CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 18-2 Calculating Depreciation Expense Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School

CENTURY 21 ACCOUNTING © Thomson/South-Western Calculating Depreciation Expense Generally accepted accounting principles require that the cost of a plant asset be expensed over the plant asset’s useful life The annual expense is recorded in Depreciation Expense & the contra asset account Accumulated Depreciation 2 LESSON 18-2

CENTURY 21 ACCOUNTING © Thomson/South-Western STRAIGHT-LINE DEPRECIATION The easiest & most widely used method of depreciation is known as the straight-line method of depreciation The straight-line method of depreciation charges an equal amount of depreciation expense in each full year in which the asset is used The method requires the business to know the cost of the plant asset & to estimate two amounts: The amount the business expects to receive when a plant asset is removed from use, known as the estimated salvage value The number of years a plant asset is expected to be used, known as the estimated useful life 3 LESSON 18-2

CENTURY 21 ACCOUNTING © Thomson/South-Western 4 LESSON 18-2 Estimated Salvage Value Original Cost Estimated Total Depreciation Expense =– $3, Annual Depreciation Expense = Years of Estimated Useful Life ÷ Estimated Total Depreciation Expense $ $ $3, STRAIGHT-LINE DEPRECIATION Calculating Annual Depreciation Expense 1 page 538 =– = 5 ÷ $3, Subtract the asset’s estimated salvage value from the original cost. 2.Divide the estimated total depreciation expense by the years of estimated useful life. 2

CENTURY 21 ACCOUNTING © Thomson/South-Western CALCULATING DEPRECIATION EXPENSE FOR PART OF A YEAR 5 LESSON 18-2  A month is the smallest unit of time used to calculate depreciation  A plant asset may be placed in service at a date other than the first day of a fiscal period  A business may elect to calculate depreciation expense to the nearest first of a month  A partial year’s depreciation may also be recorded in the year the plant asset is sold or disposed of  Plant assets may continue to be used after their estimated useful lives have ended; however, no additional depreciation is recorded

CENTURY 21 ACCOUNTING © Thomson/South-Western 6 LESSON 18-2 Months in a Year Annual Depreciation Expense Monthly Depreciation Expense =÷ $50.00 Partial Year’s Depreciation Expense = Number of Months Asset Is Used × Monthly Depreciation Expense $ $ CALCULATING DEPRECIATION EXPENSE FOR PART OF A YEAR Calculating Partial Year’s Depreciation Expense 1 page 539 =÷ = 5 × $ Divide the annual depreciation expense by Multiply the monthly depreciation expense by the number of months the plant asset is used in a year. 2

CENTURY 21 ACCOUNTING © Thomson/South-Western 7 LESSON 18-2 CALCULATING ACCUMULATED DEPRECIATION page X3 Depreciation Expense 20X2 Accumulated Depreciation 20X3 Accumulated Depreciation =+ $1,800.00$600.00$1, =+  Depreciation is not recorded as a reduction of the plant asset account. The amount of depreciation expense of a plant asset’s useful life is known as accumulated depreciation  The accumulated depreciation for a plant asset is calculated by adding the depreciation expense for the current year to the prior year’s accumulated depreciation

CENTURY 21 ACCOUNTING © Thomson/South-Western 8 LESSON 18-2 CALCULATING BOOK VALUE page 540 Accumulated Depreciation Original Cost Ending Book Value =– $1,450.00$1, $3, =–  The original cost of a plant asset minus accumulated depreciation is known as the book value of a plant asset  The book value is calculated by subtracting the accumulated depreciation from the original cost of the plant asset  The ending book value is the beginning book value for the next year

CENTURY 21 ACCOUNTING © Thomson/South-Western 9 LESSON 18-2 CALCULATING BOOK VALUE page 540 Annual Depreciation Beginning Book Value Ending Book Value =– $1,450.00$ $2, =–  The book value can also be calculated by subtracting the year’s depreciation from that year’s beginning book value  Either method of calculating a book value is acceptable because both methods calculate the same amount