Copyright 2006 Pearson Education Canada Inc. 11-1.


Outline Property and Equipment Depreciation Illustration of Depreciation Methods Amortization Inventories Inventory Valuation Methods Physical Inventory Counts Tax Considerations in Accounting for Inventories Potential Sources of Errors in Inventory Valuation


Property and EquipmentTangible AssetsAcquired for use in the

ordinary operation of the business

Useful life more than one year


Property and Equipment

Categories: Land Building Leaseholds and Leasehold Improvements Construction in Progress Furniture and Equipment China, Glassware, Silver, Linen, and Uniforms


Depreciation

Decline in the service potential of property and equipment during the accounting period

Recognition of expense for income statement and income tax purposes


Depreciation

Depreciation Methods Straight-Line Accelerated Methods

Declining-Balance Sum of Years’ Digits

Units of Output


Illustration of Depreciation Methods

Example: A Tour Bus Cost: $12,000 Salvage value: $2,000 Useful life: five years Kilometers estimated to be travelled

during lifetime: 200,000


STRAIGHT-LINE DEPRECIATION

Spreads the total depreciation equally over all periods of useful life of the property or equipment

Depreciation = Cost – salvage value

# of years of useful life

12,000-2,000 = $2,0005

Higher Net IncomeHigher Asset Value


Double-Declining Balance

Apply double the straight Line Rate to the Net book value of the property or equipment

Straight Line Rate X 2 = 100 = 20% x 2 = 40%

5 years

40% x 12,000 = 4,800 Year 1 Depreciation Expense $4800

Accumulated Depreciation $4,800

Net Book value-end of Year 1 $7,200

40% x 7,200 = 2,880 Year 2 Depreciation Expense $2,880 Accumulated Depreciation $7,680 Net Book value-end of Year 2 $4,320


Units of Output Method

Cost – Salvage Value X Annual units of output

Estimated units of output over entire life

12,000 - 2,000 = $0.05 per kilometer depreciation 200,000 kilometers

Year 1 Bus travels 40,000 kilometers Depreciation Expense $0.05 x 40,000 kms = $2,000


Net Book Value $12,000-2,000 = $8,000

Year 2 Bus travels 20,000 kilometers Depreciation Expense $0.05 X 20,000 kms = $1,000


Net Book value $9,000


Sum of Years’ Digits

The depreciation rate each year is a fraction in which

the sum of digits and the numerator is years in inverse order

n (n+1) = 5 (6) = 15 Fractions year 1 5

2 2 15

2 4

15Year 1 depreciation

5/15 X 10,000= $3,333

Year 2 depreciation4/15 X 10,000= $2,667

ACCELERATEDMETHOD


Amortization

Write-off of the cost of an asset over its estimated useful life

Always calculated on the straight line basis It is the type of depreciation used to record

cost expiration of leasehold and leasehold improvements and other intangible assets


Inventories

Inventories for sale Food Beverage Inventories consumed by the business Office Supplies Housekeeping Supplies


Inventory valuation methods

FIFO first in, first out Oldest costs will flow

through cost of sales Inventory is based on

most recent purchases

LIFO last in, first out Most recent costs will flow

through cost of sales Inventory is based on earliest

purchases


Inventory Valuation Methods

Specific Units Valuation Method

Only practical for use with readily high-value items that can be associated with their actual cost.

Weighted-Average Valuation Method Total cost of all units is divided by the total number of units on

hand when the physical inventory is taken.


Inventory valuation methods

Jan 10 100 units $1.00 $100 Feb 12 200 units $1.20 240 May 15 100 units $ 1.50 150 Nov 19 200 units $ 2.00 400 600 Total $890 Sold 120 units Dec 10 (average cost $1.48)

Cost of Sales 100 units $1.00 $100

20 1.20 40

$140

Inventory $890-140= $750

Cost of sales 120 units $2.00 = $240.

Inventory $890-240 = $650.

AVERAGE CostCost of sales

120 x $1.48=$180Inventory

480 x $1.48=$710


Physical Inventory Counts

Perpetual Inventory SystemPurchases are debited and issues are credited to the

inventory account as they occur during the accounting period.

Periodic Inventory SystemA physical inventory count is used as a basis to

record the proper amount of inventory and cost of sales at the end of the period . Issues are not recorded as they occur.


Tax Considerations in Accounting for Inventories

In times of inflation the LIFO method of inventory valuation tends to minimize net income.

In times of inflation the FIFO method usually maximizes net income.

The Weighted Average method brings results that fall between those of LIFO and FIFO.

For tax purposes, the LIFO method cannot be used in Canada.


Potential Sources of Errors in Inventory Valuation

Errors in making the physical inventory countErrors in applying purchase costs according to

the inventory valuation method selectedImproper physical control of inventory,

mathematical errors on value computation sheets, and errors in entering amounts using a computerized system

Errors in entering receipts and issues

Copyright 2006 Pearson Education Canada Inc. 11-1.

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