Exam 3: Ch 9 Plant Assets
what two categories do you divide spending on plant assets after acquisition?
Capital and revenue expenditures
Factors in Computing Depreciation - Depreciation of a plant asset is based on three main factors:
Capitalized cost Estimated useful life Estimated residual value
depreciable cost
Cost minus estimated residual value
MACRS is not acceptable for
GAAP
HOW DOES A BUSINESS MEASURE THE COST OF A PROPERTY, PLANT, AND EQUIPMENT?
Property, plant, and equipment (PP&E) are long-lived, tangible assets used in the operations of a business. Examples: Land Buildings Equipment Furniture Fixtures Automobiles
Record the purchase of land + expenses to get it ready on a note payable
Smart Touch Learning capitalizes the cost of the land at $62,000.
Three most commonly used depreciation methods:
Straight-line method Units-of-production method Double-declining-balance method
An asset is obsolete when
a newer asset can perform the job more efficiently.
The allocation of a plant asset's cost over its useful life is called
depreciation and follows the matching principle.
Capital expenditures
increase the asset's capacity or efficiency or extends the asset's useful life.
Landscaping is considered
land, not land improvements if it's done before building
Double-Declining Balance Method
An accelerated depreciation method expenses more of the asset's cost near the start of an asset's life and less at the end of its useful life.
WHAT IS DEPRECIATION, AND HOW IS IT COMPUTED?
Depreciation matches the expense against the revenue generated from using an asset.
Examples of furniture and fixtures include:
Desks Chairs File cabinets
The Internal Revenue Service (IRS) requires that companies use the
Modified Accelerated Cost Recovery System (MACRS) for tax purposes.
The cost of machinery and equipment includes:
Purchase price (less any discounts) Transportation charges Insurance while in transit Sales tax and other taxes Purchase commission Installation costs Testing costs (prior to use of the asset)
The cost of furniture and fixtures includes
Purchase price (less any discounts) +All other costs to ready the asset for its intended use
Example of measuring the cost of land
Smart Touch Learning purchases land on August 1, 2019, for $50,000 with a note payable. Other costs include $4,000 in delinquent property taxes, $2,000 in transfer taxes, $5,000 to remove an old building, and a $1,000 survey fee.
Record the improvement of the land after purchase for fence, paving, lighting, signs
Smart Touch Learning then pays $20,000 for fences, paving, lighting, and signs on August 15, 2019:
Smart Touch Learning used the truck purchased on January 1, 2019, for two full years. The truck cost $41,000, had a $1,000 residual value and a 5 year life.
The remaining depreciable book value (cost less accumulated depreciation) is $25,000 ($41,000 - $16,000).
Units-of-Production Method
The units-of-production method allocates a varying amount of depreciation each year based on the asset's usage.
The cost of land does not include:
These separate plant assets are called land improvements and, unlike land, are subject to depreciation.
would this extend the life of the asset?
Yes - capitalize as cost No-expenditure
The straight-line method
allocates an equal amount of depreciation to each year and is computed as follows:
The double-declining-balance method multiplies
an asset's decreasing book value by a constant percentage that is twice the straight-line depreciation rate.
revenue expenditures are
an expenditure that does not increase the capacity or efficiency of an asset or extend useful life
When a plant asset's usage varies by year, the units-of-production method
better matches expenses with revenues.
After an asset is up and running, the company no longer
capitalizes the cost of insurance, taxes, repairs or maintenance to the equipment account - they become expenses
book value =
cost - accumulated depreciation
The book value of the asset
cost minus accumulated depreciation, is reflected on the balance sheet.
Land improvements are unlike land and are subject to
depreciation
Land improvements is subject to
depreciation
Smart Touch Learning paid $500 cash to replace tires on the truck. This expenditure
does not extend the useful life of the truck or increase its efficiency.
units of production method, the date
does not matter
The modified half-month convention is used for assets purchased
during the month
As the asset is used, the business may change its
estimated useful life or estimated residual value.
Actual cost of land
every cost that comes before excavation for the new building
Revenue expenditures are
expenses incurred to maintain the asset in working order.
Spending $3,000 to rebuild the engine on a five-year-old truck is an example of
extraordinary repair because it extends the asset's life past the normal expected life.
The cost of land does not include
fencing, paving, sprinklers, lighting, signs = land improvements
A plant asset is recorded at
historical cost—the amount paid for the asset.
Estimated useful life
how long the company expects it will use the asset.
Lump sum purchase example
land + building - for accounting purposes must identify the cost of each asset purchased
do you capitalize the cost to repair a machine after it is in use?
no repairs and maintenance
Prior years are
not restated
Some assets may become
obsolete before they wear out.
When a business purchases an asset during the year (other than January 1), it should record depreciation for
only the portion of the year that the asset was used in the operations of the business
what are the attributes of a fixed asset?
physical existence used in normal business operations not for sale in ordinary course of business
Plant assets are different from other assets because
plant assets are long-term (lasting several years).
The actual cost of a plant asset is
purchase price + taxes + purchase commissions + all other amounts paid to ready the asset for its intended use
If this happens, the business must
recalculate depreciation expense.
Current year and future depreciation expense are
recalculated
Includes extraordinary repairs, which are
repairs that extend the asset's useful life
Under MACRS, assets are divided into
specific classes such as 3-year, 5-year, 7-year, and 39-year property.
using Double-Declining Balance Method, do not
subtract salvage value on the front end (in the beginning), it will come in last and final year.
Capitalized means
that an asset account was debited (increased) because the company acquired an asset.
Do not record depreciation in the purchase month if the asset was purchased after
the 15th.
Record depreciation for the entire month if the asset was purchased on or before
the 15th.
The total cost paid is divided among
the assets according to their relative fair market values. This is called the relative-market-value method.
If you are constructing a building, architectural fees, building permits, contractor charges and material/labor costs are considered
the cost of the building
If you are purchasing an existing building, purchase price & costs to renovate are considered
the costs of the building
using straight line, you must always look at
the date!!!
The main accelerated method of depreciation is
the double-declining-balance method.
Straight-Line Method Depreciation expense is reported on
the income statement.
The IRS specifies
the life of the asset Residual value ignored
The actual cost is
the purchase price plus taxes, commissions, and other amounts paid to get the asset ready for its intended use.
The cost of a plant asset is allocated to an expense over
the years that the asset is expected to be used.
This follows the cost principle, which states that acquired assets and services should be recorded at
their actual costs.
Lump sum cost paid is divided among the assets according to
their relative market
revenue expenditures are debited
to an expense account and are on the income statement
Land and land improvements are
two separate assets
All assets, except land,
wear out as they are used.
Lump sum purchase
when a single price is paid for several assets (aka basket purchase)
Estimated residual value
which is the expected value of a depreciable asset at the end of its useful life.
remember, units of production does not consider
years in its formula, thus, that calculation remains the same
do you capitalize the cost installation costs?
yes
do you capitalize the cost of insurance while in transit?
yes
do you capitalize the cost of sales tax and shipping during purchase?
yes
do you capitalize the cost to purchase?
yes!
