1
15
Plant Assets
Plant assets are
also know as
Property, plant
& equipment
1.
Learning Objectives
Account for the acquisition cost of
Plant Assets
2. Expense Plant Assets by allocating
to fiscal periods which benefited
from their use
3. Account for repairs, maintenance
and improvements to Plant Assets
4. Account for disposal of Plant Assets
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
5.
Analysis: Compute and explain the
asset turnover ratio
Expenses
Equity
Profit
Debit
Credit
or
Loss
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Overview
Plant asset subsidiary ledgers are separate records for each
asset.
Control Ledger
Plant Assets
Acct #180
The Subsidiary
Ledgers must add
up to the Control
Ledger
Balance
Subsidiary
Ledgers
Plant Assets
Forklift
#180.23
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Subsidiary
example
Revenue
Expenses
Equity
Profit
Debit
Credit
or
Loss
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Overview
The total cost and the date of acquisition are
recorded in the subsidiary ledgers.
SUBSIDIARY LEDGER
Account Nam e: ў EQUIPMENT -FORKLIFT
Date
201 0
Item
Balance Forward
1 5-May
BALANCE SHEET
Assets
Liabilities
Post
Ref.
J8
INCOME STATEMENT
Revenue
Expenses
Equity
Acct #: 180
BALANCE
Debit
Credit
56,000
Subsidiary
ledgers must add
up to the total in
the Control
ledger for Plant
Assets
Debit
Credit
56,000
Subsidiary
Ledgers
Plant Assets
Forklift
#180.23
Profit
Debit
Credit
or
Loss
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Objective 15.1: Account for
the acquisition cost of Plant
Assets
The Cost Concept guides the
initial valuation of plant
assets purchased with cash.
O15.1
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Cost of Plant Assets
Plant asset values should include any
reasonable and necessary costs incurred to
bring plant assets to the operating location
and into an operating condition including:
Shipping and insurance in transit costs
Costs to install, condition and assemble for
intended use
Example
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Example –Cash purchase
Western Excavators purchased a used
dump truck with the following costs:
•Purchase price
$12,000
•Shipping
1,000
•Reconditioning
3,400
Total costs of acquisition $16,400
O15.1
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Example –Cash purchase
The journal entry to record the purchase:
GENERAL JOURNAL
Date
24-Apr
Description
ўEquipment -Truck
ўCash
PR
Page 4
Debit
165
Credit
16,400
100
16,400
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
O15.1
Profit
Debit
Credit
or
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8
Lump sum purchase
When several types of
assets such as land,
building and equipment
are purchased for a
single amount, the value
assigned to each asset
type must be determined.
O15.1
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Lump sum purchase
To determine the value to be assigned
to each type of asset:
The Cost Concept controls
the total cost
The Objectivity Concept
controls the proper
allocation
Example
O15.1
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Lump sum purchase
Western Excavators purchased a new
operating facility including land, land
improvements, building and equipment.
The total purchase price including
related costs was $2,650,000. An
appraisal was completed at the time of
purchase as follows:
O15.1
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Lump sum purchase
Appraised
Value
Land
$280,000
10%
$265,000
Land Improvements
$420,000
15%
$397,500
Building
Equipment
Total
700,000/2,800,00 = 25%
25% x $2,650,000 =
$662,500
O15.1
%
Value
Assigned
$1,400,000
$700,000
50% $1,325,000
25%
$662,500
$2,800,000 100% $2,650,000
The percentage of the total
appraised value that each
type of asset represents is
multiplied times the total
cost to determine the
recorded value assigned.
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Lump sum purchase
The journal entry to record the lump sum purchase:
GENERAL JOURNAL
Date
24-Apr
Description
PR
Page 4
Debit
Credit
ўEquipment
165
662,500
ўBuilding
166
1,325,000
ўLand Improvements
170
397,500
ўLand
171
265,000
100
ўCash
BALANCE SHEET
Assets
Liabilities
2,650,000
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
O15.1
Debit
Credit
or
Loss
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Objective 15.2: Expense
Plant Assets by allocating
to fiscal periods which
benefited from their use
To allocate asset cost, the
following information is
necessary:
Acquisition Cost
Salvage Value
O15.2
Useful Life
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Depreciation Methods
Straight Line
Units of Production
Double Declining
Balance
MACRS
O15.2
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Straight Line
Annual Depreciation =
Cost – Salvage Value
Useful life (in years)
O15.2
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Straight Line
Annual Depreciation =
Depreciable
Amount
Cost – Salvage Value
Useful life (in years)
Example:
Forklift cost $50,000
Salvage value $10,000
Useful life 8 years
(50,000 - $10,000) =
$40,000/8 years =
$5,000 annual depreciation
O15.2
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Straight Line
Example Depreciation Schedule
Year
Ending
Salvag
e
Value
Acquisition
Salvage
Cost
Value
Accumulated
Ending
Depreciation Depreciation Book Value
1
$50,000
$10,000
$5,000
$5,000
$45,000
2
50,000
10,000
5,000
10,000
40,000
3
50,000
10,000
5,000
15,000
35,000
4
50,000
10,000
5,000
20,000
30,000
5
50,000
10,000
5,000
25,000
25,000
6
50,000
10,000
5,000
30,000
20,000
7
50,000
10,000
5,000
35,000
15,000
8
$50,000
$10,000
$5,000
$40,000
$10,000
Useful Life
O15.2
Annual
8 years
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Units of Production
Depreciation per unit of use=
Cost – Salvage Value
Units of Production
O15.2
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Units of Production
Depreciation per unit of use=
Cost – Salvage Value
Units of Production
Depreciable
Amount
Example:
Forklift cost $50,000
Salvage value $10,000
Useful life 20,000 hours
(50,000 - $10,000) =
$40,000/20,000 =
$2 per hour of use
1st year’s use 1500 hours x $2 =
$3,000 1st year depreciation
O15.2
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Units of Production
Example Depreciation Schedule
No usage
means no
depreciation
Acquisition
Salvage
Annual
Cost
Value
Usage
1
$50,000
$10,000
1,500
$3,000
$3,000
$47,000
2
50,000
10,000
3,500
7,000
10,000
40,000
3
50,000
10,000
0
0
10,000
40,000
4
50,000
10,000
3,000
6,000
16,000
34,000
5
50,000
10,000
3,000
6,000
22,000
28,000
6
50,000
10,000
4,000
8,000
30,000
20,000
7
$50,000
$10,000
5,000
$10,000
$40,000
$10,000
Year
Useful Life
O15.2
Annual
Accumulated
Ending
Depreciation Depreciation Book Value
20,000 hours
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Double Declining Balance
Annual depreciation =
2 x Straight line rate x
Beginning of year book value
O15.2
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Double Declining Balance
Annual depreciation =
2 x Straight line rate x
Beginning of year book value
Double
Straight
Line rate
Example: Useful life = 8 years
Straight line % = 1/8 = 12.5%
Double the rate 2 x 12.5% = 25%
O15.2
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1st year Double Declining Balance
Ignore
Annual depreciation =
Salvage
2 x Straight line rate x
value
Beginning of year book value until
end
Example: Forklift cost $50,000
Salvage value $10,000
Useful life 8 years
1 / 8 =12.5% x
2 = 25%
1st year depreciation = 25% x
$50,000 = $12,500
O15.2
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2nd year Double Declining Balance
Annual depreciation =
2 x Straight line rate x
Beginning of year book value
Book
value
has
declined
Example:
2nd year depreciation = 25% x
($50,000-$12,500) = $37,500
25% x $37,500 = $9,375
2nd year depreciation
O15.2
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Double Declining Balance
Example Depreciation Schedule
Force this
amount so
book value
= salvage
value
Acquisition
Salvage
DDB
Cost
Value
Rate
1
$50,000
$10,000
25%
$12,500
$12,500
$37,500
2
50,000
10,000
25%
9,375
21,875
28,125
3
50,000
10,000
25%
7,031
28,906
21,094
4
50,000
10,000
25%
5,273
34,180
15,820
5
50,000
10,000
25%
3,955
38,135
11,865
6
50,000
10,000
25%
1,865
40,000
10,000
7
50,000
10,000
25%
0
40,000
10,000
Year
Useful Life
O15.2
Annual
Accumulated
Ending
Depreciation Depreciation Book Value
8 years
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DDB method can help smooth
out the total costs of assets
Yr1
O15.2
Repair and Maint.
Expense
Total $
Total cost of ownership
Depreciation
Expense
Low
maintenance
and repair
expense in the
early years
and high
maintenance
and repair
expense in the
later years
Yr2
Yr3
Yr4
Yr5
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MACRS
Find
Use IRS provided tables
to determine annual depreciation class of
asset
based on class life of asset
O15.2
MACRS -Modified Accelerated Cost Recovery System
Year
3-Year
5-Year
7-Year
10-Year
1
33.33%
20.00%
14.29%
10.00%
2
44.45%
32.00%
24.49%
18.00%
3
14.81%
19.20%
17.49%
14.40%
4
7.41%
11.52%
12.49%
11.52%
5
11.52%
8.93%
9.22%
6
5.76%
8.92%
7.37%
7
8.93%
6.55%
8
4.46%
6.55%
9
6.56%
10
6.55%
11
3.28%
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MACRS
Example:
2nd year depreciation for 5 year class
asset is 32% x $50,000 = $16,000
O15.2
MACRS
doesn’t
consider
salvage
value
MACRS -Modified Accelerated Cost Recovery System
Year
3-Year
5-Year
7-Year
10-Year
1
33.33%
20.00%
14.29%
10.00%
2
44.45%
32.00%
24.49%
18.00%
3
14.81%
19.20%
17.49%
14.40%
4
7.41%
11.52%
12.49%
11.52%
5
11.52%
8.93%
9.22%
6
5.76%
8.92%
7.37%
7
8.93%
6.55%
8
4.46%
6.55%
9
6.56%
10
6.55%
11
3.28%
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Objective 15.3: Account for
repairs, maintenance and
improvements to Plant
Assets
?
29
Does the expenditure extend
the useful life of the asset?
Does the benefit of the
expenditure extend beyond the
current fiscal period?
15.3
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Ordinary repairs, betterments &
extraordinary repairs
Ordinary
maintenance
and repairs
Benefits
future
periods
Betterments
improve
asset’s
efficiency and
capacity
INCOME STATEMENT
Revenue
Extraordinary
repairs
extend the
asset’s
useful life
BALANCE SHEET
Assets
Liabilities
Expenses
Equity
Profit
or
Loss
15.3
Revenue
Expenditures
Capital
Expenditures
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Ordinary repairs
Ordinary maintenance and repairs are expenditures
necessary to keep assets in normal operating condition.
They are debited to an expense account
Example: $675 for maintenance and repairs on trucks is
journalized below
GENERAL JOURNAL
Date
14-Jun
Description
ўTruck Expense
ўCash
PR
Page 4
Debit
570
Credit
675
100
675
BALANCE SHEET
Revenue
expenditure
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
15.3
Profit
Debit
Credit
or
©CourseCollege.comLoss
32
Betterments
Betterments expenditures benefit future periods by making
assets more efficient or functional. They don’t necessarily
extend the useful life.
They are debited to the asset account
Example: $2,000 for adding heavy duty suspension to a
truck is journalized below
GENERAL JOURNAL
Date
24-Apr
Description
PR
ўEquipment -Truck
165
ўAccounts Payable
210
Page 4
Debit
Credit
2,000
2,000
BALANCE SHEET
Capital
expenditure
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
15.3
Profit
Debit
Credit
or
©CourseCollege.comLoss
33
Extraordinary Repairs
Extraordinary repair expenditures benefit future periods by
making assets last longer. They extend the useful life of the asset.
They are debited to the asset account
Example: $3,500 for rebuilding a truck engine is journalized below
GENERAL JOURNAL
Date
24-Apr
Description
PR
ўEquipment -Truck
165
ўAccounts Payable
210
Page 4
Debit
Credit
3,500
3,500
BALANCE SHEET
Capital
expenditure
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
15.3
Profit
Debit
Credit
or
©CourseCollege.comLoss
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Betterments -example
Example: After the third year of use, $2000 for adding heavy
duty suspension to a truck is debited to the asset account.
The revised depreciation schedule is shown below:
Equipment -Truck
Useful life:
5 years
Original Cost: $
Betterment:
36,000
Year
Cost
Annual
Accumulated Ending Book
Depreciation Depreciation
Value
$
2,000
1
$
36,000 $
6,900 $
6,900 $
29,100
Current Cost: $
38,000
2
$
36,000 $
6,900 $
13,800 $
22,200
Salvage value: $
1,500
3
$
36,000
6,900
20,700
4
$
38,000 $
7,900 $
28,600 $
9,400
5
$
38,000 $
7,900 $
36,500 $
1,500
Revised depreciation
for remaining life
15.3
Original
$
$
$ 15,300
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Extraordinary repair -example
Example: After the third year of use, $3,500 for rebuilding
truck engine is debited to the asset account.
The revised depreciation schedule is shown below:
Transportation Equipment
Useful life:
5 years
Original Cost: $
Extra repair
40,000
Annual
Accumulated Ending Book
$
3,500
Current Cost: $
43,500
1
$
40,000 $
7,600 $
7,600 $
32,400
Salvage value: $
2,000
2
$
40,000 $
7,600 $
15,200 $
24,800
3
$
40,000
7,600
22,800
4
$
43,500 $
4,675 $
27,475 $
16,025
5
$
43,500 $
4,675 $
32,150 $
11,350
6
$
43,500 $
4,675 $
36,825 $
6,675
7
$
43,500 $
4,675 $
41,500 $
2,000
Addnl life:
2 years
Revised depreciation
for remaining life
15.3
Original
Year
Cost
Depreciation Depreciation
$
$
Value
$ 17,200
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Objective 15.4: Account for
disposal of Plant Assets
Plant Assets are disposed of in several ways:
•They may be discarded as surplus
•They can be sold
•They can be exchanged or traded for other
assets
15.4
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Discarding a plant asset
If a plant asset is discarded when it no longer has any
market or functional value, asset values and accumulated
depreciation must be removed from the accounts.
Example: A fully depreciated computer (book value is $0) is
sent to recycling. The journal entry is shown below:
GENERAL JOURNAL
Date
22-Sep
Description
ўAccumulated Depreciation
ўComputer
15.4
PR
185
180
Page 6
Debit
Credit
6,000
6,000
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Sale of plant asset for cash
When a plant asset is sold for cash, asset values and
accumulated depreciation must be removed from the
accounts, and:
If the book value = cash received, no gain or loss is recorded
•If book value > cash received, loss is recorded
•If book value < cash received, gain is recorded
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
15.4
Debit
Credit
or
Loss
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Cash received > book value
Example: A delivery truck with recorded acquisition cost
of $28,000 and accumulated depreciation of $20,000 is
sold for $10,000. The journal entry is shown below:
GENERAL JOURNAL
Date
1-Sep
Description
PR
Page 6
Debit
Credit
ўCash
100
10,000
ўAccumulated Depreciation
185
20,000
ўEquipment -Truck
180
28,000
ўGain on Disposal
490
2,000
BALANCE SHEET
The disposal results
in additional
*revenue for the
period
*technically it should be
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
called a “gain”
15.4
Profit
Debit
Credit
or
©CourseCollege.com Loss
40
Cash received < book value
Example: A delivery truck with recorded acquisition cost
of $28,000 and accumulated depreciation of $20,000 is
sold $5,000. The journal entry is shown below:
GENERAL JOURNAL
Date
1-Sep
Description
PR
Page 6
Debit
Credit
ўCash
100
5,000
ўAccumulated Depreciation
185
20,000
ўLoss on Disposal
590
3,000
ўEquipment -Truck
180
28,000
BALANCE SHEET
The disposal results
in additional
*expense for the
period
*technically it should be
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
called a “loss”
15.4
Profit
Debit
Credit
or
©CourseCollege.com Loss
Exchanging a plant asset
41
RULES:
1. The recorded cost & accumulated depreciation of
the asset traded in must be removed from the
accounts
2. If no cash is received in the exchange, a gain on
disposal is never recognized. The value recorded
for the new asset is reduced to balance
3. The recorded value of the asset received cannot
exceed its’ fair market value
15.4
4. If book value + cash paid is more than the fair
market value of the asset received, a loss is
recorded.
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Exchanging a plant asset
Example: A delivery truck with a recorded cost of
$32,000 and accumulated depreciation of
$27,000 is traded in with $30,000 cash for a new
delivery truck with a fair market value of $38,000
GENERAL JOURNAL
Date
Description
10-Mar
ўEquipment -Truck
PR
New truck
ўAccumulated Depreciation
ўCash
ўEquipment -Truck
15.4
Old truck
Page 18
Debit
180
35,000
185
27,000
Credit
100
30,000
180
32,000
Book value = $32,000 - $27,000 = $5,000 + $30,000 cash =
$35,000 or less than the market value of the new truck,
therefore, the recorded value must be reduced to $35,000
to balance the transaction. (No gain can be recorded)
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Exchanging a plant asset
Example: A delivery truck with a recorded cost of
$32,000 and accumulated depreciation of
$27,000 is traded in with $30,000 cash for a new
delivery truck with a fair market value of $33,000
GENERAL JOURNAL
Date
Description
25-Mar
ўEquipment -Truck
PR
New truck
Page 18
Debit
Credit
180
33,000
ўAccumulated Depreciation
185
27,000
ўLoss on Disposal
590
2,000
ўEquipment -Truck
ўCash
Old truck
180
32,000
100
30,000
Book value = $32,000 - $27,000 = $5,000 + $30,000 cash =
$35,000 or more than the market value of the new truck,
therefore, a loss must be recorded.
15.4
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Objective 15.5: Analysis:
Compute and explain the
asset turnover ratio
Relates sales to
average total
assets
BALANCE SHEET
Assets
Liabilities
INCOME STATEMENT
Revenue
Expenses
Equity
Profit
Debit
Credit
or
Loss
15.5
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Total Asset Turnover Ratio
The higher the
turnover ratio,
the more
effective
management
is in utilizing
assets to
generate sales
Total asset turnover ratio is:
Net Sales / Average total assets
Sales
Average
Assets
15.5
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Total asset turnover -Example
46
Balance Sheet -Chen Distributors
As of 12/31 2010 and 2011
Assets
Cash
Accounts receivable
Inventory
Property Plant Equip
Accumulated Depr.
Total assets
2007
34,000
265,000
535,000
275,600
(175,500)
934,100
2008
28,500
301,400
575,000
264,600
(196,500)
973,000
Liabilities
Accounts Payable
Equipment loan
2007
198,500
173,000
2008
187,500
169,500
Total liabilities
Equity
Ow ner, Capital
371,500
357,000
562,600
616,000
Income Statement
For the year ended 12/31/08
Sales
Cost of Goods Sold
Wages expense
Depreciation expense
Selling expense
Miscellaneous expense
Net Profit
15.5
3,356,800
2,517,600
314,900
21,000
296,700
Average Assets
(TA for years 2010 +2011) / 2
153,200
53,400
To t al asset t urno ver
( Sales/ Average assets)
953,550
3.5
X
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End Unit 15
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