1、?The McGraw-Hill Companies, Inc., 1999Slide 9-1Irwin/McGraw-HillChapter 9Plant Assets and Depreciation?The McGraw-Hill Companies, Inc., 1999Slide 9-2Irwin/McGraw-HillPlant AssetsLong-lived assets acquired for use in business operations.Similar to long-term prepaid expensesThe cost of plant assets is
2、 the advance purchase of services.DateDescriptionDebitCreditAs years pass, and the services are used, the cost is transferred to depreciation expense.?The McGraw-Hill Companies, Inc., 1999Slide 9-3Irwin/McGraw-HillLand, buildings,equipment,furniture, fixtures.Long-termassets havingphysical substance
3、.Tangible PlantAssetsPatents, copyrights,trademarks,franchises, goodwill.Noncurrent assetswith no physicalsubstance.IntangibleAssetsOil reserves,timber, otherminerals.Sites acquired forextracting valuableresources.NaturalResourcesMajor Categories of Plant Assets?The McGraw-Hill Companies, Inc., 1999
4、Slide 9-4Irwin/McGraw-HillAccountable EventsAcquisition.Allocation of the acquisition cost to expense over the asset抯抯 useful life (depreciation).Sale or disposal.?The McGraw-Hill Companies, Inc., 1999Slide 9-5Irwin/McGraw-HillAcquisition of Plant AssetsAsset priceReasonable and necessary costs . .
5、. . . . for getting the asset to the desired location. . . . for getting the asset ready for use.Cost?The McGraw-Hill Companies, Inc., 1999Slide 9-6Irwin/McGraw-HillDetermining CostExampleOn May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a pric
6、e of $52,000. Sales tax was computed at 8%.Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs.Compute the cost of Heat Co.s new machine.?The McGraw-Hill Companies, Inc., 1999Slide 9-7Irwin/Mc
7、Graw-HillDetermining CostExampleDateDescriptionDebitCreditPrepare the journal entry.?The McGraw-Hill Companies, Inc., 1999Slide 9-8Irwin/McGraw-HillDetermining CostExampleDateDescriptionDebitCredit4-May New Machine61,960 Cash61,960 ?The McGraw-Hill Companies, Inc., 1999Slide 9-9Irwin/McGraw-HillSpec
8、ial ConsiderationsImprovements to land such as driveways, fences, and landscaping are recorded separately.Land ImprovementsCost includes real estate commissions, escrow fees, legal fees, clearing and grading the property.Land?The McGraw-Hill Companies, Inc., 1999Slide 9-10Irwin/McGraw-HillSpecial Co
9、nsiderationsRepairs made prior to the building being put in use are considered part of the building抯抯 cost.Buildings?The McGraw-Hill Companies, Inc., 1999Slide 9-11Irwin/McGraw-HillSpecial ConsiderationsEquipmentRelated interest, insurance, and property taxes are treated as expenses of the current p
10、eriod.?The McGraw-Hill Companies, Inc., 1999Slide 9-12Irwin/McGraw-HillSpecial ConsiderationsI think I抣抣l buy the whole thing; barn, land, and animals.Allocation of a Lump-Sum Purchase?The McGraw-Hill Companies, Inc., 1999Slide 9-13Irwin/McGraw-HillSpecial ConsiderationsThe total cost must be alloca
11、ted to separate accounts for each asset.The allocation is based on the relative Fair Market Value of each asset purchased.Allocation of a Lump-Sum Purchase?The McGraw-Hill Companies, Inc., 1999Slide 9-14Irwin/McGraw-HillCapital Expenditures and Revenue ExpendituresTo capitalize anexpenditure means t
12、o chargeit to an asset account.Any material expenditurethat will benefit severalaccounting periods.CapitalExpenditureTo expense anexpenditure means to chargeit to an expense account.Expenditures for ordinaryrepairs and maintenance.RevenueExpenditure?The McGraw-Hill Companies, Inc., 1999Slide 9-15Irw
13、in/McGraw-HillDepreciationThe allocation of the cost of a plant asset to expense in the periods in which services are received from the asset.Cost of plant assetsBalance SheetAssets: Plant and equipmentIncome StatementRevenues:Expenses: Depreciationas the services are received?The McGraw-Hill Compan
14、ies, Inc., 1999Slide 9-16Irwin/McGraw-HillBook ValuelCost - Accumulated DepreciationAccumulated DepreciationlContra-assetlRepresents the portion of an asset抯 cost that has already been allocated to expense.Causes of DepreciationlPhysical deteriorationlObsolescenceDepreciation?The McGraw-Hill Compani
15、es, Inc., 1999Slide 9-17Irwin/McGraw-HillCost - Residual ValueLife in Years DepreciationExpense per Year=Straight-Line Depreciation?The McGraw-Hill Companies, Inc., 1999Slide 9-18Irwin/McGraw-HillStraight-Line MethodExampleOn January 1, 1998, Bass Co. buys a new boat. Bass Co. pays $24,000 for the b
16、oat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years.Compute depreciation for 1998 using the straight-line method.?The McGraw-Hill Companies, Inc., 1999Slide 9-19Irwin/McGraw-HillStraight-Line MethodExampleCost Residual Value24,000$ 3,000$ =4,200$ per yearY
17、ears of Useful Life =5On January 1, 1998, Bass Co. buys a new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years.Compute depreciation for 1998 using the straight-line method.?The McGraw-Hill Companies, Inc., 1999Slide
18、9-20Irwin/McGraw-HillStraight-Line MethodExampleBass Co. will record $4,200 depreciation each year for five years. Total depreciation over the estimated useful life of the boat is:DepreciationAccumulatedAccumulatedUndepreciatedExpenseDepreciationDepreciationBalanceYear(debit)(credit)Balance(book val
19、ue)24,000$ 19984,200$ 4,200$ 4,200$ 19,800 19994,200 4,200 8,400 15,600 20004,200 4,200 12,600 11,400 20014,200 4,200 16,800 7,200 20024,200 4,200 21,000 3,000 21,000$ 21,000$ Salvage Value?The McGraw-Hill Companies, Inc., 1999Slide 9-21Irwin/McGraw-HillStraight-Line MethodGraph of Depreciation Expe
20、nse?The McGraw-Hill Companies, Inc., 1999Slide 9-22Irwin/McGraw-HillDepreciation for Fractional PeriodsWhen an asset is acquired during the year, depreciation in the year of acquisition must be prorated.Half-Year ConventionIn the year of acquisition, record six months of depreciation.?The McGraw-Hil
21、l Companies, Inc., 1999Slide 9-23Irwin/McGraw-HillUsing the half-year convention, calculate the straight-line depreciation on December 31, 1999, for equipment purchased in 1999. The equipment cost $75,000, has a useful life of 10 years and an estimated salvage value of $5,000.Half-Year ConventionExa
22、mple?The McGraw-Hill Companies, Inc., 1999Slide 9-24Irwin/McGraw-HillDepreciation= ($75,000 - $5,000) ?10= $7,000 for a full yearDepreciation = $7,000 ? 1/2 = $3,500Using the half-year convention, calculate the straight-line depreciation on December 31, 1999, for equipment purchased in 1999. The equ
23、ipment cost $75,000, has a useful life of 10 years and an estimated salvage value of $5,000.Half-Year ConventionExample?The McGraw-Hill Companies, Inc., 1999Slide 9-25Irwin/McGraw-HillDeclining-Balance MethodDepreciation in the early years of an assets estimated useful life is higher than in later y
24、ears.The double-declining balance accelerated depreciation rate is 200% of the straight-line depreciation rate of 1/Useful Life.?The McGraw-Hill Companies, Inc., 1999Slide 9-26Irwin/McGraw-HillDouble-Declining BalanceExampleOn January 1, 1998, Bass Co. buys a new boat. Bass Co. pays $24,000 for the
25、boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years.Compute depreciation for 1998 using the double-declining balance method.?The McGraw-Hill Companies, Inc., 1999Slide 9-27Irwin/McGraw-HillDouble-Declining BalanceExampleOn January 1, 1998, Bass Co. buys a
26、 new boat. Bass Co. pays $24,000 for the boat. The boat has an estimated residual value of $3,000 and an estimated useful life of 5 years.Compute depreciation for 1998 using the double-declining balance method.1998 Depr. Expense =Remaining Book ValueAccelerated Depreciation Rate =24,000$ 2 1/5 =24,0
27、00$ 40% =9,600$ ?The McGraw-Hill Companies, Inc., 1999Slide 9-28Irwin/McGraw-HillDouble-Declining BalanceExampleCompute depreciation for the rest of the boat抯抯 estimated useful life. YearComputationDepr. ExpenseAccumulated DepreciationBook Value199824,000$ 40%9,600$ 9,600$ 14,400$ 199914,400$ 40%5,7
28、60$ 15,360$ 8,640$ 20008,640$ 40%3,456$ 18,816$ 5,184$ 20015,184$ 40%2,074$ 20,890$ 3,110$ 2002110$ 21,000$ 3,000$ Total Depreciation21,000$ Plug year # 5?The McGraw-Hill Companies, Inc., 1999Slide 9-29Irwin/McGraw-HillDouble-Declining BalanceExampleYearComputationDepr. ExpenseAccumulated Depreciati
29、onBook Value199824,000$ 40%9,600$ 9,600$ 14,400$ 199914,400$ 40%5,760$ 15,360$ 8,640$ 20008,640$ 40%3,456$ 18,816$ 5,184$ 20015,184$ 40%2,074$ 20,890$ 3,110$ 2002110$ 21,000$ 3,000$ Total Depreciation21,000$ Plug year # 5Total depreciation over the estimated useful life of an asset is the same using
30、 either the straight-line method or the declining-balance method.?The McGraw-Hill Companies, Inc., 1999Slide 9-30Irwin/McGraw-HillDouble-Declining BalanceGraph of Depreciation Expense?The McGraw-Hill Companies, Inc., 1999Slide 9-31Irwin/McGraw-HillDepreciation Methods in Use for Financial Reporting?
31、The McGraw-Hill Companies, Inc., 1999Slide 9-32Irwin/McGraw-HillMACRS: The Tax MethodMACRS = Modified Accelerated Cost Recovery SystemBased on Declining-Balance MethodsThe only accelerated method allowed by the IRS when computing depreciation for tax return purposes.Asset Cost ? MACRS rateRates are
32、available from tables provided by the IRS.?The McGraw-Hill Companies, Inc., 1999Slide 9-33Irwin/McGraw-HillOther IssuesEstimates of Useful Life and Residual ValuelMay differ from company to company.lThe reasonableness of management抯抯 estimates is evaluated by external auditors.Principle of Consisten
33、cylCompanies should avoid switching depreciation methods from period to period.?The McGraw-Hill Companies, Inc., 1999Slide 9-34Irwin/McGraw-HillRevising Depreciation RatesSo depreciationis an estimate.Predicted salvage valuePredicteduseful life Over the life of an asset, new information may come to
34、light that indicates theoriginal estimates need to be revised.?The McGraw-Hill Companies, Inc., 1999Slide 9-35Irwin/McGraw-HillOn January 1, 1998, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2001, the useful life was revised to 8 years total
35、(5 years remaining). Calculate depreciation expense for the year ended December 31, 2001, using the straight-line method.Revising Depreciation Rates Example?The McGraw-Hill Companies, Inc., 1999Slide 9-36Irwin/McGraw-HillRevising Depreciation Rates ExampleBook value at date of changeSalvage value at
36、 date of changeRemaining useful life at date of change When our estimates change, depreciation is:?The McGraw-Hill Companies, Inc., 1999Slide 9-37Irwin/McGraw-HillRevising Depreciation Rates Example When our estimates change, depreciation is:Book value at date of changeSalvage value at date of chang
37、eRemaining useful life at date of change?The McGraw-Hill Companies, Inc., 1999Slide 9-38Irwin/McGraw-HillImpairment of AssetsIf the cost of an asset cannot be recovered through future use or sale, the asset should be written down to its net realizable value.?The McGraw-Hill Companies, Inc., 1999Slid
38、e 9-39Irwin/McGraw-HillTime to move on to a new topic.?The McGraw-Hill Companies, Inc., 1999Slide 9-40Irwin/McGraw-HillUpdate depreciation to the date of disposal.Recording cashreceived (debit)or paid (credit).Removing accumulateddepreciation (debit). Journalize disposal by:Removing the asset cost (
39、credit).Recording again (credit)or loss (debit).Disposal of Plant and Equipment?The McGraw-Hill Companies, Inc., 1999Slide 9-41Irwin/McGraw-HillIf Cash BV, record a gain (credit).If Cash BV, record a loss (debit).If Cash = BV, no gain or loss.Disposal of Plant and EquipmentRecording cashreceived (de
40、bit)or paid (credit).Removing accumulateddepreciation (debit).Removing the asset cost (credit).Recording again (credit)or loss (debit).?The McGraw-Hill Companies, Inc., 1999Slide 9-42Irwin/McGraw-Hill On September 30, 1999, Evans Map Company sells a machine that originally cost $100,000 for $60,000
41、cash. The machine was placed in service on January 1, 1994. It has been depreciated using the straight-line method with an estimated salvage value of $20,000 and an estimated useful life of 10 years.Let抯抯 answer the following questions. Disposal of Plant and EquipmentExample?The McGraw-Hill Companie
42、s, Inc., 1999Slide 9-43Irwin/McGraw-HillThe amount of depreciation recorded on September 30, 1999,to bring depreciation up to date is:a. $8,000.b. $6,000.c. $4,000.d. $2,000.Disposal of Plant and EquipmentExample?The McGraw-Hill Companies, Inc., 1999Slide 9-44Irwin/McGraw-HillThe amount of depreciat
43、ion recorded on September 30, 1999,to bring depreciation up to date is:a. $8,000.b. $6,000.c. $4,000.d. $2,000.Annual Depreciation:($100,000 - $20,000) 10 Yrs. = $8,000Depreciation to Sept. 30:9/12 $8,000 = $6,000 Disposal of Plant and EquipmentExample?The McGraw-Hill Companies, Inc., 1999Slide 9-45
44、Irwin/McGraw-Hill After updating the depreciation, the machines book value on September 30, 1999, is:a. $54,000.b. $46,000.c. $40,000.d. $60,000.Disposal of Plant and EquipmentExample?The McGraw-Hill Companies, Inc., 1999Slide 9-46Irwin/McGraw-Hill After updating the depreciation, the machines book
45、value on September 30, 1999, is:a. $54,000.b. $46,000.c. $40,000.d. $60,000.Cost100,000$ Accumulated Depreciation: (5 yrs. $8,000) + $6,000 =46,000 Book Value54,000$ Disposal of Plant and EquipmentExample?The McGraw-Hill Companies, Inc., 1999Slide 9-47Irwin/McGraw-HillDisposal of Plant and Equipment
46、ExampleThe machines sale resulted in: a. a gain of $6,000.b. a gain of $4,000.c. a loss of $6,000.d. a loss of $4,000.?The McGraw-Hill Companies, Inc., 1999Slide 9-48Irwin/McGraw-HillThe machines sale resulted in: a. a gain of $6,000.b. a gain of $4,000.c. a loss of $6,000.d. a loss of $4,000.Cost10
47、0,000$ Accum. Depr.46,000 Book Value54,000$ Cash Received60,000 Gain6,000$ Disposal of Plant and EquipmentExample?The McGraw-Hill Companies, Inc., 1999Slide 9-49Irwin/McGraw-HillTrading in Used Assets on New Accounting depends on whetherassets are similar or dissimilar.AirplaneforAirplaneTruckforAir
48、plane Only situations where cash is paid will be demonstrated.?The McGraw-Hill Companies, Inc., 1999Slide 9-50Irwin/McGraw-HillTrading in Used Assets on New?The McGraw-Hill Companies, Inc., 1999Slide 9-51Irwin/McGraw-Hill On May 30, 1999, Essex Company exchanged a used airplane and $35,000 cash for
49、a new airplane. The old airplane originally cost $40,000, had up-to-date accumulated depreciation of $30,000, and a fair value of $4,000. SIMILARTrading in Used Assets on NewSimilar Exchange Example?The McGraw-Hill Companies, Inc., 1999Slide 9-52Irwin/McGraw-HillThe exchange resulted in a:a. gain of
50、 $6,000.b. loss of $6,000.c. loss of $4,000.d. gain of $4,000.Trading in Used Assets on NewSimilar Exchange Example?The McGraw-Hill Companies, Inc., 1999Slide 9-53Irwin/McGraw-HillThe exchange resulted in a:a. gain of $6,000.b. loss of $6,000.c. loss of $4,000.d. gain of $4,000.Cost40,000$Accum. Dep
