Chapter 17 Homework Problem: 20 Points Total

E10 17chapter 10 Homework Problem E10 1720 Points Total Overall2 Point

Identify and record the journal entries related to land, land improvements, and buildings as specified in the homework problem. The problem involves understanding how to properly account for these assets, including their acquisition costs and subsequent adjustments.

Calculate depreciation expenses using different methods such as the straight-line method, units-of-production method, and double-declining-balance method. Develop depreciation schedules that include annual depreciation expense, accumulated depreciation, and book value for each asset. Ensure the appropriate depreciation rate and depreciation expense are applied based on asset useful life, cost, and usage.

Record the journal entries for asset purchases, depreciation expenses, and accumulated depreciation for each respective method, ensuring proper debit and credit entries are made appropriately. Include detailed explanations for each entry and the rationale behind applying each depreciation method where applicable.

Paper For Above instruction

In this paper, I will address the key accounting procedures involved in recording property, plant, and equipment (PP&E), focusing particularly on land, land improvements, and buildings. Moreover, I will delve into calculating depreciation using various methods, with accompanying depreciation schedules, and analyze how these methods influence financial statements and asset management.

Introduction

Proper accounting for PP&E is fundamental to accurately representing a company’s financial position. Land and buildings are tangible assets used in operations, and their costs should be capitalized and systematically depreciated to reflect their consumption over time. Depreciation methods vary; choosing the appropriate method affects net income and asset valuation. This discussion emphasizes the principles of asset recognition and depreciation, illustrating their application through practical examples.

Asset Recognition and Initial Recording

When a company acquires land, land improvements, or buildings, the initial step is recording the assets at their purchase price, including all costs necessary to acquire and prepare the assets for use. For example, land costs include purchase price, legal fees, and title taxes. Land improvements such as fencing, parking lots, and landscaping are recorded separately, as they have finite useful lives and are depreciable. Buildings are recorded at purchase price plus relevant construction costs.

Journal entries on acquisition typically debit the asset account (e.g., Land, Land Improvements, or Building) and credit cash or accounts payable. Proper documentation ensures the accuracy and completeness of these entries, aligning with accounting standards such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) (Kieso et al., 2019).

Depreciation Methods

Depreciation allocates the cost of tangible assets over their useful lives. The three common methods discussed in this context are the straight-line method, units-of-production method, and double-declining-balance method. Each method has specific implications on financial metrics and tax planning.

Straight-Line Depreciation

This method spreads the cost equally over the useful life of the asset. The annual depreciation expense is calculated as:

Depreciation Expense = (Cost - Residual Value) / Useful Life

For example, a building costing $500,000 with a residual value of $50,000 and a useful life of 25 years would have an annual depreciation expense of $18,000. The depreciation schedule would list each year, the expense amount, accumulated depreciation, and book value.

Calculating and presenting schedules helps managers and investors understand the asset's depreciation pattern (Brigham & Houston, 2021).

Units-of-Production Depreciation

This method bases depreciation on actual usage, such as production units or hours operated. The per-unit depreciation rate is computed as:

Depreciation per Unit = (Cost - Residual Value) / Total Estimated Units

Fiscal periods then record depreciation proportional to usage. This method aligns expenses with revenue generation, following the matching principle (Wild et al., 2014).

Double-Declining-Balance (DDB) Method

This accelerated method applies double the straight-line rate to the declining book value each year, resulting in higher depreciation in early years. The formula is:

Depreciation Expense = 2 × Straight-Line Rate × Book Value at Beginning of Year

This approach benefits tax depreciation by decreasing taxable income more rapidly in initial periods but leads to lower expenses later (Weygandt et al., 2019).

Depreciation Schedule Development

Creating comprehensive depreciation schedules involves detailing the annual depreciation expense, accumulated depreciation, and book value for each period. For instance, a building under the straight-line method will show consistent expenses, while the DDB schedule decreases over time due to declining book value.

These schedules facilitate tracking asset values over time and aid in financial reporting and decision-making. Managers can evaluate remaining asset life, plan for replacements, and analyze depreciation effects on profitability.

Journal Entries and Financial Reporting

On asset acquisition, the journal entry debits the respective asset account and credits cash. For depreciation, annual entries involve debiting depreciation expense and crediting accumulated depreciation. For example:

Debit: Depreciation Expense
Credit: Accumulated Depreciation

This process reduces net income and reflects the declining value of assets in the balance sheet (Kimmel et al., 2020).

Proper documentation and periodic review ensure compliance with accounting standards and provide accurate financial information to stakeholders.

Conclusion

Accounting for land, land improvements, and buildings requires precise recording and thoughtful application of depreciation methods. Straight-line, units-of-production, and double-declining-balance methods each serve different strategic purposes. Correct implementation of these methods provides transparency, improves financial analysis, and supports effective asset management. Regularly updating depreciation schedules and journal entries ensures that financial statements accurately reflect asset values and performance.

References

• Brigham, E. F., & Houston, J. F. (2021). Fundamentals of Financial Management (15th ed.). Cengage Learning.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
• Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2020). Financial Accounting: Tools for Business Decision Making (9th ed.). Wiley.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis (11th ed.). McGraw-Hill Education.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Accounting Principles (13th ed.). Wiley.