Unit 8: Accounting for Property, Plant, and Equipment
Property, plant, and equipment require the largest amount of investment for a company. This unit introduces you to the life cycle of tangible long-term assets: acquisition, depreciation, and disposal.
This unit also includes other long-term assets such as natural resources and intangible assets. Companies such as mines and lumber companies account for the 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, the student 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
This chapter introduces you to how organizations categorize and account for fixed assets. You will learn that assets are recorded at cost not necessarily market value. You will also learn of the various methods of depreciation and why each method is used. This chapter will also introduce the "rate of return" expected by an organization when they purchase an asset.
You should read and take notes on Sections 10.1 through 10.10 of chapter 10 on pages 68 through 103.
Section 10.1 provides chapter-specific learning objectives.
Section 10.2 identifies the company accountant's role in managing plant assets.
Section 10.3 explains how to classify assets through the identification of three key elements that must be in place. You will also be introduced to the four steps associated with accounting for plant assets.
Section 10.4 discusses the initial recording of plant assets. After working through this section of the course, you should be able to identify the terms fair market value, acquisition costs, and historical costs. You will also develop an understanding of which costs are capitalized. There will be some illustration and discussion on 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 careful attention to the discussion on the difference in the cost and accounting for the construction of a new building versus buying land and assets for a specific lumped price. You will also be introduced to the difference between book value and appraised value; be sure you know the difference.
Section 10.5 discusses the reality that all assets, with the exception of land, have a useful life. Basically, a business should expect some wear and tear on the asset as a direct result of using it to support its business activity. Depreciation is an allocations process that ensures the useful life of an asset is properly identified from an accounting and company valuation. You will be introduced to the three major causes of depreciation; please ensure you take good notes on this area of the course. Finally, an emphasis will be placed on the identification and synthesis of the four methods of depreciation.
Section 10.6 discusses how to distinguish capital expenditures, revenue expenditures, and betterments. Each of them has a unique impact on the assets value, its useful life, and on the financial statements. This section explains the difficulty in determining the accounting for additional costs incurred related to long-term assets.
Section 10.7 discusses the use of subsidy ledgers for plant assets. You will also be provided with a visual illustration of what happens to the accounting structure when a revenue expenditure is treated as a capital expenditure; it is important for you to know the difference.
Section 10.8 reviews the intended chapter learning objectives. It will also work through demonstration problems to reinforce the concepts presented and then show the answers to the demonstration problems. You complete the demonstration problems prior to reviewing the answers.
Section 10.9 revisits the terms from this chapter that you have connected with during your studies.
Section 10.10 provides you with a self-test of true/false and multiple-choice questions. There are other self-test questions, but the answers are only provided for the true/false and multiple-choice questions within the chapter. The solution to self-test is located on pages 118 and 119 in Chapter 10.
8.2: Plant Asset Disposal, Natural Resources, and Intangible Assets
As this title suggests, this chapter will detail the events necessary to be dealt with when disposing assets. There are balance sheet and income statement entries that must be recorded when getting rid of equipment either by scrapping it or selling it. You will also learn about intangible assets, what they are, how to record them, and how to account for their diminishing value.
You should read and take notes on Sections 11.1 through 11.10 of Chapter 11 on pages 120 through 155.
Section 11.1 will provide chapter-specific learning objectives.
Section 11.2 provides another look at a potential employment opportunity for someone interested in the business of accounting.
Section 11.3 discusses how, with the exception of land, all assets become of little to no use and a company will have to make the decision to trade the asset for a newer version, retire the asset altogether, or just simply sell the asset. How is this decision made? This section of the course provides some insight on responding to this question.
Section 11.4 discusses the sale of a plant asset. There will come a time when many business entities will 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 how the journal entries look in 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 even what to do in the event of a fire or flood that destroys an asset.
Section 11.5 provides insight on the concept of depletion of a natural resource and how you would journalize such entries.
Section 11.6 identifies the sources of an intangible asset. Pay careful attention to the identification of concepts like trademarks, amortization, patents, copyrights, trademarks, goodwill, and franchises.
Section 11.7 provides an explanation of the total assets turnover ratio, which illustrates the relationship between monetary volume and the average of the total asset. You will also be provided with an explanation of the learning objectives as they have been identified in this chapter. Finally, you will be provided with some demonstration problems and the solutions to those problems.
Section 11.8 revisits the terms from this chapter that you have connected with during your studies.
Section 11.9 provides you with a self-test of true/false and multiple-choice questions. There are other self-test questions, but the answers are only provided for the true/false and multiple-choice questions within the chapter. The solutions to self-test are located on pages 173 and 174 in Chapter 11.
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.