Plant assets and depreciation

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Basic depreciation for high school students

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  • Plant assets and depreciation

    1. 1. (about 33 slides) Plant Assets and Depreciation
    2. 2. PLANT ASSETS
    3. 3. <ul><ul><li>tangible resources used in the operation of a business </li></ul></ul><ul><ul><li>not intended for sale to customers </li></ul></ul>PLANT ASSETS
    4. 4. <ul><li>Plant assets are subdivided into four classes: </li></ul><ul><li>1 Land </li></ul><ul><li>2 Land improvements </li></ul><ul><li>3 Buildings </li></ul><ul><li>4 Equipment </li></ul>PLANT ASSETS
    5. 5. <ul><li>Plant assets are subdivided into four classes: </li></ul><ul><li>1 Land </li></ul><ul><li>2 Land improvements </li></ul><ul><li>3 Buildings </li></ul><ul><li>4 Equipment </li></ul>PLANT ASSETS
    6. 6. Land
    7. 7. Land Improvements
    8. 8. Buildings (any permanent structure)
    9. 9. Equipment
    10. 10. <ul><li>Cost (all costs to place asset into usefulness) </li></ul><ul><li>Useful life estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence </li></ul><ul><li>Salvage value estimate of the asset’s value at the end of its useful life </li></ul>3 FACTORS IN COMPUTING DEPRECIATION
    11. 11. GAAP Cost Principle An asset must be carried on the balance sheet at the amount paid for it. The cost of an asset equals the sum of all of the costs incurred to bring the asset to its intended purpose.
    12. 12. <ul><li>Costs consist of all expenditures necessary to: </li></ul><ul><li>acquire the asset </li></ul><ul><li>make it ready for its intended use. </li></ul><ul><ul><li>May include sales tax , freight costs , installation costs and training costs . </li></ul></ul>DETERMINING THE COST OF PLANT ASSETS
    13. 13. Recurring Costs <ul><li>Recurring costs such as licenses and insurance for an asset are NOT included with the asset—instead, they are expensed in an EXPENSE account. </li></ul>
    14. 14. <ul><li>Assets slowly lose value. </li></ul>DEPRECIATION
    15. 15. <ul><li>Assets slowly lose value. </li></ul><ul><li>That decrease of the asset’s value becomes an expense </li></ul>DEPRECIATION Expense Expense Expense
    16. 16. <ul><li>Depreciation recognizes that a plant asset is worth less and less over its useful life. </li></ul>
    17. 17. <ul><li>Usefulness may decline because of </li></ul><ul><ul><ul><li>Wear and tear </li></ul></ul></ul><ul><ul><ul><li>Obsolescence </li></ul></ul></ul>DEPRECIATION
    18. 18. <ul><ul><ul><li>Land is not depreciated. </li></ul></ul></ul>
    19. 19. <ul><ul><ul><li>Land is not depreciated. </li></ul></ul></ul><ul><ul><ul><li>No “wear and tear” </li></ul></ul></ul><ul><ul><ul><li>No obsolescence </li></ul></ul></ul>
    20. 20. PLANT ASSETS
    21. 21. Example Truck 30,000 If you buy a company truck for cash in the beginning of 2011, you would record the transaction like this: Cash 30,000
    22. 22. Example Truck 30,000 At the end of 2011, your truck has gone down in value, but the ledger still say it’s worth $30,000
    23. 23. Example Truck 30,000 At the end of 2011, your truck has gone down in value, but the ledger still say it’s worth $30,000 We need the ledger value to match the real value.
    24. 24. 4 GAAP Approved Depreciation Methods
    25. 25. 4 GAAP Approved Depreciation Methods Straight-Line (SL) Units-of-Production (UOP) Double-Declining-Balance (DDB) Sum-of-the-Year’s-Digits (SYD)
    26. 26. Straight-Line Method Example (Cost – Salvage value) = Depreciation per year years of useful life
    27. 27. Straight-Line Method Example (Cost – Salvage value) = Depreciation per year years of useful life (30,000 – 500) = $5,900 5
    28. 28. Straight-Line Method Example (Cost – Salvage value) = Depreciation per year years of useful life (30,000 – 500) = $5,900 5
    29. 29. <ul><li>Depreciation amount is the same for each year of the asset’s useful life. </li></ul><ul><li>Using this method, depreciation is measured only by time. </li></ul>STRAIGHT-LINE DEPRECIATION METHOD
    30. 30. Journalize Depreciation Accumulated Depreciation, Truck Depreciation Expense, Truck 5,900 5,900 New Asset Account (Contra Account) Truck 30,000
    31. 31. UNITS-OF-PRODUCTION Cost – Salvage Value Total Units of Activity = Cost per Unit
    32. 32. UNITS-OF-PRODUCTION Cost – Salvage Value Total Units of Activity = Cost per Unit $30,000 - $500 100,000 miles = 29.5¢ per mile
    33. 33. <ul><li>Depreciation if truck driven 15,000 in 2010 </li></ul><ul><li> Expense = (Cost per mile) x (# miles) </li></ul><ul><li>= $0.295 x 15,000 </li></ul><ul><li> = $4,425 depreciation </li></ul>UNITS-OF-PRODUCTION Cost – Salvage Value Total Units of Activity = Cost per Unit $30,000 - $500 100,000 miles = 29.5¢ per mile

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