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16-1
What if the Company Doesn’t Purchase (or sell) the Asset at the Beginning (or end) of the Year?
What if the Company Doesn’t Purchase (or sell) the Asset at the Beginning (or end) of the Year?
• Units-of-production Multiple the depreciation rate by the actual
usage• Straight-line or double-declining balance
Use the mid-year convention or count the time that the asset was in use
Midyear ConventionMidyear Convention
• Companies making numerous plant asset purchases and disposals spread out evenly during the course of the fiscal year frequently use the midyear convention, which reflects depreciation expense for each asset
• as if it were purchased or disposed of exactly halfway through the company’s fiscal year.
Illustration --- page 457Illustration --- page 457
• PCs to Go, with a December 31 year-end, purchases its delivery truck in April 2010 and expects to dispose of it five years later in April 2015. Straight – line depreciation for each fiscal year of use would be as follows:
• Refer to page 457
Revision of EstimatesRevision of Estimates
• A company originally assigns a useful life of seven years to a computer and, one year after the date of the purchase, realizes that it will have to replace the computer after a total of three year.
• When it becomes clear that they need to make an adjustment– do the following---
Revision of estimatesRevision of estimates
• Assume that on January 1, 2010, a company purchases and begins to use office equipment costing $12,000, with an expected useful life of 10 years and a salvage value of $2,000. Assuming the business uses the straight-line method of depreciation for the asset, accumulated depreciation at December 31, 2012, would be $3,000 (12,000 – 2,000)/10 X 3 = 3,000.
• The carrying value would be 9,000 (12 – 3)
Continued.Continued.
• If the company realizes that the equipment will last only four more years, after which its estimated salvage value will be $3,000, then depreciation expense for each of the remaining four years of the asset’s useful life would be calculated as follows:
Carrying value – Revised salvage value
Remaining useful life
9,000-3,000
4 years = $1,500 depreciation expense per year
16-7
What is the Process Involved in Asset Disposals?What is the Process Involved in Asset Disposals?
• Record depreciation to date of disposal• Remove the cost of the asset (CR) and the
accumulated depreciation (DR) from the records
• Record the assets received (DR) if applicable
• Record the cash paid (CR) if applicable• Record the loss incurred (DR) if applicable• Record the gain (CR) if applicable
16-8
How Can a Company Dispose of an Asset Before its Useful Life is Over?How Can a Company Dispose of an Asset Before its Useful Life is Over?• Discard---it is necessary to record a loss at
the date of the disposal Discard equipment that cost 50,000 with a
40,000 of accumulated depreciation at the date of the last balance sheet. Must pay $1,000 to have it removed.
Assets = Liabilities + Owner’s Equity
2,000 = 2,000
Depreciation expense 2,000
Accumulated Depreciation 2,000
Problem continuedProblem continued
• After the entry is posted, the accumulated depreciation account will have a $42,000 credit balance (previous balance of $40,000 plus $2,000. Second, we must recognize the removal of the equipment (book value = $8,000) and cash:
• Assets = Liabilities + Owners Equity• (8,000) = (9,000)• (1,000)
Journal EntryJournal Entry
• Accumulated Depreciation 42,000• Loss on Disposal 9,000
Equipment 50,000 Cash 1,000
SellSell
• Sell
Must be sold for equal, less than, or greater than.
Recall when more net assets are received than are given up, a gain results. A loss results when fewer net assets are received than are given up.
ExampleExample
Cost of Asset $80,000
Accumulated depreciation (60,000)
through date of sale
Carrying Value at date of sale $20,000
Assets = Liabilities + Owner’s Equity
+20,000
-20,000
Selling for the same amount of net assets
Journal EntryJournal Entry
Cash 20,000
Accum Dep 60,000
Equipment 80,000
16-14
Exchange (Trade-In) ExampleExchange (Trade-In) Example
• We have a computer that originally cost $6,000 and has accumulated depreciation of $4,500. We will trade-in this computer for a new computer with a list price of $10,000. The computer company will give us a trade-in allowance of $2,000.
• Book value = $6,000 - $4,500 = $1,500.• Cash payment required = $10,000 - $2,000
= $8,000
16-15
Trade-in Example ContinuedTrade-in Example Continued
• Computer received = $10,000Less assets given up = $9,500Gain = $500
• Entry:Computer (new) 10,000Accumulated depreciation 4,500
Computer (old) 6,000Cash 8,000
Gain 500
16-16
What are Depletion and Amortization?What are Depletion and Amortization?
• Depletion The cost of a natural resource is allocated to
expense Typically, units-of-production method used
• Amortization The cost of an intangible asset is allocated to
expense Typically, straight-line method is used
HomeworkHomework
• Exercise 16-9, 16-10, Problem 16-3
Ex 16-9Ex 16-9
• (850,000 – 175,000)/25 years = $27,000 per year x 12 years = $324,000 accumulated depreciation
• (850,000 – 324,000 – 150,000) /(39-12) = $13,925.93 per year for the remaining 27 years.
Ex 16-10Ex 16-10
• $36,000 – 28,000 = $8,500 carrying value
a. 10,000 – 8,500 = 1,500 gain
b. 8,000 – 8,500 = (500) loss
c. 9,000 – 8500 = 500 gain
Problem 16-3Problem 16-3
(1) Straight-line:
Depreciation Carrying
Expense** Value
Year 1 $50,000 $300,000
Year 2 50,000 250,000
Year 3 50,000 200,000
Year 4 50,000 150,000
** ($400,000 - $50,000)/7 years = $50,000/year
(2) Units-of-production:
Depreciation Carrying
Expense*** Value
Year 1 $56,000 $294,000
Year 2 61,600 234,400
Year 3 67,600 164,800
Year 4 74,536 90,264
*** ($400,000 - $50,000)/25,000 hours = $14/hour
4,000 hours * $14 = $56,000
(4,000 * 1.1) = 4,400 * $14 = $61,600
(4,400 * 1.1) = 4,840 * $14 = $67,600
(4,840 * 1.1) = 5,324 * $14 = $74,536
Problem 16-3Problem 16-3
(3) Double-declining-balance:
1/7 * 2 = .2857 is double the straight-line rate
Depreciation Carrying
Expense* Value
Year 1 $114,280 $285,720
Year 2 81,630.20 204,089.80
Year 3 58,308.46 145,781.34
Year 4 41,649.73 104,131.61
*$400,000 * 0.2857 = $114,280
$285,720 * 0.2857 = $81,630.20
$204,089.80 * 0.2857 = $58,308.46
$145,781.34 * 0.2857 = $41,649.73
b. The straight-line method produced the lowest deprecation expense, and therefore the highest income in Year 1. The double-declining balance method produced the highest depreciation expense, and therefore the lowest income in Year 1.
Ex 16-12Ex 16-12
Nelson Enterprises: $425,000 - $260,000 = $165,000 carrying value;
$575,000 - $165,000 = $410,000 gain
The $410,000 gain is recognized and the building acquired should be recorded at its fair market value of $575,000.
Lamb Corporation: $750,000 - $160,000 = $590,000 carrying value
$575,000 - $590,000 = $15,000 loss
The $15,000 loss should be recognized and the new building should be recorded at its fair market value of $575,000.
Problem 16-4Problem 16-4
a. $63,500 + $4,785 + $100 + 2,850 = $71,235
b. ($71,235 - $6,000)/8 = $8,154 * 1/2 year = $4,077
c. The cost of the transmission should be capitalized as an extraordinary repair and the cost of the tune-up should be expensed as an ordinary repair.
d. 2008 $ 4,077
2009 8,154
2010 8,154
$ 20,385
Accumulated Depreciation at the end of 2010
$71,235 - $20,385 = $50,850 carrying value plus $5,000
extraordinary repair = $55,850 - $6,000 salvage value
= $55,850/7.5 years remaining life = $7,447
Problem 16-5Problem 16-5
a.$32,000/8 = $4,000 per year; $770,000/15,400,000 = $0.05 per ton
b.$4,000/2 = $2,000
c.2,500,000 * $0.05 = $125,000
d.2,000,000 * $0.05 = $100,000
Problem 16-6Problem 16-6
a. $685,000 - $274,000 = $411,000 carrying value
(1) $365,000 - $411,000 = ($46,000) recognized loss
(2) $425,000 - $411,000 = $14,000 recognized gain
(3) $400,000 - $411,000 = ($11,000) recognized loss
(4) $450,000 - $411,000 = $39,000 recognized gain
Problem 16-6Problem 16-6
• (1) • Cash 365,000• Accumulated depreciation 274,000• Loss of sale of equipment 46,000• Motorcoach
685,000• (2)• Investment in stock 425,000• Accumulated depreciation 274,000•
Motorcoach685,000
• Gain on sale of equipment 14,000
Problem 16-6Problem 16-6
(3)
Motorcoach (new) 825,000
Accumulated depreciation 274,000
Loss on trade of equipment 11,000
Motorcoach (old) 685,000
Cash 425,000
(4)
Cash 60,000
N/R 340,000
Limousine 50,000
Accumulated depreciation 274,000
Motorcoach (new) 685,000
Gain 39,000