Date post: | 20-Jan-2016 |
Category: |
Documents |
Upload: | justin-harold-gray |
View: | 215 times |
Download: | 0 times |
1
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
CHAPTER 8: ACCOUNTING FOR PLANT CHAPTER 8: ACCOUNTING FOR PLANT ASSETSASSETS
Objectives: Define accounting terms related to plant assets and
depreciation. Identify accounting concepts and practices related to
accounting for plant assets and depreciation. Journalize entries for buying plant assets. Calculate and record property tax expense. Calculate and record depreciation expense for a plant
asset using straight-line deprecation. Journalize entries for disposing of plant assets. Calculate depreciation expense using other methods.
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 8-1LESSON 8-1
Buying Plant Assets
3
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
Buying Plant Assets: Buying Plant Assets:
Current assets: cash and other assets expected to be exchanged for cash or consumed within a year
Plant assets: assets that will be used for a number of years in the operation of a business AKA: fixed assets or long term assets Land, buildings, equipment help business earn profit for more than
one year Must keep business records up to date as plant assets are
bought and used Going Concern: business will continue indefinitely EX) business buys $30,000 worth of equipment should last 10 years
Record yearly depreciation based on expected life – 10 years After 6 years value is $13,200, but probably wouldn’t be able to sell for
that amount if the business ended, but cost should be allocated over useful life
4
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
1. Complete when asset is purchased.
2. Complete when asset is disposed of.
3. Complete each year to record annual depreciation expense.
PLANT ASSET RECORD – accounting form on which PLANT ASSET RECORD – accounting form on which business records info about each plant asset business records info about each plant asset page 225
11
22
33
5
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
BUYING A PLANT ASSET FOR CASHBUYING A PLANT ASSET FOR CASH page 226
January 2. Paid cash for new copying machine, $1,680.00. Check No. 62.
Appliance Center has 3 kinds of plant assets:
1. Office Equipment
2. Store Equipment
3. Warehouse Equipment
* Separate General Ledger account for each*
6
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
BUYING A PLANT ASSET ON ACCOUNTBUYING A PLANT ASSET ON ACCOUNT page 226
January 2. Bought an office computer on account from Discount Computers, $3,300.00. Memorandum No. 70.
7
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
CALCULATING AND PAYING PROPERTY CALCULATING AND PAYING PROPERTY TAXTAX
Real Property: land and anything attached to it AKA: real estate
Personal Property: all property not classified as real
Assessed Value of Property: Value of an asset determined by tax authority for the purposes
of calculating taxes (assessors) Value may not be the same as the book value on records
8
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
CALCULATING AND PAYING CALCULATING AND PAYING PROPERTY TAXPROPERTY TAX page 227
Feb 1. Paid cash for property tax, $3,250.00. Check No. 122.
AnnualProperty Tax
=Tax Rate
Assessed Value
$65,000.00 5% = $3,250.00
City tax rate = 5%
9
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
TERMS REVIEWTERMS REVIEW
plant asset record real property personal property assessed value
TO DO: Audit, 228 Work Together, 228 On your own, 228
Assign: Read Chapter 8 App prob 8-1, 8-2 – pg
251
page 228
CENTURY 21 ACCOUNTING © Thomson/South-Western
LESSON 8-2LESSON 8-2
Calculating and Journalizing Depreciation Expense
11
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
Factors Used to Calculate DepreciationFactors Used to Calculate Depreciation
Plant assets wear out, may no longer be needed, or may be outdated
Must match revenue with expenses incurred to earn it Cost of plant asset should be allocated to depreciation expense
account over its useful life
Land is not subject to depreciation increases/decreases in value are recorded when sold
Three factors to calculate depreciation expense: Original cost Estimated salvage value Estimated useful life
12
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
Factors Used to Calculate DepreciationFactors Used to Calculate Depreciation
1. Original Cost: Includes all costs to make the asset usable to a business
Purchase price, delivery price, and installation
2. Estimated Salvage Value: Final value can only be estimated Salvage value: amount the owner expects to receive when a plant asset is
removed from use AKA: residual value, scrap value, or trade-in value
Until disposed of, difficult to determine EXACT value
3. Estimated Useful Life: Number of years it is expected to be useful to a business Use past experience as basis May use IRS guidelines that give estimated useful life of many plant assets
13
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
Ending Book Value
=Annual Depreciation
–Beginning Book Value
Year 3 $1,270.00 – $365.00 = $905.00
STRAIGHT-LINE DEPRECIATIONSTRAIGHT-LINE DEPRECIATIONFor a computer bought on Jan. 2, 2001 for $2000For a computer bought on Jan. 2, 2001 for $2000 page 230
Original Cost $2,000.00– Estimated Salvage Value – 175.00= Estimated Total Depreciation Expense $1,825.00 Years of Estimated Useful Life 5= Annual Depreciation Expense $ 365.00
14
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
CALCULATING DEPRECIATION EXPENSE CALCULATING DEPRECIATION EXPENSE FOR PART OF A YEARFOR PART OF A YEAR page 232
Annual Depreciation Expense $ 120.00
Months in a Year 12
Monthly Depreciation Expense $ 10.00
× Number of Months Asset Is Used × 5
Partial Year’s Depreciation Expense $ 50.00
15
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
RECORDING DEPRECIATION ON PLANT RECORDING DEPRECIATION ON PLANT ASSET RECORDSASSET RECORDS- For Cabinet used as Office Equipment- For Cabinet used as Office Equipment
2. Calculate accumulated depreciation.3. Calculate ending book value.
1. Calculate annual depreciation expense.
page 231
11 22 33
16
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
Depreciation Expense—Office Equipment
Jan. 1 Bal. 37,434.00Dec. 31 Adj. 11,571.00Dec. 31 Bal. 49,005.00
Accumulated Depreciation—Office Equipment
Dec. 31 Adj. 11,571.00
JOURNALIZING ANNUAL JOURNALIZING ANNUAL DEPRECIATION EXPENSEDEPRECIATION EXPENSE page 232
17
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
TERMS REVIEWTERMS REVIEW
straight-line method of depreciation book value of a plant asset
******************************************* TO DO:
Audit, 234 Work Together, 234 On your own, 234
Assign: App prob 8-3, 8-4
page 234
18
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
LESSON 8-3: LESSON 8-3: Disposing of Plant Assets Disposing of Plant Assets
No useful life remainsNo longer needed (might still be usable)Traded for another plant asset of the same
kind
19
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
1. Record entry to remove plant asset from accounts.
2. Write the date, amount, and type of disposal.
DISCARDING A PLANT ASSET WITH NO BOOK DISCARDING A PLANT ASSET WITH NO BOOK VALUE – VALUE – Salvage value =0, total Acc. Depreciation= original costSalvage value =0, total Acc. Depreciation= original cost
11
January 5, 20X6. Discarded storage cabinet: original cost, $275.00; total accumulated depreciation through December 31, 20X5, $275.00. Memorandum No. 72.
22
20
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated depreciation through December 31, 20X5, $140.00; additional depreciation to be recorded through June 30, 20X6, $20.00. Memorandum No. 92.
1. Record a partial year’s depreciation expense.
2. Record the partial year’s depreciation.
4. Record entry to remove plant asset from accounts and record loss.
3. Write the date, amount, and type of disposal.
DISCARDING A PLANT ASSET WITH A BOOK DISCARDING A PLANT ASSET WITH A BOOK VALUE – may be disposed at any time during its VALUE – may be disposed at any time during its useful life useful life page 236
11
44
33
22
21
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
3. Record entry to remove plant asset from accounts.
1. Compute the gain or loss on the sale.
2. Write the date, amount, and type of disposal.
SELLING A PLANT ASSETSELLING A PLANT ASSET page 267
11
22
33
January 4, 20X6. Received cash from sale of fax machine, $185.00: original cost, $600.00; total accumulated depreciation through December 31, 20X5, $400.00. Receipt No. 60.
22
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
1. Compute the original cost of the new plant asset.
TRADING A PLANT ASSETTRADING A PLANT ASSET page 238
1144
June 27, 20X6. Paid cash, $850.00, plus old counter for new store counter: original cost of old counter, $1,000.00; total accumulated depreciation through June 27, 20X6, $765.00. Memorandum No. 130 and Check No. 154.
4. Record entry to remove old plant asset and add new plant asset.
2. Write the date and type of disposal and the disposal amount.
22
33
3. Complete section 1 for the new plant asset.
23
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
SELLING LAND AND BUILDINGSSELLING LAND AND BUILDINGS
Land is considered a permanent plant asset useful life is not estimated and annual depreciation is not recorded for it Book value = original cost
Land is seldom discarded (abandoned) usually sold at same time building is sold Separate plant asset record is still kept for land and building Update each when sale is made
24
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
3. Record entry to remove plant assets from accounts.
1. Compute the gain on sale of plant assets.
2. Write the date, type, and amount of disposal.
SELLING LAND AND BUILDINGSSELLING LAND AND BUILDINGS page 239
1133
January 2, 20X6. Fidelity Company sold land with a building for $97,000.00 cash; original cost of land, $25,000.00; original cost of building, $150,000.00; total accumulated depreciation on building through December 31, 20X5, $85,000.00. Receipt No. 105.
22
25
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
CALCULATING THE GAIN ON CALCULATING THE GAIN ON SALE OF LAND AND BUILDINGSSALE OF LAND AND BUILDINGS page 240
26
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
TO DO: TO DO:
Audit, 241 Finish: Work Together, 241 On your own, 241 Assign:
App prob 8-5, 8-6
27
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
LESSON 8-4:LESSON 8-4: Other Methods of Other Methods of DepreciationDepreciation
DECLINING-BALANCE METHOD OF DEPRECIATION
SUM-OF-THE-YEARS-DIGITS METHOD OF DEPRECIATION
PRODUCTION-UNIT METHOD OF DEPRECIATION
DEPLETION
28
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
DECLINING-BALANCE METHOD OF DECLINING-BALANCE METHOD OF DEPRECIATIONDEPRECIATION
Many plant assets depreciate more in their early years of useful life than later years Charging more depreciation expense in earlier years may be more accurate
than charging same amount
Declining-Balance Method of Depreciation: multiplying book value at end of each fiscal period by constant depreciation rate Rate is same, but annual depreciation declines Rate is based on straight-line rate usually twice the straight-line rate
Double-declining balance method Ex) plant asset with estimated useful life of 5 years would have depreciation rate
of 40%
Plant asset is never depreciated more than salvage value Salvage value is ONLY used as a LIMIT!!!
29
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
Plant asset: Computer
Depreciation method: Declining balance
Original cost: $2,000.00Estimated salvage value: $175.00Estimated useful life: 5 years
Year Beginning Book Value
Declining- Balance Rate
Annual Depreciation
Ending
Book Value
1
2
3
4
5
Total Depreciation
$2,000.00 1,200.00
720.00
432.00
259.20
40%
40%
40%
40%
40%
—
$ 800.00
480.00
288.00
172.80
84.20
$1,825.00
$1,200.00
720.00
432.00
259.20
175.00
—
1. Calculate the declining-balance rate.Total Depreciation Expense 100%
Estimated Useful Life (years) 5= Straight-Line Rate 20% Double the Rate 2= Declining-Balance Rate 40%
2. Calculate the annual depreciation for year 3.Beginning Book Value $720
Depreciation Rate 40%= Annual Depreciation Expense $288
DECLINING-BALANCE DECLINING-BALANCE METHOD OF DEPRECIATIONMETHOD OF DEPRECIATION page 242
1122
*Note Year 5
*
30
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
Plant asset: Computer
Depreciation method: Sum-of-the-years-digits
Original cost: $2,000.00
Estimated salvage value: $175.00
Estimated useful life: 5 years
YearBeginning Book
Value FractionTotal
Depreciation Annual Depreciation
Ending
Book Value
1
2
3
4
5
Total
$2,000.00
1,391.67
905.00
540.00
296.67
5/15
4/15
3/15
2/15
1/15
$1,825.00
$1,825.00
$1,825.00
$1,825.00
$1,825.00
$608.33
486.67
365.00
243.33
121.67
$1,825.00
$1,391.67
905.00
540.00
296.67
175.00
2. Calculate the annual depreciation for year 1.Original Cost
$2,000.00Estimated Salvage Value
– 175.00Estimated Total Depreciation
$1,825.00Year’s Fraction
5/15Annual Depreciation
$608.33
SUM-OF-THE-YEARS-DIGITS SUM-OF-THE-YEARS-DIGITS METHOD OF DEPRECIATIONMETHOD OF DEPRECIATION page 243
11 22
1. Calculate the fraction. Years’ Digits Fraction1 5/15
2 4/15
3 3/15
4 2/15
5 1/15
15
31
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
COMPARISON OF THREE COMPARISON OF THREE METHODS OF DEPRECIATIONMETHODS OF DEPRECIATION page 244
Plant asset: Computer
Depreciation method: Comparison
Original cost: $2,000.00
Estimated salvage value: $175.00
Estimated useful life: 5 years
YearStraight-Line
MethodDouble Declining-Balance Method
Sum-of-the-Years-Digits Method
1
2
3
4
5
Total Depreciation
$365.00
365.00
365.00
365.00
365.00
$1,825.00
$ 800.00
480.00
288.00
172.80
84.20
$1,825.00
$608.33
486.67
365.00
243.33
121.67
$1,825.00
Straight-line – easy to calculate, same amount recorded each year of useful lifeDouble-declining method – easy to calculate; larger depreciation expense recorded earlierSum of digits – not as easy; records higher depreciation expense earlierBoth Double-Declining and Sum of digits are known as Accelerated Depreciation methods
32
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
Plant asset: Truck Depreciation method: Production-unitOriginal cost: $18,200.00Estimated salvage value: $2,000.00
Estimated total depreciation: $16,200.00Estimated useful life: 90,000 milesDepreciation rate: $0.18 per mile driven
Year Beginning Book Value
Miles Driven Annual Depreciation EndingBook Value
12345
Totals
$18,200.0016,580.0012,440.00
7,940.003,980.20
9,00023,00025,00022,000
8,00087,000
$ 1,620.004,140.004,500.003,960.001,440.00
$15,600.00
$16,580.0012,440.00
7,940.003,980.202,540.00
1. Calculate the depreciation rate.Original Cost $18,200
– Estimated Salvage Value – 2,000= Est. Total Depreciation Expense $16,200 Estimated Useful Life (miles) 90,000= Depreciation Rate $0.18/mile
2. Calculate annual depreciation for year 1.Total Miles Driven 9,000
Depreciation Rate $0.18= Annual Depreciation Exp. $1,620.00
PRODUCTION-UNIT METHOD OF PRODUCTION-UNIT METHOD OF DEPRECIATION – DEPRECIATION – based on amount of production based on amount of production expected from plant assetexpected from plant asset page 245
11
22
* Will record through 90,000 miles
33
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
CALCULATING DEPRECIATION EXPENSE CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSESFOR INCOME TAX PURPOSES
MACRS: Modified Accelerated Cost Recovery System depreciation method required by IRS for income tax calculation for most plant
assets in service after 1986 Prescribed periods for 9 classes of useful life for plant assets Assigned to certain class based on its characteristics and general life
expectancy 2 most common classes (other than real estate)
5-year – cars, general-purpose trucks, computers, manufacturing equipment, office machinery
7-year – office furniture and fixtures Use depreciation method similar to double-declining method
IRS has prescribed methods that use annual percentage rates to determine depreciation for each class Rates applied to total cost of plant asset without considering salvage value annual depreciation = plant asset’s original cost X depreciation rate
34
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
Original Cost
DepreciationRate
=Annual
Depreciation Rate
Year 3 $2,000.00 19.20% = $384.00
CALCULATING DEPRECIATION EXPENSE CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSESFOR INCOME TAX PURPOSES
page 246
Plant asset: Printer
Depreciation method: MACRS
Original cost: $2,000.00
Property class: 5 year
Year Depreciation Rate Annual Depreciation
1
2
3
4
5
6
Totals
20.00%
32.00%
19.20%
11.52%
11.52%
5.76%
100.00%
$400.00
640.00
384.00
230.40
230.40
115.20
$2,000.00
35
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
Plant asset: Coal Mine Depreciation method: Production-unitOriginal cost: $100,000.00Estimated salvage value: $12,250.00
Estimated total depletion: $87,750.00Est. tons of recoverable coal: 50,000 tonsDepletion rate: $1.755 per ton
Year Beginning Book Value
Tons Recovered
Annual Depletion EndingBook Value
12345
Totals
$100,000.0089,470.0068,410.0045,595.0029,800.00
6,00012,00013,000
9,000 6,00046,000
$ 10,530.0021,060.0022.815.0015,795.0010,530.00
$80,730.00
$89,470.0069,410.0045,595.0029,800.0019,270.00
1. Calculate the depletion rate.Original Cost $100,000
– Estimated Salvage Value – 12,250= Est. Total Value of Coal $87,750 Est. Tons of Recoverable Coal 50,000= Depletion Rate per Ton of Coal $1.755
2. Calculate annual depletion for year 1.Tons of Coal Removed 6,000
Depletion Rate $1.755= Annual Depreciation Exp. $10,530.00
DEPLETION – decrease in value of a plant asset DEPLETION – decrease in value of a plant asset because of the removal of a natural resourcebecause of the removal of a natural resource page 247
11
22
36
CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1
TERMS REVIEWTERMS REVIEW
declining-balance method of depreciation sum-of-the-years’-digits method of depreciation production-unit method of depreciation Modified Accelerated Cost Recovery System Depletion
******************************************** TO DO:
Audit, 248 Work Together, 248 On your own, 249
Assign: App prob 8-7, 8-8. 8-9, 8-10
page 248