Chapter 21 Accounting for Plant Assets and Depreciation Two types of Assets 1. Current Assets a. Any Asset that is used up within one year. i. Cash 2. Plant Assets a. Assets that are used for a number of years. i. Trucks ii. Computers Buying a plant asset and a regular asset are done the same way. Cash Payments Journal Ck. Purchases Discount Cash No Ref Credit Payable Credit Credit Jan 2 Store Equipment 7 1215 1250 1250 Account Store Equipment Account 1215 Item Ref Credit Balance Credit Jan 1 Balance 43760 2 CP1 1250 45010 Calculating Property Tax Two types of Property 1. Real Estate - Land and anything attached to the land. Also called Real Estate. 2. Personal Property All property not classified Real Property Assessed Value The value of an asset determined by tax authorities for the purpose of calculating taxes. Assesed Value X Tax Rate = Annual Property Tax $70,000 1.2% $840.00 Depreciation: Terms that you need to know:
Depreciation Expense : The amount of value that is lost from an asset in ONE YEAR!!!! Original Cost The price that the asset was bought for when first purchased Estimated Salvage Value what the asset is worth when it has fully depreciated in value. Estimated Useful Life The government says that an asset can only be depreciated for a certain amount of years. This is determined from two types of depreciation: 1. Physical depreciation 2. functional Depreciation Straight-Line Depreciation The idea behind straight-line depreciation is that it depreciates by the same amount each year. Example: We purchased a book case for $1,250. The salvage value will be $250, and we can depreciate the bookcase for 5 years. What is the annual depreciation? Original cost - Est. Salvage Value = Est. Total Depreciation Expense $1,250 $250 $1000 Est. Total Depreciation Expense / Years of Estimated Useful Life = Annual Depr. $1000 5 $200 This means that each year we have the asset it will depreciate by $200 dollars So at the end of the first year we own the asset it would be worth $1050. ($1250-200 = 1050) Partial Year Depreciation It would be great if we could by every asset on January 1 st and sell it on December 31 st, but we know that this rarely happens. So there are many times we had do determine partial year depreciation. Once we figure out what it depreciates for the full year it is very simple to determine the partial year. Lets continue with our example:
Lets say that we bought this bookcase August 1 st so we had this asset for 5 months of the first year. August September October November December 16.67 16.67 16.67 16.67 16.67 So this bookcase lost $83.35 in value for this year. Calculating Accumulated Depreciation. Accumulated Depreciation is the amount of depreciation that adds up over the life of the asset. So in our example: The depreciation expense is $83.35 after the first year. The Accumulated depreciation is also $83.35 At the end of the second year the depreciation expense would be $200 The accumulated is $200 + 83.35 = 283.35 Calculating Book Value Book Value is what the asset is worth to us either at the end of the year or when we sell the item. In our example the book value at the end of the second year would be 1000- (our accumulated depreciation) ( 283.35) = $2216.65 Try the Work Together and On Your own on page 554 Journalizing Depreciation Expense We have all of these plant assets and we need to keep track of them. We use a form called a Plant asset record. At the end of each year, we record the depreciation expense, accumulated depreciation, and book value of the asset. An example of one of these is on page 555 of your textbook. Along with bringing all of the other accounts up to date we need to do the same with Depreciation Expense. We journalize this in the General Journal.
General Journal Doc. Ref. Credit Dec 31 Depreciation Exp. Store Equipment 8750 Accum Dep. Exp - Store Equipment 8750 Remember that each plant asset has to adjusted. Disposal of a Plant Asset Three ways we can dispose of a plant asset 1. We can make money (revenue) 2. We can loose money (expense) 3. We can break even. 2. Write off any accumulated depreciation of the asset (found in the plant asset record) There is a process that you need to go through when you sell a plant asset. Selling a Plant asset for Book Value January 5, 2006. Received cash from sale of display case, $250.00 : Original Cost $1,250; total accumulated depreciation through December 31, 2005, $1000. Receipt 4. Remember the 4 things you must remember when selling a plant asset. What is this asset worth to us. Cash Received 250 Less: Book value of asset sold: Cost 1250 Accum Depreciation 1000 250 Gain (loss) on sale of plant Asset -0-
Here is what the transaction would look like: 2. Write off any accumulated depreciation of the asset (found in the plant asset record) Cash Receipts Journal Sales Tax Payable Sales Doc Ref Credit Receivable Credit Sales Credit Credit Discount Cash Jan 5 Accum Depr- Store Equipment R4 1000 250 Store Equipment 1250 Now we must look at an asset that was sold in the middle of the year. Lets pretend that the asset was sold on April 1, 2007. We must calculate the accumulated depreciation for the first 3 months. Annual Depreciation / 12 months = monthly depreciation 120 12 = $10 per month Monthly depreciation x number of months = partial year depreciation $10 3 = $30 We then need to journalize this in the general journal: General Journal Doc. Ref. Credit Dec 31 Depreciation Exp. Store Equipment 30 Accum Dep. Exp - Store Equipment 30 Then we find out how much this cash register was worth to us. Here is the transaction: April 1, 2007. Received cash from sale of a cash register, $125. original cost, $700, accumulated depreciation though April 1, 2007, $600. Reciept 39 Cash Received 125 Less: Book value of asset sold: Cost 700 Accum. Depr 600 100 Gain or (loss) on sale of plant asset 25
So in this transaction we actually made money. 2. Write off any accumulated depreciation of the asset (found in the plant asset record) Cash Receipts Journal Sales Tax Payable Sales Doc Ref Credit Receivable Credit Sales Credit Credit Discount Cash April 1 Accum Depr- Store Equipment R4 600 1250 Store Equipment 700 Gain Plant Asset 25 Sale of a plant asset for less than book value: We have done a sale of a plant asset for more and now here is a transaction that shows for less. Remember that if this problem did not already do the calculation for additional depreciation through September we would have to do it. September 1, 2007. Received cash from sale of a computer, $500: original cost, $2000; total accumulated depreciation through September 1, 2007, $1300 Receipt 281. Cash received 500 Less: book value of asset sold: Cost 2000 Accum. Depr 1300 700 Gain or loss on sale of plant asset (200)
So according to this we lost $200 on the sale of this plant asset. It would look like this: 2. Write off any accumulated depreciation of the asset (found in the plant asset record) Cash Receipts Journal Sales Tax Payable Sales Doc Ref Credit Receivable Credit Sales Credit Credit Discount Cash April 1 Accum Depr- Store Equipment R4 1300 500 Loss on Plant Asst 200 Office Equipment 2000 Other Methods Declining Balance Method of Depreciation To determine the percentage need for Declining Balance method 100% / Estimated Useful Life = Straight line rate 100% / 5 20% Straight line rate x 2 = 40% Plant Asset : Truck Original Cost $ 22,000.00 Depreciation Method: Declining Balance Method Estimated Salvage Value: $ 2,200.00 Estimated useful Life: 5 years Year Beg Book Value Declining Balance Rate Annual Depreciation Ending Book Value 1 $ 22,000.00 40% $ 8,800.00 $ 13,200.00 2 $ 13,200.00 40% $ 5,280.00 $ 7,920.00 3 $ 7,920.00 40% $ 3,168.00 $ 4,752.00 4 $ 4,752.00 40% $ 1,900.80 $ 2,851.00 5 $ 2,851.00 ------ $ 651.20 $ 2,200.00 $ 19,800.00