1. ACCOUNTING FOR LONG TERM ASSETS
CHAPTER TWENTY
ACCOUNTING FOR LONG TERM ASSETS

2. LONG-TERM ASSETS Property, Plant, and Equipment Wasting Assets
Tangible and used in the operations of the business
Also called Plant Assets or Fixed Assets
Examples - land, buildings, furniture and equipment
Wasting Assets
Natural resources consumed in the operation of the business
Intangible Assets
Long-term assets that have no physical substance
Examples - patents, copyrights and trademarks

3. LONG-TERM ASSETS
Long-term assets (except land) gradually wear out or are used up as time passes
Portion that has been used up or worn out is recognized as an expense
Plant Asset - “Depreciation”
Natural Resources - “Depletion”
Intangible Assets - “Amortization”
Process of cost allocation
not a process of valuation
not intended to make the assets reflect their market values on the balance sheet

4. LAND
Cost includes:
all amounts spent to purchase the land and prepare it for its intended use, including costs for:
legal and real estate fees
cost of removing old buildings
grading the land
special tax assessments

5. LAND IMPROVEMENTS
Costs related to land that are not permanent in nature
Cost includes:
planting trees and shrubs
installing fences
paving parking areas
Depreciated over their expected useful lives

6. BUILDINGS Interest on loans DURING CONSTRUCTION debited
to the asset account, but
interest AFTER asset is
put into service is debited
to an expense account.
BUILDINGS
Cost includes:
purchase price
if purchase price includes land….the cost of land and building must be determined and accounted for separately
legal fees and related taxes
if building is constructed….includes material, labor, architectural and engineering fees
insurance premiums and interest on loans during construction

7. EQUIPMENT Costs include: purchase price transportation charges
insurance while in transit
installation costs
any other costs that are incurred up to the point of placing the asset in service

8. DEPRECIATION Dec. 31 Depr. Expense- Delivery Eq. Reported on the
DATE
DESCRIPTION
DEBIT PR
CREDIT
Dec. 31 1
Depr. Expense- Delivery Eq. 2 3 4
Reported on the
Income Statement 5 6 7 8 9 10 11

9. Deducted from the asset account
DEPRECIATION
DATE
DESCRIPTION
DEBIT PR
CREDIT
Dec. 31 1
Depr. Expense- Delivery Eq. 2
Accum Depr-Delivery Eq 3 4
Deducted from the asset account
“Delivery Equipment”
on the Balance Sheet 5 6 7 8 9 10 11

10. DEPRECIATION 2 major types:
Physical depreciation - the loss of usefulness because of deterioration
Functional depreciation - the loss of usefulness because of inadequacy or obsolescence

11. What did we pay for the new asset?
DEPRECIATION
COST - the sum of all amounts spent to acquire an asset and prepare it for its intended use
What did we pay for the new asset?
New asset had a cost
of $10,000

12. DEPRECIATION How long will the asset be used?
USEFUL LIFE - the amount of service expected to be obtained from an asset.
How long will the asset be used?
Be careful!! We only want to
know how long our
company will use the asset….
not how long the asset could last.

13. How long will the asset be used?
DEPRECIATION
USEFUL LIFE - the amount of service expected to be obtained from an asset.
How long will the asset be used?
We plan on using
it for 4 years.

14. What can we get for it when we’re through with it?
DEPRECIATION
SALVAGE VALUE - the estimated scrap, or market value for the asset on its expected disposal date.
What can we get for it when we’re through with it?
We feel we can sell it
for $1,000 after using
it for 4 years.

15. FOUR COMMON DEPRECIATION METHODS

16. Cost minus Salvage Value
STRAIGHT-LINE METHOD
Depreciation is recognized evenly over the years of the asset’s life.
Formula:
(Cost - Salvage Value)
($10,000 -
$1,000)
Cost minus Salvage Value
is also called
“Depreciable Cost.”

17. STRAIGHT-LINE METHOD (Cost - Salvage Value) ($10,000 - $1,000)
Depreciation is recognized evenly over the years of the asset’s life.
Formula:
(Cost - Salvage Value)
($10,000 -
$1,000)
Est. Useful Life
4 years
$2,250
per year

18. STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR
COST - ACCUM. DEPR

19. STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR
$10,000
BOOK VALUE = COST
at time of purchase

20. STRAIGHT-LINE METHOD DEPR. EXPENSE ACCUM. DEPREC. BOOK VALUE YEAR
$10,000 1
$2,250
$2,250
$ 7,750 2
$2,250
Same depreciation
each year

21. First year’s + Second year’s depreciation
STRAIGHT-LINE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$2,250
$2,250
$ 7,750 2
$2,250
$4,500
First year’s + Second year’s depreciation
$2, $2,250

22. Cost - Accum. Depreciation
STRAIGHT-LINE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$2,250
$2,250
$ 7,750 2
$2,250
$4,500
$ 5,500
Cost - Accum. Depreciation
$10, $4,500

23. 1st + 2nd + 3rd year’s depreciation
STRAIGHT-LINE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$2,250
$2,250
$ 7,750 2
$2,250
$4,500
$ 5,500 3
$2,250
$6,750
1st + 2nd + 3rd year’s depreciation
$2,250 + $2,250 + $2,250

24. The entire depreciable cost has been
STRAIGHT-LINE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$2,250
$2,250
$ 7,750 2
$2,250
$4,500
$ 5,500 3
$2,250
$6,750
$ 3,250 4
$2,250
$9,000
The entire depreciable cost has been
expensed by the end of the 4th year.

25. Book Value is now equal to the Salvage Value.
STRAIGHT-LINE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$2,250
$2,250
$ 7,750 2
$2,250
$4,500
$ 5,500 3
$2,250
$6,750
$ 3,250 4
$2,250
$9,000
$ 1,000
Book Value is now equal to the Salvage Value.

26. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate

27. DEPRECIATION RATE STRAIGHT-LINE RATE FORMULA: 100% 100% Useful Life
Commonly the depreciation rate is twice the Straight-Line rate.
STRAIGHT-LINE RATE FORMULA:
100%
100%
Useful Life
4 years
Straight-Line
rate is 25%

28. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate
50%
Twice the Straight line rate
2 x 25%

29. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate x
Book Value at Beg. of Year
50% x
$10,000
In year 1….
Book Value = Cost

30. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate x
Book Value at Beg. of Year
50% x
$10,000
$5,000
1st year’s depreciation =

31. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate x
Book Value at Beg. of Year x
Let’s compute the
second year’s depreciation.

32. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate x
Book Value at Beg. of Year
50% x
Rate stays the same

33. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate x
Book Value at Beg. of Year
50% x
$5,000 -
Cost
Accum. Depr.
$10,000 -
$5,000

34. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate x
Book Value at Beg. of Year
50% x
$5,000
Let’s look at the
3rd year’s depreciation.
$2,500
2nd year’s depreciation =

35. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate x
Book Value at Beg. of Year
50% x
$2,500
Cost -
Accum. Depr. -
$10,000
($5,000 + $2,500)

36. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate x
Book Value at Beg. of Year
50% x
$2,500
Let’s look at the
4th and final year.
$1,250
3rd year’s depreciation =

37. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate x
Book Value at Beg. of Year
50% x
$1,250
Book Value is down to $1,250.
Goal is to reduce it to the Salvage
Value by end of 4th year.
That means only $250 of depreciation to go!

38. DECLINING-BALANCE METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years.
Formula:
Depreciation Rate x
Book Value at Beg. of Year
50% x
$1,250
$625
$625 is too much!!! Book value would fall
below the salvage value.
4th year’s depreciation is limited to $250.

39. DOUBLE-DECLINING BALANCE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$5,000
$5,000
$ 5,000 2
$2,500
$7,500
$ 2,500 3
$1,250
$8,750
$ 1,250 4
$ 250
$9,000
$ 1,000
Just like the Straight-Line method…
Total depreciation is $9,000.

40. DOUBLE-DECLINING BALANCE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1 2
What if the asset had been
bought on April 1 of year 1? 3 4

41. DOUBLE-DECLINING BALANCE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$3,750
$3,750
$ 6,250 2
Year 1 $10,000 x 50% = $5,000
$5,000 x 9/12 = $3,750 3 4

42. DOUBLE-DECLINING BALANCE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$3,750
$3,750
$ 6,250 2
$3,125
$6,875
$ 3,125 3
Year 2 $6,250 x 50% = $3,125 4

43. DOUBLE-DECLINING BALANCE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$3,750
$3,750
$ 6,250 2
$3,125
$6,875
$ 3,125 3
$1,563
$8,348
$ 1,562 4
Year 3 $3,125 x 50% = $1,563

44. DOUBLE-DECLINING BALANCE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$3,750
$3,750
$ 6,250 2
$3,125
$6,875
$ 3,125 3
$1,563
$8,348
$ 1,562 4
Only $562 of depreciation to go before
book value reaches the salvage value.

45. DOUBLE-DECLINING BALANCE METHOD
DEPR. EXPENSE
ACCUM. DEPREC.
BOOK VALUE
YEAR
$10,000 1
$3,750
$3,750
$ 6,250 2
$3,125
$6,875
$ 3,125 3
$1,563
$8,348
$ 1,562 4
$ 562
$9,000
$ 1,000
Year 4 $1,562 x 50% = $781
Too much!!! Limited to only $562

46. SUM-OF-THE-YEARS’ DIGITS METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as Declining-Balance method.
Formula:
Remaining useful life
(Cost - Salvage Value) x 4
($10, ,000) x
Year 1 = 4 years remaining

47. SUM-OF-THE-YEARS’ DIGITS METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as Declining-Balance method.
Formula:
Remaining useful life
(Cost - Salvage Value) x
Sum-of-the-Years’ Digits 4
($10, ,000) x 10
= 10

48. SUM-OF-THE-YEARS’ DIGITS METHOD
Higher depreciation expense in the first year of an asset’s life and gradually decreasing expense in subsequent years. An accelerated depreciation method, but not as accelerated as Declining-Balance method.
Formula:
Remaining useful life
(Cost - Salvage Value) x
Sum-of-the-Years’ Digits 4
($10, ,000) x 10
Year 1 depreciation is $3,600.

49. SUM-OF-THE-YEARS’-DIGITS METHOD
Depreciable Cost
Annual Deprec.
Accum.Deprec.
Book Value
Year
Rate
$10,000 1
$9,000 2 3
Cost - Salvage Value 4

50. SUM-OF-THE-YEARS’-DIGITS METHOD
Depreciable Cost
Annual Deprec.
Accum.Deprec.
Book Value
Year
Rate
$10,000 1
$9,000
4/10
$3,600
$3,600
$ 6,400 2
$9,000 3
Depreciable Cost
does not change. 4

51. SUM-OF-THE-YEARS’-DIGITS METHOD
Depreciable Cost
Annual Deprec.
Accum.Deprec.
Book Value
Year
Rate
$10,000 1
$9,000
4/10
$3,600
$3,600
$ 6,400 2
$9,000
3/10 3 4
It is the rate that
decreases over time.

52. SUM-OF-THE-YEARS’-DIGITS METHOD
Depreciable Cost
Annual Deprec.
Accum.Deprec.
Book Value
Year
Rate
$10,000 1
$9,000
4/10
$3,600
$3,600
$ 6,400 2
$9,000
3/10
$2,700
$6,300
$ 3,700 3
$9,000
2/10
$1,800
$8,100
$ 1,900 4
$9,000
1/10
$ 900
$9,000
$ 1,000
No adjustment is needed
in the 4th year.

53. SUM-OF-THE-YEARS’-DIGITS METHOD
Depreciable Cost
Annual Deprec.
Accum.Deprec.
Book Value
Year
Rate
$10,000 1
$9,000 2
$9,000 3
$9,000
What if this asset
had been bought April 1st? 4
$9,000 5
$9,000

54. SUM-OF-THE-YEARS’-DIGITS METHOD
Depreciable Cost
Annual Deprec.
Accum.Deprec.
Book Value
Year
Rate
$10,000 1
$9,000
4/10
$2,700
$2,700
$ 7,300 2
$9,000 3
$9,000
$9,000 x 4/10 x 9/12 4
$9,000 5
$9,000

55. SUM-OF-THE-YEARS’-DIGITS METHOD
Depreciable Cost
Annual Deprec.
Accum.Deprec.
Book Value
Year
Rate
$10,000 1
$9,000
4/10
$2,700
$2,700
$ 7,300
4/10 2
$9,000
$2,925
$5,625
$ 4,375
3/10 3
$9,000
$9,000 x 4/10 x 3/12 = $900
$9,000 x 3/10 x 9/12 = $2,025
$900 + $2,025 = $2,925 4
$9,000 5
$9,000

56. SUM-OF-THE-YEARS’-DIGITS METHOD
Depreciable Cost
Annual Deprec.
Accum.Deprec.
Book Value
Year
Rate
$10,000 1
$9,000
$2,700
$2,700
$ 7,300
4/10
4/10 2
$9,000
$2,925
$5,625
$ 4,375
3/10
3/10 3
$9,000
$2,025
$7,650
$ 2,350
2/10 4
$9,000 5
The remaining years are computed in the same manner:
3 months at one rate & 9 months at another
$9,000

57. SUM-OF-THE-YEARS’-DIGITS METHOD
Depreciable Cost
Annual Deprec.
Accum.Deprec.
Book Value
Year
Rate
$10,000 1
$9,000
$2,700
$2,700
$ 7,300
4/10
4/10 2
$9,000
$2,925
$5,625
$ 4,375
3/10
3/10 3
$9,000
$2,025
$7,650
$ 2,350
2/10
2/10 4
$9,000
$1,125
$8,775
$ 1,225
1/10 5
$9,000
$ 225
$9,000
$ 1,000
1/10
Year 5 is only 3 months.

58. UNITS-OF-PRODUCTION METHOD
Depreciation is based on the extent to which the asset was used during the year.
Formula:
Step #1 Compute Depreciation per unit:
(Cost - Salvage Value)
($10, ,000)
Estimated Useful Life in Units
90,000
The asset (a vehicle) is expected
to be driven 90,000 miles in its useful life.

59. UNITS-OF-PRODUCTION METHOD
Depreciation is based on the extent to which the asset was used during the year.
Formula:
Step #1 Compute Depreciation per unit:
(Cost - Salvage Value)
($10, ,000)
Estimated Useful Life in Units
90,000
Depreciation per mile =
$.10

60. UNITS-OF-PRODUCTION METHOD
Depreciation is based on the extent to which the asset was used during the year.
Formula:
Step #2 Multiply depreciation per unit by number of units produced or consumed this year.
$.10/mile x
24,000 miles
Year 1 Depreciation is $2,400.

61. UNITS-OF-PRODUCTION METHOD
Depreciation is based on the extent to which the asset was used during the year.
Formula:
Step #2 Multiply depreciation per unit by number of units produced or consumed this year.
$.10/mile x
24,000 miles
All years are computed
in the same manner.

62. DEPRECIATION METHODS FOR FEDERAL INCOME TAX
Method used depends on when asset was purchased:
before 1981-
Straight-Line, Declining-Balance, Sum-of-the-Years’-Digits, or Units of Production
Accelerated Cost Recovery System (ACRS)
after 1986-
Modified Accelerated Cost Recovery (MACRS)

63. REPAIRS & MAINTENANCE
If the repairs do not extend the life of the asset or improve its usefulness
Recorded as expenses
Examples - replacement of minor parts, lubrication, cleaning

64. ADDITIONS & IMPROVEMENTS
Accounted for in two ways:
If it increases the usefulness of the asset and will provide benefits in future periods
Debited to the asset account
increasing the book value
Depreciated over the remaining life of the asset
If it extends the useful life of the asset, but does not increase its usefulness or efficiency
Debited to Accumulated Depreciation

65. ADDITIONS & IMPROVEMENTS
Example: A business purchased two computers on January 1, Both computers were purchased for $6,500, are estimated to be used for 3 years and have salvage values of $500. The business uses the Straight-Line method in computing depreciation.
If at the beginning of 20-2, the company replaced a disk drive on computer A at a cost of $400.
The replacement extends the life of the computer
but doesn’t increase its usefulness….

66. ADDITIONS & IMPROVEMENTS
Accumulated Depr. - Computer A
Computer A
$6,500
$2,000
12/31/-1
$400
1/1/-2
$1,600
Replacement is debited
to Accum. Depreciation.

67. ADDITIONS & IMPROVEMENTS
Accumulated Depr. - Computer A
Computer A
$6,500
$2,000
12/31/-1
$400
1/1/-2
$1,600
Book Value is now $4,900
($6,500 - $1,600).

68. ADDITIONS & IMPROVEMENTS
Accumulated Depr. - Computer A
Computer A
$6,500
$2,000
12/31/-1
$400
1/1/-2
$1,600
Depreciation for the remaining 2 years:
(Book Value - Salvage Value)/Remaining Life
($4,900 - $500)/2 years = $2,200 per year

69. ADDITIONS & IMPROVEMENTS
Example: A business purchased two computers on January 1, Both computers were purchased for $6,500, are estimated to be used for 3 years and have salvage values of $500. The business uses the Straight-Line method in computing depreciation.
The company also added a new tape drive backup unit to computer B at a cost of $400.
Adding new components increases
the usefulness of the computer…..

70. ADDITIONS & IMPROVEMENTS
Accumulated Depr. - Computer B
Computer B
$6,500
$2,000
$ 400
1/1/-2
Debited directly
to the asset account

71. ADDITIONS & IMPROVEMENTS
Accumulated Depr. - Computer B
Computer B
$6,500
$2,000
$ 400
1/1/-2
$6,900
Book Value is now $4,900
($6,900 - $2,000).

72. ADDITIONS & IMPROVEMENTS
Accumulated Depr. - Computer B
Computer B
$6,500
$2,000
$ 400
1/1/-2
$6,900
Depreciation for the remaining 2 years:
(Book Value - Salvage Value)/Remaining Life
($4,900 - $500)/2 years = $2,200 per year

73. PLANT ASSET DISPOSALS
A plant asset can be disposed of in several ways:
Discarded or retired
Sold
Exchanged or traded in for another asset

74. DISCARDING/RETIRING PLANT ASSETS
Example: A printer with a cost of $800 and accumulated depreciation of $800 is discarded.
There is no gain or loss
since the book value is $0...

75. DISCARDING/RETIRING PLANT ASSETS
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Accum. Depr. - Office Eq. 2
Office Equipment 3
Discarded printer 4
Since the company no longer has the
printer, its cost and related depreciation
are removed from the books. 5 6 7 8 9 10 11

76. DISCARDING/RETIRING PLANT ASSETS
DATE
DESCRIPTION
DEBIT PR
CREDIT 1 2 3 4 5 6
What if the accumulated
depreciation had been
$720 instead? 7 8 9 10 11

77. DISCARDING/RETIRING PLANT ASSETS
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Accum. Depr. - Office Eq. 2
Loss on discarded Office Eq.
80 00 3
Office Equipment 4
Discarded printer 5 6
Loss of $80 7 8 9 10 11

78. We’re giving up an asset
SELLING PLANT ASSETS
Example:A printer with a cost of $800 and accumulated depreciation of $720 is sold for $80.
We’re giving up an asset
with a value of $80
to get $80 cash.

79. SELLING PLANT ASSETS Cash Accum. Depr. - Office Eq. Office Equipment
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Cash
80 00 2
Accum. Depr. - Office Eq. 3
Office Equipment 4
Sold printer 5
No Gain or Loss 6 7 8 9 10 11

80. If we sold the printer for $120…..
SELLING PLANT ASSET
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Cash 2
Accum. Depr. - Office Eq. 3
Office Equipment 4
Gain on Sale of Printer
40 00 5
Sold printer 6
If we sold the printer for $120…..
Gain of $40
($120 cash - $80 book value) 7 8 9 10 11

81. If we sold the printer for $50…..
SELLING PLANT ASSET
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Cash
50 00 2
Accum. Depr. - Office Eq. 3
Loss on Sale of Printer
30 00 4
Office Equipment 5
Sold printer 6
If we sold the printer for $50…..
Loss of $30
($80 book value - $50 cash) 7 8 9 10 11

82. EXCHANGE/TRADE-IN OF PLANT ASSETS
Example:An old delivery truck is traded-in for a new delivery truck with a fair market value of $30,000.
Old Delivery Truck
Accum. Depr. -Old Truck
Cost
$8,000
$6,900
Book Value of $1,100
($8,000 - $6,900)

83. EXCHANGE/TRADE-IN OF PLANT ASSETS
Example:An old delivery truck is traded-in for a new delivery truck with a fair market value of $30,000.
Old Delivery Truck
Accum. Depr. -Old Truck
Cost
$8,000
$6,900
If a $1,000 trade-in is
granted on the old truck…..
$100 LOSS

84. EXCHANGE/TRADE-IN OF PLANT ASSETS
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Delivery Equipment (New)
30,000 00 2 3 4
The new delivery truck is entered
on the books at its market value. 5 6 7 8 9 10 11

85. EXCHAGE/TRADE-IN OF PLANT ASSETS
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Delivery Equipment (New)
30,000 00 2
Accum. Depr. - Delivery Eq.
6,900 00 3 4
Accumulated Depreciation on the
old truck is removed from the books. 5 6 7 8 9 10 11

86. EXCHANGE/TRADE-IN OF PLANT ASSETS
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Delivery Equipment (New)
30,000 00 2
Accum. Depr. - Delivery Eq.
6,900 00 3
Loss on Exchange of Equip.
100 00 4 5
Loss is recognized….
Will be shown on the Income Statement 6 7 8 9 10 11

87. EXCHANGE/TRADE-IN OF PLANT ASSETS
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Delivery Equipment (New)
30,000 00 2
Accum. Depr. - Delivery Eq.
6,900 00 3
Loss on Exchange of Equip.
100 00 4
Delivery Eq. (Old)
8,000 00 5 6
The cost of the old delivery truck
is removed from the books. 7 8 9 10 11

88. EXCHANGE/TRADE-IN OF PLANT ASSETS
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Delivery Equipment (New)
30,000 00 2
Accum. Depr. - Delivery Eq.
6,900 00 3
Loss on Exchange of Equip.
100 00 4
Delivery Eq. (Old)
8,000 00 5
Cash
29,000 00 6 7
Cash is credited for the amount paid, $29,000
($30,000 price - $1,000 trade-in). 8 9 10 11

89. EXCHANGE/TRADE-IN OF PLANT ASSETS
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Delivery Equipment (New)
30,000 00 2
Accum. Depr. - Delivery Eq.
6,900 00 3
Loss on Exchange of Equip.
100 00 4
Delivery Eq. (Old)
8,000 00 5
Cash
29,000 00 6
Purchased a new truck 7
What if the trade-in had
been $1,500 instead? 8 9 10 11

90. EXCHANGE/TRADE-IN OF PLANT ASSETS
$1,500 trade-in - $1,100 book value $400 GAIN
Conservatism is practiced in accounting:
“..when in doubt we should choose
the reporting technique that is least
likely to overstate assets or net income”…
Gain cannot be recognized!

91. EXCHANGE/TRADE-IN OF PLANT ASSETS
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Delivery Equipment (New)
29,600 00 2
Accum. Depr. - Delivery Eq.
6,900 00 3
Delivery Eq. (Old)
8,000 00 4
Cash
28,500 00 5
Purchased a new truck 6
New truck is recorded at $29,600
($30,000 market value - $400 gain). 7 8 9 10 11

92. using Units-of-Production
NATURAL RESOURCES
Example:A coal mine is acquired at a cost of $1,000,000. No salvage value. Approximately 1,000,000 tons of coal are expected to be mined.
Natural resources are
“depleted” over time
using Units-of-Production
method.

93. (Cost - Salvage Value)/Tons
NATURAL RESOURCES
Example:A coal mine is acquired at a cost of $1,000,000. No salvage value. Approximately 1,000,000 tons of coal are expected to be mined.
(Cost - Salvage Value)/Tons
$1,000,000
1,000,000 tons
Depletion is
$1.00/ton

94. NATURAL RESOURCES
Example: During the current year 180,000 tons of coal were mined and sold.
180,000
tons
x $1.00
per ton
$180,000
Depletion

95. depreciation adjusting entries
NATURAL RESOURCES
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Depletion Expense-Mine
180,000 2
Accum. Depletion -Mine
180,000 3 4
Very similar to
depreciation adjusting entries 5 6 7 8 9 10 11

96. INTANGIBLE ASSETS Patents
give inventor exclusive right to produce, use and sell an invention for a period of twenty years
If a company purchases a patent the amount paid = cost of patent
If it develops its own patent only the fees paid to government and patent attorneys = cost
Cost is then “AMORTIZED” over patent’s useful life
using Straight-line method

97. INTANGIBLE ASSETS Copyrights
give exclusive right to the reproduction and sale of a literary, artistic or musical composition for the life of the holder plus fifty years
If a company purchases a copyright the amount paid = cost of patent
If a develops its own patent recorded as an ordinary expense
Cost is then “AMORTIZED” over patent’s useful life
using Straight-line method

98. INTANGIBLE ASSETS Trademarks
or trade name to identify a firm’s merchandise if widespread are protected by registering them with the United States Patent Office.
If a company purchases a trademark the amount paid = cost of patent
If a develops its own trademark only the cost to register it are recorded as an asset
Cost is then “AMORTIZED” over patent’s useful life
using Straight-line method