Chapter 10 MIU Revision PDF

 DR. Gomaa 01010700046 Accounting Chapter 10 Plant Assets, Natural Resources, and Intangible Assets Plant Assets A plant asset is a long-term asset because they cannot be converted to cash easily within...

 DR. Gomaa 01010700046 Accounting Chapter 10 Plant Assets, Natural Resources, and Intangible Assets Plant Assets A plant asset is a long-term asset because they cannot be converted to cash easily within a year. Plant assets include:  Land (not depreciated) - Buildings - Machinery - Equipment - Furniture and fixtures - Vehicles ………………………………………………………………… Depreciation Expense The reduction of the value of a fixed asset during the accounting periods. Depreciation Expense= (Cost of Asset-Residual Value)/ Estimated life of Asset ………………………………………………………………… Accumulated depreciation Accumulated depreciation is the sum of depreciation expense from the date of purchase until the date of the balance sheet. Accumulated depreciation is a contra asset account with a normal credit balance and is used to reduce the carrying value of a fixed asset. Accumulated depreciation is used to record the book value (net book value) (the asset's net value) of an asset. Note The only plant asset that is not depreciated is land. That’s because the land will continue to remain useful for more than one year. Its value does not decrease over time. Thus, land is not a depreciable asset. ………………………………………………………………… 2  DR. Gomaa 01010700046 The cost of the asset ‫(تكلفة االصل‬how much you paid) The asset cost (Historical cost) is the total price that a company paid to purchase a fixed asset. ………………………………………………………………… The useful life of the asset ‫( العمر النافع (االنتاجي) لألصل‬how long it is expected to be productive or useful) (how many years you think it will last). The useful life of an asset is the number of periods/years in which the asset can be productive or useful (benefit). ………………………………………………………………… The residual value of the asset ‫( القيمة التخريدية‬how much it is worth at the end of its life) Residual Value, also known as salvage value (also called scrap value) is the amount that the company can sell the asset at the end of its useful life. ………………………………………………………………… The Book values The book value (The carrying value) of an asset is the value of the asset recorded in the company’s balance sheet. Book Value = Cost - Accumulated Depreciation ………………………………………………………………… 3  DR. Gomaa 01010700046 Methods of Calculating Depreciation A. The Straight-line method ‫ طريقة القسط الثابت‬- ‫االستهالك بالطريقة المباشرة‬ In the straight-line method of depreciation, the value of the asset depreciates by an equal amount in each accounting period. Under straight-line method of depreciation, depreciation is measured by the passage of time. How to Calculate Straight Line Depreciation 1. 2. 3. Note that:  Last Accumulated depreciation must equal to the Depreciable Cost.  Last Book Value must equal to the Salvage Value. ……………………………………………………………………………………………… 4  DR. Gomaa 01010700046 B. The Units of Activity Method Under the units-of-activity method, the useful life of the asset is expressed in terms of the total units of production. Note Units of production can be expressed in product or other units such as hours used or miles driven. How to calculate the unit-of-activity Depreciation 1. 2. 3. C. DECLINING-BALANCE ‫ طريقة القسط المتناقص‬- ‫طريقة القسط المتناقص لإلهالك‬ A DECLINING-BALANCE reflects the fact that there is greater depreciation in the early years of the life of a plant asset and less depreciation in later years. ……………………………………………………………………………………………... 5  DR. Gomaa 01010700046 How to calculate the unit-of-activity Depreciation 1. 2. Note  At the beginning of the first year, book value is the cost of the asset. This is because the balance in accumulated depreciation at the beginning of the asset’s useful life is zero.  It ignores salvage value in determining the amount to which the declining-balance rate is applied.  Salvage value limits the total depreciation. Depreciation stops when the book value equals salvage value. ……………………………………………………………………………………………... Problem 1 On January 1, 2022, Premium Belgian Company purchased a machine. The following information is related to the machine: Cost of the machine $80,000 Estimated salvage value 5,000 Estimated useful life in years 5 Estimated useful life in hours 100,000 Required: 1. Assuming that the company uses the straight-line method, compute the amount of depreciation expense that will be recorded in the fourth year of the machine’s life. 6  DR. Gomaa 01010700046 2. Assuming that the company uses the units of activity method, compute the amount of depreciation expense that will be recorded in the first and second year of the machine’s useful life, if actual hours during the first year were 26,000 hours and the actual hours in second year were 15,000 hours. 3. Assuming that the company uses the double-declining balance method, what is the book value of the machine at the end of the second year? Answer: 1. 2. 7  DR. Gomaa 01010700046 3. ………………………………………………………………………………………………………… Problem 2 On January 1, 2023, Smith Company purchased a machine. The following information is related to that machine: Cost of the machine $50,000 Estimated salvage value 2,000 Estimated useful life in years 8 Estimated useful life in machine hours 60,000 Instructions: 1. If the company uses the straight-line method, compute the amount of depreciation expense that will be recorded in the fifth year of the machine’s useful life. 2. If the company uses the units-of-activity method, compute the amount of depreciation expense that will be recorded in the first year of the machine’s useful life if actual machine hours used during the first year were 8,000 hours. 3. If the company uses the double-declining balance method, what is the book value of the machine at the end of the second year? 8  DR. Gomaa 01010700046 Answer: ……………………………………………………………………………………………… Problem 3 On January 1, 2020 Wilson Company purchased a machine. The following information is related to that machine: Cost of the machine $35,000 Estimated salvage value 5,000 Estimated useful life in years 5 Estimated useful life in hours 40,000 Instructions: 1. Assuming that the company uses the straight-line method, compute the amount of depreciation expense that will be recorded in the fourth year of the machine's useful life. 2. Assuming that the company uses the double-declining balance method, compute the book value of the machine at the end of the second. 3. Assuming that the company uses the units-of-activity method, compute the amount of depreciation expense that will be recorded in the first year of the machine's useful life if actual hours used during the first year were 9,000 hours. 9  DR. Gomaa 01010700046 Solution $𝟑𝟓,𝟎𝟎𝟎 − $𝟓,𝟎𝟎𝟎 1. Depreciation Expense Any Year = = $6,000 𝟓 𝒀𝒆𝒂𝒓𝒔 2. Straight Line Depreciation Rate = 100% / 5 = 20% Double Declining Balance Rate = 20% × 2 = 40% (1) (2) (3) (4) Cost Annual Depreciation Expense Accumulated Book Year = Book Value Beginning of Depreciation value Year × Depreciation Rate Old (3) + (2) (1)– (3) First $35,000 $35,000 × 40% = $14,000 $14,000 $21,000 Second $35,000 $21,000 × 40% = $8,400 22,400 12,600 ($𝟑𝟓,𝟎𝟎𝟎 − $𝟓,𝟎𝟎𝟎) 3. Depreciation Expense Per Hour = = $0.75 𝟒𝟎,𝟎𝟎𝟎 𝒉𝒐𝒖𝒓𝒔 Depreciation Expense First Year = 9,000 hours × $0.75 = $6,750 ……………………………………………………………………………………………… Problem 4 On January 1, 2020 Martin Company purchased a machine. The following information is related to that machine: Cost of the machine $30,000 Estimated salvage value 2,000 Estimated useful life in years 8 Estimated useful life in hours 70,000 Instructions: 1. Assuming that the company uses the straight-line method, compute the amount of depreciation expense that will be recorded in the third year of the machine's useful life. 2. Assuming that the company uses the double-declining balance method, what is the book value of the machine at the end of the second year? 3. Assuming that the company uses the units-of-activity method, compute the amount of depreciation expense that will be recorded in the first year of the machine's useful life if actual hours used during the first year were 16,000 hours. Solution: 10  DR. Gomaa 01010700046 $𝟑𝟎,𝟎𝟎𝟎 − $𝟐,𝟎𝟎𝟎 1. Depreciation Expense Any Year = = $3,500 𝟖 𝒀𝒆𝒂𝒓𝒔 2. Straight Line Depreciation Rate = 100% / 8 = 12.5% Double Declining Balance Rate = 12.5% × 2 = 25% (1) (2) (3) (4) Year Cost Annual Depreciation Expense Accumulated Book = Book Value Beginning of Depreciation value Year × Depreciation Rate Old (3) + (2) (1)– (3) First $30,000 $30,000 × 25% = $7,500 $7,500 $22,000 Second $30,000 $22,500 × 25% = $5,625 13,125 16,875 ($𝟑𝟎,𝟎𝟎𝟎 − $𝟐,𝟎𝟎𝟎) 3. Depreciation Expense Per Hour = = $0.40 𝟕𝟎,𝟎𝟎𝟎 𝒉𝒐𝒖𝒓𝒔 Depreciation Expense First Year = 16,000 hours × $0.40 = $6,400 ……………………………………………………………………………………………… Problem 5 on January 1, 2010, Mark Company purchased a small delivery truck. The following information relates to that truck Cost $13,000 Expected salvage value 1,000 Estimated useful life in years 5 Estimated useful life in miles 100,000 Solution: 1. 2. 11  DR. Gomaa 01010700046 3. To calculate the book value: …………………………………………………………………………………………….. Determining the cost of plant asset When an asset is acquired by a company, it is recorded at its cost. The cost of an asset is the original purchase price of the asset paid by the business. The cost of an asset consists of all expenditures necessary to acquire the asset and make it ready for its intended use. 12  DR. Gomaa 01010700046 The cost of Equipment includes  Cash purchase price.  Sales taxes.  Freight charges.  Insurance during transit paid by the purchaser.  Eexpenditures required in assembling, installing, and testing the unit Motor vehicle licenses and accident insurance are not included in the cost of equipment because. Thus, they are treated as expenses as they are incurred. ……………………………………………………………………………………………… Problem 6 Lew Manufacturing Ltd. purchased a new piece of equipment for $50,000. The company also incurred the following additional costs: ▪ Freight charges to transport the equipment to the company’s warehouse: $2,500 ▪ Installation costs to set up the equipment: $3,000 ▪ Training costs for employees to operate the new equipment 1,000 ▪ Annual insurance premium for the equipment: $800 Required: 1. Determine the total cost of the equipment to be capitalized 2. Identify which costs should not be included in the equipment cost and why Answer: To determine the total cost of the equipment to be capitalized, we include all costs necessary to bring the equipment to its intended use Costs to be included in the equipment cost: 1.Purchase price: $50,000 2.Freight charges: $2,500 3.Installation costs: $3,000 13  DR. Gomaa 01010700046 The training costs and annual insurance premium are not included in the equipment's cost Training costs ($1,000): Considered an operating expense because it relates to employee readiness, not the asset itself Annual insurance premium ($800): Considered a recurring expense and not part of the cost to prepare the equipment for use Total Equipment Cost to Capitalize: Cost of Equipment = Purchase Price + Freight Charges + Installation Costs Cost of Equipment = $50,000 + $2,500 + $3,000 = $55,500 ……………………………………………………………………………………………… Problem 7 Compute the recorded cost of a new machine given the following payments related to its purchase: gross purchase price, $700,000; sales tax, $49,000; purchase discount taken, $21,000; freight cost—terms FOB shipping point, $3,500; normal assembly costs, $3,000; cost of necessary machine platform, $2,500; and cost of parts used in maintaining machine, $4,200. Solution $737,000 = $700,000 + $49,000 − $21,000 + $3,500 + $3,000 + $2,500 ……………………………………………………………………………………………… Problem 8 Assume Marten Company purchases factory machinery at a cash price of $50,000. Related expenditures are for sales taxes $3,000, insurance during shipping $500, and installation and testing $1,000. The cost of the factory machinery is $54,500, computed as follows. Solution 14  DR. Gomaa 01010700046 Marten makes the following summary entry to record the purchase and related expenditures: ……………………………………………………………………………………………… Problem 9 Assume that Lenard Company purchases a delivery truck at a cash price of $22,000. Related expenditures consist of sales taxes $1,320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1,600. The cost of the delivery truck is $23,820, computed as follows. Solution ……………………………………………………………………………………………… Problem 10 Neeley Company incurs the following expenditures in purchasing a truck: cash price $30,000, accident insurance $2,000, sales taxes $1,500, motor vehicle license $100, and painting and lettering $400. What is the cost of the truck? Solution: The cost of the truck is $31,900 (cash price $30,000 + sales tax $1,500 + painting and lettering $400). The expenditures for insurance and motor vehicle license should not be added to the cost of the truck ……………………………………………………………………………………………… 15  DR. Gomaa 01010700046 Problem 11 Firefly Company had the following two transactions related to its delivery truck. 1. Paid $45 for an oil change. 2. Paid $400 to install special shelving units, which increase the operating efficiency of the truck. Prepare Firefly’s journal entries to record these two transactions Solution: ……………………………………………………………………………………………… Problem 12 On January 1, 2014 Swift Company purchased a machine. The following information is related to that machine: Cost of the machine $40,000 Estimated salvage value 4,000 Estimated useful life in years 8 Estimated useful life in hours 72,000 Instructions: 3. Assuming that the company uses the straight-line method, compute the amount of depreciation expense that will be recorded in the fourth year of the machine's useful life. 4. Assuming that the company uses the double-declining balance method, what is the book value of the machine at the end of the second year? 5. Assuming that the company uses the units-of-activity method, compute the amount of depreciation expense that will be recorded in the first year of the machine's useful life if actual hours used during the first year were 8,000 hours ……………………………………………………………………………………………… 16  DR. Gomaa 01010700046 Problem 13 On January 1, 2015 Garry Company purchased a machine. The following information is related to that machine: Cost of the machine $30,000 Estimated salvage value 3,000 Estimated useful life in years 5 Estimated useful life in hours 45,000 Instructions: 1. Assuming that the company uses the straight-line method, compute the → amount of depreciation expense that will be recorded in the third year of the machine's useful life. 2. Assuming that the company uses the double-declining balance method, compute the book value of the machine at the end of the second year? 3. Assuming that the company uses the units-of-activity method, compute the amount of depreciation expense that will be recorded in the first year of the machine's useful life if actual hours used during the first year were 10,000 hours. ……………………………………………………………………………………………… Problem 14 On January 1, 2010 Jackson Company purchased a machine. The following information is related to that machine: Cost of the machine $40,000 Estimated salvage value 4,000 Estimated useful life in years 8 Estimated useful life in hours 72,000 Instructions: 1. Assuming that the company uses the straight-line method, compute the amount of depreciation expense that will be recorded in the fourth year of the machine's useful life. 2. Assuming that the company uses the double-declining balance method, what is the book value of the machine at the end of the second year? 17  DR. Gomaa 01010700046 3. Assuming that the company uses the units-of-activity method, compute the amount of depreciation expense that will be recorded in the first year of the machine's useful life if actual hours used during the first year were 10,600 hours. ……………………………………………………………………………………………… Problem 15 On January 1, 2012 Mark Company purchased a machine. The following information is related to that machine. Cost of the machine $30,000 Estimated salvage value 2,000 Estimated useful life in years 5 Estimated useful life in hours 70,000 Instructions: 1. Assuming that the company uses the straight-line method, compute the amount of depreciation expense that will be recorded in the third year of the machine's useful life. 2. Assuming that the company uses the double-declining balance method, what is the book value of the machine at the end of the second year? 3. Assuming that the company uses the units-of-activity method, compute the amount of depreciation expense that will be recorded in the first of the machine's useful life if actual hours used during the first year were 16,000 hours ……………………………………………………………………………………………… 18