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Chapter 8


Noncurrent tangible assets. Acquired for use in the operation of the business. The accounts that make up plant assets appear on the balance sheet after current assets and long-term investments. Other titles for plant assets are fixed assets;property and equipment; and property,plant,and equipment. Plant assets should be expected to last for more than one accounting period. Plant assets are usually depreciable property except for land. Examples:land,buildings,office machines……


Accounting for plant assets
Acquisition Disposal(discard,sell,exchange) Depreciation


Valuation of plant assets at acquisition
For one piece: reasonable and necessary expenditure For lump-sum purchase:allocating to the various assets purchased according their fair market value. Plant assets can be acquired with long-term notes payable. (In such case, assets are recorded at

the present value of the consideration exchanged)


Asset Acquisition:one piece
Asset price



Reasonable and necessary costs . . .

. . . for getting the asset to the desired location.

. . . for getting the asset ready for use.

Determining Cost
On May 4, Heat Co., an Ohio maker of stoves, buys a new machine from a Texas company. The new machine has a price of $52,000. Sales tax was computed at 8%. Heat Co. pays $500 shipping cost to get the machine to Ohio. After the machine arrives, set-up costs of $1,300 are incurred, along with $4,000 in testing costs. Compute the cost of Heat Co.'s new machine.

Determining Cost
List price Sa le s ta x @ 8% Tra nsporta tion cost Se t-up Te sting Tota l cost to He a t Co.
Date Description

$ 52,000 4,160 500 1,300 4,000 $ 61,960
Debit Credit

May 4 New Machine Cash

61,960 61,960


Lump-Sum (or Basket) Purchases of Assets
Basket Purchase
The purchase of two or more assets acquired together at a single price.

Relative Market Valuation
A way of allocating a basket purchase price to the individual assets acquired based on their respective market values.(example:page 166)

Acquisition of plant assets with note payable
In such situation, in order to be in accordance with the cost principle, the recorded cost of an asset purchased on credit is based on one of the following, whichever is more objective and reliable: (1) the cash equivalent price (market value) and (2) the present value of the future cash payments required by the debt agreement discounted at the prevailing (market) interest rate for that type of debt.

Acquisition of plant assets with note payable
Example: on May 1,2003,Fesler, Inc. purchased equipment paying $3000 down and issuing a note payable. The note required four annual payments of $2500 with the first payment due on May 1, 2004. The note is noninterest-bearing. The prevailing market rate of interest on notes of this kind is 12%. Prepare the required journal entries on May 1, 2003(year-end). The useful life of the equipment was estimated 10 years and no salvage value.

Acquisition of plant assets with note payable
Annuity payment
PVA$1 ,n=4, I=12% PV of note(rounded) Down payment Cost of equipment

3.03735 $7593 3000 $10593

5/1 Equipment 10593 Discount on Note payable 2407 Cash 3000 Notes payable 10000 12/31 Interest expense 607 Discount on Note payable 607 ($7593*12%*8/12=$607) Depreciation exp. 706 Accu. Depr. 706 ($10593*1/10*8/12=706)


Disposal of Plant Assets
Discard Sell for monetary consideration Exchange for noncash assets


Accounting for Disposal of Plant Assets: discard
Fixtures cost: Accumulated depreciation: Book value Accumulated Depreciation Loss on Disposal Store Fixtures To dispose of store fixtures $4,000 $3,000 $1,000 3,000 1,000 4,000

Selling a Plant Asset
For book value: no gain or loss(example 1) Above book value: a gain is recorded(example 2) Below book value:a loss is recorded(example 3)


For students
On September 30, 2005, Evans Map Company sells a machine that originally cost $100,000 for $60,000 cash. The machine was placed in service on January 1, 2000. It has been depreciated using the straight-line method with an estimated salvage value of $20,000 and an estimated useful life of 10 years. Let's answer the following questions.

The amount of depreciation recorded on September 30, 2005, to bring depreciation up to date is:
a. b. c. d. $8,000. $6,000. Annual Depreciation: $4,000. ($100,000- $20,000) ÷ 10 Yrs = $8,000 $2,000.
Depreciation to Sept. 30: 9/12 × $8,000 = $6,000

After updating the depreciation, the machine's book value on September 30, 2005, is:
a. b. c. d. $54,000. $46,000. $40,000. $60,000.
Cost Accumulated Depreciation: (5 yrs. ? $8,000) + $6,000 = Book Value $ 100,000 46,000 $ 54,000


The machine's sale resulted in:
a. b. c. d. a gain of $6,000. a gain of $4,000. a loss of $6,000. a loss of $4,000.

Cost Accum. Depr. Book value Cash received Gain

$ $ $

100,000 46,000 54,000 60,000 6,000

Prepare the journal entry to record the sale.
Date Description Description Debit Debit Credit Credit

Sept. 30 Cash Accumulated Depreciation Gain on Sale Machinery

60,000 46,000 6,000 100,000


Exchanges of Plant Assets
Types of Exchange Dissimilar assets Similar assets (cash received Similar assets (No cash received) Accounting Guidance Recognize gain and losses Recognize loss; partial gain Recognize loss; Defer gain Rationale Earnings process is complete Earnings process is partially complete Earnings process is not complete

Exchanges of similar Assets
Example : Land for land, truck for truck, etc. In this case but on-going. Losses should always be recorded according to Conservatism principle


Exchanges of similar Assets
Businesses often trade in their old plant assets for similar assets that are newer and more efficient. The list price of the new asset less the tradein allowed for the old asset equals the amount to be paid.


Exchanges of similar Assets
Assume that an old asset is exchanged for a similar new asset with a list price of $400 000. The old asset's fair market value is $140 000. (Trade in allowance) $400 000 List price -140 000 Trade in allowance $260 000 Amount paid

Similar Assets, Gain, Cash Paid
(Deferred gain) Gains are not recognized.(because the earning process is not complete.) The new asset's cost=the book value of the old asset + the amount paid(=the fair value of the new asset-deferred gain) Example 4(page 169)


Similar Assets, Gain, Cash Paid
(Deferred gain) Example 4 Old truck Cost Acc. Drepr. List price Fair market value

$300 000 180 000 400 000 140 000

Similar Assets, Gain, Cash Paid
(Deferred gain)
The entry would be; Truck (new) 380 000 Acc. Drepr 180 000 Truck (old) 300 000 Cash 260 000 Note: Fair market value = Trade-in allowance Cash paid: $400 000 (cost) – 140 000 = $260 000 The gain $20 000 is not recorded. (140 000-120 000)

Similar Assets, Gain, Cash Paid
(Deferred gain)
Land #1 BV FMV $80,000 90,000 FMV Land #2 $120,000

Gain = $10,000 deferred cash paid $15,000 To record:

Land #2 Land #1 Cash


(BV + cash) 80,000 15,000

Similar Assets (Deferred gain)
Davis company exchanges Ford cars for GM cars from Nertz company. Fair value of Ford cars: $ 160,000. Book value of Ford cars: $ 135,000 (Cost, $150,000; Accu. Depr, $ 15,000) Cash paid to Nertz: $ 10,000 Fair value of GM cars: ($160,000 + $ 10,000) =$ 170,000 Record the purchase in Davis' books.

Similar Assets (Deferred gain)
145,000 GM Cars Acc. Depr. (Ford) 15,000 Ford cars (old) Cash

150,000 10,000

( BV+cash paid=135000+10000=145000)

Similar Assets: loss; No boot (cash)
Losses are recognized. The new asset is recorded at the fair market value of the assets exchanged.


Similar Assets:loss; No boot (cash)
Example 5 Suppose in Ex.4 Fair market value (old): $90 000 The loss is $30 000. ($90 000-120 000) No fair market value (new truck); nor trade –in allowance; and no cash involved.

Similar Assets:loss; No boot (cash)
Example 5
The entry would be; Truck (new) 90 000 Acc. Drepr 180 000 Loss on Exchange of Plant Assets 30 000 Truck (old) 300 000


Similar Assets:loss; No boot (cash)
Truck #1 (You) Cost A/D BV FMV Loss = To record: $35,000 10,000 25,000 15,000 $10,000 Truck #2 FMV $20,000

A/D Loss Truck #2 Truck #1

10,000 10,000


Similar Assets:loss;cash paid
Losses are recognized The new asset is recorded at the fair market value of the asset exchanged plus cash paid .


Similar Assets:loss;cash paid
Truck #1 (You) Cost A/D BV FMV (#1) Loss = $2,000 FMV (#1) 6,000 $12,000 4,000 8,000 6,000 FMV Truck #2 $13,000

+ cash paid 7,000 Total 13,000


Similar Assets: loss; cash paid
To record: Truck #2 A/D (Accu. Dep) Loss Truck #1 Cash 13,000 4,000 2,000 12,000 7,000

Dissimilar Assets
For example: Sold a truck with a cost of $34,000, A/D of $23,000 for cash of $6,000 and a piece of land with a FMV of $9,000.
To record:

A/D Cash Land Truck Gain

23,000 6,000

34,000 4,000

Dissimilar Assets
Your truck for Land Cost A/D BV
To record:

$80,000 (10,000) 70,000 10,000 10,000


A/D Loss Land Truck

60,000 80,000

Capital Expenditures versus Revenue Expenditures
Does the expenditure increase capacity or efficiency or extend useful life?

Capital Expenditures: Record an asset

Expenses: Record an expense

Capital Expenditures versus Revenue Expenditures
Capital Expenditures
-Major additions -Betterments -Extraordinary repairs

Revenue expenditures Ordinary repairs


Major additions
Major additions to assets include such things as adding a new wing to a factory building or a new floor to an office building. Such expenditures should be debited to the appropriate asset accounts.


Betterments are capital expenditures that improve the quality or utility of the asset. For example, replacing marrow doors with wider,automatic doors to allow access by the handicapped . The cost and accumulated depreciation of the old doors, if available, should be removed from the accounts and the cost of the new doors should be added to the asset account.

Extraordinary repairs
Extraordinary repairs are capital expenditures that extend the useful life of the asset or increase its estimated salvage value. Journal entry of Extraordinary repairs is: accumulated depreciation-equipment *** cash *** Example: page 172


The allocation of the cost of a plant asset to expense in the periods in which services are received from the asset. Adjusting entry for depreciation: Depreciation expense Accumulated depreciation


Depreciation Expense Depreciation for the current year Income Statement

Accumulated Depreciation

Total depreciation to date of balance sheet

Balance Sheet


Factors In Computing Depreciation
1 .Cost 2. Useful life 3 .Salvage value


Straight-Line Method
Annual depreciation expense = Cost - estimated salvage value Estimated useful life

Units-of-Production Method
Step 1 Depreciation expense per unit of output = Cost - estimated salvage value Estimated total production Step 2 Depreciation expense for current year = Depreciation per unit of output


Actual output for current year

Accelerated Methods
Larger amounts charged early in the asset's life Lesser amounts as asset ages Including Double-Declining-Balance
Method and Sum-of-the-Years'-Digits Method


Double-Declining-Balance Method

Accelerated Depreciation Remaining = × Depreciation Expense Book Value Rate

The double-declining balance depreciation rate is 200% of the straight-line depreciation rate of 1/Useful Life.

Sum-of-the-Years'-Digits Method
Remaining Life in Annual Depreciation (Cost – Estimated Years = × Expense Savage Value) Sum-of-the-Years' Digits


Revision of Depreciation Rates
Determination of depreciation involves initial estimates (life, salvage value.) When these estimates are revised, we recompute depreciation. These revised depreciation expenses apply prospectively to the remaining life of asset These changes do not affect prior periods.



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