What if the Company Doesn’t Purchase
(or sell) the Asset at the Beginning (or
end) of the Year?
• Units-of-production
 Multiple the depreciation rate by the actual
usage
• Straight-line or double-declining balance
 Use the mid-year convention or count the time
that the asset was in use
16-1
Midyear Convention
• Companies making numerous plant asset
purchases and disposals spread out evenly
during the course of the fiscal year
frequently use the midyear convention,
which reflects depreciation expense for
each asset
• as if it were purchased or disposed of
exactly halfway through the company’s
fiscal year.
Illustration --- page 457
• PCs to Go, with a December 31 year-end,
purchases its delivery truck in April 2010
and expects to dispose of it five years later
in April 2015. Straight – line depreciation
for each fiscal year of use would be as
follows:
• Refer to page 457
Revision of Estimates
• A company originally assigns a useful life of
seven years to a computer and, one year
after the date of the purchase, realizes that
it will have to replace the computer after a
total of three year.
• When it becomes clear that they need to
make an adjustment– do the following---
Revision of estimates
• Assume that on January 1, 2010, a company
purchases and begins to use office equipment
costing $12,000, with an expected useful life of 10
years and a salvage value of $2,000. Assuming
the business uses the straight-line method of
depreciation for the asset, accumulated
depreciation at December 31, 2012, would be
$3,000 (12,000 – 2,000)/10 X 3 = 3,000.
• The carrying value would be 9,000 (12 – 3)
Continued.
• If the company realizes that the equipment
will last only four more years, after which its
estimated salvage value will be $3,000,
then depreciation expense for each of the
remaining four years of the asset’s useful
life would be calculated as follows:
Carrying value – Revised salvage value
Remaining useful life
9,000-3,000
4 years
= $1,500 depreciation expense per year
What is the Process Involved in
Asset Disposals?
• Record depreciation to date of disposal
• Remove the cost of the asset (CR) and the
accumulated depreciation (DR) from the
records
• Record the assets received (DR) if
applicable
• Record the cash paid (CR) if applicable
• Record the loss incurred (DR) if applicable
• Record the gain (CR) if applicable
16-7
How Can a Company Dispose of an
Asset Before its Useful Life is Over?
• Discard---it is necessary to record a loss at
the date of the disposal
 Discard equipment that cost 50,000 with a
40,000 of accumulated depreciation at the date
of the last balance sheet. Must pay $1,000 to
have it removed.
16-8
Assets = Liabilities + Owner’s Equity
2,000 =
2,000
Depreciation expense 2,000
Accumulated Depreciation 2,000
Problem continued
• After the entry is posted, the accumulated
depreciation account will have a $42,000
credit balance (previous balance of $40,000
plus $2,000. Second, we must recognize
the removal of the equipment (book value =
$8,000) and cash:
• Assets = Liabilities + Owners Equity
• (8,000) =
(9,000)
• (1,000)
Journal Entry
• Accumulated Depreciation 42,000
• Loss on Disposal
9,000
 Equipment
 Cash
50,000
1,000
Sell
• Sell
Must be sold for equal, less than, or
greater than.
Recall when more net assets are received
than are given up, a gain results. A loss
results when fewer net assets are received
than are given up.
Example
Cost of Asset
$80,000
Accumulated depreciation
(60,000)
through date of sale
Carrying Value at date of sale $20,000
Assets = Liabilities + Owner’s Equity
+20,000
-20,000
Selling for the same amount of net assets
Journal Entry
Cash
20,000
Accum Dep
60,000
Equipment
80,000
Exchange (Trade-In) Example
• We have a computer that originally cost
$6,000 and has accumulated depreciation
of $4,500. We will trade-in this computer
for a new computer with a list price of
$10,000. The computer company will give
us a trade-in allowance of $2,000.
• Book value = $6,000 - $4,500 = $1,500.
• Cash payment required = $10,000 - $2,000
= $8,000
16-14
Trade-in Example Continued
• Computer received = $10,000
Less assets given up = $9,500
Gain = $500
• Entry:
Computer (new)
10,000
Accumulated depreciation
4,500
Computer (old)
Cash
Gain
16-15
6,000
8,000
500
What are Depletion and
Amortization?
• Depletion
 The cost of a natural resource is allocated to
expense
 Typically, units-of-production method used
• Amortization
 The cost of an intangible asset is allocated to
expense
 Typically, straight-line method is used
16-16
Homework
• Exercise 16-9, 16-10, Problem 16-3
Ex 16-9
• (850,000 – 175,000)/25 years = $27,000
per year x 12 years = $324,000
accumulated depreciation
• (850,000 – 324,000 – 150,000) /(39-12) =
$13,925.93 per year for the remaining 27
years.
Ex 16-10
• $36,000 – 28,000 = $8,500 carrying value
a. 10,000 – 8,500 = 1,500 gain
b. 8,000 – 8,500 = (500) loss
c. 9,000 – 8500 = 500 gain
Problem 16-3
(1) Straight-line:
Depreciation
Carrying
Expense**
Value
Year 1
$50,000
$300,000
Year 2
50,000
250,000
Year 3
50,000
200,000
Year 4
50,000
150,000
** ($400,000 - $50,000)/7 years = $50,000/year
(2) Units-of-production:
Depreciation
Carrying
Expense***
Value
Year 1
$56,000
$294,000
Year 2
61,600
234,400
Year 3
67,600
164,800
Year 4
74,536
90,264
*** ($400,000 - $50,000)/25,000 hours = $14/hour
4,000 hours * $14 = $56,000
(4,000 * 1.1) = 4,400 * $14 = $61,600
(4,400 * 1.1) = 4,840 * $14 = $67,600
(4,840 * 1.1) = 5,324 * $14 = $74,536
Problem 16-3
(3) Double-declining-balance:
1/7 * 2 = .2857 is double the straight-line rate
Year 1
Year 2
Year 3
Year 4
Depreciation
Expense*
$114,280
81,630.20
58,308.46
41,649.73
Carrying
Value
$285,720
204,089.80
145,781.34
104,131.61
*$400,000 * 0.2857 = $114,280
$285,720 * 0.2857 = $81,630.20
$204,089.80 * 0.2857 = $58,308.46
$145,781.34 * 0.2857 = $41,649.73
b. The straight-line method produced the lowest deprecation expense, and therefore the
highest income in Year 1. The double-declining balance method produced the highest
depreciation expense, and therefore the lowest income in Year 1.
Ex 16-12
Nelson Enterprises:
value;
$425,000 - $260,000 = $165,000 carrying
$575,000 - $165,000 = $410,000 gain
The $410,000 gain is recognized and the building acquired should be
recorded at its fair market value of $575,000.
Lamb Corporation:
value
$750,000 - $160,000 = $590,000 carrying
$575,000 - $590,000 = $15,000 loss
The $15,000 loss should be recognized and the new building should be
recorded at its fair market value of $575,000.
Problem 16-4
a. $63,500 + $4,785 + $100 + 2,850 = $71,235
b. ($71,235 - $6,000)/8 = $8,154 * 1/2 year = $4,077
c. The cost of the transmission should be capitalized as an
extraordinary repair and the cost of the tune-up should be expensed
as an ordinary repair.
d. 2008
$ 4,077
2009
8,154
2010
8,154
$ 20,385
Accumulated Depreciation at the end of 2010
$71,235 - $20,385 = $50,850 carrying value plus $5,000
extraordinary repair = $55,850 - $6,000 salvage value
= $55,850/7.5 years remaining life = $7,447
Problem 16-5
a.$32,000/8 = $4,000 per year;
$770,000/15,400,000 = $0.05 per ton
b.$4,000/2 = $2,000
c.2,500,000 * $0.05 = $125,000
d.2,000,000 * $0.05 = $100,000
Problem 16-6
a. $685,000 - $274,000 = $411,000 carrying value
(1) $365,000 - $411,000 = ($46,000)
recognized loss
(2) $425,000 - $411,000 = $14,000
recognized gain
(3) $400,000 - $411,000 = ($11,000)
recognized loss
(4) $450,000 - $411,000 = $39,000
recognized gain
Problem 16-6
• (1)
•
•
•
•
•
•
•
•
•
Cash
Accumulated depreciation
Loss of sale of equipment
Motorcoach
(2)
Investment in stock
Accumulated depreciation
Motorcoach
Gain on sale of equipment
365,000
274,000
46,000
685,000
425,000
274,000
685,000
14,000
Problem 16-6
(3)
Motorcoach (new)
Accumulated depreciation
Loss on trade of equipment
Motorcoach (old)
Cash
825,000
274,000
11,000
Cash
N/R
Limousine
Accumulated depreciation
Motorcoach (new)
Gain
60,000
340,000
50,000
274,000
685,000
425,000
(4)
685,000
39,000