College Accounting Heintz & Parry 20 th Edition. Chapter 18 Accounting for Long-Term Assets.
Transcript of College Accounting Heintz & Parry 20 th Edition. Chapter 18 Accounting for Long-Term Assets.
College AccountingCollege Accounting
Heintz & ParryHeintz & Parry2020thth Edition Edition
Heintz & ParryHeintz & Parry2020thth Edition Edition
LONG-TERM ASSETSLONG-TERM ASSETS
• Property, plant, and equipment– Tangible and used in the operations of the
business– Also called plant assets or fixed assets– Examples: Land, buildings, furniture and
equipment• Wasting assets
– Natural resources consumed in the operation of the business
• Intangible assets– Long-term assets that have no physical
substance– Examples: Patents, copyrights, trademarks
LONG-TERM ASSETSLONG-TERM ASSETS
• Long-term assets (except land) gradually wear out or are used up as time passes– The portion that has been used up or
worn out is recognized as an expense• Plant asset – “depreciation”• Natural resources – “depletion”• Intangible assets – “amortization”
– Process of cost allocation• Not a process of valuation• Not intended to make the assets reflect
their market values on the balance sheet
LANDLAND
• Cost includes:– All amounts spent to purchase the land
and prepare it for its intended use, including costs for:
• Legal and real estate fees• Cost of removing old
buildings• Grading the land• Special tax assessments
LAND IMPROVEMENTSLAND IMPROVEMENTS
• Costs related to land that are notpermanent in nature– Cost includes:
• Planting trees andshrubs
• Installing fences• Paving parking areas
– Depreciated overtheir expected usefullives
BUILDINGSBUILDINGS
• Cost includes:– Purchase price
• If purchase price includes land, the cost ofland and building must be determined andaccounted for separately
– Legal fees and related taxes• If the building is constructed, the cost
includes material, labor, architectural, and engineering fees– Insurance premiums and interest on
loans during construction
Interest on loans DURING CONSTRUCTION is debitedto the asset account, but interest AFTER the asset is
put into service is debited to an expense account.
EQUIPMENTEQUIPMENT
• Cost includes:– Purchase price– Transportation charges– Insurance while in transit– Installation costs– Any other costs that are incurred up to
the point of placing the asset in service
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DATE DESCRIPTION PR DEBIT CREDIT
Depr. Expense—Delivery Equip.1
2
3
4
5
6
7
8
9
10
11
100 00
DEPRECIATIONDEPRECIATION
Reported on theincome statement
Dec. 3120--
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DATE DESCRIPTION PR DEBIT CREDIT
Depr. Expense—Delivery Equip.1
2
3
4
5
6
7
8
9
10
11
100 00
Accum. Depr.—Delivery Equip. 100 00
DEPRECIATIONDEPRECIATION
Deducted from the asset account“Delivery Equipment” on the balance sheet
Dec. 3120--
DEPRECIATIONDEPRECIATION
• Two major types:
• Physical depreciation – The loss of usefulness because of
deterioration
• Functional depreciation – The loss of usefulness because of
inadequacy or obsolescence
3
Compute depreciation using
the straight-line, declining-
balance, sum-of-the-years’-
digits, and units-of-
production methods.
DEPRECIATIONDEPRECIATION
• Cost – The sum of all amounts spent to acquire an asset and prepare it for its intended use
The new asset had a cost of $10,000.
What did we pay for the new asset?
DEPRECIATIONDEPRECIATION
Useful life – The amount of service expected to be obtained from an asset
Be careful! We only want toknow how long our
company will use the asset, not how long the asset could last.
How long will the asset be used?
DEPRECIATIONDEPRECIATION
Useful life – The amount of service expected to be obtained from an asset
We plan on usingit for 4 years.
How long will the asset be used?
DEPRECIATIONDEPRECIATION
• Salvage value – The estimated scrap, or market, value for the asset on its expected disposal date
We feel we can sell itfor $1,000 after using
it for 4 years.
What can we get for it when we’re through with it?
FOUR COMMON DEPRECIATION METHODS
FOUR COMMON DEPRECIATION METHODS
• The most commonly used depreciation methods for financial reporting purposes are:– Straight-line method– Declining-balance method– Sum-of-the-years’-digits method– Units-of-production method
STRAIGHT-LINE METHODSTRAIGHT-LINE METHOD
Depreciation is recognized evenly over the years of the asset’s life.
FORMULA:
(Cost – Salvage Value) ($10,000 – $1,000)
Cost minus salvage valueis also called
“depreciable cost.”
STRAIGHT-LINE METHODSTRAIGHT-LINE METHOD
Depreciation is recognized evenly over the years of the asset’s life.
FORMULA:
(Cost – Salvage Value)Est. Useful Life
($10,000 – $1,000)4 Years
$2,250per year
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STRAIGHT-LINE METHODSTRAIGHT-LINE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
Book Value = Cost – Accumulated Depreciation
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STRAIGHT-LINE METHODSTRAIGHT-LINE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
BOOK VALUE = COSTat time of purchase
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STRAIGHT-LINE METHODSTRAIGHT-LINE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
Same depreciationeach year
1 $2,250 $2,250 7,750
2 2,250
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STRAIGHT-LINE METHODSTRAIGHT-LINE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
First year’s depreciation + Second year’s depreciation($2,250 + $2,250)
1 $2,250 $2,250 7,750
2 2,250 4,500
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STRAIGHT-LINE METHODSTRAIGHT-LINE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
Cost – Accumulated Depreciation($10,000 – $4,500)
1 $2,250 $2,250 7,750
2 2,250 4,500 5,500
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STRAIGHT-LINE METHODSTRAIGHT-LINE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
First year’s depreciation + Second year’s depreciation + Third year’s depreciation
($2,250 + $2,250 + $2,250)
1 $2,250 $2,250 7,750
2 2,250 4,500 5,500
3 2,250 6,750
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STRAIGHT-LINE METHODSTRAIGHT-LINE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
1 $2,250 $2,250 7,750
2 2,250 4,500 5,500
3 2,250 6,750 3,250
4 2,250 9,000
The entire depreciable cost has beenexpensed by the end of the fourth year.
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STRAIGHT-LINE METHODSTRAIGHT-LINE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
1 $2,250 $2,250 7,750
2 2,250 4,500 5,500
3 2,250 6,750 3,250
4 2,250 9,000 1,000
Book value is now equal to the salvage value.
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
FORMULA:
Depreciation Rate
DEPRECIATION RATEDEPRECIATION RATE
• Commonly, the depreciation rate is twice the straight-line rate.
STRAIGHT-LINE RATE FORMULA:
100%Useful Life
100%4 Years
Straight-linerate is 25%
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
FORMULA:
Twice the straight-line rate2 25%
Depreciation Rate50%
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
FORMULA:
In year 1, Book Value = Cost
Depreciation RateBook Value at Beg. of Year
50% $10,000
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
$5,000First year’s depreciation =
FORMULA:
Depreciation RateBook Value at Beg. of Year
50% $10,000
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Let’s compute thesecond year’s depreciation.
FORMULA:
Depreciation RateBook Value at Beg. of Year
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
The rate stays the same.
FORMULA:
Depreciation RateBook Value at Beg. of Year
50%
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Cost Accumulated Depreciation
–$10,00
0– $5,000
FORMULA:
Depreciation RateBook Value at Beg. of Year
50% $5,000
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Second year’s depreciation = $2,500
Let’s look at thethird year’s depreciation.
FORMULA:
Depreciation RateBook Value at Beg. of Year
50% $5,000
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
$2,500
Cost – Accumulated Depreciation$10,000– ($5,000 +
$2,500)
FORMULA:
Depreciation RateBook Value at Beg. of Year
50%
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
$2,500
Third year’s depreciation = $1,250
Let’s look at thefourth and final year.
FORMULA:
Depreciation RateBook Value at Beg. of Year
50%
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
$1,250
Book value is down to $1,250.The goal is to reduce it to the salvage
value by the end of fourth year.That means only $250 of depreciation to go!
FORMULA:
Depreciation RateBook Value at Beg. of Year
50%
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
FORMULA:
Depreciation RateBook Value at Beg. of Year
50% $1,250
$625 is too much! Book value would fallbelow the salvage value. The fourth
year’s depreciation is limited to $250.
$625
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DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
1 $5,000 $5,000 5,000
2 2,500 7,500 2,500
3 1,250 8,750 1,250
4 250 9,000 1,000
Just like the straight-line method,total depreciation is $9,000.
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DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
1
2
3
4
What if the asset had beenbought on April 1 of year 1?
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DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
1
2
3
4
Year 1: $10,000 50% = $5,000;$5,000 9/12 = $3,750
$3,750 $3,750 6,250
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DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
1
2
3
4 Year 2: $6,250 50% = $3,125
$3,750 $3,750 6,250
3,125 6,875 3,125
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DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
1
2
3
4Year 3:
$3,125 50% = $1,563
$3,750 $3,750 6,250
3,125 6,875 3,125
1,563 8,438 1,562
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DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
1
2
3
4Only $562 of depreciation to go beforebook value reaches the salvage value.
$3,750 $3,750 6,250
3,125 6,875 3,125
1,563 8,438 1,562
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1,5628,438
3,1256,875
1,0009,000 562
DECLINING-BALANCE METHODDECLINING-BALANCE METHOD
YEARDEPR.
EXPENSEACCUM.
DEPR.BOOK VALUE
$10,000
1
2
3
4
$3,750 $3,750 6,250
3,125
1,563
Year 4: $1,562 × 50% = $781
Too much! Limited to only $562
SUM-OF-THE-YEARS’ DIGITS METHOD
SUM-OF-THE-YEARS’ DIGITS METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as declining-balance method.
FORMULA:(Cost – Salvage Value)Remaining Useful Life
($10,000 – $1,000) 4
Year 1 = 4 years remaining
FORMULA:(Cost – Salvage Value) Remaining Useful Life
Sum-of-the-Years’ Digits
($10,000 – $1,000)
4 + 3 + 2 + 1 = 10
410
SUM-OF-THE-YEARS’ DIGITS METHOD
SUM-OF-THE-YEARS’ DIGITS METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as declining-balance method.
SUM-OF-THE-YEARS’ DIGITS METHOD
SUM-OF-THE-YEARS’ DIGITS METHOD
• Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as declining-balance method.
FORMULA:(Cost – Salvage Value) Remaining Useful Life
Sum-of-the-Years’ Digits
($10,000 – $1,000)
Year 1 depreciation is $3,600.
410
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SUM-OF-THE-YEARS’-DIGITS METHODSUM-OF-THE-YEARS’-DIGITS METHOD
YearDepreciable
Cost RateAnnualDepr.
$10,000
Accum.Depr.
Book Value
1 $9,000234 Cost – Salvage Value
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SUM-OF-THE-YEARS’-DIGITS METHODSUM-OF-THE-YEARS’-DIGITS METHOD
YearDepreciable
Cost RateAnnualDepr.
$10,000
Accum.Depr.
Book Value
1 $9,000234
4/10 $3,600 $3,600 6,400 9,000
Depreciable costdoes not change.
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SUM-OF-THE-YEARS’-DIGITS METHODSUM-OF-THE-YEARS’-DIGITS METHOD
YearDepreciable
Cost RateAnnualDepr.
$10,000
Accum.Depr.
Book Value
1 $9,000234
4/10 $3,600 $3,600 6,400 9,000 3/10
It is the rate thatdecreases over time.
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SUM-OF-THE-YEARS’-DIGITS METHODSUM-OF-THE-YEARS’-DIGITS METHOD
YearDepreciable
Cost RateAnnualDepr.
$10,000
Accum.Depr.
Book Value
1 $9,000234
4/10 $3,600 $3,600 6,400 9,000 3/10
900 9,000 1/102/10 9,000 8,100
6,300 3,700 1,900 1,000 9,000
2,700 1,800
No adjustment is neededin the fourth year.
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SUM-OF-THE-YEARS’-DIGITS METHODSUM-OF-THE-YEARS’-DIGITS METHOD
YearDepreciable
Cost RateAnnualDepr.
$10,000
Accum.Depr.
Book Value
1234
9,000
9,000 9,000
$9,000
5 9,000
What if this assethad been bought April 1st?
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SUM-OF-THE-YEARS’-DIGITS METHODSUM-OF-THE-YEARS’-DIGITS METHOD
YearDepreciable
Cost RateAnnualDepr.
$10,000
Accum.Depr.
Book Value
1234
9,000
9,000 9,000
$9,000
5 9,000
4/10 $2,700 $2,700 7,300
$9,000 4/10 9/12
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SUM-OF-THE-YEARS’-DIGITS METHODSUM-OF-THE-YEARS’-DIGITS METHOD
YearDepreciable
Cost RateAnnualDepr.
$10,000
Accum.Depr.
Book Value
1234
9,000
9,000 9,000
$9,000
5 9,000
$2,700 $2,700 7,3004/103/10 2,925 5,625 4,375
$9,000 4/10 3/12 = $900;$9,000 3/10 9/12 = $2,025;
$900 + $2,025 = $2,925
4/10
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SUM-OF-THE-YEARS’-DIGITS METHODSUM-OF-THE-YEARS’-DIGITS METHOD
YearDepreciable
Cost RateAnnualDepr.
$10,000
Accum.Depr.
Book Value
1234
9,000
9,000 9,000
$9,000
5 9,000
4/10 $2,700 $2,700 7,3004/103/10 2,925 5,625 4,3753/102/10 2,025 7,650 2,350
The remaining years are computed in the same manner: 3 months at one
rate and 9 months at another.
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SUM-OF-THE-YEARS’-DIGITS METHODSUM-OF-THE-YEARS’-DIGITS METHOD
YearDepreciable
Cost RateAnnualDepr.
$10,000
Accum.Depr.
Book Value
1234
9,000
9,000 9,000
$9,000
5 9,000
4/10 $2,700 $2,700 7,3004/103/10 2,925 5,625 4,3753/102/10 2,025 7,650 2,3502/101/10
1/10 1,125 8,775 1,225 225 9,000 1,000
Year 5 is only 3 months.
UNITS-OF-PRODUCTION METHODUNITS-OF-PRODUCTION METHOD
• Depreciation is based on the extent to which the asset was used during the year.
FORMULA:
(Cost – Salvage Value) ($10,000 – $1,000)
The asset (a vehicle) is expectedto be driven 90,000 miles in its
useful life.
Step #1 Compute depreciation per unit.
Estimated Useful Life in Units
90,000=
UNITS-OF-PRODUCTION METHODUNITS-OF-PRODUCTION METHOD
• Depreciation is based on the extent to which the asset was used during the year.
FORMULA:
(Cost – Salvage Value) ($10,000 – $1,000)
Step #1 Compute depreciation per unit.
Estimated Useful Life in Units
90,000
Depreciation per Mile = $.10
=
UNITS-OF-PRODUCTION METHODUNITS-OF-PRODUCTION METHOD
Depreciation is based on the extent to which the asset was used during the year.
FORMULA:
Step #2 Multiply depreciation per unit by the number of units produced or consumed this year.
24,000 miles $.10/mile
Year 1 depreciation is $2,400.
UNITS-OF-PRODUCTION METHODUNITS-OF-PRODUCTION METHOD
• Depreciation is based on the extent to which the asset was used during the year.
FORMULA:
Step #2 Multiply depreciation per unit by the number of units produced or consumed this year.
24,000 miles $.10/mile
All years are computedin the same manner.
DEPRECIATION METHODS FOR FEDERAL INCOME TAX
DEPRECIATION METHODS FOR FEDERAL INCOME TAX
• The method used depends on when the asset was purchased:– Before 1981
• Straight-line, declining-balance, sum-of-the-years’-digits, or units-of-production methods
– 1981–1986• Accelerated cost recovery system (ACRS)
– After 1986• Modified accelerated cost recovery
(MACRS)
4Account for repairs,
maintenance, additions,
improvements, and
replacements to plant and
equipment.
REPAIRS AND MAINTENANCEREPAIRS AND MAINTENANCE
• If the repairs do not extend the life of the asset or improve its usefulness:– Record as an expense– Examples:
• Replacement of minor parts• Lubrication• Cleaning
ADDITIONS AND IMPROVEMENTSADDITIONS AND IMPROVEMENTS
• Accounted for in two ways:
– If it increases the usefulness of the asset and will provide benefits in future periods:
• Debit the asset account, increasing book value• Depreciate over the remaining life of the asset
– If it extends the useful life of the asset, but does not increase its usefulness or efficiency:
• Debit Accumulated Depreciation, increasing book value
ADDITIONS AND IMPROVEMENTSADDITIONS AND IMPROVEMENTS
• If at the beginning of 20-2, the company replaced a disk drive on computer A at a cost of $400.
EXAMPLE: A business purchased two computers on January 1, 20-1. Both computers were purchased for $6,500, are estimated to be used for 3 years, and have salvage values of $500. The business uses the straight-line
method in computing depreciation.
The replacement extends the life of the computer but doesn’t increase its
usefulness.
ADDITIONS AND IMPROVEMENTSADDITIONS AND IMPROVEMENTS
Computer A6,500
Accum. Depr.—Computer A
2,000 12/31/-1
4001/1/-2
1,600
The replacement is debited
to Accumulated Depreciation.
ADDITIONS AND IMPROVEMENTSADDITIONS AND IMPROVEMENTS
Computer A6,500
Accum. Depr.—Computer A
2,000 12/31/-1
4001/1/-2
1,600
Book value is now $4,900
($6,500 – $1,600).
ADDITIONS AND IMPROVEMENTSADDITIONS AND IMPROVEMENTS
Computer A6,500
Accum. Depr.—Computer A
2,000 12/31/-1
4001/1/-2
1,600Depreciation for the remaining two years:
(Book value – Salvage value)/Remaining life
($4,900 – $500)/2 years = $2,200 per year
ADDITIONS AND IMPROVEMENTSADDITIONS AND IMPROVEMENTS
• On January 1, 20-2, the company added a new tape drive backup unit to computer B at a cost of $400.
Example: A business purchased two computers on January 1, 20-1. Both
computers were purchased for $6,500, are estimated to be used for 3 years, and have
salvage values of $500. The business uses the straight-line method in computing
depreciation.
Adding new components increases
the usefulness of the computer.
ADDITIONS AND IMPROVEMENTSADDITIONS AND IMPROVEMENTS
Computer B6,500
Accum. Depr.—Computer B
2,000
1/1/-2
Debited directlyto the asset account
400
ADDITIONS AND IMPROVEMENTSADDITIONS AND IMPROVEMENTS
Computer B6,500
Accum. Depr.—Computer B
2,000
1/1/-2
Book value is now $4,900($6,900 – $2,000).
400
6,900
ADDITIONS AND IMPROVEMENTSADDITIONS AND IMPROVEMENTS
Computer B6,500
Accum. Depr.—Computer B
2,000
1/1/-2 400
6,900Depreciation for the remaining two years:
(Book value – Salvage value)/Remaining life
($4,900 – $500)/2 years = $2,200 per year
PLANT ASSET DISPOSALSPLANT ASSET DISPOSALS
• A plant asset can be disposed of in several ways:
– Discarded or retired– Sold– Exchanged or traded in for another
asset
DISCARDING OR RETIRING PLANT ASSETS
DISCARDING OR RETIRING PLANT ASSETS
EXAMPLE: A printer with a cost of $800 and accumulated
depreciation of $800 is discarded.
There is no gain or losssince the book value is
$0.
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DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Office Equip.1
2
3
4
5
6
7
8
9
10
11
800 00
DISCARDING OR RETIRING PLANT ASSETS
DISCARDING OR RETIRING PLANT ASSETS
Since the company no longer has the
printer, its cost and related depreciation
are removed from the books.
Office Equipment 800 00
Discarded printer
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DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
DISCARDING OR RETIRING PLANT ASSETS
DISCARDING OR RETIRING PLANT ASSETS
What if the accumulated
depreciation had been$720 instead?
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Office Equip.1
2
3
4
5
6
7
8
9
10
11
720 00
DISCARDING OR RETIRING PLANT ASSETS
DISCARDING OR RETIRING PLANT ASSETS
Loss of $80
Office Equipment
80 00
Discarded printer
Loss on Discarded Office Equip.
800 00
SELLING PLANT ASSETSSELLING PLANT ASSETS
EXAMPLE: A printer with a cost of $800 and accumulated
depreciation of $720 is sold for $80.
We’re giving up an asset
with a value of $80to get $80 cash.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Office Equip.
1
2
3
4
5
6
7
8
9
10
11
720 00
SELLING PLANT ASSETSSELLING PLANT ASSETS
No gain or loss
Office Equipment
80 00
Sold printer
800 00
Cash
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Office Equip.
1
2
3
4
5
6
7
8
9
10
11
720 00
SELLING PLANT ASSETSSELLING PLANT ASSETS
If we sold the printer for $120:Gain of $40
($120 cash – $80 book value)
Office Equipment
120 00
Sold printer
800 00
Cash
Gain on Sale of Printer 40 00
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Office Equip.
1
2
3
4
5
6
7
8
9
10
11
720 00
SELLING PLANT ASSETSSELLING PLANT ASSETS
If we sold the printer for $50:Loss of $30
($80 book value – $50 cash)
Office Equipment
50 00
Sold printer
800 00
Cash
30 00Loss on Sale of Printer
EXCHANGE OR TRADE-IN OF PLANT ASSETS
EXCHANGE OR TRADE-IN OF PLANT ASSETS
Book value of $1,100($8,000 – $6,900)
Old Delivery Truck
8,000Cost
Accum. Depr.—Old Truck
6,900
EXAMPLE: An old delivery truck is traded-in for a new delivery truck with a
fair market value of $30,000.
EXCHANGE OR TRADE-IN OF PLANT ASSETS
EXCHANGE OR TRADE-IN OF PLANT ASSETS
Example: An old delivery truck is traded-in for a new delivery truck with
a fair market value of $30,000.
Old Delivery Truck
8,000Cost
Accum. Depr.—Old Truck
6,900
If a $1,000 trade-in isgranted on the old truck:
$100 loss
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
EXCHANGE OR TRADE-IN OF PLANT ASSETS
EXCHANGE OR TRADE-IN OF PLANT ASSETS
The new delivery truck is entered
on the books at its market value.
30,000 00Delivery Equipment (New)
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Delivery Equip.
1
2
3
4
5
6
7
8
9
10
11
6,900 00
EXCHANGE OR TRADE-IN OF PLANT ASSETS
EXCHANGE OR TRADE-IN OF PLANT ASSETS
Accumulated Depreciation on theold truck is removed from the
books.
30,000 00Delivery Equipment (New)
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Delivery Equip.
1
2
3
4
5
6
7
8
9
10
11
6,900 00
EXCHANGE OR TRADE-IN OF PLANT ASSETS
EXCHANGE OR TRADE-IN OF PLANT ASSETS
The loss is recognized.It will be shown on the income
statement.
Loss on Exchange of Equipment
30,000 00
100 00
Delivery Equipment (New)
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Delivery Equip.
1
2
3
4
5
6
7
8
9
10
11
6,900 00
EXCHANGE OR TRADE-IN OF PLANT ASSETS
EXCHANGE OR TRADE-IN OF PLANT ASSETS
The cost of the old delivery truck
is removed from the books.
Loss on Exchange of Equipment
30,000 00
100 00
Delivery Equipment (New)
Delivery Equipment (Old) 8,000 00
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Delivery Equip.
1
2
3
4
5
6
7
8
9
10
11
6,900 00
EXCHANGE OR TRADE-IN OF PLANT ASSETS
EXCHANGE OR TRADE-IN OF PLANT ASSETS
Cash is credited for the amount paid, $29,000
($30,000 price – $1,000 trade-in).
Loss on Exchange of Equipment
30,000 00
100 00
Delivery Equipment (New)
Delivery Equipment (Old) 8,000 00
Cash 29,000 00
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Delivery Equip.
1
2
3
4
5
6
7
8
9
10
11
6,900 00
EXCHANGE OR TRADE-IN OF PLANT ASSETS
EXCHANGE OR TRADE-IN OF PLANT ASSETS
What if the trade-in hadbeen $1,500 instead?
Loss on Exchange of Equipment
30,000 00
Purchased a new truck
100 00
Delivery Equipment (New)
Delivery Equipment (Old) 8,000 00
Cash 29,000 00
EXCHANGE OR TRADE-IN OF PLANT ASSETS
EXCHANGE OR TRADE-IN OF PLANT ASSETS
• $1,500 trade-in – $1,100 book value $400 gain
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
Accum. Depr.—Delivery Equip.
1
2
3
4
5
6
7
8
9
10
11
6,900 00
EXCHANGE OR TRADE-IN OF PLANT ASSETS
EXCHANGE OR TRADE-IN OF PLANT ASSETS
Note that for TAX purposes, the new equipment would be
valued at $29,600 and NO gain would
be recognized on the exchange.
Purchased a new truck
Delivery Equipment (New)
Delivery Equipment (Old) 8,000 00
Cash 28,500 00
30,000 00
Gain on Exchange 400 00
NATURAL RESOURCESNATURAL RESOURCES
EXAMPLE: A coal mine is acquired at a cost of $1,000,000. No salvage value. Approximately 1,000,000 tons of coal
are expected to be mined.
Natural resources are“depleted” over time
using units-of-productionmethod.
NATURAL RESOURCESNATURAL RESOURCES
EXAMPLE: A coal mine is acquired at a cost of $1,000,000. No salvage value. Approximately 1,000,000 tons of coal
are expected to be mined.(Cost – Salvage Value)/Tons
$1,000,000
1,000,000 tons
Depletion is
$1.00/ton
NATURAL RESOURCESNATURAL RESOURCES
EXAMPLE: During the current year, 180,000 tons of coal were mined and
sold.
180,000 $1.00
tonsper ton
$180,000 depletion
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
NATURAL RESOURCESNATURAL RESOURCES
180,000Depletion Expense—Mine
Accum. Depletion—Mine 180,000
Very similar todepreciation adjusting entries
INTANGIBLE ASSETSINTANGIBLE ASSETS
• Patents– Give the inventor the exclusive right to
produce, use, and sell an invention for a period of 20 years
• If a company purchases a patent, the amount paid equals the cost of the patent
• If it develops its own patent, only the fees paid to the government and patent attorneys equals the cost
• Cost is “amortized” over the patent’s useful life using the straight-line method
INTANGIBLE ASSETSINTANGIBLE ASSETS
• Copyrights– Give the exclusive right to the reproduction
and sale of a literary, artistic, or musical composition for the life of the holder plus 50 years
• If a company purchases a copyright, the amount paid equals the cost of the copyright
• If it develops its own copyrighted content, the cost of obtaining the copyright, itself, is an ordinary expense
• Cost is “amortized” over a copyright’s useful life using the straight-line method or in proportion of actual sales
INTANGIBLE ASSETSINTANGIBLE ASSETS
• Trademarks– Trade names to identify a firm’s merchandise
are protected by registering them with the United States Patent Office
• If a company purchases a trademark, the amount paid equals the cost of the trademark
• If it develops its own trademark, only the cost to register it is recorded as an asset.
• Cost is then “amortized” over the trademark’s useful life using the straight-line method