Page 431 - Accounting Principles (A Business Perspective)

10. Property, plant, and equipment

it up and showing information such as the description, cost, and purchase date for each asset. These subsidiary
ledgers and detailed records provide more information and allow the company to maintain better control over plant
and equipment.

2010
Correctly Incorrectly
Expensing Expensing
Depreciation expense $10,000 $12,000
Repair Expense 6,000 -0-
Net in come overstated by $4,000, which $16,000 $12,000
affects retained earnings
Asset cost $40,000 $46,000
Accumulated depreciation 20,000 22,000
Book value $20,000 $24,000
2011
Correctly Incorrectly
Expensing Expensing
Depreciation expense $10,000 $12,000
Repair Expense -0- -0-
Net in come understated by $2,000, which $10,000 $12,000
affects retained earnings
Asset cost $40,000 $46,000
Accumulated depreciation 30,000 34,000
Book value $10,000 $12,000
Exhibit 90: Effect of revenue expenditure treated as capital expenditure
When they are kept for each major class of plant and equipment, a company may have subsidiary ledgers for
factory machinery, office equipment, and other classes of depreciable plant assets. Then there may be an additional
subsidiary ledger for each type of asset within each category. For example, the subsidiary office equipment ledger
may contain accounts for microcomputers, printers, fax machines, copying machines, and so on. Companies also
keep a detailed record for each item represented in a subsidiary ledger account. For example, there may be a
separate detailed record for each microcomputer represented in the Microcomputer subsidiary ledger account.
Each detailed record should include a description of the asset, identification or serial number, location of the asset,
date of acquisition, cost, estimated salvage value, estimated useful life, annual depreciation, accumulated

depreciation, insurance coverage, repairs, date of disposal, and gain or loss on final disposal of the asset. Note the
detailed record for one particular microcomputer as of 2010 December 31, in Exhibit 91.
To enhance control over plant and equipment, companies stencil on or attach the identification or serial number
to each asset. Periodically, firms must take a physical inventory to determine whether all items in the accounting
records actually exist, whether they are located where they should be, and whether they are still being used. A
company that does not use detailed records and identification numbers or take physical inventories finds it difficult
to determine whether assets have been discarded or stolen.

The general ledger control account balance for each major class of plant and equipment should equal the total of
the amounts in the subsidiary ledger accounts for that class of plant assets. Also, the totals in the detailed records
for a specific subsidiary ledger account (such as Microcomputers) should equal the balance of that account. Each
time a plant asset is acquired, exchanged, or disposed of, the firm posts an entry to both a general ledger control
account and the appropriate subsidiary ledger account. It also updates the detailed record for the items affected.

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