ACCTG 211 1st Edition Lecture 11 Outline of Last Lecture I Plant Assets II 3 Depreciation Methods III Selling Assets Loss or Gain Outline of Current Lecture I Plant assets II Basket Purchase III Depreciation IV Capitalized Cost V Straight Line Method VI Units of Activity Method VII Double Declining Balance Method Current Lecture I II Plant Assets a Phase 1 Acquire Plant Asset Capitalized Cost i Capitalized Cost textbook Acquisition Cost Invoice cost PLUS all reasonable and necessary costs to place asset into use b Phase 2 Place Plant Asset Into Service and Depreciate Plant Asset i Place Into Use means to start using the plant asset use expense ii Capitalized Cost is depreciated via one of three commonly used methods c Phase 3 Expenditures After Plant Asset Has Been Placed Into Service i Capitalize or Expense Depends on GAAP two part test d Phase 4 Dispose of Plant Asset i Gain or Loss Run the journal entry template to determine Basket Purchase Example 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 a Monster Energy Drink Corporation purchases a building and land together for 180 000 An independent appraiser provides the following market values Building 140 000 Land 70 000 i Which value cost or market value should appear on Monster s balance sheet 1 Cost a Also known as historical cost ii Why would the building need to be accounted for separately than the land on Monster s balance sheet 1 Because they have different values of depreciation iii Because building is 2 3 of the total appraised value for both building and land so it is 2 3 of the cost iv Land is 1 3 of the cost v How much of the purchase price should Monster allocate to each of the assets 1 Building 120 000 a Has a positive depreciation rate because it is only valuable to the business for a finite number of time 2 Land 60 000 a Has a 0 depreciation rate because it is useful to the business for infinity Depreciate the Capitalized Cost Example a On January 1 2011 MusicPro paid 80 000 for new production equipment which was expected to provide 16 000 hours of recording time Sales tax on the equipment cost an additional 5 000 shipping of the equipment cost an additional 1 000 installation of the equipment cost an additional 6 000 and first year maintenance on the equipment cost an additional 2 000 after it had been placed into use MusicPro estimated that the equipment would be used for the next 10 years at the end of which time the equipment could be sold for 12 000 During the first three years of life 1 800 1 600 and 2 100 hours respectively of recording time were used Calculate depreciation expense for 2012 and also calculate the net book value at the end of 2012 using i Straight line method ii Units of activity method iii Double declining balance method b Determine the Capitalized Cost i Price 80 000 ii Sales Tax 5 000 iii Shipping 1 000 iv Installation 6 000 v Capitalized Cost Total 92 000 1 Expenses that are reasonable and necessary in order to using the asset a 2 000 maintenance won t be included because you have already started using the asset c Find other important information i Capitalized Cost 92 000 ii Residual Value Salvage 12 000 iii Useful Life in Years 10 iv Useful Life in Units 16 000 v Units used in Year 1 1 800 vi Units used in Year 2 1 600 d Straight Line Method i Capitalized Cost Residual Value Estimated Useful Life Depreciation Expense per period 1 92 000 12 000 10 8 000 ii Capitalized Cost Residual Value Depreciable Base 1 92 000 12 000 8000 iii 12 31 12 Depreciation Expense 8 000 Accumulated Depreciation 8 000 1 Accumulated Depreciation is an asset and Depreciation Expense is a part of Stockholder s Equity iv The accumulated depreciation will be 16 000 for the 2 nd year 1 A D is a contra asset account a Meaning an increase will decrease the account v The New Book Value NBV 92 000 16 000 76 000 e Units of Activity Method i Step 1 Depreciation expense per unit of activity ii Capitalized Cost Residual Value Estimated Useful Life Depreciation Expense Per Unit of Activity 1 92 000 12 000 16 000 Hours 5 per hour iii Step 2 Depreciation expense for accounting period iv Answer from Step 1 x Units of Activity for Accounting Period 1 5 00 per hour x 1 800 hours Year 1 hours 9 000 2 5 00 per hour x 1 600 hours Year 2 hours 8 000 3 Accumulated Depreciation will be 17 000 a 92 000 17 000 75 000 f Double Declining Balance Method i Step 1 Determine the Straight Line Depreciation Rate 1 1 n where n is the number of periods of useful life 2 1 10 10 10 ii Step 2 For DDB double your answer from Step 1 1 10 X 2 2 iii Step 3 Create a table with the following items 1 Beginning NBV 2 Depreciation Expense for Period 3 Accumulated Depreciation End of Period 4 Ending NBV Year Beg NBV Depreciation EXP A D End NBV 1 92 000 18 400 18 400 73 600 2 73 600 14 720 33 120 58 880 IV iv How to get the Table 1 Beg NBV X DDB Depreciation EXP a For Year 1 92 000 X 2 18 400 b Ending NBV of year 1 Beg NBV of year two c For Year 2 73 600 X 2 14 720 2 Capitalized Cost Accumulated Depreciation End NBV a For Year 1 92 000 18 400 73 600 b Accumulated Depreciation Year 2 Depreciation EXP Year 1 Depreciation EXP Year 2 c For Year 2 92 000 33 120 55 880 Disposal of Plant Assets a Let s assume that we are selling a plant asset for cash I b Cash we collect represents the market value c The book value represents the original capitalized cost plus any capitalized expenditures less any accumulated depreciation d IF MV BV i Gain on the sale e IF MV BV i Loss on the sale f Journal Entry i Cash XX Asset XX A D XX Loss or Gain XX XX Example Sell a plant Asset a Capitalized Cost 25 000 b Residual Value 0 c Useful Life 10 years d At the end of the 7th year you sell for 8000 e Create a journal entry to reflect the sale at the end of the seventh year Use the straight line depreciation i 25 000 0 10 2 500 depreciation expense per year ii 2 500 X 7 accumulated depreciation for 7 years 17 500 iii Journal Entry 7 th year Cash 8 000 Asset A D Gain 25 000 17 500 500 plug