Accounting for Property,
Plant Equipment,
and Intangible Assets
Pr. Zoubida SAMLAL
Property, Plant, and
Equipment
Assets that benefit more than one
accounting period must be capitalized.
To capitalize is to debit an
asset for the original cost.
Learning Objective 1
Calculating the cost of an asset.
Types of Long-Term Assets
Tangible assets:
– land
– buildings
– equipment
Intangible assets:
– patents
– copyrights
– franchises
– goodwill
Natural resources: timber, oil, coal
Cost and Value of Long-Term
Assets
What is included in the cost of an asset?
• Purchase price of the asset plus all costs
necessary to place the asset into service.
• It does not include the cost of negligence.
• Cash discounts are deducted from the price.
• Debit the asset account and credit Cash
and/or Liabilities to record the asset.
Cost and Value of Long-Term
Assets
• Debiting an asset account instead of
expensing the cost is called capitalization.
• The cost of the asset will be allocated to
periods of use to be matched with revenue of
those periods.
• This process is called depreciation.
Cost and Value of Long-Term
Assets
• The cost of driveways, shrubbery, paving of
parking lots, sprinkler systems, light poles,
etc., have a limited useful life.
• These assets would be depreciated over that
useful life.
Cost and Value of Long-Term
Assets
• The cost of land includes related costs of
surveying, commissions, title searches, and
clearing. In other words, any cost necessary to
prepare it for its designated purpose.
• Land has an unlimited useful life,
so it
is not depreciated.
Learning Objective 2
Calculating depreciation using one of four
methods:
1. straight-line,
2. declining-balance,
3. units-of-production,
4. and sum-of-the-years’-digits.
Depreciation
• What are the different depreciation
methods?
1 Straight-line
2 Double declining-balance
3 Units-of-production
4 Sum-of-the-years’ digits
• MACRS – Modified Accelerated Cost
Recovery System
Depreciation
• Melvin Company purchased a delivery truck
on January 1, 2011 for $20,000.
• The company expects the van to have a
residual value of $2,000 at the end of its
useful life.
• The truck has an estimated service life of
90,000 miles or 5 years.
Depreciation
The straight-line method assigns an equal amount of
depreciation expense to each year.
• (Cost – Residual value) ÷ Useful life in years
Depreciation:
($20,000 – $2,000) ÷ 5 = $18,000 ÷ 5 = $3,600
Depreciation
Year 1
Depreciation
200x $3,600
Accumulated
Depreciation
$3,600 200x
Depreciation
• (Cost – Residual value) ÷ Years of useful life
• ($20,000 – 2,000) ÷ 5 = $18,000 ÷ 5 = $3,600
Year 1 depreciation:$ 3,600
Year 2
depreciation: $ 3,600
Year 3
depreciation: $ 3,600
Year 4
depreciation: $ 3,600
Year 5
depreciation: $ 3,600
Total
depreciation:
$18,000
Depreciation
• The double declining-balance method is an
accelerated depreciation method.
• It writes off a relatively larger amount of the
asset’s cost nearer the start of its useful life
than the straight-line method does.
• 100% ÷ 5 = 20%
• The double declining balance is two times the
straight-line rate, or 40%
Depreciation
• The book value is the unexpired portion of
the cost of an asset.
• What is the book value of the truck at the end
of the first year?
• $20,000  40% = $8,000
• $20,000 – $8,000 = $12,000
Depreciation
• The units-of-production method assigns a
fixed amount of depreciation to each unit of
output or service produced by the plant asset.
Depreciation
Depreciation per unit:
• (Cost – Residual value) ÷ Useful life in units
• ($20,000 – $2,000) ÷ 90,000 miles
• $18,000 ÷ 90,000 miles = $.20/mile
How much is the depreciation expense if the van
was driven 30,000 miles the first year?
• 30,000 miles × $.20 ÷ mile = $6,000
Depreciation
• Depreciation @ $.20/mile:
Year 1: 30,000 miles = $ 6,000
2: 21,000 miles = $ 4,200
15,000 miles = $ 3,000
5,000 miles = $ 1,000
19,000 miles =
$ 3,800
Total: 90,000 miles = $18,000
Year
Year 3:
Year 4:
Year 5:
Depreciation
The sum-of-the -years’ digits method formula
follows:
• N is the Numerator = number of years of life
remaining
• D is the Denominator = sum of the year’s
digits divided by two = [N(N + 1) ÷ 2]
Depreciation
What is the book value of the truck at the end of the
first year?
• $18,000 × 5 ÷ 15 = $6,000
• $20,000 – $6,000 = $14,000
What is the book value of the truck at the end of the
second year?
• $18,000  4 ÷ 15 = $4,800
• $20,000 – $10,800 = $9,200
Learning Objective 3
Calculating depreciation
for tax purposes using the
Modified Accelerated
Cost Recovery System.
MACRS
• MACRS stands for Modified Accelerated Cost
Recovery System.
• Class asset life is determined.
• Depreciation rates are found in the relevant
table provided by the IRS.
• Listed property items are those which are
subject to personal use such as computers and
automobiles.
Learning Objective 4
Explaining the difference between
capital expenditures
and revenue expenditures.
Capital versus Revenue
Expenditures
•
–
–
–
•
What are capital expenditures?
original cost of assets
additions or enlargements
extraordinary repair or betterment
All capital expenditures, except for land, are
debited to asset accounts and depreciated.
16
Capital versus Revenue
Expenditures
Categories of Capital Expenditures
Additions or Enlargements:
(charged to asset account)
Extraordinary Repairs:
(charged to accumulated depreciation)
Betterments:
(charged to asset account)
Capital versus Revenue
Expenditures
•
–
–
•
•
What are revenue expenditures?
another name for expenses
payments made for ordinary maintenance
These payments occur often.
All payments are debited to expense accounts.
Learning Objective 5
Journalizing entries for discarding,
selling, or exchanging plant assets.
Journalizing Long Term Assets
• How does a company dispose of its plant
assets?
– discarding
– selling
– exchanging for similar plant assets
Journalizing Long Term Assets
Boulder Company is disposing of a $7,000 truck with
no residual value.
• The truck has been fully depreciated.
What is the entry?
Accumulated Depreciation 7,000
Truck
7,000
• Assume that the accumulated depreciation on the
truck is $6,000.
Journalizing Long Term Assets
What is the entry?
Loss on Disposal
1,000
Accumulated Depreciation 6,000
Truck
7,000
Journalizing Long Term Assets
Dissimilar assets exchange:
Gain/loss is recognized in
the same manner as if
the asset were sold.
Similar assets exchange:
No gain is recognized.
Gain is absorbed into
the new asset.
The IRS allows neither
a gain nor a loss to be
recognized on
similar exchanges.
Learning Objective 6
Explaining amortization and
how it applies to intangible assets.
Amortization and Intangible
Assets
• The cost of original intangible asset rights is
allocated over the life of the asset in terms of
estimated units of total production over the
life of the asset.
• Depletion method is similar to units of
production depreciation method.
Amortization and Intangible
Assets
• Amortization is the allocation of the cost of
original asset rights over the shorter of 40
years, legal life, or useful life of the asset.
• Patents – life of patent or 17 years
• Copyrights – useful life or 50 years
• Franchises – life of franchise or 40 years
• Goodwill – usually 40 years