1. CHAPTER 18 Buying Plant Assets and Paying Property Tax

2. 2 18-1 BUYING PLANT ASSETS AND PAYING PROPERTY TAX Assets have two categories: Current: Assets that will expected to be consumed within a year. Ex: cash, supplies, etc. Plant: Assets that will be used for a number of years in the operation of the business. Ex: Cash registers, buildings, etc. Three major categories of plant assets: 1) Equipment 2) Land 3) Buildings Buying a plant asset is similar to buying a current asset like supplies.

3. 3 RECORDING THE BUYING OF A PLANT ASSET 12 3 page 535 January 3, 20X1. Paid cash for a display case, $3,250.00. Check No. 4. 3.Cash paid 4 2.Cost of the plant asset 1.Account title 4.Post

4. 4 CALCULATING AND PAYING PROPERTY TAX page 536 February 1. Classic Parts, Inc., paid cash for property tax, $720.00. Check No. 69. Annual Property Tax =Tax Rate× Assessed Value $720.00=1.2%×$60,000.00 State and federal governments define two types of property - Real is land an anything attached (real estate), personal is anything that is not real property. Assessors determine the assessed value of the property.

5. LESSON 18-2 CALCULATING DEPRECIATION EXPENSE Plant assets are expected to be used over several years. The cost of a plant asset is expensed over the useful life of the asset. There are several methods to calculate depreciation. One popular method id the straight-line method.

6. 6 Estimated Salvage Value Original Cost Estimated Total Depreciation Expense =– $3,000.00 Annual Depreciation Expense = Years of Estimated Useful Life ÷ Estimated Total Depreciation Expense $600.00 $250.00 $3,250.00 STRAIGHT-LINE DEPRECIATION Calculating Annual Depreciation Expense 1 page 538 =– = 5 ÷ $3,000.00 1.Subtract the asset’s estimated salvage value from the original cost. 2.Divide the estimated total depreciation expense by the years of estimated useful life. 2

7. 7 Months in a Year Annual Depreciation Expense Monthly Depreciation Expense =÷ $50.00 Partial Year’s Depreciation Expense = Number of Months Asset Is Used × Monthly Depreciation Expense $250.00 12 $600.00 CALCULATING DEPRECIATION EXPENSE FOR PART OF A YEAR Calculating Partial Year’s Depreciation Expense 1 page 539 =÷ = 5 × $50.00 1.Divide the annual depreciation expense by 12. 2.Multiply the monthly depreciation expense by the number of months the plant asset is used in a year. 2

8. 8 CALCULATING ACCUMULATED DEPRECIATION page 540 20X3 Depreciation Expense 20X2 Accumulated Depreciation 20X3 Accumulated Depreciation =+ $1,800.00$600.00 $1,200.00 =+ Depreciation is not recorded as a reduction to the plant asset account. It is recorded in an accumulated depreciation account. - You add the depreciation expense for the current year to the prior year’s accumulated depreciation.

9. 9 CALCULATING BOOK VALUE page 540 Accumulated Depreciation Original Cost Ending Book Value =– $1,450.00$1,800.00 $3,250.00 =– Annual Depreciation Beginning Book Value Ending Book Value =– $1,450.00$600.00 $2,050.00 =– The original cost of a plant asset minus accumulated depreciation is known as book value. The ending book value is the beginning book value for the next year. Never depreciate below book value.

10. 10 3.Each year the asset is owned, record the year’s annual depreciation expense in Section 3. Calculate and record accumulated depreciation and ending book value. 1 2 3 page 542 2.Do not write in Section 2 until the asset is disposed of. 1.Write the information in Section 1 when the asset is purchased. LESSON 18-3 JOURNALIZING DEPRECIAION EXPENSE A separate record is kept for each plant asset. Here is how we complete the plant asset record for Restaurant Supply.

11. 11 JOURNALIZING ANNUAL DEPRECIATION EXPENSE page 543 3.Record adjusting entry 2. Accumulated Depreciation credit 1. Depreciation Expense debit 1 3 3 2

12. 12 POSTING AN ADJUSTING ENTRY FOR DEPRECIATION EXPENSE 1.Debit Depreciation Expense. page 544 2.Credit Accumulated Depreciation. 1 2

13. LESSON 18-4 DISPOSING OF PLANT ASSETS When a plant asset is no longer useful to a business, the asset may be disposed of. The old plant asset may be sold, traded, for a new assets, or discarded. A plant asset may be sold at any time during the asset’s useful life. when a plant asset is sold, its depreciation from the beginning of the current fiscal year to the date of the disposal must be recorded. Revenue that results when a plant asset is sold for more than book value is called gain on plant assets. The loss that results when a plant asset is sold for less than book value is called loss on plant assets.

14. 14 SALE OF A PLANT ASSET FOR BOOK VALUE 1.Record an entry in the cash receipts journal to remove the original cost. page 546 January 6, 20X6. Received cash from sale of display case, $250.00: original cost, $3,250.00; total accumulated depreciation through December 31, 20X5, $3,000.00. Receipt No. 4. 2.Check the type of disposal, and write the date, and disposal amount in Section 2 of the plant asset record. 1 2

15. 15 RECORDING A PLANT ASSET’S DEPRECIATION EXPENSE FOR A PARTIAL YEAR page 547 April 4, 20X7. Recorded a partial year’s depreciation on a safe to be sold, $60.00. Memorandum No. 31. 1.Debit the depreciation expense account. 2.Credit the accumulated depreciation account. 3.Update Section 3 of the plant asset record. 1 2 3

16. 16 SALE OF A PLANT ASSET FOR MORE THAN BOOK VALUE 1.Remove the original cost. Record the gain on the sale. Record the cash received from the sale. page 548 April 4, 20X7. Received cash from sale of safe, $425.00: original cost, $1,800.00; accumulated depreciation through April 4, 20X7, $1,500.00. Receipt No. 47. 2.Check the type of disposal. Write the date and disposal amount in Section 2 of the plant asset record. 1 2

17. 17 1.Remove the original cost. Record the loss on the sale. Record the cash received from the sale. SALE OF A PLANT ASSET FOR LESS THAN BOOK VALUE 1 page 549 October 6, 20X7. Received cash from sale of a computer, $150.00: original cost, $1,900.00; total accumulated depreciation through October 1, 20X7, $1,500.00. Receipt No. 281. 2.Check the type of disposal and write the date and disposal amount in Section 2. 2

18. LESSON 18-5 DECLINING-BALANCE METHOD OF DEPRECIATION The straight line method charges and equal amount of depreciation expense each year. Some assets depreciate more in the early years of useful life. Multiplying the book value by a constant depreciation rate at the end of each fiscal period is called the declining balance method of depreciation. -The declining-balance depreciation rate is a multiple of the straight line rate. Many businesses use a declining-balance rate that is two times the straight-line rate. This method is called the double declining-balance method.

19. 19 CALCULATING DEPRECIATION USING THE DOUBLE DECLINING-BALANCE METHOD 1 23 page 551 4 1.Calculate the double declining-balance rate. 2.Determine the annual depreciation expense. 3.Determine the ending book value. 4.Transfer the ending book value to the beginning book value for the following year.

20. 20 CALCULATING THE LAST YEAR’S DEPRECIATION EXPENSE 23 page 552 1.Transfer the ending book value from Year 4 to the beginning book value of Year 5. 2.Subtract the salvage value from the beginning book value to determine the depreciation expense for the last year. 3.Verify that the ending book value is equal to the salvage value. 1

21. 21 COMPARISON OF TWO METHODS OF DEPRECIATION page 553