Overview- Depreciation and Inventory Control
The matching concept comes into play when we are learning chapters 10 and 11. When property, plant and equipment are purchased, it is treated as a long-term asset when it is acquired. Accordingly, the asset produces income over its lifetime. Therefore, the matching principle of accounting applies so that the expense of the equipment is matched to the years the equipment generates revenues. The expense is called depreciation.
Similarly, when medical supplies are purchased- think IV bags, pharmaceuticals, bandages- they are maintained in inventory until they are used. As such, they are not expensed until they are used. But what are they stay in inventory- unused- many months after purchase and the price of the inventory has changed? Chapter 11 will discuss the various methods to cost inventory.
Learning Objectives:
1- To understand why GAAP requires the use of depreciation for items that have useful lives over one year.
2- To distinguish the difference between depreciation and amortization.
3- To understand various methods of depreciation and the reasons for choosing one method over another.
4- To calculate depreciation, depreciable life and salvage values of assets.
5- To understand the difference between perpetual and periodic inventory systems.
6- To understand the basic cost flow methods for inventory valuation.
7- To calculate the value of ending inventories.
Deliverables:
1- Please read chapters 10 and 11 in your textbook.
2- Please listen to the Panopto videos on chapter 10 Depreciation and chapter 11 Inventory costing. Please note- these are not optional and must be watched!
3- Watch the following supplemental you tube videos:
a. Amortization and Depreciation
b. Depreciation methods
c. LIFO and FIFO Inventory Accounting
d. Hospital Cuts Inventory Costs
e. Just for fun- Adam Ruins Everything
Assignment: Depreciation Exercise
On January 1, 2018, Happy Hospital purchased an MRI for $8,375,000. It cost an additional $125,000 to deliver, install and calibrate the MRI. The MRI has a useful life of 5 years, at which time it is expected that it will be disposed of for a $100,000 salvage value.
a) Using straight-line depreciation method, prepare a schedule showing annual depreciation expense and accumulated depreciation for each of the 5 years.
b) Show how the asset and accumulated depreciation would appear on the balance sheet at December 31, 2018.
c) Prepare journal entries to record the asset's acquisition, annual depreciation for each year and the asset's sale for $100,000.
Inventory Control Exercise -
|
Date
|
Description
|
Units
|
Unit Cost
|
Total Cost
|
|
July 1, 2018
|
Beginning Inventory
|
500
|
$20
|
$10,000
|
|
July 18, 2018
|
Inventory Purchased
|
800
|
$24
|
$19,200
|
|
July 25, 2018
|
Inventory Purchased
|
700
|
$26
|
$18,200
|
|
|
Total
|
2,000
|
|
$47,400
|
Happy Hospital used 1,400 units of medical supplies during the month of July 2018.
Required: Write journal entries to record the purchases of medical supplies, inventory value and the use of medical supplies for July 2018 using the following inventory costing methods:
a) First in, first out (FIFO) method.
b) Last in, first out (LIFO) method.
Attachment:- Assignment File.rar