Chapter-16-Plant-Assets.ppt

Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,16-,*,PLANT ASSETS and DEPRECIATION,CHAPTER 16,Long-term assets,Long-term assets,Tangible assets,Natural resources,Intangible assets,e.g.plant,buildings,and equipment,Tangible assets,Tangible assets,Fixed,assets,Plant,assets,Plant assets are remained for operations of business,not for resale.The useful life of plant assets is more,than one year.,Depreciable asset,The value of plant assets may,decline due to general wear,and tear.,A decline in revenue-producing ability may also occur because of obsolescence.,Depreciation,Under the matching rule,the cost of plant assets must be,allocated to all the periods over their useful life,and must,be done in a systematic and rational manner.,1,year,2 year,Depreciation,Before computing depreciation,its essential to determine,The cost,Residual value,Depreciable cost,Estimated useful life,Cost,Acquisition cost,The cost of plant asset,Original cost,=,=,It includes all expenditures reasonable and necessary to get the plant asset in place and available for use.,Cost,If a plant asset is acquired for cash,the acquisition cost consist of:,the cash paid for the asset,expenditures for packing,freight,insurance in transit,installation,testing,value added tax,other necessary,related costs,Cost,If a plant asset is acquired by self-construction the acquisition,cost consist of:,Direct labor,direct materials,direct machinery,equipment cost,Other expenses incurred in the course of construction,Cost,If a plant asset is acquired,from donation the acquisition,value includes,:,fair value,all the expenses,incurred during the period when the donation is received,Fair value refers to the amount which is agreed by,two sides that are familiar with the transaction.,Cost,If a plant asset is,purchased on credit,the interests are not included in cost,but as expense for this period.,However,if the assets are constructed,the interests during the construction should be calculated as part of cost of the asset.,Residual value,The residual value of an asset is its estimated net scrap,salvage,or trade-in value as of the estimated date of,disposal.,Salvage value,and,disposal value,are other terms used to stand for residual value.,Depreciable cost,The cost of an asset,Residual value,=,Depreciable value,For example,if furnitures cost is$10,000 and its,residual value is$4,000,its depreciable cost,will be$6,000.,Estimated useful life,Accounting considers estimated useful life as the depreciation,years because deterioration and obsolescence are considered,as well as wear and tear when a plant asset is depreciated.,Estimated economic useful life,Estimated useful life,Estimated useful life,Physical useful life,Estimated useful life,For example,a computer can be,used for more than,five,years,regardless to the out-of-dated.,However,its estimated useful life may be only,two,years because the new type is put into use instead,of the old one.,Methods of Computing Depreciation,Straight-line Method,Production Method,Accelerated Methods,Straight-line Method,Method,1,Straight-line,Method,Straight-line Method,Under this method,an equal amount of,depreciation expense is allocated to each,period of the assets useful life.,Straight-line method is also called,average-years method,.,Straight-line Method,f=ax+b,x=(f b)/a,“,x”stands for annual depreciation that we want to know.,“,f”refers to acquisition cost.,“,b”is salvage value.,“,a”is estimated useful life.,In mathematics,the formula of a straight line is,Straight-line Method,Formula,Annual Depreciation,=,Acquisition Cost Salvage Value,Years of Useful life,Straight-line Method,Now,lets look at an example,Straight-line Method,On March 7,Stevs Barber Shop purchased haircutting equipment and office equipment for$800.,Suppose that Stevs Barber Shop estimates that the art equipment and office equipment will last for five years and the salvage will be worthless at the end of the useful life.,Straight-line Method,The calculation is as follows:,Annual Depreciation for Haircutting Equipment,=,($,800,-0)/5,=,$,16,0,Monthly Depreciation=Annual Depreciation/12,Monthly Depreciation for Haircutting Equipment,=,$,160,/12,=,$,1,3.3,Straight-line Method,Shortcomings,It pays more attention to the useful,time than the useful Condition.,And allocate equal amount to each period regardless to,the level of wear and tear that the asset suffers.,Production Method,Method,2,Production,Method,Production Method,Production method allocates equal portion to the products.,Formula,Depreciation per Unit,=,Acquisition Cost Salvage Value,Estimated Production,Production Method,Now,lets look at an example,Production Method,A photocopier can copy about 100 thousand pieces of,paper with a 5,000-dollar acquisition cost and 500-dollar,salvage value.,Depreciation per Unit,=,$5,000-$500,100,000,=,$0.045,Production Method,Different standards of workload should be applied,to different plant assets.,If the depreciated asset is a machine,the unit depreciation,should be calculated on the basis of the estimated hours,that the machine works for.,If the depreciated asset is a vehicle,the unit depreciation,should be calculated on the basis of the estimated mileage,that the vehicle runs.,Accelerated Methods,Method,3,Accelerated,Methods,Accelerated Methods,Accelerated method has another name,descending,depreciation expense method,.,Accelerated methods result in that relatively large,amounts of depreciation will be recognized in the,early years of use,while relatively small amounts,of depreciation in the later years.,Accelerated Methods,This method comes along with the,prudence principle,.,More depreciation will be allocated to the early years,than to later years.,It is along with,matching rule,that more expenses are,allocated to more benefits,or revenue.,Accelerated Methods,Examples of accelerated methods,Double-declining-balance method,Sum-of-the-years-digits method,Double-declining-balance method,This method is based on the assumption that depreciation,rate is twice the straight-line rate.,Formula,Yearly depreciation rate,=,Estimated useful life,2,100%,Yearly depreciation,=,Carrying value at the,beginning of the year,Yearly,depreciation rate,Yearly depreciation rate,=,2,5,100%,=,40%,Double-declining-balance method,The depreciation schedule for the double-declining-balance method,Year,Calculation of depreciation,Yearly depreciation,Accumulated Depreciation,Carrying value,Date of purchase,End of first year,End of second year,End of third year,End of fourth year,End of fifth year,$,800,*40%,48,0*40%,288,*40%,172.8,40%,$,3200,192,115.2,69.12,103.68,$,320,512,627.2,696.32,800,$,800,480,288,172.8,103.68,0,Total,800,Attention:,In the fourth year and fifth year,the accelerated method isnt applied to the calculation of,depreciation because depreciation should be limited to amount necessary to reduce carrying,value to residual value.,Sum-of-the,-,Years-Digits Method,Under this method,the years in the service life of an asset,are added.,Their sum becomes the,denominator,of a series of fractions,that are applied in allocating the total depreciation over,the estimated useful life.,The,numerators,are the individual years in the estimated,useful life of the asset in their reverse order.,Sum-of-the,-,Years-Digits Method,If a plant asset has an estimated five-year useful life,the,denominator(or the sum of the years digits)is calculated,as follows:,1+2+3+4+5=15,The numerators are:,5,4,3,2,1.,The fractions are:,5/15,4/15,3/15,2/15,1/15.,Sum-of-the,-,Years-Digits Method,Suppose the cost of a delivery truck is$10,000.The depreciation schedule for the sum-of-the-years-digits method is as follows:,Year,Calculation of depreciation,Yearly depreciation,Accumulated Depreciation,Carrying value,Date of purchase,End of first year,End of second year,End of third year,End of fourth year,End of fifth year,$800,5/15,800,4/15,800,3/15,800,2/15,800,1/15,$,266.67,213.33,160,106.67,53.33,$,266.67,480,640,746.67,800,$,800,533.33,320,160,53.33,0,Total,800,Accumulated depreciation,The accumulated depreciation accounts are contra-asset,accounts to summarize the depreciation expense on a,specific fixed asset.,Accumulated depreciation,Accumulated,depreciation,Net,amount,shown,as an asset,The net amount is called,carrying value,or,book value,.,As time passed,Accumulated depreciation,Now,Let us adjust the transactions happen on March 7,Accumulated depreciation,Decreases in,assets,are recorded by,credits,.,Decreases in,owners equity,are recorded by,debits,.,Owners equity is decreased by debits to,Depreciation,Expense,Haircutting Equipment,and,Depreciation Expense,Store Equipment,.,Assets are decreased by credits to contra-asset,accounts,Accumulated Depreciation,Haircutting Equipment,and,Accumulated Depreciation,Store Equipment,.,Accumulated depreciation,Depreciation Expense,Haircutting Equipment$13.3,Accumulated Depreciation,Haircutting Equipment$13.3,Depreciation Expense,Store Equipment$40,Accumulated Depreciation,Store Equipment$40,WE ARE SAILING RIGHT ALONG!,