Principles of Financial Accounting: Plant Assets and Intangibles - Plant Assets, Property Plant Equipment Land Land Improvements Buildings Equipment

What It Is

Plant Assets, also known as Property, Plant, and Equipment (PP&E), are long-term assets used in a company's operations, such as land, buildings, equipment, and improvements. These assets are recorded at their cost and depreciated over their useful lives. If a company buys a building for $500,000, it will be recorded as a plant asset and depreciated over its useful life, say 20 years.

Key Concepts & Formulas

• Cost: The amount paid for a plant asset, including purchase price, transportation costs, and installation fees. Example: A company buys a machine for $10,000, including $1,000 for transportation.
• Accumulated Depreciation: The total depreciation expense recorded over the life of a plant asset. Formula: Accumulated Depreciation = Depreciation Expense x Number of Years.
• Depreciation Expense: The annual expense recorded for the use of a plant asset. Formula: Depreciation Expense = (Cost - Residual Value) / Useful Life.
• Residual Value: The estimated value of a plant asset at the end of its useful life. Example: A company estimates that a machine will be worth $2,000 after 5 years.
• Useful Life: The estimated number of years a plant asset will be used. Example: A company estimates that a machine will last for 5 years.
• Straight-Line Method: A method of depreciating plant assets by allocating the cost evenly over the useful life. Formula: Depreciation Expense = Cost / Useful Life.
• Double-Declining Balance Method: A method of depreciating plant assets by allocating a percentage of the cost each year. Formula: Depreciation Expense = (2 x Cost x Rate) / Useful Life.
• Depreciation Rate: The percentage of the cost that is depreciated each year. Example: A company uses a depreciation rate of 20% for a machine.
• Gross Book Value: The total cost of a plant asset minus accumulated depreciation. Formula: Gross Book Value = Cost - Accumulated Depreciation.
• Net Book Value: The total cost of a plant asset minus accumulated depreciation and any impairment losses. Formula: Net Book Value = Gross Book Value - Impairment Loss.

Journal Entry Examples

1. Purchase of a Building: Dr. Building $500,000 Cr. Cash $500,000 Explanation: The building is recorded as a plant asset, and cash is credited as it is the source of the funds.

2. Depreciation Expense: Dr. Depreciation Expense $25,000 Cr. Accumulated Depreciation $25,000 Explanation: The depreciation expense is recorded as an expense, and accumulated depreciation is credited as it is the contra-asset account.

3. Sale of a Machine: Dr. Cash $5,000 Cr. Accumulated Depreciation $2,000 Cr. Machine $3,000 Explanation: The machine is sold for $5,000, and the accumulated depreciation is credited as it is the contra-asset account. The machine is credited for its net book value.

Common Mistakes

1. Mistake: Confusing debits and credits for plant assets. Correction: Remember that plant assets are debited when purchased and credited when sold or disposed of.
2. Mistake: Forgetting to record depreciation expense. Correction: Depreciation expense is recorded annually, and it is an expense that reduces net income.
3. Mistake: Not considering the residual value of a plant asset. Correction: The residual value is the estimated value of a plant asset at the end of its useful life, and it affects the depreciation expense.

Exam Tips

1. Tip: Remember that plant assets are recorded at cost and depreciated over their useful lives.
2. Tip: Be careful with the debits and credits for plant assets – remember that they are debited when purchased and credited when sold or disposed of.
3. Tip: Don't forget to record depreciation expense annually – it's an expense that reduces net income.

Quick Practice

1. A company purchases a machine for $10,000 and estimates that it will last for 5 years. What is the annual depreciation expense using the straight-line method? Answer: $2,000. Explanation: The depreciation expense is calculated as $10,000 / 5 years.
2. A company sells a machine for $5,000, and the accumulated depreciation is $2,000. What is the journal entry to record the sale? Answer: Dr. Cash $5,000, Cr. Accumulated Depreciation $2,000, Cr. Machine $3,000. Explanation: The machine is sold for $5,000, and the accumulated depreciation is credited as it is the contra-asset account. The machine is credited for its net book value.
3. A company estimates that a machine will be worth $2,000 after 5 years. What is the residual value of the machine? Answer: $2,000. Explanation: The residual value is the estimated value of a machine at the end of its useful life.

Last-Minute Cram Sheet

1. Plant assets are recorded at cost.
2. Depreciation expense is calculated using the straight-line method or double-declining balance method.
3. Accumulated depreciation is a contra-asset account.
4. Residual value is the estimated value of a plant asset at the end of its useful life.
5. Net book value is the total cost of a plant asset minus accumulated depreciation and any impairment losses.
6. Dividends are NOT an expense – they go directly to retained earnings.
7. Depreciation expense is an expense that reduces net income.
8. Gross book value is the total cost of a plant asset minus accumulated depreciation.
9. Useful life is the estimated number of years a plant asset will be used.
10. Impairment loss is recorded when a plant asset's value decreases below its carrying value.