Disposition of Property,

Plant, and Equipment

A company may retire plant assets voluntarily or dispose of

them by
 Sale,
 Exchange,
 Involuntary conversion, or
 Abandonment.

Depreciation must be taken up to the date of disposition.

11-1
 Disposition of PP&E

Sale of Plant Assets

Illustration: Barret Group recorded depreciation on a machine
costing €18,000 for nine years at the rate of €1,200 per year. If it
sells the machine in the middle of the tenth year for €7,000, Barret
records depreciation to the date of sale as:

Depreciation Expense (€1,200 x ½) 600

Accumulated Depreciation—Machinery 600

11-2
 Disposition of PP&E

Illustration: Barret Group recorded depreciation on a machine

costing €18,000 for nine years at the rate of €1,200 per year. If it
sells the machine in the middle of the tenth year for €7,000, Barret
records depreciation to the date of sale. Record the entry to record
the sale of the asset:

Cash 7,000
Accumulated Depreciation—Machinery 11,400
Machinery 18,000
Gain on Disposal of Machinery 400

11-3
 Disposition of PP&E

Involuntary Conversion
Sometimes an asset’s service is terminated through some type of
involuntary conversion such as fire, flood, theft, or
condemnation.

Companies report the difference between the amount recovered

(e.g., from a condemnation award or insurance recovery), if any,
and the asset’s book value as a gain or loss.

They treat these gains or losses like any other type of disposition.

11-4
 Disposition of PP&E

Illustration: Camel Transport Corp. had to sell a plant located on

company property that stood directly in the path of an interstate
highway. Camel received $500,000, which substantially exceeded
the book value of the land of $150,000 and the book value of the
building of $100,000 (cost of $300,000 less accumulated
depreciation of $200,000). Camel made the following entry.

Cash 500,000
Accumulated Depreciation—Buildings 200,000
Buildings 300,000
Land 150,000
Gain on Disposal of Plant Assets 250,000

11-5
 Depreciation—A Method
of Cost Allocation

Depreciation is the accounting process of allocating the

cost of tangible assets to expense in a systematic and
rational manner to those periods expected to benefit from the
use of the asset.

Allocating costs of long-lived assets:

 Fixed assets = Depreciation expense
 Intangibles = Amortization expense
 Mineral resources = Depletion expense

11-6
 Depreciation—Method of Cost Allocation

Factors Involved in the Depreciation Process

Three basic questions:
1. What depreciable base is to be used?
2. What is the asset’s useful life?
3. What method of cost apportionment is best?

11-7
 Factors Involved in Depreciation Process

Depreciable Base for the Asset

ILLUSTRATION 11.1
Computation of Depreciation Base

11-8
 Factors Involved in Depreciation Process

Estimation of Service Lives

 Service life often differs from physical life.
 Companies retire assets for two reasons:
1. Physical factors (casualty or expiration of
physical life).

2. Economic factors (inadequacy, supersession,

and obsolescence).

11-9
 Depreciation—Method of Cost Allocation

Methods of Depreciation
The profession requires the method employed be “systematic
and rational.” Methods used include:

1. Activity method (units of use or production).

2. Straight-line method.
3. Diminishing (accelerated)-charge methods:
a. Sum-of-the-years’-digits.
b. Declining-balance method.

11-10
 Methods of Depreciation

Activity Method ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Illustration: If Stanley uses the crane for 4,000 hours the first
year, the depreciation charge is:

ILLUSTRATION 11.3
Depreciation Calculation,
Activity Method—Crane
Example

11-11
 Methods of Depreciation

Straight-Line Method ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Illustration: Stanley computes depreciation as follows:

ILLUSTRATION 11.4
Depreciation Calculation,
Straight-Line Method—
Crane Example

11-12
 Methods of Depreciation

Diminishing-Charge Methods ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Sum-of-the-Years’-Digits. Each fraction uses the sum of the

years as a denominator (5 + 4 + 3 + 2 + 1 = 15). The numerator
is the number of years of estimated life remaining as of the
beginning of the year.

Alternate sum-of-the- n(n+1) 5(5+1)

= = 15
years’ calculation 2 2
11-13
 Methods of Depreciation

Sum-of-the-Years’-Digits

ILLUSTRATION 11.6
Sum-of-the-Years’-Digits Depreciation Schedule—Crane Example

11-14
 Methods of Depreciation

Diminishing-Charge Methods ILLUSTRATION 11.2

Data Used to Illustrate
Depreciation Methods

Data for
Stanley Coal
Mines

Declining-Balance Method.
 Utilizes a depreciation rate (percentage) that is some multiple
of the straight-line method.
 Does not deduct the salvage value in computing the
depreciation base.

11-15
 Methods of Depreciation

Declining-Balance Method

ILLUSTRATION 11.7
Double-Declining Depreciation Schedule—Crane Example

11-16
 Other Depreciation Issues

Component Depreciation
IFRS requires that each part of an item of property, plant,
and equipment that is significant to the total cost of the
asset must be depreciated separately.

11-17
 Component Depreciation

Illustration: EuroAsia Airlines purchases an airplane for

€100,000,000 on January 1, 2020. The airplane has a useful life
of 20 years and a residual value of €0. EuroAsia uses the straight-
line method of depreciation for all its airplanes. EuroAsia identifies
the following components, amounts, and useful lives.

ILLUSTRATION 11.8
Airplane Components

11-18
 Component Depreciation

Computation of depreciation expense for

ILLUSTRATION 11.9
EuroAsia for 2020. Computation of
Component Depreciation

Depreciation journal entry for 2020.

Depreciation Expense 8,600,000
Accumulated Depreciation—Equipment 8,600,000

11-19
 Component Depreciation

On the statement of financial position at the end of 2020,

EuroAsia reports the airplane as a single amount.

ILLUSTRATION 11.10
Presentation of Carrying Amount of Airplane

11-20
 Other Depreciation Issues

Depreciation and Partial Periods

How should companies compute depreciation for partial
periods?
 Companies determine the depreciation expense for the
full year and then
 prorate this depreciation expense between the two
periods involved.

This process should continue throughout the useful life of the

asset.

11-21
 Depreciation and Partial Periods

Illustration—(Four Methods): Maserati SpA purchased a new

machine for its assembly process on August 1, 2019. The cost of this
machine was €150,000. The company estimated that the machine
would have a salvage value of €24,000 at the end of its service life.
Its life is estimated at 5 years and its working hours are estimated at
21,000 hours. Year-end is December 31.

Instructions: Compute the depreciation expense under the

following methods.
(a) Straight-line depreciation. (c) Sum-of-the-years’-digits.
(b) Activity method (d) Double-declining balance.

11-22
 Depreciation and Partial Periods

Straight-line Method
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.
2019 € 126,000 / 5 = $ 25,200 x 5/12 = € 10,500 $ 10,500
2020 126,000 / 5 = 25,200 25,200 35,700
2021 126,000 / 5 = 25,200 25,200 60,900
2022 126,000 / 5 = 25,200 25,200 86,100
2023 126,000 / 5 = 25,200 25,200 111,300
2024 126,000 / 5 = 25,200 x 7/12 = 14,700 126,000
€ 126,000
Journal entry:

2019 Depreciation expense 10,500

Accumultated depreciation 10,500

11-23
 Depreciation and Partial Periods

Activity Method (Assume 800 hours used in 2019)

(€126,000 / 21,000 hours = €6 per hour)
(Given) Current
Hours Rate per Annual Partial Year Accum.
Year Used Hours Expense Year Expense Deprec.
2019 800 x $6 = € 4,800 € 4,800 € 4,800
2020 x =
2021 x =
2022 x =
2023 x =
800 € 4,800

Journal entry:
2019 Depreciation expense 4,800
Accumultated depreciation 4,800

11-24
 Depreciation and Partial Periods
5/12 = .416667
Sum-of-the-Years’-Digits Method 7/12 = .583333
Current
Depreciable Annual Partial Year Accum.
Year Base Years Expense Year Expense Deprec.

2019 € 126,000 x 5/15 = 42,000 x 5/12 € 17,500 € 17,500

2020 126,000 x 4.58/15 = 38,500 38,500 56,000

2021 126,000 x 3.58/15 = 30,100 30,100 86,100

2022 126,000 x 2.58/15 = 21,700 21,700 107,800

2023 126,000 x 1.58/15 = 13,300 13,300 121,100

2024 126,000 x .58/15 = 4,900 4,900 126,000

€ 126,000
Journal entry:
2019 Depreciation expense 17,500
Accumultated depreciation 17,500
11-25
 Depreciation and Partial Periods

Double-Declining Balance Method

Current
Depreciable Rate Annual Partial Year
Year Base per Year Expense Year Expense

2019 € 150,000 x 40% = € 60,000 x 5/12 = € 25,000

2020 125,000 x 40% = 50,000 50,000

2021 75,000 x 40% = 30,000 30,000

2022 45,000 x 40% = 18,000 18,000

2023 27,000 x 40% = 10,800 Plug 3,000

€ 126,000
Journal entry:
2019 Depreciation expense 25,000
Accumultated depreciation 25,000

11-26
 Other Depreciation Issues

Depreciation and Replacement of PP&E

Does depreciation provide for the replacement of assets?
 Does not involve a current cash outflow.
 Funds for the replacement of the assets come from the
revenues (generated through use of the asset).

11-27
 Other Depreciation Issues

Revision of Depreciation Rates

How should companies handle revisions in depreciation
rates?
 Accounted for in the current and prospective periods
 Not handled retrospectively
 Not considered errors or extraordinary items

11-28
 Revision of Depreciation Rates

Arcadia HS, purchased equipment for $510,000 which was

estimated to have a useful life of 10 years with a residual value
of $10,000 at the end of that time. Depreciation has been
recorded for 7 years on a straight-line basis. In 2019 (year 8), it
is determined that the total estimated life should be 15 years
with a residual value of $5,000 at the end of that time.

Questions:
 What is the journal entry to correct No Entry
the prior years’ depreciation? Required

 Calculate the depreciation expense

for 2019.
11-29
 After 7
Revision of Depreciation Rates years

Equipment cost $510,000 First, establish NBV

Salvage value - 10,000 at date of change in
Depreciable base 500,000 estimate.
Useful life (original) 10 years
Annual depreciation $ 50,000 x 7 years = $350,000

Balance Sheet (Dec. 31, 2018)

Equipment $510,000
Accumulated depreciation 350,000
Net book value (NBV) $160,000

11-30
 After 7
Revision of Depreciation Rates years

Net book value $160,000 Depreciation

Salvage value (new) 5,000 Expense calculation
Depreciable base 155,000 for 2019.
Useful life remaining 8 years
Annual depreciation $ 19,375

Journal entry for 2019

Depreciation Expense 19,375

Accumulated Depreciation 19,375

11-31