Unit 8: Accounting for Property, Plant, and Equipment
Property, plant, and equipment require the largest amount of investment for a company. This unit introduces the life cycle of tangible long-term assets: acquisition, depreciation, and disposal. This unit also includes other long-term assets like natural resources and intangible assets. Businesses like mines and lumber companies account for resources that are extracted from the environment. The most common intangible asset is goodwill, which is recorded when acquiring a company.
Completing this unit should take you approximately 4 hours.
Upon successful completion of this unit, you will be able to:
- identify, record, and depreciate property, plant, and equipment; and
- distinguish between tangible and intangible assets.
8.1: Property, Plant, and Equipment
Read and take notes on sections 10.1-10.10 on pages 68-103.
This chapter introduces how organizations categorize and account for fixed assets. Assets are recorded at cost, not necessarily market value. It also covers the various methods of depreciation, why each method is used, and the "rate of return" expected by an organization when they purchase an asset.
- Section 10.2 identifies the accountant's role in managing plant assets.
- Section 10.3 explains how to classify assets using three key elements, and introduces the four steps of accounting for plant assets.
- Section 10.4 discusses the initial recording of plant assets. You should be able to explain fair market value, acquisition costs, historical costs, and which costs are capitalized. Review how to record the life history of a depreciable asset to ensure the proper account and true financial picture of an organization's assets. Pay attention to the difference in the cost and accounting for the construction of a new building versus buying land and assets for a specific lumped price. Be sure you know the difference between book value and appraised value.
- Section 10.5 discusses the reality that all assets with the exception of land have a useful life. A business should expect some wear and tear on assets as a direct result of using them to support business activity. Depreciation is an allocations process that ensures the useful life of an asset is properly identified from accounting and company valuation. There are three major causes of depreciation and four methods of depreciation.
- Section 10.6 distinguishes capital expenditures, revenue expenditures, and betterments. Each affects the assets value, its useful life, and financial statements. It can be difficult to account for additional costs incurred related to long-term assets.
- Section 10.7 discusses subsidy ledgers for plant assets and what happens to the accounting structure when a revenue expenditure is treated as a capital expenditure.
- Section 10.10 offers a self-test. The solution to the self-test is on pages 118-119.
8.2: Plant Asset Disposal, Natural Resources, and Intangible Assets
Read and take notes on sections 11.1-11.10 on pages 120-155.
This details the events that need to be dealt with when disposing assets. There are balance sheet and income statement entries that must be recorded when getting rid of equipment by scrapping it or selling it. It also discusses intangible assets, how to record them, and how to account for their diminishing value.
- Section 11.3 discusses how, with the exception of land, all assets eventually become of little to no use. A company will have to make the decision to trade the asset for a newer version, retire the asset altogether, or sell the asset. How is this decision made?
- Section 11.4 discusses the sale of a plant asset. Many business entities will eventually have to dispose of a plant asset. When this happens, the company will either have a loss or show a gain depending on the difference between the asset's sale price and its book value. This section shows journal entries from a variety of situations, including a gain on the sale of an asset, a loss on the sale of an asset, how to realize loss, and what to do when a fire or flood that destroys an asset.
- Section 11.5 discusses the depletion of a natural resource and how to journalize it.
- Section 11.6 identifies the sources of an intangible asset. Pay attention to trademarks, amortization, patents, copyrights, trademarks, goodwill, and franchises.
- Section 11.7 explains the total assets turnover ratio, which illustrates the relationship between monetary volume and the average of the total asset.
- Section 11.9 offers a self-test. The solutions to self-test are on pages 173-174.
Unit 8 Assessment
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.