U.C. Berkeley
Haas School of Business
Discussion Section
12th April 2001
Spring 2001
BA230B
We know how to record the purchase of an asset. What happens if these assets
lose value over time; or gets repaired or improved; or gets sold or disposed?
Acquisition of Assets
- Follows basis principles we have already learned.
- Yes, an increase an asset is a debit.
- Which costs are included an the asset, and which are expensed? (p.411)
Depreciation
- Depreciation is a process of cost allocation. What is the cost? (p.415)
- If you had an asset that in ten years time was going to be worth the same as the
acquisition cost, how much would you depreciate? Worth more?
- Important issues with depreciation: a) depreciable basis [cost less salvage value]; b)
useful life [generally in time]; c) depreciation method (p.418)
- Common depreciation methods include: a) straight line (p.420); b) use method
(p.420); c) accelerated depreciation (p.421)
- What if you change your depreciation during the life of the asset? (p.427)
- (Aside – for income tax the Accelerated Cost Recovery System is used)
Repairs and Improvements
- Repairs, maintenance, improvements, which expenditures are capitalized? Why?
What does capitalized mean anyway?
Disposal of Assets
- Basically when we dispose of an asset, we want to remove all its components from
the balance sheet (eliminate asset [by credit], eliminate the accumulated
depreciation [by debit]). Also we need to record the proceeds (if any, for example
debit cash) and we finally need to record the gain or loss from the disposal (this will
be the proceeds less the net book value of the asset when disposed).
Solutions to S&W
8.19
(Galeway Motors; calculations for various depreciation methods.)
a.
Straight-Line Method .........
($29,600 – $2,600)/6 = $4,500.
b.
Sum-of-the-Years'-Digits
Method
..........................
(6 X 7)/2 = 21 sum-of-theyears'-digits.
Prepared by Gavin Cassar
[ Long-lived Assets ]
Year 1
$4,500
Year 2
$4,500
Year 3
$4,500
$7,714
$6,429
$5,143
Page 1
U.C. Berkeley
Haas School of Business
8.22
Discussion Section
12th April 2001
Spring 2001
BA230B
c.
Declining-Balance Method ..
33 percent rate.
$9,768
$6,545
$4,385
d.
Production Method .............
$27,000/30,000 = $.90 per
hour.
$4,050
$4,500
$4,950
(United Express; production or use depreciation.)
a.
($22,600 – $2,600)/100,000 miles = $.20 per mile.
Year 6.........................
Year 7.........................
Year 8.........................
Miles at $.20 Each
14,000 Miles
34,000 Miles
32,000 Miles
80,000 Miles
Depreciation
Charge
$ 2,800
6,800
6,400
$ 16,000
b.
June 16, Year 9
Depreciation Expense ........ .....................................
3,600
Accumulated Depreciation ....... ..........................
18,000 (= 98,000 – 80,000) miles at $.20 per mile =$3,600.
Accumulated Depreciation is now $19,600 (= $.20 X 98,000 miles).
Cash
.............................................................
Accumulated Depreciation........ ..............................
Loss on Sale of Truck
......................................
Truck
........................................................
8.24
3,600
2,600
19,600
400
22,600
(Fort Manufacturing Corporation; journal entries for revising estimate of life.)
VERY IMPORTANT: To avoid confusion, please say that the reestimation occurs at 1/1/15 rather than August Year 15.
a.
b.
c.
Depreciation Expense ............... ..............................
Accumulated Depreciation ....... ..........................
($45,000 – $1,800)/144 = $300 per month.
600
Depreciation Expense ............... ..............................
Accumulated Depreciation ....... ..........................
12 X $300 = $3,600.
3,600
600
3,600
Depreciation to 1/1/Year 15 = 62 X $300 = $18,600.
Remaining depreciation = $45,000 – $18,600 – $960 = $25,440.
Remaining life = 168 months – 62 months = 106 months as of
1/1/Year 15.
Depreciation charge per month = $25,440/106 = $240.
Prepared by Gavin Cassar
[ Long-lived Assets ]
Page 2
U.C. Berkeley
Haas School of Business
Discussion Section
12th April 2001
Depreciation Expense ............... ..............................
Accumulated Depreciation ....... ..........................
d.
Spring 2001
BA230B
2,880
2,880
By March 31, Year 20, the machine has been on the new depreciation
schedule for Year 15 through Year 19 plus 3 months or 63 months
altogether. Accumulated depreciation is $18,600 + (63 X $240) = $15,190;
$18,600 + $15,120 = $33,720.
Book value is $45,000 – $33,720 = $11,280; loss is $1,280.
Journal entries are:
8.38
Depreciation Expense ............... ..............................
Accumulated Depreciation ....... ..........................
3 X $240 = $720; to bring depreciation up to date
as of 3/31/Year 20.
720
Cash
.............................................................
Accumulated Depreciation........ ..............................
Loss on Disposal of Machinery ...... .........................
Machinery........... .................................................
10,000
33,720
1,280
720
45,000
(Grand Met; accounting for plant asset revaluations.)
a.
b.
December 31, Year 3 to Year 5
Depreciation Expense ........ .....................................
Accumulated Depreciation ....... ..........................
£10,000 = £50,000/5.
January 1, Year 6
Equipment ........... ....................................................
Revaluation Allowance ....... ................................
10,000
10,000
5,000
5,000
Current Market Value
................................................
Book Value: £50,000 – (£10,000 X 3)
...............................
£
c.
December 31, Year 6 and Year 7
Depreciation Expense ........ .....................................
Revaluation Allowance ........ ...................................
Accumulated Depreciation ....... ..........................
£2,500 = £5,000/2.
Prepared by Gavin Cassar
[ Long-lived Assets ]
£ 25,000
(20,000)
5,000
10,000
2,500
12,500
Page 3
U.C. Berkeley
Haas School of Business
d.
Discussion Section
12th April 2001
Spring 2001
BA230B
The revaluation and subsequent depreciation of the revaluation had no
effect on net income. At the end of Year 7 just prior to removing the
equipment form the books, the accounts appear as follows:
Equipment (£50,000 + £5,000)
.......................................
Accumulated Depreciation (£10,000 X 5) + (£2,500 X 2) ......
Revaluation Allowance [£5,000 – (£2,500 X 2)] .................
£ 55,000
55,000
-0-
Additional Questions (if required or interested or bored or sleepless)
8.16
What should be capitalized and what should not?
8.25
Like 8.24
8.39
As it is in the reader!
8.42
Repair or Improvement?
Prepared by Gavin Cassar
[ Long-lived Assets ]
Page 4