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Plant Assets

Plant Assets

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Plant Assets

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  1. Plant Assets 15 Plant assets are also know as Property, plant & equipment • Learning Objectives • Account for the acquisition cost of Plant Assets • Expense Plant Assets by allocating to fiscal periods which benefited from their use • Account for repairs, maintenance and improvements to Plant Assets • Account for disposal of Plant Assets • Analysis: Compute and explain the asset turnover ratio

  2. Overview Plant asset subsidiary ledgers are separate records for each asset. Control Ledger Plant Assets Acct #180 The Subsidiary Ledgers must add up to the Control Ledger Balance Subsidiary Ledgers Plant Assets Forklift #180.23 Subsidiary example

  3. Overview The total cost and the date of acquisition are recorded in the subsidiary ledgers. Subsidiary ledgers must add up to the total in the Control ledger for Plant Assets Subsidiary Ledgers Plant Assets Forklift #180.23

  4. Objective 15.1: Account for the acquisition cost of Plant Assets The Cost Concept guides the initial valuation of plant assets purchased with cash. O15.1

  5. Cost of Plant Assets • Plant asset values should include any reasonable and necessary costs incurred to bring plant assets to the operating location and into an operating condition including: • Shipping and insurance in transit costs • Costs to install, condition and assemble for intended use Example

  6. Example –Cash purchase • Western Excavators purchased a used dump truck with the following costs: • Purchase price $12,000 • Shipping 1,000 • Reconditioning 3,400 • Total costs of acquisition $16,400 O15.1

  7. Example –Cash purchase The journal entry to record the purchase: O15.1

  8. Lump sum purchase When several types of assets such as land, building and equipment are purchased for a single amount, the value assigned to each asset type must be determined. O15.1

  9. Lump sum purchase To determine the value to be assigned to each type of asset: The Cost Concept controls the total cost The Objectivity Concept controls the proper allocation Example O15.1

  10. Lump sum purchase Western Excavators purchased a new operating facility including land, land improvements, building and equipment. The total purchase price including related costs was $2,650,000. An appraisal was completed at the time of purchase as follows: O15.1

  11. Lump sum purchase 700,000/2,800,00 = 25% 25% x $2,650,000 = $662,500 The percentage of the total appraised value that each type of asset represents is multiplied times the total cost to determine the recorded value assigned. O15.1

  12. Lump sum purchase The journal entry to record the lump sum purchase: O15.1

  13. Objective 15.2: Expense Plant Assets by allocating to fiscal periods which benefited from their use To allocate asset cost, the following information is necessary: Acquisition Cost Salvage Value Useful Life O15.2

  14. Depreciation Methods Straight Line Units of Production Double Declining Balance MACRS O15.2

  15. Straight Line Annual Depreciation = Cost – Salvage Value Useful life (in years) O15.2

  16. Straight Line Annual Depreciation = Cost – Salvage Value Useful life (in years) Depreciable Amount Example: Forklift cost $50,000 Salvage value $10,000 Useful life 8 years (50,000 - $10,000) = $40,000/8 years = $5,000 annual depreciation O15.2

  17. Straight LineExample Depreciation Schedule Ending Salvage Value O15.2

  18. Units of Production Depreciation per unit of use= Cost – Salvage Value Units of Production O15.2

  19. Units of Production Depreciation per unit of use= Cost – Salvage Value Units of Production Depreciable Amount Example: Forklift cost $50,000 Salvage value $10,000 Useful life 20,000 hours (50,000 - $10,000) = $40,000/20,000 = $2 per hour of use 1st year’s use 1500 hours x $2 = $3,000 1st year depreciation O15.2

  20. Units of ProductionExample Depreciation Schedule No usage means no depreciation O15.2

  21. Double Declining Balance Annual depreciation = 2 x Straight line rate x Beginning of year book value O15.2

  22. Double Declining Balance Annual depreciation = 2 x Straight line rate x Beginning of year book value Example: Useful life = 8 years Straight line % = 1/8 = 12.5% Double the rate 2 x 12.5% = 25% Double Straight Line rate O15.2

  23. 1st year Double Declining Balance Annual depreciation = 2 x Straight line rate x Beginning of year book value Ignore Salvage value until end Example: Forklift cost $50,000 Salvage value $10,000 Useful life 8 years 1 / 8 =12.5% x 2 = 25% 1st year depreciation = 25% x $50,000 = $12,500 O15.2

  24. 2nd year Double Declining Balance Annual depreciation = 2 x Straight line rate x Beginning of year book value Book value has declined Example: 2nd year depreciation = 25% x ($50,000-$12,500) = $37,500 25% x $37,500 = $9,375 2nd year depreciation O15.2

  25. Double Declining BalanceExample Depreciation Schedule Force this amount so book value = salvage value O15.2

  26. DDB method can help smooth out the total costs of assets Total cost of ownership Total $ Repair and Maint. Expense Depreciation Expense Yr1 Yr3 Yr2 Yr4 Yr5 Low maintenance and repair expense in the early years and high maintenance and repair expense in the later years O15.2

  27. MACRS Find class of asset Use IRS provided tables to determine annual depreciation based on class life of asset O15.2

  28. MACRS MACRS doesn’t consider salvage value Example: 2nd year depreciation for 5 year class asset is 32% x $50,000 = $16,000 O15.2

  29. Objective 15.3: Account for repairs, maintenance and improvements to Plant Assets ? Does the expenditure extend the useful life of the asset? Does the benefit of the expenditure extend beyond the current fiscal period? 15.3

  30. Ordinary repairs, betterments & extraordinary repairs Ordinary maintenance and repairs Betterments improve asset’s efficiency and capacity Extraordinary repairs extend the asset’s useful life Benefits future periods Revenue Expenditures Capital Expenditures 15.3

  31. Ordinary repairs Ordinary maintenance and repairs are expenditures necessary to keep assets in normal operating condition. They are debited to an expense account Example: $675 for maintenance and repairs on trucks is journalized below Revenue expenditure 15.3

  32. Betterments Betterments expenditures benefit future periods by making assets more efficient or functional. They don’t necessarily extend the useful life. They are debited to the asset account Example: $2,000 for adding heavy duty suspension to a truck is journalized below Capital expenditure 15.3

  33. Extraordinary Repairs Extraordinary repair expenditures benefit future periods by making assets last longer. They extend the useful life of the asset. They are debited to the asset account Example: $3,500 for rebuilding a truck engine is journalized below Capital expenditure 15.3

  34. Betterments -example Example: After the third year of use, $2000 for adding heavy duty suspension to a truck is debited to the asset account. The revised depreciation schedule is shown below: 15.3

  35. Extraordinary repair -example Example: After the third year of use, $3,500 for rebuilding truck engine is debited to the asset account. The revised depreciation schedule is shown below: 15.3

  36. Objective 15.4: Account for disposal of Plant Assets • Plant Assets are disposed of in several ways: • They may be discarded as surplus • They can be sold • They can be exchanged or traded for other assets 15.4

  37. Discarding a plant asset If a plant asset is discarded when it no longer has any market or functional value, asset values and accumulated depreciation must be removed from the accounts. Example: A fully depreciated computer (book value is $0) is sent to recycling. The journal entry is shown below: 15.4

  38. Sale of plant asset for cash • When a plant asset is sold for cash, asset values and accumulated depreciation must be removed from the accounts, and: • If the book value = cash received, no gain or loss is recorded • If book value > cash received, loss is recorded • If book value < cash received, gain is recorded 15.4

  39. Cash received > book value Example: A delivery truck with recorded acquisition cost of $28,000 and accumulated depreciation of $20,000 is sold for $10,000. The journal entry is shown below: The disposal results in additional *revenue for the period *technically it should be called a “gain” 15.4

  40. Cash received < book value Example: A delivery truck with recorded acquisition cost of $28,000 and accumulated depreciation of $20,000 is sold $5,000. The journal entry is shown below: The disposal results in additional *expense for the period *technically it should be called a “loss” 15.4

  41. RULES: • The recorded cost & accumulated depreciation of the asset traded in must be removed from the accounts • If no cash is received in the exchange, a gain on disposal is never recognized. The value recorded for the new asset is reduced to balance • The recorded value of the asset received cannot exceed its’ fair market value • If book value + cash paid is more than the fair market value of the asset received, a loss is recorded. Exchanging a plant asset 15.4

  42. Example: A delivery truck with a recorded cost of $32,000 and accumulated depreciation of $27,000 is traded in with $30,000 cash for a new delivery truck with a fair market value of $38,000 Exchanging a plant asset New truck Old truck Book value = $32,000 - $27,000 = $5,000 + $30,000 cash = $35,000 or less than the market value of the new truck, therefore, the recorded value must be reduced to $35,000 to balance the transaction. (No gain can be recorded) 15.4

  43. Example: A delivery truck with a recorded cost of $32,000 and accumulated depreciation of $27,000 is traded in with $30,000 cash for a new delivery truck with a fair market value of $33,000 Exchanging a plant asset New truck Old truck Book value = $32,000 - $27,000 = $5,000 + $30,000 cash = $35,000 or more than the market value of the new truck, therefore, a loss must be recorded. 15.4

  44. Objective 15.5: Analysis: Compute and explain the asset turnover ratio Relates sales to average total assets 15.5

  45. Total Asset Turnover Ratio The higher the turnover ratio, the more effective management is in utilizing assets to generate sales Total asset turnover ratio is: Net Sales / Average total assets Sales Average Assets 15.5

  46. Total asset turnover -Example 15.5

  47. End Unit 15