1. Chapter 23 Plant Assets & Depreciation

2. Section 1 Plant Asset & Equipment

3. Special Assets Produce benefits for 1+ years Purchased to operate the business, not resell

4. Assets Current Assets Consumed or converted to cash during normal operation  Cash  AR  Merchandise Plant Asset Long-lived, used in production or sales over several accounting periods  Land  Buildings  Equipment (delivery, store, office)

5. Past Lesson Link In Ch. 18, you learned about supplies and prepaid insurance and how their cost was converted to expenses (Matching Principle) Plant Assets are used over multiple accounting periods – following the Matching Principle, the cost of these are spread or allocated over the periods the asset will be used to produce revenue

6. Allocating the Cost of Plant Assets Depreciation: allocating the cost of plant assets over the assets useful life All assets depreciate except for land

7. Estimating Depreciation of a Plant Asset Depreciation is an estimate Four factors to determine depreciation 1. Cost 2. Estimated useful life 3. Estimated disposal value 4. Depreciation Method

8. 1. Cost Price paid Sales tax Delivery charge Installation fees  Total amount DR to an asset account at the time of purchase

9. 2. Estimated Useful Life # of years expected to be used before the asset wears out, becomes outdated, or is no longer needed Varies from one asset to another Accountants consider past experiences with similar assets, IRS publishes guidelines

10. 3. Estimated Disposal Value Plant Assets will be replaced, sold or trashed Disposable Value: estimated value at replacement time  Based on previous experience, IRS publishes guidelines

11. 4. Depreciation Method This book… Straight-Line Depreciation: equally distributed depreciation over estimated useful life Other Methods to be aware of… Units of Production: estimated useful life measured in units of use not time Accelerated: based on thought that asset loses more value in early years, less in later years  Two types Sum of the Years Digits Declining Balance

12. Section 2 Calculating Depreciation

13. Equation: Original Cost – Estimated Disposal Value = Amount to be Depreciated Ex. P. 630  Delivery Truck 16,500  Disposal Value 1,500  Amount of Depreciation 15,000  Useful Life 5 years Estimated Disposal Value should not be treated as an expense Next calculation annual depreciation using straight line Equation: Amount to be Depreciated ÷ Estimated Useful Life = Annual Depreciation Expense  15,000 ÷ 5 = 3000

14. Calculating Depreciation Expense for Part of a Year Purchase in April not in January, used for 9 months Equation: Annual Depreciation Expense X Fraction of Year = Partial Year Depreciation Expense 3000 X 9/12 = 2250

15. Plant Asset Records Figure 23-1 p. 631  6 Parts 1. Date of purchase 2. Original cost 3. Estimated useful life 4. Annual depreciation 5. Accumulated depreciation 6. Book value at end of each year

16. Plant Asset Records (cont.) Accumulated Depreciation: total amount of depreciation that has been recorded up to specific point in time Book Value: (Equation) original cost – accumulated depreciation  Notice book value end of year 5 is 1500  Truck is not depreciated below estimated disposal value

17. Section 3 Accounting for Depreciation Expense at the End of a Year

18. After depreciation is calculated, adjustments are made to make general ledger match plant asset records

19. Adjusting for Depreciation Expense Figure 23-2 p. 633 Summary of Depreciation Expense

20. Depreciation Expense Expense Account During the year 0 balance, adjustment recorded at the end of the period Recorded on Income Statement Closed to the Income Summary account Depreciation Expense account for each Plant Asset  Depreciation Expense – Delivery Equipment Deprec Exp – Delivery Equip  Depreciation Expense – Office Furniture Deprec Exp – Office Equip  Etc.

21. Accumulated Depreciation Accumulated Depreciation: represents total amount of depreciation expense since Assets are purchased  Accumulated Depreciation – Delivery Equipment Accum Deprec – Delivery Equip  Accumulated Depreciation – Office Furniture Accum Deprec – Office Equip  Etc. Contra Asset account, decreases related Asset account Recorded on the Balance Sheet Delivery Equipment Accumulated Depreciation – Delivery Equipment + - - +

22. Related Accounts Asset: Delivery Equipment Exp: Depreciation Expense – Delivery Equipment Contra: Accumulated Depreciation - Delivery Equipment

23. Preparing the Adjustment for Depreciation Expense P. 635 Adjustment end of year Entry: Deprec Exp – Delivery Equip3000 Accum Deprec – Delivery Equip 3000

24. Analyzing the Accumulated Depreciation Account End of the year Depreciation Expense is closed Accumulated Depreciation shows total to date

25. Recording Depreciation Adjustments on a Worksheet After adjustment prepared, entered in the Adjustment section of the Worksheet Figure 23-3 p. 636-637  Notice Depreciation Expense accounts do not have balance in Trial Balance section  Adjustments (e) & (f) entered in Adjustment section to show depreciation for the year Decrec Exp – DR Accum Deprec – CR No adjustment to assets  Each amount extended to other Worksheet columns Delivery EquipmentDR unchangedBalance Sheet Accum Deprec – Delivery EquipCR increaseBalance Sheet Deprec Exp – Delivery EquipDR increaseIncome Statement

26. Recording Depreciation Expense and Accumulated Depreciation on Financial Statements Figure 23-4 p. 637  Depreciation Expense on Income Statement Figure 23-5 p. 638  Asset & Accumulated Depreciation are recorded Balance Sheet  Accumulated Depreciation account listed immediately below related asset account

27. Recording Original cost entered 1 st column (16500) Accumulated Depreciation entered 1 st column (9000) Difference entered in 2 nd column (7500) Book value reported should be same as on Plant Asset Record

28. Journalizing Adjusting Entries for Depreciation Expense Information for journal entries taken directly from adjustment section of Worksheet Entry p. 638-639  Adjusting for Depreciation Dec 31Deprec Exp – Delivery Equip3000 Accum Deprec – Delivery Equip3000  Post

29. Journalizing Closing Entries for Depreciation Expense Entry p. 639-640 Closing – Depreciation accounts only Dec 31Income Summary5500 Deprec Exp – Delivery Equip3000 Deprec Exp – Office Equip2500