1. Chapter 9: Accounting for
Fundamentals of Intermediate Accounting
Weygandt, Kieso and Warfield
Chapter 9:
Accounting
for
Property, Plant, and Equipment
Prepared by
Bonnie Harrison, College of Southern Maryland
LaPlata, Maryland

2. Chapter 9 Accounting for Property, Plant and Equipment
After studying this chapter, you should be able to:
Describe property, plant and equipment and costs included in its initial valuation,
Describe the accounting problems associated with self-constructed assets.
Understand accounting issues related to acquiring and valuing plant assets.
Describe the accounting treatment for costs subsequent to acquisition. 1 2 3 4

3. Chapter 9 Accounting for Property Plant and Equipment
After studying this chapter, you should be able to :
Explain the concept of depreciation.
Identify the factors involved in the depreciation process.
Compare activity, straight line, and decreasing charge methods of depreciation.
Describe the accounting treatment for the disposal of property, plant and equipment.
Explain how property, plant and equipment are reported and analyzed. 5 6 7 8 9

4. Property, Plant, and Equipment (PP&E)
Includes land, building, structures and equipment
They are not held for resale
They are long term and are subject to depreciation (except land)
They are tangible

5. Acquisition Cost Historical cost is the basis for determining cost.
Historical cost includes:
the asset’s cash or cash equivalent price, and
the cost of readying the asset for use
Costs incurred after acquisition are:
added to asset’s cost, if they provide future service potential,
- or -
expensed, if they do not add to service potential

6. Cost of Land, Building, and Equipment
Land costs include:
purchase price
closing costs, attorney fees, and recording fees
costs of getting land ready for use (clearing etc)
special assessments for local improvements
assumption of liens or encumbrances, and
additional improvements with an indefinite life
Sale of salvaged materials reduces cost

7. Land Improvements, Building, and Plant
Improvements with limited lives are recorded as Land Improvements (and not as Land)
Building cost includes:
costs of materials and labor, and overhead
professional fees and building permits
Cost of equipment includes:
purchase price
freight and handling charges
insurance on equipment while in transit
costs of special foundation, and trial runs
assembling, installation, and trial run costs

8. Self-Constructed Assets
These are assets constructed by the business for use in operations
The cost of self-constructed assets includes:
cost of direct materials,
cost of direct labor,
variable manufacturing overhead,
a pro rata portion of the fixed overhead,
- and -
actual interest costs incurred during construction (with modification)

9. Interest Capitalization: Rationale
When under construction:
asset does not produce revenue, so capitalize interest cost
When construction is complete:
asset produces revenue, so expense interest cost

10. Valuation Issues
A cash discount, whether taken or not, reduces purchase price of asset. (This is the preferred approach)
Cost of assets, acquired in a basket purchase, are allocated on the basis of their relative fair market values

11. Issuance of Stock for Assets
If stock is traded:
basis for recording is the market value of the stock issued.
If the market value of stock is not determinable:
basis for recording is market value of asset.

12. Contributions Contributions received: Contributions given:
Recognized in period received as revenue
Recorded at fair value of assets received
Contributions given:
Recognized as expense in period donated
Recorded at fair value of asset donated
Difference between fair value and book value recorded as gain or loss.

13. Costs subsequent to Acquisition
If costs incurred increase future benefits, capitalize costs
If costs maintain a given level of services, expense costs
Costs incurred after acquisition can be:
additions
improvements and replacements
rearrangements and reinstallation
repairs

14. Improvements and Replacements
Capitalize costs, if
They increase future service potential
Improvements
Replacements or
Substitution of
a better asset
for present
asset
Substitution of
a similar asset
for present
asset

15. Capitalization Approaches
Carrying value of asset is known
Carrying value of the asset is unknown
Substitution approach
Capitalize the new asset (without removing the old asset from the pool), OR
Debit accumulated depreciation (when expenditures extend useful life of asset)

16. Depreciation - Concept
Depreciation is a means of cost allocation.
It is not a method of valuation.
Depreciation involves:
allocating the cost of tangible assets to an expense in a systematic and rational manner to periods expected to benefit from use of assets

17. Factors in the Depreciation Process
Questions to be answered:
What is the depreciable base of the asset?
What is the asset’s useful life?
What method of cost apportionment is best for the asset in question?

18. Depreciable Base
Depreciable base is the amount subject to depreciation.
It is determined by taking:
Original cost of the asset less
Estimated salvage or disposal value

19. Estimated Service Lives
An asset’s service life and physical life are not the same.
Assets are retired (from productive life) due to:
physical factors (such as casualty), or
economic factors (such as obsolescence)
Economic factors in turn include
Inadequacy (asset can not meet current demand)
Supercession (by a better asset)
Obsolescence (other factors)

20. Depreciation Methods
Depreciation methods can be classified as follows:
Tax depreciation methods
Financial accounting depreciation methods
Financial accounting methods are:
activity method
straight-line method
accelerated method

21. Depreciation Methods: Overview
Financial Accounting
Depreciation Methods
Tax
Depreciation
Straight-line
method
Activity
method
Accelerated
methods
1. Declining Balance
2. Sum-of-the-years’ digits

22. Depreciation Methods: Example
Amber Corporation buys a truck on January 1, Information relating to the truck is as follows:
Cost, $34,000
Estimated service life, 5 years (or 60,000 miles)
Salvage value end of five years or use, $4,000
Actual miles driven:
20,000 miles (in 2003); 15,000 miles (in 2004)

23. Straight-line method
1. Depreciable base = $34,000 less $4,000 = $30,000
2. Annual depreciation = $30,000 / 5 years = $6,000
3. Depreciation Schedule: (years 1 and 2)
Year Book Depreciation Accumulated Book value**
(beg) Depreciation end of year
1 $34,000 $6,000 $6,000 $28,000
2 $28,000 $6,000 $12,000 $22,000
** Book Value = Cost - Accumulated Depreciation

24. Activity method (unit = mile)
1. Depreciable base = $34,000 less $4,000 = $30,000
2. Depreciation per mile = $30,000 / 60,000 = $0.50
3. Depreciation (2003) = $0.50 * 20,000 miles = $10,000
Depreciation (2004) = $0.50 * 15,000 miles = $ 7,500
4. Depreciation Schedule: (years 1 and 2)
Year Book Depreciation Accumulated Book value
(beg) Depreciation end of year
1 $34,000 $10,000 $10,000 $24,000
2 $24,000 $ 7,500 $17,500 $16,500

25. Sum-of-the-years’-digits (SYD) method
1. Depreciable base = $34,000 less $4,000 = $30,000
2. SYD fraction = ( ) = 15
3. Depreciation (2003) = $30,000 * (5/15) = $10,000
Depreciation (2004) = $30,000 * (4/15) = $ 8,000
Depreciation (2005) = $30,000 * (3/15) = $ 6,000
Depreciation (2006) = $30,000 * (2/15) = $ 4,000
Depreciation (2007) = $30,000 * (1/15) = $ 2,000
Decreasing Fractions

26. Sum-of-the-years’-digits (SYD) method
4. Depreciation Schedule
Year Book Depreciation Accumulated Book value
(beg) Depreciation end of year
1 $34, $10,000 $10,000 $24,000
2 $24, $ 8,000 $18,000 $16,000
3 $16, $ 6,000 $ 24,000 $10,000
4 $10, $ 4,000 $ 28,000 $ 6,000
5 $ 6, $ 2,000 $ 30,000 $ 4,000

27. Double Declining balance method
1. Rate of depreciation = 2 * (1/5) = 0.40
2. Depreciation (2003) = $34,000 * = $ 13,600
Depreciation (2004) = $20,400 * = $ 8,160
Depreciation (2005) = $12,240 * = $ 4,896
Depreciation (2006) = $ 7,344 * = $ 2,938
Depreciation (2007) = ($34,000–$4000) – 29,594 = $406
Total depreciation taken = $ 30,000

28. Double declining balance method
3. Depreciation Schedule
Year Book Depreciation Accumulated Book value
(beg) Depreciation end of year
1 $34, $13,600 $13,600 $20,400
2 $20, $ 8,160 $21,760 $12,240
3 $12, $ 4,896 $ 26,656 $ 7,344
4 $ 7, $ $ 30,000 $ 4,406
5 $ 4, $ 406 $ 30,000 $ 4,000

29. Partial year depreciation
When an asset is bought sometime during the year, a partial depreciation charge is required.
The procedure is:
Determine depreciation for a full year, and
allocate the amount between the two periods affected (see example ==> )

30. Partial year depreciation: Example
Amber Corporation buys a truck on July 1, Information relating to the truck is as follows:
Cost, $10,000
Estimated service life, 5 years
Salvage value end of five years, none.
Determine depreciation expense under the double declining balance method.

31. Partial year depreciation: Example
Determine depreciation as follows:
First year (2003) ==> $10,000 X 40% = $4,000 X 6/12 = $2,000
Second full year (2004) ==> ($10,000 - $2,000) X 40% = $3,200
And so on for the remaining years

32. Revision of Depreciation Estimates
Determination of depreciation involves initial estimates (life, salvage value.)
When these estimates are revised, we re-compute depreciation.
These revised depreciation expenses apply prospectively to the remaining life of asset.
These changes do not affect prior periods.

33. Revision of Depreciation Estimates: Example
Amber Corporation buys a depreciable asset on January 1, 2003 for $95,000.
Estimated life was 20 years.
Estimated salvage value was $5,000.
On January 1, 2009, estimates were revised as follows:
salvage value, $2,000
estimated life : 24 years (years 2003 through 2032)
Determine depreciation for 2009 based on straight line method of depreciation.

34. Revision of Depreciation Estimates: Example
Accumulated depreciation to date of revision of estimates:
($95,000 - $5,000) / 20 years = $4,500 dep
$4,500 * 6 years = $27,000 accumulated depr.
Amount to be depreciated (years 2009 through 2032 = 18 years)
($95,000 - $27,000 - $2,000) / 18 years
= $3,667 (rounded) annual depreciation

35. Dispositions of PP&E Plant assets may be:
retired voluntarily, or
disposed of by sale, exchange, involuntary conversion
Depreciation is recorded up to the date of disposal before determining gain or loss

36. Accounting for Exchanges
Types of Accounting Rationale
Exchange Guidance
Dissimilar Recognize gain Earnings process
assets and losses is complete
Similar Recognize loss; Earnings process
assets (cash Gain up to boot is partially
received) (partial gain) complete
Similar Recognize loss; Earnings process
assets (No Defer gain is not complete
cash received)

37. Dissimilar Assets
Amber Company exchanges a number of trucks for land from Becktel Company.
Fair value of trucks: $ 49,000.
Book value of trucks: $ 42,000 (Cost, $64,000; Accu. Depr, $ 22,000)
Cash paid to Becktel: $ 17,000
Record the purchase in Amber’s books.

38. Amber recognizes gain= FMV less Book value = $7,000
Dissimilar Assets
Land,
FMV= $66,000
Amber
Becktel
Cash, $17,000
plus
Trucks,
FMV= $49,000
Amber recognizes gain= FMV less Book value = $7,000

39. Dissimilar Assets Land Dr. $ 66,000 Accu. Dep (Trucks) Dr. $ 22,000
Cash $ 17,000
Gain on disposal $ 7,000

40. Similar Assets (loss)
Amber Company exchanges a used machine for a similar machine from Becktel Company.
Fair value of used machine: $ 6,000.
Book value of used machine: $ 8,000 (Cost, $12,000; Accu. Depr, $ 4,000)
Cash paid to Becktel: $ 7,000
Record the purchase in Amber’s books.

41. Amber recognizes loss ==> Book value less FMV = $2,000
Similar Assets (Loss)
Amber
Becktel
New machine,
FMV= $13,000
Cash, $ 7,000
plus
used machine,
FMV= $ 6,000
Amber recognizes loss ==> Book value less FMV = $2,000

42. Similar Assets (Loss) New Machine Dr. $ 13,000
Accu. Dep (Old) Dr. $ 4,000
Loss on disposal Dr. $ 2,000
Machine (old) $ 12,000
Cash $ 7,000

43. Similar Assets (Deferred gain)
Davis Company exchanges Ford cars for GM cars from Nertz Company.
Fair value of Ford cars: $ 160,000.
Book value of Ford cars: $ 135,000 (Cost, $150,000; Accu. Depr, $ 15,000)
Cash paid to Nertz: $ 10,000
Fair value of GM cars: ($160,000 + $ 10,000) $ 170,000
Record the purchase in Davis’ books.

44. Similar Assets (Deferred Gain)
Davis
Nertz
GM cars,
FMV= $170,000
Cash, $ 10,000
plus
Ford cars,
FMV= $ 160,000
Davis defers gain ==> FMV less book value = $25,000

45. Similar Assets (Deferred Gain)
GM cars Dr. $ 145,000 (see below)
Accu. Dep (Ford) Dr. $ 15,000
Ford cars (old) $ 150,000
Cash $ 10,000
Fair value of GM cars $170,000 Gain deferred ($ 25,000)
GM cars (basis) $145,000

46. Similar Assets (Partial gain)
Davis Company exchanges Ford cars for GM cars from Nertz Company.
Fair value of Ford cars: $ 160,000.
Cash paid to Nertz: $ 10,000
Fair value of GM cars: ($160,000 + $ 10,000) $ 170,000
Book value of GM cars: $ 136,000 (Cost, $200,000; Accu. Depr, $ 64,000)
Record the purchase in Nertz’s books.

47. Similar Assets (Partial Gain)
Davis
Nertz
GM cars,
FMV= $170,000
Cash, $ 10,000
plus
Ford cars,
FMV= $ 160,000
Nertz: Gain realized: FMV less book value = $34,000

48. Similar Assets (Partial gain)
Since Nertz receives cash (boot) as part of the exchange, Nertz recognizes partial gain as follows:
FMV less Book value = Realized gain $170,000 less $136,000 = $ 34,000
Recognized gain: (next slide)

49. Similar Assets (Partial gain)
Nertz recognizes partial gain as follows:
(boot / total consideration) * Realized gain
($10,000 / $ 170,000) * $34,000
= $ 2,000.
Total gain less gain recognized = deferred gain $34, less $2, = $32,000

50. Nertz Company (Partial Gain)
Ford cars Dr. $ 128,000 (see below)
Accu. Dep (GM) Dr. $ 64,000
Cash Dr. $ 10,000
GM cars (old) $ 200,000
Gain on disposal $ ,000
Fair value of Ford cars $160,000
Gain deferred ($ 32,000)
Ford cars (basis) $128,000

51. Copyright
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