Property, Plant

and Equipment
and Intangibles

CHAPTER

9
Electronic Presentations in Microsoft®
PowerPoint® to accompany
Fundamental Accounting Principles, 16ce
Prepared by
Lise Wall, Red River College
 Learning Objectives
1. Describe property, plant and equipment (PPE)
and calculate their cost. (LO1)
2. Explain, record, and calculate depreciation
using the methods of straight-line, units of
production, and double-declining balance.
(LO2)
3. Explain and calculate depreciation for partial
years. (LO3)
© 2019 McGraw-Hill Education 9-2
 Learning Objectives
4. Explain and calculate revised depreciation.
(LO4)
5. Explain and record impairment losses. (LO5)
6. Account for asset disposal through discarding,
selling, or exchanging an asset. (LO6)
7. Account for intangible assets and their
amortization. (LO7)

© 2019 McGraw-Hill Education 9-3

 Learning Objectives
8. Explain and calculate revised depreciation
when there is a subsequent capital
expenditure that creates partial period
depreciation. Appendix 9A (LO8)

© 2019 McGraw-Hill Education 9-4

 Vignette Video
YVR Builds State-of-the-Art Airside Operations
Building: Vancouver Airport Authority has built a new
state-of-the-art Airside Operations Building (AOB).
The facility, opened in July 2014, to consolidate all
airside operations into one airside building to support
a heightened level of collaboration and cooperation.
This is just one of continual investments made to
upgrade the airport. The Airport Authority reinvests
all earnings into airport operations and development.
[Link]

© 2019 McGraw-Hill Education 9-5

 Property, Plant and Equipment
(PPE)
• Also referred to as fixed assets or
capital assets.
• Examples: buildings, land, equipment,
machinery, leasehold improvements,
and vehicles.

Photo credit Shutterstock / Monkey Business Images

LO 1 © 2019 McGraw-Hill Education 9-6

 Property, Plant and Equipment (PPE)
Characteristics:
• Non-current assets used in the operations of a
business to help generate revenue
• Have a useful life and provide benefits greater
than one accounting period.

• May be classified as Tangible or Intangible.

LO 1 © 2019 McGraw-Hill Education 9-7

 Intangible Assets
• Lack physical substance.
• Examples: patents, trademarks, copyrights,
leaseholds and drilling rights.

LO 1 © 2019 McGraw-Hill Education 9-8

 Issues in Accounting for PPE
EXHIBIT 9.1

Decline in book value over service life

Acquisition Use Disposal

•Calculate initial Cost •Account for subsequent costs •Record Disposal
•Allocate costs to periods benefited

© 2019 McGraw-Hill Education 9-9

 Cost of Property Plant &
Equipment
• PPE are recorded at cost, which includes all
normal and reasonable expenditures
necessary to get the asset in place and ready
for its intended use. Examples:
• Invoice price less discounts for early payment
• Freight, unpacking, assembling
• Non-refundable sales tax (PST)
• Installation and testing

LO 1 © 2019 McGraw-Hill Education 9-10

 Betterments
• Are costs of PPE that provide material benefits
extending beyond the current period.

• Are reported on the balance sheet under

Property Plant and Equipment.

• Examples: Roofing replacement, plant

expansion, major overhauls of machinery and
equipment.

LO 1 © 2019 McGraw-Hill Education 9-11

 Repairs and Maintenance
Expenses
• Are costs that maintain an asset but do not
materially increase the asset’s life or
productive capabilities.

• Are reported on the income statement as

expenses.

• Examples: supplies, lubricants, repair and

maintenance costs.

LO 1 © 2019 McGraw-Hill Education 9-12

 Land
Is not subject to depreciation.
Cost of land includes:
• Purchase price
• Legal fees
• Real estate commissions
Photo credit Shutterstock / TommyBrison
• Accrued property taxes
• Payments for surveying, grading, draining, and
clearing the land
• Assessments by local governments

LO 1 © 2019 McGraw-Hill Education 9-13

 Other Costs of Land
When land is purchased with a building or other
obstructions that must be removed total land
costs includes:
• Purchase price of building

• Any costs to remove old building, less any

amounts recovered through sale of salvaged
materials.

LO 1 © 2019 McGraw-Hill Education 9-14

 Land Improvements
• Assets that increase the usefulness of the
land but have a limited life.
• Costs are charged to a separate PPE account.
• Costs are allocated over the period they
benefit.

• Examples: parking lot surfaces, driveways,

fences and lighting systems.

LO 1 © 2019 McGraw-Hill Education 9-15

 Buildings
• Costs include all expenditures to make the
building ready for its intended use.
• Costs are depreciated over the period they
benefit.
• Examples: purchase price, brokerage fees,
taxes, title fees and legal costs, wiring,
lighting, plumbing, flooring.

LO 1 © 2019 McGraw-Hill Education 9-16

 Leasehold Improvements
• Costs of alterations or improvements to
leased property.
• Costs are depreciated over the life of the
improvements or the life of the lease,
whichever is shorter.

• Examples: interior modifications, flooring,

painting and storefronts.

LO 1 © 2019 McGraw-Hill Education 9-17

 Machinery and Equipment
• Costs include all expenditures normal and
necessary to purchase it and prepare it for
its intended use.
• Costs are depreciated over the periods they
benefit.
• Examples: purchase price, less discounts,
non-refundable sales taxes, transportation
charges, insurance while in transit,
installation and assembly.
LO 1 © 2019 McGraw-Hill Education 9-18
 Lump-Sum Asset Purchase
• PPE may be purchased in a group with a
single transaction for a lump-sum price.

• The cost of the purchase is allocated to the

various PPE based on their relative values.

• Values can be estimated by appraisal or

using tax-assessed valuations of the
individual assets.

LO 1 © 2019 McGraw-Hill Education 9-19

 Depreciation
• A process of matching (or allocating) the
depreciable cost of an asset in a rational and
systematic manner over the asset’s
estimated useful life.
• Depreciation does not measure the decline
in market value of an asset.
• Depreciation begins to be recorded when
the asset is put into use.

LO 2 © 2019 McGraw-Hill Education 9-20

 Depreciation
• PPE help the organization earn revenues
over several accounting periods.
• The cost of these PPE are depreciated
(matched) over these same periods.

Revenues
Cost
Useful life

LO 2 © 2019 McGraw-Hill Education 9-21

 Depreciation

Factors relevant in determining depreciation:

1. Cost

2. Estimated residual value*

3. Estimated useful (service) life

*Residual value is the estimated amount received when the asset is

sold or traded in at the end of it’s useful life.

LO 2 © 2019 McGraw-Hill Education 9-22

 Depreciation Methods
Three methods we will cover:
1. Straight-line (most frequently used)
2. Units-of-production
3. Double-declining balance (accelerated method)

LO 2 © 2019 McGraw-Hill Education 9-23

 Straight-Line Method

The same amount is expensed each period

of the asset’s useful life.

Straight-line Cost – Estimated residual value

depreciation =
expense Estimated useful life in years

LO 2 © 2019 McGraw-Hill Education 9-24

 Straight-Line Method - Illustration
Shoe-production equipment is purchased on
January 1, 2020. The relevant data is as follows:

Equipment Cost $10,000

Less: Estimated residual value -1,000
= Cost to be depreciated $9,000

Estimated useful life:

Accounting periods 5 years
Units produced 36,000 shoes

LO 2 © 2019 McGraw-Hill Education 9-25

 Straight-Line Method

The annual depreciation expense:

Straight-line Cost – Estimated residual value
depreciation =
Estimated useful life in years
expense

$1,800 = 10,000 – 1,000

5

LO 2 © 2019 McGraw-Hill Education 9-26

 Straight-Line Method - Illustration
The annual adjusting entry to record depreciation on this
equipment would be:
Depreciation Expense 1,800
Accumulated Depreciation, Equipment 1,800
2020 2021 2022 2023 2024
Equipment $10,000 $10,000 $10,000 $10,000 $10,000
Less: Acc. Depreciation 1,800 3,600 5,400 7,200 9,000

Book Value $8,200 $6,400 $4,600 $2,800 $1,000*

*The book value is equal to the estimated residual value.

LO 2 © 2019 McGraw-Hill Education 9-27

 Units-of-Production Method
• This method is employed when the use of an asset
varies greatly from one period to the next.
• The amount charged to expense is based on the
usage of the asset.

Depreciation Cost – Estimated residual value

=
per unit Total estimated units of production

Annual
depreciation = Actual depreciation per
expense production x unit

LO 2 © 2019 McGraw-Hill Education 9-28

 Units-of-Production Method

$.25 per unit = $10,000 – $1,000

36,000

Year Units Produced Depreciation Expense for 2020:

2020 7,000 $.25 per unit x 7,000 units = $1,750
2021 8.000
2022 9,000
2023 7,000
2024 6,000

LO 2 © 2019 McGraw-Hill Education 9-29

 Illustration:
Units-of-Production Method –
Balance Sheet Presentation
2020 2021 2022 2023 2024
Equipment $10,000 $10,000 $10,000 $10,000 $10,000
Less: Acc. Deprec. 1,750 3,750 6,000 7,750 9,000*
Book Value $8,250 $6,250 $4,000 $2,250 $1,000

*Maximum balance in accumulated depreciation for 2024 is $9,000, leaving the

book value equal to the residual value. The maximum depreciation expense for
2024 is $1,250 ($10,000-7,750), even if more units were produced. The asset
must not be depreciated below its residual value.

LO 2 © 2019 McGraw-Hill Education 9-30

 Declining-Balance Method
• This method provides higher depreciation expenses
in the early years of an asset’s life and lower charges
in later years.

• A depreciation rate, of up to twice the straight-line

rate, is applied to the asset’s beginning-of-the period
book value.

• As the book value of the asset declines each period,

the amount of depreciation also declines each
period.
LO 2 © 2019 McGraw-Hill Education 9-31
 Double-Declining Balance Method
Steps:
1. Calculate the double-declining balance rate.*
Rate = 2 ÷ Estimated years of useful life

2. Calculate depreciation expense by multiplying the

rate by the asset’s beginning-of-period book value.
Depreciation expense = Rate x Book Value

*Note: Residual value is not used in these calculations.

LO 2 © 2019 McGraw-Hill Education 9-32

 Illustration: Double-Declining
Balance Method
EXHIBIT 9.15

Depreciation for the Period End of Period

Beginning-of-
Period Book Depreciation Depreciation Accumulated
Period Value Rate Expense Depreciation Book Value
$10,000*
2020 $10,000 40% $4,000 $4,000 6,000
2021 6,000 40 2,400 6,400 3,600
2022 3,600 40 1,440 7,840 2,160
2023 2,160 40 864 8,704 1,296
2024 1,296 40 296** 9,000** 1,000
*Cost on January 1, 2020 **Year 2024 depreciation is $1,296 - $1,000 = $296. This is because the maximum
accumulated depreciation equals cost minus residual value as we depreciated the asset only up to the residual
value.

LO 2 © 2019 McGraw-Hill Education 9-33

 Double-Declining Balance Method

Balance Sheet Presentation

2020 2021 2022 2023 2024

Equipment $10,000 $10,000 $10,000 $10,000 $10,000

Less: Accum Depreciation 4,000 6,400 7,840 8,704 9,000

Book Value $6,000 $3,600 $2,160 $1,296 $1,000

LO 2 © 2019 McGraw-Hill Education 9-34

 Comparison of Depreciation
Methods
• The amount of depreciation expense per
period is different for each method, but the
total depreciation expense is the same, $9,000.
• Each starts with a cost of $10,000 and ends
with a book value equal to the residual value of
$1,000.
• The difference is the pattern in depreciation
expense over the useful life.
LO 2 © 2019 McGraw-Hill Education 9-35
 Comparison of
Depreciation Methods
EXHIBIT 9.16

Straight-Line Units of Production Double-Declining-Balance

Cost – Est. residual Cost – Est. residual Actual Units Book Value x 2 / n,
Est. useful life Total Est. units of x produced in
period. where n = Est. useful life
Period production
2020 $ 1,800 $ 1,750 $ 4,000
2021 1,800 2,000 2,400
2022 1,800 2,250 1,440
2023 1,800 1,750 864
2024 1,800 1,250 296
$ 9,000 $ 9,000 $ 9,000

LO 2 © 2019 McGraw-Hill Education 9-36

 Depreciation for Income Tax
Reporting
• The rules for financial reporting are usually
different from the rules for income tax.

• The Income Tax Act requires that companies use a

declining–balance method called Capital Cost
Allowance (CCA) for business tax reporting
purposes.
• The Income Tax Act specifies the CCA rates for
various groups of assets (example: 20% for
machinery and equipment, 4% for most buildings).
LO 2 © 2019 McGraw-Hill Education 9-37
 Partial-Year Depreciation
• Assets may be purchased or disposed of at any
time during the year.

• Depreciation for a partial year is recorded

when the purchase or disposal is made at a
time other than the beginning or end of the
accounting period.

LO 3 © 2019 McGraw-Hill Education 9-38

 Partial-Year Depreciation
Methods:
1. Nearest whole month
• If the asset was in use for more than half of the month,
depreciation is calculated for the whole month.
• If the asset was in use for less than half of the month,
depreciation is not calculated for the month.

2. Half-year convention
• Six months’ depreciation is recorded regardless when an
asset is acquired or disposed of.

LO 3 © 2019 McGraw-Hill Education 9-39

 Mini-Quiz
Metro Motors Company purchased equipment costing
$40,000 on March 18. It is expected to last for five years
and then sell for $5,000.
Calculate depreciation* for the first year using the:
1. Straight-line method.
2. Double declining balance method.

*Use the nearest whole month method.

(This mini quiz does not include Units of Production, because
this method is not affected by partial year depreciation.)

© 2019 McGraw-Hill Education 9-40

Mini-Quiz – Straight-line Solution
Metro Motors Company purchased equipment costing
$40,000 on March 18. It is expected to last for five years
and then sell for $5,000.

Straight-line Cost – Estimated residual value Portion of

depreciation = X
year
expense Estimated useful life in years

$40,000 – $5,000
= X 9/12 year
5 years
= $5,250
© 2019 McGraw-Hill Education 9-41
 Mini-Quiz – DDB Solution
Metro Motors Company purchased equipment costing
$40,000 on March 18. It is expected to last for five years
and then sell for $5,000.

DDB
depreciation = DDB rate x Cost x Portion of year
expense*
= (2 / 5 ) x $40,000 x 9/12
= $12,000
*Recall that residual value is not part of the depreciation expense calculation!
© 2019 McGraw-Hill Education 9-42
 Revising Depreciation Rates
Depreciation rates for current and future
periods may be revised if there is a change in
an asset’s:
1. Estimated residual value and/or useful life.
or
2. Cost due to subsequent betterments.

LO 4 © 2019 McGraw-Hill Education 9-43

 Changes in Estimated Residual Value
and/or Estimated Useful Life
• The undepreciated cost of the asset is
depreciated (allocated) over the remaining
life of the asset.

• This is considered to be a change in an

accounting estimate and not an error.

LO 4 © 2019 McGraw-Hill Education 9-44

 Changes in Estimated Residual
Value and/or Estimated Useful Life
Example: Straight-line Method
Revised Remaining Revised residual
depreciation book value value
for remaining =
Revised remaining useful life
years

LO 4 © 2019 McGraw-Hill Education 9-45

 Revising Depreciation Rates When
There is a Betterment
• Betterments cause the cost of an asset to
change.

• These expenditures can be the addition of a

component to an existing asset or the
replacement or overhaul of a component.

LO 4 © 2019 McGraw-Hill Education 9-46

 Revising Depreciation Rates When
There is a Betterment
• Revised depreciation is calculated to reflect the
new cost and/or changes in estimated
life/residual value.
• When a betterment results in a replacement of
a component, the cost and accumulated
depreciation of the component must be
removed and a gain or loss is recorded.

LO 4 © 2019 McGraw-Hill Education 9-47

 Impairment of PPE Assets
• An impairment loss occurs when the book
value of PPE is greater than the amount to
be recovered through the asset’s use or sale.
• Impairments may result from:
• A significant decline in the market value of
the asset.
• Technological, economic, or legal factors.

LO 5 © 2019 McGraw-Hill Education 9-48

 Impairment of PPE Assets
If an impairment loss occurs:
• The loss is recorded (example next slide).
• Depreciation is revised for future periods.

LO 5 © 2019 McGraw-Hill Education 9-49

 Impairment of PPE Assets: Example
Fitbit Inc. has specialized equipment with cost of
$50,000 and accumulated depreciation of $27,000
making the book value $23,000.
A review determines the recoverable value is
$15,000. An entry is required ($23,000 – 15,000):
Impairment Loss $8,000
Equipment $8,000
The new book value is now $15,000 (equal to the recoverable amount.)
Depreciation expense going forward needs to be revised.
LO 5 © 2019 McGraw-Hill Education 9-50
 Disposal of Capital Assets
Capital assets may be disposed of for a variety
of reasons such as:
1. Obsolescence
2. Wear and tear
3. Damage
4. Changing business plans

LO 6 © 2019 McGraw-Hill Education 9-51

 Disposal of PPE
Accounting for disposal involves:
1. Record depreciation up to date of disposal.
2. Compare the asset’s book value with the net
amount received/paid at disposal and record any
resulting gain/loss.
3. Remove the balances of the disposed asset and
related accumulated depreciation accounts.
4. Record any cash (and other assets) received or
paid in the disposal.
LO 6 © 2019 McGraw-Hill Education 9-52
 Exchanging PPE
Accounting for exchange involves:
1. Record depreciation up to date of exchange.
2. Compare the asset’s book value with the net
amount received/paid on exchange and record any
resulting gain/loss.
3. Remove the balances of the exchanged asset and
related accumulated depreciation accounts.
4. Record the new asset and cash received or paid in
the exchange.
LO 6 © 2019 McGraw-Hill Education 9-53
 Intangible Assets
• Are rights, privileges and competitive
advantages held by a company.
• Are used in operations.
• Provide future economic benefits.
• Are recorded at cost when purchased.
• Examples: patents, copyrights, trademarks,
drilling rights, trademarks and trade names,
and leaseholds.
LO 7 © 2019 McGraw-Hill Education 9-54
 Intangible Assets
• Are recorded at cost when purchased.
• Cost is amortized* over estimated useful life.
• The straight-line method is usually used.
• Are shown on the balance sheet separately
from PPE.

* Amortization is the systematic allocation of the cost of an

intangible asset over its useful life. Assumed to have a zero
residual value.

LO 7 © 2019 McGraw-Hill Education 9-55

 Goodwill
The amount by which the price paid for a company
exceeds the fair market value of the company’s net
assets (assets less liabilities) if purchased separately.
• Is not an intangible asset.
• Is reported separately on the balance sheet.
• Is not amortized but may be decreased if it is
impaired.
• Examples: superior management, skilled workforce,
superior suppliers and customer loyalty.

LO 7 © 2019 McGraw-Hill Education 9-56

Revised Depreciation When There Is a Betterment
That Creates Partial Period Depreciation
Appendix 9A
Steps in Revising Depreciation:
1. Depreciation is updated to the date of the
betterment.
2. Record the betterment and remove the
component being replaced.
3. Calculate and record the revised depreciation
on the capital asset.

LO 8 © 2019 McGraw-Hill Education 9-57

 Summary
1. Describe property, plant and equipment
(PPE) and calculate their cost.
2. Explain, record, and calculate depreciation
using the methods of straight-line, units of
production, and double-declining balance.
3. Explain and calculate depreciation for partial
years.
4. Explain and calculate revised depreciation.

© 2019 McGraw-Hill Education 9-58

 Summary
5. Explain and record impairment losses.
6. Account for asset disposal through
discarding, selling, or exchanging an asset.
7. Account for intangible assets and their
amortization.
8. Explain and calculate revised depreciation
when there is a subsequent capital
expenditure that creates partial period
depreciation. Appendix 9A
© 2019 McGraw-Hill Education 9-59
End of Chapter

© 2019 McGraw-Hill Education 9-60