PLANT ASSETS STUDY OBJECTIVES After studying this chapter, you should understand: The cost of plant assets Revising periodic depreciation The concept of depreciation Expenditures during useful life Depreciation methods Disposal of plant assets Reporting & analysis

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. THE COST OF PLANT ASSETS Plant asset categories: Land Land improvements Buildings Equipment

Land Cash price of property $ 100,000 Net removal cost of warehouse 6,000 Attorney’s fee 1,000 Real estate broker’s commission 8,000 Cost of land $ 115,000 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 improvements are structural additions made to land, such as: 1 parking lots 2 fencing 3 lighting 4 sprinklers 5 driveways 6 landscaping (or debit land if permanent) Lighting Parking Lot COST OF LAND IMPROVEMENTS

COST OF BUILDINGS PurchasedConstructed Purchase priceContract price and architects fees Attorney’s FeesMaterials and Labor Brokers commissionsPermits & excavation Interest Cost of Building Wing The cost of a building depends on whether it is purchased or constructed.

COST OF EQUIPMENT Purchase price Sales tax Freight charges Transit insurance Assembly Installation Testing and Trial Runs Other ongoing expenses are expensed as incurred

Entry to record the cost of machinery & related expenditures: Factory Machinery 54,500 Cash 54,500 COST OF MACHINERY & JOURNAL ENTRY COST OF MACHINERY & 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 Debit Credit Delivery Truck License Expense Prepaid Insurance Cash (To record purchase of delivery truck and related expenditures) 23, ,500 COST OF TRUCK & JOURNAL ENTRY COST OF TRUCK & JOURNAL ENTRY

Erin Danielle Co. purchased equipment and incurred these costs: 1.Cash price$24,000 2.Sales taxes 1,200 3.Insurance during transit Installation and testing 400 What amount should be recorded as the cost of this equipment? REVIEW QUESTION COST OF EQUIPMENT REVIEW QUESTION COST OF EQUIPMENT Answer $25,800

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. THE CONCEPT OF DEPRECIATION Factors affecting depreciation Cost Salvage/ Residual value Useful life

Let’s use the data below in the following examples. The truck was purchased on January 1, DEPRECIATION METHODS

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 Cost Salvage Value Depreciable Base Useful Life (in Years) Annual Depreciation Expense Depreciable Base $13,000 - $1,000 = $12,000 $12,000 ÷ 5 = $2,400 STRAIGHT-LINE METHOD

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

Depreciable Base Total Units of Activity Depreciable Cost per Unit $12,000 ÷ 100,000 miles = $0.12 Units of Activity during the Year Annual Depreciation Expense Depreciable Cost per Unit $0.12 x 15,000 miles = $1,800 UNITS OF ACTIVITY To use the units-of-activity method, apply the formula below:

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. DECLINING BALANCE Book Value Beg of Year DB Rate Annual Depreciation Expense x =

Formula for the double declining-balance method. DB Rate Annual Depreciation Expense $13,000 x 40% = $5,200 DECLINING BALANCE DDB rate is 2X the straight-line rate. Book Value At BOY Value

This is a change in accounting estimate. No correction of previously recorded depreciation expense. Depreciation expense for current and future is revised. REVISING PERIODIC DEPRECIATION New annual Depreciation expense Remaining Useful life Remaining depreciable cost =

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