Accounting Chapter 9

Accumulated depreciation

A contra-asset. With a normal credit balance.

Lease

A contract for the use of an asset for a period of time.

Straight-line method of depreciation

A method of depreciation that provides for equal periodic depreciation expense over the estimated life of a fixed asset.

Units-of-activity method of calculating depreciation

A method of depreciation that provides the same amount of depreciation expense for each unit of an asset's activity, which may be expressed in hours, miles driven, or quantity produced.

How annual depreciation calculated using the straight-line method

Annual Depreciation = (cost - Residual value)/useful life

What is the journal entry to record depreciation?

Debit Depreciation expense Credit accumulated depreciation

What is the journal entry made upon the disposal/sale of an asset

Debit accumulated depreciation, Credit Equipment.

What is the journal entry to record amortization

Debit amortization expense, credit patents.

What is the journal entry to record depletion

Debit depletion expense credit accumulated depletion.

How is depletion determined

Depletion = cost of resources/Estimated total units of resources.

How is depreciation handled if an asset is not purchased at the beginning of the accounting period?

Depreciation is prorated based on the month the asset is placed in service.

How depreciation is expense calculated under the units-of-activity method

Depreciation per unit = (cost - residual value)/ total estimated units of activity.

Included in the cost of a fixed asset

Everything spent getting the asset in place and ready for use.

Since depreciation is an estimate, how is a change of estimate handled?

If the estimate changes, only future payments are effected.

How is a gain or loss on the disposal/sale of an asset calculated

If the sale is for more then the book value it is a gain.

How does the calculation of depreciation using the double-declining-balance method differ from straight-line or units of activity methods?

It doubles the straight-line method. And the activity is not considered.

Captial Expenditures.

While capital expenditures effect fixed assets. A new roof, an asset

Double-declining-balance

It doubles the straight-line method. Used the book value not depreciable cost. Year cost - AD = BV. BV * rate = Annual Dep. Do this every year until you get to the poit where you only depriciate to the residual value. Never below. - To find rate, (1/number of useful years) x2 (if 5 years, = .40). - you can round up cost. If you didn't use the thing for the whole year, take what you should depriciate times say 8/12

Intangible asset

Long-term assets that are used in the operations of a business, are not held for sale, and are without physical qualities.

Fixed assets

Long-term or relatively permanent tangible assets such as equipment, machinery, buildings, and land.

Revenue expenditures

Revenue expenditures only effect current period or costs incurred for normal maintenance and repairs of fixed assets. Repairs, like shingles. An expense

2 steps in classifying costs

Step 1. If the cost is long-lived, it is recorded as an asset on the balance sheet, either as a fixed asset or an investment, if it is not long-lived it is classified and recorded as an expense. Step 2. If the asset used, is used in normal operations it is classified and recorded as a fixed asset, if it is not, it classified and recorded as an investment.

Depreciable cost

The amount of an asset's cost that will be allocated to depreciation expense over its useful life, determined by the difference between the asset's initial cost and its residual value.

3 factors that determine the depreciation expense for a fixed asset

The asset's initial cost The asset's expected useful life The asset's estimated residual value

Book value

The difference between the cost of a fixed asset and its accumulated depreciation.

Expected useful life

The estimated length of time an asset will be used in normal business operations.

Residual value

The estimated value of a fixed asset at the end of its useful life. EX. When I'm done with this, I think its value will be the residual value.

What is the fixed asset turnover ratio

The number of sales dollars earned per dollar of fixed assets, computed by dividing sales by the average book value of fixed assets.

Amortization

The periodic transfer of the cost of an intangible asset to expense.

Depletion expense?

The process of transferring the cost of natural resources to an expense account.

Depreciation

The systematic periodic transfer of the cost of a fixed asset to an expense account during its expected useful life.

3 characteristics of fixed assets

They exist physically and, thus, are tangible assets. They are owned and used by the company in its normal operations. They are not offered for sale as part of normal operations.

Compare the results of the three different methods of calculating depreciation.

Under the double-method the payments are more but end sooner and the payments decline. With straight, the payments and constant and units-of-activity payments and varied.

How is the fixed asset turnover ratio calculated

fixed asset turnover = Sales/Avarage book value of fixed assets.