ACCTG 211 1st Edition Lecture 10 Outline of Last Lecture I. Cost Flow Accounting MethodsII. Transportation CostsIII. Purchase DiscountsIV. Effects of Inventory ErrorsV. Valuation CostsVI. Gross Profit Method Outline of Current Lecture II. Acquiring Plant AssetsIII. 3 Types of Depreciation IV. Examples of Depreciation V. Selling Assets Current LectureI. Plant Assetsa. Phase 1: Acquire Plant Asset – “Capitalized Cost”b. Phase 2: Place Plant Asset Into Service and Depreciate Plant Asset i. 3 Methods of depreciationc. Phase 3: Expenditures After Plant Asset Has Been Placed Into Serviced. Phase 4: Dispose of Plant AssetII. Phase 1: Acquire Plant Asseta. Plant Assets = Fixed Assets = Property, Plant, & Equipmenti. a.k.a. PP&Eii. Must be actively used in operations to be classified as PP&Eb. Acquisition Costs (a.k.a. “Capitalized Cost”)i. Initial purchase priceii. Plus: any expenditure that is reasonable and necessary to place the asset into useThese 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.1. Examples of additional costs: sales tax, installation fees, inspectionfees, inbound shipping costs, import duties, etc.III. 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 Depreciatec. What is depreciation?d. A “cost allocation” method designed to simulate the decline in value associated with the “use” of a plant assete. Long-term deferred expense: purchase asset, then use assetf. “Amortization” is term used for depreciating intangible assetsg. Hint: the straight-line method will be used to amortize intangible assetsh. “Depletion” is term used for depreciating natural resourcesi. Hint: a derivation of the units of production method will be used to deplete natural resourcesj. “Standard” Depreciation Journal Entry1. (Date) Depreciation Expense XXAccumulated Depreciation XXI. 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 assetc. But period-to-period differences exist between the methodsa. Example of Depreciationa. Example Using Assumptions on Page 272:b. Invoice Price: $11,500c. Delivery and Installation Costs: $1,000d. Estimated Residual Value*: $500e. Estimated Useful Life (in Years): 6 yearsf. Estimated Useful Life (in Units): 240,000 unitsi. *Residual Value is also known as Salvage Valueb. Straight-Line Method (S/L):a. (Capitalized Cost – Residual Value)/(Estimated Useful Life) = Depreciation Expense Per Period of Useful Lifei. Capitalized Cost – Residual Value = “Depreciable Base”1. Capitalized Cost: Invoice Price $11,5002. Delivery/Install 1,000a. Total: $12,5003. Residual Value: $5004. Estimated Useful Life: 6 years5. Depreciation Expense = $6,000c. 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 Activityb. Step 2: Depreciation expense for accounting period:i. Answer from Step 1 x # Units of Activity for Accounting Periodii. Capitalized Cost: Invoice Price $11,500iii. Delivery/Install 1,0001. Total: $12,500iv. Residual Value: $500v. Estimated Useful Life: 240,000 glassesc. 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 $1,800Accumulated Depreciation $1,800d. 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 lifeb. Step 2: For DDB, double your answer from Step 1c. Step 3: Create a tablei. Beginning NBVii. Depreciation Expense for Periodiii. Accumulated Depreciation End of Periodiv. Ending NBVd. 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 1i. 2 / 6 = 1 / 3 or 33% per yearf. Step 3: Create a tablei. Beginning NBVii. Depreciation Expense for Periodiii. Accumulated Depreciation End of Periodiv. Ending NBVe.f. Comparing Different Depreciation methods:a. Straight-Line (S/L) vs. Double-Declining-Balance (DDB)i. DDB is considered to be an “accelerated” depreciation methodii. Accelerated = more depreciation than S/L in early years and less depreciation than S/L in later yearsg. When an asset is in use is it capital or an expense?a. Capital Expenditure vs. “Revenue” Expenditureb. Recommend calling revenue expenditure an expenseh. So the decision is between capitalizing the expenditure or expensing the expenditurea. GAAP: Two-Part Test (Pass Either Component, Pass the Test)b. Increases the estimated useful life of the assetc. Improves the efficiency of output for the assetd. EXAMPLEi. Example: Pizza Store Delivery Car1. New Engine2. New Exhaust and Air Intake3. Oil Change4. 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 cashi. 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 depreciationiii. If MV > BV → We have a gain on the saleiv. If MV < BV → We have a loss on the salev. JE Template:(Date) Cash XXAsset XXA/D XXLoss or Gain XX