Documente Academic
Documente Profesional
Documente Cultură
key terms
• Depreciation:
the process of systematically allocating the cost of an
asset over its useful life.
• Salvage value:
The estimated value of an asset at the end of its useful
life
• Depreciable cost:
an asset’s acquisition cost less its salvage value
• Book value:
an asset’s cost less its accumulated depreciation
• Three factors to consider when computing
depreciation:
cost, estimated useful life, and salvage value
Fixed Assets
• Fixed assets are those assets:
– that have a long life,
– are used in the business for future generation of
income,
– are not bought with the main purpose of resale.
– Fixed assets are also called “Depreciable
Assets”
• No depreciation is charged on land.
Grouping of Fixed Assets
• Major groups of Fixed Assets:
– Land
– Building
– Plant and Machinery
– Furniture and Fixtures
– Office Equipment
– Vehicles
Recording
• Depreciation
• Two different accounts are used
– Depreciation Expense Account
– Accumulated Depreciation Account
• Accumulated Depreciation Account – over the
years the periodic depreciation is accumulated in
this account.
• Debit Depreciation Expense Account
Credit Accumulated Account
Plant Assets
Introduction to
Long-Lived Assets
Plant Assets
Tangible
Decli
ne
in fut
u
servic re
e ben
efits. Book Value
Time
Accounting Issues
Allocating initial cost and
Measuring Recording
subsequent
Cost Disposals
maintenance/repairs.
Cost of Plant Assets
Purchase All
price expenditures
needed to
prepare the
Acquisition asset for its
cost intended use
Purchase Installation
price costs
Architectural Transportation
fees costs
$1; $2; SV
$2; $3;
$3; $4;
$3; $4;
SV $4; SV
$4; SV SV
Time
Consumed as
Depreciation
Expense
• Salvage Value.
• Useful Life.
Depreciation Methods
• Straight-line
• Units-of-production
• Declining balance
• Sum-of-the-Years’ Digits
Depreciation
• If an asset is expected to benefit all
periods equally,
– a straight-line method of
depreciation would be
appropriate.
Depreciation
• If more benefits are expected early in
the life of an asset . . .
– an accelerated method of
depreciation would be
appropriate.
Depreciation
• If benefits are related to the output of
an asset . . .
= $9,000
Straight-Line Method
Salvage Value
Depreciation
Depreciation
Expense
Expense is
reported on the
Income
Statement.
Book Value is
reported on the
Balance Sheet.
Exh.
Step 1:
Depreciation Cost - Salvage Value
=
Per Unit Total Units of Production
Step 2:
Number of
Depreciation Depreciation
= × Units Produced
Expense Per Unit
in the Period
Units-of-Production Method
Step 1:
Depreciation = $50,000 - $5,000
= $.45 per unit
Per Unit 100,000 units
Step 2:
Depreciation
Expense = $.45 per unit × 22,000 units = $9,900
Units-of-Production Method
Accumulated Undepreciated
Depreciation Depreciation Balance
Year Units Expense Balance (book value)
2001 $ 50,000
2002 22,000 $ 9,900 $ 9,900 40,100
2003 28,000 12,600 22,500 27,500
2004 - - 22,500 27,500
2005 32,000 14,400 36,900 13,100
2006 18,000 8,100 45,000 5,000
100,000 $ 45,000
Salvage Value
Depreciation Repair
Expense Expense
Early Years High Low
Later Years Low High
Repair
Costs
Depreciation
Exh.
8.11
Double-Declining-Balance Method
Step 1:
Straight-line 100 %
=
depreciation rate Useful life in periods
Step 2:
Double-declining- Straight-line
= 2 ×
balance rate depreciation rate
Step 3:
Depreciation Double-declining- Beginning period
= ×
expense balance rate book value
Ignores salvage value
Double-Declining-Balance
Method
• On December 31, 2001, equipment was
purchased for $50,000 cash.
• The equipment has an estimated useful
life of 5 years and an estimated residual
value of $5,000.
• Calculate the depreciation expense for
2002 and 2003
Double-Declining-Balance Method
Step 1:
Straight-line 100 %
= = 20%
depreciation rate 5 years
Step 2:
Double-declining-
= 2 × 20% = 40%
balance rate
Step 3:
Depreciation
= 40% × $50,000 = $20,000 (2002)
expense
Double-Declining-Balance
Method
2002
Depreciation:
40% × $50,000 = $20,000
2003
Depreciation:
40% × ($50,000 - $20,000) = $12,000
Double-Declining-Balance Method
Depreciation Accumulated Undepreciated
Expense Depreciation Balance
Year (debit) Balance (book value)
2001 $ 50,000
2002 $ 20,000 $ 20,000 30,000
2003 12,000 32,000 18,000
2004 7,200 39,200 10,800
2005 4,320 43,520 6,480
2006 2,592 46,112 3,888
$ 46,112 Below salvage value
When
When aa plant
plant asset
asset is is acquired
acquired
during
during the
the year,
year, depreciation
depreciation
is
is calculated
calculated for
for the
the fraction
fraction of
of
the
the year
year the
the asset
asset isis owned.
owned.
Ju n e
30
Partial Year Depreciation
• Calculate the straight-line depreciation on
December 31, 2003, for equipment
purchased on June 30, 2003.
• The equipment cost $75,000, has a useful
life of 10 years and an estimated salvage
value of $5,000.
Partial Year Depreciation
Depreciation
Depreciation == ($75,000
($75,000 -- $5,000)
$5,000) ÷÷ 1010
== $7,000
$7,000 for
for aa full
full year
year
66
Depreciation
Depreciation == $7,000 ×× //1122
$7,000
== $3,500
$3,500
Sum of the Year’s Digits (SOYD)
• Depreciation =
(cost-salvage value) * RL/ SOYD
Where
– RL = remaining years of useful life as of the
beginning of the year for which
depreciation is being computed.
– SOYD = sum of all the number from 1 through the
estimated useful life.
For example:
for a 5- year useful life, SOYD would
be1+2+3+4+5=15 and it would be 55 for
a 10 year useful life.
– Highest the first year and then declines by a
constant amount after.