Accounting Principles: Depreciation and Asset Valuation

Key Accounting Formulas and Concepts

Book Value = Asset - Accumulated Depreciation

• Discount: Market Rate > Stated Rate; therefore, Interest Expense > Cash.
• Premium: Market Rate < Stated Rate; therefore, Interest Expense < Cash.

Understanding Capitalized Assets

In accounting, what is the meaning of capitalized?

Capitalized means that an asset account is debited (increased) for the cost of an asset.

Asset Costs and Depreciation Entries

Which of the following would NOT be considered part of the cost of machinery and equipment?

Repairs and maintenance after start-up.

It is determined that an equipment’s depreciation expense for the year is $8,000. The journal entry to record this will be:

Debit Depreciation Expense – Equipment $8,000; Credit Accumulated Depreciation $8,000.

Depreciation Calculation Examples

Straight-Line Method

A new vehicle was purchased on January 1 for $45,000. It has a salvage value of $9,000 and a useful life of 6 years. To the nearest dollar, how much will be the depreciation expense for the first year using the straight-line method?

Answer: $6,000

Units of Production Method

Cesario Corporation purchases a machine for $125,000. It has an estimated salvage value of $10,000 and is expected to produce 50,000 units in its lifetime. During the first year of operation, it produced 14,500 units. To the nearest dollar, the depreciation for the first year under the units of production method will be:

Answer: $33,350

Double-Declining Balance Method

A company purchased furniture on January 1. Its cost was $15,600, and it had a residual value of $1,600. Its useful life is determined to be 3 years. Using double-declining balance depreciation, the depreciation for year 1 to the nearest dollar will be:

Answer: $10,400

Asset Disposal and Errors

A truck costing $65,000 has accumulated depreciation of $60,000. The truck is sold for $2,500. The journal entry to record this transaction is to:

• Debit Cash for $2,500
• Debit Loss on Disposal for $2,500
• Debit Accumulated Depreciation – Truck for $60,000
• Credit Truck for $65,000

A company replaced an engine on a vehicle and debited the amount to Repairs and Maintenance expense, rather than debiting the Vehicle account. Which of the following would occur because of this error?

Assets would be understated.

Intangible Assets and Marketable Securities

Assets that CANNOT be seen, touched, or held are called:

Intangible assets.

Which of the following marketable securities are reported at market value on the Balance Sheet date?

Available-for-sale and trading securities.