Page 435 - Accounting Principles (A Business Perspective)

10. Property, plant, and equipment

b. Units-of-production method:

USD 45,000 – USD5,000
2010: ×90,000=USD3,600
1,000,000
USD 45,000 – USD5,000
2011: ×125,000=USD5,000
1,000,000
c. Double-declining-balance method:
2010: USD 45,000×20per cent=USD9,000
2011: USD 45,000– USD9,000×20per cent=USD7,200
USD 45,000 – USD5,000 1
d. Straight-line: × =USD1,000
10 4
Units-of-production: (USD 30,000 – USD 0.04) = USD 1,200
1
Double-declining-balance: USD 45,000– USD9,000 – USD7,000×0.2× =USD1,440
4
Key terms
Accelerated depreciation methods Record higher amounts of depreciation during the early years of an
asset's life and lower amounts in later years.
Acquisition cost Amount of cash and/or cash equivalents given up to acquire a plant asset and place it in
operating condition at its proper location.
Appraised value An expert's opinion as to what an item's market price would be if the item were sold.
Betterments (improvements) Capital expenditures that are properly charged to asset accounts because
they add to the service-rendering ability of the assets; they increase the quality of services obtained from an
asset.
Book value An asset's recorded cost less its accumulated depreciation.
Capital expenditures Expenditures debited to an asset account or to an accumulated depreciation
account.
Depreciation The amount of plant asset cost allocated to each accounting period benefiting from the plant
asset's use. The straight-line depreciation method charges an equal amount of plant asset cost to each
period. The units-of-production depreciation method assigns an equal amount of depreciation for each
unit of product manufactured or service rendered by an asset. The double-declining-balance (DDB)
method assigns decreasing amounts of depreciation to successive periods of time.
Double-declining-balance (DDB) depreciation See depreciation.
Extraordinary repairs Expenditures that cancel a part of the existing accumulated depreciation because
they increase the quantity of services expected from an asset.
Fair market value The price that would be received for an item being sold in the normal course of business
(not at a forced liquidation sale).
Inadequacy The inability of a plant asset to produce enough products or provide enough services to meet
current demands.
Land improvements Attachments to land, such as driveways, landscaping, parking lots, fences, lighting
systems, and sprinkler systems, that have limited lives and therefore are depreciable.
Low-cost items Items that provide years of service at a relatively low unit cost, such as hammers,
paperweights, and drills.
Obsolescence Decline in usefulness of an asset brought about by inventions and technological progress.
Physical deterioration Results from use of the asset—wear and tear—and the action of the elements.
Plant and equipment A shorter title for property, plant, and equipment; also called plant assets. Included
are land and manufactured or constructed assets such as buildings, machinery, vehicles, and furniture.
Rate of return on operating assets Net operating income/Operating assets. This ratio helps
management determine how effectively it used assets to produce a profit.
Revenue expenditures Expenditures (on a plant asset) that are immediately expensed.

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