10-1 P ROPERTY, P LANT, A ND E QUIPMENT CHAPTER 10

10-2 Nature of Plant Assets Tangible.Tangible. Used to produce revenue rather than being held for resale. Used to produce revenue rather than being held for resale. Useful life is more than one year. Useful life is more than one year. HILTON

10-3 Nature of Plant Assets 1. Record acquisition of asset. 2. Record depreciation. 3. Record subsequent expenditures. 4. Record disposal of asset. Asset cost Disposal of asset Salvage value $ Time (useful life) Decline in asset’s service potential 367

10-4 Acquisition Cost of Plant Assets General Rule The amount of cash or cash equivalents given up to acquire and place the asset in service.

10-5 Computers-R-Us 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.

10-6 Acquisition Cost Land Purchase price Real estate commissions Title search Title transfer fees Title insurance premiums

10-7 Acquisition Cost - Buildings Purchase price Remodeling costs Unpaid taxes we assumed Legal costs Real estate commissions paid Building Cost

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 Fair Value Land87,500$ Building162,500 Total fair value250,000$

10-11 Group Purchase of Assets Fair Value Land87,500$ Building162,500 Total fair value250,000$ Land87,500$ ÷250,000$ =35%of fair value Building162,500 ÷250,000 =65%of fair value

10-12 Group Purchase of Assets Fair Value Land87,500$ Building162,500 Total fair value250,000$ Land87,500$ ÷250,000$ =35%of fair value Building162,500 ÷250,000 =65%of fair value Land200,000$ 35%70,000$ Building200,000 65%130, ,000$ x x = =

10-13 Acquisition Cost - Equipment Net purchase price Transportation costs Installation costs Testing costs 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 l Fair market value is the price received for an item sold in the normal course of business. l 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 cannot be determined 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. unavailable 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.

10-20Depreciation allocating the cost Depreciation is the process of allocating the cost of plant assets to the periods that will benefit from its use. Asset Cost $150,000 Depreciate over useful life. (Depreciation expense) Not depreciable. Depreciable base $145,000 Salvage value $5,000

10-21Depreciation allocating the cost Depreciation is the process of allocating the cost of plant assets to the periods that will benefit from its use. cost allocation process Depreciation is a cost allocation process and has nothing to do with asset valuation.

10-22Depreciation Factors Affecting Depreciation ÊAsset cost ËEstimated salvage value ÌEstimated useful life ÍDepreciation method used

10-23 Depreciation Methods l Straight-line l Units-of-production l Accelerated methods u Sum-of-the-years’-digits u Double-declining-balance

10-24 Straight-Line Depreciation Depreciation Expense Expense Asset Cost - Est. Salvage Value Asset Cost - Est. Salvage Value Est. Useful Life Est. Useful Life =

10-25 Straight-Line Depreciation 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?

10-26 Straight-Line Depreciation Example Asset cost27,500$ Less: salvage value(2,500) Basis for depreciation25,000 Useful life÷5 Annual depreciation5,000$

10-27 Straight-Line Depreciation Example Period Depr. Expense Accum. Depr. Book Value 15,000$ $ 22,500$ 25,000 10,000 17,500 35,000 15,000 12,500 45,000 20,000 7,500 55,000 25,000 2,500 25,000 Depreciation Schedule

10-28 Straight-Line Depreciation Example $- $5,000 $10,000 $15,000 $20,000 $25, Depr. Expense Accum. Depr. Book Value

10-29 Units-of-Production Depreciation Depreciation Per Unit Per Unit= Asset Cost - Est. Salvage Value Asset Cost - Est. Salvage Value Est. Total Units of Production Est. Total Units of Production

10-30Depreciation Per Period Per Period = Depreciation Number of Units Per Unit Produced Per Unit Produced x Units-of-Production Depreciation Depreciation Per Unit Per Unit= Asset Cost - Est. Salvage Value Asset Cost - Est. Salvage Value Est. Total Units of Production Est. Total Units of Production

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 Cost50,000$ Salvage value(5,000) Depreciation base45,000 Total units÷100,000 Depreciation per unit0.45$ Current units produced×30,000 Depreciation expense13,500$

10-33 Units-of-Production Depreciation Example The schedule of actual production is: Year Units Produced 1 30, , , , ,000

10-34 Units-of-Production Depreciation Example Completed depreciation schedule. Year Units Produced Depreciation Per Unit Depreciation Expense Accumulated Depreciation Book Value 1 30, $ 13,500$ $ 36,500$ 2 20, ,000 22,500 27, , ,000 40,500 9, , ,500 45,000 5, ,000 45,000$

10-35 Units-of-Production Depreciation Example - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50, Units Produced Depreciation Expense Accumulated Depreciation

10-36Question The accumulated depreciation account increases each year of the asset’s life if the asset is not fully depreciated. a. TrueTrue b. FalseFalse The accumulated depreciation account increases each year of the asset’s life if the asset is not fully depreciated. a. TrueTrue b. FalseFalse

10-37 Accelerated Depreciation Sum-of-the-Years’ Digits Double-Declining Balance

10-38 Sum-of-Years’-Digits Depreciation (SOYD)

10-39 Sum-of-Years’-Digits Depreciation (SOYD) Depreciation Fraction Fraction No. of Years Remaining in Useful Life in Useful Life SOYD SOYD=

10-40 Depr. Per Period PeriodDepreciation Fraction Fraction (Cost - SV) =x Sum-of-Years’-Digits Depreciation (SOYD) Depreciation Fraction Fraction No. of Years Remaining in Useful Life in Useful Life SOYD SOYD=

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 = 36 Cost40,000$ Salvage value(4,000) Depreciable amount36,000$ SOYD Depreciation Example

10-43 Year SOYD Fraction Depreciation Expense Accumulated DepreciationBook Value 1 8/368,000$ $ 32,000$ SOYD Depreciation Example

10-44 Year SOYD Fraction Depreciation Expense Accumulated DepreciationBook Value 1 8/368,000$ $ 32,000$ 2 7/367,000 15,000 25, /366,000 21,000 19, /365,000 26,000 14, /364,000 30,000 10, /363,000 33,000 7, /362,000 35,000 5, /361,000 36,000 4,000 36/3636,000$ SOYD Depreciation Example

10-45 $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40, Year Depreciation Expense Accumulated Depreciation Book Value SOYD Depreciation Example

10-46 Double-Declining-Balance (DDB) Depreciation per Period =2 × Straight-line rate × Asset Accumulated Cost Depreciation () – ( ) i.e., Book Value at beginning of period.

10-47 Double-Declining-Balance (DDB) Depreciation per Period =2 × Straight-line rate × Asset Accumulated Cost Depreciation () – ( ) Straight-line rate = 1 Est. Useful Life

10-48 Straight-line rate = 1 Est. Useful Life Double-Declining-Balance (DDB) Depreciation per Period =2 × Straight-line rate × Asset Accumulated Cost Depreciation () – ( ) 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 Year Depreciation Expense Accumulated Depreciation Book Value 1 12,500$ $ 37,500$ Straight-line rate = 1 8 = 12.5% Depreciation per Period =2 × 12.5%× ()() $50,000 - $0 DDB Depreciation Example

10-51 Year Depreciation Expense Accumulated Depreciation Book Value 1 12,500$ $ 37,500$ 2 9,375 21,875 28, ,031 28,906 21, ,273 34,180 15, ,955 38,135 11, ,966 41,101 8, ,225 43,326 6, ,669 44,994 5,006 44,994$ Hey, shouldn’t the total depreciation expense be $48,000? * * * Rounding difference DDB Depreciation Example

10-52 Year Depreciation Expense Accumulated Depreciation Book Value 1 12,500$ $ 37,500$ 2 9,375 21,875 28, ,031 28,906 21, ,273 34,180 15, ,955 38,135 11, ,966 41,101 8, ,225 43,326 6, ,674 48,000 2,000 48,000$ When using DDB it is sometimes necessary to adjust the last year’s depreciation so that Book Value will equal Salvage Value. DDB Depreciation Example

10-53 $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $50, Year Depreciation Expense Accumulated Depreciation Book Value DDB Depreciation Example

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

10-55 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.

10-56 Partial-Year Depreciation Example Ann. Depr. = ($75,000 - $5,000) ÷ 10 = $7,000 Depr. Expense = $7,000 × = $3, June 30

10-57 Changes in Estimates Useful Life? estimated estimated estimate l Because depreciation is based on the estimated useful life and estimated salvage value, depreciation expense is an estimate. l Over the life of an asset, new information may come to light that indicates the original estimated useful life or salvage value was inaccurate.

10-58 Changes in Estimates l 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.) change in accounting estimate l For this change in accounting estimate, we spread the remaining undepreciated cost (book value) over the remaining useful life - like peanut butter.

10-59 Changes in Estimates Example 1999 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.

10-60 Changes in Estimates Example Cost30,000$ Salvage value- Depreciation base30,000 Useful life÷10 Annual depreciation3, ×3 Accumulated depreciation9,000$

10-61 Depreciation for 1999, and subsequent years, will be $4,200. Changes in Estimates Example Cost30,000$ Accumulated depreciation(9,000) Book value 21,000 Remaining useful life÷5 Annual depreciation4,200 $

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 Land30,000$ Buildings75,000$ Less: Accumulated depreciation(45,000) 30,000 Equipment19,000 Less: Accumulated depreciation(1,500) 17,500 Total property, plant, and equipment77,500$

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. Debit maintenance expense Debit asset account. Debit accumulated depreciation. Does not extend the quality or quantity of services. 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) Extends services beyond original estimate. Debit accumulated depreciation. Relates to extraordinary repairs. (e.g., replacing the engine in a delivery vehicle.)

10-67 Subsequent Expenditures on Assets (P.382) Debit maintenance expense Does not extend the quality or quantity of services. Relates to ordinary repairs and maintenance. (e.g., changing the engine oil in a delivery vehicle.)

10-68 GENERAL LEDGER Account:Acct. No.## Balance DateItem Post. Ref.DebitCreditDR (CR) ? 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. Cost Salvage Value Useful Life Location of Asset Depreciation Policy

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 Date 5/17/97 ID Cost 12, LocDallas - 87 SV Life 8 years Repair record: DateAmt DateAmt DateAmt

10-70 Well, I guess this computer is about fully depreciated!