Property, equipment, and intangibles

Learning goals

• Determine which costs belong in an asset's initial carrying amount.
• Calculate straight-line and usage-based depreciation.
• Record betterments, ordinary repairs, impairment indicators, and disposals at an introductory level.
• distinguish finite-life and indefinite-life intangible treatments conceptually.
• Explain important IFRS/ASPE differences without assuming one universal policy.

Prerequisite check

1. Why was merchandise inventory expensed when sold rather than when purchased?
2. Does depreciation estimate an asset's market value? Explain.

Vocabulary

• Property, plant and equipment (PPE): tangible items held for production, supply, rental, or administration and expected to be used beyond one period.
• Capitalized cost: qualifying expenditure included in an asset's carrying amount.
• Carrying amount: recognized cost/amount less accumulated depreciation/amortization and impairment, as applicable.
• Residual value: estimated amount from disposal at end of useful life, after disposal costs, in current-condition terms.
• Useful life: period or production expected from the asset by the entity.
• Betterment: expenditure that increases future benefits beyond the previously assessed level.
• Intangible asset: identifiable non-monetary asset without physical substance.
• Impairment: reduction when an asset's carrying amount is not recoverable under the applicable framework's test.

Core idea

Initial cost includes purchase price and directly attributable costs needed to bring an asset to the location and condition necessary for intended operation. Training, abnormal waste, general administration, and operating losses are not automatically PPE cost. Depreciation allocates depreciable amount systematically over use; it does not build a replacement fund or continually revalue the asset.

IFRS and ASPE differ in choices and detailed treatment, including subsequent measurement, components, impairment, reversals, and some development costs. Apply the current framework and facts rather than memorizing a single universal rule.

Why this treatment makes sense

Capitalizing a valid cost reports a remaining resource; expensing reports consumption or lack of future benefit. Over-capitalization inflates present profit and assets, then shifts expense into later periods. Under-capitalization does the opposite. Estimates must reflect expected use and be reviewed when facts change.

A repeatable method

Use READY–ALLOCATE–REVIEW–REMOVE:

1. Ready: capitalize valid costs to make the asset ready for intended use.
2. Allocate: choose a method reflecting consumption; calculate from available-for-use date.
3. Review: reassess life, residual value, method, components, and impairment indicators.
4. Remove: on disposal, update depreciation, remove cost and accumulated amount, record proceeds, and recognize gain/loss.

Worked example

Coastal Print Ltd. incurs these cash amounts for a press:

Press cost = $59,000. Assume $5,000 residual value, six-year useful life, straight-line, and no component complication. Annual depreciation = ($59,000 − $5,000) ÷ 6 = $9,000.

Entry when ready, separating training and prepaid insurance:

After 2.5 years, accumulated depreciation is $22,500 and carrying amount is $36,500. If the press is sold for $34,000 cash immediately after updating depreciation:

Journal, ledger, and statement connection

Cost remains in the Equipment ledger while accumulated depreciation grows. Depreciation expense lowers profit and retained earnings but not current-period cash. Disposal removes both gross cost and contra asset; gain/loss is proceeds minus carrying amount, not proceeds minus original cost.

For a finite-life purchased patent, cost is generally amortized over its useful life subject to the framework. An indefinite-life classification means no routine amortization while that assessment remains valid, but impairment review still matters. “Indefinite” does not mean infinite.

Common mistakes

• Starting depreciation when ordered or paid instead of when available for use.
• Capitalizing training because it occurs before launch.
• Using original cost rather than carrying amount to calculate disposal gain/loss.
• Treating every large repair as an asset or every replacement as expense.
• Recording ordinary depreciation as a cash outflow.
• Capitalizing an internally generated brand merely because it is valuable.
• Applying IFRS revaluation, component, or development-cost rules to an ASPE entity without checking.

Guided practice

A delivery van costs $46,000 plus $1,800 delivery and $1,200 branding wrap. A roof rack necessary for intended deliveries costs $2,000. Annual licence $240 and driver training $600 are also paid. Under the stated facts, identify likely capitalized cost and period/prepaid items. Then calculate annual straight-line depreciation with $5,000 residual and five-year life.

Independent practice

Mountain Lab buys equipment for $84,000; freight $3,000; installation $5,000; abnormal installation damage repair $2,000; and staff training $1,000. It is available October 1. Residual value is $8,000, useful life seven years, and the year-end is December 31. Determine cost and first-year straight-line depreciation. At the end of year 3 immediately after depreciation, it sells the equipment for $58,000. Prepare the disposal entry. State two facts you would investigate before capitalizing a $25,000 software-development cost.

Self-check and solutions

Guided: Likely cost includes van $46,000 + delivery $1,800 + necessary rack $2,000 = $49,800. The decorative branding wrap is normally advertising expense under these facts; licence is period/prepaid according to coverage; training is expense. Annual depreciation = ($49,800 − $5,000)/5 = $8,960. Facts may alter classification, so document purpose and directly attributable nature.

Independent: Cost = $84,000 + $3,000 + $5,000 = $92,000; abnormal damage and training are expense. Annual depreciation = ($92,000 − $8,000)/7 = $12,000; first three months = $3,000. After year 1 and two more full years, accumulated depreciation = $27,000; carrying amount = $65,000. Sale for $58,000 creates $7,000 loss: Dr Cash 58,000; Dr Accumulated Depreciation 27,000; Dr Loss 7,000; Cr Equipment 92,000.

Software questions include: Is it a separate acquisition or internal project? When were technical feasibility and other framework criteria demonstrable? Are research and development phases distinguishable, are future benefits and resources supportable, and can qualifying costs be measured reliably? IFRS and ASPE options/details differ; use current guidance.

Retrieval practice

1. Define depreciable amount.
2. List the four disposal steps.
3. Why is training normally not part of equipment cost?
4. What does “indefinite life” not mean?

Exam-style application

Equipment cost $120,000, residual $12,000, life nine years. After three full years, before recording year 4 depreciation, it sells for $79,000. Calculate the gain/loss if sale is on the last day of year 4 and prepare the entry.

Target: Annual depreciation $12,000; accumulated after four years $48,000; carrying amount $72,000; gain $7,000. Dr Cash 79,000; Dr Accumulated Depreciation 48,000; Cr Equipment 120,000; Cr Gain 7,000.

Lesson summary

Capitalize costs that create and prepare a controlled resource, allocate the depreciable amount as benefits are consumed, review estimates, and compare proceeds with carrying amount on disposal. Framework and evidence matter.