16 Fixed AssetsIntroduction to Depreciation

Buildings, machinery, equipment, furniture, fixtures, computers, outdoor

lighting, parking lots, cars, and trucks are examples of assets that will last for more

than one year, but will not last indefinitely. During each accounting period (year,

quarter, month, etc.) a portion of the cost of these assets is being used up.

According to the current default classification of

fixed assets - are grouped^

1- according to functional purpose,

2 - industry sector ,

3 - real - natural composition and more.

Depending on the functional purpose of fixed

assets are divided into productive and non-

productive.

Industrial equipment - this means,

directly involved in the production

process or facilitate its

implementation. These include

buildings, machinery and power

equipment , transmission

equipment , vehicles , livestock,

perennial plants and other fixed

assets , operating in the sphere of

material production.

Non-productive fixed assets - this means, other than those directly or indirectly participate in the production process and are provided to serve the needs of housing and communal services, health, education and culture. These include buildings , structures, machinery, equipment , vehicles and other equipment used in non-production sphere .

Sectoral affiliation are divided into basic tools industry, construction, agriculture, transport , communications and others.

For natural- material composition of basic production assets are divided into buildings, transmission equipment , machinery and equipment , vehicles , tools and supplies , industrial and household equipment, working and breeding livestock , perennial plants , capital costs for the improvement of land and other fixed assets .

There are three primary methods for

depreciating fixed assets: straight line, units-

of-production, and double declining balance.

Regardless of the method used, there are

three things you must find out before you can

depreciate any fixed asset. Of course, you

have to know the initial cost of the fixed asset

so you have a starting value to work with..

You also need the expected useful life

of the fixed asset and its estimated

value at the end of that useful life.

Types of cost of fixed assets:

1) initial (primary) cost

2) market cost

3) fair cost

4) Residual value

5) liquidation cost

6)Depreciation cost (initial – liquidation)

By municipal pharmacy number 173 was purchased new equipment to get purified water. At what cost will be credited to the balance of this healthcare enterprise:

A. The fair value ofB. Price's depreciableC. * Primary costD. Residual costE. Residua value

Give the definition of residual value:A. Historical (actual) value fixed assets in the sum of

money funds paid (transferred) spent for the acquisition of (a) non-current assets

B. Cost of fixed assets after their pereotsinkyC. * The difference between Primary valued and the

amount of wear of fixed assetsD. The market value of, determined by expert estimates,

which tend to define professional estimatorsE. Primary value fixed assets minus the cost of their

Residua value

Pharmacy "Stork" for household needs has acquired a new vehicle. An old car that was available at the pharmacy, and whose life ended, written off and implemented. What is the name the amount of funds received from the sale of health:

A. Fair valueB. * The residual valueC. Cost, which depreciatedD. Residual valueE. Cost

Accountant Ternopil pharmaceutical factory at the request of the head of the company's filed cost data equipment used by several years. From now until the end of the life of the equipment (useful life ends after 8 months). On what kind of value in question:

A. Fair valueB. The residual valueC. Cost, which depreciatedD. * Residual valueE. Cost

Identify the value that should be depreciated:

A. Historical (actual) value fixed assets in the sum of money funds paid (transferred) spent for the acquisition of (a) non-current assets

B. Cost of fixed assets after their revaluationC. The difference between primary valued and

the amount of wear of fixed assetsD. The market value of, determined by expert

estimates, which tend to define professional estimators

E. * Primary or revaluation fixed assets cost minus the cost of their residual value

Systematic distribution of value of fixed assets during the period of their useful lives are:

A. revaluation of fixed assetsB. * Depreciation of fixed assetsC. Cost Health CareD. Residual value healthcareE. The residual value

Pharmaceutical company "Dennis" was targeted credit for the purchase of new equipment. After a certain period of time supervisory authorities examined the use of the loan, since The residual vit was bought cheap equipment at very high prices. To establish the market value of the equipment were invited independent experts. How else can you name the price, which established the experts:

A. * Fair valueB. valueC. Cost, which depreciatedD. Residual valueE. Cost

The initial cost of a fixed

asset includes more than

just the purchase price of

the item. Any set-up or

installation costs required

to put the asset into service

should be included in the

initial cost. Sales tax and

freight are also generally

added in and made part of

the fixed asset´s

depreciable value

depreciating fixed assets

The portion being used up is reported as Depreciation Expense on the income statement

. In effect depreciation is the transfer of a portion of the asset's cost from the

balance sheet to the income statement during each year of the asset's life.

The assets mentioned above are often referred to as fixed assets, plant assets, depreciable assets, constructed assets, and property, plant and equipment.

It is important to note that the asset land is not depreciated, because land is assumed to last indefinitely.

The calculation and reporting of depreciation is based upon two

accounting principles:Cost principle. This principle requires

that the Depreciation Expense reported on the income statement, and the

asset amount that is reported on the balance sheet, should be based on the historical (original) cost of the asset.

(The amounts should not be based on the cost to replace the asset, or on the current market value of the asset,

etc.)

1.Matching principle. This principle requires that the asset's cost be allocated to Depreciation Expense over the life of

the asset. In effect the cost of the asset is divided up with some of the cost being

reported on each of the income statements issued during the life of the

asset.

1.By assigning a portion of the asset's cost to various income statements, the accountant is matching a portion of the asset's cost with each period in which the asset is used. Hopefully this also means that the asset's cost is being matched with the revenues earned by using the asset.

There are several depreciation methods allowed for achieving the matching principle. The depreciation methods can be grouped into two categories: straight line depreciation and accelerated depreciation.

Book Tax DepreciationAccountingCoach.com's discussion of

depreciation is limited to the depreciation entered into the

company's general ledger (or books) and reported on the company's

financial statements.

These amounts are based on accounting principles. The amounts

resulting from the accounting principles are often different from the

amounts based on the Internal Revenue Service code and

regulations.

Hence the depreciation on the financial statements will likely be legitimately different from the depreciation on the

company's tax returns.

Book Depreciation IllustratedAssumptions

To illustrate depreciation used in the accounting records and on the financial statements, let's assume the

following facts:

On July 1, 2009 a company purchases equipment having a cost of $10,500.

The company estimates that the equipment will have a useful life of 5 years.

At the end of its useful life, the company expects to sell the equipment for $500.

The company wants the depreciation to be reported evenly over the 5–year life.

Calculation of Straight-line Depreciation

The most common method of depreciating assets for financial

statement purposes (as opposed to the method used for income tax

purposes) is the straight-line method. Under this depreciation method, the depreciation for each full year is the

same amount.

The depreciation expense for a full year when computed under

the straight-line method is illustrated here:

Cost of the asset 10.500 $

Less: Expected salvage value 500 $

Depreciable Cost (amount to be depreciated over the estimated useful life)

10000 $

Years of estimated useful life 5 years

Depreciation Expense per year 2000 $

If a company's accounting year ends on December 31, the company will report the depreciation expense on the company's

income statement as shown in the following depreciation schedule:

2009 2010 2011 2012 2013 2014

Depreciation Expense:

$1,000 $2,000 2,000 $2,000 $2,000 $1,000

The actual cash paid by the company for this equipment will occur as follows:

2009 2010 2011 2012 2013 2014

Cash Paid: $10,500 $ –0– $ –0– $ –0– $ –0– $ –0–

As you can see, the company paid $10,500 in 2009, but the 2009 income statement reports

Depreciation Expense of only $1,000. (Because the asset was acquired on July 1, 2009, only half of the annual depreciation expense amount is recorded in 2009 and

2014.)

In each of the years 2010 through 2013 the company's income statements will report $2,000 of Depreciation Expense, thereby matching $2,000 of Depreciation Expense with the revenues earned in each of those

years.

However, the company will not pay out any cash for this expense during those years. The company's net income before income taxes will be reduced in each of the years 2010 through 2013 by $2,000—but the

Cash account will not be reduced. This explains why Depreciation Expense is sometimes referred to as a noncash

expense.

Journal Entries For Depreciation

The depreciation for the financial statements is entered into the

accounts via a general journal entry. Assuming that the company prepares only annual financial statements the journal entries can be prepared as of

the last day of each year:

Date Account Name Debit Credit

December 31, 2009

Depreciation Expense 1,000

Accumulated Depreciation

1,000

December 31, 2010

Depreciation Expense 2,000

Accumulated Depreciation

2,000

December 31, 2011

Depreciation Expense 2,000

Accumulated Depreciation

2,000

December 31, 2012

Depreciation Expense 2,000

Accumulated Depreciation

2,000

Date Account Name Debit Credit

December 31, 2013

Depreciation Expense 2,000

Accumulated Depreciation

2,000

December 31, 2014

Depreciation Expense 1,000

Accumulated Depreciation

1,000

If monthly financial statements were prepared, 1/12 of the annual amounts would

be entered monthly.Note that the account credited in the journal entries is not the asset account Equipment. Instead, the credit is entered in the contra asset account Accumulated Depreciation.

The use of this contra account will allow the asset Equipment to continue to report the

equipment's cost, while also reporting in the account Accumulated Depreciation the

amount that has been charged to Depreciation

Expense since the asset was acquired. For example, as of December 31, 2010 the

Equipment account will have a debit balance of $10,500. On the same day, the

account Accumulated Depreciation will have a credit balance of $3,000. In T-

account form, it looks like this:

Equipment (balance sheet account)

DebitIncreases an asset

CreditDecreases an asset

July 1, 2009

ENTRY10,500

DebitDecreases a contra asset

CreditIncreases a contra asset

1,000

ENTRY Dec. 31, 2009

2,000 ENTRY Dec. 31, 2010

3,000 Balance Dec. 31, 2010

 Accumulated Depreciation – Equipment (balance sheet acct.)

The $10,500 debit balance in Equipment minus the $3,000 credit balance in Accumulated Depreciation equals

$7,500. This net amount of $7,500 is referred to as the book value or as the

carrying value of the equipment.

What is not subject to depreciation?BuildingsTransportEquipmentWorking machines* Land

Depreciation for tangible assets are:* Quarterly, monthly, yearlyOnce a semesterMonthlyEvery 2 yearsDepreciation for tangible assets is not required

Depreciation of fixed assets begins:* In the month following the month in which an item of plant was suitable for usefulIn the month following the month of disposal of property, plantThree months after the fixed assets was appropriate for usefulSix months after the fixed assets was appropriate for usefulAt each company individually

Depreciation of fixed assets and intangible assets are:A. Only by using straight-line method on all

subjects of economic activityB. Only by using the cumulative method on all

subjects of economic activityC. Using the method of rapid reduction of the

residual value of business entity is defined by the state

D. Using the method of rapid reduction of residual value on all subjects of economic activity

E. Use any method that is chosen independently now

At pharmaceutical firm Edelweiss annual amount of depreciation determined by dividing the value that depreciation for the estimated period of an item of plant. What depreciation method used:

A. Reducing residual valueB. Accelerated reduction of residual valueC. CumulativeD. ManufacturingE. * Rectilinear

Using that method, annual depreciation is determined as the product of the residual value of the beginning of the year or its initial value at the date of the beginning of depreciation and annual depreciation rates:

A. * Reducing residual valueB. Accelerated reduction of residual valueC. CumulativeD. ManufacturingE. Rectilinear

Using that method, annual depreciation is determined as the product of the residual value of the beginning of the year or its initial value on start date of depreciation and annual depreciation rate, which is calculated based on the useful life of the object, and doubles:

A. Reducing the residual valueB. * Accelerated reduction of residual valueC. CumulativeD. ManufacturingE. Rectilinear

Using that method, monthly depreciation is defined as the product of actual monthly output (services) and production rates of depreciation.

Reducing the residual valueAccelerated reduction of residual valueCumulative* ManufacturingRectilinear

Name the process of modifying the original (restored) the value of fixed assets, taking into account inflation, the ratio:

Revaluation surplusWrite-off* IndexingAmortizationInternal displacement

At what value of intangible assets reflected in the accounting and reporting:

The fair value;The residual value;Cost, which depreciated;Residual value;* Cost.

For the balance sheet to determine the residual value of fixed assets is calculated as:

A. * The difference between the initial cost and the amount of depreciable

B. The difference between initial and replacement cost

C. The difference between retail and wholesale prices

D. The difference between liquidation value and the amount of depreciable

E. Total replacement cost and depreciable

Pharmacy has acquired new equipment room assistant. When posting you must divide on low value items and fixed assets. Specify a characteristic feature of fixed assets?

A. In the process of changing their kindB. Participate in the production process onceC. * Transfer parts of its value in accordance with

depreciationD. Transfer their value to the products produced by

one turnE. The cost of not less than 15 minimum wages