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Plant Assets. 15. Plant assets are also know as Property, plant & equipment. Learning Objectives Account for the acquisition cost of Plant Assets Expense Plant Assets by allocating to fiscal periods which benefited from their use - PowerPoint PPT Presentation
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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 Assets2. 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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ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
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
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Subsidiary Ledgers
Plant AssetsForklift
#180.23
Subsidiary ledgers must add up to the total in the
Control ledger for Plant Assets
Debit Credit2010 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.
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Cost of Plant AssetsPlant 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
O15.1
Example –Cash purchase
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The journal entry to record the purchase:
O15.1
Example –Cash purchase
Page 4Date Description PR Debit Credit
24-Apr Equipment -Truck 165 16,400Cash 100 16,400
GENERAL JOURNAL
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
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.
Lump sum purchase
O15.1
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To determine the value to be assigned to each type of asset:
Lump sum purchase
Example
O15.1
The Cost Concept controls the total cost
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:
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Appraised Value Value % Assigned
Land $280,000 10% $265,000Land Improvements $420,000 15% $397,500Building $1,400,000 50% $1,325,000Equipment $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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ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
The journal entry to record the lump sum purchase:
O15.1
Lump sum purchase
Page 4Date Description PR Debit Credit
24-Apr Equipment 165 662,500Building 166 1,325,000Land Improvements 170 397,500Land 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 Line
Units of Production
Double Declining Balance
MACRS
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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
Depreciable
Amount
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Straight LineExample Depreciation Schedule
O15.2
Acquisition Salvage Annual Accumulated EndingYear 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
Example: Forklift cost $50,000Salvage value $10,000
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 EndingYear 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
Annual depreciation =2 x Straight line rate x
Beginning of year book value
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
Annual depreciation =2 x Straight line rate x
Beginning of year book value
Example: Forklift cost $50,000Salvage value $10,000
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
Annual depreciation =2 x Straight line rate x
Beginning of year book value
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 EndingYear 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 $ Depreciation Expense
Total cost of ownership
Repair and M
aint. Expense
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%
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MACRS
O15.2
MACRSdoesn’tconsidersalvagevalue
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%
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 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 4Date Description PR Debit Credit
14-Jun Truck Expense 570 675 Cash 100 675
GENERAL JOURNAL
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
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 4Date Description PR Debit Credit
24-Apr Equipment -Truck 165 2,000 Accounts Payable 210 2,000
GENERAL JOURNAL
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
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
below Page 4Date Description PR Debit Credit
24-Apr Equipment -Truck 165 3,500 Accounts Payable 210 3,500
GENERAL JOURNAL
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Capitalexpenditur
e
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Betterments -example
15.3
Example: After the third year of use, $2000 for adding heavy duty suspension to a truck is debited to the
asset account.
The revised depreciation schedule is shown below:
Equipment -TruckUseful life: 5 years Original Annual Accumulated Ending BookOriginal Cost: 36,000$ Year Cost Depreciation Depreciation ValueBetterment: 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 depreciationfor remaining life
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Extraordinary repair -example
15.3
Example: After the third year of use, $3,500 for rebuilding truck engine is debited to the asset
account.
The revised depreciation schedule is shown below:
Transportation EquipmentUseful life: 5 yearsOriginal Cost: 40,000$ Original Annual Accumulated Ending BookExtra repair 3,500$ Year Cost Depreciation Depreciation ValueCurrent 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
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:
Discarding a plant asset
Page 6Date Description PR Debit Credit
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
Sale of plant asset for cash
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
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:
Cash received > book value
Page 6Date Description PR Debit Credit
1-Sep Cash 100 10,000Accumulated Depreciation 185 20,000 Equipment -Truck 180 28,000 Gain on Disposal 490 2,000
GENERAL JOURNAL
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
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:
Cash received < book value
Page 6Date Description PR Debit Credit
1-Sep Cash 100 5,000Accumulated Depreciation 185 20,000Loss on Disposal 590 3,000Equipment -Truck 180 28,000
GENERAL JOURNAL
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
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.
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
Exchanging a plant asset
Page 18Date Description PR Debit Credit
10-Mar Equipment -Truck 180 35,000Accumulated Depreciation 185 27,000 Cash 100 30,000 Equipment -Truck 180 32,000
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)
New truck
Old truck
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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 $33,000
Exchanging a plant asset
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 18Date Description PR Debit Credit
25-Mar Equipment -Truck 180 33,000Accumulated Depreciation 185 27,000Loss on Disposal 590 2,000 Equipment -Truck 180 32,000Cash 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
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Relates sales to average total
assets
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15.5
Total Asset Turnover RatioTotal 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 296,700Miscellaneous expense 153,200 Total asset turnover 3.5Net 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