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Transcript of Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Long-Lived Nonmonetary Assets and Their...
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Long-Lived Nonmonetary Assets and Their Amortization
© The McGraw-Hill Companies, Inc., 1999
7Part One: Financial Accounting
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Tangible assets:Land not amortizedPlant and equipment depreciationNatural resources depletion
Intangible assets:Goodwill amortizationPatents, copyrights, etc. amortizationLeasehold improvements amortizationDeferred charges amortizationResearch and development costs not capitalized
Types of Long-Lived Assets Slide 7-1
Type of AssetMethod of Converting
to Expense
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Purchase priceSales taxTransportation costs Installation cost
Items Included in Cost Slide 7-2
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Straight-Line Method Slide 7-3
Depreciation Expense =Original cost - Residual value
Service life (years)
The number of accounting periods overwhich the asset will be
useful to the entity.
The number of accounting periods overwhich the asset will be
useful to the entity.
The expected amount tobe recovered at the end
of the service life.
The expected amount tobe recovered at the end
of the service life.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Straight-Line Method Slide 7-4
Depreciation Expense =Original cost - Residual value
Service life (years)
Depreciation Expense =$10,000 - $1,000
5 years
Depreciation Expense = $1,800
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
$10,000
Year 1: $10,000 x .40 = $4,000 6,000
Year 2: $6,000 x .40 = 2,400 3,600
Year 3: $3,600 x. 40 = 1,440 2,160
Year 4: $2,160 x .40 = 864 1,296
Year 5: $1,296 - $1,000 = 296 1,000
Declining-Balance Method Slide 7-5
Note that this amount reduces the book value to the salvage value.
Note that this amount reduces the book value to the salvage value.
DepreciationExpense
BookValue
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
$10,000Year 1: 5/15 x ($10,000 - $1,000) $3,000 7,000Year 2: 4/15 x ($10,000 - $1,000) 2,400 4,600Year 3: 3/15 x ($10,000 - $1,000) 1,800 2,800Year 4: 2/15 x ($10,000 - $1,000) 1,200 1,600Year 5: 1/15 x ($10,000 - $1,000) 600 1,000
n + 1
2
Years’-Digits Method Slide 7-6
First, determine the sum by using the following equation:
n =5 + 1
25 = 15
Next, build a table:Annual
DepreciationBookValue
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Units-of-Production Method Slide 7-7
Depreciation Expense =Original cost - Residual value
Service life (units)
Depreciation Expense =$10,000 - $1,000
90,000 miles
Depreciation Expense = $.10 per mile
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Accounting for Depreciation Slide 7-8
Building, at net $1,000,000Less: Accumulated depreciation 25,000
Building, net$975,000
December 31, 1996
Building, at net $1,000,000Less: Accumulated depreciation 50,000
Building, net$950,000
December 31, 1997
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Accounting for Depreciation Slide 7-9
The annual journal entry to record depreciation is:
Depreciation Expense 25,000
Accumulated Depreciation 25,000
A fully depreciated building still in use (assume no salvage value) would appear on the balance sheet as follows:
Building, at net $1,000,000Less: Accumulated depreciation 1,000,000
Building, net$0
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Disposal of Plant and Equipment Slide 7-10
A building is sold for its book value of $750,000:
Cash 750,000
Accumulated Depreciation 250,000
Building 1,000,000
Assume instead that the building was sold for $650,000:Cash 650,000
Accumulated Depreciation 250,000
Loss on Sale of Building 100,000
Building 1,000,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Exchanges and Trade-Ins Slide 7-11
Assume a company trades in two automobiles, each of which originally cost $20,000 and each has a book value of $5,000.
Each car has a market value of $7,000.
Assume a company trades in two automobiles, each of which originally cost $20,000 and each has a book value of $5,000.
Each car has a market value of $7,000.
The first car is traded for another car with a list price of $30,000,and $18,000 cash is given to the dealer in addition to the trade-in.
The first car is traded for another car with a list price of $30,000,and $18,000 cash is given to the dealer in addition to the trade-in.
Automobile (New) 23,000
Accumulated Depreciation (Automobile) 15,000
Cash 18,000
Automobile (Old) 20,000
$18,000 + $7,000 -
“gain” of $2,000
$18,000 + $7,000 -
“gain” of $2,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Exchanges and Trade-Ins Slide 7-12
Assume a company trades in two automobiles, each of which originally cost $20,000 and each has a book value of $5,000.
Each car has a market value of $7,000.
Assume a company trades in two automobiles, each of which originally cost $20,000 and each has a book value of $5,000.
Each car has a market value of $7,000.
The second automobile is traded for a piece of equipmentthat also has a list price of $30,000 and $18,000 cash
is given in addition to the trade-in.
The second automobile is traded for a piece of equipmentthat also has a list price of $30,000 and $18,000 cash
is given in addition to the trade-in.
Equipment (New) 25,000Accumulated Depreciation (Automobile) 15,000
Cash 18,000Automobile (Old) 20,000Gain on Disposal of Automobile 2,000
$18,000 +
$7,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Group Depreciation Slide 7-13
Group depreciation treats all similar assets (such as automobile or office chairs) as a “pool” or group rather
than making the calculation for each one separately.
Group depreciation treats all similar assets (such as automobile or office chairs) as a “pool” or group rather
than making the calculation for each one separately.
A used microcomputer which originally cost $3,000 isdisposed of for $400 cash.
A used microcomputer which originally cost $3,000 isdisposed of for $400 cash.
Cash 400Accumulated Depreciation, Microcomputers 2,600
Microcomputers 3,000
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
A method provided by the tax codeDesigned as an incentive to invest in capital
assetsShortened assets’ lives for tax purposesMost classes of property acquired or
disposed of at any point during the year are assumed to have been acquired or disposed of at the midpoint of the year
A method provided by the tax codeDesigned as an incentive to invest in capital
assetsShortened assets’ lives for tax purposesMost classes of property acquired or
disposed of at any point during the year are assumed to have been acquired or disposed of at the midpoint of the year
MACRS Slide 7-14
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
19x1 $ 20,000 1/2 * 40% * $100,000
19x2 32,000 40% * ($100,000 - $20,000)
19x3 19,200 40% * ($80,000 - $32,000)
19x4 11,520 40% * ($48,000 - $19,200)
19x5 11,520 change to straight-line
19x6 5,760 1/2 * 19x5 amount
Total $100,000
MACRS Slide 7-15
Assume that a machine in the five-year class is acquired at some point in 19x1 for $100,000.
Assume that a machine in the five-year class is acquired at some point in 19x1 for $100,000.
Cost Recovery Year Deduction Computation
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Investment Tax Credit Slide 7-16
In late December 19x1 a company purchased a $200,000machine that qualified for a $20,000 investment tax credit.
In late December 19x1 a company purchased a $200,000machine that qualified for a $20,000 investment tax credit.
Income Tax Liability 20,000 Income Tax Expense 20,000
This is theflow-through
method.
This is theflow-through
method.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Investment Tax Credit Slide 7-17
An alternative approach is to record the investment tax creditas a deferred credit--which is analogous to unearned revenue.
An alternative approach is to record the investment tax creditas a deferred credit--which is analogous to unearned revenue.
Income Tax Liability 20,000 Deferred Investment Tax Credits 20,000
This approach iscalled the
deferred method.
This approach iscalled the
deferred method.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Investment Tax Credit Slide 7-18
In 19x2 and the subsequent nine years, IncomeTax Expense would be decrease by $2,000.
In 19x2 and the subsequent nine years, IncomeTax Expense would be decrease by $2,000.
Deferred Investment Tax Credits 2,000Income Tax Expense 2,000
This method has theeffect of increasing net
income each yearthe entry is made.
This method has theeffect of increasing net
income each yearthe entry is made.
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
Depletion Expense Slide 7-19
An oil property cost $250 million and is estimated to contain 50 million barrels of oil.
An oil property cost $250 million and is estimated to contain 50 million barrels of oil.
Depletion Expense =Original cost - Residual value
Total barrels of oil
Depletion Expense =$250 million - $0
50 million
Depletion Expense = $5 per barrel
Irwin/McGraw-Hill
© The McGraw-Hill Companies, Inc., 1999
• Goodwill• Patent• Copyrights• Franchise rights• Leasehold improvements• Deferred charges• Research and development costs
Intangible Assets Slide 7-20