ACCOUNTING—

INDONESIA ADAPTATION
4 TH EDITION—VOLUME 1
Carl S. Warren
James M. Reeve
Jonathan E.Duchac
Ersa Tri Wahyuni
Amir Abadi Jusuf
 CHAPTER 10

FIXED ASSETS AND INTANGIBLE

ASSETS
Learning Objectives (slide 1 of 2)

 Define, classify, and account for the cost of fixed assets

 Compute depreciation, using the following method: straight-
line method, units-of-output method, and double-declining-
balance method.
 Journalize entries for the disposal of fixed assets.
 Compute depletion and journalize the entry for depletion
assets.
 Describe the accounting for intangible assets, such as
patents, copy rights, and goodwill.
Learning Objectives (slide 2 of 2)

 Describe how depreciation expense is reported in income

statement and prepare a statement of financial position that
includes fixed assets and intangible assets.
 Describe and illustrate the fixed assets turnover ratio to
assess the efficiency of a company’s use of its fixed assets.
Nature of Fixed Assets

Fixed assets have the following

characteristics:
• They exist physically and, thus, are tangible assets.
• They are owned and used by the company in its
normal operations.
• They are not offered for sale as part of normal
operations.
Exhibit 1: Fixed Assets as a Percent of Total
Assets—Selected Companies
Classifying Costs
 A cost that has been incurred may be classified as:

Fixed asset Investment Expense

Exhibit 2: Classifying Costs
PSAK Insight
Investments
 Long-lived assets that are not used in the normal operations
and are held for future resale.
 Reported on the statement of financial position in a section
entitled Investments.
 For example, undeveloped land acquired for future resale
would be classified and reported as an investment, not land.
The Cost of Fixed Assets
 Purchase price, the costs of acquiring fixed assets include:
 All amounts spent getting the asset in place and ready for
use.
 For example, freight costs and the costs of installing
equipment are part of the asset’s total cost.
Exhibit 3: Costs of Acquiring Fixed Assets
Cost Included as an Expense (slide 1 of 2)

The following costs are included as an expense:

1. Vandalism
2. Mistakes in installation
3. Uninsured theft
4. Damage during unpacking and installing
5. Fines for not obtaining proper permits from governmental
agencies.
Cost Included as an Expense (slide 2 of 2)

 The direct costs incurred in the construction, such as labor

and materials, should be capitalized as a debit to an account
entitled Construction in Progress.
 When the construction is complete, the costs are reclassified
by crediting Construction in Progress and debiting the proper
fixed asset account such as Building.
Capital and Revenue Expenditures
Ordinary Maintenance and Repairs

Recorded as an expense of the current period.

Such expenditures are revenue expenditures and are recorded as increases to

Repairs and Maintenance Expense.
Example of Ordinary Maintenance
and Repairs

Rp300,000 paid for a tune-up of a delivery truck.

Asset Improvements
 Costs may be incurred to improve the asset after a fixed asset
has been placed into service.
 The service value of a delivery truck might be improved by
adding a Rp5,500,000 hydraulic lift to allow for easier and
quicker loading of cargo.
 Such costs are capital expenditures and are recorded as
increases to the fixed asset account.
 Because the cost of the delivery truck has increased,
depreciation for the truck will also change over its remaining
useful life.
Example of Asset Improvements

The service value of a delivery truck might be improved

by adding a Rp5,500,000 hydraulic lift to allow for easier
and quicker loading of cargo.
Extraordinary Repairs

Incurred to Recorded as a
decrease in an
extend the asset’s accumulated
useful life. depreciation account.
Example of Extraordinary Repairs

The engine of a forklift that is near the end of its useful

life may be overhauled at a cost of Rp4,500,000,
extending its useful life by eight years.
Accounting for Revenue and
Capital Expenditures
Leasing Fixed Assets

 Lease is a contract for the use of an asset for a period of

time.
 For example, automobiles, computers, medical equipment,
buildings, and airplanes are often leased.
 The two parties to a lease contract are as follows:
1. The lessor is the party who owns the asset.
2. The lessee is the party to whom the rights to use the asset
are granted by the lessor.
 Under a lease contract, the lessee pays rent on a periodic
basis for the lease term.
PSAK Insight
Accounting for Depreciation (slide 1 of 2)

 The periodic recording of the cost of fixed assets as an

expense is called depreciation.
 Land has an unlimited life so it is not depreciated.
 The adjusting entry to record depreciation:
 Debits: Depreciation Expense
 Credits: a contra asset account entitled Accumulated
Depreciation or Allowance for Depreciation.
Accounting for Depreciation (slide 2 of 2)

Depreciation can be caused by physical or functional factors.

1. Physical depreciation factors include wear and tear during
use or from exposure to weather.
2. Functional depreciation factors include obsolescence and
changes in customer needs that cause the asset to no longer
provide services for which it was intended.
Factors in Computing Depreciation Expense
(slide 1 of 2)

The asset’s expected The asset’s estimated

The asset’s initial cost
useful life residual value
Factors in Computing Depreciation Expense
(slide 2 of 2)

 The initial cost of a fixed asset is determined using the concepts discussed
and illustrated earlier.
 The expected useful life of a fixed asset is estimated at the time the asset is
placed into service.
 The residual value of a fixed asset at the end of its useful life is estimated at
the time the asset is placed into service.
 Residual value is sometimes referred to as scrap value, salvage value, or
trade-in value.
 The difference between a fixed asset’s initial cost and its residual value is
called the asset’s depreciable cost.
 The depreciable cost is the amount of the asset’s cost that is allocated over
its useful life as depreciation expense.
Exhibit 5: Depreciation Expense Factors
Depreciation Methods

Straight-line Units-of-output
depreciation depreciation

Double-
declining-balance
depreciation
Exhibit 6: Use of Depreciation Methods
Straight-Line Method (slide 1 of 4)

 Provides for the same amount of depreciation expense for

each year of the asset’s useful life.
 The straight-line method is by far the most widely used
depreciation method.
Straight-Line Method (slide 2 of 4)

 Assume equipment was purchased on January 1 as follows:

 Initial cost Rp24,000,000
 Expected useful life 5 years
 Estimated residual value Rp2,000,000
 The annual straight-line depreciation of Rp4,400,000.
Straight-Line Method (slide 3 of 4)

If an asset is used for only part of a year, the annual depreciation

is prorated.
 For example, assume that the preceding equipment was
purchased and placed into service on October 1.
 The depreciation for the year ending December 31 would be
as follows:
Straight-Line Method (slide 4 of 4)

 The straight-line percentage is determined by dividing 100%

by the number of years of expected useful life.
Units-of-Output Method (slide 1 of 2)

 The units-of-output method provides the same amount of

depreciation expense for each unit of output of the asset.
 Step 1. Determine the depreciation per unit as:

 Step 2. Compute the depreciation expense as:

Units-of-Output Method (slide 2 of 2)

 Assume the equipment in the preceding example is expected

to have a useful life of 10,000 operating hours. During the
year, the equipment was operated 2,100 hours.
 Step 1. Determine the depreciation per unit as:

 Step 2. Compute the depreciation expense as:

Double-Declining-Balance Method
(slide 1 of 7)

 Provides for a declining periodic expense over the expected useful

life of the asset.
 The double-declining-balance method is applied in three steps.
Step 1.
Determine the straight-line percentage, using the expected useful
life.
Step 2.
Determine the double-declining-balance rate by multiplying the
straight- line rate from Step 1 by 2.
Step 3.
Compute the depreciation expense by multiplying the double-
declining-balance rate from Step 2 times the book value of the asset.
Double-Declining-Balance Method
(slide 2 of 7)

Assume the equipment

purchased in the preceding
example is used to compute
double-declining-balance
depreciation.
Double-Declining-Balance Method
(slide 3 of 7)

Step 1.
Straight-line percentage = 20% (100%/5)
Step 2.
Double-declining-balance rate = 40% (20% × 2)
Step 3.
Depreciation expense = Rp9,600,000 (Rp24,000,000 × 40%)
Double-Declining-Balance Method
(slide 4 of 7)

 The double-declining-balance depreciation for the full five-

year life of the equipment is shown below.
Double-Declining-Balance Method
(slide 5 of 7)

 When the double-declining-balance method is used, the

estimated residual value is not considered.
 The asset should not be depreciated below its estimated
residual value.
Double-Declining-Balance Method
(slide 6 of 7)

If an asset is used for

only part of a year, the
annual Depreciation is
prorated.
Double-Declining-Balance Method
(slide 7 of 7)

 Assume that the preceding equipment was purchased and

placed into service on October 1.

 The depreciation for the second year would then be

Rp8,640,000.
Exhibit 7: Summary of Depreciation Methods
Exhibit 8: Comparing Depreciation Methods
Depreciation for Income Tax (slide 1 of 2)

The Indonesian taxation regulator

allows only two methods to
compute the depreciation in a
corporation for tax purposes,
there are straight-line and
declining balance method.
Depreciation for Income Tax (slide 2 of 2)
Revising Depreciation Estimates (slide 1 of 5)

When new estimates are determined, they are used to determine the
depreciation expense in future periods.

The depreciation expense recorded in earlier years is not affected.

Revising Depreciation Estimates (slide 2 of 5)

Assume the following data for a machine that was purchased on

January 1, 2015:
 Initial machine cost Rp140,000,000
 Expected useful life 5 years
 Estimated residual value Rp10,000,000
 Annual depreciation using the straight-line method

[(Rp140,000,000 – Rp10,000,000)/5 years]

= Rp26,000,000
Revising Depreciation Estimates (slide 3 of 5)

 At the end of 2016, the machine’s book value (undepreciated

cost) is Rp88,000,000, compute as follows:
Revising Depreciation Estimates (slide 4 of 5)

 At the beginning of 2017, the company estimates that the

machine’s remaining useful life is eight years (instead of
three) and that its residual value is Rp8,000,000 (instead of
Rp10,000,000).
Revising Depreciation Estimates (slide 5 of 5)

 The depreciation expense for each of the remaining eight

years is Rp10,000,000, computed as follows:
Exhibit 10: Book Value of Asset with
Change in Estimate
Disposal of Fixed Assets (slide 1 of 2)

 Fixed assets that are no longer useful may be discarded or

sold.
 In such cases, the fixed asset is removed from the accounts.
 Just because a fixed asset is fully depreciated does not mean
that it should be removed from the accounts.
Disposal of Fixed Assets (slide 2 of 2)

 If a fixed asset is still being used, its cost and accumulated

depreciation should remaining the ledger even if the asset is
fully depreciated.
 This maintains accountability for the asset in the ledger.
Discarding Fixed Assets (slide 1 of 4)

 If a fixed asset is no longer used and has no residual value, it

is discarded.
 For example, assume that a fixed asset that is fully
depreciated and has no residual value is discarded.
 The entry to record the discarding removes the asset and its
related accumulated depreciation from the ledger.
Discarding Fixed Assets (slide 2 of 4)

 Assume that equipment acquired at a cost of Rp25,000,000 is

fully depreciated at December 31, 2015.
 On February 14, 2016, the equipment is discarded.
Discarding Fixed Assets (slide 3 of 4)

 Assume that equipment costing Rp6,000,000 with no

estimated residual value is depreciated at a straight-line rate
of 10%.
 On December 31, 2015, the accumulated depreciation
balance, after adjusting entries, is Rp4,650,000.
 On March 24, 2016, the asset is removed from service and
discarded.
Discarding Fixed Assets (slide 4 of 4)
Selling Fixed Assets (slide 1 of 5)

 The entry to record the sale of a fixed asset is similar to the

entry for discarding an asset.
 The only difference is that the receipt of cash is also
recorded.
 If the selling price is more than the book value of the asset, a
gain is recorded.
 If the selling price is less than the book value, a loss is
recorded.
Selling Fixed Assets (slide 2 of 5)

 Assume that equipment is purchased at a cost of

Rp10,000,000 with no estimated residual value and is
depreciated at a straight-line rate of 10%.
 The equipment is sold for cash on October 12 of the eighth
year of its use.
 The balance of the accumulated depreciation account as of
the preceding December 31 is Rp7,000,000.
Selling Fixed Assets (slide 3 of 5)
Selling Fixed Assets (slide 4 of 5)
Selling Fixed Assets (slide 5 of 5)
Natural Resources
 The fixed assets of some companies include timber, metal
ores, minerals, or other natural resources.
 As these resources are harvested or mined and then sold, a
portion of their cost is debited to an expense account.
 This process of transferring the cost of natural resources to
an expense account is called depletion.
Calculating Depletion
 Step 1. Determine the depletion rate as:

 Step 2. Multiply the depletion rate by the quantity extracted

from the resource during the period.
Example of Depletion Calculation
(slide 1 of 3)

 To illustrate, assume that PT Kencana Utama purchased

mining rights as follows:
 Cost of mineral deposit Rp400,000,000
 Estimated total units of resource 1,000,000 tons
 Tons mined during year 90,000 tons
Example of Depletion Calculation
(slide 2 of 3)

 Step 1.

 Step 2.
Example of Depletion Calculation
(slide 3 of 3)

 Accumulated Depletion is a contra asset account.

 Reported on the statement of financial position as a
deduction from the cost of the mineral deposit.
Intangible Assets (slide 1 of 2)

 IAS 38 (or PSAK 19) defines an intangible asset as an

identifiable non-monetary asset without physical substance.
 To be recognized as an intangible asset, an asset needs to
satisfy the conditions of identifiability, control, and future
economic benefits.
 A company recognize an intangible asset (a) if and only if
the expected future economic benefits is probable; and (b)
the cost measurement is reliable.
 Intangible assets usually are used in the operation of a
business and are not held for sale.
Intangible Assets (slide 2 of 2)

The accounting for intangible assets is similar to that for fixed

assets. The major issues are:
 Determining the initial cost.
 Determining the amortization, which is the amount of cost to
transfer to expense.
Amortization results from the passage of time or a decline in the
usefulness of the intangible asset.
Patents (slide 1 of 4)

 Patent is an exclusive rights to produce and sell goods with

one or more unique features.
 The initial cost of a purchased patent, including any legal
fees, is debited to an asset account.
 This cost is written off, or amortized, over the years of the
patent’s expected useful life.
 The expected useful life of a patent may be less than its
legal life.
Patents (slide 2 of 4)

 Amortization is normally computed using the straight-line

method.
 The amortization is recorded by debiting an amortization
expense account and crediting the patents account.
 A separate contra asset account is usually not used for
intangible assets.
Patents (slide 3 of 4)

Assume that at the beginning

of its fiscal year, a company
acquires patent rights for
Rp100,000,000.
The patent will not expire for
14 years, its remaining useful
life is estimated as five years.
Patents (slide 4 of 4)

 The adjusting entry to amortize the patent at the end of the

year is as follows:
Copyrights and Trademarks

 A Copyrights is the exclusive right to publish and sell a

literary, artistic, or musical composition.
 The costs of a copyright include all costs of creating the work
plus any other costs of obtaining the copyright.
 A copyright that is purchased is recorded at the price paid for it.
 Copyrights are amortized over their estimated useful lives.
 A trademark is a name, term, or symbol used to identify a
business and its products.
 Most businesses identify their trademarks with ® in their
advertisements and on their products.
Goodwill (slide 1 of 3)
 Goodwill refers to an intangible asset of a business that is
created from such favorable factors as location, product
quality, reputation, and managerial skill.
 Goodwill allows a business to earn a greater rate of return than
normal.
 Indonesian accounting standard (PSAK) allow goodwill to be
recorded only if it is objectively determined by a transaction.
 An example of such a transaction is the purchase of a business
at a price in excess of the fair value of its net assets (assets –
liabilities). The excess is recorded as goodwill and reported as
an intangible asset.
Goodwill (slide 2 of 3)
 Goodwill is not amortized but impaired.
 Assume that on December 31 PT Eka Pratama has
determined that Rp250,000,000 of the goodwill created from
the purchase of PT Regina is impaired.
Goodwill (slide 3 of 3)
 The entry to record the impairment is as follows.
Exhibit 11: Frequency of Intangible Asset
Disclosures for 70 Firms
Exhibit 12: Comparison of Intangible Assets
Financial Reporting for Fixed Assets
and Intangible Assets (slide 1 of 2)

 In the income statement, depreciation and amortization

should be reported separately or disclosed in a note.
 In the statement of financial position, each class of fixed
assets should be disclosed on the face of the statement or in
the notes. The related accumulated depreciation should also
be disclosed, either by class or in total.
 The fixed assets may be shown at their book value (cost less
accumulated depreciation), which can also be described as
their net amount.
Financial Reporting for Fixed Assets
and Intangible Assets (slide 2 of 2)

 If there are many classes of fixed assets, a single amount

may be presented in the statement of financial position,
supported by a note with a separate listing.
 Intangible assets are usually reported in the statement of
financial position in a separate section following fixed
assets.
 The balance of each class of intangible assets should be
disclosed net of any amortization.
Statement of Financial Position for
Kedai Kopi
Financial Analysis and Interpretation:
Fixed Asset Turnover Ratio (slide 1 of 3)

 Fixed asset turnover ratio measures a company’s efficiency

in using its fixed assets to generate revenue.
Financial Analysis and Interpretation:
Fixed Asset Turnover Ratio (slide 2 of 3)

 To illustrate, the following data (in thousands of rupiah)

were taken from recent financial statements (2015) of PT
Sepatu Bata Tbk.:.
Financial Analysis and Interpretation:
Fixed Asset Turnover Ratio (slide 3 of 3)

 PT Sepatu Bata’s fixed asset turnover ratios for Year 2

(2015) and Year 1 (2014) are computed as follows:
Appendix: Exchanging Similar Fixed Assets
(slide 1 of 2)

 Old equipment is often traded in for new equipment having a

similar use.
 In such cases, the seller allows the buyer an amount for the
old equipment traded in. This amount, called the trade-in
allowance, may be either greater or less than the book value
of the old equipment.
 The remaining balance—the amount owed—is either paid in
cash or recorded as a liability. It is normally called boot,
which is its tax name.
Appendix: Exchanging Similar Fixed Assets
(slide 2 of 2)

 Accounting for the exchange of similar assets depends on

whether the transaction has commercial substance.
 An exchange has commercial substance if future cash flows
change as a result of the exchange.
 If an exchange of similar assets has commercial substance, a
gain or loss is recognized.
 In such cases, the exchange is accounted for similar to that of a
sale of a fixed asset.
 The gain or loss is determined as the difference between the
fair market value (trade-in allowance) of the asset given up
(exchanged) and its book value.
Appendix: Gain on Exchange (slide 1 of 2)

 To illustrate a gain on an exchange of similar assets, assume

the following:
Appendix: Gain on Exchange (slide 2 of 2)

 The entry to record this exchange and payment of cash is as

follows:
Loss On Exchange (slide 1 of 2)

 To illustrate a loss on an exchange of similar assets, assume

that instead of a trade-in allowance of Rp1,100,000, a trade-
in allowance of only Rp675,000 was allowed in the
preceding example. In this case, the cash paid on the
exchange is Rp4,325,000, computed as follows:
Loss On Exchange (slide 2 of 2)

 The entry to record this exchange and payment of cash is as

follows: