TANGIBLE

FIXED
ASSET
Chapter 9

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1
Objectives
Compute depreciation, using the following methods: straight –
line method, units-of-production method, and declining-balance
method.

Journalise entries for the disposal of fixed assets

Describe how depreciation expense is reported in a profit and

loss statement, and prepare a balance sheet that includes fixed
assets.
 Tangible Fixed Assets
Contents
Purchase of Tangible Fixed Assets

Depreciation

Accounting for Depreciation

Disposal of Tangible Fixed Assets

Financial Reporting for Tangible Fixed

Assets
 Tangible Fixed assets
◆Physical substance (a definite size and shape),

◆Are used in the operations of a business,

◆Are not intended for sale to customers,

◆Are expected to be of use to the company for a number of years.

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Purchase of Tangible Fixed assets maybe
purchase with cash, bank or on
Tangible credit (on account)
Fixed Assets

Dr PPE
Cr Cash/Bank/Account payable
Depreciation
As time passes, tangible fixed assets (except land) lose their ability to
provide useful services. In other words, when they get older, they may
spoil, and do not work as well as before.

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 Fixed asset’s cost: all amounts spent to
get it to the business’ premises and ready
Accounting for use
for
Depreciation Expected useful life: how long the fixed
asset can be used by the business

Residual value: what the fixed asset item

is worth at the end of its expected useful
life
Accounting for Depreciation

Fixed
Residual Depreciation
asset’s
value Cost
cost
Accounting for Depreciation

• Three methods of depreciation:

1. Straight-line
2. Units-of-production
3. Declining-balance

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 Straight-line Depreciation
• This method provides for the same amount of depreciation expense for
each year of the asset’s useful life.

Depreciation Cost
Annual
Depreciation
Expense
Estimated useful Life
Straight-line • Example 1
Depreciation
– Assume that the cost of an asset
is $40,000, its estimated residual
value is $4,000, and its estimated
life is 10 years.

– Annual Depreciation Expense =

????????
 • The amount of depreciation could be

Straight-line calculated for less than one accounting

period
Depreciation
• Example 2
– An asset is bought at cost of $40,000
on 1st of March 20X0, its estimated
residual value is $4,000, and its
estimated life is 10 years. What is its
depreciation expense for the year
ended on 31st December 20X0?

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 Example 3
1. An asset is bought at cost of $100,000 on 1st of May 2016, its estimated residual
value is $5,000, and its estimated life is 10 years. Business uses straight line
method
- What is its annual depreciation expense?
- What is its depreciation expense for the year ended on 31st December 2016?
- What is its accumulated depreciation for the year ended on 31st December 2016?
- What is its Net book value for the year ended on 31st December 2016?
- What is its accumulated depreciation for the year ended on 31st December 2020?
- What is its Net book value for the year ended on 31st December 2020?
2. A machine with a cost of $200,000 and an estimated residual value of $0 is
expected to produce 200,000 units during its useful lifetime. What is the
depreciation expense of this machine? Given that, during the accounting period, this
machine produced 50,000 units.
3. The cost of an asset is $80,000, its estimated residual value is $5,000, and its
estimated life is 5 years. Declining-balance rate is 40%. Compute the depreciation
for this asset. Assume that the asset is purchased at the beginning of the year.
 Units-of-Production Depreciation
• This method is used when the usage of fixed asset varies from year to
year.

• The idea is that the more depreciation should be recorded when the
machine is used for more hours (or for more units produced)
 Units-of-Production Depreciation
• The useful life of fixed asset is now expressed in terms of estimated number of
hours used or estimated number of units produced

Depreciation Cost
Depreciation
For a unit-of-
production
Estimated Number of hours used
(or estimated number of units
produced)
 Units-of-Production Depreciation

• Example 4
– A machine with a cost of $100,000 and an estimated residual value of $5,000 is
expected to produce 200,000 units during its useful life-time. What is the
depreciation expense of this machine? Given that, during the accounting period,
this machine produced 35,000 units.
 Declining-Balance Method

• This methods provides for a declining

(reducing) depreciation expense over the
useful life of the asset.

• The highest amount of depreciation is

recorded on the first year.
 Declining-Balance Method

• Depreciation amount:
– For the first year = cost of asset X declining-balance rate
– After the first year = the opening net book value X declining-balance rate
 Declining-Balance Method

• Example 5
– the cost of an asset is $40,000, its estimated residual value is $4,000,
and its estimated life is 5 years. Declining-balance rate is 40%. Compute
the depreciation for this asset. Assume that the asset is purchased at the
beginning of the year.
 Declining-Balance Method
Year Cost Accum Open Net Rate Depre for Close Net
(A) Depre (B) Book Value (D) Year Book Value
(C=A - B) (E=C*D) (F= C – E)

1 $40,000 $40,000 40% $16,000 $24,000

2 $40,000 $16,000 $24,000 40% $9,600 $14,400

3 $40,000 $25,600 $14,400 40% $5,760 $8,640

4 $40,000 $31,360 $8,640 40% $3,456 $5,148

5 $40,000 $35,680 $5,148 $1,148 $4,000

 Disposal of Fixed Assets

• When fixed assets are no longer used:

– Discarded (thrown away)
– Sold
– Traded in (exchanged)

• Accounting treatment for above situation?

 • The fixed asset could be fully depreciated

Dr Accumulated Depreciation
Cr PPE
Discarding Fixed
Assets
1st Jan 20x0, the company purchased a machine at $100,000 in cash. The company estimates
to use in 10 years. The company uses straight-line method.
The company discarded this machine on 30th June 20x6
Cost of asset: $100,000
Residual value: 0
Dep cost = $100,000
Annual dep exp = $100,000/10 = $10,0000
1/1/20x0 – 30/06/20x6: 6.5 years
Accumulated dep = $10,000 x 6.5 = $65,000
Net book value= $100,000 - $65,000 = $35,000
Dr Accumulated Depreciation: $65,000
Dr Loss on Disposal of FA: $35,000
Cr PPE: $100,000
 Discarding Fixed Assets
• If the fixed asset is not fully depreciated
• Remember:
– To calculate and include depreciation for the period prior to
removing date.
– The net book value would be recorded as Loss on Disposal
of Fixed Assets
Dr Depreciation Expense
Cr Accumulated Depreciation

Dr Accumulated Depreciation
Dr Loss on Disposal of FA
Cr PPE
• Example 6
– Assume that equipment costing $80,000 is depreciated at a straight-line rate of 10%. In addition, assume that
the accumulated depreciation at the beginning of 20X0 is $20,000 and the asset is discarded on 1st Jan
20X4.
– How would this transaction be recorded on 1st Jan 20X4?
Cost of asset: $80,000
Dep cost : 80,000
Annual dep exp = $80,000 x 10% = $8,000
1/1/20x0: Accumulated dep = $20,000
1/1/20x0 – 1/1/20x4: Accumulated dep = $8,000 x 4 = $32,000
Accumulated dep : 20000 + 32000 = 52,000
Net book value = 80,000 – 52,000 = 28,000

Dr Accumulated Depreciation: $52,000

Dr Loss on Disposal of FA: $28,000
Cr PPE: $80,000
An asset was bought at a cost of $100,000 on the 1st Jan 2016; its
estimated residual value is $5,000, and its estimated life is 10 years.
Business uses the straight-line method. Business discarded this asset
on 31 Dec 2025
 Selling Fixed Assets

• If the selling price:

< Net Book Value: Make a loss
= Net Book Value: No gain no loss
> Net Book Value: Make a profit

• And as always, take off the Accumulated Depreciation

 • Example 7
– Assume that equipment costing $40,000 is depreciated
Selling Fixed at a straight-line rate of 10%. In addition, assume that
Assets accumulated depreciation at the beginning of 20X0 is
$5,000 and the asset is sold on 30th June 20X0.
Accumulated dep: $5,000 + $2,000 = $7,000
Net book value = $40,000 – $7,000 = $33,000
– How would this transaction be recorded if:
• Selling price is $26,000
• Selling price is $33,000
• Selling price is $38,000
Assume that equipment costing $50,000 is depreciated at a straight-line rate of 10%. In
addition, assume that accumulated depreciation at the beginning of 20X0 is $10,000 and
the asset is sold on 30th June 20X1.
Annual dep exp = 50000 x 10% = 5000
1/1/20x0: Acc dep = $10,000
1/1/20x0 – 30/06/20x1: 1.5 years
Acc dep : $5,000 x 1.5 = $7,500
30/6/20x1: Acc dep = $10,000 + 7,500 = $17,500
NBV = 50,000 – 17,500 = $32,500

Selling price is $15,000→ make a loss: 32,500 – 15,000 = 17,500

Selling price is $30,000→ make a loss: 32,500 – 30,000 = 2,500
 Determine the depreciation expense prior
Step 1 selling point
• Depreciation = (6/12*$20,000*10%)= $1,000
Selling Fixed
Assets

Find the Net Book Value of the equipment:

Step 2 • Net Book Value = $20,000 – ($5,000 + $1,000) =
$14,000

Step 3 Compare NBV with selling price and record

the transaction
 Selling Fixed Assets
1. Selling price is $26,000 < NBV: make a loss ($33,000 - $26,000
= $7,000)
Dr Cash $26,000
Dr Accumulated Depreciation $7,000
Dr Loss on Disposal $7,000
Cr PPE $40,000
Selling Fixed Assets

2. Selling price is $33,000 = NBV: no gain or loss ($33,000 -

$33,000 = $0)
Dr Cash $33,000
Dr Accumulated Depreciation $7,000
Cr PPE $40,000
 Selling Fixed Assets

3. Selling price is $38,000 > NBV: make a profit ($38,000 -

$33,000 = $5,000)
Dr Cash $38,000
Dr Accumulated Depreciation $7,000
Cr PPE $40,000
Cr Profit on Disposal $5,000
 Exchanging Fixed Assets

• Old equipment could be traded in for new equipment. Seller allows the buyer an
amount for the old equipment traded in.

• This amount is called the trade-in allowance. In addition, trade-in allowance could be
> or < NBV of the old equipment
 Exchanging Fixed Assets
• Example 8
– Assume that equipment costing $20,000 is depreciated at a straight-line rate of
10%. In addition, assume that accumulated depreciation at the beginning of 20X0
is $17,000.
– The equipment will be traded in for a new equipment (cost $15,000, cash pay) on
1st Jan 20X0 and receive a trade-in allowance.
– How this transaction would be recorded if the trade-in allowance:
• A) $2,000
• B) $4,000
 Exchanging Fixed Assets

– A) Trade-in allowance is $2,000

New equipment $15,000

Trade-in allowance $ 2,000
Cash paid $13,000
Old equipment $20,000
Accumulated depreciation $17,000
NBV $ 3,000
Trade-in allowance $ 2,000
Loss on exchange $ 1,000
 Exchanging Fixed Assets

– A) Trade-in allowance is $2,000

Dr Accumulated Depreciation $17,000

Dr PPE (New ) $15,000
Dr Loss on Exchange $ 1,000
Cr PPE (Old ) $20,000
Cr Cash $13,000
 Exchanging Fixed Assets
B) Trade-in allowance is $4,000 > NBV of old equipment: No gain is recognised
for the exchange. However, this unrecognised gain could be used to reduce the
cost of new equipment.

Old equipment $20,000

Accumulated depreciation $17,000
NBV $ 3,000

New equipment (List price) $15,000

Unrecognised gain (4,000-3,000) $ 1,000
Cost of new equipment $14,000
 Exchanging Fixed Assets

– B) Trade-in allowance is $4,000

Dr Accumulated Depreciation $17,000

Dr PPE (New) $14,000
Cr PPE (old) $20,000
Cr Cash (15,000 – 4,000) $11,000
Example 9
Assume that equipment costing $50,000 is depreciated at a straight-line rate of 10%. In
addition, assume that accumulated depreciation at the beginning of 20X0 is $30,000.
The equipment will be traded in for new equipment (cost $42,000, cash pay) on 1st Jan
20X0 and receive a trade-in allowance.
Acc dep : $30,000
NBV: $20,000
How this transaction would be recorded if the trade-in allowance:
A) $10,000
B) $25,000
A) Trade-in allowance is $10,000

New equipment $42,000

Trade-in allowance $ 10,000
Cash paid $32,000
Old equipment $50,000
Accumulated depreciation $30,000
NBV $ 20,000
Trade-in allowance $ 10,000
Loss on exchange $ 10,000

Dr Accumulated Depreciation $30,000

Dr PPE (New ) $42,000
Dr Loss on Exchange $ 10,000
Cr PPE (Old ) $50,000
Cr Cash $32,000
B) Trade-in allowance is $25,000 > NBV of old equipment: No gain is recognised
for the exchange. However, this unrecognised gain could be used to reduce the
cost of new equipment.

Old equipment $50,000

Accumulated depreciation $30,000
NBV $ 20,000

New equipment (List price) $42,000

Unrecognised gain (25,000-20,000) $ 5,000
Cost of new equipment $37,000
Dr Accumulated Depreciation $30,000
Dr PPE (New) $37,000
Cr PPE (old) $50,000
Cr Cash (42,000 – 25,000) $17,000
 Financial Reporting for Fixed Assets

• PL:
– Depreciation expense
– Profit/Loss on Disposal of Fixed Assets

• BS:
– PPE
– Accumulated Depreciation
– Net book value
Example 10
Machine A cost = $100,000
Estimated useful life 5 years
Residual value: 0
Purchased on 01 January 2019
Sold for $36,000 cash on 30 June 2022
Accounting entries on 1 March 2021
Example 11

Machine B cost = $200,000

Estimated useful life 5 years
Residual value $50,000
Purchased on 01 June 2019
Exchange with a new machine (cash price $125,000) and trade in
allowance $72,000 on 1 Sep 2021.
Accounting entries on 01 Sep 2021