1. © 2014 Cengage Learning. All Rights Reserved. Learning Objectives Cengage – Century 21 Accounting -- Edited for Advanced Accounting LO1Record the buying of a plant asset. LO2 Analyze the cost of individual assets bought as a bundle. LO3 Calculate and record the payment of property tax. Chapter 19-2 Buying Plant Assets and Paying Property Taxes

2. © 2014 Cengage Learning. All Rights Reserved. Plant Assets (Know all vocabulary terms for the test.) ●Accounting data can be used to predict the efficiency of an investment. ●The ratio of the money earned on an investment relative to the amount of the investment is called return on investment, or ROI. ●The more efficient the investment, the higher its ROI. ●That makes sense: The better the investment does, the higher your return on investment ●These predictions will help company managers decide which assets to buy. SLIDE 2 Lesson 19-1 LO1

3. © 2014 Cengage Learning. All Rights Reserved. Recording the Buying of a Plant Asset SLIDE 3 LO1 January 3, 20X1. Paid cash for a shelving unit, $8,500.00. Check No. 612. 1 1 Account Title 8,500.00 Store Equipment Cash 8,500.00 2 2 Cost of the Plant Asset 3 3 Cash Paid Lesson 19-1

4. © 2014 Cengage Learning. All Rights Reserved. Recording the Buying of a Group of Assets SLIDE 4 Estimated Value of Asset 1 + Estimated Value of Asset 2 = Total Estimated Value of All Assets Bought Calculate the total estimated value of all the assets bought: $7,500.00+$22,500.00=$30,000.00 LO2 Lesson 19-1 The value of each needs to be determined so you can depreciate each asset separately.

5. © 2014 Cengage Learning. All Rights Reserved. Recording the Buying of a Group of Assets SLIDE 5 Estimated Value of Asset 1 ÷ Total Estimated Value of All Assets Bought = Percentage of Total Estimated Value Calculate the cost assigned to the copy machine (Asset 1): Total Purchase Price × Percentage of Total Estimated Value = Cost Assigned to Asset 1 $7,500.00÷$30,000.00=25% $27,000.00×25%=$6,750.00 LO2 Lesson 19-1

6. © 2014 Cengage Learning. All Rights Reserved. Estimated Value of Asset 2÷ Total Estimated Value of All Assets Bought= Percentage of Total Estimated Value Recording the Buying of a Group of Assets SLIDE 6 Calculate the cost assigned to the display case (Asset 2): Total Purchase Price÷ Percentage of Total Estimated Value= Cost Assigned to Asset 1 $22,500.00÷$30,000.00=75% $27,000.00÷75%=$20,250.00 LO2 Lesson 19-1

7. © 2014 Cengage Learning. All Rights Reserved. Recording the Buying of a Group of Assets SLIDE 7 LO2 March 5, 20X1. Dufore Company bought a copy machine and a display case for $27,000.00. Check No. 234. 6,750.00 Office Equipment 20,250.00 Store Equipment Cash 27,000.00 Lesson 19-1

8. © 2014 Cengage Learning. All Rights Reserved. Calculating and Paying Property Tax ●Land and anything attached to the land is called real property. ●Real property is sometimes referred to as real estate. ●All property not classified as real property is called personal property. ●The value of an asset determined by tax authorities for the purpose of calculating taxes is called the assessed value. ●Assessed value is usually based on the judgment of officials referred to as assessors. SLIDE 8 Lesson 19-1

9. © 2014 Cengage Learning. All Rights Reserved. Assessed Value ×Tax Rate= Annual Property Tax $80,000.00×1.30%=$1,040.00 Calculating and Paying Property Tax SLIDE 9 1,040.00 Property Tax Expense Cash 1,040.00 1 1 Account Title 2 2 Amount of Tax 3 3 Cash Paid LO3 Lesson 19-1

10. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-1 Audit Your Understanding 1.Why must a cost be allocated to each asset bought in a group? SLIDE 10 ANSWER So that each plant asset can be depreciated individually Lesson 19-1

11. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-1 Audit Your Understanding 2. What items are classified as plant assets? SLIDE 11 ANSWER Physical assets that will be used for a number of years in the operation of a business. (They will be depreciated over time.) Examples: equipment, furniture, computers, delivery equipment Note: Supplies, prepaid insurance, and cash are not plant assets. Lesson 19-1

12. © 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO4 Calculate depreciation expense. LO5 Calculate depreciation for a partial year. LO6 Calculate accumulated depreciation and book value. Lesson 19-2 Calculating Depreciation Expense

13. © 2014 Cengage Learning. All Rights Reserved. Calculating Straight-Line Depreciation SLIDE 13 LO4 Original Cost− Estimated Salvage Value = Estimated Total Depreciation Expense ÷ Years of Estimated Useful Life = Annual Depreciation Expense $8,500.00−$500.00=$8,000.00 ÷4=$2,000.00 Lesson 19-2 Generally, a business will remove a plant asset from use and dispose of it when the asset is no longer useable. (They predicted 4 years in this example.)

14. © 2014 Cengage Learning. All Rights Reserved. $75.00×4=$300.00 $900.00÷12=$75.00 Calculating Depreciation Expense for Part of a Year SLIDE 14 LO5 Annual Depreciation Expense ÷Months in Year= Monthly Depreciation Expense × Number of Months Asset Is Used = Prior Year’s Depreciation Expense Lesson 19-2

15. © 2014 Cengage Learning. All Rights Reserved. Calculating Accumulated Depreciation SLIDE 15 LO6 20X2 Accumulated Depreciation + 20X3 Depreciation Expense = 20X3 Accumulated Depreciation $1,200.00+$900.00=$2,100.00 Lesson 19-2

16. © 2014 Cengage Learning. All Rights Reserved. Calculating Book Value SLIDE 16 LO6 Original Cost− Accumulated Depreciation =Ending Book Value $3,000.00−$2,700.00=$300.00 Lesson 19-2 The book value of a plant asset is its original cost minus the accumulated depreciation. GAAP requires that the cost of a plant asset be expensed over the plant asset’s useful life. You are matching the expense with the revenue each year.

17. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-2 Audit Your Understanding 1.Which accounting concept is being applied when depreciation expense is recorded for plant assets? SLIDE 17 ANSWER Matching Expenses with Revenue Lesson 19-2

18. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-2 Audit Your Understanding 2.What three amounts are used to calculate a plant asset’s annual depreciation expense using the straight-line method of depreciation? SLIDE 18 ANSWER Original cost, estimated salvage value, and estimated useful life Lesson 19-2

19. © 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO7Prepare plant asset records. LO8 Journalize annual depreciation expense. Lesson 19-3 Calculating Depreciation Expense

20. © 2014 Cengage Learning. All Rights Reserved. Preparing Plant Asset Records ●An accounting form on which a business records information about each plant asset is called a plant asset record. SLIDE 20 LO7 Lesson 19-3

21. © 2014 Cengage Learning. All Rights Reserved. Content of Plant Asset Records ●Most plant asset records contain similar information. ●Section 1 is prepared when a plant asset is bought. ●Section 2 provides space for recording the disposition of the plant asset. When the asset is disposed of, this information will be filled in. ●Section 3 provides space for recording annual depreciation expense and the changing book value of the asset each year it is used. SLIDE 21 LO7 Lesson 19-3

22. © 2014 Cengage Learning. All Rights Reserved. Preparing Plant Asset Records SLIDE 22 LO7 1 1 Write the information in Section 1 when the plant asset is bought. Do not write in Section 2 until the asset is disposed of. 2 2 Each year the asset is owned, record the year’s annual depreciation expense in Section 3. Calculate and record accumulated depreciation and ending book value. 3 3 Lesson 19-3

23. © 2014 Cengage Learning. All Rights Reserved. Journalizing Annual Depreciation Expense SLIDE 23 LO8 Dec. 31 Bal.325,648.16 Office Equipment Dec. 31 Adj.25,146.00 Depreciation Expense—Office Equipment Accumulated Depreciation—Office Equipment Dec. 31 Bal.79,727.00 Dec. 31 Adj.25,146.00 (Dec. 31 Bal.104,873.00) Lesson 19-3 Note: The amount that a plant asset depreciates is classified as an expense.

24. © 2014 Cengage Learning. All Rights Reserved. Journalizing Annual Depreciation Expense SLIDE 24 LO8 1 1 Debit Depreciation Expense 2 2 Credit Accumulated Depreciation Lesson 19-3

25. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-3 Audit Your Understanding 1.How is accumulated depreciation recorded so as to retain the original cost information for plant assets? SLIDE 25 ANSWER Depreciation is credited to the contra account, Accumulated Depreciation, rather than crediting the asset account. Lesson 19-3

26. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-3 Audit Your Understanding 2.How does an adjusting entry for depreciation expense change the balance of the asset account? SLIDE 26 ANSWER The balance of the asset account is not changed. (Only the book value changes.) Lesson 19-3

27. © 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO9Record the sale of a plant asset for book value. LO10Record the sale of a plant asset for more/less than book value. Lesson 19-4 Disposing of Plant Assets

28. © 2014 Cengage Learning. All Rights Reserved. Selling a Plant Asset for Book Value SLIDE 28 LO9 500.00 Cash 8,000.00 Accumulated Depreciation—Store Equipment Bal.8,000.00 8,500.00 Store Equipment Bal.8,500.00 Lesson 19-4

29. © 2014 Cengage Learning. All Rights Reserved. Selling a Plant Asset for Book Value SLIDE 29 January 2, 20X5. Received cash from sale of shelving unit, $500.00: original cost, $8,500.00; total accumulated depreciation through December 31, 20X4, $8,000.00. Receipt No. 543. LO9 1 1 Remove the original cost of the plant asset and its related accumulated depreciation. Record the cash received. 2 2 Complete Section 2 of the plant asset record. Lesson 19-4

30. © 2014 Cengage Learning. All Rights Reserved. Bal.1,200.00 Add Depr.100.00 (New Bal.1,300.00) Accumulated Depreciation—Store Equipment Add Depr.100.00 Depreciation Expense—Store Equipment Recording Depreciation Expense on Disposal of an Asset SLIDE 30 May 1, 20X5. Recorded a partial year’s depreciation on a desk to be sold, $100.00. Memorandum No. 72. LO9 Lesson 19-4

31. © 2014 Cengage Learning. All Rights Reserved. Year Annual Depreciation Expense Accumulated Depreciation Ending Book Value 20X1 $300.00 $1,700.00 20X2300.00 600.001,400.00 20X3300.00 900.00 1,100.00 20X4300.001,200.00 800.00 20X5100.001,300.00700.00 Recording Depreciation Expense on Disposal of an Asset SLIDE 31 LO9 3 3 Update Section 3 of the plant asset record. 1 1 Debit Depreciation Expense account. 2 2 Credit the Accumulated Depreciation account. Lesson 19-4

32. © 2014 Cengage Learning. All Rights Reserved. Selling a Plant Asset for More Than Book Value SLIDE 32 LO10 850.00 Cash 1,300.00 Accumulated Depreciation—Store Equipment Bal.1,300.00 Store Equipment 2,000.00 Bal.2,000.00 Gain on Plant Assets 150.00 Lesson 19-4 A Gain is credited because it will increase the capital account.

33. © 2014 Cengage Learning. All Rights Reserved. Gain or Loss? SLIDE 33 LO10 Lesson 19-4 If a plant asset costs $10,000, has accumulated depreciation of $9,000, and is sold for $1,400, determine how much the gain or loss is. Answer: $400 gain because the book value was $1,000, and they were paid $400 more.

34. © 2014 Cengage Learning. All Rights Reserved. Selling a Plant Asset for More Than Book Value SLIDE 34 May 1, 20X5. Received cash from sale of desk, $850.00: original cost, $2,000.00; accumulated depreciation through May 1, 20X5, $1,300.00. Receipt No. 582. LO10 1 1 Record an entry to remove the asset and its accumulated depreciation, record the gain, and record cash. 2 2 Complete Section 2 of the plant asset record. Lesson 19-4

35. © 2014 Cengage Learning. All Rights Reserved. Selling a Plant Asset for Less Than Book Value ●The decrease in equity that results when a plant asset is sold for less than book value is called loss on plant assets. SLIDE 35 LO10 Lesson 19-4

36. © 2014 Cengage Learning. All Rights Reserved. Selling a Plant Asset for Less Than Book Value SLIDE 36 LO10 Lesson 19-4 200.00 Cash 3,300.00 Accumulated Depreciation—Store Equipment Bal.3,300.00 Loss on Plant Assets 300.00 Office Equipment 3,800.00 Bal.3,800.00 A Loss is debited because, like an expense, it will decrease the capital account. The Loss on Plant Assets account is classified with Other Expenses.

37. © 2014 Cengage Learning. All Rights Reserved. Selling a Plant Asset for Less Than Book Value SLIDE 37 October 6, 20X6. Received cash from sale of a computer, $200.00: original cost, $3,800.00; total accumulated depreciation through October 1, 20X6, $3,300.00. Receipt No. 645. LO10 1 1 Record an entry to remove the asset and its accumulated depreciation, record the loss, and record cash. 2 2 Complete Section 2 of the plant asset record. Lesson 19-4

38. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-4 Audit Your Understanding 1.What is recorded on plant asset records for plant assets that have been disposed of? SLIDE 38 ANSWER Disposal date, disposal method, and disposal amount Lesson 19-4

39. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-4 Audit Your Understanding 2.When an asset is disposed of after the beginning of the fiscal year, what entry may need to be recorded before an entry is made for the discarding of a plant asset? SLIDE 39 ANSWER Partial year’s depreciation Lesson 19-4

40. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-4 Audit Your Understanding 3.What is the formula to calculate the gain or loss on the sale of a plant asset? SLIDE 40 ANSWER Cash received less the book value of the asset sold Decide: Did you receive more or less than the book value of the asset? Lesson 19-4

41. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-4 Audit Your Understanding 4.In which account classification is Loss on Plant Assets listed? SLIDE 41 ANSWER Other Expenses Lesson 19-4

42. © 2014 Cengage Learning. All Rights Reserved. Learning Objective © 2014 Cengage Learning. All Rights Reserved. LO11Calculate depreciation using the double declining-balance method. Lesson 19-5 Declining-Balance Method of Depreciation

43. © 2014 Cengage Learning. All Rights Reserved. Calculating Depreciation Using the Double Declining-Balance Method ●Any method of depreciation that records greater depreciation expense in the early years and less depreciation expense in the later years is called accelerated depreciation. ●The declining-balance method of depreciation is a type of accelerated depreciation that multiplies the book value of an asset by a constant depreciation rate to determine annual depreciation. ●A declining-balance rate that is two times the straight- line rate is called the double declining-balance method of depreciation. SLIDE 43 LO11 Lesson 19-5

44. © 2014 Cengage Learning. All Rights Reserved. Calculating Depreciation Using the Double Declining-Balance Method SLIDE 44 LO11 20%×2=40% 100%÷5=20% Estimated Depreciation Expense ÷ Years of Estimated Useful Life = Straight-Line Rate of Depreciation ×Multiply by Two= Double Declining-Balance Rate of Depreciation Lesson 19-5 In this example, the book value will be multiplied by 40% every year to determine the depreciation expense. That is, 40% a year until it reaches the salvage value.

45. © 2014 Cengage Learning. All Rights Reserved. Year Beginning Book Value Declining- Balance Rate Annual Depreciation Ending Book Value 1$30,000.0040%$12,000.00$18,000.00 218,000.0040%7,200.0010,800.00 Calculating Depreciation Using the Double Declining-Balance Method SLIDE 45 LO11 4 4 Transfer the book value to the following year. Plant Asset: Automobile Original Cost: $30,000.00 Depreciation Method: Double Declining-Balance Estimated Salvage Value: $2,500.00 Estimated Useful Life: 5 years 1 1 Calculate rate. Note: This rate stays constant each year. 2 2 Determine the annual depreciation expense. 3 3 Determine the ending book value. Lesson 19-5

46. © 2014 Cengage Learning. All Rights Reserved. Year Beginning Book Value Declining- Balance Rate Annual Depreciation Ending Book Value 1$30,000.0040%$12,000.00$18,000.00 218,000.0040%7,200.0010,800.00 3 40%4,320.006,480.00 4 40%2,592.003,888.00 5 —1,388.002,500.00 Total Depreciation$27,500.00 Calculating Depreciation Expense in the Final Year SLIDE 46 LO11 Plant Asset: Automobile Original Cost: $30,000.00 Depreciation Method: Double Declining-Balance Estimated Salvage Value: $2,500.00 Estimated Useful Life: 5 years 1 1 Transfer the book value. 2 2 Determine the last year’s depreciation. 3 3 Verify the ending book value. Lesson 19-5

47. © 2014 Cengage Learning. All Rights Reserved. Accelerated Depreciation Methods ●The double declining-balance method of depreciation is one method of accelerated depreciation. ●All accelerated methods have one thing in common— more depreciation is charged in the first year than in the later years. ●GAAP allows each business to choose either straight-line or accelerated depreciation for financial reporting. ●But, once chosen, the business should use the same method from year to year. SLIDE 47 LO11 Lesson 19-5

48. © 2014 Cengage Learning. All Rights Reserved. Straight-Line Method Double Declining-Balance Method Year Beginning Book Value Annual Depreciation Ending Book Value Beginning Book Value Annual Depreciation Ending Book Value 1 $6,000.00$1,100.00$4,900.00$6,000.00$2,400.00$3,600.00 2 4,900.001,100.003,800.003,600.001,440.002,160.00 3 3,800.001,100.002,700.002,160.00864.001,296.00 4 2,700.001,100.001,600.001,296.00518.40777.60 5 1,600.001,100.00500.00777.6277.60500.00 Total Depreciation5,500.00 Comparing Two Methods of Depreciation SLIDE 48 LO11 Plant Asset: Automobile Original Cost: $6,000.00 Depreciation Method: Comparison of Two MethodsEstimated Salvage Value: $500.00 Estimated Useful Life: 5 years Lesson 19-5 Both methods depreciate down to the book value.

49. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-5 Audit Your Understanding 1.When calculating depreciation expense using the declining-balance method, what number stays constant each fiscal period? SLIDE 49 ANSWER Depreciation rate Lesson 19-5

50. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-5 Audit Your Understanding 2.What is the declining-balance method that uses twice the straight-line rate? SLIDE 50 ANSWER Double declining-balance method Lesson 19-5

51. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-5 Audit Your Understanding 3.What change occurs in the annual depreciation expense calculated using the declining-balance method? SLIDE 51 ANSWER Depreciation expense declines each year Lesson 19-5

52. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-5 Audit Your Understanding 4.An asset is never depreciated below what amount? SLIDE 52 ANSWER Its estimated salvage value Lesson 19-5

53. © 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO12Record the buying of an intangible asset. LO13Calculate and record amortization expense. Lesson 19-6 Buying Intangible Assets and Calculating Amortization Expense

54. © 2014 Cengage Learning. All Rights Reserved. Recording the Buying of an Intangible Asset ●An asset that does not have physical substance is called an intangible asset. ●Intangible assets include patents, copyrights, trademarks, and other similar items. ●The value of an intangible asset such as a patent comes from the rights it gives to the patent holder, not from the piece of paper that ensures those rights. ●Note: If an intangible asset’s useful life is different from its legal life, amortization should be based on the legal or useful life, whichever is less. SLIDE 54 LO12 Lesson 19-6

55. © 2014 Cengage Learning. All Rights Reserved. Recording the Buying of an Intangible Asset SLIDE 55 January 2, 20X1. Paid cash for a patent, $45,000.00. Check No. 628. LO12 45,000.00 Patent Line of Credit 45,000.00 1 1 Account Title 2 2 Cost of the Asset 3 3 Cash Paid Lesson 19-6

56. © 2014 Cengage Learning. All Rights Reserved. Calculating and Recording Amortization Expense ●Amortization is the spreading of the cost of an intangible asset over its useful life. ●Amortization is similar to depreciation, which applies only to physical assets. ●Some intangible assets have a legal life, such as a patent. SLIDE 56 LO13 Lesson 19-6

57. © 2014 Cengage Learning. All Rights Reserved. Calculating and Recording Amortization Expense SLIDE 57 LO4 Original Cost− Estimated Salvage Value = Estimated Total Amortization Expense ÷ Years of Estimated Useful Life = Annual Amortization Expense $45,000.00−$0.00=$45,000.00 ÷10=$4,500.00 Lesson 19-6

58. © 2014 Cengage Learning. All Rights Reserved. Calculating and Recording Amortization Expense SLIDE 58 LO13 4,500.00 Amortization Expense Bal.45,000.00 (New Bal.40,500.00) Patent 4,500.00 1 1 Debit Amortization Expense 2 2 Credit Patent Lesson 19-6 Amortization for intangible assets is similar to depreciation for plant assets. However, notice how the patent account is being credited. The matching expenses with revenue concept is being applied.

59. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-6 Audit Your Understanding 1.Which account is debited when recording amortization on a patent? SLIDE 59 ANSWER Amortization Expense Lesson 19-6

60. © 2014 Cengage Learning. All Rights Reserved. Lesson 19-6 Audit Your Understanding 2.Which account is credited when recording amortization on a patent? SLIDE 60 ANSWER Patent Lesson 19-6

61. © 2014 Cengage Learning. All Rights Reserved. The End SLIDE 61