©CourseCollege.com 1 15 Plant Assets Plant assets are also know as Property, plant & equipment Learning Objectives 1.Account for the acquisition cost of

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15 Plant Assets

ProfitDebit Credit or

Loss

Expenses

BALANCE SHEET INCOME STATEMENT

Assets Liabilities Revenue

Equity

Plant assets are also know as Property,

plant & equipment

Learning Objectives1. Account for the acquisition

cost of Plant Assets

2. Expense Plant Assets by allocating to fiscal periods which benefited from their use

3. Account for repairs, maintenance and improvements to Plant Assets

4. Account for disposal of Plant Assets

5. Analysis: Compute and explain the asset turnover ratio

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Loss

Expenses



Equity

Plant asset subsidiary ledgers are separate records for each asset.

Plant asset subsidiary ledgers are separate records for each asset.

Control LedgerPlant Assets

Acct #180

Subsidiary Ledgers

Plant AssetsForklift

#180.23

Balance

The Subsidiary Ledgers must add up to the

Control Ledger

Overview

Subsidiary example

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The total cost and the date of acquisition are recorded in the subsidiary ledgers.

Overview


Loss

Expenses



Equity

Subsidiary Ledgers

Plant AssetsForklift

#180.23

Subsidiary ledgers must add up to the total in the

Control ledger for Plant Assets

Debit Credit

2010 Balance Forward

15-May J8 56,000 56,000

SUBSIDIARY LEDGER

Account Name: EQUIPMENT -FORKLIFT Acct #: 180

Date ItemPost Ref. Debit Credit

BALANCE

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Objective 15.1: Account for the acquisition cost of

Plant Assets

O15.1

The Cost Concept guides the initial valuation of plant assets purchased with cash.

The Cost Concept guides the initial valuation of plant assets purchased with cash.

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Cost of Plant Assets

Plant asset values should include any reasonable and necessary costs incurred to bring plant assets to the operating location and into an operating condition including:

Shipping and insurance in transit costsCosts to install, condition and assemble for intended use

Plant asset values should include any reasonable and necessary costs incurred to bring plant assets to the operating location and into an operating condition including:

Shipping and insurance in transit costsCosts to install, condition and assemble for intended use

Example

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Western Excavators purchased a used dump truck with the following costs:•Purchase price $12,000•Shipping 1,000•Reconditioning 3,400

Total costs of acquisition $16,400

Western Excavators purchased a used dump truck with the following costs:•Purchase price $12,000•Shipping 1,000•Reconditioning 3,400

Total costs of acquisition $16,400

O15.1

Example –Cash purchase

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The journal entry to record the purchase:The journal entry to record the purchase:

O15.1

Example –Cash purchase

Page 4

Date Description PR Debit Credit

24-Apr Equipment -Truck 165 16,400

Cash 100 16,400

GENERAL JOURNAL


Loss

Expenses



Equity

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When several types of assets such as land, building and equipment are purchased for a single amount, the value assigned to each asset type must be determined.

When several types of assets such as land, building and equipment are purchased for a single amount, the value assigned to each asset type must be determined.

Lump sum purchase

O15.1

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To determine the value to be assigned to each type of asset:To determine the value to be assigned to each type of asset:

Lump sum purchase

Example

O15.1

The Cost Concept controls the total costThe Cost Concept controls the total cost

The Objectivity Concept controls the proper allocation

The Objectivity Concept controls the proper allocation

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Lump sum purchase

O15.1

Western Excavators purchased a new operating facility including land, land improvements, building and equipment. The total purchase price including related costs was $2,650,000. An appraisal was completed at the time of purchase as follows:

Western Excavators purchased a new operating facility including land, land improvements, building and equipment. The total purchase price including related costs was $2,650,000. An appraisal was completed at the time of purchase as follows:

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Appraised Value Value % Assigned

Land $280,000 10% $265,000

Land Improvements $420,000 15% $397,500

Building $1,400,000 50% $1,325,000

Equipment $700,000 25% $662,500

Total $2,800,000 100% $2,650,000

Lump sum purchase

The percentage of the total appraised value

that each type of asset represents is multiplied times the total cost to

determine the recorded value assigned.O15.1

700,000/2,800,00 = 25%

25% x $2,650,000 = $662,500

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Loss

Expenses



Equity

The journal entry to record the lump sum purchase:

The journal entry to record the lump sum purchase:

O15.1

Lump sum purchase

Page 4


24-Apr Equipment 165 662,500

Building 166 1,325,000

Land Improvements 170 397,500

Land 171 265,000

Cash 100 2,650,000

GENERAL JOURNAL

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To allocate asset cost, the following information is

necessary:

Objective 15.2: Expense Plant Assets by allocating

to fiscal periods which benefited from their use

O15.2

Acquisition Cost

Salvage Value Useful Life

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Depreciation Methods

O15.2

Straight LineStraight Line

Units of ProductionUnits of

Production

Double Declining Balance

Double Declining Balance

MACRSMACRS

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Straight Line

O15.2

Annual Depreciation =

Cost – Salvage ValueUseful life (in years)

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Straight Line

O15.2

Annual Depreciation =

Cost – Salvage ValueUseful life (in years)

Example: Forklift cost $50,000Salvage value $10,000

Useful life 8 years(50,000 - $10,000) =

$40,000/8 years =$5,000 annual depreciation


Useful life 8 years(50,000 - $10,000) =

$40,000/8 years =$5,000 annual depreciation

Depreciable

Amount

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Straight LineExample Depreciation Schedule

O15.2

Acquisition Salvage Annual Accumulated Ending

Year Cost Value Depreciation Depreciation Book Value

1 $50,000 $10,000 $5,000 $5,000 $45,000

2 50,000 10,000 5,000 10,000 40,000

3 50,000 10,000 5,000 15,000 35,000

4 50,000 10,000 5,000 20,000 30,000

5 50,000 10,000 5,000 25,000 25,000

6 50,000 10,000 5,000 30,000 20,000

7 50,000 10,000 5,000 35,000 15,000

8 $50,000 $10,000 $5,000 $40,000 $10,000

8 yearsUseful Life

Acquisition Salvage Annual Accumulated Ending

Year Cost Value Depreciation Depreciation Book Value

1 $50,000 $10,000 $5,000 $5,000 $45,000

2 50,000 10,000 5,000 10,000 40,000

3 50,000 10,000 5,000 15,000 35,000

4 50,000 10,000 5,000 20,000 30,000

5 50,000 10,000 5,000 25,000 25,000

6 50,000 10,000 5,000 30,000 20,000

7 50,000 10,000 5,000 35,000 15,000

8 $50,000 $10,000 $5,000 $40,000 $10,000

8 yearsUseful Life

EndingSalvag

e Value

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Units of Production

O15.2

Depreciation per unit of use=Cost – Salvage ValueUnits of Production

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Units of Production

O15.2

Depreciation per unit of use=Cost – Salvage ValueUnits of Production


Useful life 20,000 hours(50,000 - $10,000) =

$40,000/20,000 =$2 per hour of use

1st year’s use 1500 hours x $2 =$3,000 1st year depreciation


Useful life 20,000 hours(50,000 - $10,000) =

$40,000/20,000 =$2 per hour of use

1st year’s use 1500 hours x $2 =$3,000 1st year depreciation

Depreciable

Amount

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Units of ProductionExample Depreciation Schedule

O15.2

Acquisition Salvage Annual Annual Accumulated Ending

Year Cost Value Usage Depreciation Depreciation Book Value

1 $50,000 $10,000 1,500 $3,000 $3,000 $47,000

2 50,000 10,000 3,500 7,000 10,000 40,000

3 50,000 10,000 0 0 10,000 40,000

4 50,000 10,000 3,000 6,000 16,000 34,000

5 50,000 10,000 3,000 6,000 22,000 28,000

6 50,000 10,000 4,000 8,000 30,000 20,000

7 $50,000 $10,000 5,000 $10,000 $40,000 $10,000

20,000 hoursUseful Life

Acquisition Salvage Annual Annual Accumulated Ending

Year Cost Value Usage Depreciation Depreciation Book Value

1 $50,000 $10,000 1,500 $3,000 $3,000 $47,000

2 50,000 10,000 3,500 7,000 10,000 40,000

3 50,000 10,000 0 0 10,000 40,000

4 50,000 10,000 3,000 6,000 16,000 34,000

5 50,000 10,000 3,000 6,000 22,000 28,000

6 50,000 10,000 4,000 8,000 30,000 20,000

7 $50,000 $10,000 5,000 $10,000 $40,000 $10,000

20,000 hoursUseful Life

No usage means no

depreciation

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O15.2

Annual depreciation =2 x Straight line rate x

Beginning of year book value

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O15.2



Example: Useful life = 8 years

Straight line % = 1/8 = 12.5%

Double the rate 2 x 12.5% = 25%

Example: Useful life = 8 years

Straight line % = 1/8 = 12.5%

Double the rate 2 x 12.5% = 25%

Double StraightLine rate

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1st year Double Declining Balance

O15.2




Useful life 8 years1 / 8 =12.5% x

2 = 25%

1st year depreciation = 25% x$50,000 = $12,500


Useful life 8 years1 / 8 =12.5% x

2 = 25%

1st year depreciation = 25% x$50,000 = $12,500

Ignore Salvage

valueuntil end

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2nd year Double Declining Balance

O15.2



Example:

2nd year depreciation = 25% x($50,000-$12,500) = $37,500

25% x $37,500 = $9,375 2nd year depreciation

Example:

2nd year depreciation = 25% x($50,000-$12,500) = $37,500

25% x $37,500 = $9,375 2nd year depreciation

Book valuehas

declined

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Double Declining BalanceExample Depreciation Schedule

O15.2

Acquisition Salvage DDB Annual Accumulated Ending

Year Cost Value Rate Depreciation Depreciation Book Value

1 $50,000 $10,000 25% $12,500 $12,500 $37,500

2 50,000 10,000 25% 9,375 21,875 28,125

3 50,000 10,000 25% 7,031 28,906 21,094

4 50,000 10,000 25% 5,273 34,180 15,820

5 50,000 10,000 25% 3,955 38,135 11,865

6 50,000 10,000 25% 1,865 40,000 10,000

7 50,000 10,000 25% 0 40,000 10,000

8 yearsUseful Life

Acquisition Salvage DDB Annual Accumulated Ending

Year Cost Value Rate Depreciation Depreciation Book Value

1 $50,000 $10,000 25% $12,500 $12,500 $37,500

2 50,000 10,000 25% 9,375 21,875 28,125

3 50,000 10,000 25% 7,031 28,906 21,094

4 50,000 10,000 25% 5,273 34,180 15,820

5 50,000 10,000 25% 3,955 38,135 11,865

6 50,000 10,000 25% 1,865 40,000 10,000

7 50,000 10,000 25% 0 40,000 10,000

8 yearsUseful Life

Force this amount so book value = salvage

value

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DDB method can help smooth out the total costs of assets

O15.2

Low maintenance

and repair expense in the early years and

high maintenance

and repair expense in the later

years

Tota

l $

Dep

recia

tion

Exp

en

se

Total cost of ownership

Rep

air a

nd

M

ain

t. Exp

en

se

Yr1 Yr2 Yr3 Yr4 Yr5

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MACRS

O15.2

Use IRS provided tables to determine annual depreciation

based on class life of asset

Find class

ofasset

MACRS -Modified Accelerated Cost Recovery SystemYear 3-Year 5-Year 7-Year 10-Year

1 33.33% 20.00% 14.29% 10.00%2 44.45% 32.00% 24.49% 18.00%3 14.81% 19.20% 17.49% 14.40%4 7.41% 11.52% 12.49% 11.52%5 11.52% 8.93% 9.22%6 5.76% 8.92% 7.37%7 8.93% 6.55%8 4.46% 6.55%9 6.56%

10 6.55%11 3.28%


1 33.33% 20.00% 14.29% 10.00%2 44.45% 32.00% 24.49% 18.00%3 14.81% 19.20% 17.49% 14.40%4 7.41% 11.52% 12.49% 11.52%5 11.52% 8.93% 9.22%6 5.76% 8.92% 7.37%7 8.93% 6.55%8 4.46% 6.55%9 6.56%

10 6.55%11 3.28%

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MACRS

O15.2

MACRSdoesn’tconsidersalvagevalue


1 33.33% 20.00% 14.29% 10.00%2 44.45% 32.00% 24.49% 18.00%3 14.81% 19.20% 17.49% 14.40%4 7.41% 11.52% 12.49% 11.52%5 11.52% 8.93% 9.22%6 5.76% 8.92% 7.37%7 8.93% 6.55%8 4.46% 6.55%9 6.56%

10 6.55%11 3.28%


1 33.33% 20.00% 14.29% 10.00%2 44.45% 32.00% 24.49% 18.00%3 14.81% 19.20% 17.49% 14.40%4 7.41% 11.52% 12.49% 11.52%5 11.52% 8.93% 9.22%6 5.76% 8.92% 7.37%7 8.93% 6.55%8 4.46% 6.55%9 6.56%

10 6.55%11 3.28%

Example:

2nd year depreciation for 5 year classasset is 32% x $50,000 = $16,000

Example:

2nd year depreciation for 5 year classasset is 32% x $50,000 = $16,000

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15.3

Objective 15.3: Account for repairs, maintenance and

improvements to Plant Assets

Does the expenditure extend the useful life of the asset?Does the expenditure extend the useful life of the asset??Does the benefit of the expenditure extend beyond the current fiscal period?

Does the benefit of the expenditure extend beyond the current fiscal period?

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Ordinary repairs, betterments & extraordinary repairs

15.3

Ordinary maintenance and repairs

Betterments improve asset’s

efficiency and capacity

Extraordinary repairs

extend the asset’s

useful life

Equity

BALANCE SHEET

Assets Liabilities

Profitor

Loss

Expenses

INCOME STATEMENT

Revenue

Revenue Expenditures

Capital Expenditures

Benefits future

periods

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Ordinary repairs

15.3

Ordinary maintenance and repairs are expenditures necessary to keep assets in normal operating

condition. They are debited to an expense accountExample: $675 for maintenance and repairs on trucks

is journalized below

Page 4


14-Jun Truck Expense 570 675

Cash 100 675

GENERAL JOURNAL


Loss

Expenses



Equity

Revenue expenditur

e

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Betterments

15.3

Betterments expenditures benefit future periods by making assets more efficient or functional. They don’t

necessarily extend the useful life. They are debited to the asset account

Example: $2,000 for adding heavy duty suspension to a truck is journalized below

Page 4



Accounts Payable 210 2,000

GENERAL JOURNAL


Loss

Expenses



Equity

Capitalexpenditur

e

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Extraordinary Repairs

15.3

Extraordinary repair expenditures benefit future periods by making assets last longer. They extend the useful life of the

asset.

They are debited to the asset accountExample: $3,500 for rebuilding a truck engine is journalized

belowPage 4



Accounts Payable 210 3,500

GENERAL JOURNAL


Loss

Expenses



Equity

Capitalexpenditur

e

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Betterments -example

15.3

Example: After the third year of use, $2000 for adding heavy duty suspension to a truck is debited to the

asset account.

The revised depreciation schedule is shown below:

Equipment -TruckUseful life: 5 years Original Annual Accumulated Ending Book

Original Cost: 36,000$ Year Cost Depreciation Depreciation Value

Betterment: 2,000$ 1 36,000$ 6,900$ 6,900$ 29,100$

Current Cost: 38,000$ 2 36,000$ 6,900$ 13,800$ 22,200$

Salvage value: 1,500$ 3 36,000$ 6,900$ 20,700$ 15,300$

4 38,000$ 7,900$ 28,600$ 9,400$

5 38,000$ 7,900$ 36,500$ 1,500$ Revised depreciation

for remaining life

Equipment -TruckUseful life: 5 years Original Annual Accumulated Ending Book

Original Cost: 36,000$ Year Cost Depreciation Depreciation Value

Betterment: 2,000$ 1 36,000$ 6,900$ 6,900$ 29,100$

Current Cost: 38,000$ 2 36,000$ 6,900$ 13,800$ 22,200$

Salvage value: 1,500$ 3 36,000$ 6,900$ 20,700$ 15,300$

4 38,000$ 7,900$ 28,600$ 9,400$

5 38,000$ 7,900$ 36,500$ 1,500$ Revised depreciation

for remaining life

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Extraordinary repair -example

15.3

Example: After the third year of use, $3,500 for rebuilding truck engine is debited to the asset

account.

The revised depreciation schedule is shown below:

Transportation EquipmentUseful life: 5 years

Original Cost: 40,000$ Original Annual Accumulated Ending Book

Extra repair 3,500$ Year Cost Depreciation Depreciation Value

Current Cost: 43,500$ 1 40,000$ 7,600$ 7,600$ 32,400$

Salvage value: 2,000$ 2 40,000$ 7,600$ 15,200$ 24,800$

Addnl life: 2 years 3 40,000$ 7,600$ 22,800$ 17,200$

4 43,500$ 4,675$ 27,475$ 16,025$

5 43,500$ 4,675$ 32,150$ 11,350$

6 43,500$ 4,675$ 36,825$ 6,675$

7 43,500$ 4,675$ 41,500$ 2,000$

Revised depreciationfor remaining life

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15.4

Plant Assets are disposed of in several ways:

•They may be discarded as surplus

•They can be sold

•They can be exchanged or traded for other assets

Plant Assets are disposed of in several ways:

•They may be discarded as surplus

•They can be sold

•They can be exchanged or traded for other assets

Objective 15.4: Account for disposal of Plant Assets

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15.4

If a plant asset is discarded when it no longer has any market or functional value, asset values and accumulated depreciation must be removed from the accounts.

Example: A fully depreciated computer (book value is $0) is sent to recycling. The journal entry is shown below:

If a plant asset is discarded when it no longer has any market or functional value, asset values and accumulated depreciation must be removed from the accounts.

Example: A fully depreciated computer (book value is $0) is sent to recycling. The journal entry is shown below:

Discarding a plant asset

Page 6


22-Sep Accumulated Depreciation 185 6,000

Computer 180 6,000

GENERAL JOURNAL

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15.4

When a plant asset is sold for cash, asset values and accumulated depreciation must be removed from the accounts, and:If the book value = cash received, no gain or loss is recorded

•If book value > cash received, loss is recorded

•If book value < cash received, gain is recorded

When a plant asset is sold for cash, asset values and accumulated depreciation must be removed from the accounts, and:If the book value = cash received, no gain or loss is recorded

•If book value > cash received, loss is recorded

•If book value < cash received, gain is recorded

Sale of plant asset for cash


Loss

Expenses



Equity

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15.4

Example: A delivery truck with recorded acquisition cost of $28,000 and accumulated depreciation of $20,000 is sold for $10,000. The journal entry is shown below:

Example: A delivery truck with recorded acquisition cost of $28,000 and accumulated depreciation of $20,000 is sold for $10,000. The journal entry is shown below:

Cash received > book value

Page 6


1-Sep Cash 100 10,000

Accumulated Depreciation 185 20,000

Equipment -Truck 180 28,000

Gain on Disposal 490 2,000

GENERAL JOURNAL


Loss

Expenses



Equity

The disposal results in additional

*revenue for the period

*technically it should be called a “gain”

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15.4

Example: A delivery truck with recorded acquisition cost of $28,000 and accumulated depreciation of $20,000 is sold $5,000. The journal entry is shown below:

Example: A delivery truck with recorded acquisition cost of $28,000 and accumulated depreciation of $20,000 is sold $5,000. The journal entry is shown below:

Cash received < book value

Page 6


1-Sep Cash 100 5,000


Loss on Disposal 590 3,000


GENERAL JOURNAL


Loss

Expenses



Equity

The disposal results in additional

*expense for the period

*technically it should be called a “loss”

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15.4

RULES:1. The recorded cost & accumulated depreciation

of the asset traded in must be removed from the accounts

2. If no cash is received in the exchange, a gain on disposal is never recognized. The value recorded for the new asset is reduced to balance

3. The recorded value of the asset received cannot exceed its’ fair market value

4. If book value + cash paid is more than the fair market value of the asset received, a loss is recorded.

RULES:1. The recorded cost & accumulated depreciation

of the asset traded in must be removed from the accounts

2. If no cash is received in the exchange, a gain on disposal is never recognized. The value recorded for the new asset is reduced to balance

3. The recorded value of the asset received cannot exceed its’ fair market value

4. If book value + cash paid is more than the fair market value of the asset received, a loss is recorded.

Exchanging a plant asset

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15.4

Example: A delivery truck with a recorded cost of $32,000 and accumulated depreciation of $27,000 is traded in with $30,000 cash for a new delivery truck with a fair market value of $38,000



Page 18


10-Mar Equipment -Truck 180 35,000


Cash 100 30,000


GENERAL JOURNAL

Book value = $32,000 - $27,000 = $5,000 + $30,000 cash = $35,000 or less than the market value of the new truck, therefore, the recorded value must be reduced to $35,000 to balance the transaction. (No gain can be recorded)

Book value = $32,000 - $27,000 = $5,000 + $30,000 cash = $35,000 or less than the market value of the new truck, therefore, the recorded value must be reduced to $35,000 to balance the transaction. (No gain can be recorded)

New truck

Old truck

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15.4




Book value = $32,000 - $27,000 = $5,000 + $30,000 cash = $35,000 or more than the market value of the new truck, therefore, a loss must be recorded.

Book value = $32,000 - $27,000 = $5,000 + $30,000 cash = $35,000 or more than the market value of the new truck, therefore, a loss must be recorded.

Page 18


25-Mar Equipment -Truck 180 33,000


Loss on Disposal 590 2,000


Cash 100 30,000

GENERAL JOURNAL

New truck

Old truck

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15.5

Objective 15.5: Analysis: Compute and explain

the asset turnover ratio


Loss

Expenses



Equity

Relates sales to average total

assets

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15.5

Total Asset Turnover Ratio

Total asset turnover ratio is:

Net Sales / Average total assets

Sales

AverageAssets

The higher the turnover

ratio, the more

effective management is in utilizing

assets to generate

sales

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15.5

Total asset turnover -Example

Assets 2007 2008 Liabilities 2007 2008Cash 34,000 28,500 Accounts Payable 198,500 187,500Accounts receivable 265,000 301,400 Equipment loan 173,000 169,500Inventory 535,000 575,000Property Plant Equip 275,600 264,600 Total liabilities 371,500 357,000

Accumulated Depr. (175,500) (196,500) Equity Total assets 934,100 973,000 Owner, Capital 562,600 616,000

Sales 3,356,800

Cost of Goods Sold 2,517,600 Average Assets 953,550Wages expense 314,900 (TA for years 2010 +2011) / 2Depreciation expense 21,000Selling expense 296,700

Miscellaneous expense 153,200 Total asset turnover 3.5

Net Profit 53,400

X

Balance Sheet -Chen DistributorsAs of 12/31 2010 and 2011

( Sales/ Average assets)

Income StatementFor the year ended 12/31/08

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End Unit 15

Documents

©CourseCollege.com 1 15 Plant Assets Plant assets are also know as Property, plant & equipment Learning Objectives 1.Account for the acquisition cost of