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# Acct076 Chp 5 App Acctg

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### Acct076 Chp 5 App Acctg

1. 1. <ul><li>College Accounting </li></ul>Heintz & Parry 20 th Edition
2. 2. <ul><li>Appendix: Depreciation Methods </li></ul>5 Chapter
3. 3. <ul><li>Prepare a depreciation schedule using the straight-line method. </li></ul>1
4. 4. Depreciation Methods <ul><li>Straight-line </li></ul><ul><li>Sum-of-the-years’-digits </li></ul><ul><li>Double-declining-balance </li></ul><ul><li>Modified Accelerated Cost Recovery System </li></ul>
5. 5. Example For all illustrations in this appendix, we will assume that a delivery van was purchased for \$40,000. It has a five-year useful life and salvage value of \$4,000.
6. 6. Straight-line Method Under this method, an equal amount of depreciation will be taken each period. STEP #1: Compute the depreciable cost. COST SALVAGE VALUE = DEPRECIABLE COST \$40,000 \$4,000 = \$36,000 – –
7. 7. Straight-line Method STEP #2: Divide the depreciable cost by the expected life of the asset. Depreciation Expense per Year = Depreciable Cost Years of Life \$36,000 5 years = \$7,200 per year
8. 8. Straight-line Method It is often convenient to use a depreciation rate per year. Depreciation Rate per Year = 100% Years of Life 100% 5 years = 20% 20% of the asset’s depreciable cost will be recognized as Depreciation Expense each year.
9. 9. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Original Cost – Salvage Value (\$40,000 – \$4,000)
10. 10. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = 100% ÷ Years of Life (100% ÷ 5-year life) 20%
11. 11. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Depreciable Cost × Depreciation Rate (\$36,000 × 20%) 20% \$7,200
12. 12. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Since this is the first year of the asset’s life, only this year’s depreciation has accumulated. 20% \$7,200 \$7,200
13. 13. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Cost – Accumulated Depreciation (\$40,000 – \$7,200) 20% \$7,200 \$7,200 \$32,800
14. 14. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Depreciable Cost does not change. 20% \$7,200 \$7,200 \$32,800 2 \$36,000
15. 15. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Depreciation Rate does not change. 20% \$7,200 \$7,200 \$32,800 2 \$36,000 20%
16. 16. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Depreciation Expense remains the same each year. 20% \$7,200 \$7,200 \$32,800 2 \$36,000 20% \$7,200
17. 17. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Now two years of depreciation has accumulated. (\$7,200 + \$7,200) 20% \$7,200 \$7,200 \$32,800 2 \$36,000 20% \$7,200 \$14,400
18. 18. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Cost – Accumulated Depreciation (\$40,000 – \$14,400) 20% \$7,200 \$7,200 \$32,800 2 \$36,000 20% \$7,200 \$14,400 \$25,600
19. 19. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Book Value declines over the life of the asset. 20% \$7,200 \$7,200 \$32,800 2 \$36,000 20% \$7,200 \$14,400 \$25,600
20. 20. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 20% × = \$7,200 \$7,200 \$32,800 2 \$36,000 20% \$7,200 \$14,400 \$25,600 3 \$36,000 20% \$7,200 \$21,600 \$18,400 4 \$28,800 \$36,000 20% \$7,200 \$11,200 5 \$36,000 20% \$7,200 \$36,000 The entire Depreciable Cost has now been recognized as Depreciation Expense.
21. 21. Straight-line Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 20% × = \$7,200 \$7,200 \$32,800 2 \$36,000 20% \$7,200 \$14,400 \$25,600 3 \$36,000 20% \$7,200 \$21,600 \$18,400 4 \$28,800 \$36,000 20% \$7,200 \$11,200 5 \$36,000 20% \$7,200 \$36,000 Book Value now matches the Salvage Value. \$4,000
22. 22. <ul><li>Prepare a depreciation schedule using the sum-of-the-years’-digits method. </li></ul>2
23. 23. Sum-of-the-years’-digits <ul><li>Depreciation is determined by multiplying the depreciable cost by a schedule of fractions. </li></ul><ul><li>The numerator (top) of the fraction for a specific year is the number of years of remaining useful life. </li></ul><ul><li>The denominator (bottom) of the fraction is determined by adding the digits of the years of the estimated life of the asset. </li></ul>
24. 24. Sum-of-the-years’-digits FORMULA : DEPRECIABLE COST Remember, Depreciable Cost = Original Cost – Salvage Value.
25. 25. Sum-of-the-years’-digits FORMULA : DEPRECIABLE COST × YEARS REMAINING This is measured from the beginning of the year. For example, to calculate the first year’s depreciation…we would say there are 5 years remaining.
26. 26. Sum-of-the-years’-digits FORMULA : DEPRECIABLE COST × YEARS REMAINING 5-YEAR LIFE = 5 + 4 + 3 + 2 + 1 OR 15 10-YEAR LIFE = 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 OR 55 SUM-OF-THE-YEARS’-DIGITS
27. 27. Sum-of-the-years’-digits Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Original Cost – Salvage Value (\$40,000 – \$4,000)
28. 28. Sum-of-the-years’-digits Depreciation Schedule Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$36,000 × = Original Cost – Salvage Value (\$40,000 – \$4,000) 5/15
29. 29. Sum-of-the-years’-digits Depreciation Schedule \$36,000 Five years remaining divided by sum-of-years’-digits of 15 (5 + 4 + 3 + 2 + 1) 5/15 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
30. 30. Sum-of-the-years’-digits Depreciation Schedule \$36,000 \$36,000 × 5/15 5/15 \$12,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
31. 31. Sum-of-the-years’-digits Depreciation Schedule \$36,000 The sum-of-the-years’-digits method recognizes large amounts of depreciation in the first year of the asset’s life and smaller amounts each subsequent year. 5/15 \$12,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
32. 32. Sum-of-the-years’-digits Depreciation Schedule \$36,000 Only this first year of depreciation has accumulated so far. 5/15 \$12,000 \$12,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
33. 33. Sum-of-the-years’-digits Depreciation Schedule \$36,000 Original Cost – Accumulated Depreciation (\$40,000 – \$12,000) 5/15 \$12,000 \$12,000 \$28,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
34. 34. Sum-of-the-years’-digits Depreciation Schedule \$36,000 Depreciable Cost does not change. 5/15 \$12,000 \$12,000 \$28,000 2 \$36,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
35. 35. Sum-of-the-years’-digits Depreciation Schedule \$36,000 Now there are four years remaining. 5/15 \$12,000 \$12,000 \$28,000 2 4/15 \$36,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
36. 36. Sum-of-the-years’-digits Depreciation Schedule \$36,000 Since the rate (fraction) is smaller, the depreciation expense is also smaller in the second year. 5/15 \$12,000 \$12,000 \$28,000 2 4/15 \$9,600 \$36,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
37. 37. Sum-of-the-years’-digits Depreciation Schedule \$36,000 There are now two years of depreciation accumulated. (\$12,000 + \$9,600) 5/15 \$12,000 \$12,000 \$28,000 2 \$36,000 4/15 \$9,600 \$21,600 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
38. 38. Sum-of-the-years’-digits Depreciation Schedule \$36,000 Book Value falls as the asset ages. 5/15 \$12,000 \$12,000 \$28,000 2 4/15 \$9,600 \$21,600 \$18,400 \$36,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
39. 39. Sum-of-the-years’-digits Depreciation Schedule 5/15 \$12,000 \$12,000 \$28,000 2 4/15 \$9,600 \$21,600 \$18,400 3 3/15 \$7,200 \$28,800 \$11,200 4 2/15 \$4,800 \$33,600 \$6,400 5 2/15 \$36,000 The entire depreciable cost has been recognized as Depreciation Expense. \$36,000 \$36,000 \$36,000 \$36,000 \$36,000 \$2,400 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
40. 40. Sum-of-the-years’-digits Depreciation Schedule \$36,000 5/15 \$12,000 \$12,000 \$28,000 2 4/15 \$9,600 \$21,600 \$18,400 3 3/15 \$7,200 \$28,800 \$11,200 4 2/15 \$4,800 \$33,600 \$6,400 5 2/15 Book Value now matches the Salvage Value. \$4,000 \$36,000 \$36,000 \$36,000 \$36,000 \$2,400 \$36,000 Year Depreciable Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 × =
41. 41. <ul><li>Prepare a depreciation schedule using the double-declining-balance method. </li></ul>3
42. 42. Double-declining-balance Method <ul><li>The book value is multiplied by a fixed rate </li></ul><ul><ul><ul><li>Often double the straight-line rate </li></ul></ul></ul><ul><li>Once the book value is reduced to the expected salvage value, no more depreciation may be recognized. </li></ul><ul><li>Similar to the sum-of-the-years’-digits depreciation method, larger amounts of depreciation are taken in the early years of the asset’s life. </li></ul>
43. 43. Double-declining-balance Method FORMULA: Book Value Cost – Accumulated Depreciation = Book Value For an asset’s first year depreciation, Book Value = Original Cost.
44. 44. Double-declining-balance Method FORMULA: Book Value × (Straight-Line Rate) 2 100% ÷ Useful Life For our example…… 100% ÷ 5 years = 20%
45. 45. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = Original Cost – Accumulated Depreciation (\$40,000 – \$0)
46. 46. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = Double the Straight-Line Rate 2 × (100% ÷ 5) or 2 × 20% 40%
47. 47. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = Book Value × Double the Straight-Line Rate (\$40,000 × 40%) 40% \$16,000
48. 48. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = The first year’s depreciation is all that has accumulated. 40% \$16,000 \$16,000
49. 49. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = Original Cost – Accumulated Depreciation (\$40,000 – \$16,000) 40% \$16,000 \$16,000 \$24,000
50. 50. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = The Book Value at the end of one year becomes the next year’s beginning Book Value. 40% \$16,000 \$16,000 \$24,000 2 \$24,000
51. 51. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = The rate will be the same every year (always double the straight-line rate). 40% \$16,000 \$16,000 \$24,000 2 \$24,000 40%
52. 52. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = Depreciation Expense will be smaller each year because the book value is declining each year. 40% \$16,000 \$16,000 \$24,000 2 \$24,000 40% \$9,600
53. 53. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = Two years’ depreciation has accumulated… (\$16,000 + \$9,600) 40% \$16,000 \$16,000 \$24,000 2 \$24,000 40% \$9,600 \$25,600
54. 54. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = Original Cost – Accumulated Depreciation (\$40,000 – \$25,600) 40% \$16,000 \$16,000 \$24,000 2 \$24,000 40% \$9,600 \$25,600 \$14,400
55. 55. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = \$16,000 \$16,000 \$24,000 2 \$24,000 Book Value can fall only to the amount of the Salvage Value. (\$5,184 – \$4,000 = \$1,184 to go!!) 40% 40% \$9,600 \$25,600 \$14,400 3 \$14,400 40% \$5,760 \$31,360 \$8,640 4 \$8,640 40% \$3,456 \$34,816 \$5,184
56. 56. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = \$16,000 \$16,000 \$24,000 2 \$24,000 Book Value × Rate = \$2,074. This would be too much depreciation. We can only recognize \$1,184. 40% 40% \$9,600 \$25,600 \$14,400 3 \$14,400 40% \$5,760 \$31,360 \$8,640 4 \$8,640 40% \$3,456 \$34,816 \$5,184 5 \$5,184 \$1,184
57. 57. Double-declining-balance Depreciation Schedule Year Book Value (Beginning of Year) Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = \$16,000 \$16,000 \$24,000 2 \$24,000 Book Value has reached the Salvage Value. 40% 40% \$9,600 \$25,600 \$14,400 3 \$14,400 40% \$5,760 \$31,360 \$8,640 4 \$8,640 40% \$3,456 \$34,816 \$5,184 5 \$5,184 \$1,184 \$36,000 \$4,000
58. 58. <ul><li>Prepare a depreciation schedule for tax purposes using the modified accelerated cost recovery system. </li></ul>4
59. 59. Modified Accelerated Cost Recovery System <ul><li>Used for tax purposes </li></ul><ul><li>The Internal Revenue Service (IRS) classifies various assets according to useful life and sets depreciation rates for each year of the asset’s life </li></ul><ul><li>These rates are then multiplied by the cost of the asset </li></ul><ul><li>Abbreviation: MACRS </li></ul>
60. 60. MACRS Example A delivery van was purchased for \$40,000. It has a five-year useful life and salvage value of \$4,000. The IRS would give this van a six-year life and no salvage value.
61. 61. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = The IRS doesn’t allow a salvage value for this asset.
62. 62. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = The IRS sets the first-year rate at 20%. 20%
63. 63. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = Cost × Rate (\$40,000 × 20%) 20% \$8,000
64. 64. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = Cost – Accumulated Depreciation (\$40,000 – \$8,000) 20% \$8,000 \$8,000 \$32,000
65. 65. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = The IRS has a larger second-year rate. 20% \$8,000 \$8,000 \$32,000 2 \$40,000 32%
66. 66. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = 20% \$8,000 \$8,000 \$32,000 2 \$40,000 32% \$12,800 \$20,800 \$19,200 3 \$40,000 19.20% Each year has a different rate.
67. 67. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = 20% \$8,000 \$8,000 \$32,000 2 \$40,000 32% \$12,800 \$20,800 \$19,200 3 \$40,000 19.20% \$7,680 \$28,480 \$11,520 4 \$40,000 11.52% \$4,608 \$33,088 \$6,912 5 \$40,000 11.52% \$4,608 \$37,696 \$2,304 6 \$40,000 5.76% 100% At the end of the 6 years, 100% of the asset’s cost will have been recognized as Depreciation Expense.
68. 68. MACRS Depreciation Schedule Year Cost Rate Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 \$40,000 × = 20% \$8,000 \$8,000 \$32,000 2 \$40,000 32% \$12,800 \$20,800 \$19,200 3 \$40,000 19.20% \$7,680 \$28,480 \$11,520 4 \$40,000 11.52% \$4,608 \$33,088 \$6,912 5 \$40,000 11.52% \$4,608 \$37,696 \$2,304 6 \$40,000 5.76% 100% \$2,304 \$40,000 \$0 \$40,000