LECTURE NOTES FOR CHAPTER 10
“Assets” can be broken down into several categories such as “current”, “fixed”, and a few
other categories that we’ll discuss later.
In this chapter, the star of the show is “fixed
assets” We’re talking about such items as Land, Building, and Equipment. Fixed assets
are physically large, like equipment, expensive, like land and will last a long time, like a
building AND will actually be used in the business.
If any of these items are bought
strictly with the intention of selling them later at a profit, then they would be classified as
“Investments” rather than fixed assets.
What we’ll be learning to do in this chapter is:
(1) How to determine the cost of a fixed asset and to record its purchase.
(2) How to compute, revise and
record depreciation expense
(3) How to dispose of the asset when we are finished with it.
Determining the cost of a fixed asset
Whenever a company purchases a fixed asset, they
pay not only for the asset itself, but
miscellaneous items such as sales tax, freight charges to get the item from the
seller’s place to the buyers place, and quite often there are installation cost involved.
QUESTION: What does the accountant do with these miscellaneous charges?
As is the
case so many times in accounting, “It Depends” If these charges are necessary to get the
machine “up and running” then we will add them to the cost of the asset.
The act of adding miscellaneous costs to the cost of the asset
is called CAPITALIZING.
If however, these cost are not necessary to get the machine
“up and running”, they will be written off to expense.
These items are said to be
Thus, miscellaneous cost associated with the purchased of a fixed asset
will be either expensed or capitalized.
Examples of items that would be expensed might
be if our employees were taking the asset off the truck and they dropped it and damaged
After the item was damaged, certainly it is necessary to repair it; however, it was not
necessary to damage it in the first place. Therefore, the cost of the repair would be written
off to “Repairs Expense”. (Expensed)
and NOT added to the cost of the asset. Another
example of a miscellaneous cost that would be expensed would be if after purchasing the
asset, you were bringing it back to your place and you got a speeding ticket.
The cost of
the ticket would be written off to expense (Expensed) since it was not a necessary cost of
getting the asset “up and running” For a list of cost that would be added to the cost of the
asset (Capitalized) look on page 443.
Don’t try to memorize the entire list, just
remembers a couple from each category.
Thus, if we paid $1,000 for a piece of
equipment and also had to pay $80 in sales taxes $50 freight charges to have the asset
transported from the sellers place to our place, and then pay $200 installation charges, the
entry to record the
Notice that there is no breakdown as to how much of the $1,330 went for sales tax, how
much went for freight, etc, reason is that nobody
All of the costs are just