11 Property, Plant, & Equipment
Value-Creating Assets
Method 1: Straight-Line
Straight-line depreciation is the simplest way to calculate depreciation. Here’s how we do it:
Tell Me More
Each company creates value in a unique way. Some companies have lots of expensive capital assets – buildings, equipment, machinery, and furniture – that create value. Others, like service companies, hold minimal capital assets. Because every company is so different, companies develop accounting policiesAccounting Policy:
Company-specific choices on how to calculate and account for accounting transactions where accounting standards allow for alternative methods. Examples are half-year proration, depreciation method, or use of the allowance method for Accounts Receivable.: general rules for how the company calculates and records transactions. Accounting policies make sure that accounting numbers are always calculated the same way. This is important so financial statement users can compare and evaluate the company over time!
You have already seen accounting policies in action. That’s right, the depreciation method used for each class of assets is an accounting policy choice. Another accounting policy is how a company prorates depreciation on capital assets purchased in the year. Some companies will prorate by month. This would be calculated as calculated annual depreciation multiplied by the number of months the company owned the asset in the year divided by 12 months (depreciation × ?/12). Other times companies will prorate by the day (depreciation × ?/365). But the most common accounting policy for prorating capital asset depreciation is the half-year rule: depreciation × ½. Regardless of when the asset is purchased during the year, the company records half of the calculated annual depreciation in the year of purchase.
Let’s continue the examples from the previous section. Assume straight-line depreciation is used, assets were purchased in the fiscal year ended Dec 31 20X1, and half a year’s depreciationHalf-Year Rule:
A company policy that dictates proration of depreciation. For straight-line and declining balance methods, this means recording half the calculated annual depreciation in the year an asset was purchased, and another half in the year of disposal. No adjustment is necessary for activity-based depreciation methods like units-of-production. See also: Accounting policy. is taken in the year of purchase and year of disposal.
- My Turn:
- Jody’s Joinery: the welding equipment cost account has a balance of $49,240. The equipment has a useful life of 20 years and Jody estimates that she can sell the equipment for $5,000 at that time.
- Required:
- record depreciation on the welding equipment at 31 Dec 20X1 and 31 Dec 20X2. What is the Statement of Financial Position presentation at 31 December 20X3. That is, after three years of depreciation?
31 Dec. 20X1:
| DR | Depreciation Expense | 2,212 | ||
| CR | Accumulated Depreciation — Equipment | 2,212 |
31 Dec. 20X2:
| DR | Depreciation Expense | 2,212 | ||
| CR | Accumulated Depreciation — Equipment | 2,212 |
31 Dec. 20X3:
| DR | Depreciation Expense | 2,212 | ||
| CR | Accumulated Depreciation — Equipment | 2,212 |
Statement of Financial Position Presentation at 31 Dec. 20X3:
| Equipment — Cost | 49,240 |
|---|---|
| Accumulated Depreciation — Equipment | (6,636) |
| Equipment (net) | 42,604 |
Your turn. See how you get on calculating depreciation for Flo’s Flowers!
You did it! Now here’s another one just for fun 
Well done! Now that you have some practice with straight-line depreciation, let’s move to declining balance!