PLANT ASSETS
STUDY OBJECTIVES
After studying this chapter, you should understand:
The cost of
plant assets
The concept of
depreciation
Depreciation
methods
Revising periodic
depreciation
Expenditures during
useful life
Disposal of
plant assets
Reporting &
analysis
THE COST OF PLANT ASSETS
• Plant assets are recorded at cost (cost principle).
• Cost includes all expenditures necessary to
acquire the asset and make it ready for use.
• An asset’s cost includes purchase price, freight
costs, and installation costs.
Plant asset categories:
Land
Land improvements
Buildings
Equipment
COST OF LAND
Costs debited to land account
Purchase price
Closing costs, broker commissions, accrued taxes, etc.
Other costs necessary to make land ready for use such as
clearing, surveying costs
Land
Cash price of property
Net removal cost of warehouse
Attorney’s fee
Real estate broker’s commission
Cost of land
$ 100,000
6,000
1,000
8,000
$ 115,000
COST OF LAND IMPROVEMENTS
Land improvements are structural additions
made to land, such as:
Lighting
1 parking lots
2 fencing
3 lighting
4 sprinklers
5 driveways
Parking Lot
6 landscaping (or debit land if permanent)
COST OF BUILDINGS
The cost of a building depends on whether it is purchased or
constructed.
Purchased
Constructed
Purchase price
Contract price and
architects fees
Materials and Labor
Permits & excavation
Interest
Attorney’s Fees
Brokers commissions
Cost of Building Wing
COST OF EQUIPMENT
Purchase price
Sales tax
Freight charges
Transit insurance
Assembly
Installation
Testing and Trial Runs
Other ongoing expenses are expensed as incurred
COST OF MACHINERY
& JOURNAL ENTRY
Factory Machinery
Cash price
$ 50,000
Sales taxes
3,000
Insurance during shipping
500
Installation and testing
1,000
Cost of factory machinery
$ 54,500
Entry to record the cost of machinery & related expenditures:
Factory Machinery
Cash
54,500
54,500
COST OF TRUCK
& JOURNAL ENTRY
Delivery Truck
Cash price
$ 22,000
Sales taxes
1,320
Painting and lettering
500
Cost of delivery truck $ 23,820
The company also paid an $80 license fee, which is expensed.
Account Titles and Explanation
Delivery Truck
License Expense
Prepaid Insurance
Cash
(To record purchase of delivery
truck and related expenditures)
Debit
Credit
23,820
80
1600
25,500
REVIEW QUESTION
COST OF EQUIPMENT
Erin Danielle Co. purchased equipment and incurred these costs:
1. Cash price
$24,000
2. Sales taxes
1,200
3. Insurance during transit
200
4. Installation and testing
400
What amount should be recorded as the cost of this equipment?
Answer
$25,800
THE CONCEPT OF DEPRECIATION
The allocation of an asset’s cost to expense over its useful life.
Matches expenses with revenues.
Does not result in an accumulation of cash to replace the asset.
Land is not depreciated.
Factors
affecting
depreciation
Cost
Salvage/
Residual
value
Useful
life
DEPRECIATION METHODS
Let’s use the data below in the following examples.
The truck was purchased on January 1, 2006.
Cost
Expected salvage value
Estimated useful life in years
Estimated useful life in miles
$13,000
$1,000
5
100,000
STRAIGHT-LINE METHOD
• Depreciation is the same for each year of
the asset’s useful life.
• It is measured solely by the passage of time.
• Cost of asset - salvage value = depreciable
base
STRAIGHT-LINE METHOD
The formula for computing annual depreciation expense is:
Depreciable Base/ Useful Life (in years) = Depreciation Expense
Salvage
Value
Cost
$13,000
Depreciable
Base
$12,000
-
$1,000


Useful
Life
(in Years)
÷
5
Depreciable
Base
=
$12,000
Annual
Depreciation
Expense
=
$2,400
UNITS OF ACTIVITY
• Useful life is expressed in terms of the total
units of production expected.
• Total activity is a rough estimate.
• If productivity varies significantly from one
period to another, this method is best at
matching of expenses with revenues.
UNITS OF ACTIVITY
To use the units-of-activity method,
apply the formula below:


Depreciable
Base
$12,000
Depreciable
Cost per Unit
÷ 100,000 miles = $0.12
Units of
Activity during
the Year
Depreciable
Cost per Unit
$0.12
Total Units of
Activity
x
Annual
Depreciation
Expense
15,000 miles = $1,800
DECLINING BALANCE
Produces a decreasing annual depreciation
expense over the asset’s useful life.
Constant depreciation rate applied to a declining book value.
Salvage value ignored in computing depreciation expense.
Higher depreciation in early years is matched
with higher benefits received in these years.
Book Value
Beg of Year
x
DB Rate
=
Annual
Depreciation
Expense
DECLINING BALANCE
Formula for the double declining-balance method.
DDB rate is 2X the straight-line rate.
Book Value
At BOY Value
$13,000
Annual
Depreciation
Expense
DB
Rate
x
40%
=
$5,200
REVISING PERIODIC DEPRECIATION
This is a change in accounting estimate.
No correction of previously
recorded depreciation expense.
Depreciation expense for
current and future is revised.
Remaining
depreciable
cost
Remaining
Useful life
=
New annual
Depreciation
expense
EXPENDITURES DURING USEFUL LIFE
REVENUE EXPENDITURES
Ordinary repairs and maintenance
Immaterial in amount
No effect on useful life of asset
Expensed immediately
CAPITAL EXPENDITURES
Additions and Improvements to assets
Material in amount
Extend asset’s useful life