đź“… Tuesday, June 4th, 2024

Wisdom cannot come by railroad or automobile or airplane or be hurried up by telegraph or telephone.

— John Burroughs

MGT011A Lecture: long-term assets

  • long-term assets
    • plant assets, e.g., production plant - depreciation
    • intangible, e.g., copyrights, patents - amortization
    • natural resources, e.g., gas deposits - depletion
  • how to journalize long-term assets
    • record acquisition cost (a.k.a. historical cost) as asset account
    • journalize expense over useful life as depreciation, amortization, or depletion
      • account for salvage value when depreciating
      • land itself (not including what’s built on top) is not depreciated, because it can be used indefinitely
    • account for future expenditures related to assets as they are used in separate accounts
      • maintenance: future costs for repairing or maintaining the equipment shouldn’t be added to the asset account)
      • adding to asset: improving the asset in a way that introduces brand new functions (e.g., adding a new wing to a hospital building) requires creating a separate asset account that need depreciation over time.
  • methods of journalizing annual expense
    • straight-line method: annual depreciation = (acquisition cost - salvage value) / estimated useful life
    • units-of-production method: depreciation per unit = (acuiqision cost - salvage value) / total estimated units of production
      • instead of depreciation based on time, estimate expense based on the number of units for sale (or other metrics of use, like number of miles for a car) produced by the equipment
    • double-declining method
      • first year’s expense is the highest; annual expense decreases for subsequent years
      • straight-line depreciation rate = 100% / expected life
      • double declining balance rate = 2 * straight-line rate
      • net book value = acquisition cost - accumulated depreciation
      • current year expense = net book value * double declining balance rate
        • formula does not account for salvage value initially, but depreciation stops at the salvage value (i.e., at the last year of useful life)
  • salvaging
    • debit cash (+A): records cash earned for sale
    • debit accumulated depreciation (-XA, +A): clear the account
    • credit equipment (-A): remove equipment acquisition cost from ledger
    • credit gain on sale (+Gain, +SE) (for selling more than the net book value, i.e., at a gain)
    • or: debit loss on sale (-Gain, -SE) (for selling less than the net book value, i.e., at a loss)