Lecture Week 13

Principles of Accounting (2)
College of Management and Technology in Alexandria
1
Lecture Week 13
Plant Assets, Natural Resources, and Intangibles
2
Plant Assets
Tangible in Nature
Actively Used in Operations
Expected to Benefit Future Periods
Called Property, Plant, & Equipment

Cost Determination
Purchase All expenditures
price needed to prepare the
asset for its intended
Acquisition use
Cost
Acquisition cost excludes financing charges

and
cash discounts
Example: ABC company purchased equipment and paid the
following:
• Purchase price $100,000
• Sales tax 10%
• Transportation charges (F.O.B. shipping point) 5,000
• Commission 2,000
• Insurance during transportation 8,000
• Installing and testing costs 10,000
• Insurance during operations (after use) 3,000
• Repair expense after one month of use 2,000
Required: Determine the cost of equipment and journalize the
necessary entry
Answer:
Purchase price $100,000
+ Sales tax 10% (100,000 x 10%) 10,000
+ Transportation charges (F.O.B. shipping point) 5,000
+ Commission 2,000
+ Insurance during transportation 8,000
+ Installing and testing costs 10,000
Acquisition Cost $135,000
Equipment………………135,000
Cash……………135,000
Insurance during operations:

Insurance expense……..3,000
Cash…………….3,000
Repair expense:
Repair expense ……………..2,000
Cash………………….2,000
Depreciation
Depreciation is the process of allocating the cost of a plant asset to

expense in the accounting periods benefiting from its use.
Balance Sheet Income Statement

Acquisition Cost
Expense
Cost Allocation
Land is not depreciable.

Factors in Computing Depreciation
The calculation of depreciation requires three amounts for each asset:
1. Cost
2. Salvage Value
3. Useful Life
Depreciation Methods
1. Straight-line
2. Units-of-production
3. Declining-balance
Asset we will depreciate in future screens
Straight-Line Method
Straight-Line Method
Balance Sheet Presentation

Machinery $ 10,000
Less: accumulated depreciation 3,600 $ 6,400
Book Value
Units-of-Production Method
• When equipment use varies from period to period, the units-of-
production depreciation method can better match expenses
with revenues.
• Units-of-production depreciation charges a varying amount to

expense for each period of an asset’s useful life depending on
its usage.
Step 1:
Depreciation = Cost - Salvage Value
Per Unit Total Units of Production
Step 2:
Number of Units
Depreciation Depreciation × Produced
=
Expense Per Unit in the Period
Assume that 7,000 units were inspected
during 2011. Depreciation would be
calculated as follows:
Step 1:
Depreciation = Cost - Salvage Value = $9,000 = $0.25/unit
Per Unit Total Units of Production 36,000
Step 2:
Depreciation Depreciation Number of Units
= × Produced = $0.25 × 7,000 = $1,750
Expense Per Unit
in the Period
Units-of-Production
Depreciation Schedule
Units produced and sold during the period.

Declining-Balance Method
• Under this method, we take more depreciation expense in
the early years of the asset’s life and lower amounts of
depreciation in later years.
• The most popular declining-balance method is called

double-declining-balance (DDB) method.
Double-Declining-Balance Method
Double-Declining-Balance Method
Cost – Accumulated Depreciation (Ending)
Cost – Accumulated Depreciation (Beginning)
* =
* =
* =
* =
- 1000 =
Cost – Accumulated Depreciation

=
Salvage Value
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
Straight-Line Units-of-Production Double-Declining-Balance

Partial-Year Depreciation
When a plant asset is acquired during the year,
depreciation is calculated for the fraction of the year the
asset is owned.
Cost $ 10,000
Salvage value 1,000 Assume our machinery was purchased on
Depreciable cost $ 9,000 October 1, 2010. Let’s calculate depreciation
Useful life expense for 2010, assuming we use straight-line
Accounting periods 5 years depreciation.
Units inspected 36,000 units
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References
• Wild, J., Shaw, K., Chiappetta, B. and Samaha, K., 2017. Fundamental
Accounting Principles. 2nd ed. McGraw-Hill Education.
• Weygandt, J., Kimmel, P. and Kieso, D., 2019. Accounting Principles
IFRS Version. Global Edition. Wiley.
23

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Principles of Accounting (2)

College of Management and Technology in Alexandria

Actively Used in Operations

Expected to Benefit Future Periods

Called Property, Plant, & Equipment

Acquisition cost excludes financing charges

Insurance during operations:

Depreciation is the process of allocating the cost of a plant asset to

Balance Sheet Income Statement

Land is not depreciable.

Balance Sheet Presentation

• Units-of-production depreciation charges a varying amount to

Units produced and sold during the period.

• The most popular declining-balance method is called

Cost – Accumulated Depreciation

Straight-Line Units-of-Production Double-Declining-Balance

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