Chapter 8
•Plant assets- tangible assets used in a company’s operations that have
a useful life of more than one accounting period
•Plant assets are used in operations
•Plant assets have useful lives extending over more than one
accounting period
•Land cost is not allocated to expense when expected to have an indefinite life
•Four main issues in accounting for plant assets
1. Computing the costs of plant assets
2. Allocating the costs of most plant assets against revenues for
the periods they benefit
3. Accounting for expenditures such as repairs and improvements
to plant assets
4. Recording the disposal of plant assets
•Cost principle- records plant assets at cost when acquired
•Five major categories of plant assets
1. Machinery and equipment
2. Buildings
3. Land improvements
4. Land
•Cost of plant assets include all costs to prepare asset for use
•Land improvements- additions to land with limited useful lives
•Lump-sum purchases allocate the cost of purchase among the different
types of assets acquired based on their relative market values
•Depreciation- the process of allocating the cost of a plant asset to expense in
the accounting periods benefiting from its use
•Three factors determine depreciation
1. Cost
2. Salvage value
3. Useful life
•Salvage value- an estimate of the asset’s value at the end of its benefit period
•Useful life- the length of time an asset is productively used in a
company’s operations
•Inadequacy- the insufficient capacity of a company’s plant assets to meet its
growing productive demands
•Obsolescence- the condition of a plant asset that is no longer useful in
producing goods or services with a competitive advantage because of
new inventions and improvements
•Straight-line depreciation- charges the same amount of expense to
each period of the asset’s useful life
•Depreciable cost= total cost- salvage value
•Straight line depreciation= (cost-salvage value) - useful life in periods
•Straight line depreciation = 100% / number of useful periods
