9-1
Chapter
9
PLANT AND
INTANGIBLE ASSETS
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9-2
Plant Assets
Long-lived assets acquired for use in
business operations.
Similar to long-term prepaid expenses
Date
The cost of plant assets
is the advance purchase
of services.
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Description
Debit
Credit
As years pass, and the
services are used, the
cost is transferred to
depreciation expense.
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9-3
Major Categories of Plant Assets
Tangible Plant
Assets
Intangible
Assets
Natural
Resources
Long-term
assets having
physical substance.
Noncurrent assets
with no physical
substance.
Sites acquired for
extracting valuable
resources.
Land, buildings,
equipment,
furniture, fixtures.
Patents, copyrights,
trademarks,
franchises, goodwill.
Oil reserves,
timber, other
minerals.
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Accountable Events
Acquisition.
Allocation of the acquisition cost
to expense over the asset’s
useful life (depreciation).
Sale or disposal.
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9-5
Acquisition of Plant Assets
Asset
price
Cost
=
+
Reasonable and
necessary costs . . .
. . . for getting
the asset to the
desired location.
McGraw-Hill/Irwin
. . . for getting
the asset ready
for use.
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9-6
Determining Cost
On May 4, Heat Co., a stove maker, buys a new
machine from Supply Co. The new machine
has a price of $52,000. Sales tax is 8%.
Heat Co. pays $500 shipping cost to get the
machine to its plant. After the machine
arrives, set-up costs of $1,300 are incurred,
along with $4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
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9-7
Determining Cost
List price
Sales tax ($52,000 × 8%)
Transportation cost
Set-up
Testing
Total cost to Heat Co.
Date
Description
May 4 Machine
Cash
McGraw-Hill/Irwin
$ 52,000
4,160
500
1,300
4,000
$ 61,960
Debit
Credit
61,960
61,960
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9-8
Special Considerations
Land
Cost includes real estate
commissions, escrow
fees, legal fees, clearing
and grading the property.
Land
Improvements
Improvements to land
such as driveways,
fences, and landscaping
are recorded separately.
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9-9
Special Considerations
Buildings
Repairs made prior to the
building being put in use
are considered part of the
building’s cost.
Equipment
Related interest,
insurance, and property
taxes are treated as
expenses of the current
period.
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Special Considerations
Allocation of a Lump-Sum Purchase
I think I’ll buy the
whole thing;
building, land, and
contents.
McGraw-Hill/Irwin
The total cost
must be
allocated to
separate
accounts for
each asset.
The allocation
is based on
the relative
Fair Market
Value of each
asset
purchased.
© The McGraw-Hill Companies, Inc., 2008
Capital Expenditures and Revenue
Expenditures
Capital
Expenditure
Revenue
Expenditure
Any material expenditure
that will benefit several
accounting periods.
Expenditure for
ordinary repairs
and maintenance.
To capitalize an expenditure
means to charge it to an
asset account.
To expense an expenditure
means to charge it to an
expense account.
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9-11
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9-12
Depreciation
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
Cost of
plant
assets
Balance Sheet
Assets:
Plant and
equipment
Income Statement
as the services
are received
Revenues:
Expenses:
Depreciation
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Depreciation
Book Value
• Cost – Accumulated Depreciation
Depreciation
• Contra-asset
• Represents the portion of an asset’s
cost that has already
been allocated to expense.
Causes of Depreciation
• Physical deterioration
• Obsolescence
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Straight-Line Depreciation
Depreciation
Expense per Year
McGraw-Hill/Irwin
=
Cost - Residual Value
Years of Useful Life
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9-15
Straight-Line Depreciation
On January 1, 2007, Bass Co. buys new equipment.
Bass pays a total of $24,000 for the equipment. The
equipment has an estimated residual value of $3,000
and an estimated useful life of 5 years.
Compute depreciation for 2007 using the straight-line
method.
Cost – Residual Value
$ 24,000 – $ 3,000
=
Years of Useful Life
5
= $ 4,200 per year
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Straight-Line Depreciation
Bass Co. will record $4,200 depreciation each year for five
years. Total depreciation over the estimated useful life of
the equipment is:
Year
2007
2008
2009
2010
2011
Depreciation
Expense
(debit)
$
$
McGraw-Hill/Irwin
4,200
4,200
4,200
4,200
4,200
21,000
Accumulated
Depreciation
(credit)
$
$
4,200
4,200
4,200
4,200
4,200
21,000
Accumulated
Depreciation
Balance
$
4,200
8,400
12,600
16,800
21,000
Undepreciated
Balance
(book value)
$
24,000
19,800
15,600
11,400
7,200
3,000
Salvage Value
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9-17
Depreciation for Fractional Periods
When an asset is acquired during the year, depreciation
in the year of acquisition must be prorated.
Half-Year Convention
In the year of
acquisition, record six
months of depreciation.
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½
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9-18
Half-Year Convention
Using the half-year convention, calculate the
straight-line depreciation on December 31, 2007,
for equipment purchased in 2007. The
equipment cost $75,000, has a useful life of 10
years and an estimated residual value of $5,000.
Depreciation
Depreciation
McGraw-Hill/Irwin
=
=
=
($75,000 - $5,000) ÷ 10
$7,000 for a full year
$7,000 ×
1
/2 = $3,500
© The McGraw-Hill Companies, Inc., 2008
9-19
Declining-Balance Method
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
Accelerated
Depreciation
Remaining
=
× Depreciation
Expense
Book Value
Rate
The double-declining balance depreciation
rate is 200% of the straight-line
depreciation rate of (1÷Useful Life).
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9-20
Declining-Balance Method
On January 1, 2007, Bass Co. buys a new delivery truck.
Bass Co. pays $24,000 for the truck. The truck has an
estimated residual value of $3,000 and an estimated useful
life of 5 years.
Compute depreciation for 2007 using the doubledeclining balance method.
2007 Depr.
Expense
=
=
=
=
McGraw-Hill/Irwin
Remaining
×
Book Value
$
24,000 ×
$
24,000 ×
$
9,600
Accelerated
Depreciation Rate
2 × 1/5
40%
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9-21
Declining-Balance Method
Total depreciation over the estimated useful life of an
Compute
depreciation
for
the
rest
of
the
asset is the same using either the straight-line method or
truck’s
estimated useful
life.
the declining-balance
method.
Year
Computation
2007 $ 24,000 × 40%
2008 $ 14,400 × 40%
2009 $ 8,640 × 40%
2010 $ 5,184 × 40%
2011
Plug year # 5
Total Depreciation
McGraw-Hill/Irwin
Depr.
Expense
$ 9,600
$ 5,760
$ 3,456
$ 2,074
$
110
$ 21,000
Accumulated
Depreciation
$
9,600
$
15,360
$
18,816
$
20,890
$
21,000
Book
Value
$ 14,400
$ 8,640
$ 5,184
$ 3,110
$ 3,000
© The McGraw-Hill Companies, Inc., 2008
9-22
Financial Statement Disclosures
Estimates of Useful Life and Residual
Value
•
•
May differ from company to
company.
The reasonableness of
management’s estimates is
evaluated by external auditors.
Principle of Consistency
•
Companies should avoid
switching depreciation methods
from period to period.
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9-23
Revising Depreciation Rates
Predicted
salvage value
Predicted
useful life
So depreciation
is an estimate.
Over the life of an asset, new information
may come to light that indicates the
original estimates need to be revised.
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9-24
Revising Depreciation Rates
On January 1, 2004, equipment was
purchased that cost $30,000, has a useful
life of 10 years and no salvage value.
During 2007, the useful life was revised to
8 years total (5 years remaining).
Calculate depreciation expense for the year
ended December 31, 2007, using the
straight-line method.
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9-25
Revising Depreciation Rates
When our estimates change,
depreciation is:
Book value at
date of change
–
Salvage value at
date of change
Remaining useful life at date of change
Asset cost
Accumulated depreciation, 12/31/2006
($3,000 per year × 3 years)
Remaining book value
Divide by remaining life
Revised annual depreciation
McGraw-Hill/Irwin
$ 30,000
9,000
$ 21,000
÷5
$ 4,200
© The McGraw-Hill Companies, Inc., 2008
9-26
Impairment of Plant Assets
If the cost of an asset
cannot be recovered
through future use or
sale, the asset should
be written down to its
net realizable value.
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9-27
Disposal of Plant and Equipment
Update depreciation
to the date of disposal.
Journalize disposal by:
Recording cash
received (debit).
Removing accumulated
depreciation (debit).
McGraw-Hill/Irwin
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
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9-28
Disposal of Plant and Equipment
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Recording cash
received (debit).
Removing accumulated
depreciation (debit).
McGraw-Hill/Irwin
Recording a
gain (credit)
or loss (debit).
Removing the
asset cost (credit).
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9-29
Disposal of Plant and Equipment
On September 30, 2007, Evans Company sells a
machine that originally cost $100,000 for
$60,000 cash. The machine was placed in
service on January 1, 2002. It has been
depreciated using the straight-line method with
an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.
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9-30
Disposal of Plant and Equipment
The amount of depreciation
recorded on September 30, 2007,
to bring depreciation up to date is:
a.
b.
c.
d.
McGraw-Hill/Irwin
$8,000.
$6,000.
$4,000.
$2,000.
Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs. = $8,000
Depreciation to Sept. 30:
9/12 × $8,000 = $6,000
© The McGraw-Hill Companies, Inc., 2008
9-31
Disposal of Plant and Equipment
After updating the depreciation, the
machine’s book value on
September 30, 2007, is:
a.
b.
c.
d.
McGraw-Hill/Irwin
$54,000.
$46,000.
$40,000.
$60,000.
Cost
Accumulated Depreciation:
(5 yrs. × $8,000) + $6,000 =
Book Value
$ 100,000
46,000
$ 54,000
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9-32
Disposal of Plant and Equipment
The machine’s sale resulted in:
a.
b.
c.
d.
McGraw-Hill/Irwin
a gain of $6,000.
a gain of $4,000.
a loss of $6,000.
a loss of $4,000.
Cost
Accum. Depr.
Book value
Cash received
Gain
$
$
$
100,000
46,000
54,000
60,000
6,000
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9-33
Disposal of Plant and Equipment
Prepare the journal entry to record
the sale.
Date
Description
Sept. 30 Cash
Accumulated Depreciation
Gain on Sale
Machinery
McGraw-Hill/Irwin
Debit
Credit
60,000
46,000
6,000
100,000
© The McGraw-Hill Companies, Inc., 2008
Trading in Used Assets for New
Ones
9-34
On May 30, 2007, Essex Company
exchanges a used airplane and $35,000
cash for a new airplane. The old airplane
originally cost $40,000, had up-to-date
accumulated depreciation of $30,000, and
a fair value of $4,000.
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Trading in Used Assets for New
Ones
9-35
The exchange resulted in a:
a.
b.
c.
d.
gain of $6,000.
loss of $6,000.
loss of $4,000.
gain of $4,000.
Cost
Accum. Depr.
$ 40,000
30,000
Book Value
Fair Value
Loss
$ 10,000
4,000
$ 6,000
Prepare a journal entry
to record the exchange.
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Trading in Used Assets for New
Ones
9-36
Prepare the journal entry to record
the trade.
Date
Description
May 30 Airplane (new)
Accumulated Depreciation
Loss on Exchange
Airplane (old)
Cash
McGraw-Hill/Irwin
Debit
Credit
39,000
30,000
6,000
40,000
35,000
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9-37
Intangible Assets
Often provide
exclusive rights
or privileges.
Noncurrent assets
without physical
substance.
Characteristics
Useful life is
often difficult
to determine.
McGraw-Hill/Irwin
Usually acquired
for operational
use.
© The McGraw-Hill Companies, Inc., 2008
9-38
Intangible Assets
Record at
current cash
equivalent cost,
including
purchase price,
legal fees, and
filing fees.






McGraw-Hill/Irwin
Patents
Copyrights
Leaseholds
Leasehold
Improvements
Goodwill
Trademarks and
Trade Names
© The McGraw-Hill Companies, Inc., 2008
9-39
Amortization
•
Amortization is the systematic write-off to
expense of the cost of intangible assets
over their useful life or legal life,
whichever is shorter.
•
Use the straight-line method to amortize
most intangible assets.
Date
Description
Amortization Expense
Intangible Asset
McGraw-Hill/Irwin
Debit
Credit
$$$$$
$$$$$
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9-40
Goodwill
Occurs when one
company buys
another company.
Only purchased
goodwill is an
intangible asset.
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
Goodwill is NOT amortized. It is tested
annually to determine if there has been
an impairment loss.
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9-41
Patents
Exclusive right granted
by federal government to sell or
manufacture an invention.
Cost is purchase
price plus legal
cost to defend.
McGraw-Hill/Irwin
Amortize cost
over the shorter of
useful life or 20 years.
© The McGraw-Hill Companies, Inc., 2008
9-42
Trademarks and Trade Names
A symbol, design, or logo
associated with a business.
Internally
developed
trademarks
have no
recorded
asset cost.
McGraw-Hill/Irwin
Purchased
trademarks
are recorded
at cost, and
amortized over
shorter of legal
or economic life.
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9-43
Franchises
Legally protected right to sell products or
provide services purchased by franchisee
from franchisor.
Purchase price is intangible asset
which is amortized over the shorter of
the protected right or useful life.
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9-44
Copyrights
Exclusive right granted by the
federal government to protect
artistic or intellectual properties.
Legal life is
life of creator
plus 70 years.
McGraw-Hill/Irwin
Amortize cost
over period
benefited.
© The McGraw-Hill Companies, Inc., 2008
9-45
Research and Development Costs
All expenditures classified as research and
development should be charged to
expense when incurred.
All of these R&D costs
will really reduce our
net income this year!
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9-46
Natural Resources
Total cost,
including
exploration and
development,
is charged to
depletion expense
over periods
benefited.
Extracted from
the natural
environment
and reported
at cost less
accumulated
depletion.
Examples: oil, coal, gold
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9-47
Depletion of Natural Resources
Depletion is calculated using the
units-of-production method.
Unit depletion rate is calculated as follows:
Cost – Residual Value
Total Units of Natural
Resource
McGraw-Hill/Irwin
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9-48
Depletion of Natural Resources
Total depletion cost for a period is:
Unit Depletion
Rate
Total
depletion
cost
McGraw-Hill/Irwin
×
Number of Units
Extracted in Period
Cost of
goods sold
Inventory
for sale
Unsold
Inventory
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9-49
Depletion of Natural Resources
Specialized plant assets may be required to
extract the natural resource.
These assets should be depreciated over
their normal useful lives or over the life of
the natural resource, whichever is shorter.
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9-50
Plant Transactions and the
Statement of Cash Flows
Cash payments for plant assets represent a cash
outflow for investing activities on the statement of
cash flows. A disposal of a plant asset for cash
results in a cash inflow to the company.
Depreciation is a
non-cash charge to
income and has no
effect on cash flows.
McGraw-Hill/Irwin
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9-51
Other Depreciation Methods
Units-of-Output Method
Cost – Residual Value
Depreciation cost
=
Estimated Units of Output
per unit of output
MACRS
Modified Accelerated Cost Recovery System
The depreciation system used on federal
income tax returns. It is an accelerated method.
McGraw-Hill/Irwin
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9-52
Other Depreciation Methods
Sum-of-the-Years’ Digits Method
In general, depreciation calculated under this
accelerated method falls between the doubledeclining amount and 150-percent-declining
method. It is not used by many companies
because the computations are complex.
McGraw-Hill/Irwin
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9-53
Depreciation Methods in Use:
A Survey
A survey of 600 Publicly Owned Corporations
Straight-line
579
Declining-balance
Sum-of-the-years'-digits
22
5
Accelerated methods (not specified)
44
Units-of-output
Other
McGraw-Hill/Irwin
32
9
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