Class 16 Chapter 8 Long-lived assetsLong-lived assetsChanges in Depreciation Estimates (Required for SL)Changes in Depreciation EstimatesChanges in Depreciation EstimatesPP3Disposal of Property, Plant, and EquipmentSlide 8Slide 9Slide 10Practice Problem 4Capitalization vs. expensingPP5PP6Next Class1Class 16Chapter 8 Long-lived assetsAccounting 2610Xiumin Martin2/5/20132Long-lived assetsClassificationAcquisitionCostLife of assetDepreciation (Different methods: SL, UOP, DDB)Changes in estimates DisposalVoluntaryInvoluntary3Changes in Depreciation Estimates(Required for SL)So depreciationis an estimate.Estimatedresidual valueEstimateduseful life Over the life of an asset, new information may come to light that indicates theoriginal estimates were inaccurate. Over the life of an asset, new information may come to light that indicates theoriginal estimates were inaccurate.4Changes in Depreciation EstimatesIf our estimates change, depreciation is:We do NOT revise previous year’s depreciationsThe effects of the change in estimates are seen in the period the change occurred and periods after. Book value at date of changeResidual value at date of changeRemaining useful life at date of change–5Changes in Depreciation Estimates Acquisition cost of aircraft 60,000,000$ Original estimated useful life 20 yearsOriginal estimated residual value 3,000,000$ Original annual depreciation ($60,000,000 - $3,000,000) ÷ 20 2,850,000$ Revised estimated useful life 25 yearsRevised estimated residual value 750,000$ Acquisition cost of aircraft 60,000,000$ Original estimated useful life 20 yearsOriginal estimated residual value 3,000,000$ Original annual depreciation ($60,000,000 - $3,000,000) ÷ 20 2,850,000$ Revised estimated useful life 25 yearsRevised estimated residual value 750,000$ After owning aircraft costing $60,000,000for five years, Delta revised estimatesof residual value and useful life:What is the new annual depreciation?6PP3Beta-Beta-Beta purchased equipment for $99,500 on 7/1/2000.Estimated useful life – 5 years.Residual value - $4,500. The company uses the SL method. In July 2002 the company changed its estimates:Estimated useful life is 6 years. Residual value is $1,500. Calculate depreciation expenses for 2000,2001 and 2002. Fiscal year ends on 12/31 of each year. Evaluate the effect of changes in estimates on future years.7Voluntary disposals: SaleTrade-inRetirementInvoluntary disposals:Fire AccidentDisposal of Property, Plant,and Equipment8Disposal of Property, Plant,and EquipmentUpdate depreciation to the date of the disposalJournalize disposalRecord cash received (debit) or cash paid (credit)Eliminate BV of assetWrite off the asset cost (credit)Write off accumulated depreciation (debit)Record Gain (credit) or Loss (debit)Cash received could be from:The buyerThe insurance company9Disposal of Property, Plant,and EquipmentGain or Loss ???If amount received > BV gain (credit)Accounting depreciation exceeded economic depreciationIf amount received < BV loss (debit)Accounting depreciation was lower than economic depreciationIf amount received = BV no gain or lossAmount received could be:Cash onlyA combination of cash and some other assetsNon-cash consideration10Delta Airlines sold flight equipmentfor $4,000,000 cash at the end of its17th year of use. The flight equipment originally cost $20,000,000, and was depreciated using the straight-line method with zero salvage valueand a useful life of 20 years. Delta Airlines sold flight equipmentfor $4,000,000 cash at the end of its17th year of use. The flight equipment originally cost $20,000,000, and was depreciated using the straight-line method with zero salvage valueand a useful life of 20 years. Disposal of Property, Plant,and Equipment11Practice Problem 4Chamber Company purchased a truck on January 1, 1999, at a cash cost of $10,600. The estimated residual value was $400 and the estimated useful life 4 years. The company uses the double-declining-balance method. On July 1, 2001, the company sold the truck for $1,700 cash.Required:a. What was the depreciation expense in 1999, 2000 and 2001?b. What was the amount of accumulated depreciation at July 1, 2001?c. Give the required journal entries for the sale of the equipment on July 1, 2001.12Capitalization vs. expensingExpenditures are cash outlays. Some expenditure possess potential long-term benefits.Should firms treat these expenditures as assets in the balance sheet Or expenses in the income statementSo far,Recorded them as assets Depreciated them over the assets’ useful life. What if future benefits cannot be measured with reasonable degree of precision. In these cases we do not capitalize.All the expenditures will be treated as expenses in the period incurred.13PP5On August 1, Coldplay purchased a coal digging machine for $30,000 cash and also gave 100 shares of Clocks common stock which it held as an investment. The Clocks common stock cost Coldplay $5,000 and on August 1 had a market value of $4,200. Installation cost of the machine was $700 and shipping cost was $200. What amount should be the total amount debited to the machinery account? A) $35,100. B) $34,900. C)$35,900. D)$34,200. E) $30,900.14PP6On January 1, 2001, Bodner company agreed to buy equipment from Adams Company. Bodner signed a note, agreeing to pay Adams $500,000 for the equipment on December 31, 2003. The market rate of interest for the note is 10%. The company depreciates the equipment using the straight-line method over 5 years.Residual value assumed to be $75,650.Record:The initial Journal entry.Adjusting entry at the end of 2001:InterestDepreciation15Next ClassSecond mid-term
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