Definitions:

1. Real property- consist of land, and improvements (sidewalks and parking lots), buildings, and
other structures attached to the land.
2. Tangible Personal Asset- includes machinery, equipment, furniture, and fixtures that can be
remove elsewhere.
3. Capitalized Costs- are all cost recorded as a part of the assets’ costs.
4. Tangible Personal Property- The term “personal” means that the property has a physical
substance and is something other than real estate. Personal property is owned by the business,
not by the individual owners.
5. Land Improvements- includes the costs of installing permanent permanents roadways, curbing,
gutters and drainage facilities. They are depreciated.
6. Depreciation- things that have limited life and will get used up or deteriorate over time. It is the
allocation of cost/asset’s useful life. Does not refer to the decrease in market value.
7. Accumulated Depreciation shows all depreciation that has been taken during the asset’s life.
8. Net Book Value- The balance sheet shows a long-term asset’s cost minus its accumulated
depreciation.
9. Fair market value- which is the asset’s price on the open market
10. Salvage Value- is an estimate of the amount that could be obtained from an asset’s sale or
disposition at the end of its useful life.
11. Residual Value/ Scrap Value- a.k.a. salvage value
12. Net Salvage Value- is the salvage value of the asset less any costs to remove or sell it.
13. Disposition of Assets- involves removing the asset’s cost and its accumulated depreciation from
the firm’s accounting records.
14. Gain - is the disposition of an asset for more than its book value.
15. Loss is the disposition of an asset for less than its book value.

Book Value= Cost- Accumulate Depreciation

16. Intangible assets- patent (U.S. patent and Trademark office), copyright (granted by federal
government), franchises (right grante by governmental unit & exclusive dealership, Trademarks,
trade names, and brand names are used to build consumer confidence and loyalty. Computer
software consists of written program.
17. Goodwill represents the value of a business in excess of the value of its identifiable asset

Important notes to remember:

- The PPE classification does not include assets purchased for investment reasons.
- Assets classified for investment purposes is classified as other assets or investments.
- If the land and building are bought for a SINGLE price, the purchase price is allocated between
the LAND and the BUILDING. The building depreciates; Land do not depreciate.
- If a building or other PPE is constructed and used by the businesses, the capitalized cost
includes: the capitalized costs include all costs of labor, materials, permits and fees, insurance,
measurable direct overhead, and other reasonable and necessary costs of construction. Interest
costs incurred on borrowed funds during the construction period are capitalized as part of the
asset.
 - Assets that are used over a year are capitalized. They have descriptive names. Namely: Office
Equipment, Store Equipment, Vehicles, or Buildings.

Particulars
Land Improvements Cost Debit
Depreciation Depreciation Expense Debit
Accumulated Depreciation Credit
(contra-asset account)

Costs of Equipment and Other Tangible Personal Property

The total cost of an asset can consist of several elements. Each element is debited to the account for that
asset. The acquisition cost of an asset includes:
- gross purchase price less discounts, including cash discounts for prompt payment;
- transportation costs;
- installation costs;
- costs of adjustments or modifications needed to prepare the asset for use.
Cost of Land and Building
- it includes purchase price, legal costs in connection with acquisition, abstracts, title insurance,
recording fees, and any other costs paid by the purchaser that are related to the acquisition.
- The Acquisition cost of land purchased for a building site should include NET COSTS-
SALVAGE VALUE. Salvage value refers to the unwanted buildings and gradings.
- LAND is not depreciated; only the BUILDINGS depreciate.
DEPRECIATION METHODS:
1. Straight Line Method- an equal amount of depreciation is recorded for each period over the
useful life of the asset.
o If the asset is acquired during the first 15 days of the month, depreciation is taken for the
full month. If the asset is acquired after the 15th, depreciation starts in the following
month. ***
Formula: Depreciation= Cost-Salvage Value
Estimated Useful Life

2. Declining-Balance Method- the book value of an asset at the beginning of the year is multiplied
by a percentage to determine depreciation for the year.
o Accelerated Mode of Depreciation- A method of depreciating an asset’s cost that
allocates greater amounts of depreciation to an asset’s early years of useful life.
o The declining-balance computation ignores salvage value until the year in which
the book value is reduced to estimated salvage value.
 o
o Most common rates used is the double-declining-balance (DDB). uses a rate equal to
twice the straight-line rate and applies that rate to the book value of the asset at the
beginning of the year.
o STEPS IN DDB
 Step 1: Calculate the straight-line rate.

 Step 2: Calculate the double-declining rate. The double-declining rate is the

straight-line rate multiplied by 2, or 40 percent (20 percent × 2).
 Step 3: Compute depreciation for the period by multiplying the book value by the
double-declining rate. Repeat this step each year during the asset’s useful life
until the year in which the net book value would be less than salvage value.
 Step 4: In the final year of depreciation, take only the amount of depreciation that
will reduce the asset’s net book value to its salvage value.

3. Sum-of-the-Years’-Digits Method- another accelerated method of depreciation. a fractional part

of the asset cost is charged to expense each year.

- Denominator (the bottom)= sum of the years digit; the number of the assets useful life.
o Example: 5 years estimated useful life: (1+2+3+4+5)= 15
- Numerator (top part)= s the number of years remaining in the useful life of the asset.
o Example: 5/15- first year; 4/15- second year. (DESCENDING ORDER0
- If for example, hinihingi lang yung month kahit saang year. Just do this:
o $2,160 × 5/15 (1st year fraction) × 8/12 (8 months)  $480
o $2,160 × 4/15 (2nd year fraction) × 4/12 (4 months) $192
o Depreciation for 2020     $672
o When choosing a depreciation method, much consideration is given to the matching
principle. ***

4. Units-of-Output Method- a.k.a. units-of-production method. A method of depreciating asset cost

at the same rate for each unit produced during each period.

Measured by: physical quantities of production, number of hours the asset is used, other
measures.
 STEP BY STEP PROCESS:

Step 1: Determine the depreciation per unit (per mile). Divide the depreciable cost (the cost,
minus estimated net salvage value) by the total miles expected to be driven during the truck’s life.

Step 2: Compute depreciation. Multiply the number of units produced (miles driven) by the rate
for each unit.

In its first year of operation, the truck would have depreciation expense of $8,700.

Federal Income Tax Requirements for “Cost Recovery” (Depreciation) of Property, Plant,
and Equipment

- Modified Accelerated Cost Recovery System (MACRS). MACRS was designed to encourage
taxpayers to invest in business property and to simplify depreciation computations.
- Federal income tax rules basically replace the depreciation rules of generally accepted
accounting principles with the Modified Accelerated Cost Recovery System (MACRS), which
applies to all assets purchased after December 31, 1986.
- Personal property falls in three of those classes. Those three are:
o 5-year class—automobiles, lightweight trucks, computers, and certain special-purpose
property.
o 7-year class—office furniture and fixtures and most manufacturing equipment.
o 10-year class—special purpose property, such as equipment used in the manufacture of
food and tobacco products.
- Under MACRS, the recovery periods for real property are:
o residential rental buildings—27.5 years.
o nonresidential buildings (office buildings) placed in service after May 12, 1993—39 years.
o nonresidential buildings placed in service on or before May 12, 1993—31.5 years.

NOTE: MACRS calculates depreciation for six months in the first year of the asset’s life. The remaining
six months of cost recovery are taken in the year after the end of the class life***

Disposition of Assets
1. Disposal by Scrapping or Discarding
- Disposition of Assets- involves removing the asset’s cost and its accumulated depreciation from
the firm’s accounting records.
- Gain - is the disposition of an asset for more than its book value.
- Loss is the disposition of an asset for less than its book value.

Book Value= Cost- Accumulate Depreciation

DISPOSAL OF SALE
Step 1. Record depreciation to the date of disposition.
Step 2. Remove the cost of the asset.
Step 3. Remove the accumulated depreciation.
Step 4. Record the proceeds.
Step 5. Determine and record the gain or loss, if any.

Looks like this:

Depreciation Expense- Laboratory Equipment 540
Accum. Depreciation Expense - Laboratory Equipment 540
After this entry:
Accumulate Depreication has a balance of 7,020 (6480+540)
Book Value (12,000- 7020) = 4980

Sale for an Amount Equal to Book Value

Step 1, record depreciation to the date of disposition, has been illustrated. Steps 2–5 are as follows:
Step 2. Remove the cost of the asset. Credit Laboratory Equipment for $12,000.
Step 3. Remove the accumulated depreciation. Debit Accumulated Depreciation—Laboratory Equipment
for $7,020.
Step 4. Record the proceeds. Debit Accounts Receivable for $4,980.
Step 5. Determine and record the gain or loss, if any.
Proceeds $4,980
(Book value) (4,980)
Gain or loss $0

Sale for More Than Book Value

The gain is recorded in the Gain on Sale of Equipment account. The gain is shown on the income
statement in the Other Income section.

Sale for Less Than Book Value

The loss is recorded in the Loss on Sale of Equipment account. The loss appears on the income
statement in the Other Expenses section.

*Some companies’ records “Gains and Losses on Sales of Assets”

It appears on the income statement in the Other Income section (if net gain) or Other Expenses
section (if net loss).

NEXT CHAPTER: Accounts Receivable and Accounts Payable

Terminologies:
1. Allowance Method- an estimate is made and recorded each year of the bad debt losses
applicable to sales of that year. CONTRA ASSET ACCOUNT
Debit- Uncollectible Accounts expense- estimated loss
Credit- Allowance for Doubtful Accounts
- Allowance for bad debts expense is subtracted from accounts receivable on the balance sheet
- Valuation account- An account, such as Allowance for Doubtful Accounts, whose balance is
revalued or reappraised in light of reasonable expectations
- Principles of Matching Revenues and Related costs are applied.
- Current assets that will be converted into cash should not be shown more than the amount
expected to be realized.
- Required by GAAP

2. Direct charge-off method- aka specific charge-off method; losses from uncollectible accounts are
recorded only when specific customers’ accounts become uncollectible.
- When this happens, the balance due is removed from Accounts Receivable- charged to
Uncollectible accounts expense aka BAD DEBTS EXPENSE or Losses from Uncollectible
Accounts
Debit- Uncollectible accounts expense
Credit- Accounts Receivable
- Do not generally reflect to GAAP; violation for matching principle.
** For tax purposes, direct charge of method Is used, but not allowance.
** Uncollectible accounts expense- general expense
** Bad Debts Expense- income statements as a general expense/ selling expense
Factors Used to Compute the Year-End Provision for Uncollectible Accounts
- net credit sales for the year,
- total accounts receivable on December 31,
- aging of accounts receivable on December 31.
Basis: net credit sales
- preparer is using the “income statement approach.
Basis: based on total accounts receivable or the aging of accounts receivable
- “balance sheet approach.
BASED: Percentage of Net Credit Sales
- New businesses often base the percentage on the experience of other businesses in the same
industry. The percentage is calculated as follows:

- Net credit sales is calculated as total credit sales minus the sales returns and allowances on
credit sales.
BASED: Percentage of Total Accounts Receivable
- more important to focus on the balance in the allowance account than on the amount charged to
expense.

-
3. Aging of A/R- classifying receivables according to how long they have been outstanding. 1–30
days past due, 31–60 days past due, or over 60 days past due.

NOTES ABOUT ADJUSTING ENTRIES:

INCOME

1. Liability Method- initially credited to a liability account. The earned portion is recognized as
income while the unearned portion remain as a liability. (USED BY MOST)
2. Income Method- advance collection of income are initially credited to an income account at
the end of the period. The unearned portion is recognized as a liability while earned remains
as income
 i. Earned portion- “used up” pertains to the used up months
ii. Unearned pertains to the remaining months

EXPENSES METHOD:

1. Asset Method: prepayments are initially debited to an asset account. It is the incurred portion.
“Used up” or “Expired” which pertains to expense, while unused remains as asset.
2. Expense Method: prepayments are initially debited to an expense account. It is the unused
portion. “Not yet incurred” “unexpired”- Recognized as an asset.; incurred is an expense.