GLOSSARY
420 Chapter 9 Fixed Assets and Intangible Assets
Compute depreciation, using the following methods:
straight-line, units-of-production, and declining-
balance.As time passes, all fixed assets except land lose
their ability to provide services. As a result, the cost of a
fixed asset should be transferred to an expense account, in a
systematic manner, during the asset’s expected useful life.
This periodic transfer of cost to expense is called deprecia-
tion.In computing depreciation, three factors need to be
considered: (1) the fixed asset’s initial cost, (2) the useful life
of the asset, and (3) the residual value of the asset.
The straight-line method spreads the initial cost less the
residual value equally over the useful life. The units-of-
production method spreads the initial cost less the residual
value equally over the units expected to be produced by the
asset during its useful life. The declining-balance method is
applied by multiplying the declining book value of the asset
by a multiple of the straight-line rate.Account for the disposal of fixed assets. The journal
entries to record disposals of fixed assets will vary. In
all cases, however, any depreciation for the current period
should be recorded, and the book value of the asset is then
removed from the accounts. The entry to remove the book
value from the accounts is a debit to the asset’s accumulated
depreciation account and a credit to the asset account for
the cost of the asset. For assets retired from service, a loss
may be recorded for any remaining book value of the asset.
When a fixed asset is sold, the book value is removed,
and the cash or other asset received is also recorded. If the
selling price is more than the book value of the asset, the
transaction results in a gain. If the selling price is less than
the book value, a loss occurs.Describe and account for intangible assets, such as
patents, copyrights, and goodwill. Long-term assets thatare without physical attributes but are used in the business
are classified as intangible assets. Examples of intangible
assets are patents, copyrights, trademarks, and goodwill. The
initial cost of an intangible asset should be debited to an
asset account. For patents and copyrights, this cost should be
written off, or amortized, over the years of the asset’s
expected usefulness by debiting an expense account and
crediting the intangible asset account. Trademarks and
goodwill are not amortized, but are written down only upon
impairment.Describe how depreciation expense is reported in an
income statement, and prepare a balance sheet that
includes fixed assets and intangible assets.The amount of
depreciation expense and the method or methods used in
computing depreciation should be disclosed in the financial
statements. In addition, each major class of fixed assets
should be disclosed, along with the related accumulated
depreciation. Intangible assets are usually presented in the
balance sheet in a separate section immediately following
the fixed assets. Each major class of intangible assets should
be disclosed at an amount net of the amortization recorded
to date.Analyze the utilization of fixed assets. Business suc-
cess for many firms is influenced by the utilization of
their fixed assets. Fixed asset utilization can be measured us-
ing operational and financial data. Operational utilization
statistics evaluate the used portion of fixed assets to the total
fixed asset capacity. A financial measure of asset utilization
is the fixed asset turnover ratio, which is calculated as
revenue divided by the average book value of fixed
assets.2
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Accelerated depreciation method A depreciation
method that provides for a higher depreciation amount in the
first year of the asset’s use, followed by a gradually declining
amount of depreciation.AmortizationThe periodic transfer of the cost of an intan-
gible asset to expense.
Book valueThe cost of a fixed asset minus accumulated de-
preciation on the asset.Capital expendituresThe cost of acquiring fixed assets, im-
proving an asset, or extending the asset’s life.
CopyrightAn exclusive right to publish and sell a literary,
artistic, or musical composition.Declining-balance methodA method of depreciation that
provides periodic depreciation expense based on the declining
book value of a fixed asset over its estimated life.DepreciationThe systematic periodic transfer of the cost of a
fixed asset to an expense account during its expected useful life.Fixed asset turnover ratioA ratio that measures the num-
ber of dollars of revenue earned per dollar of fixed assets and
is calculated as total revenue divided by the average book
value of fixed assets.Fixed assetsLong-lived or relatively permanent tangible
assets that are used in the normal business operations.GoodwillAn intangible asset of a business that is created
from such favorable factors as location, product quality, rep-
utation, and managerial skill, as verified from a merger
transaction.Intangible assetsLong-lived assets that are useful in the
operations of a business, are not held for sale, and are with-
out physical qualities.