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©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 1 Chapter 7 Long-Lived Depreciable Assets – A Closer.

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Presentation on theme: "©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 1 Chapter 7 Long-Lived Depreciable Assets – A Closer."— Presentation transcript:

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2 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 1 Chapter 7 Long-Lived Depreciable Assets – A Closer Look

3 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 2 Learning Objective 1 Explain the process of depreciating long-lived assets.

4 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 3 Depreciation AccountingPeriod

5 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 4 Effect of Estimates on Depreciation Depreciable Annual Options BaseExpense Residual value: $4,000, Useful life: 4 years$16,000$4,000 Residual value: $4,000, Useful life: 5 years$16,000$3,200 Residual value: $3,000, Useful life: 4 years$17,000$4,250 Residual value: $3,000, Useful life: 5 years$17,000$3,400

6 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 5 Learning Objective 2 Determine depreciation expense using the straight-line and the double-declining-balance depreciation methods.

7 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 6 The Effects of Different Depreciation Methods Amount of Depreciation Straight-line depreciation Accelerated depreciation

8 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 7 Depreciation Methods Used by 600 Companies, Year 2000 96% Straight-line 4% Other

9 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 8 Straight-Line Depreciation Barlow Paving Corporation purchased a machine on January 2, 2002, for a total cost of $300,000. Cost includes: Invoice price Applicable taxes Installation costs Insurance in transit Shipping costs Personnel training costs Cost does not include: Repairs Maintenance MaintenanceInsurance (once the asset becomes productive)

10 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 9 Straight-Line Depreciation Data Amount Cost of machine$300,000 Less: Estimated residual value– 25,000 Depreciable base$275,000 Estimated useful life 5 years (Cost – Residual value) ÷ Estimated useful life ($300,000 – $25,000) ÷ 5 = $55,000 per year

11 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 10 Barlow’ s Financial Statements Using Straight-Line Depreciation Income Statements 200220032004 Sales$755,000$755,000$755,000 Cost of goods sold 422,000 422,000 422,000 Gross margin$333,000$333,000$333,000 Operating expenses other than depreciation–236,000–236,000–236,000 Depreciation expense– 55,000– 55,000– 55,000 Net income$ 42,000$ 42,000$ 42,000

12 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 11 Barlow’ s Financial Statements Using Straight-Line Depreciation Balance Sheets Balance Sheets 200220032004 Assets: Cash$ 50,000$ 96,000$157,000 Accounts receivable 206,000 257,000 293,000 Inventory 77,000 77,000 77,000 Machine 300,000 300,000 300,000 Accumulated depreciation– 55,000–110,000–165,000 Total assets$578,000$620,000$662,000

13 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 12 Barlow’ s Financial Statements Using Straight-Line Depreciation Balance Sheets Balance Sheets 200220032004 Liabilities and stockholders’ equity: stockholders’ equity: Accounts payable$206,000$206,000$206,000 Notes payable 170,000 170,000 170,000 Common stock 100,000 100,000 100,000 Paid-in capital 10,000 10,000 10,000 Retained earnings 92,000 134,000 176,000 Total liabilities and stockholders’ equity$578,000$620,000$662,000 stockholders’ equity$578,000$620,000$662,000

14 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 13 Barlow’ s Financial Statements Using Straight-Line Depreciation Partial Balance Sheet December 31, 2004 Plant assets: Machine$300,000 Less: Accumulated depreciation 165,000 $135,000 Book value

15 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 14 Double-Declining-Balance Depreciation Straight-line rate per year: 100% ÷ 5 = 20% Book value of machine at the end of the first year: $300,000 × 40% = $120,000 $300,000 – $120,000 = $180,000 Double-declining balance: 2 times the straight-line rate = 40%

16 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 15 Barlow’s Financial Statements Using Double-Declining Balance Income Statements 200220032004 Sales$755,000$755,000$755,000 Cost of goods sold 422,000 422,000 422,000 Gross margin$333,000$333,000$333,000 Operating expenses other than depreciation–236,000–236,000–236,000 Depreciation expense–120,000– 72,000– 43,200 Net income$ 23,000$ 25,000$ 53,800

17 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 16 Barlow’s Financial Statements Using Double-Declining Balance Balance Sheets Balance Sheets 200220032004 Assets: Cash$ 50,000$ 96,000$157,000 Accounts receivable 206,000 257,000 293,000 Inventory 77,000 77,000 77,000 Machine 300,000 300,000 300,000 Accumulated depreciation–120,000–192,000–235,200 Total assets$513,000$538,000$591,800

18 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 17 Barlow’s Financial Statements Using Double-Declining Balance Balance Sheets Balance Sheets 200220032004 Liabilities and stockholders’ equity: stockholders’ equity: Accounts payable$206,000$206,000$206,000 Notes payable 170,000 170,000 170,000 Common stock 100,000 100,000 100,000 Paid-in capital 10,000 10,000 10,000 Retained earnings 27,000 52,000 105,800 Total liabilities and stockholders’ equity$513,000$538,000$591,800 stockholders’ equity$513,000$538,000$591,800

19 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 18 Learning Objective 3 Describe how the use of different depreciation methods affects the income statement and the balance sheet.

20 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 19 Straight-Line versus Double-Declining-Balance DepreciationNet Book DepreciationNet Book Year Expense Income Value 2002$ 55,000$ 42,000$245,000 2003$ 55,000$ 42,000$190,000 2004$ 55,000$ 42,000$135,000 2005$ 55,000$ 42,000$ 80,000 2006$ 55,000$ 42,000$ 25,000 Total$275,000$210,000 Straight-Line

21 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 20 Straight-Line versus Double-Declining-Balance DepreciationNet Book DepreciationNet Book Year Expense Income Value 2002$120,000$–23,000$180,000 2003$ 72,000$ 25,000$108,000 2004$ 43,200$ 53,800$ 64,800 2005$ 25,920$ 71,080$ 38,880 2006$ 13,880$ 83,120$ 25,000 Total$275,000$210,000 Double-Declining-Balance

22 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 21 Learning Objective 4 Compare and contrast gains and losses with revenues and expenses.

23 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 22 Disposal of Depreciable Assets Disposing of depreciable assets is usually not associated with the company’s ongoing major or central activity. This type of transaction is most often incidental or peripheral to the day-to-day operation of the business.

24 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 23 Gains and Losses Gains are increases in equity from peripheral or incidental transactions of an entity except those that result from revenues or investments by owners. Losses are decreases in equity from peripheral or incidental transactions of an entity except those that result from expenses or distributions to owners.

25 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 24 Learning Objective 5 Calculate gains and losses on the disposal of depreciable assets.

26 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 25 Gain on Disposal: Example Barlow sells the machine, which cost $300,000, on January 7, 2002, for $32,000. The book value of the machine is $25,000. What is the gain?

27 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 26 Loss on Disposal: Example Assume that Barlow sells the machine for $19,000 on January 2, 2007. What is the loss?

28 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 27 Barlow Paving Corporation Income Statements 2006 2007 Sales$755,000$941,000 Cost of goods sold 422,000 525,000 Gross margin$333,000$416,000 Operating expenses other than depreciation–236,000–319,000 other than depreciation–236,000–319,000 Depreciation expense– 55,000 0 Operating income$ 42,000$ 97,000 Loss on sale of machine 0 – 6,000 Net Income$ 42,000$ 91,000

29 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 28 Barlow Paving Corporation Income Statements 2006 2007 Assets: Cash$289,000$212,000 Accounts receivable 355,000 313,000 Inventory 77,000 172,000 Machine 300,000 0 Less: Accumulated depreciation–275,000 0 Total assets$746,000$697,000

30 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 29 Barlow Paving Corporation Income Statements 2006 2007 Liabilities and stockholders’ equity: stockholders’ equity: Accounts payable$206,000$216,000 Notes payable 170,000 20,000 Common stock 100,000 100,000 Paid-in capital 10,000 1,0000 Retained earnings 260,000 351,000 Total liabilities and stockholders’ equity$746,000$697,000 stockholders’ equity$746,000$697,000

31 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 30 Learning Objective 6 Describe the true meaning of gains and losses on the disposal of depreciable assets.

32 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 31 Understanding the True Meaning of Gains and Losses 1. Straight-Line Movers and Accelerated Movers have identical business activities. 2. On January 2, 2002, each company purchased a fleet of trucks for $228,000. 3. Estimated useful life is 4 years. 4. Estimated residual value is $92,000.

33 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 32 Straight-Line and Accelerated Movers Financial Statements Income Statements For the Year Ending December 31, 2002 Sales$769,000$769,000 Cost of goods sold 295,500 295,500 Gross margin$473,500$473,500 Wages expense 67,500 67,500 Utilities expense 31,000 31,000 Depreciation expense 34,000 114,000 Operating income$341,000$261,000 Other revenues and expenses: Interest expense 120,000 120,000 Net income$221,000$141,000 Straight-Line Accelerated

34 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 33 Assets: Cash$226,000$226,000 Accounts receivable 198,000 198,000 Inventory 223,000 223,000 Trucks, net of depreciation 194,000 1 114,000 2 Total assets$841,000$761,000 1 $228,000 – $34,000 2 $228,000 – $114,000 Straight-Line and Accelerated Movers Financial Statements Straight-LineAccelerated Balance Sheets December 31, 2002

35 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 34 Liabilities: Accounts payable$ 22,000$ 22,000 Notes payable 61,000 61,000 Total liabilities$ 83,000$ 83,000 Shareholders’ equity: Common stock$200,000$200,000 Paid-in capital 194,000 194,000 Retained earnings 364,000 284,000 Total shareholders’ equity$758,000$678,000 Total liabilities and shareholders’ equity$841,000$761,000 shareholders’ equity$841,000$761,000 Straight-Line and Accelerated Movers Financial Statements Straight-LineAccelerated

36 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 35 Straight-Line and Accelerated Movers Financial Statements Income Statements For the Year Ending December 31, 2003 Sales$769,000$769,000 Cost of goods sold 295,500 295,500 Gross margin$473,500$473,500 Wages expense 67,500 67,500 Utilities expense 31,000 31,000 Depreciation expense 34,000 22,000 Operating income$341,000$353,000 Other revenues and expenses: Interest expense 120,000 120,000 Net income$221,000$233,000 Straight-Line Accelerated

37 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 36 Assets: Cash$ 426,000$426,000 Accounts receivable 253,000 253,000 Inventory 223,000 223,000 Trucks, net of depreciation 160,000 1 92,000 2 Total assets$1,062,000$994,000 1 $228,000 – $68,000 2 $228,000 – $136,000 Straight-Line and Accelerated Movers Financial Statements Straight-LineAccelerated Balance Sheets December 31, 2003

38 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 37 Liabilities: Accounts payable$ 22,000$ 22,000 Notes payable 61,000 61,000 Total liabilities$ 83,000$ 83,000 Shareholders’ equity: Common stock$ 200,000$200,000 Paid-in capital 194,000 194,000 Retained earnings 585,000 517,000 Total shareholders’ equity$ 979,000$911,000 Total liabilities and shareholders’ equity$1,062,000$994,000 shareholders’ equity$1,062,000$994,000 Straight-Line and Accelerated Movers Financial Statements Straight-LineAccelerated

39 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 38 Sale of Trucks: Example On December 31, 2003, the companies sold the trucks for $150,000. Straight-Line incurred a loss. $160,000 – $150,000 = $10,000 loss Accelerated had a gain. $150,000 – $92,000 = $58,000 gain

40 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 39 Other Depreciation Methods Units of Production (or Activity) Method ($125,000 – $25,000) ÷ 400,000 = $.25/mile On January 2, 2003, Rodriguez Trucking purchased a truck for $125,000. Estimated residual value is $25,000. It is estimated that the truck would be used for 400,000 miles.

41 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 40 Other Depreciation Methods Under the Modified Accelerated Cost Recovery System (MACRS), companies must use IRS mandated service lives regardless of how long the company feels its assets will last.

42 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 41 Learning Objective 7 Prepare journal entries associated with long-lived depreciable assets.

43 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 42 Journal Entries On January 2, 2002, Barlow Corporation purchased a paving machine for $300,000 cash. 2002 Jan 2 Machine300,000 Cash300,000 On December 31, 2002, Barlow Corporation records straight-line depreciation for $55,000. 2002 Dec 31 Depreciation Expense 55,000 Accumulated Depreciation 55,000

44 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 43 Journal Entries On January 2, 2007, Barlow Corporation sold its paving machine for $32,000 cash resulting in a gain of $7,000. 2007 Jan 2 Cash 32,000 Accumulated Depreciation275,000 Machine300,000 Gain on Disposal of Assets 7,000

45 ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones7 - 44 End of Chapter 7

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