CENTURY 21 ACCOUNTING © Thomson/South-Western 1 LESSON 8-1 CHAPTER 8: ACCOUNTING FOR PLANT ASSETS Objectives: Define accounting terms related to plant.

1

CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1

CHAPTER 8: ACCOUNTING FOR PLANT CHAPTER 8: ACCOUNTING FOR PLANT ASSETSASSETS

Objectives: Define accounting terms related to plant assets and

depreciation. Identify accounting concepts and practices related to

accounting for plant assets and depreciation. Journalize entries for buying plant assets. Calculate and record property tax expense. Calculate and record depreciation expense for a plant

asset using straight-line deprecation. Journalize entries for disposing of plant assets. Calculate depreciation expense using other methods.

CENTURY 21 ACCOUNTING © Thomson/South-Western

LESSON 8-1LESSON 8-1

Buying Plant Assets

3


Buying Plant Assets: Buying Plant Assets:

Current assets: cash and other assets expected to be exchanged for cash or consumed within a year

Plant assets: assets that will be used for a number of years in the operation of a business AKA: fixed assets or long term assets Land, buildings, equipment help business earn profit for more than

one year Must keep business records up to date as plant assets are

bought and used Going Concern: business will continue indefinitely EX) business buys $30,000 worth of equipment should last 10 years

Record yearly depreciation based on expected life – 10 years After 6 years value is $13,200, but probably wouldn’t be able to sell for

that amount if the business ended, but cost should be allocated over useful life

4


1. Complete when asset is purchased.

2. Complete when asset is disposed of.

3. Complete each year to record annual depreciation expense.

PLANT ASSET RECORD – accounting form on which PLANT ASSET RECORD – accounting form on which business records info about each plant asset business records info about each plant asset page 225

11

22

33

5


BUYING A PLANT ASSET FOR CASHBUYING A PLANT ASSET FOR CASH page 226

January 2. Paid cash for new copying machine, $1,680.00. Check No. 62.

Appliance Center has 3 kinds of plant assets:

1. Office Equipment

2. Store Equipment

3. Warehouse Equipment

* Separate General Ledger account for each*

6


BUYING A PLANT ASSET ON ACCOUNTBUYING A PLANT ASSET ON ACCOUNT page 226

January 2. Bought an office computer on account from Discount Computers, $3,300.00. Memorandum No. 70.

7


CALCULATING AND PAYING PROPERTY CALCULATING AND PAYING PROPERTY TAXTAX

Real Property: land and anything attached to it AKA: real estate

Personal Property: all property not classified as real

Assessed Value of Property: Value of an asset determined by tax authority for the purposes

of calculating taxes (assessors) Value may not be the same as the book value on records

8


CALCULATING AND PAYING CALCULATING AND PAYING PROPERTY TAXPROPERTY TAX page 227

Feb 1. Paid cash for property tax, $3,250.00. Check No. 122.

AnnualProperty Tax

=Tax Rate

Assessed Value

$65,000.00 5% = $3,250.00

City tax rate = 5%

9


TERMS REVIEWTERMS REVIEW

plant asset record real property personal property assessed value

TO DO: Audit, 228 Work Together, 228 On your own, 228

Assign: Read Chapter 8 App prob 8-1, 8-2 – pg

251

page 228

CENTURY 21 ACCOUNTING © Thomson/South-Western

LESSON 8-2LESSON 8-2

Calculating and Journalizing Depreciation Expense

11


Factors Used to Calculate DepreciationFactors Used to Calculate Depreciation

Plant assets wear out, may no longer be needed, or may be outdated

Must match revenue with expenses incurred to earn it Cost of plant asset should be allocated to depreciation expense

account over its useful life

Land is not subject to depreciation increases/decreases in value are recorded when sold

Three factors to calculate depreciation expense: Original cost Estimated salvage value Estimated useful life

12


Factors Used to Calculate DepreciationFactors Used to Calculate Depreciation

1. Original Cost: Includes all costs to make the asset usable to a business

Purchase price, delivery price, and installation

2. Estimated Salvage Value: Final value can only be estimated Salvage value: amount the owner expects to receive when a plant asset is

removed from use AKA: residual value, scrap value, or trade-in value

Until disposed of, difficult to determine EXACT value

3. Estimated Useful Life: Number of years it is expected to be useful to a business Use past experience as basis May use IRS guidelines that give estimated useful life of many plant assets

13


Ending Book Value

=Annual Depreciation

–Beginning Book Value

Year 3 $1,270.00 – $365.00 = $905.00

STRAIGHT-LINE DEPRECIATIONSTRAIGHT-LINE DEPRECIATIONFor a computer bought on Jan. 2, 2001 for $2000For a computer bought on Jan. 2, 2001 for $2000 page 230

Original Cost $2,000.00– Estimated Salvage Value – 175.00= Estimated Total Depreciation Expense $1,825.00 Years of Estimated Useful Life 5= Annual Depreciation Expense $ 365.00

14


CALCULATING DEPRECIATION EXPENSE CALCULATING DEPRECIATION EXPENSE FOR PART OF A YEARFOR PART OF A YEAR page 232

Annual Depreciation Expense $ 120.00

Months in a Year 12

Monthly Depreciation Expense $ 10.00

× Number of Months Asset Is Used × 5

Partial Year’s Depreciation Expense $ 50.00

15


RECORDING DEPRECIATION ON PLANT RECORDING DEPRECIATION ON PLANT ASSET RECORDSASSET RECORDS- For Cabinet used as Office Equipment- For Cabinet used as Office Equipment

2. Calculate accumulated depreciation.3. Calculate ending book value.

1. Calculate annual depreciation expense.

page 231

11 22 33

16


Depreciation Expense—Office Equipment

Jan. 1 Bal. 37,434.00Dec. 31 Adj. 11,571.00Dec. 31 Bal. 49,005.00

Accumulated Depreciation—Office Equipment

Dec. 31 Adj. 11,571.00

JOURNALIZING ANNUAL JOURNALIZING ANNUAL DEPRECIATION EXPENSEDEPRECIATION EXPENSE page 232

17



straight-line method of depreciation book value of a plant asset

******************************************* TO DO:

Audit, 234 Work Together, 234 On your own, 234

Assign: App prob 8-3, 8-4

page 234

18


LESSON 8-3: LESSON 8-3: Disposing of Plant Assets Disposing of Plant Assets

No useful life remainsNo longer needed (might still be usable)Traded for another plant asset of the same

kind

19


1. Record entry to remove plant asset from accounts.

2. Write the date, amount, and type of disposal.

DISCARDING A PLANT ASSET WITH NO BOOK DISCARDING A PLANT ASSET WITH NO BOOK VALUE – VALUE – Salvage value =0, total Acc. Depreciation= original costSalvage value =0, total Acc. Depreciation= original cost

11

January 5, 20X6. Discarded storage cabinet: original cost, $275.00; total accumulated depreciation through December 31, 20X5, $275.00. Memorandum No. 72.

22

20


June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated depreciation through December 31, 20X5, $140.00; additional depreciation to be recorded through June 30, 20X6, $20.00. Memorandum No. 92.

1. Record a partial year’s depreciation expense.

2. Record the partial year’s depreciation.

4. Record entry to remove plant asset from accounts and record loss.


DISCARDING A PLANT ASSET WITH A BOOK DISCARDING A PLANT ASSET WITH A BOOK VALUE – may be disposed at any time during its VALUE – may be disposed at any time during its useful life useful life page 236

11

44

33

22

21


3. Record entry to remove plant asset from accounts.

1. Compute the gain or loss on the sale.


SELLING A PLANT ASSETSELLING A PLANT ASSET page 267

11

22

33

January 4, 20X6. Received cash from sale of fax machine, $185.00: original cost, $600.00; total accumulated depreciation through December 31, 20X5, $400.00. Receipt No. 60.

22


1. Compute the original cost of the new plant asset.

TRADING A PLANT ASSETTRADING A PLANT ASSET page 238

1144

June 27, 20X6. Paid cash, $850.00, plus old counter for new store counter: original cost of old counter, $1,000.00; total accumulated depreciation through June 27, 20X6, $765.00. Memorandum No. 130 and Check No. 154.

4. Record entry to remove old plant asset and add new plant asset.

2. Write the date and type of disposal and the disposal amount.

22

33

3. Complete section 1 for the new plant asset.

23


SELLING LAND AND BUILDINGSSELLING LAND AND BUILDINGS

Land is considered a permanent plant asset useful life is not estimated and annual depreciation is not recorded for it Book value = original cost

Land is seldom discarded (abandoned) usually sold at same time building is sold Separate plant asset record is still kept for land and building Update each when sale is made

24


3. Record entry to remove plant assets from accounts.

1. Compute the gain on sale of plant assets.

2. Write the date, type, and amount of disposal.

SELLING LAND AND BUILDINGSSELLING LAND AND BUILDINGS page 239

1133

January 2, 20X6. Fidelity Company sold land with a building for $97,000.00 cash; original cost of land, $25,000.00; original cost of building, $150,000.00; total accumulated depreciation on building through December 31, 20X5, $85,000.00. Receipt No. 105.

22

25


CALCULATING THE GAIN ON CALCULATING THE GAIN ON SALE OF LAND AND BUILDINGSSALE OF LAND AND BUILDINGS page 240

26


TO DO: TO DO:

Audit, 241 Finish: Work Together, 241 On your own, 241 Assign:

App prob 8-5, 8-6

27


LESSON 8-4:LESSON 8-4: Other Methods of Other Methods of DepreciationDepreciation

DECLINING-BALANCE METHOD OF DEPRECIATION

SUM-OF-THE-YEARS-DIGITS METHOD OF DEPRECIATION

PRODUCTION-UNIT METHOD OF DEPRECIATION

DEPLETION

28


DECLINING-BALANCE METHOD OF DECLINING-BALANCE METHOD OF DEPRECIATIONDEPRECIATION

Many plant assets depreciate more in their early years of useful life than later years Charging more depreciation expense in earlier years may be more accurate

than charging same amount

Declining-Balance Method of Depreciation: multiplying book value at end of each fiscal period by constant depreciation rate Rate is same, but annual depreciation declines Rate is based on straight-line rate usually twice the straight-line rate

Double-declining balance method Ex) plant asset with estimated useful life of 5 years would have depreciation rate

of 40%

Plant asset is never depreciated more than salvage value Salvage value is ONLY used as a LIMIT!!!

29


Plant asset: Computer

Depreciation method: Declining balance

Original cost: $2,000.00Estimated salvage value: $175.00Estimated useful life: 5 years

Year Beginning Book Value

Declining- Balance Rate

Annual Depreciation

Ending

Book Value

1

2

3

4

5

Total Depreciation

$2,000.00 1,200.00

720.00

432.00

259.20

40%

40%

40%

40%

40%

—

$ 800.00

480.00

288.00

172.80

84.20

$1,825.00

$1,200.00

720.00

432.00

259.20

175.00

—

1. Calculate the declining-balance rate.Total Depreciation Expense 100%

Estimated Useful Life (years) 5= Straight-Line Rate 20% Double the Rate 2= Declining-Balance Rate 40%

2. Calculate the annual depreciation for year 3.Beginning Book Value $720

Depreciation Rate 40%= Annual Depreciation Expense $288

DECLINING-BALANCE DECLINING-BALANCE METHOD OF DEPRECIATIONMETHOD OF DEPRECIATION page 242

1122

*Note Year 5

*

30



Depreciation method: Sum-of-the-years-digits

Original cost: $2,000.00

Estimated salvage value: $175.00

Estimated useful life: 5 years

YearBeginning Book

Value FractionTotal

Depreciation Annual Depreciation

Ending

Book Value

1

2

3

4

5

Total

$2,000.00

1,391.67

905.00

540.00

296.67

5/15

4/15

3/15

2/15

1/15

$1,825.00

$1,825.00

$1,825.00

$1,825.00

$1,825.00

$608.33

486.67

365.00

243.33

121.67

$1,825.00

$1,391.67

905.00

540.00

296.67

175.00

2. Calculate the annual depreciation for year 1.Original Cost

$2,000.00Estimated Salvage Value

– 175.00Estimated Total Depreciation

$1,825.00Year’s Fraction

5/15Annual Depreciation

$608.33

SUM-OF-THE-YEARS-DIGITS SUM-OF-THE-YEARS-DIGITS METHOD OF DEPRECIATIONMETHOD OF DEPRECIATION page 243

11 22

1. Calculate the fraction. Years’ Digits Fraction1 5/15

2 4/15

3 3/15

4 2/15

5 1/15

15

31


COMPARISON OF THREE COMPARISON OF THREE METHODS OF DEPRECIATIONMETHODS OF DEPRECIATION page 244


Depreciation method: Comparison


Estimated salvage value: $175.00

Estimated useful life: 5 years

YearStraight-Line

MethodDouble Declining-Balance Method

Sum-of-the-Years-Digits Method

1

2

3

4

5

Total Depreciation

$365.00

365.00

365.00

365.00

365.00

$1,825.00

$ 800.00

480.00

288.00

172.80

84.20

$1,825.00

$608.33

486.67

365.00

243.33

121.67

$1,825.00

Straight-line – easy to calculate, same amount recorded each year of useful lifeDouble-declining method – easy to calculate; larger depreciation expense recorded earlierSum of digits – not as easy; records higher depreciation expense earlierBoth Double-Declining and Sum of digits are known as Accelerated Depreciation methods

32


Plant asset: Truck Depreciation method: Production-unitOriginal cost: $18,200.00Estimated salvage value: $2,000.00

Estimated total depreciation: $16,200.00Estimated useful life: 90,000 milesDepreciation rate: $0.18 per mile driven


Miles Driven Annual Depreciation EndingBook Value

12345

Totals

$18,200.0016,580.0012,440.00

7,940.003,980.20

9,00023,00025,00022,000

8,00087,000

$ 1,620.004,140.004,500.003,960.001,440.00

$15,600.00

$16,580.0012,440.00

7,940.003,980.202,540.00

1. Calculate the depreciation rate.Original Cost $18,200

– Estimated Salvage Value – 2,000= Est. Total Depreciation Expense $16,200 Estimated Useful Life (miles) 90,000= Depreciation Rate $0.18/mile

2. Calculate annual depreciation for year 1.Total Miles Driven 9,000

Depreciation Rate $0.18= Annual Depreciation Exp. $1,620.00

PRODUCTION-UNIT METHOD OF PRODUCTION-UNIT METHOD OF DEPRECIATION – DEPRECIATION – based on amount of production based on amount of production expected from plant assetexpected from plant asset page 245

11

22

* Will record through 90,000 miles

33


CALCULATING DEPRECIATION EXPENSE CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSESFOR INCOME TAX PURPOSES

MACRS: Modified Accelerated Cost Recovery System depreciation method required by IRS for income tax calculation for most plant

assets in service after 1986 Prescribed periods for 9 classes of useful life for plant assets Assigned to certain class based on its characteristics and general life

expectancy 2 most common classes (other than real estate)

5-year – cars, general-purpose trucks, computers, manufacturing equipment, office machinery

7-year – office furniture and fixtures Use depreciation method similar to double-declining method

IRS has prescribed methods that use annual percentage rates to determine depreciation for each class Rates applied to total cost of plant asset without considering salvage value annual depreciation = plant asset’s original cost X depreciation rate

34


Original Cost

DepreciationRate

=Annual

Depreciation Rate

Year 3 $2,000.00 19.20% = $384.00

CALCULATING DEPRECIATION EXPENSE CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSESFOR INCOME TAX PURPOSES

page 246

Plant asset: Printer

Depreciation method: MACRS


Property class: 5 year

Year Depreciation Rate Annual Depreciation

1

2

3

4

5

6

Totals

20.00%

32.00%

19.20%

11.52%

11.52%

5.76%

100.00%

$400.00

640.00

384.00

230.40

230.40

115.20

$2,000.00

35


Plant asset: Coal Mine Depreciation method: Production-unitOriginal cost: $100,000.00Estimated salvage value: $12,250.00

Estimated total depletion: $87,750.00Est. tons of recoverable coal: 50,000 tonsDepletion rate: $1.755 per ton


Tons Recovered

Annual Depletion EndingBook Value

12345

Totals

$100,000.0089,470.0068,410.0045,595.0029,800.00

6,00012,00013,000

9,000 6,00046,000

$ 10,530.0021,060.0022.815.0015,795.0010,530.00

$80,730.00

$89,470.0069,410.0045,595.0029,800.0019,270.00

1. Calculate the depletion rate.Original Cost $100,000

– Estimated Salvage Value – 12,250= Est. Total Value of Coal $87,750 Est. Tons of Recoverable Coal 50,000= Depletion Rate per Ton of Coal $1.755

2. Calculate annual depletion for year 1.Tons of Coal Removed 6,000

Depletion Rate $1.755= Annual Depreciation Exp. $10,530.00

DEPLETION – decrease in value of a plant asset DEPLETION – decrease in value of a plant asset because of the removal of a natural resourcebecause of the removal of a natural resource page 247

11

22

36



declining-balance method of depreciation sum-of-the-years’-digits method of depreciation production-unit method of depreciation Modified Accelerated Cost Recovery System Depletion

******************************************** TO DO:

Audit, 248 Work Together, 248 On your own, 249

Assign: App prob 8-7, 8-8. 8-9, 8-10

page 248

CENTURY 21 ACCOUNTING © Thomson/South-Western 1 LESSON 8-1 CHAPTER 8: ACCOUNTING FOR PLANT ASSETS Objectives: Define accounting terms related to plant.

Documents