A business uses plant assets for more
than one accounting period, so it
spreads the cost of these assets over
a number of years. A business must
also calculate depreciation of certain
plant assets.
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Identify plant assets.
Explain the need to depreciate plant assets.
Calculate annual depreciation of plant assets.
Calculate partial-year depreciation of plant assets.
Determine the book value of a plant asset.
Record depreciation of plant assets.
Prepare depreciation schedules.
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Plant Assets
and Equipment
Section 23.1
Key Terms
plant assets
depreciation
disposal value
straight-line depreciation
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Current and Plant Assets
Plant Assets
and Equipment
Section 23.1
Land
Office
Equipment
Buildings
Examples of
Plant Assets
Store
Equipment
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plant assets
Long-lived assets
that are used in the
production or sale of
other assets or services
over several
accounting periods.
Delivery
Equipment
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Estimating Depreciation of a
Plant Asset
Section 23.1
Plant Assets
and Equipment
Cost
Factors Used
to Calculate
Depreciation
Estimated Useful Life
Estimated Disposal Value
Depreciation Method
depreciation
Allocating a plant asset’s cost over its useful life.
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Estimating Depreciation of a
Plant Asset
Section 23.1
Plant Assets
and Equipment
The cost of a plant asset is equal to the purchase price plus
sales taxes, delivery charges, and installation charges.
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Estimating Depreciation of a
Plant Asset
Section 23.1
Plant Assets
and Equipment
Estimated useful life can be calculated using
past experiences.
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Estimating Depreciation of a
Plant Asset
Section 23.1
Plant Assets
and Equipment
The IRS publishes guidelines on disposal values.
disposal value
The estimated value of a plant asset at its
replacement time; also called salvage value.
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Estimating Depreciation of a
Plant Asset
Section 23.1
Plant Assets
and Equipment
Depreciation
Methods
Straight-Line
Depreciation Method
Units-of-Production
Method
straight-line depreciation
A method that equally
distributes the depreciation
expense over an asset’s
estimated useful life.
Accelerated Depreciation
Method
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Estimating Depreciation of a
Plant Asset
Section 23.1
Plant Assets
and Equipment
Federal Income Tax Laws for Depreciating Assets
The Accelerated Cost
Recovery System (ACRS)
Allows a business to recognize
depreciation over a shorter period
of time and does not consider
disposal value.
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Modified Accelerated Cost
Recovery System (MARCS)
Used for tax accounting only.
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Section 23.2
Calculating Depreciation
Key Terms
accumulated depreciation
book value
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Calculating Depreciation
Section 23.2
Calculating Depreciation
Calculate Depreciation
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Calculating Depreciation
Section 23.2
Calculating Depreciation
Straight-Line Depreciation
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Calculating Depreciation
Section 23.2
Calculating Depreciation
Straight-Line Depreciation
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Calculating Depreciation
Section 23.2
Calculating Depreciation
Declining-Balance Depreciation
The annual depreciation expense is the asset’s book
value multiplied by the declining-balance rate.
This rate can vary but it is usually double the
straight line rate.
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Plant Asset Records
Section 23.2
Calculating Depreciation
Information in the Plant Asset Record
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1
Date of Purchase
2
Original Cost
3
Estimated Useful Life
4
Annual Depreciation
5
Accumulated Depreciation
6
Book Value at the End of Each Year
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Plant Asset Records
Section 23.2
Calculating Depreciation
See page 678
accumulated depreciation
The total amount of depreciation for a plant asset that
has been recorded up to a specific point in time.
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Plant Asset Records
Section 23.2
Calculating Depreciation
See page 678
book value
The original cost of a plant asset minus
accumulated depreciation.
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Adjusting for
Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
See page 680
Information to make depreciation adjustments comes from
the plant asset records. Each type of asset has its own
depreciation expense summary.
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Adjusting for
Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
Depreciation
Expense
Two accounts affected
by the adjustment for
depreciation:
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Accumulated
Depreciation
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Adjusting for
Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
The debit and credit rules followed by the Accumulated
Depreciation account are opposite those for an asset account.
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Adjusting for
Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
During the year,
Depreciation Expense has
a zero balance because
the adjustment for
depreciation is recorded
at the end of the period.
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The account is closed to
Income Summary at the
end of the year.
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Adjusting for
Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
Business Transaction
On December 31 the accounting clerk for The Starting Line records the
depreciation for the delivery truck.
See page 681–682
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Adjusting for
Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
Work Sheet with Depreciation Adjustments
See page 682
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Adjusting for
Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
The depreciation expense accounts are reported on the
income statement.
See page 684
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Adjusting for
Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
The plant asset and related accumulated depreciation accounts
appear in the assets section of the balance sheet.
See page 684
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Adjusting and Closing Entries
for Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
Adjustment
Record the December 31 adjusting journal entries for depreciation.
See page 685
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Adjusting and Closing Entries
for Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
Adjustment
Record the December 31 adjusting journal entries for depreciation.
See page 685
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Adjusting and Closing Entries
for Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
Closing
Second Closing Entry—Depreciation accounts only.
See page 686
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Adjusting and Closing Entries
for Depreciation Expense
Section 23.3
Accounting for a
Depreciation Expense
at the End of a Year
Closing
Second Closing Entry—Depreciation accounts only.
See page 686
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Question 1
On March 1 Lakeview Landscape purchased a new dump truck for $45,000. The
truck will have a useful life of 10 years and a disposal value of $7,500.
(a) Using straight-line depreciation, calculate the yearly depreciation of the truck.
(b) How much could you depreciate in Year 1?
a) Step 1: Subtract the disposal value from the cost of the truck:
$45,000 - $7,500 = $37,500 to be depreciated
Step 2: Divide the amount to be depreciated by the useful life of the
asset: $37,500 ÷ 10 = $3,750 per year
b) Calculate depreciation in Year 1 (for 10 months, March 1 to December
31): $3,750 x 10/12 = $3,125
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Question 2
Why would a corporation choose to use an accelerated depreciation system such
as declining-balance depreciation instead of straight-line depreciation?
An accelerated depreciation schedule allows the corporation to take a
higher expense early in the life of the asset. Since money today is more
desirable than money one year from now, it allows the corporation to realize
tax benefits early.
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