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Chapter 9:
Accounting
for
Property, Plant, and Equipment
Prepared by
Bonnie Harrison, College of Southern Maryland
LaPlata, Maryland
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Chapter 9
Accounting for Property, Plant
and Equipment
After studying this chapter, you should be able to:
1 Describe property, plant and equipment and costs
included in its initial valuation,
2 Describe the accounting problems associated with
self-constructed assets.
3 Understand accounting issues related to acquiring
and valuing plant assets.
4 Describe the accounting treatment for costs
subsequent to acquisition.
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Chapter 9
Accounting for Property Plant and
Equipment
After studying this chapter, you should be able to :
5 Explain the concept of depreciation.
6 Identify the factors involved in the depreciation
process.
7 Compare activity, straight line, and decreasing charge
methods of depreciation.
8 Describe the accounting treatment for the disposal of
property, plant and equipment.
9 Explain how property, plant and equipment are
reported and analyzed.
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Property, Plant, and Equipment (PP&E)
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Acquisition Cost
Historical cost is the basis for determining cost.
Historical cost includes:
the asset’s cash or cash equivalent price, and
the cost of readying the asset for use
Costs incurred after acquisition are:
added to asset’s cost, if they provide future
service potential,
- or -
expensed, if they do not add to service potential
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Cost of Land, Building, and Equipment
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Valuation Issues
• A cash discount, whether taken or not, reduces
purchase price of asset. (This is the preferred
approach)
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Issuance of Stock for Assets
If stock is traded:
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Contributions
Contributions received:
Recognized in period received as revenue
Recorded at fair value of assets received
Contributions given:
Recognized as expense in period donated
Recorded at fair value of asset donated
Difference between fair value and book value
recorded as gain or loss.
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Costs subsequent to Acquisition
• If costs incurred increase future benefits,
capitalize costs
• If costs maintain a given level of services, expense
costs
• Costs incurred after acquisition can be:
additions
improvements and replacements
rearrangements and reinstallation
repairs
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Improvements and Replacements
Capitalize costs, if
Improvements or Replacements
Substitution of Substitution of
a better asset a similar asset
for present for present
asset asset
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Capitalization Approaches
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Factors in the Depreciation Process
Questions to be answered:
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Depreciable Base
Depreciable base is the amount subject to
depreciation.
It is determined by taking:
Originalcost of the asset less
Estimated salvage or disposal value
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Estimated Service Lives
An asset’s service life and physical life are not the
same.
Assets are retired (from productive life) due to:
physical factors (such as casualty), or
economic factors (such as obsolescence)
Economic factors in turn include
Inadequacy (asset can not meet current demand)
Supercession (by a better asset)
Obsolescence (other factors)
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Depreciation Methods
Depreciation methods can be classified as follows:
Tax depreciation methods
Financial accounting depreciation methods
Financial accounting methods are:
activity method
straight-line method
accelerated method
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Depreciation Methods: Overview
Depreciation
Methods
1. Declining Balance
2. Sum-of-the-years’ digits
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Depreciation Methods: Example
Amber Corporation buys a truck on January 1, 2003.
Information relating to the truck is as follows:
Cost, $34,000
Estimated service life, 5 years (or 60,000 miles)
Salvage value end of five years or use, $4,000
Actual miles driven:
20,000 miles (in 2003); 15,000 miles (in 2004)
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Straight-line method
1. Depreciable base = $34,000 less $4,000 = $30,000
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Sum-of-the-years’-digits (SYD) method
Decreasing Fractions
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Sum-of-the-years’-digits (SYD) method
4. Depreciation Schedule
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Double Declining balance method
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Double declining balance method
3. Depreciation Schedule
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Partial year depreciation
When an asset is bought sometime during
the year, a partial depreciation charge is
required.
The procedure is:
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Partial year depreciation: Example
Amber Corporation buys a truck on July 1, 2003.
Information relating to the truck is as follows:
Cost, $10,000
Estimated service life, 5 years
Salvage value end of five years, none.
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Partial year depreciation: Example
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Revision of Depreciation Estimates
Determination of depreciation involves
initial estimates (life, salvage value.)
Whenthese estimates are revised, we re-
compute depreciation.
Theserevised depreciation expenses apply
prospectively to the remaining life of asset.
These changes do not affect prior periods.
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Revision of Depreciation Estimates:
Example
Amber Corporation buys a depreciable asset on
January 1, 2003 for $95,000.
Estimated life was 20 years.
Estimated salvage value was $5,000.
On January 1, 2009, estimates were revised as
follows:
salvage value, $2,000
estimated life : 24 years (years 2003 through 2032)
Determine depreciation for 2009 based on straight
line method of depreciation.
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Revision of Depreciation Estimates:
Example
Accumulated depreciation to date of
revision of estimates:
($95,000 - $5,000) / 20 years = $4,500 dep
$4,500 * 6 years = $27,000 accumulated depr.
Amount to be depreciated (years 2009 through
2032 = 18 years)
($95,000 - $27,000 - $2,000) / 18 years
= $3,667 (rounded) annual depreciation
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Dispositions of PP&E
• Plant assets may be:
– retired voluntarily, or
– disposed of by sale, exchange, involuntary
conversion
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Accounting for Exchanges
Types of Accounting Rationale
Exchange Guidance
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Dissimilar Assets
Land,
Amber
FMV= $66,000
Becktel
Cash, $17,000
plus
Trucks,
FMV= $49,000
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Similar Assets (loss)
• Amber Company exchanges a used machine for a
similar machine from Becktel Company.
• Fair value of used machine: $ 6,000.
• Book value of used machine: $ 8,000
(Cost, $12,000; Accu. Depr, $ 4,000)
• Cash paid to Becktel: $ 7,000
• Record the purchase in Amber’s books.
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Similar Assets (Loss)
New machine,
Amber
FMV= $13,000
Becktel
Cash, $ 7,000
plus
used machine,
FMV= $ 6,000
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Similar Assets (Deferred gain)
• Davis Company exchanges Ford cars for GM cars
from Nertz Company.
• Fair value of Ford cars: $ 160,000.
• Book value of Ford cars: $ 135,000
(Cost, $150,000; Accu. Depr, $ 15,000)
• Cash paid to Nertz: $ 10,000
• Fair value of GM cars: ($160,000 + $ 10,000)
$ 170,000
• Record the purchase in Davis’ books.
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Similar Assets (Deferred Gain)
GM cars,
Davis
FMV= $170,000
Nertz
Cash, $ 10,000
plus
Ford cars,
FMV= $ 160,000
Cash, $ 10,000
plus
Ford cars,
FMV= $ 160,000
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Similar Assets (Partial gain)
• Nertz recognizes partial gain as follows:
(boot / total consideration) * Realized gain
($10,000 / $ 170,000) * $34,000
= $ 2,000.
Total gain less gain recognized = deferred gain
$34,000 less $2,000 = $32,000
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Nertz Company (Partial Gain)
Ford cars Dr. $ 128,000 (see below)
Accu. Dep (GM) Dr. $ 64,000
Cash Dr. $ 10,000
GM cars (old) $ 200,000
Gain on disposal $ 2,000
Fair value of Ford cars $160,000
Gain deferred ($ 32,000)
Ford cars (basis) $128,000
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Copyright
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