Accounting 3

1. Accounting 3 Chapter 21 Section 2

2. Depreciating Plant Assets • A business buys plant assets to use in earning revenue. • In order to match revenue with expenses used to earn revenue, the cost of a plant asset should be expensed over the plant asset’s useful life. • Depreciation Expense – The portion of a plant asset’s cost that is transferred to an expense account in each fiscal period during a plant asset’s useful life.

3. Depreciating Plant Assets • Three factors are considered in calculating the annual amount of depreciation expense for a plant asset: • Original Cost – This includes all costs paid to make the asset usable to the business (purchase price, delivery costs, installation, etc.). • Estimated Salvage Value – The estimated amount an owner expects to receive when a plant asset is no longer usable. • Estimated Useful Life – The estimated amount of time the business could use the plant asset. Physical and functional use are taken into consideration in this estimation. • Land is not depreciated because it is considered permanent.

4. Straight Line Depreciation • Charging an equal amount of depreciation expense for a plant asset in each year of useful life is called straight-line method of depreciation. • Formula to calculate: • Original Cost – Estimated Salvage Value = Estimated Total Depreciation Expense • Estimated Total Depreciation Expense / Years of Estimated Useful Life = Annual Depreciation Expense

5. Straight Line Depreciation • Example: • January 2, 2001 Winning Edge bought a lighted display case for $1,250.00 with an estimated salvage value of $250.00 and estimated useful life of 5 years. • (OC) $1,2500.00 – (ESV) $250.00 = (ETDE) $1,000.00 • (ETDE) $1,000.00 / (EUL) 5 = (ADE) $200.00 • In other words, this display case will depreciate in value by $200.00/year for 5 years and should be able to be salvaged for $250.00 at the end of 5 years.

6. Calculating Depreciation for Part of a Year • Companies do not always buy plant assets at the beginning of a fiscal period. • Because of this there are times when depreciation must be figured for part of a year. • Formula: • Annual Depreciation Expense / Months in a Year = Monthly Depreciation Expense • Monthly Depreciation Expense x Number of Months Asset is Used = Partial Year’s Depreciation Expense

7. Calculating Depreciation for Part of a Year • Example: • Winning Edge bought a computer on August 2, 2001. The annual Straight Line Depreciation expense is $900.00. • (ADE) $900.00 / (MIY) 12 = (MDE) $75.00 • (MDE) $75.00 x (MAU) 5 = (PYDE) $375.00 • So this computer would have $375.00 of depreciation for 2001 and then $900.00 for every year after that until the end of its useful life.

8. Calculating Accumulated Depreciation • Accumulated Depreciation – The total amount of depreciation expense that has been recorded since the purchase of a plant asset. • To calculate you just add all of the depreciation that has been expensed since the purchase was made until the present time.

9. Calculating Book Value • The original cost of a plant asset minus accumulated depreciation is the book value of a plant asset. • For the first year, the beginning book value is the original cost. After that, book value is calculated by subtracting the accumulated depreciation from the original cost of the asset. • Original Cost – Accumulated Depreciation = Ending Book Value. • The book value can also be calculated using that year’s beginning book value. • Beginning Book Value – Annual Depreciation = Ending Book Value

10. Calculating Book Value • Example: • (OC) $1250.00 – (AccD) $600.00 = (EBV) $650.00 • OR • (BBVyear02) $850.00 – (AnD) $200.00 = (EBV) $650.00

11. Plant Asset : __________________ Original Cost: _______________________ Depreciation Method: ______________ Estimated Salvage Value: _____________ Estimated Useful Life: ________________ Year Beginning Annual Accumulated Ending Book Value Depreciation Depreciation Book Value Depreciation Tables • These are forms that help you to figure out depreciation and book values of an asset before filling out a plant asset record (discussed next section). • *An asset is never expensed below its estimated salvage value. If in the last year of its useful life, the depreciation method used would put the value below the ESV, then only the difference between the BBV and the ESV is expensed. • Example:

12. Plant Asset : __________________ Original Cost: _______________________ Depreciation Method: ______________ Estimated Salvage Value: _____________ Estimated Useful Life: ________________ Year Beginning Annual Accumulated Ending Book Value Depreciation Depreciation Book Value Work Together p. 552On two slides, assignment on last slide. Television $700.00 Straight Line $100.00 3 years 2001 $700.00 $200.00 $200.00 $500.00 2002 $500.00 $200.00 $400.00 $300.00 2003 $300.00 $200.00 $600.00 $100.00

13. Plant Asset : __________________ Original Cost: _______________________ Depreciation Method: ______________ Estimated Salvage Value: _____________ Estimated Useful Life: ________________ Year Beginning Annual Accumulated Ending Book Value Depreciation Depreciation Book Value Office Desk $920.00 $200.00 Straight Line 6 years 2001 $920.00 $70.00 $70.00 $850.00 2002 $850.00 $120.00 $190.00 $730.00 2003 $730.00 $120.00 $310.00 $610.00 2004 $610.00 $120.00 $430.00 $490.00 2005 $490.00 $120.00 $550.00 $370.00 2006 $370.00 $120.00 $670.00 $250.00 2007 $250.00 $50.00 $720.00 $200.00

14. Assignment • Do Application 21-2 by hand. • Turn it into Mrs. Middleton. • Move on to Section 21-3.