Plant assets and depreciation

(about 33 slides)

Plant Assets and

Depreciation

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PLANT ASSETS

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– tangible resources used in the operation of a business

– not intended for sale to customers

PLANT ASSETS

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Plant assets are subdivided into four classes:

1 Land2 Land improvements3 Buildings4 Equipment

PLANT ASSETS

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Plant assets are subdivided into four classes:

1 Land2 Land improvements3 Buildings4 Equipment

PLANT ASSETS

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Land

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Land Improvements

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Buildings

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(any permanent structure)

Equipment

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Cost (all costs to place asset into usefulness)

Useful life estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence

Salvage value estimate of the asset’s value at the end of its useful life

3 FACTORS IN COMPUTING DEPRECIATION

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An asset must be carried on thebalance sheet at the amount paid for it.

The cost of an asset equals the sum ofall of the costs incurred to bring the asset

to its intended purpose.

GAAP Cost Principle

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Costs consist of all expenditures necessary to:

1. acquire the asset

2. make it ready for its intended use.a) May include sales tax, freight costs,

installation costs and training costs.

DETERMINING THE COST OF PLANT ASSETS

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Recurring Costs

Recurring costs such as licenses and insurance for an asset are NOT included with the asset—instead, they are expensed in an EXPENSE account.

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Assets slowly lose value.

DEPRECIATION

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Assets slowly lose value.That decrease of the asset’s value becomes an expense

DEPRECIATION

Expense

ExpenseExpense

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Depreciation recognizes that a plant asset is worth less and less over its useful life.

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Usefulness may decline because of • Wear and tear

• Obsolescence

DEPRECIATION

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Land is not depreciated.

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Land is not depreciated.

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No “wear and tear”No obsolescence

PLANT ASSETS

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Example

Truck

30,000

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If you buy a company truck for cash in the beginning of 2011, you would record the transaction like this:

Cash

30,000

Example

Truck

30,000

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At the end of 2011, your truck has gone down in value, but the ledger still say it’s worth $30,000

Example

Truck

30,000

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At the end of 2011, your truck has gone down in value, but the ledger still say it’s worth $30,000

We need the ledger value to match the real value.

4 GAAP Approved Depreciation Methods

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Straight-Line (SL)Straight-Line (SL)

Units-of-Production (UOP)Units-of-Production (UOP)

Double-Declining-Balance (DDB)Double-Declining-Balance (DDB)

4 GAAP Approved Depreciation Methods

Sum-of-the-Year’s-Digits (SYD)Sum-of-the-Year’s-Digits (SYD)

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(Cost – Salvage value)= Depreciation per year

Straight-Line Method Example

years of useful life

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(Cost – Salvage value)= Depreciation per year

Straight-Line Method Example

years of useful life

(30,000 – 500)= $5,900

5

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(Cost – Salvage value)= Depreciation per year

Straight-Line Method Example

years of useful life

(30,000 – 500)= $5,900

5

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Depreciation amount is the same for each year of the asset’s useful life.

Using this method, depreciation is measured only by time.

STRAIGHT-LINE DEPRECIATION METHOD

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Journalize Depreciation

Accumulated Depreciation, Truck

Depreciation Expense, Truck

5,900

5,900

New Asset Account(Contra Account)

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Truck

30,000

UNITS-OF-PRODUCTION

Cost – Salvage ValueCost – Salvage Value

Total Units of ActivityTotal Units of Activity= Cost per Unit= Cost per Unit

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UNITS-OF-PRODUCTION

Cost – Salvage ValueCost – Salvage Value

Total Units of ActivityTotal Units of Activity= Cost per Unit= Cost per Unit

$30,000 - $500$30,000 - $500

100,000 miles100,000 miles= 29.5¢ per mile= 29.5¢ per mile

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Depreciation if truck driven 15,000 in 2010

Expense = (Cost per mile) x (# miles)

= $0.295 x 15,000

= $4,425 depreciation

UNITS-OF-PRODUCTION

Cost – Salvage ValueCost – Salvage Value

Total Units of ActivityTotal Units of Activity= Cost per Unit= Cost per Unit

$30,000 - $500$30,000 - $500

100,000 miles100,000 miles= 29.5¢ per mile= 29.5¢ per mile

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