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)