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09 - Plant Assets PDF
09 - Plant Assets PDF
MODULE 9
PLANT ASSETS
Plant Assets
Plant assets are resources that have a physical substance (a definite size and shape), are used in the
operations of a business and are not intended for sale to customers. They are also called property,
plant, and equipment; plant and equipment; or fixed assets.
The cost of land includes the cash purchase price, closing costs such as title and attorneys fees, real
estate brokers commissions, and accrued property taxes and other liens on the land assumed by the
purchaser. All necessary costs incurred in making land ready for its intended use are debited to the Land
account.
Land improvements are structural additions made to land, such as driveways, parking lots, fences,
landscaping, and underground sprinklers. The cost of land improvements includes all expenditures
needed to make the improvements ready for their intended use.
The cost of buildings includes all necessary costs related to the purchase or construction of a building:
a. When a building is purchased, such costs include the purchase price, closing costs, and real estate
brokers commission.
b. Costs to make the building ready for its intended use include expenditures for remodeling and
replacing or repairing the roof, floors, wiring, and plumbing.
c. When a new building is constructed, cost consists of the contract price plus payments for architects
fees, building permits, interest payments during construction, and excavation costs.
The cost of equipment consists of the cash purchase price, sales taxes, freight charges, and insurance
paid by the purchaser during transit. Cost includes all expenditures required in assembling, installing,
and testing the unit. Recurring costs such as licenses and insurance are expensed as incurred.
Depreciation
Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life
in a rational and systematic manner.
a. The cost allocation is designed to provide for the proper matching of expenses with revenues in
accordance with the expense recognition principle.
b. During an assets life, its usefulness may decline because of wear and tear or obsolescence.
c. Recognition of depreciation does not result in the accumulation of cash for the replacement of the
asset.
Three factors that affect the computation of depreciation are (1) cost, (2) useful life, and (3) salvage
value.
Three methods of recognizing depreciation are (a) straight-line, (b) units of activity, and (c) declining-
balance.
a. Each method is acceptable under generally accepted accounting principles.
b. Management selects the method that is appropriate in the circumstances.
c. Once a method is chosen, it should be applied consistently.
Straight-Line Method
Under the straight-line method depreciation is the same for each year of the asset's useful life. The
formula for computing annual depreciation expense is:
To illustrate the computation, assume that the Benson Company purchased a delivery truck for P11,000
on January 1 with an estimated salvage value of P1,000 at the end of its four-year service life. Annual
depreciation is P2,500 [(P11,000 - P1,000 4)].
Review Class for ACT111-0 and ACT112-0 E.T Yuchengco School of Business and Management
This method is simple to apply and it matches expenses and revenues appropriately when the use of the
asset is reasonably uniform throughout the service life.
To illustrate the computation, assume that Benson Company expects to drive the truck purchased in
above for 100,000 miles and that 30,000 miles are driven in the first year. Depreciation for the first year is
P3,000.
In using this method, it is often difficult to make a reasonable estimate of total activity.
When the productivity of an asset varies significantly from one period to another, this method results in
the best matching of expenses with revenues.
To illustrate the computation, assume that Benson Company uses a declining-balance rate that is double
the straight-line rate of 25%. Depreciation in the first year is P5,500 (P11,000 X 50%).
Under this method, the depreciation rate remains constant from year to year, but the book value to which
the rate is applied declines each year.
This method is compatible with the matching principle because the higher depreciation in early years is
matched with the higher benefits received in these years.
Additions and improvements are costs incurred to increase the operating efficiency, productive capacity,
or expected useful life of the plant asset. These expenditures are usually material in amount and occur
infrequently during the period of ownership.
At the time of disposal, it is necessary to determine the book value of the plant asset.
a. If the disposal occurs during the year, depreciation for the fraction of the year to the date of disposal
must be recorded.
b. The book value is then eliminated by debiting the Accumulated Depreciation account for the total
depreciation to the date of disposal and crediting the asset account for the cost of the asset.
Computational Drills
1. Foster Corporation purchased a new machine for its assembly process on August 1, 2014. The cost
of this machine was P235,800. The company estimated that the machine would have a trade-in value
of P25,800 at the end of its service life. Its life is estimated at 10 years, and its working hours are
estimated at 42,000 hours. Year-end is December 31.
Required: Compute the depreciation expense under the following methods. Each of the following
should be considered unrelated.
a. Straight-line depreciation for 2014 and 2015.
b. Activity method for 2014 and 2015, assuming that machine usage was 800 and 3,400 hours,
respectively.
c. Double-declining balance for 2014 and 2015.
2. On June 28, 2014, a business sold for P1,500 a plant asset that cost P5,000. The asset had a 5-year
useful life, no salvage value, and had been used by the business since January 1, 2011. Straight-line
depreciation was used. The fiscal year ends on December 31. What was the result of selling the plant
asset?