ACCOUNTING FOR LONG TERM ASSETS CHAPTER TWENTY ACCOUNTING FOR LONG TERM ASSETS

LONG-TERM ASSETS Property, Plant, and Equipment Wasting Assets Tangible and used in the operations of the business Also called Plant Assets or Fixed Assets Examples - land, buildings, furniture and equipment Wasting Assets Natural resources consumed in the operation of the business Intangible Assets Long-term assets that have no physical substance Examples - patents, copyrights and trademarks

LONG-TERM ASSETS Long-term assets (except land) gradually wear out or are used up as time passes Portion that has been used up or worn out is recognized as an expense Plant Asset - “Depreciation” Natural Resources - “Depletion” Intangible Assets - “Amortization” Process of cost allocation not a process of valuation not intended to make the assets reflect their market values on the balance sheet

LAND Cost includes: all amounts spent to purchase the land and prepare it for its intended use, including costs for: legal and real estate fees cost of removing old buildings grading the land special tax assessments

LAND IMPROVEMENTS Costs related to land that are not permanent in nature Cost includes: planting trees and shrubs installing fences paving parking areas Depreciated over their expected useful lives

BUILDINGS Interest on loans DURING CONSTRUCTION debited to the asset account, but interest AFTER asset is put into service is debited to an expense account. BUILDINGS Cost includes: purchase price if purchase price includes land….the cost of land and building must be determined and accounted for separately legal fees and related taxes if building is constructed….includes material, labor, architectural and engineering fees insurance premiums and interest on loans during construction

EQUIPMENT Costs include: purchase price transportation charges insurance while in transit installation costs any other costs that are incurred up to the point of placing the asset in service

DEPRECIATION Dec. 31 Depr. Expense- Delivery Eq. Reported on the DATE DESCRIPTION DEBIT PR CREDIT Dec. 31 1 Depr. Expense- Delivery Eq. 100 00 2 3 4 Reported on the Income Statement 5 6 7 8 9 10 11

Deducted from the asset account DEPRECIATION DATE DESCRIPTION DEBIT PR CREDIT Dec. 31 1 Depr. Expense- Delivery Eq. 100 00 2 Accum Depr-Delivery Eq 100 00 3 4 Deducted from the asset account “Delivery Equipment” on the Balance Sheet 5 6 7 8 9 10 11

DEPRECIATION 2 major types: Physical depreciation - the loss of usefulness because of deterioration Functional depreciation - the loss of usefulness because of inadequacy or obsolescence

What did we pay for the new asset? DEPRECIATION COST - the sum of all amounts spent to acquire an asset and prepare it for its intended use What did we pay for the new asset? New asset had a cost of $10,000

DEPRECIATION How long will the asset be used? USEFUL LIFE - the amount of service expected to be obtained from an asset. How long will the asset be used? Be careful!! We only want to know how long our company will use the asset…. not how long the asset could last.

How long will the asset be used? DEPRECIATION USEFUL LIFE - the amount of service expected to be obtained from an asset. How long will the asset be used? We plan on using it for 4 years.

What can we get for it when we’re through with it? DEPRECIATION SALVAGE VALUE - the estimated scrap, or market value for the asset on its expected disposal date. What can we get for it when we’re through with it? We feel we can sell it for $1,000 after using it for 4 years.

FOUR COMMON DEPRECIATION METHODS

Cost minus Salvage Value STRAIGHT-LINE METHOD Depreciation is recognized evenly over the years of the asset’s life. Formula: (Cost - Salvage Value) ($10,000 - $1,000) Cost minus Salvage Value is also called “Depreciable Cost.”

STRAIGHT-LINE METHOD (Cost - Salvage Value) ($10,000 - $1,000) Depreciation is recognized evenly over the years of the asset’s life. Formula: (Cost - Salvage Value) ($10,000 - $1,000) Est. Useful Life 4 years $2,250 per year

STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR COST - ACCUM. DEPR

STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 BOOK VALUE = COST at time of purchase

STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $2,250 $2,250 $ 7,750 2 $2,250 Same depreciation each year

First year’s + Second year’s depreciation STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $2,250 $2,250 $ 7,750 2 $2,250 $4,500 First year’s + Second year’s depreciation $2,250 + $2,250

Cost - Accum. Depreciation STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $2,250 $2,250 $ 7,750 2 $2,250 $4,500 $ 5,500 Cost - Accum. Depreciation $10,000 - $4,500

1st + 2nd + 3rd year’s depreciation STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $2,250 $2,250 $ 7,750 2 $2,250 $4,500 $ 5,500 3 $2,250 $6,750 1st + 2nd + 3rd year’s depreciation $2,250 + $2,250 + $2,250

The entire depreciable cost has been STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $2,250 $2,250 $ 7,750 2 $2,250 $4,500 $ 5,500 3 $2,250 $6,750 $ 3,250 4 $2,250 $9,000 The entire depreciable cost has been expensed by the end of the 4th year.

Book Value is now equal to the Salvage Value. STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $2,250 $2,250 $ 7,750 2 $2,250 $4,500 $ 5,500 3 $2,250 $6,750 $ 3,250 4 $2,250 $9,000 $ 1,000 Book Value is now equal to the Salvage Value.

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate

DEPRECIATION RATE STRAIGHT-LINE RATE FORMULA: 100% 100% Useful Life Commonly the depreciation rate is twice the Straight-Line rate. STRAIGHT-LINE RATE FORMULA: 100% 100% Useful Life 4 years Straight-Line rate is 25%

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate 50% Twice the Straight line rate 2 x 25%

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year 50% x $10,000 In year 1…. Book Value = Cost

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year 50% x $10,000 $5,000 1st year’s depreciation =

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year x Let’s compute the second year’s depreciation.

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year 50% x Rate stays the same

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year 50% x $5,000 - Cost Accum. Depr. $10,000 - $5,000

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year 50% x $5,000 Let’s look at the 3rd year’s depreciation. $2,500 2nd year’s depreciation =

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year 50% x $2,500 Cost - Accum. Depr. - $10,000 ($5,000 + $2,500)

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year 50% x $2,500 Let’s look at the 4th and final year. $1,250 3rd year’s depreciation =

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year 50% x $1,250 Book Value is down to $1,250. Goal is to reduce it to the Salvage Value by end of 4th year. That means only $250 of depreciation to go!

DECLINING-BALANCE METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. Formula: Depreciation Rate x Book Value at Beg. of Year 50% x $1,250 $625 $625 is too much!!! Book value would fall below the salvage value. 4th year’s depreciation is limited to $250.

DOUBLE-DECLINING BALANCE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $5,000 $5,000 $ 5,000 2 $2,500 $7,500 $ 2,500 3 $1,250 $8,750 $ 1,250 4 $ 250 $9,000 $ 1,000 Just like the Straight-Line method… Total depreciation is $9,000.

DOUBLE-DECLINING BALANCE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 2 What if the asset had been bought on April 1 of year 1? 3 4

DOUBLE-DECLINING BALANCE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $3,750 $3,750 $ 6,250 2 Year 1 $10,000 x 50% = $5,000 $5,000 x 9/12 = $3,750 3 4

DOUBLE-DECLINING BALANCE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $3,750 $3,750 $ 6,250 2 $3,125 $6,875 $ 3,125 3 Year 2 $6,250 x 50% = $3,125 4

DOUBLE-DECLINING BALANCE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $3,750 $3,750 $ 6,250 2 $3,125 $6,875 $ 3,125 3 $1,563 $8,348 $ 1,562 4 Year 3 $3,125 x 50% = $1,563

DOUBLE-DECLINING BALANCE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $3,750 $3,750 $ 6,250 2 $3,125 $6,875 $ 3,125 3 $1,563 $8,348 $ 1,562 4 Only $562 of depreciation to go before book value reaches the salvage value.

DOUBLE-DECLINING BALANCE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR $10,000 1 $3,750 $3,750 $ 6,250 2 $3,125 $6,875 $ 3,125 3 $1,563 $8,348 $ 1,562 4 $ 562 $9,000 $ 1,000 Year 4 $1,562 x 50% = $781 Too much!!! Limited to only $562

SUM-OF-THE-YEARS’ DIGITS METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as Declining-Balance method. Formula: Remaining useful life (Cost - Salvage Value) x 4 ($10,000 - 1,000) x Year 1 = 4 years remaining

SUM-OF-THE-YEARS’ DIGITS METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as Declining-Balance method. Formula: Remaining useful life (Cost - Salvage Value) x Sum-of-the-Years’ Digits 4 ($10,000 - 1,000) x 10 4 + 3 + 2 + 1 = 10

SUM-OF-THE-YEARS’ DIGITS METHOD Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as Declining-Balance method. Formula: Remaining useful life (Cost - Salvage Value) x Sum-of-the-Years’ Digits 4 ($10,000 - 1,000) x 10 Year 1 depreciation is $3,600.

SUM-OF-THE-YEARS’-DIGITS METHOD Depreciable Cost Annual Deprec. Accum.Deprec. Book Value Year Rate $10,000 1 $9,000 2 3 Cost - Salvage Value 4

SUM-OF-THE-YEARS’-DIGITS METHOD Depreciable Cost Annual Deprec. Accum.Deprec. Book Value Year Rate $10,000 1 $9,000 4/10 $3,600 $3,600 $ 6,400 2 $9,000 3 Depreciable Cost does not change. 4

SUM-OF-THE-YEARS’-DIGITS METHOD Depreciable Cost Annual Deprec. Accum.Deprec. Book Value Year Rate $10,000 1 $9,000 4/10 $3,600 $3,600 $ 6,400 2 $9,000 3/10 3 4 It is the rate that decreases over time.

SUM-OF-THE-YEARS’-DIGITS METHOD Depreciable Cost Annual Deprec. Accum.Deprec. Book Value Year Rate $10,000 1 $9,000 4/10 $3,600 $3,600 $ 6,400 2 $9,000 3/10 $2,700 $6,300 $ 3,700 3 $9,000 2/10 $1,800 $8,100 $ 1,900 4 $9,000 1/10 $ 900 $9,000 $ 1,000 No adjustment is needed in the 4th year.

SUM-OF-THE-YEARS’-DIGITS METHOD Depreciable Cost Annual Deprec. Accum.Deprec. Book Value Year Rate $10,000 1 $9,000 2 $9,000 3 $9,000 What if this asset had been bought April 1st? 4 $9,000 5 $9,000

SUM-OF-THE-YEARS’-DIGITS METHOD Depreciable Cost Annual Deprec. Accum.Deprec. Book Value Year Rate $10,000 1 $9,000 4/10 $2,700 $2,700 $ 7,300 2 $9,000 3 $9,000 $9,000 x 4/10 x 9/12 4 $9,000 5 $9,000

SUM-OF-THE-YEARS’-DIGITS METHOD Depreciable Cost Annual Deprec. Accum.Deprec. Book Value Year Rate $10,000 1 $9,000 4/10 $2,700 $2,700 $ 7,300 4/10 2 $9,000 $2,925 $5,625 $ 4,375 3/10 3 $9,000 $9,000 x 4/10 x 3/12 = $900 $9,000 x 3/10 x 9/12 = $2,025 $900 + $2,025 = $2,925 4 $9,000 5 $9,000

SUM-OF-THE-YEARS’-DIGITS METHOD Depreciable Cost Annual Deprec. Accum.Deprec. Book Value Year Rate $10,000 1 $9,000 $2,700 $2,700 $ 7,300 4/10 4/10 2 $9,000 $2,925 $5,625 $ 4,375 3/10 3/10 3 $9,000 $2,025 $7,650 $ 2,350 2/10 4 $9,000 5 The remaining years are computed in the same manner: 3 months at one rate & 9 months at another $9,000

SUM-OF-THE-YEARS’-DIGITS METHOD Depreciable Cost Annual Deprec. Accum.Deprec. Book Value Year Rate $10,000 1 $9,000 $2,700 $2,700 $ 7,300 4/10 4/10 2 $9,000 $2,925 $5,625 $ 4,375 3/10 3/10 3 $9,000 $2,025 $7,650 $ 2,350 2/10 2/10 4 $9,000 $1,125 $8,775 $ 1,225 1/10 5 $9,000 $ 225 $9,000 $ 1,000 1/10 Year 5 is only 3 months.

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. Formula: Step #1 Compute Depreciation per unit: (Cost - Salvage Value) ($10,000 - 1,000) Estimated Useful Life in Units 90,000 The asset (a vehicle) is expected to be driven 90,000 miles in its useful life.

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. Formula: Step #1 Compute Depreciation per unit: (Cost - Salvage Value) ($10,000 - 1,000) Estimated Useful Life in Units 90,000 Depreciation per mile = $.10

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. Formula: Step #2 Multiply depreciation per unit by number of units produced or consumed this year. $.10/mile x 24,000 miles Year 1 Depreciation is $2,400.

UNITS-OF-PRODUCTION METHOD Depreciation is based on the extent to which the asset was used during the year. Formula: Step #2 Multiply depreciation per unit by number of units produced or consumed this year. $.10/mile x 24,000 miles All years are computed in the same manner.

DEPRECIATION METHODS FOR FEDERAL INCOME TAX Method used depends on when asset was purchased: before 1981- Straight-Line, Declining-Balance, Sum-of-the-Years’-Digits, or Units of Production 1981-1986 - Accelerated Cost Recovery System (ACRS) after 1986- Modified Accelerated Cost Recovery (MACRS)

REPAIRS & MAINTENANCE If the repairs do not extend the life of the asset or improve its usefulness Recorded as expenses Examples - replacement of minor parts, lubrication, cleaning

ADDITIONS & IMPROVEMENTS Accounted for in two ways: If it increases the usefulness of the asset and will provide benefits in future periods Debited to the asset account increasing the book value Depreciated over the remaining life of the asset If it extends the useful life of the asset, but does not increase its usefulness or efficiency Debited to Accumulated Depreciation

ADDITIONS & IMPROVEMENTS Example: A business purchased two computers on January 1, 20-1. Both computers were purchased for $6,500, are estimated to be used for 3 years and have salvage values of $500. The business uses the Straight-Line method in computing depreciation. If at the beginning of 20-2, the company replaced a disk drive on computer A at a cost of $400. The replacement extends the life of the computer but doesn’t increase its usefulness….

ADDITIONS & IMPROVEMENTS Accumulated Depr. - Computer A Computer A $6,500 $2,000 12/31/-1 $400 1/1/-2 $1,600 Replacement is debited to Accum. Depreciation.

ADDITIONS & IMPROVEMENTS Accumulated Depr. - Computer A Computer A $6,500 $2,000 12/31/-1 $400 1/1/-2 $1,600 Book Value is now $4,900 ($6,500 - $1,600).

ADDITIONS & IMPROVEMENTS Accumulated Depr. - Computer A Computer A $6,500 $2,000 12/31/-1 $400 1/1/-2 $1,600 Depreciation for the remaining 2 years: (Book Value - Salvage Value)/Remaining Life ($4,900 - $500)/2 years = $2,200 per year

ADDITIONS & IMPROVEMENTS Example: A business purchased two computers on January 1, 20-1. Both computers were purchased for $6,500, are estimated to be used for 3 years and have salvage values of $500. The business uses the Straight-Line method in computing depreciation. The company also added a new tape drive backup unit to computer B at a cost of $400. Adding new components increases the usefulness of the computer…..

ADDITIONS & IMPROVEMENTS Accumulated Depr. - Computer B Computer B $6,500 $2,000 $ 400 1/1/-2 Debited directly to the asset account

ADDITIONS & IMPROVEMENTS Accumulated Depr. - Computer B Computer B $6,500 $2,000 $ 400 1/1/-2 $6,900 Book Value is now $4,900 ($6,900 - $2,000).

ADDITIONS & IMPROVEMENTS Accumulated Depr. - Computer B Computer B $6,500 $2,000 $ 400 1/1/-2 $6,900 Depreciation for the remaining 2 years: (Book Value - Salvage Value)/Remaining Life ($4,900 - $500)/2 years = $2,200 per year

PLANT ASSET DISPOSALS A plant asset can be disposed of in several ways: Discarded or retired Sold Exchanged or traded in for another asset

DISCARDING/RETIRING PLANT ASSETS Example: A printer with a cost of $800 and accumulated depreciation of $800 is discarded. There is no gain or loss since the book value is $0...

DISCARDING/RETIRING PLANT ASSETS DATE DESCRIPTION DEBIT PR CREDIT 1 Accum. Depr. - Office Eq. 800 00 2 Office Equipment 800 00 3 Discarded printer 4 Since the company no longer has the printer, its cost and related depreciation are removed from the books. 5 6 7 8 9 10 11

DISCARDING/RETIRING PLANT ASSETS DATE DESCRIPTION DEBIT PR CREDIT 1 2 3 4 5 6 What if the accumulated depreciation had been $720 instead? 7 8 9 10 11

DISCARDING/RETIRING PLANT ASSETS DATE DESCRIPTION DEBIT PR CREDIT 1 Accum. Depr. - Office Eq. 720 00 2 Loss on discarded Office Eq. 80 00 3 Office Equipment 800 00 4 Discarded printer 5 6 Loss of $80 7 8 9 10 11

We’re giving up an asset SELLING PLANT ASSETS Example:A printer with a cost of $800 and accumulated depreciation of $720 is sold for $80. We’re giving up an asset with a value of $80 to get $80 cash.

SELLING PLANT ASSETS Cash Accum. Depr. - Office Eq. Office Equipment DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 80 00 2 Accum. Depr. - Office Eq. 720 00 3 Office Equipment 800 00 4 Sold printer 5 No Gain or Loss 6 7 8 9 10 11

If we sold the printer for $120….. SELLING PLANT ASSET DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 120 00 2 Accum. Depr. - Office Eq. 720 00 3 Office Equipment 800 00 4 Gain on Sale of Printer 40 00 5 Sold printer 6 If we sold the printer for $120….. Gain of $40 ($120 cash - $80 book value) 7 8 9 10 11

If we sold the printer for $50….. SELLING PLANT ASSET DATE DESCRIPTION DEBIT PR CREDIT 1 Cash 50 00 2 Accum. Depr. - Office Eq. 720 00 3 Loss on Sale of Printer 30 00 4 Office Equipment 800 00 5 Sold printer 6 If we sold the printer for $50….. Loss of $30 ($80 book value - $50 cash) 7 8 9 10 11

EXCHANGE/TRADE-IN OF PLANT ASSETS Example:An old delivery truck is traded-in for a new delivery truck with a fair market value of $30,000. Old Delivery Truck Accum. Depr. -Old Truck Cost $8,000 $6,900 Book Value of $1,100 ($8,000 - $6,900)

EXCHANGE/TRADE-IN OF PLANT ASSETS Example:An old delivery truck is traded-in for a new delivery truck with a fair market value of $30,000. Old Delivery Truck Accum. Depr. -Old Truck Cost $8,000 $6,900 If a $1,000 trade-in is granted on the old truck….. $100 LOSS

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE DESCRIPTION DEBIT PR CREDIT 1 Delivery Equipment (New) 30,000 00 2 3 4 The new delivery truck is entered on the books at its market value. 5 6 7 8 9 10 11

EXCHAGE/TRADE-IN OF PLANT ASSETS DATE DESCRIPTION DEBIT PR CREDIT 1 Delivery Equipment (New) 30,000 00 2 Accum. Depr. - Delivery Eq. 6,900 00 3 4 Accumulated Depreciation on the old truck is removed from the books. 5 6 7 8 9 10 11

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE DESCRIPTION DEBIT PR CREDIT 1 Delivery Equipment (New) 30,000 00 2 Accum. Depr. - Delivery Eq. 6,900 00 3 Loss on Exchange of Equip. 100 00 4 5 Loss is recognized…. Will be shown on the Income Statement 6 7 8 9 10 11

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE DESCRIPTION DEBIT PR CREDIT 1 Delivery Equipment (New) 30,000 00 2 Accum. Depr. - Delivery Eq. 6,900 00 3 Loss on Exchange of Equip. 100 00 4 Delivery Eq. (Old) 8,000 00 5 6 The cost of the old delivery truck is removed from the books. 7 8 9 10 11

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE DESCRIPTION DEBIT PR CREDIT 1 Delivery Equipment (New) 30,000 00 2 Accum. Depr. - Delivery Eq. 6,900 00 3 Loss on Exchange of Equip. 100 00 4 Delivery Eq. (Old) 8,000 00 5 Cash 29,000 00 6 7 Cash is credited for the amount paid, $29,000 ($30,000 price - $1,000 trade-in). 8 9 10 11

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE DESCRIPTION DEBIT PR CREDIT 1 Delivery Equipment (New) 30,000 00 2 Accum. Depr. - Delivery Eq. 6,900 00 3 Loss on Exchange of Equip. 100 00 4 Delivery Eq. (Old) 8,000 00 5 Cash 29,000 00 6 Purchased a new truck 7 What if the trade-in had been $1,500 instead? 8 9 10 11

EXCHANGE/TRADE-IN OF PLANT ASSETS $1,500 trade-in - $1,100 book value $400 GAIN Conservatism is practiced in accounting: “..when in doubt we should choose the reporting technique that is least likely to overstate assets or net income”… Gain cannot be recognized!

EXCHANGE/TRADE-IN OF PLANT ASSETS DATE DESCRIPTION DEBIT PR CREDIT 1 Delivery Equipment (New) 29,600 00 2 Accum. Depr. - Delivery Eq. 6,900 00 3 Delivery Eq. (Old) 8,000 00 4 Cash 28,500 00 5 Purchased a new truck 6 New truck is recorded at $29,600 ($30,000 market value - $400 gain). 7 8 9 10 11

using Units-of-Production NATURAL RESOURCES Example:A coal mine is acquired at a cost of $1,000,000. No salvage value. Approximately 1,000,000 tons of coal are expected to be mined. Natural resources are “depleted” over time using Units-of-Production method.

(Cost - Salvage Value)/Tons NATURAL RESOURCES Example:A coal mine is acquired at a cost of $1,000,000. No salvage value. Approximately 1,000,000 tons of coal are expected to be mined. (Cost - Salvage Value)/Tons $1,000,000 1,000,000 tons Depletion is $1.00/ton

NATURAL RESOURCES Example: During the current year 180,000 tons of coal were mined and sold. 180,000 tons x $1.00 per ton $180,000 Depletion

depreciation adjusting entries NATURAL RESOURCES DATE DESCRIPTION DEBIT PR CREDIT 1 Depletion Expense-Mine 180,000 2 Accum. Depletion -Mine 180,000 3 4 Very similar to depreciation adjusting entries 5 6 7 8 9 10 11

INTANGIBLE ASSETS Patents give inventor exclusive right to produce, use and sell an invention for a period of twenty years If a company purchases a patent the amount paid = cost of patent If it develops its own patent only the fees paid to government and patent attorneys = cost Cost is then “AMORTIZED” over patent’s useful life using Straight-line method

INTANGIBLE ASSETS Copyrights give exclusive right to the reproduction and sale of a literary, artistic or musical composition for the life of the holder plus fifty years If a company purchases a copyright the amount paid = cost of patent If a develops its own patent recorded as an ordinary expense Cost is then “AMORTIZED” over patent’s useful life using Straight-line method

INTANGIBLE ASSETS Trademarks or trade name to identify a firm’s merchandise if widespread are protected by registering them with the United States Patent Office. If a company purchases a trademark the amount paid = cost of patent If a develops its own trademark only the cost to register it are recorded as an asset Cost is then “AMORTIZED” over patent’s useful life using Straight-line method