A business uses plant assets for more than one accounting period, so it spreads the cost of these assets over a number of years. A business must also calculate depreciation of certain plant assets. Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Explain the need to depreciate plant assets. Identify plant assets. Explain the need to depreciate plant assets. Calculate annual depreciation of plant assets. Calculate partial-year depreciation of plant assets. Determine the book value of a plant asset. Record depreciation of plant assets. Prepare depreciation schedules. Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Key Terms plant assets depreciation disposal value Plant Assets and Equipment Section 23.1 Key Terms plant assets depreciation disposal value straight-line depreciation Glencoe Accounting

Current and Plant Assets Plant Assets and Equipment Section 23.1 Land plant assets Long-lived assets that are used in the production or sale of other assets or services over several accounting periods. Office Equipment Buildings Examples of Plant Assets Store Equipment Delivery Equipment Glencoe Accounting

Estimating Depreciation of a Plant Asset Plant Assets and Equipment Section 23.1 Cost Estimated Useful Life Factors Used to Calculate Depreciation Estimated Disposal Value Depreciation Method depreciation Allocating a plant asset’s cost over its useful life. Glencoe Accounting

Estimating Depreciation of a Plant Asset Plant Assets and Equipment Section 23.1 The cost of a plant asset is equal to the purchase price plus sales taxes, delivery charges, and installation charges. Glencoe Accounting

Estimating Depreciation of a Plant Asset Plant Assets and Equipment Section 23.1 Estimated useful life can be calculated using past experiences. Glencoe Accounting

Estimating Depreciation of a Plant Asset Plant Assets and Equipment Section 23.1 The IRS publishes guidelines on disposal values. disposal value The estimated value of a plant asset at its replacement time; also called salvage value. Glencoe Accounting

Estimating Depreciation of a Plant Asset Plant Assets and Equipment Section 23.1 Depreciation Methods Straight-Line Depreciation Method straight-line depreciation A method that equally distributes the depreciation expense over an asset’s estimated useful life. Units-of-Production Method Accelerated Depreciation Method Glencoe Accounting

Estimating Depreciation of a Plant Asset Plant Assets and Equipment Section 23.1 Federal Income Tax Laws for Depreciating Assets The Accelerated Cost Recovery System (ACRS) Modified Accelerated Cost Recovery System (MARCS) Allows a business to recognize depreciation over a shorter period of time and does not consider disposal value. Used for tax accounting only. Glencoe Accounting

Key Terms accumulated depreciation book value Section 23.2 Calculating Depreciation Key Terms accumulated depreciation book value Glencoe Accounting

Calculating Depreciation Section 23.2 Calculating Depreciation Calculate Depreciation Glencoe Accounting

Calculating Depreciation Section 23.2 Calculating Depreciation Straight-Line Depreciation Glencoe Accounting

Calculating Depreciation Section 23.2 Calculating Depreciation Straight-Line Depreciation Glencoe Accounting

Calculating Depreciation Section 23.2 Calculating Depreciation Declining-Balance Depreciation The annual depreciation expense is the asset’s book value multiplied by the declining-balance rate. This rate can vary but it is usually double the straight line rate. Glencoe Accounting

Plant Asset Records Information in the Plant Asset Record 1 Section 23.2 Calculating Depreciation Information in the Plant Asset Record 1 Date of Purchase 2 Original Cost 3 Estimated Useful Life 4 Annual Depreciation 5 Accumulated Depreciation 6 Book Value at the End of Each Year Glencoe Accounting

accumulated depreciation Plant Asset Records Section 23.2 Calculating Depreciation See page 678 accumulated depreciation The total amount of depreciation for a plant asset that has been recorded up to a specific point in time. Glencoe Accounting

The original cost of a plant asset minus accumulated depreciation. Plant Asset Records Section 23.2 Calculating Depreciation See page 678 book value The original cost of a plant asset minus accumulated depreciation. Glencoe Accounting

Adjusting for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 See page 680 Information to make depreciation adjustments comes from the plant asset records. Each type of asset has its own depreciation expense summary. Glencoe Accounting

Adjusting for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 Depreciation Expense Two accounts affected by the adjustment for depreciation: Accumulated Depreciation Glencoe Accounting

Adjusting for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 The debit and credit rules followed by the Accumulated Depreciation account are opposite those for an asset account. Glencoe Accounting

Adjusting for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 During the year, Depreciation Expense has a zero balance because the adjustment for depreciation is recorded at the end of the period. The account is closed to Income Summary at the end of the year. Glencoe Accounting

Adjusting for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 Business Transaction On December 31 the accounting clerk for The Starting Line records the depreciation for the delivery truck. See page 681–682 Glencoe Accounting

Adjusting for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 Work Sheet with Depreciation Adjustments See page 682 Glencoe Accounting

Adjusting for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 The depreciation expense accounts are reported on the income statement. See page 684 Glencoe Accounting

Adjusting for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 The plant asset and related accumulated depreciation accounts appear in the assets section of the balance sheet. See page 684 Glencoe Accounting

Adjusting and Closing Entries for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 Adjustment Record the December 31 adjusting journal entries for depreciation. See page 685 Glencoe Accounting

Adjusting and Closing Entries for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 Adjustment Record the December 31 adjusting journal entries for depreciation. See page 685 Glencoe Accounting

Adjusting and Closing Entries for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 Closing Second Closing Entry—Depreciation accounts only. See page 686 Glencoe Accounting

Adjusting and Closing Entries for Depreciation Expense Accounting for a Depreciation Expense at the End of a Year Section 23.3 Closing Second Closing Entry—Depreciation accounts only. See page 686 Glencoe Accounting

Question 1 On March 1 Lakeview Landscape purchased a new dump truck for $45,000. The truck will have a useful life of 10 years and a disposal value of $7,500. (a) Using straight-line depreciation, calculate the yearly depreciation of the truck. (b) How much could you depreciate in Year 1? Step 1: Subtract the disposal value from the cost of the truck: $45,000 - $7,500 = $37,500 to be depreciated Step 2: Divide the amount to be depreciated by the useful life of the asset: $37,500 ÷ 10 = $3,750 per year Calculate depreciation in Year 1 (for 10 months, March 1 to December 31): $3,750 x 10/12 = $3,125 a) b) Glencoe Accounting

Question 2 Why would a corporation choose to use an accelerated depreciation system such as declining-balance depreciation instead of straight-line depreciation? An accelerated depreciation schedule allows the corporation to take a higher expense early in the life of the asset. Since money today is more desirable than money one year from now, it allows the corporation to realize tax benefits early. Glencoe Accounting

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