Property, Plant, and Equipment

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. You should be able to explain fair market value, acquisition costs, historical costs, and which costs are capitalized. This chapter addresses 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 allocation process that ensures the useful life of an asset is properly identified from accounting and company valuation.

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.

 

2010

 
 

Correctly Expensing

Incorrectly Expensing

Depreciation expense

$10,000

$12,000

Repair Expense

6,000

-0-

Net in come overstated by $4,000, which affects retained earnings

$16,000

$12,000

Asset cost

$40,000

$46,000

Accumulated depreciation

20,000

22,000

Book value

$20,000

$24,000

 

2011

 
 

Correctly Expensing

Incorrectly Expensing

Depreciation expense

$10,000

$12,000

Repair Expense

-0-

-0-

Net in come understated by $2,000, which affects retained earnings

$10,000

$12,000

Asset cost

$40,000

$46,000

Accumulated depreciation

30,000

34,000

Book value

$10,000

$12,000


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.

Item Dell Precision M40

Insurance coverage:

Id. No. Z-43806

United Ins. Co.

Location Rm. 403, Adm. bldg.

Pol. No. 0052-61481-24

Date acquired 2009 Jan. 1

Amt. $3,000

Cost $3,000

Repairs:

Estimated salvage value $200

2010/6/13 $140

Estimated useful life 4 yrs.

 

Deprecation per year $700

 

Accumulated depreciation: '

Disposal date

2009/12/31 $ 700

Gain or loss

2010/12/31 1,400

 

31/12/2011

 

31/12/2012

 

 
Exhibit 15: Detailed record of a specific plant asset

  

DEMENT & PEERY, INC.

Consolidated Balance Sheets

2010 December 31 and 2009 (Dollars in millions) 

 

2010

2009

ASSETS

   

Current Assets:

   

 Cash

$ 121

$ 192

 Accounts receivable, net of allowance for doubtful accounts of $15 in both 2010 and 2009

379

491

 Inventories

247

175

Deposits, prepaid expenses, and other

120

58

 Total Current Assets

$ 867

$ 916

Investments

   

 Equity affiliates

170

277

 Other assets

87

63

Property and Equipment - Net

4153

3919

Deferred Charges

164

154

 Total Assets

$5,441

$5,329

Net Operating Earnings

$ 560

$ 433


Exhibit 16: Consolidated balance sheets