Professional Documents
Culture Documents
9-1
Chapter
In Chapter 8
You learned:
o How to account for cash and accounts
receivable
o Why its important to control cash
o How a company accounts for bad debts
o Types of short term receivables
Slide
9-3
Study Objectives
Slide
9-4
1.
2.
3.
4.
5.
6.
7.
8.
9.
In Chapter 9
You will learn:
o To account for the purchase and use of:
Buildings
Manufacturing plants
Equipment
Furniture & Fixtures
Natural resources
Intangible assets
o How transactions related to long-term assets
are presented on the financial statements.
Slide
9-5
Slide
9-6
1.
2.
Print out the Chapter Handouts and use to take notes along
with the slides.
3.
4.
5.
Plant Assets
Determining the
cost of plant
assets
Depreciation
Expenditures
during useful life
Plant asset
disposals
Slide
9-7
Natural
Resources
Intangible
Assets
Accounting for
natural resources
Accounting for
intangibles
Financial
statement
presentation
Types of
intangibles
Research and
development
costs
Statement
Presentation and
Analysis
Presentation
Analysis
Slide
9-8
Slide
9-9
Slide
9-11
Land
Price Paid for Land
+
+
Slide
9-12
Attorneys fees
Cost of Land
The Historical
Cost Remains on
the Balance
Sheet. Land is
not
depreciated
Slide
9-13
Slide
9-14
Slide
9-15
Land
6,000
1,000
8,000
Cost of Land
Slide
9-16
$100,000
$115,000
Slide
9-17
Acquisition Cost
Buildings - Plant
+
+
=
Slide
9-18
Depreciation
allocates the
cost against
future
revenues.
Construction costs:
Contract price plus payments for architects fees, building
permits, and excavation costs.
Slide
9-19
Acquisition Cost
Building
Architects or
contractors fees
Slide
9-20
Construction Costs
Cost of renovating
or repairing building
Cost of Building
Buildings are
depreciated,
even if the
firm expects
the market
value of the
building to
increase
Acquisition Cost
Slide
9-21
Freight-In Cost to
have the Equipment
Delivered
Insurance in Transit
Installation Costs,
including test runs
Cost of Equipment
Will be
depreciated over
the estimated
useful life of the
equipment
Determine amount to be
reported as the cost of
the machinery.
Cost of Machinery
Slide
9-23
Slide
9-24
Cash price
3,000
Sales taxes
Insurance during shipping
500
1,000
Cost of Machinery
Slide
9-25
$54,500
Lets practice
Slide
9-26
Long-Term Assets
Are recorded on the
Balance Sheet at Cost
Recording a Cost as an
Asset is called
Capitalizing the Cost
Slide
9-27
Depreciation
Depreciation is the process of allocating the cost of
tangible assets to expense in a systematic and rational
manner to those periods expected to benefit from the
use of the asset.
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and
equipment, not land.
Depreciable, because the revenue-producing ability
of asset will decline over the assets useful life.
Slide
9-29
Depreciation
Factors in Computing Depreciation
Illustration 9-6
Cost
Slide
9-30
Useful Life
Salvage Value
Depreciation
Depreciation Methods
Objective is to select the method that best measures
an assets contribution to revenue over its useful life.
Examples include:
(1) Straight-line method.
(2) Units-of-Activity method.
(3) Declining-balance method.
Illustration 9-8
Use of depreciation methods
in 600 large U.S. companies
Slide
9-31
Depreciation
Slide
9-32
Depreciation
Slide
9-34
Credit
1/1/2011 Equipment
Cash
To record purchase of Delivery Truck
with a 5 year life and $1,000 salvage
value.
Slide
9-35
Credit
13,000
13,000
Depreciation
Straight-Line
Expense is same amount for each year.
Depreciable cost is cost of the asset less its
salvage value.
Illustration 9-9
Slide
9-36
Depreciation
Straight-Line Depreciation Schedule (use
your handout)
Facts:
Item: ____________________
original cost:
13,000
salvage:
1,000
depreciable cost:
12,000
Straight - line
Column headers:
Depreciation
Expense
Accum.
Depreciation
Date of purchase
end of year
end of year
end of year
end of year
end of year
Slide
9-37
1
2
3
4
5
Book Value
$
2,400
2,400
13,000
10,600
Depreciation
Slide
9-38
SOLUTION
Illustration:
Illustration 9-10
Year
Depreciable
Cost
2011
$ 12,000
2012
12,000
20
2,400
4,800
8,200
2013
12,000
20
2,400
7,200
5,800
2014
12,000
20
2,400
9,600
3,400
2015
12,000
20
2,400
12,000
1,000
2011
Journal
Entry
Slide
9-39
Rate
20%
Annual
Expense
Accum.
Deprec.
Book
Value
$ 2,400
$ 2,400
$ 10,600
Depreciation expense
Accumulated depreciation
2,400
2,400
1/1/2011
Equipment
Cash
To record purchase of Delivery Truck
with a 5 year life and $1,000 salvage
value.
XXX
Slide
9-40
12/31/2011
Credit
13,000
13,000
1/1/2011
Equipment
Credit
13,000
Cash
13,000
Slide
9-41
2,400
2,400
Depreciation
Units-of-Activity
Companies estimate total units of activity to calculate
depreciation cost per unit.
In this case, the
Expense varies based on units of activity.
Depreciable cost is
cost less salvage
value.
Slide
9-42
Depreciation
Units-of-Activity (use your handout)
Create a Depreciation Schedule, given the
following mileage:
Year 1: 15,000 miles
Year 2: 30,000 miles
Year 3: 20,000 miles
Year 4: 25,000 miles
Year 5: 10,000 miles
Slide
9-43
Depreciation
Units-of-Activity (use your handout)
Units of Activity
Depreciation
Expense
Milage
Accum.
Depreciation
Book Value
Column headers:
Date of purchase
Slide
9-44
end of year 1
15,000
end of year 2
30,000
end of year 3
20,000
end of year 4
25,000
end of year 5
10,000
1,800
1,800
13,000
11,200
12,000
0.12
per mile
Can1,800
you do the
other 4 years
without
checking the
answer?
Depreciation
Slide
9-45
Units
Annual
of
Year
Activity
2011
15,000
2012
Unit
Depreciation Accumulated
=
Book
Expense
Depreciation
Value
$ 0.12
$ 1,800
$ 1,800
$ 11,200
30,000
0.12
3,600
5,400
7,600
2013
20,000
0.12
2,400
7,800
5,200
2014
25,000
0.12
3,000
10,800
2,200
2015
10,000
0.12
1,200
12,000
1,000
2011
Journal
Entry
Slide
9-46
Cost /
Depreciation expense
Accumulated depreciation
1,800
1,800
1/1/2011
Equipment
Cash
To record purchase of Delivery Truck
with a 5 year life and $1,000 salvage
value.
XXX
Slide
9-47
12/31/2011
Credit
13,000
13,000
1/1/2011
Equipment
Credit
13,000
Cash
13,000
Slide
9-48
1,800
1,800
Depreciation
Declining-Balance
Decreasing annual depreciation expense over the
assets useful life.
Declining-balance rate is double the straight-line rate.
Rate applied to book value.
Illustration 9-13
Slide
9-49
Depreciation
Slide
9-50
SOLUTION
Illustration:
Declining
Balance
x Rate =
Annual
Deprec.
Expense
Illustration 9-14
Year
Beginning
Book value
2011
13,000
40%
2012
7,800
40
3,120
8,320
4,680
2013
4,680
40
1,872
10,192
2,808
2014
2,808
40
1,123
11,315
1,685
2015
1,685
40
12,000
1,000
2011
Journal
Entry
Slide
9-51
Accum.
Deprec.
Book
Value
$ 5,200
$ 5,200
$ 7,800
685*
Depreciation expense
5,200
Accumulated depreciation
5,200
1/1/2011
Equipment
Cash
To record purchase of Delivery Truck
with a 5 year life and $1,000 salvage
value.
XXX
Slide
9-52
12/31/2011
Credit
13,000
13,000
1/1/2011
Equipment
Credit
13,000
Cash
13,000
Slide
9-53
5,200
5,200
Depreciation
Comparison of Methods
Illustration 9-15
Illustration 9-16
Slide
9-54
Slide
9-55
Depreciable
Cost
2011
$ 12,000
20% =
$ 2,400
2012
12,000
20% =
2,400
2,400
3,000
2013
12,000
20% =
2,400
2,400
5,400
2014
12,000
20% =
2,400
2,400
7,800
2015
12,000
20% =
2,400
2,400
10,200
2016
12,000
20% =
2,400
1,800
12,000
Rate
Annual
Expense
Current
Year
Expense
Partial
Year
x
3/12
9/12
600
Accum.
Deprec.
$
600
$ 12,000
Journal entry:
2011
Depreciation expense
Accumultated depreciation
Slide
9-57
600
600
Unit
Annual
Accum.
Book
Expense
Deprec.
Value
Year
Used
2011
15,000
$ 0.12
$ 1,800
$ 1,800
$ 11,200
2012
30,000
0.12
3,600
5,400
7,600
2013
20,000
0.12
2,400
7,800
5,200
2014
25,000
0.12
3,000
10,800
2,200
2015
10,000
0.12
1,200
12,000
1,000
2011
Journal
Entry
Slide
9-58
Cost /
Illustration 9-12
Depreciation expense
Accumulated depreciation
1,800
1,800
Annual
Expense
Partial
Year
3/12
Year
Beginning
Book Value
2011
$ 13,000 x
40%
= $ 5,200 x
2012
11,700 x
40%
2013
7,020 x
40%
2014
4,212 x
2015
2016
Current
Year
Expense
1,300
$ 1,300
4,680
4,680
5,980
2,808
2,808
8,788
40%
1,685
1,685
10,473
2,527 x
40%
1,011
1,011
11,484
1,516 x
40%
607
516
12,000
Plug
= $
Accum.
Deprec.
$ 12,000
Journal entry:
2011
Depreciation expense
Accumultated depreciation
Slide
9-59
1,300
1,300
Depreciation
Depreciation and Income Taxes
IRS does not require taxpayer to use the same
depreciation method on the tax return that is used in
preparing financial statements.
IRS requires the straight-line method or a special
Slide
9-60
Depreciation
Revising Periodic Depreciation
Accounted for in the period of change and
Slide
9-61
Depreciation
Illustration: Assume that Barbs Florists decides on
January 1, 2014, to extend the useful life of the truck one
year because of its excellent condition. The company has
used the straight-line method to depreciate the asset to
date, and book value is $5,800 ($13,000 - $7,200).
Questions:
1. What is the journal entry to correct
the prior years depreciation?
No Entry
Required
Slide
9-62
Depreciation
Book value, 1/1/14
Salvage value
Depreciable cost
Useful life (revised)
Annual depreciation
4,800
/ 3 years
$ 1,600
Illustration 9-17
Depreciation expense
Accumulated depreciation
Slide
9-63
First,
establish
Book Value
at the date
of change in
estimate.
$5,800
- 1,000
1,600
1,600
Fraud Alert
Slide
9-65
32,000
32,000
Loss on disposal
Delivery equipment
14,000
4,000
18,000
Slide
9-68
Slide
9-69
Slide
9-70
8,000
8,000
Cash
16,000
Accumulated depreciation
49,000
Office equipment
Gain on disposal
Slide
9-71
60,000
5,000
Illustration 9-20
Computation of loss on disposal
Illustration: Assume
that instead of selling
the office furniture
for $16,000, Wright
sells it for $9,000.
July 1
Cash
9,000
Accumulated depreciation
Loss on disposal
Office equipment
Slide
9-72
49,000
2,000
60,000
Slide
9-73
Long-Term
Assets
Expense
over time
The general term to
describe the
process is called
Amortization
Depreciation is the
specific term to describe
the amortization of
Property Plant and
Equipment
Slide
9-74
Depletion is the
specific term to describe
the amortization of
Natural Resources
Amortization is also
used to describe the
write-off of Intangible
Assets
Journal entry:
Depletion expense
Accumulated depreciation
Slide
9-76
400,000
400,000
Slide
9-77
Slide
9-78
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to
provide cash flows.
No amortization.
Slide
9-80
Amortization expense
Patent
Slide
9-82
7,500
7,500
Slide
9-85
*
Franchise Facts .
* = based on a survey of North American franchise owners representing over 200 franchises by
the Franchise Business Review, over one half million responses.
Slide
9-86
They are:
Slide
9-87
2006
Slide
9-88
2007
2008
2009
2010
Subway
Subway
Pizza Hut
Jan-Pro
Franchising*
Jan-Pro
Franchising*
Quiznos
Source:
http://www.entrepreneur.com/franzone/fastestgrowing/index.html
* Provides cleaning
service for
commercial buildings
Jan-Pro
Franchising*
Subway
Subway
Instant Tax
Solutions
Stratus Building
Solutions*
Slide
9-89
Slide
9-90
new product,
process,
idea,
formula,
composition, or
literary work.
Slide
9-91
Slide
9-92
Illustration 9-23
Slide
9-93
End of Chapter 9
Slide
9-98
Copyright
Copyright 2010 John Wiley & Sons, Inc. All rights reserved.
DEPRECIATION
Name: ___________________
On January 1, 20x1, Maynard's computer repair purchased for $50,000 a delivery truck that will be
driven an estimated 120,000 miles. The truck has an estimated useful life of five years and an
estimated residual value of $6,000. To the best of your ability, prepare a depreciation schedule.
Note: If you do not have enough information to solve a problem, put an X in the box.
Hint: WATCH THE DATES!
Straight - line
Misc. calc:
Column headers:
Cost
deprec exp
acc depre
carry. Value
Date of purchase
50,000
1
50,000
8,800
8,800
41,200
50,000
8,800
17,600
32,400
50,000
8,800
26,400
23,600
50,000
8,800
35,200
14,800
50,000
8,800
44,000
6,000
Double-Declining
Carry Value
before depre deprec exp
Rate
acc depre
Solution to
extra problem
in course pack
carry. Value
0.2
Column headers:
0.4
Date of purchase
Production
50,000
1
0.4
50,000
20,000
20,000
30,000
0.4
30,000
12,000
32,000
18,000
0.4
18,000
7,200
39,200
10,800
0.4
10,800
4,320
43,520
6,480
0.4
6,480
480
44,000
6,000
Cost
deprec exp
acc depre
carry. Value
Column headers:
Date of purchase
Year 4 only
50,000
6,233
44,000
$
0.37
6,233
Slide
9-100
Slide
9-101