Chapter 5 Assets. 1. Record the acquisition of property, plant, and equipment. 2. Determine the cost of assets acquired by the exchange of other assets

Chapter 5

AssetsAssets

1. Record the acquisition of property, plant, and equipment.

2. Determine the cost of assets acquired by the exchange of other

assets.

3. Compute the cost of a self-constructed asset, including interest

capitalization.

4. Record costs subsequent to acquisition.

5. Record the disposal of property, plant, and equipment.

6. Understand the disclosures of property, plant, and equipment.

7. Explain the accounting for oil and gas properties. (appendix)

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

8. Identify the factors involved in depreciation.

9. Explain the alternative methods of cost allocation, including activity and time-based methods.

10. Record depreciation.

11. Explain the conceptual issues regarding depreciation methods.

12. Understand the disclosure of depreciation.

13. Understand additional depreciation methods, including group and composite methods.

14. Compute depreciation for partial periods.

15. Explain the impairment of noncurrent assets.

16. Understand depreciation for income tax purposes.

17. Explain changes and corrections of depreciation.

18. Understand and record depletion.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Actively Used in Operations

Expected to Benefit Future Periods

Tangible

PhysicalSubstance

Intangible

No PhysicalSubstance

Operational AssetsOperational AssetsOperational AssetsOperational Assets

Expected to Benefit Future Periods


Examples

Tangible

PhysicalSubstance


1. The asset must be held for use and not for investment.

2. The asset must have an expected life of more than one year.

3. The asset must be tangible in nature.

To be included in the property, plant, and equipment category, an asset must have three characteristics:

Characteristics of Property, Plant, and EquipmentCharacteristics of Property, Plant, and EquipmentCharacteristics of Property, Plant, and EquipmentCharacteristics of Property, Plant, and Equipment


Expected to Benefit Future Periods• Value represented by rights that produce benefits

GoodwillPatentsCopyrightsTrademarks

• Assets subject to amortization

Examples

Intangible

No PhysicalSubstance


General Rule

The historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use.

Acquisition CostAcquisition CostAcquisition CostAcquisition Cost

Contract priceContract price Remodeling and reconditioningRemodeling and reconditioning Excavating for the specific buildingExcavating for the specific building Architectural and building permit Architectural and building permit

costscosts Capitalized interestCapitalized interest Certain unanticipated costsCertain unanticipated costs

Contract priceContract price Remodeling and reconditioningRemodeling and reconditioning Excavating for the specific buildingExcavating for the specific building Architectural and building permit Architectural and building permit

costscosts Capitalized interestCapitalized interest Certain unanticipated costsCertain unanticipated costs

Cost of BuildingsCost of Buildings

Acquisition of Property,Acquisition of Property, Plant, and Equipment Plant, and EquipmentAcquisition of Property,Acquisition of Property, Plant, and Equipment Plant, and Equipment

Installation costs Net purchase price Modification to building

necessary to install equipment

Transportation costs

Cost of Machinery, Furniture, and FixturesCost of Machinery, Furniture, and Fixtures


Contract priceContract price Costs of closing the Costs of closing the

transaction, obtaining transaction, obtaining the title, options, legal the title, options, legal fees, title search, fees, title search, insurance, past due insurance, past due taxestaxes

Contract priceContract price Costs of closing the Costs of closing the

transaction, obtaining transaction, obtaining the title, options, legal the title, options, legal fees, title search, fees, title search, insurance, past due insurance, past due taxestaxes

Cost of LandCost of Land

Cost of surveysCost of surveys Clearing and grading Clearing and grading

property to get it ready property to get it ready for its intended usefor its intended use

Razing old buildings Razing old buildings (net of salvage)(net of salvage)

Cost of surveysCost of surveys Clearing and grading Clearing and grading

property to get it ready property to get it ready for its intended usefor its intended use

Razing old buildings Razing old buildings (net of salvage)(net of salvage)


LandscapingLandscaping StreetsStreets SidewalksSidewalks SewersSewers

Cost of Land ImprovementsCost of Land Improvements


DrivewaysDrivewaysParking lotsParking lotsFencingFencingLandscapingLandscaping

Cost of Land ImprovementsCost of Land Improvements


Several assets are acquired for a single,lump-sum price that may be lower thanthe sum of the individual asset prices.

Asset 4Asset 3Asset 2Asset 1

Lump-Sum PurchaseLump-Sum PurchaseLump-Sum PurchaseLump-Sum Purchase



Portions of the lump-sumprice attributable toparticular assets areassigned to those assets.




Allocation of theremaining lump-sumprice is based onrelative values ofthe individual assets.

Portions of the lump-sumprice attributable toparticular assets areassigned to those assets.


Lump-Sum PurchasesLump-Sum Purchases

1. Under the proportional method, the value of each asset is based on the proportion of it’s market value to the total market value of the group of assets being purchased.

2. The incremental method is used when market values are not available for all of the assets.


Proportional MethodProportional Method

A company pays $120,000 for land and a building. The land and building are appraised at $50,000 and $75,000, respectively.


Appraisal Relative Fair Total Allocated Value Value x Cost = Cost

Land $ 50,000 $50,000/$125,000 x $120,000 = $ 48,000Building 75,000 $75,000/$125,000 x $120,000 = 72,000Total $125,000 $120,000


Proportional MethodProportional Method



Land 48,000Building 72,000 Cash 120,000


A company pays $120,000 for a truck and a used custom made machine. The truck has a value of $70,000 but the value of the machine is unknown.

A company pays $120,000 for a truck and a used custom made machine. The truck has a value of $70,000 but the value of the machine is unknown.

Truck 70,000Equipment 50,000 Cash 120,000

Incremental MethodIncremental Method

Incremental MethodIncremental MethodIncremental MethodIncremental Method

When plant assets are used that require substantial costs of dismantling, removal, and site reclamation at the end of the asset’s useful life . . .

The present value of these costs should be

capitalized and the associated liability should be

recognized when the following criteria are met:

Capitalized ClosureCapitalized Closureand Removal Costsand Removal CostsCapitalized ClosureCapitalized Closureand Removal Costsand Removal Costs

1. The cost can be estimated.

2. The liability is the result of the future requirement to close

or remove the asset, and cannot be satisfied until the

operation of the asset ceases.

3. The liability cannot be avoided if the asset is used as

intended.

Capitalized ClosureCapitalized Closureand Removal Costsand Removal CostsCapitalized ClosureCapitalized Closureand Removal Costsand Removal Costs

• With cash

• On credit

• In exchange for equity securities of the acquiring

company

• Through donation from another entity

• Through construction

• In exchange for

nonmonetary assets

Asset AcquisitionAsset AcquisitionAsset AcquisitionAsset Acquisition

The asset acquired is recorded at the

Cash equivalent price (market value)

or

Present value of future cash payments using the

prevailing market interest rate

Whichever is more objective and reliable. (APB Opinion No.

21)

Purchase on CreditPurchase on CreditPurchase on CreditPurchase on Credit

On May 1, X6, Fesler, Inc. purchased equipment paying

$3,000 down and issuing a note payable. The note

requires four annual payments of $2,500 with the first

payment due on May 1, X7. The note is noninterest-

bearing. The prevailing market rate of interest on notes of

this nature is 12%.

Prepare the required journal entries on May 1, X6 and

December 31, X6 (year-end).

Purchase on CreditPurchase on CreditExampleExamplePurchase on CreditPurchase on CreditExampleExample

Annuity payment 2,500$ PVA $1, n = 4, i = 12% 3.03735 PV of note (rounded) 7,593$ Down payment 3,000 Cost of equipment 10,593$


GENERAL JOURNAL Page 1

Date Description PR Debit Credit

5/1 Equipment 10,593 Discount on Note Payable 2,407

Cash 3,000 Note Payable 10,000

Discount = $10,000 - $7,593




12/31 Interest Expense 607 Discount on Note Payable 607

$7,593 ×12% ×8/12 = $607

(rounded)


• Asset acquired is recorded at the market value of the

asset or the market value of the securities, whichever is

more objective and reliable.

• If the securities are actively traded, market value can be

easily determined.

• If no objective and reliable value can be determined,

board of directors assigns a reasonable value.

Purchased With Equity SecuritiesPurchased With Equity SecuritiesPurchased With Equity SecuritiesPurchased With Equity Securities

• Municipalities may donate land and buildings to

induce a company to locate in the area.

• SFAS No. 116 defines a contribution as

“an unconditional transfer of cash or other

assets to

an entity or a settlement or cancellation of its

liabilities in a voluntary nonreciprocal

transfer. . .”

Donated AssetsDonated AssetsDonated AssetsDonated Assets

• SFAS NO.116:

Donated assets are capitalized at market

value and revenue from donated assets

is recognized.


Assets Acquired by DonationAssets Acquired by Donation

The CEO of Hrouda Company donates a building worth $50,000 to the company.

The CEO of Hrouda Company donates a building worth $50,000 to the company.

Building 50,000 Gain from Donation of Land 50,000 (by a nongovernmental unit)

The gain is reported in the Other section of the income statement.


Assets Acquired by DonationAssets Acquired by Donation

The City of Julesberg (a governmental unit) donates land worth $20,000 to the Klemme Company.

The City of Julesberg (a governmental unit) donates land worth $20,000 to the Klemme Company.

Land 20,000 Donated Capital 20,000

(by a governmental unit)


• Contributed services that enhance nonfinancial assets

are recognized as expenses and revenues on receipt.

• Contribution of collectibles, like works of art for public

display, are disclosed, but not recognized in the

accounts.


The cost of materials, labor, and overhead used in the self-construction of property, plant, and equipment intended for a firm’s production process are added to the cost of the asset.

The cost of materials, labor, and overhead used in the self-construction of property, plant, and equipment intended for a firm’s production process are added to the cost of the asset.

Self-Constructed AssetsSelf-Constructed AssetsSelf-Constructed AssetsSelf-Constructed Assets

• The asset’s recorded cost must never exceed its fair

market value.

• If costs actually incurred exceed fair market value, a loss

must be recognized.


Assume that Kelvin Corporation complete a project with total construction costs as follows:

Material $ 200,000

Labor 500,000

Incremental overhead 60,000

Applied general overhead 40,000

Capitalized interest 100,000

Total $ 900,000


If the asset’s market value at completion

equals or exceeds $900,000:

Equipment 900,000

Equipment under construction 900,000

If the asset’s market value is only $880,000 Equipment 880,000

Loss on construction of equipment 20,000

Equipment under construction 900,000


• They must require a period of time to

make them ready for use.

• There are two types of qualifying

assets: 1. Assets under construction for use in

operations, and

2. Discrete assets intended for sale or lease.

41

Interest Capitalization - Qualifying AssetsInterest Capitalization - Qualifying Assets

Interest cannot be capitalized for the following types of assets:

1. Inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis.

2. Assets that are in use or ready for their intended use.

3. Assets that are not being used in the earning activities of the company and are not undergoing the activities necessary to get them ready for use.

Interest Capitalization Interest Capitalization

• Capitalization begins when . . .

Qualifying expenditures have been made, and

Construction activities are underway, and

Interest cost has been incurred.

• Capitalization ends when . . .

The asset is substantially complete and ready

for

its intended use.


– Avoidable interest

interest that could have been avoided if the asset

were not con-structed and the money used to retire

debt.


Determineweighted-averageaccumulatedexpenditures

1

Avoidable interest

Appropriateinterest rate(s)

2

Multiplyby

45

Interest Capitalization-Computing Avoidable Interest Capitalization-Computing Avoidable InterestInterestInterest Capitalization-Computing Avoidable Interest Capitalization-Computing Avoidable InterestInterest

• Interest is capitalized on Average Accumulated

Expenditures (AAE)

Qualifying expenditures weighted for the number of months

outstanding during the current accounting period.

• Qualifying Expenditures

Cash payments for construction

Transfer of other assets

Incurrence of interest-bearing liabilities


Amber makes the following two payments in 2004: Jan 31: $24,000 July 31: $18,000Capitalization period ran from Jan 31 – Dec 31.What is the WAAE?

Jan 31: $24,000 × (11/12) $22,000July 31: $18,000 × (5/12) $ 7,500

WAAE $29,500

47

Determining Weighted-Average AccumulatedExpenditures (WAAE): Example

Determining Weighted-Average AccumulatedExpenditures (WAAE): Example

• Interest Potentially Capitalizable (IPC)

Multiply the AAE by the capitalization rate or rates.


• Capitalization Rate(s)

If the qualifying asset is financed through a

specific new borrowing, the interest rate on the

new borrowing is used for the computation of IPC.

If the qualifying asset is internally financed, the

capitalization rate will be the weighted-average

cost of debt.

Use both rates, if partially financed with a new

borrowing.


AAE less than specific new borrowing

SpecificnewborrowingAAE

Capitalize AAEusing specificborrowing rate


AAE more than specific new borrowing

Specific newborrowing

AAECapitalize this part of AAE using specificborrowing rate

Other debt

Capitalize this part of AAEusing weighted averagerate of other debt


Steps in the capitalization process

1. Compute actual interest expense.

2. Compute AAE.

3. Compute IPC.

4. Capitalize the smaller of actual interest or IPC.


Welling, Inc. is constructing a building for its own use.

Construction activities started on May 1 and have continued

through Dec. 31. Welling made the following qualifying

expenditures: May 1, $125,000; July 31, $160,000, Oct. 1,

$200,000; and Dec. 1, $300,000.

Welling recorded total interest expense of $175,000 during

the year, including construction borrowing of $1,000,000 on

May 1, from Bub’s Bank for 10 years at 12%.

Interest CapitalizationInterest CapitalizationExampleExampleInterest CapitalizationInterest CapitalizationExampleExample

Actual interest expense is $175,000.

Compute AAE:

Fraction ofDate Expenditure Year AAE5/1 125,000$ 8/12 83,333$

7/31 160,000 5/12 66,667 10/1 200,000 3/12 50,000 12/1 300,000 1/12 25,000

785,000$ 225,000$


Compute IPC:

Since we have a specific new borrowing, and

the amount of the borrowing ($1,000,000)

exceeds the AAE ($225,000), we use the

interest rate on the specific new borrowing for

the capitalization.

IPC = AAE × Capitalization rate

IPC = $225,000 × 12% = $27,000


Capitalize the smaller of actual interest or IPC.

Actual interest = $175,000

IPC = $27,000

Capitalize $27,000




12/31 Construction-In-Progress 27,000

Interest Expense 27,000






ACCOUNT NAME: C-I-P Account No. 142

Date Description PR Debit Credit Balance

12/31 Balance 785,000

12/31 Capitalization of interest 27,000 812,000






ACCOUNT NAME: Interest Expense Account No. 571

Date Description PR Debit Credit Balance

12/31 Balance 175,000

12/31 Capitalization of Interest 27,000 148,000


• Update depreciation to date of disposal.

• Original cost of asset and accumulated depreciation are

removed from the accounts.

• The difference between book value of the asset and the

amount received in the disposal process is recorded as

a gain or loss.

Disposal of Plant AssetsDisposal of Plant AssetsDisposal of Plant AssetsDisposal of Plant Assets

On June 30,2006, MeLo, Inc. sells equipment for

$6,350 cash. The equipment was purchased on

January 1, 19X1 at a cost of $15,000. The asset has a

useful life of 10 years and no salvage value. MeLo last

recorded depreciation on the equipment on December

31, 2005, its year-end.

Prepare the journal entries necessary to record the

disposal of this equipment.

Disposal of Plant AssetsDisposal of Plant AssetsExampleExampleDisposal of Plant AssetsDisposal of Plant AssetsExampleExample

Update depreciation to date of sale.



6/30 Depreciation Expense 750

Accumulated Depreciation 750

$15,000 ÷ 10 yrs. ÷ 2 = $750


Remove asset and Accumulated Depreciation and

recognize gain or loss.

6/30 Accumulated Depreciation 8,250

Cash 6,350

Loss on Sale 400

Equipment 15,000

($15,000 ÷10 years) ×5.5years = $8,250


The general exchange principle is that the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered.

The general exchange principle is that the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered.

Nonmonetary Asset ExchangesNonmonetary Asset ExchangesNonmonetary Asset ExchangesNonmonetary Asset Exchanges

• Cost of asset acquired isFair value of asset transferred plus cash paid or

minus cash

received

or

Fair value of asset acquired, if it is more readily

determinable.


The Company acquiring the asset recognizes a gain or loss on the exchange as the difference between the fair value of the asset surrendered and its book value.

The Company acquiring the asset recognizes a gain or loss on the exchange as the difference between the fair value of the asset surrendered and its book value.


• A nonmonetary exchange is considered to

have commercial substance if the

company(1) Expects a change in future cash flows as a result

of

the exchange and

(2) That expected change is significant relative to the

fair value of the assets exchanged.


A company would not recognize a gain if the transaction lacks “commercial substance; that is, future cash flows are not expected change significantly.

A company would not recognize a gain if the transaction lacks “commercial substance; that is, future cash flows are not expected change significantly.


Commercial SubstanceCommercial Substance

Arnold Company Carbon Company

Cost $100,000Accum. depr. 54,000Fair value 40,000


Assets Acquired by Assets Acquired by Exchange of Other AssetsExchange of Other AssetsAssets Acquired by Assets Acquired by Exchange of Other AssetsExchange of Other Assets

Arnold Company


Equipment 40,000Accum. depr. 54,000Loss 6,000 Building 100,000

Book value $46,000Fair value 40,000Loss $6,000



Company A

Equipment 40,000Accum. depr. 54,000Loss 6,000 Building 100,000

Cost $40,000 Book value $46,000Fair value 40,000Loss $6,000



Cost $60,000Accum. Depr. 32,000Fair value 40,000

Building 40,000Accum. Depr. 32,000 Equipment 60,000 Gain 12,000

Book value $28,000Fair value 40,000Gain $12,000


Carbon Company


Cost $40,000Book value $28,000Fair value 40,000Gain $12,000

Building 40,000Accum. Depr. 32,000 Equipment 60,000 Gain 12,000


Carbon Company


Commercial Substance with BootCommercial Substance with Boot

Arnold Company

Cost $100,000Accum. depr. 54,000Fair value 40,000Cash received 5,000

Cost $60,000Accum. depr. 32,000Fair value 35,000Cash paid 5,000

Carbon Company


Arnold Company

Cost $100,000Accum. depr. 54,000Fair value 40,000Cash received 5,000

Equipment 35,000Accum. depr. 54,000Cash 5,000Loss 6,000 Building 100,000

Book value $46,000Fair value 40,000Loss $6,000



Arnold Company Equipment 35,000Accum. depr. 54,000Cash 5,000Loss 6,000 Building 100,000

Cost $35,000



Cost $60,000Accum. Depr. 32,000Fair value 35,000Cash paid 5,000

Building 40,000Accum. Depr. 32,000 Equipment

60,000 Cash

5,000 Gain

7,000

Book value $28,000Fair value 35,000Gain $7,000


Carbon Company


Let’s change the subject.

• If cost incurred increase future benefits,

capitalize costs.

• If costs maintain a given level of services,

expense costs.

79

Post-Acquisition ExpendituresPost-Acquisition ExpendituresPost-Acquisition ExpendituresPost-Acquisition Expenditures

Extending the life of the asset.Extending the life of the asset. Improving the productivity.Improving the productivity. Producing the same product at lower Producing the same product at lower

cost.cost. Increasing the quality of the product.Increasing the quality of the product.

Extending the life of the asset.Extending the life of the asset. Improving the productivity.Improving the productivity. Producing the same product at lower Producing the same product at lower

cost.cost. Increasing the quality of the product.Increasing the quality of the product.

The future economic benefits of a productive asset or product can be increased by--


• Maintenance and ordinary repairs.

• Improvements (betterments), replacements, and extraordinary repairs.

• Additions.

• Rearrangements and other adjustments.


Normally we debit an expenseexpense account for amounts spent on:

Maintenance and Ordinary RepairsMaintenance and Ordinary Repairs


Maintenance and Ordinary RepairsMaintenance and Ordinary Repairs

1. Incurred approach

2. Allocation approach Repair and maintenance expense xxx

Allowance for repairs and maintenance xxx


Normally we debit the assetasset account for amounts spent on:

Improvements, Replacements,Improvements, Replacements,

and Extraordinary Repairsand Extraordinary Repairs

Concept: increase useful life or productivity of the original asset.


A company decides to replace its oil furnace with a gas furnace.

The oil furnace is carried on the books at a cost of $50,000 with

an accumulated depreciation of $30,000. The scrap value of

the old furnace is $5,000, and the new furnace costs $70,000.

A company decides to replace its oil furnace with a gas furnace.

The oil furnace is carried on the books at a cost of $50,000 with

an accumulated depreciation of $30,000. The scrap value of

the old furnace is $5,000, and the new furnace costs $70,000.

Furnace 70,000Accumulated Depreciation: Furnace 30,000Loss on Disposal of Furnace 15,000 Furnace 50,000 Cash 65,000Substitution MethodSubstitution Method

Improvements and ReplacementsImprovements and ReplacementsImprovements and ReplacementsImprovements and Replacements

A capital expenditure of $80,000 is incurred to enlarge a factory.

A capital expenditure of $80,000 is incurred to enlarge a factory.

Factory 80,000 Cash 80,000

Increase the Asset AccountIncrease the Asset Account

Improvements, Replacements and AdditionsImprovements, Replacements and AdditionsImprovements, Replacements and AdditionsImprovements, Replacements and Additions

A capital expenditure of $60,000 is incurred in replacing a roof on a factory building.

A capital expenditure of $60,000 is incurred in replacing a roof on a factory building.

Accumulated Depreciation 60,000 Cash 60,000

Reduce Accumulated DepreciationReduce Accumulated Depreciation

Improvements and ReplacementsImprovements and ReplacementsImprovements and ReplacementsImprovements and Replacements

Normally we debit the asset asset account for

amounts spent on:

AdditionsAdditions

Concept: expansion of an existing asset.


Normally we debit an other asset other asset account

for amounts spent on:

Rearrangements and Other AdjustmentsRearrangements and Other Adjustments

Concept: increase efficiency of

operations.


Bean Company has a machine that originally cost $10,000, has accumulated depreciation of $8,000 at the beginning of the current year, and is being depreciated at $1,000 per year. On December 30, the company sells the machine for $600.

Bean Company has a machine that originally cost $10,000, has accumulated depreciation of $8,000 at the beginning of the current year, and is being depreciated at $1,000 per year. On December 30, the company sells the machine for $600.

Depreciation 1,000 Accumulated Depreciation 1,000

To bring depreciation to point of sale.To bring depreciation to point of sale.

Disposal of Property, Plant,Disposal of Property, Plant,and Equipmentand EquipmentDisposal of Property, Plant,Disposal of Property, Plant,and Equipmentand Equipment

Cash 600Accumulated Depreciation 9,000Loss on Disposal 400 Machine 10,000

To record disposal of machine for $600.To record disposal of machine for $600.

Bean Company has a machine that originally cost $10,000, has accumulated depreciation of $8,000 at the beginning of the current year, and is being depreciation at $1,000 per year. On December 30, the company sells the machine for $600.

Bean Company has a machine that originally cost $10,000, has accumulated depreciation of $8,000 at the beginning of the current year, and is being depreciation at $1,000 per year. On December 30, the company sells the machine for $600.

Disposal of Property, Plant,Disposal of Property, Plant,and Equipmentand EquipmentDisposal of Property, Plant,Disposal of Property, Plant,and Equipmentand Equipment

• The acquisition cost of an operational asset represents a bundle of future services that help earn future revenues.

• The matching principle requires that part of the acquisition cost be expensed in periods when the future revenues are earned.

AcquisitionCost

Expense

(Unused) (Used)

Depreciation ConceptsDepreciation ConceptsDepreciation ConceptsDepreciation Concepts

Depreciation, depletion, and amortization are cost allocation processes that systematically and rationally allocate acquisition costs of operational assets to periods benefited by their use.

Cost

Allocation

AcquisitionCost

Expense

(Unused) (Used)


Type ofOperational Expense

Asset Debit Account Credited

Property, Plantand Equipment Depreciation Accumulated Depreciation

Natural Resource Depletion Natural Resource Asset

Intangible Amortization Intangible Asset

Depreciation is a cost allocation cost allocation process and has nothing to do with asset valuation.


Depreciation Expense

• Temporary account, reported on the income statement.

• Balance in Depreciation Expense indicates how much depreciation has been recorded in the current year.

Accumulated Depreciation

• Permanent account, reported on the balance sheet as a deduction from plant assets.

• Balance in Accumulated Depreciation is a cumulative total of all depreciation recorded on an asset.


Property, plant, and equipment: Land and buildings 150,000$ Machinery and equipment 200,000 Office furniture and equipment 175,000 Land improvements 50,000 Total 575,000$Less Accumulated depreciation (122,000) Net property, plant, and equipment 453,000$

Net property, plant, and equipment is the undepreciated cost (book value) of the plant assets.

Depreciation on the Balance SheetDepreciation on the Balance SheetDepreciation on the Balance SheetDepreciation on the Balance Sheet

• Depreciation is a means of cost

allocation.

• It is not a method of valuation.

• Depreciation involves: allocating the cost of tangible assets to

expense in a systematic and rational manner

to periods expected to benefit from use of its

depreciable assets.

8


Asset cost

Service life

Residual value

Method of cost allocation

Factors Involved in DepreciationFactors Involved in DepreciationFactors Involved in DepreciationFactors Involved in Depreciation

Residual ValueResidual Value

Residual, or salvage value, is the net amount that can be expected to be obtained when the asset is disposed.

Residual, or salvage value, is the net amount that can be expected to be obtained when the asset is disposed.


Service LifeService Life

Service life is the measure of the number of units of service expected from the asset before its disposal.

Service life is the measure of the number of units of service expected from the asset before its disposal.


Service LifeService Life

The factors that limit the service life of an asset can be divided into two general categories.

The factors that limit the service life of an asset can be divided into two general categories.

Physical causesFunctional causes


Straight-line.

Based on inputs and outputs.

Service hours (SH) method.

Productive output (PO) or units-of-production method.

Accelerated methods.

Sum-of-the-years?digits (SYD).

Double-declining-balance (DB).

Tax depreciation.

Depreciation systems.

Inventory appraisal.

Group and composite.

Depreciation MethodsDepreciation MethodsDepreciation MethodsDepreciation Methods

Documents

Chapter 5 Assets. 1. Record the acquisition of property, plant, and equipment. 2. Determine the cost of assets acquired by the exchange of other assets