ACC116A Chapter 7 Fall 2016 - CHAPTER 07 ACCOUNTING FOR...

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CHAPTER 07ACCOUNTING FOR LONG-TERM ASSETS
Called “Property, Plant, & Equipment”PLANT ASSETSExpected to Benefit Future PeriodsActively Used in OperationsTangible in Nature8-2
PLANT ASSETS8-3Cost BasisAcquisition PriceBasket PurchasesDepreciationWhat to DepreciateMethods
ACQUISITION COST:LAND AND BUILDINGS (IMPROVEMENTS):THE COST OF TO INCLUDE:Purchase PriceCost of ConstructionBrokerage FeesTaxesTitle FeesAttorney Fees8-4
ACQUISITION COST:MACHINERY AND EQUIPMENT8-5THE COST OF TO INCLUDE:Purchase PriceInstalling, Assembling and TestingTransportation ChargesTaxesInsurance while in Transit
ACQUISITION COST:LUMP-SUM ‘BASKET’ PURCHASEOn 1-1-11, Matrix, Inc. paid $200,000 cash for land & a building. The appraised values are:Building:$162,500Land: $ 87,500 The total cost of a combined purchase of land and building is separated on the basis of their relative market values.How much of the $200,000 purchase price will be charged to the building and land accounts?8-6
ACQUISITION COST:LUMP-SUM ‘BASKET’ PURCHASE8-7
Decline in asset value over its useful lifeUSE IT:2. Allocate cost to periodsbenefited3. Account for subsequent expendituresDISPOSE OF IT:4. Record disposal.DEPRECIATIONBUY IT:1. Compute cost8-8$$$$$$
Depreciation:The process of allocating the cost of a plant asset expensing the cost of an asset in the period(s) that benefit from its use. CostAllocationAcquisitionCostBalance Sheet: Account: AssetAmount: Unused PortionIncome Statement:Account: ExpenseAmount: Used PortionExpenseDEPRECIATION8-9
CAN I DEPRECIATE ANYTHING?LAND: NO!Land “Improvements” - YES!Equipment – YES!8-10
COMPUTING DEPRECIATIONThe calculation of depreciation requires three amounts: 1.Acquisition Cost2.Salvage Value3.Useful Life8-11
DEPRECIATION METHODS1. Straight-line (S/L)A.Half Year Convention2. Units-of-production (UOP)3. Declining-balance – Accelerated DepreciationA.Double Declining Balance8-12
STRAIGHT-LINE METHODCost - Salvage ValueUseful lifeDepreciationExpense for Period=$9,000 DepreciationExpense per Year=$50,000 - $5,0005 years=P18-13
Salvage ValueSTRAIGHT-LINE METHODDEPRECIATIONRATE=(100% ÷ 5 years)= 20% per year or 1/5P18-14
PARTIAL-YEAR DEPRECIATION (A.K.A. HALF YEAR CONVENTION)DEPRECIATION METHOD: Straight-linePURCHASED: June 30, 2011COST:$75,000USEFUL LIFE:10 yearsEST. SALVAGE VALUE:$5,000DEPRECIATIONEXPENSE ON:December 31, 2011Depreciation (Annual)= ($75,000 - $5,000) ÷ 10= $7,000Depreciation (1/2 Year)= $7,000 × 6/12= $3,5008-15

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