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Accounting for Depreciation PowerPoint Presentation

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Slide 1 - Accounting for Depreciation Chapter 9 Part 2 of 4
Slide 2 - Accounting for Depreciation Fixed assets other than land lose their ability over time to provide services Costs of equipment, buildings, and land improvements should be transferred to expense accounts in a systematic manner during their expected useful lives. DEPRECIATION Adjusting entry to record depreciation is usually made at the end of each month or at the end of the year Fixed assets other than land lose their ability over time to provide services
Slide 3 - Adjusting Entry
Slide 4 - Depreciation Accumulated depreciation Shows the amount that the asset has lost in value since its purchase Depreciation expense Shows the amount that the asset has lost in value this period. Factors that cause a decline the ability of a fixed asset to provide services may be identified as Physical depreciation Occurs from the wear and tear while in use and from the action of the weather Functional depreciation Occurs when a fixed asset is no longer able to provide services at the level for which it was intended.
Slide 5 - Factors in Computing Depreciation Expense The fixed asset’s initial cost Its expected useful life Its estimated value at the end of its useful life.
Slide 6 - Depreciation Methods Straight line Declining balance Units of production
Slide 7 - Straight line Method Provides for the same amount of depreciation expense for each year of the asset’s useful life Annual depreciation expense = Cost – Salvage value Life
Slide 8 - Example 1 A machine had a cost of $24,000, salvage value of $2,000 and useful life of 5 years Annual depreciation expense = Cost – Salvage value Life = $24,000 - $2,000 5 years = $4,400 annual depreciation
Slide 9 - Adjusting entry
Slide 10 - Example 2 A machine had a cost of $30,000, salvage of $5,000 and useful life of 6 years. Compute depreciation under the straight line method? What is depreciation expense in year 3?
Slide 11 - Units of Production This method provides for the same amount of depreciation expense for each unit produced or each unit of capacity used by the asset
Slide 12 - Units of Production Depreciation rate per unit = Cost – Salvage value Estimated units Depreciation Expense = Depreciation rate x annual units
Slide 13 - Example 3 A machine had a cost of $24,000, salvage value of $2,000, estimated total hours of production of 10,000 and annual hours used of 2,100 hours. Compute depreciation for the period under the units of production method.
Slide 14 - Example 3 Depreciation rate per unit = Cost – Salvage value Estimated hour = $24,000 - $2,000 = $2.20 10,000 hours Annual depreciation expense = Hourly depreciation rate x annual hours = $2.20 x 10,000 hours = $2,200
Slide 15 - Example 4 A machine had a cost of $30,000, salvage value of $5,000, estimated total hours in production of 5,000 and annual hours used of 900 hours. Compute the depreciation expense for the period using the units of production method
Slide 16 - Declining Balance Method Provides for a declining periodic expense over the estimated useful life of the asset. Book value = Cost – Accumulated depreciation
Slide 17 - Declining Balance Method Steps Compute the DB rate = 100/Life of asset For double declining balance Multiply rate time 2 Depreciation expense = Beg. book value X Rate Rule: the book value may never by less than the salvage value of the asset
Slide 18 - Example 5: A machine had a cost of $24,000, salvage value of $2,000, estimated life of five year. Compute depreciation
Slide 19 - Example 6 Example 6: A machine had a cost of $30,000, salvage value of $5,000, estimated life of 6 years. Compute depreciation using the double declining balance method.
Slide 20 - Revision of Depreciation Revising the estimates of the residual value and the useful life is normal Used to determine depreciation expense in future periods
Slide 21 - Example 7 Assumed a fixed asset purchased for $130,000 was originally estimated to have a useful life of 30 years and a residual value of $10,000. The asset has been depreciated for 10 years by the straight line method. At the end of ten years, the asset’s book value of $90,000. During 11th year, it is estimated that the remaining useful life is 25 years and that the residual value is $5,000. Compute depreciation expense for the 11th year using the new information provided.
Slide 22 - Example 7 Depreciation expense= = $130,000-$10,000 30 = $ 4,000.00 per year before changes Accumulated Depreciation balance =$4,000 X 10 years = $40,000 Book value = $130,000.00 – $40,000 = $90,000
Slide 23 - Example 7 New depreciation expense = Book value – new salvage Remaining life = ($90,000-$5,000) 25 = $ 3,400.00 per year for remaining years
Slide 24 - Disposal of Fixed Assets Discarding of Fixed Assets When asset has no residual value and is fully depreciated.
Slide 25 - Example 8 Asset with a cost of $25,000 and fully depreciated is discarded
Slide 26 - Selling of Fixed Assets Three things can happen Sale at book value No gain or loss Sale below book value Loss is recognized Sale after book value Gain is recognized
Slide 27 - Selling at book value Example 9: Asset with cost of $25,000 and Accumulated Depreciation of $10,000 is sold for $15,000 cash.
Slide 28 - Selling price above book value Gain is recognized Example 10: Asset with cost $25,000, Accumulated Depreciation of $10,000 is sold for $20,000 cash.
Slide 29 - Selling price below book value Loss is recognized Example 11: Asset with cost of $25,000, Accumulated Depreciation of $10,000 is sold for $12,000 cash.
Slide 30 - Exchanging Similar Assets Old equipment is often traded in for new equipment having a similar use. The seller allows the buyer an amount for the old equipment traded in called TRADE IN ALLOWANCE. The remaining balance – the amount owed is either paid in cash or recorded as a liability – called BOOT
Slide 31 - Gain on exchanges Not recognized for financial reporting purposes. When trade-in allowance exceeds the book value of an asset traded in and no gain is recognized, the cost recorded for the new asset can be determined in either of two ways: Cost of new asset = List price + Unrecognized gain Cost of new asset = Cash given + book value of oldNot recognized for financial reporting purposes.
Slide 32 - Example 12 New equipment is purchased with a list price of $5,000, trade in allowance of old is $1,100, cost of old equipment is $4,000, accumulated depreciation $3,200. Record the entry. New equipment is purchased with a list price of $5,000, trade in allowance of old is $1,100, cost of old equipment is $4,000, accumulated depreciation $3,200. Record the entry.
Slide 33 - Example 12
Slide 34 - Losses on Exchange For financial reporting purposes, losses are recognized on exchanges of similar fixed assets. If trade in is less than the book value of the old equipment, there is a loss
Slide 35 - Example 14 New equipment is purchased with a list price of $5,000, trade in allowance of old is $700, cost of old equipment is $4,000, accumulated depreciation $3,200. Record the entry.
 

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