College Accounting, by Heintz and Parry

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College Accounting, by Heintz and Parry

• Chapter 19
• Accounting for
• Long-Term Assets

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When Nick purchased the point-of-sale terminals,
Eddie had another question for him. Now that we
have some expensive equipment, do you want to
switch to an accelerated method of
depreciation?Jumping Jupiter, for crying out
loud, hold the cellular phones! You mean theres
another choice of methods to do my accounting
again? My word, I always thought accounting was
straightforward debit this, credit that. Okay,
explain the different methods of depreciation to
me, but get a pencil and paper and talk verrrry
sloooowly.Up until now, weve been using the
straight-line method of depreciation . . .
Question What is the formula for calculating
straight-line depreciation?
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Answer The formula isCost - Salvage Value
4500 - 300 840/year (70/month)
Useful Life 5
Cost purchase price (including things
like taxes, freight, installation, etc.)Useful
Life the number of years the company intends to
use the assetSalvage Value what the company
expects to receive for it at the end of its
useful lifeIf we keep using this method, our
monthly adjustment will be Date
Description
P. R. Debit Credit 2001 June
10 Depreciation Exp.-Computer Equip.
70.00 Accumulated
Deprn.-Comp. Equip.
70.00
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Nick was focused now. Okay, Dr. Debit, what are
these accelerated methods you mentioned? Do we
depreciate our asset in five years instead of
seven or something?No, but we take more
depreciation in the earlier years than in the
later years. This makes sense for many assets
where the repairs and maintenance go up in the
later years. The accelerated depreciation can
tend to smooth out the total expenses over the
assets useful life.The most common accelerated
depreciation method is the double-declining
balance method. The word double is used
because we calculate the depreciation at double
the straight-line rate.
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The Double-declining-balance method has the
following formula Book Value X (2 X
the Straight-Line Rate)
Depreciation for the Year Book
value Cost - Accumulated Depreciation(Note No
salvage value is subtracted.)The factor 2 X the
straight-line rate is most easily calculated as

200
useful life In this case, 200
divided by 5 40. In year 1, depreciation is
4,500 X 40 1800/year (or 150/month) and the
entry is Date Description
P. R. Debit
Credit 2001 June 10 Depreciation
Exp.-Computer Equip. 150.00
Accumulated Deprn.-Comp. Equip.
150.00
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The depreciation goes down in later years because
the book value is lower. In our example, the
book value next year would be 4500 cost -
1800 accumulated depreciation 2700 so the
depreciation next year would be 2700 Book
Value X 40 Depreciation Rate 1080
Depreciation for the Year (90/month)
which is significantly less than the 1800
in depreciation taken this year. The entry would
be Date Description
P. R. Debit
Credit 2002 June 30 Depreciation
Exp.-Computer Equip. 90.00
Accumulated Deprn.-Comp. Equip.
90.00
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The sum-of-the-years-digits method is the
second common accelerated method. The formula
is (Cost - Salvage Value) X
Remaining Useful Life
Sum-of-the-Years-Digits
The sum of the years digits when the useful
life is 7 years is 7
6 5 4 3 2 1 28so the calculation
in the first year would be (4500 -
300) X 7 1,050/year (87.50/month)
28
The second year we would use
the fraction 6/28, then 5/28, 4/28, etc. Our
monthly entry would be Date
Description
P. R. Debit Credit 2001 June
30 Depreciation Exp.-Computer Equip.
87.50 Accumulated
Deprn.-Comp. Equip.
87.50
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Nick looked perplexed. The one thing wrong with
all of these methods is they dont seem to
account for the reality of whether we really wore
out the asset this year.Good point, Nick.
There is one method that tries to do that. Its
the units-of-production method. The formula is
Cost - Salvage Value Depreciation Per
Unit Useful Life (in units) This is just
like the straight-line method, except that the
useful life is measured in units of production,
not years. For example, if it were a car, you
would estimate the useful life in miles to be
driven. Then the total depreciation for a period
is Depreciation Per Unit X Units
Produced
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We probably would not use the units-of-production
method with our point-of-sale terminals, but
lets just say that we expected them to last for
a certain number of sales transactions (lets say
210,000). Depreciation would be Cost -
Salvage Value 4,500 - 300 .02 per
transaction Useful Life (in units)
210,000If we had 3,000 transactions in June,
depreciation would be Depreciation Per Unit X
Units Produced Deprn. for Period
.02
X 3,000 60.00
Our monthly adjustment would be Date
Description
P. R. Debit Credit 2001
June 30 Depreciation Exp.-Computer Equip.
60.00 Accumulated
Deprn.-Comp. Equip.
60.00
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Nick was ready with his decision. The terminals
arent supposed to need expensive repairs, and I
dont want to keep track of sales transactions,
so I would rather just stick with straight-line
depreciation. Thanks for helping me make an
informed decision, though, Eddie.No problem,
Nick. Now we have to figure out journal entries
for the equipment were replacing.That
piece-of-junk printer is just getting tossed in
the garbage, so we dont even need an entry for
that, right?Actually, we do. It wasnt even
fully depreciated yet, so discarding it will
impact our net income for the month.Question
What accounts would be debited and credited when
discarding an asset (computer equipment) that
still has a book value?
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Answer The computer equipment account would be
credited and the accumulated depreciation account
would be debited to get the equipment off of the
books. To balance the entry, a new income
statement account called Loss on Discarded
Computer Equipment would be debited for the
amount of the book value.The entry would look
like this Date Description
P. R. Debit
Credit 2001 June 10 Accum.
Deprn.-Computer Equip.
120.00 Loss on Discarded
Computer Equip. 180.00
Computer Equipment
300.00
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I got really lucky on the old computer and those
expensive speakers that you had me buy. I sold
them to a customer for very close to what I paid
for them.Great, we might actually recognize a
gain on that sale.The transaction did result
in a gain on sale of computer equipment, which
is easily calculated as the difference between
the debits and credits after you debit cash for
the amount received, debit accumulated
depreciation, and credit computer equipment
Date Description
P. R. Debit Credit
2001 June 10 Cash
1100.00
Accum. Deprn.-Computer Equip.
180.00
Computer Equipment
1200.00
Gain on Sale of Comp. Equip.
80.00Question How
would the entry be different if the company only
received 900 for the computer and speakers?
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Answer The cash account and the accumulated
depreciation account would still be debited, and
the computer equipment account would still be
credited to get the equipment off of the books.
To balance the entry, a new income statement
account called Loss on Sale of Computer Equipment
would be debited for the difference between the
cash received and the book value.The entry
would look like this Date
Description
P. R. Debit Credit 2001 June
10 Cash
900.00
Accum. Deprn.-Computer Equip.
180.00 Loss on Discarded
Computer Equip. 120.00
Computer Equipment
1200.00
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The tricky part is probably the transaction to
buy the point-of -sale terminals themselves,
because the company took my old computerized cash
registers as a trade-in. The trade-in value
wasnt much, but I didnt want the hassle of
trying to sell them.You are right, Nick,
trade-ins can be difficult. This one should be
fairly easy, because it sounds like we took a
loss on the trade-in. Lets see.The entry did
indeed show a loss Date
Description
P. R. Debit Credit 2001 June
10 Computer Equipment (new)
4,500.00 Accum.
Deprn.- Comp. Equipment
150.00 Loss on Exchange of
Comp. Equip. 100.00
Computer Equipment (old)
500.00
Cash

4,250.00
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Eddie, you make it sound like gains are harder
to record, but it would be almost the same entry
with a credit to a gain account, right? Whats
harder about that?Nick, its not harder, its
impossible! When exchanging similar assets,
youre allowed to recognize a loss, but not a
gain.Why not? Boy, its no wonder you need a
degree to do accounting, when you have all these
silly rules.Actually, this rule is very
logical. As you know, many companies give
generous trade-ins as a way to give discounts off
of their inflated list prices. When that
happens, a buyer would be crediting a gain on
exchange just to balance out the unrealistically
high price of their new equipment. For example,
the company couldve told you the equipment price
was 5,000 and offered you a 750 trade-in on
your cash registers so that you would pay the
same 4,250 in cash. The trade-in wouldnt
really be worth 750, because the new equipment
isnt really worth 5,000. Question What
would the entry be in this case?
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Answer Here is the entry, with the debit for
the new equipment being the difference between
the other debits and credits, not the 5,000 list
price.The other thing you should know, Nick, is
that you cant recognize a gain or a loss for tax
purposes.Thanks for telling me, Eddie, but
make sure you write yourself a note for the end
of the year. Youre my accountant, you know.
Date Description
P. R. Debit
Credit 2001 June 10 Computer Equipment
(new) 4,600.00
Accum. Deprn.- Comp. Equipment
150.00
Computer Equipment (old)
500.00
Cash
4,250.00