CH 9: Reporting and Analyzing Long-Lived Assets

In-Class Problems

,, cPlant Assets

1. Depreciation:
Notes:
Depreciation is the process of allocating the cost of a plant asset to expense over
its useful life.
Accumulated Depreciation is the total amount of depreciation expense recorded for
the asset since date of purchase.
Three methods can be used to calculate depreciation: Straight-line, Units-of-Activity,
or Declining Balance.
Journal Entry to record Depreciation:
Depreciation Expense
xxx
Accumulated Depreciation
xxx
Calculation Depreciation
Straight-Line Method
Cost Salvage Value
Useful Life

Depreciation Expense

Units of Activity
Step 1: Calculate rate per unit of activity (units, miles, hours, etc)
Cost Salvage Value
Useful Life in units

Depreciation rate per unit of activity

Step 2: Calculate Depreciation Expense

Annual
Activity

Depr. Rate per

unit

Depreciation
Expense

Note: As the end of the useful life approaches, be careful not to overdepreciate. Can use an asset after it is fully depreciated. Book Value =
Salvage at end of useful life.

Double-Declining Balance
Step 1: Calculate depreciation rate

1
Useful
Life

Rate (straight-line)
x2

Step 2: Calculate Depreciation Expense

Beginning Book
Value
Beginning Book
value

= Depreciation Rate

DDB
= Depreciation Expense
Rate
Co
=
- Accumulated Depreciation
st
x

Note: Typically, the Depreciation Expense in the last year of the useful
life is a plug number. Be careful not to over depreciate.
Book Value = Salvage Value at end of useful life.

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CH 9: Reporting and Analyzing Long-Lived Assets

In-Class Problems
Problem:
On January 1, 2010, Wang, Inc. purchased a machine to be used in the fabrication of a
part for one of its key products. The machine cost $85,000, and its estimated useful
life was five years or 500,000 units, after which it could be sold for $5,000 (salvage
value). Annual production in units for each year is 110,000; 100,000; 175,000; 90,000;
and 25,000, respectively. Compute depreciation for each year using Straight-line, Units
of Activity, and Double-declining balance methods.
2. Partial year Depreciation:
Notes:
Depreciation expense should only be recorded for the period of time the asset was
owned during the period.
Partial-year depreciation calculations are required for assets that are purchased on
a date other than the beginning of the year or are disposed of on a date other than
the end of the fiscal year.
o Must pro-rate depreciation for partial years for the Straight-Line and Double
Declining methods. This concept does not apply to Units-Of-Activity.
Problem:
An asset with a cost of $10,000, useful life of 5 years, and salvage value of $2,000 was
purchased on April 1, 2010. What is the straight-line depreciation recorded on
12/31/2010?
3. Change in Estimate:
Notes:
The useful life and salvage values are estimates.
Depreciation must be revised when these estimates change.
The revision occurs in the current period and is carried forward into future periods.
Steps:
1)
Calculate Book value: Cost Accumulated Depreciation = Book Value
2)
Calculate Remaining Depreciable Cost: Book Value Salvage value =
Depreciable Cost
3)
Determine remaining useful life. Note: This calculation depends on the
information provided in the problem. If the remaining useful life is given, use
that number. If total revised useful life is give then the remaining useful life
must be calculated as follows: Revised useful life years that have passed.
4)
Calculate new annual Depreciation Expense: Remaining depreciable book
value/Remaining useful life.
Problem:
On January 2, 2010, ABC Co. purchased a floor maintenance machine costing $2,100.
ABC estimated the machines useful life at 5 years with a $100 salvage value. In 2012,
ABC realized that the machine would only last four years and at that time would have
an estimated salvage value of $400. Using the straight-line method, compute 2012
depreciation.

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CH 9: Reporting and Analyzing Long-Lived Assets

In-Class Problems
4. Plant Asset Disposal:
Note:
Disposal of an plant asset can result from retiring the asset/junking it, selling the
asset, trading the asset for a new asset, or receipt of insurance proceeds in the
event assets are damaged/destroyed. We will not discuss trading an asset or
receipt of insurance proceeds.
Steps:
1) Update (record) depreciation through date of disposal and calculate the assets
book value.
2) Calculate Book Value (Cost Accumulated Depreciation)
3) Compare book value to sales price to determine gain or loss on disposal.
a.
Sales Price > Book Value = Gain; SP<BV = Loss.
b.
If the asset is retired or junked, then there will be no sales price
and a loss will occur if the asset is not fully depreciated. If the asset is
fully depreciated than there will be no gain or loss.
4) Record the journal entry.
Problem:
On March 1, 2013, ABC sold equipment for $2,000. The machine was originally
purchased on January 1, 2010 for $10,000. The equipment had a salvage value of
$2,000 and useful life of 5 years. At the end of 2012, Accumulated Depreciation was
$4,800. Journalize the transaction to record the sale.

Intangible Assets

5. Amortization:
Notes:
Amortization is the process of allocating the cost of an intangible asset to expense
over its useful life (not to exceed its legal life).
Limited-Life Intangibles: Amortize cost
Indefinite-Life: Do not Amortize
Do not Amortize:
Research & Development Costs: expense when incurred
Trademarks & Trade Names: Capitalize cost but do not amortize
Goodwill
Amortization is calculated using the Straight-Line Method.
No Salvage Value
The Journal Entry to record Amortization
Amortization Expense
xxx
Asset account
xxx
Problem:
A company acquired a patent at a cost of $10,000 on January 1, 2010. The asset is
expected to have an economic life of 10 years. Calculate amortization for 2010.

Depreciation Extra Practice

Straight-line Method
Axel Corporation purchased machinery on
January 1, 2005 at a cost of $202,000.

Cost

Salvage Value

Depr Cost

Useful Life

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CH 9: Reporting and Analyzing Long-Lived Assets

In-Class Problems
Date

Beg BV

Depr Exp

Accum Dep

Double-Declining Balance Method

Straight-line Rate = 1/Useful Life
Date

Beg BV

DDB Rate

DDB Rate = 2 x SL Rate

Depr Exp

Calculate Depreciation assuming Axel uses

the Units-of-Activity Method. Total machine
hours are expected to be 38,000.

Accum Depr

Year
End BV

Units-of-Activity Method
Cost

Salvage Value

Depr Cost

Date

Units of Act.

DC per Unit

Total UA
Depr Exp

Actual machine hours of use were:

2005
7,000
2006
7,500
2007
8,000
2008
7,900
2009
7,600

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