Property, Plant & Equipment

(Fixed Assets)

Extracted from slides prepared by:

C. Douglas Cloud

Professor Emeritus of Accounting

Pepperdine University

2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Reeve Warren Duchac

Nature of Fixed Assets

Fixed assets are long -term or relatively

permanent assets, such as equipment,

machinery, buildings, and land.

Other descriptive titles for fixed assets are

plant assets or property, plant, and

equipment .

LO 1

Nature of Fixed Assets

Fixed assets have the following

characteristics:

They exist physically and, thus, are tangible

assets.

They are owned and used by the company in its normal operations.

They are not offered for sale as part of

normal operations.

LO 1

Depreciation

Over time, most fixed assets (equipment,

buildings, and land improvements) lose

their ability to provide services.

The periodic recording of the cost of fixed

assets as an expense is called

depreciation .

LO 2

Accounting for Depreciation

Depreciation can be caused by physical or

functional factors.

Physical depreciation factors include wear

and tear during use or from exposure to the

weather.

Functional depreciation factors include

obsolescence and changes in customer

needs that cause the asset to no longer

provide services for which it was intended.

LO 2

LO 2

Factors in Computing Depreciation

3 factors determine the depreciation

expense for a fixed asset:

1.

2.

3.

The expected useful life of a fixed asset is

estimated at the time the asset is placed

into service.

The residual value of a fixed asset at the

end of its useful life is also estimated at the

time the asset is placed into service.

LO 2

Factors in Computing Depreciation

Straight-Line Method

The straight-line method provides for the

same amount of depreciation expense for

LO 2

Annual

Depreciation

Cost Residual Value

Useful Life =

Straight-Line Method

LO 2

Initial cost $24,000

Expected useful life 5 years

Estimated residual value $2,000

The annual straight-line depreciation of

$4,400 is computed below:

Annual Depreciation = Cost Residual Value

Useful Life

$24,000 - $2,000

5 years =

= $4,400

Straight-Line Method

LO 2

If the preceding equipment was purchased

and placed into service on October 1, the

depreciation for the first year of use would

be $1,100, computed as follows:

$4,400 x 3/12 = $1,100

Reducing Balance Method

depreciation expense is based on a % of

the remaining book balance.

LO 2

Depreciation Depreciation rate (%) x

remaining book balance =

Reducing Balance Method

LO 2

Initial cost $24,000

Expected useful life 5 years

Depreciation rate 40%

Estimated residual value $2,000

Depreciation =

(1st year) Depreciation rate X

(Cost Residual Value)

40% X ($24,000 - $2,000) =

= $8,800

Book value after 1st year = $24,000 - $8,800 = 15,200

Reducing Balance Method

LO 2

Depreciation =

(2nd year) 40% X $15,200

= $6,080

Depreciation =

(3rd year)

40% X ($15,200 6,080)

= $3,648

Depreciation =

(4th year)

40% X ($15,200 6,080 3,648)

= $2,188.80

(After 4th year, book value = 3,283.20)

Depreciation =

(5th year)

$3,283.20 - $2,000 = 1,283.20

(residual value)

Double Entry for Depreciation

Dr Depreciation (Expense)

Cr Accumulated Depreciation (Asset -

contra)

LO 3

PPE/Fixed Asset

Equipment

24,000

Bal c/f 24,000

24,000 24,000

Bal b/f 24,000

Acc. Depn - Fixed Asset

Bal c/f 8,800 Depn 8,800

8,800 8,800

Bal b/f 8,800

Depreciation Expense

Acc. Depn

8,800

Book value after 1st year

= 24,000 8,800

= 15,200

Double Entry for Depreciation (Contd.)

LO 3

PPE/Fixed Asset

Equipment

24,000

Bal c/f 24,000

24,000 24,000

Bal b/f 24,000

Acc. Depn - Fixed Asset

Bal c/f 14,880 Bal b/f 8,800

Depn 6,080

14,880 14,880

Bal b/f 14,880

Depreciation Expense

Acc. Depn

6,080

Book value after 2nd

year

= 24,000 14,880

= 9,120

Double Entry for Depreciation (Contd.)

LO 3

PPE/Fixed Asset

Equipment

24,000

Bal c/f 24,000

24,000 24,000

Bal b/f 24,000

Acc. Depn - Fixed Asset

Bal c/f 18,528 Bal b/f 14,880

Depn 3,648

18,528 18,528

Bal b/f 18,528

Depreciation Expense

Acc. Depn

3,648

Book value after 3rd

year

= 24,000 18,528

= 5,472

Double Entry for Depreciation (Contd.)

LO 3

PPE/Fixed Asset

Equipment

24,000

Bal c/f 24,000

24,000 24,000

Bal b/f 24,000

Acc. Depn - Fixed Asset

Bal c/f

20,716.80

Bal b/f 18,528

Depn 2,188.80

20,716.80 20,716.80

Bal b/f

20,716.80

Depreciation Expense

Acc. Depn

2,188.80

Book value after 4th

year

= 24,000 20,716.80

= 3,283.20

Double Entry for Depreciation (Contd.)

LO 3

PPE/Fixed Asset

Equipment

24,000

Bal c/f 24,000

24,000 24,000

Bal b/f 24,000

Acc. Depn - Fixed Asset

Bal c/f 22,000 Bal b/f

20,716.80

Depn 1,283.20

22,000 22,000

Bal b/f 22,000

Depreciation Expense

Acc. Depn

1,283.20

Book value after 5th

year

= 24,000 22,000

= 2,000 (residual value)

Revising Depreciation Estimates

A machine is purchased on January 1,

2011, for $140,000.

(continued)

LO 2

$88,000, as shown below.

(continued)

LO 2

Revising Depreciation Estimates

During 2013, the company estimates that the

(instead of 3 years) and that its residual value is

$8,000 (instead of $10,000). Depreciation

expense for each of the remaining 8 years is:

LO 2

Revising Depreciation Estimates

Discarding Fixed Assets

Equipment acquired at a cost of $25,000 is

fully depreciated at December 31, 2011.

LO 3

Equipment

Cost 25,000

Acc. Depn - Equipment

Bal b/f 25,000

Book value

= 25,000 25,000

= 0

Discarding Fixed Assets (Contd.)

On February 14, 2012, the equipment is

discarded (thrown away).

LO 3

Note: The entry to record the disposal of a fixed

asset removes the cost of the asset and its

accumulated depreciation from the accounts.

Equipment

Cost 25,000 Write-off 25,000

Acc. Depn Equipment

Write-off 25,000 Bal b/f 25,000

Discarding Fixed Assets

Equipment costing $6,000, with no residual

value, is depreciated at an annual straight -

line rate of 10%.

Annual depreciation = 6,000 X 10% = 600

After the December 31, 2011, Accumulated

Depreciation Equipment has a $4,750

balance.

On March 24, 2012, the asset is removed

from service and discarded.

LO 3

Discarding Fixed Assets

LO 3

$600 3/12

Discarding Fixed Assets

LO 3

The discarding of the equipment is then

recorded as shown below. (Note that this is the

2nd of 2 entries on March 24.)

Total accumulated depreciation at the date of

discard: 4,750 + 150 = 4,900

Original cost of equipment: 6,000

Loss on disposal of equipment (an expense)

= 6,000 4,900 = 1,100

Discarding Fixed Assets

LO 3

Equipment

Cost 6,000 Write-off 6,000

6,000 6,000

Bal b/f 0

Acc. Depn - Equipment

Write-off 4,900 Bal b/f 4,750

Depn 150

4,900 4,900

Bal b/f 0

Depreciation Expense

Acc. Depn 150

Loss on disposal of equipment

(Expense)

Loss 1,100

Selling Fixed Assets

Equipment was purchased at a cost of

$10,000.

It had no estimated residual value and was

depreciated at a straight -line rate of 10%.

The equipment is sold for cash on October

12 of the 8th year of its use.

The balance of the accumulated

depreciation account as of the preceding

December 31 is $7,000.

LO 3

(continued)

Selling Fixed Assets

LO 3

(continued)

The entry to update the depreciation for the

9 months of the current year is as follows:

Selling Fixed Assets

LO 3

Sold below book value for $1,000. Loss of $1,250.

After the current depreciation is recorded,

the book value of the asset is $2,250

($10,000 $7,750).

Selling Fixed Assets

LO 3

Equipment

Cost 10,000 Write-off

10,000

10,000 10,000

Bal b/f 0

Acc. Depn - Equipment

Write-off 7,750 Bal b/f 7,000

Depn 750

7,750 7,750

Bal b/f 0

Depreciation Expense

Acc. Depn 750

Loss on disposal of equipment

(Expense)

Loss 1,250

Cash

1,000

Selling Fixed Assets

LO 3

Sold above book value for $2,800. Gain of $550.

After the current depreciation is recorded,

the book value of the asset is $2,250

($10,000 $7,750).