1. Accounting for Plant Assets and Depreciation
Chapter 18
Accounting for Plant Assets and Depreciation

2. Buying and selling plant assets, paying property tax, and calculating depreciation
Plant asset – an asset that will be used for a number of years in the operation of the business (equipment, buildings, land) Every plant asset has a related accumulated depreciation account
Real property – land and anything attached to the land (real estate)
Personal property – all property not classified as real
For tax purposes, same definitions apply to business and individual
Assessed value – value of an asset determined by tax authorities for the purpose of calculating taxes

3. RECORDING THE BUYING OF A PLANT ASSET
page 535
January 3, 20X1. Paid cash for a display case, $3, Check No. 4. 1 2 4 3
1. Account title
3. Cash paid
2. Cost of the plant asset
4. Post
LESSON 18-1

4. CALCULATING AND PAYING PROPERTY TAX
page 536
February 1. Classic Parts, Inc., paid cash for property tax, $ Check No. 69.
Annual Property Tax =
Tax Rate ×
Assessed Value
$60,000.00 ×
1.2% =
$720.00
LESSON 18-1

5. Buying and selling plant assets, paying property tax, and calculating depreciation
GAAP (Generally accepted accounting principals) require plant assets be expensed over the asset’s useful life (Concept: Matching Expenses with Revenue)
A month is the smallest unit of time used to calculate depreciation

6. STRAIGHT-LINE DEPRECIATION
page 538
Calculating Annual Depreciation Expense
1. Subtract the asset’s estimated salvage value from the original cost.
2. Divide the estimated total depreciation expense by the years of estimated useful life.
Estimated Salvage Value
Original Cost
Estimated Total Depreciation Expense = –
$3,250.00 –
$250.00 =
$3,000.00 1
Annual Depreciation Expense =
Years of Estimated Useful Life ÷
Estimated Total Depreciation Expense
$3,000.00 ÷ 5 =
$600.00 2
LESSON 18-2

7. CALCULATING DEPRECIATION EXPENSE FOR PART OF A YEAR
page 539
Calculating Partial Year’s Depreciation Expense
1. Divide the annual depreciation expense by 12.
2. Multiply the monthly depreciation expense by the number of months the plant asset is used in a year.
Months in a Year
Annual Depreciation Expense
Monthly Depreciation Expense = ÷
$600.00 ÷ 12 =
$50.00 1
Partial Year’s Depreciation Expense =
Number of Months Asset Is Used ×
Monthly Depreciation Expense
$50.00 × 5 =
$250.00 2
LESSON 18-2

8. CALCULATING ACCUMULATED DEPRECIATION
page 540
20X3 Depreciation Expense
20X2 Accumulated Depreciation
20X3 Accumulated Depreciation = +
$1,200.00 +
$600.00 =
$1,800.00
LESSON 18-2

9. CALCULATING BOOK VALUE
page 540
Accumulated Depreciation
Original Cost
Ending Book Value = –
$3,250.00 –
$1,800.00 =
$1,450.00
Annual Depreciation
Beginning Book Value
Ending Book Value = –
$2,050.00 –
$600.00 =
$1,450.00
LESSON 18-2

10. Buying and selling plant assets, paying property tax, and calculating depreciation
Plant asset record – an accounting form on which a business records information about each plant asset

11. PREPARING PLANT ASSET RECORDS
page 542 1
1. Write the information in Section 1 when the asset is purchased. 2
2. Do not write in Section 2 until the asset is disposed of. 3
3. Each year the asset is owned, record the year’s annual depreciation expense in Section 3. Calculate and record accumulated depreciation and ending book value.
LESSON 18-3

12. JOURNALIZING ANNUAL DEPRECIATION EXPENSE
page 543 2 3 1
1. Depreciation Expense debit
2. Accumulated Depreciation credit
3. Record adjusting entry
LESSON 18-3

13. POSTING AN ADJUSTING ENTRY FOR DEPRECIATION EXPENSE
page 544
1. Debit Depreciation Expense.
2. Credit Accumulated Depreciation. 1 2
LESSON 18-3

14. Buying and selling plant assets, paying property tax, and calculating depreciation
When plant assets are no longer useful they can be sold, traded, or discarded
A company could have a gain or loss from the sale of a plant asset
Gain on plant asset – revenue that results when a plant asset is sold for more than the book value (other revenue)
Loss on a plant asset – a loss that results when a plant asset is sold for less than the book value (other expense)

15. SALE OF A PLANT ASSET FOR BOOK VALUE
page 546
January 6, 20X6. Received cash from sale of display case, $250.00: original cost, $3,250.00; total accumulated depreciation through December 31, 20X5, $3, Receipt No. 4. 1 2
1. Record an entry in the cash receipts journal to remove the original cost.
2. Check the type of disposal, and write the date, and disposal amount in Section 2 of the plant asset record.
LESSON 18-4

16. RECORDING A PLANT ASSET’S DEPRECIATION EXPENSE FOR A PARTIAL YEAR
page 547
April 4, 20X7. Recorded a partial year’s depreciation on a safe to be sold, $ Memorandum No. 31. 1 2 3
1. Debit the depreciation expense account.
2. Credit the accumulated depreciation account.
3. Update Section 3 of the plant asset record.
LESSON 18-4

17. SALE OF A PLANT ASSET FOR MORE THAN BOOK VALUE
page 548
April 4, 20X7. Received cash from sale of safe, $425.00: original cost, $1,800.00; accumulated depreciation through April 4, 20X7, $1, Receipt No. 47. 1
1. Remove the original cost. Record the gain on the sale. Record the cash received from the sale. 2
2. Check the type of disposal. Write the date and disposal amount in Section 2 of the plant asset record.
LESSON 18-4

18. SALE OF A PLANT ASSET FOR LESS THAN BOOK VALUE
page 549
October 6, 20X7. Received cash from sale of a computer, $150.00: original cost, $1,900.00; total accumulated depreciation through October 1, 20X7, $1, Receipt No. 281. 1 2
1. Remove the original cost. Record the loss on the sale. Record the cash received from the sale.
2. Check the type of disposal and write the date and disposal amount in Section 2.
LESSON 18-4

19. Buying and selling plant assets, paying property tax, and calculating depreciation
Many plant assets depreciate more in the early years of useful life than in later years. (vehicles, computer equipment)
Declining balance method of depreciation – multiplying the book value by a constant depreciation rate at the end of each fiscal period 100% ÷ # of useful years = %
Double declining-balance method – a declining-balance rate that is two times the rate.
***Plant asset never depreciated below estimated salvage value, therefore the last year of depreciation is only the amount required to get it to salvage value***

20. CALCULATING DEPRECIATION USING THE DOUBLE DECLINING-BALANCE METHOD
page 551 1 2 3 4
1. Calculate the double declining-balance rate.
2. Determine the annual depreciation expense.
3. Determine the ending book value.
4. Transfer the ending book value to the beginning book value for the following year.
LESSON 18-5

21. CALCULATING THE LAST YEAR’S DEPRECIATION EXPENSE
page 552 1 2 3
1. Transfer the ending book value from Year 4 to the beginning book value of Year 5.
2. Subtract the salvage value from the beginning book value to determine the depreciation expense for the last year.
3. Verify that the ending book value is equal to the salvage value.
LESSON 18-5

22. COMPARISON OF TWO METHODS OF DEPRECIATION
page 553
LESSON 18-5