Question

50. How does a business measure the cost of property, plant and equipment?

1. List three examples of items paid to the purchaser that is part of the total cost of land?    
2. A piece of machinery equipment has a purchase price of $10,000. We also paid $1,000 commission, $1,200 for sales tax, and $300 for repair work from damaged when unloading. What is the amount to be debited to the Equipment account?
   

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50. What is depreciation and how is it computed?

1. Use the following information regarding a piece of equipment to answer the following questions:

                        Cost of machine is $20,000
                   Useful life is 4 years or 15,000 machine hours
                   Residual value is $5,000

1. What is the depreciation expense for the first year using the straight-line method?
   
   
   

Assume the equipment was used 3,000 hour the first year of operations. What is the depreciation expense for the first year based on machine hours using the units of production method?

Answer 1

Cost of property plant and equipment

Cost of property plant and equipment means the cost to be capitalized in balance sheet in name of property plant and equipment. Cost to be capitalized will include all the cost that will be incurred to bring the assets as ready to use.

So Costs incurred on property plant and equipment till make them ready to use will be capitalized.

And after the installation any repair cost that will enhance the capacity or useful life of the assets will be capitalized. So it is the rule for capitalization of the cost for property plant and equipment.

Examples of items part of the cost of land purchased

Expenses incurred to make land ready to use will be part of the cost of the land i.e. capitalized. they may be as per the list below.

1. Unpaid property taxes paid by the purchaser.

2. Fee paid to drafts deeds etc.

3. Fee paid to survey.

4. Sales deed registration fees. paid to government.

5. Improvement costs such as utilities, earthing etc.

6. Demolishing Cost such as removal of old structure for make land ready to use.

Amount to be debited to equipment account

Costs till make equipment ready to use will be capitalized. So below mentioned out of given items will be capitalized.

Purchased Cost - To be capitalized

Commission - Paid to make ready to use hence capitalized

Sales Tax    - Paid to purchased assets hence capitalized

Repair of damage when unloading - this cost took place before installation of equipment hence will be capitalized.

So Amount to be debited to equipment account will be

= Purchase cost + Commission + Sales tax + unloading wages

= 10000 + 1000 + 1200 + 300

= 12500

So 12500 will be debited in equipment account.

What is the depreciation and how it is computed

Assets purchased in business is not for use for one accounting period, it is for use for many accounting years. so expense its cost in one accounting year will not reflect the true picture of business so we need to spread its costs in years in which it will be used. So depreciation is the tool to expense the capitalized cost of assets in years on rationals basis.

There are several methods of calculating depreciation such as Straight line method, Double declining balance method, unit production methods, hours used methods.

Calculation of depreciation in given case.

SLM

Cost of machine = 20000

Useful Life = 4 Years

Residual value = 5000

Depreciation = (Cost - residual value ) / useful years

= (20000 - 5000) / 4

= 3750

Depreciation = 3750

Unit of production method

Cost = 20000

Residual value = 5000

Total machine hours = 15000 hours

Hours used in year 1 = 3000 machine hours

Depreciation = (Cost - Residual value) / total machine hours x Machine hour used in year 1

= (20000 - 5000) / 15000 X 3000

= 3000

Depreciation = 3000

All figures in $