ACCTG 211 1st EditionLecture 11Outline of Last Lecture I. Plant AssetsII. 3 Depreciation MethodsIII. Selling Assets (Loss or Gain)Outline of Current Lecture I. Plant assetsII. Basket PurchaseIII. Depreciation IV. Capitalized Cost V. Straight Line MethodVI. Units of Activity Method VII. Double Declining Balance MethodCurrent LectureI. 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 useb. 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 methodsc. Phase 3: Expenditures After Plant Asset Has Been Placed Into Servicei. Capitalize or Expense? Depends on GAAP two-part test.d. Phase 4: Dispose of Plant Asseti. Gain or Loss? Run the journal entry template to determine.II. Basket Purchase ExampleThese 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.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. Costa. 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 costv. How much of the purchase price should Monster allocate to each of the assets?1. Building: $120,000a. Has a positive depreciation rate because it is only valuable to the business for a finite number of time 2. Land: $60,000a. Has a 0 depreciation rate because it is useful to the business for infinityIII. Depreciate the Capitalized Cost Example a. On January 1, 2011, MusicPro paid $80,000 for new production equipment whichwas 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 forthe 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 methodiii. Double-declining balance methodb. Determine the Capitalized Cost: i. Price: 80,000ii. Sales Tax: 5,000iii. Shipping: 1,000iv. Installation: 6,000v. Capitalized Cost Total: $92,0001. Expenses that are reasonable and necessary in order to using the asseta. $2,000 maintenance won’t be included because you have already started using the assetc. Find other important information i. Capitalized Cost: 92,000ii. Residual Value (Salvage): 12,000iii. Useful Life in Years: 10iv. Useful Life in Units: 16,000v. Units used in Year 1: 1,800vi. Units used in Year 2: 1,600d. Straight-Line Methodi. (Capitalized Cost – Residual Value) /Estimated Useful Life = Depreciation Expense per period. 1. (92,000-12,000)/10=8,000ii. (Capitalized Cost – Residual Value) = “Depreciable Base”1. (92,000-12,000) = 8000iii. 12/31/12 Depreciation Expense 8,000Accumulated Depreciation 8,0001) 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 2nd year1. A/D is a “contra-asset” accounta. Meaning an increase will decrease the accountv. The New Book Value (NBV) = (92,000-16,000) = 76,000e. 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 Activity1. (92,000 – 12,000)/16,000 Hours = $5 per houriii. Step 2: Depreciation expense for accounting period:iv. Answer from Step 1 x # Units of Activity for Accounting Period1. $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 $17,000a. (92,000-17,000) = 75,000f. Double Declining Balance Methodi. Step 1: Determine the Straight-Line Depreciation Rate (%)1. 1 / n , where “n” is the number of periods of useful life2. 1/10 = 10% = .10ii. Step 2: For DDB, double your answer from Step 11. .10 X 2 = .2iii. Step 3: Create a table with the following items1. Beginning NBV2. Depreciation Expense for Period3. Accumulated Depreciation End of Period4. Ending NBVYear Beg. NBV Depreciation EXP A/D End NBV1 92,000 18,400 18,400 73,6002 73,600 14,720 33,120 58,880iv. How to get the Table 1. (Beg. NBV X DDB) = Depreciation EXPa. For Year 1: (92,000 X .2) = 18,400b. Ending NBV of year 1 = Beg. NBV of year twoc. For Year 2: (73,600 X .2) = 14,7202. Capitalized Cost - Accumulated Depreciation = End NBVa. For Year 1: (92,000 – 18,400) = 73,600b. Accumulated Depreciation Year 2 = Depreciation EXP Year 1+ Depreciation EXP Year 2c. For Year 2: (92,000 – 33,120) = 55,880IV. Disposal of Plant Assetsa. Let’s assume that we are selling a plant asset for cashb. Cash we collect represents the market valuec. The book value represents the original capitalized cost, plus any capitalized expenditures, less any accumulated depreciation d. IF MV > BVi. Gain on the salee. IF MV < BVi. Loss on the salef. Journal Entry i. Cash XX Asset XX A/D XXLoss or Gain XX XXI. Example: Sell a plant Asseta. Capitalized Cost: $25,000b. Residual Value = $0c. Useful Life = 10 yearsd. At the end of the 7th year, you sell for $8000e. 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 yearii. 2,500 X 7 = accumulated depreciation for 7 years = 17,500iii. Journal Entry 7th year