Post on 31-Jul-2015
Unit VIIPlant, Property and Equipment
Overview
Background Property, plant and equipment are assets used in the operation of business and often constitute the largest single asset category of a firm. For accounting purposes, these so called plant assets or tangible assets are grouped into three sub classifications: (Dyckman, T., Dukes, R., Davis, C., 1998).
1. Assets subject to depreciation, e.g., buildings, equipment, etc.2. Assets subject to depletion, e.g., mineral deposits, timber tracts, etc.3. Land, which is not subject to depreciation or depletion.
Purpose The purpose of Unit VII “Plant, Property and Equipment” is to illustrate how
the acquisition and disposal of fixed assets may be recorded in the books of the company.
Nature of Property, Plant & Equipment
The term plant, property and equipment is used to describe long lived assets that meet the following criteria: (Pefianco, E., Mercado, R., 1983)
1. they must possess physical existence; 2. they must be more or less permanent in nature; 3. they must not be held for sale; 4. they must be intended for use in operations; and 5. must undergo depreciation (except land)
In this unit This unit contains the
following topics:
Topics See PageKinds of Expenditures
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Purchase of Land
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Purchase of Property, Furniture or Equipment
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Cash Purchase 5 of G
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of Property, Plant & EquipmentCredit Purchase of Property, Plant & Equipment
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Returns & Allowances on Plant Assets Acquired
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Partial Payments on Plant Assets Acquired
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Full Payment of Outstanding Liability
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Recording Incidental Charges
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Recording Sale of Property and Equipment
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Review Questions
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Kinds of Expenditures
Overview Expenditures related to the acquisition and use of operational assets is
either capital expenditures or revenue expenditures. The charge to an expense account is based on the assumption that the benefits from the expenditure will be used up in the current period, and the cost should therefore be deducted from the revenue of the period in determining the net income.
Capital Expenditure
Expenditures for the purchase or expansion of plant assets are called capital expenditures and are recorded as asset accounts.
Revenue Expenditure
Expenditures for ordinary repairs, maintenance, fuel and other items necessary to the ownership and use of plant and equipment are called revenue expenditures and are recorded by debiting expense accounts.
Exceptions to the rule
There are items on the other hand that businesses purchase which will benefit several accounting periods but whose amounts are relatively low, e.g., wastebaskets, pencil sharpeners, etc. These are not capitalized in order not to be burdened by the yearly computation of the assets’ depreciation. Thus, for reasons of convenience and economy, expenditures that are not material in peso amount are treated in accounting records as expenses of the current period. In short, any material expenditure that will benefit only the current period or that is not material in amount is treated as revenue expenditure.
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Purchase of Land
Overview Acquiring a piece of land which will be used as a site where an office
building or a factory may be constructed will be recorded in the books of the buyer as “Land” not to be subjected to depletion, i.e., the gradual decrease in the value of land due to mining or oil extraction purposes.
Terms of Payment
Purchase of land will cause an increase in assets and the corresponding credit varies depending on the terms under which the purchase was made. The purchase may be on 4. cash basis, 5. on credit terms, 6. on credit terms with down payment, or 7. by signing a mortgage contract for the plant assets. Land is unique. Its cost is not depreciated/expensed overtime because its usefulness does not decrease like that of other assets.
Land xxxx Cash or Mortgage PayablexxxxPurchased land to be used in the business operation
Land Improvements
Improvements to real estate such as driveways, fences, parking lots, etc. have limited life and are therefore subject to depreciation. For this reason, they should be recorded in separate account called Land Improvements
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Purchase of Property, Furniture or Equipment
Overview Every business organization would need different types of fixed assets
to function efficiently and effectively. In this part, we shall be dealing on how to record acquisition of different properties of the firm, e.g., land, equipment, furniture and fixtures. We would also show how to record the eventual sale of this used plant assets.
Nature of depreciable assets
All assets except land decline in usefulness as they age. These depreciable assets are of useful to the company for only a limited number of years. Depreciation, as the term is used in accounting, is the allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. This is being done for the basic purpose of achieving the matching principle, i.e., to offset the revenue of an accounting period with the cost of goods and services being consumed in the effort to generate that revenue
Rule on acquisition
When property, furniture or equipment is acquired, the purchase may be made on cash basis, on credit terms with down payment, or by issuing a promissory note. If the purchase is made under credit terms, the said purchase must be recorded net of cash discount, if the seller is giving such discount.
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Cash Purchase of Property, Plant & Equipment
Overview Plant assets may be acquired under different purchase terms. In the
case of cash purchase, assets are acquired and fully paid on the date of acquisition.
Effect of cash purchase
When property, furniture or equipment is acquired by cash purchase, there is an increase in the asset property and equipment and a decrease in the asset cash.
Illustration For example, Labrador Trading purchased one IBM computer for
P40,000, cash basis. The entry to record the transaction is:
Office Equipment CashPurchased one IBM computer.
40,000 40,000
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Credit Purchase of Property, Plant & Equipment
Overview A purchase on credit terms of any type of plant assets will either
require a down payment or purely on account basis. At the same time, the seller may or may not give a cash discount.
Purely credit without cash discount
Assuming the purchase made was purely on account basis without any discounts, this will cause an increase in asset and increase in liability.
Office equipment Accounts PayablePurchased IBM computer on account.
40,000 40,000
With downpayment without cash discount
Credit purchase with down payment but without any discounts given will be recorded by using the following entry:
Office equipment Accounts Payable CashPurchased IBM computer. Terms: with
40,000 20,000 20,000
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50%down, balance on account.
Credit purchase with cash discount
When a credit purchase is with a cash discount, the property acquired must be recorded net of cash discount.
To illustrate, Labrador Trading purchased a cash register from Omron Marketing for P30,000. Terms: 2/10, n/30. The entry to record the transaction is:
Store Equipment Accounts PayablePurchased cash register. Terms: 2/10, n/30
29,400 29,400
COMPUTATION: Since there was a cash discount given by the seller, the applicable amount should be deducted from the liability to be recorded.
Invoice Price P 30,000 Less: 2% cash discount(30,000*2%) 600 Accounts Payable to be recorded P 29,400
=======Continued on next page
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Credit Purchase of Property, Plant & Equipment, Continued
Downpayment and Cash discount
Recording net of cash discount will also be applied under credit purchase with down payment and cash discount.
To illustrate, Labrador Trading purchased a cash register from OMRON Marketing for P30,000. Terms: P10,000 down payment; balance, 2/10, n/30. The entry to record the transaction is:
Store Equipment Cash Accounts payablePurchased cash register.Terms: with down; balance, 2/10, n/30.
29,600 10,000 19,600
COMPUTATION: Since the down payment is not to be subjected to the cash discount, only the liability portion must be recorded at an amount net of cash discount.
Invoice PriceLess: Down paymentAccounts Payable should beLess: Cash discount (20,000x2%)Accounts Payable to be recordedAdd: Down paymentCost of Store Equipment to be recorded
P 30,000 10,000 20,000 400 19,600 10,000P 29,600=======
Reminder It is important to note that the computation started with invoice price,
thus, trade discounts will be treated in the same way it was used in the purchase of merchandise.
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Returns and Allowances on Plant Assets Acquired
Overview When property, furniture or equipment purchased turns out to be
defective, damaged, or of the wrong specification, the buyer either returns the asset bought or bargains for a reduction in the acquisition cost of such asset. When asset bought is returned, there is a decrease in asset and a decrease in liability, if the asset was originally acquired on credit terms. And the said reduction must also be recorded net of cash discount if there was a cash discount given in the term of purchase since returns and allowances are normally treated as part of the amount subjected to the cash discount. But when property is purchased on cash basis, allowance granted will be made by way of cash refunds. This will cause an increase in asset cash and a decrease in asset property.
Illustration Assume that on July 1, Labrador Trading purchased store shelves and
cabinets from Mansion Inc. for P40,000 less 5. Terms: P10,000 down; balance; 2/10, n/30. The entry to record the transaction is:
Jul. 1 Store Furniture and Fixture Cash Accounts PayablePurchased cabinet and shelves. Terms: 10,000 down, balance 2/10, n/30.
37,440 10,000 27,440
COMPUTATION:
List PriceLess: Trade Discount (40,000 x 5%)Invoice PriceLess: Down paymentAccounts Payable should beLess: Cash discount (28,000 x 2%)Accounts Payable to be recordedAdd: Down paymentCost of Furniture and Fixture to be recorded
P 40,000 2,000 38,000 10,000 28,000 560 27,440 10,000P 37,440========
Continued on next page
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Returns and Allowances on Plant Assets Acquired, Continued
Illustration, con’t
If one of the shelves is subsequently returned by Labrador to Mansion, Inc. because of some defects, there will be a decrease in liability and also a decrease in the asset.
Assume that on July 3, Labrador returned one of the cabinets worth P5,000 due to some major defects. The entry to record the transaction is:
July 3 Accounts Payable Store Furniture and FixtureReturned one cabinet.
4,900 4,900
COMPUTATION:
Since the original purchase was recorded net of cash discount, subsequent returns made by the buyer will also be recorded as net of cash discount.
Amount of returned assetLess: Applicable cash discount(5,000 x 2%)Decrease in the liability of the buyer
P5,000 100P4,900=====
Defective items
It is not uncommon for a seller to replace defective items sold with a new unit. When this happens, no entry need be made of the return.
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Partial Payments on Plant Assets Acquired
Overview The buyer has the option to make a partial payment of his account to
decrease the amount of his liability prior to his full payment. Partial payment will reduce liability and asset, cash.
Illustration Assume that on July 5, Labrador Trading made a partial payment of
P10,000. The entry to record the transaction is:
July 5 Accounts Payable CashMade a partial payment.
10,000 10,000
Note: Partial payments, unlike returns, are not recorded net of cash discount since it will not affect computation of the discount account on the date payment is made. Partial payments on the other hand will reduce existing liability of the buyer.
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Full Payment of Outstanding Liability
Overview The buyer can pay his outstanding account within or after the discount
period. If full settlement is made within the discount period, the entry will only reflect a decrease in liability and cash
Illustration Assume on July 11, Labrador Trading settled his account with
Mansion, Inc. in full. The entry to record this transaction is:
July 11 Accounts Payable CashFull payment of account.
12,540 12,540
COMPUTATION:
Accounts Payable initially recordedLess: Return of one table Partial PaymentAccount to be paid
P 4,900 10,000
P 27,440 14,900P 12,540=======
Reminder It is important to note that the acquisition of property was recorded net
of cash discount on the date asset was bought. Therefore, if the buyer pays his liability within the discount period, the accounts payable reflected on his books would be the amount that must be actually paid with the cash discount already deducted. The cash discount reduces the cost of the property acquired and not to be recorded in a separate account title such as purchase discount (as in the case of merchandise)
Continued on next page
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Full Payment of Outstanding Liability, Continued
Illustration Assume that instead of paying on July 11, Labrador paid his account in full with Mansion, Inc. on July 20. The entry to record the transaction is:
July 20 Accounts PayableDiscount Lost CashPaid account in full.
12,540 460
13,000
COMPUTATION:
Accounts Payable initially recordedLess: Return of one table Partial PaymentAccounts Payable balance in the books of the buyerAdd: Discount lost due to paying after discount period Original amount of Accounts Payable P28,000 Less: Actual amount of return 5,000 Basis for computing cash discount 23,000 Cash discount percentage x 2%Cash to be paid by the buyer
P 27,440 4,900 10,000 P 12,540
460P 13,000=========
Reminder The “Discount Lost” account is to be included in the other expenses
category in the multiple statement since this expense was incurred due to the failure of the company to take advantage of the discount given to them by the seller.
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Recording Incidental Charges
Overview The purchase of property, furniture, or equipment may involve
additional expenditures for freight, insurance while asset is in transit, brokerage fees, arrastre, handling, storage, customs duties, test runs, installation costs, etc. These expenditures are usually paid by the buyer and are necessary in order to put the property in a place and condition ready for use. These expenditures become part of the cost of acquiring the property, furniture or equipment. In short, incidental charges are capitalized, i.e., debited to the asset account and not to an expense account
Illustration Assume that on July 20, 20X1, Labrador Trading bought a delivery
van from Toyota, Inc., Japan for P950,000. Terms: P300,000 down payment; balance, 2/10, n/30. F.O.B. shipping point, collect P3,000. The entries to record the transaction are:
July 20 Delivery Equipment Cash Accounts PayablePurchased delivery van. Terms: with down, balance, 2/10, n/30
937,000 300,000 637,000
July 20 Delivery Equipment CashFreight cost of the van purchased.
3,000 3,000
Assume further that Labrador Trading paid for the following incidental charges for the delivery van bought.
Customs dutiesInsurance while in transit
P 20,000 15,000
The entry to record this is:
July 20 Delivery Equipment CashTaxes and insurance paid for the van.
35,000 35,000
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Recording Sale of Property and Equipment
Overview Although property and equipment are not originally intended for sale,
these assets may eventually be sold when they become worn out or obsolete. The proceeds of the sale will be used to replace old units with new units.
Disposal of property and equipment could be for an amount just sufficient to recover the book value of the asset at the date of sale or for an amount, which results in either a gain on the sale or a loss on the sale. A comparison is made between the selling price and the net book value of the asset sold. Net book value is the difference between the acquisition cost of the asset and any depreciation accumulated to date.
Illustration Assume that on July 25, Labrador Trading sold its old typewriter being
used in the office. The said asset was acquired at P20,000 with an accumulated depreciation to date amounting to P12,000.
Case 1: Assume that the typewriter was sold at P8,000. The entry to record the transaction is:
July 25 CashAccumulated depreciation-Office Equipment Office EquipmentSold old typewriter.
8,000 12,000
20,000
COMPUTATION:
Acquisition costLess: Accumulated depreciationNet Book valueResale priceNo gain or loss
P 20,000 12,000 8,000 8,000 -=======
Continued on next page
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Recording Sale of Property and Equipment, Continued
Illustration, con’t
Case 2: Assume that the typewriter was sold at P10,000. The entry to record the transaction is:
CashAccumulated depreciation-Office Equipment Office Equipment Gain on sale of Office EquipmentSold old typewriter.
10,000 12,000
20,000 2,000
COMPUTATION:
Resale PriceLess: Net Book Value Acquisition Cost Less: Accumulated DepreciationGain on sale of office equipment
20,000 12,000
10,000
8,000P 2,000=======
Case 3: Assume that the typewriter was sold at P7,000. The entry to record the transaction is:
CashAccumulated Depreciation-Office EquipmentLoss on sale of Office Equipment Office EquipmentSold old typewriter
7,000 12,000 1,000
20,000
COMPUTATION:
Resale PriceLess: Net Book Value Acquisition Cost Less: Accumulated DepreciationLoss on sale of office equipment
20,000 12,000
7,000
8,000 (P 1,000)========
Reminder Any gain on the sale of property and equipment is classified as other
income because it is an income from a source which is not from the ordinary course of business operations. Any loss on the sale is classified as other expense in the multiple step income statement.
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Review Questions
Overview The following questions will encourage the students to review the
different topics included in this unit.
Questions The following are the review questions:
1. Differentiate capital expenditures from revenue expenditures.
2. What are the different characteristics of plant, property and
equipment?
3. Enumerate and describe at least three types of plat assets.
4. How do we value plant, property and equipment in the balance
sheet?
5. What is the meaning of recording plant assets using the net method
approach?
6. What are incidental charges?
7. Give examples of expenses treated as incidental charges.
8. What is discount lost? How will it be presented in the multiple
step income statement?
9. What is the objective of the company in selling used plant assets?
10. What is the formula for computing net book value of an asset being sold?
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