Property, Plant, & Equipment

Depreciation Methods Highlights

Straight Line
• Yearly charge = (Cost less salvage) / (Est service life)

Decreasing Charge Method (a.k.a. DDB)

• Does NOT include salvage in depreciable base (only method which does this)
• Yearly charge = (BV @ beg of yr) * (SL dep *accelerated rate)

Sum-of-years-digits
• Depreciation base = (cost – estimated salvage)
• At the end of the estimated life, BV will equal salvage value
• Yearly charge = (Remaining life in yrs / SYD) * (Depreciable base)
• Shortcut to calculate SYD = [n*(n+1)] / 2

Units of Production
• Dep Base = (Cost – salvage)
• Dep cost per unit = (Cost – salvage) / (Total est units available)
• Yearly charge = (Units extracted * Dep cost per unit)

Composite/Group Depreciation (e.g. fleet of trucks)

• No gain/loss recognized upon retirement of a plant asset
• Group = similar assets; Composite = dissimilar assets (both same from ACC perspective)
• Both may utilize SL depreciation
• A.D. is debited for difference between (Original cost) & (Cash received)

Cash 3,000
A.D. 14,000 [plug]
Truck 17,000 [cost]

Depletion
Per unit depletion rate = (depletable base – residual value) / # units available for extraction

Capitalization vs. Expensing

Capitalize
• Repairs/improvements that increase the future use potential of the asset (e.g. new engine)
o Includes improvements to efficiency of production process, or greater life
• Freight in, testing, installation costs associated with preparing machine for use
• Interest costs for assets constructed for self-use incurred during construction
o Apply interest rate to average accumulated expenditure over the period
§ Ex: 400K construction costs incurred evenly over 1 year, 10% int rate
§ Capitalize = ($400K / 2) * 10% = $20K

Expense
• Routine maintenance with no future value
• Interest expense for inventories routinely manufactured or produced on a repeat basis
 • Interest expense incurred on construction loans after completion of project

Donated Assets = Record as APIC, not income, at FMV

Asset xx
APIC – Donated assets xx

Exchanges with Commercial Substance- FMV

• Commercial Substance à Entity’s future cash flows are expected to change significantly
as a result of the exchange of nonmonetary asset
• Base CV of assets received on FMV of assets given up
o Exception: Book at BV if any of the following apply
§ FMV of asset sold or acquired cannot be determined
§ Transaction of product or property held for sale in the same line of business
to facilitate sales to customers (other than the parties to the exchange)
§ Transaction lacks commercial substance

Gain on exchange = FMV of assets received (-) BV of assets relinquished

Losses – Recognize immediately so that assets received are not valued at more than their cash
equivalent price

Acquisition cost (BV of asset rec)-> Recorded @ FMV of asset surrendered (or FMV of asset
received, if more clearly evident). Gains and losses should be recognized @ date of exchange.
• If replacing an asset with a new one, acquisition cost does NOT take disposal of old asset
into account

Exchanges lacking commercial substance (or for resale to custo’s in ordinary course of biz)
• Does not result in recognized gain (only to extent of boot received as % of FMV received)
• NO gains, only losses, are recognized on exchanges w/o commercial substance
• Measurement based on the BV of nonmonetary assets relinquished, not on the FV of the
assets exchanged

Example: Y co. and Z co. exchange oil for custo’s in ord course of business
On transfer date: Y co. oil (cost = 100K, FV = 120K), Z co. oil (cost = 126K, FV = 150K)
Boot: Y co pays Z co. 30K cash
Calculations – Z Co.
FMV received = 150K (120K oil + 30K boot)
CV of asset given up = 126K
Realized gain = 24,000 (150K-126K)
Cash as % of total FMV received = 20% (30K/150K)
Recognized gain on exchange = 4,800 (24K realized gain * 20%)
Deferred gain = 19,200 (24K – 4,800)

Z co. journal entry

Cash 30,000
Oil – Y. co’s 100,000
Oil – Z. co’s 126,000
Gain 4,800
Impairment Testing procedure
1. Compare BV of asset (net of depreciation) with undiscounted future cash flows
a. If BV exceeds undiscounted FCF’s, proceed to step 2
2. Compare BV to FMV (or discounted FCF’s) to determine impairment loss

*To be impaired, the CV must exceed FMV, and is not expected to be recoverable

Fixed Asset Disposal

• Involuntary conversion (fire, theft, etc..)
o Recognize gain/loss for nonmonetary assets even if reinvested in replacement
asset
o Removal & Clean-up à Included in gain/loss computation of involuntary
conversion
o Incidental costs related to acquiring replacement = Capitalize
•
Land and buildings- combined purchase
• If intending to raze old and build new...
o Razing => Capitalize to LAND (net of scrap proceeds)
o Amount allocated to existing building => Capitalize to LAND