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UNIVERSITY OF THE WEST INDIES
Mona Campus
Financial Accounting – ACCT 1005(MS15D)

Plant Assets
Fixed assets are long-lived assets that are purchased to enhance the earning power of the business
...

The three categories of plant assets are:
1
...
g
...

2
...
g
...

3
...
g
...


1
...

Land Cost of land includes purchase price (pp) brokerage commission, survey and legal fees, back
property taxes and cost of clearing land and removing unwanted buildings
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Land improvements

Costs to improve land e
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fencing, paving, lighting & signs are depreciated
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Buildings are
depreciated
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Furniture & Fixtures Include desks, chairs, file cabinets, display racks, shelves etc
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Lump-Sum or Basket Purchase
Costs are allocated based on the assets appraised or market value
...
g
...
Appraised values are: land $600,000 and
building $5,400,000
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A capital expenditure is incurred when a business expends money either to purchase fixed assets or to
add to the value of existing assets Examples of capital expenditures are








Purchase price of fixed asset
Delivery/Transportation costs
Installation costs
Legal costs incurred in buying a building
Costs incurred replacing an important component of a fixed asset
All other costs incurred in putting the asset in an operational form
Repair work that generates a major repair

Capital expenditures are debited to the asset account and are reflected on the BS
...
g
...
revenue
expenditures are debited to an expense account
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Depreciation
Depreciation is the process of allocating the cost of fixed asset over its economic useful life or the fall in
the value of a fixed asset
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An asset is said to be obsolete when another asset can do the job more
efficiently
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Accumulated depreciation is a contra-asset account
and represents the portion of the asset’s cost that has already been used up
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This is in accordance with
the accruals or matching concept, which states that revenues should be matched against their associated,
costs i
...
the costs incurred in earning such revenues
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In determining depreciation the accountant must know




The capitalized cost of the fixed asset
The assets economic useful life
The residual value of the fixed asset i
...
expected cash value at the end of useful life
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The physical life is the period,
over which the asset will remain intact, while the economic life is the period over which the asset
can be used by the business to assist in earning its income
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2

Accounting for Depreciation
There are several methods of accounting for depreciation
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1) Straight-Line Method
This method assumes that the fixed asset is depreciated by the same amount every year; hence the cost is
allocated equally over the assets useful life
...
g
...

Annual Depreciation Expense

=

Capitalized Cost of Fixed Asset – Residual Value
Economic Useful Life in years

2) Units-of-Production Method
This method allocates a fixed amount of depreciation to each unit of production
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It is useful for assets that depreciate due to wear & tear e
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trucks
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The highest depreciation is in the first year and the
lowest in the last year
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Expense = (Capitalized Cost of Asset – Residual Value) * Remaining Useful Life
Sum-of-years-digits
4) Reducing/Double-Declining Balance Method
In this method, a fixed percentage is taken from the balance of the cost of the fixed asset remaining at
the end of each accounting period
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Depreciation methods that provide for a higher
depreciation charge in the first year of an assets life and gradually decrease in subsequent years are
called accelerated depreciation methods
...
It is therefore useful
for assets that produce more revenues in their earlier years e
...
Computer Equipment
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



Regardless of the method used, the same total amount of depreciation will be written off over
the economical useful life of the asset
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The straight-line method is most popular
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Higher depreciation implies lower net
income
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These cash
savings can be invested
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New Annual Depreciation = Cost – Accumulated Depreciation – New Residue
New estimated useful life remaining
A business may continue to use fully depreciated assets, but additional depreciation expense may not
be recorded
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If the cost of an
asset cannot be recovered through future use or sale, the asset should be written down to its net
realizable value i
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Dr Impairment Expense; Cr Accumulated Depreciation
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Regardless of
the method of disposal the updated accumulated depreciation and cost of fixed asset, must be removed
from the records i
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Dr Accumulated Depreciation
Cr Fixed Asset
Gains & losses on disposal of non-current assets are reflected in the IS under “Other Revenues &
Expenses”
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Dep
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To
determine gain or loss at date of exchange, compare the old asset’s book value to the trade-in value for
old asset
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Recognize Gain?
Recognize Loss?

Dissimilar Assets
Yes
Yes

Similar Assets
No
Yes

i) Calculate annual depreciation & Update depreciation to the date of disposal
ii) Compare trade-in allowance or fair value with NBV
iii) Prepare journal entries
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Dr
Dr
Dr

Asset A/C (New)*
xxxx
Accumulated Depreciation xxxx
Loss on Exchange
xxxx
Cr
Cash
Cr
Asset A/C(Old)
*Usually the balancing/plug figure
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Gains on exchange are not regarded as taxable income nor are losses on exchange
regarded as deductible in the determination of income taxes

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