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ACCT 1201 (41)
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ACCT Chapter 8 Condensed (Day 2).docx

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Department
Accounting
Course
ACCT 1201
Professor
Ronen Gal-or
Semester
Spring

Description
Chapter 8 Condensed (Day 2) I. Property, Plant, and Equipment (PPE) II. Acquisition and maintenance of PPE III. Fixed asset turnover ratio IV. Depreciation and Depletion V. Asset Impairment VI. Disposal, Retirement and Trading of PPE – don’t forget to study this! VII. Intangible Assets VIII. Amortization How do you get PP&E off your books? Depreciation IV. Depreciation and Depletion A. Depreciation is the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method We depreciate it not down to zero necessarily, but down to the “salvage value.” Depreciation is NOT a process of determining an asset’s current market value. Periodic Adjusting Entry: Dr. Depreciation Expense (Operating expense in I/S) Cr. Accumulated Depreciation (Contra Asset Account in B/S) Example: 7/1/01 Zagreb Corp purchases an automobile for $29,000 for $9,000 cash and signs a note for the balance. Zagreb paid $1,000 to paint to company logo on the car. That $1,000 painting cost is capitalized, making the value of the automobile $30,000. Dr. Automobile $30,000 Cr. Cash $10,000 Cr. Notes Payable $20,000 Adjusting Entry (12/31/01) to recognize Depreciation Expense – Based on the Depreciation schedule, Zagreb determines that $5,000 of depreciation should be recorded relating to this automobile for the year 2010. Dr. Depreciation Expense $5,000 Cr. Accumulated Depreciation (Automobile) $5,000 Automobile Accumulated Depreciation (Automobile) 30,000 5,000 30,000 5,000 1 Zagreb Corp Balance Sheet 12/31/01 Current Assets: Long Term Assets: Land $100,000 Building 200,000 Accumulated Depreciation (Building) (100,000) Automobile 30,000 Accumulated Depreciation (Automobile) (5,000) Total PP&E 225,000 How did you get the $5,000 of depreciation? How do you calculate the depreciation schedule? B. Calculating Depreciation 1.Three amounts are required for each depreciable asset:  Acquisition cost  Estimated useful life – the expected service life of the asset  Estimated residual (or salvage) value - estimated amount to be recovered by the company at the end of the asset’s estimated useful life Three methods to calculate depreciation: a. Straight-line (used by 95% of companies) b. Units of production c. Declining balance (used for tax purposes, required by IRS) a. Straight line method - Allocates the cost of an asset in equal periodic amounts over its useful life Straight-Line Formula: Depreciation Expense = memorize Depreciation expense can be manipulated because residual value and useful life are estimates (see below) Example: PPE, Inc., purchased a new machine on September 1, 2007, at an invoice price of $95,000. Additional costs include freight charges of $500, and installation cost of $1,200. The machine has an estimated salvage of $6,700. It is estimated that the machine will be productive for six (6) years operating a total of 120,000 machine hours. Acquisition Cost: $95,000 + $500 + $1,200 = $96,700 Salvage Value: $6,700 (estimate) Useful life: 6 years (estimate) 2 Determine the annual depreciation for both Dec 31, 2007 and Dec 31, 2008 using the straight line depreciation method: $96,700 – 6,700 = $15,000 per year 6 years 2007 2008 4 months (a) Straight-line: (15,000/(4/12)) = $5,000 12 months = $15,000 Calculating Depreciation: $96,700 – 6,700 = $90,000 / 6 years The depreciable case is $90,000 Balance Sheet 12/31/07 Long Term Assets: Machine 96,700 Accumulated Depreciation (Machine) (5,000) Net Machine 91,700 2007 Depreciation Expense Entry Dr. Depreciation Expense 5,000 Cr. Accumulation Depreciation - Equipment 5,000 Balance Sheet 12/31/08 Long Term Assets: Machine 96,700 Accumulated Depreciation (Machine) (20,000) Net Machine 76,700 2008 Depreciation Expense Entry Dr. Depreciation Expense 15,000 Cr. Accumulation Depreciation - Equipment 15,000 Why do you show the original cost of the machine? So that investors can see how old the machine is b. Units-of-Production Method - Allocates the cost of an asset over its useful life based on the relation of its periodic output to its total estimated output Requires a lot of information but is more accurate Units-of-Production Formula: memorize Depreciation Expense = Where estimated total production is in hours available or units capable of being produced 3 Example: PPE, Inc., purchased a new machine on September 1, 2007, at an invoice price of $95,000. Additional costs include freight charges of $500, and installation cost of $1,200. The machine has an estimated salvage of $6,700. It is estimated that the machine will be productive for six (6) years operating a total of 120,000 machine hours. Acquisition Cost = 95,000 + 500 + 1,200 = $96,700 Salvage Value = $6,700 Estimated Total Production = 120,000 hours Determine the annual depreciation for both Dec 31, 2007 and Dec 31, 2008 using the units- of-production depreciation method. Assume the machine operated for 4,000 and 15,000 hours, respectively for 2007 and 2008. 2007 2008 (96,700 – 6,700) / (96,700 – 6,700) / 120,000 * 4,000 = 120,000 * 15,000 = (b) Units-of-production: 3,000 11,250 Balance Sheet 12/31/07 Long Term Assets: Machine 96,700 Accumulated Depreciation (Machine) (3,000) Net Machine 93,700 Balance Sheet 12/31/08 Long Term Assets: Machine 96,700 Accumulated Depreciation (Machine) (14,250) Net Mac
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