# 8.4 Depreciation. What is Depreciation? Decreasing the value of a fixed asset over its useful life.

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8.4 Depreciation

What is Depreciation? Decreasing the value of a fixed asset over its useful life

What do we Depreciate? FIXED ASSETS ◦Examples:  Office Furniture  Automobile  Building ◦Except Land  We do not depreciate land

Why do we Depreciate? To show original cost of fixed assets and amount used up over fiscal period To help financial statements up-to-date

Methods of Depreciation A. Straight Line Depreciation - Divides up the net cost of the asset equally over the years of the assets life B. Declining Balance - A method of calculating the annual depreciation of an asset as a fixed percentage of the remaining value of the asset

Straight Line Eg. A business purchases a new company car on January 1, 2006. Straight Line -- Cost – Salvage Value Estimate life in years Estimate value of asset at end of its useful life Jan. 01, 2006 Cost of car \$20 000 Estimated Salvage Value\$5 000 Estimated Years of Life5 Years 20 000 -5 000 5 years

Salvage Value Year Cost - Depreciation Used =Net Book Value Accumulated Depreciation 2006\$20 000- 3 000= 17 0003 000 200717 0003 00014 0006 000 200814 0003 00011 0009 000 200911 0003 0008 00012 000 20108 0003 0005 00015 000 20 000 -5 000 5 years Expense  I/S Keeps track of total deprecation  “CONTRA ASSET” (CR)

Accumulated Depreciation Accumulated depreciation account is a valuation or contra account, that keeps track of total depreciation Valuation- one that is used, together with an asset account to show true net value of asset

Jan 01 – Journalize the purchase of the automobile. Dec. 31, 2006 – Journalize the adjustment to record the 1 st year of deprecation Automobile20 000 Bank20 000 Depreciation Expense- Auto3 000 Accumulated Deprecation- Auto 3 000 Adj. Entry Contra Asset

All the same!! Dec. 31 2007, 2008, 2009, 2010- Journalize the adjusting entries for depreciation for each following year. Depreciation Expense- Auto3 000 Accumulated Deprecation- Auto 3 000

Dec. 31, 2010 – Journalize the entry if the business sells the auto at the end of the five years for \$5 000 Bank 5 000 Acc. Dep.- Auto15 000 Automobile 20 000

B) Declining Balance Declining Balance – Eg. Auto- 30% Government %, pg. 308 in text Year Cost - Depreciation Used =Net Book Value Accumulated Depreciation 2006\$20 000-6 000 (20 000 *.3) = 14 0006 000 200714 0004 200 (14 000 *.3) 9 80010 200 20089 8002 940 (9 800*.3) 6 86013 140 20096 8602058 (6 860*.3) 480215 198 20104 8021 440.60 (4802*.3) 3 361.4016 638.60 + 4 200 + 2 940 + 2 058 + 1 440. 60

Journalize the adjusting entries to record the depreciation for: Dec. 31, 2006 (year 1) Dec. 31, 2007 (year 2) Depreciation Expense- Auto 6 000 Accumulated Deprecation- auto 6 000 Depreciation Expense- Auto 4 200 Accumulated Deprecation- auto 4 200

Dec 31, 2008 (year 3) Depreciation Expense- Auto 2 940 Accumulated Deprecation- auto 2 940

Answer the following: ◦How much depreciation was accumulated (contra asset) after year 3?  \$13 140 ◦How much depreciation was used up in year 3?  2 940 (expense)

Depreciation calculations are recorded in the Adjustment Columns on the worksheet. You must extend these entries to the appropriate columns! Depreciation Expense- Auto will extend to the __ side of the __________ because it is treated like any other ______. (p. 307) Accumulated Depreciation- Auto is extended to the __ side of the ____________. Accumulated Depreciation is an example of a _____ account because it has the opposite balance of normal assets. (p.307) CR Income Statement Expense DR Balance Sheet Contra

Let’s Try it! 8.4 Depreciation pg. 301-310 Read p. 306-307 in textbook, review the worksheet, income statement & balance sheet Answer Exercise questions #1,2 p. 311- 312 (t), p. 242-244 (w)

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