Transcript Accounting 3 - Topeka West High School

Accounting 3
Chapter 21
Section 2
Depreciating Plant Assets
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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.
Depreciating Plant Assets
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Three factors are considered in calculating the annual
amount of depreciation expense for a plant asset:
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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.
Straight Line Depreciation
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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:
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Original Cost – Estimated Salvage Value =
Estimated Total Depreciation Expense
Estimated Total Depreciation Expense / Years of
Estimated Useful Life = Annual Depreciation
Expense
Straight Line Depreciation
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Example:
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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.
Calculating Depreciation for Part of a Year
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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:
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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
Calculating Depreciation for Part of a Year
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Example:
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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.
Calculating Accumulated Depreciation
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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.
Calculating Book Value
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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.
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Original Cost – Accumulated Depreciation = Ending Book
Value.
The book value can also be calculated using that
year’s beginning book value.
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Beginning Book Value – Annual Depreciation = Ending
Book Value
Calculating Book Value
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Example:
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(OC) $1250.00 – (AccD) $600.00 = (EBV)
$650.00
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(BBVyear02) $850.00 – (AnD) $200.00 = (EBV)
$650.00
Depreciation Tables
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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:
Plant Asset :
__________________
Original Cost: _______________________
Depreciation Method: ______________
Estimated Salvage Value: _____________
Estimated Useful Life: ________________
Year
Beginning
Book Value
Annual
Depreciation
Accumulated
Ending
Depreciation
Book Value
Work Together p. 552
On two slides, assignment on last slide.
Television
__________________
$700.00
Original Cost: _______________________
Straight Line
Depreciation Method: ______________
$100.00
Estimated Salvage Value: _____________
Plant Asset :
Estimated Useful Life: ________________
3 years
Year
Beginning
Book Value
2001
2002
2003
$700.00
$500.00
$300.00
Annual
Depreciation
$200.00
$200.00
$200.00
Accumulated
Ending
Depreciation
Book Value
$200.00
$400.00
$600.00
$500.00
$300.00
$100.00
Office Desk
__________________
$920.00
Original Cost: _______________________
Depreciation Method: ______________
Straight Line
$200.00
Estimated Salvage Value: _____________
Plant Asset :
Estimated Useful Life: ________________
6 years
Year
Beginning
Book Value
Annual
Depreciation
Accumulated
Ending
Depreciation
Book Value
2001
2002
$920.00
$850.00
$70.00
$120.00
$70.00
$190.00
$850.00
$730.00
2003
2004
2005
2006
2007
$730.00
$610.00
$490.00
$370.00
$250.00
$120.00
$120.00
$120.00
$120.00
$50.00
$310.00
$430.00
$550.00
$670.00
$720.00
$610.00
$490.00
$370.00
$250.00
$200.00
Assignment
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Do Application 21-2 by hand.
Turn it into Mrs. Middleton.
Move on to Section 21-3.