Plant Asset

Weygandt ● Kimmel ● Kieso

IFRS 4th Edition

Akuntansi Pengantar II
Progdi Perpajakan
Semeseter Genap 2021/2022
Plant Asset Expenditures
Plant assets are resources that have
• physical substance (a definite size and shape),
• are used in the operations of a business,
• are not intended for sale to customers,
• are expected to provide service to the company for a
number of years, except for land.
Historical Cost Principle
• Requires that companies record plant assets at cost
• Cost consists of all expenditures necessary to acquire an
asset and make it ready for its intended use
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The Cost of Plant Assets
Land
All necessary costs incurred in making land ready for its
intended use increase (debit) the Land account.

Illustration: Lew Ltd. acquires real estate at a cash cost of

HK$2,000,000. The property contains an old warehouse that is
razed at a net cost of HK$60,000 (HK$75,000 in costs less
HK$15,000 proceeds from salvaged materials). Additional
expenditures are the attorney’s fee, HK$10,000, and the real estate
broker’s commission, HK$80,000. Determine the amount to be
reported as the cost of the land.

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The Cost of Plant Assets
Required: Determine amount to be reported as the cost of
the land. Land
Cash price of property (HK$2,000,000) HK$2,000,000
Net removal cost of warehouse (HK$60,000) 60,000
Attorney's fees (HK$10,000) 10,000
Real estate broker’s commission (HK$80,000) 80,000
Cost of Land HK$2,150,000
Lew makes the following entry:
Land 2,150,000
Cash 2,150,000
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The Cost of Plant Assets
Land Improvements
Structural additions with limited lives that are made to
land. Cost includes all expenditures necessary to make
the improvements ready for their intended use.
• Examples: driveways, parking lots, fences,
landscaping, and underground sprinklers
• Limited useful lives
• Expense (depreciate) cost of land improvements over
their useful lives

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The Cost of Plant Assets
Buildings
Includes all costs related directly to purchase or construction.

Purchase costs:
• Purchase price, closing costs (attorney’s fees, title
insurance, etc.) and real estate broker’s commission
• Remodeling and replacing or repairing the roof, floors,
electrical wiring, and plumbing
Construction costs:
• Contract price, Payments for architects’ fees, Building
permits, Excavation costs
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The Cost of Plant Assets
Equipment
Include all costs incurred in acquiring the equipment and preparing it for use.
Illustration: Lenard Huang Group purchases a delivery truck at a cash
price of HK$420,000. Related expenditures consist of sales taxes
HK$13,200, painting and lettering HK$5,000, motor vehicle license
HK$800, and a three-year accident insurance policy HK$16,000. Compute
the cost of the delivery truck.
Blank Truck
Cash price HK$420,000
Sales taxes 13,200
Painting and lettering 5,000
Blank Blank
Cost of Delivery Truck HK$438,200
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The Cost of Plant Assets
Illustration: Lenard Huang Group purchases a delivery truck at
a cash price of HK$420,000. Related expenditures consist of
sales taxes HK$13,200, painting and lettering HK$5,000,
motor vehicle license HK$800, and a three-year accident
insurance policy HK$16,000. Prepare the journal entry to
record these costs.

Equipment 438,200
License Expense 800
Prepaid Insurance 16,000
Cash 455,000

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Expenditures During Useful Life
Ordinary Repairs are expenditures to maintain the
operating efficiency and productive life of the unit.
Debit to Maintenance and Repairs Expense
Referred to as revenue expenditures
Additions and Improvements are costs incurred to
increase the operating efficiency, productive capacity, or
useful life of a plant asset.
Debit plant asset affected
Referred to as capital expenditures
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Depreciation Methods
Depreciation
Process of allocating to expense the cost of a plant asset
over its useful life in a rational and systematic manner.
• Process of cost allocation, not asset valuation
• Applies to land improvements, buildings, and
equipment, not land
• Depreciable, because the revenue-producing ability
of asset will decline over the asset’s useful life

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Factors in Computing Depreciation

Depreciation expense is reported on the income statement. Accumulated

depreciation is reported on the balance sheet as a deduction from plant
assets.

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Depreciation Methods

• Management selects the method it believes best

measures an asset’s contribution to revenue over
its useful life.
• Examples include:
1) Straight-line method.
2) Units-of-activity method.
3) Declining-balance method.

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Depreciation Methods
Illustration: Barb’s Florists purchased a small delivery truck on
January 1, 2020.
Cost €13,000
Expected salvage value € 1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000
Required: Compute depreciation using the following.
(a) Straight-Line (b) Units-of-Activity (c) Declining Balance

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Straight-Line Method
Expense is same amount for each year
Depreciable cost = Cost less residual value

Residual Depreciable
Cost - Value = Cost
€13,000 - €1,000 = €12,000

Annual
Depreciable Useful Life Depreciation
Cost ÷ (in years) = Expense
€12,000 ÷ 5 = €2,400

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 Straight-Line Method
Computations End of Year
Depreciable Annual Accumulated Book
Year Cost x Rate = Expense Depreciation Value
2020 $12,000 x 20% = € 2,400 € 2,400 €10,600*
2021 12,000 x 20 = 2,400 4,800 8,200
2022 12,000 x 20 = 2,400 7,200 5,800
2023 12,000 x 20 = 2,400 9,600 3,400
2024 12,000 x 20 = 2,400 12,000 1,000
€12,000
Journal Entry
2020 Depreciation Expense 2,400
*€13,000 − €2,400
Accumulated Depreciation 2,400
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Straight-Line Method
Assume the delivery truck was purchased on April 1, 2020.
Computations End of Year
Depreciable Annual Partial Depreciation Accum.
Year Cost x Rate = Expense x Year = Expense Deprec.
2020 €12,000 x 20% = € 2,400 x 9/12 = € 1,800 €1,800
2021 12,000 x 20 = 2,400 x = 2,400 4,200
2022 12,000 x 20 = 2,400 x = 2,400 6,600
2023 12,000 x 20 = 2,400 x = 2,400 9,000
2024 12,000 x 20 = 2,400 x = 2,400 11,400
2025 12,000 x 20 = 2,400 x 3/12 = 600 12,000
€12,000

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Units-of-Activity Method
• Companies estimate total units of activity to calculate
depreciation cost per unit
• Expense varies based on units of activity
• Depreciable cost is cost less salvage value
• Often referred to as units-of-production method

Depreciable Total Units Depreciable Cost

Cost ÷ of Activity = per Unit
€12,000 ÷ 100,000 miles = €0.12

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 Units-of-Activity Method
Computations End of Year
Units of Annual Accumulated Book
Year Activity x Rate = Expense Depreciation Value
2020 15,000 x €.012 = € 1,800 € 1,800 €11,200*
2021 30,000 x .012 = 3,600 5,400 7,600
2022 20,000 x .012 = 2,400 7,800 5,200
2023 25,000 x .012 = 3,000 10,800 2,200
2024 10,000 x .012 = 1,200 12,000 1,000

Journal Entry
2020 Depreciation Expense 1,800
*€13,000 − €1,800
Accumulated Depreciation 1,800
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Declining-Balance Method
Computations End of Year
Beginning Annual Accumulated Book
Year Book Value x Rate = Expense Depreciation Value
2020 €13,000 x 40% = € 5,200 € 5,200 €7,800 (a)
2021 7,800 x 40 = 3,120 8,320 4,680
2022 4,680 x 40 = 1,872 10,192 2,808
2023 2,808 x 40 = 1,123 11,315 1,685
2024 1,685 x 40 = 685 (b) 12,000 1,000

(a) €13,000 − €5,200

(b) €1,685 x 40% = €674, expense adjusted to €685 to result in residual value of €1,000.

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Declining-Balance Method
Assume the delivery truck was purchased on April 1, 2020.
Computations End of Year
Beginning Annual Partial Depreciation Accum.
Year Book Value x Rate = Expense x Year = Expense Deprec.
2020 €13,000 x 40% = € 5,200 x 9/12 = € 3,900 €3,900
2021 9,100 x 40 = 3,640 x = 3,640 7,540
2022 5,460 x 40 = 2,184 x = 2,184 9,724
2023 3,276 x 40 = 1,310 x = 1,310 11,034
2024 1,966 x 40 = 786 x = 786 11,820
2025 1,180 x 40 = 472 x = 180 (a) 12,000

(a) Expense adjusted to €180 to result in residual value of €1,000.

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Comparison of Methods
Straight- Declining- Units-of-
Year Line Balance Activity
2020 € 2,400 € 5,200 € 1,800
2021 2,400 3,120 3,600
2022 2,400 1,872 2,400
2023 2,400 1,123 3,000
2024 2,400 685 1,200
€12,000 €12,000 €12,000

Annual depreciation expense varies, but total depreciation

expense is the same (€12,000) for the five-year period.

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Component Depreciation
• IFRS requires component depreciation for plant
assets
• Any significant parts of a plant asset that have
significantly different estimated useful lives should
be separately depreciated

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Soal 1.
Lewallen Company was organized on January 1. During the first year of operations, the following
expenditures and receipts were recorded in random order in the account, Land.
Debits
1. Cost of real estate purchased as a plant site (land and building). 220,000
2. Accrued real estate taxes paid at the time of the purchase of the real estate. 4,000
3. Cost of demolishing building to make land suitable for construction of a new building. 15,000
4. Architect’s fees on building plans. 14,000
5. Excavation costs for new building. 29,000
6. Cost of filling and grading the land. 5,000
7. Insurance and taxes during construction of building. 6,000
8. Cost of repairs to building under construction caused by a small fire. 7,000
9. Interest paid during the year, of which $54,000 pertains to the construction period. 69,000
10. Full payment to building contractor. 740,000
11. Cost of parking lots and driveways. 46,000
12. Real estate taxes paid for the current year on the land. 4,000
Total Debits $1,159,000
Credits
13. Insurance proceeds for fire damage. $3,000
14. Proceeds from residual of demolished building 3,500
Total Credits $6,500
Instructions: Analyze the foregoing transactions using the following tabular arrangement. Insert
the number of each transaction in the Item space and insert the amounts in the appropriate
columns.
Item Land Building Other Account Title

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Soal 2.
Marlow Company purchased equipment on January 1, 2019 for $90,000. It is
estimated that the equipment will have a $5,000 residual value at the end of its 5-
year useful life. It is also estimated that the equipment will produce 100,000 units
over its 5-year life.
Instructions
Answer the following independent questions.
1. Compute the amount of depreciation expense for the year ended December 31,
2019, using the straight-line method of depreciation.
2. If 16,000 units of product are produced in 2019 and 24,000 units are produced
in 2020, what is the book value of the equipment at December 31, 2020? The
company uses the units-of-activity depreciation method.
3. If the company uses the double-declining-balance method of depreciation, what
is the balance of the Accumulated Depreciation—Equipment account at
December 31, 2021?

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