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Harley-Davidson’s financial statements provide the following information (in millions of dollars):
As of Dec 31 ($ in millions) Property, Plant and Equipment (Less: Accumulated Depreciation) Property, Plant and Equipment, net
2017 2016 $3,050 $2, ($820) ($710) $2,230 $2,190
During 2017, Harley sold PP&E for $1,170 Million in cash. The property was originally purchased for $940 and had accumulated depreciation of $440 million. There were no asset write-offs during 201
How much depreciation expense did Harley record on its PP&E for the fiscal year ended 2017?
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Part C
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Suppose that because of trade issues, Harley must move much of its production to Europe. As a consequence, the value of their net PP&E falls to $550 million on January 1, 2018. What transaction would they record?
Cash + Noncash Assets – Contra Assets = Liabilities
Shareholders Equity
The Correct Answer and Explanation is:
Part 1: Depreciation Expense Calculation for 2017
We are given the following:
- Net PP&E (2016): $2,190 million
- Net PP&E (2017): $2,230 million
- PP&E sold:
- Original cost = $940 million
- Accumulated depreciation = $440 million
- Cash proceeds = $1,170 million
Step-by-step:
1. Calculate purchases of PP&E:
We use the formula:
Ending Net PP&E = Beginning Net PP&E + Purchases – Depreciation – Net Book Value of Assets Sold
We rearrange to find Depreciation:
Depreciation = Beginning Net PP&E + Purchases – Ending Net PP&E – Net Book Value of Assets Sold
We don’t know purchases, so we solve for it indirectly.
But let’s use another approach using Gross PP&E and Accumulated Depreciation:
- Gross PP&E 2016 = $3,050 million
- Gross PP&E 2017 = $3,050 + new purchases – $940 (asset sold)
Let’s call new purchases = X
So:
Gross PP&E 2017 = $3,050 + X – $940 = $2,110 + X
We know Gross PP&E 2017 = $2,950 million (calculated from: Net PP&E = $2,230 + Acc. Depreciation = $720 → Gross = $2,950)
So:
$2,110 + X = $2,950 → X = $840 million (New purchases)
Now calculate Depreciation Expense using accumulated depreciation:
Accum. Depreciation:
- 2016: $820 million
- 2017: $720 million
However, Harley removed $440 million of depreciation with the asset sale. So:
Acc. Depr. 2016 + Depreciation – $440 = Acc. Depr. 2017
$820 + Depreciation – $440 = $720
Depreciation = $340 million
✅ Answer: $340 million depreciation expense recorded in 2017
Part 2: Impact of Net PP&E Falling to $550 million on Jan 1, 2018
Net PP&E drops from $2,230 million to $550 million. This means Harley wrote down or disposed of $1,680 million in net PP&E.
This could be due to:
- Sale
- Asset impairment/write-down (most likely since value dropped due to production relocation)
Journal Entry for Write-down:
| Cash | Noncash Assets (PP&E) | Contra Assets (Accum. Depr.) | Liabilities | Shareholders’ Equity |
|---|---|---|---|---|
| 0 | ↓ $1,680 | 0 | 0 | ↓ $1,680 |
Explanation:
This is treated as an impairment loss, which reduces PP&E (noncash assets) directly. There is no change to cash or liabilities. The loss impacts Shareholders’ Equity via a decrease in retained earnings (through the income statement).
No change in contra assets (e.g., accumulated depreciation), because impairments bypass them and go directly to net asset value.
✅ Answer:
| Cash | Noncash Assets | Contra Assets | Liabilities | Shareholders’ Equity |
|---|---|---|---|---|
| 0 | –1,680 | 0 | 0 | –1,680 |
This represents an impairment loss reducing net PP&E and equity.