Ch 22 Lecture Guide

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ACCOUNTING-I

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Chapter 22
Lecture Guide
Accounting for a Corporation Plant Assets
Depreciation
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Overview New Asset Category

• Assets, such as cash, supplies, and prepaid
  insurance are called current assets because they
  are consumed (used) within a year.
• Plant assets consist of land, buildings and
  equipment used in business operations for a
  number of years.
• Land and buildings actually increase in value
  over time property taxes are paid by businesses
  and individuals on both land and buildings.
• Unlike land and buildings, equipment decreases in
  value as it is used.
• The dollar amount of the decrease in value is
  called depreciation -- a valid expense of doing
  business.

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Buying and Recording Plant Assets
When equipment is purchased 1. The original
cost of the equipment is added (debited) to the
appropriate asset account i.e., Office
Equipment, and
22-1 2 (p 588)
2. A plant asset record is created and used to
keep track of the original cost, yearly and
accumulated depreciation (total reduction in
value), and the current book value of the asset.
22-3 (p 592)
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Effects of Depreciation on Plant Assets
Each year, during the useful life of an asset,
the annual decrease in value is recorded as
depreciation expense in order to attribute the
expense to the appropriate fiscal period. An
assets useful life is determined by two factors
1. Physical depreciation caused by wear and
use, and 2. Functional depreciation which
occurs when an asset becomes obsolete or
inadequate for its intended use.
(p 588)
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Calculating Depreciation Expense
Three factors determine the annual depreciation
expense for each piece of equipment
1. Original Cost (purchase price) 2. Estimated
salvage value (price for which the item can be
sold when it is no longer useful), and
3. Estimated useful life (number of years of
use)
Depreciation can be calculated two
ways 1. Straight-line (depreciation is equally
divided/year) 2. Declining-balance (a
percentage of the book value is charged to
depreciation each year)
(p 589)
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Calculating Straight-line Depreciation
Asset is in use the entire year and has not been
depreciated below salvage value
Original Price - Salvage Value
Total Depreciation ? Years of Useful
Life Annual Depreciation Expense
For part of a year Note Depreciation only
applies to the of months the asset is actually
used.
IMPORTANT In the last year of an assets useful
life, the asset can only be depreciated by an
amount which will reduce it to salvage value.
Annual Depreciation ? 12
(months) Depreciation per month X of
months used Depreciation Expense
(p 591)
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Answer Audit Your Understanding p 592
1. What are three major types of plant
assets? 2. What is the normal balance of a
plant ASSET account? 3. What two factors affect
the useful life of a plant asset? 4. What three
factors affect the amount of depreciation
expense? 5. How can the estimated total
depreciation expense for a plant assets entire
useful life be calculated?
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Preparing Plant Asset Records
An asset record is created for each piece of
equipment when it is purchased. Each record shows
all details needed to identify the item including
a description, the serial number, original cost,
salvage value, etc., and lists annual and
accumulated depreciation amounts and book value.

• At the end of each fiscal period
• The annual depreciation expense is recorded,
• Accumulated depreciation is calculated by adding
  the depreciation expense to the previous total of
  accumulated depreciation, and
• The book value is calculated by subtracting the
  total accumulated depreciation from the original
  cost.

22-3 (p 592)
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Accounts AffectingPlant Assets
Plant Asset Accounts (Asset) original
cost Ex Office Equipment does not change
until equipment is disposed of Accumulated
Depreciation Accounts (Contra-Asset) total
depreciation applied Ex Accumulated
Depreciation-Office Equipment increases
annually Depreciation Expense Accounts
(Expense) annual depreciation attributed to a
fiscal period Ex Depreciation Expense-Office
Equipment used to match income with expenses
for a fiscal period and then closed
(p 594)
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Recording Depreciation Expense
1. Calculate the depreciation expense applicable
to the fiscal period. Remember Items can be
depreciated for ONLY the portion of the year in
which they were used and NO LOWER than their
salvage value. 2. Enter the appropriate
adjustment on the worksheet. Debit
Depreciation Expense Credit Accumulated
Depreciation
22-4 (p 597)
3. Journalize the adjusting entry in the General
Journal (as part of the process of
journalizing all adjustments).
22-5 (p 598)
4. Post the adjusting entry.
22-6 (p 599)
Remember An asset account (ex Office
Equipment) remains unchanged until the asset is
disposed of.
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Answer Audit Your Understanding p 598
1. What three amounts are calculated at the end
of each fiscal period to bring each plant asset
record up to date? 2. How much depreciation
expense is recorded after a plan assets book
value equals the estimated salvage
value? 3. What is the normal balance of an
accumulated depreciation account? 4. How is a
plant asset account affected by the adjustment
for depreciation expense? 5. What is the
adjusting entry to record depreciation expense
for the period?
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Disposing of a Plant Asset
When a plant asset is sold or sent to the great
equipment graveyard somewhere in the great
beyond, the plant asset record provides
information needed to journalize the appropriate
transaction(s) as follows
1. Charge the amount of depreciation applicable
to the portion of the year in which the equipment
was used to (1) depreciation expense and (2)
accumulated depreciation. 2. Update the asset
record. 3. Remove the original cost of the
equipment from the asset account.
(credit) 4. Remove the total depreciation
accumulated on the item from the accumulated
depreciation account. (debit)
(p 598)
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Disposing of a Plant Asset
5. Record the value of cash or another item
received in exchange/trade for the asset as a
debit to cash or another asset account. 6. Record
the gain (amount greater than the assets book
value) OR loss (amount less than the assets book
value) in either Other Revenue--Gain on Plant
Assets (7105) or Other Expenses--Loss on Plant
Assets (8115).
Illustrations 22-7 (p 600) through 22-12 (p 606)
show the calculations and journal entries
recorded when disposing of plant assets.
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Answer Audit Your Understanding p 606
1. What are three effects of the journal entry
to record disposal of a plant asset? 2. How is
gain or loss on the disposal of a plant asset
calculated? 3. When is it necessary to record
additional depreciation expense for a plant asset
before recording the entries for disposing of the
asset? 4. How is depreciation expense for a
partial year calculated?
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Declining-Balance Method
Depreciation expense for each year is determined
by multiplying the book value of an asset by a
constant rate. This rate is based on the
straight-line of depreciation per year relative
to 100. For instance, an asset with a useful
life of five years is depreciated at a rate of
20 per year using the straight-line method. A
rate of 40 (20 X 2) is multiplied by the book
value each year using the declining-balance
method. Use of the declining-balance method
results in a greater amount of depreciation being
applied in the first year an item is used and a
progressively smaller amount being applied in
each successive year. This method more
accurately reflects an assets actual decline in
value.
22-13 (p 607)
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Calculating and Paying Property Tax
Taxes are levied by various levels of government
on businesses and individuals for two types of
property
1. Real property land and anything
permanently attached to the land and 2. Personal
property all other property
Taxes are calculated using assessed property
values and rates established governmental taxing
authorities.
Typically, the federal government collects taxes
on business and corporate income while state and
local governments tax real and personal property.
(p 608)
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Calculating and Paying Property Tax
A special ledger account (9105) is used to record
Federal Income Tax Expense.
When income taxes are paid, the expense account
is debited, and cash is credited.
Property taxes are paid based on the assessed
value of land and buildings (real property) and a
designated rate applied to the book value of
equipment (personal property).
When property taxes are paid, Property Tax
Expense (an operating expense account) is
debited, and cash is credited.
22-14 (p 610)
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Answer Audit Your Understanding p 609
1. In what year is the greatest portion of an
assets depreciation recorded when the
declining-balance method is used? 2. When the
declining-balance method of depreciation is used,
how much depreciation is recorded in the last
year of a plant assets useful life? 3. Who
usually determines the assessed value of property
for tax purposes?
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Summary Ilustrations 22-15
General Ledger accounts affected p
610 Calculations p 611
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CREDITS
Based on Century 21 Accounting Ross, Hanson,
et al Southwestern Publishing Company, 1995
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