ACC 221 1st Edition Lecture 23 Outline of Last Lecture- Section 22: Fixed Assets Review Fixed Assetso Dollar value we put into assetso Operating costs and expenseso Grey area Outline of Current Lecture - Section 23: Asset Depreciation Depreciationo Overview Straight Line Depreciationo Allocates evenly over time Double Declining Balance Methodo Front Loadedo Depreciation Factoro Adjusting Entry Activity Based Depreciationo Depreciation based on Activity Removing Assetso No gain or losso Gain on saleo Loss on saleCurrent Lecture- Section 23: Asset Depreciation Depreciationo Overview Depreciation – allocation method to show the usage of assets and equipment by the company Three types- Straight line depreciation- Double declining balance depreciation method- Activity based depreciation method Considerations: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.- Total value- Estimated life- Residual value o Residual value – the amount that the asset will be worth after all of the usage has been allocated to depreciation; an estimate of end worth Accounts:- Accumulated depreciation o Permanent account, shows the total value of depreciation over time; rolls over to next accounting period and builds upon itself- Depreciation expenseo Temporary account, emptied into retained earnings as an expense at the end of the accounting cycle- Book valueo Is a calculated cost found based on the balance sheeto Original cost of asset – accumulated depreciation Stop depreciation when book value = residual value- May use different types of depreciation for financial reporting and tax returns; government does not regulate then like FIFO and LIFO Straight line depreciationo Allocates evenly over time (Full cost – residual value) / estimated life- ($110,000 - $10,000) / 5 years = $20,000- Adjust to depreciate $20,000 per year Adjusting entry- Dr. depreciation expense, Cr. Accumulated depreciation Double declining balance method o Front loaded – expenses are larger in your first years to gain a tax advantageo Depreciation factor (1/ life of loan) x 2- 1/5 2/5- $110,000 (2/5) = $44,000 first year depreciation- $66,000 (2/5) = $26400 second year depreciationo Adjusting Ending and beginning balance on following year are the same- Dr. Depreciation expense, Cr. Accumulated depreciation Must know when to stop depreciating: adjust the 5th year to get to the exact residual value; cannot be above or below residual at the end Activity based depreciationo Depreciation based on usage Fully depreciated when reaching 100,000 miles- (Cost – residual value) / life- ($110,000 – $5,000) / 100,000 miles = $1.05 per mile- 25,000 miles ($1.05) = $26,250 depreciation in year 1- In final year, stop depreciation when reach 100,000 miles, even if you continue to drive the car Removing assetso No gain or loss Dr. Cash (amount equipment worth, $66,000) Dr. accumulated depreciation (amount depreciated, $44,000) Cr. Equipment (total $110,000)o Gain on sale Dr. Cash ($76,000) Dr. Accumulated depreciation ($44,000) Cr. Equipment ($110,000) Cr. Gain on disposal on fixed assets ($10,000)o Loss on sale Dr. Cash ($56,000) Dr. Accumulated depreciation ($44,000) Dr. Loss on disposal of fixed assets (-$10,000) Cr. Equipment
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