Chapter 16
Accounting for Property, Plant,
Equipment & Intangible Assets
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Learning Objective 1
Calculating the cost of an asset
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Cost of Land
Costs that add permanent value to land
 Surveying
 Commissions to attorneys
 Commissions to real estate brokers
 Title searches
 Grading, draining, and clearing
 Special one-time assessments
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Cost of Land Improvements
Improvements that have limited useful
lives
 Have their own account
 Subject to depreciation

◦
◦
◦
◦
◦
Driveways
Fences
Shrubbery
Paving of parking lots
Sprinkler systems
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Cost of Buildings

All costs necessary to acquire building
and get it ready for use
◦ Purchase price, repairs, expenses
If land and building are purchased for
lump-sum price, cost must be allocated
to each asset
 New Buildings

◦ Includes all reasonable/necessary payments
for labor, insurance, permits, architect’s fees,
legal fees, etc…
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Exercise 16-1
Cost of Machine:
Invoice less discount
Freight charges
Assembly charges
Special base
Total cost of machine
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$27,000
500
1,400
505
$29,405
LO-1
Learning Objective 2
Calculating depreciation using one of
three methods: straight-line, double
declining-balance, and units-of-production
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Depreciation
Allocate the cost of an asset to expense
over its useful life
 Must estimate

◦ Useful life
◦ Residual value – amount of asset’s cost that
will be recovered when the asset is sold,
traded in, or scrapped
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Straight-line Method
Allocates an equal amount of depreciation
over an asset’s period of usefulness
Cost – Residual Value
Service Useful Life in Years
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Depreciation
We will use Problem 16B-2 to apply these
concepts.
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Problem 16B-2
$117,000 – 9,000
4
Year
End
Cost
= $27,000 each year
Depr.
Expense
Accum.
Depr.
Book
Value
1
117,000
27,000
27,000
90,000
2
117,000
27,000
54,000
63,000
3
117,000
27,000
81,000
36,000
4
117,000
27,000
108,000
9,000
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Units-of-Production Method
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Problem 16B-2
$117,000 – 9,000
90,000 units
Year
End
=
$1.20 per unit
Cost
Depr.
Expense
Accum.
Depr.
Book
Value
1
117,000
13,200
13,200
103,800
2
117,000
10,800
24,000
93,000
3
117,000
13,200
37,200
79,800
4
117,000
70,800
108,000
9,000
Year 1 = $1.20 x 11,000 units
= $13,200
Year 3 = $1.20 x 11,000 units
= $13,200
Year 2 = $1.20 x 9,000 units
= $10,800
Year 4 = $1.20 x 59,000 units
= $70,800
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Double Declining-Balance Method
Accelerated method – more depreciation
taken in early years of asset’s life,
decreasing amounts in later years
 Called an accelerated depreciation
method
 Depreciates at twice the straight line rate
 Residual value is not subtracted from cost

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Double Declining-Balance Method
1.
2.
Calculate the straight-line rate and
double it.
100%
X 2
Useful life
At the end of each year multiply the
rate times the book value of the asset at
the beginning of the year.
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Problem 16B-2
Rate: 100% x 2 = 50%
4
Year
End
Cost
Depr.
Expense
Accum.
Depr.
Book
Value
1
117,000
58,500
58,500
58,500
2
117,000
29,250
87,750
29,250
3
117,000
14,625
102,375
14,625
4
117,000
5,625
108,000
9,000
Year 1 = $117,000 x .50 = $58,500
Year 3 = $29,250 x .50 = 14,625
Year 2 = $58,500 x .50 = $29,250
Year 4 = $14,625 – 9,000 = $5,625
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Depreciation for Partial Years
Depreciation to nearest full month
 If asset is purchased before the 15th,
calculate for full month
 If purchased after the15th, depreciation is
disregarded for month

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Depreciation for Partial Years
Assume a $20,000 truck with a $2,000 salvage
value and a 5 year life was purchased.
Straight-Line Method
 If a truck was purchased on July 4, depreciation
expense would be calculated as follows:
$20,000 - $2,000
5 Years
6
= $1,800
12
X
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Depreciation for Partial Years
Assume a $20,000 truck with a $2,000 salvage
value and a 5-year life was purchased.
Double Declining-Balance Method
 If a truck was purchased on July 4, depreciation
expense would be calculated as follows:
($20,000 x .40) X
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6
12
= $4,000
LO-2
Learning Objective 3
Calculating depreciation for tax purposes
using the Modified Accelerated Cost
Recovery System
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Depreciation for Tax Purposes
Modified Accelerated Cost Recovery
System (MACRS)
 Must know

◦ Recovery classification
 Classes 3, 5, 7, and 10 use 200% declining balance,
switching to straight-line
 Classes 15 & 20 use 150% declining balance,
switching to straight-line
◦ MACRS depreciation rates
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Exercise 16-6
Light general-purpose truck = 5-year class
Depreciation for
1991: $9,000 x 20% =
$1,800.00
1992: $9,000 x 32% =
2,880.00
1993: $9,000 x 19.20% =
1,728.00
1994: $9,000 x 11.52% =
1,036.80
1995: $9,000 x 11.52% =
1,036.80
1996: $9,000 x 5.76% =
518.40
$9,000.00
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Learning Objective 4
Explaining the difference between capital
expenditures and revenue expenditures
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Capital Expenditures
Original cost of an asset as well as
 Additions or enlargements
◦ Add to value of asset
◦ Debit asset account

Extraordinary repairs
◦ Extend useful life
◦ Debit Accumulated Depreciation

Betterments
◦ Improve efficiency
◦ Debit asset account
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Revenue Expenditures
Payments made for ordinary maintenance
of an asset
 Occur on a regular basis
 Recorded as expenses
 Examples include oil changes, replacing
window panes, changing tires, and adding
a sun roof

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Journalizing Transactions
We will use Problem 16B-1 to apply these
concepts.
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LO-1, 4
PROBLEM 16B-1
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PROBLEM 16B-1
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PROBLEM 16B-1
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Learning Objective 5
Journalizing entries for discarding, selling,
or exchanging plant assets
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Disposal of Plant Assets
Discard
 Sell
 Exchange for similar assets

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Disposal by Discarding
Recognize depreciation up to date of
disposal
 If fully depreciated, don’t have to bring
depreciation up-to-date
 Determine gain or loss on disposal

◦ If book value > assets received, loss
◦ If book value < assets received, gain
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Disposal by Selling - Gain


If amount received is greater than book
value - a Gain results
Categorized as “Other Income” on
income statement
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Disposal by Selling - Loss
When price is less than book value - a
Loss results
 Categorized as “Other Expense” on the
income statement

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Disposal by Exchanging - Loss




Calculate book value of old asset.
Compare book value of old asset with
trade-in to determine gain or loss.
Loss results if book value of old asset is
greater than what is received for tradein allowance.
If loss, recognize it.
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Disposal by Exchanging - Gain
Determining cost of new asset:
 Calculate book value of old asset.
 Identify cash paid.
 Add Steps 1 and 2.
 If gain, do not recognize it.
 The gain is absorbed into the cost of the
new asset.
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Income Tax Method & Accounting
for Exchanges

Both gains and losses are absorbed in
cost of new asset
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Journalizing entries for discarding,
selling, and exchanging plant assets
We will use Problem 16B-4 to apply these
concepts.
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PROBLEM 16B-4
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PROBLEM 16B-4
Cost
Accum Depr
Book Value
$18,500
15,750
$2,750
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Book Value
Trade in
Loss
$2,750
2,600
$150
Book Value
Insurance
Proceeds
Loss
$610
150
$460
Cost
Accum Depr
Book Value
LO-5
$4,000
3,390
$610
PROBLEM 16B-4
Cost
Accum Depr
Book Value
+ Cash Paid
New Machinery
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$39,500
35,700
$3,800
32,500
$36,300
Cost
Accum Depr
Book Value
+ Cash Paid
New Machinery
$18,500
15,750
$2,750
23,600
$26,350
LO-5
PROBLEM 16B-4
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Learning Objective 6
Explaining amortization and how it applies
to intangible assets
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Natural Resources
Natural assets (coal, timber, oil)
 Record at cost
 Recognize depletion as resource is
removed from earth
 Depletion is similar to units-ofproduction method

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Intangible Assets
Assets having no physical substance
 Long-lived
 Represent legal rights and monetary
relationships that benefit company
 Patents, copyrights, franchises, goodwill

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Intangible Assets
Record at cost
 Amortization – process of allocating cost
of intangible assets to expense
 Intangibles with indefinite lives are not
subject to amortization

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Patent
Exclusive right to sell or produce a
discovery or invention
 Right is granted by federal government
 Legal life of 20 years
 Usually amortized for shorter period of
time

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Exercise 16-5
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Copyright
Exclusive right granted by federal
government to publish artistic, literary, or
musical work
 Granted for life of creator plus 50 years
 Cost is recorded as cost and amortized
over useful life

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Franchise
Right granted by business or government
to produce or sell goods in a specific
geographic region
 Useful lives of many franchises are
indefinite – not amortized

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Goodwill
Difference between price paid and value
of the identifiable assets when a business
is purchased
 Occurs when expected rate of future
earnings is greater than rate of earnings
for industry standard
 Brand names, business location and
service are examples
 Not amortized

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Accounting for Impairment of
Intangible

If an intangible loses value, recognize a
loss by a debit to Loss on Goodwill and a
credit to Goodwill.
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LO-6
End of Chapter 16
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