Slide #1.

Chapter ACCT 201 ACCT 201 8 Reporting and Analyzing Long-Term Assets ACCT 201 UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee 1
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Slide #2.

ACCT 201 ACCT 201 Day #1 ACCT 201
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Slide #3.

Chapter 8 - Day 1 Agenda Topic LO Read HW C1 332333 QS2, E3 Cost of Plant Assets P1 333335 QS1, E1, E2 Depreciation C2, 3 P2, A1 335343 E4,5,6, 7, P1A Plant Assets HW #6: P7-6A Due Today
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Slide #4.

ACCT 201 Plant Assets ACCT 201 Introduction to Long-Lived Assets ACCT 201
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Slide #5.

ACCT 201 Plant Assets Tangible ACCT 201 Actively Used in Operations Expected to Benefit Future Periods ACCT 201 Property, Plant, and Equipment
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Slide #6.

Plant Assets of Selected Companies e-Bay Wal-Mart Anheuser-Busch McDonald's 0% $44 million 29% 47% $32,839 million 63% $7,965 million 78% $16,325 million 20% 40% 60% As a percent of total assets 80%
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Slide #7.

Issues Related to Plant Assets Asset Service Potential Use in business operations Acquisition Disposal Decli ne in fut u servic re e b en efit s. Book Value Time Accounting Issues Measuring Cost Allocating initial cost and subsequent maintenance/repairs. Recording Disposals
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Slide #8.

ACCT 201 Cost of Plant Assets ACCT 201 Purchase price Acquisition cost All expenditures needed to prepare the asset for its intended use ACCT 201 Acquisition cost excludes financing charges and cash discounts. 8
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Slide #9.

ACCT 201 Land ACCT 201 PurchaseTitle insurance premiums Delinquent price taxes Real estate commissions Surveying fees ACCT 201 Title search and transfer fees Land is not depreciable 9
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Slide #10.

ACCT 201 Buildings and Equipment ACCT 201 Purchase price Architectural fees ACCT 201 Cost of permits Installation costs Transportation costs Excavation and construction costs 10
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Slide #11.

ACCT 201 Land Improvements ACCT 201 Parking lots, driveways, fences, walks, etc. Depreciate over useful life. ACCT 201 11
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Slide #12.

ACCT 201 ACCT 201 Basket “Lump-Sum” Purchases ACCT 201 12
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Slide #13.

ACCT 201 Issues Involved . . . ACCT 201 Acquiring two or more assets at the same time . . . in a single transaction, and for a single lump sum ACCT 201 Requires allocation of cost to each of the assets individually. 13
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Slide #14.

ACCT 201 Issues Involved . . . ACCT 201 Separating costs is important for two reasons . . . Depreciation ACCT 201 Has both Income Statement and Balance Sheet implications. 14
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Slide #15.

ACCT 201 ACCT 201 Accountants usually allocate the cost of the items in a basket purchase according to the relative fair value of each component of the basket at acquisition. Asset 1 Asset 2 ACCT 201 Asset 3
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Slide #16.

ACCT 201 Lump-Sum Asset Purchase ACCT 201 On January 1, UpCo purchased land and building for $200,000 cash. The appraised values are building, $162,500, and land, $87,500. ACCT 201 How much of the $200,000 purchase price will be charged to the building and land accounts? 16
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Slide #17.

Lump-Sum Asset Purchase Asset Appraised Value % of Value b* Land Building Total a $ 87,500 162,500 $ 250,000 Purchase Price Apportioned Cost c b × c 35% × $ 200,000 = $ 70,000 65% × 200,000 = 130,000 100% $ 200,000 * $87,500 ÷ $250,000 = 35% $162,500 ÷ $250,000 = 65% ACCT 201 ACCT 201 ACCT 201
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Slide #18.

ACCT 201 ACCT 201 Depreciation – The Concept ACCT 201 18
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Slide #19.

A Theoretical View of Depreciation $1; $2; $3; $4; SV $2; $3; $4; SV $3; $4; SV SV $4; SV Time Consumed as Depreciation Expense An application of the Matching Principle.
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Slide #20.

Depreciation Depreciation is a cost allocation process that systematically and rationally matches acquisition costs of plant assets with periods benefited by their use. Balance Sheet Acquisition Cost (Unused) Income Statement Cost Allocation Expense (Used)
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Slide #21.

ACCT 201 Depreciation ACCT 201 Depreciation Expense Depreciation for the current year ACCT 201 Accumulated Total depreciation to Depreciation date of balance sheet Income Statement Balance Sheet 21
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Slide #22.

ACCT 201 Factors in Computing Depreciation ACCT 201 The calculation of depreciation requires three amounts for each asset: Cost. ACCT 201 Salvage Value. Useful Life. 22
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Slide #23.

ACCT 201 Depreciation Methods ACCT 201 Straight-line Units-of-production Declining balance ACCT 201 23
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Slide #24.

ACCT 201 Depreciation ACCT 201 If an asset is expected to benefit all periods equally, ACCT 201 a straight-line method of depreciation would be appropriate. 24
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Slide #25.

ACCT 201 Depreciation ACCT 201 If more benefits are expected early in the life of an asset . . . ACCT 201 an accelerated method of depreciation would be appropriate. 25
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Slide #26.

ACCT 201 Depreciation ACCT 201 If benefits are related to the output of an asset . . . ACCT 201 the units-of-production method of depreciation would be appropriate. 26
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Slide #27.

ACCT 201 ACCT 201 Depreciation and the Tax Code ACCT 201
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Slide #28.

Depreciation and the Tax Code < 1981 1981 thru 1986 1987>
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Slide #29.

Depreciation and the Tax Code < 1981 1981 thru 1986 Could use any of four methods: Straight-Line Declining Balance Units-of-Output Sum-of-the-Years’ Digits 1987>
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Slide #30.

Depreciation and the Tax Code < 1981 1981 thru 1986 1987>
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Slide #31.

Depreciation and the Tax Code < 1981 1981 thru 1986 1987>
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Slide #32.

ACCT 201 ACCT 201 Methods of Depreciation ACCT 201 Straight-Line Method 32
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Slide #33.

Straight-Line Method Depreciation Expense per Year = Cost - Salvage Value Useful life in years Appropriate if an asset is expected to benefit all periods equally. ACCT 201 ACCT 201 ACCT 201
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Slide #34.

Straight-Line 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. Depreciation Expense Per Year ACCT 201 $50,000 - $5,000 = 5 Years = $9,000 ACCT 201 ACCT 201
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Slide #35.

Straight-Line Method Year 2001 2002 2003 2004 2005 2006 Depreciation Expense (debit) Accumulated Depreciation (credit) Accumulated Depreciation Balance $ $ $ $ 9,000 9,000 9,000 9,000 9,000 45,000 $ 9,000 9,000 9,000 9,000 9,000 45,000 9,000 18,000 27,000 36,000 45,000 Undepreciated Balance (book value) $ 50,000 41,000 32,000 23,000 14,000 5,000 Salvage Value ACCT 201 ACCT 201 ACCT 201
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Slide #36.

Depreciation Expense Book Value is reported on the Balance Sheet. Depreciation Expense is reported on the Income Statement.
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Slide #37.

Units-of-Production Method Exh. 8.9 Step 1: Depreciation Cost - Salvage Value = Per Unit Total Units of Production Step 2: Depreciation Expense = ACCT 201 Number of Depreciation × Units Produced Per Unit in the Period ACCT 201 ACCT 201
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Slide #38.

ACCT 201 Units-of-Production Method ACCT 201 On December 31, 2001, equipment was purchased for $50,000 cash. ACCT 201 The equipment is expected to produce 100,000 units during its useful life and has an estimated salvage value of $5,000. If 22,000 units were produced in 2002, what is the amount of depreciation expense? 38
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Slide #39.

Units-of-Production Method Step 1: Depreciation = Per Unit $50,000 - $5,000 100,000 units = $.45 per unit Step 2: Depreciation = $.45 per unit × 22,000 units = $9,900 Expense ACCT 201 ACCT 201 ACCT 201
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Slide #40.

Units-of-Production Method Year 2001 2002 2003 2004 2005 2006 Units 22,000 28,000 32,000 18,000 100,000 Depreciation Expense Accumulated Depreciation Balance $ $ $ 9,900 12,600 14,400 8,100 45,000 9,900 22,500 22,500 36,900 45,000 Undepreciated Balance (book value) $ 50,000 40,100 27,500 27,500 13,100 5,000 Salvage Value No depreciation expense if the equipment is idle. ACCT 201 ACCT 201 ACCT 201
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Slide #41.

ACCT 201 Declining Balance Method ACCT 201 Depreciation Expense Early Years High Later Years Low Repair Expense Low High ACCT 201 Early years’ total expense approximates later years’ total expense. 41
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Slide #42.

Accelerated Depreciation Repair Costs Depreciation
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Slide #43.

Double-Declining-Balance Method Exh. 8.11 Step 1: Straight-line depreciation rate = 100 % Useful life in periods Step 2: Double-decliningbalance rate = 2 × Straight-line depreciation rate Step 3: Depreciation Double-decliningBeginning period = × expense balance rate book value Ignores salvage value
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Slide #44.

ACCT 201 Double-Declining-Balance Method ACCT 201 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. ACCT 201 Calculate the depreciation expense for 2002 and 2003 44
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Slide #45.

Double-Declining-Balance Method Step 1: Straight-line = depreciation rate 100 % 5 years = 20% Step 2: Double-declining= 2 × 20% = 40% balance rate Step 3: Depreciation = 40% × $50,000 = $20,000 (2002) expense
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Slide #46.

ACCT 201 Double-Declining-Balance Method ACCT 201 2002 Depreciation: 40% × $50,000 = $20,000 ACCT 201 2003 Depreciation: 40% × ($50,000 - $20,000) = $12,000 46
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Slide #47.

ACCT 201 Double-Declining-Balance Method ACCT 201 ACCT 201 Year 2001 2002 2003 2004 2005 2006 Depreciation Expense (debit) Accumulated Depreciation Balance $ $ $ 20,000 12,000 7,200 4,320 2,592 46,112 Undepreciated Balance (book value) $ 50,000 20,000 30,000 32,000 18,000 39,200 10,800 43,520 6,480 46,112 3,888 Below salvage value ($50,000 – $43,520) × 40% = $2,592 47
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Slide #48.

ACCT 201 Double-Declining-Balance Method ACCT 201 Year 2001 2002 2003 2004 2005 2006 Depreciation Expense (debit) Accumulated Depreciation Balance $ $ ACCT 201 $ 20,000 12,000 7,200 4,320 1,480 45,000 20,000 32,000 39,200 43,520 45,000 Undepreciated Balance (book value) $ 50,000 30,000 18,000 10,800 6,480 5,000 We usually have to force depreciation expense in the latter years to an amount that brings BV to salvage value. 48
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Slide #49.

Comparing Depreciation Methods Straight-Line Annual Depreciation $8,000 $6,000 $4,000 $2,000 $0 1 2 3 4 5 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Life in Years $20,000 $15,000 $10,000 $5,000 $0 1 Units-of-Production 1 2 3 Life in Years Double-Declining-Balance Annual Depreciation Annual Depreciation $10,000 2 3 Life in Years 4 5 4 5
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Slide #50.

ACCT 201 Comparing Depreciation Method ACCT 201 Trends in Depreciation ACCT 201 Straight-line 80% Accelerated & Other 9% Declining-balance 4% Units-of-production 7% 50
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Slide #51.

ACCT 201 Depreciation for Tax Reporting ACCT 201 Most corporations use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes. ACCT 201 MACRS depreciation provides for rapid write-off of an asset’s cost in order to stimulate new investment. 51
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Slide #52.

ACCT 201 Partial Year Depreciation ACCT 201 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 is is owned. owned. ACCT 201 Ju n e 30 52
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Slide #53.

ACCT 201 Partial Year Depreciation ACCT 201 Calculate the straight-line depreciation on December 31, 2003, for equipment purchased on June 30, 2003. ACCT 201 The equipment cost $75,000, has a useful life of 10 years and an estimated salvage value of $5,000. 53
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Slide #54.

ACCT 201 Partial Year Depreciation ACCT 201 Depreciation Depreciation == == Depreciation Depreciation == ($75,000 ($75,000 -- $5,000) $5,000) ÷÷ 10 10 $7,000 $7,000 for for aa full full year year 66 ACCT 201 $7,000 $7,000 ×× //12 12 == $3,500 $3,500 54
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Slide #55.

Revising Depreciation Rates Predicted salvage value Predicted useful life So depreciation is an estimate. Over the life of an asset, new information may come to light that indicates the original estimates were inaccurate. ACCT 201 ACCT 201 ACCT 201
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Slide #56.

ACCT 201 Revising Depreciation Rates ACCT 201 ACCT 201 On January 1, 2000, equipment was purchased that cost $30,000, has a useful life of 10 years and no salvage value. During 2003, the useful life was revised to 8 years total (5 years remaining). 56
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Slide #57.

ACCT 201 Revising Depreciation Rates ACCT 201 Calculate depreciation expense for the year ended December 31, 2003, using the straight-line method. ACCT 201 Book value at date of change – Salvage value at date of change Remaining useful life at date of change 57
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Slide #58.

Revising Depreciation Rates Asset cost Accumulated depreciation, 12/31/2002 ($3,000 per year × 3 years) Remaining book value Divide by remaining life Revised annual depreciation ACCT 201 ACCT 201 $ 30,000 9,000 $ 21,000 ÷ 5 $ 4,200 ACCT 201
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Slide #59.

Reporting Depreciation Property, plant, and equipment: Land and buildings Machinery and equipment Office furniture and equipment Land improvements Total Less Accumulated depreciation Net property, plant, and equipment $ 150,000 200,000 175,000 50,000 $ 575,000 (122,000) $ 453,000 Net property, plant, and equipment is the undepreciated cost (book value) of the plant assets. Book value  Market value
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