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5- 1Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
5- 2Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Marshall,McManus,andViele11thEdition
AccountingWhattheNumbersMean
CHAPTER5: AccountingforandPresentationofCurrentAssets
5- 3Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Inventories
Short-term Securities
Current assets include cash and those assets that are expected to be converted to cash or used up within one year, or an operating cycle, whichever is longer.
Cash
Deferred Tax Assets
Accounts and Notes Receivable
Prepaid Expenses
Current Assets
include…
WhatareCurrentAssets?
5- 4Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Coins and paper money
Checking accounts
Money orders
Undeposited receipts
Petty cash funds
Cash Includes…
Cash
Learning Objective 5-1: Explain what is included in the cash and cash equivalents amount reported on the balance sheet.
5- 5Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Commercial paper
U.S. Treasury securities
Bank certificates of deposit
Money market mutual funds
Cash Equivalents include. . .
CashEquivalents
Learning Objective 5-1: Explain what is included in the cash and cash equivalents amount reported on the balance sheet.
5- 6Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
CashManagementGoalsl Investexcesscashwithminimalrisk.
lAssuretheavailabilityofadequateamountsofcash.
lAvoidunnecessarilylargeamountsofidlecash.
l Preventtheftandfraud.
Learning Objective 5-1: Explain what is included in the cash and cash equivalents amount reported on the balance sheet.
5- 7Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
TheInternalControlSystem
InternalControlOverCash
l Requiredailydeposits.
lMakeallpaymentsbycheck.
l Promptlyreconcilebankstatements.
Internal control objectives are to ensure:
1. Effective and efficient operations.
2. Reliable financial reporting.
3. Compliance with applicable laws and regulations.
Learning Objective 5-2: Describe the key features of a system of internal control and explain why internal controls are important.
5- 8Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Beginning Bank Balance+
Deposits processed by the bank-
Checks which have cleared the account+/-
Other adjustments made by the bank=
Ending Balance
Bank Statement
BankStatements
Learning Objective 5-3: Explain the bank reconciliation procedure.
5- 9Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Identify Differences BetweenEnding cash balance reported on bank
statementCompared to
Ending cash balance in depositor’s accounting records.
Provides information for adjusting journal entries.
BankReconciliationObjective
Learning Objective 5-3: Explain the bank reconciliation procedure.
5- 10Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Balance per Bank
+ Deposits in Transit
- Outstanding Checks
± Bank Errors
Adjusted Balance
Balance per Depositor
+ Deposits by Bank
- Bank Adjustments
± Book Errors
Adjusted Balance
EndResult:AdjustedBank
Balance=
AdjustedBookBalance
=
BankReconciliationProcess
Learning Objective 5-3: Explain the bank reconciliation procedure.
5- 11Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
All reconciling items on the
book side require an
adjusting entry to the cash
account.
BankReconciliationBalance per Depositor
+ Deposits by Bank
- Bank Adjustments
± Book Errors
Adjusted Balance
Learning Objective 5-3: Explain the bank reconciliation procedure.
5- 12Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Bond Investments
Capital Stock
Investments
Current AssetsAlmost As Liquid As
Cash
Readily Marketable
Marketable Securities
are . . .
Short-termMarketableSecurities
Learning Objective 5-4: Explain how short-term marketable securities are reported on the balance sheet.
5- 13Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Ifacompanymakescreditsalestocustomers,someaccountsinevitablywill
turnouttobeuncollectible.
PAST DUE
UncollectibleAccounts
Learning Objective 5-5: Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.
Credit managers must estimate the probable bad debts
expense (or uncollectible accounts expense) of the firm.
5- 14Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
BalanceSheetPresentation
Thenetrealizablevalueistheamountofaccountsreceivablethatthebusiness
expectstocollect.
Accounts ReceivableLess: Allowance for Bad DebtsNet realizable value of accounts receivable
Learning Objective 5-5: Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.
5- 15Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
CashDiscountsSellers offer cash discounts to customers which are a
deduction from the invoice price granted to induce early payment of the amount due.
Terms
Time
Due
Purchase or Sale
Discount Period
Invoice totalless discount
Credit Period
Invoice total due
2/10,n/30
Discount Period
Otherwise, Net (or invoice
total) is Due
CreditPeriod
Discount Percent
Learning Objective 5-5: Discuss how accounts receivable are reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts.
5- 16Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
A note is a written
promise to pay a specific amount at a
specific future date.
NotesReceivable
Notes typically include an
interest chargefor use of the money during
the time period of the note.
Learning Objective 5-6: Explain how notes receivable and related accrued interest are reported on the balance sheet.
5- 17Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Inventory
Goods ownedand held for sale
to customers
Classified as a current
asset
Inventories
Learning Objective 5-7: Explain how inventories are reported on the balance sheet.
5- 18Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
We use one of these inventory valuation methods to determine cost of inventory
sold.
InventoryCost-FlowAssumptions
Specific identification
LIFO
Weighted-average
FIFO
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 19Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cost of Goods Available for SaleAug. 1 Beg. Inventory 10 units @ 91$ = 910$ Aug. 3 Purchased 15 units @ 106$ = 1,590$ Aug. 17 Purchased 20 units @ 115$ = 2,300$ Aug. 28 Purchased 10 units @ 119$ = 1,190$
55Retail Sales of GoodsAug. 14 Sales 20 units @ 130$ = 2,600$ Aug. 31 Sales 23 units @ 150$ = 3,450$
43
The Bike Co.’s purchases are recorded separately because the costs can change from one purchase to another. TBC has recorded two retail sales during the month.
InventoryCost-FlowAssumptions
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 20Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
SpecificIdentification
Whenaunitissold,the
specificcostoftheunitsoldisaddedtocostofgoodssold.
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 21Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Cost of Goods Available for Sale During
the Year
Units Available for Sale During
the Year÷
Weighted-Average
Calculate the average cost of the items in beginning inventory plus purchases
made during the year.
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 22Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
$5,990 ÷ 55 = $108.9091
Weighted-Average
Cost of Goods Sold$108.9091 × 43 =
$4,683.09
Ending Inventory$108.9091 × 12 =
$1,306.91
DateAug. 1 10 @ $91 = $910Aug. 3 15 @ $106 = 1,590 Aug. 17 20 @ $115 = 2,300 Aug. 28 10 @ $119 = 1,190 Total 55 $5,990
Purchases
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 23Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Costs of Goods Sold
Oldest Costs
Ending Inventory
Recent Costs
First-In,First-Out(FIFO)
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
The first-in, first-out (FIFO) method assigns the oldest costs to cost of goods sold and the
recent costs to ending inventory.
5- 24Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
First-In,First-Out(FIFO)
10 × 119$ = 1,190$ 2 × 115$ = 230
12 1,420$
Ending Inventory
DateAug. 1 10 @ $91 = $910Aug. 3 15 @ $106 = 1,590 Aug. 17 20 @ $115 = 2,300 Aug. 28 10 @ $119 = 1,190 Total 55 $5,990
Purchases
10 × 91 = 910$ 15 × 106 = 1,590 18 × 115 = 2,070 43 4,570$
Cost of Goods Sold
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 25Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
25
Costs of Goods Sold
Recent Costs
Ending Inventory
Oldest Costs
Last-In,First-OutMethod(LIFO)Last-in, last-out (LIFO) method assigns recent
costs to cost of goods sold and the oldest costs to the ending inventory.
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 26Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Last-In,First-OutMethod(LIFO)
10 × 91$ = 910$ 2 × 106$ = 212
12 1,122$
Ending Inventory10 × 119$ = 1,190$ 20 × 115$ = 2,300 13 × 106$ = 1,378 43 4,868$
Cost of Goods Sold
DateAug. 1 10 @ $91 = $910Aug. 3 15 @ $106 = 1,590 Aug. 17 20 @ $115 = 2,300 Aug. 28 10 @ $119 = 1,190 Total 55 $5,990
Purchases
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 27Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
TheImpactofChangingCosts
In periods of rising costs, LIFO results
in lower ending inventory and higher cost of goods sold
than FIFO.
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 28Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
TheImpactofInventoryQuantityChanges
Changes in the quantities of inventory will have an impact on profits that is
dependent on the cost-flow assumption used and the extent of cost changes
during the year.Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 29Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
InventoryAccountingSystemAlternatives
Periodic Inventory System
Cost of goods sold is determined
at the end of the fiscal period.
Cost of goods sold is determined
each time inventory is sold.
Perpetual Inventory System
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 30Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
InventoryAccountsRETAILFIRMS
• MerchandiseInventory
MANUFACTURINGFIRMS
• RawMaterials• WorkinProcess• FinishedGoods
Learning Objective 5-8: Discuss the alternative inventory cost flow assumptions and generalize about their respective effects on the income statement and balance sheet when price levels are changing.
5- 31Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
InventoryErrorsErrors in the amount of ending
inventory have a direct dollar-for-dollar effect on cost of goods sold
and net income.
For this reason, independent auditors, income tax auditors,
and financial analysts look closely at reported inventory
amounts.
Learning Objective 5-9: Discuss the impact of inventory errors on the balance sheet and income statement.
5- 32Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
LowerofCostorMarketInventorymustbereportedatmarketvalue
whenmarket islower thancost.
Can be applied three ways:(1) Separately to each
individual item.(2) to broad categories of
inventory.(3) to the whole inventory.
Defined as current replacement cost (not sales price).Consistent with
the conservatismprinciple.
Learning Objective 5-9: Discuss the impact of inventory errors on the balance sheet and income statement.
5- 33Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Examples:Insurance
Rent
Prepaid Expenses require adjusting
entries.Assets are decreased.
Expenses are increased.
Prepaid expenses are expenses that have been paid in the current fiscal
period but will not be subtracted from revenue until a subsequent fiscal
period.
PrepaidExpensesandOtherCurrentAssets
Learning Objective 5-10: Explain what prepaid expenses are and how they are reported on the balance sheet.
5- 34Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
DeferredTaxAssetsA deferred tax asset
arises when an income tax expense is
recognized for financial accounting purposes in a fiscal year before the fiscal year in which it is
deductible in the determination of taxable income.
Learning Objective 5-10: Explain what prepaid expenses are and how they are reported on the balance sheet.
5- 35Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
5- 36Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Marshall,McManus,andViele11thEdition
AccountingWhattheNumbersMeanCHAPTER6: AccountingforandPresentationofProperty,Plant,
andEquipment,andOtherNoncurrentAssets
5- 37Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Land
Equipment
Buildings
Intangible Assets
Natural Resources
1) Classifiedasassetsbecausetheyareownedbytheorganization.
2) Havetheabilitytogeneraterevenuebeyondoneyear.
NoncurrentAssets
5- 38Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AcquisitionAccounting for acquisition of
the asset.
UseAccounting for
depreciation of the asset.
Accounting for maintenance and
repair costs.
DisposalAccounting for the disposition of the
asset.
PrimaryIssuesforNoncurrentAssets
5- 39Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Land is a non-depreciable asset.
Purchaseprice
Real estatecommissions
Title insurance premiumsDelinquent
taxes
Razing costs of building on the land
Title and legal fees
All costs incurred to get land ready for use are
capitalized.
Land
Learning Objective 6-1: Illustrate the expansion of the basic accounting equation to include revenues and expenses.
5- 40Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Purchaseprice
Architecturalfees
Cost ofpermits
Excavation andconstruction costs
Installationcosts
Transportationcosts
All costs incurred to get an asset ready for use are capitalized.
BuildingsandEquipment
Learning Objective 6-1: Illustrate the expansion of the basic accounting equation to include revenues and expenses.
5- 41Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Depreciation is the allocation of the cost of an asset to the years in which the benefits of the asset are expected to be received. It is
an application of the matching concept.
CostAllocation
AcquisitionCost
(Unused)
Balance Sheet
(Used)
Income Statement
Expense
Does not reflect decline in value.
Depreciation
Learning Objective 6-2: Discuss how the terms capitalize and expense are used with respect to property, plant, and equipment.
5- 42Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
IncomeStatement
DepreciationExpense
Depreciation forthe current year
BalanceSheet
AccumulatedDepreciation
Total depreciation recorded as of balance
sheet date
Depreciation
Learning Objective 6-2: Discuss how the terms capitalize and expense are used with respect to property, plant, and equipment.
=
5- 43Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
In the early years of an asset’s life, accelerated depreciation methods result in greater depreciation expense and lower net
income than straight-line depreciation.
An
nu
al
Dep
reci
atio
n
Exp
ense
($)
Years of Life
Straight-Line Depreciation Accelerated Depreciation
Years of Life
Annu
al
Depr
ecia
tion
Expe
nse
($)
DepreciationMethods
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 44Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Straight-Line Depreciation
Years of Life
Ann
ual
Dep
reci
atio
n Ex
pens
e ($
)
Straight-Line Methods
Straight-line
Units-of-production
An
nu
al
De
pre
cia
tio
n
Ex
pe
ns
e (
$)
Years of Life
Accelerated Depreciation
Accelerated Methods
Sum-of-the-years’-digits
Declining-balance
DepreciationMethods
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 45Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Straight-LineMethod
EXAMPLEOnDecember,2016,equipmentwas
purchasedfor$50,000cash.Theequipmenthasanestimatedusefullifeof5yearsandanestimated
salvagevalueof$5,000.
SL
Cost - Estimated Salvage ValueEstimated Useful Life
Annual DepreciationExpense
=
Formula
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 46Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Annual DepreciationExpense =
Annual DepreciationExpense = $9,000
$50,000 - $5,0005 years
SL
Cost - Estimated Salvage ValueEstimated Useful Life
Annual DepreciationExpense =
Straight-lineMethod
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 47Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Depreciation Accumulated Accumulated UndepreciatedExpense Depreciation Depreciation Balance
Year (debit) (credit) Balance (NBV)2017 9,000$ 9,000$ 9,000$ 41,000 2018 9,000$ 9,000 18,000 32,000 2019 9,000$ 9,000 27,000 23,000 2020 9,000$ 9,000 36,000 14,000 2021 9,000$ 9,000 45,000 5,000
45,000$ 45,000$
Salvage Value
Depreciation stops when NBV = SALVAGE VALUE!
Straight-lineMethod
SL
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 48Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Straight-LineMethod
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000
$10,000
2017 2018 2019 2020 2021
For the year ended December 31
$41,000
$32,000
$23,000
$14,000
$5,000 $0
$5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000
2017 2018 2019 2020 2021
Boo
k Va
lue
As of December 31
Dep
reci
atio
n Ex
pens
e
Depreciation Expense is reported on the Income Statement.
Book Value is reported on the Balance Sheet.
SL
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 49Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
=
Step 2:
Annual DepreciationExpense
DepreciationExpense Per Unit
Produced
Number of Units Produced
during the Year×
DepreciationExpense Per Unit
Produced= Cost - Estimated Salvage Value
Estimated Total Units to be Made
Step 1:
Units-of-ProductionMethod
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 50Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Units-of-ProductionMethodOnDecember31,2016,equipmentwas
purchasedfor$50,000cash.Theequipmentisexpectedtoproduce100,000
unitsduringitsusefullifeandhasanestimatedsalvagevalueof$5,000.
If22,000unitswereproducedin2017,thefirstyearthattheassetwasused,whatistheamountofdepreciationexpense?
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 51Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
=Depreciation
Expense Per Unit Produced
$50,000 - $5,000 100,000
Step 1:
= $0.45 per unit
Step 2:Annual Depreciation
Expense = $0.45 per unit
× 22,000 $9,900=
Units-of-ProductionMethod
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
=
5- 52Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accumulated UndepreciatedDepreciation Depreciation Balance
Year Units Expense Balance (book value)2016 50,000$ 2017 22,000 9,900$ 9,900$ 40,100 2018 28,000 12,600 22,500 27,500 2019 * - - 22,500 27,500 2020 32,000 14,400 36,900 13,100 2021 18,000 8,100 45,000 5,000
100,000 45,000$
*No depreciation expense is recorded if the equipment is idle.
Salvage Value
Units-of-ProductionMethod
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 53Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Annual DepreciationExpense =
Double the Straight-line Depreciation
Rate
× Book Value at Beginning of Year
1
Life in Years× 2
Since we are using two times the straight-line rate, this is called the
Declining-Balance Method or (Double-Declining
Balance Method
Declining-BalanceMethod
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 54Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
On December 31, 2016, equipment was purchased for $50,000 cash. The
equipment has an estimated useful life of 5 years and an estimated residual
value of $5,000.
Calculate the depreciation expensefor 2017 and 2018 (the first two years
that the asset is used in the company.
Declining-BalanceMethod
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 55Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Double the Straight-line Depreciation Rate2 × 20% = 40%
Depreciation Expense for 2017 (yr1)40% × $50,000 = $20,000
Depreciation Expense for 2018 (yr2)40% × ($50,000 - $20,000) = $12,000
Net Book Value at Beginning of Year
Declining-BalanceMethod
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 56Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Depreciation Accumulated UndepreciatedExpense Depreciation Balance
Year (debit) Balance (NBV)2016 50,000$ 2017 20,000$ 20,000$ 30,000 2018 12,000 32,000 18,000 2019 7,200 39,200 10,800 2020 4,320 43,520 6,480 2021 2,592 46,112 3,888
46,112$
($50,000 – $43,520) × 40% = $2,592Below salvage value!
Declining-BalanceMethod
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 57Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Depreciation Accumulated UndepreciatedExpense Depreciation Balance
Year (debit) Balance (NBV)2016 50,000$ 2017 20,000$ 20,000$ 30,000 2018 12,000 32,000 18,000 2019 7,200 39,200 10,800 2020 4,320 43,520 6,480 2021 1,480 45,000 5,000
45,000$
In the latter years, depreciation is limited to NBV X 40%, but the asset cannot be depreciated below salvage value.
$1,480 = 6,480 – 5,000 salvage value
Declining-BalanceMethod
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 58Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Life in Years
$0
$2,000
$4,000
$6,000
$8,000
$10,000
1 2 3 4 5
Ann
ual
Dep
reci
atio
n
Straight-Line
$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000
1 2 3 4 5Life in Years
Ann
ual
Dep
reci
atio
n
Units-of-Production
Life in Years
Ann
ual
Dep
reci
atio
n
$0
$5,000
$10,000
$15,000
$20,000
1 2 3 4 5
Double-Declining-Balance Total depreciation at
end of useful life will be the same regardless of depreciation method
ComparingDepreciationMethods
Learning Objective 6-3: Describe alternative methods of calculating depreciation for financial accounting purposes and compare the relative effects of each on the income statement and the balance sheet.
5- 59Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
DepreciationforTaxReporting
MostcorporationsusetheModifiedAcceleratedCostRecoverySystem (MACRS)fortaxpurposes.
MACRS depreciationprovidesforrapidwrite-offofanasset’scostinordertostimulatenew
investment.
Salvage values are ignoredUseful lives are set by the Internal Revenue Service
Learning Objective 6-4: Describe the accounting treatment of maintenance and repair expenditures.
5- 60Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Preventative maintenance
expenditures and routine repair costs are clearly expenses
of the period in which they are
incurred.
MaintenanceandRepairExpense
Learning Objective 6-5: Explain why depreciation for income tax purposes is an important concern of taxpayers and how tax differs from financial accounting depreciation.
5- 61Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Recording cashreceived (debit).
Removing accumulateddepreciation (debit).
Update depreciationto the date of disposal.
Removing theasset cost (credit).
Recording again (credit)
or loss (debit).
DisposalofDepreciableAssets
Journalize disposal by:
Learning Objective 6-6: Describe the effect on the financial statements of the disposition of noncurrent assets, either by sale or abandonment.
5- 62Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
•Cash > BV, record a gain (credit).•Cash < BV, record a loss (debit).•Cash = BV, no gain or loss.
DisposalofDepreciableAssets
Recording again (credit)
or loss (debit).
Determining Gain or Loss
Learning Objective 6-6: Describe the effect on the financial statements of the disposition of noncurrent assets, either by sale or abandonment.
5- 63Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
An operating lease is an
ordinary lease for the use of an asset that does not involve any
attributes of ownership.
A capital lease results in the
lessee (renter) assuming
virtually all of the benefits and
risks of ownership for
the leased asset.
AssetsAcquiredbyCapitalLease
Learning Objective 6-7: Describe the difference between an operating lease and a capital lease.
5- 64Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
*Capital Lease Characteristics:1. Transfers ownership to lessee.2. Includes nominal purchase price.3. Lease term is ³ 75% of life of asset.4. Present value of lease payments is ³ 90% of fair value of
asset.
AssetsAcquiredbyCapitalLease
Only one criteria needs to be met!
Learning Objective 6-7: Describe the difference between an operating lease and a capital lease.
5- 65Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
BuyorLeaseanAsset?
Computer EquipmentCost: $217,765 Issue a 10%, 6 year Note Payable Annual payment: $50,000.
Computer EquipmentAnnual payment: $50,000. Present Value of Lease Payments: $50,000 @ 10%, 6 years = $217,765
BuyorLease?
Learning Objective 6-8: Explain the similarities in the financial statement effects of buying an asset compared to using a capital lease to acquire the rights to an asset.
5- 66Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
= Liabilities + Owners' Equity
Net income = Revenues - Expenses
1. Date of Acquisition Computer Equipment
Capital Lease Liability
+217,765 +217,7652. Annual Depreciation
Accumulated Depreciation
Depreciation Expense
3. Annual Lease Payment -Lease Liability Interest Expense
Balance Sheet Income Statement
Assets
Lease
= Liabilities + Owners' Equity
Net income = Revenues - Expenses
1. Date of Acquisition Computer Equipment
Note Payable
+217,765 +217,7652. Annual Depreciation
Accumulated Depreciation
Depreciation Expense
3. Annual Lease Payment -Note Principal Interest Expense
Balance Sheet Income Statement
Assets
Leasing the computer is essentially the same as buying it. Both methods of acquiring the asset yield the same economic impact and the same effect on the
financial statements.
BuyorLeaseanAsset?
Learning Objective 6-8: Explain the similarities in the financial statement effects of buying an asset compared to using a capital lease to acquire the rights to an asset.
Buy
5- 67Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
IntangibleAssets
Noncurrent assetswithout physical
substance.
Often provideexclusive rights
or privileges.
Useful life isoften difficultto determine.
Usually acquiredfor operational
use.
Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
IntangibleAssets
5- 68Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
IntangibleAssetsRecordatcurrent
cashequivalentcost,includingpurchaseprice,legalfees,and
filingfees.
• Patents• Copyrights• Leaseholds• LeaseholdImprovements
• FranchisesandLicenses• TrademarksandTradeNames
• Goodwill
Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
5- 69Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
IntangibleAssets
• Amortizationfortheseintangibles:– Patent=20years– RegisteredTrademark=Unlimitedlife
• Usestraight-linemethod.• Amortizeoverlegallifeorusefullife,whicheverisless
Amortization is the term used to refer to the allocation of the cost of an intangible asset over
its useful life. The process is similar to straight-line depreciation.
CopyrightLife of artist + 70 years
Patent20 years
Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
5- 70Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Only ‘purchased’ goodwill is an
intangible asset.
Occurs when onecompany buys
another company.
The amount by which thepurchase price exceeds the fair
market value of net assets acquired.
GoodwillGoodwill
Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
5- 71Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
GoodwillCruiser’sInc.paid$1,000,000topurchaseallofJamesCompany’sassetsandassumedliabilitiesof$100,000.Theacquiredassetswereappraisedatafairvalueof$800,000.
Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
If we subtract the $100,000 of debt, then the fair value of the net assets equal $700,000.
5- 72Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
What amount of goodwill should be recorded on Cruiser Inc.’s books?
a. $100,000.b. $200,000.c. $300,000.d. $400,000.
Goodwill
Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
5- 73Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
What amount of goodwill should be recorded on Cruiser Inc.’s books?
a. $100,000.b. $200,000.c. $300,000.d. $400,000.
FMV of Assets 800,000$ Debt Assumed 100,000 FMV of Net Assets 700,000$ Purchase Price 1,000,000 Goodwill 300,000$
Goodwill
Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
5- 74Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Goodwill is notamortized.
Instead, it is tested annually for impairment.
If the book value of goodwill exceeds its fair
value, an impairment loss will be recorded.
Goodwill
Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
5- 75Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Total cost,including
exploration anddevelopment,is charged to
depletion expenseover periods
benefited.
Examples: oil, coal, gold
Extracted fromthe natural
environmentand reportedat cost less
accumulateddepletion.
NaturalResources
Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
5- 76Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
NaturalResources
Depletion is the term used to refer to the
allocation of the cost of a natural resource over its useful life.
The process is similar to units-of-production
depreciation.Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
5- 77Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
OtherNoncurrentAssets
Long-term Investments
Notes Receivables (with maturities more than a year after the balance
sheet date)
Long-term Deferred Income Tax AssetsWhen these assets become current, they will
be reclassified to current assets.
Learning Objective 6-9: Discuss the meaning of various intangible assets, how their values are measured, and how their costs are reflected in the income statement.
5- 78Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Future Value: the value at some future date of an investment made today.
$ 1,000 Invested at 10% has a future value of
Today 1 year 2 years 3 years 4 years
$ 1,464
TimeValueofMoney
Present Value: the value now of an amount to be received or paid at some future date.
Today 1 year 2 years 3 years 4 years
$ 1,464$ 1,000 Is the present value at 10% of
Learning Objective 6-10: Explain the role of time value of money concepts in financial reporting and their usefulness in decision making.
