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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8-1 Buying Plant Assets.

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Presentation on theme: "CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8-1 Buying Plant Assets."— Presentation transcript:

1 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8-1 Buying Plant Assets

2 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 2 LESSON 8-1 TERMS REVIEW plant asset record real property personal property assessed value page 228

3 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 3 LESSON 8-1 1.Complete when asset is purchased. 2.Complete when asset is disposed of. 3.Complete each year to record annual depreciation expense. PLANT ASSET RECORD page 225 1 2 3

4 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 4 LESSON 8-1 BUYING A PLANT ASSET FOR CASH page 226 January 2. Paid cash for new copying machine, $1,680.00. Check No. 62.

5 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 5 LESSON 8-1 BUYING A PLANT ASSET ON ACCOUNT page 226 January 2. Bought an office computer on account from Discount Computers, $3,300.00. Memorandum No. 70.

6 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 6 LESSON 8-1 CALCULATING AND PAYING PROPERTY TAX page 227 Feb 1. Paid cash for property tax, $3,250.00. Check No. 122. Annual Property Tax = Tax Rate  Assessed Value $65,000.00  5% = $3,250.00

7 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8-2 Calculating and Journalizing Depreciation Expense

8 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 8 LESSON 8-2 TERMS REVIEW straight-line method of depreciation book value of a plant asset page 234

9 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 9 LESSON 8-2 Ending Book Value =Annual Depreciation –Beginning Book Value Year 3$1,270.00–$365.00=$905.00 STRAIGHT-LINE DEPRECIATION page 230 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

10 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 10 LESSON 8-2 RECORDING DEPRECIATION ON PLANT ASSET RECORDS 2. Calculate accumulated depreciation. 3. Calculate ending book value. 1.Calculate annual depreciation expense. page 231 123

11 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 11 LESSON 8-2 Depreciation Expense—Office Equipment Jan. 1 Bal.37,434.00 Dec. 31 Adj.11,571.00 Dec. 31 Bal.49,005.00 Accumulated Depreciation—Office Equipment Dec. 31 Adj.11,571.00 JOURNALIZING ANNUAL DEPRECIATION EXPENSE page 232

12 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 12 LESSON 8-2 CALCULATING DEPRECIATION EXPENSE FOR PART OF A YEAR page 232 Annual Depreciation Expense$120.00  Months in a Year  12 Monthly Depreciation Expense$10.00 ×Number of Months Asset Is Used×5 Partial Year’s Depreciation Expense$50.00

13 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8-3 Disposing of Plant Assets

14 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 14 LESSON 8-3 1.Record entry to remove plant asset from accounts. 2.Write the date, amount, and type of disposal. DISCARDING A PLANT ASSET WITH NO BOOK VALUE page 235 1 January 5, 20X6. Discarded storage cabinet: original cost, $275.00; total accumulated depreciation through December 31, 20X5, $275.00. Memorandum No. 72. 2

15 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 15 LESSON 8-3 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. Memorandum No. 92. 1.Record a partial year’s depreciation expense. 2.Record the partial year’s depreciation. 4.Record entry to remove plant asset from accounts. 3.Write the date, amount, and type of disposal. DISCARDING A PLANT ASSET WITH A BOOK VALUE page 236 1 4 3 2

16 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 16 LESSON 8-3 3.Record entry to remove plant asset from accounts. 1.Compute the gain or loss on the sale. 2.Write the date, amount, and type of disposal. SELLING A PLANT ASSET page 267 1 2 3 January 4, 20X6. Received cash from sale of fax machine, $185.00: original cost, $600.00; total accumulated depreciation through December 31, 20X5, $400.00. Receipt No. 60.

17 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 17 LESSON 8-3 1. Compute the original cost of the new plant asset. TRADING A PLANT ASSET page 238 1 4 June 27, 20X6. 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, 20X6, $765.00. Memorandum No. 130 and Check No. 154. 4.Record entry to remove old plant asset and add new plant asset. 2.Write the date and type of disposal and the disposal amount. 2 3 3.Complete section 1 for the new plant asset.

18 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 18 LESSON 8-3 3.Record entry to remove plant assets from accounts. 1.Compute the gain on sale of plant assets. 2.Write the date, type, and amount of disposal. SELLING LAND AND BUILDINGS page 239 1 3 January 2, 20X6. Fidelity Company sold land with a building for $97,000.00 cash; original cost of land, $25,000.00; original cost of building, $150,000.00; total accumulated depreciation on building through December 31, 20X5, $85,000.00. Receipt No. 105. 2

19 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 19 LESSON 8-3 CALCULATING THE GAIN ON SALE OF LAND AND BUILDINGS page 240

20 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning T ERMS REVIEW – lesson 8-4 declining-balance method of depreciation – Multiplying the book value at the end of each fiscal period by a constant depreciation rate – Used to depreciate more of the asset in the early years of its use – Salvage value is not used in calculating the annual depreciation expense sum-of-the-years-digits method of depreciation – Using fractions based on the number of years of a plant asset’s useful life. Calculate by multiplying the total depreciation expense by the fraction for that year Lesson 8-4, page 240

21 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning T ERMS REVIEW – Cont’d production-unit method of depreciation – Calculating estimated annual depreciation expense based on the amount of production expected from a plant asset Modified Accelerated Cost Recovery System – a depreciation method required by the IRS to be used for income tax calculation purposes for most plant assets placed in service after 1986 – classify assets as belonging to “5” and “7” year property classes; assume purchase half way through the year; calculate by multiplying original cost by the rate for that year (rates determined by IRS). Not a generally accepted depreciation method for financial reporting. Depletion – decrease in value of a plant asset due to removal of a natural resource Lesson 8-4, page 240

22 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning declining-balance method of depreciation – Multiplying the book value at the end of each fiscal period by a constant depreciation rate – Used to depreciate more of the asset in the early years of its use – Salvage value is not used in calculating the annual depreciation expense

23 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 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 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% 12 2.Calculate the annual depreciation for year 3. Beginning Book Value$720  Depreciation Rate  40% =Annual Depreciation Expense$288 Total———— Depreciation—$1,825.00—

24 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning sum-of-the-years-digits method of depreciation – Using fractions based on the number of years of a plant asset’s useful life. Calculate by multiplying the total depreciation expense by the fraction for that year

25 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 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 1 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 2 SUM-OF-THE-YEARS-DIGITS METHOD OF DEPRECIATION

26 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 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

27 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning production-unit method of depreciation – Calculating estimated annual depreciation expense based on the amount of production expected from a plant asset

28 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning PRODUCTION-UNIT METHOD OF DEPRECIATION Lesson 8-4, page 237 Plant asset: Truck 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 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 1

29 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Modified Accelerated Cost Recovery System – a depreciation method required by the IRS to be used for income tax calculation purposes for most plant assets placed in service after 1986 – classify assets as belonging to “5” and “7” year property classes; assume purchase half way through the year; calculate by multiplying original cost by the rate for that year (rates determined by IRS). Not a generally accepted depreciation method for financial reporting.

30 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning   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

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