depreciation in infrastucture and busuness.ppt

depreciasion

1. Nature of Fixed AssetsNature of Fixed Assets
LIABILITIES
OWNER’S
EQUITY
Fixed assets are long-
term, relatively
permanent, tangible
assets such as buildings
and equipment used to
help produce revenues.
REVENUES
ASSETS
EXPENSES
FixedFixed
AssetsAssets
All fixed assets except
land lose their capacity
to provide services.
This loss of productive
capacity is recognized as
depreciation expense.

2. Costs of Acquiring Fixed Assets Include:Costs of Acquiring Fixed Assets Include:
Installation and assembling
Repairs and reconditioning (used assets)
Testing and modifying
Insurance while asset is in transit

3. Mistakes in installation
Damage during unpacking and installing
Costs of Acquiring Fixed Assets Exclude:Costs of Acquiring Fixed Assets Exclude:

4. Factors that Determine Depreciation ExpenseFactors that Determine Depreciation Expense
minus
Initial Cost $24,000a

5. equals
Factors that Determine Depreciation ExpenseFactors that Determine Depreciation Expense
Estimated salvage value $2,000b
minus
Initial Cost $24,000a

6. divided by
Depreciable Cost $22,000
equals
Factors that Determine Depreciation ExpenseFactors that Determine Depreciation Expense
Estimated salvage value $2,000b
minus
Initial Cost $24,000a

7. equals
Estimated Useful Life 5 yearsc
divided by
Depreciable Cost $22,000
equals
Factors that Determine Depreciation ExpenseFactors that Determine Depreciation Expense
Estimated salvage value $2,000b
minus
Initial Cost $24,000a

8. Periodic Depreciation Expense $4,400 per year
equals
Estimated Useful Life 5 yearsc
divided by
Depreciable Cost $22,000
equals
Factors that Determine Depreciation ExpenseFactors that Determine Depreciation Expense
Estimated salvage value $2,000b
minus
Initial Cost $24,000a

9. Recording DepreciationRecording Depreciation
General Journal
Description DebitCredit
General Ledger
Equipment 24,000
Cash 24,000
Equipment
24,000
AA
AA
Accum. Depreciation
Depreciation Expense
Record straight-line depreciation for first year.
BB
BB
Purchase equipment for $24,000. Estimated salvage
value is $2,000 and useful life is 5 years.
AA

10. Record straight-line depreciation for first year.
Description DebitCredit
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum. Depreciation 4,400
Equipment
24,000
AA
BB
AA
Accum. Depreciation
Depreciation Expense
BB
Recording DepreciationRecording Depreciation
Purchase equipment for $24,000. Estimated salvage
value is $2,000 and useful life is 5 years.
AA

11. Purchase equipment for $24,000. Estimated salvage
value is $2,000 and useful life is 5 years.
AA
Record straight-line depreciation for first year.
Description DebitCredit
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum. Depreciation 4,400
Equipment
24,000
AA
BB
AA
Accum. Depreciation
Depreciation Expense
BB
$24,000 - $2,000
5 years
= $4,400
Recording DepreciationRecording Depreciation

12. Record straight-line depreciation for first year.
Description DebitCredit
Equipment 24,000
Cash 24,000
Depreciation Expense 4,400
Accum. Depreciation 4,400
Equipment
24,000
AA
BB
AA
Accum. Depreciation
4,400BB
Depreciation Expense
4,400BB
BB
$24,000 - $2,000
5 years
= $4,400
Recording DepreciationRecording Depreciation
Purchase equipment for $24,000. Estimated salvage
value is $2,000 and useful life is 5 years.
AA

13. Equipment
24,000AA
Accum. Depreciation
4,400BB
Depreciation Expense
4,400BB
Calculation of Book ValueCalculation of Book Value

14. Calculation of Book ValueCalculation of Book Value
Equipment
24,000AA
Accum. Depreciation
4,400BB
Depreciation Expense
4,400BB
Original Cost $24,000
Less Accum. Depr. 4,400
Book Value 19,600

15. The following four depreciation methods are
acceptable for Financial Accounting purposes:
1. Straight-Line
2. Double declining balance
3. Declining-Balance
4. Sum-of-Years-Digits
5. Sinking fund method
Straight-lineStraight-line is far more widely used than other
methods.
Declining-balance Declining-balance and sum-of-years-digitssum-of-years-digits are
known as accelerated depreciation methods.
Depreciation MethodsDepreciation Methods

16. Comparing Depreciation MethodsComparing Depreciation Methods
Straight-Line
Method
D
e
p
r
e
c
ia
t
io
n

(
$
)
10,000
8,000
6,000
4,000
2,000
0
Life (years)
Declining-Balance
Method
Life (years)

17. Accum. Depr.Book Value Depr. Book Value
at Beginningat Beginning Expense at End
YearCost of Year of Year for Year of Year
1$24,000 $24,000.00 $4,400.00$19,600.00
2 24,000$ 4,400.0019,600.00 4,400.0015,200.00
3 24,000 8,800.00 15,200.00 4,400.00 10,800.00
4 24,00013,200.00 10,800.00 4,400.00 6,400.00
5 24,00017,600.00 6,400.00 4,400.00 2,000.00
Straight - Line DepreciationStraight - Line Depreciation
Cost ($24,000) - salvage value ($2,000)Cost ($24,000) - salvage value ($2,000)
Estimated Useful Life (5 years)Estimated Useful Life (5 years)
=
Annual DepreciationAnnual Depreciation
Expense ($4,400)Expense ($4,400)

18. Depreciation Methods
•Straight Line Method

19. Depreciation Methods
•Declining Balance Method

20. Depreciation Methods
•Double Declining Method

21. Depreciation Methods
•Sum Of The Year Method

22. Depreciation Methods
•Sinking Fund Method

23. Solved Example
•The original value of an industrial unit is 22 MM L.E. and
its expected Salvage-Value is 2 MM L.E. The service life of
the unit is estimated to be 10 years.
•Determine the asset ( or book ) value at the end of each year
during the service-life of 10 years, using the following
depreciation methods :-
• Straight-Line method.
• Textbook declining balance method.
•Sum of the year digits method.
•Sinking fund method with a sinking-fund-factor of 0.09.

24. When fixed assets are sold, the owner may
break even, sustain a loss, or realize a gain.
1.If the sale price is equal to book value,
there will be no gain or loss.
2.If the sale price is less than book value,
there will be a loss equal to the difference.
3.If the sale price is more than book value,
there will be a gain equal to the difference.
Gain or loss will be reported in the income
statement as Other Income or Other Loss.
Sale of Fixed AssetsSale of Fixed Assets