Digital Splash Algorithmic Problems and Simulations 1 st Web- Based Edition Problem 17: Plant Assets Acquisition, Disposal, and Depreciation Zeke s Pedalorium NBE Achievement Standard: 2) Apply GAAP to determine the value of assets, liabilities, and owner s equity CCTE Pathway Standard: A1.2: Examine, analyze, and categorize financial transactions. A2.3: Understand the process involved in revenue recognition and in matching of income and expenses. A2.4: Know the procedures for acquisition, disposition, and depreciation of fixed assets. Page 1
Acquisition of Plant Assets Plant (or fixed) assets are acquired in a variety of ways. They are acquired by cash purchase, or by cash down payments and the issue of a short- term or long- term note payable. 1. A business purchases store equipment for $20,000. Store Equipment 20,000.00 Cash 20,000.00 2. A business purchases land for $50,000, paying $10,000 down and issuing a note for the balance. Land 50,000.00 Cash 10,000.00 Notes Payable 40,000.00 Depreciation of Plant Assets The matching principle requires that expenses associated with earning revenue be reported in the same time period that the revenue is earned. The buildings, store equipment, office equipment, delivery equipment, and other plant assets are used to generate revenues. In order to accomplish the matching principle, plant assets are subject to depreciation. The term depreciation refers to the recognition and recording of the cost of an asset over its useful life to the entity as a periodic expense. For example, the purchase price of a delivery van is not recorded as an expense for the period in which it was purchased. Instead the purchase price is charged to the Delivery Equipment account, since the delivery van is going to provide a service to the business (generate revenue) over the useful life of the delivery van. Adhering to the matching principle, the cost of the delivery van will be amortized (depreciated) over its useful life, or service life, to the business. In order to calculate the period depreciation of a plant asset, you need to know four values: 1. Cost (cost of the plant asset) 2. Estimated useful life (estimated useful life of the plant asset to the business) 3. Estimated salvage value (estimated value at the end of its useful life to the business) 4. Depreciable value (cost estimated salvage value) Plant asset are never depreciated below their depreciable value of cost less the estimated salvage value. Page 2
Straight- line Method of Depreciation Straight- line deprecation is a method of calculating the amount of the periodic depreciation of a plant asset. It is called the straight- line method because the amounts of periodic depreciation are equal. Example: If the estimated or expected useful life of store equipment to the business is 10 years, then the cost of the store equipment is depreciated at 1/10 of its cost per year, or 1/120 of its cost per month. A plant asset that cost $13,000, with an expected useful life of 10 years, and an estimated salvage value of $1,000, has a depreciable value of $12,000 ($13,000 - $1,000). It would be depreciated at a rate of $1,200 per year ($12,000 /10) or $100 per month ($12,000/120). Monthly depreciation is recorded as: Depreciation Expense Store Equipment 100.00 Accumulated Depreciation Store Equipment 100.00 Note the credit to the account Accumulated Depreciation Store Equipment. Unlike a prepaid asset such as Prepaid Insurance, which is decreased as it is adjusted for the used portion of the insurance, plant asset accounts are not decreased. Plant assets remain on the books at cost until they are sold or discarded. Their original cost must be shown on the balance sheet, offset by the amount of depreciation accumulated to date. The net difference between the cost of a plant asset and its accumulated depreciation is called book value. Double Declining- Balance Method Declining- balance depreciation is another method of calculating the amount of periodic depreciation of a plant asset. It is called the declining- balance method because the amounts are based on a rate that is twice that of the straight- line rate. If the expected useful life of a plant asset is 5 years, the straight- line rate is 20% per year (1/5 = 20%). Therefore, the declining- balance rate is 40%, or twice that of the straight- line rate. Obviously, if you depreciate a plant asset at 40% of its cost per year for 5 years, you will be depreciating an amount equal to twice the cost of the plant asset. That is not permitted. Under the declining- balance method, the plant asset is depreciated at twice the straight- line rate multiplied by its original cost the first year, then depreciated at twice the straight- line rate multiplied by its book value for every year after, until the book value becomes equal to the salvage value. Page 3
Example: Assume a plant asset with an expected useful life of 5 years and an estimated salvage value of $1,000 is purchased for $13,500. Its depreciable value is $12,500 ($13,500 - $1,000). Year Beginning Book Value Depreciation Expense Accumulated Depreciation Ending Book Value 1 $13,500 $5,400 (.40 x $13,500 $5,400 $8,100 ($13,500 - $5,400 2 8,100 3,240 (.40 x $8,100) 8,640 4.860 ($13,500 - $8,640) 3 4,860 1,944 (.40 x $4,860) 10.584 2,916 ($13,500 - $10,584) 4 2,916 1,166 (.40 x $2,916) 11,750 1,750 ($13,500 - $11750) 5 1,750 250.00 * 12,000 $1,000 ($13,500 - $12,000) * The 5 th year depreciation must be $250.00; $1,750 + $250.00 = $12,000, the depreciable value of the plant asset. Using the declining- balance method, the accumulated depreciation will often become equal to the depreciable value before the end of the expected useful life of the asset, and depreciation expense is recorded in fewer time periods than the estimated useful life of the plant asset. However, once the accumulated depreciation becomes equal to cost minus salvage value (the depreciable value) depreciation is no longer recorded on the plant asset. Monthly depreciation for the first year is: Depreciation Expense Store Equipment 450.00 Accumulated Depreciation Store Equipment 450.00 $5,400 /12 = $450 The On or Before the 15 th Rule The general rule for recording depreciation expense on a plant asset is: (1) if the asset is purchased and put into service on or before the 15 th of the month, record depreciation expense for a full month; and (2) if the asset is purchased and put into service after the 15 th of the month, begin depreciation expense for the month following the month of purchase. If a plant asset is purchased in January but not put into service until March, depreciation starts in March. Depreciation of Real Property and Personal Property Land and everything attached to the land is called real property. Property not classified as real property is called personal property. All real and personal property is subject to depreciation, except for land. Land is never depreciated. Page 4
Disposal of Plant Assets When disposing of a plant asset, either by selling it or discarding it, the rules for recognizing a gain or a loss on the disposal are as follows: Book Value of Plant Asset at Rule Time of Disposal 1. Book Value is Equal to the Sales Price 2. Book Value Greater Than the Sales Price 3. Book Value Less Than the Sales Price Recognition of Gain or Loss on Disposal of Plant Asset No gain or loss is recognized Recognize a gain equal to the book value minus sales price. Recognize a loss equal to sales price minus the book value. In the case of a discard, recognize a loss equal to the book value of the plant asset. Recording the Disposal of a Plant Asset There are three steps for recording the disposal of a plant asset, whether by sale or discard. 1. Bring the depreciation up- to- date. If the book value has not reached estimated salvage value, use the On or Before the 15 th Rule to determine if depreciation expense for the month of the disposal should be recorded. 2. Determine the new book value. 3. Calculate the gain or loss on disposal, and record the sale of the asset. Sales Price Equal to Book Value On May 18, a piece of store equipment that cost $2,400.00, with a useful life of 5 years and accumulated depreciation of $1,960.00, was sold for $400.00. The straight- line depreciation has been $40.00 per month. Step 1: Record the depreciation expense for the month of May. Depreciation Expense Store Equipment 40.00 Accumulated Depreciation Store Equipment 40.00 Step 2: Determine the book value of the store equipment. $2.400.00 ($1,960.00 + $40.00) = $400.00 Page 5
Step 3: Record the sale or disposal of the store equipment. Cash 400.00 Accumulated Depreciation Store Equipment 2,000.00 Store Equipment 2,400.00 Depreciation expense was recorded for the month of disposal (May), because of the On or Before the 15 th Rule. The asset was sold after the 15 th of the month, so depreciation expense was recorded for the month of disposal. Sales Price Greater Than Book Value On May 18, a piece of store equipment that cost $2,400.00, with a useful life of 5 years and accumulated depreciation of $1,960.00, was sold for $500.00. The straight- line depreciation has been $40.00 per month. Step 1: Record the depreciation expense for the month of May. Depreciation Expense Store Equipment 40.00 Accumulated Depreciation Store Equipment 40.00 Step 2: Determine the book value of the store equipment. $2.400.00 ($1,960.00 + $40.00) = $400.00 Step 3: Record the sale or disposal of the store equipment and the gain of $100.00. The gain is equal to the cash received minus the book value of the asset sold. Cash 500.00 Accumulated Depreciation Store Equipment 2,000.00 Store Equipment 2,400.00 Gain on Sale of Plant Assets 100.00 Depreciation expense was recorded for the month of disposal (May), because of the On or Before the 15 th Rule. The asset was sold after the 15 th of the month, so depreciation expense was recorded for the month of disposal. Page 6
Sales Price Less Than Book Value On May 5, a piece of store equipment that cost $2,400.00, with a useful life of 5 years and accumulated depreciation of $1,960.00, was sold for $200.00. The straight- line depreciation has been $40.00 per month. Step 1: The On or Before 15 th Rule applies, and no depreciation is recorded in the month of sale. Step 2: Determine the book value of the store equipment. $2.400.00 $1,960.00 = $440.00 Step 3: Record the sale or disposal of the store equipment. The loss is equal to the cash received minus the book value of the asset sold. Cash 200.00 Accumulated Depreciation Store Equipment 1,960.00 Loss on Sale of Plant Assets 240.00 Store Equipment 2,400.00 Discard of a Plant Asset On May 5, a piece of store equipment that cost $2,400.00, with a useful life of 5 years and accumulated depreciation of $2,100.00, was discarded. The equipment was obsolete and no longer productive. Step 1: The On or Before 15 th Rule applies, and no depreciation is recorded in the month of sale. Step 2: Determine the book value of the store equipment. $2.400.00 $1,960.00 = $440.00 Step 3: Record the discard of the store equipment. The loss is equal to the book value of the asset being discarded. Accumulated Depreciation Store Equipment 2,100.00 Loss on Disposal of Plant Assets 300.00 Store Equipment 2,400.00 Page 7
Some companies distinguish between the losses from sales of assets and the losses from discarding of assets by using different accounts to record each type of loss: Loss on Sale of Plant Assets and Loss on Disposal of Plant Assets. Duties Your duties will include completing the accounting cycle for the month of December: A. Recording Daily Transactions 1. Purchases, Sales, and Expenses 2. Acquisition of Plant Assets 3. Disposal of Plant Asset B. Recording Adjusting Entries 1. Adjustments for Prepaid Accounts 2. Adjustments for Depreciation C. Analysis 1. Prepare and analyze an Adjusted Trial Balance CHART OF ACCOUNTS Zeke s Pedalorium Assets 101 Cash 105 Accounts Receivable 110 Interest Receivable 115 Merchandise Inventory 121 Store Supplies 123 Office Supplies 125 Prepaid Insurance 128 Prepaid Rent 130 Store Equipment 131 Accumulated Depreciation Store Equipment 134 Office Equipment 135 Accumulated Depreciation Office Equipment 138 Delivery Equipment 140 Accumulated Depreciation Delivery Equipment Page 8
Liabilities 201 Accounts Payable 203 Interest Payable 205 Sales Tax Payable Capital 301 Common Stock 305 Retained Earnings 320 Income Summary Revenue 401 Sales 403 Sales Returns and Allowances Cost of Merchandise Sold 501 Cost of Merchandise Sold Operating Expenses 601 Salaries and Wages Expense 602 Insurance Expense 603 Rent Expense 605 Store Supplies Expense 607 Office Supplies Expense 608 Advertising Expense 610 Depreciation Expense Store Equipment 611 Depreciation Expense Office Equipment 612 Depreciation Expense Delivery Equipment 620 Professional Expenses 625 Utilities Expense 626 Telephone Expense 650 Miscellaneous Expense 702 Interest Income 802 Interest Expense Page 9
CUSTOMER ACCOUNTS No. Name 10100 Albany Bike Club 10200 Del Oro Cyclists 10300 San Juan Emporium 10400 Up Town Dusters 10500 Wandering Pedal Pushers Credit terms for customers are Net 30 VENDOR ACCOUNTS No. Name 20100 American Cycles 20200 Office Equipment & More 20300 Pacific Trails 20400 Unicycles Unlimited 20500 Van Dyke Cycles, Inc. Credit terms from vendors are Net 30 Special Account Considerations 115 Merchandise Inventory is used to record all purchases of merchandise and purchases returns and allowances. 205 Sales Tax Payable is charged at 8% on the sales price of merchandise. 401 The Sales account is used to record sales of merchandise. Credit card sales are treated the same as cash sales. 402 Sales Discounts is used to record earned sales discount for receipt of account balances within the discount period offered to customers. 501 Cost of Merchandise Sold is used to record the cost of merchandise as it is sold. Merchandise inventory is marked up 100% on cost to determine the selling price of merchandise. 605 Store Supplies Expense is used only for adjusting the store supplies expense at the end of the accounting period. Page 10
607 Office Supplies Expense is used only for adjusting the office supplies expense at the end of the accounting period. When you have a good understanding of how the accounts used, and the procedures for recording transactions, you are ready to complete this module. Begin the Transactions After logging in to Digital Splash, do the following: 1. From the Menu Bar of the Data Entry page, move the pointer to Problems, then down to Problem 17: Plant Assets - Acquisition, Disposal, and Depreciation and click. 2. Move the pointer to Journal/Ledgers/Statements on the Menu Bar, select General Ledger, and print the Trial Balance for December 3. 3. Move the pointer to Journal/Ledgers/Statements on the Menu Bar, select Subsidiary Ledgers, select Accounts Receivable, then click on All Customers, and print. 4. Move the pointer to Journal/Ledgers/Statements on the Menu Bar, select Subsidiary Ledgers, select Accounts Payable, then click on All Vendors, and print. 5. Click on Data Entry, select Daily JE, click on OK, and then enter the transactions for December 3 to December 31. Responsibilities Zeke s Pedalorium, a bicycle specialty shop, closes its general ledger on a monthly basis. You are responsible for recording the daily transactions and adjusting entries for the month of December. Page 11
December 3: Paid a vendor invoice A check was issued to Van Dyke Cycles, Inc. for is invoice of November 22. Check your printout of All Vendors for details. Check Number: 42010. December 4: Purchased merchandise on credit A purchase of unicycles and unicycle parts was received from Unicycles Unlimited. The invoice price is $1,700.00, with credit terms of 2/10, n/30. Invoice Number: U6721. Vendor Number: 20400. December 5: Sold merchandise on account A credit sale of bicycles was made to Del Oro Cyclists for $4,775.00, plus sales tax of 8%. Invoice Number: Z6601. Customer Number: 10200. Note that the Cost of Merchandise Sold and the Merchandise Inventory accounts were automatically updated for the sale. After the message detailing the postings to the Cost of Merchandise Sold and Merchandise Inventory, click OK and continue recording the transactions. December 8: Collected a customer account A check was received from Albany Bike Club for its invoice of November 8. Check your printout of All Customers for details. December 9: Purchased office equipment Office equipment was purchased, on credit, from Office Equipment & More. The invoice price is $3,560.00. Invoice Number: OE452. Vendor Number: 20200. December 11: Sold old office equipment Office equipment that had become obsolete was sold for $500.00. Original cost $6,500.00 Accumulated depreciation $6,000.00 Estimated useful life 5 years Estimated salvage value $500.00 Record the disposal of the old equipment. Invoice Number: ASALE. Page 12
December 11: Sold merchandise on credit Credit customer Up Town Dusters purchased a variety of bicycle parts and accessories for $2,100.00, plus sales tax of 8%. Invoice Number: Z6002. Customer Number: 10400. December 16: Paid a vendor invoice A check was issued for the October 16 invoice from Pacific Trails. Check Number: 42011. Invoice Number: Z5210. Vendor Number: 20300. December 16: Sold obsolete store equipment A cash register (store equipment) that has become obsolete is being sold for $200.00. Original cost $2,600.00 Accumulated depreciation $2,030.00 Estimated useful life 5 years Estimated salvage value $500.00 Depreciation expense per month $35.00 Record the sale of the cash register, using the three steps outlined on page 5. 1. Using the On or Before the 15 th Rule, determine if depreciation expense is to be recorded. If so, then record the depreciation expense for December. Enter DEPRE as the invoice number. 2. Determine whether there is a gain or a loss on the disposal, and record the sale of the cash register, entering ASALE as the invoice number. December 17: Purchased store equipment A new point- of- sale cash register (store equipment) was purchased from Office Equipment & More. The invoice price is $3,200.00. Invoice Number: OE484. Vendor Number: 20200. December 18: Sold merchandise for cash A cash sale was made for $2,600.00 plus sales tax of 8%, with credit terms of 2/10, n/30. Invoice Number: Z6003. Page 13
December 19: Sold obsolete delivery equipment A delivery van which has been driven in excess of 100,000 miles is being sold for $3,000.00 to a private party. Original cost $20,000.00 Accumulated depreciation $17,400.00 Estimated useful life 5 years Estimated salvage value $2,000.00 Depreciation expense per month $300.00 Record the sale of the delivery van, using the three steps outlined on page 5. 1. Using the On or Before the 15 th Rule, determine if depreciation expense is to be recorded. If so, then record the depreciation expense for December. Enter DEPRE as the invoice number. 2. Determine whether there is a gain or a loss on the disposal, and record the sale of the cash register, entering ASALE as the invoice number. December 22: Purchased a delivery van A delivery van was purchased for $25,000.00 cash. Check Number: 42012. Invoice Number: A2360. December 31: Paid utility invoice A check was issued for a $340.00 utility invoice. Check Number: 42013. Invoice Number: UTILT. December 31: Paid telephone invoice A check was issued for the monthly telephone bill of $120.00. Check Number: 42014. Invoice Number: T5699. This concludes the daily transactions for December 3 to December 31. End of Month Procedures 1. Move the pointer to Journal/Ledgers/Statements on the Menu Bar. 2. Select General Journal, and print the document. 3. Move the pointer to Journal/Ledgers/Statements on the Menu Bar. 4. Move the pointer to General Ledger and click. 5. Print a copy of the December 31 Trial Balance. Page 14
6. Move the pointer to Check Figures on the Menu Bar. 7. Click on Problem Check Figures. 8. Print the Check Figures for Daily Entries for Problem 17: Plant Assets Acquisition, Disposal, and Depreciation. If Your Balances match the Correct Balances for the selected account totals in the Check Figures for Problem 17: Plant Assets, follow the instructions for adjusting entries that begin at the top of page 16. If Your Balances do not match the Correct Balances of the selected account totals in the Check Figures for Problem 17 you must correct the unmatched balances before continuing to the adjusting entries. The most efficient method of locating and correcting the error(s) is to compare your journal entries to the transactions in the module. Use the correction system designed specifically for the Digital Splash accounting system for accuracy, efficiency, and a clear audit trail. You have two options available to you for handling unmatched balances. Option One: Examine your documents, locate the error(s), and return to Data Entry and record the required correction entries. Option Two: If you find that you have several errors, you may wish to reset to the beginning of this problem and record the transactions again. To reset back to the beginning, move the pointer to Support and down to Files: Reset and Backup, select Reset Problem, and click. Select problem 17, and then click on Reset Selected Problem. Your data files will be set back to the beginning of the problem. Adjusting Entries All adjusting entries should be dated December 31. A. Store Supplies costing $440.00 were used during the month. B. Office Supplies valued at $360.00 were used during the month. C. The balance of the Prepaid Insurance account is for a 3- month insurance policy purchased on November 30. Record the insurance expense for the month of December. D. The balance of the Prepaid Rent account is for rent paid 4 months in advance on November 30. Record the rent expense for the month of December. Page 15
E. Record the depreciation expense on the store equipment of $300.00 for the month of December. F. Record the depreciation expense on the office equipment of $140.00 for the month of December. After Adjusting Entries 1. Move the pointer to Journal/Ledgers/Statements on the Menu Bar. 2. Move the pointer to General Journal, and print the journal. 3. Select Journal/Ledgers/Statements on the Menu Bar. 4. Move the pointer to General Ledger and click. 5. Print a copy of the December 31 Adjusted Trial Balance. 6. Move the pointer to Check Figures on the Menu Bar. 7. Click on Problem Check Figures. 8. Print the Check Figures for Problem 17: Plant Assets If Your Balances match the Correct Balances for the selected account totals in the Check Figures for Problem 17, then proceed to Backup Your Data Files. BACKUP YOUR DATA FILES Before continuing, backup your work (data files) for the problem. Go to Support on the Menu Bar, scroll down to Files: Reset and Back up, select Backup Data Files, and click on Start Backup, and then click on OK. You now have a copy of all of your work for Problem 16. CONTINUE TO THE EVALUATION If you have printed all the required documents, and backed up your data files, you are ready to complete the evaluation for Problem 17: Plant Assets - Acquisition, Disposal, and Depreciation. Complete the printed version of the evaluation that is given at the end of this manual. After completing the printed version, log in to Digital Splash, move the pointer to Evaluations and select Problem 17: Plant Assets Acquisition, Disposal, and Depreciation, and complete the on- line evaluation. Page 16
EXITING THE SYSTEM When you have completed your work for this session, click on Log Out and return to the PKL Software Home Page. You can exit the program at any point and return to that point at a later time. Page 17
DIGITAL SPLASH PROBLEM 17 PLANT ASSETS NAME DAY AND TIME DATE 1. What is the balance of the Adjusted Trial Balance? $ 2. Office equipment that had become obsolete was sold on December 11. The sale of the office equipment resulted in which of the following? A. A gain on sale of plant assets. B. A loss on sale of plant assets. C. No gain or loss on sale of plant assets. 3. Store equipment that had become obsolete was sold on December 16. The sale of the store equipment resulted in which of the following? A. A loss on the sale of plant assets of $370.00. B. A loss on the sale of plant assets of $450.00. C. A gain on the sale of plant assets of $370.00. D. A loss on the sale of plant assets of $335.00. 4. A delivery van was sold on December 19 for $3,000. What was the amount of the gain or loss on the sale of the delivery van? 5. Office equipment was purchased on December 9 for $3,560.00. Its estimated salvage value is $200.00, and its estimated useful life is 8 years. Use the straight- line method of depreciation to determine the amount of the yearly depreciation. 6. Office equipment was purchased on December 9, for $3,560.00. Its estimated salvage value is $200.00, and its estimated useful life is 8 years. Use the declining- balance method of depreciation to determine the amount of the first year depreciation. 7. A new point- of- sale cash register was purchased on December 12. The invoice price was $3,200, the estimated salvage value is $320.00, and its estimated useful life is 6 years. Use the straight- line method of depreciation to determine the amount of the yearly depreciation. $ $ $ $ Page 18
8. The delivery van purchased on December 22 for $25,000 has an estimated salvage value is $2,500.00, and an estimated useful life of 5 years. Use the straight- line method of depreciation and determine the amount of the yearly depreciation. 9. The delivery van purchased on December 22 for $25,000 has an estimated salvage value of $2,500, and an estimated useful life of 5 years. Use the declining- balance method of depreciation and determine the amount of the first year depreciation. $ $ 10. What is the total of Depreciation Expense Office Equipment? $ 11. What is the current book value of the Office Equipment? $ 12. What is the current book value of the Store Equipment? $ 13. What is the current book value of the Delivery Equipment? $ 14. What is the total of the Loss on Sale of Plant Assets? $ 15. What is the total of the Gain on Sale of Plant Assets? $ Page 19