Tip:
Highlight text to annotate it
X
Hey guys how you doing here we are again we have this lecture and then one more lecture
and then the test correct? Over chapters eight nine and the first part of ten. And uh next
period we will talk in detail as far as what's going to be on the test the uh title of today's
lecture is intro to fixed assets we actually started at the very tail end of last lecture
we started to talk about fixed assets didn't we? We will continue that day so let's go
ahead and take a look at the homework I didn't have much this time did I Is think just gave
you two quick studies I want to do quick study nine point one which was on credit card right?
And this chapter or this subject is covered in the accounts receivable chapter even though
credit cards really aren't pure receivables are they okay um so let's go ahead and take
a look at quick study nine point one prepare journal entries for the following credit card
sales transactions and the company uses the perpetual inventory system okay. Okay in situation
one we sold ten thousand in merchandise that cost seventy five hundred on MasterCard credit
cards the net cash receipts are immediately deposited in the cellars bank account MasterCard
charges a five percent fee right? Okay now if we would have oh where did I put my pen?
If we would have uh oh the teacher can't find his pen, I got it crisis averted okay um if
we would have just sold for cash if we would have just sold for cash what would our journal
entry have been I know that's not what they asked yet but if we would have just sold for
cash our first journal entry to record the sale would be cash sales for how much? Ten
thousand but we didn't sell on cash did we we sold on credit cards so um our first journal
entry is this right here okay our first journal entry is we don't get cash of ten thousand
dollars we only get cash of ninety five hundred dollars which is one hundred percent minus
the five percent fee times the sales right? The five percent we don't get gets debited
to credit card expense so we receive less cash here don't we than if we would have sold
it, uh not sold it on credit card correct? Then they would have just given us the cash
so by allowing our customers to use credit cards it does cost us something right? But
gain we talked about the benefits of credit cards last time you don't have to evaluate
the credit worthiness of your customers you get your cash quicker it opens up a whole
new customer base that maybe wouldn't buy from you if you didn't offer the credit card
option. Now we do have to however we account for this or however they pay for it remember
that you do also have to do your journal entry to uh debit cost of goods sold and decrease
your merchandise inventory remember chapter five how there was two entries for a sale
so the situation number one requires two journal entries and those are the journal entries
okay alright any questions on that one? I know we have a second one here but any questions
on the first situation in quick study nine point one? Okay let's do quick study nine
one number two we sold three thousand dollars of merchandise that cost fifteen hundred dollars
on an assortment of credit cards now here we don't get the cash right away net cash
receipts are received seven days later as this on right here and we are not debiting
cash we are debiting ninety six percent of three thousand and we are debiting accounts
receivable not from the customer not from the customer but from the credit card okay
accounts receivable from the credit card company now we have to record our cost of goods sold
as well and then we have to wait seven days and then the credit card company pays us right?
And that's the journal entry seven days later when we get our cash from the credit card
company we debit cash and our receivable from the credit card company is decreased. Okay
alright any questions on that does that make any sense folks? Any confusion there? Credit
cards usually are not too hard of a situation but I always ask about that on the test you
should be familiar with that alright if there is no questions there then let's jump over
to the only other homework I asked which was quick study ten point one alright quick study
ten point one alright quick study ten point one on page four twenty one strike bowling
installs automatic score keeping equipment with an invoice cost one one hundred and eighty
thousand dollars the electrical worker required for the installation costs eight thousand
dollars additional costs are three thousand dollars for delivery and twelve thousand six
hundred for sales tax during the installation a component is carelessly left on the lane
and hit by the automatic lane cleaning machine the costs of repairing the component is twenty
two fifty what's the total recorded costs of the automatic score keeping equipment okay
who got an answer, what did you get? Very good, nice job though Sarah got it right it
is two o' three six hundred we do not include the twenty two fifty repair charge because
it is not a normal and reasonable expense that is necessary to get that asset in place
I mean we would have to record the twenty two fifty but it would just go into repair
expense it would not be part of the cost of the asset okay is that why you excluded it
Sarah? Very smart, very smart okay so that is the recorded cost. The other costs are
reasonable and necessary in order to get that asset into working condition okay. Alright
that's it for homework isn't it. Probably just going to let you go early today no I'm
kidding you know that's not true alright lets go ahead and talk about a subject that is
a very important subject and um we will do some work on it here in class I'll give you
some homework to do and um we will go from there what I want to talk about today is depreciation
o0kay now we have talked a little bit about depreciation in chapter three when we went
over adjusting journal entries is that correct? Remember depreciation? What is depreciation
I want to talk about what depreciation is and I want to talk about what depreciation
is not okay what depreciation is, is the process of allocating the cost of plant assets to
expense in the accounting period benefits in its use okay alright coming off the PowerPoint
a little bit okay let's say that uh let's say that Jessica that you purchased a thirty
thousand dollar truck for you landscaping business okay now it would not make sense
to expense that entire thirty thousand dollars of truck in one year would it? Okay because
that truck is going to benefit you for a number of years. Are you with me? That doesn't really
follow the matching principal. You remember the matching principal? We want to attempt
to match the expenses to the periods in which they helped create the revenue so if we buy
a truck and just debit a truck expense for thirty thousand that doesn't really make any
sense now let's say you think that truck is going to last six years in your business and
let's say that you think it's not going to be worth anything you might decide five thousand
dollars per year for the next six years do you see what I'm saying and that way every
year you would have five thousand dollars of depreciation expense spread out over the
estimated time periods that you think that truck will be beneficial in helping you create
revenue for your business do you understand? And we may make depreciation journal entries
monthly or we may do it annually. Remember how we talked about AJE' some people do it
monthly some people do it annually so we just have to you know but in that sort of situation
it would make more sense to spread that expenditure as an expense over six years right? And then
it wouldn't mess with our income statement either. Think about if you expense that entire
thirty thousand in one year you would go whoa why didn't we make any money well we had the
truck purchase. Okay it would really mess with your financial bottom. Okay so depreciation
going back to the slide what we want to do is spread out that expense over a number of
uh over the number of accounting period that we think will benefit from it. In a way we
are going to take it slowly off the balance sheet and slowly expense it okay now let me
tell you what depreciation is not depreciation is not an attempt to write down an asset to
its market value and this is very very hard for -people to understand and we should really
really you know really really uh comprehend what we are talking about here coming off
of that if I depreciate that thirty thousand dollar truck by five thousand dollars after
one year I am not saying I think the market value is twenty five thousand dollars after
one year okay because we do not record our assets on our balance sheets generally speaking
trying to figure out the market value because what you think the market value of that truck
is after one year versus what I think versus what Jake thinks versus what ally thinks that's
probably four different amounts that's too subjective okay the lay person who hasn't
had the privilege of taking accounting one they think that balance sheets report that
they just always seem to think that balance sheets report assets at the market value what
they are worth if we sold them on the open market. It's not the case depreciation is
not an attempt to write an asset down to what we think it is at market value it is simply
spreading it out the expense is that, are you trekking with me? Okay alright okay now
we are going to talk about some different types and each one of those types of depreciation
we're going to need to know the cost of the asset the salvage value which is also called
the residual value and this is what we think we can sell the asset for if anything at the
end of its estimated life okay and the example we just did Jessica we were just saying zero
which is probably the most common salvage value we use. But the salvage value and the
residual value aren't the same thing as what we think we can sell it for t the end of its
life and then we have the third thing we need is useful life now I want to point out something
here that is important okay there are two of these things that are estimates which are
they? Yeah this one and this one now we know the cost we can just look off the invoice
right? But salvage value is an estimate that we make as is useful life some people think
financial accounting is just black and white. It's always one hundred percent no numbers
it's not true there is lots of estimates in accounting and in depreciation we have to
estimate what we think the salvage value is and we have to estimate what we think useful
life is okay so these are some factors that we are going to need to know as we are working
on our depreciation methods now we are going to learn in this class three depreciation
methods we are going to learn straight line which we already know or should remember from
chapter three we are going to learn something called units of production and then we are
learning a method called declining balance and specifically we are learning the double
declining balance okay so that is what we are going to talk about today is straight
line units of production declining balance cool? Alright lets talk about the straight
line method first the straight line we calculate the depreciation of expense for a period by
taking the cost of the asset minus the salvage value or residual value divided by the useful
eye lets look at an example on January one of 2012 equipment was purchased for fifty
thousand dollars cash the equipment had an estimated useful life of five years and an
estimated residual value of five thousand dollars well how much would we depreciate
we would take the cost of the asset of fifty thousand minus the salvage value of five thousand
and divide it by five years and that means we will depreciate nine thousand dollars per
year okay how does that journal entry look? Remember the depreciation journal entries
what does that spell do you remember that? DEA D, dead remember that from chapter three
that seems a long time ago doesn't it we debit depreciation expense and we credit accumulated
depreciation for nine thousand dollars remind what kind of account accumulated depreciation
is it's a contra asset with a credit balance correct? So this is our entry right? That's
our entry now one thing I want to point out how would this look on the balance sheet after
we had depreciated it for this first year well one the balance sheet we would have the
cost of the assets of fifty thousand dollars okay less less the accumulated depreciation
of nine thousand and that would equal forty one thousand what would we call that forty
one thousand do you remember? Does anybody remember what we call that forty one thousand
it's very important and I want you to remember what's that is called because we are going
to be using it a lot in chapter ten does anybody remember what cost less accumulated depreciation
is? That's the book value of the asset the book value of the asset okay so what does
book value equal? Cost minus accumulated depreciation what is the book value of an asset what is
it all together cost less accumulated depreciation cost minus accumulated depreciation is the
book value of an asset okay because we are going to be working on problems where it says
take the book value of an asset and you are going to go what is that well that's cost
minus depreciation so that's how that would look after one year correct? Okay going back
to this so this is our amount of depreciation using the straight line method for the first
year we talked about how it would look on the balance sheet um now notice with straight
line method we take an equal amount of depreciation each year don't we correct? And uh the book
value what does book value equal? Cost minus accumulated depreciation the book value equals
the cost of fifty thousand minus whatever accumulated depreciation is so fifty thousand
minus nine equals forty one fifteen thousand minus eighteen equals thirty two and so on
so this is a little chart to help us keep track of our depreciation under the straight
line method. And we depreciate down to the salvage value and then we are done aren't
we? Okay and of course if we use the salvage value of zero then that book value at the
end of its depreciation amounts will be zero but in this case we used a residual value
of five thousand cool? Now sometimes they ask for what is the depreciation rate under
straight line well the depreciation rate under straight line is simply one hundred percent
divided by the estimated useful life okay whoops. The depreciation rate is simply one
hundred percent divided by the useful life of five years we basically are depreciating
twenty percent per year aren't we? Make sense? Okay cool any questions on that? One more
thing they want to point out is again they take the equal amount of depreciation each
year and the book value declines at a constant rate doesn't it for straight line what's the
book value? Cost minus accumulated depreciation now let's talk real quick about a different
method that you haven't learned and this one is going to be best learned by looking at
an example um but bear with me as we go through this slide this is called the units of production
method the units of production the numerator that we start with is still cost minus salvage
value but then we divide it by what we think the total amo8unt of production we will get
out of that asset is going to be and this is going to be our depreciation per unit then
each year we are going to take that depreciation per unit times the number of units produced
in that period okay the number of units produced in that period. Are you with me? So let's
look at an example on December thirty one of 2012 equipment was purchased for fifty
thousand dollars cash. The equipment is expected to produce one hundred thousand units during
its useful life that's the total amount of production we are going to get out of this
thing estimate of course and it has an estimated salvage value of five thousand dollars now
in 2013 twenty two thousand units were produced what's the amount of depreciation expense
we take well first lets figure out a depreciation per units we taker the cost of fifty thousand
minus the estimated residual value of five thousand divided by the one hundred thousand
total amount of production we think we are going to get and that gives us forty five
cents per unit are you with me? Now each year what we are going to do is take that forty
five cents per unit times the number of production for that period I think this example said
that in two 2013 we produced twenty two thousand units didn't we? So twenty two thousand times
that forty five cents per unit equals ninety nine hundred and that's the amount of depreciation
that we are going to take in 2013 they don't give us an entry but it would be ninety nine
hundred dollar debit to depreciation expense ninety nine hundred dollar credit to accumulated
depreciation understand? Now do you see under this method the amount of production is going
to change each year so the amount of depreciation is going to change for each year here is that
ninety nine hundred for the first year but took the amount of depreciation expense for
each year is going to be different because the units produced is different right? As
a matter of fact if for some reason the equipment I idle and it doesn't produce any units this
is zero then the depreciation expense we take on that is zero for that year so each year
we take that twenty two thousand dollar unit times that depreciation per unit until its
fully depreciated down to its salvage value of five thousand are you with me? Now um can
you think of any example that it might make sense to use the unit of production method?
One method or one example where they might use it is lets say that truck you buy will
last a total of we think it will last a total of one hundred and fifty thousand miles well
could you see where we are going to figure out the depreciation per mile that we are
going to take ach period times the number of miles that we drove do you see what I'm
saying that might be a good way to spread that expense out yet again we are not trying
to mark it down to market value but that might be a good way to allocate that expense understand?
Now I want to do a couple of examples here in class of these two so let's go ahead while
they roll that music lets go ahead and do quick study ten point three and quick study
ten point four um in your book you can see those right there okay quick study ten three
and quick study ten four do these two and we will come back in a few minutes and go
over them. Okay lets go over these quick study ten three quick study ten four on quick study
ten three on January two two thousand and eleven the crossover band acquires sound equipment
for sound performances at a cost of fifty five thousand nine hundred dollars the band
estimates it will use its equipment for four years during which time it anticipates performing
about one hundred and fifty concerts it estimates that after four years it can sell the equipment
for nineteen hundred dollars during the year two thousand eleven the band performed forty
concerts compute the year two thousand eleven depreciation using the straight line method
okay well the uh what we would figure out first of all is how much we are going to depreciate
per year and we would take the cost of fifty five thousand nine hundred minus the residual
value of nineteen dollars divide by four years equals thirteen thousand five hundred depreciation
for the year right? Correct? And of course they didn't ask us to do the entry but if
they would that would be depreciation expense debited an accumulated depreciation credited
in this case for thirteen five hundred right? Make sense? Okay that's pretty easy isn't
it okay what about ten four quick study ten four well here what we do first of all is
we take the the cost minus the residual value of nineteen hundred but here we divide it
by one hundred and twenty concerts which we think is the total amount of production we
are going to get out of that asset and that means we are going to depreciate four hundred
and fifty dollars depreciation per concert correct>? Now how many concerts did we do?
In this period we did forty in 2011 so we take forty times four hundred and fifty and
that means we are going to take eighteen thousand dollars depreciation in 2011 are you with
me? Once again they didn't ask us to do the journal entry but if they would have we would
debit depreciation expense and accredit accumulated depreciation for eighteen thousand dollars
that's not too hard is it? Okay now I promise you I promise you I'm going to ask you to
do this on the test okay um so let's move on to the third method now the third method
I will tell you is the method that students have a little bit more trouble with okay and
I'm going to promise you I'm going to ask this on the test and I want you to be able
to do it some student have just even left this problem blank it's like I don't even
want to try it and I really want to work on this I really want you to understand this
okay um what it's called is the declining balance method and what you are going to find
with the declining balance is that we are going to take where is my pointer we are going
to take more depreciation or a higher amount of depreciation in the early years and less
in the later years and sometimes we do this because it off sets our repair expense right?
If you have ever had an automobile you know that there is usually less repair expense
in the early years of your automobile than in the late so sometimes this balance things
out on the um income statement the declining balance method we are going to learn just
the double declining balance method and its going to you are going to see that we are
going to take more depreciation in the early years than in the later years okay now how
does this work? Well you really want to walk through it step by step okay you really want
to walk through this step by step the first thing that you are going to figure out is
to take this straight line you are going to calculate this straight line rate now do you
remember when we did that at that one slide you just take one hundred percent divided
by the useful life and that gives you your straight line rate so in this case its one
hundred percent divided by the asset we have been talking about has a five year useful
life so our straight line rate is twenty percent then we take that twenty percent and we multiply
it by two because we are learning the double declining balance method okay and that gives
us our double declining balance rate okay are you with me so far? Then what we are going
to do is we are going to take that double declining balance rate each period times the
beginning period book value now what does book value equal? Cost less accumulated depreciation
now the beginning period book value as we begin is fifty thousand because that is the
cost of fifty thousand minus accumulated depreciation zero we haven't depreciated anything yet right?
But how we did this is then we get twenty thousand dollars depreciation for two thousand
thirteen okay are you with me? Now um what is it for the next year well for 2014 for
2014 we are going to take the double declining balance rate times the beginning of the year
book value which in this case is the cost of fifty thousand minus whatever we depreciated
i9n this case we depreciated twenty thousand fifty minus twenty is thierty is forty percent
equals twelve thousand are you with me? Now students have a tendency to struggle with
this um and so I have made up I don't know if it helps or not if it doesn't then don't
use it but I have made up this little worksheet to kind of walk people through this now for
you folks at home I have this on angel under the chapter ten lessons now let's go ahead
and take a look at that and lets do the example that was on the screen using this worksheet
do your remember what the cost was? It was fifty thousand dollars okay what was the estimated
life fife years and you remember what the salvage value was? Wasn't it five thousand
dollars? Somebody double check it. Okay so the estimated life we have that's EL cost
is C so the first thing we do is take one hundred percent divided by the estimated life
of five years and that gives us our straight line rate of twenty five percent we take that
times two since it's the double declining balance method and we get forty percent that
is our double declining balance rate are you with me? So depreciation expense for year
one we take C the cost of fifty thousand times the double declining balance rate of forty
percent and that gives us twenty thousand dollars that's the amount of depreciation
for year one and we just did that on the screen didn't we? What about year two? Well we take
the cost of fifty thousand minus now this is the book value this in the parenthesis
right here is the book value the cost minus what have we depreciated so far we have depreciated
twenty thousand and we take that times the double declining rate of forty percent and
what does that equal that equals twelve thousand okay what about depreciation for year three
well right here in between my finger is going to be the book value asset which is the cost
of fifty thousand minus whatever we have depreciated well how much did we depreciate in year one
twenty thousand how much did we depreciate in year two? Twelve thousand okay so the book
value of the asset is actually fifty thousand minus twenty minus twelve its eighteen thousand
isn't it? It's eighteen thousand and we are going to take that times the double declining
balance rate and that gives us I believe seventy two hundred dollars is that correct? Now do
you see how the amount of depreciation we are taking each year goes down? Alright? If
that worksheet doesn't help you think through it then by all means don't use it now you
can pull off if you fill this in you can pull another one off angel and use it again Dave
Krug designed that so every time that used I get twenty five cents which is nice okay
I got that going for me okay so if you look at depreciation you will see there is our
twenty thousand which we calculated there is our twelve thousand which we calculated
our seventy two hundred and if we would keep going these would be the amounts that we would
get now remember though we could only depreciate down to well let me back up here we have depreciated
below our estimated salvage value we can't do that this ending number has to be what
our salvage value is so sometimes we have to force that last number because we want
an ending book value when we are done depreciating equal to the estimated salvage value that
we set up if it was zero it would be zero but in this case it was five thousand but
you are not just going to keep depreciating things until they have negative book values
right? So sometimes we have to force that depreciation expense in the last year alright
now a review of these methods the straight line method gave us equal amounts of depreciation
for each year the units of production method was different amounts in each year depending
on what our production was right? And the double declining balance method it was a less
it went down didn't it went down a different amount ever year okay now I can guarantee
you on the test you are going to have a problem not a multiple choice but a problem where
I am going to give you a bunch of information about a fixed asset and I'm going to want
you to figure out what's the depreciation for the first year or so if we used straight
line well what if we used units of production well what if we used double declining balance
and it's the problem on my test that people have a tendency to do the worst on I want
you to do well okay I want you to do good on it so uh let's do one of these in class
let's do quick study ten point six quick study ten point six okay. Okay if you are not done
at home just pause and press play when you are real quick study ten six a fleet of refrigerated
delivery truck is required on January five of two thousand eleven at a cost of nine hundred
and thirty thousand dollars with an estimated useful life of eight years and an estimated
salvage value of one hundred and fifty thousand dollars compute the depreciation expense for
the first three years using the double declining balance method okay alright I want to make
sure we get through this I might have to move a little quicker than I would have liked but
what was the cost of this truck? Or what was the cost of this equipment? Nine hundred thirty
thousand the estimated life was what? Eight years and the salvage value was what? One
hundred and fifty thousand okay so the estimated life is eight years one hundred percent divided
by eight equals twelve and a half percent we take that times two because it's the double
declining balance method and our double declining balance rate will be twenty five percent so
I can just fill that in in all o9f these right? Okay depreciation in year one the book value
is just the cost there is no depreciation yet so the cost is nine hundred and thirty
thousand dollars times twenty five percent that equals two thirty two five hundred okay
two thirty two five hundred did you get that? What about year two well you take the cost
of nine hundred and thirty thousand minus whatever we depreciated minus what we depreciated
two hundred and two thirty five okay and we take that times twenty five percent and that
gives us let me do that in my head real quick um if I calculate it in my head I get one
hundred and seventy four three seven five is that correct? Okay what about depreciation
for year three I take nine hundred and thirty thousand cost minus whatever it is we depreciated
year one was two thirty two five hundred year two was one seventy four three seven five
and you take that book value times twenty five percent and I'm going to go ahead and
round this but I think you can get about one thirty seven eight one is that correct? And
the total accumulated depreciation now is five thirty seven six fifty six and it doesn't
we haven't depreciated below the salvage value here if we kept doing this we would get to
the point where we would have to force the final one but we are still good to go and
I don't know did that help did anybody use that worksheet? Okay you can print those off
on angel if you would like okay now what I want you to do for homework is there are uh
for homework I want you to do five exercises I want you to do exercise ten point four through
ten point eight so do ten point four ten point five ten point six ten point seven ten point
eight exercise that's what I want you to do for your homework okay thanks bye.