1

Depreciation
Accounting
2
%pes oI Long-Lived Assets
O Tangible asset
O Asset with physical substance
O Property, plant, and equipment = fixed
asset.
O Ìntangible asset
O Ìntellectual property.
O No physical substance
O Examples are patent rights, copyrights
3
Amortization
O View capital asset as bundle of services
O Similar to prepaid expenses, cost is
expensed as company benefits from the
services
O Land - no depreciation
O Plant and equipment - depreciation
O Natural resources - depletion
O Ìntangible assets - amortization
4
Depreciation Methods
O Straight line method
O (original cost - residual value) /service life
O Accelerated methods
O Declining balance methods
O Sum of the years' or years' digits methods
5
Declining Balance Method
O Depreciation = book value *
depreciation rate.
O Double declining balance method = book
value * 2 * straight line rate.
O Straight line rate = 1/(life of asset in years).
6
mpaired Assets
O An asset for which its remaining benefits, as
measured by the sum of future cash flows the
asset's use will generate, is less than its book
value
O Ìf entity expects to hold asset
O Write asset down to fair value
O Ìf entity expects to sell asset
O Write asset down to lower of cost or fair value less
cost of disposal.
7
roup Depreciation
Group depreciation
· Treats all similar assets as a "pool¨ or group rather than
calculating for each item separately.
· No gain or loss recognized when an individual item is
disposed.
÷ Credit asset account for original cost.
÷ Debit cash for amount of proceeds.
÷ Debit accumulated depreciation for difference.
Accumulated depreciation
· Does not represent the accumulation of any tangible
thing.
· Sum of the original cost that has been expensed.
· Funding the purchase of new assets is usually unrelated
to depreciation
8
oodwill
When one company buys another.
Goodwill = Purchase price of company ÷ fair value
of net assets.
÷ Net assets include tangible assets and recognized
intangible assets net of liabilities assumed by the
purchaser.
Recorded as an asset upon acquisition.
Not amortized.
Annual impairment test.
Any write down is charged against income.
9
ntangible Assets with Limited Lives
Examples: patents and copyrights
Ìf purchased, recorded at cost
÷ Amortized over useful life
÷ Useful life can equal or be shorter than
legal life
Ìf developed internally, expense as
incurred
10
$tern Corporation (B)
Case 7-1
Page 210
11
$tern Corporation
Ascertaining the PP&E and accumulated
depreciation accounts
Transactions..,
· Jan 2, 2006: Machine sold for its book value: $3,866
(Books record: $31,233, Accumulated depreciation:
$27,367)
· End 2006: Decrease in tool inventory accounting to
$7,850
· Mar 1, 2006: Sold Automobile for cash $2,336 (Books
record: $8,354, Accumulated depreciation: $5,180, Net
book value as of Jan 1, 2006 $3,174)
12
$tern Corporation
Transaction
· Cost of patent written off as an expense over
the reminder of its legal life as of Dec 31, 2005.
Patent's remaining legal life was 5 years
· July 1, 2006: Typewriter that had cost of $1,027
and had been fully depreciated on Dec 31,
2005, was sold for $75
· Oct 1, 2006: company sold a desk for $80
(Book cost of $490 with an accumulated
depreciation of $395 as of Jan 1, 2006)
13
Depreciation Rates
Buildings: 2%
Factory machinery: 10%
Furniture and fixtures: 10%
Automotive equipment: 20%
Office machines: 10%
· Ìncluded in the factory machinery cost of
$3,425,585 was machine costing $85,000 that
had been fully depreciated on Dec 21, 2005,
and that was still in use
14
CurrenL AsseLs
CusI 6;1,¤qq
AJR ¤88,z=;
¡ess: AIIowunce Ior DoubLIuI AccounLs z¤6q8 ¤=8,6o¤
US Treusurv SecuIrLIes uL CosL z;qo6o
¡nvenLorIes 1;¤qqo=
ToLuI CurrenL AsseLs ¤,6¤8,q18
OLIer AsseLs
¡nvesLmenLs q1zz¤q
¡und 186=6¤
BuIIdIng zqo=z=¤
¡ess: AccumuIuLed DeprecIuLIon 66¤¤;¤ 1;q188o
¡ucLorv MucIInerv ¤qz==8=
¡ess: AccumuIuLed DeprecIuLIon 16qz¤=8 1;8¤zz;
¡urnILure und ¡IxLures =6q8q
¡ess: AccumuIuLed DeprecIuLIon qoqoo 16o8q
AuLomoLIve EquIpmenL =8z¤8
¡ess: AccumuIuLed DeprecIuLIon ¤;1=6 z11qz
OIIIce MucIInes qz=¤q
¡ess: AccumuIuLed DeprecIuLIon z8oo= 1q=z¤
TooIs 61z¤q
PuLenL =6z=o
PrepuId Expenses 1oo1¤o
ToLuI AsseLs 8,o¤1,8;1
Stern Corporution
Bulunce Sheet
As oI Ðec ¿1, ±oo=
15
CurrenL ¡IubIIILIes
AJP =1o,ooo
Tuxes PuvubIe ;o¤¤=q
Accrued SuIurIes, Wuges, und ¡nLeresL 1q1,q;8
¡T DebL, Due wILIIn one veur 6¤¤oo
ToLuI CurrenL ¡IubIIILIes 1,q¤o,1¤z
NoncurrenL ¡IubIIILIes
¡T DebL 1zq;¤68
SIureIoIders EquILv
Common SLock z=o¤z;=
ReLIuned EurnIngs z8=1o¤6
ToLuI SIureIoIders' EquILv =¤=q¤;1
ToLuI ¡IubIIILIes und SIureIoIder's EquILv 8,o¤1,8;1
Stern Corporution
Bulunce Sheet
As oI Ðec ¿1, ±oo=
16
17
18
19
ross Accomoluted
Ðepreciution
Net
¡und $186,=6¤ $186,=6¤
BuIIdIng z,qo=,z=¤ $;11,q8q 1,6¤¤,;;=
¡ucLorv mucIInerv ¤,¤¤q,¤=z 1,¤=q,qz6 1,q¤¤,¤z6
¡urnILure und IIxLures ==,¤¤q q=,6oq 1o,¤¤o
AuLomoLIve equIpmenL q¤,¤qq q1,¤6= ;,¤;¤
OIIIce mucIInes q1,=o; ¤1,1z¤ 1o,¤;8
TooIs =¤,qqq =¤,qqq
PuLenL q=,ooo q=,ooo
ToLuI $6,z¤z,o6¤ $z,;;6,1o8 $¤,q==,¤==
20
Depreciation Accounting (A$ 6)
Assets not included for depreciation..,
· Forests
· Plantations
· Regenerative natural resources
· Wasting assets
» Expenditure on exploration for and extraction of
minerals, oils, natural gas, similar non generative
assets
· Expenditure on R&D
· Goodwill
· Live stock
· Land with unlimited useful life for the enterprise
21
DeIined %erms
Depreciation
· Measure of..,
» Wearing out / consumption / loss of value on
» Usage / effluxion of time / obsolescence through
technology and market change
· Ìncludes amortization of assets with predetermined
useful life
Depreciable asset
· Used more than one accounting period
· Having limited useful life
· Used for production or supply of goods and services
22
DeIined %erms
Useful life
· Period of usage by firm
· No. of production or similar units expected to
be obtained by suing the asset
Depreciable amount
· = historical cost ÷ estimated residual value
23
actors in Assessment oI
Depreciation
Historical cost or revalued value of the asset
· Ìncludes..,
» Acquisition +
» Ìnstallation +
» Commissioning +
» Ìmprovements
· May change due to..,
» Ìncrease or decrease in LT liability on account of
exchange fluctuations
» Price adjustments
» Changes in duties
» Changes in similar other factor
24
actors in Assessment oI
Depreciation
Expected useful life of the depreciable asset
· Ìs shorter than physical life
· Predetermined by legal or contractual limits
· Directly governed by extraction or consumption
· Depends on operational factors [usage]
· Reduced by obsolescence due to..,
» Technological changes
» Ìmprovement in production methods
» Change in market demand for the product or service output of the
asset
» Legal or other restrictions
· Estimation purely based on..,
» Experience with similar type of assets
· Any addition or extension which retains a separate identity and is
capable of being used after the existing asset is disposed of, is
depreciated independently on the basis of an estimate of its own useful
life
25
actors in Assessment oI
Depreciation
Estimated Residual Value of the
Depreciable Asset
· A difficult matter
· Estimated at time of acquisition / installation or
at time of subsequent revaluation of the asset
· Basis of determination..,
» Realizable value of similar assets
26
Depreciation
Quantum of depreciation to be provided
in an accounting period involves..,
Exercise of judgment by management in
light of..,
· Technical
· Commercial
· Accounting
· Legal requirements
· Need periodical review and revision
27
Depreciation Methods
Commonly employed method includes..,
· Straightline method
· Reducing balance method
Factors in selection of method..,
· Type of asset
· Nature of use of such asset
· Circumstances prevailing in business
Applied consistently to provide comparability
Combination of more than method is sometimes used
Depreciable assets which do not have material value,
depreciation is often allocated fully in accounting
period in which they are acquired
28
Changing Depreciation Method
Ìs treated as as a change in an accounting
policy
Change in method is allowed if..,
· Ìts required by statute
· Compliance with an AS
· Results in more appropriate preparation and presentation
of financial statements
On change in method
· Depreciation is calculated using new method from the
date of asset coming into use
· Deficiency or surplus on change need to be adjusted
during the year of change [charged to P&L statement]
29
Depreciation
Companies Act 1956 lays down rates of depreciation
in respect of various assets
Estimates useful life of an asset is shorter than under
the provision of relevant statute
Depreciation provision computed by applying higher
rate
Depreciable assets are disposed / discarded /
demolished / destroyed, the net surplus or deficiency,
if material, is disclosed separately
30
Depreciation Disclosure in inancial
$tatements
Disclosure to be made includes..,
· Depreciation methods used
· Total depreciation for the periods for each class of assets
· Gross amount of each class of depreciable assets
· Related accumulated depreciation
Assets depreciation rates and useful life are
disclosed only of they are different from the
principal rates specified in the statute
governing the enterprise
31
Accounting Ior ixed Assets (A$
10)
Fixed assets include..,
· Land
· Buildings
· Plant and machinery
· Vehicles
· Furniture and fittings
· Goodwill
· Patents
· Trade marks
· Designs
32
Assets Excluded Irom A$ 10
Forests
Plantations
Regenerative natural resources
Wasting rights..,
· Mineral rights
· Expenditures on exploration for extraction of minerals, oils,
natural gas, and non-regenerative resources
Expenditure on real estate development
Livestock
Government grants and subsidies
Assets under leasing rights
33
DeIinitions
Fixed asset
· Used for producing and providing services
· Not held for sale
Fair market value
· Price agreed in open unrestricted market
between knowledgeable willing parties dealing
at arm's length
Gross book value - historical cost
34
dentiIication oI ixed Asset
Judgment required
Aggregate individually insignificant items, and to apply the
criteria to aggregate value
Stand-by equipment ÷ is capitalized
Servicing equipment ÷ is capitalized
General machinery spares ÷ charged to P&L on consumption
Any specific machinery spares which irregular in nature ÷
allocate over a period not exceeding useful life of the principal
item
Accounting can be improved if the total expenditure is allocated
to component parts, when in practice separable, and estimates
are made of useful lives of these components
35
Components oI Cost
Purchase price
Ìmport duties
Non-refundable taxes or levies
Directly attributable cost in bringing the asset to its working
condition..,
· Site preparation
· Ìnitial delivery and handling costs
· Ìnstallation costs ÷ special foundations for plant
· Professional fees ÷ architect fees or engineers fees
Deduct trade discount and rebates from purchase price
Commissioning cost..,
Expenditure on test runs
Expenditure on experimental production
36
Components oI Cost
Costs may undergo changes subsequent to acquisition due to..,
· Exchange fluctuations
· Price adjustments
· Changes in duties or similar factors
Administration and general overheads expenses are excluded
Any specific direct admin and OH expenses related to making
the asset workable is included
Expenses during prolonged period between installation and
commercial start up
· Will be charged to P&L statements
· Treated as deferred revenue expenditure amortized over a period not
exceeding 3 to 5 years after commencement of commercial production
37
$elI-Constructed ixed Assets
Gross book value = costs of
construction
Ìnternal profit to be eliminated
38
on-Monetar Consideration
FA acquired in exchange for another asset
Cost of FA = FMV of consideration given
When asset is same; cost = net book value
FA acquired in exchange for shares in the
enterprise.,
· Cost of FA = FMV (or)
· Cost of FA = FMV of shares
39
mprovements and Repairs
Ìmprovement
· Expenditure increasing future benefits
· Added to gross book value
· Ìncludes..,
» Addition
» Extension
40
Amount $ubstituted Ior
Historical Cost
Methods valuing assets
· Can be restated by appraisal by competent valuer
· Ìndexation and reference to current prices
Revalued amount is presented as..,
· Restating gross book value and accumulated depreciation; net
book value = net revalued amount
· Restating the net book value by adding therein the net increase
on account of revaluation
Upward revaluation does not provide a basis for
crediting to the P&L statement the accumulated
depreciation existing at the date of revaluation
41
Amount $ubstituted Ior
Historical Cost
Different bases of valuation can be sued in
same financial statements for..,
· Separate item in each of the categories of fixed assets
· Different categories of fixed assets
Systematic basis of valuation is required
when select assets are revalued
Not appropriate to have revalued class of
assets' net book value more than recoverable
amount of the assets of that class
42
Amount $ubstituted Ior
Historical Cost
Ìncrease in net book value on
revaluation is directly credited to
· Owners account in the name revaluation
reserve
· P&L account, if earlier a revaluation loss is
charged to P&L account
Any decrease in value charged to..,
· P&L account
· Revaluation reserve, if there was charge in
increase done earlier
43
Retirement and Disposals
On disposal the FA are eliminated from financial
statements
Assets retired from active use and held for disposal
are stated at lower of net book value or realizable
value, expected loss accounted in P&L account
Gain or loss on disposal of an asset in recognized in
P&L account in a historical cost financial statement
On disposal of revalued asset
· Difference between net book value and net disposal proceed to
P&L account, but loss to the extent of increase in revaluation
reserve will be charged to revaluation reserve account
· Any unsettled amount in revaluation reserve will be transferred
to general reserve
44
'aluation oI ixed Assets in
$pecial Cases
Hire purchase
· Proportional value to the extent of payment is shown in the
balance sheet
· Appropriate disclosure regarding HP should be made
Joint ownership with others
· Extent of its share in balance sheet including..,
» Original cost
» Accumulated depreciation
» Written down value
· Can be also grouped with similar fully owned assets
Several assets purchased for a consolidated price
· Consideration is apportioned to the various assets on a fair
basis as determined by competent valuers
45
ixed Assets oI $pecial %pes
Goodwill
· Recorded in books only when some consideration in
money or money;s worth has been paid for it
· Arises from..,
» Business connections
» Trade name
» Reputation of an enterprise
» Ìntangible benefits enjoyed by an enterprise
· Goodwill is written off over a period
· Many of them they retain it as an asset without writing off
46
Disclosure
Special disclosure required in financial statements
· Gross and net book values of FA at the beginning and end to
show..,
» Additions
» Disposals
» Acquisitions
» Other movements
· Expenditure incurred on account of FA in the course of
construction or acquisition
· On revaluation of FA, show disclose..,
» Method adopted to compute the revalued amounts
» Nature of any indices used
» Year of any appraisal made
» Whether an external value was involved?
47
$taIIord Press
Case: 7-3
Page: 213
48
$taIIord Press
Founded in: 1996
Founded as: one-man job printing firm
Founded in: a small southwestern town
Owner: Lucas Stafford
Product line: concentrated on special
line of printing
Experienced: rapid growth due to high
degree of technical proficiency
49
$taIIord Press`s
Competitive Disadvantage
Major market: metropolitan area
Metropolitan area located 300 miles
away from the plant
2006
· Accumulated extra cash to finance a move near
the primary market
· Expand and modernize facilities at the time of
move
· Moved to suburb
50
Balance $heet BeIore the Move
to $uburb
CurrenL usseLs CurrenL IIubIIILIes $16o,zz¤
CusI $¤¤=,868 Common sLock $qoo,ooo
OLIer currenL usseLs $z=1,;¤o ReLuIned eurnIngs $¤=8,6q8
ToLuI currenL usseLs $6q;,6=8
ProperLv und equIpmenL
¡und $¤q,o¤q
BuIIdIngs $¤=o,o6q
¡ess: AccumuIuLed deprecIuLIon $1¤¤,o=6
NeL vuIue $1=1,oo8
EquIpmenL $z6=,o¤¤
¡ess: AccumuIuLed deprecIuLIon $1;8,¤zz
NeL vuIue $86,1;1
%otul ussets $n1S,S¬1
%otul liubilities
und owner's eqoity $n1S,S¬1
Assets Liubilities
Condensed Bulunce Sheet (Prior to Move)
StuIIord Press
51
%ransaction Arose Irom the
Move
Land + building at old site sold for cash: $149,860
· Accumulated depreciation on building: $199,056 [shown in B/S)
· Cost of land: $34,034 [shown in B/S)
· Cost of building: $350,064 [shown in B/S)
· Loss on sale of fixed assets: $35,182 [plug figure]
Equipment sold for cash: $35,200
· Cost that appeared on book: $73,645
· Accumulated depreciation: $40,890
· Net book value: $32,755
· Gain on sale of fixed assets: $2,445 [plug figure]
Purchased a new printing press
· Ìnvoice cost: $112,110
· Cash discount taken: 2%
· Actually paid: $109,868
· Payment to truck delivered: $450
· Time spent by Stafford employees on installation of the machine: 60 hours
· Ordinarily workers received wage at $15 per hour, but their time was ordinarily
charged to printing jobs at $30.50 per hour, the difference representing an
allowance for overhead ($12.15) and profits ($3.35)
52
%ransaction Arose Irom the
Move
Purchased land to build new plant: $140,000
· An run down building on the land was torn down for:
$21,235
· Paid for permanent drainage facilities installation:
$13,950
Purchased a new composing machine
· Ìnvoice cost: $28,030 [cash paid: $20,830, Trade-in
allowance: $7,200]
· Could be sold outright for: $6,050
· Cost as new machine: $12,000
· Accumulated depreciation: $5,200
· Net value: $6,800
53
%ransaction Arose Irom the
Move
Erected building: $561,000
· Paid in cash: $136,000
· Borrowed on mortgage: $425,000
Trucking / costs associated with moving
to new location / installation: $8,440
· Time spent by Stafford press employees: 125
hours
54
%ransaction Arose Irom the
Move
During moving a piece of equipment was
dropped and damaged
· Cost of equipment: $10,000
· Amount spent to repair: $3,220
· Reduction in salvage value by: $660 [from $1,950 to
$1,290]
· Up until that time, equipment was depreciated at $850
per year [representing a 10% rate after deduction of
estimated salvage value of $1,950]
· Accumulated depreciation: $3,220
55
Discussion Question
Analyze the effect of each of these
transactions on the items in the balance
sheet and income statement
For transactions that affect owner's
equity, distinguish between those that
affect the net income of the current year
and those that do not
Show the appropriate JEs
56
ournal Entr (1)
Ðebit Credit
CusI 1q¤,86o
AccumuIuLed DeprecIuLIon (bIdgs.) 1¤¤,o=6
¡oss on SuIe oI ¡Ixed AsseLs ¤=,18z
¡und ¤q,o¤q
BuIIdIngs ¤=o,o6q
57
ournal Entr (2)
Ðebit Credit
CusI ¤=,zoo
AccumuIuLed DeprecIuLIon (eqpL.) qo,8¤o
EquIpmenL ;¤,6q=
GuIn on SuIe oI ¡Ixed AsseLs z,qq=
58
ournal Entr (3)
Ðebit Credit
EquIpmenL (1o¤,868 + q=o + 1,6z¤) 111,¤q;
CusI (possIbIv oLIer ILems) 111,¤q;
59
ournal Entr (4)
Ðebit Credit
¡und 1qo,ooo
CusI 1qo,ooo
¡und z1,z¤=
CusI z1,z¤=
¡und 1¤,¤=o
CusI 1¤,¤=o
60
ournal Entr (5)
Ðebit Credit
EquIpmenL (new) (zo,8¤o + 6,8oo) z;,6¤o
AccumuIuLed DeprecIuLIon (oId) =,zoo
CusI zo,8¤o
EquIpmenL (oId) 1z,ooo
TIIs Is LIe enLrv wIen equIpmenL Lruded In wus sImIIur, LIen LIe journuI
enLrv Is consLrucLed so LIuL no guIn or Ioss on dIsposuI Is recorded
Ðebit Credit
EquIpmenL (new) (zo,8¤o + 6,o=o) z6,88o
AccumuIuLed DeprecIuLIon (oId) =,zoo
¡oss on SuIe oI ¡Ixed AsseLs ;=o
CusI zo,8¤o
EquIpmenL (oId) 1z,ooo
TIIs Is LIe enLrv Is wIen ussumed LIuL LIe Lrude-In wus noL sImIIur
n either case trade-in allowance $7,200 is irrelevant n the second case loss $750 is
the diIIerence between the Iair value oI trade-in, $6,050, and its $6,800 net book
value
61
ournal Entr (6)
Ðebit Credit
BuIIdIngs =61,ooo
CusI 1¤6,ooo
MorLguge PuvubIe qz=,ooo
62
ournal Entr (7)
Ðebit Credit
Moving Expense (8,440 ¹ 3,394) 11,834
Cash 11,834
Assumed LIuL move Ius been mude ouL oI necessILv ¡.e. oId properLv
Iud been condemned or Luken bv emInenL domuIn, so movIng cosL noL
cupILuIIzued
¡ubor cIurges noL uccounLed us LoLuI no. oI workers Iours noL gIven
63
ournal Entr (8)
Ðebit Credit
MuInLenunce (or MovIng) Expense ¤,zzo
CusI ¤,zzo
MovIng Expense (or Deprec. Expense) 66o
EquIpmenL (or Accum. Deprec.) 66o
TIe repuIr oI LIe dumuge durIng LIe move Ius noL Improved LIe
equIpmenL so us Lo consLILuLe u beLLermenL; LIus IL Is expensed
%he decrease in salvage value, $660, could be expensed immediatel
64
ournal Entr (8)
However, Ì don't think an event that changes a fixed asset's future
salvage value is any more relevant, in terms of the cost concept, than
an event that changes its current market value. Thus, in my view, rather
than adjusting the cost of the asset, it is better to amortize the reduction
in salvage value by adjusting the depreciation charge for the rest of the
equipment's useful life, which constitutes a change in an estimate.
Since the accumulated depreciation was $3,220, and annual
depreciation was $805, the asset was 4 years old, and thus had 6
years left of useful life. The amount of remaining depreciation is the net
book value at the end of 4 years, $6,780, less the newly estimated
S1,290 salvage value, or $5,490. Divided by 6 years, the new annual
depreciation expense on this item would be $915. (Easier, though not
quite as thorough: the $660 lesser salvage value, spread over 6 years,
is $110 per year, added to the current depreciation charge of $805,
makes a total of $915.)
65
Discussion Question
Adjust the balance sheet in Exhibit 1 to
show the effect of these transaction
66
Revised Balance $heet AIter the Move
CurrenL usseLs: CurrenL IIubIIILIes $16o,zz¤
CusI $1z1,¤1z ¡ong-Lerm IIubIIILIes qz=,ooo
OLIer currenL usseLs z=1,;¤o Common sLock qoo,ooo
ToLuI currenL AsseLs ¤;¤,;oz ReLuIned eurnIngs ¤1o,8=;
PIunL und equIpmenL:
¡und 1;=,18=
BuIIdIngs $=61,ooo
¡ess uccumuIuLed DeprecIuLIon o =61,ooo
EquIpmenL ¤1¤,oz=
¡ess: uccumuIuLed deprecIuLIon 1¤z,8¤z 186,1¤¤
ToLuI usseLs $1,z¤6,o8o ToLuI IIubIIILIes und owners` equILv $1,z¤6,o8o
StuIIord Press
Condensed Bulunce Sheet (Revised to ReIlect Move)
Assets Liubilities und Owner's Iqoity
67
Accounting Ior Propert, Plant,
and Equipment and Other Assets
Depreciation: expense matched with revenues
Depletion: expense matched with revenues in the
case of natural resources [forest land, mineral
deposits]
Amortized: expense matched with revenues in the
case of intangible assets
Three phases of accounting for PPE..,
· Determining cost of fixed asset
· Amortizing cost over the useful life of the asset
· Removing it from the accounts at the end of the asset's life
68
Cost oI ixed Assets
Total amount of expenditures necessary
to ready the asset for its intended use,
which includes..,
· Price of acquiring legal title
· Costs of delivery
· Ìnstallation
· Training of employees
· Modification of facilities to use the asset
69
Cost oI ixed Assets
Example
PurcIuse prIce oI new Iurnuce 1¤,ooo
¡ess: Trude-In uIIowunce -¤ooo
¡ess: DIscounL Ior cusI -=oo
¤,=oo
VuIue oI oId Iurnuce ¤ooo
ToLuI usseLs puId 1z,=oo
¡reIgIL cIurges Ior deIIverv =oo
¡nsLuIIuLIon cosLs zooo
TruInIng cosLs Ior empIovees 1ooo
ToLuI cosL 16,ooo
Costs oI New Luborutory Iornuce - Jun 1, ±ooA
70
Estimating Depreciation
Estimate salvage value
Salvage value = expected selling price of the
asset ÷ any removal costs
Depreciable cost = cost ÷ salvage value
Use appropriate depreciation method based
on following two criteria..,
· Not subject to manipulation by management ÷ distorting
income
· Some resemblance to the decline in value of assets
measured on historical cost basis
71
$traight-Line Depreciation
An equal portion of depreciable cost is
charged to some measure of length of
an asset's life
Measure may be..,
· Periods of time
· Units of products
Accumulated depreciation: contra asset
72
$traight-Line Depreciation
Example
PurcIuse prIce oI new Iurnuce 1¤,ooo
¡ess: Trude-In uIIowunce -¤ooo
¡ess: DIscounL Ior cusI -=oo
¤,=oo
VuIue oI oId Iurnuce ¤ooo
ToLuI usseLs puId 1z,=oo
¡reIgIL cIurges Ior deIIverv =oo
¡nsLuIIuLIon cosLs zooo
TruInIng cosLs Ior empIovees 1ooo
ToLuI cosL 16,ooo
¡ess: SuIvuge vuIue -6ooo
DeprecIubIe cosL 1o,ooo
eur
Ixpected
Melt (in
poonds)
%ime
Buse
Lse
Buse
1 qo,ooo z,ooo 16oo
z q=,ooo z,ooo 18oo
¤ =o,ooo z,ooo zooo
q ==,ooo z,ooo zzoo
= 6o,ooo z,ooo zqoo
ToLuI z=o,ooo 1o,ooo 1o,ooo
Ðepreciution - Struiuht Line Method
Shedole oI Ðepreciution Ixpense
EsLIumLed IIIe: = veurs
ExpecLed meLuI meIL: z=o,ooo pounds
73
Declining Balance Method
Principle: an asset is most productive in
the early years of its use
Charging each period a fixed
percentage of the original cost of the
asset less any previously accumulated
depreciation
74
75
76
Long-Lived ixed Assets
Physical assets with a life > 1 year
Categories
· Plant and equipment ÷ depreciation
· Natural resources ÷ depletion
· Land ÷ appreciation
77
mportance oI Accounting umbers
Related to Long-Lived ixed Assets
Major determinant of many companies' book value
used in..,
· Equity valuations
· Debt covenants
Determines company's cost structure and ability to
improve its capital and employee productivity
Ìnfluences periodic income through depreciation and
depletion charges
Ìmprove or depress current profits by lowering or
raising the level of maintenance expenditures
required to maintain FAs
78
AAP Depreciation Methods
Production (Use) method
Straight-line depreciation
· Used by majority of firms
Accelerated depreciation
· Mostly confined to tax reporting

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