Long Term Assets 1

What is included in asset cost?

Purchase Price
Sales taxes(customs fees and duties)
shipping and insurance
installation
test run
some training
other
Define Residual Value?

the value of an asset at the end of its life

the total value depreciated over an asset's entire life is its cost.
aka salvage value
What are other depreciation methods are we going to learn?

straight-line depreciation
units of production depreciation
double declining balance
GAAP is not very strict when it comes to depreciation methods

just want it to be reasonable.
define straight-line depreciation

is the original method use in chapter 2

the formula is just adjusted to include residual value.
simplest and most popular
what is the straight-line depreciation formula?

Cost of Asset – Residual Value / Years of Useful Life

units = per year=
Define units of production Depreciation

Units of production depreciation (or unit depreciation, for short) spreads depreciation evenly over the life of the asset as measured in units

theoretically the most accurate method, but realistically is difficult to apply.
Define Declining Balance Depreciation

Declining balance has the most depreciation expense in the early years of the asset's life, giving the lowest next income. This method is useful if there is uncertainty regarding the asset's life and/or residual value.

aka Accelerated Depreciation Method
what is Declining Balance Depreciation Expense formula?

Net Value of Asset × Depreciation Rate (declining balance depreciation)
who uses the declining balance method?

those who want flexibility in their long-term assets because they don't know how long they will be around.
How to calculate correctly declining balance?

Year 1 $40,000 X ½ = $20,000
Year 2 ($40,000 - $20,000) X ½ = $10,000
Year 3 ($40,000 - $30,000) X ½ = $ 5,000 $20,000+$10,000+$5,000 = $35,000
Year 4 plug = $39,000–$35,000 = $ 4,000
$39,000 (calculated)