Transcript Slide 1

Unit 5
Accounting for Special Procedures
Chapter 22 Cash Funds
Chapter 23 Plant Assets and Depreciation
Chapter 24 Uncollectible Accounts Receivable
Chapter 25 Inventories
Chapter 26 Notes Payable and Receivable
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Chapter 23
Plant Assets and Depreciation
What You’ll Learn
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Identify plant assets.
Explain the need to depreciate plant assets.
Calculate annual depreciation of plant assets.
Calculate partial-year depreciation of plant assets.
Determine the book value of a plant asset.
Record depreciation of plant assets.
Prepare depreciation schedules.
Define the accounting terms introduced in this
chapter.
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Chapter 23, Section 1
Plant Assets and Equipment
What Do You Think?
Why is the plant asset cost spread over a
number of years?
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SECTION 23.1
Plant Assets and Equipment
Main Idea
A business uses plant assets for more than one
accounting period, so it spreads the cost of these assets
over a number of years.
You Will Learn
 the difference between current assets and plant
assets.
 four factors used to estimate the depreciation of
plant assets.
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Plant Assets and Equipment
SECTION 23.1
Key Terms
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plant assets
depreciation
disposal value
straight-line depreciation
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SECTION 23.1
Plant Assets and Equipment
Current and Plant Assets
Assets such as office equipment and buildings are
expected to produce benefits for more than one year
and are purchased for use in operating the business.
Plant assets are long-lived assets that are used in the
production or sale of other assets or services over
several accounting periods. Examples include
 land,
 buildings,
 delivery equipment,
 store equipment, and
 office equipment.
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SECTION 23.1
Plant Assets and Equipment
Estimating Depreciation of a Plant Asset
To follow the matching principle, the cost of a plant asset
is spread over the periods the asset will produce
revenue. This is called depreciation. Factors used to
calculate depreciation are
 its cost,
 its estimated useful life,
 its estimated disposal value, and
 the depreciation method used.
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SECTION 23.1
Plant Assets and Equipment
Plant Asset Cost
The cost of a plant asset is equal to the purchase price
plus sales taxes, delivery charges, and installation
charges. This amount is debited to the plant asset
account.
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SECTION 23.1
Plant Assets and Equipment
Cost and Estimated Useful Life of a Plant Asset
The number of years a plant asset is expected to be
used before it wears out or becomes outdated is the
estimated useful life. This number varies from asset to
asset and can be determined by considering past
experiences.
The estimated value of a plant asset at the time of its
replacement is its disposal value.
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SECTION 23.1
Plant Assets and Equipment
Depreciation Methods
There are several methods that can be used when
calculating depreciation. Three methods are
 the straight-line method,
 the units-of-production method, and
 accelerated depreciation methods.
In this course, you will learn how to calculate straightline depreciation.
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SECTION 23.1
Plant Assets and Equipment
Depreciation for Tax Reporting
Federal income tax law has rules for depreciating
assets. This includes the accelerated cost recovery
system (ACRS), which allows a business to recognize
depreciation over a shorter period of time and does not
consider disposal value.
MACRS is the modified accelerated cost recovery
system and is used for tax accounting only.
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SECTION 23.1
Plant Assets and Equipment
Key Terms Review
 plant assets
Long-lived assets that are used in the production
or sale of other assets or services over several
accounting periods.
 depreciation
Allocating a plant asset’s cost over its useful life.
 disposal value
The estimated value of a plant asset at its
replacement time; also called salvage value.
 straight-line depreciation
A method that equally distributes the depreciation
expense over an asset’s estimated useful life.
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Chapter 23, Section 2
Calculating Depreciation
What Do You Think?
What happens if a business does not maintain accurate
records of each asset?
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SECTION 23.2
Calculating Depreciation
Main Idea
Businesses maintain a record of each plant asset and its
related depreciation.
You Will Learn
 how to calculate depreciation.
 how to determine book value.
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SECTION 23.2
Calculating Depreciation
Key Terms
 accumulated depreciation
 book value
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SECTION 23.2
Calculating Depreciation
Calculating Depreciation
Use the following calculation to compute depreciation:
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SECTION 23.2
Calculating Depreciation
Straight-Line Depreciation
Calculate annual depreciation using the straight-line
method:
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SECTION 23.2
Calculating Depreciation
Straight-Line Depreciation
Calculate partial-year depreciation using the straight-line
method:
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SECTION 23.2
Calculating Depreciation
Declining-Balance Depreciation
With this method, the annual depreciation expense is
the asset’s book value multiplied by the decliningbalance rate. This rate can vary but it is usually double
the straight line rate.
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SECTION 23.2
Calculating Depreciation
Plant Asset Records
The plant asset record provides detailed information
about the plant asset including
 the date of purchase,
 the original cost,
 the estimated useful life,
 the annual depreciation,
 the accumulated depreciation, and
 the book value at the end of each year.
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SECTION 23.2
Calculating Depreciation
Plant Asset Records
The lower part of the record contains the depreciation
schedule including the accumulated depreciation (the
total amount of depreciation recorded up to a specific
point in time) and the book value (original cost less
accumulated depreciation) for the asset.
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SECTION 23.2
Calculating Depreciation
Plant Asset Records
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SECTION 23.2
Calculating Depreciation
Key Terms Review
 accumulated depreciation
The total amount of depreciation for a plant asset
that has been recorded up to a specific point in
time.
 book value
The original cost of a plant asset minus
accumulated depreciation.
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Chapter 23, Section 3
Accounting for Depreciation Expense
at the End of a Year
What Do You Think?
How does a business prepare its records to present
up-to-date financial information about plant assets?
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Main Idea
An end-of-period adjusting entry is made for
depreciation expense.
You Will Learn
 the accounts used to record depreciation.
 how to journalize adjusting and closing entries for
depreciation expense.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Adjusting for Depreciation Expense
Information to make depreciation adjustments comes
from the plant asset records. Each type of asset has its
own depreciation expense summary.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Making the Depreciation Expense Adjustment
Two accounts are affected by the adjustment for
depreciation:
 Depreciation Expense
 Accumulated Depreciation
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
The Depreciation Expense Account
During the year, Depreciation Expense has a zero
balance because the adjustment for depreciation is
recorded at the end of the period. The account is closed
to Income Summary at the end of the year.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
The Accumulated Depreciation Account
This account represents the total amount of depreciation
expensed since the asset was purchased and is
classified as a contra asset account.
The debit and credit rules followed by the Accumulated
Depreciation account are opposite those for an asset
account.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
The Adjustment
This is an
example of
how to record
the adjustment
for the
depreciation of
plant assets.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
The Adjustment
This is an
example of
how to record
the adjustment
for the
depreciation of
plant assets.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
The Adjustment
This is an
example of
how to record
the adjustment
for the
depreciation of
plant assets.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Analysis of the Accumulated Depreciation
Account
For On Your Mark, each year the same adjustment was
made to record the depreciation of the delivery truck:
 a debit to Depreciation Expense–Delivery
Equipment
 a credit to Accumulated Expense–Delivery
Equipment
At the end of the year, the Depreciation Expense–
Delivery Equipment account has a zero balance and
the Accumulated Expense–Delivery Equipment
account shows the total amount of depreciation
expensed since the asset was purchased.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Recording Depreciation Adjustments on a
Work Sheet
After preparing the adjustment for depreciation, the
accountant enters it in the Adjustments section of the
work sheet.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Reporting Depreciation Expense and
Accumulated Depreciation on Financial
Statements
The depreciation expense accounts are reported on the
income statement.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Reporting Depreciation Expense and
Accumulated Depreciation on Financial
Statements
The plant asset and related accumulated depreciation
accounts appear in the assets section of the balance
sheet.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Adjusting and Closing Entries for
Depreciation Expense
Adjustments for depreciation expense are recorded in
the general journal using the Adjustments section of the
work sheet.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Adjusting and Closing Entries for
Depreciation Expense
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Adjusting and Closing Entries for
Depreciation Expense
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Adjusting and Closing Entries for
Depreciation Expense
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Adjusting and Closing Entries for
Depreciation Expense
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Adjusting and Closing Entries for
Depreciation Expense
Now the ledger must be closed.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Adjusting and Closing Entries for
Depreciation Expense
Now the ledger must be closed.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Adjusting and Closing Entries for
Depreciation Expense
Now the ledger must be closed.
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SECTION 23.3
Accounting for Depreciation
Expense at the End of a Year
Adjusting and Closing Entries for
Depreciation Expense
Now the ledger must be closed.
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CHAPTER 23
Chapter 23 Review
Question 1
On March 1, Lakeview Landscape purchased a new dump
truck for $45,000. The truck will have a useful life of 10
years and a disposal value of $7,500.
(a) Using straight-line depreciation, calculate the yearly
depreciation of the truck.
(b) How much could you depreciate in Year 1?
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CHAPTER 23
Chapter 23 Review
Answer 1
a) Step 1: Subtract the disposal value from the cost of
the truck: $45,000 - $7,500 = $37,500 to be
depreciated
Step 2: Divide the amount to be depreciated by the
useful life of the asset: $37,500 ÷ 10 =
$3,750 per year
b) Calculate depreciation in Year 1 (for 10 months,
March 1 to December 31): $3,750  10/12 = $3,125
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CHAPTER 23
Chapter 23 Review
Question 2
Why would a corporation choose to use an accelerated
depreciation system such as declining-balance depreciation
instead of straight-line depreciation?
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CHAPTER 23
Chapter 23 Review
Answer 2
An accelerated depreciation schedule allows the
corporation to take a higher expense early in the life of
the asset. Since money today is more desirable than
money one year from now, it allows the corporation to
realize tax benefits early.
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