In this video, we walk through 5 FAR practice questions teaching about calculating the net balance of PP&E. These questions are from FAR content area 2 on the AICPA CPA exam blueprints: Select Balance Sheet Accounts.

The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.

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## Calculating the Net Balance of PP&E

Calculating the net book value of property, plant, and equipment (PP&E) involves understanding several methods of depreciation and depletion. Each method impacts how assets are written down over time and can influence a company’s financial statements. In this guide, we’ll focus on the most common methods of depreciation—straight-line, double-declining balance, and sum-of-the-years-digits—as well as the half-year convention and depletion for land.

### Straight-Line Depreciation

The straight-line method is the simplest and most commonly used depreciation method. It evenly spreads the cost of the asset over its useful life, resulting in equal depreciation amounts each year.

**Formula:**

Depreciation Expense = (Cost of Asset – Salvage Value) / Useful Life

**Example:**

Let’s say Riverside Manufacturing purchases machinery for $100,000. The machinery has a useful life of 10 years, and the salvage value at the end of its life is expected to be $10,000. Using the straight-line method:

Depreciation Expense = ($100,000 – $10,000) / 10 = $9,000 per year

After 3 years, the accumulated depreciation would be $27,000 ($9,000 × 3), and the net book value of the machinery would be:

Net Book Value = Cost of Asset – Accumulated Depreciation

Net Book Value = $100,000 – $27,000 = $73,000

### Double-Declining Balance Depreciation

The double-declining balance (DDB) method is an accelerated depreciation method that results in higher depreciation expenses in the early years of the asset’s life. This method applies double the straight-line rate to the beginning net book value of the asset each year.

**Formula:**

Depreciation Expense = 2 × (Straight-Line Rate) × Beginning Net Book Value

**Example:**

Sunrise Corp buys equipment for $200,000 with a useful life of 5 years and no salvage value. The straight-line rate is 20% (1/5), so the double-declining rate is 40%.

**Year 1:**

Depreciation = 40% × $200,000 = $80,000

Net Book Value (end of Year 1) = $200,000 – $80,000 = $120,000**Year 2:**

Depreciation = 40% × $120,000 = $48,000

Net Book Value (end of Year 2) = $120,000 – $48,000 = $72,000

In this case, the asset depreciates more quickly in the earlier years, but the remaining value decreases each year as it approaches zero or the salvage value.

### Sum-of-the-Years-Digits Depreciation

The sum-of-the-years-digits (SYD) method is another accelerated depreciation method that results in higher expenses in the early years of an asset’s life. The sum of the digits of the useful life forms the denominator, while the remaining years form the numerator in each year’s calculation.

**Formula:**

Depreciation Expense = (Remaining Useful Life / Sum of the Years) × Depreciable Base

**Example:**

Rockridge Quarry purchases machinery for $150,000 with a useful life of 5 years and a salvage value of $10,000. The depreciable base is $140,000 ($150,000 – $10,000). The sum of the digits for 5 years is 15 (5 + 4 + 3 + 2 + 1).

**Year 1:**

Depreciation = (5/15) × $140,000 = $46,666.67

Net Book Value (end of Year 1) = $150,000 – $46,666.67 = $103,333.33**Year 2:**

Depreciation = (4/15) × $140,000 = $37,333.33

Net Book Value (end of Year 2) = $103,333.33 – $37,333.33 = $66,000

This method accelerates depreciation more gradually than the double-declining balance method, but the largest depreciation occurs in the first few years.

### The Half-Year Convention

The half-year convention assumes that assets are placed in service halfway through the year, regardless of when they were actually purchased. This means that only half of the annual depreciation is taken in both the first and last years of the asset’s useful life.

**Example:**

If Brighton Corp purchases office furniture on July 1, Year 1, for $100,000 with a useful life of 10 years and a salvage value of $10,000, the annual straight-line depreciation would normally be $9,000 ($90,000 / 10).

However, because of the half-year convention, the depreciation for Year 1 would only be:

Depreciation for Year 1 = $9,000 × 1/2 = $4,500

For the remaining years, Brighton will depreciate the full $9,000 per year, with the final $4,500 taken in Year 11.

### Depletion for Land

Depletion is used to allocate the cost of natural resources over the period in which they are extracted. The depletion base includes the purchase price of the land, development costs, estimated restoration costs, and is reduced by any expected salvage value.

**Formula:**

Depletion Expense = (Depletion Base / Total Estimated Resources) × Resources Extracted in the Year

**Example:**

Forest View Lumber Co. purchases a timberland plot for $400,000, spends $150,000 on development costs, and estimates restoration will cost $80,000. The company expects to sell the land for $100,000 after use. The total estimated harvestable timber is 50,000 tons.

**Depletion Base:**

$400,000 + $150,000 + $80,000 – $100,000 = $530,000**Cost per Ton:**

$530,000 / 50,000 tons = $10.60 per ton

If Forest View harvests 10,000 tons of timber in Year 1, the depletion expense for the year would be:

Depletion Expense = $10.60 × 10,000 = $106,000

### Conclusion

Calculating the net book value of property, plant, and equipment requires an understanding of various depreciation methods, as well as depletion for land. Each method serves a different purpose depending on the nature of the asset and the goals of financial reporting. Whether you use straight-line, double-declining balance, sum-of-the-years-digits, or depletion for natural resources, understanding these calculations is essential for accurate accounting of long-term assets.