Week of March 28 - April 1
Week of March 28 - April 1 ACCT 2110 - 002
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ACCT 2110 - 002
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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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