1. CENTURY 21 ACCOUNTING © Thomson/South-Western 1 LESSON 8-1 CHAPTER 8: ACCOUNTING FOR PLANT ASSETS Objectives: Define accounting terms related to plant assets and depreciation. Identify accounting concepts and practices related to accounting for plant assets and depreciation. Journalize entries for buying plant assets. Calculate and record property tax expense. Calculate and record depreciation expense for a plant asset using straight-line deprecation. Journalize entries for disposing of plant assets. Calculate depreciation expense using other methods.

2. CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-1 Buying Plant Assets

3. CENTURY 21 ACCOUNTING © Thomson/South-Western 3 LESSON 8-1 Buying Plant Assets: Current assets: cash and other assets 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 AKA: fixed assets or long term assets Land, buildings, equipment  help business earn profit for more than one year Must keep business records up to date as plant assets are bought and used Going Concern: business will continue indefinitely EX) business buys $30,000 worth of equipment  should last 10 years Record yearly depreciation based on expected life – 10 years After 6 years  value is $13,200, but probably wouldn’t be able to sell for that amount if the business ended, but cost should be allocated over useful life

4. CENTURY 21 ACCOUNTING © Thomson/South-Western 4 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 – accounting form on which business records info about each plant asset page 225 1 2 3

5. CENTURY 21 ACCOUNTING © Thomson/South-Western 5 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. Appliance Center has 3 kinds of plant assets: 1.Office Equipment 2.Store Equipment 3.Warehouse Equipment * Separate General Ledger account for each*

6. CENTURY 21 ACCOUNTING © Thomson/South-Western 6 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.

7. CENTURY 21 ACCOUNTING © Thomson/South-Western 7 LESSON 8-1 CALCULATING AND PAYING PROPERTY TAX Real Property: land and anything attached to it AKA: real estate Personal Property: all property not classified as real Assessed Value of Property: Value of an asset determined by tax authority for the purposes of calculating taxes (assessors) Value may not be the same as the book value on records

8. CENTURY 21 ACCOUNTING © Thomson/South-Western 8 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 City tax rate = 5%

9. CENTURY 21 ACCOUNTING © Thomson/South-Western 9 LESSON 8-1 TERMS REVIEW plant asset record real property personal property assessed value TO DO: Audit, 228 Work Together, 228 On your own, 228 Assign: Read Chapter 8 App prob 8-1, 8-2 – pg 251 page 228

10. CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 8-2 Calculating and Journalizing Depreciation Expense

11. CENTURY 21 ACCOUNTING © Thomson/South-Western 11 LESSON 8-1 Factors Used to Calculate Depreciation Plant assets wear out, may no longer be needed, or may be outdated Must match revenue with expenses incurred to earn it Cost of plant asset should be allocated to depreciation expense account over its useful life Land is not subject to depreciation  increases/decreases in value are recorded when sold Three factors to calculate depreciation expense: Original cost Estimated salvage value Estimated useful life

12. CENTURY 21 ACCOUNTING © Thomson/South-Western 12 LESSON 8-1 Factors Used to Calculate Depreciation 1.Original Cost: Includes all costs to make the asset usable to a business Purchase price, delivery price, and installation 2.Estimated Salvage Value: Final value can only be estimated Salvage value: amount the owner expects to receive when a plant asset is removed from use AKA: residual value, scrap value, or trade-in value Until disposed of, difficult to determine EXACT value 3.Estimated Useful Life: Number of years it is expected to be useful to a business Use past experience as basis May use IRS guidelines that give estimated useful life of many plant assets

13. CENTURY 21 ACCOUNTING © Thomson/South-Western 13 LESSON 8-1 Ending Book Value =Annual Depreciation –Beginning Book Value Year 3$1,270.00–$365.00=$905.00 STRAIGHT-LINE DEPRECIATION For a computer bought on Jan. 2, 2001 for $2000 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

14. CENTURY 21 ACCOUNTING © Thomson/South-Western 14 LESSON 8-1 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

15. CENTURY 21 ACCOUNTING © Thomson/South-Western 15 LESSON 8-1 RECORDING DEPRECIATION ON PLANT ASSET RECORDS - For Cabinet used as Office Equipment 2. Calculate accumulated depreciation. 3. Calculate ending book value. 1.Calculate annual depreciation expense. page 231 123

16. CENTURY 21 ACCOUNTING © Thomson/South-Western 16 LESSON 8-1 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

17. CENTURY 21 ACCOUNTING © Thomson/South-Western 17 LESSON 8-1 TERMS REVIEW straight-line method of depreciation book value of a plant asset ******************************************* TO DO: Audit, 234 Work Together, 234 On your own, 234 Assign: App prob 8-3, 8-4 page 234

18. CENTURY 21 ACCOUNTING © Thomson/South-Western 18 LESSON 8-1 LESSON 8-3: Disposing of Plant Assets No useful life remains No longer needed (might still be usable) Traded for another plant asset of the same kind

19. CENTURY 21 ACCOUNTING © Thomson/South-Western 19 LESSON 8-1 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 – Salvage value =0, total Acc. Depreciation= original cost 1 January 5, 20X6. Discarded storage cabinet: original cost, $275.00; total accumulated depreciation through December 31, 20X5, $275.00. Memorandum No. 72. 2

20. CENTURY 21 ACCOUNTING © Thomson/South-Western 20 LESSON 8-1 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 and record loss. 3.Write the date, amount, and type of disposal. DISCARDING A PLANT ASSET WITH A BOOK VALUE – may be disposed at any time during its useful life page 236 1 4 3 2

21. CENTURY 21 ACCOUNTING © Thomson/South-Western 21 LESSON 8-1 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.

22. CENTURY 21 ACCOUNTING © Thomson/South-Western 22 LESSON 8-1 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.

23. CENTURY 21 ACCOUNTING © Thomson/South-Western 23 LESSON 8-1 SELLING LAND AND BUILDINGS Land is considered a permanent plant asset  useful life is not estimated and annual depreciation is not recorded for it Book value = original cost Land is seldom discarded (abandoned)  usually sold at same time building is sold Separate plant asset record is still kept for land and building Update each when sale is made

24. CENTURY 21 ACCOUNTING © Thomson/South-Western 24 LESSON 8-1 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

25. CENTURY 21 ACCOUNTING © Thomson/South-Western 25 LESSON 8-1 CALCULATING THE GAIN ON SALE OF LAND AND BUILDINGS page 240

26. CENTURY 21 ACCOUNTING © Thomson/South-Western 26 LESSON 8-1 TO DO: Audit, 241 Finish: Work Together, 241 On your own, 241 Assign: App prob 8-5, 8-6

27. CENTURY 21 ACCOUNTING © Thomson/South-Western 27 LESSON 8-1 LESSON 8-4: Other Methods of Depreciation DECLINING-BALANCE METHOD OF DEPRECIATION SUM-OF-THE-YEARS-DIGITS METHOD OF DEPRECIATION PRODUCTION-UNIT METHOD OF DEPRECIATION DEPLETION

28. CENTURY 21 ACCOUNTING © Thomson/South-Western 28 LESSON 8-1 DECLINING-BALANCE METHOD OF DEPRECIATION Many plant assets depreciate more in their early years of useful life than later years Charging more depreciation expense in earlier years may be more accurate than charging same amount Declining-Balance Method of Depreciation: multiplying book value at end of each fiscal period by constant depreciation rate Rate is same, but annual depreciation declines Rate is based on straight-line rate  usually twice the straight-line rate Double-declining balance method Ex) plant asset with estimated useful life of 5 years would have depreciation rate of 40% Plant asset is never depreciated more than salvage value Salvage value is ONLY used as a LIMIT!!!

29. CENTURY 21 ACCOUNTING © Thomson/South-Western 29 LESSON 8-1 Plant asset: Computer Depreciation method: Declining balance Original cost: $2,000.00 Estimated salvage value: $175.00 Estimated useful life: 5 years YearBeginning Book Value Declining- Balance Rate Annual Depreciation Ending Book Value 1 2 3 4 5 Total Depreciation $2,000.00 1,200.00 720.00 432.00 259.20 40% — $ 800.00 480.00 288.00 172.80 84.20 $1,825.00 $1,200.00 720.00 432.00 259.20 175.00 — 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% 2.Calculate the annual depreciation for year 3. Beginning Book Value$720  Depreciation Rate  40% =Annual Depreciation Expense$288 DECLINING-BALANCE METHOD OF DEPRECIATION page 242 1 2 *Note Year 5 *

30. CENTURY 21 ACCOUNTING © Thomson/South-Western 30 LESSON 8-1 Plant asset: Computer Depreciation method: Sum-of-the-years-digits Original cost: $2,000.00 Estimated salvage value: $175.00 Estimated useful life: 5 years Year Beginning Book ValueFraction Total DepreciationAnnual Depreciation Ending Book Value 1 2 3 4 5 Total $2,000.00 1,391.67 905.00 540.00 296.67 5/15 4/15 3/15 2/15 1/15 $1,825.00 $608.33 486.67 365.00 243.33 121.67 $1,825.00 $1,391.67 905.00 540.00 296.67 175.00 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 page 243 12 1.Calculate the fraction.Years’ DigitsFraction 1 5/15 2 4/15 3 3/15 4 2/15 5 1/15 15

31. CENTURY 21 ACCOUNTING © Thomson/South-Western 31 LESSON 8-1 COMPARISON OF THREE METHODS OF DEPRECIATION page 244 Plant asset: Computer Depreciation method: Comparison Original cost: $2,000.00 Estimated salvage value: $175.00 Estimated useful life: 5 years Year Straight-Line Method Double Declining- Balance Method Sum-of-the-Years- Digits Method 1 2 3 4 5 Total Depreciation $365.00 365.00 $1,825.00 $ 800.00 480.00 288.00 172.80 84.20 $1,825.00 $608.33 486.67 365.00 243.33 121.67 $1,825.00 Straight-line – easy to calculate, same amount recorded each year of useful life Double-declining method – easy to calculate; larger depreciation expense recorded earlier Sum of digits – not as easy; records higher depreciation expense earlier Both Double-Declining and Sum of digits are known as Accelerated Depreciation methods

32. CENTURY 21 ACCOUNTING © Thomson/South-Western 32 LESSON 8-1 Plant asset: Truck Depreciation method: Production-unit Original cost: $18,200.00 Estimated salvage value: $2,000.00 Estimated total depreciation: $16,200.00 Estimated useful life: 90,000 miles Depreciation rate: $0.18 per mile driven YearBeginning Book Value Miles DrivenAnnual DepreciationEnding Book Value 1 2 3 4 5 Totals $18,200.00 16,580.00 12,440.00 7,940.00 3,980.20 9,000 23,000 25,000 22,000 8,000 87,000 $ 1,620.00 4,140.00 4,500.00 3,960.00 1,440.00 $15,600.00 $16,580.00 12,440.00 7,940.00 3,980.20 2,540.00 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 2.Calculate annual depreciation for year 1. Total Miles Driven9,000  Depreciation Rate  $0.18 =Annual Depreciation Exp.$1,620.00 PRODUCTION-UNIT METHOD OF DEPRECIATION – based on amount of production expected from plant asset page 245 1 2 * Will record through 90,000 miles

33. CENTURY 21 ACCOUNTING © Thomson/South-Western 33 LESSON 8-1 CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSES MACRS: Modified Accelerated Cost Recovery System depreciation method required by IRS for income tax calculation for most plant assets in service after 1986 Prescribed periods for 9 classes of useful life for plant assets Assigned to certain class based on its characteristics and general life expectancy 2 most common classes (other than real estate)  5-year – cars, general-purpose trucks, computers, manufacturing equipment, office machinery 7-year – office furniture and fixtures Use depreciation method similar to double-declining method IRS has prescribed methods that use annual percentage rates to determine depreciation for each class Rates applied to total cost of plant asset without considering salvage value annual depreciation = plant asset’s original cost X depreciation rate

34. CENTURY 21 ACCOUNTING © Thomson/South-Western 34 LESSON 8-1 Original Cost  Depreciation Rate = Annual Depreciation Rate Year 3$2,000.00  19.20%=$384.00 CALCULATING DEPRECIATION EXPENSE FOR INCOME TAX PURPOSES page 246 Plant asset: Printer Depreciation method: MACRS Original cost: $2,000.00 Property class: 5 year YearDepreciation RateAnnual Depreciation 1 2 3 4 5 6 Totals 20.00% 32.00% 19.20% 11.52% 5.76% 100.00% $400.00 640.00 384.00 230.40 115.20 $2,000.00

35. CENTURY 21 ACCOUNTING © Thomson/South-Western 35 LESSON 8-1 Plant asset: Coal Mine Depreciation method: Production-unit Original cost: $100,000.00 Estimated salvage value: $12,250.00 Estimated total depletion: $87,750.00 Est. tons of recoverable coal: 50,000 tons Depletion rate: $1.755 per ton YearBeginning Book Value Tons Recovered Annual DepletionEnding Book Value 1 2 3 4 5 Totals $100,000.00 89,470.00 68,410.00 45,595.00 29,800.00 6,000 12,000 13,000 9,000 6,000 46,000 $ 10,530.00 21,060.00 22.815.00 15,795.00 10,530.00 $80,730.00 $89,470.00 69,410.00 45,595.00 29,800.00 19,270.00 1.Calculate the depletion rate. Original Cost$100,000 –Estimated Salvage Value – 12,250 =Est. Total Value of Coal$87,750  Est. Tons of Recoverable Coal  50,000 =Depletion Rate per Ton of Coal $1.755 2.Calculate annual depletion for year 1. Tons of Coal Removed6,000  Depletion Rate  $1.755 =Annual Depreciation Exp.$10,530.00 DEPLETION – decrease in value of a plant asset because of the removal of a natural resource page 247 1 2

36. CENTURY 21 ACCOUNTING © Thomson/South-Western 36 LESSON 8-1 TERMS REVIEW declining-balance method of depreciation sum-of-the-years’-digits method of depreciation production-unit method of depreciation Modified Accelerated Cost Recovery System Depletion ******************************************** TO DO: Audit, 248 Work Together, 248 On your own, 249 Assign: App prob 8-7, 8-8. 8-9, 8-10 page 248