ACCT 2 Chapter 10 Summer Semester
Smart touch learning purchases land on August 1,205, for $50,000 with a note payable. Other costs related to this transaction include $4,00 in delinquent property taxes, 2,000 in transfer taxes, 5,000 to remove an old building and a $1,000 surgery fee. The additional cost are paid in cash.
(Measure the cost of land) Purchase price of land $50,000 Add related costs: Property taxes $4,000 Transfer taxes $2,000 removal of building 5,000 Survey fee 1,000 12,000 ---------- Total cost of land $62,000
Buildings:
Buildings- when a building is constructed, the costs to be capitalized include the following: -Architecual fees, buildings permits, contractor charges, payments for material and labor. When a building is purchased, the costs to be capitalized include: Purchase price, brokerage fees, delinquent taxes, renovation costs.
Capital and revenue Expenditures: 1. Capital expenditures
Capital and revenue Expenditures: - Accountants divide spending on plant assets after the acquisition into two categories. 1. Capital expenditures- increase the assets capacity or efficiency or extends the assets useful life. Includes extradorinaiy repairs 2. Revenue expenditures- are expensed incurred to maintain the assets in working order.
Capital and revenue expenditures; Capital expenditure & Revenue expenditure:
Capital expenditure- Debit an asset account Revenue expenditure- Debit repairs and maintenance
Factors in Computeing depreciation
Factors in Computeing depreciation: depreciation of a plant asset is based on three main factors. capitalized cost, estimated useful life, estimated residual value.
Furniture and fixtures
Furniture and fixtures: - Examples of furniture and fixture include" _Descks - Chairs -File cabinets - The costs of furniture and fixtures include: -Purchase price(less any discounts) -All other costs to ready the assets for its intended use.
How are disposal of plant assets recorded?
How are disposal of plant assets recorded? - Regardless of the type of disposal, there are four steps: 1. Bring the depreciation up to date. 2. Remove the old, disposed of asset and associated accumulated depreciation from the books. 3. Record the value of any cash received(or paid) 4. Determine the amount of any gain or loss.
Selling A plant Asset At Book Value: - Smart touch learning sells the equipment for 1,500.
Selling A plant Asset At Book Value: - Smart touch learning sells the equipment for 1,500 DR: Cash 1,500 DR: Accumulated Depreciation-Equipment CR: Equipment -Sold equipment for cash
Selling a plant asset below book value: -If smart touch learning sells the equipment for 500, the company will record a loss on the sale of the equipment.
Selling a plant asset below book value: -If smart touch learning sells the equipment for 500, the company will record a loss on the sale of the equipment. DR: Cash 500 DR: Accumulated Depreciation-equipment 8,500 DR: Loss on disposal 1,000 CR: Equipment 10,000 - Sold Equipment for cash
Land and land Improvements: The entry to record the purchase of the land on August 1,2017 follows:
The entry to record the purchase of the land on August 1,2017 follows: DR: Land 62,000 CR: Notes Payable 50,000 CR: Cash 12,000 -To Record purchase of land with cash and note payable
What is depreciation, and how is it computed?
What is depreciation, and how is it computed? - Depreciation matches the expense against the revenue generated from using an asset. - All assets, except land, wear out as they are used - Some assets may become obsolete before they wear out. An assets is obsolete when a newer asset can perform the job more efficiently.
1. Straight line method
1. Straight line method- The straight line method allocates an equal amount of depreciation to each year and is computed as follows: Straight line depreciation= (Cost- Residual value)/useful life =(41,000 -1,000/5 years =8,000 per year Straight line method- The adjusting entry to record the years depreciation expense, assuming the truck was placed in service on the first day of the year as follows: DR: Depreciation Expense- truck 8,000 CR: Accumulated Depreciation- truck 8,000 to record depreciation on truck. Depreciation expense is reflected on the income statement. The book value of the assets, cost minus accumulated depreciation, is reflected on the balance sheet. Plant Assets: Truck 41,000 Less: Accumalted Depreciation-truck(8,000) Truck, Net 33,000
2. Units- of Production Method
2. Units- of Production Method- The units of production method allocates a varying amount of depreciation each year based on the assets usage. - When a plants assets usage varies by year, the units of production method better matches expenses with revenues Example- Smart touch learning expects to drive a truck 20,000 miles the first year, 3000 miles the second, 25,000 the third, 15,000 the fourth, and 10,000 the fifth- for a total of 100,000 miles. - The founts of production depreciation for each period varies with the number of units the assets is used. step 1. Depreciation per unit= (Cost-Residual value)/useful life in units =(41,000 -1,000/100,000 miles = $0.40 per mile Step 2: Units of production depreciation= Depreciation per unit * current year usage =0.40 per mile * 20,000 miles = 8,000 (year 1)
3. Double- Declining Balance Method
3. Double- Declining Balance Method- An accelerated depreciation method expenses more of the assets cost near the start of an assets life and less at the end of its useful life. - The main accelerated method of depreciation is the double-declining balance method. - The double declining balance method multiplies an assets decreasing book value by a constant percentage that is twice the straight line depreciation rate.
Accounting for Intangibles: Amortization:
Accounting for Intangibles: Intangible assets that are purchased at cost. - Most purchased intangible are expensed through amortization, the allocation of the cost of an intangible asset to expense over its useful life. - Only intangible with a definite life are amortized. - Intangible assets with an indefinite life are tested for impairment annually. - Impairment occurs when the fair value of an assets is less than the book value. - A company records a loss when an impairment occurs.
Depreciation Methods: Three most commonly used depreciation methods
Depreciation Methods: Three most commonly used depreciation methods: 1. Straight line method 2. Units of production method 3. Double declining balance method
Discarding Plant Assets: Suppose instead that on July 1 smart touch learning discarded the equipment which has a cost of 10,000 but is not fully depreciated. Accumulated depreciation is 8,000 and annual depreciation is 1,000.
Discarding Plant Assets: 1. The first step is to bring the asset up to date on depreciation. 2. The second step is to record the disposal DR: Accumulated expense- Equipment CR: Accumulated depreciation- equipment - to record depreciation on equipment DR: Accumulated depreciation-equipment DR: Loss of disposal CR: Equipment -discarded equipment with a book value of 1,500
Discarding Plant Assets: Assume that on July 1, Smart touch learning discards equipment with a cost of 10,000 and accumulated depreciation of 10,000.
Discarding Plant Assets: DR:Accumulated Depreciation-Equipment CR:Equipment
Factors in Computeing depreciation: (Depreciable cost Formula)
Factors in Computeing depreciation: (Depreciable cost) - Estimated residual value, also called salvage value, is the amount the company expects to receive upon disposition of the asset. - Cost minus estimated residual value is called depreciable cost. Depreciable cost= cost-Estimated residual value
How are disposals of plant assets recorded? a. Discarding of fully depreciated plant asset. b. Discarding of a plant asset that is not fully depreciated c. Selling of a plant asset at book value.
How are disposals of plant assets recorded? a. Discarding of fully depreciated plant asset. DR: Accumulated Depreciation CR:Plant asset b. Discarding of a plant asset that is not fully depreciated DR: Accumulated Depreciation DR: Loss of disposal CR: Plant asset c. Selling of a plant asset at book value DR: Cash DR: Accumulated Depreciation CR: Plant asset
How are disposals of plant assets recorded? a. Selling a plant asset above book value b. Selling a plant asset below book value
How are disposals of plant assets recorded? a. Selling a plant asset above book value DR: Cash DR: Accumulated Depreciation CR: Plant Asset CR: Gain on Disposal b. Selling a plant asset below book value: DR: Cash DR: Accumulated Depreciation DR: Loss on Disposal CR: Plant Asset
How are intangible assets accounted for?
How are intangible assets accounted for? - Intangible assets- are assets that have no physical form. - Examples of intangible assets include: - patents -copyrights -trademarks -other creative works
How does a business measure the cost of a plant asset? - Cost principle
How does a business measure the cost of a plant asset? - A plant asset is recorded at historical cost- the amount paid for the asset. - This follows the cost principle, which states that acquired assets and services should be recorded at their actual costs. - The actual cost is the purchase price plus taxes, commissions & other amounts paid to get the asset ready for its intended use.
How does a business measure the cost of a plants asset?
How does a business measure the cost of a plants asset? -Plant assets are different from other assets because plants assets are long term)lasting several years) -The cost of a plant assets allocated over the years that the asset is expected to be used. -The allocation of a plant assets cost over tits useful life ic called depreciation and follows the matching principle.
Land & Land Improvements: - Capitalizes
Land & Land Improvements: - Smart touch learning capitalizes the cost of the land at $62,000 - To capitalize an asset means to record the acquisition of land, building, or other assets by debiting (Increasing) an asset account.
Land & Land Improvements
Land & Land Improvements: The cost of land includes the following amounts paid by the purchaser: Purchase price, Brokerage commission, survey and legal fees, delinquent property taxes, title transfer fees, cost of clearing the land. The cost of land does not include: fencing, paving, sprinkler systems, lighting, signs These operate plant assets are called land improvements and, unlike land, are subject to depreciation.
How does a business measure the cost of a plants asset?
Life cycle of a plant assets: 1. Acquisition of asset 2. Usage of asset 3. Disposal of assets
Machinery & Equipment:
Machinery & Equipment: - The cost of machinery and equipment includes: -Purchase price(less any discounts) -transportation charges - Insurance while in transit - Sales tax and other taxes _ Purchase commission - Installation cost - Testing costs (prior to use of the asset)
Plants assets
Plants assets- are long lived, tangible assets used in the operations of a business. Examples include: - land buildings equipment furniture fixtures automobiles
Selling A Plant Asset Above Book Value:
Selling A Plant Asset Above Book Value: -If Smart touch learning sells the equipment for 4,000, the company will record a gain on the sale of the equipment. DR: Cash DR: Accumulated depreciation- equipment CR: Equipment CR: Gain on disposal - Sold equipment for cash
patent example: Assume smart touch learning pays 200,000 to accrue a patent on January 1. The useful life of the parent is determined to be five years. - Use the straight line method to calculate amortization.
patent example: Assume smart touch learning pays 200,000 to accrue a patent on January 1. The useful life of the parent is determined to be five years. - Use the straight line method to calculate amortization. Patents: DR: Patent 200,000 CR: 200,000 to record purchase of patent. DR: Amortization Expense- Patent CR: Patent to record amortization of patent
patents
patents: -A parents is an intangible asset that is a federal grant conveying an exclusive 20-year right to produce and sell an invention. - The invention may be a process, product or formula. - The acquisition cost of a patent is debited to the patent account.
