Page 433 - Accounting Principles (A Business Perspective)

10. Property, plant, and equipment

Understanding the learning objectives
• To be classified as a plant asset, an asset must: (1) be tangible; (2) have a useful service life of more than

one year; and (3) be used in business operations rather than held for resale.
• In accounting for plant assets, accountants must:
(a) Record the acquisition cost of the asset.
(b)Record the allocation of the asset's original cost to periods of its useful life through depreciation.
(c) Record subsequent expenditures on the asset.
(d)Account for the disposal of the asset.
• Accountants consider four major factors in computing depreciation: (1) cost of the asset; (2) estimated

salvage value of the asset; (3) estimated useful life of the asset; and (4) depreciation method to use in
depreciating the asset.
• Straight-line method: Assigns an equal amount of depreciation to each period. The formula for
calculating straight-line depreciation is:
Assetcost – Estimatedsalvage value
Depreciation per period=
Number of accounting periods∈estimated usefullife
• Units-of-production method: Assigns an equal amount of depreciation to each unit of product
manufactured by an asset. The units-of-production depreciation formulas are:
Asset cost – Estimated salvage value
Deprecation perperiod=
Estimated total units of productionserviceduring usefullifeof asset
Depreciation per period=Depreciation per unit×Number of unitsof goods/servicesproduced
• Double-declining-balance method: DDB is an accelerated deprecation method. Salvage value is
ignored in making annual calculations. The formula for DDB deprecation is:
Deprecation per period=2×straight−line rate×Asset cost – Accumulated deprecation
• Capital expenditures are debited to an asset account or an accumulated depreciation account and increase
the book value of plant assets. Expenditures that increase the quality of services or extend the quantity of
services beyond the original estimate are capital expenditures.
• Revenue expenditures are expensed immediately and reported in the income statement as expenses.

Recurring and or minor expenditures that neither add to the asset's quality of service-rendering abilities nor
extend its quantity of services beyond the asset's original estimated useful life are expenses.
• Plant asset subsidiary ledgers contain detailed information that cannot be maintained in the general ledger
account about each item in a major class of depreciable plant assets.
• Control over plant and equipment is enhanced by plant asset subsidiary ledgers and other detailed records.
Information in a detailed record may 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. A periodic physical inventory should be taken to determine whether items in accounting
records actually exist and are still being used at the proper location.
• To calculate the rate of return on operating assets, divide net operating income by operating assets. This
ratio helps management determine how effectively it used assets to produce a profit.

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