©CourseCollege.com 1 15 Plant Assets Plant assets are also know as Property, plant & equipment Learning Objectives 1.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

©CourseCollege.com 2 Plant asset subsidiary ledgers are separate records for each asset. Control Ledger Plant Assets Acct #180 Subsidiary Ledgers Plant Assets Forklift # Balance The Subsidiary Ledgers must add up to the Control Ledger Overview Subsidiary example

©CourseCollege.com 3 The total cost and the date of acquisition are recorded in the subsidiary ledgers. Overview Subsidiary Ledgers Plant Assets Forklift # Subsidiary ledgers must add up to the total in the Control ledger for Plant Assets

©CourseCollege.com 4 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.

©CourseCollege.com 5 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 costs  Costs 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 costs  Costs to install, condition and assemble for intended use Example

©CourseCollege.com 6 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

©CourseCollege.com 7 The journal entry to record the purchase: O15.1 Example –Cash purchase

©CourseCollege.com 8 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

©CourseCollege.com 9 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

©CourseCollege.com 10 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:

©CourseCollege.com 11 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. O ,000/2,800,00 = 25% 25% x $2,650,000 = $662,500

©CourseCollege.com 12 The journal entry to record the lump sum purchase: O15.1 Lump sum purchase

©CourseCollege.com 13 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 ValueUseful Life

©CourseCollege.com 14 Depreciation Methods O15.2 Straight Line Units of Production Double Declining Balance MACRS

©CourseCollege.com 15 Straight Line O15.2 Annual Depreciation = Cost – Salvage Value Useful life (in years)

©CourseCollege.com 16 Straight Line O15.2 Annual Depreciation = Cost – Salvage Value Useful life (in years) Example: Forklift cost $50,000 Salvage value $10,000 Useful life 8 years (50,000 - $10,000) = $40,000/8 years = $5,000 annual depreciation Example: Forklift cost $50,000 Salvage value $10,000 Useful life 8 years (50,000 - $10,000) = $40,000/8 years = $5,000 annual depreciation Depreciable Amount

©CourseCollege.com 17 Straight Line Example Depreciation Schedule O15.2 Ending Salvag e Value

©CourseCollege.com 18 Units of Production O15.2 Depreciation per unit of use= Cost – Salvage Value Units of Production

©CourseCollege.com 19 Units of Production O15.2 Depreciation per unit of use= Cost – Salvage Value Units of Production Example: Forklift cost $50,000 Salvage value $10,000 Useful life 20,000 hours (50,000 - $10,000) = $40,000/20,000 = $2 per hour of use 1 st year’s use 1500 hours x $2 = $3,000 1 st year depreciation Example: Forklift cost $50,000 Salvage value $10,000 Useful life 20,000 hours (50,000 - $10,000) = $40,000/20,000 = $2 per hour of use 1 st year’s use 1500 hours x $2 = $3,000 1 st year depreciation Depreciable Amount

©CourseCollege.com 20 Units of Production Example Depreciation Schedule O15.2 No usage means no depreciation

©CourseCollege.com 21 Double Declining Balance O15.2 Annual depreciation = 2 x Straight line rate x Beginning of year book value

©CourseCollege.com 22 Double Declining Balance 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% Example: Useful life = 8 years Straight line % = 1/8 = 12.5% Double the rate 2 x 12.5% = 25% Double Straight Line rate

©CourseCollege.com 23 1 st year Double Declining Balance O15.2 Annual depreciation = 2 x Straight line rate x Beginning of year book value Example: Forklift cost $50,000 Salvage value $10,000 Useful life 8 years 1 / 8 =12.5% x 2 = 25% 1 st year depreciation = 25% x $50,000 = $12,500 Example: Forklift cost $50,000 Salvage value $10,000 Useful life 8 years 1 / 8 =12.5% x 2 = 25% 1 st year depreciation = 25% x $50,000 = $12,500 Ignore Salvage value until end

©CourseCollege.com 24 2 nd year Double Declining Balance O15.2 Annual depreciation = 2 x Straight line rate x Beginning of year book value Example: 2 nd year depreciation = 25% x ($50,000-$12,500) = $37,500 25% x $37,500 = $9,375 2 nd year depreciation Example: 2 nd year depreciation = 25% x ($50,000-$12,500) = $37,500 25% x $37,500 = $9,375 2 nd year depreciation Book value has declined

©CourseCollege.com 25 Double Declining Balance Example Depreciation Schedule O15.2 Force this amount so book value = salvage value

©CourseCollege.com 26 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 Total $ Depreciation Expense Total cost of ownership Repair and Maint. Expense Yr1 Yr2 Yr3 Yr4Yr5

©CourseCollege.com 27 MACRS O15.2 Use IRS provided tables to determine annual depreciation based on class life of asset Find class of asset

©CourseCollege.com 28 MACRS O15.2 MACRS doesn’t consider salvage value Example: 2 nd year depreciation for 5 year class asset is 32% x $50,000 = $16,000 Example: 2 nd year depreciation for 5 year class asset is 32% x $50,000 = $16,000

©CourseCollege.com 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?

©CourseCollege.com 30 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 Revenue Expenditures Capital Expenditures Benefits future periods

©CourseCollege.com 31 Ordinary repairs 15.3 Ordinary maintenance and repairs are expenditures necessary to keep assets in normal operating condition. They are debited to an expense account Example: $675 for maintenance and repairs on trucks is journalized below Revenue expenditure

©CourseCollege.com 32 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 Capital expenditure

©CourseCollege.com 33 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 account Example: $3,500 for rebuilding a truck engine is journalized below Capital expenditure

©CourseCollege.com 34 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:

©CourseCollege.com 35 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:

©CourseCollege.com 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

©CourseCollege.com 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

©CourseCollege.com 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

©CourseCollege.com 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 The disposal results in additional *revenue for the period * technically it should be called a “gain”

©CourseCollege.com 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 The disposal results in additional *expense for the period * technically it should be called a “loss”

©CourseCollege.com 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

©CourseCollege.com 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 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

©CourseCollege.com 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. New truck Old truck

©CourseCollege.com Objective 15.5: Analysis: Compute and explain the asset turnover ratio Relates sales to average total assets

©CourseCollege.com Total Asset Turnover Ratio Total asset turnover ratio is: Net Sales / Average total assets Sales Average Assets The higher the turnover ratio, the more effective management is in utilizing assets to generate sales

©CourseCollege.com Total asset turnover -Example

©CourseCollege.com 47 End Unit 15