McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 16 Recording and Evaluating Capital Resource Activities:

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McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 16 Recording and Evaluating Capital Resource Activities:

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Presentation transcript:

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 16 Recording and Evaluating Capital Resource Activities: Investing

16-2 What is the Cost of Property, Plant, and Equipment? PPE is recorded as the total amount required to obtain and get the asset ready for its intended use Purchase price Sales Tax Costs incurred to obtain (freight, etc.) Cost incurred to setup (installation, etc.)

16-3 What are the Factors Affecting Depreciation Calculations? Cost Useful life Salvage value Depreciation method

16-4 How is Depreciation Expense Calculated Using the Different Methods? Straight-line  (Cost – salvage value)/Useful life (time) = annual depreciation expense Units-of-production  (Cost – salvage value)/Useful life (units) = depreciation rate  Depreciation rate * annual usage = annual depreciation expense

16-5 Depreciation Expense Calculated Using the Different Methods Continued Double-declining balance  2 * straight-line rate = DDB rate  DDB * carrying value = annual depreciation expense

16-6 What if the Company Doesn’t Purchase (or sell) the Asset at the Beginning (or end) of the Year? Units-of-production  Multiple the depreciation rate by the actual usage Straight-line or double-declining balance  Use the mid-year convention or count the time that the asset was in use

16-7 How Can a Company Dispose of an Asset Before its Useful Life is Over? Discard Sell Exchange or Trade-in

16-8 What is the Process Involved in Asset Disposals? Record depreciation to date of disposal Remove the cost of the asset (CR) and the accumulated depreciation (DR) from the records Record the assets received (DR) if applicable Record the cash paid (CR) if applicable Record the loss incurred (DR) if applicable Record the gain (CR) if applicable

16-9 Exchange (Trade-In) Example We have a computer that originally cost $6,000 and has accumulated depreciation of $4,500. We will trade-in this computer for a new computer with a list price of $10,000. The computer company will give us a trade-in allowance of $2,000. Book value = $6,000 - $4,500 = $1,500. Cash payment required = $10,000 - $2,000 = $8,000

16-10 Trade-in Example Continued Computer received = $10,000 Less assets given up = $9,500 Gain = $500 Entry: Computer (new)10,000 Accumulated depreciation 4,500 Computer (old)6,000 Cash8,000 Gain 500

16-11 What are Depletion and Amortization? Depletion  The cost of a natural resource is allocated to expense  Typically, units-of-production method used Amortization  The cost of an intangible asset is allocated to expense  Typically, straight-line method is used