war22ech10fixed assets and intangible assets revisi

(1)

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Adeng Pustikaningsih, M.Si.

Dosen Jurusan Pendidikan Akuntansi Fakultas Ekonomi

(2)

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Fixed Assets and

Intangible Assets

(3)

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1.

Define, classify, and account for the

cost of fixed assets.

2.

Compute depreciation, using the

following methods: straight-line

method, units-of-production method,

and double-declining-balance

(4)

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3.

Journalize entries for the disposal of

fixed assets.

4.

Compute depletion and journalize the

entry for depletion.

5.

Describe the accounting for

(5)

6.

Describe how depreciation expense is

reported in an income statement, and

prepare a balance sheet that includes

fixed assets and intangible assets.

(6)

Define, classify,

and account for the

cost of fixed assets.

Objective 1

(7)

Nature of Fixed Assets

Fixed assets

are long-term or

relatively permanent assets. They are

tangible assets

because they exist

physically. They are owned and used

by the business and are not offered for

sale as part of normal operations.

(8)

Fixed Assets as a Percent of Total Assets Service Firms:

Pembangunan Jaya Ancol Tbk. (Recreation Park) 35.74%

Bayu Buana Tbk. (Travel Agent) 8.65%

Bank Rakyat Indonesia Tbk. (Bank) 1.18%

Manufacturing Firms:

Kimia Farma Tbk. (Pharmaceuticals) 78.67%

Sepatu Bata Tbk. (Shoes Factory) 25.13%

Indofood Sukses Makmur Tbk. (Food and Beverage) 39.97%

Merchandising Firms:

Alfa Retailindo Tbk. 44.07%

Fixed Assets as a Percent of Total Assets—Selected Companies

(9)

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Is the purchased item long-lived?

yes

Is the asset used in a productive purpose?

no

Expense

yes no

(10)

 Purchase price

 Sales taxes

 Permits from government agencies

 Broker’s commissions

 Title fees

 Surveying fees

 Delinquent real estate taxes

 Razing or removing unwanted buildings, less any salvage

LAND

(11)

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 Architects’ fees

 Engineers’ fees

 Insurance costs incurred during construction

 Interest on money borrowed to finance construction

 Walkways to and around the building

 Sales taxes

 Repairs (purchase of existing building)

 Reconditioning (purchase of existing building)

BUILDING

(12)

 Sales taxes

 Freight

 Installation

 Repairs (purchase of used equipment)

 Reconditioning (purchase of used equipment)

 Trees and shrubs

 Fences

 Outdoor lighting

Cost of Acquiring Fixed Assets

MACHINERY AND EQUIPMENT

LAND

IMPROVEMENT

 Modification for use

 Testing for use

 Permits from government agencies

(13)

Cost of Acquiring Fixed Assets Excludes:



Vandalism



Mistakes in installation



Uninsured theft



Damage during unpacking

and installing



Fines for not obtaining proper

permits from government

agencies

(14)

Expenditures that benefit only the

current period are called

revenue

expenditures

.

Expenditures that

improve the asset or extend its useful

life are

capital expenditures

.

(15)

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CAPITAL

EXPENDITURES

1) Additions

2) Improvements

3) Extraordinary

repairs

Normal and

ordinary repairs

and maintenance

REVENUE

EXPENDITURES

(16)

Ordinary Maintenance and Repairs

On April 9, the firm paid Rp 300,000

for a tune-up of a delivery truck.

Apr. 9 Repairs and Maintenance Exp. 300 000

Cash 300 000

(17)

Asset Improvements

On May 4, a Rp 5,500,000 hydraulic lift was

installed on the delivery truck to allow for easier

and quicker loading of heavy cargo.

May 4 Delivery Truck 5 500 000

Cash 5 500 000

10-1

(18)

Extraordinary Repairs

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

useful life is overhauled at a cost of Rp 4,500,000

which extends its useful life eight years. Work on

the forklift was completed on Oct. 14.

Oct. 14 Accum. Depreciation—Forklift 4 500 000

Cash 4 500 000

(19)

10-1

(20)

Example Exercise 10-1

On June 18 GTS Co. paid Rp 1,200,000 to upgrade a

hydraulic lift and Rp 45,000 for an oil change for one

of its delivery trucks. Journalize the entries for the

hydraulic lift upgrade and oil change expenditures.

Follow My Example 10-1

June 18 Delivery Truck 1,200,000

(21)

Leasing Fixed Assets

A

capital lease

is accounted

for as if the lessee has, in fact,

purchased the asset. The

asset is then amortized over

the life of the capital lease.

(22)

Leasing Fixed Assets

A lease that is not

classified as a capital

lease for accounting

purposes is classified as

an

operating lease

(an

operating leases is treated

(23)

Compute depreciation using the

following methods: straight-line

method, units-of-production method,

double-declining-balance method.

Objective 2

(24)

Over time, fixed assets such as

equipment, buildings, and land

improvements lose their ability to

provide services. The periodic

transfer of the cost of fixed assets to

expense is called

depreciation

.

10-2

(25)

Physical depreciation

occurs from wear

and tear while in use and from the

action of the weather

Functional

depreciation

occurs when a fixed asset

is no longer able to provide services at

the level for which it was intended.

10-2

(26)

Factors in Computing Depreciation

The three factors in determining the

amount of depreciation expense to be

recognized each period are: (a) the fixed

asset’s initial cost, (b) its expected useful

life, and (c) its estimated value at the end

of the useful life.

(27)

The fixed asset’s estimated value at

the end of its useful life is called the

residual value

,

scrap value

,

salvage

value

, or

trade-in value

. A fixed

asset’s residual value and its

expected

useful life

must be estimated at the

time the asset is placed in service.

10-2

(28)

(29)

88% 2%

7% 3%

Exhibit 5: Use of Depreciation Methods

Straight-line

Units-of-production

Double-declining-balance Other

(30)

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Straight-Line Method 10-2

The

straight-line method

provides

for the same amount of

depreciation expense for each year

of the asset’s useful life.

(31)

A depreciable asset cost Rp 24,000,000. Its

estimated residual value is Rp 2,000,000

and its estimated life is 5 years.

Annual depreciation = Cost – estimated residual value Estimated life

Annual depreciation = Rp 24,000,000 – Rp 2,000,000 5 years

(32)

The straight-line method is

widely used by firms because it

is simple and it provides a

reasonable transfer of cost to

periodic expenses if the asset is

used about the same from

period to period.

(33)

Equipment that was acquired at the beginning of the year at a cost of Rp 125,000,000 has an estimated residual value of Rp 5,000,000 and an estimated useful life of 10 years. Determine the (a) depreciable cost, (b) straight-line rate, and (c) annual straight-straight-line depreciation.

(a) Rp 120,000,000 (Rp 125,000,000 – Rp 5,000,000) (b) 10% = (1/10)

(34)

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Units-of-Production Method 10-2

The

units-of-production method

provides

for the same amount of depreciation

expense for each unit produced or each

unit of capacity used by the asset.

(35)

10-2

A machine with a cost Rp 24,000,000. Its

estimated residual value is Rp 2,000,000 and its

expected to have an estimated life of 10,000

operating hours.

Hourly depreciation = Rp 24,000,000 – Rp 2,000,000 10,000 estimated hours

(36)

The units-of-production method

is more appropriate than the

straight-line method when the

amount of use of a fixed asset

varies from year to year.

(37)

Equipment acquired at a cost of Rp 180,000,000 has an estimated residual value of Rp 10,000,000 an estimated useful life of 40,000 hours, and was operated 3,600

hours during the year. Determine the (a) depreciable cost, (b) depreciation rate, and (c) the

units-of-production depreciation for the year.

(38)

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Double-Declining-Balance Method

The

double-declining-balance method

provides

for a declining periodic

expense over the estimated

useful life of the asset.

(39)

A double-declining balance rate is

determined by doubling the

straight-line rate. A shortcut to determining

the straight-line rate is to divide one

by the number of years (

1/5 = .20

).

Hence, using the double-declining-

balance method, a five-year life

results in a 40 percent rate (.20 x 2).

(40)

For the first year, the cost of the asset

is multiplied by 40 percent. After the

first year, the declining

book value

of

the asset is multiplied 40 percent.

Continuing with the example where

the fixed asset cost Rp 24,000,000

and has an expected residual value of

Rp 2,000,000 a table can be built.

(41)

Rp 24,000,000 x .40

Book Value Accum.

Beginning Annual Deprec. Book Value Year of Year Rate Deprec. Year-End Year-End

1 Rp 24,000,000 40% Rp 9,600,000

(42)

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1 Rp 24,000,000 40% Rp 9,600,000 Rp9,600,000 Rp14,400,000 2 14,400,000 40% 5,760,000

Book Value Accum.

Rp 14,400,000 x .40

(43)

1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000 2 14,400,000 40% 5,760,000 15,360,000 8,640,000

Book Value Accum.

(44)

1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000 2 14,400,000 40% 5,760,000 15,360,000 8,640,000

3 8,640,000 40% 3,456,000 18,816,000 5,184,000

Book Value Accum.

(45)

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1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000 2 14,400,000 40% 5,760,000 15,360,000 8,640,000 3 8,640,000 40% 3,456,000 18,816,000 5,184,000 4 5,184,000 40% 2,073,600 20,889,600 3,110,040

Book Value Accum.

(46)

1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000 2 14,400,000 40% 5,760,000 15,360,000 8,640,000 3 8,640,000 40% 3,456,000 18,816,000 5,184,000 4 5,184,000 40% 2,073,600 20,889,600 3,110,040 5 3,110,040 40% 1,110,400 22,000,000 2,000,000

Book Value Accum.

(47)

1 Rp 24,000,000 40% Rp 9,600,000 Rp 9,600,000 Rp 14,400,000 2 14,400,000 40% 5,760,000 15,360,000 8,640,000 3 8,640,000 40% 3,456,000 18,816,000 5,184,000 4 5,184,000 40% 2,073,600 20,889,600 3,110,040 5 3,110,040 – Rp 2,000,000 1,110,400 22,000,000 2,000,000 Book Value Accum.

(48)

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Equipment that was acquired at the beginning of the year at a cost of Rp 125,000,000 has an estimated residual value of Rp 5,000,000 and an estimated useful life of 10 years. Determine the (a) depreciable cost, (b) double-declining-balance rate, and (c) double-declining balance depreciation for the first year.

(49)

(50)

Comparing 10-2

(51)

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Depreciation for Govenment Income Tax

Indonesia Directorate

General of Tax (DGT)

specifies

the depreciation rate for each group

of fixed asset.

(52)

DGT specifies Six classes of useful

life and depreciation rates for each

class. The two most common classes

are the 4-year class (includes public

transport vehicles and office

equipment from woods) and the

8-year class (includes most machinery,

(53)

A machine purchased for Rp 140,000,000 was

originally estimated to have a useful life of five

years and a residual value of Rp 10,000,000.

The asset has been depreciated for two years

using the straight-line method.

Revising Depreciation Estimates

Rp140,000,000 – Rp10,000,000

5 years Annual

Depreciation (S/L)

=

Rp26,000,000 per year

Annual

=

(54)

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At the end of two years, the asset’s book value

is Rp 88,000,000, determined as follows:

Asset cost Rp 140,000,000

Less accumulated depreciation

(Rp 26,000,000 per year x 2 years) 52,000,000 Book value, end of second year Rp 88,000,000

(55)

During the third year, the company estimates that

the remaining useful life is eight years (instead of

three) and that the residual value is Rp 8,000,000

(instead of Rp 10,000,000). Depreciation expense

for each of the remaining eight year is determined

as follows:

Book value, end of second year Rp 88,000,000 Less revised estimated residual value 8,000,000 Revised remaining depreciation cost Rp 80,000,000

Revised annual depreciation expense

(56)

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A warehouse with a cost of Rp 500,000,000 has an

estimated residual value of Rp 120,000,000 an estimated useful life of 40 years, and is depreciated by the

straight-line method. (a) Determine the amount of annual depreciation. (b) Determine the book value at the end of the 20th_{year of use. (c) If at the start of the}

21st_{year it is estimated that the remaining life is 25}

(57)

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a. Rp 9,500,000 [(Rp 500,000,000

–

Rp

120,000,000)/40]

b. Rp 310,000,000 [Rp 500,000,000

–

(Rp

9,500,000 x 20)]

(58)

Journalize entries

for the disposal of

fixed assets.

Objective 3

(59)

Discarding Fixed Assets

A piece of equipment acquired at a cost of

Rp 25,000,000 is fully depreciation. On

February 14, the equipment is discarded.

Feb. 14 Accumulated Depr.—Equipment 25 000 00

Equipment 25 000 00

To write off equipment discarded.

(60)

Equipment costing Rp 6,000,000 is depreciated

at an annual straight-line rate of 10%. After the

adjusting entry,

Accumulated Depreciation

—

Equipment

had a Rp 4,750,000 balance. The

equipment was discarded on March 24.

Mar. 24 Depreciation Expense—Equipment 150 000

Accum. Depr.—Equipment 150 000 To record current

depreciation on Rp 600,000 x 3/12

(61)

The discarding of the equipment is then

recorded by the following entry:

Mar. 24 Accum. Depreciation—Equipment 4 900 000 Loss on Disposal of Fixed Assets 1 100 000

Equipment 6 000 000

To write off equipment discarded.

(62)

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Equipment costing Rp 10,000,000 is depreciated at

an annual straight-line rate of 10%. The equipment

is sold for cash on October 12.

Accumulated

Depreciation

(last adjusted December 31) has a

balance of Rp 7,000,000 and needs to be updated.

Selling Fixed Assets

Oct. 12 Depreciation Expense—Equipment 750 000

Accum. Depr.—Equipment 750 000 To record current

(63)

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The equipment is sold on October

12 for Rp 2,250,000. No gain or

loss.

Oct. 12 Cash 2 250 000

Accum. Depreciation—Equipment 7 750 000

Equipment 10 000 000

Sold equipment at book value.

10-3

(64)

Oct. 12 Cash 1 000 000

Accum. Depreciation—Equipment 7 750 000 Loss on Disposal of Fixed Assets 1 250 000

Sold equipment at a loss.

The equipment is sold on October 12

for Rp 1,000,000; a loss of Rp

1,250,000.

10-3

(65)

Oct. 12 Cash 2 800 000

Accum. Depreciation—Equipment 7 750 000

Sold equipment at a gain.

The equipment is sold on October 12

for Rp 2,800,000; a gain of Rp

550,000.

Gain on Disp. of Fixed Assets 550 000

10-3

(66)

Equipment was acquired at the beginning of year at a cost of Rp 91,000,000. The equipment was depreciated using the straight-line method based upon an estimated useful life of 9 years and an estimated residual value of Rp 10,000,000.

a. What was the depreciation for the first year?

(67)

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a. Rp 9,000,000 [(Rp 91,000,000 – Rp 10,000,000)/9]

b. Rp 5,000,000 gain; Rp 78,000,000 – [Rp 91,000,000 – (Rp 9,000,000 x 2)]

c. Cash 78,000,000

Accum. Depreciation—Equipment 18,000,000

Equipment 91,000,000

(68)

Exchanging Fixed Assets

When old equipment is traded for new

equipment, the seller often allows the buyer

a

trade-in allowance

for the old equipment

traded. The remainder, the

boot

, is either

paid in cash or recorded as a liability.

(69)

10-3

Gains on exchanges of similar

fixed assets

are not

recognized

for financial reporting purposes.

(70)

On June 19, assume that new

equipment being purchased has a list

price of Rp 5,000,000. The dealer

allows a trade-in allowance of Rp

1,100,000 on the old, similar

equipment. The old equipment cost

Rp 4,000,000 and has a book value

(71)

Two Methods of Determining Cost

Method One

List price of new equipment Rp 5,000,000 Trade-in allowance Rp 1,100,000

Book value of old equipment 800,000

Unrecognized gain on exchange (300,000)

Cost of new equipment Rp 4,700,000

(72)

Method Two

Book value of old equipment Rp 800,000 Cash paid at date of exchange 3,900,000

Cost of new equipment Rp 4,700,000

Note that either method provides the same

(73)

On June 19, equipment was

exchanged at a gain of Rp 300,000.

June 19 Accum. Depreciation—Equipment 3 200 000

Equipment (old equipment) 4 000 000 To record exchange of

equipment.

Cash 3 900 000

Equipment (new equipment) 4 700 000

(74)

Losses on Exchanges

For financial reporting purposes, losses are

recognized on exchange of similar fixed

assets if the trade-in allowance is less than

the book value of the old equipment. On

September 7, new equipment was acquired

by trading in old equipment with a cost of

Rp 7,000,000 and a book value of Rp

(75)

Cost of old equipment Rp 7,000,000

Accumulated depreciation at date of exchange 4,600,000 Book value at September 7, date of exchange Rp 2,400,000 Trade-in allowance on old equipment 2,000,000

Loss on exchange Rp 400,000

Sept 7 Accum. Depreciation—Equipment 4 600 000

Loss on Disposal of Fixed Assets 400 000

Equipment 7 000 000

Cash 8 000 000

To record exchange of

(76)

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On the first day of the fiscal year, a delivery truck with a list price of Rp 75,000,000 was acquired in exchange for an old delivery truck and Rp 63,000,000 cash. The old truck had a cost of Rp 50,000,000 and accumulated

depreciation of Rp 39,500,000.

(77)

a. Rp 73,500,000

List price of new truck Rp 75,000,000

Trade-in allowance on old truck

($75,000 – $63,000) Rp 12,000,000 Book value of old truck

($50,000 – $39,500) 10,500,000

Unrecognized gain on exchange (1,500,000)

Cost of new truck Rp 73,500,000

(78)

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Book value of old truck (Rp 50,000,000 –

Rp 39,500,000) Rp 10,500,000

Plus cash paid at date of exchange 63,000,000

Cost of new truck Rp 73,500,000

b. Truck (new) 73,500,000

Accumulated Depreciation—

Truck (old) 39,500,000

Truck (old) 50,000,000

(79)

Compute depletion

and journalize the

entry for depletion.

Objective 4

(80)

The process of

transferring the cost of

natural resources to an

expense account is called

depletion

.

(81)

Recording Depletion 10-4

A business paid Rp 400,000,000 for

the mining rights to a mineral deposit

estimated at 1,000,000 tons of ore.

The depletion rate is Rp 400 per ton

(82)

Dec. 31 Depletion Expense 36 000 000

Accumulated Depletion 36 000 000

Adjusting Entry

10-4

(83)

Earth’s Treasures Mining Co. acquired mineral rights for

Rp 45,000,000,000. The mineral deposit is estimated at 50,000,000 tons. During the current year, 12,600,000 tons were mined and sold.

a. Determine the depletion rate.

b. Determine the amount of depletion expense for the current year.

(84)

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a. Rp 900 per ton = Rp 45,000,000,000/50,000,000 tons

b. Rp11,340,000,000 = (12,600,000 tons x Rp 900 per ton)

c. Dec. 31 Depletion Expense 11,340,000,000

Accumulated Depletion 11,340,000,000

(85)

Describe the accounting

for intangible assets,

such patents, copyrights,

and goodwill.

Objective 5

(86)

Intangible Assets

Patents, copyrights, trademarks, and

goodwill are long-lived assets that

are useful in the operations of a

business and not held for sale. These

assets are called

intangible assets

because they do not exist physically.

(87)

The exclusive right granted by the

federal government to

manufacturers to produce and sell

goods with one or more unique

features is a

patent

. These rights

continue in effect for

20

years.

(88)

At the beginning of its fiscal year, a business

acquires a patent right for Rp 100,000,000. Its

remaining useful life is estimated at 5 years.

10-5

Journalizing Amortization of a Patent

Dec. 31 Amortization Expense—Patents 20 000 000

Patents 20 000 000

(89)

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10-5

Dec. 31 Amortization Expense—Patents 20 000 000

Patents 20 000 000

Patent amortization (Rp 100,000,000/5).

Adjusting Entry

Because a patent (and other intangible assets) does not exist physically, it is acceptable to credit the asset. This

(90)

The exclusive right granted by the

federal government to publish and

sell a literary, artistic, or musical

composition is a

copyright

. A

copyright extends for

70

years

beyond the author’s death.

10-5

(91)

A

trademark

is a unique 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. Trademarks can be

registered for

10

years and can be

renewed every 10 year period thereafter.

10-5

(92)

In business,

goodwill

refers to an

intangible asset of a business that is

created from such favorable factors

as location, product quality,

reputation, and managerial skill.

10-5

(93)

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Generally accepted accounting principles

permit goodwill to be recorded in the

accounts only if it is objectively

determined by a transaction.

(94)

Impaired Goodwill 10-5

A loss should be recorded if the business

prospects of the acquired firm (and the acquired

goodwill) become significantly impaired.

Mar. 19 Loss from Impaired Goodwill 50 000 000

Goodwill 50 000 000

(95)

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On December 31 it was estimated that goodwill of Rp 40,000,000 was impaired. In addition, a patent with an estimated useful economic life of 12 years was acquired for Rp 484,000,000 on July 1.

a. Journalize the adjusting entry on December 31, for the impaired goodwill.

(96)

a. Dec. 31 Loss from Impaired Goodwill 40,000,000

Goodwill 40,000,000

Impaired goodwill.

b. Dec. 31 Amortization Expense—Patents 3,500,000

Patents 3,500,000

Amortized patent rights

(97)

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Describe how depreciation

expense is reported in an

income statement, and

prepare a balance sheet

that includes fixed assets

Objective 6

(98)

10-6



The fixed assets may be shown at their

net

amount.



The amount of each major class of fixed

assets should be disclosed in the balance

sheet or in notes.

(99)

10-6



The cost of mineral rights or ore deposits is

normally shown as part of the fixed asset

section of the balance sheet. The related

accumulated depletion should also be

disclosed.



Intangible assets are usually reported (net of

amortization) in the balance sheet in a

(100)

Total Current Assets 1,647,854,000,000

Property,Plant, and Equipment

Cost Accum.Depr Book Value Land 102,249,000,000 0 102,249,000,000 Road & Bridges 430,410,000,000 162,006,000,000 268,404,000,000 Building, Installations and Machinery 794,147,000,000 217,622,000,000 576,525,000,000 Machinery and Equipment 766,698,000,000 291,510,000,000 475,188,000,000 Vehicles 257,916,000,000 147,864,000,000 110,052,000,000 Office and Housing Equipment 48,010,000,000 37,758,000,000 10,252,000,000 Construction in Progress 212,904,000,000 0 212,904,000,000

2,612,334,000,000 856,760,000,000 1,755,574,000,000

Plantations Mature Plantations

Cost Accum. Depl. Book Value Oil Palm 1,207,204,000,000 543,310,000,000 663,894,000,000 Rubber 19,834,000,000 8,492,000,000 11,342,000,000

Cocoa 0 0 0

1,227,038,000,000 551,802,000,000 675,236,000,000

PT ASTRA AGRO LESTARI Tbk BALANCE SHEET (PARTIAL)

31-Dec-07 Assets

Fixed Assets and Intangible Assets in the Balance Sheet

(101)

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10-6

Fixed Asset Turnover Ratio

One measure of the revenue-generating

efficiency of fixed assets is the

fixed asset

turnover ratio

. It measures the number of

dollars of revenue earned per dollar of fixed

assets and is computed as follows:

Fixed Asset Turnover Ratio

Revenue

Average Book Value of Fixed Assets

(102)

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10-6

Financial Analysis and Interpretation

For Rimo Department Store

Revenue

Average Book Value of Fixed Assets

=

Rp 199,246,551,622

(24,661,628,738 + 33,455,273,668)/2

=

Fixed Asset