Accounting for Property,
Plant Equipment,
and Intangible Assets
Chapter 17
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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.
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Learning Objective 1
Calculating the cost of an asset.
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Types of Long-Term Assets
Tangible assets:
– land
– buildings
– equipment
Intangible assets:
– patents
– copyrights
– franchises
– goodwill
Natural resources: timber, oil, coal
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Learning Unit 17-1
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.
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Learning Unit 17-1
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.

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Learning Unit 17-1
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.

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Learning Unit 17-1
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.

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Learning Objective 2
Calculating depreciation
using one of four methods:
straight-line,
declining-balance,
units-of-production,
and sum-of-the-years’-digits.
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Learning Unit 17-2
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

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Learning Unit 17-2
Melvin Company purchased a delivery
truck on January 1, 200x 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.

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Learning Unit 17-2
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
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Learning Unit 17-2
Year 1
Depreciation
200x $3,600
Accumulated
Depreciation
$3,600 200x
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Learning Unit 17-2
(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

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Learning Unit 17-2
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%

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Learning Unit 17-2
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

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Learning Unit 17-2

The units-of-production method assigns a
fixed amount of depreciation to each unit
of output or service produced by the plant
asset.
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Learning Unit 17-2
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
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Learning Unit 17-2

Depreciation @ $.20/mile:
Year 1: 30,000 miles = $ 6,000
Year 2: 21,000 miles = $ 4,200
Year 3: 15,000 miles = $ 3,000
Year 4: 5,000 miles = $ 1,000
Year 5: 19,000 miles = $ 3,800
Total: 90,000 miles = $18,000
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Learning Unit 17-2
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]

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Learning Unit 17-2




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
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Learning Objective 3
Calculating depreciation
for tax purposes using the
Modified Accelerated
Cost Recovery System.
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Learning Unit 17-2
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.

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Learning Objective 4
Explaining the difference between
capital expenditures
and revenue expenditures.
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Learning Unit 17-3
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.

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Learning Unit 17-3
Categories of Capital Expenditures
Additions or Enlargements:
(charged to asset account)
Extraordinary Repairs:
(charged to accumulated depreciation)
Betterments:
(charged to asset account)
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Learning Unit 17-3
What are revenue expenditures?
– another name for expenses
– payments made for ordinary maintenance
 These payments occur often.
 All payments are debited to expense
accounts.

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Learning Objective 5
Journalizing entries for discarding,
selling, or exchanging plant assets.
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Learning Unit 17-3

–
–
–
How does a company dispose of its plant
assets?
discarding
selling
exchanging for similar plant assets
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Learning Unit 17-3


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.
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Learning Unit 17-3
What is the entry?
Loss on Disposal
1,000
Accumulated Depreciation 6,000
Truck
7,000
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Learning Unit 17-3
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.
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Learning Objective 6
Explaining amortization and
how it applies to intangible assets.
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Learning Unit 17-4
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.

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Learning Unit 17-4
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

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End of Chapter 17
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