Property, Plant & Equipment

(Fixed Assets)

Extracted from slides prepared by:

C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Reeve Warren Duchac

LO 1

Nature of Fixed Assets

Fixed assets are long-term or relatively
permanent assets, such as equipment,
machinery, buildings, and land.
Other descriptive titles for fixed assets are
plant assets or property, plant, and
equipment.

LO 1

Nature of Fixed Assets

Fixed assets have the following
characteristics:
They exist physically and, thus, are tangible
assets.
They are owned and used by the company
in its normal operations.
They are not offered for sale as part of
normal operations.

LO 2

Depreciation
Over time, most fixed assets (equipment,
buildings, and land improvements) lose
their ability to provide services.
The periodic recording of the cost of fixed
assets as an expense is called
depreciation.

LO 2

Accounting for Depreciation

Depreciation can be caused by physical or
functional factors.
Physical depreciation factors include wear
and tear during use or from exposure to the
weather.
Functional depreciation factors include
obsolescence and changes in customer
needs that cause the asset to no longer
provide services for which it was intended.

LO 2

Factors in Computing Depreciation

3 factors determine the depreciation
expense for a fixed asset:
1. The assets initial cost
2. The assets expected useful life
3. The assets estimated residual value

LO 2

Factors in Computing Depreciation

The expected useful life of a fixed asset is
estimated at the time the asset is placed
into service.
The residual value of a fixed asset at the
end of its useful life is also estimated at the
time the asset is placed into service.

LO 2

Straight-Line Method
The straight-line method provides for the
same amount of depreciation expense for
each year of the assets useful life.
Annual
=
Depreciation

Cost Residual Value

Useful Life

LO 2

Straight-Line Method
Initial cost
Expected useful life
Estimated residual value

$24,000
5 years
$2,000

The annual straight-line depreciation of

$4,400 is computed below:
Cost Residual Value
Annual Depreciation =
Useful Life
$24,000 - $2,000
=
5 years
= $4,400

LO 2

Straight-Line Method

If the preceding equipment was purchased

and placed into service on October 1, the
depreciation for the first year of use would
be $1,100, computed as follows:
$4,400 x 3/12 = $1,100

LO 2

Reducing Balance Method

depreciation expense is based on a % of
the remaining book balance.
Depreciation

Depreciation rate (%) x

remaining book balance

LO 2

Reducing Balance Method

Initial cost
Expected useful life
Depreciation rate
Estimated residual value

$24,000
5 years
40%
$2,000

Depreciation = Depreciation rate X

(1st year)
(Cost Residual Value)
= 40% X ($24,000 - $2,000)

= $8,800
Book value after 1st year = $24,000 - $8,800 = 15,200

LO 2

Reducing Balance Method

Depreciation =
(2nd year)
=

Depreciation =
(3rd year)
=
Depreciation =
(4th year)
=
Depreciation =
(5th year)

40% X $15,200
$6,080
40% X ($15,200 6,080)
$3,648
40% X ($15,200 6,080 3,648)
$2,188.80
(After 4th year, book value = 3,283.20)
$3,283.20 - $2,000 = 1,283.20

(residual value)

Double Entry for Depreciation

Dr
Cr

LO 3

Depreciation (Expense)
Accumulated Depreciation (Asset contra)
Depreciation Expense

PPE/Fixed Asset
Equipment Bal c/f 24,000
24,000
24,000
Bal b/f

24,000

24,000

Acc. Depn - Fixed Asset

Bal c/f

Acc. Depn
8,800

8,800 Depn
8,800

8,800
8,800

Bal b/f

8,800

Book value after 1st year

= 24,000 8,800
= 15,200

LO 3

Double Entry for Depreciation (Contd.)

Depreciation Expense

PPE/Fixed Asset
Equipment Bal c/f 24,000
24,000

24,000
Bal b/f

24,000

24,000

Acc. Depn - Fixed Asset

Bal c/f

Acc. Depn
6,080

14,880 Bal b/f

Depn
14,880

8,800
6,080
14,880

Bal b/f 14,880

Book value after 2nd

year
= 24,000 14,880
= 9,120

LO 3

Double Entry for Depreciation (Contd.)

Depreciation Expense

PPE/Fixed Asset
Equipment Bal c/f 24,000
24,000

24,000
Bal b/f

24,000

24,000

Acc. Depn - Fixed Asset

Bal c/f

Acc. Depn
3,648

18,528 Bal b/f 14,880

Depn
18,528

3,648
18,528

Bal b/f 18,528

Book value after 3rd

year
= 24,000 18,528
= 5,472

LO 3

Double Entry for Depreciation (Contd.)

Depreciation Expense

PPE/Fixed Asset
Equipment Bal c/f 24,000
24,000

24,000
Bal b/f

Acc. Depn
2,188.80

24,000

24,000

Acc. Depn - Fixed Asset

Bal c/f Bal b/f 18,528
20,716.80
Depn 2,188.80

20,716.80

20,716.80
Bal b/f
20,716.80

Book value after 4th

year
= 24,000 20,716.80
= 3,283.20

LO 3

Double Entry for Depreciation (Contd.)

Depreciation Expense

PPE/Fixed Asset
Equipment Bal c/f 24,000
24,000

24,000
Bal b/f

24,000

24,000

Acc. Depn - Fixed Asset

Bal c/f

Acc. Depn
1,283.20

22,000

Bal b/f
20,716.80
Depn 1,283.20

22,000

22,000
Bal b/f 22,000

Book value after 5th

year
= 24,000 22,000
= 2,000 (residual value)

LO 2

Revising Depreciation Estimates

A machine is purchased on January 1,
2011, for $140,000.

(continued)

LO 2

Revising Depreciation Estimates

At the end of 2012, the assets book value is
$88,000, as shown below.

(continued)

LO 2

Revising Depreciation Estimates

During 2013, the company estimates that the
machines remaining useful life is 8 years
(instead of 3 years) and that its residual value is
$8,000 (instead of $10,000). Depreciation
expense for each of the remaining 8 years is:

Discarding Fixed Assets

LO 3

Equipment acquired at a cost of $25,000 is

fully depreciated at December 31, 2011.
Equipment
Cost

25,000

Acc. Depn - Equipment

Bal b/f 25,000

Book value
= 25,000 25,000
=0

Discarding Fixed Assets (Contd.)

LO 3

On February 14, 2012, the equipment is

discarded (thrown away).

Equipment
Cost

25,000 Write-off 25,000

Acc. Depn Equipment

Write-off 25,000 Bal b/f 25,000

Note: The entry to record the disposal of a fixed

asset removes the cost of the asset and its
accumulated depreciation from the accounts.

LO 3

Discarding Fixed Assets

Equipment costing $6,000, with no residual
value, is depreciated at an annual straightline rate of 10%.
Annual depreciation = 6,000 X 10% = 600
After the December 31, 2011, Accumulated
DepreciationEquipment has a $4,750
balance.
On March 24, 2012, the asset is removed
from service and discarded.

LO 3

Discarding Fixed Assets

$600 3/12

LO 3

Discarding Fixed Assets

The discarding of the equipment is then
recorded as shown below. (Note that this is the
2nd of 2 entries on March 24.)
Total accumulated depreciation at the date of
discard: 4,750 + 150 = 4,900
Original cost of equipment: 6,000
Loss on disposal of equipment (an expense)
= 6,000 4,900 = 1,100

LO 3

Discarding Fixed Assets

Equipment
Cost

6,000 Write-off 6,000

6,000

Bal b/f

Depreciation Expense
Acc. Depn 150

6,000

Acc. Depn - Equipment

Write-off 4,900 Bal b/f
Depn
4,900

4,750
150
4,900

Bal b/f

Loss on disposal of equipment

(Expense)
Loss

1,100

LO 3

Selling Fixed Assets

Equipment was purchased at a cost of
$10,000.
It had no estimated residual value and was
depreciated at a straight-line rate of 10%.
The equipment is sold for cash on October
12 of the 8th year of its use.
The balance of the accumulated
depreciation account as of the preceding
December 31 is $7,000.
(continued)

LO 3

Selling Fixed Assets

The entry to update the depreciation for the
9 months of the current year is as follows:

(continued)

LO 3

Selling Fixed Assets

After the current depreciation is recorded,
the book value of the asset is $2,250
($10,000 $7,750).
Sold below book value for $1,000. Loss of $1,250.

LO 3

Selling Fixed Assets

Equipment
Cost

Bal b/f

Depreciation Expense

10,000 Write-off
10,000

Acc. Depn 750

10,000

Loss on disposal of equipment

(Expense)

10,000

Loss

1,250

Acc. Depn - Equipment

Write-off 7,750 Bal b/f
Depn
7,750

7,000
750
7,750

Bal b/f

Cash

1,000

LO 3

Selling Fixed Assets

After the current depreciation is recorded,
the book value of the asset is $2,250
($10,000 $7,750).
Sold above book value for $2,800. Gain of $550.

LO 3

Selling Fixed Assets

Equipment
Cost

Bal b/f

Depreciation Expense

10,000 Write-off
10,000

Acc. Depn 750

10,000

Gain on disposal of equipment

(Revenue)

10,000

Gain

Acc. Depn - Equipment

Write-off 7,750 Bal b/f
Depn
7,750

7,000
750
7,750

Bal b/f

Cash

2,800

550