Page 424 - Accounting Principles (A Business Perspective)

10. Property, plant, and equipment

that the company decides to use on the assets. After processing this information, the computer
calculates the company's depreciation expense and accumulates depreciation for each type of asset

and each individual asset (e.g. a machine).

After depreciating an asset down to its estimated salvage value, a firm records no more depreciation on the asset
even if continuing to use it. At times, a firm finds the estimated useful life of an asset or its estimated salvage value
is incorrect before the asset is depreciated down to its estimated salvage value; then, it computes revised
depreciation charges for the remaining useful life. These revised charges do not correct past depreciation taken;
they merely compensate for past incorrect charges through changed expense amounts in current and future
periods. To compute the new depreciation charge per period, divide the book value less the newly estimated salvage
value by the estimated periods of useful life remaining.

For example, assume that a machine cost USD 30,000, has an estimated salvage value of USD 3,000, and
originally had an estimated useful life of eight years. At the end of the fourth year of the machine's life, the balance
in its accumulated depreciation account (assuming use of the straight-line method) was (USD 30,000 - USD 3,000)
X 4/8 = USD 13,500. At the beginning of the fifth year, a manager estimates that the asset will last six more years.
The newly estimated salvage value is USD 2,700. To determine the revised depreciation per period:
Original cost $ 30,000
th
Less: Accumulated deprecation at end of 4 year 13,500
th
Book value at the beginning of 5 year 16,500
Less: Revised salvage value 2,700
Remaining depreciable cost $13,800
Revised deprecation per period $ 13,000/6 = $2,300
Had this company used the units-of-production method, its revision of the life estimate would have been in
units. Thus, to determine depreciation expense, compute a new per-unit depreciation charge by dividing book value
less revised salvage value by the estimated remaining units of production. Multiply this per unit charge by the

periodic production to determine depreciation expense.
Using the double-declining-balance method, the book value at the beginning of year 5 would be USD 9,492.19
(cost of USD 30,000 less accumulated depreciation of USD 20,507.81). Depreciation expense for year 5 would be
twice the new straight-line rate times book value. The straight-line rate is 100 per cent/6 = 16.67 per cent. So twice
the straight-line rate is 33.33 per cent, or 1/3. Thus, 1/3 X USD 9,492.19 = USD 3,164.06.
APB Opinion No. 12 requires that companies separately disclose the methods of depreciation they use and the
amount of depreciation expense for the period in the body of the income statement or in the notes to the financial
statements. Major classes of plant assets and their related accumulated depreciation amounts are reported as
shown in Exhibit 87.

Showing cost less accumulated depreciation in the balance sheet gives statement users a better understanding of
the percentages of a company's plant assets that have been used up than reporting only the book value (remaining
undepreciated cost) of the assets. For example, reporting buildings at USD 75,000 less USD 45,000 of accumulated
depreciation, resulting in a net amount of USD 30,000, is quite different from merely reporting buildings at USD
30,000. In the first case, the statement user can see that the assets are about 60 per cent used up. In the latter case,
the statement user has no way of knowing whether the assets are new or old.

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