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What You’ll Learn Identify plant assets. Explain the need to depreciate plant assets. Calculate annual depreciation of plant assets. Calculate partial-year depreciation of plant assets. Determine the book value of a plant asset. Record depreciation of plant assets. Prepare depreciation schedules. Define the accounting terms introduced in this
Current and Plant AssetsAssets such as office equipment and buildings are expected to produce benefits for more than one year and are purchased for use in operating the business. Plant assets are long-lived assets that are used in the production or sale of other assets or services over several accounting periods. Examples include
land, buildings, delivery equipment, store equipment, and office equipment.
Estimating Depreciation of a Plant AssetTo follow the matching principle, the cost of a plant asset is spread over the periods the asset will produce revenue. This is called depreciation. Factors used to calculate depreciation are
its cost, its estimated useful life, its estimated disposal value, and the depreciation method used.
Plant Asset CostThe cost of a plant asset is equal to the purchase price plus sales taxes, delivery charges, and installation charges. This amount is debited to the plant asset account.
Cost and Estimated Useful Life of a Plant AssetThe number of years a plant asset is expected to be used before it wears out or becomes outdated is the estimated useful life. This number varies from asset to asset and can be determined by considering past experiences.
The estimated value of a plant asset at the time of its replacement is its disposal value.
Depreciation for Tax ReportingFederal income tax law has rules for depreciating assets. This includes the accelerated cost recovery system (ACRS), which allows a business to recognize depreciation over a shorter period of time and does not consider disposal value.
MACRS is the modified accelerated cost recovery system and is used for tax accounting only.
Declining-Balance DepreciationWith this method, the annual depreciation expense is the asset’s book value multiplied by the declining-balance rate. This rate can vary but it is usually double the straight line rate.
Plant Asset RecordsThe plant asset record provides detailed information about the plant asset including
the date of purchase, the original cost, the estimated useful life, the annual depreciation, the accumulated depreciation, and the book value at the end of each year.
Plant Asset RecordsThe lower part of the record contains the depreciation schedule including the accumulated depreciation (the total amount of depreciation recorded up to a specific point in time) and the book value (original cost less accumulated depreciation) for the asset.
Adjusting for Depreciation ExpenseInformation to make depreciation adjustments comes from the plant asset records. Each type of asset has its own depreciation expense summary.
Accounting for Depreciation Expense at the End of a Year
The Depreciation Expense AccountDuring the year, Depreciation Expense has a zero balance because the adjustment for depreciation is recorded at the end of the period. The account is closed to Income Summary at the end of the year.
Accounting for Depreciation Expense at the End of a Year
The Accumulated Depreciation AccountThis account represents the total amount of depreciation expensed since the asset was purchased and is classified as a contra asset account.
The debit and credit rules followed by the Accumulated Depreciation account are opposite those for an asset account.
Accounting for Depreciation Expense at the End of a Year
Analysis of the Accumulated Depreciation AccountFor On Your Mark, each year the same adjustment was made to record the depreciation of the delivery truck:
a debit to Depreciation Expense–Delivery Equipment
a credit to Accumulated Expense–Delivery Equipment
At the end of the year, the Depreciation Expense–Delivery Equipment account has a zero balance and the Accumulated Expense–Delivery Equipment account shows the total amount of depreciation expensed since the asset was purchased.
Accounting for Depreciation Expense at the End of a Year
Recording Depreciation Adjustments on a Work SheetAfter preparing the adjustment for depreciation, the accountant enters it in the Adjustments section of the work sheet.
Accounting for Depreciation Expense at the End of a Year
Reporting Depreciation Expense and Accumulated Depreciation on Financial StatementsThe depreciation expense accounts are reported on the income statement.
Accounting for Depreciation Expense at the End of a Year
Reporting Depreciation Expense and Accumulated Depreciation on Financial StatementsThe plant asset and related accumulated depreciation accounts appear in the assets section of the balance sheet.
Accounting for Depreciation Expense at the End of a Year
Adjusting and Closing Entries for Depreciation ExpenseAdjustments for depreciation expense are recorded in the general journal using the Adjustments section of the work sheet.
Accounting for Depreciation Expense at the End of a Year
Question 1On March 1, Lakeview Landscape purchased a new dump truck for $45,000. The truck will have a useful life of 10 years and a disposal value of $7,500. (a) Using straight-line depreciation, calculate the yearly depreciation of the truck. (b) How much could you depreciate in Year 1?
Question 2Why would a corporation choose to use an accelerated depreciation system such as declining-balance depreciation instead of straight-line depreciation?
Answer 2An accelerated depreciation schedule allows the corporation to take a higher expense early in the life of the asset. Since money today is more desirable than money one year from now, it allows the corporation to realize tax benefits early.