Plant Property & Equipment

Definition
Long lived assets
Used in the operation of business
Not intended for re-sale
Examples: Land, building, machinery etc
Difference between inventory & PPE
A cargo van in the showroom of an automobile
dealer is inventory
When this same vehicle is sold to furniture store
for use in making deliveries to customer, it
becomes a unit of PPE
Fixed Asset
All types of PPE
Old name of PPE
Major categories of PPE
Tangible plant assets
Plant property(depreciation is charged)
Land
Intangible assets
Patents
Copyright
Trademark
Franchises
Goodwill
Note: Accounts receivable and prepaid are not
included in this category despite of their lacking
of physical existence.
Natural Resources
Site for the purpose of extracting or removing
some valuable resources.
Oil, minerals etc
Determining the cost of PPE
All expenditures reasonable & necessary to
acquire asset
Placing it in the condition for use in operating
business
Cash or Accounts payable + expenditure
(freight , insurance while in transit, installation,
trail runs etc)
Interest shall be treated as:
If on installment
If the company takes a loan to construct the
asset
Practice question
A factory in Minneapolis orders a machine from
San Francisco tool manufacturer at a list price of
$10,000, with terms 2/10, n/30. sales tax of
$588 must be paid, as well as freight charges of
$1,250. transportation from railroad station to
the factory costs $150, and installation labor
amounts to$400. Calculate the cost of the
machine to be entered in the Machinery account.
Solution
List price of machine $10,000
Less: cash discount(2%*$10,000) 200
Net cash price 9,800
Sales tax 588
Freight 1,250
Transportation from railroad station to factory 150
Installation labor 400
Cost of machine $12,188
Reason for capitalizing all incidental costs
Matching concept
Example: Land (legal fees, insuring the title,
taxes etc)
Apportionment of the lump sum purchase
Land and building must be treated as separate
accounts.
Capital expenditure and revenue
expenditure
Capital Expenditure
Any material expenditure that will benefit
several accounting periods is considered a
capital expenditure.
Capital expenditures are for the expansion of
plant assets.
Revenue expenditure
Any expenditure that will benefit only the
current period or that is not material in amount
is treated as revenue expenditure.
Revenue expenditures are for ordinary repairs,
maintenance, fuel.
Effect of errors in distinguishing between
capital and revenue expenditure
Capital expenditure is recorded by debiting an
asset account thus no immediate effect upon net
income.
Depreciation however will be expensed in future
periods.
Effect of errors in distinguishing between
capital and revenue expenditure
Revenue expenditure is recorded by debiting
expense account .
Immediate reduction from current years net
income.
Example
Delivery truck repairs erroneously recorded to
asset account.
Understated net income
Overstated asset account
Capital budgeting
Process of planning and evaluating proposals for
capital expenditure is called capital budgeting
Examples:
Whether to build new factories or automate old
ones?
Buy competing businesses or develop new
plants?
Depreciation
Allocating the cost of tangible plant and
equipment to expense in the periods in which
services are received from the asset. (matching
principle)
 Depreciation

Cost of a plant
asset (a stream
of services) As the
services are
received
General Entry
Date Particulars P/R DR. CR.
Depreciation Expense XXX
Allowance for Depreciation XXX
 The credit portion removes that portion of
assets cost estimated to have been used up
during the current period.
The debit portion of the entry allocates this
expired cost to expense.
Book Value
Accumulated depreciation is contra assets
account.
Book value represents the portion of assets cost
that remains to be allocated to expense.
Plant assets are shown in the balance sheet at
their book value (carrying value).
Book Value= Cost Related Accumulated Depreciation
Causes of Depreciation
Physical Deterioration
Obsolescence
Methods of Depreciation
Example on page 462
On January 2, S&G Wholesale Grocery acquires
a new delivery truck. The data and estimates
needed for the computation of the annual
depreciation expense are:
Cost $17,000
Estimated Residual value 2,000
Estimated useful life 5 years(or 10,000 miles)
Straight line method
Cost Residual Value
Years of useful life
17000 2000
5
=$3000
 Depreciation Schedule: Straight Line Method
Year Computation Depreciation Accumulated Book Value
Expense Depreciation
17,000

1 15000*1/5 3000 3000 14,000

2 15000*1/5 3000 6000 11,000
3 15000*1/5 3000 9000 8000
4 15000*1/5 3000 12,000 5000
5 15000*1/5 3000 15,000 2000
Total 15,000
Units Of Output Method
Cost Residual value
Estimated units of output (Miles)

=Depreciation per unit of output

=17,000 2000
100,000 miles
=$.15 depreciation per mile
Accelerated Depreciation Methods
Fixed percentage of declining balance method
Sum of years digit method
 Fixed Percentage Of Declining Balance
Method
Remaining book value * accelerated depreciation
rate

Accelerated rate is twice the straight-line rate

mostly.
Example
$17,000 delivery truck. The estimated life is
5years
Solution
Straight line rate = 1/5 =20%
Doubling this rate =20%*2=40%
Year Computation Depreciation Accumulated Book value
expense depreciation
17,000
1 17,000*40% 6,800 6,800 10,200
2 10,200*40% 4,080 10,800 6,120
3 6,120*40% 2,448 13,328 3,672
4 3,672*40% 1,469 14,797 2,203
5 2,203*40% 203 15,000 2,000
Total
Sum Of The Year Digit Method