Sesi 4 FA and Intangible War22e - Ch10

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Fixed Assets and

Intangible Assets
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10-2
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Units-of-Production Method
The units-of-production method provides

for the same amount of depreciation
expense for each unit produced or each
unit of capacity used by the asset.
Cost – estimated residual value

Unit depreciation =
Estimated hours, units, etc.
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10-2
A depreciable asset cost $24,000. Its
estimated residual value is $2,000 and
its expected to have an estimated life
of 10,000 operating hours.
Cost – estimated residual value
Hourly depreciation =
Estimated hours
$24,000 – $2,000
Hourly depreciation =
10,000 estimated hours
Hourly depreciation = $2.20 hourly depreciation

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10-2
The units-of-production method is

more appropriate than the straight-
line method when the amount of
use of a fixed asset varies from
year to year.
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10-2
Example Exercise 10-3
Equipment acquired at a cost of $180,000 has an
estimated residual value of $10,000, an estimated useful
life of 40,000 hours, and was operated 3,600 hours
during the year. Determine the (a) depreciable cost, (b)
depreciation rate, and (c) the units-of-production
depreciation for the year.
Follow My Example 10-3
(a) $170,000 ($180,000 – $10,000)
(b) $4.25 per hour ($170,000/40,000 hours)
(c) $15,300 (3,600 hours x $4.25)
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For Practice: PE 10-3A, PE 10-3B
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10-2
Double-Declining-Balance Method
The double-declining-
balance method provides
for a declining periodic
expense over the estimated
useful life of the asset.
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10-2
A double-declining balance rate is
determined by doubling the straight-
line rate. A shortcut to determining
the straight-line rate is to divide one
by the number of years (1/5 = .20).
Hence, using the double-declining-
balance method, a five-year life
results in a 40 percent rate (.20 x 2).
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10-2
For the first year, the cost of the asset
is multiplied by 40 percent. After the
first year, the declining book value of
the asset is multiplied 40 percent.
Continuing with the example where
the fixed asset cost $24,000 and has
an expected residual value of $2,000,
a table can be built.
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10-2
Click to edit MasterAccum.
Book Value title style
Beginning Annual Deprec. Book Value
Year of Year Rate Deprec. Year-End Year-End

1 $24,000 40% $9,600
$24,000 x .40
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10-2

1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760
$14,400 x .40
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10-2

1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
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10-2

1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
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10-2

1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
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14
10-2

1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
5 3,110 40% 1,244 22,134 1,866
DEPRECIATION STOPS WHEN
BOOK VALUE EQUALS STOP
RESIDUAL VALUE! 14
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10-2

1 $24,000 40% $9,600 $9,600 $14,400
2 14,400 40% 5,760 15,360 8,640
3 8,640 40% 3,456 18,816 5,184
4 5,184 40% 2,074 20,890 3,110
5 3,110 – $2,000 1,110 22,000 2,000
“Forced” Desired
annual ending book
depreciation value 15
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10-2
Equipment that was acquired at the beginning of the year
at a cost of $125,000 has an estimated residual value of
$5,000 and an estimated useful life of 10 years.
Determine the (a) depreciable cost, (b) double-
declining-balance rate, and (c) double-declining balance
depreciation for the first year.
(a) $120,000 ($125,000 – $5,000)
(b) 20% [(1/10) x2]
(c) $25,000 ($125,000 x 20%)
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For Practice: PE 10-4A, PE 10-4B
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10-2
Summary of
Depreciation Methods
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10-2
Comparing
Depreciation Methods
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10-2
Depreciation for Federal Income Tax
The Internal Revenue Code

specifies the Modified Accelerated
Cost Recovery System (MACRS)
for use by businesses in computing
depreciation for tax purposes.
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10-2
MACRS specifies eight classes of
useful life and depreciation rates for
each class. The two most common
classes are the 5-year class (includes
automobiles and light duty trucks)
and the 7-year class (includes most
machinery and equipment).
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10-2
Revising Depreciation Estimates
A machine purchased for $140,000 was

originally estimated to have a useful life of five
years and a residual value of $10,000. The
asset has been depreciated for two years using
the straight-line method.
Annual $140,000 – $10,000
Depreciation (S/L) = 5 years
Annual
$26,000 per year
Depreciation (S/L) =
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10-2
At the end of two years, the asset’s book value
is $88,000, determined as follows:
Asset cost
$140,000
Less accumulated depreciation
($26,000 per year x 2 years)
52,000
Book value, end of second year
$ 88,000 53
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10-2
During the third year, the company estimates
that the remaining useful life is eight years
(instead of three) and that the residual value is
$8,000 (instead of $10,000). Depreciation
expense for each of the remaining eight year is
determined as follows:
Book value, end of second year
$88,000
Less revised estimated residual value
8,000
Revised annual depreciation expense
Revised remaining
($80,000 depreciation cost
÷ 8 years) $10,000
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$80,000
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10-2

A warehouse with a cost of $500,000 has an estimated
residual value of $120,000, an estimated useful life of
40 years, and is depreciated by the straight-line method.
(a) Determine the amount of annual depreciation. (b)
Determine the book value at the end of the 20th year of
use. (c) If at the start of the 21st year it is estimated that
the remaining life is 25 years and that the residual value
is $150,000, determine the depreciation expense for
each of the remaining 25 years.
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10-2

a. $9,500 [($500,000 – $120,000)/40]

b. $310,000 [$500,000 – ($9,500 x 20)]
c. $6,400 [310,000 – $150,000)/25]
For Practice: PE 10-5A, PE 10-5B 56

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10-3
Objective
Objective 33
Journalize entries
for the disposal of
fixed assets.
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10-3
Discarding Fixed Assets
A piece of equipment acquired at a cost of

$25,000 is fully depreciation. On February
14, the equipment is discarded.
Feb. 14 Accumulated Depr.—Equipment 25 000 00

Equipment 25 000 00
To write off equipment
discarded.
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10-3
Equipment costing $6,000 is depreciated at an
annual straight-line rate of 10%. After the
adjusting entry, Accumulated Depreciation—
Equipment had a $4,750 balance. The
equipment was discarded on March 24.
Mar. 24 Depreciation Expense—Equipment 150 00
Accum. Depr.—Equipment 150 00
To record current
depreciation on $600
$600xx3/12
3/12
equipment discarded.
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10-3
The discarding of the equipment is then
recorded by the following entry:
Mar. 24 Accum. Depreciation—Equipment 4 900 00

Loss on Disposal of Fixed Assets 1 100 00
Equipment 6 000 00
To write off equipment
discarded.
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10-3
Selling Fixed Assets
Equipment costing $10,000 is depreciated at an

annual straight-line rate of 10%. The equipment is
sold for cash on October 12. Accumulated
Depreciation (last adjusted December 31) has a
balance of $7,000 and needs to be updated.
Oct. 12 Depreciation Expense—Equipment 750 00
Accum. Depr.—Equipment 750 00
To record current
depreciation on $10,000
$10,000 xx ¾
¾
equipment sold. x10%
x10%
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10-3
Assumption 1
The equipment is sold on October

12 for $2,250. No gain or loss.
Oct. 12 Cash 2 250 00

Accum. Depreciation—Equipment 7 750 00
Equipment 10 000 00
Sold equipment at book
value.
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10-3
Assumption 2
The equipment is sold on October 12

for $1,000; a loss of $1,250.
Oct. 12 Cash 1 000 00

Loss on Disposal of Fixed Assets 1 250 00
Equipment 10 000 00
Sold equipment at a loss.
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10-3
Assumption 3
The equipment is sold on October 12

for $2,800; a gain of $550.
Oct. 12 Cash 2 800 00

Equipment 10 000 00
Gain on Disp. of Fixed Assets 550 00
Sold equipment at a gain.
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10-3

Equipment was acquired at the beginning of year at a
cost of $91,000. The equipment was depreciated using
the straight-line method based upon an estimated useful
life of 9 years and an estimated residual value of
$10,000.
a. What was the depreciation for the first year?
b. Assuming the equipment was sold at the end of the
second year for $78,000, determine the gain or loss on
sale of the equipment.
c. Journalize the entry to record the sale.
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10-3

a. $9,000 [($91,000 – $10,000)/9]

b. $5,000 gain; $78,000 – [$91,000 – ($9,000 x 2)]
c. Cash 78,000
Accum. Depreciation—Equipment 18,000
Equipment
91,000
Gain on Disposal of Fixed Assets
5,000
For Practice: PE 10-6A, PE 10-6B 66
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Sesi 4 FA and Intangible War22e - Ch10

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1

Click to edit Master title style 10

Fixed Assets and

The units-of-production method provides

Cost – estimated residual value

Hourly depreciation = $2.20 hourly depreciation

The units-of-production method is

Year of Year Rate Deprec. Year-End Year-End

Year of Year Rate Deprec. Year-End Year-End

Year of Year Rate Deprec. Year-End Year-End

Year of Year Rate Deprec. Year-End Year-End

Year of Year Rate Deprec. Year-End Year-End

Year of Year Rate Deprec. Year-End Year-End

Year of Year Rate Deprec. Year-End Year-End

The Internal Revenue Code

A machine purchased for $140,000 was

Click to edit Master title style

Click to edit Master title style

a. $9,500 [($500,000 – $120,000)/40]

For Practice: PE 10-5A, PE 10-5B 56

A piece of equipment acquired at a cost of

Feb. 14 Accumulated Depr.—Equipment 25 000 00

Mar. 24 Accum. Depreciation—Equipment 4 900 00

Equipment costing $10,000 is depreciated at an

The equipment is sold on October

Oct. 12 Cash 2 250 00

The equipment is sold on October 12

Oct. 12 Cash 1 000 00

The equipment is sold on October 12

Oct. 12 Cash 2 800 00

Click to edit Master title style

Click to edit Master title style

a. $9,000 [($91,000 – $10,000)/9]

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