CHAPTER II

Accounting for Plant,

Properties and
Equipment,

Slide
9-1
 Study
Study Objectives
Objectives
1. Describe how the cost principle applies to plant assets.
2. Explain the concept of depreciation.
3. Compute periodic depreciation using different methods.
4. Describe the procedure for revising periodic depreciation.
5. Distinguish between revenue and capital expenditures, and
explain the entries for each.
6. Explain how to account for the disposal of a plant asset.

Slide
9-2
 2.1. Introduction: Plant
2.1. Introduction: Plant Assets
Assets

 PPE Life Cycle

Acquisition Operation Disposal

Cost: • Depreciation • Discard

• Purchased • Subsequent costs • Sale
• Self-Constructed • Exchange

Slide
9-3
 Plant
Plant Assets
Assets (PPE)
(PPE)

Plant assets include land, land improvements, buildings,

and equipment (machinery, furniture, tools).
Major characteristics include:

Purpose - “Used in operations” and not for resale.

Useful life - Long-term in nature and usually
depreciated.
Tangible - Possess physical substance.

Referred to as property, plant, and equipment; plant and

equipment; and fixed assets.

Slide
9-4
 2.2.Determining
2.2.Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Cost = Purchase price (net) + Make ready costs
Acquisition: purchase/construction

Land
Includes all costs to acquire land and ready it for use.
Costs typically include:

(1) purchase price;

(2) closing costs, such as title and attorney’s fees;
(3) real estate brokers’ commissions;
(4) costs of grading, filling, draining, and clearing;
(5) assumption of any liens, mortgages, or encumbrances on
Slide
the property.
9-5
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Illustration: Assume that A Company acquires real estate at a

cash cost of Br100,000. The property contains an old warehouse
that is razed at a net cost of Br6,000 (Br7,500 in costs less
Br1,500 proceeds from salvaged materials). Additional
expenditures are the attorney’s fee, Br1,000, and the real estate
broker’s commission, Br8,000. The cost of the land is
___________, computed as follows.

Required: Determine amount to be reported as the cost of the

land.

Slide
9-6
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets
Required: Determine amount to be reported as the cost of the
land.
Land
Cash price of property of Br100,000 Br100,000
Net removal cost of warehouse of Br6,000 6,000
Attorney's fees of Br1,000 1,000
Real estate broker’s commission of Br8,000 8,000
Cost of Land Br115,000
Journal Entry
Land 115,000
Cash 115,000
Slide
9-7
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Land Improvements
All expenditures necessary to make the improvements
ready for their intended use.

Driveways, parking lots, fences, landscaping, and

underground sprinklers.
Limited useful lives.
Expense (depreciate) the cost of land improvements
over their useful lives.

Slide
9-8
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Buildings
All costs related directly to purchase or construction.
Purchase costs:
Purchase price, closing costs and real estate broker’s
commission.
Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing.
Construction costs:
Contract price plus payments for architects’ fees, building
permits, and excavation costs.

Slide
9-9
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Equipment
All costs incurred in acquiring the equipment and
preparing it for use.
Costs typically include:
purchase price,
sales taxes (non refundable),
freight and handling charges,
insurance on the equipment while in transit,
assembling and installation costs, and
costs of conducting trial runs.
Slide
9-10
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Illustration: Assume A Company purchases factory machinery

at a cash price of Br50,000. Related expenditures are for sales
taxes Br3,000 (non refundable), insurance during shipping
Br500, and installation and testing Br1,000. Determine amount
to be reported as the cost of the machinery. Machinery
Cash price Br50,000
Sales taxes 3,000
Insurance during shipping 500
Installation and testing 1,000
Cost of Machinery Br54,500

Slide
9-11
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Exercise: Assume that A company purchases a delivery

truck at a purchase price of Br22 000. Related expenditures
are for air conditioning Br1320, painting and lettering
Br500, motor vehicle registration Br350, and a 3-year
accident insurance policy Br1600. The cost of the delivery
truck is ___________________

Slide
9-12
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Exercise: Assume that A company purchases a delivery truck at

a purchase price of Br22 000. Related expenditures are for air
conditioning Br1320, painting and lettering Br500, motor vehicle
registration Br350, and a 3-year accident insurance policy
Br1600. The cost of the delivery truck is ___________________

Truck
Purchase price Br22,000
Air conditioning 1,320
Painting and lettering 500
Cost of Delivery Truck Br23,820

Slide
9-13
SO 1 Describe how the cost principle applies to plant assets.
 Determining
Determining the
the Cost
Cost of
of Plant
Plant Assets
Assets

Cost of Acquiring Fixed Assets Excludes:

Vandalism
Mistakes in installation
Uninsured theft
Damage during unpacking and installing
 Fines for not obtaining proper permits from
government agencies
 Employee training costs

Slide
9-14
SO 1 Describe how the cost principle applies to plant assets.
 2.3.Depreciation
2.3.Depreciation
Depreciation is the 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.
Depreciation expense - loss of productive capacity

Process of cost allocation, not asset valuation.

Applies to land improvements, buildings, and
equipment, not land.
Depreciable, because the revenue-producing ability of
asset will decline over the asset’s useful life.
Slide
9-15
SO 2 Explain the concept of depreciation.
 Depreciation
Depreciation

 Causes
 Physical depreciation - wear and tear
 Use
 Exposure to natural elements (e.g. wind, sun,
rain, etc.)
 Economic/Functional depreciation
 Obsolescence – e.g. new tech
 Inadequacy – e.g. growth or change firm
operation/size

Slide
9-16
SO 2 Explain the concept of depreciation.
 Factors in Computing Depreciation

Illustration 10-6
Three factors in computing
Helpful Hint
depreciation
Depreciation expense is reported on
the income statement. Accumulated
depreciation is reported on the balance
Alternative Terminology
sheet as a deduction from plant assets.
Another term sometimes used for
salvage value is residual value.

Slide
9-17
 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).

Slide
9-18
 Depreciation Methods

Management selects the method it believes best measures

an asset’s contribution to revenue over its useful life.

Examples include:
1. Straight-line method
2. Units-of-activity method
3. Declining-balance method Diminishing
4. Sum-of-the-Years’-Digits (accelerated)-charge
methods

Slide
9-19
 Depreciation Methods

Illustration: Barb’s Florists purchased a small delivery truck on

January 1, 2017.
Illustration 10-7
Delivery truck data
Cost $13,000
Expected salvage value $1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000

Required: Compute depreciation using the following.

(a) Straight-Line (b) Units-of-Activity (c) Declining Balance

Slide
9-20
 Depreciation Methods
STRAIGHT-LINE METHOD
 Expense is same amount for each year.
 Depreciable cost = Cost less salvage value.

Illustration 10-9
Formula for straight-line
method

 Formula
D/E = Cost –Salvage Value
Service Life
Slide
9-21
 Depreciation Methods

Illustration: (Straight-Line)
Illustration 10-10
Annual
Depreciable Depreciation Accumulated Book
Year Cost x Rate = Expense Depreciation Value
2017 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600 *
2018 12,000 2,400 4,800 8,200
20
2019 12,000 2,400 7,200 5,800
20
2020 12,000 2,400 9,600 3,400
20
2021 12,000 2,400 12,000 1,000
20
2017 Depreciation expense 2,400
Journal Accumulated depreciation 2,400
Entry
Slide * Book value = Cost - Accumulated depreciation = ($13,000 - $2,400).
9-22
 Depreciation Methods

UNITS-OF-ACTIVITY METHOD
 Companies estimate total units of activity to calculate
depreciation cost per unit.
 Expense varies based on units of activity.
 Depreciable cost is cost less salvage value.
Alternative Terminology
Another term often used is the units-of-production method.

 Formula
D = (Cost – Residual Value) x Yearly Activity
Total Estimated Activity
Slide
9-23
 Depreciation Methods

UNITS-OF-ACTIVITY METHOD

Illustration 10-11
Formula for units-of-activity method

Slide
9-24
 Depreciation Methods

Illustration: (Units-of-Activity)
Illustration 10-12
Cost Annual
Miles per Depreciation Accumulated Book
Year Driven x Unit = Expense Depreciation Value

2017 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,200

2018 30,000 3,600 5,400 7,600
0.12
2019 20,000 2,400 7,800 5,200
0.12
2020 25,000 3,000 10,800 2,200
0.12
2021 10,000 1,200 12,000 1,000
0.12

2017 Depreciation expense 1,800

Journal Accumulated depreciation 1,800
Entry
Slide
9-25
 Depreciation Methods

DECLINING-BALANCE METHOD
 Accelerated method.
 Decreasing annual depreciation expense over the asset’s
useful life.
 Twice the straight-line rate with Double-Declining-Balance.
 Rate applied to book value.
Illustration 10-13

Slide
9-26
 Depreciation Methods
Illustration: (Declining-Balance)
Illustration 10-14
Declining Annual
Beginning Balance Depreciation Accumulated Book
Year Book value x Rate = Expense Depreciation Value

2017 $13,000 40% $ 5,200 $ 5,200 $ 7,800

2018 7,800 3,120 8,320 4,680
40
2019 4,680 1,872 10,192 2,808
40
2020 2,808 1,123 11,315 1,685
40
2021 1,685 685* 12,000 1,000
40
$1,685 Desired ending
2017
$1,685––$1,000
$1,000 book value
Journal Depreciation expense 5,200
Entry Accumulated depreciation 5,200
Slide * Computation of $674 ($1,685 x 40%) is adjusted to $685.
9-27
 Depreciation Methods
SUM-OF-THE-YEARS’-DIGITS METHOD
 Accelerated method.
 Decreasing annual depreciation expense over the asset’s
useful life.
 Rate applied to depreciable cost.
 Formula:

D/E = Declining fraction or rate/(Cost-Salvage Value)

Rate: The numerator is the remaining life of the asset

The denominator is the sum of digits representing the life

of asset computed as S = N [(N+1) ÷2] where N is life of
Slide asset
9-28
 Depreciation
Illustration: (Sum-of-the-Years’-Digits Method)
Depreciation Depreciation Depreciation Accumulated Book Value
Year Base Fraction Expense Depreciation End of Year
1 $12,000 5/15 $4,000 $4,000 $9,000
2 12,000 4/15 3,200 7,200 5,800
3 12,000 3/15 2,400 9,600 3,400
4 12,000 2/15 1,600 11,200 1,800
5 12,000 1/15 800 12,000 1000

2012 Depreciation expense 4,000

Journal
Accumulated depreciation 4,000
Entry

Slide
9-29
 Revising Depreciation After 7 years

Equipment cost Br510,000 First,

First,establish
establishNBV
NBV
Salvage value - 10,000 at
atdate
dateofofchange
changein
in
Depreciable base 500,000 estimate.
estimate.
Useful life (original) ÷ 10 years
Annual depreciation Br 50,000 x 7 years = Br350,000

Balance Sheet (Dec. 31, 2014)

Plant Assets:
Equipment Br510,000
Accumulated depreciation 350,000
Net book value (NBV) Br160,000

Slide
9-32
 Revising Depreciation After 7 years

Net book value Br160,000 Depreciation

Depreciation
Salvage value (new) - Expense
Expensecalculation
calculation
5,000 for
for2015.
2015.
Depreciable base 155,000
Useful life remaining 8 years
Annual depreciation Br 19,375

Journal entry for 2015 and future years.

Depreciation Expense 19,375

Accumulated Depreciation 19,375

Slide
9-33
 2.4.Expenditures
2.4.Expenditures During
During Useful
Useful Life
Life
Ordinary Repairs - expenditures to maintain the operating
efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.
Example : motor tune up and oil changes, etc
Additions and Improvements - costs incurred to increase
the operating efficiency, productive capacity, or useful life of a
plant asset.
Debit - the plant asset affected. (Cost/Acc. Dep.)
Referred to as capital expenditures.

Slide SO 5 Distinguish between revenue and capital expenditures,

9-34 and explain the entries for each.
 Expenditures
Expenditures During
During Useful
Useful Life
Life
EXPENDITURE
Revenue
Increases Expenditure
Increases (Debit expense
operating
useful life account for
efficiency or No No
(extraordinary ordinary
adds to
repairs)? maintenance
capacity?
and repairs)

Yes Yes

Capital Expenditure Capital Expenditure

(Debit fixed asset (Debit accumulated
account) depreciation account)

Slide SO 5 Distinguish between revenue and capital expenditures,

9-35 and explain the entries for each.
 2.5.Plant
2.5.Plant Asset
Asset Disposals
Disposals
Companies dispose of plant assets in three ways —
Retirement, Sale, or Exchange.
Illustration 9-19

Record depreciation up to the date of disposal.

Eliminate asset by (1) debiting Accumulated Depreciation, and
(2) crediting the asset account.
Slide
9-36
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Retirement
Retirement

Retirement of Plant Assets

Illustration: Assume that a company retires
its computer printers, which cost Br32,000. The accumulated
depreciation on these printers is Br32,000. The journal entry to
record this retirement is:

Accumulated depreciation 32,000

Printing equipment 32,000

Question: What happens if a fully depreciated plant asset is still useful

to the company?

Slide
9-37
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Retirement
Retirement
Illustration: Assume that a company discards delivery
equipment that cost Br18,000 and has accumulated
depreciation of Br14,000. The journal entry is:

Accumulated depreciation 14,000

Loss on disposal 4,000
Delivery equipment 18,000

Companies report a loss on disposal in the “Other income and

expense” section of the income statement.

Slide
9-38
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

Sale of Plant Assets

Compare the book value of the asset with the proceeds
received from the sale.
If proceeds exceed the book value, a gain on disposal
occurs.
If proceeds are less than the book value, a loss on
disposal occurs.

Slide
9-39
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

Gain on Disposal
Illustration: Assume that on July 1, 2011, Wright Company sells
office furniture for Br16,000 cash. The office furniture originally
cost Br60,000. As of January 1, 2011, it had accumulated
depreciation of Br41,000. Depreciation for the first six months of
2011 is Br8,000. Prepare the journal entry to record depreciation
expense up to the date of sale.

Depreciation expense 8,000

Accumulated depreciation 8,000

Slide
9-40
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

Illustration 9-20
Computation of gain on
disposal

Illustration: Wright records the sale as follows.

July 1 Cash 16,000

Accumulated depreciation 49,000
Office equipment 60,000
Gain on disposal 5,000

Slide
9-41
SO 6 Explain how to account for the disposal of a plant asset.
 Plant
Plant Asset
Asset Disposals
Disposals -- Sale
Sale

Loss on Disposal Illustration 9-21

Computation of loss on disposal

Illustration: Assume
that instead of selling
the office furniture for
Br16,000, Wright sells it
for Br9,000.

July 1 Cash 9,000

Accumulated depreciation 49,000
Loss on disposal 2,000

Office equipment 60,000

Slide
9-42
SO 6 Explain how to account for the disposal of a plant asset.
 End of Chapter 2.

Slide
9-43