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9.5 Depreciation

9.5 Depreciation. Decreasing the value of a fixed asset over its useful life. What is Depreciation?. FIXED ASSETS Examples: Office Furniture Automobile Building Except Land We do not depreciate land. What do we Depreciate?.

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9.5 Depreciation

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  1. 9.5 Depreciation

  2. Decreasing the value of a fixed asset over its useful life What is Depreciation?

  3. FIXED ASSETS • Examples: • Office Furniture • Automobile • Building • Except Land • We do not depreciate land What do we Depreciate?

  4. To show original cost of fixed assets and amount used up over fiscal period • To help financial statements up-to-date Why do we Depreciate?

  5. Straight Line Depreciation - Divides up the net cost of the asset equally over the years of the assets life • Declining Balance - A method of calculating the annual depreciation of an asset as a fixed percentage of the remaining value of the asset Methods of Depreciation

  6. Eg. A business purchases a new company car on January 1, 2006. Straight Line -- Estimate value of asset at end of its useful life Cost – Salvage Value Estimate life in years Jan. 01, 2006 Cost of car $20 000 Estimated Salvage Value $5 000 Estimated Years of Life 5 Years 20 000 - 5 000 5 years Straight Line

  7. Keeps track of total deprecation  “CONTRA ASSET” (CR) 20 000 - 5 000 = 3 000 5 years Expense  I/S Salvage Value

  8. Accumulated depreciation account is a valuation or contra account, that keeps track of total depreciation • Valuation- one that is used, together with an asset account to show true net value of asset Accumulated Depreciation

  9. Jan 01 – Journalize the purchase of the automobile. • Dec. 31, 2006 – Journalize the adjustment to record the 1st year of deprecation Automobile 20 000 Bank 20 000 Adj. Entry Depreciation Expense- Auto 3 000 Accumulated Deprecation- Auto 3 000 Contra Asset

  10. Dec. 31 2007, 2008, 2009, 2010- Journalize the adjusting entries for depreciation for each following year. Depreciation Expense- Auto 3 000 Accumulated Deprecation- Auto 3 000 All the same!!

  11. Dec. 31, 2010 – Journalize the entry if the business sells the auto at the end of the five years for $5 000 Bank 5 000 Acc. Dep.- Auto 15 000 Automobile 20 000

  12. Declining Balance – • Eg. Auto- 30% Government %, pg. 345 in text + 4 200 + 2 940 + 2 058 B) Declining Balance + 1 440.60

  13. Journalize the adjusting entries to record the depreciation for: • Dec. 31, 2006 (year 1) • Dec. 31, 2007 (year 2) Depreciation Expense- Auto 6 000 Accumulated Deprecation- auto 6 000 Depreciation Expense- Auto 4 200 Accumulated Deprecation- auto 4 200

  14. Dec 31, 2008 (year 3) Depreciation Expense- Auto 2 940 Accumulated Deprecation- auto 2 940

  15. Answer the following: • How much depreciation was accumulated (contra asset) after year 3? • $13 140 • How much depreciation was used up in year 3? • 2 940 (expense)

  16. Depreciation calculations are recorded in the Adjustment Columns on the worksheet. You must extend these entries to the appropriate columns! Depreciation Expense- Auto will extend to the __ side of the __________ because it is treated like any other ______. (p. 343) Accumulated Depreciation- Auto is extended to the __ side of the ____________. Accumulated Depreciation is an example of a _____ account because it has the opposite balance of normal assets. (p.344) DR Income Statement Expense Balance Sheet CR Contra

  17. 9.5 Depreciation pg. 336-348 • Read p. 341-344 in textbook, review the worksheet, income statement & balance sheet • Answer Exercise questions #1,2 p. 348-349 (t), p. 242-243 (w) • Ex. # 3,4,6 p. 308-309 (t), p.219-222(w) • Ex. 1 Parts A, B, C, D (P. Tang) p. 320 (t), p. 223-227 (w) Let’s Try it!

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