Property, Plant, and Equipment

Learning objectives

After studying this chapter, you should be able to:

• List the characteristics of plant assets and identify the costs of acquiring plant assets.
• List the four major factors affecting depreciation expense.
• Describe the various methods of calculating depreciation expense.
• Distinguish between capital and revenue expenditures for plant assets.
• Describe the subsidiary records used to control plant assets.
• Analyze and use the financial results - rate of return on operating assets.

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A company accountant's role in managing plant assets

Property, plant, and equipment (fixed assets or operating assets) compose more than one-half of total assets in many corporations. These resources are necessary for the companies to operate and ultimately make a profit. It is the efficient use of these resources that in many cases determines the amount of profit corporations will earn.

Accountants employed by a company are deeply involved in nearly all decisions regarding the company's fixed assets, from pre-acquisition planning to the ultimate disposal or sale of those assets. Companies do not view an asset acquisition as merely a purchase, but as an investment. For example, should your company or client purchase an airplane to visit clients? Accountants will investigate all the benefits, both financial and intangible, and compare these benefits to the costs. By determining whether or not the airplane will be a good investment for the company, the accountant can assist the company in making sound strategic business decisions.

Since these assets are so closely related to profits, good management is required. In accounting terms, a good return on operating assets is crucial to the success of the corporation. Many corporations have a staff of accountants whose primary task is to manage operating assets. This task involves making decisions concerning the purchase, use, and disposal of said assets. Once an asset has been acquired, accountants are responsible for determining the original value of the asset, the period over which it will extend benefits to the company, and its current market value while owned by the entity. The accountant must ultimately determine when and how to dispose of such an asset. The decision can range from trading the asset for a new asset to selling the asset to a salvage dealer.

Recently, The Williams Companies, Inc. had over USD 10 billion dollars in property, plant, and equipment. In addition, the company also had approximately USD 530 million in commitments for construction and acquisition of property, plant, and equipment. Managing a portfolio of assets of this magnitude takes both accounting knowledge and analytical skills. Successful management of these assets can be financially rewarding to both the company and the accountant.

On a classified balance sheet, the asset section contains: (1) current assets; (2) property, plant, and equipment; and (3) other categories such as intangible assets and long-term investments. Previous chapters discussed current assets. This chapter begins a discussion of property, plant, and equipment that is concluded in Chapter 11. Property, plant, and equipment are often called plant and equipment or simply plant assets. Plant assets are long-lived assets because they are expected to last for more than one year. Long-lived assets consist of tangible assets and intangible assets. Tangible assets have physical characteristics that we can see and touch; they include plant assets such as buildings and furniture, and natural resources such as gas and oil. Intangible assets have no physical characteristics that we can see and touch but represent exclusive privileges and rights to their owners.

Nature of plant assets

To be classified as a plant asset, an asset must: (1) be tangible, that is, capable of being seen and touched; (2) have a useful service life of more than one year; and (3) be used in business operations rather than held for resale. Common plant assets are buildings, machines, tools, and office equipment. On the balance sheet, these assets appear under the heading "Property, plant, and equipment".

Plant assets include all long-lived tangible assets used to generate the principal revenues of the business. Inventory is a tangible asset but not a plant asset because inventory is usually not long-lived and it is held for sale rather than for use. What represents a plant asset to one company may be inventory to another. For example, a business such as a retail appliance store may classify a delivery truck as a plant asset because the truck is used to deliver merchandise. A business such as a truck dealership would classify the same delivery truck as inventory because the truck is held for sale. Also, land held for speculation or not yet put into service is a long-term investment rather than a plant asset because the land is not being used by the business. However, standby equipment used only in peak or emergency periods is a plant asset because it is used in the operations of the business.

Accountants view plant assets as a collection of service potentials that are consumed over a long time. For example, over several years, a delivery truck may provide 100,000 miles of delivery services to an appliance business. A new building may provide 40 years of shelter, while a machine may perform a particular operation on 400,000 parts. In each instance, purchase of the plant asset actually represents the advance payment or prepayment for expected services. Plant asset costs are a form of prepaid expense. As with short-term prepayments, the accountant must allocate the cost of these services to the accounting periods benefited.

Accounting for plant assets involves the following four steps:

• Record the acquisition cost of the asset.
• Record the allocation of the asset's original cost to periods of its useful life through depreciation.
• Record subsequent expenditures on the asset.
• Account for the disposal of the asset.

In Exhibit 4, note how the asset's life begins with its procurement and the recording of its acquisition cost, which is usually in the form of a dollar purchase. Then, as the asset provides services through time, accountants record the asset's depreciation and any subsequent expenditures related to the asset. Finally, accountants record the disposal of the asset. We discuss the first three steps in this chapter and the disposal of an asset in Chapter 11. The last section in this chapter explains how accountants use subsidiary ledgers to control assets.

Remember that in recording the life history of an asset, accountants match expenses related to the asset with the revenues generated by it. Because measuring the periodic expense of plant assets affects net income, accounting for property, plant, and equipment is important to financial statement users.

Initial recording of plant assets

When a company acquires a plant asset, accountants record the asset at the cost of acquisition (historical cost). This cost is objective, verifiable, and the best measure of an asset's fair market value at the time of purchase. Fair market value is the price received for an item sold in the normal course of business (not at a forced liquidation sale). Even if the market value of the asset changes over time, accountants continue to report the acquisition cost in the asset account in subsequent periods.

The acquisition cost of a plant asset is the amount of cash or cash equivalents given up to acquire and place the asset in operating condition at its proper location. Thus, cost includes all normal, reasonable, and necessary expenditures to obtain the asset and get it ready for use. Acquisition cost also includes the repair and reconditioning costs for used or damaged assets. Unnecessary costs (such as traffic tickets or fines) that must be paid as a result of hauling machinery to a new plant are not part of the acquisition cost of the asset.

The next sections discuss which costs are capitalized (debited to an asset account) for: (1) land and land improvements; (2) buildings; (3) group purchases of assets; (4) machinery and other equipment; (5) self-constructed assets; (6) noncash acquisitions; and (7) gifts of plant assets.

The cost of land includes its purchase price and other costs such as option cost, real estate commissions, title search and title transfer fees, and title insurance premiums. Also included are an existing mortgage note or unpaid taxes (back taxes) assumed by the purchaser; costs of surveying, clearing, and grading; and local assessments for sidewalks, streets, sewers, and water mains. Sometimes land purchased as a building site contains an unusable building that must be removed. Then, the accountant debits the entire purchase price to Land, including the cost of removing the building less any cash received from the sale of salvaged items while the land is being readied for use.

Exhibit 4: Recording the life history of a depreciable asset

To illustrate, assume that Spivey Company purchased an old farm on the outskirts of San Diego, California,USA, as a factory site. The company paid USD 225,000 for the property. In addition, the company agreed to pay unpaid property taxes from previous periods (called back taxes) of USD 12,000. Attorneys' fees and other legal costs relating to the purchase of the farm totaled USD 1,800. Spivey demolished (razed) the farm buildings at a cost of USD 18,000. The company salvaged some of the structural pieces of the building and sold them for USD 3,000. Because the firm was constructing a new building at the site, the city assessed Spivey Company USD 9,000 for water mains, sewers, and street paving. Spivey computed the cost of the land as follows:

Accountants assigned all costs relating to the farm purchase and razing of the old buildings to the Land account because the old buildings purchased with the land were not usable. The real goal was to purchase the land, but the land was not available without the buildings.

Land is considered to have an unlimited life and is therefore not depreciable. However, land improvements, including driveways, temporary landscaping, parking lots, fences, lighting systems, and sprinkler systems, are attachments to the land. They have limited lives and therefore are depreciable. Owners record depreciable land improvements in a separate account called Land Improvements. They record the cost of permanent landscaping, including leveling and grading, in the Land account.

When a business buys a building, its cost includes the purchase price, repair and remodeling costs, unpaid taxes assumed by the purchaser, legal costs, and real estate commissions paid.

Determining the cost of constructing a new building is often more difficult. Usually this cost includes architect's fees; building permits; payments to contractors; and the cost of digging the foundation. Also included are labor and materials to build the building; salaries of officers supervising the construction; and insurance, taxes, and interest during the construction period. Any miscellaneous amounts earned from the building during construction reduce the cost of the building. For example, an owner who could rent out a small completed portion during construction of the remainder of the building, would credit the rental proceeds to the Buildings account rather than to a revenue account.

Sometimes a company buys land and other assets for a lump sum. When land and buildings purchased together are to be used, the firm divides the total cost and establishes separate ledger accounts for land and for buildings. This division of cost establishes the proper balances in the appropriate accounts. This is especially important later because the depreciation recorded on the buildings affects reported income, while no depreciation is taken on the land.

Returning to our example of Spivey Company, suppose one of the farm buildings was going to be remodeled for use by the company. Then, Spivey would determine what portion of the purchase price of the farm, back taxes, and legal fees (USD 225,000 + USD 12,000 + USD 1,800 = USD 238,800) it could assign to the buildings and what portion to the land. (The net cost of demolition would not be incurred, and the city assessment would be incurred at a later time). Spivey would assign the USD 238,800 to the land and the buildings on the basis of their appraised values. For example, assume that the land was appraised at USD 162,000 and the buildings at USD 108,000. Spivey would determine the cost assignable to each of these plant assets as follows:

*The purchase price is the sum of the cash price, back taxes, and legal fees.

The journal entry to record the purchase of the land and buildings would be:

When the city eventually assessed the charges for the water mains, sewers, and street paving, the company would still debit these costs to the Land account as in the previous example.

Often companies purchase machinery or other equipment such as delivery or office equipment. Its cost includes the seller's net invoice price (whether the discount is taken or not), transportation charges incurred, insurance in transit, cost of installation, costs of accessories, and testing and break-in costs. Also included are other costs needed to put the machine or equipment in operating condition in its intended location. The cost of machinery does not include removing and disposing of a replaced, old machine that has been used in operations. Such costs are part of the gain or loss on disposal of the old machine, as discussed in Chapter 11.

To illustrate, assume that Clark Company purchased new equipment to replace equipment that it has used for five years. The company paid a net purchase price of USD 150,000, brokerage fees of USD 5,000, legal fees of USD 2,000, and freight and insurance in transit of USD 3,000. In addition, the company paid USD 1,500 to remove old equipment and USD 2,000 to install new equipment. Clark would compute the cost of new equipment as follows:

If a company builds a plant asset for its own use, the cost includes all materials and labor directly traceable to construction of the asset. Also included in the cost of the asset are interest costs related to the asset and amounts paid for utilities (such as heat, light, and power) and for supplies used during construction. To determine how much of these indirect costs to capitalize, the company compares utility and supply costs during the construction period with those costs in a period when no construction occurred. The firm records the increase as part of the asset's cost. For example, assume a company normally incurred a USD 600 utility bill for June. This year, the company constructed a machine during June, and the utility bill was USD 975. Thus, it records the USD 375 increase as part of the machine's cost.

To illustrate further, assume that Tanner Company needed a new die-casting machine and received a quote from Smith Company for USD 23,000, plus USD 1,000 freight costs. Tanner decided to build the machine rather than buy it. The company incurred the following costs to build the machine: materials, USD 4,000; labor, USD 13,000; and indirect services of heat, power, and supplies, USD 3,000. Tanner would record the machine at its cost of USD 20,000 (USD 4,000 + USD 13,000 + USD 3,000) rather than USD 24,000, the purchase price of the machine. The USD 20,000 is the cost of the resources given up to construct the machine. Also, recording the machine at USD 24,000 would require Tanner to recognize a gain on construction of the assets. Accountants do not subscribe to the idea that a business can earn revenue (or realize a gain), and therefore net income, by dealing with itself.

You can apply the general guidelines we have just discussed to other plant assets, such as furniture and fixtures. The accounting methods are the same.

When a plant asset is purchased for cash, its acquisition cost is simply the agreed on cash price. However, when a business acquires plant assets in exchange for other noncash assets (shares of stock, a customer's note, or a tract of land) or as gifts, it is more difficult to establish a cash price. This section discusses three possible asset valuation bases.

The general rule on noncash exchanges is to value the noncash asset received at its fair market value or the fair market value of what was given up, whichever is more clearly evident. The reason for not using the book value of the old asset to value the new asset is that the asset being given up is often carried in the accounting records at historical cost or book value. Neither amount may adequately represent the actual fair market value of either asset. Therefore, if the fair market value of one asset is clearly evident, a firm should record this amount for the new asset at the time of the exchange.

Appraised value Sometimes, neither of the items exchanged has a clearly determinable fair market value. Then, accountants record exchanges of items at their appraised values as determined by a professional appraiser. An appraised value is an expert's opinion of an item's fair market price if the item were sold. Appraisals are used often to value works of art, rare books, and antiques.

Book value The book value of an asset is its recorded cost less accumulated depreciation. An old asset's book value is usually not a valid indication of the new asset's fair market value. If a better basis is not available, however, a firm could use the book value of the old asset.

Occasionally, a company receives an asset without giving up anything for it. For example, to attract industry to an area and provide jobs for local residents, a city may give a company a tract of land on which to build a factory. Although such a gift costs the recipient company nothing, it usually records the asset (Land) at its fair market value. Accountants record gifts of plant assets at fair market value to provide information on all assets owned by the company. Omitting some assets may make information provided misleading. They would credit assets received as gifts to a stockholders' equity account titled Paid-in Capital - Donations.

An accounting perspective:

Use of technology

How can CPA firms sell services on the Web other than by advertising their services? Ernst & Young has developed a website for nonaudit consulting clients in which they charge an annual fixed fee for nonaudit clients to obtain advice from the firm's consultants. The site is secure in that it can only be accessed by those who have paid the fee. The subscribers type in their questions on any business topic and get a response from an expert within two working days. Another firm, PricewaterhouseCoopers, has an on-line service for tax professionals to seek advice. The other large accounting firms undoubtedly have developed or are developing secure websites for providing similar types of services.

Depreciation of plant assets

Subsequent expenditures (capital and revenue) on assets

Companies often spend additional funds on plant assets that have been in use for some time. They debit these expenditures to: (1) an asset account; (2) an accumulated depreciation account; or (3) an expense account.

Expenditures debited to an asset account or to an accumulated depreciation account are capital expenditures. Capital expenditures increase the book value of plant assets.

Revenue expenditures, on the other hand, do not qualify as capital expenditures because they help to generate the current period's revenues rather than future periods' revenues. As a result, companies expense these revenue expenditures immediately and report them in the income statement as expenses.

Betterments or improvements to existing plant assets are capital expenditures because they increase the quality of services obtained from the asset. Because betterments or improvements add to the service-rendering ability of assets, firms charge them to the asset accounts. For example, installing an air conditioner in an automobile that did not previously have one is a betterment. The debit for such an expenditure is to the asset account, Automobiles.

Occasionally, expenditures made on plant assets extend the quantity of services beyond the original estimate but do not improve the quality of the services. Since these expenditures benefit an increased number of future periods, accountants capitalize rather than expense them. However, since there is no visible, tangible addition to, or improvement in, the quality of services, they charge the expenditures to the accumulated depreciation account, thus reducing the credit balance in that account.

Such expenditures cancel a part of the existing accumulated depreciation; firms often call them extraordinary repairs.

To illustrate, assume that after operating a press for four years, a company spent USD 5,000 to recondition the press. The reconditioning increased the machine's life to 14 years instead of the original estimate of 10 years. The journal entry to record the extraordinary repair is:

Originally, the press cost USD 40,000, had an estimated useful life of 10 years, and had no estimated salvage value. At the end of the fourth year, the balance in its accumulated depreciation account under the straight-line method is [(USD 40,000/10) X 4] = USD 16,000. After debiting the USD 5,000 spent to recondition the press to the accumulated depreciation account, the balances in the asset account and its related accumulated depreciation account are as shown in the last column: 

In effect, the expenditure increases the carrying amount (book value) of the asset by reducing its contra account, accumulated depreciation. Under the straight-line method, we would divide the new book value of the press, USD 29,000, equally among the 10 remaining years in amounts of USD 2,900 per year (assuming that the estimated salvage value is still zero).

As a practical matter, expenditures for major repairs not extending the asset's life are sometimes charged to accumulated depreciation. This avoids distorting net income by expensing these expenditures in the year incurred. Then, firms calculate a revised depreciation expense, and spread the cost of major repairs over a number of years. This treatment is not theoretically correct.

To illustrate, assume the same facts as in the previous example except that the USD 5,000 expenditure did not extend the life of the asset. Because of the size of this expenditure, the company still charges it to accumulated depreciation. Now, it would spread the USD 29,000 remaining book value over the remaining six years of the life of the press. Under the straight-line method, annual depreciation would then be (USD 29,000/6) = USD 4,833.

Exhibit 12: Expenditures on plant assets after acquisition

Accountants treat as expenses those recurring and/or minor expenditures that neither add to the asset's service-rendering quality nor extend its quantity of services beyond its original estimated useful life. Thus, firms immediately expense regular maintenance (lubricating a machine) and ordinary repairs (replacing a broken fan belt on an automobile) as revenue expenditures. For example, a company that spends USD 190 to repair a machine after using it for some time, debits Maintenance Expense or Repairs Expense.

Low-cost items Most businesses purchase low-cost items that provide years of service, such as paperweights, hammers, wrenches, and drills. Because of the small dollar amounts involved, it is impractical to use the ordinary depreciation methods for such assets, and it is often costly to maintain records of individual items. Also, the effect of low-cost items on the financial statements is not significant. Accordingly, it is more efficient to record the items as expenses when they are purchased. For instance, many companies charge any expenditure less than an arbitrary minimum, say, USD 100, to expense regardless of its impact on the asset's useful life. This practice of accounting for such low unit cost items as expenses is an example of the modifying convention of materiality that was discussed in Chapter 5. In Exhibit 12, we summarize expenditures on plant assets after acquisition.

In practice, it is difficult to decide whether to debit an expenditure to the asset account or to the accumulated depreciation account. For example, some expenditures seem to affect both the quality and quantity of services. Even if the wrong account were debited for the expenditure, the book value of the plant asset at that point would be the same amount it would have been if the correct account had been debited. However, both the asset and accumulated depreciation accounts would be misstated.

As an example of the effect of misstated asset and accumulated depreciation accounts, assume Watson Company had an asset that had originally cost USD 15,000 and had been depreciated to a book value of USD 6,000 at the beginning of 2010. At that time, Watson estimated the equipment had a remaining useful life of two years. The company spent USD 4,000 in early January 2010 to install a new motor in the equipment. This motor extended the useful life of the asset four years beyond the original estimate. Since the expenditure extended the life, the firm should capitalize it by a debit to the accumulated depreciation account. We show the calculations for depreciation expense if the entry was made correctly and if the expenditure had been improperly charged (debited) to the asset account in Exhibit 13.

Exhibit 13: Expenditure extending plant asset life

If an expenditure that should be expensed is capitalized, the effects are more significant. Assume now that USD 6,000 in repairs expense is incurred for a plant asset that originally cost USD 40,000 and had a useful life of four years and no estimated salvage value. This asset had been depreciated using the straight-line method for one year and had a book value of USD 30,000 (USD 40,000 cost - USD 10,000 first-year depreciation) at the beginning of 2010. The company capitalized the USD 6,000 that should have been charged to repairs expense in 2010. The charge for depreciation should have remained at USD 10,000 for each of the next three years. With the incorrect entry, however, depreciation increases.

Regardless of whether the repair was debited to the asset account or the accumulated depreciation account, the firm would change the depreciation expense amount to USD 12,000 for each of the next three years [(USD 30,000 book value + USD 6,000 repairs expense)/3 more years of useful life]. These errors would cause net income for the year 2010 to be overstated USD 4,000: (1) repairs expense is understated by USD 6,000, causing income to be overstated by USD 6,000; and (2) depreciation expense is overstated by USD 2,000, causing income to be understated by USD 2,000. In 2011, the overstatement of depreciation by USD 2,000 would cause 2011 income to be understated by USD 2,000.

Note that the USD 6,000 recording error affects more than just the expense accounts and net income. Plant asset and Retained Earnings accounts on the balance sheet also reflect the impact of this error. To see the effect of incorrectly capitalizing the USD 6,000 to the asset account rather than correctly expensing it, look at Exhibit 14.

Subsidiary records used to control plant assets

Most companies maintain formal records (ranging from handwritten documents to computer tapes) to ensure control over their plant assets. These records include an asset account and a related accumulated depreciation account in the general ledger for each major class of depreciable plant assets, such as buildings, factory machinery, office equipment, delivery equipment, and store equipment.

Because the general ledger account has no room for detailed information about each item in a major class of depreciable plant assets, many companies use plant asset subsidiary ledgers. Subsidiary ledgers for Accounts Receivable and Accounts Payable were explained briefly in An accounting perspective in Chapter 4. A company may also use subsidiary ledgers for plant assets. For instance, assume a company has a general ledger account for office furniture. The subsidiary ledger for office furniture might contain four separate accounts entitled: Desks, Chairs, File Cabinets, and Bookshelves. Alternatively, a company could even have a separate subsidiary account for each piece of furniture. The total of all the subsidiary account balances must equal the total of the general ledger "control" account for Office Furniture at the end of the accounting period. Each general ledger account for each class of depreciable asset, such as Buildings, Delivery Equipment, and so on, could have a subsidiary ledger backing it up and showing information such as the description, cost, and purchase date for each asset. These subsidiary ledgers and detailed records provide more information and allow the company to maintain better control over plant and equipment.

Exhibit 14: Effect of revenue expenditure treated as capital expenditure

When they are kept for each major class of plant and equipment, a company may have subsidiary ledgers for factory machinery, office equipment, and other classes of depreciable plant assets. Then there may be an additional subsidiary ledger for each type of asset within each category. For example, the subsidiary office equipment ledger may contain accounts for microcomputers, printers, fax machines, copying machines, and so on. Companies also keep a detailed record for each item represented in a subsidiary ledger account. For example, there may be a separate detailed record for each microcomputer represented in the Microcomputer subsidiary ledger account. Each detailed record should include a description of the asset, identification or serial number, location of the asset, date of acquisition, cost, estimated salvage value, estimated useful life, annual depreciation, accumulated depreciation, insurance coverage, repairs, date of disposal, and gain or loss on final disposal of the asset. Note the detailed record for one particular microcomputer as of 2010 December 31, in Exhibit 15.

To enhance control over plant and equipment, companies stencil on or attach the identification or serial number to each asset. Periodically, firms must take a physical inventory to determine whether all items in the accounting records actually exist, whether they are located where they should be, and whether they are still being used. A company that does not use detailed records and identification numbers or take physical inventories finds it difficult to determine whether assets have been discarded or stolen.

The general ledger control account balance for each major class of plant and equipment should equal the total of the amounts in the subsidiary ledger accounts for that class of plant assets. Also, the totals in the detailed records for a specific subsidiary ledger account (such as Microcomputers) should equal the balance of that account. Each time a plant asset is acquired, exchanged, or disposed of, the firm posts an entry to both a general ledger control account and the appropriate subsidiary ledger account. It also updates the detailed record for the items affected.

 
Exhibit 15: Detailed record of a specific plant asset

DEMENT & PEERY, INC.

Consolidated Balance Sheets

2010 December 31 and 2009 (Dollars in millions) 

Exhibit 16: Consolidated balance sheets

Analyzing and using the financial results - Rate of return on operating assets

Understanding the learning objectives

Key terms

Accelerated depreciation methods Record higher amounts of depreciation during the early years of an asset's life and lower amounts in later years.

Acquisition cost Amount of cash and/or cash equivalents given up to acquire a plant asset and place it in operating condition at its proper location.

Appraised value An expert's opinion as to what an item's market price would be if the item were sold.

Betterments (improvements) Capital expenditures that are properly charged to asset accounts because they add to the service-rendering ability of the assets; they increase the quality of services obtained from an asset.

Book value An asset's recorded cost less its accumulated depreciation.

Capital expenditures Expenditures debited to an asset account or to an accumulated depreciation account.

Depreciation The amount of plant asset cost allocated to each accounting period benefiting from the plant asset's use. The straight-line depreciation method charges an equal amount of plant asset cost to each period. The units-of-production depreciation method assigns an equal amount of depreciation for each unit of product manufactured or service rendered by an asset. The double-declining-balance (DDB) method assigns decreasing amounts of depreciation to successive periods of time.

Double-declining-balance (DDB) depreciation See depreciation.

Extraordinary repairs Expenditures that cancel a part of the existing accumulated depreciation because they increase the quantity of services expected from an asset.

Fair market value The price that would be received for an item being sold in the normal course of business (not at a forced liquidation sale).

Inadequacy The inability of a plant asset to produce enough products or provide enough services to meet current demands.

Land improvements Attachments to land, such as driveways, landscaping, parking lots, fences, lighting systems, and sprinkler systems, that have limited lives and therefore are depreciable.

Low-cost items Items that provide years of service at a relatively low unit cost, such as hammers, paperweights, and drills.

Obsolescence Decline in usefulness of an asset brought about by inventions and technological progress.

Physical deterioration Results from use of the asset - wear and tear - and the action of the elements.

Plant and equipment A shorter title for property, plant, and equipment; also called plant assets. Included are land and manufactured or constructed assets such as buildings, machinery, vehicles, and furniture.

Rate of return on operating assets Net operating income/Operating assets. This ratio helps management determine how effectively it used assets to produce a profit.

Revenue expenditures Expenditures (on a plant asset) that are immediately expensed.

Salvage value The amount of money the company expects to recover, less disposal costs, on the date a plant asset is scrapped, sold, or traded in. Also called scrap value or residual value.

Straight-line depreciation See depreciation.

Tangible assets Assets that we can see and touch such as land, buildings, and equipment.

Units-of-production depreciation See depreciation.

Useful life Refers to the length of time the company owning the asset intends to use it.