Accounting 2200 PPE
PPE assets are recorded at cost (historical cost concept) -This cost includes purchase price plus all costs incurred in getting the asset ready for use
At what amount should P-P-E be recorded when it is purchased?
To calculate annual depreciation expense using double declining balance depreciation:
Book Value at beginning of the year x (2/Life)
Residual Value
estimate of the company thinks the asset can be sold for at the end of its useful life
Useful Life
estimate of the length of time in years the asset will be used in business operations
Double Declining Balance Depreciation
an example of an accelerated depreciation method
Depreciation Cost per Unit
(Cost - Residual Value)/Total Estimated Usage
Depreciation expense characteristics
-Expense account -Found on income statement -Reduces net income
Accumulated depreciation characteristics
-causes a decrease in assets -contra asset -Normal balance is credit
Loss on Sale
-expense account -recorded on the income statement -decreases net income
Gain on Sale characteristics
-revenue account -recorded on the income statement -increases net income
Capitalization
All of the costs incurred in getting the asset ready for use are recorded on the balance sheet as part of the cost of the asset
Matching concept
Buildings and equipment are depreciated because of the...
Book Value of an asset FORMULA
Cost of Asset - Accumulated Depreciation
Straight-line Depreciation Expense per Year
Cost-Residual Value/Life in Years
Units-of-Production method Formula
Depreciation Cost per Unit x Actual Usage for the Current Year = Depreciation Expense
Straight Line method
Depreciation expense is the same amount each year of the asset's life
Units of Production Depreciation
Depreciation method based on actual usage of the asset rather than on some estimate of time
NO
Do we depreciate an asset when its' value is decreasing?
NO
Does depreciation have anything to do with the value of an asset?
No, since its usefulness and revenue producing ability generally remain intact (never gets used up)
Does land depreciate?
Salvage value
Residual Value is also referred to as
Revenue Expenditure
Expenditures made to keep an asset in good working order: repairs, occur frequently, expensed immediately
Capital Expenditure
Expenditures that increase the operating efficiency of an asset, the productivity capacity of an asset, or the expected useful life of the asset
1. Account for the acquisition of P-P-E 2. Account for any capital expenditures made during the life of the asset 3. Account for the depreciation of buildings and equipment 4. Account for the sale or disposal of P-P-E
Four Accountable Events in the Life Cycle of P-P-E
Debit Depreciation Expense and credit Accumulated Depreciation
How do you record depreciation expense?
1. Cash received from the sale 2. Eliminate the asset sold from the balance sheet (at its costs) 3. Eliminate the accumulated depreciation related to the asset sold from the balance sheet 4. Record a gain or loss
How to record the sale of a plant asset
Debit Cash received Debit Accumulated Depreciation Debit Loss/Credit Gain Credit Cost
How to record the sale of a plant asset on balance sheet
Cost
all expenditures necessary to acquire the asset and make it ready for intended use
Property-Plant-Equipment (P-P-E)
Long-term assets that have a physical substance
Asset Turnover Ratio
Measures how efficiently a company uses its assets to generate sales
Return on Assets
Measures the amount of profits earned for each dollar invested in assets
Return on Assets Formula
Net Income/Average Total Assets
Asset Turnover Formula
Net Sales Revenue/Average Total Assets
The book value will decrease each year because the amount of accumulated depreciation gets larger each year
Over time, what happens to the book value of an asset?
Depreciation
The systematic allocation of the cost of a plant asset to expense over its useful life (needs adjusting entries)
Advantages of the Units of Production method
This method best adheres to the matching concept because the recording of the expense is based on actual usage
1. Straight Line 2. Double-Depreciation Balance 3. Units of Production
Three Common Depreciation Methods
Average Total Assets Equation
Total Assets at Jan 1 + Dec 31 / 2
Income Statement: No effect Balance Sheet: No effect (Increase PPE and Decrease Cash) Cash Flow Statement: Investing Cash Outflow
What effect does a capital expenditure have on the Income Statement, Balance Sheet, and Cash Flow Statement?
Income Statement: Increase Repair Expense and Decrease Net Income Balance Sheet: Decrease Cash and Decrease Retained Earnings Cash Flow Statement: Operating Cash Outflow
What effect does a revenue expenditure have on the Income Statement, Balance Sheet, and Cash Flow Statement?
Income Statement: No effect Balance Sheet: No affect (Increase PPE and Decrease Cash) Cash Flow Statement: Investing Cash Outflow
What effect does an acquisition of PPE make on the Income Statement, Balance Sheet, and Cash Flow Statement?
Income Statement: Increase Depreciation Expense and Decrease Net Income Balance Sheet: Decrease Assets and Decrease Retained Earnings Cash Flow Statement: None - Depreciation is a non-cash expense
What effect does recording depreciation have on the Income Statement, Balance Sheet, and Cash Flow Statement?
Higher (the higher the number, the more sales are being generated from your assets)
What's better? A higher or lower Asset Turnover Ratio
Higher
What's better? A higher or lower Return on Assets?
Lump Sum (basket) purchase
When a company purchases more than one asset for one, lump-sum amount
When it is recorded as part of an asset on the balance sheet rather than as an expense on the income statement
When is a cost capitalized?
Straight-Line (smaller depreciation expense = higher net income)
Which method shows the highest net income?
Straight-Line
Which method will ALWAYS record more depreciation expense in the last year of an asset?
Double-declining balance (larger amount of depreciation expense = smaller net income = less income taxes)
Which method will give an income tax advantage?
Straight-Line (lower amount of accumulated depreciation = lower reduction of assets since assume depreciation is a contra asset)
Which method will show the highest total assets on the year-end balance sheet?
Accelerated depreciation method
records more depreciation in the early years of an assets life and less depreciation in the later years