Unit 5 Accounting for Special Procedures Chapter 22 Cash Funds Chapter 23 Plant Assets and Depreciation Chapter 24 Uncollectible Accounts Receivable Chapter 25 Inventories Chapter 26 Notes Payable and Receivable Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 23 Plant Assets and Depreciation What You’ll Learn 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. Define the accounting terms introduced in this chapter. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 23, Section 1 Plant Assets and Equipment What Do You Think? Why is the plant asset cost spread over a number of years? Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Plant Assets and Equipment SECTION 23.1 Main Idea A business uses plant assets for more than one accounting period, so it spreads the cost of these assets over a number of years. You Will Learn the difference between current assets and plant assets. four factors used to estimate the depreciation of plant assets. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Plant Assets and Equipment SECTION 23.1 Key Terms plant assets depreciation disposal value straight-line depreciation Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Plant Assets and Equipment SECTION 23.1 Current and Plant Assets Assets such as office equipment and buildings are expected to produce benefits for more than one year and are purchased for use in operating the business. Plant assets are long-lived assets that are used in the production or sale of other assets or services over several accounting periods. Examples include land, buildings, delivery equipment, store equipment, and office equipment. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Plant Assets and Equipment SECTION 23.1 Estimating Depreciation of a Plant Asset To follow the matching principle, the cost of a plant asset is spread over the periods the asset will produce revenue. This is called depreciation. Factors used to calculate depreciation are its cost, its estimated useful life, its estimated disposal value, and the depreciation method used. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Plant Assets and Equipment SECTION 23.1 Plant Asset Cost The cost of a plant asset is equal to the purchase price plus sales taxes, delivery charges, and installation charges. This amount is debited to the plant asset account. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Plant Assets and Equipment SECTION 23.1 Cost and Estimated Useful Life of a Plant Asset The number of years a plant asset is expected to be used before it wears out or becomes outdated is the estimated useful life. This number varies from asset to asset and can be determined by considering past experiences. The estimated value of a plant asset at the time of its replacement is its disposal value. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Plant Assets and Equipment SECTION 23.1 Depreciation Methods There are several methods that can be used when calculating depreciation. Three methods are the straight-line method, the units-of-production method, and accelerated depreciation methods. In this course, you will learn how to calculate straight-line depreciation. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Plant Assets and Equipment SECTION 23.1 Depreciation for Tax Reporting Federal income tax law has rules for depreciating assets. This includes the accelerated cost recovery system (ACRS), which allows a business to recognize depreciation over a shorter period of time and does not consider disposal value. MACRS is the modified accelerated cost recovery system and is used for tax accounting only. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Plant Assets and Equipment SECTION 23.1 Key Terms Review plant assets Long-lived assets that are used in the production or sale of other assets or services over several accounting periods. depreciation Allocating a plant asset’s cost over its useful life. disposal value The estimated value of a plant asset at its replacement time; also called salvage value. straight-line depreciation A method that equally distributes the depreciation expense over an asset’s estimated useful life. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 23, Section 2 Calculating Depreciation What Do You Think? What happens if a business does not maintain accurate records of each asset? Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Depreciation SECTION 23.2 Main Idea Businesses maintain a record of each plant asset and its related depreciation. You Will Learn how to calculate depreciation. how to determine book value. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Depreciation SECTION 23.2 Key Terms accumulated depreciation book value Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Depreciation SECTION 23.2 Calculating Depreciation Use the following calculation to compute depreciation: Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Depreciation SECTION 23.2 Straight-Line Depreciation Calculate annual depreciation using the straight-line method: Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Depreciation SECTION 23.2 Straight-Line Depreciation Calculate partial-year depreciation using the straight-line method: Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Depreciation SECTION 23.2 Declining-Balance Depreciation With this method, 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 Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Depreciation SECTION 23.2 Plant Asset Records The plant asset record provides detailed information about the plant asset including the date of purchase, the original cost, the estimated useful life, the annual depreciation, the accumulated depreciation, and the book value at the end of each year. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Depreciation SECTION 23.2 Plant Asset Records The lower part of the record contains the depreciation schedule including the accumulated depreciation (the total amount of depreciation recorded up to a specific point in time) and the book value (original cost less accumulated depreciation) for the asset. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Depreciation SECTION 23.2 Plant Asset Records Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Calculating Depreciation SECTION 23.2 Key Terms Review accumulated depreciation The 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. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 23, Section 3 Accounting for Depreciation Expense at the End of a Year What Do You Think? How does a business prepare its records to present up-to-date financial information about plant assets? Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Main Idea An end-of-period adjusting entry is made for depreciation expense. You Will Learn the accounts used to record depreciation. how to journalize adjusting and closing entries for depreciation expense. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Adjusting for Depreciation Expense Information to make depreciation adjustments comes from the plant asset records. Each type of asset has its own depreciation expense summary. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Making the Depreciation Expense Adjustment Two accounts are affected by the adjustment for depreciation: Depreciation Expense Accumulated Depreciation Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 The Depreciation Expense Account 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 Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 The Accumulated Depreciation Account This account represents the total amount of depreciation expensed since the asset was purchased and is classified as a contra asset account. The debit and credit rules followed by the Accumulated Depreciation account are opposite those for an asset account. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 The Adjustment This is an example of how to record the adjustment for the depreciation of plant assets. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 The Adjustment This is an example of how to record the adjustment for the depreciation of plant assets. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 The Adjustment This is an example of how to record the adjustment for the depreciation of plant assets. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Analysis of the Accumulated Depreciation Account For On Your Mark, each year the same adjustment was made to record the depreciation of the delivery truck: a debit to Depreciation Expense–Delivery Equipment a credit to Accumulated Expense–Delivery Equipment At the end of the year, the Depreciation Expense–Delivery Equipment account has a zero balance and the Accumulated Expense–Delivery Equipment account shows the total amount of depreciation expensed since the asset was purchased. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Recording Depreciation Adjustments on a Work Sheet After preparing the adjustment for depreciation, the accountant enters it in the Adjustments section of the work sheet. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Reporting Depreciation Expense and Accumulated Depreciation on Financial Statements The depreciation expense accounts are reported on the income statement. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Reporting Depreciation Expense and Accumulated Depreciation on Financial Statements The plant asset and related accumulated depreciation accounts appear in the assets section of the balance sheet. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Adjusting and Closing Entries for Depreciation Expense Adjustments for depreciation expense are recorded in the general journal using the Adjustments section of the work sheet. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Adjusting and Closing Entries for Depreciation Expense Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Adjusting and Closing Entries for Depreciation Expense Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Adjusting and Closing Entries for Depreciation Expense Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Adjusting and Closing Entries for Depreciation Expense Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Adjusting and Closing Entries for Depreciation Expense Now the ledger must be closed. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Adjusting and Closing Entries for Depreciation Expense Now the ledger must be closed. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Adjusting and Closing Entries for Depreciation Expense Now the ledger must be closed. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Accounting for Depreciation Expense at the End of a Year SECTION 23.3 Adjusting and Closing Entries for Depreciation Expense Now the ledger must be closed. Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 23 Review 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? Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 23 Review CHAPTER 23 Answer 1 a) 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 b) Calculate depreciation in Year 1 (for 10 months, March 1 to December 31): $3,750  10/12 = $3,125 Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 23 Review Question 2 Why would a corporation choose to use an accelerated depreciation system such as declining-balance depreciation instead of straight-line depreciation? Glencoe Accounting Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 23 Review CHAPTER 23 Answer 2 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 Unit 5 Chapter 23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

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