Accounting
Chapter 21
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Current assets – cash and other assets expected to be exchanged for cash
or consumed within a year. Cash, Accounts Receivables, Merchandise
Inventory, Supplies and Prepaid Insurance
Plant assets: assets that will be used for a number of years in the
operation of a business. Computers, cash registers, furniture, sales display
cases.
o Three major types of plant assets: equipment, buildings, and land
Section 21.1
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To purchase plant equipment journalize and post same as buying current
asset Supplies: debit Plant Assets account and credit Cash and post to
general ledger from entry in Cash Payments Journal
Real Property: land and property attached to it.
Personal Property: all property not classified as real property
Assessed Value: value of an asset as determined by tax authorities for the
purpose of calculating taxes
o Usually based on judgment of assessor
o Assessors are elected or specially trained employees of government
Governmental taxing unit determines a tax rate to use in calculating taxes.
Tax rate is multiplied by asset’s assessed value, not the value recorded on
a business’s records
Assessed value x tax rate = Annual Property Tax
Paying property tax on Plant Assets
o Debit property tax expense and credit cash in cash payments
journal and post to general ledger
Property tax is considered an operating expense
Section 21.2
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A business buys plant assets to use in earning revenue
In order to mach revenue with the expenses used to earn the revenue,
the cost of a plant asset should be expensed over the plant asset’s useful
life.
Portion of a plant asset’s cost is transferred to an expense account in each
fiscal period that a plant asset is used to earn revenue.
Depreciation Expense: the portion of a plant asset’s cost that is
transferred to an expense account in each fiscal period during a plant
asset’s useful life.
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Three factors to consider when calculating annual amounts of depreciation
expense
• Original Cost – cost +delivery + installation
• Estimated Salvage Value – amount will be able to get when done
with asset – residual or scrap value
• Estimated Useful Life
• Physical depreciation – caused by wear from use and
deteriorating from age and weather
• Functional depreciation – happens when a plant asset
becomes obsolete or inadequate
Land is generally NOT depreciated
Estimated useful life should be based on prior experience with similar
assets and available guidelines
Straight-Line Depreciation: charging an equal amount of depreciation for a
plant asset in each year of useful life
Original Cost – Estimated Salvage Value = Estimated Total Depreciation Expense
Estimated Total Depreciation Expense ¸ Years of Estimated Useful Life = Annual
Depreciation Expense
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Calculating Depreciation Expense for part of a year
Annual Depreciation Expense ¸ Months in a Year = Monthly Depreciation
Expense
Monthly Depreciation Expense x # of months asset is used = Partial Year’s
Depreciation Expense
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Calculating Accumulated Depreciation
o 20x0 Accumulated Depreciation + 20X1 Depreciation =
20x1 Accumulated Depreciation
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Accumulated Depreciation – the total amount of depreciation expense that
has been recorded since the purchase of the plant asset
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Calculating Book Value
Original Cost - Accumulated Depreciation = Ending Book Value
Or
Beginning Book Value – Annual Depreciation = Ending Book Value
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Book value of plant asset – original cost of a plant asset minus
accumulated depreciation
Ending book value is the beginning book value for the next year.
Section 21.3
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A separate record is kept for each plant asset
Plant Asset Record: an accounting form on which a business records
information about each plant asset
o Section 1 is prepared when the plant asset bought
o Section 2 provides space for recording the disposition of the plant
asset – filled in when disposed of
o Section 3 provides space for recording annual depreciation expense
and the changing book value of the asset each year it is used.
Analyzing and journalizing annual depreciation expense
o In the adjustments section of the work sheet write the total annual
depreciation expense in Adjustments Debit column on the
Depreciation Expense –Store (Office) Equipment and Credit
Accumulated Depreciation – Store (Office) Equipment and label
both with small letter (g)
Add all the annual depreciation for all plant assets in that category and
enter that amount
Adjustment for depreciation expense planned on the work sheet is
recorded as an adjusting entry in the general journal and then posted to
the general ledger
Section 21.4
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When a plant asset is no longer useful to the business, need to dispose of
it by selling, trading for new asset or discarding
Journal entry is recorded that details
o Remove the original cost of the plant asset and its related
accumulated depreciation
o Recognize any cash or other asset received for the old plant asset
o Recognize any gain or loss on the disposal
The amount of any gain or loss, if any, is calculated by subtracting the
book value from the cash received
Recording Sale of a plant asset for book value
o In Cash receipts journal debit Accumulated Depreciation – Store
(Office) Equipment and credit Store (Office) Equipment and debit
cash
o Check the type of disposal and record the date on the plant asset
record
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The method to calculate a partial year’s depreciation is the same as
calculating depreciation when an asset is purchase during the fiscal year
Recording Partial Depreciation
o Record debit to Depreciation Expense – Store (office) Equipment in
general journal
o Record a credit to Accumulated Depreciation – Store (Office)
Equipment in general journal
o Record Depreciation expense in Section 3 of the plant asset record,
calculate and record accumulated depreciation and ending book
value
Gain on Plant Asset – revenue that results when a plant asset is sold for
more money than book value
Gain or loss on plant asset is the book value subtracted from cash
received
Gain on Plant Asset is classified as Other Revenue in the chart of accounts
Recording a sale of a plant asset for more than book value
o Record an entry in cash receipts journal to remove the original cost
from Store (Office) Equipment (credit it) and the amount of
Accumulated Depreciation – Store (Office) Equipment. Record the
gain on sale as a credit to Gain on Plant Assets. Record the cash
received from the sales as a debit to Cash
o Fill in the Plant Asset Record
Loss on Plant Asset: the loss that results when a plant asset is sold for
less than book value
The loss is realized on the disposal of plant asset is debited to an expense
account titled Loss on Plant Asset
Recording sale of a plant asset for less than book value
o Record and entry in the Cash Receipts Journal to remove original
cost and accumulated depreciation expense (credit both) and debit
cash and Loss on Plant Asset
o Fill in the Plant Asset Record
Section 21.5
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Straight-line method of depreciation charges an equal amount of
depreciation expense each year.
But, not all assets depreciate the same each year
Many plant assets depreciate more in the early years of useful life than
later years – so will charge more depreciation expense in the early years
Declining-Balance Method of Depreciation: multiplying the book value by a
constant depreciation rate at the end of the fiscal period. It is a multiple
of the straight-line rate
Many businesses use a declining-balance rate that is two times the
straight-line rate and that is the double declining-balance method
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Calculate double declining-balance method
1a. Estimated Depreciation Expense ¸ Years of Estimated Useful Life =
Straight-Line Rate of Depreciation
1b. Straight-line rate of depreciation x 2 = double declining-balance rate
2. Multiply the double-declining balance rate by the beginning book value to
determine the annual depreciation expense for a given year
3. Subtract the annual depreciation expense from the beginning book value
to determine the ending book value
4. Transfer ending book value to beginning book value for the following year
– then repeat for each year – except the last year
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The depreciation rate is the same but the amount is different
Plants asset is never depreciated below salvage value so for the last year
of useful life, only enough depreciation is recorded to reduce the book
value of the plant asset to its salvage value.