Accounting for Plant Assets and Depreciation
14. Buying and selling plant assets, paying
property tax, and calculating depreciation
Plant asset – an asset that will be used for a number of
years in the operation of the business (equipment,
buildings, land) Every plant asset has a related accumulated depreciation account
Real property – land and anything attached to the land
(real estate)
Personal property – all property not classified as real
For tax purposes, same definitions apply to business and individual
Assessed value – value of an asset determined by tax
authorities for the purpose of calculating taxes
2
RECORDING THE BUYING
OF A PLANT ASSET
page 535
January 3, 20X1. Paid cash for a display case, $3,250.00. Check No. 4.
1
2
3
4
1. Account title
2. Cost of the plant asset
3
LESSON 18-1
3. Cash paid
4. Post
CALCULATING AND PAYING
PROPERTY TAX
February 1. Classic Parts, Inc., paid cash for property tax, $720.00.
Check No. 69.
4
Assessed
Value
×
Tax Rate
=
Annual
Property Tax
$60,000.00
×
1.2%
=
$720.00
LESSON 18-1
page 536
14. Buying and selling plant assets, paying
property tax, and calculating depreciation
GAAP (Generally accepted accounting principals) require
plant assets be expensed over the asset’s useful life
(Concept: Matching Expenses with Revenue)
A month is the smallest unit of time used to calculate
depreciation
5
STRAIGHT-LINE DEPRECIATION
page 538
Calculating Annual Depreciation Expense
1. Subtract the asset’s estimated salvage value from the original cost.
2. Divide the estimated total depreciation expense by the years of
estimated useful life.
Original
Cost
$3,250.00
Estimated Total
Depreciation
Expense
$3,000.00
6
–
Estimated
Salvage Value
=
–
$250.00
=
÷ Years of Estimated =
Useful Life
÷
LESSON 18-2
5
=
Estimated Total
Depreciation
Expense
$3,000.00 1
Annual
Depreciation
Expense
$600.00
2
CALCULATING DEPRECIATION
EXPENSE FOR PART OF A YEAR
page 539
Calculating Partial Year’s Depreciation Expense
1. Divide the annual depreciation expense by 12.
2. Multiply the monthly depreciation expense by the number of
months the plant asset is used in a year.
Annual
Depreciation
Expense
$600.00
Monthly
Depreciation
Expense
$50.00
7
÷
Months in
a Year
=
Monthly
Depreciation
Expense
÷
12
=
$50.00
× Number of Months =
Asset Is Used
×
LESSON 18-2
5
=
1
Partial Year’s
Depreciation
Expense
$250.00
2
CALCULATING ACCUMULATED
DEPRECIATION
20X2 Accumulated +
Depreciation
$1,200.00
8
+
LESSON 18-2
20X3
Depreciation
Expense
$600.00
page 540
= 20X3 Accumulated
Depreciation
=
$1,800.00
page 540
CALCULATING BOOK VALUE
9
Original
Cost
–
Accumulated
Depreciation
=
Ending
Book Value
$3,250.00
–
$1,800.00
=
$1,450.00
Beginning
Book Value
–
Annual
Depreciation
=
Ending
Book Value
$2,050.00
–
$600.00
=
$1,450.00
LESSON 18-2
14. Buying and selling plant assets, paying
property tax, and calculating depreciation
Plant asset record – an accounting form on which a
business records information about each plant asset
10
PREPARING PLANT ASSET RECORDS
page 542
1 1. Write the information in
Section 1 when the
asset is purchased.
2 2. Do not write in Section
2 until the asset is
disposed of.
3 3. Each year the asset is
owned, record the
year’s annual
depreciation expense in
Section 3. Calculate
and record accumulated
depreciation and ending
book value.
11
LESSON 18-3
JOURNALIZING ANNUAL
DEPRECIATION EXPENSE
page 543
2
1
3
1. Depreciation Expense debit
2. Accumulated Depreciation credit
3. Record adjusting entry
12
LESSON 18-3
3
POSTING AN ADJUSTING ENTRY
FOR DEPRECIATION EXPENSE
page 544
1. Debit Depreciation Expense.
2. Credit Accumulated
Depreciation.
1
2
13
LESSON 18-3
14. Buying and selling plant assets, paying
property tax, and calculating depreciation
When plant assets are no longer useful they can be sold,
traded, or discarded
A company could have a gain or loss from the sale of a
plant asset
Gain on plant asset – revenue that results when a plant
asset is sold for more than the book value (other revenue)
Loss on a plant asset – a loss that results when a plant
asset is sold for less than the book value (other expense)
14
SALE OF A PLANT ASSET FOR
BOOK VALUE
page 546
January 6, 20X6. Received cash from sale of display case, $250.00:
original cost, $3,250.00; total accumulated depreciation through
December 31, 20X5, $3,000.00. Receipt No. 4.
1
1. Record an entry
in the cash
receipts journal
to remove the
2. Check the type of disposal, and write the
original cost.
date, and disposal amount in Section 2 of the
plant asset record.
15
LESSON 18-4
2
RECORDING A PLANT ASSET’S DEPRECIATION EXPENSE FOR A
PARTIAL YEAR
April 4, 20X7. Recorded a partial year’s depreciation on a safe to
be sold, $60.00. Memorandum No. 31.
1
3
1. Debit the depreciation expense account.
2. Credit the accumulated depreciation account.
3. Update Section 3 of the plant asset record.
16
LESSON 18-4
2
page 547
SALE OF A PLANT ASSET FOR MORE
THAN BOOK VALUE
page 548
April 4, 20X7. Received cash from sale of safe, $425.00: original
cost, $1,800.00; accumulated depreciation through April 4, 20X7,
$1,500.00. Receipt No. 47.
1
1. Remove the
original cost.
Record the gain
on the sale.
Record the cash
received from the
sale.
17
2
2. Check the type of disposal. Write the date and
disposal amount in Section 2 of the plant asset
record.
LESSON 18-4
SALE OF A PLANT ASSET FOR LESS
THAN BOOK VALUE
October 6, 20X7. Received cash from sale of a computer, $150.00:
original cost, $1,900.00; total accumulated depreciation through
October 1, 20X7, $1,500.00. Receipt No. 281.
1
2
1. Remove the original cost. Record the loss on the
sale. Record the cash received from the sale.
2. Check the type of disposal and write the date and
disposal amount in Section 2.
18
LESSON 18-4
page 549
14. Buying and selling plant assets, paying
property tax, and calculating depreciation
Many plant assets depreciate more in the early years of
useful life than in later years. (vehicles, computer equipment)
Declining balance method of depreciation – multiplying
the book value by a constant depreciation rate at the end of
each fiscal period
100% ÷ # of useful years = %
Double declining-balance method – a declining-balance
rate that is two times the rate.
19
Plant asset never depreciated below estimated salvage
value, therefore the last year of depreciation is only the
amount required to get it to salvage value
CALCULATING DEPRECIATION USING THE DOUBLE DECLININGBALANCE METHOD
1
2
3
4
1.
2.
3.
4.
20
Calculate the double declining-balance rate.
Determine the annual depreciation expense.
Determine the ending book value.
Transfer the ending book value to the beginning book value for
the following year.
LESSON 18-5
page 551
CALCULATING THE LAST YEAR’S
DEPRECIATION EXPENSE
2
3
1
1. Transfer the ending book value from Year 4 to the beginning
book value of Year 5.
2. Subtract the salvage value from the beginning book value to
determine the depreciation expense for the last year.
3. Verify that the ending book value is equal to the salvage value.
21
LESSON 18-5
page 552
COMPARISON OF TWO METHODS
OF DEPRECIATION
page 553
22
LESSON 18-5