Topic 7 Part 2
Long-lived assets
Spring 2022
Professor Xi Wu
Today’s Agenda
• Class Announcements
• HW 4 posted
• Review and practice
• Disposal of fixed assets
• Lots of real world examples
2
Depreciation is a process that systematically allocates acquisition
costs (less its salvage value) of long-term assets with the periods
benefited by their use.
Cost
Allocation(Unused)
Balance Sheet
(Used)
Income Statement
Depreciation
Expense
Depreciation (Key Concept)
Acquisition
Cost
The remaining balance sheet amount
probably does not represent market value.
Accounting in the news
…and question the status quo?
…and confidence without attitude?
• Sen. Elizabeth Warren: lengthening the depreciation period for
industrial equipment
• “I’m a former CEO and president of a tier-one automotive supplier. I
want to shorten the depreciation time” Why?
• Depreciation averaged 10 years => tax saving each year => after 10
years, buy new machine
• but only for major automotive companies
• 10-year old machinery purchased by tier-one suppliers, and use for
another 10 years
• Tier-two suppliers would then purchase 20-year-old machines
• Results: many of the parts made for the auto industry were
produced on 30-year-old machinery
• Germany and Japan: 6 years; hard to compete
4
1. Straight-line Depreciation
(Cost - Residual Value) X 1/Useful Life Depreciation Expense =
Depreciation (Cost – Residual Value) Actual
Expense Estimated Total Production Production
= X
2. Units-of-Production Method
3. Accelerated Depreciation
Depreciation
Expense (Cost – Accumulated Depreciation) Useful Life
2
×=
Depreciation Methods
Joel Harvey Florists acquired a truck on January 1, 2017.
The company paid $11,000 for the truck, $500 for destination
charges, and $250 to paint the company name on the side of
the truck. The company’s accounting manager estimates the
truck to have a five-year useful life and a residual value of
$1,750. The truck is expected to be driven 100,000 miles in
five years. It is actually driven 15,000 miles in 2017, 25,000
miles in 2018, 30,000 miles in 2019, 25,000 miles in 2020,
and 5,000 miles in 2021.
Class Problem 7-1: Depreciation Methods
Part 1
On January 1, 2017, how much should Joel Harvey Florist capitalize
for the cost of the truck?
11,000 + 500 + 250 = $11,750.
Part 1 – Journal Entry
Problem 7-1: Depreciation Methods
Truck Fixed Asset
Bal. XXX
Jan 1 11,750
Jan 1 Truck Asset (+A) 11,750
Cash ( –A) 11,750
Record the purchase of truck
Cash
11,750 Jan 1
Part 2: How much depreciation expense will be recorded for
the years 2017 through 2021 using each of the following
methods?
a. Straight-line
Accum Deprec-Truck
Bal. 2,000
2,000 12/31/17
Dec. 31 Depreciation Expense (+E, -SE) 2,000
Accumulated Depreciation (+XA, -A) 2,000

Recognize depreciation for the truck asset
Truck Asset
11,750
Net Truck Balance: 11,750 – 2,000= 9,750 on
the Balance Sheet as the Truck Value
11,750
Depreciation Expense
2,000
2,000
2017 Income Statement
(11,750 – 1,750) ÷ 5 = $2,000 per year
Part 2: If straight-line was used for the life of the truck, what
would the J/E be for the following years?
a. Straight-line
Accum Deprec-Truck
Bal. 10,000
2,000 12/31/17
2,000 12/31/18
2,000 12/31/19
2,000 12/31/20
2,000 12/31/21
Dec. 31 Depreciation Expense 2,000
Accumulated Depreciation 2,000
Recognize depreciation for the truck asset
Truck Asset
11,750
Net Balance at the end of 2021: 11,750 –
10,000= 1,750 on the Balance Sheet as the Truck
Value at 12/31/21
11,750
Depreciation
Expense
2,000
2,000
$2,000 on each year’s
Income Statement
Accum Deprec-Truck
Bal. 1,500
1,500 12/31/17
Truck Asset
11,750
Net Balance: 11,750 – 1,500= 10,250
on the Balance Sheet as the Truck
Value
11,750
Depreciation Expense
1,500
1,500
2017 Income
Statement
b. Unit-of-production: First, calculate the rate:
12/31/17 Depreciation Expense 1,500
Accumulated Depreciation 1,500
Recognize depreciation for the truck asset
2017: 15,000 x 0.10 = $1,500;
(11,750 – 1,750) ÷ 100,000 = 10 cents/mile
b. Unit-of-production cont’d
Accum Deprec-Truck
Bal. 10,000
1,500 12/31/17
2,500 12/31/18
3,000 12/31/19
2,500 12/31/20
500 12/31/21
Truck Asset
11,750
Net Balance at the end of 2021: 11,750 –
10,000= 1,750 on the Balance Sheet as the Truck
Value
11,750
Depreciation Expense
500
500
$500 on 2021 Income
Statement
(11,750 – 1,750) ÷ 100,000 = 10 cents/mile
2017: 15,000 x 0.10 = $1,500;
2018: 25,000 x 0.10 = $2,500;
2019: 30,000 x 0.10 = $3,000;
2020: 25,000 x 0.10 = $2,500;
2021: 5,000 x 0.10 = $500.
Year Computation Deprec
Expense
Accum
Deprec Bal
Net Book Value
Acquisition 11,750
2017
2018
2019
2020
2021

c. Double-Declining Balance
(11,750-0) * 2/5
(11,750-4,700)*2/5
0
$4,700
$2,820
$1,692
$1,015
$0
$788
$4,700
$7,520
$9,212
$10,227
$10,000
$4,230
$2,538
$1,750
11,750-4,700= $7,050
12/31/17 Depreciation Expense 4,700
Accumulated Depreciation 4,700
Recognize depreciation for the truck asset
$1,750$10,000
(11,750-7,520)*2/5
(11,750-9,212)*2/5
(11,750-9,212)–1,750
$1,523
c. Declining Balance cont’d
Accum Deprec-Truck
Bal. 10,000
4,700 12/31/17
2,820 12/31/18
1,692 12/31/19
788 12/31/20
0 12/31/21
Truck Asset
11,750
Net Balance at the end of 2021: 11,750 – 10,000
= 1,750 on the Balance Sheet as the Truck Value
11,750
Depreciation
Expense
0
0
$0 on 2021 Income
Statement b/c fully
depreciated
Comparing Depreciation Methods
• The straight-line method best meets the matching principle
for an asset that generates revenue evenly over time
• The units (activity) method best fits those assets that wear
out because of physical use rather than obsolescence
• The accelerated method applies best to those assets that
generate greater revenue earlier in their useful lives
Most companies use straight-line
What if we change useful life estimate?
Change in Useful Life Estimate (Key
Concept)
Prospective method
• Revise depreciation expense going forward.
• Do not retro-actively adjust for the past years of
financial statements.
• What effect does increasing the useful life have on
the financial statements?
What effect does increasing the useful life
have on the financial statements?
• In 2001, Singapore Airlines disclosed in its annual
report that it had increased the estimated useful
life of its aircraft from 10 to 15 years to reflect a
change in its aircraft replacement policy.
• The change reduced depreciation expense by $265
million each year.

Book problem: P8-11
Rungano Corp is a global publisher of magazines books, and music and video
collections and is a leading direct mail marketer. Many direct mail marketers use
high-speed Didde press equipment to print their ads. These presses can cost more
than $1 million. Assume that the co. owns a press acquired at an original cost of
$400,000. It is being depreciated on a straight-line basis over a 20-year estimated
useful life and has a $50,000 estimated residual value. At the end of 2013, the press
has been depreciated for a full 6 years. In Jan 2014, a decision was made, on the
basis of improved maintenance procedures, that a total estimated useful life of 25
years and a residual value of $73,000 would be more realistic. The accounting period
ends Dec 31.
1. Compute (a) the amount of depreciation expense recorded in 2013 and
(b) the book value of the press at the end of 2013
2. Compute the amount of depreciation that should be recorded in 2014.
3. Give the adjusting journal entry for depreciation at Dec 31, 2014.
Req 1:
(a) Cost of press $400,000
Residual value (50,000)
Amount to depreciate over 20 years $350,000
Annual depreciation expense recorded in 2013 ($350,000  20 years) = $17,500
(b) Cost of press $400,000
Less: Accumulated depreciation for 6 years ($17,500 x 6 years) (105,000)
Net book (carrying) value at end of 2013 $295,000
Req 2:
Cost of press $400,000
Accumulated depreciation at end of 2013 (from Req. 1) (105,000)
Net book value (undepreciated amount at the beginning of 2014) 295,000
Less: Revised residual value (73,000)
Remaining balance to depreciate $222,000
Annual depreciation for 2014 [$222,000  (25 years – 6 years = 19 years)] = $11,684
Req. 3: December 31, 2014—Adjusting entry:
Depreciation expense (+E, SE) 11,684
Accumulated depreciation (+XA, A) 11,684
Remaining Life
(New) Remaining depreciable BV ÷ (New) Estimated
useful life remaining = (New) Annual depreciation
Accounting in the news
Fixed assets, depreciation expense, salvage
value & fraud at Waste Management?
• Waste Management, Inc. is the leading provider of
comprehensive waste and environmental services in
North America.
• In 1998, Waste Management found itself facing scrutiny
(and ultimately a scandal) because of the way in which
they handled the accounting for their fixed assets.
• Much of the scandal stemmed from the topics we’re
currently studying in Topic 7.
What did WM’s executives do wrong?
• They inflated the useful lives of the garbage trucks and
dumpsters. Specifically, they estimated useful lives of 12-
14 years for their garbage trucks and useful lives for
dumpsters of 15-20, while others in the industry
estimated those to be 8-10 years and 12 years,
respectively.
• They assigned a salvage value to dumpsters that all others
in the industry assumed had $0 residual value.
• They didn’t depreciate their landfills as they filled them
with waste.
What effect did this behavior have on
the financial statements?
• It caused them to avoid recording depreciation
expense, which overstates their earnings and their
assets.
• In other words, it made it look better to investors.
• What method might they have used to depreciate
their landfills?
• The “activity” (i.e., units of production/activity) method
would work well in this case.
What ultimately happened to the
company?
• They incurred $3.5 billion in pretax charges and
earnings restatements.
• They settled a lawsuit with their shareholders for nearly
$0.5 billion.
• They faced SEC investigations, fines and sanctions.
• Their auditor, Arthur Andersen LLP, paid $220 million to
settle a shareholder lawsuit, faced SEC fines of $7
million, and paid a heavy reputational price. (Note the
close timing to the Enron scandal.)
What happened to their CEO? What’s
he up to now?
• In March of 2002, the SEC
indicted Dean Buntrock, the
founder and CEO of Waste
Management, Inc. The SEC
charged him (and five other
former top officers) with
perpetrating a massive
financial fraud from 1992
through 1997. Buntrock
(and others) settled the
matter out of court in 2005
for $2.3 million with no
admission of wrongdoing.



What happens when we sell
a tangible asset?
Disposal of Property, Plant
and Equipment (Key Concept)
• Assets are often sold before the end of their
useful lives
• Difference between cash received and the
net book value of the asset = gain or loss
Update depreciation to the date of disposal
Journalize disposal:
DEBIT: Any cash or other asset received
DEBIT: Updated balance in acc. dep. that relates to the asset
DEBIT: LOSS -- if needed to make the entry balance
CREDIT: Asset at its capitalized value
CREDIT: GAIN -- if needed to make entry balance
Disposal of Property, Plant
and Equipment
Disposal of Property, Plant, and
Equipment
1. Update depreciation expense and accumulated depreciation.
Annual Depreciation: ($30,000,000 – $0) ÷ 25 years = $1,200,000
Southwest Airlines sold flight equipment for $11 million cash at the
end of its 17th year of use. The flight equipment originally cost $30
million and was depreciated using the straight-line method with
zero residual value and a useful life of 25 years.
Depreciation expense ……………………… 1,200,000
Accumulated Depreciation…………... 1,200,000
Disposal of Property, Plant, and
Equipment
Southwest Airlines sold flight equipment for $11 million cash at the
end of its 17th year of use. The flight equipment originally cost $30
million and was depreciated using the straight-line method with
zero residual value and a useful life of 25 years.
2. Record the Disposal
• Have to eliminate
 PPE, here: flight equipment 30,000,000
 Accumulated Depreciation = (17yrs. × $1,200,000) = $20,400,000
Cash (+A) ….….………………………………… 11,000,000
Accumulated Depreciation (-XA, +A) ……… 20,400,000
Flight Equipment (-A) ………………………. 30,000,000
Gain on Sale of Assets (+Gain, +SE) .……. 1,400,000
How about T-accounts?
In-class example
Disposal of PPE
Renaissance Incorporated is a worldwide operator and franchiser of hotels and has over
$750 million in property and equipment. Assume that Renaissance replaced furniture that
had been used in the business for five years. The records of the company reflected the
following regarding the sale of the existing furniture:
Furniture (cost) $3,000,000
Accumulated depreciation 2,750,000
Required:
1.Give the journal entry for the disposal of the furniture, assuming that it was sold for
a. $250,000 cash
b. $800,000 cash
c. $200,000 cash
2.Based on the three preceding situations, explain the effects of the disposal of an asset.
Cash (+A) 250,000
Accumulated Depreciation (−XA, +A) 2,750,000
Furniture (−A) 3,000,000
(Sale of an asset at book value; the result is no loss or gain.)
Requirement 1a
Furniture (cost)
Less: Accumulated depreciation
Net book value
Debit Credit
$3,000,000
2,750,000
$ 250,000
In-class example
Disposal of PPE
Cash (+A) 800,000
Accumulated Depreciation (−XA, +A) 2,750,000
Gain on Sale of Long-lived Asset (+Gain, +SE) 550,000
Furniture (−A) 3,000,000
(Sale of an asset above book value; the result is a gain.)
Requirement 1b
Cash (+A) 200,000
Accumulated Depreciation (−XA, +A) 2,750,000
Loss on Sale of Long-lived Asset (+Loss, -SE) 50,000
Furniture (−A) 3,000,000
(Sale of an asset below book value; the result is a loss.)
Requirement 1c
Debit Credit
In-class example
Disposal of PPE
Effects of Depreciation on Cash
• Depreciation is a noncash expense.
• Before taxes, changes in the depreciation method
affect only the Accumulated Depreciation and
Retained Earnings accounts.
Quick Question
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Summary
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Key Take-Aways
1. Practice of depreciation methods
2. Disposal of fixed assets
3. Have a great time during Spring Break!
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