4. Accounting in the Real World P223
What effect would
increasing estimated
useful life of an asset
have on net income?
What information would
you need to help ID the
useful life of a piece of
equipment?
7. Plant Assets:
Assets that will be
used for a long
period of time
(at least over a year).
8. 8 LESSON 8-1
1. Complete when asset is purchased.
2. Complete when asset is disposed of.
3. Complete each year to record annual depreciation expense.
PLANT ASSET RECORD
page 225
1
2
3
9. 9 LESSON 8-1
BUYING A PLANT ASSET
FOR CASH
page 226
January 2. Paid cash for new copying machine, $1,680.00.
Check No. 62.
10. 10 LESSON 8-1
BUYING A PLANT ASSET
ON ACCOUNT
page 226
January 2. Bought an office computer on account from Discount
Computers, $3,300.00. Memorandum No. 70.
23. 23 LESSON 8-2
STRAIGHT-LINE DEPRECIATION
page 230
Original Cost $2,000.00
– Estimated Salvage Value – 175.00
= Estimated Total Depreciation Expense $1,825.00
24. Salvage Value
What we think this asset will be worth when we
are done using it.
25. 25 LESSON 8-2
STRAIGHT-LINE DEPRECIATION
page 230
Original Cost $2,000.00
– Estimated Salvage Value – 175.00
= Estimated Total Depreciation Expense $1,825.00
Years of Estimated Useful Life 5
= Annual Depreciation Expense $ 365.00
26. The Formula:
Useful Life:
• Automotive equipment: 3-6 years
• Furniture and fixtures: 5-12 years
• Machinery and equipment: 3-20 years
• Buildings and improvements: 10-50 years
27. 27 LESSON 8-2
STRAIGHT-LINE DEPRECIATION
page 230
Ending Book
Value
=Annual
Depreciation
–Beginning Book
Value
Year 3 $1,270.00 – $365.00 = $905.00
28. 28
RECORDING DEPRECIATION
ON PLANT ASSET RECORDS
2. Calculate accumulated depreciation.
3. Calculate ending book value.
1. Calculate annual depreciation expense.
page 231
30. Example 1:
We buy a Machine for $25,000. We estimate
that it’s salvage value after 10 years of useful
life will be $0. What is our annual depreciation?
OC – Salvage / Useful Life = AD
(25,000-0) / 10
25,000 / 10
$2,500
31. Example 2:
We buy a computer for $2,000. We estimate
that we can sell it for $200 after 3 years of
useful life. What is our annual depreciation?
OC – Salvage / Useful Life = AD
(2000-200) / 3
1800/3
$600
32. Example 3:
We buy a car for $53,250. We estimate that we
can sell it for $12,500 after 5 years of useful life.
What is our annual depreciation?
OC – Salvage / Useful Life = AD
(53,250-12,500) / 5
40,750 / 5
$8,150
33. 33 LESSON 8-2
CALCULATING DEPRECIATION
EXPENSE FOR PART OF A YEAR
page 232
Annual Depreciation Expense $ 120.00
Months in a Year 12
Monthly Depreciation Expense $ 10.00
× Number of Months Asset Is Used × 5
Partial Year’s Depreciation Expense $ 50.00
37. Why would a business discard an asset?
Not useful
No longer needed
Traded for an upgrade
38. Read to Yourself
P: 235 - 240
Chapter 8 Quizlet
Continue Outline in
notes
39. Ways to dispose of Assets
Discard (throw away)
Sell
Trade
40. Follow 3 Steps
ARU
Additional Depreciation?
Record the discard
Update Plant Record
41. Follow 3 Steps
1: Does additional depreciation need to be recorded?
If yes, record in general journal. Update plant asset
record.
If no, skip this step.
42. Follow 3 Steps
2: Record discard, sell, or trade in appropriate journal.
Select Journal
Record Transaction
If a gain or loss applies, include this in the journal entry above
44. 44 LESSON 8-3
1. Record entry to
remove plant
asset from
accounts.
2. Write the date,
amount, and type
of disposal.
DISCARDING A PLANT ASSET
WITH NO BOOK VALUE
page 235
1
January 5, 20X6. Discarded storage cabinet: original cost, $275.00; total
accumulated depreciation through December 31, 20X5, $275.00.
Memorandum No. 72.
2
45. 45
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation to be
recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
Annual Depreciation = $40 / Year
46. 46
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation to be
recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
Annual Depreciation = $40 / Year
Jan 1 – June 30 = 6 Months … or half a year
Additional Depreciation = ???
47. 47
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation to be
recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
48. 48
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation to be
recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
49. 49
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation to be
recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
50. 50
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation
to be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
51. 51
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation
to be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
52. 52
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation
to be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
53. 53
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation
to be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
54. 54
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation
to be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
55. 55
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation
to be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
56. 56
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation to
be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
1. Record the entire amount depreciated.
57. 57
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation to
be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
1. Record the monetary loss.
58. 58
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation to
be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
DISCARDING A PLANT
ASSET WITH A BOOK VALUE
page 236
1. Record the removal of the asset.
63. Gains / Losses on Plant Assets
Book value of Asset = $500
I sell it for $400
Did I gain or lose?
Debit/Credit?
64. Gains / Losses on Plant Assets
Book value of Asset = $7,000
I sell it for $9,400
Did I gain or lose?
Debit/Credit?
65. In the Journal -- Gains / Losses on
Plant Assets
Gains on Plant Assets = Credit (think Revenue)
Loss on Plant Assets = Debit (think Expense)
66. 66
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated
depreciation through December 31, 20X5, $140.00; additional depreciation to
be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
REVIEW:
page 236
67. 673. Record entry to remove plant asset from accounts.
1. Compute the
gain or loss
on the sale.
2. Write the date, amount, and type of disposal.
SELLING A PLANT ASSET
page 237
1
2
3
January 4, 20X6. Received cash from sale of fax machine, $185.00:
original cost, $600.00; total accumulated depreciation through December
31, 20X5, $400.00. Receipt No. 60.
69. 1. Compute the
original cost
of the new
plant asset.
TRADING A PLANT ASSET
page 238
1
4
June 27, 20X6. Paid cash, $850.00, plus old counter for new store counter:
original cost of old counter, $1,000.00; total accumulated depreciation through
June 27, 20X6, $765.00. Memorandum No. 130 and Check No. 154.
4. Record entry to remove old plant asset and add new plant asset.
2. Write the date and
type of disposal
and the disposal
amount.
2
3
3. Complete section 1 for
the new plant asset.
70. 3. Record entry to
remove plant
assets from
accounts.
1. Compute the gain on
sale of plant assets.
2. Write the date, type,
and amount of
disposal.
SELLING LAND AND BUILDINGS
page 239
13
January 2, 20X6. Fidelity Company sold land with a building for $97,000.00
cash; original cost of land, $25,000.00; original cost of building, $150,000.00;
total accumulated depreciation on building through December 31, 20X5,
$85,000.00. Receipt No. 105.
2
82. Double Declining Example
Year 1:
BV x Rate = Annual Depreciation
$10,000 x 50% = $5,000
BV: 10,000 – 5,000 = $5,000
Year 2:
$5,000 x 50% = $2,500
BV: 5,000 - $2,500 = $2,500
83. Double Declining Example
Year 3:
BV x Rate = Annual Depreciation
$2,500 x 50% = $1,250
BV: 2,500 – 1250 = Problems
84. Double Declining Example
Year 3:
BV x Rate = Annual Depreciation
$2,500 x 50% = $1,250
BV: 2,500 – 1,000 = Salvage Value of $1,500
We have fully depreciated the asset
85. Sum of Years Method
Using fractions based
on the number of years
of a plant assets useful
life
91. Sum of Years Example
Total Depreciation = OC – Salvage … $8,500
92. Sum of Years Example
Year 1:
Total Depreciation x Fraction % = Annual Depreciation
$8,500 x 33.3% (5/15) = $2,833.33
BV: 8500 – 2833.33 = $5,667.67
Year 2:
$8,500 x 27% (4/15) = $2,266.67
BV: 5,667.67 – 2,266.67 = $3,400
93. Sum of Years Example
Year 3:
Total Depreciation x Fraction % = Annual Depreciation
$8,500 x 20% (3/15) = $1,700
BV: 3,400 – 1,700 = $1,700
Year 4:
$8,500 x 13% (2/15) = $1,133.33
BV: $1,700 – 1,133.33 = $566.67
94. Sum of Years Example
Year 5:
$8,500 x 7% (1/15) = $566.67
BV: 566.67 – 566.67 = Fully Depreciated to SV
95. SL vs. DD vs. SOY
Straight Line – Conservative
DD – Aggressive
SOY - Aggressive
96. Income Tax Deduction
Depreciation allows a taxpayer to recover the cost or
other basis of certain property
97. Deduction Requirements:
The taxpayer must own the property. Taxpayers may also
depreciate any capital improvements for property the
taxpayer leases.
A taxpayer must use the property in business or in an
income-producing activity.
The property must have a useful life of more than one
year.
98. MACRS
Modified Accelerated Cost Recovery
System
Method required by the IRS to be used
for income tax calculations
Corporations use GAAP Depreciation
method for their own records
MACRS for IRS reporting
104. 8-4 Other Methods Of
Depreciation
1. Declining-Balance Method
2. Sum-Of-The-Years’-Digits Method Of Depreciation
3. Comparison Of Three Methods Of Depreciation
4. Production-Unit Method Of Depreciation
5. Calculating Depreciation Expense For Income Tax
Purposes
6. Depletion
105.
106.
107. Sum-Of-The-Years’-Digits Method Of Depreciation
1. Calculate the fraction.
You calculate the fraction by adding up the
number of years.
For example, 5 years= 15 = 1+2+3+4+5
2. Then the last years number over the 15 is the
fraction used for the first year and so on.
3.Take the Beginning book value and subtract the
salvage value from it.
4. Then take that answer(Total Depreciation) by the
fraction and get the annual depreciation.
5. Then subtract the annual depreciation from the
beginning book value to get the ending book value for
that year.
6. Then repeat steps 3-5.
108. Calculating Depreciation Expense For Income Tax
Purposes
Take the original cost
multiply it by the percent
given to you and then
subtract the answer from
the original cost and
repeat every year.