BUS103: Introduction to Financial Accounting

8a. Distinguish between tangible and intangible assets 

• What is the difference between a tangible and intangible asset?
• How is the accounting different for a tangible vs. intangible asset?
  

Tangible assets have physical characteristics that we can see and touch – things like buildings, equipment, and vehicles. Intangible assets have no physical characteristics but have value due to the privileges and rights they convey to the owner, such as patents and copyrights. The accounting treatment for tangible assets differs from the treatment for intangible assets. Tangible assets tend to be depreciated, whereas intangible assets are either amortized or checked periodically for impairment.
 
To review, see Property, Plant, and Equipment.
 

8b. produce journal entries for the acquisition, depreciation, and disposal of fixed assets 

• How is the cost determined for the journal entry for the acquisition of fixed assets?
• How is the depreciation of fixed assets recorded?
• What entries must be made when fixed assets are disposed of?
  

Fixed assets are recorded at historical cost. Even if the market value of the asset changes over time, the acquisition cost is still reflected on the balance sheet. The acquisition cost is the amount of cash or cash equivalents given up to acquire and place the asset in operating condition at its proper location. Once the appropriate cost is determined, the acquisition would be recorded as:
 
(debit)         Plant Asset Name
(credit)        Cash or Payable
 
Plant assets are depreciated in accordance with the matching principle. Depreciation is
the amount of plan asset cost allocated to each accounting period benefiting from the plant asset's use. Once depreciation is calculated, the entry to record it is:
 
(debit)         Depreciation Expense    $$
(credit)        Accumulated Depreciation – Plant Asset name $$
 
When a fixed asset is disposed of, all the accounts associated with the asset must be closed, and a potential gain or loss on the asset recognized. The entry is as follows:
 
(debit)                       Cash
(debit)                       Accumulated depreciation
(credit)                      Equipment
(credit) or (debit)    Gain or Loss on Sale
 
To review, see Property, Plant, and Equipment and Plant Asset Disposals.
 

8c. Calculate depreciation expense using the various methods of depreciation 

• What are the main methods for calculating depreciation expense?
• How do companies choose which depreciation method to use?
  

The main methods for calculating depreciation expense are:

1. Straight-line method: an equal amount is charged to each accounting period.
   1. Depreciation = (asset cost-estimated salvage value)/# of accounting periods for useful life
2. Units-of-production method: assigns an equal amount of depreciation to each unit of product manufactured or service rendered.
   1. Depreciation = (asst cost – estimated salvage value)/units of production during useful life of asset
   2. This answer is then multiplied by the number of goods/service produced in period
3. Double-declining method: an accelerated depreciation method that increases the amount charged in the earlier years.
   1. Depreciation = 2 x (straight-line rate) x (asset cost-accumulated depreciation)

Depreciation = 2 x (straight-line rate) x (asset cost-accumulated depreciation)
 
Companies should use the depreciation method that reflects most closely allocated costs according to the benefit received from the asset. Many companies use accelerated depreciation to minimize their tax liability. Others use the straight-line method because of its ease of use.
 
To review, see:

• Property, Plant, and Equipment
• Calculating Depreciation

8d. Explain the difference between book value and market value 

• How is the book value of an asset calculated?
• How is market value determined?
  

The book value of an asset is its cost less its accumulated depreciation. The cost on the "books" is the historical cost at acquisition, which we then subtract the accumulated depreciation from. The market value of an asset is determined according to what it could be sold or traded for on the current market. Book value and market value are usually not the same. In some instances, an asset is worth more than its book value, and when it is sold, a gain will be realized. When an asset is sold for less than its book value, a loss will be realized.
 
To review, see Plant Asset Disposals.
 

Unit 8 Vocabulary

This vocabulary list includes terms you will need to know to successfully complete the final exam.

• book value
• depreciation
• double-declining method
• intangible asset
• market value
• straight-line method
• tangible asset
• units-of-production method