Acct 3

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Plant assets

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tangible assets used in a company's operations that have a useful life of more than one accounting period (usually one year).

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plant assets are recorded

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at cost when acquired

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Cost includes

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all normal and reasonable expenditures necessary to get an asset in place and ready for its intended use.

The amount that is recorded as an asset is said to be “capitalized” (means we put it in the assets,)

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Land—has an unlimited life and is not usually used up over time. Cost includes:

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1. The total amount paid for the land; real estate commissions; title
insurance fees, legal fees, and any accrued property taxes paid by the
purchaser.
2. Payments for surveying, clearing, grading, and draining, and government assessments (incurred at the time or purchase or later) for public roadways, sewers, and sidewalks.
3. Cost of removal of any existing structures (less proceeds from sale of salvaged material). Land is not depreciated.

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Land Improvements

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costs that increase the usefulness of the land.

1. Examples include parking lot surfaces, driveways, fences, and lighting systems, all of which have limited useful lives.
2. These costs are charged to a separate “Land Improvements” account so that their costs can be allocated to the periods they benefit.

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Buildings

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1. If purchased, cost usually includes its purchase price, brokerage fees, taxes, title and attorney fees, and all expenditures to make it ready for its intended use (any necessary repairs or renovations such as wiring, lighting, flooring and wall coverings).
2. If constructed for own use, cost includes materials and labor plus other costs to construct the asset and make it ready for use (such as design fees and lighting).

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Machinery and Equipment

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Costs include all normal and necessary expenditures to purchase and prepare for intended use, including purchase price, taxes, transportation charges, insurance while in transit, as well as installation, assembly and testing of the machinery and equipment.

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Depreciation

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The process of assigning the cost of a plant asset to expense in the accounting periods benefiting from its use.

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Factors in Computing Depreciation

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Cost, Salvage value, and Useful life

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Cost for depreciation

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consists of all necessary and reasonable expenditures to acquire the plant asset and to prepare it for its intended use.

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Salvage value

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an estimate of the asset's value at the end of its benefit period - also called residual value or scrap value (what we expect to sell it for when we are finished with it).

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Useful life

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length of time the asset is expected to be productivity used in a company's operations (also called service life).(estimate) Factors affecting useful (how long do you plan to legit use it)life

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Useful life includes

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Wear, inadequacy and obsolescence

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Inadequacy

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the capacity of plant assets that is unable to meet the company's growing productive demands.

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Obsolescence

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refers to a plant asset that is no longer useful in producing goods or services with a competitive advantage because of new inventions and improvements.

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Depreciation methods are used to

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allocate a plant asset’s cost over the accounting periods in its useful life. They are NOT based on the market values of the asset during its life.

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Straight-line method

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charges the same amount to expense for each period of the asset’s useful life; most frequently used method

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Straight-line method equation

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Cost minus salvage value (equals the depreciable cost) divided by the useful life equals annual depreciation expense.

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Double-declining-balance method

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an accelerated depreciation method that yields larger depreciation expense during the early years of an asset's life and less depreciation in the later years

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Double-declining-balance method equation

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Multiply the asset’s beginning of the period book value by a twice the straight-line rate. (Do not consider salvage value!)
b. For example, if the useful life is ten years, then the straight line rate would be 1/10 or 10%. The annual rate under double declining balance would be twice that 2/10 or 20%.
d. Do not depreciate such that the book value goes below estimated salvage value.

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Comparing depreciation methods

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while the amount of depreciation expense per period differs for different methods, total depreciation expense is the same over a given asset’s life.

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Depreciation for tax reporting—differences between financial and tax accounting systems are normal and expected.

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a. Most companies use accelerated depreciation in computing taxable income because it postpones its tax payments by charging higher depreciation expense in the early years and lower amounts in the later years.
b. Federal income tax law rules for depreciating assets are called the

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Partial Year Depreciation

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When an asset is purchased (or disposed of) at a time other than the beginning or end of an accounting period, depreciation is recorded for the part of the year the asset was in use. For example, if an asset is purchased on April 1, the first year’s depreciation would only reflect 9/12 or 75% of the annual amount.

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Change in Estimates for Depreciation

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Depreciation is based on estimates of salvage value and useful life; later, new information may indicate these estimates are inaccurate

1. Use the new estimate to compute depreciation for current and future periods by revising the depreciation expense computation by spreading the cost yet to be depreciated over the remaining useful life.
2. The revision is referred to as a change in an accounting estimate and is reflected in current and future financial statements. Do not adjust prior years’ statements.

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Additional Expenditures

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In recording additional expenditures (after the original purchase) for an asset’s operation, maintenance, repair, and/or improvement, the company must decide whether to capitalize (that is, debit an asset account) or expense them.

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Types of Additional Expenditures

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revenue expenditures

capital expenditures

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revenue expenditures

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income statement expenditures) are additional costs of plant assets that do not materially increase the asset's life or productive capabilities; they are recorded as expenses and reported on the income statement. Example:
• Ordinary repairs which are expenditures to keep an asset in good operating condition.

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capital expenditures

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balance sheet expenditures) are additional costs of plant assets that provide benefits beyond the current period; they are debited to asset accounts and reported on the balance sheet. Examples:
• Betterments (also called improvements) which are expenditures that make a plant asset more efficient or productive.
• Extraordinary repairs are expenditures extending the asset’s useful life beyond its original estimate.