Depreciation

Plant Assets

Asset Account on Related Expense Account

the Balance Sheet on the Income Statement

Plant Assets
Land…………………………… None
Buildings, Machinery and
Equipment, Furniture
and Fixtures, and Land
Usage of the plant assets….….. Depreciation
Natural Resources………..…… Depletion
Intangibles…………………….. Amortization
Measure the cost
of a plant asset.
 Cost Principle

An asset must be carried on the

balance sheet at the amount paid for it.

The cost of an asset equals the sum of

all of the costs incurred to bring the asset
to its intended purpose, net of discounts
Land and Land Improvements

Purchase price of land $500,000

Add related costs:
Back property taxes $ 40,000
Transfer taxes 8,000
Removal of buildings 5,000
Survey fees 1,000 54,000
Total cost of land $554,000
Buildings – Construction

Architectural fees
Building permits
Contractor’s charges

Materials
Labor
Overhead
Buildings – Purchasing

Purchase price
Brokerage commissions
Sales and other taxes
Repairing or renovating building
for its intended purpose
Machinery and Equipment

Purchase price less discounts

Transportation charges
Insurance in transit
Sales and other taxes
Purchase commissions
Installation cost
Expenditures to test asset
before it is placed in service
Distinction Between Capital and Revenue
Expenditures

Does the expenditure increase capacity

or efficiency or extend useful life?
YES NO

Capital Expenditure Revenue Expenditure

Debit Plant Assets Debit Repairs and
accounts Maintenance account
Measuring the Depreciation
of Plant Assets

Cost or basis

Estimated residual value

Estimated useful life

Objective 2

Account for depreciation.

Depreciation Methods

Straight-Line (SL)

Units-of-Production (UOP)

Double-Declining-Balance (DDB)
Depreciation Methods Example

• Sunny Catering, Inc., purchased a delivery van on January 1,

2020, for $22,000.
• The company expects the van to have a trade-in value of $2,000
at the end of its useful life.
• The van has an estimated service life of 100,000 miles or 4 years.
Straight-Line Method Example

(Cost – Residual value) ÷ years of useful life

($22,000 – 2,000) ÷ 4 = $20,000 ÷ 4 = $5,000

Year 1 Depreciation: $ 5,000

Year 2 Depreciation: 5,000
Year 3 Depreciation: 5,000
Year 4 Depreciation: 5,000
Total Depreciation: $20,000
Units-of-Production
Method Example

($22,000 – 2,000) ÷ 100,000 = $.20/mile

Year 1: 30,000 miles = $ 6,000

Year 2: 27,000 miles = 5,400
Year 3: 23,000 miles = 4,600
Year 4: 20,000 miles = 4,000
Total: 100,000 miles = $20,000
(Actual mileage in year 4 was 22,000)
Double-Declining-Balance Method Example

• Straight-line rate is 100% ÷ 4 = 25%

• Double-declining-balance = 2 times the straight-line rate = 50%
• What is the book value of the van at the end of the first year?
• $22,000 × 50% = $11,000
• $22,000 – $11,000 = $11,000
 Double-Declining-Balance Method Example

Dec. 31, 200x

Depreciation Expense $11,000
Accumulated Depreciation $11,000
To record depreciation expense for a one-year period
Depreciation Methods Comparison

Year SL UOP DDB

1 $ 5,000 $ 6,000 $11,000
2 $ 5,000 $ 5,400 $ 5,500
3 $ 5,000 $ 4,600 $ 2,750
4 $ 5,000 $ 4,000 $ 750
Totals $20,000 $20,000 $20,000
Use of Depreciation Methods

3%
2%
5% Straight-line
8%
Accelerated –
(not specified)
UOP

Declining-
balance
Other
82%
Objective 3

Select the best depreciation

method for tax purposes.
Relationship Between Depreciation and Taxes

• MACRS was created by the Tax Reform Act of 1986.

• It is an accelerated method used for depreciating equipment.
Depreciation for Partial Years

• Assume that Sunny Catering, Inc., owned the van for 3 months.
• How much is the van’s depreciation?

Straight-line method:
$5,000 × 3/12 = $1,250

Double-declining-balance method:
$11,000 × 3/12 = $2,750
Revising Depreciation Rates

Revised SL depreciation
=
Cost – Accumulated depreciation
–
New residual value
÷
Remaining useful life