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PROPERTY, PLANT AND EQUIPMENT
LUMP-SUM ASSET PURCHASE
DEPRECIATION
REVENUE AND CAPITAL EXPENDITURES
DISCARDING PROPERTY, PLANT AND EQUIPMENT
INTANGIBLE ASSETS
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property, plant and equipment
Tangible in Nature
Actively Used in Operations
Expected to Benefit Future Periods
Called Property, Plant, & Equipment
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property, plant and equipment
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Cost Determination
Purchase All expenditures
price needed to
prepare the
Acquisition asset for its
Cost intended use
Acquisition cost excludes
financing charges and
cash discounts
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Land
Title insurance premiums
Purchase Delinquent
price taxes
Real estate Surveying
commissions fees
Title search and transfer fees
Land is not depreciable.
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Land Improvements
Parking lots, driveways, fences, walks, shrubs,
and lighting systems.
Depreciate
over useful life of
improvements.
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Buildings
Cost of purchase or Title fees
construction
Brokerage Attorney fees
fees
Taxes
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Machinery and Equipment
Purchase
price Taxes
Transportation
charges
Installing,
assembling, and Insurance while
testing in transit
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Lump-Sum Asset Purchase
The total cost of a combined purchase of land and building is
separated on the basis of their relative fair market values.
CarMax paid $90,000 cash to acquire a group of items
consisting of land appraised at $30,000, land improvements
appraised at $10,000, and a building appraised at $60,000.
The $90,000 cost will be allocated on the basis of appraised
values as shown:
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Depreciation
Depreciation is the process of allocating the cost of
an item of property, plant and equipment to
expense in the accounting periods benefiting from
its use.
Balance Sheet Income Statement
Acquisition Cost
Expense
Cost Allocation
(Unused) (Used)
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Factors in Computing Depreciation
The calculation of depreciation requires
three amounts for each asset:
1. Cost
2. Residual Value
3. Useful Life
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Depreciation Methods
1. Straight-line
2. Units-of-production
3. Declining-balance
Asset we will depreciate in future screens
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Straight-Line Method
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Straight-Line Method
For year ended December 31 As of December 31
Balance Sheet Presentation
Machinery $ 10,000
Less: accumulated depreciation 3,600 $ 6,400
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Straight-Line Depreciation Schedule
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Units-of-Production Method
Step 1:
Depreciation = Cost - Residual Value
Per Unit Total Units of Production
Step 2:
Number of Units
Depreciation Depreciation × Produced
=
Expense Per Unit in the Period
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Units-of-Production Method
Assume that 7,000 units were inspected
during 2011. Depreciation would be
calculated as follows:
Step 1:
Depreciation = Cost - Residual Value = $9,000 = $0.25/unit
Per Unit Total Units of Production 36,000
Step 2:
Number of Units
Depreciation Depreciation = $0.25 × 7,000 = $1,750
× Produced
Expense = Per Unit
in the Period
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Units-of-Production
Depreciation Schedule
Units produced and sold during the period.
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Double-Declining-Balance Method
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Double-Declining-Balance Method
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Comparing Depreciation Methods
Double-
Straight- Units of Declining-
Period Line Production Balance
2011 $ 1,800 $ 1,750 $ 4,000
2012 1,800 2,000 2,400
2013 1,800 2,250 1,440
2014 1,800 1,750 864
2015 1,800 1,250 296
Totals $ 9,000 $ 9,000 $ 9,000
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$-
2011 2012 2013 2014 2015
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Units-of-Production
Double-Declining-Balance
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C2
Partial-Year Depreciation
When an item of property, plant and equipment is
acquired during the year, depreciation is calculated
for the fraction of the year the asset is owned.
Cost $ 10,000
Assume our machinery was purchased
Residual value 1,000
on October 8, 2010. Let’s calculate
Depreciable cost $ 9,000
Useful life depreciation expense for 2010,
Accounting periods 5 years assuming we use straight-line
Units inspected 36,000 units depreciation.
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Revenue and Capital Expenditures
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Discarding property, plant and equipment
A machine costing $9,000, with accumulated depreciation of
$9,000 on December 31st of the previous year was
discarded on June 5th of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero residual value.
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Discarding property, plant and equipment
Equipment costing $8,000, with accumulated depreciation of
$6,000 on December 31st of the previous year was
discarded on July 1st of the current year. The company is
depreciating the equipment using the straight-line method
over eight years with zero residual value.
Step 1: Bring the depreciation up-to-date.
Step 2: Record discarding of asset.
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Intangible Assets
Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.
Intangible
Assets
Useful life is Usually acquired
often difficult for operational
to determine. use.
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Cost Determination and Amortization
Record at current
cash equivalent o Patents
cost, including o Copyrights
purchase price, o Franchises and Licenses
legal fees, and
filing fees. o Goodwill
o Trademarks and Trade Names
o Other Intangibles
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LAYLI CASHIRKII (26AAD )
MUS
T
XAR FEA
E ED
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QUESTIONS AND ANSWERS
1. A plant asset with a cost of $900,000 and accumulated
depreciation of $800,000 is sold for $80,000. What is the amount
of the gain or loss on disposal of the plant asset?
a. $20,000 loss. AMOUINT
PLANT ASSETS COST 900,000
b. $80,000 loss. ACC DEP 800,000
c. $80,000 gain. BOOK VALUE 100,000
d. $20,000 gain. PRICE TO SOLD 80,000
LOSS (20,000)
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QUESTIONS AND ANSWERS
2. Equipment with a cost of $450,000 has an estimated salvage value of
$30,000 and an estimated life of 4 years or 10,000 hours. It is to be
depreciated by the units-of-activity method. What is the amount of
depreciation for the first full year, during which the equipment was used
2,700 hours?
a. $112,500.
b. $105,000.
c. $113,400.
d. $108,750.
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QUESTIONS AND ANSWERS
3. Equipment with a cost of $450,000 has an estimated salvage value of
$30,000 and an estimated life of 4 years or 10,000 hours. It is to be
depreciated by the straight-line method. What is the amount of
depreciation for the first full year, during which the equipment was used
2,700 hours?
a. $112,500.
b. $105,000.
c. $113,400.
d. $108,750.
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QUESTIONS AND ANSWERS
4. Equipment with a cost of $450,000 has an estimated salvage value of
$30,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated
by the declining balance method (double). What is the amount of
depreciation for the first full year, during which the equipment was used 2,700
hours?
a. $225,000.
b. $210,000.
c. $112,500.
d. $113,400.
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QUESTIONS AND ANSWERS
5. Jack's Copy Shop bought equipment for $240,000 on January 1, 2018. Jack
estimated the useful life to be 3 years with no salvage value, and the straight-line
method of depreciation will be used. On January 1, 2019, Jack decides that the
business will use the equipment for a total of 5 years. What is the revised
depreciation expense for 2019? Column1 Column2
EQUITMENT COST 1.1.2018 240,000
a. $80,000. SALVAGE -
DEPRECIABLE 240,000
b. $32,000.
USEFUL LIFE (YEARS) 3
c. $40,000.
DEPRECIATION 31.12.2018 80,000
d. $60,000. BOOK VALUE 31.12.2018 160,000
CHANGE THE USEFUL 4
DEPRECIATION 31.12.2019 www.sheerxirfad.com
40,000
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QUESTIONS AND ANSWERS
6. Given the following account balances at year end, compute the total intangible assets on the
balance sheet of Janssen Enterprises.
Cash $1,500,000
Accounts Receivable 1,000,000
Trademarks 1,200,000
Goodwill 2,500,000
Research & Development Costs 2,000,000
a. $9,700,000.
b. $5,700,000.
c. $3,700,000.
d. $7,700,000
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QUESTIONS AND ANSWERS
7. 14. The book value of an asset is equal to the
a. asset's fair value less its historical cost.
b. blue book value relied on by secondary markets.
c. replacement cost of the asset.
d. asset's cost less accumulated depreciation.
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