Accounting Depreciation

Declining balance method of depreciation

-a type of accelerated depreciation that multiplies the book value of an asset by a constant depreciation rate to determine annual depreciation (100%/estimated useful life=straight line rate x 2) -last year, only enough depreciation expense is recorded to reduce the book value of the plant asset to its salvage value

Units of Production Method of Depreciation

-calculating the estimated annual depreciation expense based on the amount of production expected from a plant asset (original cost-estimated salvage value=total depreciation expense/estimated useful life= unit depreciation rate= 0.16) -total miles driven x unit dep. rate= annual dep. exp.

Annual Depreciation Expense

1. Original cost- Estimated Salvage Value= Estimated Total Depreciation Expense/Years of Estimated Useful Life= Annual Depreciation Expense 2. Annual percentage rate- 100/ years of useful life=annual depreciation rate annual depreciation rate x estimated total depreciation expense

Calculating depreciation expense for income tax reporting

A depreciation method required by the Internal Revenue Service to be used for income tax calculation purposes for most plant assets is called the Modified Accelerated Cost Recovery System -look at chart based on estimated salvage value to find depreciation rate -annual depreciation= depreciation rate x original cost always -always an extra year than salvage value, use dep. rate from chart

Plant Asset Record

An accounting form on which a business records information about each plant asset

Straight-Line Depreciation

An equal amount of depreciation expense for a plant asset in each year of its useful life

Calculating Depreciation Expense for Part of the Year

Annual depreciation expense/12= monthly depreciation expense x years asset is used= partial year's depreciation expense

Plant Assets, Fixed Assets, Long-Term Assets

Assets that will be used for a number of years in the operation of business (Other assets such as land, buildings, and equipment are expected to help the business earn a profit for more than one year)

Buying a plant asset for cash "Paid cash to Metal Fabricators for a storage system, 16,850. Check no. 416"

Cash Payments Journal Warehouse Equipment 16850 General Debit, 16850 Cash Credit

Current Assets

Cash and other assets expected to be exchanged for cash or consumed within a year

Going Concern Concept

Cost of plant assets are recorded on the balance sheet (depreciation expense, costs necessary to get plant asset ready for use-freight, installation, etc.)

Buying a plant asset on account "Bought on account new monitors for three office computers from Tech Systems, 690. Memorandum 23."

General Journal Office Equipment, 690 Debit Accounts Payable/Tech System, 690 Credit

Alternate methods for partial-year depreciation

Half-year convention: method that recognizes one half of a year's depreciation in the year Modified half-year convention: method that recognizes a full year's depreciation if the asset is acquired in the first half of the year.

Real Property/Real Estate

Land and anything attached to it; all property not classified as real property=personal property

Book Value of a Plant Asset

Original cost of a plant asset minus accumulated depreciation. Beginning Book Value- Annual Depreciation= Ending Book Value

Allocating the Cost of Plant Assets (buying from group) "Purchased a distribution center from NexTra Industries, signing a 10-year note. Memorandum 26." Appraised Value for Land= 60,000 Appraised Value for Building= 240,000 Total Appraised Value= 300,000 Total Purchase Price/Assigned Cost=280,000

Purchase includes land and building- company has 10 years Land, 56,000 debit (60,000/300,000, .2*280,000) Building, 224,000 debit (240,000/300,000,.8*280,000) Notes Payable, 280,000 Credit

Millage Rate

Tax rate used to calculate property taxes

Estimated Salvage Value/ Scrap Value/ Trade-in Value

The amount that will be received for an asset the time of its disposal

Depreciation Expense

The portion of a plant asset's cost that is transferred to an expense account in each fiscal period during a plant asset's useful life. Land does not depreciate Three factors: 1. Original cost all costs paid to make the asset usable- purchase price, delivery costs, any necessary installation costs 2. Estimated salvage value 3. Estimated useful life

Assessed Value

The value of an asset determined by tax authorities for the purpose of calculating taxes

Disposing of Plant Asset

Three ways: 1. Discarded; asset is no longer usable 2. Sold; asset is no longer needed 3. Traded for another plant asset of same kind

Journalizing Depreciation Expense

Year 1 depreciation expense and accumulated depreciation Adjusting Entries Depreciation expense- office equipment DEBIT Accumulated depreciation- office equipment CREDIT

Trading a Plant Asset "December 20, 20X5. Paid cash, 8,995, plus old forklift for new forklift: original cost of old forklift, 12,950.00; total accumulated depreciation through December 30, 20X5, $6,000.00"

journal entries recorded to 1. remove the original cost of the old plant asset and its related accumulated depreciation 2. recognize cash paid 3. record the new plant asset at its original cost Step 1: Assign cost to new asset Cash paid + (original cost- accumulated depreciation) Step 2: Date, amount (original cost- accumulated depreciation), and type of disposal Step 3: New Asset Information Step 4: Journalize in Cash Payments Warehouse Equipment; cost of new asset-gen. debit, cash paid- cash credit Accum. Depr.-Warehouse Equipment; accumulated dep.-gen. debit Warehouse Equipment- Original Cost

Selling Land and Buildings "January 5, 20X6. Fidelity Company sold land with a building for 97,000 cash; original cost of land, 25,000; original cost of building, 140,000; total accumulated depreciation on building through December 31, 20X5, 85,000. Receipt no. 4"

journal entries recorded to 1. removes the original cost of the land and building and the building's related accumulated depreciation. 2. recognizes the cash received 3. recognizes the gain on disposal of the plant assets Step 1: Calculate gain or loss on sale of plant asset Proceeds from sale- (original cost+improvements-accum. dep.) Step 2: Date, amount (97,000 with No.188; ref. to other plant asset included in sale), and type of disposal Step 3: Journalize in Cash Receipts Accum. Depr, general debit, cash debit Gain (loss) on plant assets, general credit Building (original cost + improvements), general credit Land, general credit

Discarding a Plant Asset with a Book Value "April 28, 20X4. Discarded office table; original cost 700, total accumulated depreciation through December 31, 20X3, 360.00; additional depreciation to be recorded through April 28, 20X4, 40.00, memorandum no. 92"

journal entries recorded to 1. remove the original cost of plant asset and its related accumulated depreciation 2. recognize the loss on disposal of the asset Step 1: Journalize Partial Year Depreciation- 20X4** Depreciation Expense- Office Equipment 40.00 Accumulated Depreciation- Office Equipment 40.00 Step 2: Fill out table; think it out with clues given Step 3: Date, amount, type of disposal Step 4: Journalize Disposal Accumulated Depreciation- Office Equipment Loss on Plant Assets (Ending Book Value) Office Equipment- Original Cost

Selling a Plant Asset "January 3, 20X4. Received cash from sale of a packing machine, 13,400: original cost, 26,000, total accumulated depreciation through December 31, 20X3, 12,000.00 Receipt No.2"

journal entries recorded to 1. remove the original cost of the plant asset and its related accumulated depreciation. 2. recognize cash received 3. recognize the gain or loss on disposal of the asset Step 1: Calculate Gain or Loss on Sale of Plant Asset Proceeds from sale- (original cost- accum. dep.) Step 2: Date, Amount (amount of sale), Type of Disposal Step 3: Journalize in Cash Receipts Accum. Depr.- Warehouse Equipment General Debit, Sales from proceeds Cash Debit Loss on Plant Assets General Debit Warehouse Equipment (original cost) General Credit

International Accounting Standards "Bethune Company pays cash for a 30,000 delivery truck. check no. 523" Appraised Value for Frame=24,640 Appraised Value for Transmission=4,800 Appraised Value for Tires=2,560 Total Appraised Value=32,000 Total Purchase Price/Assigned Cost=30,000

plant asset is divided up instead of just the entire item Cash Payments Journal Truck- Frame 23,100 debit, Cash 30,000 credit Truck-Transmission, 4,500 debit Truck-Tires, 2,400 debit