Plant Asset

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Life University

Chapter 4

Chapter Sections
1. 2. 3. 4. 5. 6. 7. Cost of plant assets Lump sum purchase Capital expenditure and Revenue expenditure Depreciation method Partial year Depreciation Revise estimate of salvage value and useful life Disposal of plant assets

Long Term Assets
• Plant Assets • Natural Resource • Intangible Assets

Plant Assets
• • • • Possess physical substance. Used in operation and not for resale. Long-term in nature Examples:  Land  Land Improvement  Building  Equipment  Furniture  Tools………

Land
• Cost includes:
• • • • • the purchase price; title and attorney’s fees; brokers’ commissions; costs of grading, filling, draining, and clearing; assumption of any liens, mortgages, or encumbrances on the property.

• Cost of land is determined by
• All costs to acquire land • And all cost to ready it for use

• No Depreciation

Example
FedEx signs a $300,000 note payable to purchase 20 acres of land for a new shipping site. FedEx also pays in cash – $10,000 for real estate commission, – $8,000 of back property tax, – $5,000 for removal of an old building, – $1,000 survey fee, and – $260,000 to pave the parking lot.

• Purchase price…………………………………… • Related cost     …………………………………………… …………………………………………… …………………………………………… ……………………………………………

• Total cost of land………………………………..

General Journal
Date Account Title and Explanation PR Debit Credit

Building
Purchased • • • • • • • Price Brokerage fee Tax Title fee Attorney fee Repairing Renovation Constructed • Material • Labor • Overhead – – – – Heat Lighting Power Depreciation on machine used – Design – Permits – Insurance during construction

Machinery and Equipment
The costs include:
– Purchase price – Tax – Transportation – Insurance while in transit – Installing, Testing…

The cost = all cost for purchasing and preparing for intended use

Lump Sum Purchase
Plant assets are purchased in group with a single transaction for a lump sum price: Example Cola company paid $90,000 cash to acquire land, land improvement and building. Appraised value:
 land = $30,000  land improvement = $10,000  Building = $60,000

Appraised value
Land Land improvement Building Total 30,000 10,000 60,000 100,000

%
……………………….? ……………………….? ……………………….?

Apportioned cost
……………………….? ……………………….? ……………………….?

1. Cost of building =……………………….. ? 2. Cost of land=……………………………….? 3. Cost of land improvement=…………?

General Journal
Date Account Title and Explanation PR Debit Credit

Capital Expenditure and Revenue Expenditure
• • • • Ordinary repair (Revenue expenditure) Extraordinary repair (Capital expenditure) Betterment (Capital expenditure) Minor capital expenditure

Depreciation Method
4 Methods
1. Straight line method 2. Units of production method 3. Double Declining balance method 4. Sum of year digit method

Example
• • • • • Purchase of a machine = $10,000 (31 Dec 98) Estimated salvage value = $1000 Estimated useful life = 5 years Estimated production capacity = 36,000 units Compute Depreciation expense for each year Record depreciation for each year Prepare partial B/S

Straight Line Method
Depreciation =
�������� −�������������� ���������� ������������ �������� ………………………… ………………………….

Depreciation =

Unit of Production Method
Depreciation per unit =
�������� −�������������� ���������� ���������� ���� ��������������������

Depreciation per unit =
Units produced • Year 99 = 7000 units • Year 2000 = 8000 units • Year 2001 = 9000 units • Year 2002= 7000 units • Year 2003 = 5000 units

………………………… ………………………….

Double Declining Method
• Step 1 :
Straight line rate =
100% ������������ ��������

• Step 2 : Double rate = straight line rate x 2 • Step 3 : Depreciation = double rate x BB BV Beginning Balance of Book Value for each year

Book Value = Cost – Accumulated Depreciation

Double Declining Method
• Step 1 :
Straight line rate =
…………….. ………….

• Step 2 :...
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