16-1PLANTASSETSandDEPRECIATIONCHAPTER 16CHAPTER 1616-2Long-term assets Long-termassets Tangibleassets Naturalresources Intangibleassets e.g. plant, buildings, and equipment 16-3Tangible assetsTangibleassets Fixed assets Plant assets Plantassetsareremainedforoperationsofbusiness,notforresale.Theusefullifeofplantassetsismorethanoneyear. 16-4Depreciable assetThevalueofplantassetsmaydeclineduetogeneralwearandtear.Adeclineinrevenue-producingabilitymayalsooccurbecauseofobsolescence.16-5DepreciationUnderthematchingrule,thecostofplantassetsmustbeallocatedtoalltheperiodsovertheirusefullife,andmustbedoneinasystematicandrationalmanner.1 year2 year16-6DepreciationBeforecomputingdepreciation,itsessentialtodetermine Thecost Residualvalue Depreciablecost Estimatedusefullife 16-7Cost Acquisitioncost Thecostofplantasset Originalcost =Itincludesallexpendituresreasonableandnecessarytogettheplantassetinplaceandavailableforuse.16-8CostIfaplantassetisacquiredforcash,theacquisitioncostconsistof:thecashpaidfortheassetexpendituresforpackingfreightinsuranceintransitinstallationtestingvalueaddedtaxothernecessaryrelatedcosts16-9CostIfaplantassetisacquiredbyself-constructiontheacquisitioncostconsistof:DirectlabordirectmaterialsdirectmachineryequipmentcostOtherexpensesincurredinthecourseofconstruction16-10CostIfaplantassetisacquiredfromdonationtheacquisitionvalueincludes :fairvaluealltheexpensesincurredduringtheperiodwhenthedonationisreceivedFair value refers to the amount which is agreed by two sides that are familiar with the transaction.16-11CostIfaplantassetispurchasedoncredit theinterestsarenotincludedincost,butasexpenseforthisperiod.However,iftheassetsareconstructed,theinterestsduringtheconstructionshouldbecalculatedaspartofcostoftheasset.16-12Residual valueTheresidualvalueofanassetisitsestimatednetscrap,salvage,ortrade-invalueasoftheestimateddateofdisposal.Salvagevalueanddisposalvalueareothertermsusedtostandforresidualvalue. 16-13Depreciable costThecostofanassetResidualvalue=DepreciablevalueForexample,iffurniturescostis$10,000anditsresidualvalueis$4,000,itsdepreciablecostwillbe$6,000.16-14Estimated useful life Accountingconsidersestimatedusefullifeasthedepreciationyearsbecausedeteriorationandobsolescenceareconsideredaswellaswearandtearwhenaplantassetisdepreciated.EstimatedeconomicusefullifeEstimatedusefullifeEstimatedusefullife Physicalusefullife16-15Estimated useful life Forexample,acomputercanbeusedformorethanfiveyearsregardlesstotheout-of-dated.However,itsestimatedusefullifemaybeonlytwoyearsbecausethenewtypeisputintouseinsteadoftheoldone.16-16Methods of Computing DepreciationlStraight-line MethodlProduction Method l Accelerated Methods 16-17Straight-line Method Method1Straight-line Method16-18Straight-line MethodUnderthismethod,anequalamountofdepreciationexpenseisallocatedtoeachperiodoftheassetsusefullife.Straight-linemethodisalsocalledaverage-yearsmethod.16-19Straight-line Methodf=ax+bx=(fb)/a“x” stands for annual depreciation that we want to know. “f” refers to acquisition cost.“b” is salvage value.“a” is estimated useful life.Inmathematics,theformulaofastraightlineis16-20Straight-line MethodFormulaAnnualDepreciation=AcquisitionCostSalvageValueYearsofUsefullife16-21Straight-line MethodNow, lets look at an example 16-22Straight-line MethodOnMarch7,StevsBarberShoppurchasedhaircuttingequipmentandofficeequipmentfor$800.SupposethatStevsBarberShopestimatesthattheartequipmentandofficeequipmentwilllastforfiveyearsandthesalvagewillbeworthlessattheendoftheusefullife.16-23Straight-line MethodThecalculationisasfollows:AnnualDepreciationforHaircuttingEquipment=($800-0)/5=$160MonthlyDepreciation=AnnualDepreciation/12MonthlyDepreciationforHaircuttingEquipment=$160/12=$13.316-24Straight-line MethodShortcomingsItpaysmoreattentiontotheusefultimethantheusefulCondition.Andallocateequalamounttoeachperiodregardlesstothelevelofwearandtearthattheassetsuffers.16-25Production Method Method2ProductionMethod16-26Production MethodProductionmethodallocatesequalportiontotheproducts.FormulaDepreciationperUnit=AcquisitionCostSalvageValueEstimatedProduction16-27Production MethodNow, lets look at an example 16-28Production MethodAphotocopiercancopyabout100thousandpiecesofpaperwitha5,000-dollaracquisitioncostand500-dollarsalvagevalue.DepreciationperUnit=$5,000-$500100,000=$0.04516-29Production MethodDifferentstandardsofworkloadshouldbeappliedtodifferentplantassets.Ifthedepreciatedassetisamachine,theunitdepreciationshouldbecalculatedonthebasisoftheestimatedhoursthatthemachineworksfor.Ifthedepreciatedassetisavehicle,theunitdepreciationshouldbecalculatedonthebasisoftheestimatedmileagethatthevehicleruns.16-30Accelerated MethodsMethod3Accelerated Methods 16-31Accelerated Methods Acceleratedmethodhasanothernamedescendingdepreciationexpensemethod.Acceleratedmethodsresultinthatrelativelylargeamountsofdepreciationwillberecognizedintheearlyyearsofuse,whilerelativelysmallamountsofdepreciationinthelateryears.16-32Accelerated MethodsThismethodcomesalongwiththeprudenceprinciple.Moredepreciationwillbeallocatedtotheearlyyearsthantolateryears.Itisalongwithmatchingrulethatmoreexpensesareallocatedtomorebenefitsorrevenue.16-33Accelerated MethodsExamplesofacceleratedmethodsDouble-declining-balancemethodSum-of-the-years-digitsmethod16-34 Double-declining-balance method Thismethodisbasedontheassumptionthatdepreciationrateistwicethestraight-linerate.FormulaYearlydepreciationrate =Estimatedusefullife2100%Yearlydepreciation =CarryingvalueatthebeginningoftheyearYearlydepreciationrateYearlydepreciationrate=25 100% =40%16-35Double-declining-balance methodThedepreciationscheduleforthedouble-declining-balancemethodYearCalculationofdepreciationYearlydepreciationAccumulatedDepreciationCarryingvalueDateofpurchaseEndoffirstyearEndofsecondyearEndofthirdyearEndoffourthyearEndoffifthyear$800*40%480*40%288*40%172.840%$3200192115.269.12103.68$320512627.2696.32800$800480288172.8103.680Total800Attention:Inthefourthyearandfifthyear,theacceleratedmethodisntappliedtothecalculationofdepreciationbecausedepreciationshouldbelimitedtoamountnecessarytoreducecarryingvaluetoresidualvalue.16-36Sum-of-the-Years-Digits Method Underthismethod,theyearsintheservicelifeofanassetareadded.Theirsumbecomesthedenominatorofaseriesoffractionsthatareappliedinallocatingthetotaldepreciationovertheestimatedusefullife.Thenumeratorsaretheindividualyearsintheestimatedusefullifeoftheassetintheirreverseorder.16-37Sum-of-the-Years-Digits MethodIfaplantassethasanestimatedfive-yearusefullife,thedenominator(orthesumoftheyearsdigits)iscalculatedasfollows:1+2+3+4+5=15Thenumeratorsare: 5,4,3,2,1.Thefractionsare:5/15,4/15,3/15,2/15,1/15.16-38Sum-of-the-Years-Digits MethodSupposethecostofadeliverytruckis$10,000.Thedepreciationscheduleforthesum-of-the-years-digitsmethodisasfollows:YearCalculationofdepreciationYearlydepreciationAccumulatedDepreciationCarryingvalueDateofpurchaseEndoffirstyearEndofsecondyearEndofthirdyearEndoffourthyearEndoffifthyear$8005/158004/158003/158002/158001/15$266.67213.33160106.6753.33$266.67480640746.67800$ $800800533.33533.33320320160160 53.3353.330Total80016-39Accumulated depreciation Theaccumulateddepreciationaccountsarecontra-assetaccountstosummarizethedepreciationexpenseonaspecificfixedasset.AccumulateddepreciationAccumulateddepreciationNetamountshownasanassetThe net amount is called carrying value or book value.Astimepassed16-40Accumulated depreciationNow, Let us adjust the transactions happen on March 716-41Accumulated depreciationDecreasesinassetsarerecordedbycredits.Decreasesinownersequityarerecordedbydebits.OwnersequityisdecreasedbydebitstoDepreciationExpense,HaircuttingEquipment,andDepreciationExpense,StoreEquipment.Assetsaredecreasedbycreditstocontra-assetaccountsAccumulatedDepreciation,HaircuttingEquipment,andAccumulatedDepreciation,StoreEquipment.16-42Accumulated depreciationDepreciationExpense,HaircuttingEquipment$13.3AccumulatedDepreciation,HaircuttingEquipment$13.3DepreciationExpense,StoreEquipment$40AccumulatedDepreciation,StoreEquipment$4016-43WE ARE SAILING RIGHT ALONG!