CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8-1 Buying Plant Assets

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 2 LESSON 8-1 TERMS REVIEW plant asset record real property personal property assessed value page 228

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 3 LESSON Complete when asset is purchased. 2.Complete when asset is disposed of. 3.Complete each year to record annual depreciation expense. PLANT ASSET RECORD page

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 4 LESSON 8-1 BUYING A PLANT ASSET FOR CASH page 226 January 2. Paid cash for new copying machine, $1, Check No. 62.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 5 LESSON 8-1 BUYING A PLANT ASSET ON ACCOUNT page 226 January 2. Bought an office computer on account from Discount Computers, $3, Memorandum No. 70.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 6 LESSON 8-1 CALCULATING AND PAYING PROPERTY TAX page 227 Feb 1. Paid cash for property tax, $3, Check No Annual Property Tax = Tax Rate  Assessed Value $65,  5% = $3,250.00

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8-2 Calculating and Journalizing Depreciation Expense

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 8 LESSON 8-2 TERMS REVIEW straight-line method of depreciation book value of a plant asset page 234

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 9 LESSON 8-2 Ending Book Value =Annual Depreciation –Beginning Book Value Year 3$1,270.00–$365.00=$ STRAIGHT-LINE DEPRECIATION page 230 Original Cost$2, – Estimated Salvage Value– =Estimated Total Depreciation Expense$1,  Years of Estimated Useful Life  5 =Annual Depreciation Expense$

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 10 LESSON 8-2 RECORDING DEPRECIATION ON PLANT ASSET RECORDS 2. Calculate accumulated depreciation. 3. Calculate ending book value. 1.Calculate annual depreciation expense. page

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 11 LESSON 8-2 Depreciation Expense—Office Equipment Jan. 1 Bal.37, Dec. 31 Adj.11, Dec. 31 Bal.49, Accumulated Depreciation—Office Equipment Dec. 31 Adj.11, JOURNALIZING ANNUAL DEPRECIATION EXPENSE page 232

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 12 LESSON 8-2 CALCULATING DEPRECIATION EXPENSE FOR PART OF A YEAR page 232 Annual Depreciation Expense$  Months in a Year  12 Monthly Depreciation Expense$10.00 ×Number of Months Asset Is Used×5 Partial Year’s Depreciation Expense$50.00

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8-3 Disposing of Plant Assets

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 14 LESSON Record entry to remove plant asset from accounts. 2.Write the date, amount, and type of disposal. DISCARDING A PLANT ASSET WITH NO BOOK VALUE page January 5, 20X6. Discarded storage cabinet: original cost, $275.00; total accumulated depreciation through December 31, 20X5, $ Memorandum No

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 15 LESSON 8-3 June 30, 20X6. Discarded office table: original cost, $200.00; total accumulated depreciation through December 31, 20X5, $140.00; additional depreciation to be recorded through June 30, 20X6, $ Memorandum No Record a partial year’s depreciation expense. 2.Record the partial year’s depreciation. 4.Record entry to remove plant asset from accounts. 3.Write the date, amount, and type of disposal. DISCARDING A PLANT ASSET WITH A BOOK VALUE page

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 16 LESSON Record entry to remove plant asset from accounts. 1.Compute the gain or loss on the sale. 2.Write the date, amount, and type of disposal. SELLING A PLANT ASSET page January 4, 20X6. Received cash from sale of fax machine, $185.00: original cost, $600.00; total accumulated depreciation through December 31, 20X5, $ Receipt No. 60.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 17 LESSON Compute the original cost of the new plant asset. TRADING A PLANT ASSET page June 27, 20X6. Paid cash, $850.00, plus old counter for new store counter: original cost of old counter, $1,000.00; total accumulated depreciation through June 27, 20X6, $ Memorandum No. 130 and Check No Record entry to remove old plant asset and add new plant asset. 2.Write the date and type of disposal and the disposal amount Complete section 1 for the new plant asset.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 18 LESSON Record entry to remove plant assets from accounts. 1.Compute the gain on sale of plant assets. 2.Write the date, type, and amount of disposal. SELLING LAND AND BUILDINGS page January 2, 20X6. Fidelity Company sold land with a building for $97, cash; original cost of land, $25,000.00; original cost of building, $150,000.00; total accumulated depreciation on building through December 31, 20X5, $85, Receipt No

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 19 LESSON 8-3 CALCULATING THE GAIN ON SALE OF LAND AND BUILDINGS page 240

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning T ERMS REVIEW – lesson 8-4 declining-balance method of depreciation – Multiplying the book value at the end of each fiscal period by a constant depreciation rate – Used to depreciate more of the asset in the early years of its use – Salvage value is not used in calculating the annual depreciation expense sum-of-the-years-digits method of depreciation – Using fractions based on the number of years of a plant asset’s useful life. Calculate by multiplying the total depreciation expense by the fraction for that year Lesson 8-4, page 240

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning T ERMS REVIEW – Cont’d production-unit method of depreciation – Calculating estimated annual depreciation expense based on the amount of production expected from a plant asset Modified Accelerated Cost Recovery System – a depreciation method required by the IRS to be used for income tax calculation purposes for most plant assets placed in service after 1986 – classify assets as belonging to “5” and “7” year property classes; assume purchase half way through the year; calculate by multiplying original cost by the rate for that year (rates determined by IRS). Not a generally accepted depreciation method for financial reporting. Depletion – decrease in value of a plant asset due to removal of a natural resource Lesson 8-4, page 240

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning declining-balance method of depreciation – Multiplying the book value at the end of each fiscal period by a constant depreciation rate – Used to depreciate more of the asset in the early years of its use – Salvage value is not used in calculating the annual depreciation expense

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning DECLINING-BALANCE METHOD OF DEPRECIATION Lesson 8-4, page 234 Plant asset: ComputerOriginal cost: $2, Depreciation method: Declining balanceEstimated salvage value: $ Estimated useful life: 5 years BeginningDeclining- AnnualEnding Year Book ValueBalance Rate DepreciationBook Value 1$2, %$ $1, , % % % % Calculate the declining-balance rate. Total Depreciation Expense 100%  Estimated Useful Life (years)  5 =Straight-Line Rate 20%  Double the Rate  2 =Declining-Balance Rate 40% 12 2.Calculate the annual depreciation for year 3. Beginning Book Value$720  Depreciation Rate  40% =Annual Depreciation Expense$288 Total———— Depreciation—$1,825.00—

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning sum-of-the-years-digits method of depreciation – Using fractions based on the number of years of a plant asset’s useful life. Calculate by multiplying the total depreciation expense by the fraction for that year

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Lesson 8-4, page 235 Plant asset: ComputerOriginal cost: $2, Depreciation method: Sum-of-the-years-digitsEstimated salvage value: $ Estimated useful life: 5 years BeginningTotal AnnualEnding Year Book ValueFractionDepreciation DepreciationBook Value 1$2, /15$1,825.00$ $1, , /15 $1, /15 $1, /15 $1, /15 $1, Calculate the fraction. Years’ DigitsFraction 15/15 24/15 33/15 42/15 51/15 Total 15 1 Total — ——— Depreciation $1, Calculate the annual depreciation for year 1. Original Cost $2, Estimated Salvage Value – Estimated Total Depreciation $1, Year’s Fraction  5/15 Annual Depreciation $ SUM-OF-THE-YEARS-DIGITS METHOD OF DEPRECIATION

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning COMPARISON OF THREE METHODS OF DEPRECIATION Lesson 8-4, page 236 Plant asset: ComputerOriginal cost: $2, Depreciation method: ComparisonEstimated salvage value: $ Estimated useful life: 5 years Straight-LineDouble Declining-Balance Sum-of-the-Years-Digits Year Method MethodMethod 1$ $ $ Total Depreciation$1,825.00$ $1,825.00

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning production-unit method of depreciation – Calculating estimated annual depreciation expense based on the amount of production expected from a plant asset

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning PRODUCTION-UNIT METHOD OF DEPRECIATION Lesson 8-4, page 237 Plant asset: Truck Depreciation method: Production-unitEstimated total depreciation: $16, Original cost: $18, Estimated useful life: 90,000 miles Estimated salvage value: $2, Depreciation rate: $0.18 per mile driven BeginningMiles AnnualEnding Year Book ValueDriven DepreciationBook Value 1$18, ,000$ 1,620.00$ 16, , ,0004, , , ,0004, , , ,0003, , , ,000 1, , Totals87,000$15, Calculate annual depreciation for year 1. Total Miles Driven9,000  Depreciation Rate  $0.18 =Annual Depreciation Exp.$1, Calculate the depreciation rate. Original Cost$18,200 –Estimated Salvage Value – 2,000 =Est. Total Depreciation Expense$16,200  Estimated Useful Life (miles)  90,000 =Depreciation Rate $0.18/mile 1

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Modified Accelerated Cost Recovery System – a depreciation method required by the IRS to be used for income tax calculation purposes for most plant assets placed in service after 1986 – classify assets as belonging to “5” and “7” year property classes; assume purchase half way through the year; calculate by multiplying original cost by the rate for that year (rates determined by IRS). Not a generally accepted depreciation method for financial reporting.

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning   Plant asset: PrinterOriginal cost: $2, Depreciation method: MACRSProperty class: 5 year YearDepreciation RateAnnual Depreciation CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSES Lesson 8-4, page %$ % % % % % Totals100.00%$2,000.00