8.4 Depreciation

What is Depreciation?

Decreasing the value of a fixed asset over its useful life

What do we Depreciate?

FIXED ASSETS ◦Examples:

Office Furniture Automobile Building

◦Except Land We do not depreciate land

Why do we Depreciate?

To show original cost of fixed assets and amount used up over fiscal period

To help financial statements up-to-date

Methods of Depreciation

A. Straight Line Depreciation- Divides up the net cost of the asset equally over

the years of the assets life

B. Declining Balance- A method of calculating the annual depreciation of

an asset as a fixed percentage of the remaining value of the asset

Straight Line

Eg. A business purchases a new company car on January 1, 2006.

Straight Line -- Cost – Salvage Value

Estimate life in years

Estimate value of asset at end of its useful life

Jan. 01, 2006Cost of car $20 000Estimated Salvage Value $5 000Estimated Years of Life 5 Years

20 000 - 5 000

5 years

Salvage Value

Year Cost - Depreciation Used

=Net Book Value

Accumulated Depreciation

2006 $20 000 - 3 000 = 17 000 3 000

2007 17 000 3 000 14 000 6 000

2008 14 000 3 000 11 000 9 000

2009 11 000 3 000 8 000 12 000

2010 8 000 3 000 5 000 15 000

20 000 - 5 000

5 years= 3 000

Expense I/S

Keeps track of total deprecation “CONTRA ASSET” (CR)

Accumulated Depreciation

Accumulated depreciation account is a valuation or contra account, that keeps track of total depreciation

Valuation- one that is used, together with an asset account to show true net value of asset

Jan 01 – Journalize the purchase of the automobile.

Dec. 31, 2006 – Journalize the adjustment to record the 1st year of deprecation

Automobile 20 000 Bank 20 000

Depreciation Expense- Auto 3 000 Accumulated Deprecation- Auto 3 000

Adj. Entry

Contra Asset

All the same!!

Dec. 31 2007, 2008, 2009, 2010- Journalize the adjusting entries for depreciation for each following year.

Depreciation Expense- Auto 3 000 Accumulated Deprecation- Auto 3 000

Dec. 31, 2010 – Journalize the entry if the business sells the auto at the end of the five years for $5 000

Bank 5 000Acc. Dep.- Auto 15 000 Automobile 20 000

B) Declining Balance

Declining Balance –Eg. Auto- 30%

Government %, pg. 308 in text

Year Cost - Depreciation Used

=Net Book Value

Accumulated Depreciation

2006 $20 000 - 6 000(20 000 *.3)

= 14 000 6 000

2007 14 000 4 200(14 000 *.3)

9 800 10 200

2008 9 800 2 940(9 800*.3)

6 860 13 140

2009 6 860 2058(6 860*.3)

4802 15 198

2010 4 802 1 440.60(4802*.3)

3 361.40 16 638.60

+ 4 200

+ 2 940

+ 2 058

+ 1 440.60

Journalize the adjusting entries to record the depreciation for:

Dec. 31, 2006 (year 1)

Dec. 31, 2007 (year 2)

Depreciation Expense- Auto 6 000 Accumulated Deprecation- auto 6 000

Depreciation Expense- Auto 4 200 Accumulated Deprecation- auto 4 200

Dec 31, 2008 (year 3)

Depreciation Expense- Auto 2 940 Accumulated Deprecation- auto 2 940

Answer the following:

◦How much depreciation was accumulated (contra asset) after year 3?

$13 140

◦How much depreciation was used up in year 3? 2 940 (expense)

Depreciation calculations are recorded in the Adjustment Columns on the worksheet. You must extend these entries to the appropriate columns!

Depreciation Expense- Auto will extend to the __ side of the __________ because it is treated like any other ______. (p. 307)

Accumulated Depreciation- Auto is extended to the __ side of the ____________. Accumulated Depreciation is an example of a _____ account because it has the opposite balance of normal assets. (p.307)

CR

Income Statement

Expense

DR

Balance Sheet

Contra

Let’s Try it!

8.4 Depreciation pg. 301-310

Read p. 306-307 in textbook, review the worksheet, income statement & balance sheet

Answer Exercise questions #1,2 p. 311-312 (t), p. 242-244 (w)