Financial Accounting: PPE and Intangibles
Financial Accounting: PPE and Intangibles
Financial Accounting: PPE and Intangibles
Eleventh Edition
Global Edition
Chapter 7
PPE and
Intangibles
Book Value
Plant assets are recorded on the balance sheet at their
book value.
Book Value = Cost − Accumulated Depreciation
(sometimes called net book value)
• Depreciation
– Process of allocating a plant asset’s cost to
expense over its life
– Necessary as plant assets wear out, grow
obsolete, and lose value over time
– Allocates cost against revenue it helps earn each
period (matching principle)
– Depreciation expense is reported on the income
statement
– Freehold Land is not depreciated
• Cost
‒ Purchase price and all costs to get plant asset
ready for use, known amount
• Estimated Useful Life
‒ Length of service expected from using the asset,
estimated amount
• Estimated Residual Value
‒ Expected cash value of an asset at the end of its
(intended) useful life, estimated amount
Note:
1st year $41,000 (book value) is used instead of $40,000 as in other methods
Last-year is calculated backward from “book value – residual value =
depreciation needed” = 4,314 instead of 0.4 x 5,314 = 2,126
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Comparing Depreciation Methods (1 of 2)
• Straight-line
‒ Best for plant assets that generate revenue evenly
over time
• Units-of-production
‒ Best for assets that wear out because of use
• Double-declining-balance
‒ Best for assets that generate more revenue earlier
in their useful life
*
X = 100,000 + 150,000 − 180,000
• Natural Resources
– Long-term assets such as iron ore, petroleum (oil),
and timber
– Depletion – tracks the flow of a natural resource
from its raw state through inventory to cost of
goods sold (same as units-of-production)
– Depletion expense (Expense account) on the
income statement
– Accumulated depletion (Contra-Asset account)
on the balance sheet