp 12,000,000
10,500,000
(1,500,000)
Rp 73,500,000
or
(Continued)
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10-3
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Follow My Example 10-7
b.
Book value of old truck (Rp 50,000,000 –
Rp 39,500,000)
Plus cash paid at date of exchange
Cost of new truck
Rp 10,500,000
63,000,000
Rp 73,500,000
Truck (new)
Accumulated Depreciation—
Truck (old)
Truck (old)
Cash
50,000,000
63,000,000
73,500,000
39,500,000
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For Practice: PE 10-7A, PE 10-7B
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Objective 4
10-4
Compute depletion
and journalize the
entry for depletion.
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Natural Resources
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10-4
The process of
transferring the cost of
natural resources to an
expense account is called
depletion.
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Recording Depletion
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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
Accumulated Depletion
Depletion of mineral
deposit.
36 000 000
36 000 000
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10-4
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Example Exercise 10-8
Earth’s Treasures Mining Co. acquired mineral rights for
Rp 45,000,000,000. The mineral deposit is estimated at
50,000,000 tons. During the current year, 12,600,000
tons were mined and sold.
a. Determine the depletion rate.
b. Determine the amount of depletion expense for the
current year.
c. Journalize the adjusting entry on December 31 to
recognize the depletion expense.
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10-4
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Follow My Example 10-8
a. Rp 900 per ton = Rp 45,000,000,000/50,000,000 tons
b. Rp11,340,000,000 = (12,600,000 tons x Rp 900 per ton)
c.
Dec. 31
Depletion Expense
Accumulated Depletion
11,340,000,000
11,340,000,000
Depletion of mineral
deposit.
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For Practice: PE 10-8A, PE 10-8B
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Objective 5
10-5
Describe the accounting
for intangible assets,
such patents, copyrights,
and goodwill.
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Intangible Assets
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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.
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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.
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Journalizing Amortization of a
Patent
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10-5
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
Patents
Patent amortization
(Rp 100,000,000/5).
20 000 000
20 000 000
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10-5
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Adjusting Entry
Dec. 31 Amortization Expense—Patents
Patents
Patent amortization
(Rp 100,000,000/5).
20 000 000
20 000 000
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.
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Copyright
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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.
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Trademark
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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.
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Goodwill
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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.
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10-5
Generally accepted accounting principles
permit goodwill to be recorded in the
accounts only if it is objectively
determined by a transaction.
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Impaired Goodwill
10-5
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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
Goodwill
Impaired goodwill.
50 000 000
50 000 000
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10-5
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Example Exercise 10-9
On December 31 it was estimated that goodwill of Rp
40,000,000 was impaired. In addition, a patent with an
estimated useful economic life of 12 years was acquired
for Rp 484,000,000 on July 1.
a. Journalize the adjusting entry on December 31,
for the impaired goodwill.
b. Journalize the adjusting entry on December 31
for the amortization of the patent rights.
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10-5
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Follow My Example 10-9
a. Dec. 31 Loss from Impaired Goodwill 40,000,000
Goodwill
40,000,000
Impaired goodwill.
b. Dec. 31 Amortization Expense—Patents 3,500,000
Patents
3,500,000
Amortized patent rights
[(Rp 84,000,000/12) x (6/12)].
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For Practice: PE 10-9A, PE 10-9B
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Objective 6
Describe how depreciation
expense is reported in an
income statement, and
prepare a balance sheet
that includes fixed assets
and intangible assets.
10-6
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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
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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.
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Fixed Assets and Intangible
Assets in the Balance Sheet
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10-6
PT ASTRA AGRO LESTARI Tbk
BALANCE SHEET (PARTIAL)
31-Dec-07
Assets
Total Current Assets
1,647,854,000,000
Property,Plant, and Equipment
Land
Road & Bridges
Building, Installations and Machinery
Machinery and Equipment
Vehicles
Office and Housing Equipment
Construction in Progress
Cost
102,249,000,000
430,410,000,000
794,147,000,000
766,698,000,000
257,916,000,000
48,010,000,000
212,904,000,000
2,612,334,000,000
Accum.Depr
0
162,006,000,000
217,622,000,000
291,510,000,000
147,864,000,000
37,758,000,000
0
856,760,000,000
Book Value
102,249,000,000
268,404,000,000
576,525,000,000
475,188,000,000
110,052,000,000
10,252,000,000
212,904,000,000
Cost
1,207,204,000,000
19,834,000,000
0
1,227,038,000,000
Accum. Depl.
543,310,000,000
8,492,000,000
0
551,802,000,000
Book Value
663,894,000,000
11,342,000,000
0
659,536,000,000
7,760,000,000
667,296,000,000
0
0
659,536,000,000
7,760,000,000
1,755,574,000,000
Plantations
Mature Plantations
Oil Palm
Rubber
Cocoa
Immature Plantations
Oil Palm
Rubber
675,236,000,000
667,296,000,000
Total Property, Plant and Equipment
Intagible Assets
Goodwill
Total Intagible Asset
2,430,810,000,000
66,947,000,000
100
66,947,000,000
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Fixed Asset Turnover Ratio
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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
Turnover Ratio
=
Revenue
Average Book Value of
Fixed Assets
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Financial Analysis and Interpretation
10-6
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For Rimo Department Store
Revenue
Fixed Asset
=
Turnover Ratio
Average Book Value of
Fixed Assets
Fixed Asset Turnover
=
Ratio
Fixed Asset
=
Turnover Ratio
Rp 199,246,551,622
(24,661,628,738 + 33,455,273,668)/2
6.68
Conclusion: For every Rupiahs of fixed assets,
Rimo earns Rp6.68 of revenue.
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Adeng Pustikaningsih, M.Si.
Dosen Jurusan Pendidikan Akuntansi
Fakultas Ekonomi
Universitas Negeri Yogyakarta
CP: 08 222 180 1695
Email : adengpustikaningsih@uny.ac.id
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Fixed Assets and
Intangible Assets
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After studying this chapter, you should
be able to:
1. Define, classify, and account for the
cost of fixed assets.
2. Compute depreciation, using the
following methods: straight-line
method, units-of-production method,
and double-declining-balance
method.
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After studying this chapter, you should
be able to:
3. Journalize entries for the disposal of
fixed assets.
4. Compute depletion and journalize the
entry for depletion.
5. Describe the accounting for
intangible assets, such as patents,
copyrights, and goodwill.
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After studying this chapter, you should
be able to:
6. Describe how depreciation expense is
reported in an income statement, and
prepare a balance sheet that includes
fixed assets and intangible assets.
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6
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Objective 1
10-1
Define, classify,
and account for the
cost of fixed assets.
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Nature of Fixed Assets
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10-1
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 and are not offered for
sale as part of normal operations.
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Fixed Assets as a Percent
of Total Assets—Selected
Companies
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10-1
Fixed Assets as a Percent
of Total Assets
Service Firms:
Pembangunan Jaya Ancol Tbk. (Recreation Park)
Bayu Buana Tbk. (Travel Agent)
Bank Rakyat Indonesia Tbk. (Bank)
35.74%
8.65%
1.18%
Manufacturing Firms:
Kimia Farma Tbk. (Pharmaceuticals)
Sepatu Bata Tbk. (Shoes Factory)
Indofood Sukses Makmur Tbk. (Food and Beverage)
78.67%
25.13%
39.97%
Merchandising Firms:
Alfa Retailindo Tbk.
Hero Supermarket Tbk.
Metro Supermarket Tbk.
44.07%
34.25%
22.72%
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Classifying Costs
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10-1
Is the purchased
item long-lived?
yes
no
Is the asset used in a
productive purpose?
yes
Fixed Assets
Expense
no
Investment property
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Cost of Acquiring Fixed Assets
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10-1
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
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Cost of Acquiring Fixed Assets
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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
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Cost of Acquiring Fixed Assets
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MACHINERY AND
EQUIPMENT
Sales taxes
Freight
Installation
Repairs (purchase of used
equipment)
Reconditioning (purchase
of used equipment)
Insurance while in transit
Assembly
10-1
Modification for use
Testing for use
Permits from government
agencies
LAND
IMPROVEMENT
Trees and shrubs
Fences
Outdoor lighting
Paved parking areas
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10-1
Cost of Acquiring Fixed Assets Excludes:
Vandalism
Mistakes in installation
Uninsured theft
Damage during unpacking
and installing
Fines for not obtaining proper
permits from government
agencies
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Capital and Revenue Expenditures
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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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REVENUE
EXPENDITURES
CAPITAL
EXPENDITURES
Normal and
ordinary repairs
and maintenance
1) Additions
2) Improvements
3) Extraordinary
repairs
10-1
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Ordinary Maintenance and Repairs
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10-1
On April 9, the firm paid Rp 300,000
for a tune-up of a delivery truck.
Apr. 9 Repairs and Maintenance Exp.
Cash
300 000
300 000
This is a revenue expenditure
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Asset Improvements
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10-1
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
Cash
5 500 000
5 500 000
This is a capital expenditure
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Extraordinary Repairs
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10-1
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
Cash
4 500 000
4 500 000
This is a capital expenditure
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Capital or Revenue Expenditure
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10-1
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10-1
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Example Exercise 10-1
On June 18 GTS Co. paid Rp 1,200,000 to upgrade a
hydraulic lift and Rp 45,000 for an oil change for one
of its delivery trucks. Journalize the entries for the
hydraulic lift upgrade and oil change expenditures.
Follow My Example 10-1
June 18 Delivery Truck
1,200,000
Cash
1,200,000
18 Repairs and Maintenance Exp. 45,000
Cash
45,000
For Practice: PE 10-1A, PE 10-1B
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Leasing Fixed Assets
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10-1
A capital lease is accounted
for as if the lessee has, in fact,
purchased the asset. The
asset is then amortized over
the life of the capital lease.
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Leasing Fixed Assets
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10-1
A lease that is not
classified as a capital
lease for accounting
purposes is classified as
an operating lease (an
operating leases is treated
as an expense).
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Objective 2
10-2
Compute depreciation using the
following methods: straight-line
method, units-of-production method,
double-declining-balance method.
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Accounting for Depreciation
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10-2
Over time, fixed assets such as
equipment, buildings, and land
improvements lose their ability to
provide services. The periodic
transfer of the cost of fixed assets to
expense is called depreciation.
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Physical and Functional
Depreciation
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10-2
Physical depreciation occurs from wear
and tear while in use and from the
action of the weather Functional
depreciation occurs when a fixed asset
is no longer able to provide services at
the level for which it was intended.
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Factors in Computing Depreciation
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10-2
The three factors in determining the
amount of depreciation expense to be
recognized each period are: (a) the fixed
asset’s initial cost, (b) its expected useful
life, and (c) its estimated value at the end
of the useful life.
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Residual Value
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10-2
The fixed asset’s estimated value at
the end of its useful life is called the
residual value, scrap value, salvage
value, or trade-in value. A fixed
asset’s residual value and its expected
useful life must be estimated at the
time the asset is placed in service.
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10-2
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Exhibit 5: Use of Depreciation
Methods
7%
10-2
3%
2%
Straight-line
Units-of-production
Double-decliningbalance
Other
88%
Source: Accounting Trends & Techniques, 59th ed., American
Institute of Certified Public Accountants, New York, 2005.
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Straight-Line Method
10-2
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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
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A depreciable asset cost Rp 24,000,000. Its
estimated residual value is Rp 2,000,000
and its estimated life is 5 years.
Cost – estimated residual value
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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10-2
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Example Exercise 10-2
Equipment that was acquired at the beginning of the year
at a cost of Rp 125,000,000 has an estimated residual
value of Rp 5,000,000 and an estimated useful life of 10
years. Determine the (a) depreciable cost, (b) straightline rate, and (c) annual straight-line depreciation.
Follow My Example 10-2
(a) Rp 120,000,000 (Rp 125,000,000 – Rp 5,000,000)
(b) 10% = (1/10)
(c) Rp 12,000,000 (Rp 120,000,000 x 10%) or (Rp 120,000,000 ÷ 10 years)
For Practice: PE 10-2A, PE 10-2B
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Units-of-Production Method
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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.
Cost – estimated residual value
Unit depreciation =
Estimated hours, units, etc.
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10-2
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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.
Cost – estimated residual value
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
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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.
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10-2
Example Exercise 10-3
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Equipment acquired at a cost of Rp 180,000,000 has an
estimated residual value of Rp 10,000,000 an estimated
useful life of 40,000 hours, and was operated 3,600
hours during the year. Determine the (a) depreciable
cost, (b) depreciation rate, and (c) the units-ofproduction depreciation for the year.
Follow My Example 10-3
(a) Rp 170,000,000 (Rp 180,000,000 – Rp 10,000,000)
(b) Rp 4,250 per hour (Rp 170,000,000/40,000 hours)
(c) Rp 15,300 (3,600 hours x Rp 4,250)
For Practice: PE 10-3A, PE 10-3B
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Double-Declining-Balance Method
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10-2
The double-decliningbalance method provides
for a declining periodic
expense over the estimated
useful life of the asset.
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10-2
A double-declining balance rate is
determined by doubling the straightline 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-decliningbalance 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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Book Value
Beginning
Year of Year
Rate
10-2
Annual
Deprec. Book Value
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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Book Value
Beginning
Year of Year
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
1 Rp 24,000,000
40% Rp 9,600,000
2
40%
14,400,000
10-2
Rp9,600,000
Rp14,400,000
5,760,000
Rp 14,400,000 x .40
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Book Value
Beginning
Year of Year
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
1 Rp 24,000,000
40% Rp 9,600,000 Rp 9,600,000
2
40%
14,400,000
10-2
5,760,000
15,360,000
Rp 14,400,000
8,640,000
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Book Value
Beginning
Year of Year
Rate
10-2
Annual
Deprec. Book Value
Deprec. Year-End Year-End
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
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Book Value
Beginning
Year of Year
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
1 Rp 24,000,000
40% Rp 9,600,000 Rp 9,600,000
2
3
4
40%
40%
40%
14,400,000
8,640,000
5,184,000
10-2
5,760,000
3,456,000
2,073,600
15,360,000
18,816,000
20,889,600
Rp 14,400,000
8,640,000
5,184,000
3,110,040
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Book Value
Beginning
Year of Year
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
1 Rp 24,000,000
40% Rp 9,600,000 Rp 9,600,000
2
3
4
5
40%
40%
40%
40%
14,400,000
8,640,000
5,184,000
3,110,040
10-2
5,760,000
3,456,000
2,073,600
1,110,400
15,360,000
18,816,000
20,889,600
22,000,000
Rp 14,400,000
8,640,000
5,184,000
3,110,040
2,000,000
DEPRECIATION STOPS WHEN
STOP
BOOK VALUE EQUALS
RESIDUAL VALUE!
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Book Value
Beginning
Year of Year
1 Rp 24,000,000
2
3
4
5
Rate
Annual
Deprec. Book Value
Deprec. Year-End Year-End
40% Rp 9,600,000 Rp 9,600,000
14,400,000
40%
8,640,000
40%
5,184,000
40%
3,110,040 – Rp 2,000,000
10-2
5,760,000
3,456,000
2,073,600
1,110,400
―Forced‖
annual
depreciation
15,360,000
18,816,000
20,889,600
22,000,000
Rp 14,400,000
8,640,000
5,184,000
3,110,040
2,000,000
Desired
ending book
value
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10-2
Example Exercise 10-4
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Equipment that was acquired at the beginning of the year
at a cost of Rp 125,000,000 has an estimated residual
value of Rp 5,000,000 and an estimated useful life of 10
years. Determine the (a) depreciable cost, (b) doubledeclining-balance rate, and (c) double-declining balance
depreciation for the first year.
Follow My Example 10-4
(a) Rp 120,000,000 (Rp 125,000,000 – Rp 5,000,000)
(b) 20% [(1/10) x2]
(c) Rp 25,000,000 (Rp 125,000,000 x 20%)
For Practice: PE 10-4A, PE 10-4B
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Summary of
Depreciation Methods
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10-2
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Comparing
Depreciation Methods
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10-2
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Depreciation for Govenment Income
Tax
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10-2
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 8year class (includes most machinery,
automobiles and equipment).
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Revising Depreciation Estimates
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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)
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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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During the third year, the company estimates that
10-2
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
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10-2
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Example Exercise 10-5
A warehouse with a cost of Rp 500,000,000 has an
estimated residual value of Rp 120,000,000 an estimated
useful life of 40 years, and is depreciated by the
straight-line method. (a) Determine the amount of
annual depreciation. (b) Determine the book value at
the end of the 20th year of use. (c) If at the start of the
21st year it is estimated that the remaining life is 25
years and that the residual value is Rp 150,000,000
determine the depreciation expense for each of the
remaining 25 years.
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10-2
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Follow My Example 10-5
a. Rp 9,500,000 [(Rp 500,000,000 – Rp
120,000,000)/40]
b. Rp 310,000,000 [Rp 500,000,000 – (Rp
9,500,000 x 20)]
c. Rp 6,400,000 [Rp 310,000,000 – Rp
150,000,000)/25]
For Practice: PE 10-5A, PE 10-5B
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Objective 3
10-3
Journalize entries
for the disposal of
fixed assets.
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Discarding Fixed Assets
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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
Equipment
To write off equipment
25 000 00
25 000 00
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
Accum. Depr.—Equipment
To record current
depreciation on
equipment discarded.
150 000
150 000
Rp 600,000 x 3/12
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10-3
The discarding of the equipment is then
recorded by the following entry:
Mar. 24 Accum. Depreciation—Equipment
Loss on Disposal of Fixed Assets
Equipment
To write off equipment
discarded.
4 900 000
1 100 000
6 000 000
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Selling Fixed Assets
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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
Accum. Depr.—Equipment
To record current
depreciation on
equipment sold.
750 000
750 000
Rp 10,000,000
x ¾ x 10%
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Assumption 1
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10-3
The equipment is sold on October
12 for Rp 2,250,000. No gain or
loss.
Oct. 12 Cash
Accum. Depreciation—Equipment
Equipment
Sold equipment at book
value.
2 250 000
7 750 000
10 000 000
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Assumption 2
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10-3
The equipment is sold on October 12
for Rp 1,000,000; a loss of Rp
1,250,000.
Oct. 12 Cash
Accum. Depreciation—Equipment
Loss on Disposal of Fixed Assets
Equipment
Sold equipment at a loss.
1 000 000
7 750 000
1 250 000
10 000 000
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Assumption 3
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10-3
The equipment is sold on October 12
for Rp 2,800,000; a gain of Rp
550,000.
Oct. 12 Cash
Accum. Depreciation—Equipment
Equipment
Gain on Disp. of Fixed Assets
Sold equipment at a gain.
2 800 000
7 750 000
10 000 000
550 000
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10-3
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Example Exercise 10-6
Equipment was acquired at the beginning of year at a
cost of Rp 91,000,000. The equipment was depreciated
using the straight-line method based upon an estimated
useful life of 9 years and an estimated residual value of
Rp 10,000,000.
a. What was the depreciation for the first year?
b. Assuming the equipment was sold at the end of the
second year for Rp 78,000,000 determine the gain or
loss on sale of the equipment.
c. Journalize the entry to record the sale.
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10-3
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Follow My Example 10-6
a.
Rp 9,000,000 [(Rp 91,000,000 – Rp 10,000,000)/9]
b.
Rp 5,000,000 gain; Rp 78,000,000 – [Rp 91,000,000 – (Rp
9,000,000 x 2)]
c.
Cash
Accum. Depreciation—Equipment
Equipment
Gain on Disposal of Fixed Assets
For Practice: PE 10-6A, PE 10-6B
78,000,000
18,000,000
91,000,000
5,000,000
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Exchanging Fixed Assets
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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
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10-3
Method One
List price of new equipment
Trade-in allowance
Book value of old equipment
Unrecognized gain on exchange
Cost of new equipment
Rp 5,000,000
Rp 1,100,000
800,000
(300,000)
Rp 4,700,000
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10-3
Method Two
Book value of old equipment
Cash paid at date of exchange
Cost of new equipment
Rp 800,000
3,900,000
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
Equipment (new equipment)
Equipment (old equipment)
Cash
To record exchange of
equipment.
3 200 000
4 700 000
4 000 000
3 900 000
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Losses on Exchanges
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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 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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Cost of old equipment
Rp 7,000,000
Accumulated depreciation at date of exchange
Book value at September 7, date of exchange
Trade-in allowance on old equipment
Loss on exchange
Sept 7
Accum. Depreciation—Equipment
Equipment
Loss on Disposal of Fixed Assets
Equipment
Cash
To record exchange of
equipment with loss.
10-3
4,600,000
Rp 2,400,000
2,000,000
Rp 400,000
4 600 000
10 000 000
400 000
7 000 000
8 000 000
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10-3
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Example Exercise 10-7
On the first day of the fiscal year, a delivery truck with a
list price of Rp 75,000,000 was acquired in exchange for
an old delivery truck and Rp 63,000,000 cash. The old
truck had a cost of Rp 50,000,000 and accumulated
depreciation of Rp 39,500,000.
a. Determine the cost of the new truck for financial
reporting purposes.
b. Journalize the entry to record the exchange.
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10-3
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Follow My Example 10-7
a.
Rp 73,500,000
List price of new truck
Trade-in allowance on old truck
($75,000 – $63,000)
Book value of old truck
($50,000 – $39,500)
Unrecognized gain on exchange
Cost of new truck
Rp 75,000,000
Rp 12,000,000
10,500,000
(1,500,000)
Rp 73,500,000
or
(Continued)
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10-3
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Follow My Example 10-7
b.
Book value of old truck (Rp 50,000,000 –
Rp 39,500,000)
Plus cash paid at date of exchange
Cost of new truck
Rp 10,500,000
63,000,000
Rp 73,500,000
Truck (new)
Accumulated Depreciation—
Truck (old)
Truck (old)
Cash
50,000,000
63,000,000
73,500,000
39,500,000
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For Practice: PE 10-7A, PE 10-7B
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Objective 4
10-4
Compute depletion
and journalize the
entry for depletion.
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Natural Resources
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10-4
The process of
transferring the cost of
natural resources to an
expense account is called
depletion.
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Recording Depletion
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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
Accumulated Depletion
Depletion of mineral
deposit.
36 000 000
36 000 000
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10-4
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Example Exercise 10-8
Earth’s Treasures Mining Co. acquired mineral rights for
Rp 45,000,000,000. The mineral deposit is estimated at
50,000,000 tons. During the current year, 12,600,000
tons were mined and sold.
a. Determine the depletion rate.
b. Determine the amount of depletion expense for the
current year.
c. Journalize the adjusting entry on December 31 to
recognize the depletion expense.
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10-4
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Follow My Example 10-8
a. Rp 900 per ton = Rp 45,000,000,000/50,000,000 tons
b. Rp11,340,000,000 = (12,600,000 tons x Rp 900 per ton)
c.
Dec. 31
Depletion Expense
Accumulated Depletion
11,340,000,000
11,340,000,000
Depletion of mineral
deposit.
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For Practice: PE 10-8A, PE 10-8B
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Objective 5
10-5
Describe the accounting
for intangible assets,
such patents, copyrights,
and goodwill.
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Intangible Assets
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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.
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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.
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Journalizing Amortization of a
Patent
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10-5
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
Patents
Patent amortization
(Rp 100,000,000/5).
20 000 000
20 000 000
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10-5
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Adjusting Entry
Dec. 31 Amortization Expense—Patents
Patents
Patent amortization
(Rp 100,000,000/5).
20 000 000
20 000 000
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.
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Copyright
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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.
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Trademark
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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.
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Goodwill
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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.
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10-5
Generally accepted accounting principles
permit goodwill to be recorded in the
accounts only if it is objectively
determined by a transaction.
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Impaired Goodwill
10-5
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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
Goodwill
Impaired goodwill.
50 000 000
50 000 000
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10-5
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Example Exercise 10-9
On December 31 it was estimated that goodwill of Rp
40,000,000 was impaired. In addition, a patent with an
estimated useful economic life of 12 years was acquired
for Rp 484,000,000 on July 1.
a. Journalize the adjusting entry on December 31,
for the impaired goodwill.
b. Journalize the adjusting entry on December 31
for the amortization of the patent rights.
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10-5
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Follow My Example 10-9
a. Dec. 31 Loss from Impaired Goodwill 40,000,000
Goodwill
40,000,000
Impaired goodwill.
b. Dec. 31 Amortization Expense—Patents 3,500,000
Patents
3,500,000
Amortized patent rights
[(Rp 84,000,000/12) x (6/12)].
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For Practice: PE 10-9A, PE 10-9B
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Objective 6
Describe how depreciation
expense is reported in an
income statement, and
prepare a balance sheet
that includes fixed assets
and intangible assets.
10-6
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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
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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.
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Fixed Assets and Intangible
Assets in the Balance Sheet
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10-6
PT ASTRA AGRO LESTARI Tbk
BALANCE SHEET (PARTIAL)
31-Dec-07
Assets
Total Current Assets
1,647,854,000,000
Property,Plant, and Equipment
Land
Road & Bridges
Building, Installations and Machinery
Machinery and Equipment
Vehicles
Office and Housing Equipment
Construction in Progress
Cost
102,249,000,000
430,410,000,000
794,147,000,000
766,698,000,000
257,916,000,000
48,010,000,000
212,904,000,000
2,612,334,000,000
Accum.Depr
0
162,006,000,000
217,622,000,000
291,510,000,000
147,864,000,000
37,758,000,000
0
856,760,000,000
Book Value
102,249,000,000
268,404,000,000
576,525,000,000
475,188,000,000
110,052,000,000
10,252,000,000
212,904,000,000
Cost
1,207,204,000,000
19,834,000,000
0
1,227,038,000,000
Accum. Depl.
543,310,000,000
8,492,000,000
0
551,802,000,000
Book Value
663,894,000,000
11,342,000,000
0
659,536,000,000
7,760,000,000
667,296,000,000
0
0
659,536,000,000
7,760,000,000
1,755,574,000,000
Plantations
Mature Plantations
Oil Palm
Rubber
Cocoa
Immature Plantations
Oil Palm
Rubber
675,236,000,000
667,296,000,000
Total Property, Plant and Equipment
Intagible Assets
Goodwill
Total Intagible Asset
2,430,810,000,000
66,947,000,000
100
66,947,000,000
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Fixed Asset Turnover Ratio
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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
Turnover Ratio
=
Revenue
Average Book Value of
Fixed Assets
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Financial Analysis and Interpretation
10-6
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For Rimo Department Store
Revenue
Fixed Asset
=
Turnover Ratio
Average Book Value of
Fixed Assets
Fixed Asset Turnover
=
Ratio
Fixed Asset
=
Turnover Ratio
Rp 199,246,551,622
(24,661,628,738 + 33,455,273,668)/2
6.68
Conclusion: For every Rupiahs of fixed assets,
Rimo earns Rp6.68 of revenue.
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