Analyzing key phrases keyed in the search tab of AFT and comments left in the articles so far, I found tens of essential questions around fixed asset accounting.

Advertisement

While most of fixed asset accounting subjects have been covered with articles (and case examples) in much greater detail, thought it is still helpful if I address your questions altogether in a form of question-answer, more straight-forward and faster solution.

For easier scanning and more logical order, I broke the question and answer down into some sections. It comes not only in words, but also formula and journal entries. I hope you like it.

 

Capitalization Of Fixed Asset Cost

1. Question: What is to be capitalized on purchased (acquired) fixed asset?

Answer:

Capitalized amount = Cost of asset + Costs incurred in preparing it for its intended use

Cost of asset = Fair Market Value (FMV) of asset received or Cash paid plus FMV of assets given.

 

2. Question: What journal entry should I make when fixed asset is received as a gift?

Answer:

[Debit]. Asset (at Fair Market Value) = xx

[Credit]. Income = xx

 

3. Question: What are other capitalized costs for assets acquired by gift or purchase?

Answer:

Shipping cost, insurance cost during shipping, installation cost and testing

 

 

Land and Building

4. Question: What is total cost of land and building that should be capitalized?

Answer:

Purchase price + Delinquent taxes assumed + Legal fees + Title insurance

5. Question: How to allocate total acquisition cost to land and building, using ‘Relative Fair Market Value Method’?

Answer:

First, determine total Fair Market value: FMV of land + FMV of building

Second, Allocate:

  • Land = FMV of land / (Total FMV × Total Cost)
  • Building = FMV of building / (Total FMV × Total Cost)

 

 

Capitalization of Interest

6. Question: What to be and what not to be capitalized on?

Answer:

Capitalize on assets constructed for company’s use; and/or assets manufactured for resale resulting from special order. Do not capitalize on inventory manufactured in the ordinary course of business.

7. Question: What interest to be capitalized?

Answer:

Interest capitalized:  Interest on debt incurred for construction of asset, and/or interest on other debt that could be avoided by repayment of debt.

8. Question: What to be computed on?

Answer:

Compute on: weighted-average accumulated expenditures

 

 

Costs Incurred After Acquisition

9. Question: Should I capitalized expenditures after acquisition of fixed asset?

Answer:

Capitalize if:

  • Bigger – the cost makes the asset bigger, such as an addition to a building; or
  • Better – the cost makes the asset better, such as an improvement that makes an asset perform more efficiently; or
  • Longer – the cost makes the asset last longer, it extends the useful life

Do not capitalize: Repairs and maintenance

 

 

Depreciation

10. Question: What basic terms should I know before attempting to work on depreciation of fixed asset, at minimum?

Answer:

At the minimum, you should know the followings:

  • Land ownerships is non-depreciable
  • Straight-line rate = 100% / Useful life (in years)
  • Depreciable basis = Cost – Salvage value
  • Book value = Cost – Accumulated depreciation

Note: Cost is all capitalized costs (see capitalization of fixed asset cost)

 

11. Question: What depreciation method should I use?

Answer:

Use straight-line when: benefit from asset is uniform over life

Use accelerated when: Asset more productive in earlier years; or costs of maintenance increase in later years; or risk of obsolescence is high.

Use units-of-production when: usefulness decreases with use

 

12. Question: How to compute depreciation using ‘STRAIGHT-LINE’ Method?

Answer:

Annual Depreciation = Depreciable Basis x Straight-line Rate

Partial Year = Annual depreciation x Portion of year

 

13. How to compute depreciation using ‘DOUBLE-DECLINING BALANCE’ Method?

Answer:

Annual depreciation = (Book Value x Straight-line rate) x 2

Partial Year = [(Book Value x Straight-line rate) x 2] x portion of year

 

14. How to compute depreciation using ‘SUM-of-the YEARS’-DIGITS’ Method?

Answer:

Annual Depreciation = Depreciable basis x Fraction

Fraction:

1st Year      2nd Year      3rd Year

Numerator                 n                    n-1                 n-2

Denominator       [n(n+1)]/2   [n(n+1)]/2    [n(n+1)]/2

Partial year:

  • 1st Year = 1st year’s depreciation x portion of year
  • 2nd Year = Reminder of 1st Year’s deprec + 2nd Year’s deprec x portion of year
  • 3rd Year = Reminder of 2nd Year’s deprec + 3rd Year’s deprec x portion of year

 

 

15. How to compute depreciation using ‘UNITS-of-PRODUCTION’ Method?

Answer:

Depreciation rate = Depreciable basis / Total estimated units to be produced (hours)

Annual Depreciation = Depreciation rate x Number of units (hours used)

 

16. How do I compute depreciation using Group or Composite Methods?

Answer:

They are based on straight-line. But ‘gains or losses’ not recognized on disposal. Here is journal entry you should make on the disposal:

[Debit]. Cash (proceed) = xx

[Debit]. Accum. Deprec (plug) = xx

[Credit]. Asset (original cost) = xx

 

 

Impairment of Fixed asset

17. Question: When does impairment occur?

Answer:

Impairment of fixed asset occurs if undiscounted future cash flow less than asset carrying amount from events such as: a decrease in the market value of the asset; or an adverse action or assessment by a regulator; or an operating or cash flow loss associated with a revenue producing asset.

 

18. Question: What to do if an impairment loss occur?

Answer:

When an impairment loss occurs: Asset should be written down to fair market value (or discounted net cash flow). Use the following entry:

[Debit]. Loss due to impairment = xx

[Cerdit]. Accum, deprec = xx

Note that test for impairment (future cash flow) is different from write-down amount (net realizable value).

 

19. Question: Would you show me an example of application of Impairment Rules?

Answer:

Here are two examples:

Example 1: An asset has carrying value of $1,000,000, undiscounted future cash flow expected from asset is $900,000, while Fair market value of the asset is only $600,000. In this case impairment exists since $900,000 expected cash flow less than $1,000,000 carrying amount. Therefore, write asset down by $400,000 ($1,000,000 reduced to $600,000).

Example 2: An asset has carrying value of $800,000, undiscounted future cash flow expected from asset is $900,000, while its Fair market value of asset is $600,000. No impairment adjustment in this case, since $900,000 expected cash flow exceeds $800,000 carrying amount.

 

 

Disposal of Fixed Asset

20. Question: What is journal entry of fixed asset disposal, in general?

Answer:

[Debit]. Cash (proceeds) = xx

[Debit]. Accumulated depreciation (balance) = xx

[Debit]. Loss on disposal (plug) = xx

[Credit]. Gain on disposal (plug) = xx

[Credit]. Asset (original cost) = xx

Note that a disposal in involuntary conversion is recorded in the same manner as a sale

 

21. Question: What is journal entry of non-monetary exchanges of fixed asset?

Answer:

[Debit]. Cash (amount received)

[Debit]. Asset – New (FMV) = xx

[Debit]. Accumulated depreciation (balance on old asset) = xx

[Debit]. Loss on disposal (plug)

[Credit]. Cash (amount paid)

[Credit]. Gain on disposal (plug) = xx

[Credit]. Asset – Old (Original cost) = xx

 

22. Question: What is Fair Market Value of a non-monetary exchange of fixed asset?

Answer:

It is fair value of asset received or asset given + Cash paid – Cash received.

Exception notes: Applies to exchanges when:

  • FMV is not determinable
  • Exchange is only to facilitate subsequent sales to customers (e.g. ownership of inventory in one city is swapped for similar inventory in another to facilitate prompt delivery to customer in distant city)
  • Transaction lacks commercial substance (risk, timing, and amount of future cash flows will not significantly change as a result of the transaction).

 

23. Question: How to determine if a fixed asset exchange is in loss or gain position, and what journal entry should I make?

Answer:

Recognize LOSS if FMV of asset given is LESS THAN Carrying value of asset given. Key in the following the following journal entry:

[Debit]. Cash (amount received) = xx

[Debit]. Asset – New (FMV) = xx

[Debit]. Loss on disposal (plug) = xx

[Credit]. Cash (amount paid) = xx

[Credit]. Asset – Old (carrying value) = xx

 

Recognize GAIN if FMV of asset given is GREATER THAN Carrying value of asset given. Gain recognized only when cash received. Amount to be recognized = (FMV of asset given – Carrying value of asset given) x percentage. (Note: *Percentage = Cash received / [cash + FMV of asset received]). In this position, you would make the following journal entry:

[Debit]. Cash (amount received) = xx

[Debit]. Asset—New (plug) = xx

[Credit]. Gain on disposal (computed amount) = xx

[Credit]. Asset—Old (carrying value) = xx

 

NO GAIN recognized when cash paid or no cash involved. In this case, you would make the following journal entry:

[Debit]. Asset – New (plug) = xx

[Debit]. Accumulated depreciation (balance on old asset) = xx

[Credit]. Cash (amount paid) = xx

[Credit]. Asset – Old (original cost) = xx