5.

03 - NOTES

Understand the concepts listed below to be able to apply the procedures to prepare
journal entries related to straight-line depreciation of plant assets.

 Plant Assets
 Assets that will be used for a number of years in the operation of a business are
known as plant assets.
 A business may have several types of plant assets including equipment,
buildings, and land.
 Most plant assets are useful for only a limited period of time. The cost of a plant
asset should be depreciated over its useful life.
 Plant assets may continue to be used after their estimated useful lives have
ended; however, no additional depreciation is recorded.

 Straight-Line Depreciation
 Generally Accepted Accounting Principles require that the cost of a plant asset
be expensed over the plant asset’s useful life.
 The annual expense is recorded in Depreciation Expense and the contra-asset
account Accumulated Depreciation.
 Straight-line depreciation is the easiest and most widely used method of
depreciation.
 To calculate straight-line depreciation, a business must know the cost of the
plant asset, the estimated salvage (disposal) value, and the estimated useful
life.
 The straight-line method of depreciation charges an equal amount of
depreciation expense in each full year in which the asset is used.

 Depreciation Expense
 A month is the smallest unit of time used to calculate depreciation.
 A plant asset may be placed in service at a date other than the first day of a
fiscal period.
 A partial year’s depreciation may also be recorded in the year the plant asset is
sold or disposed of.

6311 Accounting I Summer 2010, Version 2 Page 164

 Accumulated Depreciation and Book Value
 Depreciation is not recorded as a reduction of the plant asset account.
 The amount of the depreciation of a plant asset’s useful life is known as
accumulated depreciation.

 Plant Asset Records

 A separate record is kept for each plant asset. An accounting form on which a
business records information about each plant asset is called a plant asset
record.
 Plant asset records may vary in arrangement for different businesses, but most
records contain similar information.
 Plant asset records include annual depreciation expense amounts, accumulated
depreciation, and ending book value. Plant asset records may also include
information regarding the disposal of the asset.

 Book Value
 The original cost of a plant asset minus accumulated depreciation is known as
the book value of a plant asset.
 The ending book value for one year becomes the beginning book value for the
next year.

 Journalizing and Posting Depreciation Expense

 The adjustment for Depreciation Expense is recorded in the Adjustments
column of the worksheet.
 The adjustment is also entered as an adjusting entry in the General Journal.
 The adjusting entry is then posted to the general ledger.

KEY TERMS

 Plant asset
 Depreciation expense
 Straight-line method of
depreciation
 Estimated salvage value
(estimated disposal value)
 Estimated useful life
 Plant asset record
 Declining balance method of
depreciation

6311 Accounting I Summer 2010, Version 2 Page 165

5.03 Plant Assets and Depreciation – Page 1
(Straight-Line Depreciation)

1. Calculating Annual Depreciation Expense

STEP ONE:
Estimated

- = Total
Depreciation
Expense

STEP TWO:

÷ =
Annual
Depreciation
Expense

Example:
Truck: Original Cost = $32,000.00
Estimated Useful Life = 5 years
Estimate Salvage (Disposal) Value = $2,000.00

STEP ONE:
Estimated Estimated
Original Cost Salvage Total

- (Disposal)
Value
___________
= Depreciation
Expense
____________

STEP TWO:
Estimated
Total Years of Annual
Depreciation
Expense
___________
÷ Estimated
Useful Life
__________
= Depreciation
Expense
___________
5.03 Plant Assets and Depreciation – Page 1
(Straight-Line Depreciation)

1. Calculating Annual Depreciation Expense

STEP ONE:
Estimated Estimated
Original
Cost - Salvage
(Disposal)
Value
= Total
Depreciation
Expense

STEP TWO:
Estimated

÷ =
Years of Annual
Total
Estimated Depreciation
Depreciation
Useful Life Expense
Expense

Example:
Truck: Original Cost = $32,000.00
Estimated Useful Life = 5 years
Estimate Salvage (Disposal) Value = $2,000.00

STEP ONE:
Original Cost Estimated Estimated

- =
Salvage Total
(Disposal) Depreciation
Value Expense
$32,000.00 $2,000.00 $30,000.00

STEP TWO:
Estimated Years of Annual

÷ =
Total Estimated Depreciation
Depreciation Useful Life Expense
Expense
$30,000.00 5 $6,000.00
5.03 Plant Assets and Depreciation – Page 2
(Straight-Line Depreciation)

2. Calculating Partial Year’s Depreciation Expense

STEP ONE:

÷ =
Monthly
Depreciation
Expense

STEP TWO:

x =
Partial Year’s
Depreciation
Expense

Example:
Truck: Original Cost = $32,000.00
Estimated Useful Life = 5 years
Estimate Salvage (Disposal) Value = $2,000.00
Purchase Date = July 1st

STEP ONE:
Annual
Monthly

÷ =
Depreciation Months in a
Depreciation
Expense Year
Expense
__________ ___________
___________

STEP TWO:
Monthly Partial Year’s
Number of

x =
Depreciation Depreciation
Months Asset is
Expense Used Expense
___________ __________ ___________
5.03 Plant Assets & Depreciation – Page 2
(Straight-Line Depreciation)

2. Calculating Partial Year’s Depreciation Expense

STEP ONE:

÷ =
Annual Monthly
Months in a
Depreciation Depreciation
Year
Expense Expense

STEP TWO:
Number of

x =
Monthly Partial Year’s
Months
Depreciation Depreciation
Asset is
Expense Expense
Used

Example:
Truck: Original Cost = $32,000.00
Estimated Useful Life = 5 years
Estimate Salvage (Disposal) Value = $2,000.00
Purchase Date = July 1st

STEP ONE:
Annual Months in a Monthly
Depreciation
Expense
$6,000.00
÷ Year

12
= Depreciation
Expense
$500.00

STEP TWO:
Monthly Number of Partial Year’s
Depreciation
Expense
$500.00
x Months Asset
is Used
6
= Depreciation
Expense
$3,000.00
5.03 Plant Assets and Depreciation – Page 3
(Straight-Line Depreciation)

3. Calculating Accumulated Depreciation

+ =
Current Year
Accumulated
Depreciation

Example:
Truck: Original Cost = $32,000.00
Estimated Useful Life = 5 years
Estimate Salvage (Disposal) Value = $2,000.00
Purchase Date = July 1, 2007
Accumulated Depreciation at December 31, 2008 = $9,000.00
Current Year Depreciation = $6,000.00

Prior Year Current Year Current Year

(12/31/2008) (2009) (12/31/2009)
Accumulated
Depreciation
__________
+ Depreciation
Expense
____________
= Accumulated
Depreciation
5.03 Plant Assets and Depreciation – Page 3
(Straight-Line Depreciation)

3. Calculating Accumulated Depreciation

+ =
Prior Year Current Year Current Year
Accumulated Depreciation Accumulated
Depreciation Expense Depreciation

Example:
Truck: Original Cost = $32,000.00
Estimated Useful Life = 5 years
Estimate Salvage (Disposal) Value = $2,000.00
Purchase Date = July 1, 2007
Accumulated Depreciation at December 31, 2008 = $9,000.00
Current Year Depreciation = $6,000.00

Prior Year Current Year Current Year

+ =
(12/31/2008) (2009) (12/31/2009)
Accumulated Depreciation Accumulated
Depreciation Expense Depreciation
$9,000.00 $6,000.00 $15,000.00
5.03 Plant Assets and Depreciation – Page 4
(Straight-Line Depreciation)

4. Calculating Book Value

- = Ending Book
Value

OR

- = Ending Book
Value

Example:
Truck: Original Cost = $32,000.00
Estimated Useful Life = 5 years
Estimate Salvage (Disposal) Value = $2,000.00
Purchase Date = July 1, 2007
Accumulated Depreciation at December 31, 2008 = $9,000.00
Current Year Depreciation = $6,000.00

Original Cost Accumulated Ending Book

___________ - Depreciation
____________ = Value
____________

OR

Beginning Annual Ending Book

Book Value
____________ - Depreciation
____________ = Value
_____________
5.03 Plant Assets and Depreciation – Page 4
(Straight-Line Depreciation)

4. Calculating Book Value

Original
Cost - Accumulated
Depreciation = Ending
Book Value

OR

Beginning
Book Value - Annual
Depreciation = Ending Book
Value

Example:
Truck: Original Cost = $32,000.00
Estimated Useful Life = 5 years
Estimate Salvage (Disposal) Value = $2,000.00
Purchase Date = July 1, 2007
Accumulated Depreciation at December 31, 2008 = $9,000.00
Current Year Depreciation = $6,000.00

- =
Original Cost Accumulated Ending Book
Depreciation Value
$32,000.00 $15,000.00 $17,000.00

OR

- =
Beginning Annual Ending Book
Book Value Depreciation Value
$23,000.00 $6,000.00 $17,000.00
5.03 Key Terms

TERM DEFINITION
Asset that will be used for a number of years in the
Plant asset
operation of a business
The portion of a plant asset’s cost that is
Depreciation expense transferred to an expense account in each fiscal
period during the plant asset’s useful life
Method of calculating depreciation which charges
Straight-line method of
an equal amount of depreciation expense for a
depreciation
plant asset in each year of its useful life
Estimated salvage value The amount an owner expects to receive when a
(estimated disposal value) plant asset is removed from use

The number of years a plant asset is expected to be

Estimated useful life
used

An accounting form on which a business records

Plant asset record
information about each plant asset

Revenue that results when a plant asset is sold for

Gain on plant assets
more than book value

The loss that results when a plant asset is sold for

Loss on plant assets
less than book value
Method of calculating depreciation in which bases
depreciation expense for a plant asset on the
Declining-balance method of
declining book value of the asset at the end of each
depreciation
fiscal period multiplied by a constant depreciation
rate
5.03 Buying Plant Assets –Practice

On January 1, 2009, Joe’s Auto Shop paid cash for an air jack, $1,850.00.
Check No. 201.

Steps to Record the Purchase of a Plant Asset

1. Write the date in the Date column of the journal.
2. Write the account title in the Account Title column.
3. Write the check number in the Ck. No. column.
4. Debit the appropriate plant asset account for the total cost of the asset.
5. Credit Cash for the total cost of the asset.

CASH PAYMENTS
JOURNAL PAGE
1 2 3 4 5

GENERAL ACCOUNTS PURCHASES

CK. POST PAYABLE DISCOUNT CASH
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT DEBIT CREDIT CREDIT

1 Jan. 1 Equipment 201 1850.00 1850.00 1

2 2

3 3

4 4

5 5

6 6

7 7

8 8

9 9

10 10
5.03 Buying Plant Assets –Practice

Journalize the following transactions:

1. On January 2, 2009, Mary’s Diner paid cash for a new cooler. $1,500.00.
Check No. 25.

2. On May 1, 2009, Mary’s Diner paid cash for a commercial oven. $2,700.00.
Check No. 70.

3. On August 31, 2009, Mary’s Diner paid cash for a dishwasher. $850.00.
Check No. 125.

CASH PAYMENTS
JOURNAL PAGE
1 2 3 4 5

GENERAL ACCOUNTS PURCHASES

CK. POST PAYABLE DISCOUNT CASH
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT DEBIT CREDIT CREDIT

1 1

2 2

3 3

4 4

5 5

6 6

7 7

8 8

9 9

10 10
5.03 Buying Plant Assets –Practice

Journalize the following transactions:

1. On January 2, 2009, Mary’s Diner paid cash for a new cooler, $1,500.00.
Check No. 25.

2. On May 1, 2009, Mary’s Diner paid cash for a commercial oven. $2,700.00.
Check No. 70.

3. On August 31, 2009, Mary’s Diner paid cash for a dishwasher. $850.00.
Check No. 125.

CASH PAYMENTS
JOURNAL PAGE
1 2 3 4 5

GENERAL
CK. POST ACCOUNTS PURCHASES CASH
DATE ACCOUNT TITLE NO. REF. DEBIT CREDIT DEBIT CREDIT CREDIT

1 Jan 2 Equipment 25 1500.00 1500.00 1

2 May 1 Equipment 70 2700.00 2700.00 2

3 Aug 31 Equipment 125 850.00 850.00 3

4 4

5 5

6 6

7 7

8 8

9 9

10 10