Accounting Chapter 8

Average Useful Life

cost of fixed assets/ depreciation exp.

Accumulated depreciation

cumulative amount of depreciation expense recognized to date

net book value

the cost of fixed asset that has not yet been depreciated. Calculated by subtracting the accumulated depreciation to date from the cost of the fixed asset

Depreciation Schedule: Straight-line Method

-depreciation exp. is the same each year -accumulated depreciation grows each year by depreciation expense (until the balance equals the depreciable cost of the asset) -net book value decreases each year by depreciation exp., until it equals the salvage value estimated for the asset (start with the cost of asset, the subtract dep. exp. each yr)

summary of each method

-straight line: depreciates the same amount each year -double declining: accelerates depreciation into the early years of the asset's life -units of activity: depreciates different amounts each year depending on the asset's usage

fixed asset examples

land, buildings, equipment, furniture, fixtures

Depreciation expense

the amount of expense recognized each period

Intangible Asset

a resource that is used in operations for more than one year but has no physical substance ex. a patent (the right, granted by the US Patent Office, for the holder of the patent to manufacture, sell of use a particular product or process exclusively for a limited period of time)

fixed assets

accounting for property and equipment

Depreciation Schedule: Units-of-activity method

accumulated depreciation equals the depreciation exp. that year and the year before. Net book value is the cost - depreciation exp. each individual year

Units-of-activity method

calculates depreciation based on actual asset activity. because it relies on an estimate of an asset's lifetime activity, the method is limited to those assets whose units of activity can be determined with some degree of accuracy. Start by: depreciation exp. per unit= (cost-salvage value)/ useful life in units then: depreciation exp.= depreciation exp. per unit x actual units of activity

adjustments for fixed assets can arise from:

changes in estimates, additional improvement expenditures, significant declines in asset's market values

Under double declining

depreciation exp. will become smaller and smaller each period as the depreciation rate is applied to a smaller net book value. but over an asset's life, an entity cannot record more total depreciation than the asset's depreciable cost

Depreciation Schedule: Double-declining-balance method

each year accumulated depreciation equals depreciation exp. of that year and year before. netbook value starts with cost then each year subtracts the dep. exp. of that year

straight-line rate

ex. if an asset has a four-year life, it has a straight-line rate of 25% (calculated by dividing 100% by 4 years)

cost

historical cost of the asset being depreciated. this is the amount that was recorded when the asset was purchased

where is depreciation expense recorded?

income statement

what is not included in cost?

insurance- that is part of operating expenses

Where do fixed assets go?

on the balance sheet and classified as noncurrent assets because they are used for more than one year

Depreciation

process of allocating the cost of a fixed asset over its useful life. application of the matching principle.

fixed assets should be recorded at the cost of acquiring them, including:

purchase price, taxes paid on the purchase, fees such as closing costs paid to attorneys, delivery costs, installation costs

what happens to proceeds from the sale?

reduce the cost of land (they are subtracted from the other costs)

useful life

refers to the length of time the asset will be used in operations

salvage value

refers to the market value of the asset at the end of its useful life. it is the amount the company expects to receive when the asset is sold, traded-in, or scrapped.

Average age of fixed assets

represents the number of years, on average, that the company has used its fixed assets: =accumulated depreciation/depreciation exp.

Double-declining-balance method

results in more depreciation exp. in the early years of an asset's life, and less depreciation exp. in the later years of an asset's life. Often matches expenses to revenues better than straight line. Depreciation exp.= depreciation rate x net book value= (straight-line rate x 2) x (cost-accumulated depreciation)

straight-line method

spreads depreciation expense evenly over each year of the asset's useful life. depreciation exp= cost- salvage value/ useful life then would be recorded as, depreciation expense 10,000 accumulated depreciation 10,000

fixed asset

tangible resource that is expected to be used in the normal course of operations for more than one year and is not intended for resale

Depreciable cost

the difference between an asset's cost and its salvage value is the asset's net cost to the company or the depreciable cost. depreciable cost is the total amount that should be depreciated over time

depreciation method

the method used to calculate depreciation expense. the three methods are: straight-line, double-declining-balance, and units-of-activity

Fixed Asset Turnover Ratio

total revenues/ average net book value of fixed assets average net book value is: (beginning net book value+ ending net book value)/2