Copyright 2006 Pearson Education Canada Inc. 11-1.
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Transcript of Copyright 2006 Pearson Education Canada Inc. 11-1.
Copyright 2006 Pearson Education Canada Inc. 11-1
Copyright 2006 Pearson Education Canada Inc. 11-2
Outline Property and Equipment Depreciation Illustration of Depreciation Methods Amortization Inventories Inventory Valuation Methods Physical Inventory Counts Tax Considerations in Accounting for Inventories Potential Sources of Errors in Inventory Valuation
Copyright 2006 Pearson Education Canada Inc. 11-3
Property and EquipmentTangible AssetsAcquired for use in the
ordinary operation of the business
Useful life more than one year
Copyright 2006 Pearson Education Canada Inc. 11-4
Property and Equipment
Categories: Land Building Leaseholds and Leasehold Improvements Construction in Progress Furniture and Equipment China, Glassware, Silver, Linen, and Uniforms
Copyright 2006 Pearson Education Canada Inc. 11-5
Depreciation
Decline in the service potential of property and equipment during the accounting period
Recognition of expense for income statement and income tax purposes
Copyright 2006 Pearson Education Canada Inc. 11-6
Depreciation
Depreciation Methods Straight-Line Accelerated Methods
Declining-Balance Sum of Years’ Digits
Units of Output
Copyright 2006 Pearson Education Canada Inc. 11-7
Illustration of Depreciation Methods
Example: A Tour Bus Cost: $12,000 Salvage value: $2,000 Useful life: five years Kilometers estimated to be travelled
during lifetime: 200,000
Copyright 2006 Pearson Education Canada Inc. 11-8
STRAIGHT-LINE DEPRECIATION
Spreads the total depreciation equally over all periods of useful life of the property or equipment
Depreciation = Cost – salvage value
# of years of useful life
12,000-2,000 = $2,0005
Higher Net IncomeHigher Asset Value
Copyright 2006 Pearson Education Canada Inc. 11-9
Double-Declining Balance
Apply double the straight Line Rate to the Net book value of the property or equipment
Straight Line Rate X 2 = 100 = 20% x 2 = 40%
5 years
40% x 12,000 = 4,800 Year 1 Depreciation Expense $4800
Accumulated Depreciation $4,800
Net Book value-end of Year 1 $7,200
40% x 7,200 = 2,880 Year 2 Depreciation Expense $2,880 Accumulated Depreciation $7,680 Net Book value-end of Year 2 $4,320
Copyright 2006 Pearson Education Canada Inc. 11-10
Units of Output Method
Cost – Salvage Value X Annual units of output
Estimated units of output over entire life
12,000 - 2,000 = $0.05 per kilometer depreciation 200,000 kilometers
Year 1 Bus travels 40,000 kilometers Depreciation Expense $0.05 x 40,000 kms = $2,000
Accumulated Depreciation $2,000
Net Book Value $12,000-2,000 = $8,000
Year 2 Bus travels 20,000 kilometers Depreciation Expense $0.05 X 20,000 kms = $1,000
Accumulated Depreciation $3,000
Net Book value $9,000
Copyright 2006 Pearson Education Canada Inc. 11-11
Sum of Years’ Digits
The depreciation rate each year is a fraction in which
the sum of digits and the numerator is years in inverse order
n (n+1) = 5 (6) = 15 Fractions year 1 5
2 2 15
2 4
15Year 1 depreciation
5/15 X 10,000= $3,333
Year 2 depreciation4/15 X 10,000= $2,667
ACCELERATEDMETHOD
Copyright 2006 Pearson Education Canada Inc. 11-12
Amortization
Write-off of the cost of an asset over its estimated useful life
Always calculated on the straight line basis It is the type of depreciation used to record
cost expiration of leasehold and leasehold improvements and other intangible assets
Copyright 2006 Pearson Education Canada Inc. 11-13
Inventories
Inventories for sale Food Beverage Inventories consumed by the business Office Supplies Housekeeping Supplies
Copyright 2006 Pearson Education Canada Inc. 11-14
Inventory valuation methods
FIFO first in, first out Oldest costs will flow
through cost of sales Inventory is based on
most recent purchases
LIFO last in, first out Most recent costs will flow
through cost of sales Inventory is based on earliest
purchases
Copyright 2006 Pearson Education Canada Inc. 11-15
Inventory Valuation Methods
Specific Units Valuation Method
Only practical for use with readily high-value items that can be associated with their actual cost.
Weighted-Average Valuation Method Total cost of all units is divided by the total number of units on
hand when the physical inventory is taken.
Copyright 2006 Pearson Education Canada Inc. 11-16
Inventory valuation methods
Jan 10 100 units $1.00 $100 Feb 12 200 units $1.20 240 May 15 100 units $ 1.50 150 Nov 19 200 units $ 2.00 400 600 Total $890 Sold 120 units Dec 10 (average cost $1.48)
Cost of Sales 100 units $1.00 $100
20 1.20 40
$140
Inventory $890-140= $750
Cost of sales 120 units $2.00 = $240.
Inventory $890-240 = $650.
AVERAGE CostCost of sales
120 x $1.48=$180Inventory
480 x $1.48=$710
Copyright 2006 Pearson Education Canada Inc. 11-17
Physical Inventory Counts
Perpetual Inventory SystemPurchases are debited and issues are credited to the
inventory account as they occur during the accounting period.
Periodic Inventory SystemA physical inventory count is used as a basis to
record the proper amount of inventory and cost of sales at the end of the period . Issues are not recorded as they occur.
Copyright 2006 Pearson Education Canada Inc. 11-18
Tax Considerations in Accounting for Inventories
In times of inflation the LIFO method of inventory valuation tends to minimize net income.
In times of inflation the FIFO method usually maximizes net income.
The Weighted Average method brings results that fall between those of LIFO and FIFO.
For tax purposes, the LIFO method cannot be used in Canada.
Copyright 2006 Pearson Education Canada Inc. 11-19
Potential Sources of Errors in Inventory Valuation
Errors in making the physical inventory countErrors in applying purchase costs according to
the inventory valuation method selectedImproper physical control of inventory,
mathematical errors on value computation sheets, and errors in entering amounts using a computerized system
Errors in entering receipts and issues