ACCTG 211 1st Edition Lecture 10 Outline of Last Lecture I Cost Flow Accounting Methods II Transportation Costs III Purchase Discounts IV Effects of Inventory Errors V Valuation Costs VI Gross Profit Method Outline of Current Lecture II Acquiring Plant Assets III 3 Types of Depreciation IV Examples of Depreciation V Selling Assets Current Lecture I II Plant Assets a Phase 1 Acquire Plant Asset Capitalized Cost b Phase 2 Place Plant Asset Into Service and Depreciate Plant Asset i 3 Methods of depreciation c Phase 3 Expenditures After Plant Asset Has Been Placed Into Service d Phase 4 Dispose of Plant Asset Phase 1 Acquire Plant Asset a Plant Assets Fixed Assets Property Plant Equipment i a k a PP E ii Must be actively used in operations to be classified as PP E b Acquisition Costs a k a Capitalized Cost i Initial purchase price ii Plus any expenditure that is reasonable and necessary to place the asset into use These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute III 1 Examples of additional costs sales tax installation fees inspection fees inbound shipping costs import duties etc Phase 1 Example Basket Purchase Allocation a Building and land were purchased together for 100 000 The appraised fair market value of the building was determined by an independent appraiser to be 90 000 and the appraised value of the land was determined to be 30 000 i Why would we care to allocate the cost of the building separate from the cost of the land ii How to allocate cost of building versus land iii b Place Plant Asset Into Service and Depreciate c What is depreciation d A cost allocation method designed to simulate the decline in value associated with the use of a plant asset e Long term deferred expense purchase asset then use asset f Amortization is term used for depreciating intangible assets g Hint the straight line method will be used to amortize intangible assets h Depletion is term used for depreciating natural resources i Hint a derivation of the units of production method will be used to deplete natural resources j Standard Depreciation Journal Entry 1 Date Depreciation Expense XX Accumulated Depreciation XX I How to Calculate Depreciation Dollar Amount a Three commonly used methods i Straight Line S L ii Units of Activity or Units of Production UOP iii Double Declining Balance DDB b Key Point each of the three commonly used methods assigns the same amount of total depreciation expense to the income statement over the useful life of the asset c But period to period differences exist between the methods a Example of Depreciation a b c d e f Example Using Assumptions on Page 272 Invoice Price 11 500 Delivery and Installation Costs 1 000 Estimated Residual Value 500 Estimated Useful Life in Years 6 years Estimated Useful Life in Units 240 000 units i Residual Value is also known as Salvage Value b Straight Line Method S L a Capitalized Cost Residual Value Estimated Useful Life Depreciation Expense Per Period of Useful Life i Capitalized Cost Residual Value Depreciable Base 1 Capitalized Cost Invoice Price 11 500 2 Delivery Install 1 000 a Total 12 500 3 Residual Value 500 4 Estimated Useful Life 6 years 5 Depreciation Expense 6 000 c Units of Activity or Units of Production UOP 2 Steps a Step 1 Depreciation expense per unit of activity i Capitalized Cost Residual Value Estimated Useful Life Depreciation Expense Per Unit of Activity b Step 2 Depreciation expense for accounting period i Answer from Step 1 x Units of Activity for Accounting Period ii Capitalized Cost Invoice Price 11 500 iii Delivery Install 1 000 1 Total 12 500 iv Residual Value 500 v Estimated Useful Life 240 000 glasses c Units of Production UOP assuming 36 000 glasses were produced during the first accounting period i 12 500 500 240 000 glasses 0 05 per glass Step 1 ii 0 05 per glass x 36 000 glasses 1 800 Step 2 1 Date Depreciation Expense 1 800 Accumulated Depreciation d Double Declining Balance Method DDB a Step 1 Determine the Straight Line Depreciation Rate i 1 n where n is the number of periods of useful life b Step 2 For DDB double your answer from Step 1 c Step 3 Create a table i Beginning NBV ii Depreciation Expense for Period iii Accumulated Depreciation End of Period 1 800 iv Ending NBV d Step 1 Determine the Straight Line Depreciation Rate i 1 6 useful life in our example was estimated to be 6 years e Step 2 For DDB double your answer from Step 1 i 2 6 1 3 or 33 per year f Step 3 Create a table i Beginning NBV ii Depreciation Expense for Period iii Accumulated Depreciation End of Period iv Ending NBV e f Comparing Different Depreciation methods a Straight Line S L vs Double Declining Balance DDB i DDB is considered to be an accelerated depreciation method ii Accelerated more depreciation than S L in early years and less depreciation than S L in later years g When an asset is in use is it capital or an expense a Capital Expenditure vs Revenue Expenditure b Recommend calling revenue expenditure an expense h So the decision is between capitalizing the expenditure or expensing the expenditure a GAAP Two Part Test Pass Either Component Pass the Test b Increases the estimated useful life of the asset c Improves the efficiency of output for the asset d EXAMPLE i Example Pizza Store Delivery Car 1 New Engine 2 New Exhaust and Air Intake 3 Oil Change 4 If the expenditure is capitalized GAAP handles the adjusted depreciation prospectively That is the increase in overall depreciation is handled from the point of the expenditure forward No need to go back and change the depreciation already recorded in prior accounting periods i How does GAAP deal with the sale or disposal a Let s assume that we are selling a plant asset for cash i Cash we collect represents the market value MV ii The book value BV represents the original capitalized cost plus any capitalized expenditures less any accumulated depreciation iii If MV BV We have a gain on the sale iv If MV BV We have a loss on the sale v JE Template Date Cash XX Asset XX A D XX Loss or Gain XX or XX j Example of Selling a Plant Asset k Capitalized Cost 25 000 l Residual Value 0 m Useful Life 10 years n At the end of the seventh 7th year you sell for 8 000 a Objective create a journal entry to reflect the sale at the end of the seventh year Use straight line depreciation b JE Template Date Cash XX Asset XX A D XX Loss or Gain XX or XX o Example Sell a Plant Asset a Original