1-1
Property, Plant, and
Equipment and Intangibles
CHAPTER 9
Electronic Presentations in Microsoft® PowerPoint® to accompany
Fundamental Accounting Principles, 17ce
Prepared by
Regula Lewis
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Learning Objectives
1
1. Describe property, plant and equipment (PPE) and calculate their
cost. (LO1)
2. Explain, record, and calculate depreciation using the methods of
straight-line, units of production, and double-declining balance. (LO2)
3. Explain and calculate depreciation for partial years. (LO3)
4. Explain and calculate revised depreciation. (LO4)
5. Explain and record impairment losses. (LO5)
6. Account for asset disposal through discarding, selling, or exchanging
an asset. (LO6)
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Learning Objectives
2
7. Account for intangible assets and their amortization. (LO7)
8. Explain and calculate revised depreciation when there is a betterment
that creates partial-period depreciation. Appendix 9A (LO8)
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Vignette Video
Vancouver International Airport – A Canadian Leader in Sustainability and
Innovation.
Video Link:
https://youtu.be/xS60bqgB8VM
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Critical Thinking Challenge
You are asked by the CFO of YVR to evaluate one of the airport’s capital
assets additions, the Airside Operations Building, and to break it into
major components for depreciation purposes. Identify at least five major
components and determine an expected life for each of those
components.
Video Link:
https://youtu.be/xS60bqgB8VM
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LO1: Property, Plant and Equipment (PPE)
1
Non-current assets that are used in the operations of a business and have
a useful life of more than one accounting period are divided into three
groups:
1. Tangible assets known as property, plant, and equipment
2. Intangible assets
3. Goodwill
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Property, Plant and Equipment (PPE)
2
• Sometimes referred to as capital assets or fixed assets, includes
furniture, fixtures and equipment, computer equipment, and leasehold
improvements.
• For many businesses, PPE makes up the single largest asset category on
the balance sheet.
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Property, Plant and Equipment (PPE)
3
PPE are set apart from other assets by two important features:
1. Assets are used in business operations to help generate revenue.
2. PPE are in use and provide benefits for more than one accounting
period.
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Property, Plant and Equipment (PPE)
4
The three main accounting issues with PPE are:
1. Calculating and accounting for the initial and subsequent costs of PPE.
2. Allocating the costs of PPE against revenues for the periods they
benefit in the manner in which the asset is consumed/used.
3. Recording the disposal of PPE.
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Issues in Accounting for PPE
EXHIBIT 9.1
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Cost of Property, Plant & Equipment
1
PPE are recorded at cost, which includes all normal and reasonable
expenditures necessary to get the asset in place and ready for its intended
use.
Example: The cost of a piece of manufacturing equipment (Betterments):
1. Its invoice price, less any cash discount for early payment
2. Freight, unpacking, and assembling costs
3. Non-refundable sales taxes (PST)
4. Installation and testing equipment before placing it in use
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Cost of Property, Plant & Equipment
2
• Betterments represent costs of PPE that provide material benefits
extending beyond the current period.
• They are debited to PPE accounts and reported on the balance sheet.
• When expenditures regarding PPE are not considered a normal part of
getting the asset ready for its intended use, they are expensed as a
current-period cost.
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Subsequent Expenditures
1
• When PPE are acquired and put into service, additional or subsequent
expenditures often are incurred after the acquisition to operate,
maintain, repair, and improve it.
• In recording these subsequent expenditures, we must decide whether
they are to be accounted for as betterments or as repairs and
maintenance expenses.
• Examples: Supplies, fuel, minor repairs, and costs relating to routine
testing.
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Subsequent Expenditures
2
EXHIBIT 9.2
Is it a Betterment or a
Repairs and Maintenance
Expense?
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Subsequent Expenditures
3
• A betterment does not always increase an asset’s useful life.
• Financial statements are affected for several years as a result of the
choice to record costs as repairs and maintenance expenses or as
betterments.
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PPE Subledger
• Details information such as cost, residual value, estimated useful life,
date of purchase, depreciation, serial number, and other relevant data
for each item of PPE or group of PPE.
• Can be used as an audit trail to verify recorded PPE against a physical
count.
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Low-Cost Asset Purchases
• Are treated as repairs and maintenance expenses.
• Costs are directly charged to an expense account at the time of
purchase.
• Example: In a recent annual report Coca-Cola disclosed that it capitalizes
only major or material betterments: “ Repair and maintenance costs
that do not improve service potential or extend economic life are
expensed as incurred.” Source: Coca-Cola Annual Report 2020
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CHECKPOINT
1. What is included in the cost of a PPE asset?
2. Explain the difference between repairs and maintenance expenses and
betterments and how they are recorded.
3. What is a betterment and how is it recorded?
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Land
1
When land is purchased for a building site, its cost includes the following:
• Total amount paid for the land, including any real estate commissions,
fees for insuring the title, legal fees, and any accrued property taxes
paid by the purchaser.
• Payments for surveying, clearing, grading, draining, and landscaping are
also included in the cost of land.
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Land
2
Other costs of land include:
• Assessments by the local government, whether incurred at the time of
purchase or later, for items such as roadways, sewers, and sidewalks.
These assessments are included because they permanently add to the
land’s value.
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Land Purchased with Removal of a Building
Land purchased as a building site sometimes includes a building or other
obstructions that must be removed. The total amount included in the cost
of land is:
• Purchase price is capitalized under the Land account
• Any costs incurred in removing the old building, less any amounts
recovered through sale of salvaged materials.
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Land Improvements
Land improvements are charged to a separate PPE account so their costs
can be allocated to the periods they benefit. They are subject to
depreciation.
Examples:
• Parking lot surfaces
• Driveways
• Fences
• Lighting systems
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Acquired Buildings
1
Charged for the costs of purchasing or constructing a building when it is
used in operations. Includes:
• Purchase price
• Brokerage fees
• Taxes
• Title fees
• Legal costs
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Acquired Buildings
2
Its costs also include all expenditures to make it ready for its intended use,
such as repairs or renovations that include:
• Wiring
• Lighting
• Plumbing
• Flooring
• Wall coverings
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Constructed Buildings
1
When a building, or any PPE item, is constructed by a company for the
company’s own use. Includes:
• Construction-related materials and labour costs
• Heat, electricity, and other utilities consumed during construction
• A reasonable amount of depreciation expense on machinery used to
construct the asset
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Constructed Buildings
2
• Design fees
• Building permits
• Interest and insurance costs applicable to the period of construction
All interest and insurance costs incurred after the asset is placed in use
are expensed as operating expenses.
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Leasehold Improvements
1
• The property’s owner grants the lease and is called the lessor.
• The one who secures the right to possess and use the property is called
the lessee.
• Non-current leases sometimes require the lessee to pay for alterations
or improvements to the leased property—these costs are referred to as
leasehold improvements.
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Leasehold Improvements
2
Includes:
• Interior modifications, such as installation of walls
• Enhancements, such as installation of built-in display walls, new
storefronts, updated flooring, and painting
• Plumbing, including new fixtures for restrooms
• Electrical, such as installation of updated light fixtures
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Machinery and Equipment
The cost of machinery and equipment consists of all costs normal and
necessary to purchase it and prepare it for its intended use. Includes:
• Purchase price less discounts
• Non-refundable sales taxes
• Transportation charges
• Insurance while in transit
• Costs of installing, assembling, and testing of machinery and equipment
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Lump-Sum Asset Purchase
• The purchase of PPE in a group with a single transaction for a lump-sum
price.
• The cost of the purchase is allocated to the different types of assets
acquired based on their relative values.
• Values can be estimated by appraisal or by using tax-assessed valuations
of the assets.
• A lump-sum purchase is also called a basket purchase.
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CHECKPOINT
4. Identify the account charged for each of the following expenditures:
(a) purchase price of a vacant lot, and (b) cost of paving that vacant
lot.
5. What amount is recorded as the cost of a new machine given the
following items related to its purchase: gross purchase price,
$700,000; sales tax, $49,000; purchase discount taken, $21,000;
freight to move machine to plant, $3500; assembly costs, $3,000; cost
of foundation for machine, $2,500; cost of spare parts used in
maintaining machine, $4,200?
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LO2: Depreciation
1
• The process of matching (or allocating) as asset’s cost to expense over
its useful life.
• Depreciation is a process of cost allocation, not asset valuation.
• Both the cost and accumulated depreciation of PPE must be reported.
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Depreciation
2
Cost of the Delivery Van Recorded as an Expense in Year of Purchase:
EXHIBIT 9.4
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Depreciation
3
Cost of the Delivery Van Matched Against Revenues Generated Over
Its Four-Year Useful Life:
EXHIBIT 9.5
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Reporting Depreciation on Assets
1
• Both the cost and accumulated depreciation of PPE must be reported.
• Many companies show PPE on one line at the net amount of cost less
accumulated depreciation.
• The amount of accumulated depreciation is disclosed in a footnote.
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Reporting Depreciation on Assets
2
• Derecognized assets are removed from a company’s accounting
records either when they are disposed of or when the company
determines that no future benefits are expected from their use.
• Any gain or loss arising on derecognition is included in earnings in the
period the asset is disposed or in the period that it is determined the
asset will no longer provide the company with value.
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Factors in Calculating Depreciation
1. Cost
2. Estimated residual value
3. Estimated useful (service) life
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Allocating Cost to Assets with Significant
Components
• Where an asset consists of major parts (or components) that are
significant in relation to the total cost of the asset, each part or
common group of parts is required to be depreciated separately
under the IFRS.
• Each major part must be depreciated separately.
• Use PEE subledger to record information related to assets and parts
of assets.
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Residual Value
• An estimate of the amount we expect to be received from selling or
trading the asset at the end of its useful life.
• The residual value is not depreciated, as the value is expected to be
collected at the end of the asset’s useful life.
• If we expect an asset to be traded in on a new asset, its residual value
is the expected trade-in value.
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Useful (Service) Life
• Length of time a plant asset is to be used in operations.
• Several variables often make the useful life of an asset hard to
predict, such as wear and tear from use in operations, inadequacy,
and obsolescence.
• To predict the useful life of a new asset, a company uses its past
experience or, when it has no experience with a type of asset, it relies
on the experience of others or on engineering studies and judgment.
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ETHICAL IMPACT
1
You are a newly graduated CPA student and recently accepted a job as a
junior accountant responsible for managing the property, plant, and
equipment subledger for the Bermuda Airport Authority (BAA). The
controller has asked you to update the outdated PPE subledger by
adjusting the following areas:
1. Hold off on recording depreciation for the new BorderXpress
automatic passport control kiosks that were installed last year until
there is a better idea of their expected useful life.
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ETHICAL IMPACT
2
2. Extend the useful lives for the airport’s emergency vehicles,
including the fire trucks, ambulance, and security trucks, from 8
years to 15 years.
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ETHICAL IMPACT
3
3. The building maintenance group is responsible for ensuring the
airport facilities are clean and in good working condition. They
recently had to deal with a major plumbing blockage and damage to
one of the runways that was caused by invasive tree roots coming
from a green space near the domestic terminal. The tree root
removal and cleaning of the debris from the plumbing system and
runway repair cost the airport $280,000. The controller has asked
that you capitalize these expenses, including them in the property,
plant, and equipment subledger and depreciating over 50 years with
a $60,000 salvage value.
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ETHICAL IMPACT
4
4. A storage facility that is expected to be removed next year and is
currently not in use by BAA is being depreciated.
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ETHICAL IMPACT
5
Last week at lunch you overheard the director of finance talking to the
CFO about the negotiation of a major loan to pay for a new
international terminal expansion; he is concerned with the current high
debt levels as a percentage of total assets.
What, if any, are your concerns with each of the controller’s requests?
How would you handle the controller’s requests?
Who is impacted by your decision?
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Depreciation Methods
1
1. Straight-line (most frequently used).
2. Units-of-production.
3. Double-declining balance (accelerated method).
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Depreciation Methods
2
• Companies are required to select a method that most closely reflects
the expected pattern of consumption of the benefits of the underlying
asset.
• The depreciation method chosen is applied consistently from period to
period unless there is a change in use or a change in expected future
benefits.
• Depreciation methods based on revenue produced from operations
where the asset is being used are not permitted.
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Depreciation Methods
3
Data for Shoe Production Company:
Cost
Estimated residual value
Depreciable Cost
Estimated useful life:
Accounting periods
Units produced
$10,000
1,000
$9,000
5 years
36,000 shoes
EXHIBIT 9.6
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Straight-Line Method
1
Straight-Line Depreciation charges the same amount of depreciation
in each period of the asset’s useful life.
Formula:
EXHIBIT 9.7
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Straight-Line Method
2
Balance Sheet Presentation After Two Years of Depreciation:
EXHIBIT 9.8
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Straight-Line Method
3
Alternative Balance Sheet Presentation:
EXHIBIT 9.9
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Straight-Line Method
4
Financial Statement Effects of Straight-Line Depreciation
EXHIBIT 9.10
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Straight-Line Method
5
EXHIBIT 9.11 Straight-Line Depreciation Schedule:
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Straight-Line Method
6
The annual adjusting entry to record depreciation on this equipment
would be:
2020
2021
2022
2023
2024
$10,000
$10,000
$10,000
$10,000
$10,000
Less: Acc. Depreciation
1,800
3,600
5,400
7,200
9,000
Book Value
$8,200
$6,400
$4,600
$2,800
$1,000*
Equipment
*The book value is equal to the estimated residual value.
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Straight-Line Method
7
The three key features of the straight-line method:
1. Depreciation expense is the same each period.
2. Accumulated depreciation is the sum of current and prior periods
depreciation expense.
3. Book value declines each period until it equals the residual value at
the end of its useful life.
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Units-of-Production Method
1
• When use of equipment varies from period to period, the units-ofproduction method provides better allocation.
• Units of production depreciation charges a varying amount to expense
for each period of an asset’s useful life directly linked to its usage.
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Units-of-Production Method
2
• A two-step process is used to calculate units-of-production
depreciation:
Depreciation per unit =
𝐶𝑜𝑠𝑡 – 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝑇𝑜𝑡𝑎𝑙 𝑒𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
Annual depreciation expense = Actual production × depreciation per unit
EXHIBIT 9.12
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Units-of-Production Method
Year
Units Produced
2023
7,000
2024
8.000
2025
9,000
2026
7,000
2027
6,000
$.25 per unit 
3
$10, 000 – $1, 000
36, 000
Depreciation Expense for 2020:
$.25 per unit × 7,000 units = $1,750
EXHIBIT 9.13
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Units-of-Production Method
4
2023
2024
2025
2026
2027
$10,000
$10,000
$10,000
$10,000
$10,000
Less: Acc. Deprec.
1,750
3,750
6,000
7,750
9,000*
Book Value
$8,250
$6,250
$4,000
$2,250
$1,000
Equipment
*Maximum balance in accumulated depreciation for 2024 is $9,000, leaving the book value equal to the
residual value. The maximum depreciation expense for 2024 is $1,250 ($10,000-7,750), even if more
units were produced. The asset must not be depreciated below its residual value.
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Accelerated Depreciation Method
• Provides higher depreciation expenses in the early years of an asset’s
life and lower charges in later years.
• The most common is declining-balance depreciation.
• A depreciation rate, of up to twice the straight-line rate, is applied to
the asset’s beginning-of-the period book value.
• Because book value declines each period, the amount of depreciation
also declines each period.
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Double-Declining-Balance Method
Double-declining-balance depreciation (DDB) or diminishingbalance depreciation is applied in two steps:
1. Calculate the double-declining-balance rate (= 2 ÷ Estimated years of
useful life), and
2. Calculate depreciation expense by multiplying the rate by the asset’s
beginning-of-period book value.
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Important Tip
It is important to note that unlike the straight-line and units-ofproduction methods, residual value is not used in these calculations.
We adjust depreciation expense in the final year to depreciate the
asset down to the residual value, as illustrated in Exhibit 9.15.
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Double-Declining-Balance Method
1
Double-Declining-Balance Depreciation Formula:
2
Double-declining-balance depreciation = Book value × 𝑛 ,
Where 𝑛 = estimated useful life
Step 1:
Double-declining-balance rate = 2 ÷ Estimated useful life = 2 ÷ 5 years = 0.40 or 40%
Step 2:
Depreciation expense = Double-declining-balance rate × Beginning period book value
= 40% × $10,000 = $4,000
EXHIBIT 9.14
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Double-Declining-Balance Method
EXHIBIT 9.15
2
Depreciation Schedule
Depreciation for the Period
Beginning-of-Period Book
Value
Depreciation for
the Period
Depreciation Rate
End of Period
Depreciation
Expense
End of Period
Accumulated
Depreciation
End of Period
Book Value
-------
-------
-------
-------
$10,000*
2023
$10,000
40%
$4,000
$4,000
6,000
2024
6,000
40
2,400
6,400
3,600
2025
3,600
40
1,440
7,840
2,160
2026
2,160
40
864
8,704
1,296
2027
1,296
40
296**
9,000**
1,000
Period
*Cost on January 1, 2020 **Year 2024 depreciation is $1,296 - $1,000 = $296. This is because the maximum accumulated
depreciation equals cost minus residual value as we depreciated the asset only up to the residual value.
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Depreciation for Income Tax Reporting
1
• Financial accounting aims to report useful information on financial
performance and position, whereas income tax accounting reflects
government-established requirements developed to raise public
revenues and encourage public interests.
• Differences between these two bases are normal and expected.
• Depreciation is an example of one of these common differences
between financial statement profit and taxable income.
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Depreciation for Income Tax Reporting
2
• The Income Tax Act requires that companies use an accelerated
depreciation method for calculating the maximum capital cost
allowance that may be claimed in any period.
• Capital cost allowance (CCA) is the term used to describe depreciation
for tax purposes.
• CCA reduces taxable income in the early years of an asset’s life because
depreciation expense is greatest in the early years.
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Comparing Depreciation Methods
1
• The amount of depreciation expense per period is different for each
method, but the total depreciation expense is the same, $9,000.
• Each method starts with a cost of $10,000 and ends with a residual
value of $1,000.
• The difference is the pattern in depreciation expense over the useful
life.
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Comparison of Depreciation Methods
2
EXHIBIT 9.16
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Comparison of Depreciation Methods
2
Depreciation Methods Compared: Annual Depreciation Expense:
Straight-Line
Units-of-Production
Actual units
produced in
period
Double-DecliningBalance
Period
Cost – Est. residual
Est. useful life
Cost – Est. residual
Total est. units
of production
Book value x 2/n,
Where n = Est. useful
life
2023
$ 1,800
$ 1,750
$ 4,000
2024
1,800
2,000
2,400
2025
1,800
2,250
1,440
2026
1,800
1,750
864
2027
1,800
1,250
296
$ 9,000
$ 9,000
$ 9,000
EXHIBIT 9.16
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Comparison of Depreciation Methods
3
EXHIBIT 9.17
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CHECKPOINT
1
6. On January 1, 2023, Laser Renew Inc. pays $77,000 to purchase office
furniture with a residual value of zero. The furniture’s useful life is
somewhere between 7 and 10 years. What is the 2023 straight-line
depreciation on the furniture using (a) a 7-year-useful life, and (b) a
10-year useful life?
7. What is the meaning of the accounting term “depreciation”?
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CHECKPOINT
2
8. Laser Renew Inc. purchases a new machine for $96,000 on January 1,
2023. Its predicted useful life is 5 years or 100,000 units of product,
and its residual value is $8,000. During 2023, 10,000 units of product
are produced. Calculate the book value of this machine on December
21, 2023, assuming (1) straight-line depreciation, and (2) units-ofproduction depreciation.
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CHECKPOINT
3
9. A specialized piece of laser therapy equipment was purchased for
$340,000. Its components A, B, and C had respective costs estimated
to be 20%, 50%, and 30% of the total cost. The estimated useful lives
of the components were determined to be 4 years, 8 years, and 15
years, respectively. The residual value for each component was $0.
Calculate the annual depreciation for each component assuming
straight-line.
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LO3: Partial-Year Depreciation
1
• Assets are purchased and disposed of at various times during an
accounting period.
• Depreciation for a partial year is recorded when the purchase or
disposal is made at a time other than the beginning or end of the
accounting period.
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Partial-Year Depreciation
2
There are different ways to account for the depreciation for partial
years.
1. Nearest whole month (most common)
2. Half-year convention
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Nearest Whole Month
1
• Depreciation is calculated if the asset was in use for more than half of
that month.
• Depreciation is not calculated by taking into account specific days of use
because this would imply that depreciation is precise, when in fact it is
based on estimates of the useful life and residual values.
• A similar calculation is necessary when disposal of an asset occurs
during a year.
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Nearest Whole Month
2
Partial Year’s Depreciation Calculated to Nearest Whole Month Under
the Units-of-Production and Double-Declining-Balance Method:
Date of
Purchase
April 8, 2023
Units-of-Production
Double-Declining Balance
$10,000 − $1,000
36,000 𝑢𝑛𝑖𝑡𝑠
Rate = 5 = 0.40 𝑜𝑟 40%
40% x $10,000
= $0.25/unit x 7,000 units = $1,750
2
9
= $4,000/year × 12 = $𝟑, 𝟎𝟎𝟎
EXHIBIT 9.18
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Half-Year Convention
1
• When calculating depreciation for partial years using the half-year
convention, six months’ depreciation is recorded for the partial period
regardless of when during the period the asset was acquired or
disposed of.
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Half-Year Convention
2
Partial Year’s Depreciation Calculated Using the Half-Year Convention
Under the Straight-Line, Units-of-Production, and Double-DecliningBalance Method:
Date of
Purchase
Straight-Line
Units-of-Production
Double-Declining
Balance
April 8, 2023
$10,000 − $1,000
5 𝑦𝑒𝑎𝑟𝑠
$10,000 − $1,000
36,000 𝑢𝑛𝑖𝑡𝑠
Rate = 5 =
0.40 𝑜𝑟 40%
40% x $10,000
6
= $1,800/year ×
12
= $𝟗𝟎𝟎
2
= $0.25/unit x 7,000 units = $4,000/year × 6
12
= $1,750
= $𝟐, 𝟎𝟎𝟎
EXHIBIT 9.19
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CHECKPOINT
10.Why is depreciation for a partial year not calculated to the nearest
day?
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LO4: Revising Depreciation Rates
• Depreciation is based on the original cost of an asset, estimated residual
value, and estimated useful life.
• If the cost of the asset changes because the estimates for residual value
and/or useful life are adjusted or because of a betterment, revised
depreciation for current and future periods must be calculated.
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Changes in Estimated Residual Value and/or
Estimated Useful Life
1
• Because depreciation is based on predictions of residual value and
useful life, depreciation expense is an estimate.
• If our estimate of an asset’s useful life and/or residual value changes,
we use the new estimate(s) to calculate revised depreciation for the
current and future periods.
• This means we calculate a new depreciation expense calculation by
spreading the cost that has not yet been depreciated over the
remaining useful life.
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Revising Depreciation Rates When There Is a
Change in Estimated Residual Value and/or
Estimated Useful Life
Calculating Revised Depreciation Rates:
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 – 𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
6,400−400
=
= 1,500 per year
𝑅𝑒𝑣𝑖𝑠𝑒𝑑 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
4 𝑦𝑒𝑎𝑟𝑠
EXHIBIT 9.20
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Revising Depreciation Rates When There is a
Betterment
1
• Betterments cause the cost of an asset to change.
• Revised depreciation must be calculated when there is a betterment.
• A betterment can be the addition of a component to an existing asset or
the replacement or overhaul of a component.
• Revised depreciation is calculated to reflect the new cost and/or
changes in estimated life/residual value.
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Revising Depreciation Rates When There is a
Betterment
2
• When a betterment results in a replacement of a component, the cost
and accumulated depreciation of the component must be removed and
a gain or loss is recorded.
• When a betterment occurs partway through the accounting period,
partial-period depreciation must be calculated on the component being
replaced up to the time of the replacement to update the accumulated
depreciation account.
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Revising Depreciation Rates When There is a
Betterment
3
An impairment loss occurs when the book value of PPE is greater than the
amount to be recovered through the asset’s use or sale.
Impairments may result from:
• A significant decline in the market value of the asset.
• Technological, economic, or legal factors.
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CHECKPOINT
1
11. In early January 2023, a cellphone repair shop acquires equipment at a
cost of $3,800. The company estimates this equipment to have a
useful life of three years and a residual value of $200. Early in 2025,
the controller at the shop changes its estimate to a total four-year
useful life and zero residual value. Using straight-line depreciation,
what is depreciation expense on this equipment for the year ended
December 31, 2025?
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CHECKPOINT
2
12. Assume the Fairmont Hotel had a desktop computer with a book value
at its December 31, 2022 year-end of $5,000. The computer had an
estimated remaining useful life of two years and a $500 residual value.
On January 12, 2023, a second monitor costing $800 was added to the
computer to enhance the booking agent’s productivity. The second
monitor had an estimated life of two years and no residual value.
Record the addition on January 12 and the revised depreciation on the
computer at December 31. Assume the second monitor was
purchased on account.
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LO5: Impairment of PPE Assets
1
• If the book value (or carrying amount) of a PPE item is greater than the
amount to be recovered through the asset’s use or sale, the difference
is recognized as an impairment loss, as the asset’s value is impaired.
• When an impairment loss is recorded, revised depreciation must be
calculated and recorded in future periods because of the decrease in
the carrying amount of the asset caused by the impairment loss.
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Impairment of PPE Assets
2
• Impairment losses may be reversed in subsequent periods if the
recoverable amount of the asset exceeds the book value (or carrying
amount). Reversal of impairment losses is beyond the scope of this
course and is covered in more advanced courses.
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CHECKPOINT
13. At its December 31, 2023, year-end, Solartech Ltd. assessed its assets
for impairment and found that two machines had recoverable
amounts that differed from book value: Machine A and Machine B had
respective book values of $107,000 and $238,000, and recoverable
values of $136,000 and $92,000, respectively. Assuming the business
had recorded no impairment losses in previous years, what accounting
treatment is required for the impairment loss?
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LO6: Disposal of PPE
Disposal of PPE occur in one of three ways:
1. Discarding
2. Sale
3. Exchange
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Accounting for Disposal of PPE
1. Calculate depreciation expense up to the date of disposal.
2. Record journal entry to record depreciation expense up to the date of disposal
updating the accumulated depreciation account.
3. Compare the asset’s book value with the net amount received or paid at disposal
and record any resulting gain or loss.
4. Remove the balances of the disposed asset and related accumulated depreciation
accounts. Why? If the asset is gone, all accounts related to the asset (the asset
account and its related accumulated depreciation) must be taken off the books as
well.
5. Record any cash (and other assets) received or paid in the disposal.
** Steps 3, 4 and 5 are recorded in one journal entry.
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Discarding PPE
1
• A PPE asset is discarded when it is no longer useful to the
company and it has no market value.
• Impairment losses may be reversed in subsequent periods if the
recoverable amount of the asset exceeds the book value (or
carrying amount). Reversal of impairment losses is beyond the
scope of this course and is covered in more advanced courses.
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Discarding PPE
2
When accumulated depreciation equals the asset’s cost, the asset is fully
depreciated and the entry to record the discarding of this asset is:
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Discarding PPE
3
Step 1 is to calculate depreciation expense up to the date of disposal.
Step 2 records depreciation expense to bring it up to date:
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Selling PPE
A PPE asset is discarded when it is no longer useful to the company
and it has no market value.
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CHECKPOINT
14.A company acquires equipment on January 10, 2023, at a
cost of $42,000. The CFO selected the straight-line
depreciation method and assumed a five-year life and
$7,000 residual value for the equipment. On June 27, 2024,
the company sold this equipment for $32,000. Prepare the
entry or entries for June 27, 2024.
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Exchanging PPE
Many assets such as machinery, automobiles, and office equipment
are disposed of by exchanging them (also referred to as a trade-in) for
new assets.
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CHECKPOINT
15.On March 3, a local organic apple orchard trades an old
truck for a new tractor. The original cost of the old truck is
$30,000, and its accumulated depreciation at the time of the
trade is $23,400. The new tractor has a list price of $45,000
and the trade-in allowance being offered is $5,000. Prepare
entries to record the trade under two different assumptions
where the list price of the new tractor is (1) representative of
its fair value, or (2) not representative of its fair value.
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LO7: Intangible Assets
• Are rights, privileges and competitive advantages held by a company.
• Are used in operations.
• Provide future economic benefits.
• Are recorded at cost when purchased.
• Examples: patents, copyrights, leaseholds, drilling rights, and
trademarks.
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Accounting For Intangible Assets
• Are recorded at cost when purchased.
• Cost is amortized* over estimated useful life.
• The straight-line method is usually used.
• Are shown on the balance sheet separately from PPE.
* Amortization is the systematic allocation of the cost of an intangible asset over
its useful life. Assumed to have a zero residual value.
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Patents
• Are granted under the federal Patent Act.
• Must relate to something that is new, inventive (non-obvious to a
person of average skill in the related field) and useful.
• A patent is a legally protected exclusive right to an invention.
• When patent rights are purchased, the cost of acquiring the rights is
debited to an account called Patents.
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Copyrights
• Are granted by the Canadian Intellectual Property Office of the
federal government or by international agreement.
• Gives its owner the exclusive right to publish and sell musical,
dramatic, literary, or artistic work during the life of the creator plus 50
years.
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Mineral Resources
• Other terms related to drilling rights are mineral rights, mining
rights, or oil rights.
• Often, a government body has the legal rights to the subsurface
even when someone else might have legal rights to the surface.
• Companies wanting to drill for oil or other minerals must pay for the
legal right to do so.
• The rights are intangible in nature and are accounted for as
intangible assets.
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Cost Determination and Depletion
• The process of allocating the cost of a natural resource to the period
when it is consumed.
• Natural resources are reported at cost minus accumulated depletion.
• The depletion expense per period is usually based on units extracted
from cutting, mining, or pumping.
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Cost Determination and Depletion
1
Depletion Formula:
EXHIBIT
9.23
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Cost Determination and Depletion
2
Alternative Balance Sheet Presentation
EXHIBIT
9.24
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Plant Assets Tied to Extracting
• Mining, cutting, or pumping natural resources requires machinery,
equipment, and buildings.
• When the usefulness of these plant assets is directly related to the
depletion of a natural resource, their costs are depreciated using the
units-of-production method in proportion to the depletion of the
natural resource.
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Trademarks and Brand Names
1
• Is a symbol, name, phrase, or jingle identified with a company,
product, or service.
• Ownership is best established by registering a trademark or brand
(trade) name with the Canadian Intellectual Property Office.
• If a trademark or brand (trade) name is purchased outright or as
part of a business acquisition, its cost is debited to an asset
account and amortized.
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Trademarks and Brand Names
2
EXHIBIT 9.25
50 Most Valuable
Brands
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Leaseholds
• Refers to the rights granted to the lessee to use a specific asset by
the lessor in the lease.
• Is an intangible asset for the lessee if a non-current lease requires
the lessee to pay a bonus in advance.
• The resulting debit to a Leasehold account is amortized over the
term of the lease by debiting Rent Expense and crediting
Leaseholds.
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Goodwill
The amount paid for a business that exceeds the fair market value of the
company’s net assets (assets minus liabilities) if purchased separately.
• Is not an intangible asset.
• Is reported separately on the balance sheet.
• Is not depreciated or amortized but may be decreased if it is impaired.
• Examples: superior management, skilled workforce, superior suppliers,
and customer loyalty.
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CHECKPOINT
16. On January 6, 2023, assume Lego pays $120,000 for a patent with a
20-year legal life to produce a new electronic Lego product that is
expected to be marketable for about three years. Prepare entries to
record its acquisition and the December 31, 2023, adjustment.
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APPENDIX 9A
Revised Depreciation When There Is a Betterment
That Creates Partial Period Depreciation
Steps in Revising Depreciation:
1. Depreciation is updated to the date of the betterment.
2. Record the betterment and remove the component being replaced.
3. Calculate and record the revised depreciation on the capital asset.
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CHECKPOINT
17. Explain the accounting treatment when a significant component of a
machine is replaced by a new one.
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Summary
1
1. Describe property, plant and equipment (PPE) and calculate their cost.
PPE (1) are used in the operations of a company, and (2) have a useful life of more
than one accounting period. There are three main accounting issues with PPE: (1)
calculating and accounting for their initial and subsequent costs, (2) allocating their
costs to the periods they benefit, and (3) recording their disposal. PPE are recorded at
cost when purchased. Cost includes all normal and reasonable expenditures necessary
to get the asset in place and ready for its intended use. Repairs and maintenance
expenses expire in the current period and are debited to expense accounts.
Betterments benefit future periods and are debited to asset accounts. The cost of a
lump-sum purchase is allocated among its individual assets based on their relative
values.
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Summary
2
2. Explain, record, and calculate depreciation using the methods of
straight-line, units-of-production, and double-declining-balance.
Depreciation is the process of allocating to expense the cost of plant and equipment
over the accounting periods benefiting from use of the asset. Depreciation does not
measure the asset’s decline in market value, nor does it measure its physical
deterioration. Three factors determine depreciation: cost, residual value, and useful
life. Residual value is an estimate of the asset’s value at the end of its benefit period.
Useful (service) life is the length of time an asset is productively used in operations.
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Summary
3
3. Explain and calculate depreciation for partial years.
When PPE are bought and sold throughout the year, depreciation can be calculated
either to the nearest whole month or by applying the half-year convention.
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Summary
4
4. Explain and calculate revised depreciation.
Depreciation is revised when material changes occur in the estimated residual value
and/or useful life and/or there is a betterment. Revised depreciation is calculated by
spreading the remaining cost to be depreciated over the remaining useful life of the
asset.
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Summary
5
5. Explain and record impairment losses.
If the book value of an asset is greater than its recoverable amount, an impairment
loss is recorded. When an impairment loss is recorded, revised depreciation is
calculated and recorded in the subsequent period because of the change in the asset’s
book value. Assets must be assessed annually for impairment.
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Summary
6
6. Account for asset disposal through discarding, selling, or exchanging
an asset.
When PPE is discarded, sold, or exchanged, its cost and accumulated depreciation are
removed from the accounts. Any cash proceeds from discarding or selling an asset are
recorded and compared to the asset’s book value to determine a gain or loss. When
assets are exchanged, the new asset is recorded at its fair value, and any gain or loss
on disposal is recognized.
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Summary
7
7. Account for intangible assets and their amortization.
An intangible asset is recorded at the cost incurred to purchase the asset.
Amortization is normally recorded using the straight-line method. Intangible assets
include patents, copyrights, drilling rights, leaseholds, franchises, and trademarks.
Goodwill is not an intangible asset and is presented separately on the financial
statements.
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Summary
8
8. Explain and calculate revised depreciation when there is a betterment
that creates partial period depreciation. Appendix 9A.
Depreciation is revised when there is a betterment since the book value of the asset
has changed. Depreciation must be updated/recorded to the time the betterment was
made. Then, if the betterment resulted in the replacement of a component, the cost
and accumulated depreciation related to the replaced component must be removed
from the books. Revised depreciation is then calculated based on the revised values.
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End of Chapter
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