Chapter 7

Learning Objective
1. Measure and account for the cost of plant assets
7-1
Copyright 2015 Pearson Education Inc. All rights reserved.
7-2
MEASURE AND ACCOUNT FOR THE COST

OF PLANT ASSETS
Working rule for measuring the cost of an asset:
The cost of any asset is the sum of all the costs
incurred to bring the asset to its intended use
Cost includes
7-3
Purchase price
Taxes
Commissions
Other amounts paid to make the asset ready for use
LO 1
Land
Cost of land includes:
7-4
Purchase price (cash plus any note payable given)
Brokerage commission
Survey fees
Legal fees
Back property taxes that the purchaser pays
Expenditures for grading and clearing and for removing

unwanted buildings
LO 1
Illustration
FedEx signs a $300,000 note payable to purchase 20 acres of land
for a new shipping site. FedEx also pays $10,000 for real estate
commission, $8,000 of back property tax, $5,000 for removal of an
old building, a $1,000 survey fee, and $260,000 to pave the parking
lotall in cash. What is FedExs cost of this land?
Land
Purchase price
$300,000
Real estate commission
10,000
Back property tax
8,000
Removal of building
5,000
Survey fee
1,000
0
Pave parking lot
Cost of Land
7-5
$324,000
LO 1
Illustration
FedEx signs a $300,000 note payable to purchase 20 acres of land
for a new shipping site. FedEx also pays $10,000 for real estate
commission, $8,000 of back property tax, $5,000 for removal of an
old building, a $1,000 survey fee, and $260,000 to pave the parking
lotall in cash.
FedEx records the purchase of the land as follows:
Account
Land
Credit
324,000
Notes Payable
300,000
24,000
Cash
7-6
Debit
LO 1
Buildings, Machinery, and Equipment

Cost of constructing a building includes:
Architectural fees
Building permits
Contractors charges
Payments for material, labor, and overhead
Interest on money borrowed to finance construction
Cost of purchasing a building includes:
7-7
Purchase price
Brokerage commission
Sales and other taxes paid
Expenditures to repair and

renovate the building for its
intended purpose
LO 1
Buildings, Machinery, and Equipment

Cost of equipment includes:
7-8
Purchase price (less any discounts)
Transportation from the seller
Insurance while in transit
Sales and other taxes
Purchase commission
Installation costs
Expenditures to test the asset before its placed in service
Cost of any special platforms
LO 1
Land Improvements and Leasehold

Improvements
Cost of land improvements include:
Driveways, signs, fences, and sprinkler systems
These costs are subject to decay and should therefore be

depreciated
Leasehold improvements
7-9
Improvements to leased property
Depreciated or amortized over lease term
LO 1
Lump-Sum (or Basket) Purchases of

Assets
Several assets purchased in a group at one price
Total cost is allocated based on their market values
Technique is called the relative-sales-value method
Illustration: Suppose FedEx purchases land and a building in

Denver. The building sits on two acres of land, and the combined
purchase price of land and building is $2,800,000. An appraisal
indicates that the lands market value is $300,000 and that the
buildings market value is $2,700,000.
7-10
LO 1
Illustration
FedEx first figures the ratio of each assets market value to the total
market value. These percentages are then used to determine the
cost of each asset:
LO 1
7-11
Illustration
If FedEx pays cash, the entry to record the

purchase of the land and building is as follows:
Account
Land
Credit
280,000
2,520,000
Building
2,800,000
Cash
7-12
Debit
LO 1
How would FedEx divide a $120,000 lump-sum purchase price

for land, building, and equipment with estimated market values
of $40,000, $95,000, and $15,000, respectively?
Answer
7-13
*$40,000/$150,000 = 0.267
LO 1
Learning Objective
2. Distinguish a capital expenditure from an
immediate expense
7-14
DISTINGUISH A CAPITAL EXPENDITURE

FROM AN IMMEDIATE EXPENSE
Capital expenditures increase the assets capacity or

extend its useful life
Capitalized, means the cost is added to an asset account

and not expensed immediately
Exhibit 7-2
7-15
LO 2
Learning Objective
3. Measure and record depreciation on plant assets
7-16
MEASURE AND RECORD DEPRECIATION

ON PLANT ASSETS
Depreciation
7-17
Process that allocates a plant assets cost to expense over

its life
Allocates cost against the revenue the asset helps earn

each period
Depreciation expense (not accumulated depreciation) is

reported on the income statement
Land is not depreciated
LO 3
MEASURE AND RECORD DEPRECIATION

ON PLANT ASSETS
Depreciation
Is not a process of valuation
Does not mean setting aside cash to replace assets as they

wear out
Exhibit 7-3 | Depreciation: Allocating Costs to Periods in Which Revenues Are Generated
7-18
LO 3
How to Measure Depreciation

Need to Know Three Things
Cost
7-19
Estimated
Useful Life
Estimated
Residual
Value
Length of service expected from using the asset
May be expressed in years, units of output, miles, or some

other measure
LO 3
How to Measure Depreciation

Need to Know Three Things
Estimated
Useful Life
Cost
Estimated
Residual
Value
Also called scrap value or salvage value
Expected cash value of an asset at the end of its useful

life
Not depreciated
Depreciable Cost = Assets cost - Estimated residual value

7-20
LO 3
Depreciation Methods
Three Main Methods
Straight-line
Units-ofproduction
Exhibit 7-4 |
Depreciation
Computation
Data
7-21
Doubledecliningbalance
Three Main Methods
Straight-line
7-22
Units-ofproduction
Equal amount of depreciation assigned to each year (or

period)
Depreciable cost is divided by useful life in years to

determine the annual depreciation expense
LO 3
Straightline
Exhibit 7-4
Depreciation expense per year =
=
=
Cost Residual value

Useful life, in years
$41,000 - $1,000
5
$8,000
LO 3
7-23
Straight-line
The entry to record depreciation is
Account
Depreciation Expense - Truck
Debit
Credit
8,000
Accumulated Depreciation - Truck
8,000
Exhibit 7-5 | Straight-Line Depreciation Schedule for Truck
7-24
LO 3
As an asset is used in operations and depreciated
Accumulated
depreciation
increases
Book value
decreases
Assets final book value =
Residual value
7-25
LO 3
A FedEx sorting machine that cost $10,000 with a useful life of

five years and a residual value of $2,000 was purchased on
January 1. What is SL depreciation for each year?
Answer
Cost
$10,000
Less: Residual value
- 2,000
Depreciable cost
7-26
8,000
Useful life in years
Depreciation expense per year
$1,600
LO 3
Three Main Methods
Straight-line
7-27
Units-ofproduction
Fixed amount of depreciation is assigned to each unit of

output, or service, produced by the asset
Depreciable cost is divided by useful lifein units of

productionto determine fixed amount per-unit
Per-unit depreciation expense is multiplied by number of

units produced each period to compute total expense
LO 3
Units-ofProduction
Exhibit 7-4
Depreciation per unit of output =
=
=
7-28
Cost Residual value

Useful life, in units
$41,000 - $1,000
100,000 miles
$0.40 per mile
LO 3
Units-of-Production
Assume that FedEx expects to drive the truck 20,000 miles
during the first year, 30,000 during the second, 25,000 during
the third, 15,000 during the fourth, and 10,000 during the fifth.
Exhibit 7-6 shows the UOP depreciation schedule.
Exhibit 7-6 | Units-of-Production (UOP) Depreciation Schedule for Truck
UOP depreciation varies with the number of units the asset

produces
7-29
LO 3
Units-of-Production
Exhibit 7-6 | Units-of-Production (UOP) Depreciation Schedule for Truck
The entry to record depreciation is for year ended 12/31/2011 is

Account
Depreciation Expense - Truck
Accumulated Depreciation - Truck
7-30
Debit
Credit
8,000
8,000
LO 3
Three Main Methods
Straight-line
7-31
Units-ofproduction
Writes off a larger amount of the assets cost near the start of its
useful life than the straight-line method
Most frequently used accelerated depreciation method
Computes annual depreciation by multiplying assets declining

book value at the beginning of the year by a constant
percentage two times the straight-line depreciation rate
LO 3
Exhibit 7-4
DDB depreciation rate per year =
1
Useful life, in years
1
=
=
7-32
x2
x2
5 years
20% x 2 = 40%
LO 3
Double-declining-balance
Exhibit 7-7 | Double-Declining-Balance Depreciation Schedule for Truck
For a 5-year asset the DDB rate is 40% (20% 2)
7-33
LO 3
Multiply the rate by the periods beginning asset book value

(40% x $41,000 = $16,400)
Ignore residual value of asset in computing depreciation,
except during last year
7-34
LO 3
Final years depreciation is $4,314book value, end of year 4

of $5,314 less the $1,000 residual value
* Final-year depreciation is a plug amount needed to reduce asset

book value to estimated salvage value
7-35
LO 3
DDB method differs from other methods in two ways:
7-36
First-year depreciation is based on assets full cost
Final year depreciation is a plug amount needed to

reduce book value to residual value
LO 3
A FedEx sorting machine that cost $10,000 with a useful life of

five years and a residual value of $2,000 was purchased on
January 1. What is DDB depreciation each year for the asset?
Answer
7-37
*The asset is not depreciated below residual value of

LO 3
Comparing Depreciation Methods

Straight-line
For a plant asset

that generates
revenue evenly
over time, best
meets the expense
recognition principle
7-38
Units-ofproduction
Best for assets that
wear out because
of use
Best for assets that
generate more
revenue early in
useful life
LO 3
7-39
LO 3

Exhibit 7-8 | Depreciation Patterns Through Time
7-40
LO 3

Exhibit 7-9 |
Depreciation
Methods Used
by 600
Companies
7-41
LO 3
Illustration
Ralph's Pizza bought a used Toyota delivery van on January 2,
2014, for $13,000. The useful life of the van is 5 years. At the
end of its useful life, Ralph's officials estimated that the vans
residual value would be $1,000. Prepare a schedule of
depreciation expense per year for the van using the straightline method.
7-42
LO 3
Illustration: Straight-line Method
2014
$ 12,000
2015
12,000
2016
$ 2,400
$ 2,400
$ 10,600
20
2,400
4,800
8,200
12,000
20
2,400
7,200
5,800
2017
12,000
20
2,400
9,600
3,400
2018
12,000
20
2,400
12,000
1,000
7-43
20%
LO 3
Illustration
2014, for $13,000. The van was expected to remain in service
for five years (100,000 miles). At the end of its useful life,
Ralph's officials estimated that the vans residual value would be
$1,000. The van traveled 15,000 miles the first year, 30,000
miles the second year, 20,000 miles the third year, 25,000 miles
in the fourth year, and 10,000 miles in the fifth year.
Prepare a schedule of depreciation expense per year for the
van using the units-of-production method.
7-44
LO 3
Illustration: Units-of-Production
2014
15,000
$ 0.12
$ 1,800
$ 1,800
$ 11,200
2015
30,000
0.12
3,600
5,400
7,600
2016
20,000
0.12
2,400
7,800
5,200
2017
25,000
0.12
3,000
10,800
2,200
2018
10,000
0.12
1,200
12,000
1,000
Depreciation per
unit of output
$13,000 - $1,000
100,000 miles
= $0.12 per mile

LO 3
Illustration
2014, for $13,000. The useful life of the van is 5 years. At the
end of its useful life, Ralph's officials estimated that the vans
residual value would be $1,000.
Prepare a schedule of depreciation expense per year for the
van using the double-declining-balance method.
7-46
LO 3
Illustration: Double-Declining Balance
2014
13,000
2015
7,800
2016
40%
$ 5,200
$ 5,200
$ 7,800
40
3,120
8,320
4,680
4,680
40
1,872
10,192
2,808
2017
2,808
40
1,123
11,315
1,685
2018
1,685
40
12,000
1,000
685*
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
757
LO 3
Other Issues in Accounting for Plant

Assets
Plant assets are complex because
7-48
They have long lives
Depreciation affects income taxes
Gains or losses when plant assets sold
International accounting changes in the future
LO 3
Depreciation for Tax Purposes

Accelerated deprecation provides
fastest tax deductions
Tax deductions decrease tax
payments
Tax savings can be reinvested in
business
7-49
LO 3
Depreciation for Tax Purposes

Exhibit 7-10 | The Cash Flow Advantage of Accelerated Depreciation for Tax
Purposes
7-50
LO 3
Depreciation for Partial Years

Companies must compute depreciation for partial years
Illustration: Suppose UPS purchases a warehouse building
on April 1 for $500,000. The buildings estimated life is 20
years, and its estimated residual value is $80,000. UPSs
accounting year ends on December 31. Compute UPSs
depreciation for April through December.
Full-year depreciation =
Partial year depreciation =
7-51
$500,000 - $80,000
20
= $21,000
$21,000 x 9/12 = $15,750
LO 3
Changing the Useful Life of a

Depreciable Asset
After an asset is in use, managers may change its useful
life or residual value on the basis of experience and new
information
7-52
Accounted for in the period of change and future periods
Prior years not adjusted for change
Called a change in estimate
LO 3
Change in Estimate
Illustration: Arcadia HS, purchased equipment for $510,000
which was estimated to have a useful life of 10 years with a
residual value of $10,000 at the end of that time. Depreciation has
been recorded for 7 years on a straight-line basis. In 2014 (year 8),
it is determined that the total estimated life should be 15 years with
a residual value of $5,000 at the end of that time.
Questions:
757
What is the journal entry to correct the

prior years depreciation?
Calculate the depreciation expense for

2014.
No Entry
Required
LO 3
Change in Estimate
Equipment cost
Residual value
Depreciable base
Useful life (original)
Annual depreciation
After 7 years
$510,000
First,
First,establish
establishNBV
NBV
- 10,000
at
atdate
dateof
ofchange
changeinin
500,000
estimate.
estimate.
10 years
$ 50,000 x 7 years = $350,000
Balance Sheet (Dec. 31, 2013)

Plant Assets:
7-57
Equipment
Accumulated depreciation
$510,000
350,000
Net book value (NBV)
$160,000
LO 3
Change in Estimate
Net book value
Residual value (new)
Depreciable base
Useful life remaining
Annual depreciation
After 7 years
$160,000
5,000
155,000
8 years
$ 19,375
Depreciation
DepreciationExpense
Expense
calculation
calculationfor
for2014.
2014.
Journal entry for 2014 and future years.

Depreciation Expense 19,375
Accumulated Depreciation
7-57
19,375
LO 3
Fully Depreciated Assets

Illustration: Suppose FedEx has fully depreciated equipment
with zero residual value
757
May use equipment for several more years
Will not record any more depreciation
When FedEx disposes of equipment they remove both the

assets cost and accumulated depreciation from the books
LO 3
Learning Objective
4. Analyze the effect of a plant asset disposal
7-57
ANALYZE THE EFFECT OF A PLANT ASSET

DISPOSAL
Bring depreciation up to date to:
Measure assets final book value
Record expense up to date of sale
Remove asset and related accumulated depreciation

account from books
LO 4
7-58
Disposing of a Fully Depreciated Asset

for No Proceeds
Illustration: Suppose the final years depreciation expense has
just been recorded for a machine that cost $60,000 and is
estimated to have zero residual value. The machines
accumulated depreciation thus totals $60,000. Assuming that this
asset is junked, the entry to record its disposal is as follows:
Account
Accumulated Depreciation-Machinery
Credit
60,000
60,000
Machinery
7-59
Debit
LO 4
Disposing of a Fully Depreciated Asset

for No Proceeds
Illustration: Suppose FedEx disposes of equipment that cost
$60,000. This assets accumulated depreciation is $50,000, and
book value is, therefore, $10,000. Junking this equipment results
in a loss equal to the book value of the asset:
Account
Debit
Accumulated Depreciation-Equipment
50,000
Loss on Disposal of Equipment
10,000
Credit
Equipment
60,000
Gain or Loss on Disposal of Equipment is reported as Other income

(expense) on the income statement
7-60
LO 4
Selling a Plant Asset
7-61
If cash
received is
greater than
book value
GAIN
If cash
received is
less than book
value
LOSS
LO 4

Illustration: Suppose FedEx sells equipment on September 30,
2014, for $7,300 cash. The equipment cost $10,000 when
purchased on January 1, 2011, and has been depreciated straightline. FedEx estimated a 10-year useful life and no residual value.
Partial-year depreciation must be recorded for the assets
depreciation from January 1, 2014, to the sale date. The
depreciation entry at September 30, 2014, is
Account
Depreciation expense
Debit
Credit
750
750
($10,000 10 years x 9/12 = $750)

7-62
LO 4

Illustration: The equipments book value is $6,250.
Gain on sale of equipment:
7-63
LO 4
Entry to record sale of equipment:

Account
Cash
7,300
3,750
Equipment
Gain on Sale of Equipment
7-64
Debit
Credit
10,000
1,050
LO 4

Illustration: Assume that on January 2, 2014, Crystal of Vermont
purchased fixtures for $8,700 cash, expecting the fixtures to remain in
service for five years. Crystal has depreciated the fixtures on a doubledeclining-balance basis, with $1,800 estimated residual value. On
September 30, 2015, Crystal sold the fixtures for $2,600 cash. Record
both the depreciation expense on the fixtures for 2015 and the sale of
the fixtures. Apart from your journal entry, also show how to compute
the gain or loss on Crystals disposal of these fixtures.
7-65
LO 4

Illustration: Show how to compute the gain or loss on Crystals
disposal of these fixtures.
7-66
Cash received
$2,600
Less book value fixtures
- 3,654
Loss on sale
$1,054
LO 4

Illustration: Record both the depreciation expense on the fixtures for
2015 and the sale of the fixtures.
Account
Depreciation Expense
Debit
1,566
1,566
Cash
2,600
5,046
Loss on Sale of Plant Assets
1,054
8,700
Fixtures
7-67
Credit
LO 4
Exchanging a Plant Asset
Old assets traded in for new assets
Cost of plant asset received is equal to the fair values

of assets given up
7-68
Nonmonetary exchange
Old asset and any cash paid
Difference between fair value of old asset and its book

value is a gain or loss
LO 4
Exchanging a Plant Asset
Illustration: Papa Johns trades in the old automobile for a new one
with a fair market value of $15,000 and pays cash of $10,000. The old
auto has a cost of $9,000 and accumulated depreciation of $8,000.The
implied fair value of the old car is $5,000 ($15,000 $10,000). The
cost of the new delivery car is $15,000 (fair value of the old asset,
$5,000, plus cash paid, $10,000). The pizzeria records the exchange
transaction:
Account
Delivery Auto (new)
Accumulated Depreciation (old)
Delivery Auto (old)
Credit
15,000
8,000
9,000
10,000
Cash
Gain on Exchange of Delivery Auto
7-69
Debit
4,000
LO 4
T-Accounts for Analyzing Plant Asset

Transactions
7-70
LO 4
Learning Objective
5. Apply GAAP for natural resources and intangible
assets
7-71
Accounting for Natural Resources
Include iron ore, oil, and timber
Assets are physically used depletion
Distinct from depreciation
Computed like units-of-production
If all of extracted resource is sold
If portion of extracted resource is not immediately sold
7-72
Amount depleted is recorded as an expense
Amount becomes inventory
LO 5

Illustration: An oil reserve may cost ExxonMobil $100,000,000 and
contain an estimated 10,000,000 barrels of oil. ExxonMobil is an
integrated oil company, meaning it both drills for oil and refines it, so
the company retains some inventory rather than selling all it produces.
Upon purchase or development of the oil reserve (assuming the
company paid cash), ExxonMobil makes the following entry:
Account
Oil Reserve
Credit
100,000,000
100,000,000
Cash
7-73
Debit
LO 5

Illustration: The depletion rate is $10 per barrel ($100,000,000
10,000,000 barrels). If 3,000,000 barrels are extracted and 1,000,000
barrels are sold, the companys different divisions might make the
following entries:
Account
Oil Inventory (3,000,000 barrels x $10)
Debit
30,000,000
30,000,000
Oil Reserve
Cost of Oil Sold (1,000,000 barrels x $10)
Oil Inventory
7-74
Credit
10,000,000
10,000,000
LO 5
Accounting for Intangible Assets
No physical form
Carry special rights
Include patents, copyrights, and franchises
Two categories
Finite lives
Straight-line method
Intangible asset reduced directly
Indefinite lives
7-75
Amortization recorded
Tested for loss in value (impairment)

LO 5

Patents
7-76
Granted by federal government
Give holder exclusive right to produce and sell an

invention
Legal life of 20 years
LO 5

Patents
Illustration: Sony pays $170,000 to acquire a patent on
January 1, and the business believes the expected useful life of
the patent is 5 yearsnot the entire 20-year period.
Amortization expense is $34,000 per year ($170,000 5 years).
Sony records the acquisition and amortization for this patent:
Account
Jan 1
Patents
Cash
7-77
Debit
Credit
170,000
170,000
LO 5

Patents
Illustration: Sony pays $170,000 to acquire a patent on
January 1, and the business believes the expected useful life of
the patent is 5 yearsnot the entire 20-year period.
Amortization expense is $34,000 per year ($170,000 5 years).
Sony records the acquisition and amortization for this patent:
Account
Dec 31
Amortization Expense-Patents
Patents
Debit
Credit
34,000
34,000
LO 5
7-78

Copyrights
7-79
Granted by federal government
Give holder exclusive rights to reproduce and sell a

book, musical composition, film, or other work of art
Extend 70 years after creators life

Useful life is usually very short
LO 5

Trademarks and Trade Names
7-80
Distinctive identification of a product or service

Also include advertising slogans
Useful life may be set by contract

Or indefinite life
Indicated by TM or
LO 5

Franchises and Licenses
7-81
Granted by private business or government
Give purchaser right to sell a product or service with

specified conditions
Include restaurant chains and sports organizations
Have indefinite life
LO 5

Goodwill
7-82
Only recorded when an entire company is purchased
Defined as the excess of the purchase price of the

company over the market value of its net assets
Represents earning power of company purchased
Not amortized
LO 5
Learning Objective
6. Explain the effect of an asset impairment on the
financial statements
7-83
EXPLAIN THE EFFECT OF AN ASSET

IMPAIRMENT ON THE FINANCIAL
STATEMENTS
7-84
Both tangible and intangible assets must be tested

yearly for impairment
Occurs when expected future cash flows less than

assets book value
Carrying value adjusted to fair value
Accounting for asset impairment requires two steps
LO 6
EXPLAIN THE EFFECT OF AN ASSET

IMPAIRMENT ON THE FINANCIAL
STATEMENTS
Ste
p1
Net book
value
>
Estimated future
cash flows
If yes, asset is impaired and proceed to step 2
Ste
p2
7-85
Net book
value
Fair
value
Impairment
loss
LO 6
ASSET IMPAIRMENT
To illustrate, lets assume that FedEx has a long-term asset with
the following information as of May 31, 2012:
Net book value
$100 million
Estimated future cash flows 80 million

Fair (market) value
70 million
The two-stage impairment process is
Ste
p1
Net book
value
>
$100 million
>
Estimated future
cash flows
Asset is Impaired
7-86
$80 million
LO 6
ASSET IMPAIRMENT
Net book value
$100 million

Fair (market) value
70 million
The two-stage impairment process is
Ste
p2
7-87
Net book
value
Fair
value
Impairment
loss
$100 million
$70 million
$30 million
LO 6
ASSET IMPAIRMENT
Net book value
$100 million

Fair (market) value
70 million
FedEx will make the following entry:
Account
May 31
Impairment Loss
Long-term Asset
7-88
Debit
Credit
30,000,000
30,000,000
LO 6
Learning Objective
7. Analyze rate of return on assets
7-89
ANALYZE RATE OF RETURN ON ASSETS

Net income
Average total assets
(Beginning total assets + Ending

total assets) 2
Measures how profitably management has used the assets
that stockholders and creditors have provided the company
7-90
LO 7
DuPont Analysis: A Detailed View of ROA
Net profit
margin ratio
Net income
=
Net sales
Measures how much every sales dollar generates in profit

Increased three ways:
1. Increasing sales volume
2. Increasing sales prices
3. Decreasing cost of goods sold and operating expenses
7-91
LO 7

Measures how many sales dollars are generated for each
dollar of assets invested
Increased by:
1. Increasing sales and keeping less inventory on hand
2. Closing facilities, selling idle assets, and consolidating
operations
Total asset
turnover
7-92
Net sales
Average total
assets
LO 7
Net profit
margin ratio
Total asset
turnover
7-93
Net income
=
Net sales
Net sales
Average total
assets
LO 7
Net profit
margin ratio
Total asset
turnover
Return on
assets
7-94
LO 7
Learning Objective
8. Analyze the cash flow impact of long-lived asset
transactions
7-95
ANALYZE THE CASH FLOW IMPACT OF

LONG-LIVED ASSET TRANSACTIONS
Item
Section
Depreciation
Operating
Sales of longlived assets
Investing
Purchase of longlived assets
Investing
7-96
Description
Added to net
income as a
reconciling item
Cash proceeds
from sales of plant
assets (inflow)
Cash purchases
(outflow)
LO 8
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Chapter 7

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Chapter 7

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Learning Objective

1. Measure and account for the cost of plant assets

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MEASURE AND ACCOUNT FOR THE COST

Other amounts paid to make the asset ready for use

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Purchase price (cash plus any note payable given)

Back property taxes that the purchaser pays

Expenditures for grading and clearing and for removing

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Real estate commission

Back property tax

Pave parking lot

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Copyright 2015 Pearson Education Inc. All rights reserved.

Buildings, Machinery, and Equipment

Payments for material, labor, and overhead

Interest on money borrowed to finance construction

Cost of purchasing a building includes:

Sales and other taxes paid

Expenditures to repair and

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Buildings, Machinery, and Equipment

Purchase price (less any discounts)

Transportation from the seller

Insurance while in transit

Sales and other taxes

Expenditures to test the asset before its placed in service

Cost of any special platforms

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Land Improvements and Leasehold

Driveways, signs, fences, and sprinkler systems

These costs are subject to decay and should therefore be

Improvements to leased property

Depreciated or amortized over lease term

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Lump-Sum (or Basket) Purchases of

Several assets purchased in a group at one price

Total cost is allocated based on their market values

Technique is called the relative-sales-value method

Illustration: Suppose FedEx purchases land and a building in

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If FedEx pays cash, the entry to record the

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How would FedEx divide a $120,000 lump-sum purchase price

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DISTINGUISH A CAPITAL EXPENDITURE

Capital expenditures increase the assets capacity or

Capitalized, means the cost is added to an asset account

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Copyright 2015 Pearson Education Inc. All rights reserved.

MEASURE AND RECORD DEPRECIATION

Process that allocates a plant assets cost to expense over

Allocates cost against the revenue the asset helps earn

Depreciation expense (not accumulated depreciation) is

Land is not depreciated

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MEASURE AND RECORD DEPRECIATION

Is not a process of valuation

Does not mean setting aside cash to replace assets as they

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How to Measure Depreciation