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Week of March 28 - April 1

by: Callisa Ruschmeyer

Week of March 28 - April 1 ACCT 2110 - 002

Marketplace > Auburn University > Accounting > ACCT 2110 - 002 > Week of March 28 April 1
Callisa Ruschmeyer
GPA 4.0

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About this Document

Started Chapter 7 notes Three Depreciation Methods 1. Straight-Line 2. Declining Balance Method 3. Unit of Production
Principles of Financial Accounting
Elizabeth G Miller
Class Notes
Financial Accounting; Miller; Auburn; Chapter 7; Operating Assets; Depreciation Methods
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This 7 page Class Notes was uploaded by Callisa Ruschmeyer on Friday April 1, 2016. The Class Notes belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth G Miller in Fall 2015. Since its upload, it has received 22 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.


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Date Created: 04/01/16
th st March 28 – April 1 Chapter 7- Depreciation Methods Operating Assets  Long lived assets that are used by the company in the normal course of operations  Assets are not sold to customers  Used by the company in normal day to day operations to generate revenue  Three categories 1. Property, plant, and equipment- fixed assets or plant assets  Land, buildings, machines, equipment, automobiles  Allocation called depreciation 2. Intangible assets- no physical substance  Patents, copyrights, trademarks, licenses, franchises, and goodwill  Allocation called amortization 3. Natural resources- naturally occurring materials  Timberlands and deposits like coal, oil, and gravel  Allocation called depletion  Operating asset is recorded at its cost- AND the costs of preparing the asset for use o You do this to follow the GAAP principle of historical cost  As operating asset declines, the cost of the asset is allocated as an expense since you use it to create benefits for your company o Follows the matching principle Property, Plant, and Equipment  Tangible operating assets  Land- the site or office building used to operate business o NOT subject to deprecation- it has an unlimited life and service potential o Other expenses dealing with land: real-estate agent, attorney fees, etc  Land Improvements- structural additions o Driveways, parking lots, fences, etc o Depreciate  Buildings- structures used to operate business in o Factory, office, warehouse o Depreciate  Equipment- assets used in operations o Machinery, furniture, automobiles o Depreciate Measuring the Cost of a Fixed Asset  Cost is an expenditure necessary to acquire the asset and to prepare it for use  Capitalized- when expenditure is included as part of the cost of the asset  Expensed- when expenditure is not included as part of the cost of the asset Depreciation  Allocating the cost of a tangible fixed asset to expense over the asset's useful life  We do this because of the matching principle  Depreciation expense is reported on the income statement each period  Accumulated depreciation- total amount of depreciation expense (since the asset was acquired) is reported on the balance sheet o Remember- accumulated depreciation is a contra asset (normal credit balance)  Book value = cost - accumulated depreciation o Decreases each year by that years expense Measuring Depreciation  Three pieces of information needed 1. Cost of the fixed asset  Cost of any expenditure necessary to acquire the asset 2. Useful life (or expected life) of the fixed asset  Period of time which the company anticipates benefiting from the asset 3. Residual value (salvage value) of the fixed asset  Amount of cash or trade-in value that the company expects when it goes to retire the asset  Depreciation Cost = cost - residual value  Assets depreciate down to the residual value Depreciation Methods  Assets decline with each period of use  The pattern of decline is not the same for all assets o This create the reason to why there are different depreciation methods  Depreciation methods are standardized to determine periodic depreciation expense  Most common methods o Straight-line o Declining balance o Units-of-production Straight-Line Method  Allocates an equal amount of an asset's cost to depreciation expense for each year of the asset's life  Apply this method to assets where the service potential is equal from year to year (like a building)  Straight-line depreciation = (cost - residual value) / expected useful life  Straight-line depreciation rate = 100% / expected useful life (in years)  Graph is a straight line Declining Balance Method  Accelerated depreciation method  The declining amount of depreciation expense each period is computed by multiplying the declining book value by a constant depreciation rate  Basically shows how things depreciate quickly in the first few years and then slows in the later years  Double-Declining Balance rate = 2 X Straight-Line Rate o Straight-Line Rate = 100% / Estimated Life in Years  Declining Balance Deprecation Expense = Declining Balance Rate X Book Value  Graph is an exponential curve Units-of-Production Method  The depreciation increases proportional to the usage of the asset  Periodic depreciation due to rise and fall of the asset's use  Usage is typically gauged by a measure of productive capacity such as miles, hours, or production  Depreciation Cost per Unit = (cost-residual value) / expected usage  Units-of-Production Depreciation Expense = Depreciation Cost per Unit X Actual Usage  Graph is fluctuating (peaks and troughs) Comparison of Depreciation Methods  Declining Balance- double the percent of [(cost-residual values)/useful life] o Straight-line just uses the depreciation cost divided by the useful life  Remember, both use the depreciation cost = cost - residual value  Straight-line and Declining Balance consider years; Units-of-Production considers usage in units Depreciation for Partial Years  Assets can be purchased throughout the year- not just on January 1st  The matching principle requires that depreciation be recorded only for the portion of the year that the asset was used- so entries must be up to date if an asset is purchased (or disposed of) during an accounting period  Only Straight-line and Declining Balance use partial years o For Units-of-Production, it does not matter when you use it- just how much you use it Depreciation and Income Taxes  Depreciation method used in preparing tax returns does not need to be the same for all assets- but it does on the financial statements  Tax depreciation rules are designed to stimulate investment in operating assets and, therefore, are not guided by the matching concept


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