ch11 Depreciation Techniques

7/28/2019 ch11 Depreciation Techniques

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Chapter11-1

Depreciation Techniques

Chapter11

Prepared by Coby Harmon, University of California, Santa Barbara


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Chapter11-2

Used in operations and not for resale.Long-term in nature and usually depreciated.

Possess physical substance.

Plant assets include land, land improvements,buildings, and equipment (machinery, furniture, tools).

Major characteristics include:

Section 1 Plant Assets

Referred to as property, plant, and equipment; plant andequipment; and fixed assets.


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Chapter11-3

Includes all costs to acquire land and ready it for use.

Costs typically include:

Land

Determining the Cost of Plant Assets

(1) the purchase price;(2) closing costs, such as title and attorneys fees;

(3) real estate brokers commissions;

(4) costs of grading, filling, draining, and clearing;(5) assumption of any liens, mortgages, or

encumbrances on the property.

LO 1 Describe how the cost principle applies to plant assets.


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Chapter11-4

Includes all costs related directly to purchase orconstruction.

Buildings

Purchase costs:Purchase price, closing costs (attorneys fees, titleinsurance, etc.) and real estate brokers commission.

Remodeling and replacing or repairing the roof, floors,

electrical wiring, and plumbing.Construction costs:

Contract price plus payments for architects fees,building permits, and excavation costs.

Determining the Cost of Plant Assets

LO 1 Describe how the cost principle applies to plant assets.


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Chapter11-5

Objective is to select the method that best measuresan assets contribution to revenue over its useful life.Examples include:

Depreciation Methods

(1) Straight-line method.

(2) Units-of-Activity method.

(3) Declining-balance method.

Depreciation

LO 3 Compute periodic depreciation using different methods.

Illustration 10-8Use of depreciationmethods in 600 largeU.S. companies


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Chapter11-6

Allocating costs of long-term assets:

Fixed assets = Depreciation expense

Intangibles = Amortization expense

Natural resources = Depletion expense

Depreciation is the accounting process of allocatingthe cost of tangible assets to expense in a systematicand rational manner to those periods expected tobenefit from the use of the asset.

Depreciation - Method of Cost Allocation

LO 1 Explain the concept of depreciation.


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Chapter11-7


LO 3 Compare activity, straight-line, and decreasing-charge methods of depreciation.

The profession requires the method employed besystematic and rational. Examples include:

Methods of Depreciation

(1) Units of Activity method (units of use or production).(2) Straight-line method.

(3) Declining-balance method.


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Chapter11-8



Exercise (Depreciation ComputationsThree Methods)Robert Parish Corporation purchased a new machine for itsassembly process on September 30, 2007. The cost of thismachine was $117,900. The company estimated that the machinewould have a salvage value of $12,900 at the end of its service

life. Its life is estimated at 5 years and its working hours areestimated at 1,000 hours. Year-end is December 31.

Instructions: Compute the depreciation expense under thefollowing methods.

(a) Straight-line depreciation.

(b) Activity method.

(c) Double-declining balance.


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Chapter11-9



Exercise (Straight-line Method)Current

Depreciable Annual Partial Year Accum.Year Base Years Expense Year Expense Deprec.

2007 105,000$ / 5 = 21,000$ x 3/12 = 5,250$ 5,250$

2008 105,000 / 5 = 21,000 21,000 26,250

2009 105,000 / 5 = 21,000 21,000 47,2502010 105,000 / 5 = 21,000 21,000 68,250

2011 105,000 / 5 = 21,000 21,000 89,250

2012 105,000 / 5 = 21,000 x 9/12 = 15,750 105,000

105,000$

Journal entry:2007 Depreciation expense 5,250

Accumultated depreciation 5,250


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Chapter11-10



Exercise (Activity Method)($105,000 / 1,000 hours = $105 per hour)

(Given) CurrentHours Rate per Annual Partial Year Accum.

Year Used Hours Expense Year Expense Deprec.

2007 200 x $105 = 21,000$ 21,000$ 21,000$2008 150 x 105 = 15,750 15,750 36,750

2009 250 x 105 = 26,250 26,250 63,000

2010 300 x 105 = 31,500 31,500 94,500

2011 100 x 105 = 10,500 10,500 105,000

1,000 105,000$

Journal entry:

2007 Depreciation expense 21,000



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Chapter11-11



Exercise (Double-Declining Balance Method)Current

Depreciable Rate Annual Partial Year Accum.Year Base per Year Expense Year Expense Deprec.

2007 117,900$ x 40% = 47,160$ x 3/12 = 11,790$ 11,790$

2008 106,110 x 40% = 42,444 42,444 54,234

2009 63,666 x 40% = 25,466 25,466 79,700

2010 38,200 x 40% = 15,280 15,280 94,980

2011 22,920 x 40% = 9,168 9,168 104,148

2012 13,752 x 40% = 5,501 Plug 852 105,000

105,000$

Journal entry:

2007 Depreciation expense 11,790



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Chapter11-12

Changes in Depreciation Rate

Accounted for in the period of change andfuture periods (Change in Estimate)

LO 4 Explain special depreciation methods.



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Chapter11-13

Arcadia HS, purchased equipment for $510,000 whichwas estimated to have a useful life of 10 years with asalvage value of $10,000 at the end of that time.Depreciation has been recorded for 7 years on a

straight-line basis. In 2005 (year 8), it is determinedthat the total estimated life should be 15 years with asalvage value of $5,000 at the end of that time.

Questions:

What is the journal entry to correctthe prior years depreciation?

Calculate the depreciation expensefor 2005.

No EntryRequired

Change in Estimate Example



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Chapter11-14

Equipment $510,000

Fixed Assets:

Accumulated depreciation 350,000

Net book value (NBV) $160,000

Balance Sheet (Dec. 31, 2004)

Change in Estimate Example After 7 years

Equipment cost $510,000Salvage value - 10,000

Depreciable base 500,000

Useful life (original) 10 years

Annual depreciation $ 50,000 x 7 years = $350,000

First, establishNBV at date of

change in estimate.



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Chapter11-15

Change in Estimate Example After 7 years

Net book value $160,000Salvage value (new) 5,000

Depreciable base 155,000

Useful life remaining 8 years

Annual depreciation $ 19,375

DepreciationExpense calculation

for 2005.

Depreciation expense 19,375


Journal entry for 2005



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Chapter11-16

Natural resources, often called wasting assets,include petroleum, minerals, and timber.

They have two main features:

Depletion

LO 6 Explain the accounting procedures for depletion of natural resources.

1. complete removal (consumption) of the asset, and2. replacement of the asset only by an act of nature.

Depletionis the process of allocating the cost ofnatural resources.


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Chapter11-17

Establishing a Depletion Base

Depletion


Computation of the depletion base involves four factors:

(1) Acquisition cost of the deposit,

(2) Exploration costs,

(3) Development costs, and

(4) Restoration costs.


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Chapter11-18

Write-off of Resource Cost

Depletion


Normally, companies compute depletion on a units-of-production method(an activity approach). Thus,

depletion is a function of the number of units extractedduring the period.

Calculation:

Total cost Salvage value

Total estimated units available = Depletion cost per unit

Units extracted x Cost per unit = Depletion


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Chapter11-19

BE10-9 Prepare journal entries to record the following.(a)Gomez Company retires its delivery equipment, which cost$41,000. Accumulated depreciation is also $41,000 on thisdelivery equipment. No salvage value is received.

(b) Assume the same information as (a), except thataccumulated depreciation for Gomez Company is $39,000,instead of $41,000.

Plant Asset Disposals - Retirement

LO 6 Explain how to account for the disposal of a plant asset.

Accumulated depreciation 41,000(a)Equipment 41,000


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Chapter11-20

BE10-9 Prepare journal entries to record the following.(a)Gomez Company retires its delivery equipment, which cost$41,000. Accumulated depreciation is also $41,000 on thisdelivery equipment. No salvage value is received.

(b) Assume the same information as (a), except thataccumulated depreciation for Gomez Company is $39,000,instead of $41,000.


Accumulated depreciation 39,000(b)Equipment 41,000

Loss on disposal 2,000

Plant Asset Disposals - Retirement


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Chapter11-21

Sale of Plant AssetsCompare the book value of the asset with theproceeds received from the sale.

If proceeds exceed the book value, a gain ondisposal occurs.

If proceeds are less than the book value, a losson disposal occurs.

Plant Asset Disposals



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Chapter11-22

BE10-10 Chan Company sells office equipment onSeptember 30, 2008, for $20,000 cash. The office

equipment originally cost $72,000 and as of January 1,2008, had accumulated depreciation of $42,000.Prepare the journal entries to (a) record the sale of theequipment.


Plant Asset Disposals - Sale


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Chapter11-23

BE10-10 Prepare the journal entries to (a) record thesale of the equipment.


Plant Asset Disposals - Sale

Cash 20,000(a)


Loss on disposal 10,000

Office equipment 72,000


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Chapter11-24

Intangible assetsare rights, privileges, andcompetitive advantages that do not possess physicalsubstance.

Section 3 Intangible Assets

Normally classified as long-term asset.Common types of intangibles:

Patents

CopyrightsFranchises or licenses

Trademarks or trade names

Goodwill

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ch11 Depreciation Techniques

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