Chapter 10
Plant Assets
Chapter Summary
Plant assets are tangible resources that are used in the
operation of business and are not intended for sale to
customers.
Examples of plant assets include: land, buildings, Equipment,
delivery trucks, buses, etc.
Plant assets are recorded at their acquisition cost in accordance
with the cost principle.
Cost consists of all expenditures necessary to acquire the asset
and make it ready for its intended use. The cost includes
purchase price, freight costs, installation costs, and testing
costs.
Depreciation:
Depreciation is the process of allocating to expense the cost of a
plant asset over its useful life in a rational and systematic
manner.
Cost allocation provides the proper matching of expenses with
revenues in accordance with the matching principle.
Factors in Computing Depreciation:
Factors that affect the computation of depreciation expense
are:
1. Cost: all expenditures necessary to acquire the asset and
make it ready for its intended use.
2. Useful life: an estimate of the expected productive life of the
asset.
3. Salvage value: an estimate of the asset’s value at the end of
its useful life.
1
Depreciation Methods:
Depreciation expense is generally computed using one of the
following methods:
1. Straight-line.
2. Declining-balance.
3. Units-of-activity.
The following example will be used in computing depreciation
expense under the different methods:
Example:
On January 1, 2010, Mark Company purchased a small
delivery truck. The following information relates to that truck:
Cost $13,000
Expected salvage value 1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000
Straight-line Method:
Under the straight-line method:
1. Depreciation expense is the same for each year of the asset’s
useful life.
2. Depreciation is measured solely by the passage of time.
3. Depreciation expense is computed using the following
formula:
Depreciation Expense = Cost – Salvage value
Useful life in years
Using the information in the truck example:
Depreciation expense each year = $13,000 - $1,000 = $2,400
5 years
2
Declining-Balance Method:
The declining-balance method produces a decreasing annual
depreciation expense over the useful life of the asset.
The calculation of periodic depreciation is based on a declining
book value (cost of the asset less accumulated depreciation)
The book value for the first year is the cost of the asset since
accumulated depreciation has a zero balance at the beginning
of the first year of the asset’s useful life.
The following formula is used for computing depreciation
expense in each year:
Depreciation expense = Book value at beginning of year ×
Declining-balance rate
A common application of the declining-balance method is the
double-declining-balance method in which the depreciation
rate is double the straight-line rate.
Unlike other depreciation methods, salvage value is ignored in
determining the amount to which the declining-balance rate is
applied. The salvage value is considered only in determining
depreciation expense in the last year as illustrated later.
Assuming that Mark Company uses the double-declining
balance method the computations proceeds as follows:
Straight-line Rate = 100% = 100% = 20%
Useful life 5 years
Double-declining balance Rate = 20% × 2 = 40%
The depreciation Schedule over the 5-year period is
shown below:
3
(1) (2) (3) (4)
Year Cost Annual Depreciation Expense Accumulated Book
= Book Value Beginning of Depreciation
Year × Depreciation Rate Old (3) + (2)
Value
(1) – (3)
First $13,000 $13,000 × 40% = $5,200 $5,200 $7,800
Second $13,000 $7,800 × 40% = $3,120 8,320 4,680
Third $13,000 $4,680 × 40% = $1,872 10,192 2,808
Fourth $13,000 2,808 × 40% = $1,123 11,315 1,685
Fifth $13,000 $1,685 - $1,000 salvage = $685 12,000 1,000
Units-of-Activity Method:
Under the units-of-activity method, the useful life of the asset is
expressed in terms of the total units of production or expected
use from the asset, rather than as a time period.
Depreciation expense is computed as follows:
1. Depreciation cost Per unit = Cost – Salvage Value
Useful life in units of activity
2. Depreciation expense any year= Depreciation cost per unit ×
Actual units of activity
during the year
Using the information in the truck example, compute
depreciation expense in the first year assuming that total miles
used in the first year amounted to 15,000 miles.
Depreciation cost per mile = $13,000 - $1,000 = $0.12 per mile
100,000 miles
Depreciation expense first year = 15,000 miles × $0.12 = $1,800
