1. 10 Property, Plant and Equipment and Intangibles CHAPTER
PowerPoint Slides to accompany
Fundamental Accounting Principles, 14ce
Prepared by
Joe Pidutti, Durham College
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Learning Objectives
Describe property, plant and equipment (PPE) and calculate their cost. (LO1)
Explain, record, and calculate depreciation using the methods of straight-line, units of production, and double-declining balance. (LO2)
Explain and calculate depreciation for partial years. (LO3)
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Learning Objectives
Explain and calculate revised depreciation. (LO4)
Explain and record impairment losses. (LO5)
Account for asset disposal through discarding, selling, or exchanging an asset. (LO6)
Account for intangible assets and their amortization. (LO7)
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Learning Objectives
Explain and calculate revised depreciation when there is a subsequent capital expenditure that creates partial period depreciation. Appendix 10A (LO8)
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5. Property, Plant and Equipment (PPE)
Characteristics:
Non-current assets used in the operations of a company.
Have a useful life greater than one accounting period.
May be classified as Tangible or Intangible.
LO 1
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6. Property, Plant and Equipment (PPE)
Also referred to as Fixed Assets.
Examples: buildings, land, equipment, machinery, leasehold improvements, and vehicles.
LO 1
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Intangible Assets
Lack physical substance.
Examples: patents, trademarks, copyrights, leaseholds and drilling rights.
LO 1
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Cost of PPE
PPE are recorded at cost, which includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use.
LO 1
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Capital Expenditures
Are costs of PPE that provide material benefits extending beyond the current period.
Are reported on the balance sheet under PPE.
LO 1
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Revenue Expenditures
Are costs that maintain an asset but do not materially increase the asset’s life or productive capabilities.
Are reported on the income statement as expenses.
Examples: supplies, lubricants, repair and maintenance costs.
LO 1
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11. Subsequent Expenditures
Expenditures that make PPE more efficient or productive and/or extend the useful life of the PPE beyond original expectations.
Examples: roofing replacement, plant expansion and major overhauls of machinery and equipment.
LO 1
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Land
Is not subject to depreciation.
Cost of land includes:
Purchase price
Legal fees
Real estate commissions
Accrued property taxes
Payments for surveying, grading, draining, and clearing the land
Assessments by local governments
LO 1
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Land Improvements
Assets that increase the usefulness of the land but have a limited life.
Costs are charged to a separate PPE account.
Costs are allocated over the period they benefit.
Cost examples include parking lot surfaces, driveways, fences and lighting systems.
LO 1
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Buildings
Costs include all expenditures to make the building ready for its intended use.
Costs are depreciated over the period they benefit.
Cost examples include purchase price, brokerage fees, taxes, title fees and legal costs.
LO 1
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15. Leasehold Improvements
Costs of alterations or improvements to leased property.
Costs are depreciated over the life of the improvements or the life of the lease, whichever is shorter.
Examples include flooring, painting, storefronts, and partitions.
LO 1
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16. Machinery and Equipment
Costs include all expenditures normal and necessary to purchase it and prepare it for its intended use.
Costs are depreciated over the periods they benefit.
Cost examples include purchase price, less discounts, plus non-refundable sales taxes, transportation charges, insurance while in transit.
LO 1
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17. Lump-Sum Asset Purchase
PPE may be purchased in a group with a single transaction for a lump-sum price.
The cost of the purchase is allocated to the various PPE based on their relative values.
LO 1
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Depreciation
A process of matching (or allocating) the depreciable cost of an asset in a rational and systematic manner over the asset’s useful life.
Depreciation does not measure the decline in market value of an asset.
Depreciation begins to be recorded when the asset is put into use.
LO 2
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Depreciation
PPE help the organization earn revenues over several accounting periods.
The cost of these PPE are depreciated (spread out) over these same periods.
Cost
Useful life
LO 2
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Depreciation
Factors relevant in determining depreciation:
Cost
Residual value
Useful (service) life
LO 2
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Depreciation Methods
The most commonly used methods are:
Straight-line
Units-of-production
Double-declining balance
LO 2
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22. Straight-Line Method
The same amount is expensed each period of the asset’s useful life.
Straight-line depreciation expense
Cost – Estimated residual value =
Estimated useful life
LO 2
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Illustration
A piece of shoe-inspection machinery is purchased on January 1, 2014.
The relevant data is as follows:
Cost $10,000
Estimated residual value ,000
Cost to be depreciated $9,000
Estimated useful life:
Accounting periods years
Units inspected ,000 shoes
LO 2
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24. Illustration: Straight-Line Method
Straight-line depreciation expense
Cost – Estimated residual value =
Estimated useful life in years
$10,000 – $1,000 =
5 years =
$1,800/ year
LO 2
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25. Illustration: Straight-Line Method
The annual adjusting entry to record depreciation on this equipment would be:
Depreciation Expense-Equipment 1,800
Accumulated Deprec. -Equipment ,800
2014
2015
2016
2017
2018
Equipment
$10,000
Less: Acc. Deprec.
1,800
3,600
5,400
7,200
9,000
Book Value
$8,200
$6,400
$4,600
$2,800
$1,000
LO 2
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26. Units-of-Production Method
This method is employed when the use of an asset varies greatly from one period to the next.
The amount charged to expense is based on the usage of the asset.
Depreciation per unit
Cost – Estimated residual value =
Total estimated units of production
Annual depreciation expense
Actual production
depreciation per unit = x
LO 2
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Illustration: Units-of-Production Method
$10,000 – $1,000
Depreciation per unit (shoe) =
36,000 units (shoes) =
$.25/shoe
Assume actual production is as follows:
Units (shoes) 7, , , , ,000
x x x x x.25
depreciation $1,750 $2,000 $2,250 $1, $1,250*
*Maximum depreciation allowed since 36,000 units have been produced.
LO 2
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Illustration: Units-of-Production Method
2014
2015
2016
2017
2018
Equipment
$10,000
Less: Acc. Deprec.
1,750
3,750
6,000
7,750
9,000
Book Value
$8,250
$6,250
$4,000
$2,250
$1,000
LO 2
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29. Declining-Balance Method
This method yields larger depreciation expenses in the early years of an asset’s life and smaller charges in later years.
A depreciation rate, up to twice the straight-line rate, is applied to the asset’s beginning of the period book value.
LO 2
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30. Double-Declining Balance Method
Steps:
Calculate the double-declining balance rate.*
rate = 2 / (Estimated years of useful life)
Calculate deprecation expense by multiplying the rate by the asset’s beginning-of-period book value.
(depreciation expense = rate x book value)
*Note: Residual value is not used in these calculations.
LO 2
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Illustration: Double-Declining-Balance Method
Rate = 2 / 5 years x 100%
= 40% per year
Year
Book Value at
start of period
Depreciation Expense
Accumulated Depreciation
end of period
2014
$10,000
40% x 10,000
= $4,000
$4,000
$6,000
2015
6,000
40% x 6,000
= 2,400
6,400
3,600
2016
40% x 3,600
= 1,440
7,840
2,160
2017
40% x 2,160
= 864
8,704
1,296
2018
296 (maximum)
9,000
1,000
(residual value)
LO 2
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Illustration: Double-Declining-Balance Method
2014
2015
2016
2017
2018
Equipment
$10,000
Less: Acc. Deprec.
4,000
6,400
7,840
8,704
9,000
Book Value
$6,000
$3,600
$2,160
$1,296
$1,000
LO 2
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Comparison of Methods
Period
Straight-line
Units-of-production
Double-Declining Balance
2014
$1,800
$1,750
$4,000
2015
1,800
2,000
2,400
2016
2,250
1,440
2017
1,750
864
2018
1,250
296
$9,000
LO 2
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34. Partial-Year Depreciation
Assets may be purchased or disposed of at any time during the year.
Depreciation for a partial year is recorded when the purchase or disposal is made at a time other than the beginning or end of the accounting period.
LO 3
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35. Partial-Year Depreciation
Methods:
Nearest whole month
If the asset is in use for more than half of the month, depreciation is calculated for the whole month.
If the asset is in use for less than half of the month, depreciation is not calculated for the month.
Half-year convention
Six months’ depreciation is recorded regardless when an asset is acquired or disposed of.
LO 3
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Mini-Quiz
Gamma Company purchased a computer costing $4,000 on April 18. It is expected to last for three years and then sell for $400.
Calculate depreciation for the first year using the:
Straight-line method.
Double declining balance method.
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37. Mini-Quiz
Gamma Company purchased a computer costing $4,000 on April 18. It is expected to last for three years and then sell for $400.
Straight-line depreciation expense
Cost – Estimated residual value
Portion of year = X
Estimated useful life
$4,000 – $400 =
X 8/12 year
3 years
= $800
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38. Mini-Quiz = = = $1,778 (rounded)
Gamma Company purchased a computer costing $4,000 on April 18. It is expected to last for three years and then sell for $400.
DDB depreciation expense
DDB rate x Cost x Portion of year = =
(2 /3) x $4,000 x 8/12
= $1,778 (rounded)
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39. Depreciation for Income Tax Reporting
rules for financial accounting usually differ from rules for income tax accounting
purpose of financial accounting is to report useful information on financial performance and position
purpose of income tax accounting reflects government objectives in raising revenues

40. Depreciation for Income Tax Reporting
Income Tax Act requires declining-balance method for depreciation
Capital cost allowance (CCA) is the term used to describe depreciation for tax purposes
The declining balance method reduces taxable income in the early years of an asset's life because depreciation is greatest in the early years. The government hopes to encourage capital investment by allowing the higher deduction and tax savings in the early years.
The Income Tax Act specifies rates for various groups of assets.

41. Revising Depreciation Rates
Depreciation rates for current and future periods may be revised if there is a change in an asset’s:
Estimated residual value and/or useful life. or
Cost due to subsequent capital expenditures.
LO 4
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42. Changes in Estimated Residual Value and/or Estimated Useful Life
The undepreciated cost of the asset is depreciated (allocated) over the remaining life of the asset.
This is considered to be a change in an accounting estimate and not an error.
LO 4
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43. Changes in Estimated Residual Value and/or Estimated Useful Life
Example: Straight-line Method
Revised depreciation for remaining years
Remaining book value
Revised residual value =
Revised remaining useful life
LO 4
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44. Revising Depreciation Rates
EXAMPLE: Straight-line Method
Equipment costing $10,000 was depreciated using the straight-line method. The estimated useful life was 5 years with a residual value of $1,000. The depreciation expense is $1,800 each year. After two years, the account balances are as follows:
Cost $10,000
Accumulated Depreciation 3,600
Book Value $ 6,400
At the beginning of its third year, the predicted number of years remaining in its useful life changes from three to four years and its estimate of residual value changes from $1,000 to $400. Calculate the depreciation expense for the remaining years.

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Revising Depreciation Rates When There is a Subsequent Capital Expenditure
Subsequent capital expenditures cause the cost of an asset to change.
These expenditures can be the addition of a component to an existing asset or the replacement or overhaul of a component.
LO 4
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Revising Depreciation Rates When There is a Subsequent Capital Expenditure
Revised depreciation is calculated to reflect the new cost and/or changes in estimated life/residual value.
When a subsequent expenditure results in a replacement of a component, the cost and accumulated depreciation of the component must be removed and a gain or loss is recorded.
LO 4
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48. Revising Depreciation Rates When There is a Subsequent Capital Expenditure
EXAMPLE: On January 3, 2014, Lexi Company paid $15,000 cash for a refrigeration unit installed on its delivery van. The delivery van had a book value of $32,000 at December 31, 2013, and an estimated remaining useful life of 10 years and no residual value. Assume the refrigeration unit had an estimated life of five years and no residual value and that its addition to the delivery van did not change the van's useful life or residual value.

49. The entries to record the addition of the refrigeration unit on January 3 and revised depreciation at December 31 are:

50. Revising Depreciation Rates When There is a Subsequent Capital Expenditure
EXAMPLE: On January 2, 2014, Lexi company purchased equipment with several components including an engine. The engine had a cost of $50,000, an estimated useful life of five years, and a residual value of $8,000. On January 5, 2016, the engine suffered major damage and was replaced with a new one for $55,000 on account with an estimated useful life of six years and residual value of $7,000.
If the old engine was scrapped (no cash received), two entries are required on January 5, 2016.

51. First, the old engine must be removed from the accounting records.

52. The purchase of the new engine on the same date must also be recorded

53. These two entries could be combined as:

54. If the old engine was sold for $5,000 cash instead of being scrapped, the entry would be:

55. Impairment of PPE Assets
An impairment loss occurs when the book value of PPE is greater than the amount to be recovered through the asset’s use or sale.
Impairments may result from:
A significant decline in the market value of the asset.
Technological, economic, or legal factors.
LO 5
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56. Impairment of PPE Assets
PPE must be assessed for impairments annually to ensure assets and income are not overstated.
If an impairment loss occurs:
The loss is recorded.
Depreciation is revised for future periods.
LO 5
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57. Impairment of PPE Assets
EXAMPLE: On December 31, 2014, the adjusted trial balance showed equipment with a cost of $50,000 and accumulated depreciation of $27,000. As part of its December 31, 2014 year-end procedures, the business performed an asset impairment assessment and found that the equipment had a recoverable value of $15,000. Prepare the entries for:
a) the impairment loss on December 31, 2014 and
b) the revised depreciation on December 31, 2015 if straight-line depreciation is used and that the remaining useful life is four years and the residual value of the equipment is zero.

58. a)
2014
Dec 31 Impairment Loss 8,000
Equipment 8,000
To record impairment
loss on equipment.

59. b) 2015 Dec 31 Depreciation Expense-Equipment 3,750
Accumulated Depreciation – Equipment 3,750
To record revised depreciation caused by impairment
loss. Revised cost = $50,000-8,000
= $42,000
Remaining book value = $42,000-$27,000
= $15,000
Revised depreciation = $15,000/4
= $3,750

60. Impairment of PPE Assets

61. Disposal of Capital Assets
Capital assets may be disposed of for a variety of reasons such as:
Obsolescence
Wear and tear
Damage
Changing business plans
LO 6
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Disposal of PPE
Accounting for disposal involves:
Record depreciation up to date of disposal.
Compare the asset’s book value with the net amount received/paid at disposal and record any resulting gain/loss.
Remove the balances of the disposed asset and related accumulated depreciation accounts.
Record any cash (and other assets) received or paid in the disposal.
LO 6
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Intangible Assets
Have no physical substance.
Are used in operations.
Provide future economic benefits.
Are recorded at cost when purchased.
Examples include patents, copyrights, trademarks, drilling rights, trademarks and trade names, and leaseholds.
LO 7
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Intangible Assets
Are recorded at cost when purchased.
Cost is amortized over estimated useful life.
The straight-line method is usually used.
Are shown on the balance sheet separately from PPE.
LO 7
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Goodwill
The amount by which the price paid for a company exceeds the fair market value of the company’s net assets if purchased separately.
Goodwill
Is not an intangible asset.
Is reported separately on the balance sheet.
Is not amortized but may be decreased if it is impaired.
LO 7
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Review
Explain the difference between revenue and capital expenditures and how they are recorded in the accounting system.
Revenue expenditures such as ordinary repairs expire in the current accounting period. They are debited to expense and are thus matched with current revenues.
Capital expenditures provide material benefits extending beyond the current period. They are debited to PPE accounts and are matched with future periods through depreciation expense.
Immaterial long-term expenditures are treated as current period expenses.
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Revised Depreciation When There is a Subsequent Capital Expenditure That Creates Partial Period Depreciation-Appendix 10A
Steps in Revising Depreciation:
Depreciation is updated to the date of the subsequent capital expenditure.
The subsequent capital expenditure and any gain/loss is recorded(if a replacement).
Revised depreciation is calculated.
LO 8
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End of Chapter
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