Depreciate Me Slowly
What is included in the acquisition cost of a plant asset?
All expenditures necessary to get the asset ready for use.
What are the three factors needed to calculate depreciation?
Cost, salvage value, useful life.
Equipment cost $25,000. Accumulated depreciation $20,000. Sold for $5,000.
Gain, loss, or neither?
Book value = 5,000 → Sold at book value → No gain or loss.
What is the allocation process for natural resources called?
Depletion.
Old equipment book value $15,000. Trade-in allowance $12,000.
Is there a gain or loss?
$3,000 loss.
Besides the actual items themselves, name two costs included in the cost of machinery and equipment.
Transportation, installation, testing, insurance in transit, taxes.
Which depreciation method spreads expense evenly over useful life?
Straight-line method
Equipment cost $25,000. Accumulated depreciation $20,000. Sold for $7,000.
Gain, loss, or neither? How much?
Book value = 5,000
Gain = 2,000.
A mine costs $900,000. Estimated 300,000 tons.
What is depletion rate per ton?
$3 per ton.
Company has $500,000 net sales and $250,000 average assets.
What is total asset turnover?
2.0 times.
Are land improvements depreciated? Why?
Yes, because they have limited useful lives.
A $12,000 Car has a useful life of 5 years and a salvage value of $2,000. What is the yearly depreciation?
$2,000
When estimates change, (useful life is increased) what is done to prior financial statements?
Nothing, changs are handled prospectively
If 40,000 tons are mined at $3, what is depletion expense?
40,000 × $3 = $120,000.
Routine Maintenance after equipment is installed is recorded as an?
An expense
Why is land not depreciated?
Because land has an unlimited useful life.
Which method results in higher expense in early years?
Declining-balance (double-declining balance).
If useful life increases, what happens to future annual depreciation?
It decreases.
Are patents amortized? Why?
Yes, because they have a limited legal life.
If we have a piece of machinery that has a useful life of 5 years - what method will depreciate it the most at the end?
None, they all depreciate it the same total - just different amounts per year.
A company buys equipment for $50,000. It pays $2,000 for shipping, $1,500 for installation, and $800 for employee training.
What is the total acquisition cost?
$53,500 (training is expensed, not capitalized).
A parking lot costing $30,000 is added to company property. Estimated life is 10 years, no salvage value.
How should this be recorded and treated?
Recorded as Land Improvement and depreciated over 10 years.
Equipment fully depreciated is discarded.
What is the journal entry?
Debit Accumulated Depreciation
Credit Equipment
No gain or loss.
What is the difference between revenue expenditures and capital expenditures?
Revenue = are expenses, don't increase the assets life or capabilities. (don't increase value) - income statement
Capital = recorded as an asset, increases the value of asset for a long time - balance sheet.
Old equipment cost $36,000, accumulated depreciation $20,000. Trade-in allowance $18,000.
Book value? Gain or loss?
Book value = 16,000
Trade-in 18,000 → $2,000 gain.