Plant assets and depreciation Chapter 23

Plant Assets and Equipment Plant Assets – Long lived assets that are used in production or sale of other assets over several accounting periods Land, buildings, equipment Aka long term assets, fixed assets Depreciation – Allocating the cost of a plant asset over its useful life

Estimating Depreciation Four Factors Cost Useful Life Disposal Value (salvage, residual) Depreciation Method

Depreciation Methods Straight Line depreciation – equally distributes cost over time Units of Production method – distributes cost over equally by production opposed to time Accelerated Depreciation Sum of the years digits Double Declining

Straight Line Formula (Cost – Salvage Value) = Annual Depreciation Useful Life Another Way to say it… Depreciable Amount = Annual Depreciation

Units of Production Formula Depreciable Amount * Units Used Useful Life in Units

Sum of the Years’ Digits Depreciable Amount * Reverse Order Year Sum of Years’ Digits

Double Declining Book Value * 2 Useful Life Book Value cannot be reduced below Salvage Value If at any point Straight Line method would result in a greater Annual Depreciation, then switch

Why Depreciate Assets??? Advantages:

Calculating Depreciation Accumulated Depreciation – total amount of depreciation for a plant asset that has been recorded up to a specific point in time Book Value – The original cost of a plant asset minus accumulated depreciation.

End of Period Adjusting for Depreciation Expense Depreciation Expense - Asset xxx Accumulated Depreciation – Asset xxx Closing Depreciation Expense Income Summary xxx Depreciation Expense – Asset xxx

End of period Like all expense accounts, Depreciation Expense will be closed to income summary… and eventually impact net income and retained earnings Accumulated Depreciation is a Contra Asset account. Found on Balance Sheet Listed under the asset The book value of the asset is considering when proving A = L + OE

Other Depreciation Methods Double – Declining 2x annual depreciation Based on book value Sum of year’s digits Depreciable Amount x (Reverse order of year / Sum of year’s digits) Units of production Depreciable Amount x (Units used/Expected Life in units)