1. ACCOUNTING FOR PLANT ASSETS Lesson 8-1, page 216 (GAAP) (on)Going Concern – financial statements are prepared with the expectation that a business will remain in operation indefinitely -accounting records must be kept up to date as plant assets are bought and used -costs will be allocated over the useful life of assets **a building and the land it is located on are typically purchased together for a single price…separate values must be assigned to each asset…if a sales contract does not specify separate amounts, an appraisal may be used to determine separate amounts Current Assets – assets that are expected to be exchanged for cash or consumed within a year Plant Assets – assets that will be used for a number of years in the operation of a business (land, buildings, equipment) aka fixed assets or long-term assets Appliance Center has 3 kinds: Office equipment (copier), store equipment (cash register), and warehouse equipment (forklift)

2. PLANT ASSET RECORD Lesson 8-1, page 218 1 1.Complete when asset is purchased. 2 2.Complete when asset is discarded, sold, or traded. -an accounting form on which a business records information about each plant asset it owns; 3 sections: Straight-line method of depreciation – charging an equal amount of depreciation for a plant asset in each year of useful life 3 3.Complete each year to record annual depreciation expense, the accumulated depreciation, and the ending book value – at the end of each year, we can report the value of our assets accurately 20X0 this year total so far current value

3. BUYING A PLANT ASSET FOR CASH Lesson 8-1, page 219 BUYING A PLANT ASSET ON ACCOUNT Paid cash for new copying machine, $1,680.00. Check No. 62 Bought an office computer on account from Discount Computers, $3,300.00. Memo No. 70

4. CALCULATING AND PAYING PROPERTY TAX Lesson 8-1, page 220 For tax purposes, state and federal governments define two kinds of property: real and personal real property – land and anything attached to it (real estate) personal property – all the rest (anything that’s not “real”) The value of an asset determined by tax authorities for the purpose of calculating taxes (only) is the assessed value The assessed value may not (will most likely not) be the same as the book value on the business’ records A governmental taxing unit (borough, city, township, etc.) determines a tax rate to use in calculating taxes…this rate is multiplied by an asset’s assessed value, not the book value

5. CALCULATING AND PAYING PROPERTY TAX Lesson 8-1, page 220 Paid cash for yearly property tax, $3,250.00. Check No. 122. Payment of property taxes is necessary if a firm is to continue in business…therefore property tax is classified as an operating expense (must pay it to keep operating) Be careful to only record for the time period… ½ year, ½ tax Annual Property Tax = Tax Rate  Assessed Value $65,000.00  5% = $3,250.00

6. Work Together 8-1 (p221, wb269,270) & On Your Own 8-1 (p221, wb271,272) Work Together 8-1 (p221, wb269,270) & On Your Own 8-1 (p221, wb271,272)

7. WT All straight-line (directions) Office, Store, or Warehouse

8. OYO

9. Applications 1 & 2

10. DEPRECIATIONDEPRECIATION Lesson 8-2, page 222 Plant assets will wear out, become outdated by new models, or become no longer needed (GAAP) – Matching Expenses with Revenue – the cost of a plant asset should be allocated to an expense account over the useful life of the plant asset; record depreciation expense at the end of each fiscal period Depreciation Expense – the portion of a plant asset’s cost that is transferred to an expense account in each fiscal period Land – permanent – not subject to depreciation; increases or decreases are only recorded when land is sold or otherwise disposed of

11. FACTORS USED TO CALCULATE DEPRECIATION Lesson 8-2, page 222 Three factors are used to calculate a plant asset’s annual depreciation expense: 1 – Original Cost: Includes all costs paid to make the asset usable to a business – purchase price, delivery costs, and any necessary installation costs 2 – Estimated Salvage Value: when a plant asset is disposed of, some part of its original value may remain; the salvage value is the amount an owner expects to receive when a plant asset is removed from use aka residual value, scrap value or trade-in value an estimate made when the asset is bought we need the estimated number so we can depreciate as we go 3 – Estimated Useful Life: the number of years an asset is expected to be useful to a business; past experience tells us…or we can use IRS guidelines 2 of these 3 values are estimates

12. STRAIGHT-LINE DEPRECIATION Lesson 8-2, page 223 Original Cost$2,000.00 – Estimated Salvage Value– 175.00 =Estimated Total Depreciation Expense$1,825.00  Years of Estimated Useful Life  5 =Annual Depreciation Expense$ 365.00 -Charging an equal amount of depreciation expense for a plant asset in each year of useful life Bought a computer for $2,000.00 Estimated Salvage Value $175.00 Estimated Useful life of 5 Years

13. STRAIGHT-LINE DEPRECIATION Lesson 8-2, page 223 -Charging an equal amount of depreciation expense for a plant asset in each year of useful life Bought a computer for $2,000.00 Estimated Salvage Value $175.00 Estimated Useful life of 5 Years YearBeginning Book Value Annual Depreciation Ending Book Value 12,000.003651,635.00 2 3651,270.00 3 365905.00 4 365540.00 5 365175.00 Total Depreciation -------------1,825.00-------------

14. 1 – On the plant asset record 2 – As part of the adjusting entries (then posted to general ledger accounts) RECORDING DEPRECIATION Lesson 8-2, page 224 Appliance Center records annual depreciation expense in two places for each plant asset: DETAILS COMING DETAILS COMING

15. CALCULATING DEPRECIATION EXPENSE FOR PART OF A YEAR Lesson 8-2, page 223 A calendar month is the smallest unit of time used to calculate depreciation …but a plant asset may be put into or taken out of use at a date other than the first day of a fiscal period When this happens, depreciation expense is calculated to the nearest first of a month August 8 th = August 1 st September 20 th = October 1 st (Sept. 20 th is closer to October 1 st than Sept. 1 st ) August 1 st to December 31 st = 5 months of use that year October 1 st to December 31 st = 3 months of use that year

16. RECORDING DEPRECIATION ON PLANT ASSET RECORDS – Step 1 Lesson 8-2, page 224 2. Calculate accumulated depreciation. 20X320X220X3 Depreciation Expense+Accumulated Depreciation=Accumulated Depreciation 20X3$120.00+$170.00=$290.00 3. Calculate ending book value. 20X320X220X3 Original Cost–Accumulated Depreciation=Ending Book Value 20X3$700.00 – $290.00=$410.00 1. Calculate annual depreciation expense. Original Cost$700.00 – Estimated Salvage Value – 100.00 =Est. Depreciation Expense$ 600.00  Estimated Useful Life  5 =Annual Depreciation Expense$120.00 2 At the end of the useful life, the cabinet should be depreciated down to its estimated salvage value. At the end of the sixth year, the ending book value is equal to the estimated salvage value, $100.00. The actual useful life may exceed the estimate made when the asset was put to use. 3 …but the depreciation is no longer recorded once they are equal 1 120.00  12 = 10/month (nearest 1 st of a month) 5 months (Aug-Dec)

17. JOURNALIZING ANNUAL DEPRECIATION EXPENSE - Step 2 Lesson 8-2, page 225 Depreciation Expense—Office Equipment Jan. 1 Bal.37,434.00 Accumulated Depreciation—Office Equipment Dec. 31 Adj.11,571.00 Dec. 31 Bal.49,005.00 After recording on plant asset records, depreciation amounts for the year are totaled for each category (Office, Store, Warehouse) An adjusting entry is made to record the total depreciation expense for each category of plant assets + + (contra asset)

18. Book Value: 80,000 Year 20X1: Debit Warehouse Equipment – Truck – 80,000 Asset: 80,000 Depreciation: 0 Year 20X1: Used 10,000 worth of the truck so it depreciated 10,000 Entry:Depreciation Exp. - Warehouse+10,000 Accum. Depreciation – Warehouse +10,000 Book Value: 70,000 Depreciation: 10,000 Year 20X2: Used 10,000 worth of the truck so it depreciated 10,000 Entry:Depreciation Exp. - Warehouse +10,000 Accum. Depreciation – Warehouse +10,000 Depreciation: 20,000 Book Value: 60,000 Year 20X3: Used 10,000 worth of the truck so it depreciated 10,000 Entry:Depreciation Exp. - Warehouse +10,000 Accum. Depreciation – Warehouse +10,000 Depreciation: 30,000 Book Value: 50,000 DEPRECIATIONDEPRECIATION

19. DEPRECIATION TABLE Depreciation Tables: **Show the PLAN for the depreciation for the asset. **These are completed when the asset is purchased. but things don’t always go according to plan… Plant Asset Records: **Show the actual depreciation attributed to the asset **What if the asset breaks? **Or is sold?

20. 100-25=75 to be depreciated 75÷5=15/year 15÷12=1.25/ month Apr., May, June, July, August, Sept., Oct., Nov., Dec. (9 months) 1.25 x 9 =11.25 Jan., Feb., March 1.25 x 3 = 3.75 DEPRECIATION TABLE

21. Work Together 8-2 (p226, wb273) & On Your Own 8-2 (p226, wb275) Work Together 8-2 (p226, wb273) & On Your Own 8-2 (p226, wb275) 1) Depreciation table for each asset 2) Plant Asset Record for each asset 3) Journalize adjusting entries for 20X1 1) Depreciation table for each asset 2) Plant Asset Record for each asset 3) Journalize adjusting entries for 20X1

22. WT 600-0=600 600  3=200 2800-400=2400 2400  5=480 5 880.00 480.00 2,400.00 400.00 (If you finished out the depreciation for this asset) $400.00 DEPRECIATION TABLES – wb page 273

23. WT PLANT ASSET RECORDS– wb page 270

24. Get Depreciation Expense for 2001 only (per directions) – wb p. 70WT Scanner: Freight Scale: Record Depreciation Expense for 2001 only (per directions) – wb p. 274

25. OYO

26. OYO

27. OYO Record Depreciation Expense for 2001

28. Applications 3 & 4 Note for App 3: Assets 3, 4 & 5 were not bought in January… so they weren’t used for the full first or LAST year…see this slide for help on the hand truck this slidethis slide Applications 3 & 4 Note for App 3: Assets 3, 4 & 5 were not bought in January… so they weren’t used for the full first or LAST year…see this slide for help on the hand truck this slidethis slide

29. DISCARDING PLANT ASSETS 1 – With no book value 2 – With a book value 3 – Selling assets 4 – Trading assets 5 – Selling Land and Buildings 6 – Calculating the gain on sale of Land and Buildings Plant assets are disposed of when: 1.No useful life remains 2.It is no longer needed 3.It is traded for another plant asset of the same kind

30. DISCARDING A PLANT ASSET WITH NO BOOK VALUE Lesson 8-3, page 227 If a plant asset has a salvage value of zero and its total accumulated depreciation is equal to the original cost value, the plant asset has no book value When a plant asset with no book value is discarded, a journal entry is recorded that removes the original cost of the plant asset and its related accumulated depreciation - -

31. Book Value: 80,000 Year 20X1: Debit Warehouse Equipment – Truck – 80,000 Asset: 80,000 Depreciation: 0 Year 20X1: Used 10,000 worth of the truck so it depreciated 10,000 Entry:Depreciation Exp. - Warehouse+10,000 Accum. Depreciation – Warehouse +10,000 Book Value: 70,000 Depreciation: 10,000 Year 20X2: Used 10,000 worth of the truck so it depreciated 10,000 Entry:Depreciation Exp. - Warehouse +10,000 Accum. Depreciation – Warehouse +10,000 Depreciation: 20,000 Book Value: 60,000 Year 20X3: Used 10,000 worth of the truck so it depreciated 10,000 Entry:Depreciation Exp. - Warehouse +10,000 Accum. Depreciation – Warehouse +10,000 Depreciation: 30,000 Book Value: 50,000 DEPRECIATIONDEPRECIATION Year 20X9: Credit Warehouse Equipment – Truck – 80,000 Asset: 0 Book Value: - 30,000? Year 20X9: Discarded Truck Used 30,000 worth of the truck; we’ve accumulated 30,000 Entry: Accumulated Depreciation – WarehouseEquip - 30,000 Loss on Plant Assets + 50,000 Warehouse Equipment – Truck - 80,000 Depreciation: 0 Book Value: 0

32. DISCARDING A PLANT ASSET WITH NO BOOK VALUE Lesson 8-3, page 227 2 2.Write the date, amount, and type of disposal. Discarded storage cabinet: original cost: 275.00; total accumulated depreciation through Dec 31, 275.00 Memo No. 72 1 1.Record entry to remove plant asset from accounts. - - The asset is gone, so we reduce the Accum. Depr. that counters our assets

33. DISCARDING A PLANT ASSET WITH A BOOK VALUE Lesson 8-3, page 228 When a plant asset is disposed of, its depreciation expense from the beginning of the year to the date of disposal is recorded …the asset won’t be around (in reality or on our books) at the end of the year to depreciate it When an asset with a book value is discarded, 2 journal entries are recorded to: 1 – Remove the original cost of the plant asset and its related depreciation 2 – Recognize the loss on disposal of the asset The loss from discarding a plant asset with a book value is equal to the book value (Loss on Plant Assets – classified as “Other Expense”) If you throw out something worth $25.00, it would be a $25.00 loss

34. DISCARDING A PLANT ASSET WITH A BOOK VALUE Lesson 8-3, page 228 4.Record entry to remove plant asset from accounts. 4 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, 20.00 M92 “other” expense ++-+-++-+- 1.Record a partial year’s depreciation expense. (from the beginning of the year) 1 3.Write the date, amount, and type of disposal. 3 2.Record the partial year’s depreciation. 2 FIRST!

35. SELLING A PLANT ASSET Lesson 8-3, page 228 When a plant asset is sold, a journal entry is recorded to: 1 – Remove the original cost of the plant asset and its related depreciation 2 – Recognize the cash received 3 – Recognize the gain or loss on disposal of the asset The amount of gain or loss is calculated by subtracting the book value from the cash received.

36. SELLING A PLANT ASSET Lesson 8-3, page 229 3.Record entry to remove plant asset from records. 3 1.Compute the gain or loss on the sale. 1 Cash Received$185.00 Book Value of Asset Sold: Cost$600.00 Accum. Depr.400.00200.00 Gain (Loss) on Sale of Plant Asset$(15.00) 2 2.Write the date, amount, and type of disposal. (“other” expense)

37. SELLING A PLANT ASSET Lesson 8-3, page 229 What we bought it for What we sold it for the difference what we used up of it *wear & tear the loss we are taking If it were a gain Gain

38. TRADING A PLANT ASSET Lesson 8-3, page 230 When an old plant asset is traded for a new plant asset, a journal entry is recorded to: 1 – Remove the original cost of the old plant asset and its related depreciation 2 – Recognize the cash paid 3 – Record the new plant asset at its original cost (No gain or loss is recorded separately)

39. TRADING A PLANT ASSET Lesson 8-3, page 230 Cash Paid$850.00 Book Value of Asset Traded: Cost$1,000.00 Accum. Depr.765.00235.00 Original Cost of New Plant Asset$1,085.00 1. Compute the original cost of the new plant asset. 1 3.Complete section 1 for the new plant asset. 3 4.Record entry to remove old plant asset and add new plant asset. 4 2.Write the date and type of disposal. 2 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, 765.00. M130 & C154 OLD COUNTER NEW COUNTER

40. SELLING LAND AND BUILDINGS Lesson 8-3, page 231 Land – permanent – not subject to depreciation; increases or decreases are only recorded when land is sold or otherwise disposed of …so the book value of land is the original cost (GAAP – Historical Cost)

41. --+--+ - SELLING LAND AND BUILDINGS Lesson 8-3, page 231 3.Record cash receipts and remove plant assets/related depreciation. 32 2.Write the date, type, and amount of disposal. Fidelity Company sold land with a building for $97,000.00 cash; original cost of land, $25,000.00; original cost of building, $150,000; total accumulated depreciation on building through December 31, 20X5, $85,000.00. Receipt No. 105 1.Compute the gain on sale of plant assets. 1 175,000 (orig. cost of land & building) -85,000 (depreciation) 90,000 (value) 97,000 (Cash received) -90,000 (value) 7,000 (Gain) (“other” revenue)

42. No book value With book value Gain = credit (each entry is a link to its slide... click the To come back here) Loss=debitSUMMARY --+--+ - to WT to WT

43. Work Together 8-3 (p233, wb277) & On Your Own 8-3 (p233, wb281) Work Together 8-3 (p233, wb277) & On Your Own 8-3 (p233, wb281)

44. p. 270 WT 1/3 p. 279

45. p. 270 WT 3/30 760 -600 160 p. 280 p. 279

46. WT 6/26 p. 277 p. 280 p. 279 500-375=125 gain Different from wb – Fix to match this record

47. WT 12/28 Cash Paid$30,000.00 Book Value of Asset Traded: Cost$38,000.00 Accum. Depr.31,500.006500.00 Original Cost of New Plant Asset$36,500.00

48. WT 12/30 (Assume land did not depreciate) 100,000 (orig. cost of land & building) -18,000 (depreciation) 82,000 (value ) 110,000 (Cash received) -82,000 (value) 28,000 (Gain)

49. OYO 1/4

50. OYO 5/28

51. OYO 6/30

52. OYO 10/2

53. OYO 12/29

54. Applications 5 & 6

55. DECLINING-BALANCE METHOD OF DEPRECIATION Lesson 8-4, page 234 Def. – multiplying the book value at the end of each fiscal period by a constant depreciation rate Many plant assets depreciate more in the early years of useful life than in the later years Charging more depreciation expense in the early years would be more accurate (“drive it off the lot”) Although the depreciation rate is the same each year, the annual depreciation expense declines from year to year Rate is based on the straight-line rate. A declining-balance depreciation rate that is twice the straight line rate is commonly used – double declining-balance method **We will always double the rate Never depreciate below the ESV 

56. DECLINING-BALANCE METHOD OF DEPRECIATION Lesson 8-4, page 234 Plant asset: ComputerOriginal cost: $2,000.00 Depreciation method: Declining balanceEstimated salvage value: $175.00 Estimated useful life: 5 years BeginningDeclining- AnnualEnding Year Book ValueBalance Rate DepreciationBook Value 1$2,000.0040%$ 800.00$1,200.00 21,200.0040%480.00720.00 3720.0040%288.00432.00 4432.0040%172.80259.20 5259.2040%84.20175.00 (not 103.68) 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% Total———— Depreciation—$1,825.00— **this method (only) does not use the ESV in CALCULATING the depreciation, although you do stop depreciating once you reach the ESV

57. Lesson 8-4, page 235 Plant asset: ComputerOriginal cost: $2,000.00 Depreciation method: Sum-of-the-years-digitsEstimated salvage value: $175.00 Estimated useful life: 5 years BeginningTotal AnnualEnding Year Book ValueFractionDepreciation DepreciationBook Value 1$2,000.005/15$1,825.00$ 608.33$1,391.67 2 1,391.67 4/15 $1,825.00486.67905.00 3 905.00 3/15 $1,825.00365.00540.00 4 540.00 2/15 $1,825.00243.33296.67 5 296.67 1/15 $1,825.00121.67175.00 1.Calculate the fraction. Years’ DigitsFraction 15/15 24/15 33/15 42/15 51/15 Total 15 Total ———— Depreciation $1,825.00 2.Calculate the annual depreciation for year 1. Original Cost $2,000.00 Estimated Salvage Value – 175.00 Estimated Total Depreciation $1,825.00 Year’s Fraction  5/15 Annual Depreciation $608.33 SUM-OF-THE-YEARS-DIGITS METHOD OF DEPRECIATION XXXXXXXXXX ==========

58. COMPARISON OF THREE METHODS OF DEPRECIATION Lesson 8-4, page 236 Plant asset: ComputerOriginal cost: $2,000.00 Depreciation method: ComparisonEstimated salvage value: $175.00 Estimated useful life: 5 years Straight-LineDouble Declining-Balance Sum-of-the-Years-Digits Year Method MethodMethod 1$ 365.00$ 800.00$ 608.33 2365.00480.00486.67 3365.00288.00365.00 4365.00 84.20243.33 5 365.00 121.67 Total Depreciation$1,825.00$1825.00$1,825.00 “accelerated depreciation methods” As always, pick the method that works best for your type of business and stick with it – CAN’T change it unless you can prove that it would be more accurate

59. PRODUCTION-UNIT METHOD OF DEPRECIATION Lesson 8-4, page 237 Plant asset: Truck – wears out faster if you use it a lot Depreciation method: Production-unitEstimated total depreciation: $16,200.00 Original cost: $18,200.00 Estimated useful life: 90,000 miles Estimated salvage value: $2,000.00 Depreciation rate: $0.18 per mile driven BeginningMiles AnnualEnding Year Book ValueDriven DepreciationBook Value 1$18,200.009,000$ 1,620.00$ 16,580.00 216,580.0023,0004,140.00 12,440.00 312,440.0025,0004,500.00 7,940.00 47,940.0022,0003,960.00 3,980.20 53,980.20 8,000 1,440.002,540.00 Totals87,000$15,600.00 2.Calculate annual depreciation for year 1. Total Miles Driven9,000  Depreciation Rate  $0.18 =Annual Depreciation Exp.$1,620.00 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 X.18 =

60. CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSES Lesson 8-4, page 238 MACRS – Modified Accelerated Cost Recovery System IRS requires that plant assets placed into service after 1986 be evaluated for tax purposes using this method (all other methods were for financial statement purposes) There are 9 classes of plant assets – each one has its own set of rates MACRS allows for more depreciation towards the beginning of the life of the capital asset (similar to double-declining balance), allowing the tax deductible depreciation expense to be taken sooner All plant assets are assumed to be placed in service in the middle of the year and taken out of service in the middle of the year 3-year property 5-year property 7-year property 10-year property 15-year property 20-year property Real Estate: 27.5-year property 39-year property Most common – cars, computers, mfg. equipment Office furniture & fixtures

61. Plant asset: PrinterOriginal cost: $2,000.00 Depreciation method: MACRSProperty class: 5 year YearDepreciation RateAnnual Depreciation CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSES Lesson 8-4, page 238 120.00%$400.00 232.00%640.00 319.20%384.00 411.52%230.40 511.52%230.40 6 5.76% 115.20 Totals100.00%$2,000.00 X 2,000 = Yearly percentages set forth by IRS 200020012002200320042005 1234512345 How does 5 years become 6 years? ***Salvage Value is not taken into consideration

62. DEPLETION – physical removal of natural resources Lesson 8-4, page 237 Plant asset: Coal Mine (decreases in value as coal is removed / depleted) Depreciation method: Production-unitEstimated total depreciation: $87,750.00 Original cost: $100,000.00 Estimated tons of recoverable coal: 50,000 Estimated salvage value: $12,250.00 Depletion rate: $1.755 per ton BeginningTons AnnualEnding Year Book ValueRecovered DepletionBook Value 1$100,000.006,000$ 10,530.00$ 89,470.00 289,470.0012,00021,060.00 68,410.00 368,410.0013,00022,815.00 45,595.00 445,595.009,00015,795.00 29,800.00 529,800.00 6,000 10,530.0019,270.00 Totals46,000$80,730.00 2.Calculate annual depletion for year 1. Tons of Coal Removed6,000  Depletion Rate  $1.755 =Annual Depletion Exp.$10,530.00 1.Calculate the depletion rate. Original Cost$100,000 –Estimated Salvage Value – 12,250 =Est. Total Value of Coal$87,750  Estimated Tons of Recov. Coal  50,000 =Depletion Rate per ton of coal $1.755 X 1.755 =

63. Work Together 8-4 (p240, wb285) & On Your Own 8-4 (p241, wb287) Work Together 8-4 (p240, wb285) & On Your Own 8-4 (p241, wb287)

64. WT Total Depreciation

65. WT

66. OYO

67. OYO

68. Applications 7 - 11