Assignment Study Notes: Property, Plant, and Equipment; Goodwill and Intangible Assets

Property, Plant, and Equipment; Goodwill and Intangible Assets

Overview

This section covers the accounting treatment for property, plant, and equipment (PPE), as well as intangible assets such as goodwill. It focuses on acquisition, depreciation/amortization, and the preparation of adjusting journal entries. Understanding these concepts is essential for accurately reporting long-term assets in financial statements.

Acquisition of Property, Plant, and Equipment (PPE)

Initial Recognition and Measurement

• PPE are tangible long-term assets used in business operations and not intended for resale.

• Initially recorded at cost, which includes purchase price and all expenditures necessary to bring the asset to its intended use (e.g., installation, delivery, legal fees).

• Example: Purchasing equipment for $84,000, including installation costs, is recorded as an increase in the Equipment account.

Depreciation Methods

Straight-Line Depreciation

• Allocates the cost of an asset evenly over its useful life.

• Formula:

$\text{Annual Depreciation Expense} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life (years)}}$

• Example: Equipment costing $84,000, residual value $24,000, useful life 5 years:

$\text{Annual Depreciation} = \frac{84,000 - 24,000}{5} = 12,000$

Units of Production Method

• Depreciation is based on actual usage or output rather than time.

• Formula:

$\text{Depreciation Expense} = \frac{\text{Cost} - \text{Residual Value}}{\text{Total Estimated Units}} \times \text{Units Produced in Period}$

• Example: Equipment costing $460,000, residual value $60,000, estimated 1,400,000 units; 1st year usage: 348,000 units:

$\text{Depreciation per Unit} = \frac{460,000 - 60,000}{1,400,000} = 0.2857$ $\text{Year 1 Depreciation} = 0.2857 \times 348,000 = 99,996$

Declining Balance Method

• An accelerated depreciation method applying a constant rate to the declining book value each year.

• Formula (Double Declining):

$\text{Depreciation Expense} = \text{Book Value at Beginning of Year} \times \left(\frac{2}{\text{Useful Life}}\right)$

• Example: Equipment with a cost of $25,000, residual value $3,000, useful life 10 years:

$\text{Depreciation Rate} = 2 \times \frac{1}{10} = 20\%$

Amortization of Intangible Assets

• Intangible assets (e.g., patents, copyrights, goodwill) are amortized over their useful lives if finite.

• Goodwill is not amortized but tested annually for impairment.

Journal Entries for Depreciation and Amortization

Recording Depreciation

• At the end of each period, record depreciation/amortization expense:

Journal Entry: Debit: Depreciation Expense Credit: Accumulated Depreciation

• For intangible assets, use Amortization Expense and Accumulated Amortization.

Disposal of Assets

• When an asset is sold or retired, remove its cost and accumulated depreciation from the books.

• Calculate gain or loss as the difference between proceeds and book value.

• Example: Selling a truck for $25,000 with a book value of $8,000 results in a gain of $17,000.

Summary Table: Depreciation Methods Comparison

Method	Basis	Expense Pattern	Common Use
Straight-Line	Time	Even	Buildings, office equipment
Units of Production	Usage/Output	Varies with use	Machinery, vehicles
Declining Balance	Time (accelerated)	Higher in early years	Technology, assets with rapid obsolescence

Key Terms

• Residual Value (Salvage Value): Estimated value at the end of an asset's useful life.

• Useful Life: Period over which an asset is expected to be used.

• Book Value: Cost of asset minus accumulated depreciation.

• Amortization: Systematic allocation of the cost of an intangible asset over its useful life.

Application and Practice

• Prepare adjusting entries for depreciation and amortization at year-end.

• Calculate depreciation using different methods as required by the asset type and company policy.

• Record disposals, including calculation of gain or loss.

Additional info: These notes are based on typical Financial Accounting assignments involving PPE and intangible assets, focusing on journal entries, depreciation methods, and asset disposals.