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Construction costs:
Contract price plus payments for architects fees, building permits, and e cavation costs.
Chapter 10-4
Depreciation
Depreciation is the process of allocating the cost of tangible assets to e pense in a systematic and rational manner to those periods e pected to benefit from the use of the asset. Process of cost allocation, not asset valuation. Applies to land improvements, buildings, and equipment, not land.
Chapter 10-5
Depreciation
Factors in Computing Depreciation
Illustration 10-6
Cost
Useful Life
Salvage Value
Chapter 10-6
Depreciation
Depreciation Methods
Objective is to select the method that best measures an assets contribution to revenue over its useful life. E amples include: (1) Straight-line method. (2) Units-of-Activity method. (3) Declining-balance method.
Illustration 10-8 Use of depreciation methods in 600 large U.S. companies
Chapter 10-7
Depreciation
E ercise (Depreciation ComputationsThree Methods) Parish Corporation purchased a new machine for its assembly process on January 2, 2007. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years and its working hours are estimated at 1,000 hours. Year-end is December 31. Instructions: Compute the depreciation e pense under the following methods. (a) Straight-Line. (b) Units-of-Activity. (c) Double-Declining Balance.
Chapter 10-8
Depreciation
Straight-Line
E pense is same amount for each year. Depreciable cost is cost of the asset less its salvage value. Straight-line method predominates in practice.
Chapter 10-9
Depreciation
Exercise (Straight-Line Method)
Year 2007 2008 2009 2010 2011 Depreciable Base $ 105,000 105,000 105,000 105,000 105,000 Years 5 = 5 = 5 5 5 = = = Annual Expense $ 21,000 21,000 21,000 21,000 21,000 $ 105,000 Accum. Deprec. $ 21,000 42,000 63,000 84,000 105,000
/ / / / /
21,000 21,000
Depreciation
Units-of-Activity
E pense varies based on units of activity. Depreciable cost is cost less salvage value. Companies estimate total units of activity to calculate depreciation cost per unit.
Chapter 10-11
Depreciation
Exercise (Units-of-Activity Method)
($105,000 / 1,000 hours = $105 per hour)
Year 2007 2008 2009 2010 2011 Hours sed 200 150 250 300 100 1,000 Rate per Hour x $105 = x 105 = x x x 105 105 105 = = = Annual Expense $ 21,000 15,750 26,250 31,500 10,500 $ 105,000 Accum. Deprec. $ 21,000 36,750 63,000 94,500 105,000
Chapter 10-12
Depreciation
Declining-Balance Method
Decreasing annual depreciation e pense over the assets useful life. Rate applied to book value (cost less accumulated depreciation).
Chapter 10-13
Depreciation
Exercise (Declining Balance Method)
ear 008 2009 2010 2011 Net Bookvalue , 70,740 42,444 25,466 15,280 x x x x x Rate er Year 40% 40% 40% 40% 40% = = = = = Annual Expense $ 47, 0 28,296 16,978 10,186 2,380 $105,000 Accum. Deprec. $ 47, 0 75,456 92,434 102,620 105,000
Chapter 10-14
Illustration 10-16
Depreciation
Comparison of Depreciation Methods
Annual Expense
Year 3 4 5 6 7 SL , , , , , 5,
Chapter 10-15
DB 47, 6 , 96 6,97 , ,3 5, 6
Record depreciation up to the date of disposal. Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.
Chapter 10-16
LO
(a)
41,000 41,000
Chapter 10-17
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(b)
Chapter 10-18
LO
Chapter 10-19
LO
BE10-10 Chan Company sells office equipment on BE10September 30, 2008, for $20,000 cash. The office equipment originally cost $72,000 and as of January 1, 2008, had accumulated depreciation of $42,000. Prepare the journal entries to (a) record the sale of the equipment.
Chapter 10-20
LO
(a)
Chapter 10-21
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Chapter 10-22
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Chapter 10-23