Acquisition of an Asset
What are plant assets?
Plant assets have useful lives that extend more than one accounting period and are considered long term assets.
What is the straight-line depreciation formula?
(Asset cost – salvage vale) / Useful life in periods = $ amount depreciated per year
What is the units of production depreciation formula?
(Asset cost – salvage value) / total units expected to be produced during its useful life
Depreciation per unit x number of units produced
Increase expenses (repairs expense)
Decrease assets (paid with cash)
Depletion is based on the number of units extracted from cutting, mining, or pumping and is similar to units of production method.
What are the three issues in accounting for plant assets?
1. Acquisition of asset – compute the cost.
2. Use of asset – allocate costs to periods benefited & account for subsequent expenditures
3. Disposal of asset – record the disposal
What is the depreciation journal entry?
Debit: Depreciation Expenses
Credit: Accumulated Depreciation
On January 1, a company buys a machine. The cost of a machine is $82,000 with the estimated amount of units that will be produced during its life being 820,000 units. At the end of its life, the company estimates it can sell the machine for $0. What is the amount of depreciation per unit?
$0.10 per unit
What are capital expenditures?
Costs of plant assets that provide benefits for longer than the current period. They increase the value of the asset on the balance sheet. Can be defined as betterments or extraordinary repairs.
How do we calculate depletion?
(Cost – salvage value) / total units of capacity
Depletion per unit x units extracted AND sold in period
Kegler Bowling buys scorekeeping equipment with an invoice cost of $230,000. The electrical work required for the installations cost $10,000. Additional costs are $7,000 for delivery and $26,000 for sales tax. During the installation, the equipment was damaged, and the cost of repair was $3,250
273,000
On January 1, the Matthews Band pays $82,300 for sound equipment. The band estimates it will use this equipment for four years and perform 200 concerts. It estimates that, after four years, it can sell the equipment for $7,000. During the first year, the band performs 85 concerts. Compute the first-year depreciation using the straight-line method.
First year depreciation: 18,825
(82,300-7,000)/4
On January 1, the Matthews Band pays $82,300 for sound equipment. The band estimates it will use this equipment for four years and perform 200 concerts. It estimates that, after four years, it can sell the equipment for $7,000. During the first year, the band performs 85 concerts. Compute the first-year depreciation using the units of production method and prepare the journal entry for depreciation
376.50 concerts
(82,300-7,000)/200
Debit: Building
Credit: Cash
A mineral deposit with an estimated 550,000 tons of available ore. It was purchased for $100,000 and no salvage value is expected. If in the first year 93,000 tons were mined and sold the depletion charge for the year is:
First year depletion: 16,740
(100,000-0)/550,000*93,000
Diego Co. paid $300,000 cash to acquire a group of items consisting of land appraised at $75,000 and a building appraised at $125,000. Allocate total cost to these two assets and prepare an entry to record the purchase.
Land = 112,500
(125,000+75,000)=200,000 (75,000/200,000)*300,000
Building = 187,500
(125,000+75,000)=200,000 (125,000/200,000)*300,000
On October 1, Organic Farming purchases wind turbines for $325,000. The wind turbines are expected to last 20 years, have a salvage value of $8,000, and be depreciated using the straight-line method.
First year depreciation: 15,850
(325,000-8,000)/20
On January 1, a company buys a machine. The cost of a machine is $125,000 with the estimated amount of units that will be produced during its life being 11,300 units. At the end of its life, the company estimates it can sell the machine for $12,000. If the first year the company produced 83,000 units what is the first years deprecation using the units of production method?
First year deprecation: 830,000
((125,000-12,000)/11,300)*83,000
What is the journal entry for extending the life of the Machine beyond the original estimate, like a complete engine overhaul.
Debit: Machine
Credit: Cash
Perez Company acquires an ore mine at a cost of $1,800,000. It incurs additional costs of $500,000 to access the mine, which is estimated to hold 1,000,000 tons of ore. The estimated value of the land after the ore is removed is $200,000. Prepare the journal entry if 200,000 tons of ore are mined and sold the first year.
Debit: Depreciation Expense 420,000
Credit: Accumulated Depreciation 420,000
(1,800,000+500,000-200,000)/1,000,000 * 200,000