chapter 8

# chapter 8 - CHAPTER 8 Reporting and Analyzing Long-Term...

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Reporting and Analyzing Long-Term Assets C H A P T E R 8

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Plant Assets Expected to Benefit Future Periods Actively Used in Operations Tangible in Nature
Plant Assets Plant Assets as a Percent of Total Assets 9% 54% 55% 74% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% eBay Wal-Mart Anheuser- Busch McDonald's

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Decline in asset value over its useful life Use 2. Allocate cost to periods benefited. 3. Account for subsequent expenditures. Disposal 4. Record disposal. Plant Assets Acquisition 1. Compute cost.
Acquisition Cost Acquisition cost excludes financing charges, cash discounts, negligence costs and fines All expenditures needed to prepare the asset for its intended use Purchase price Cost Determination

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On January 1, Matrix, Inc. purchased land and building for \$500,000 cash. The appraised values are building, \$480,000, and land, \$120,000. How much of the \$ 500,000 purchase price will be charged to the building and land accounts? Lump-Sum Asset Purchase The total cost of a combined purchase of land and building is separated on the basis of their relative market values .
Appraised % of Purchase Apportioned Asset Value Value Price Cost a b * c b × c Land 120,000 \$ 20% × 200,000 \$ = 40,000 \$ Building 480,000 80% × 200,000 = 160,000 Total 600,000 \$ 100% 200,000 \$ * \$120,000 ÷ \$600,000 = 20% \$480,000 ÷ \$600,000 = 80% Appraised % of Purchase Apportioned Asset Value Value Price Cost a b * c b × c Land 120,000 \$ 20% × 500,000 \$ = 100,000 \$ Building 480,000 80% × 500,000 = 400,000 Total 600,000 \$ 100% 500,000 \$ * \$120,000 ÷ \$600,000 = 20% \$480,000 ÷ \$600,000 = 80% Lump-Sum Asset Purchase

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Depreciation is the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use. Cost Allocation Acquisition Cost (Unused) Balance Sheet (Used) Income Statement Expense Depreciation
How is Depreciation Recorded? An adjusting Journal entry is prepared at the end of the accounting period to allocate the cost of the asset to the current period. Depreciation Expense XXXX Accumulated Depreciation XXXX Asset is shown on the Balance sheet at Book Value Contra Asset Account Book Value= Cost of the Asset- Accum. Deprec.

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The calculation of depreciation requires three amounts for each asset: 1. Cost 1. Salvage Value 2. Useful Life Factors in Computing Depreciation
1. Straight-line 2. Units-of-production 3. Declining-balance Depreciation Methods

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On January 1, 2008, equipment was purchased for \$100,000 cash. The equipment has an estimated useful life of five years and an estimated residual value of \$10,000. Cost - Salvage Value Useful life Depreciation Expense for Period = Straight-Line Method
Straight-Line Method Cost - Salvage Value Useful life Depreciation Expense for Period = Depreciation Expense per Year = = 100,000 -10,000 5 years 18,000 Depreciation Expense 18,000 Accumulated Depreciation 18,000 To record annual depreciation

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## This note was uploaded on 04/08/2008 for the course ACCT 2101 taught by Professor Bhan during the Spring '07 term at UGA.

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chapter 8 - CHAPTER 8 Reporting and Analyzing Long-Term...

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