Accounting Chapter 16 Homework Overhauling Aircraft Engine Definitely Extends The Life

Chapter 16

Accounting for Property, Plant, Equipment, and Intangible Assets

Chapter Overview

Property, plant, equipment, and intangible assets are used in a business to earn revenue for more than one year

or operating cycle. They lose value over that period of time and eventually will be written off the books. This

chapter discusses the cost of an asset and some of the depreciation methods used to write off a portion of the

cost each year. The methods of straight-line and units-of-production consider the cost of the asset less its

Learning Objectives

After studying Chapter 16, your students should gain proficiency in the following:

2. Explain and Calculate Depreciation Methods.

4. Journalize Transactions for Natural Resources and Intangible Assets.

Chapter 16 Assignment Grid

Estimated Level

Learning Time in of

Assignment Topic(s) Objective(s) Minutes Difficulty

Discussion Questions and Critical Thinking/Ethical Case

1 Cost of Property, Plant, and Equipment 1 5 Easy

2 Cost of Property, Plant, and Equipment 1 5 Easy

3 Capital and Revenue Expenditures 3 5 Easy

4 Depreciation 2 5 Easy

Concept Checks

1 Cost of Property, Plant, and Equipment 1 5 Easy

2 Straight-Line Method 2 10 Easy

3 Book Value 2 10 Easy

4 Units-of-Production Method 2 10 Easy

9 Exchange with Gain 3 15 Medium

Exercises (Set A)

16A-1 Cost of Property, Plant, and Equipment 1 15 Medium

16A-2 Depreciation 2 30 Medium

Exercises (Set B)

16A-1 Cost of Property, Plant, and Equipment 1 15 Medium

16A-2 Depreciation 2 30 Medium

Problems (Set A)

16A-1 Property, Plant, & Equipment Entries 1, 3 30 Medium

16A-2 Depreciation 2 60 Hard

Estimated Level

Learning Time in of

Assignment Topic(s) Objective(s) Minutes Difficulty

Problems (Set B)

16B-1 Property, Plant, & Equipment Entries 1, 3 30 Medium

16B-2 Depreciation 2 60 Hard

Learning Unit 16-1: Calculating the Cost of Property, Plant, and

Equipment

Summary: The cost of property, plant, and equipment is not just the price one pays to buy it. One must also

include the cost involved in getting it into position and in condition for use in the company. Thus, the cost of

a machine includes freight, assembly, and all other costs that are needed to get the machine up and ready to

run. When land (which has unlimited useful life) is purchased, many incidental costs are usually considered

part of the cost of the land. These costs include surveying, commissions to attorneys and real estate brokers,

title searches, and grading, draining, and clearing the property. Any special one-time assessment made for

Key Concepts: Land improvements

Lecture Outline:

1. Land and land improvements:

a. Land – there are some types of costs associated with the purchase of land which add permanent value

to the land and are added to the costs. Examples are:

i. Surveying

ii. Attorney’s and/or real estate broker’s commissions

iii. Title searches

iv. Grading, draining, and clearing of property

b. Land Improvements – an asset account that records improvements made to land. Such improvements

have a useful life and are subject to depreciation. Examples are:

i. Driveways

ii. Fences

v. Sprinkler system

c. Buildings:

i. Cost of purchased building includes the purchase price and all cost of repairs and other

expenses to get the building ready for use.

ii. Cost of construction of a building includes all reasonable costs for labor, insurance,

building permits, architect fees, legal fees, etc. to get the building ready for use.

d. Equipment – the cost of equipment is similar to the cost of buildings and includes all associated fees

to get the equipment ready for its intended use.

Teaching Tips/Strategy: Describe each asset, its classification, and the related costs included in the

acquisition cost. Explain why the classification will help determine the useful life, the depreciation rate, and

Use the “Ten-Minute Quiz” Question #1 to reinforce the learning concepts.

Learning Unit 16-2: Depreciation Methods

Summary: When a company calculates its periodic depreciation expense, different methods will produce

significantly different results. Thus, the method of depreciation chosen will affect the net income for current

as well as future periods and the book value (cost of asset less accumulated depreciation) of the asset on the

balance sheet. The following are the three common depreciation methods that an organization could use:

straight-line method, units-of-production method, and double declining-balance method. The straight-line

method is simple to use because it allocates the cost of the asset (less residual value) evenly over its

estimated useful life. (At the time an asset is acquired, an estimate is made of its usefulness or useful life in

A system for businesses to calculate depreciation for tax purposes based on the Tax Laws of 1986 and 1989 is

called the Modified Accelerated Cost Recovery System. The tax law requires a business to depreciate assets

based on recovery classification and the MACRS depreciation rate.

Lecture Outline:

1. Terms needed:

2. Depreciation methods:

a. Straight-line depreciation method is the method that allocates an equal amount of depreciation

over its useful life. The annual depreciation expense computation: (Cost – residual value) / Useful

life in years.

b. Units-of-production method is the method based on usage, and depreciation is allocated in equal

amounts per unit produced.

i. The annual depreciation expense per unit computation is done in two parts. The first part

c. Double declining-balance method is an accelerated depreciation method that calculates

depreciation as twice the straight-line rate times the book value of the assets. (Book value = cost

less accumulated depreciation).

a. An accelerated depreciation method is a method where more depreciation is taken in earlier

years compared to later years.

3. Depreciation for partial years:

a. When assets are purchased during the year, depreciation is calculated based on the number of

months the business owned the asset.

i. Any asset purchased before the 15th of the month is considered owned by the business for

4. Modified Accelerated Cost Recovery System (MACRS):

a. Used to calculate depreciation for tax purposes

b. Based on the Tax Laws of 1986, 1989, and 2010

c. Also known as the General Depreciation System (GDS)

d. Provides the opportunity to expense more of an asset in a shorter time

Teaching Tips/Strategy: Define the term: residual value or salvage value, disposal value, useful life, and

depreciable cost. Emphasize that depreciable cost differs from cost, and that useful life is not the actual

physical life. Differentiate the three depreciation methods and point out the uses of each one of the methods.

For lecture demonstration of the straight-line method, complete Concept Check #2. For demonstration of the

Use the “Ten-Minute Quiz” questions #5, #6, #7, and #8 to reinforce the learning concepts.

Learning Unit 16-3: Journalizing Entries for Capital and Revenue

Expenditures and Disposal of Plant Assets

Summary: Capital expenditures include the original cost of an asset as well as payments that improve on or

enlarge existing assets. Capital expenditures may be broken down into three categories: additions or

enlargements, extraordinary repairs, and betterments. The differences between these three categories are

based on whether the change will add to the value of the asset, extend the life of the asset, or only improve the

The assets can be disposed of in the following ways: discarding plant assets, selling plant assets, and

exchanging for similar plant assets. Remember that depreciation is recorded up until the date a plant asset is

Key Concepts: Capital expenditures, additions or enlargements, extraordinary repairs, betterments, revenue

expenditures.

Lecture Outline:

1. Capital expenditures include the original cost of an asset as well as payments that improve on or enlarge

existing assets.

a. Additions or enlargements are major changes or improvements that increase the value of an

asset.

b. Extraordinary repairs are infrequent expenditures that extend an asset’s useful life.

i. Example: a new engine in a car

ii. These expenditures may cancel some of the past accumulated depreciation for the cost of

the extraordinary repairs:

Dr. Accumulated Depreciation XX

Cr. Cash XX

iii. These extraordinary repairs extend the useful life of the asset for depreciation purposes

from this point forward.

c. Betterments are improvements that increase the efficiency of an asset by adding accessories

or replacing parts with more effective/powerful ones.

i. Example: stairway replaced by escalator

ii. They do not extend the life of an asset.

2. Revenue expenditures are payments made for ordinary maintenance of an asset.

a. Occur on a regular basis

3. Disposal of Plant Assets (Discard/Abandon/Donation) occurs when the asset is no longer functional to

the business, and there is no salvage value.

a. No gain or loss is recognized because the asset is fully depreciated.