Chapter 10 PA

CH-10: Plant Assets, Natural
Resources, and Intangible Assets
Determining the cost

Plant Depreciation
Assets Expenditures during
useful life
Plant Assets
Plant assets are resources that have
physical substance (a definite size and shape),
are used in the operations of a business,
are not intended for sale to customers,
are expected to provide service to the company for a number

of years, except for land.
Types: Land, Land Improvements, Buildings, Equipments
Referred to as property, plant, and equipment; plant and equipment; and

fixed assets.
Plant
Assets
Determining the Cost
Cost Principle requires that companies record

plant assets at costs
Cost consists of all expenditures necessary to
acquire an asset and make it ready for its intended
use.
Land
Costs typically include:

1) cash purchase price,
2) closing costs such as title and attorneys fees,
3) real estate brokers commissions, and
4) accrued property taxes and other liens on the land

assumed by the purchaser.
Plant
Assets
Example: Hayes Manufacturing Company acquires real estate at a cash

cost of $100,000.The property contains an old warehouse that is razed
at a net cost of $6,000 ($7,500 in costs less $1,500 proceeds from
salvaged materials). Additional expenditures are the attorneys fee,
$1,000, and the real estate brokers commission, $8,000. Determine the
amount to be reported as the cost of the land.
Cash price of property ($100,000)
$100,000
Net removal cost of warehouse ($6,000)
6,000
Attorney's fees ($1,000)
1,000
Real estate brokers commission ($8,000)
8,000
Cost of Land
$115,000
Plant
Assets
Land Improvements
Includes all expenditures necessary to make the improvements
ready for their intended use.
Examples: driveways, parking lots, fences, landscaping, and

lighting.
Limited useful lives.
Expense (depreciate) the cost of land improvements over their

useful lives.
Plant
Assets
Buildings
Includes all costs related directly to purchase or construction.
Purchase costs:
Purchase price, closing costs (attorneys fees, title insurance, etc.)

and real estate brokers commission.
Remodeling and replacing or repairing the roof, floors, electrical

wiring, and plumbing.
Construction costs:
Contract price plus payments for architects fees, building permits,

and excavation costs.
Plant
Assets
Equipment
Include all costs incurred in acquiring the equipment and preparing
it for use.
Costs typically include:
Cash purchase price.
Sales taxes.
Freight charges.
Insurance during transit paid by the purchaser.
Expenditures required in assembling, installing, and testing the

unit.
Plant
Assets
Example: Lenard Company purchases a delivery truck at a cash price
of $22,000. Related expenditures are sales taxes $1,320, painting and

lettering $500, motor vehicle license $80, and a three-year accident
insurance policy $1,600. Compute the cost of the delivery truck.
Truck
Cash price
$22,000
Sales taxes
1,320
Painting and lettering

Cost of Delivery Truck
500
$23,820
Plant
Assets
Prepare the journal entry to record these costs.

Equipment
License expense
Prepaid insurance
Cash
23,820
80
1,600
25,500
Plant
Assets
Depreciation
Process of allocating to expense the cost of a plant asset over

its useful (service) life in a rational and systematic manner.
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and equipment,

not land.
Depreciable, because the revenue-producing ability of

asset will decline over the assets useful life.
Plant
Assets
Depreciation
Factors in Computing Depreciation

Cost
Useful Life
Salvage Value
Plant
Assets
Depreciation
Depreciation Methods
Management selects the method it believes best measures
an assets contribution to revenue over its useful life.
Some common types of measures include:
(1) Straight-line method.
(2) Declining-balance method.
(3) Units-of-activity method.
Plant
Assets
Depreciation
Scenario: Barbs Florists purchased a small delivery truck on

January 1, 2012.
Required: Compute depreciation using the following.

(a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance.
Plant
Assets
Depreciation
Straight-Line
Expense is same amount for each year.
Depreciable cost = Cost less salvage value.
Plant
Assets
Depreciation
Example: (Straight-Line Method)
Year
Depreciable
Cost
x
Rate =
Annual
Expense
Accum.
Deprec.
Book
Value
20%
$ 2,400
$ 2,400
$ 10,600
2012
$ 12,000
2013
12,000
20
2,400
4,800
8,200
2014
12,000
20
2,400
7,200
5,800
2015
12,000
20
2,400
9,600
3,400
2016
12,000
20
2,400
12,000
1,000
2012
Depreciation expense
Journal
Accumulated depreciation
Entry
2,400
2,400
Plant
Assets
Depreciation
Example: (Straight-Line Method) Partial Year

Assume the delivery truck was purchased on April 1, 2012.
Year
Depreciable
Cost
2012
Rate
Annual
Expense
$
2,400
Current
Year
Expense
Partial
Year
x
12,000
20% =
2013
12,000
20% =
2,400
2,400
4,200
2014
12,000
20% =
2,400
2,400
6,600
2015
12,000
20% =
2,400
2,400
9,000
2016
12,000
20% =
2,400
2,400
11,400
2017
12,000
20% =
2,400
600
12,000
9/12
3/12
= $
=
$
1,800
Accum.
Deprec.
12,000
Journal entry:
2012
1,800
1,800
1,800
Plant
Assets
Depreciation
Units-of-Activity
Companies estimate total units of activity to calculate

depreciation cost per unit.
Expense varies based

on units of activity.
Depreciable cost is
cost less salvage
value.
Plant
Assets
Depreciation
Example: (Units-of-Activity Method)

Miles
Cost per
Unit
Accum.
Book
Expense
Deprec.
Value
Year
Used
2012
15,000
$ 0.12
$ 1,800
$ 1,800
$ 11,200
2013
30,000
0.12
3,600
5,400
7,600
2014
20,000
0.12
2,400
7,800
5,200
2015
25,000
0.12
3,000
10,800
2,200
2016
10,000
0.12
1,200
12,000
1,000
2012
Journal
Entry
Annual
1,800
1,800
Plant
Assets
Depreciation
Declining-Balance
Accelerated method.
Decreasing annual depreciation expense over the assets

useful life.
Common rate: Twice the straight-line rate with DoubleDeclining-Balance.
Rate applied to book value.
Plant
Assets
Depreciation
Example: (Declining-Balance Method)

Year
Declining
Beginning
Balance
Book value x Rate =
2012
13,000
40%
2013
7,800
2014
Annual
Expense
Accum.
Deprec.
Book
Value
$ 5,200
$ 5,200
$ 7,800
40
3,120
8,320
4,680
4,680
40
1,872
10,192
2,808
2015
2,808
40
1,123
11,315
1,685
2016
1,685
40
12,000
1,000
2012
Journal
Entry
685*
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
5,200
5,200
Plant
Assets
Depreciation
Example: (Declining-Balance Method) Partial Year
Year
Beginning
Book Value
2012
Declining
Balance
Rate
Annual
Expense
Partial
Year
9/12
Current
Year
Expense
= $
13,000 x
40%
= $
5,200 x
2013
9,100 x
40%
3,640
3,640
7,540
2014
5,460 x
40%
2,184
2,184
9,724
2015
3,276 x
40%
1,310
1,310
11,034
2016
1,966 x
40%
786
786
11,821
2017
1,179 x
40%
472
179
12,000
Plug
$
3,900
Accum.
Deprec.
12,000
Journal entry:
2012
3,900
3,900
3,900
Plant
Assets
Depreciation
Comparison of
Methods
Each method is
acceptable because
each recognizes the
decline in service
potential of the asset
in a rational and
systematic manner.

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Chapter 10 PA

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CH-10: Plant Assets, Natural

Resources, and Intangible Assets

Determining the cost

physical substance (a definite size and shape),

are used in the operations of a business,

are not intended for sale to customers,

are expected to provide service to the company for a number

Types: Land, Land Improvements, Buildings, Equipments

Referred to as property, plant, and equipment; plant and equipment; and

Determining the Cost

Cost Principle requires that companies record

Costs typically include:

4) accrued property taxes and other liens on the land

Determining the Cost

Example: Hayes Manufacturing Company acquires real estate at a cash

Cash price of property ($100,000)

Net removal cost of warehouse ($6,000)

Attorney's fees ($1,000)

Real estate brokers commission ($8,000)

Determining the Cost

Examples: driveways, parking lots, fences, landscaping, and

Limited useful lives.

Expense (depreciate) the cost of land improvements over their

Determining the Cost

Purchase price, closing costs (attorneys fees, title insurance, etc.)

Remodeling and replacing or repairing the roof, floors, electrical

Contract price plus payments for architects fees, building permits,

Determining the Cost

Cash purchase price.

Insurance during transit paid by the purchaser.

Expenditures required in assembling, installing, and testing the

Determining the Cost

Example: Lenard Company purchases a delivery truck at a cash price

of $22,000. Related expenditures are sales taxes $1,320, painting and

Painting and lettering

Determining the Cost

Prepare the journal entry to record these costs.

Process of allocating to expense the cost of a plant asset over

Process of cost allocation, not asset valuation.

Applies to land improvements, buildings, and equipment,

Depreciable, because the revenue-producing ability of

Factors in Computing Depreciation

Scenario: Barbs Florists purchased a small delivery truck on

Required: Compute depreciation using the following.

Expense is same amount for each year.

Depreciable cost = Cost less salvage value.

Example: (Straight-Line Method)

Example: (Straight-Line Method) Partial Year

Companies estimate total units of activity to calculate

Expense varies based

Example: (Units-of-Activity Method)

Decreasing annual depreciation expense over the assets

Common rate: Twice the straight-line rate with DoubleDeclining-Balance.

Rate applied to book value.

Example: (Declining-Balance Method)

* Computation of $674 ($1,685 x 40%) is adjusted to $685.

Example: (Declining-Balance Method) Partial Year

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