Non current Assets (Long-term Assets) and Depreciation-
Non current Assets (Long-term Assets) and Depreciation-
Issues associated with long-term assets include original cost (adjustments to original cost, useful life of the asset, salvage value, estimates of asset use (depreciation expense or aging) and retirement (sale) of the asset.
The original cost of an asset includes cost of acquiring and setting up an asset for normal use. Adjustments to the original cost can occur if new events lead to a change in the asset's useful life or a material change in the way the asset is used. For example, the original cost can increase if rehabilitation of the asset prolongs its useful life. Also, the original cost can fall through an asset impairment charge if the asset becomes obsolete prematurely. The entry is
Property, plant & equipment X
Cash X
An asset's useful life is the time period for which the company anticipates to gain economic benefits from the long-term asset.
Salvage value is the expected value associated with the asset at the end of its useful life.
Estimates of asset use (depreciation expense for physical assets, amortization expense for intangible assets and depletion expense for natural resources) are functions of the asset's original cost, salvage value and useful life. Depreciation methods include straight-line depreciation, sum-of-the digits' depreciation, double declining balance depreciation and units-of-production depreciation. Tax reporting for depreciation differs from financial reporting and is NOT affected by a company's choice of depreciation procedure; cash flows are NOT affected.
Irrespective of the depreciation method, the appropriate entry for a given year is:
Depreciation expense X (Income statement)
Accumulated depreciation X (Contra-Asset)
Depreciation expense is a non-cash expense (the cash was paid when the asset was acquired) and is an "add-back" to income when the indirect cash flow statement is used.
Straight-line depreciation is calculated as (OC-S)/N per year where OC is original cost, S is salvage value and N is the useful life of the asset.
Sum-of-the years' digits depreciation is calculated as ((N+1-year)/SUM)(OC-S) where SUM = N(N+1)/2 (the sum of the digits [for a 5 year asset the sum is 1+2=3+4+5 = 15 or 5*6/2]) and year is the aging measure (1 for the first year, 2 for he second year,…).
Double declining balance depreciation is calculated as 2/N * (Net book value). Salvage value is not used here except as a limit to the total depreciation expense allowed over several years.. In some cases (when there is a low salvage value), it is necessary to switch to straight-line depreciation in the later years to complete the depreciation process.
Units-of-production depreciation is calculated as (Period production)/(Estimated total lifetime production) (OC-S).
Asset sales (retirements)are calculated as or
Cash A Cash A
Accumulated depreciation B Accumulated depreciation B
Loss Z-(A+B) Gain (A+B)-Z
Property, plant & equipment Z Property, plant & equipment Z
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