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