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Plant Assets
Plant assets are resources that have a physical substance (a definite size and shape), are used in the
operations of a business and are not intended for sale to customers. They are also called property,
plant, and equipment; plant and equipment; or fixed assets.
Cost of Plant Assets
Plant assets are recorded at cost in accordance with the cost principle of accounting. Cost consists of
all expenditures necessary to (1) acquire the asset, and (2) make it ready for its intended use.
The cost of land includes the cash purchase price, closing costs such as title and attorneys fees, real
estate brokers commissions, and accrued property taxes and other liens on the land assumed by the
purchaser. All necessary costs incurred in making land ready for its intended use are debited to the Land
account.
Land improvements are structural additions made to land, such as driveways, parking lots, fences,
landscaping, and underground sprinklers. The cost of land improvements includes all expenditures
needed to make the improvements ready for their intended use.
The cost of buildings includes all necessary costs related to the purchase or construction of a building:
a. When a building is purchased, such costs include the purchase price, closing costs, and real estate
brokers commission.
b. Costs to make the building ready for its intended use include expenditures for remodeling and
replacing or repairing the roof, floors, wiring, and plumbing.
c. When a new building is constructed, cost consists of the contract price plus payments for architects
fees, building permits, interest payments during construction, and excavation costs.
The cost of equipment consists of the cash purchase price, sales taxes, freight charges, and insurance
paid by the purchaser during transit. Cost includes all expenditures required in assembling, installing,
and testing the unit. Recurring costs such as licenses and insurance are expensed as incurred.
Depreciation
Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life
in a rational and systematic manner.
a. The cost allocation is designed to provide for the proper matching of expenses with revenues in
accordance with the expense recognition principle.
b. During an assets life, its usefulness may decline because of wear and tear or obsolescence.
c. Recognition of depreciation does not result in the accumulation of cash for the replacement of the
asset.
Three factors that affect the computation of depreciation are (1) cost, (2) useful life, and (3) salvage
value.
Three methods of recognizing depreciation are (a) straight-line, (b) units of activity, and (c) decliningbalance.
a. Each method is acceptable under generally accepted accounting principles.
b. Management selects the method that is appropriate in the circumstances.
c. Once a method is chosen, it should be applied consistently.
Straight-Line Method
Under the straight-line method depreciation is the same for each year of the asset's useful life. The
formula for computing annual depreciation expense is:
Depreciable Cost Useful Life (in years) = Depreciation Expense
To illustrate the computation, assume that the Benson Company purchased a delivery truck for P11,000
on January 1 with an estimated salvage value of P1,000 at the end of its four-year service life. Annual
depreciation is P2,500 [(P11,000 - P1,000 4)].