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Chapter 21

Chapter 21. Accounting for Plant Assets and Depreciation. Vocabulary. Current Assets Assets that are used up within a year or fiscal period Ex. Supplies Plant Assets Assets that are around for longer than a year’s time Buildings, Property, and Equipment.

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Chapter 21

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  1. Chapter 21 Accounting for Plant Assets and Depreciation

  2. Vocabulary • Current Assets • Assets that are used up within a year or fiscal period • Ex. Supplies • Plant Assets • Assets that are around for longer than a year’s time • Buildings, Property, and Equipment

  3. Buying a plant asset is no different than buying supplies

  4. Defining a few more terms • Government Defines two types of property • Real property is the land and anything attached to the land. • Otherwise known as real estate • Personal Property – all property not classified as real property. • Assessed Value – The value of an asset determined by tax authorities for the purpose of calculating taxes is the assessed value.

  5. Feb. 1 Harrison Manufacturing paid cash for property tax, $840.00. Check No. 187 Every year your parents have to pay a tax on the personal property that they own, same goes for a business

  6. Please work on “Work together” on page 550

  7. Calculating Depreciation Expense • Depreciation expense is the amount that a plant asset looses value over a period of time (usually a year) • Three things that you need to know to determine Depreciation expense • Original Cost – of the asset • Estimated Salvage Value • Estimated Useful Life

  8. Calculating Depreciation • Original Cost - the original cost of the asset • Estimated Salvage Value – what will the asset be worth when it is totally depreciated. • Estimated Useful Life - the government sets the number of years that a asset can be depreciated.

  9. Types of Depreciation • Straight-line depreciation • Depreciates the same amount each year. • Double Declining Balance Method • We will talk about that later.

  10. Actually finding out how much the asset depreciates. • Rule # 1 (most important) • ALWAYS ALWAYS ALWAYS find out how much the asset depreciates for a full year and we can determine anything from that……. • So if we have a asset that depreciates $900 in value every year how much does it depreciate per month. • 900/12 = $75.00 So for every month that we have the asset we loose $75

  11. So if we buy an asset in August and we need to find out how much it depreciated at the end of the year. $900 for whole year (75 a month) August September October November December $75 $75 $75 $75 $75 So we would record that our asset depreciated $375 this year.

  12. More Terms • Accumulated Depreciation • This is the total amount it has depreciated over the life of the asset….. • Think of accumulating snow……… • Book Value of a Plant Asset • What the asset is worth to us at this point • Need to know • Original Cost • Accumulated Depreciation

  13. Back to the example • If we have the asset ($12,000) that decrease in value $900 a year, but we bought it in August and it depreciated $375.00 this year what is the book value this year. • $12,000 - $375 = $11,625 • That is how much the asset is worth to us right now or its book value…..

  14. Please work on “On Your Own” on page 554

  15. Jan. 4 Bought a television costing $700 for use in a sales display; estimated salvage value, $100 Estimated useful life 3 years Calculate the Annual Depreciation = (Total Cost - Salvage Value ) / # of years 700 (700 - 100)/ 3 = $200

  16. May 27 Bought an office desk, $920; estimated salvage value, $200; estimated useful life, 6 years • We did not buy it in January though we bought it at the end of May. • June • July • August • September • October • November • December • Original Cost = $920 • Estimated Salvage Value = 200 • Total Depreciation = 720 • Divide # of years = 6 yr • Yearly depreciation = 120 per year So we have to calculate 7/12 of a year that we used the asset = $70

  17. Part 3 Plant asset record A form that we use to keep track of the value of a single asset and its accumulated depreciation.

  18. Lets do a problem • Asset Value - $1250 • Total years Depreciation 5 years • Estimated Salvage Value 250 • Annual Depreciation? • $200 • Monthly Depreciation • $16.67 • So what would the plant asset record look like if we bought it in January?

  19. Plant Asset Record • We need something to keep track of how much it depreciates each year so we can keep the ending book value. January February March April May June 16.67 16.67 16.67 16.67 16.67 16.67 July August September October November December 16.67 16.67 16.67 16.67 16.67 16.67

  20. Now what would it look like if we bought the asset in August instead of January • Value of the asset $1250 • Salvage Valule is $250 • Monthly Depreciation is $16.67 August September October November December 16.67 16.67 16.67 16.67 16.67 = 83.35

  21. Then the next year we would calculate the depreciation for the entire year. January February March April May June $20.83 $20.83 $20.83 $20.83 $20.83 $20.83 July August September October November December $20.83 $20.83 $20.83 $20.83 $20.83 $20.83 = $250.00

  22. Here comes the difficult stuff…. • Disposal of a plant Asset • WRITE THIS DOWN!!!!!!!!!!!!!!!!! • When you dispose of a plant asset you have to record three things • Remove original cost of the plant asset and accumulated depreciation • Recognized any cash received • Recognize any gain or loss

  23. Three ways to dispose of a plant asset • For the book value • For more than the book value • For less than the book value • Remember that we find the book value from the plant asset record

  24. Sale of a Plant Asset for more than Book Value Gain or Loss on Plant Asset This is either a revenue (gain) or expense (loss) You determine the gain or loss on how much money you received and the book value on the plant asset record.

  25. So if we have a transaction that looks like • Received cash from sale of store equipment, $900: original cost $1250, accumulated depreciation $354.15. Receipt No. 39. • Remember!!!!! • Remove original cost of the plant asset and accumulated depreciation • Recognized any cash received • Recognize any gain or loss • We received $900 and we valued the asset to be worth $895.85

  26. Recording it into the journal 1. Remove original cost of the plant asset and accumulated depreciation • 2. Recognized any cash received • 3. Recognize any gain or loss

  27. Received cash from sale of a computer, $800: original cost, $1250; total accumulated depreciation $354.15Receipt No. 281 1. Remove original cost of the plant asset and accumulated depreciation 2. Recognized any cash received • 3. Recognize any gain or loss Original Plant Asset – Accum Depreciation – Cash Received = Gain or Loss

  28. Part 5 • Declining Balance Method of Depreciation • This is simply another way of spreading the expenses for assets over a amount of time. • We find out which method is the best to offset our expenses so that our bottom line is least effected.

  29. Double declining balance is 2x’s the straight-line method. Here is how we figure it out. 100% / estimated useful life = straight-line 100% / 5 = 20% 20% x 2 = 40% 19800 22,000 - 2200 = 19,800

  30. 21-1,2,3,4,5,6,7

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