10-1
CHAPTER 10
PROPERTY, PLANT, AND
EQUIPMENT
10-2
Nature of Plant Assets
Tangible.
Used to produce
revenue rather
than being held
for resale.
Useful life is
more than one
year.
HILTON
10-3
Nature of Plant Assets
1. Record
acquisition
of asset.
Asset
cost
2. Record depreciation.
3. Record subsequent
expenditures.
4. Record
disposal
of asset.
$
Disposal
of asset
Salvage
value
367
Time (useful life)
Acquisition Cost of
Plant Assets
General Rule
The amount of cash or cash equivalents
given up to acquire and place the asset
in service.
10-4
Acquisition Cost of
Plant Assets
More on General Rule
Includes cost incurred to get the asset
into the position and condition to start
earning revenue.
Computers-R-Us
10-5
Acquisition Cost
Land
Purchase price
Title insurance
premiums
Real estate
commissions
Title search
Title transfer
fees
10-6
10-7
Acquisition Cost - Buildings
Legal costs
Purchase price
Remodeling
costs
Unpaid taxes
we assumed
Real estate
commissions
paid
10-8
“Basket” Purchase of Assets
When assets are purchased together,
separate the cost into the proper
accounts ...
... on the basis of relative fair market value.
10-9
Group Purchase of Assets
On January 1, we purchase land and
building for $200,000 cash. The
appraised value of the building is
$162,500, and the land is appraised
at $87,500.
How much of the $200,000 purchase
price do we debit to the separate
building and land accounts?
10-10
Group Purchase of Assets
Land
Building
Total fair value
Fair Value
$
87,500
162,500
$ 250,000
10-11
Group Purchase of Assets
Land
Building
Total fair value
Land
Building
Fair Value
$
87,500
162,500
$ 250,000
$
87,500 ÷ $ 250,000 =
162,500 ÷
250,000 =
35% of fair value
65% of fair value
10-12
Group Purchase of Assets
Land
Building
Total fair value
Fair Value
$
87,500
162,500
$ 250,000
Land
Building
$
87,500 ÷ $ 250,000 =
162,500 ÷
250,000 =
Land
Building
$
200,000 x
200,000 x
35% of fair value
65% of fair value
35% = $ 70,000
65% =
130,000
$ 200,000
10-13
Acquisition Cost - Equipment
Testing
costs
Transportation
costs
Installation
costs
Net purchase
price
Insurance
while in
transit
10-14
Acquisition Cost
Self-Constructed Assets
The cost should include all materials
used and labor directly traceable to the
construction as well as indirect costs
such as interest, utilities, and
supervision.
10-15
Noncash Acquisitions
A plant asset may be acquired in
exchange for noncash items, such
as land, stock or notes payable.
10-16
Noncash Acquisitions

Fair market value is
the price received
for an item sold in
the normal course
of business.

Accountants
generally record
noncash exchanges
at fair market value.
Let’s trade this guy
for a new pitcher!
10-17
Noncash Acquisitions
General Rule
Record the asset received at the fair
market value of the asset received or
the fair market value of the asset given
up, whichever is more clearly evident.
10-18
Noncash Acquisitions
If fair market value cannot be
determined, use appraised value to
record a noncash transaction.
As an expert, I
believe he’s worth
$3,500,000.
10-19
Noncash Acquisitions
Book value is the asset’s cost less
accumulated depreciation.
We would only assign book value of the
asset given up to the asset received
when better information is unavailable.
You don’t know what you’re
talking about! No way is this
player worth $3,500,000.
10-20
Depreciation
Depreciation is the process of allocating
the cost of plant assets to the periods
that will benefit from its use.
Depreciable
base $145,000
Asset
Cost
$150,000
Depreciate over useful life.
(Depreciation expense)
Not depreciable.
Salvage
value $5,000
10-21
Depreciation
Depreciation is the process of allocating
the cost of plant assets to the periods
that will benefit from its use.
Depreciation is a cost allocation process
and has nothing to do with asset
valuation.
10-22
Depreciation
Factors Affecting Depreciation
Asset cost
Estimated salvage value
Estimated useful life
Depreciation method used
10-23
Depreciation Methods

Straight-line

Units-of-production

Accelerated methods
Sum-of-the-years’-digits
 Double-declining-balance

10-24
Straight-Line Depreciation
Depreciation
= Asset Cost - Est. Salvage Value
Expense
Est. Useful Life
Straight-Line Depreciation
10-25
Example
On January 1, Ace, Inc. purchased equipment
for $27,500 cash. The equipment has an
estimated useful life of 5 years and an
estimated salvage value of $2,500.
What is the annual straight-line
depreciation expense?
Straight-Line Depreciation
Example
Asset cost
Less: salvage value
Basis for depreciation
Useful life
Annual depreciation
$ 27,500
(2,500)
25,000
÷
5
$ 5,000
10-26
Straight-Line Depreciation
Example
Depreciation Schedule
Period
1
2
3
4
5
Depr.
Expense
$ 5,000
5,000
5,000
5,000
5,000
25,000
Accum.
Depr.
$ 5,000
10,000
15,000
20,000
25,000
Book
Value
$ 22,500
17,500
12,500
7,500
2,500
10-27
Straight-Line Depreciation
Example
$25,000
$20,000
$15,000
Depr. Expense
Accum. Depr.
Book Value
$10,000
$5,000
$1
2
3
4
5
10-28
10-29
Units-of-Production Depreciation
Depreciation =
Per Unit
Asset Cost - Est. Salvage Value
Est. Total Units of Production
10-30
Units-of-Production Depreciation
Depreciation =
Per Unit
Depreciation
Per Period
=
Asset Cost - Est. Salvage Value
Est. Total Units of Production
Depreciation
Number of Units
x
Per Unit
Produced
10-31
Units-of-Production Depreciation
Example
On January 1, we purchase equipment for
$50,000 cash. The equipment is expected to
produce 100,000 units during its life and has
an estimated salvage value of $5,000.
If 30,000 were produced this year, what is the
amount of depreciation expense?
10-32
Units-of-Production Depreciation
Example
Cost
Salvage value
Depreciation base
Total units
Depreciation per unit
Current units produced
Depreciation expense
$ 50,000
(5,000)
45,000
÷ 100,000
$ 0.45
×
30,000
$ 13,500
10-33
Units-of-Production Depreciation
Example
The schedule of actual production is:
Year
1
2
3
4
Units
Produced
30,000
20,000
40,000
10,000
100,000
10-34
Units-of-Production Depreciation
Example
Completed depreciation schedule.
Year
1
2
3
4
Units
Produced
30,000
20,000
40,000
10,000
100,000
Depreciation
Per Unit
Depreciation
Expense
$
$
0.45
0.45
0.45
0.45
$
13,500
9,000
18,000
4,500
45,000
Accumulated
Depreciation
$
13,500
22,500
40,500
45,000
Book
Value
$
36,500
27,500
9,500
5,000
10-35
Units-of-Production Depreciation
Example
50,000
45,000
40,000
35,000
30,000
Units Produced
25,000
Depreciation Expense
Accumulated Depreciation
20,000
15,000
10,000
5,000
1
2
3
4
10-36
Question
The accumulated depreciation account
increases each year of the asset’s life if
the asset is not fully depreciated.
a. True
b. False
10-37
Accelerated Depreciation
Sum-of-the-Years’ Digits
Double-Declining Balance
10-38
Sum-of-Years’-Digits Depreciation
(SOYD)
SOYD =
nn + 1
2
10-39
Sum-of-Years’-Digits Depreciation
(SOYD)
Depreciation
=
Fraction
No. of Years Remaining
in Useful Life
SOYD
10-40
Sum-of-Years’-Digits Depreciation
(SOYD)
Depreciation
=
Fraction
Depr. Per
Period
No. of Years Remaining
in Useful Life
SOYD
Depreciation
=
x (Cost - SV)
Fraction
10-41
SOYD Depreciation
Example
On January 1, we purchase equipment
for $40,000 cash. The equipment has a
useful life of 8 years and an estimated
salvage value of $4,000.
Calculate depreciation using the
SOYD method.
10-42
SOYD Depreciation
Example
Cost
Salvage value
Depreciable amount
SOYD = 36
$ 40,000
(4,000)
$ 36,000
10-43
SOYD Depreciation
Example
Year
1
SOYD
Fraction
8/36
Depreciation
Expense
Accumulated
Depreciation
$
$
8,000
8,000
Book Value
$32,000
10-44
SOYD Depreciation
Example
Year
1
2
3
4
5
6
7
8
SOYD
Fraction
8/36
7/36
6/36
5/36
4/36
3/36
2/36
1/36
36/36
Depreciation
Expense
Accumulated
Depreciation
$
$
$
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
36,000
8,000
15,000
21,000
26,000
30,000
33,000
35,000
36,000
Book Value
$32,000
25,000
19,000
14,000
10,000
7,000
5,000
4,000
10-45
SOYD Depreciation
Example
$40,000
$35,000
$30,000
Depreciation
Expense
$25,000
$20,000
Accumulated
Depreciation
$15,000
Book Value
$10,000
$5,000
$1
2
3
4
Year
5
6
7
8
10-46
Double-Declining-Balance (DDB)
Depreciation
=
per Period
(
2×
Straight-line
Asset
Accumulated
–
×
rate
Cost
Depreciation
) (
)
i.e., Book Value
at beginning of period.
10-47
Double-Declining-Balance (DDB)
Depreciation
=
per Period
(
2×
Straight-line
Asset
Accumulated
–
×
rate
Cost
Depreciation
) (
Straight-line
1
=
rate
Est. Useful Life
)
10-48
Double-Declining-Balance (DDB)
Depreciation
=
per Period
(
2×
Straight-line
Asset
Accumulated
–
×
rate
Cost
Depreciation
) (
Straight-line
1
=
rate
Est. Useful Life
Ignore salvage value when
calculating DDB depreciation!
)
10-49
DDB Depreciation
Example
On January 1, we purchase equipment
for $50,000 cash. The equipment has
a useful life of 8 years and an
estimated salvage value of $2,000.
Calculate depreciation using the DDB
method.
10-50
DDB Depreciation
Example
Straight-line
=
rate
Depreciation
=
per Period
Year
1
1
8
( 2 × 12.5%)
= 12.5%
×
($50,000 - $0)
Depreciation
Expense
Accumulated
Depreciation
$
$
12,500
12,500
Book
Value
$ 37,500
10-51
DDB Depreciation
Example
Year
1
2
3
4
5
6
7
8
Depreciation
Expense
Accumulated
Depreciation
$
$
$
12,500
9,375
7,031
5,273
3,955
2,966
2,225
1,669
44,994
*Rounding difference
12,500
21,875
28,906
34,180*
38,135
41,101
43,326
44,994*
Book
Value
$ 37,500
28,125
21,094
15,820
11,865
8,899
6,674
5,006
Hey, shouldn’t the total
depreciation expense be $48,000?
10-52
DDB Depreciation
Example
Year
1
2
3
4
5
6
7
8
Depreciation
Expense
$
Accumulated
Depreciation
Book
Value
12,500
$
12,500
$ 37,500
9,375
21,875
28,125
7,031
28,906
21,094
When using DDB it is sometimes necessary
5,273
34,180
15,820
to adjust the last year’s depreciation so
that3,955
Book Value will 38,135
equal Salvage11,865
Value.
2,966
41,101
8,899
2,225
43,326
6,674
4,674
48,000
2,000
$ 48,000
10-53
DDB Depreciation
Example
$50,000
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$-
Depreciation
Expense
Accumulated
Depreciation
Book Value
1
2
3
4
5
Year
6
7
8
10-54
Partial-Year Depreciation
If an asset is purchased sometime during
the year, we have to adjust annual
depreciation for the partial-year period.
June
30
Partial-Year Depreciation
Example
On June 30, 19X1 we purchased
equipment for $75,000 cash. The
equipment has a useful life of 10 years
and estimated salvage value of $5,000.
Calculate the straight-line depreciation
for the year ended December 31, 19X1.
10-55
Partial-Year Depreciation
Example
Ann. Depr. = ($75,000 - $5,000) ÷ 10
= $7,000
6
Depr. Expense = $7,000 × 12 =
June
30
$3,500
10-56
10-57
Changes in Estimates
Because depreciation is based on the
estimated useful life and estimated
salvage value, depreciation expense is
an estimate.
 Over the life of an asset,
Useful
Life?
new information may come
to light that indicates the
original estimated useful
life or salvage value was
inaccurate.

10-58
Changes in Estimates
If the useful life or salvage value of an
asset changes, we must revise
depreciation expense for the current
and future periods. (i.e., prospectively
not retroactively.)
 For this change in accounting estimate,
we spread the remaining undepreciated
cost (book value) over the remaining
useful life - like peanut butter.

Changes in Estimates
10-59
Example
On January 1, 1996, we purchased
equipment costing $30,000, with a useful
life of 10 years and zero salvage value.
During 1999, we determine that the
remaining useful life is 5 years (8-year
total life). We use straight-line
depreciation.
Calculate depreciation expense for the
year ended December 31, 1999.
Changes in Estimates
Example
Cost
Salvage value
Depreciation base
Useful life
Annual depreciation
1996 - 1998
Accumulated depreciation
$ 30,000
30,000
÷
10
3,000
×
3
$ 9,000
10-60
Changes in Estimates
Example
Cost
$ 30,000
Accumulated depreciation
(9,000)
Book value
21,000
Remaining useful life
÷
5
$ 4,200
Annual depreciation
Depreciation for 1999, and subsequent
years, will be $4,200.
10-61
10-62
Depreciation and Financial
Reporting
Report assets at cost less accumulated
depreciation.
Sample Company
Partial Balance Sheet
December 31, 1999
Property, plant, and equipment
Land
Buildings
$ 75,000
Less: Accumulated depreciation
(45,000)
Equipment
19,000
Less: Accumulated depreciation
(1,500)
Total property, plant, and equipment
$
30,000
30,000
$
17,500
77,500
10-63
Subsequent Expenditures
on Assets (P.382)
Please note:
“Expenditure” = “Expense”
10-64
Subsequent Expenditures
on Assets (P.382)
Increases quality
of services of
the asset.
Extends services
beyond original
estimate.
Does not extend the
quality or
quantity of services.
Debit asset account.
Debit accumulated
depreciation.
Debit maintenance
expense
Capital expenditure
(allocate over life
of asset)
Revenue expenditure
(expensed in the
current period)
10-65
Subsequent Expenditures
on Assets (P.382)
Increases quality
of services of
the asset.
Debit asset account.
Relates to betterments or
improvements.
(e.g., adding air conditioning
to a delivery vehicle.)
10-66
Subsequent Expenditures
on Assets (P.382)
Relates to
extraordinary
repairs.
(e.g., replacing the
engine in a delivery
vehicle.)
Extends services
beyond original
estimate.
Debit accumulated
depreciation.
10-67
Subsequent Expenditures
on Assets (P.382)
Relates to ordinary
repairs and
maintenance.
(e.g., changing the
engine oil in a
delivery vehicle.)
Does not extend the
quality or
quantity of services.
Debit maintenance
expense
10-68
Subsidiary Records
As in the case of Accounts Receivable,
General ledger accounts do not
provide space for the details necessary
to keep track of depreciable assets.
Salvage
Value
Cost
GENERAL LEDGER
Account:
Depreciation
Policy
?
Acct. No.
Location
of Asset
##
Balance
Date
Item
Post.
Ref.
Debit
Credit
DR (CR)
Useful
Life
10-69
Subsidiary Records
To overcome this shortcoming, companies
keep detail information about individual
assets in a subsidiary ledger account that
looks something like this:
Item:
Arc Welder
ID
97-37628
Loc
Dallas - 87
Date
Cost
SV
Life
Repair record:
Date
Amt
Date
Amt
Date
Amt
5/17/97
12,147.62
400.00
8 years
10-70
Well, I guess this computer
is about fully depreciated!