Property, plant and equipment include the assets that are expected to be used in operations for more than a year.

Assets classified as property, plant and equipment are tangible assets that have physical substance.

Property, plant and equipment include tangible assets that have physical substance, such as land, buildings, machinery, equipment, vehicles, furniture and fixtures.

Because these assets are expected to be used over multiple accounting periods, they are called as long-lived assets.

Property, plant and equipment are recorded at the acquisition cost when they are initially recorded.

In subsequent periods, accumulated depreciation is subtracted from the acquisition cost to report the carrying amount of the asset, except for land. Land is not depreciated and the acquisition cost of land is reported as carrying amount in the financial statements.

All property, plant and equipment other than land are depreciated over the useful life of the asset.

Depreciation is the process of allocating the cost of property, plant and equipment over the life of the asset.

Depreciation expense is reported in the income statement.

Accumulated depreciation is a contra-asset asset account that is subtracted from property, plant and equipment in the statement of financial position.

If the fair value of property, plant and equipment is lower than the carrying amount, the asset is impaired and an impairment loss is recognized.

Acquisition Cost

Acquisition cost includes all the expenditures required to make an asset ready for the intended use are included in the acquisition cost of the asset. Cost of demolishing an old building on land purchased is included in the acquisition cost of land.

Depreciation

Except for land, the cost of property, plant and equipment is allocated over the life of the asset through depreciation process. The cumulative amount of depreciation is recorded in the accumulated depreciation account.

Carrying Amount (Book Value)

Carrying amount, also called as book value, of an asset is calculated by subtracting the accumulated depreciation from the cost of property, plant and equipment.

Impairment of an Asset

An asset is impaired if the fair value of the asset is lower than the carrying amount (book value) of the asset. If an asset is impaired, the carrying amount is reduced to the fair value and the difference between fair value and carrying amount is recognized as an impairment loss.

Gain or Loss on Disposal

If an asset is sold at the price higher than the carrying amount of the asset at the time of sale, gain on sale of asset is recognized. If the amount recovered from the sale or disposal of the asset is lower than the carrying amount, loss on disposal of asset is recognized.

Review Questions

1. How is the acquisition cost of property, plant and equipment determined?

(1) Expenditures required to make an asset ready for the intended use are included in the acquisition cost of the asset.
(2) Cost of demolishing an old building on land purchased is included in the acquisition cost of land.

2. How is the carrying amount (book value) of property, plant and equipment calculated?

Carrying amount = Acquisition cost – Accumulated depreciation

Exercise 1

Company T had the following balances.
Property, plant and equipment = $720,000
Accumulated depreciation = $170,000
What is the amount of net property, plant and equipment?

Exercise 2

Company S had the following balances.
Cost of equipment = $300,000
Accumulated depreciation for equipment = $80,000
What is the amount of book value of equipment?

Exercise 3.

A plant asset with a cost of $900,000 and accumulated depreciation of $800,000 is sold for $80,000. 

What is the amount of the gain or loss on disposal of the plant asset?
a. $20,000 loss.
b. $80,000 loss.
c. $80,000 gain.
d. $20,000 gain.

Exercise 4

Equipment with a cost of $450,000 has an estimated salvage value of $30,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the units-of-activity method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours?
a. $112,500.
b. $105,000.
c. $113,400.
d. $108,750.

Exercise 5
Equipment with a cost of $450,000 has an estimated salvage value of $30,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours?
a. $112,500.
b. $105,000.
c. $113,400.
d. $108,750.

Exercise 6

Equipment with a cost of $450,000 has an estimated salvage value of $30,000 and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the declining balance method (double). What is the amount of depreciation for the first full year, during which the equipment was used 2,700 hours?
a. $225,000.
b. $210,000.
c. $112,500.
d. $113,400.

Exercise 7

Grant Company has decided to change the estimate of the useful life of an asset that has been in service for 2 years. Which of the following statements describes the proper way to revise a useful life estimate?
a. Revisions in useful life are permitted if approved by the IRS.
b. Retroactive changes must be made to correct previously recorded depreciation.
c. Only future years will be affected by the revision.
d. Both current and future years will be affected by the revision.

Exercise 8

Jack's Copy Shop bought equipment for $240,000 on January 1, 2018. Jack estimated the useful life to be 3 years with no salvage value, and the straight-line method of depreciation will be used. On January 1, 2019, Jack decides that the business will use the equipment for a total of 5 years. What is the revised depreciation expense for 2019?
a. $80,000.
b. $32,000.
c. $40,000.
d. $60,000.