Question

Describe the nature of property, plant, and equipment (PPE) and intangibles.

Explain, calculate, and record depreciation using different methods.

Answer 1

NATURE OF PROPERTY, PLANT, EQUIPMENT AND INTANGIBLES

Property, plant, and equipment and intagibles, all are fixed assets which cannot be easily change into cash. These assets are not easy to sell in a short period of time. These assets need long term investment and requires lot of cash to invest. These are long term assets which cannot realize easily and are non-current assets. These assets falls under the balance sheet on the asset side as non-current asset. Property, plant and equipments contains, building, machinery, land, vehicles and many more assets , these all are physical assets. Intangibles includes goodwill, patent, copyrights etc and these all are not physical assets. All fixed assets wheather physical or not; include huge capital investment.

DIFFERENT METHODS OF DEPRECIATION

Depreciation is the decrease or fall in the value of tangible and intangible assets. Companies charge depreciation on assets over the time. Under GAAP there are basically four methods of depreciation:

1. Straight line depreciation Straight line depreciation is the depreciation charge on the assets which remain same for every year. It is calculated by subtracting the scrap value of an asset from the cost of the asset and then by dividing it with the useful years of that asset. Formula: Depreciation= (cost of asset - scrap value)/ Useful life of asset. It is recorded by debiting the depreciation account and crediting the fixed asset account.

2. Declining balance depreciation Declining balance depreciation which is charge on the book value of an asset at the start of the year, its depreciation changes according to the book value and the rate of depreciation. It is charge on asset every year by subtracting the depreciation. And when the new book value arrive after the charge of depreciation, so the next depreciation will be charge on that book value. It is also debited to depreciation account and credited to asset account by the contra entry.

3. Sum-of-the-years digits depreciation It is a method of depreciation which includes the original cost of asset, salvage value and useful years. It is calculated by adding the years(1+ 2+ 3= 6) for making a base to calculate the depreciation amount. It debited the depreciation account and credited the assets account.

4. Units of production depreciation This depreciation is calculated by subtracting the salvage value from the cost of asset and then dividing it by the expected number of units the asset will produce. Then multiply it by the number of actual units used in the current year. It also decreases(credit) the assets value and increases(debit) the depreciation.