Fundamentals of Acct Ch 10

plant assets are recorded at

cost when acquired

factors that determine depreciation

cost, salvage value, useful life

useful life

length of time it is productively used in company's operations.

the useful life of a new plant asset

might be estimated based on the experience of others or on engineering studies and judgement if the company does not have past experience with a similar asset

plant assets are

tangible assets used in a company's operations that have a useful life of more than one accounting period

plant assets

tangible assets used in a company's operations that have a useful life of more than one accounting period.

Worthington, Inc., paid $90,000 to acquire land, land improvements, and a building. The company obtained two appraisals: The land was appraised at $30,000, the land improvements were appraised at $10,000, and the building was appraised at $60,000. The allocation of the cost of the purchase result in cost figures of

$27,000 for the land, $9,000 for the land improvements, and $54,000 for the building

On January 1, 2015, Truesdale, Inc., purchased a piece of machinery for use in operations. The total acquisition cost was $33,000. The machine has an estimated useful life of 3 years and a salvage value of $3,000. Using the straight-line method, the book value of the machinery at December 31, 2016, is approximately

Book value at December 31, 2016 = Cost of $33,000 = Accumulated depreciation of $20,000 (or $10,000 for 2015 + $10,000 for 2016) = $13,000

asset book value

asset's acquisition costs less its accumulated depreciation

depreciation

the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.

4 main issues in accounting for plant assets

computing the costs of plant assets, allocating the costs of most plant assets, account for subsequent expenditures, record disposal

straight line method

cost minus salvage value divided by useful life in periods

Cost

incudes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.

Cost of factory machine includes

invoice cost less any cash discount for early payment + any necessary freight, unpacking, assembling, installing and testing costs

accelerated depreciation method

method that produces larger depreciation charges in the early years of an asset's life and smaller charges in its later years

land improvements include

parking lot surfaces, walkways, fences, landscaping and sprinkling/lighting systems

salvage value is the

part of the acquisition cost of an asset that is expected to be recovered when the asset is disposed of at the end of its usefulness to its owner

land includes

payments for surveying, clearing, grading, and draining, government assessments,

Plant assets are also caclled

plant and equipment; property, plant and equipment; or fixed assets

amortization

process of allocating the cost of an intangible asset to expense over its estimated useful life

The double-declining-balance and straight-line depreciation methods _____.

produce the same amount of total depreciation over an asset's useful life

Building's cost includes

purchase price, brokerage fees, taxes, titles fee and attorney fees

Cost of machinery and equipment consist of

purchase price, taxes, transportation charges, insurance while in transit, and the installing, assembling and testing

The acquisition cost of a plant asset does not include_

repair costs resulting from damage to the plant asset while it was being unpacked

On January 1, 2015, Coopers Industries bought a parcel of land for use in its operations by paying the seller $100,000 in cash and signing a 5-year, 12 percent note payable in the amount of $400,000. In connection with the purchase of the land, Coopers incurred legal fees of $19,000, a real estate agent sales commission of $25,000, surveying fees of $1,000, and an appraisal fee of $5,000. The acquisition cost of the land is

$550,000

Zimmerman Auto sells new and used cars. Among its assets are the following: (1) the showroom building, a separate building used to service customer cars, and various parking lots, (2) a nearby acre of land not currently used by the auto dealership, (3) new and used cars and trucks for sale to customers, and (4) a car that is used to provide rides to customers who prefer to wait at home while their cars are serviced. The assets that are classified as plant assets on the company's balance sheet include

1 & 4

Straight line rate

100% divided by useful life

A company used straight-line depreciation for equipment that cost $12,000, had a salvage value of $2,000, and a 5-year useful life. At the beginning of year 4 of its useful life, the estimate of the salvage value was reduced to $1,200 and its total useful life was increased to 6 years. The amount of depreciation that will be recorded during each of the remaining years of its useful life is _____.

Annual Depreciation = (Cost of $12,000 - Salvage value of $2,000) ÷ Useful life of 5 years = $2,000 Depreciation through year 3 = Annual depreciation of $2,000 x 3 years = $6,000 Book value at end of year 3 = Cost of $12,000 = Accumulated depreciation of $6,000 = $6,000 New annual depreciation = (Book value of $6,000 - Revised salvage value of $1,200) ÷ Years remaining in useful life of 3 = $1,600

Roselle, Inc., prepares financial statements annually as of December 31. On January 31, 2015, Roselle discards a piece of equipment. The equipment, which cost $12,000, had accumulated depreciation of $10,800 as of December 31, 2014. This equipment was depreciated using the straight-line method over 10 years with zero salvage. Complete the necessary journal entry to bring the accumulated depreciation up-to-date by selecting the account names and dollar amounts from the drop-down menus.

Annual depreciation on this equipment = (Cost of $12,000 − Salvage value of $0) ÷ useful life of 10 years = $1,200. Because the equipment was discarded on January 31, one month of depreciation needs to be recorded. The entry to bring the accumulated depreciation up-to-date includes a debit to Depreciation Expense — Equipment for $100 (or $1,200 x 1/12) and a credit Accumulated Depreciation — Equipment for $100.

Roselle, Inc., prepares financial statements annually as of December 31. On January 31, 2015, Roselle discards a piece of equipment. The equipment, which cost $12,000, had accumulated depreciation of $10,800 as of December 31, 2014. This equipment was depreciated using the straight-line method over 10 years with zero salvage. Complete the necessary journal entry to record the disposal by selecting the account names and dollar amounts from the drop-down menus. Assume that the entry to bring the accumulated depreciation up-to-date through January 31 has already been recorded.

Before the entry to record the disposal is made, an entry to bring the accumulated depreciation up-to-date is recorded. The amount of accumulated depreciation recorded in that entry is $100 (or Cost of $12,000 — Salvage value of $0) / useful life of 10 years x 1/12 = $100). The updated accumulated depreciation now equals $10,900 (or $10,800 + $100). Because the equipment has a book value of $1,100 (or cost of $12,000 — updated accumulated depreciation of $10,900) when it is discarded, the company must recognize a loss of $1,100 (which, in this case, equals the book value). The entry to record the disposal includes a debit to Accumulated Depreciation — Equipment for $10,900, a debit to Loss on Disposal of Equipment for $1,100, and a credit to Equipment for $12,000.

On January 1, 2015, Truesdale, Inc., purchased a piece of machinery for use in operations. The total acquisition cost was $33,000. The machine was expected to produce a total of 60,000 units in during its life. The machine actually produced 16,000 units during 2015, 23,000 units during 2016, and 21,000 units during 2017. The machinery has a salvage value of $3,000. Using the units-of-production method, the amount of depreciation that should be recorded during 2015 is approximately

Depreciation per unit = (Cost of $33,000 - Salvage value of $3,000) ÷ Total number of units expected to be produced of 60,000 = $0.50 per unit Depreciation for 2013 = Units produced in the period of 16,000 x Depreciation per unit of $0.50 = $8,000

On January 1, 2015, Truesdale, Inc., purchased a piece of machinery for use in operations. The total acquisition cost was $33,000. The machine was expected to produce a total of 60,000 units in during its life. The machine actually produced 16,000 units during 2015, 23,000 units during 2016, and 21,000 units during 2017. The machinery has a salvage value of $3,000. Using the units-of-production method, the book value of the machinery at December 31, 2016 is approximately

Depreciation per unit = (Cost of $33,000 - Salvage value of $3,000) ÷ Total number of units expected to be produced of 60,000 = $0.50 per unit Depreciation for 2015 = Units produced in the period of 16,000 x Depreciation per unit of $0.50 = $8,000 Depreciation for 2016 = Units produced in the period of 23,000 x Depreciation per unit of $0.50 = $11,500 Book value at December 31, 2016 = Cost of $33,000 - Accumulated depreciation of $19,500 (or $8,000 for 2015 + $11,500 for 2016) = $13,500

Depreciation computations for tax return purposes are performed using the _____.

Modified Accelerated Cost Recovery System

Units of production method

Step 1: Depreciation per unit = cost - salvage value / total units of production Step 2: Depreciation Expense = Depreciation per unit x units produced in period

On January 1, 2015, Truesdale, Inc., purchased a piece of machinery for use in operations. The total acquisition cost was $33,000. The machine has an estimated useful life of 3 years and a salvage value of $3,000. At December 31, 2016, using the double-declining-balance method, the book value of the machine is approximately _____.

Straight-line rate = 100%÷ useful life of 3 years = 1/3 Double-declining rate = Straight-line rate of 1/3 x 2 = 2/3 2015 Depreciation = Starting book value of $33,000 (or cost of $33,000) x rate of 2/3 = $22,000 Book value at 12/31/13 = Cost of $33,000 - Accumulated depreciation of $22,000 = $11,000 2016 Depreciation = Book value at 12/31/15 of $11,000 x rate of 2/3 = $7,333 Book value at 12/31/16 = (Cost of $33,000 - Accumulated depreciation of $29,733 (or $22,000 + $7,333) = $3,667

On January 2, 2015, Dixie, Inc., pays a salvage company $1,000 to haul away a machine costing $28,000 with accumulated depreciation of $28,000. Complete the necessary journal entry by selecting the account names and dollar amounts from the drop-down menus.

The entry to record the disposal includes a debit to Accumulated Depreciation — Machinery for $28,000, a debit to Loss on Disposal of Machinery for $1,000, a credit to Cash for $1,000, and a credit to Machinery for $28,000. Although the book value of the machine is zero (or cost of $28,000 − accumulated depreciation of $28,000), the cash payment to haul away the equipment caused the loss.

the primary purpose of depreciation is to

allocate the cost of a plant asset over its useful life in conformity with the matching (or expense recognition) principle

How to record straight line depreciation for machinery in the general journal

depreciation expense debit, accumulated depreciation - machinery credit

Examples of plant assets

equipment being used in the office, building being used for operations

salvage value

estimate of the asset's value at the end of its benefit period.