What if the Company Doesnt Purchase or sell the Asset at the Beginning or end of the Year Unitsofproduction Multiple the depreciation rate by the actual usage Straightline or doubledeclining balance ID: 200300
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Slide1
16-1
What
if the Company Doesn’t Purchase (or sell) the Asset at the Beginning (or end) of the Year?
Units-of-production
Multiple the depreciation rate by the actual usage
Straight-line or double-declining balance
Use the mid-year convention or count the time that the asset was in useSlide2
Midyear Convention
Companies making numerous plant asset purchases and disposals spread out evenly during the course of the fiscal year frequently use the midyear convention, which reflects depreciation expense for each asset as if it were purchased or disposed of exactly halfway through the company’s fiscal year.Slide3
Illustration --- page 457
PCs to Go, with a December 31 year-end, purchases its delivery truck in April 2010 and expects to dispose of it five years later in April 2015. Straight – line depreciation for each fiscal year of use would be as follows:Refer to page 457Slide4
Revision of Estimates
A company originally assigns a useful life of seven years to a computer and, one year after the date of the purchase, realizes that it will have to replace the computer after a total of three year.When it becomes clear that they need to make an adjustment– do the following---Slide5
Revision of estimates
Assume that on January 1, 2010, a company purchases and begins to use office equipment costing $12,000, with an expected useful life of 10 years and a salvage value of $2,000. Assuming the business uses the straight-line method of depreciation for the asset, accumulated depreciation at December 31, 2012, would be $3,000 (12,000 – 2,000)/10 X 3 = 3,000.
The carrying value would be 9,000 (12 – 3)Slide6
Continued.
If the company realizes that the equipment will last only four more years, after which its estimated salvage value will be $3,000, then depreciation expense for each of the remaining four years of the asset’s useful life would be calculated as follows:
Carrying value – Revised salvage value Remaining useful life9,000-3,000 4 years = $1,500 depreciation expense per yearSlide7
16-7
What is the Process Involved in Asset Disposals?
Record depreciation to date of disposalRemove the cost of the asset (CR) and the accumulated depreciation (DR) from the records Record the assets received (DR) if applicableRecord the cash paid (CR) if applicableRecord the loss incurred (DR) if applicable
Record the gain (CR) if applicable Slide8
16-8
How Can a Company Dispose of an Asset Before its Useful Life is Over?
Discard---it is necessary to record a loss at the date of the disposalDiscard equipment that cost 50,000 with a 40,000 of accumulated depreciation at the date of the last balance sheet. Must pay $1,000 to have it removed.
Assets = Liabilities + Owner’s Equity
2,000 = 2,000
Depreciation expense 2,000
Accumulated Depreciation 2,000Slide9
Problem continued
After the entry is posted, the accumulated depreciation account will have a $42,000 credit balance (previous balance of $40,000 plus $2,000. Second, we must recognize the removal of the equipment (book value = $8,000) and cash:Assets = Liabilities + Owners Equity
(8,000) = (9,000)(1,000)Slide10
Journal Entry
Accumulated Depreciation 42,000Loss on Disposal 9,000Equipment 50,000Cash 1,000Slide11
Sell
Sell Must be sold for equal, less than, or greater than.Recall when more net assets are received than are given up, a gain results. A loss results when fewer net assets are received than are given up.Slide12
Example
Cost of Asset $80,000Accumulated depreciation (60,000)
through date of saleCarrying Value at date of sale $20,000Assets = Liabilities + Owner’s Equity+20,000
-20,000
Selling for the same amount of net assetsSlide13
Journal Entry
Cash 20,000Accum
Dep 60,000 Equipment 80,000Slide14
16-14
Exchange (Trade-In) Example
We have a computer that originally cost $6,000 and has accumulated depreciation of $4,500. We will trade-in this computer for a new computer with a list price of $10,000. The computer company will give us a trade-in allowance of $2,000.Book value = $6,000 - $4,500 = $1,500.Cash payment required = $10,000 - $2,000 = $8,000Slide15
16-15
Trade-in Example Continued
Computer received = $10,000 Less assets given up = $9,500
Gain = $500
Entry:
Computer (new) 10,000
Accumulated depreciation 4,500
Computer (old) 6,000
Cash 8,000
Gain 500Slide16
16-16
What are Depletion and Amortization?
DepletionThe cost of a natural resource is allocated to expenseTypically, units-of-production method usedAmortizationThe cost of an intangible asset is allocated to expense
Typically, straight-line method is usedSlide17
Homework
Exercise 16-9, 16-10, Problem 16-3Slide18
Ex 16-9
(850,000 – 175,000)/25 years = $27,000 per year x 12 years = $324,000 accumulated depreciation(850,000 – 324,000 – 150,000) /(39-12) = $13,925.93 per year for the remaining 27 years.Slide19
Ex 16-10
$36,000 – 28,000 = $8,500 carrying value10,000 – 8,500 = 1,500 gain
8,000 – 8,500 = (500) loss9,000 – 8500 = 500 gainSlide20
Problem 16-3
(1) Straight-line: Depreciation Carrying
Expense** Value Year 1 $50,000 $300,000
Year 2 50,000 250,000
Year 3 50,000 200,000
Year 4 50,000 150,000
** ($400,000 - $50,000)/7 years = $50,000/year
(2) Units-of-production:
Depreciation Carrying
Expense
***
Value
Year 1 $56,000 $294,000
Year 2 61,600 234,400
Year 3 67,600 164,800
Year 4 74,536 90,264
*** ($400,000 - $50,000)/25,000 hours = $14/hour
4,000 hours * $14 = $56,000
(4,000 * 1.1) = 4,400 * $14 = $61,600
(4,400 * 1.1) = 4,840 * $14 = $67,600
(4,840 * 1.1) = 5,324 * $14 = $74,536Slide21
Problem 16-3
(3) Double-declining-balance: 1/7 * 2 = .2857 is double the straight-line rate
Depreciation Carrying Expense* Value
Year 1 $114,280 $285,720
Year 2 81,630.20 204,089.80
Year 3 58,308.46 145,781.34
Year 4 41,649.73 104,131.61
*$400,000 * 0.2857 = $114,280
$285,720 * 0.2857 = $81,630.20
$204,089.80 * 0.2857 = $58,308.46
$145,781.34 * 0.2857 = $41,649.73
b. The straight-line method produced the lowest deprecation expense, and therefore the highest income in Year 1. The double-declining balance method produced the highest depreciation expense, and therefore the lowest income in Year 1.Slide22
Ex 16-12
Nelson Enterprises: $425,000 - $260,000 = $165,000 carrying value; $575,000 - $165,000 = $410,000 gain
The $410,000 gain is recognized and the building acquired should be recorded at its fair market value of $575,000.Lamb Corporation: $750,000 - $160,000 = $590,000 carrying value $575,000 - $590,000 = $15,000 loss
The $15,000 loss should be recognized and the new building should be recorded at its fair market value of $575,000.Slide23
Problem 16-4
$63,500 + $4,785 + $100 + 2,850 = $71,235 ($71,235 - $6,000)/8 = $8,154 * 1/2 year = $4,077
The cost of the transmission should be capitalized as an extraordinary repair and the cost of the tune-up should be expensed as an ordinary repair.2008 $ 4,077
2009 8,154
2010
8,154
$ 20,385
Accumulated Depreciation at the end of 2010
$71,235 - $20,385 = $50,850 carrying value plus $5,000
extraordinary repair = $55,850 - $6,000 salvage value
= $55,850/7.5 years remaining life = $7,447Slide24
Problem 16-5
a. $32,000/8 = $4,000 per year; $770,000/15,400,000 = $0.05 per tonb. $4,000/2 = $2,000c. 2,500,000 * $0.05 = $125,000
d. 2,000,000 * $0.05 = $100,000Slide25
Problem 16-6
a. $685,000 - $274,000 = $411,000 carrying value (1) $365,000 - $411,000 = ($46,000) recognized loss
(2) $425,000 - $411,000 = $14,000 recognized gain (3) $400,000 - $411,000 = ($11,000) recognized loss (4) $450,000 - $411,000 = $39,000 recognized gainSlide26
Problem 16-6
(1) Cash 365,000 Accumulated depreciation 274,000 Loss of sale of equipment 46,000
Motorcoach 685,000 (2) Investment in stock 425,000 Accumulated depreciation 274,000
Motorcoach
685,000
Gain on sale of equipment 14,000Slide27
Problem 16-6
(3) Motorcoach (new) 825,000
Accumulated depreciation 274,000 Loss on trade of equipment 11,000 Motorcoach (old) 685,000
Cash 425,000
(4)
Cash 60,000
N/R 340,000
Limousine 50,000
Accumulated depreciation 274,000
Motorcoach
(new) 685,000
Gain 39,000