Chapter 18 - Property, plant, and equipment. After reading this chapter, you should be able to: Determine the amount to record as an asset's cost, compute and record depreciation of property, plant, and equipment by commonly used methods, apply the modified accelerated cost recovery system (MACRS) for federal income tax purposes, record sales of plant and equipment,. | 1- McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Property, Plant, and Equipment Section 1: Acquisition and Depreciation Chapter 18 Section Objectives Determine the amount to record as an asset’s cost. Compute and record depreciation of property, plant, and equipment by commonly used methods. Apply the Modified Accelerated Cost Recovery System (MACRS) classes for federal income tax purposes. Cost of Tangible Personal Property Gross purchase price less discounts Transportation costs Installation costs Costs of adjustments or modifications needed to prepare the asset for use Cost of Real Property Purchase price Legal costs Other costs related to the acquisition Long term assets, like buildings, machinery, equipment, furniture, and fixtures are depreciated because they have a limited life and get used up over time. Depreciation refers to the loss of usefulness, and not necessarily to a decrease in the market value. The account . | 1- McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Property, Plant, and Equipment Section 1: Acquisition and Depreciation Chapter 18 Section Objectives Determine the amount to record as an asset’s cost. Compute and record depreciation of property, plant, and equipment by commonly used methods. Apply the Modified Accelerated Cost Recovery System (MACRS) classes for federal income tax purposes. Cost of Tangible Personal Property Gross purchase price less discounts Transportation costs Installation costs Costs of adjustments or modifications needed to prepare the asset for use Cost of Real Property Purchase price Legal costs Other costs related to the acquisition Long term assets, like buildings, machinery, equipment, furniture, and fixtures are depreciated because they have a limited life and get used up over time. Depreciation refers to the loss of usefulness, and not necessarily to a decrease in the market value. The account depreciation expense is debited, and the account accumulated depreciation is credited to record the depreciation for a period. Depreciation Depreciation Methods Straight-Line Declining-Balance Sum-of-the-Years’-Digits Units-of-Output Straight-Line Method Formula: Depreciation = Cost – Salvage Value Estimated Useful Life The same dollar amount of depreciation is taken each year as an expense. Declining-Balance Method The book value of an asset at the beginning of the year is multiplied by a percentage to determine depreciation for the year. This is an accelerated method of depreciation. This method ignores salvage value. Sum-of-the-Years’-Digits Method This is an accelerated depreciation method. The denominator is sum of the useful life years added together. (If the useful life is 5 years, then denominator is 15 (1+2+3+4+5). The numerator is the number of years remaining in the useful life of the asset. Year 1: The fraction is 5/15. Year 2: The fraction is 4/15. Year 5: The fraction is 1/15.
