16- 1 - PowerPoint Presentation

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