CH9 FINANCIAL

4 Pages
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Department
Accounting & Financial Management
Course Code
AFM 123
Professor
Peter Blake

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Description
Chapter 9 Class Notes Long Term Assets • Provide economic benefits • Will last more than one year o Property, plant and equipment --> must be used in business (not normally for sale) • Recorded at cost DR Asset CR Accounts Payable (or cash) • Cost? Any reasonable expense that is incurred to bring the asset to its intended use (including delivery, installation, re-profit, sales, taxes, duties) • Repairs and Maintenance - expense in period incurred • Overhaul - if extends useful life, added to the cost of asset, otherwise an expense Depreciation/Amortization Expense • Allocating the cost of the asset to the accounting periods that benefit from its use (matching) • Methods 1. Straight Line 90% 1. Units of 75% Production 1. Declining 100% Balance (tax) 1. Double 0% Declining Balance • Example to Illustrate Asset Cost $10 000 Useful Life 6 years Salvage Value $1 000 (value at the end of the 6 years) Expected Productivity (lifetime)30 000 units4 Production in 2010 3 800 2011 5400 Applicable declining balance rate20% Acquired April 1st 2010 Year-end December 31st 1. Straight Line • Annual Depreciation Expense = (cost −salvage value)/(useful life in years) = (10 000 −1000)/(6 years) = $1500/year • Acquired April 1st therefore 2010: owned 9⁄12 year 2010 expense = 1500 x 9⁄12 = $1125 2011 expense = 1500 • Entry: DR Depreciation Expense $1 125 CR Accumulated Depreciation $1 125 Balance Sheet 2010 2011 2012 2015 Assets - cost 10 000 10 000 10 000 10 000 Less: Accumulated Dep(1 125) (2 625) (4 125) (8 625) Net Book Value 8 875 7375 5875 1 375 1. Assets - Costs Less Cost never changes but accumulated depreciation does 2. Units of Production • Per unit charge = (cost −salvage value)/(expected lifetime production) = (10 000 −1 000)/(30 000) =$0.30/unit • Therefore the 2010 depreciation expense is 3800 units x 0.30 = 0.3 $1 140 • Entry (2010) DR Depreciation Expense $1 140
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