Property, Plant & Equipment
(Fixed Assets)
Extracted from slides prepared by:
C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Reeve Warren Duchac
LO 1
Nature of Fixed Assets
Fixed assets are long-term or relatively
permanent assets, such as equipment,
machinery, buildings, and land.
Other descriptive titles for fixed assets are
plant assets or property, plant, and
equipment.
LO 1
Nature of Fixed Assets
Fixed assets have the following
characteristics:
They exist physically and, thus, are tangible
assets.
They are owned and used by the company
in its normal operations.
They are not offered for sale as part of
normal operations.
LO 2
Depreciation
Over time, most fixed assets (equipment,
buildings, and land improvements) lose
their ability to provide services.
The periodic recording of the cost of fixed
assets as an expense is called
depreciation.
LO 2
Accounting for Depreciation
Depreciation can be caused by physical or
functional factors.
Physical depreciation factors include wear
and tear during use or from exposure to the
weather.
Functional depreciation factors include
obsolescence and changes in customer
needs that cause the asset to no longer
provide services for which it was intended.
LO 2
Factors in Computing Depreciation
3 factors determine the depreciation
expense for a fixed asset:
1. The assets initial cost
2. The assets expected useful life
3. The assets estimated residual value
LO 2
Factors in Computing Depreciation
The expected useful life of a fixed asset is
estimated at the time the asset is placed
into service.
The residual value of a fixed asset at the
end of its useful life is also estimated at the
time the asset is placed into service.
LO 2
Straight-Line Method
The straight-line method provides for the
same amount of depreciation expense for
each year of the assets useful life.
Annual
=
Depreciation
Cost Residual Value
Useful Life
LO 2
Straight-Line Method
Initial cost
Expected useful life
Estimated residual value
$24,000
5 years
$2,000
The annual straight-line depreciation of
$4,400 is computed below:
Cost Residual Value
Annual Depreciation =
Useful Life
$24,000 - $2,000
=
5 years
= $4,400
LO 2
Straight-Line Method
If the preceding equipment was purchased
and placed into service on October 1, the
depreciation for the first year of use would
be $1,100, computed as follows:
$4,400 x 3/12 = $1,100
LO 2
Reducing Balance Method
depreciation expense is based on a % of
the remaining book balance.
Depreciation
Depreciation rate (%) x
remaining book balance
LO 2
Reducing Balance Method
Initial cost
Expected useful life
Depreciation rate
Estimated residual value
$24,000
5 years
40%
$2,000
Depreciation = Depreciation rate X
(1st year)
(Cost Residual Value)
= 40% X ($24,000 - $2,000)
= $8,800
Book value after 1st year = $24,000 - $8,800 = 15,200
LO 2
Reducing Balance Method
Depreciation =
(2nd year)
=
Depreciation =
(3rd year)
=
Depreciation =
(4th year)
=
Depreciation =
(5th year)
40% X $15,200
$6,080
40% X ($15,200 6,080)
$3,648
40% X ($15,200 6,080 3,648)
$2,188.80
(After 4th year, book value = 3,283.20)
$3,283.20 - $2,000 = 1,283.20
(residual value)
Double Entry for Depreciation
Dr
Cr
LO 3
Depreciation (Expense)
Accumulated Depreciation (Asset contra)
Depreciation Expense
PPE/Fixed Asset
Equipment Bal c/f 24,000
24,000
24,000
Bal b/f
24,000
24,000
Acc. Depn - Fixed Asset
Bal c/f
Acc. Depn
8,800
8,800 Depn
8,800
8,800
8,800
Bal b/f
8,800
Book value after 1st year
= 24,000 8,800
= 15,200
LO 3
Double Entry for Depreciation (Contd.)
Depreciation Expense
PPE/Fixed Asset
Equipment Bal c/f 24,000
24,000
24,000
Bal b/f
24,000
24,000
Acc. Depn - Fixed Asset
Bal c/f
Acc. Depn
6,080
14,880 Bal b/f
Depn
14,880
8,800
6,080
14,880
Bal b/f 14,880
Book value after 2nd
year
= 24,000 14,880
= 9,120
LO 3
Double Entry for Depreciation (Contd.)
Depreciation Expense
PPE/Fixed Asset
Equipment Bal c/f 24,000
24,000
24,000
Bal b/f
24,000
24,000
Acc. Depn - Fixed Asset
Bal c/f
Acc. Depn
3,648
18,528 Bal b/f 14,880
Depn
18,528
3,648
18,528
Bal b/f 18,528
Book value after 3rd
year
= 24,000 18,528
= 5,472
LO 3
Double Entry for Depreciation (Contd.)
Depreciation Expense
PPE/Fixed Asset
Equipment Bal c/f 24,000
24,000
24,000
Bal b/f
Acc. Depn
2,188.80
24,000
24,000
Acc. Depn - Fixed Asset
Bal c/f Bal b/f 18,528
20,716.80
Depn 2,188.80
20,716.80
20,716.80
Bal b/f
20,716.80
Book value after 4th
year
= 24,000 20,716.80
= 3,283.20
LO 3
Double Entry for Depreciation (Contd.)
Depreciation Expense
PPE/Fixed Asset
Equipment Bal c/f 24,000
24,000
24,000
Bal b/f
24,000
24,000
Acc. Depn - Fixed Asset
Bal c/f
Acc. Depn
1,283.20
22,000
Bal b/f
20,716.80
Depn 1,283.20
22,000
22,000
Bal b/f 22,000
Book value after 5th
year
= 24,000 22,000
= 2,000 (residual value)
LO 2
Revising Depreciation Estimates
A machine is purchased on January 1,
2011, for $140,000.
(continued)
LO 2
Revising Depreciation Estimates
At the end of 2012, the assets book value is
$88,000, as shown below.
(continued)
LO 2
Revising Depreciation Estimates
During 2013, the company estimates that the
machines remaining useful life is 8 years
(instead of 3 years) and that its residual value is
$8,000 (instead of $10,000). Depreciation
expense for each of the remaining 8 years is:
Discarding Fixed Assets
LO 3
Equipment acquired at a cost of $25,000 is
fully depreciated at December 31, 2011.
Equipment
Cost
25,000
Acc. Depn - Equipment
Bal b/f 25,000
Book value
= 25,000 25,000
=0
Discarding Fixed Assets (Contd.)
LO 3
On February 14, 2012, the equipment is
discarded (thrown away).
Equipment
Cost
25,000 Write-off 25,000
Acc. Depn Equipment
Write-off 25,000 Bal b/f 25,000
Note: The entry to record the disposal of a fixed
asset removes the cost of the asset and its
accumulated depreciation from the accounts.
LO 3
Discarding Fixed Assets
Equipment costing $6,000, with no residual
value, is depreciated at an annual straightline rate of 10%.
Annual depreciation = 6,000 X 10% = 600
After the December 31, 2011, Accumulated
DepreciationEquipment has a $4,750
balance.
On March 24, 2012, the asset is removed
from service and discarded.
LO 3
Discarding Fixed Assets
$600 3/12
LO 3
Discarding Fixed Assets
The discarding of the equipment is then
recorded as shown below. (Note that this is the
2nd of 2 entries on March 24.)
Total accumulated depreciation at the date of
discard: 4,750 + 150 = 4,900
Original cost of equipment: 6,000
Loss on disposal of equipment (an expense)
= 6,000 4,900 = 1,100
LO 3
Discarding Fixed Assets
Equipment
Cost
6,000 Write-off 6,000
6,000
Bal b/f
Depreciation Expense
Acc. Depn 150
6,000
Acc. Depn - Equipment
Write-off 4,900 Bal b/f
Depn
4,900
4,750
150
4,900
Bal b/f
Loss on disposal of equipment
(Expense)
Loss
1,100
LO 3
Selling Fixed Assets
Equipment was purchased at a cost of
$10,000.
It had no estimated residual value and was
depreciated at a straight-line rate of 10%.
The equipment is sold for cash on October
12 of the 8th year of its use.
The balance of the accumulated
depreciation account as of the preceding
December 31 is $7,000.
(continued)
LO 3
Selling Fixed Assets
The entry to update the depreciation for the
9 months of the current year is as follows:
(continued)
LO 3
Selling Fixed Assets
After the current depreciation is recorded,
the book value of the asset is $2,250
($10,000 $7,750).
Sold below book value for $1,000. Loss of $1,250.
LO 3
Selling Fixed Assets
Equipment
Cost
Bal b/f
Depreciation Expense
10,000 Write-off
10,000
Acc. Depn 750
10,000
Loss on disposal of equipment
(Expense)
10,000
Loss
1,250
Acc. Depn - Equipment
Write-off 7,750 Bal b/f
Depn
7,750
7,000
750
7,750
Bal b/f
Cash
1,000
LO 3
Selling Fixed Assets
After the current depreciation is recorded,
the book value of the asset is $2,250
($10,000 $7,750).
Sold above book value for $2,800. Gain of $550.
LO 3
Selling Fixed Assets
Equipment
Cost
Bal b/f
Depreciation Expense
10,000 Write-off
10,000
Acc. Depn 750
10,000
Gain on disposal of equipment
(Revenue)
10,000
Gain
Acc. Depn - Equipment
Write-off 7,750 Bal b/f
Depn
7,750
7,000
750
7,750
Bal b/f
Cash
2,800
550
